Construction industry shrinks

Source: Construction industry shrinks | The Financial Gazette February 23, 2017

ZIMBABWE’S construction industry is in a precarious position, with operators living on the margins as they try to deal with underlying productivity, profitability, performance and sustainability challenges.
Industry players told the Financial Gazette’s Companies & Markets (C&M) that there are low barriers to entry in the construction industry due to the absence of industry regulations, a situation which has created a saturated market place with heavy competition.
Consequently, this has resulted in shrinking profit margins and constraining reinvestment in new technology and better business practices.
Construction companies have found themselves trapped between shrinking profit margins and stagnant production, meaning that companies in the sector are unable to generate the profit necessary to invest in critical technology.
As such, operating under such razor-thin profit margins means a single production surprise can wipe out profits for the whole company.
What is compounding this problem is labour productivity, which is stagnant. Direct labour time is spent waiting for materials and equipment.
This lack of productivity is reflected in the bottom line, resulting in a dramatic reduction in workforce. To cap it all, there is a crunch in skill trades, due to macro-economic problems in the country, which have drove many skilled craftsmen to leave the industry and they have never returned.
At its peak in mid 1990s, the construction industry, used to employ more than 50 000 people but the figures have plummeted to less than 10 000.
A combination of increasing project complexity and decreasing industry experience is a risk multiplier, increasing the risk of deliverable delays, quality construction problems, and employee safety concerns.
If one has been in Harare, or any other major city across the country, one would not fail to notice that there has been not been any crane in Harare’s skyline for many years, a sign that things have not been going well for the construction sector.
President of the Zimbabwe Builders Contractors Association (ZBCA), Ramson Nherera, painted a gloomy picture.
“The biggest challenge is funding of projects,” said Nherera.
“Government, which provided over 70 percent of construction work in the country, has no funding. This means that government, (whose purse is almost empty), still owes local contractors millions of dollars, meaning a lot of contractors are under stress.
The business model may be there; very clear but there is no money to fund that. Even if we go into private public partnerships (PPP), across the across, government has failed to repay its debt.
Nherera said the system does not favour local contractors.
“As local contractors, we may also want to go into the region but there is no system that protects us. “There is no government guarantee. We are not covered by insurance. If we go out there (in the region) and set up structures, we are not strong enough.
“In fact it’s not easy to go there (in the region) and work. For example, if a contractor want to set up an establishment in Zambia, one is required to part with US$250 000 as registration fees. Funding from local banks is also a problem. We don’t have a funding structure which is cheap. Therefore, we remain stuck with our old equipment because new ones are very expensive.
People are also cutting corners, and by so doing players come up with shoddy work.
“We also have a lot of people who are green because most of the experienced workers have going into the region and overseas for greener pastures.
Local contractors have been forced to downsize operations and retrench workers.
“We started downsizing and retrenching a long time ago. Because of little work, profitability is big problem. We used to have profit margins of between 15 percent and 25 percent, which was reasonable. But we are not having profit margins of between zero percent to two percent. This is not because work is not unprofitable but there are two many contractors for too little work.”
Politically, there are two feuding factions in the ruling party ZANU-PF-Team Lacoste and Generation 40 (G40)-which are tearing each other at every turn in the succession race to have a candidate to succeed President Robert Mugabe.
Nherera told the C&M that politics was affecting the sector.
He said: “There is polarisation in government. Officials are no longer making own decisions. They all wait for President Mugabe for any decision. This is affecting the sector.”
The country’s Look East policy has not been beneficial to local contractors as most of the contracts that are funded by the Chinese government are given to Chinese firms.
The industry is struggling to contain the influx of foreigners, especially the Chinese, into the country due to the absence of a legal framework to regulate the industry.
The situation has resulted in local players in the construction industry being sidelined from major projects, a situation that has gravely affected local players who have since expressed concern over their marginalisation in government projects.
The local players argue that government continues to award lucrative tenders to foreign companies especially the Chinese, who even bring in labour for menial work from China.
This situation has led to retrenchments, downsizing of operations and closure of a lot of local construction firms.
Local Government, Public Works and National Housing Minister, Saviour Kasukuwere, recently told the C&M that government was working on a new legislation to regulate players in the sector.
The law would have provisions for the establishment of a Construction Industry Council, which would regulate contractors.
This would protect the public from substandard products and workmanship, as well as control the influx of foreign players into the country’s construction sector.
He said: “My ministry is working on the enactment of the Construction Contractors Act.The proposed Act shall establish a Construction Industry Council which shall regulate the construction industry by ensuring registration and monitoring of the construction companies carrying out construction work in Zimbabwe.
“While we have the Architects Council, the Quantity Surveyors Council and the Engineering Council, it is not acceptable to point out that there is no law which regulates the contractors.
It is against this background that my ministry is working tirelessly to ensure that contractors Bill sail through.
Despite the challenges, there are however opportunities in the sector.
Government has lined up a number of infrastructure development projects which have the potential to unlock opportunities for growth in the sector.
Currently, President Robert Mugabe’s administration is under increasing pressure to rehabilitate the dilapidated road network and infrastructure.
According to official data from the Ministry of Transport and Infrastructural Development, the country’s road network has outlived its lifespan by more than 40 years.
Most of the country’s major roads were constructed before the country’s independence in 1980.
Currently, only about 20 percent of the national road network is in usable condition.
The country’s road network has been a key artery in the southern African region with traffic from South Africa passing through Zimbabwe on its way to Zambia, Malawi, the Democratic Republic of Congo (DRC) and some parts of Mozambique.
Consignments landing at the port of Beira in Mozambique have had to pass through Zimbabwe to Zambia, Botswana and Namibia, while there have been large volumes of traffic from the DRC to South Africa passing through Zimbabwe.
The treacherous roads, riddled with potholes and ragged sharp edges, have long been condemned as death traps accounting for most of the road traffic accidents that claim at least five lives per day, injuring dozens, according to 2015 statistics from the Traffic Safety Council of Zimbabwe.
The bad state of the country’s roads means that the amount of money required to rehabilitate them to international standards would be enormous given the huge funding gap.
About US$10 billion is needed to rehabilitate the country’s entire road network.
A few projects have taken place, including the rehabilitation of the 828km Plumtree-Mutare highway financed by a US$200 million loan from the Development Bank of Southern Africa.
Now, government has now prioritised the rehabilitation of the Harare-Masvingo-Beitbridge road, the Harare-Chirundu, Harare-Nyamapanda, Bulawayo-Victoria Falls and Bulawayo-Beitbridge highways.
Also to be rehabilitated are Bulawayo-Nkayi, Bulawayo-Tsholotsho, Kwekwe-Nkayi-Lupane and Buchwa-Rutenga-Sango roads.
The Mberengwa-West Nicholson, Karoi-Binga-Dete, Golden Valley-Sanyati-Kuwirirana-Nembudziya, Harare-Bindura and the Murambinda-Birchenough Bridge roads need to be widened.