Covid-19 disruption to the construction sector
By Daniel Otto
Although construction companies will continue with some activity in the short term - largely because construction works were not stopped by government under the lock down - in the long term, they are likely to face stress that could threaten their very existence, global consulting firm Delloitte has warned.
Javier Prada, Delloitte’s global sub sector leader for engineering & construction said the stress will arise from public projects owing to long term suppressed demand, as governments face rising deficits in the coming months, and possibly years.
He added that the private sector investments in commercial and residential projects will as well be affected because works will be dampened by unemployment and therefore reduced demand, low GDP and wariness amongst investors in which they will be tempted to conserve their money as they watch the evolving Covid-19 situation.
Delloitte said in the mid and long term, supply chains –including sub-contracting and materials supply- may be disrupted , affecting the flow of the works.
In their report, Understanding the Sector Impact of Covid-19 on Engineering and Construction, Delloitte said that because of Covid-19, many engineering and construction projects are expected to go through suspension, re-negotiation or termination.
In this process, construction companies with high levels of debt and low cash reserves may hit a liquidity turbulence. Besides, the entire structure of the construction sector is likely to freeze as international companies will have to go through serious soul-searching regarding their international presence. A number of companies will have to reconsider which regions and countries to pull out from, and which to maintain a presence in.
The Delloitte report also says that companies are likely to consider reducing their staffing levels as they restructure to try to stay viable. They will have to reconsider their supply chains, including sub-contracting arrangements. Moreover, many companies will now have to leverage on technology for efficiency, cost-cutting and generating savings.
International business will also be affected as many countries will as part of their recovery efforts are likely to place more restrictions on international companies, while favouring local capacity.
In their 2019 Africa Construction Trends Report- an annual publication that analyses trends on the construction projects valued at US$50 million and above on the continent, Delloitte reported that a majority of big projects on the continent belong to governments. They also reported that in the year a majority of the big projects on the continent were financed by China and were being implemented by Chinese contractors.
The report further showed that in 2019, East Africa (as opposed to other regions of the continent-North, West and South) had the highest share of the number of projects of over US$50 million in value. Nearly 40.3 per cent (US$146 billion) of the total investment on the entire continent (US$497 billion) was in East Africa. In terms of the number of projects, Kenya and Tanzania had the highest number of projects per country, anywhere on the continent- with each of them having 51 projects. In terms of the monetary magnitude of projects, Tanzania comes third –only after South Africa and Egypt correspondingly with the projects with the biggest amount of money.
This means that any long term impacts of Covid-19 on the East African construction sector will be felt by the economies in the respective countries and in the region.