The South African Consulting Engineering Industry Presenting and interpretation of latest survey results Presented by Elsie Snyman CESA Infrastructure Indaba 2016 7 8 November 2016
Bi-annual Economic and Capacity Survey January June 2016
Purpose of the survey Quantitative as well as Qualitative monitoring of key set of indicators affecting the consulting engineering profession Quantitative Set of financial indicators, payment, employment, capacity (measuring real change) Qualitative Opinions related to employment, tendering, competition, profitability, confidence Leading indicator for the construction industry, affecting the outlook for contracting fraternity and downstream suppliers Shapes the outlook for future Economic Infrastructure Has a large multiplier effect on the development of infrastructure and therefore also employment
Survey Scope and Profile Bi-annual survey Since 1997 CESA membership Consecutive sample to monitor real change in financial indicators Responses are weighed by employment contribution Represents app 1/3 of total employment Micro (< 10) 27% Small (10-20) 31% Large (>100) 9% Medium (20-100) 33%
Financial Human Resources Profile Indicators Fee earnings Discounting Profitability Payments Financial Benchmarks Salary and Wage bill Employment Trends Employment Profile Capacity Utilisation Training, Bursaries Geographical Disciplines Sector Clients Monitor opinions of firms regarding current and expected business conditions 5
30 000 25 000 20 000 15 000 10 000 5 000 0 Nominal fee earnings reach R25bn in 2015 Nominal Real 2000 prices (CPI deflated) 12 000 10 000 8 000 6 000 4 000 2 000 0 6 JUN96 JUN97 DEC97 JUN98 DEC98 JUN99 DEC99 JUN00 DEC00 JUN01 DEC01 JUN02 DEC02 JUN03 DEC03 JUN04 DEC04 JUN05 DEC05 JUN06 DEC06 JUN07 DEC07 JUN08 DEC08 JUN09 DEC09 JUN10 DEC10 JUN11 DEC11 JUN12 DEC12 JUN13 DEC13 JUN14 DEC14 JUN15 DEC15 JUN16
Earnings fell by an average of 0.7% in 2015, with a 0.5 percent contraction reported in the first half of 2016 50.0% Average growth 2004 2009: 22% Average growth since 2009: 2.3% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% Jan - Jun 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Per. Chg 44.3% 16.9% 42.6% -7.4% -4.7% 9.5% 4.4% 3.0% 3.9% -0.7% -0.5% 7
Earnings in South Africa rise by 7% in first six months of 2016 vs a 23% contraction in cross border earnings 300.00 Earnings: RSA vs EX-RSA Index 1998 = 100 (2010 prices) 800.00 25% 250.00 200.00 700.00 600.00 500.00 150.00 400.00 Growth in Africa constrained by lower economic growth and weak commodity prices Growing Oil and Gas opportunities Potential $100bn / year 100.00 50.00 - Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 300.00 200.00 100.00 - RSA Ex-RSA 8
Strong relationship between Consulting Engineering Fee earnings and GFCF Source: SARB, CESA 9
Weaker economic growth outlook combined with low investor confidence dampens GFCF growth outlook 20.0% GFCF Growth Then and Now 2013 Budget 2014 Budget 2015 Budget 2016 Budget 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2013 Budget 14.1% -4.3% -2.0% 4.5% 6.4% 5.70% 5.9% 6.5% 2014 Budget 14.1% -4.3% -2.1% 4.2% 4.4% 3.20% 4.2% 5.3% 6.0% 2015 Budget 14.1% -4.3% -2.1% 5.7% 3.6% 7.60% -0.6% 2.2% 3.4% 3.8% 2016 Budget 14.1% -4.3% -2.1% 5.7% 3.6% 7.60% -0.6% 1.1% 0.3% 1.4% 2.7% Source: National Treasury
0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% Contribution of Consulting Engineering Profession % of GDP 0.6% 3.5% 3.0% 2.5% 2.0% % of GFCF 3.0% 8.0% 7.0% 6.0% 5.0% % of GFCF (Construction) 6.0% 1.5% 4.0% 1.0% 3.0% 2.0% 0.5% 1.0% 0.0% 0.0% JUN97 JUN99 JUN01 JUN03 JUN05 JUN07 JUN09 JUN11 JUN13 JUN15 JUN97 DEC98 JUN00 DEC01 JUN03 DEC04 JUN06 DEC07 JUN09 DEC10 JUN12 DEC13 JUN15 JUN97 DEC98 JUN00 DEC01 JUN03 DEC04 JUN06 DEC07 JUN09 DEC10 JUN12 DEC13 JUN15 11
Engineering firms outsource for various reasons including: External business enterprises or individuals including subconsultants, JV s and contract workers To satisfy public sector / transformational requirements as laid down by public sector clients Black owned enterprises 17% 19% 13% 25.00 20.00 15.00 10.00 5.00 0.00 40.00 30.00 20.00 10.00 0.00 25.00 20.00 15.00 10.00 5.00 0.00 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 12
