Confidence levels amongst firms have deteriorated over the last few years, alongside modest increases in fee earnings. The outlook for gross fixed investment has deteriorated and expected to fall behind GDP growth in the next three years. Over 537 firms employing just over 24 315 staff, who collectively earn a total fee income of R25 billion per annum, are members of CESA.
Three key factors continue to influence the global outlook - these are the gradual slowdown and rebalancing of the Chinese economy; lower prices for energy and other commodities; and the gradual tightening of US monetary policy.
The South African economy has faced several headwinds in 2016, some of which were expected, while others were not. Global factors play a much bigger role than may be suggested, with the sluggish global economy offering little relief in the demand for South African goods and services which has waned considerably over the last 2-3 years.
Contractors have for some time reported on the slow pace by which contracts are awarded, as well as the slow roll out of government projects. This creates disconnect between opinions expressed by engineers and contractors, where projects are in planning stages, supporting earnings in the consulting engineering industry, but implementation is slow
Transformation of the Industry – significant progress
The appointment of Black executive staff (including Black, Asian and Coloured staff) increased to 40.8 percent from 39,5 percent and 38,0 percent in the previous two surveys. The appointment of Black executive staff has steadily increased from 28,1 percent in the June 2012 survey. This shows real significant progress in terms of industry transformation. There has also been a steady improvement in the appointment of women at an executive level.
Business Confidence - low
Confidence in the consulting engineering sector generally lags business sentiment. Business confidence is currently at 42 as at the 3rd quarter of 2016. This continues to depict negative market sentiment which does not bode well for private sector fixed investment. Business confidence is negatively impacted by poor economic growth, threatened by a looming recession, increase in political instability, tightening of monetary policy alongside a sharper than expected increase in inflation.
Gross Fixed Capital Formation - deteriorating
Growth in Gross fixed capital formation lagged GDP growth in 2014, and contracted by 0.3 percent on average for the year, compared to a 1.5 percent increase in economic growth. Investment in fixed capital formation showed a mild recovery in 2015, up 1.4 percent on average, supported by a 6 percent increase in investment by general government. Investment growth from SOEs and the private sector remained muted, increasing by 0.8 percent and 0.4 percent respectively.
Fee earnings - muted
Fee earnings in the first six months of 2016 fell marginally by 0.2 percent compared to the last six months of 2015, following the increase of 6.0 percent in the previous period. Larger firms reported a stronger decline of 5.3 percent, while medium and smaller size firms improved earnings by 15.1 percent and 10.6 percent respectively. This follows a similar trend reported in the previous survey whereby larger firms recorded more muted growth compared to a more robust increase in earnings by the medium and smaller size firms. Fee income stabilized at R25 billion, annualised, at current prices as at June 2016. Respondents expect earnings to increase by 6 percent in nominal terms during the last six months of 2016, compared with the first six months of the year.
The contribution to fee earnings by the private sector improved slightly to 41.0 percent (from 40.3 percent in the December 2015 survey), but is largely on par with the average over the last 2-year and 5-year period.
The public sector remains the most important client to the industry, but due to the decrease in central government (down from 5.9 percent in December 2015 to 4.0 percent in the current survey), the contribution by the public sector moderated to 58 percent from 60 percent.
Payment- a serious issue
Payment remains a serious issue, having a broad based effect on firms operating in the industry. After having shown some improvement in the December 2015 survey, the percentage of fees outstanding for longer than 90 days as a percentage of total estimated income (including late payments) deteriorated to an average of 25 percent from 23.0 percent and 24.5 percent in the previous two surveys. At 25 percent, this is the highest recorded level since 1999.
Industry Confidence Levels – well below average
Confidence levels among firms has deteriorated over the last few years, alongside modest increases in fee earnings. The current weakening in the confidence index, depicting less than satisfactory conditions, may therefore predict weaker growth in earnings. In the December 2015 survey, confidence levels fell to its lowest level in 16 years, significantly weaker in the last six months of 2015, compared to expectations in the June 2015 survey. Since then there has been some improvement with the net satisfaction rate improving to 75 percent in the first six months of 2016 (from 39.4 percent in the December 2015 survey), with similar levels projected for the next 12 months. Levels remain well below the average over the last five years, and is recovering from historically low levels, surpassed only by the 1998/99 recession caused by the Asian financial crisis.
Industry Challenges - Procurement the biggest challenge
Regulation issues, including the procurement of consulting engineering services, remain one of the biggest challenges faced by the industry. Unrealistic tendering fees remain a concern for members, while the extended time it takes in which to finalise a proposal is affecting profitability in the industry. The quality of technical personnel is argued by some firms to have deteriorated, putting greater risk on the built environment sector. Skills shortage is regarded as one the most significant institutional challenges faced by the private and the public sector.
The involvement of non-CESA members in government tenders and procurement continues to threaten the standard and performance of the industry. Firms from across South African borders are tendering at rates that are not competitive for local firms.
Unlocking greater private sector participation is seen as a critical element to fast track delivery which will support engineering fees and as such engineering development in the industry. Many of the projects highlighted in the NDP can be carried out by the private sector through public-private partnerships.
Service delivery, especially at municipal level remains a critical burning issue. Lack of attention to maintain infrastructure poses a serious problem for the industry with infrastructure being left to deteriorate to such a state, that maintenance becomes almost impossible.
Fraud and corruption is affecting the ethos of our society, with a lot of talk and little action accompanying the growing evidence of corruption. CESA is aware that members are under pressure from contractors and corrupt officials, to certify payment for work not completed. This is regarded as an extremely serious matter for CESA and as such will be relentless in holding those in power accountable.
Quality Management System (QMS)
All CESA member firms are required to have a QMS as a condition of CESA membership. The majority of firms reported to have a QMS system in place (97 percent). While all the larger firms have the QMS in place, 93% of the micro enterprises that responded to the survey, currently comply, up from 88 percent in the December 2015 survey.