Construction and Engineering: Revival on the horizon
SA Infrastructure spend boosts ailing construction sector: Fact or fiction?
Kalim Rajab is the managing director of New National Assurance Company (NNAC), which celebrates its 50th anniversary this year. Caught in the middle between increasingly negative market forces and increased competition, insurers have to differentiate themselves by their technical skill in their assessment and management of risks.
Our Government committed to infrastructure spend in the 2021 budget with an estimated investment of R791billion for public-sector infrastructure over a 4-year period. R287 billion of the planned spend was allocated to transport and logistics and about R150billion for the energy sector. Over the longer term the government plan to spend R2.2 trillion on transport, energy, industrial and housing developments.
The building plans passed by municipalities in 2021 increased by about 5% on the norm, which indicates optimism by property investors and this probably kickstarted what slight recovery we are seeing. The plans noted that economists were only expecting to see significant growth of more than 9% in 2022, followed by sustained growth of about 3% per annum thereafter. This is possibly very optimistic for various reasons and realistically growth may be slower, hopefully gaining momentum only much later than expected.
A project doesn’t spring forth fully grown, like the mythological Athena who emerged from Zeus’ head. The idea is converted into a conceptual design, followed by financial viability studies, engineering design, tender documents for construction, a tender adjudication process and finally the award to a suitable contractor. The process can easily take 6 months and there are challenges even before the contractor establishes on site, only to be faced with irate community members, business forums and lack of materials which delay the commencement of the works.
Difficult Operating Environment: The status of the construction sector is difficult to measure but many medium to large construction companies have either closed or are finding it too difficult to operate in South Africa for various reasons. Engineers and experienced
contracting personnel are emigrating to various first world countries to further their careers and ensure the future of their families. In other words, there is a brain drain and the majority of immigrants coming to South Africa from elsewhere in Africa generally have limited technical skills. New engineers are awarded professional status before they gain adequate knowledge and the SME’s have limited experience and are often not prepared to learn from the remaining experienced engineers when assistance is offered. This attitude is politically driven and sustained by the client’s acceptance of poor workmanship in many instances.
The question whether economic pressure results in lower standards is valid. The answer is of course, a resounding YES but we need to look at the reasons for the economic pressure. Despite all efforts, the roots of corruption have penetrated deeply and we have government officials requiring payment for awarding tenders, we have tender-preneurs in the mix and business forums/community demands to participate in profits. At the end of the day the contract value remaining after deductions could be inadequate to complete the planned works to standard.
The risk of underwriting infrastructure construction projects has been increasing for some time, initially because of the tendency to cut the engineer’s fee to such an extent that they no longer do site visits and accordingly don’t assist with quality control or guidance for the contractor. Now we also have inexperienced engineers who use designs from previous projects rather than do an appropriate design and contractors with inadequate experience to anticipate problems. Even the projects where the main contractor is suitably qualified is exposed to more risk by the government agencies’ delayed appointment of inexperienced sub-contractors.
Absorbing Losses: So, what is the Insurance industry doing to maintain premium levels under the circumstances? It appears that the industry will continue absorbing losses without increasing premiums, because of the competition for business. Insurers are under pressure from the fiduciary authorities to pay claims and this will also contribute to the pressure on premiums; however, it is likely that premiums will only increase when insurers are faced with reinsurance costs rising after posting poor results.
The question is then how insurers will maintain reasonable premium and loss ratio’s. The only approach lies in the assessment and management of risks before offering insurance and thereafter in ongoing support when claims are reported. For example we at NNAC, via our exclusive partners the AC&E Group, employ engineering specialists and only uses highly skilled loss adjusters who can provide the Insured with guidance when investigating claims. AC&E offers broker training and technical support during underwriting and claims stages.