On average firms outsource a higher percentage of turnover due to procurement and transformation requirements 35.00 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 30.00 25.00 20.00 15.00 10.00 5.00 0.00 External Public Sector requirements Black owned enterprises Jun-14 21.02 32.15 20.35 Dec-14 21.82 27.80 22.85 Jun-15 18.4 15.5 13.3 Dec-15 19.7 20.9 21.9 Jun-16 17.5 18.8 12.5 13
Outlook on profitability has been largely negative since 2009, and although the nett satisfaction rate remains negative, there has been some improvement, although margins remain below historical levels. Majority of firms expect profit margins to stabilise (54 percent) 64% of firms are satisfied with current levels of profitability vs 22% in the previous survey 14
100.00% 80.00% 60.00% 40.00% 20.00% 0.00% -20.00% -40.00% -60.00% -80.00% -100.00% Profitability slows to 14% in first six months of 2016 from an average of 16.1% in 2015 (13% 2014) Profitability : Nett % Satisfaction rate Nett perception trends improving Profitability 4 per. Mov. Avg. (Nett perception trends improving) Trend -40% 25 20 15 10 5 0 Dec-99 Jul-00 Feb-01 Sep-01 Apr-02 Nov-02 Jun-03 Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr-16
70% 65% 60% 55% 50% 45% 40% 35% 30% Salary and wages represent 63% of earnings in the current survey (Average 2015: 64.5%) 25 20 15 10 5 0 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Salary and Wage bill % of earnings Profitability
Employment contracted by 1% in H1 2016, no growth compared to same period in 2015, alongside weaker earnings in the first six months of the year Employment Earnings (Real - Right axis) 30 000 12.0 25 000 10.0 20 000 24,072 8.0 15 000 6.0 10 000 4.0 5 000 2.0 0 0.0 JUN96 DEC97 DEC98 DEC99 DEC00 DEC01 DEC02 DEC03 DEC04 DEC05 DEC06 DEC07 DEC08 DEC09 DEC10 DEC11 DEC12 DEC13 DEC14 DEC15 17
Fewer firms looking to employ engineers in the last survey No real improvement since 2012 100 90 Conditions not conducive to job creation 80 70 60 50 40 30 20 32% 50% 10 0 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Engineers 4 per. Mov. Avg. (Engineers)
Earnings by Sector Percentage contribution Economic Average Sector 2 yearprofile Jun-16 of earnings 2014 Other Agriculture / Forestry / Fishing Commercial Housing (residential inc. land) Tourism/Leisure Health Education Mining / Quarrying Energy (electricity, gas, hydro) Transportation (land, air, road, rail, ports) Water (Full water cycle) 8.2% 1.1% 1% 8.0% 8% 0.5% 0% 1.6% 1% 1.5% 2% 4.2% 7% 6.3% 5.0% 12% 13% 16.5% 18% 24.3% 27.8% 33% 0% 5% 10% 15% 20% 25% 30% 35%
Transport accounted for 33% of earnings in first six months of 2016 (from 28% in 2014, 27.6% in 2015, 27.8% 2-year average) 4 500 4 000 R291bn over MTEF allocated to Transport and Logistics (largest economic infrastructure sector) Overall spending projected to fall by 3 percent (MTEF) Reduced capital expenditure by Transnet R77bn (MTEF), deferring capital projects due to low demand and lower commodity prices SANRAL e-toll debacle continues expect 16% increase in revenue collections over the MTEF period 3 500 3 000 2 500 2 000 1 500 1 000 500 0 Jun-05 Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15
Negative average growth over MTEF (-2.8%) compared to 9% growth in 2015 Budget 2014/15 2015/16 2016/17 2017/18 2018/19 % of Total Avg Growth (Nominal) Transport and logistics 19.0% 9.5% -3.3% 9.5% -14.5% 34% -2.8% Source: National Treasury
Spending on transport & logistics projected to fall over the medium term, -3% (nominal terms) 70 000 000.00 Transport & Logistics Infrastructure Dept Transport vs other SOE's, Rm current prices 60 000 000.00 50 000 000.00 40 000 000.00 30 000 000.00 20 000 000.00 10 000 000.00-2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 SOE's 51 206 500.0 42 003 900.0 44 483 400.0 49 687 200.0 51 572 700.0 60 992 700.0 56 466 800.0 61 264 000.0 42 537 400.0 Dept Transport (incl Transfers) 17 393 500 28 096 100 25 016 600 26 712 800 39 327 300 38 507 300 39 733 200 44 036 000 47 462 600 Source: National Treasury 22
