The construction boom in Africa – China’s doing less than you think, but SA firms also losing out

Africa is currently in the middle of a pretty major construction boom as countries throughout the continent attempt to develop their transport, communication, and energy networks to the point where these enable, rather than inhibit economic activity. With plenty of big-ticket projects approved or started across Africa, foreign construction groups are very active in pursuing tenders and breaking ground on new projects. However, according to Deloitte’s Andre Pottas, project leader for Infrastructure and Capital Development, despite the popular press attention that Chinese companies operating in Africa have attracted, the reality is that American and European firms continue to dominate the business in Africa.  Brazil has a comparable footprint to China, which is one of the smaller players. – FD

To watch this CNBC Power Lunch video click hereAndre Pottas - Deloitte

GUGULETHU MFUPHI:  The infrastructure development boom across Africa has attracted investments totalling 222.7 billion dollars spent on a total of 322 projects.  This is according to Deloitte’s latest African construction survey.  Joining us now to explain a little bit more about these findings is Andre Pottas, who is a Project Leader for Infrastructure and Capital at Deloitte.  Andre, when we look at the infrastructure environment in the continent it seems as though there are many motivating factors, some of which you listed in your report such as the rapid urbanisation and the rise of the middle class.  However, there are doubtless things holding us back.  What are those?

ANDRE POTTAS:   I think a number of things that are holding us back need to be addressed through infrastructure, so infrastructure is the opportunity.  It’s also currently the limiting factor.  What we looked at in our research, one of the attributes was ‘where, which sectors are seeing the principal areas of investment?’  If you look at those, it’s power and transport.  If we want to manufacture in Africa, to serve the African market and the growing middle class (1) we need the power to be able to put in those manufacturing facilities and (2) we need to be able to get them to the markets.  With the colonial legacy, the African transport networks will all be from the middle out.  It’s all about getting raw materials out.  If we now want to trade, intra-African trade levels are ten percent whereas in Europe they’re 60 percent.  If Africa wants to trade with each other, we need those transport networks.  It’s therefore encouraging to see that a lot of the infrastructure development happening, is in the power sector and the transport sector – currently.

GUGULETHU MFUPHI:  A lot of that is happening outside of South Africa – you mentioned that in your report – companies like Ghana, Sierra Leone, but not much happening here in SA.

ANDRE POTTAS:   I think what we did this year – this was the report for the first time last year which we were going to make annual – and this year we’ve desegregated it into regions.  If one looks regionally, Southern Africa still has the bulk of the current projects, and if we were really looking at projects which are currently under construction: so projects which have broken ground, but not been commissioned at the 1st of June, and that’s where the figures come from. Southern Africa is still the biggest.  East Africa isn’t far behind, followed by West Africa, and then some distance behind, Central and North Africa.  If one looks at the trends over time – and that’s what we’re hoping to do with this being an annual survey – as we build up a bit of a history, I think we might see that the growth rate in Southern Africa is not what it is in East and West Africa.  Clearly, we have Mozambique, which has very good growth potential, but if you look at the economic growth rates in the rest of Africa versus South Africa, that has to be where the bulk of the growth is going to come from.

ALEC HOGG:  Andre, strip away the top line and get to the subject that most of us talk about around dinner parties, but don’t talk about in polite conversation.  How bad are the corruption issues?  Clearly, infrastructure projects are big, so there’s lots of potential for those who want to put their snouts in the trough.  How bad is it and what kind of impact is it having?

ANDRE POTTAS:   I think it’s out there.  I think it has an impact.  I don’t think South Africa or Africa is unique in that respect. I think that if you look at a number of developing markets, whether you’re in Russia, Eastern Europe, or China I think corruption is a factor.  It’s a risk that needs to be managed, and I think the type of survey we’re doing, getting more data – data has been the limitation in Africa. The best way to address corruption is transparency.  The more transparency there is, the more data that’s out there, and the more analysis there is the harder it becomes to hide things and keep them out of the public view.  I think corruption is there.  I think there’s a lot of attention on it at the moment, not just in South Africa.

ALEC HOGG:  We know it’s there.  How bad is it?

ANDRE POTTAS:   That’s a ‘how long is a piece of string’ thing.

ALEC HOGG:   No, are you going to have to add 10/20/30 percent to the cost of things because there are hands that are giving what we used to call ‘the Pretoria salute’?  I suppose you could call it ‘the Pretoria salute’ again, now.

ANDRE POTTAS:   I’m not sure it’s as high as 30 percent.  I’m probably not even sure it’s as high as 20 percent.  I don’t have the data.

ALEC HOGG:   But you speak to people in the industry.

ANDRE POTTAS:   Yes, we have seen recently…there have been some issues with the construction companies with some collusion and you get those things.  You talk to people in the street.  I don’t think people are paying that much to get tenders.  I don’t think it’s at that level.

ALEC HOGG:   What about the allocation of particular subcontractors?  In other words, you got the tender but these people must be part of the scheme even though they might not have construction companies.

ANDRE POTTAS:   I think that does happen – that’s more of an issue, and clearly, Government is currently looking at the procurement methodologies.  I know Treasury is looking hard at how they address that, but that is a factor.  Whether that is more than ten percent value to a contract…that’s hard to say.

ALEC HOGG:   We know Pravin Gordhan has his new Procurement Officer and he’s been pushing this issue for a long time.  We should support him more.

ANDRE POTTAS:   Yes, very much so.

GUGULETHU MFUPHI:   Maybe the enforcement of the corruption is also an area to embark on, given the fact that legislation in one country differs from another.

ANDRE POTTAS:   Yes, that’s the thing in Africa – and that’s part of the reason we’ve desegregated into regions this year – you then have to desegregate again.  As we always say to our American friends, ‘Africa is not one country.  Its 54 countries and each one is different’.  I think when you want to go and do business in a country; you need to understand that country, that market, and that environment.  Clearly, there are countries you’re going to want to be in and there are countries you don’t want to be in, and different investors have different risk appetites and a different appetite for how local countries do things.

ALEC HOGG:   Who is doing best on the continent?

ANDRE POTTAS:    It’s interesting.  In our research one hears about China all the time and clearly, China’s starting to come through quite strongly, so we’re starting to see them crop up as a significant factor in the funding and construction of projects.  One hears these stats: China’s building one and three projects on the continent.  Our research in the mega project space didn’t support that.  Interestingly, the European and US construction companies are still coming through as the principal contractors on the continent.  The Brazilians are strong.  We’re starting to see the Japanese, Koreans, and the Indians coming in. As the markets mature, you start to see a broader range of players.  The South African construction companies are interestingly, not featuring as the top players on the continent. I think they have found it a bit harder to penetrate than the expectation was originally.

ALEC HOGG:  Do they want higher profit margins?  Is that the reason?

ANDRE POTTAS:   I don’t think they want higher profit margins.  I think our construction companies at the moment, are going through a tough spell.  I think their cash resources are limited, and if you want to go into a new market, you need cash to do that.  Clearly, some of the global guys have deeper pockets.

ALEC HOGG:  That was Andre Pottas – thanks, Andre – Project Leader for Infrastructure and Capital at Deloitte.

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