EMPLOYMENT CREATION AND CONSTRUCTION SMME INVOLVEMENT IN DEVELOPMENT PROJECTS IN SOUTH AFRICA - A SECTOR AND SUB SECTOR ANALYSIS

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1 WORK2001 First International Conference on Employment Creation in Development University of the Witwatersrand Johannesburg, South Africa, 2-5 April 2001 Work2001 EMPLOYMENT CREATION AND CONSTRUCTION SMME INVOLVEMENT IN DEVELOPMENT PROJECTS IN SOUTH AFRICA - A SECTOR AND SUB SECTOR ANALYSIS Glenn Havemann, Development Bank of Southern Africa. (DBSA) South Africa. Conrad van Gass, Development Bank of Southern Africa. (DBSA) South Africa. Abstract This is the first of two articles. This article analyses the relative potential for job creation in the Construction sector in South Africa, its various component sub-sectors (e.g. Civil Engineering and Building) and on DBSA projects. The second article A Project Analyses of Employment Creation and Construction SMME involvement in DBSA funded Projects -The involvement of Women in the Construction Sector. (Ingrid Verwey and Glenn Havemann 2000). The two case studies raise the issue of entrepreneurial development in the Construction sector and should be read in conjunction with the first article. Keywords: sector, construction, employment, job

2 1. Introduction This is the first of two articles. This article analyses the relative potential for job creation in the Construction sector in South Africa, its various component sub-sectors (e.g. Civil Engineering and Building) and on DBSA projects. The second article A Project Analyses of Employment Creation and Construction SMME involvement in DBSA funded Projects -The involvement of Women in the Construction Sector. (Ingrid Verwey and Glenn Havemann 2000). The two case studies raise the issue of entrepreneurial development in the Construction sector and should be read in conjunction with the first article. 2. Development policy: Investment led Entrepreneurial Development A key feature of developmental policy in South Africa is the utilization of above-average employment [and small-enterprise] generating capacity of investment in constructed assets. Construction sector activity is the most labour intensive of the economic sectors, after Tourism and Community services. Roughly one third of employment generated through construction activity is for low skilled labourers (DBSA Annual Report 1999). Semi-skilled, artisanal, supervisory and managerial occupations constitute the remaining employment. It is from the ranks of these occupations that small entrepreneurs are most likely to emerge. The National Department of Public Works has played a leading role in establishing construction industry policy, regulatory frameworks and guidelines in support of job creation and SMME development. Various instruments to ensure delivery of social policy such as the Preferential Procurement Policy Framework Act No 5 of 2000 bear testimony to the extent to which the public sector, in consultation with the formal and emerging construction sector, is committed to the implementation of social development. In order to evaluate job creation on DBSA projects, national averages or norms for the South African construction sector were used to establish a basis of comparison. These were collated for the period 1995/96 to 1999/00. The comparison is established to enable the DBSA to evaluate the extent to which its projects facilitate the government s developmental policy objectives relative to other players in the construction sector. Further to maximizing job creation in the construction sector, government and DBSA policy aims to: (a) Increase the role of small enterprises in both construction and related activities (such as maintenance, security, catering and other service sector activities, and (b) Target the increased involvement of women, youth and the disabled as both employees and entrepreneurs. Unfortunately, national averages or norms with respect to (a) and (b) above cannot be calculated without available data.

3 3. Job Creation and Entrepreneurial Development in the Construction Sector To comply with construction sector policy and procurement reform, public sector and parastatal financed construction projects (including many public-private partnerships) in the post 1995 period have included arrangements to engage SMME s in the construction process. The application of the Employment Equity Act has also had a profound impact on the governance structures, management and marketing approaches in private sector investments in infrastructure, with social development issues remaining high on their agendas. This has resulted in an increase in compliance with the same social development policy, empowerment considerations and procurement reforms applied in the public sector projects (See table 4). Project designers now routinely make use of design for development and labour-based approaches, engage targeted groups of small contractors and include women, the disabled and the youth in the construction process. Decisions regarding SMME participation requirements, suitability of work packages and training and financial support programmes are agreed in consultation with small, medium and micro enterprises. These SMME s are involved not only in construction activity but also in the manufacture and distribution of materials and components as well as site-related service activities such as catering, security, laundry etc. Many of these activities are informal sector spin-offs and are often lost to the job creation recording and measurement process. Although the established construction sector has expressed reservations about its capacity to contribute to the upliftment of the emerging construction given the additional costs of social development, the sector appears to have rapidly adapted to the new construction sector policy and procurements requirements and now regards a working knowledge of social development as a tradable credit likely to provide a competitive edge in the bidding process. 4. Sources and Analyses 4.1 Construction Sector Policy and Regulatory Frameworks Job creation and SMME policy directives initiated in the National Department of Public Works white paper Creating an Enabling Environment for Reconstruction, Growth and Development in the Construction Industry (June 1998) are reinforced in the Preferential Procurement Policy Framework Act No. 5 of 2000 in which preference is given to previously disadvantaged SMME s including women, youth and the disabled. Training initiatives and incentives play an important role in SMME development. The Skills Development Act No 97 of 1998, the South African Qualifications Act (SAQA Act 1995) and the Employment Equity Act No 55 of 1998 provide the platforms for SMME training. The Skills Development Levies Act No. 9 of 1999 provides the funding base (the National Skills Fund) which is intended to pay for the development of skills of people who have no access to training such as people in informal employment, the unemployed, physically disabled youth and the imprisoned. Levies are also paid back to companies (to a maximum of 50% refund) to provide incentives to train in workplace skills. Entrepreneurial training in the construction sector falls under the Construction Education and Training Authority (CETA), which is one of twenty-seven sectors on the SETA (Sector Education and Training Authority). These bodies are coming on