Commercial sector accounted for 13% of earnings in first six months of 2016 (from 24% in 2014, 24.6% in 2015, 24.3% 2-year average) Higher levels of investment in owneroccupied developments, offices and mixed use developments Old Mutual Head office, PWC head office, 140 West Street, Silo no 5 (Water front), KPMG offices Retail development, extensions Extenstions to Balito Junction, Extension to Fourways mall, Springs Mall, Thavhani mall, Kyalami corner, Botshabelo shopping centre, Redevelopment of Village Walk shopping centre, Cornubia Mall, Whale Coast Shopping centre 3 000 2 500 2 000 1 500 1 000 500 0 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16
Business confidence remains weak and deteriorated to 36 in 2016Q1 before recovering to 42 in Q3 100 FNB/BER Business Confidence Index 90 80 70 60 >6 years 50 40 30 20 10 Structural rather than cyclical 0 Mar-16 Mar-80 Mar-81 Mar-82 Mar-83 Mar-84 Mar-85 Mar-86 Mar-87 Mar-88 Mar-89 Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Source: FNB FNB/BER Business Confidence Index 24
Initiatives to engage with and encourage investment with the private sector? To grow faster, the economy needs higher levels of private sector investment Government s plan to restore confidence: Pravin Gordhan October 2016 Finalising a regulatory framework for private-sector participation in infrastructure projects, including initiatives in partnerships with SOE s Addressing legislative and regulatory uncertainties that hold back investment in mining, agriculture and key technology sectors Rationalising, closing or selling off public assets that are no longer relevant to government s development agenda Concluding labour market reforms? IMF highlights political instability/concerns as key growth constraints 25
Non-Residential SQM approved Down 17% y-y (MAT, Aug 16) 6 000 000 5 000 000 4 000 000 3 000 000 2 000 000 1 000 000 0 Dec-88 Sep-89 Jun-90 Mar-91 Dec-91 Sep-92 Jun-93 Mar-94 Dec-94 Sep-95 Jun-96 Mar-97 Dec-97 Sep-98 Jun-99 Mar-00 Dec-00 Sep-01 Jun-02 Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15 Source: Stats SA 26
Sharp declines across all market segments suggesting further contraction in private sector commercial pipeline projects 0% SQM approved Private Sector Non-residential projects -5% -10% -15% -20% -25% -30% -35% -40% Office Space Retail Industrial Renovations Y-Y % Change (MAT) Source: Stats SA 27
Water accounted for 18% of earnings in first six months of 2016 (from 14% in 2014, 17.2% in 2015, 16.5% 2-year average) Earnings nearly doubled since 2010 to R2bn Expenditure on Water & Sanitation projected to increase by 10% (nominal) over MTEF period, from an average growth of 5% in the 2015 Budget WATER CRISIS LOOMING Required spending R300bn in 4 years (ActionAid South Africa Review), predict a 2 million cubic litre shortfall by 2025 Demand side management, improve efficiency in usage, reduce wastage 2 000 1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16
Water & Sanitation Total Public sector Infrastructure: R132bn (MTEF) Average growth of 10% Avg 2014/15 2015/16 2016/17 2017/18 2018/19 % of Total Growth (Nominal) Water and Sanitation 14.3% 19.3% 22.4% 0.0% 6.5% 15% 9.6% Source: National Treasury
Government plays lesser role in water infrastructure Increased focus on water boards - Will tariff increases be sufficient? 30.0% Government share of Total Water & Sanitation Infrastructure 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 % of Total Infrastructure 24.4% 18.6% 25.3% 20.9% 21.2% 20.6% 17.8% 16.9% 17.4% % of Total Infrastructure Source: National Treasury
Energy accounted for 5% of earnings in first six months of 2016 (from 7% in 2014, 5.6% in 2015, 6.3% 2-year average) 1 600 Expenditure on Energy projected to increase by 10% (MTEF) from a decrease of 16% (2015 MTEF) Supported by higher levels of investment in Renewable energy Diverse Energy Mix Nuclear? 1 400 1 200 1 000 800 600 400 200 0 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15
Energy Infrastructure allocations increase towards 2018/19 Energy Total Public Sector Infrastructure Rm, current prices 2015 2016 90000 80000 70000 60000 50000 40000 30000 20000 10000 2014/15 2015/16 2016/17 2017/18 2018/19 % of Total Avg Growth (Nominal) Energy -2.6% 2.8% -27.1% -1.8% 60.1% 21% 10.4% 0 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2015 52200 67100 75100 69500 69200 71100 56000 39200 2016 52200 67100 75200 69600 67800 69700 50800 49900 79900 Source: National Treasury
