ENGINEERING: Challenging Conditions For Consulting Industry
Recent Western Cape Business News
The results of the bi-annual Consulting Engineers South Africa (CESA) Economic and Capacity Survey for the period January to June 2010 just released indicate that conditions in the consulting engineering industry continued to be extremely challenging. The general economy is recovering well after the sharp recession but despite the much talked about R846 billion to be spent over 3 years, capital expenditure is slowing down with delivery bottlenecks to execute micro economic policies at the heart of the problem.
Increased spending by government and state owned enterprises, supported consulting engineering confidence during a time when the economy and the business sector showed considerably weakness while project postponements and delays in project implementation affected confidence in the contracting fraternity. Civil contracting confidence deteriorated from an average of 34,0 in the last six months of 2009 to 29 in the first half of 2010. Lack of funding and a review of capital expenditure plans have now also affected confidence in the consulting industry
Despite this fee earnings in the first six months of 2010 were expected to decline by 2%, but earnings were better than expected and increased by 2,9%. The industry is still grappling with lower revenues, as fee earnings have fallen by 8% y/y in real terms (adjusted for inflation (CPI)). Order books for confirmed appointments have increased by 21% since the June 2009 survey, compared to a 29% decrease in the December 2008 survey. This means the gap between current income and order books is widening, translating into fewer prospects for future earnings. The contribution of GFCF to GDP averaged between 20% and 22% during the last five quarters, a marked improvement from an average of 17% in 2005. Over the last four years there has been a substantial increase in fixed capital, necessary to support longer term and sustainable economic growth with the construction sector contributing 49% to GFCF.
Confidence levels did not deteriorate as badly as expected in the first half of 2010. The level of optimism for working conditions in the first six months weakened to a level of 74,6 in the December 2009 survey, but actual working conditions were better than expected and confidence recovered to 87,1. The outlook for the next 6 months of 2010 is poorer conditions yet again with confidence deteriorating to 71,9, but recovering quite strongly in the first half of 2011 to 93,6. The depressed outlook in the consulting engineering industry will have a lagged impact on industry turnover, affecting downstream opportunities for suppliers and contractors.
Fee earnings outstanding from local government, for longer than 90 days, remained at above 16%, the highest level since the December 2004 survey when fees outstanding escalated to over 14%. Fees outstanding from provincial governments moderated to 14,7% (from 27% in the December 2009 survey). Payments from the private sector deteriorated to over 65% outstanding for longer than 90 days. The overall rate has skyrocketed to above 20%, from 18% in December 2009. This means the consulting industry is hit twice as hard, on the one side, by a contraction in demand and on the other side, a tendency by clients to withhold payments for work already completed. This has serious implications for the industry, already struggling with fewer work opportunities, lower margins and increased competition. Competition in tendering has intensified.
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