4 stream during 1999/2000 and should stimulate entrepreneurial development in the construction sector. 4.2 Data Limitations The statistical data published by the South African Central Statistical Services does not distinguish between conventional projects and development projects, nor does the data indicate the participation of women, the disabled or the youth. The authors were unable to separate the labour and emerging entrepreneurial employment figures, both appear as one figure under the employment umbrella. Nonetheless, the data was of great assistance and enabled the authors to compile the tables indicating the person years per R1 million attained in infrastructure investment for the five-year period ending (See table1). 4.3 Data illustrating Job Creation in the Construction Sector The data on jobs created in the construction sector has been sourced from the South African Central Statistical Services (SA Stats) 1999 statistical data for the Construction sector and its Civil Engineering and Building sub sectors, the SARB Quarterly Bulletin December 1999, Statistical release P1027, Surveys of Total Employment and Earning September 1999 and the Census Brief The number of jobs created or alternatively the employment generating capacity of the construction sector and sub sectors of Civil Engineering and Building is expressed as the number of person years per R1 million invested in infrastructure and determined by dividing value added (expenditure) into employment. 4.4 Data illustrating Labour and Entrepreneurial Outcomes in DBSA funded Projects As is mentioned above, the data that illustrates the extent to which the construction sector acts, as a vehicle for emerging entrepreneurial growth, remains speculative. Nonetheless data obtained from completed projects in the DBSA investment portfolio has provided some insight into entrepreneurial empowerment and is dealt with in the two case studies in the second of these articles. The data on labour and entrepreneurial outcomes (combined) was selected from DBSA-funded projects in the water, sanitation, energy, roads, communications, education and entrepreneurial support sectors over the past five years. Although labour and entrepreneurial opportunities are separately recorded in DBSA projects, the DBSA reports express the sum of all these opportunities taken up by labour from communities and emerging entrepreneurs as a percentage of the total project cost. This enables comparative benchmarks to be set for each of the infrastructure sectors that the Bank invests in. (See table 3) 4.5 Data illustrating Construction Sector compliance with Policy and Regulatory Frameworks The data illustrating the extent to which the construction sector is in compliance with Job creation and construction SMME development policy and best practice has been sourced from

5 the DBSA / Ntsika evaluation reports of the private public partnership concession contracts awarded by the South African National Road Agency- (SANRA). Additional information on social development policy requirements was sourced from the National Public Works emerging contractor development programmes and the Development Bank of Southern Africa s Construction and Development Series. (See references). In the component studies (See table 4) the measurement of compliance is mirrored in the percentage of the total project cost awarded to labour and entrepreneurs. In theory, the higher the percentage the greater the commitment. 5. Findings 5.1 Job Creation in the Construction Sector. The South African national accounting data allows for the estimation of employment-generating capacity in the Construction Sector and its civil engineering and building components. Civil engineering activities include the construction of water, sanitation, energy and road infrastructure whilst building activities include community facilities and housing. Specific job-creation ratios for these activities have been calculated using DBSA project data, normalized against construction sector norms. (See table 1) The national benchmark for the Construction Sector for 1999/2000 is person years per R1 million, which is made up of for Civil Engineering and for Building. (Refer Table 1). Clearly, the Building sub sector provides more opportunities for job creation than does Civil Engineering. As previously stated these statistical benchmarks do not reflect the extent to which entrepreneurial development and empowerment has taken place. Table 1 Estimated national averages for components of the Construction Sector for 1999/2000 Civil Engineering (Infrastructure) Number of person years per R1mil spent Building Number of person years per R1mil spent Water Sanitation Electricity Roads Agriculture Educational Social community Commercial Telecommunication nk. Average Average Employment Generating Capacity The measure of employment-generating capacity is person years per R million. This is derived by dividing value added (or expenditure) into employment. Between 1995/96 and 1999/00, person years per R million spent dropped from to in nominal terms. This decline though does not distinguish between that due to actual job losses and the impact of inflation in devaluing the unit of measurement (R million). One R million in 1999/00 buys considerably less labour than one R million did in 1995/96.