Diversifying the renewable energy mix Private Sector Investment R194 bn 10 9 8 7 6 5 4 3 2 1 0 <30% 20% Wind 2030 GW Target 18.9 GW + 3 GW Gas Photovoltaic (Solar panels) GW Completed Concentrated solar power 42% 39% 6% 14% Gas Source: Department of Energy
Housing accounted for 8% of earnings in first six months of 2016 (from 6% in 2014, 9.8% in 2015, 8.0% 2-year average) 1 600 Supported by higher levels of investment in large scale mixed-use developments Moffat park South Hills Savanna City Jackal Creek Steyn City Cornubia Continued support for mega city, catalytic developments (Department of Human Settlement) Private housing supported by listing of residential property funds amidst growing housing shortage Indluplace Properties first to list Balwin Properties strong pipeline in the next five years, aims to be the largest fund on the JSE with market cap of R10bn (currently R3.3bn) 1 400 1 200 1 000 800 600 400 200 0 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15
No growth in approvals for further private sector developments of Flats and Townhouses 40.00% Flats / Townhouses: SQM Approved MAT Y-Y percentage change 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% Flats / Townhouses contribute around 20% of total private sector residential approvals Jul-16 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Source: Stats SA 35
Earnings contribution by Client Type Client Contribution Central 4% Private 42% Provincial 15% Local 23% 58% Parastatals 16% Central Provincial Local Parastatals Private 36
Fewer firms reported less fierce competition, slowing discount rates to an average of 25% 80% 70% 60% 50% 40% 30% 20% 10% Fierce Discounting - right axis 4 per. Mov. Avg. (Fierce) 30% 25% 20% 15% 10% 5% 0% 0% Jun-00 02-Jun 04-Jun 06-Jun 08-Jun 10-Jun Jun-12 Jun-14 Jun-16
1.20 1.00 0.80 0.60 0.40 0.20 0.00 Firms not optimistic regarding improved capacity utilisation, while levels slow to 84 percent Capacity Utilisation % Increase (Right axis) 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Utilisation of technical staff
70.0 Majority of firms expect capacity levels to stabilise, as fewer expect levels to improve 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Large Medium Small Micro Dec'15 11.7 37.3 40.3 25.9 Jun'16 24.1 40.7 17 8 39
Payment outstanding for longer than 90 days rise to 25% in first six months of 2016 from 23% in H2 2015 30.00% Outstanding >90 days 25.00% 20.00% 15.00% 10.00% 5.00% Situation worsened by diminished profitability 0.00% Dec-15 Jun-16 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Outstanding >90 days 4 per. Mov. Avg. (Outstanding >90 days)
Prompt Regulations Draft prompt payment regulations are delayed by the CIDB Act which doesn t make provision for regulations to be enforced. Dept of Public Works is currently preparing draft changes to the Act which will then provide Regulations to be issued. 41
120.0 100.0 80.0 60.0 40.0 20.0 0.0 Consulting Engineering Industry Confidence Index (Satisfaction rate) Current Previous Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 120 100 80 60 40 20 0 Consulting Engineers outlook suggest further pressure on the construction industry CESA - Satisfaction rate left axis SAFCEC Satisfaction rate BER Civil Confidence Jun 16: 75% Q3 16 52% Q3 16 33% Source: FNB, SAFCEC, CESA
Key Challenges More emphasis on localisation of professional services to mitigate foreign competition Lack of a definitive project pipeline (NDP?) Weak private sector confidence Procurement Greater transparency in procurement process Standardisation of procurement procedures Procurement on price and BBBEEE, with little or no regard to functionality, quality, qualifications, experience, capability and/or innovation. Complexities around BBBEEE requirements, difficult to comply due to shortage of skills Quality of Client s technical personnel skills shortages regarded as one of the most significant institutional challenges (client bodies), also affecting service delivery as municipal level Low growth economic environment, project implementation delays, budget cuts on infrastructure allocations
Thank you elsie@industryinsight.co.za T 021 554 0886 C 082 822 9161 45