THE INTERNATIONAL EXPERIENCE OF SOUTH AFRICAN CONSTRUCTION COMPANIES

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The Implications of Globalisation

Globalisation presents both risks and opportunities in developing countries, such as those in the Southern African Region. It also demands that the region becomes more competitive in attracting investment, applying new technology, and producing goods and services that can compete efficiently on the global market. National economies are no longer immune to external influences and cannot be insulated from global effects. No country or economy can function in total isolation. Today people are increasingly able to acquire information from all corners of the world. Consumers want to buy the best products at the best prices, no matter where in the world they are produced. In a globalised world business will become relatively smaller but more dynamic. We have seen this shift in the trend of major construction companies who mainly manage the construction procurement and complete mammoth projects without having a single bricklayer in their direct employ. Global construction output is estimated at somewhere between US$ 2500 and US$ 3000 billion annually. International construction accounts for between 3% and 4% of all global economic activity (Drewer, 2001).
Foreign aid funding is now coming with different strings attached. Governments are having to adopt prudent, free market policies to qualify for funds. The countries in Africa that are currently making headway are those that are complying with these requirements. Others are bound to follow. Barriers to entry are down and development possibilities are improving (Skeen, 1998). Increased globalisation means that any loss of relative competitiveness translates into a far greater loss of markets, abroad and at home. Jordaan (2001), states that: “Southern African countries are unattractive to global investors on account of their political instability, lack of accountable government, poor infrastructure and massive brain drain. Therefore investor confidence must be restored and the general perception changed if Southern Africa is to play a substantial role in the global economy. It is, however, important to take cognisance of the fact that almost all Southern African countries are engaged in market orientated reforms aimed at restoring investor confidence. Many previously state owned banks have been privatised and nearly all countries have established stock exchanges. Exchange controls have also been liberalised extensively, privatisation drives have created many opportunities and various investments incentives are in place. The SADC is arguably Africa’s fastest growing region but military disputes, in particular, are spoiling potential harmony.”