6 To strip away the effects of inflation, person years per R million can be expressed in real terms. Over the past 5 years, employment-generating capacity has declined from to for every R million spent (in 1995 prices). This is the effect of labour shedding technological and organizational change. Thus, of the nominal decline in employment creating capacity from to person years per R million spent, just over half reflects job losses and just under half is due to devaluation of one million rand as a result of inflation (See table 2). Table 2 National Construction Sector norms for Employment-Generating Capacity 1 95/96 96/97 97/98 98/99 99/00 Average annual % change Gross Value Added R15, , ,386 20,681 22, (R million - nominal) Estimated Employment (Person Years) Employment Generating Capacity (Person Years per R million - nominal) Gross Value Added (R R15, ,092 16,572 16,774 16, million - real) Estimated Employment (Person Years) Employment Generating Capacity (Person Years per R million - real) Declining Employment Value-added by the construction sector has increased in nominal terms (or current prices) by an average of just under 10% p.a. over the past 5 years. However, stripped of the effects of building inflation, construction value has increased in real terms by only 1% per annum over the same period. By contrast, recorded employment has been declining by an average of over 7 % per annum between 1995/6 and 1999/ Job Shedding Widespread across the Economy Job shedding growth has been a feature of most economic sectors during the course of the 1990s. This can be attributed to labour saving technological changes and methods of organizational restructuring. A complicating factor with respect to measurement, especially of the construction sector, is the shift from recorded formal sector employment to unrecorded informal sector underemployment. According to the Reserve Bank Quarterly Bulletin of December 1999, the construction sector has grown at 1.03% p.a. between 1995 and This is less than half the average annual growth of the economy as a whole at 2.22 % p.a. in real terms (i.e. after taking out the effect of inflation). 1 Data sources included SARB Quarterly Bulletin, Dec 99; Statistical Release P1027, Survey of Total Employment and Earnings, Sep 99 and Census Brief 1996.

7 The Construction sector s share of total capital formation has also been declining. During the period 1994 to 1998, constructed assets as a proportion of total capital formation has declined from 38% to 32%. Most new investment has been used to purchase machinery and equipment, primarily in the form of upgrading information and communications technology. The labourreplacing nature of these new technologies is of concern if maximizing employment generation in the economy is the primary objective of developmental policy. 5.5 Labour and Entrepreneurial Outcomes in DBSA projects The development projects below were extracted from evaluation and research reports and tend to typify the various sub sectors and their propensity to provide job opportunities. Employment was recorded as number of jobs created during and after the construction phase and expressed as a percentage of total project investment cost. Project benchmarks were determined on the basis of actual recorded outcomes of similar projects considered to have successfully adopted job creation policy. For example a building project in Educational facilities (Building) should provide job opportunities in the benchmark range of between 7% and 20% of the total project cost whereas labour intensive sanitation projects are known to provide job opportunities in excess of 46% of the total project cost. (See table 3) Table 3 Case studies of Job creation and Construction SMME involvement in development funded projects Construction sector Project Job opportunities as percentage of total project cost Civil Engineering - Telecommunication The Mozambique Fibre Optic Submarine Cable project 0.25 Civil Engineering water Driekoppies dam 0.75 Civil Engineering 2 electricity Civil Engineeringsanitation Building-Educational facilities Eskom 1997 bulk reticulation electrical reticulation programme Electrification projects for households Southern Free State labour intensive construction sanitation project 8 46 Pretoria Technikon project 20 The above percentages represent recorded employment on site during the construction phase of the various projects. Projects that have adopted labour intensive approaches such as the Southern Free State sanitation project clearly reflect a high percentage of employment. Conversely, a construction process that requires heavy or high technology equipment such as the Driekoppies Dam and Mozambique Fibre Optic Cable project do not lend themselves to employment creation or entrepreneurial opportunities.

