Local consulting engineering firms take a confidence knock

Despite remaining relatively optimistic owing to pending projects under South Africa’s National Development Plan (NDP), the country’s lack of a concrete pipeline has caused consulting engineers’ confidence to plummet to 36%, matching the business and construction outlooks.

There seemed to be little hope for improvement in the short to medium term, and the industry now needed to adapt to a low-growth environment as infrastructure spending was hampered by poor economic growth, lower-than-expected revenue by government, international economic instability and price volatility.

Unpacking engineering body Consulting Engineers South Africa’s (Cesa’s) latest Biannual Economic and Capacity Survey for June to December 2015, information management services provider Industry Insight CEO and economist Elsie Snyman said that consulting engineers’ confidence had become as negative as the contractors, and was falling in line with the indices of the South African Federation of Civil Engineering Contractors and the First National Bank/Bureau for Economic Research (FNB/BER).

The FNB/BER Business Confidence Index showed continued weak confidence, deteriorating to 36% in the first quarter of 2016, the lowest level in seven years.

Further, from a peak point of nearly 100% in the “glory years” of 2006 to 2008, the consulting engineering industry’s confidence levels fell to its lowest in 16 years, from 44% in the six months to June 2015 to 39.4% in the period to December 2015.

While business conditions were expected to improve slightly to 48% in the first half of 2016 and to 44% in the last half of the year, the levels would remain well below the average of the last five years, with indications that the challenges were no longer cyclical in nature, but had become a structural rut that was reducing institutional capacity as companies cut back on employment and training, as well as on bursary programmes, among others.

Snyman pointed out that, with government’s budget constraints and reduced flow of projects, the targeted R870-billion infrastructure spend over the medium term was unlikely, owing to the downward trend of economic growth, compounded by flailing confidence levels.

She added that, in the current economic state, the industry would continue to track sideways and that confidence needed to reach between 60% and 70% to make a visible difference and to stimulate investments and participation.

Even then, it would take a few years to gain traction and get the industry back on track, she noted.

“All economic indicators currently suggest that investment in relation to gross domestic product is likely to slow over the medium term, due to slower government spending, financial constraints experienced by State-owned enterprises and continued weak private-sector confidence,” Snyman commented.

This was in addition to the fear of a further sovereign credit rating downgrade, which would reduce the amount of capital available to fund an ambitious infrastructure programme, particularly as the economy did not have the strength to support it.

South Africa’s economic growth slowed from 1.5% year-on-year in 2014 to 1.3% in 2015, slowing a further 0.6% quarter-on-quarter.

“The books are not balancing, in my view,” she said.

Cesa CEO Chris Campbell said that unlocking greater private sector participation was a critical element to fast-track delivery, which would support engineering fees and, as such, engineering development in the industry.

“Government must create an environment for the private sector so that it can play a much bigger role in infrastructure delivery.  Many of the projects highlighted in the NDP can be carried out by the private sector through public-private partnerships,” he said.

Meanwhile, the Economic and Capacity Survey findings showed that consulting engineering fee earnings in the last six months of 2015 increased by around 6%, against an expected decrease of between 2% and 3%.

Larger firms reported muted growth of 2% on average for the last six months, while growth was supported by a 31% and 11% jump in earnings by medium and smaller firms respectively.

However, it was expected that earnings would contract by 5% in the first six months of 2016.

The transport sector accounted for 30% of the earnings, water 17%, energy 5%, commercial 23% and housing 9%.

“Although the outlook is concerning, it is encouraging to see that profitability among member firms has increased,” Campbell commented.

While most of the firms surveyed expected profit margins to stabilise, an increasing number of firms expressed their dissatisfaction with current margins.

The weak outlook on profitability was also hampering growth in employment and training.

Employment increased by 2% in the second half of 2015, compared with the first half of the same year. However, the average growth in the last two years was 0.3%, compared with the 10% recorded between 2012 and 2013.

Further, bursary spend as a percentage of the wage bill dropped to 0.3%, while spending on training remained static at 0.4% during the last half of 2015.