Globalisation and Regionalism

Driven by explosive growth of information, communication and other technological changes, the interrelated processes of globalisation and regionalism profoundly influence Africa’s development needs, risks and opportunities. Keeping pace demands literacy, numeracy and technical ability, skills that the majority of Africans do not possess. To enhance Africa’s competitive position in the global economy, African leaders are in the forefront of efforts to foster regional economic integration. They know Africa’s problems are not contained within the national borders; political instability in one country spills over to others; infectious diseases spread across borders; poor transport and communication infrastructure links between countries raise costs of doing business and reduce market size. Regional approaches can increase investment and improve economic performance. Economic integration in Southern Africa has been enhanced significantly through assistance of regional protocols relating to trade, finance, investment, transport, telecommunications, laws, amelioration of cross border trade barriers, facilitating efficient movement of goods between countries and frameworks for good governance. 2.3 Review of National and International Literature Identifying Most Notable Risks and Opportunities when Globalising Risks: Kerzner (2001), defines risk as a measure of the probability and consequence of not achieving a defined project goal.
Risk involves a notion of uncertainty. It has two primary components; a probability of the occurrence of the event and the impact of the event occurring. Risk constitutes a lack of knowledge of future events; an unfavourable event is called a risk. Risk increases with hazard but decreases with safeguard. A review of literature identified the risks discussed below. Thus, in this context, construction companies should identify these hazards and allow for safeguards to be developed to overcome the risks or to reduce risks to an acceptable levels. 2.3.1 Competition Many construction projects, which developing countries require for their socio- economic development, are beyond the capability of their local industries to undertake owing to the size, novelty and complexity of those projects. The effect of globalisation to these industries is therefore an inescapable fact due to the foreign input required to accomplish these projects, observes Ngowi (2002). In 1997, only 5% of the total international work carried out by international contractors was carried out in Africa, (Murray, 2000). This obviously has implications for South African contractors, which are currently focussing on the southern and sub-Saharan African markets. The regional scenario of contracting in Southern Africa is dominated by South African Contractors, following the downturn in contracts in South Africa, however certain countries have been penetrated and dominated by Chinese, European, Malaysian and Indian contractors. South African construction companies are thus forced to recognise and evaluate competitors other than their usual South African counterparts. In 1998, Murray and Roberts RSA ranked 45th amongst the top 225 international contractors with an international revenue of US$ 565 million and with 48% of their total profile being international work. Murray and Roberts climbed the league table from position 121 in 1995 to 45 in 1998.
What is evident from the ranking list is that the top ten international contractors earn over 50% of their revenue outside their home countries (Murray, 2000). are still lower than the 50% usual portion for established international contractors, however trends towards the 50% appear to be improving. Large European contractors, Bouygues and Hochtief, are shareholders of two of the seven companies. LTA and Grinaker have since merged to form Grinaker/ LTA an Aveng Group. Together, the seven companies make up about 39% of the South African share of the construction market and 61% is owned by others (Murray, 2000). South African construction companies also become targets for international take-overs. The South African Global Company Awards, in 2002, ranked Group Five, 17th amongst all companies in South Africa giving it a global index score of 29.3, stating that Foreign Assets are 28.55% and Foreign Turnover is 29.95%. Group Five decided to enter the global market in about 1998 and currently generates 37% of its revenue outside of South Africa. Mike Lomas, CEO, would like this to reach 60%, however Group Five would still like to remain in the top 3 companies in South Africa (SA Global Company Awards, 2002. An insert in the Star Newspaper, October 2002). The difficulties currently faced by established South African contractors can be summarised as follows (Murray, 2000):
♦ Intense competition from experienced European and United States companies in Southern Africa South African contractors choice of sub-Saharan Africa as a suitable market when in fact it is a very difficult one
♦ Lack of managers and experienced staff in international contracting, which is evidently different from domestic work
♦ Reluctance to invest in internationalisation. This takes a minimum of two years and may take up to ten to consolidate its position. Shareholder pressure during the learning curve may lead the company to take a half- hearted approach The gap between the local construction companies and their foreign counterparts for example in technology, finance, management and know–how could be filled through technology transfer via joint ventures. However, foreign firms are not keen to effectively transfer their technology since they believe that it means they would be nurturing their future competitors (Ofori, 2000). Large multi-national contractors form associations to spread risks and increase their critical mass. This is particularly noticeable with European contractors. Only recently have South African contractors began to associate themselves with European contractors instead of counterpart South African contractors. For this to be successful it is believed that strong representative organisations are needed. The advantages are, evidently, the dilution of risks and start-up costs. Competition however, causes South African construction companies to re-define their service offerings.

Political Stability

One of the distinct features of the developing countries is the political and insecurity problems they face. Due to political instability and war in the Southern African countries, they are unable to attract foreign private investments on large scales. For years now politics in Southern African countries are very sensitive to the politics of their neighbouring countries and, thus, viewed globally as a politically unstable region. Africa’s mostly costly and complex war continued in Angola, despite various efforts to bring it to a political settlement (Matlosa, 2000). Sporadic violent conflicts in Lesotho and recent interstate conflicts between Botswana and Namibia are other examples of political instability in the region. Zimbabwe’s legal system is in complete disarray and the country is crippled. Issues at the national and regional level, including inconsistencies in policies, laws and regulations, affect political stability, creating an environment of confidence or uncertainty for the return on capital investment. The lack of transparency in policy decisions is an indicator of political instability. The probability of occurrence of a political factor might be small but the impact could be relatively large. Some associated political factors are: Political takeover, war, allegations of corruption and nationalisation of assets.
Legal risk relates to unexpected changes in government policies pertinent to rules and regulations and currency conversion, absence of appropriate regulatory systems, rates and methods of taxation including customs, royalties, convertibility of currency, role of local courts in arbitration, and the methods by which electricity tariffs are set and approved (Kwak, 2003). Construction projects in developing countries face risks of various natures associated with political and insecurity problems. Stability is crucial for development. Government continues to be a major client in construction investment of most of the countries reviewed, implying that its workload depend mainly on government policies and direction. All SADC countries have embraced the practice of regular multi-party elections, with the exception of Congo-Kinshasa and Swaziland. In addition, positive development for democratic governance and stability in Namibia was followed by the ending of another long-drawn violent conflict in Mozambique in 1992. The peace dividend that Mozambique has enjoyed since then has been enhanced by the two successful elections held in 1994 and in 1999, respectively (Matlosa, 2000). Fraud and Corruption Southern African countries are cluttered with allegations of corruption and fraudulent dealings. Following such allegations, many construction projects are then either disrupted or cancelled with a negative influence on assistance by means of foreign aid.
Binnington (2002) warns that, “Obstacles may be put in the way of establishment and disestablishment unless appropriate palms are greased. And in case of disputes, some countries may make it impossible to remove plant from site.” The World Bank defines corruption as “abuse of public office for private gain”. Inevitably, political interference, coupled with the lack of transparency and regulatory institutions, bribery and corruption are widespread in international development projects. Corruption is based on using unlawful influence to extract additional costs to receive or give preferential consideration in awards and agreements (Kwak, 2003). It is not uncommon that only a minimal percentage of the money earmarked for development actually reaches the end user. Some people either deliberately create bureaucracy bottlenecks to attract bribes for themselves, or create bureaucracy ‘red tape’ to protect themselves from corruption allegations (Okema, 2000). According to a leading anti-corruption organisation, Transparency International, the construction and arms industries are leading business sectors with the greatest propensity to pay bribes (Okema, 2000).