8 5.6 Construction Sector compliance with Policy and Regulatory Frameworks The following case studies illustrate the extent to which private and public sector projects are complying with the job creation and SMME policy directives initiated in the National Department of Public Works white paper Creating and enabling environment for Reconstruction, Growth and Development in the Construction Industry (June 1998) and reinforced in the Preferential Procurement Policy Framework Act No.5 of Table 4 Case studies of compliance and employment outcomes in public, private, private public partnership and development funded projects Case studies Areas of compliance Outcomes as a percentage of cost Sun International Carnival City Brakpan Concessionaire contract with the Trans Africa Concessionaire (TRAC) N4 Maputo Toll Road Public Works projects Development Bank of Southern Africadevelopment funded projects. New Casino license to construct, manage and operate a casino. Implemented SMME set a sides in the construction process, equity ownership and Service Level Agreements Concessionaire contract for the design, finance, operation and maintenance of a national toll road. Implemented a comprehensive socio economic development strategy around job creation, SMME and community development Tenders for the construction and maintenance of projects. Tenderers are required to implement labour intensive and emerging contractor development programmes Pre-requisite to disbursement in DBSA funded projects. Implementation of the development impact approach, job creation and involvement of SMME s 70% of the cost of the construction work awarded to SMME s (Reznik 2000)- (Rogerson 2000) 14.6% of the cost of the SA section of the toll road construction works awarded to SMME s. (Rogerson 2000) Community Based Public Works Programme and Emerging Contractor Development Programme Outcomes vary according to the type of project See table 3 above. Varies per sector from 0.25 to 46% of the project cost and upward 6. Disturbing Trends in the Uptake of Labour and Entrepreneurial Job Opportunities The DBSA/ Ntsika evaluations and research indicate that despite a keen desire to participate, the inability of construction SMME s to take up job opportunities is severely impacting on their participation and subsequent development. This is due not so much to lack of SMME skills but to inadequately structured, funded and implemented development support that would enable SMME s to access venture capital, bridging finance and credit lines. The evaluations conclude that where current private and public sector development support is accessible to SMME s, this is being overtaken by the increasing demands for financial assistance. The question is no longer what opportunities can be created for entrepreneurial development in the construction sector but rather how can SMME financial support be effectively structured to ensure sustainable development.

9 7. Conclusion It is important to note that although SA statistics represent the outcomes of job creation, the statistics do not enable the extrapolation of entrepreneurial opportunities for the reasons given above nor do they capture the periphery informal and formal entrepreneurial opportunities that the construction process creates in the supportive sectors such as manufacturing. At best the statistics offer an indication of the construction sector s potential for creating employment and which of the component sub sectors of Civil Engineering and Building favours job creation. This potential could however be eroded if Construction SMME s are unable to take up the job opportunities on offer as a result of inadequate institutional and financial support. Additional factors that are intended to create an enabling environment for the employment and development of entrepreneurial skills in the construction sector such as the training incentives offered through the Construction Education and Training Authority (CETA) will need to be recorded and assessed over time. Acknowledgements Thanks are offered to those Construction SMME s in development projects in the construction sector countrywide, in particular the presidents of the small contractor association s EBCAT (Mpumalanga), REGBUF (Northern Province), WCECC (Western Cape), the Black Construction Council (BCC), the South African Women in Construction (SAWIC) and other associations who have provided wonderful insight into the realities on the ground. Thanks are also extended to our colleagues in the Development Bank of Southern Africa who have contributed in one way or another in building up a storehouse of knowledge and wisdom in all matters relating to socio economic development. All errors and opinions expressed in this article are the authors responsibility. References Annual Report; (1999) Development Bank of Southern Africa Construction Education and Training Authorities (CETA) An organ of the Sector Education Training Authorities Section 9 (1) of the Skills Development Act No 97 of Kornegay, F., (2000) Assessing the effectiveness of the DBSA policy and delivery process in supporting the empowerment of construction SMMEs in infrastructure investment. Unpublished evaluation report prepared for the Development Bank of Southern Africa. Milne, C., (1994) Construction and Development Series.The Socio Economic Enhancement of Development Projects. Policy guidelines of the Development Bank of Southern Africa Preferential Procurement Policy Framework Act No 5 of Rogerson, CM., (1999) Investment Led Entrepreneurship Development: An Investigation into the impact of large investments on the SMME sector Report prepared for the Development Bank of Southern Africa and Ntsika Enterprise Promotion Agency.

10 Rogerson, CM., (2000) Investment Led Entrepreneurship Development: Tourism and Small Enterprise Development in South Africa. - Report prepared for the Development Bank of Southern Africa and Ntsika Enterprise Promotion Agency. Treaty establishing the Southern African Development Community: SADC Protocol on Transport, Communications and Meteorology. - Southern Africa Transport and Communications Technical unit (SATCC-TU) March White paper for Works: (1998) Creating an enabling environment for Reconstruction, Growth and Development in the Construction Industry White paper: by the Department of Public Works in collaboration with the Departments of Transport, Water Affair and Forestry, Housing and Constitutional Development. Contact Details Glenn Havemann Construction SMME Development Specialist Business Unit Development Bank of Southern Africa , fax cell glennh@dbsa.org Conrad van Gass Policy Unit Development Bank of Southern Africa cvgass@iafrica.com