CONTENTS :

• Declaration
• Acknowledgements
• Abstract
• Contents
• Schedule of Tables
• Schedule of Figures
• CHAPTER 1: THE PROBLEM AND ITS SETTING
  • Introduction
  • The Milieu of the Problem
  • Sub-Problems
  • Hypotheses
  • Delimitations
  • Definitions
  • Assumptions
  • The Importance of the Study
  • Research Methodology
• CHAPTER 2: LITERATURE STUDY OF SELECTED RISKS AND OPPORTUNITIES THAT EXIST WHEN GLOBALISING INTO SOUTHERN AFRICA
  • 2.1 Introduction
  • Globalisation
  • What is Globalisation?
  • Why Globalise?
  • The Implications of Globalisation
  • Globalisation and Regionalism
  • 2.3 Review of National and International Literature Identifying
  • Most Notable Risks and Opportunities when Globalising
  • Risks:
  • Competition
  • Political Stability
  • Fraud and Corruption
  • Culture
  • Foreign Exchange
  • Research, Documented Industries and Quality
  • Assurance
  • The Impact of HIV/ AIDS
  • General Risks
  • Opportunities:
  • Funding and Foreign Aid
  • Information Technology and Management Capability
  • Associations and Joint Ventures
  • Advance Payments (A Method to Reduce Certain
  • Political Risks)
  • General Opportunities
  • 2.4 The Current Status of Selected SADC Countries
  • The Analysis of Selected SADC Countries in terms of
  • Risks and Opportunities
  • Angola
  • Botswana
  • Lesotho
  • Malawi
  • Mozambique
  • Namibia
  • Swaziland
  • Zambia
  • Zimbabwe
  • 2.6 Conclusion
• CHAPTER 3: THE INTERNATIONAL EXPERIENCE OF SOUTH AFRICAN CONSTRUCTION COMPANIES
  • 3.1 Introduction
  • The Results of the Interviews
  • Why Globalise?
  • To What Extent are the Major Domestic Construction
  • Companies Globalising into Southern Africa?
  • What are the Risks Encountered in the Selected
  • Southern African Countries?
  • What are the Opportunities Encountered in the
  • Selected Southern African Countries?
  • 3.3 Conclusion
• CHAPTER 4: AN EVALUATION OF SELECTED RISKS AND OPPORTUNITIES IN SELECTED SOUTHERN AFICAN COUNTRIES
  • Introduction
  • The Evaluation of the Risks
  • The Evaluation of Opportunities
  • The Evaluation of Selected Southern African Countries
  • Conclusion
• CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
  • Summary
  • Globalisation
  • The Current Status of Selected SADC Countries
  • Risks and Opportunities Identified from the Literature
  • Review Associated with Globalisation into
  • Southern Africa
  • The International Experience of Risks and
  • Opportunities Associated with Globalisation into
  • Southern Africa
  • An Analysis of the Risks and Opportunities in Each
  • Selected SADC Country
  • Conclusion
  • Recommendations
  • Scope for Further Research

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