South Africa Infrastructure Report Q2 2008

South Africa is in the midst of a power crisis. Eskom, the country's main power utility, has been forced to implement a scheme of load shedding - scheduling and rotating power cuts when demand outstrips supply. In February 2008, Eskom announced that it was capable of supplying 38,500MW, while recording that demand was reaching 36,700MW. Shortages can be triggered by a sudden surge, at which time Eskom initiates load shedding to keep vital industries with power. The current power constraints stem from underinvestment in South Africa's power sector. The South African President Thabo Mbeki has admitted that the government refused Eskom's request for more investment in the country's power sector several years ago.

Continuing power shortages will start to impact upon South Africa's economy. The country's power constraints have already hit South Africa's mining sector. In January 2008, the country's mines were forced to operate on 80% of normal power consumption. This led to Goldfields, the precious metal producer, suspending its operations, BHP having to stop mining at its manganese facilities and Anglo American stating that it had shut five out of its nine coal mines. South Africa's power shortage has spread past its borders to neighbouring African states, which are reliant on imported power from South Africa. With Eskom unable to provide a surplus for export, Botswana, Lesotho, Mozambique, Namibia, Swaziland and Zimbabwe have witnessed a decline in supply stability. In January 2008, Lesotho and Swaziland experienced power cuts, while Zimbabwe and Mozambique were hit by complete blackouts.

The power constraints have started to affect the infrastructure of the nation. The population have been hit the most, with domestic power the most regularly cut during the rolling power cuts. Fears have grown in South Africa's water sector, with load shedding sometimes taking place more than once within a 24-hour period, leaving water companies unable to fill their reservoirs by 70% and so struggling to meet customer demand.

Eskom has announced that it will honour agreements it has already made to provide electricity to major building projects; these include the Gautain and work associated with the 2010 World Cup. The power utility has announced that it is not halting new developments but says that it will take four to six months for it to process applications that require over 100kV. This will endanger building projects and so the country's construction sector. Developments such as residential projects, petrol stations and shopping malls require advance power guarantees before construction can begin.

The power crisis looks set to continue in the short to medium term, as no major power projects are due online in this time period that will alleviate the electricity shortages. The South African government has an initiated a mid- to long-term plan to increase the country's electricity capacity. In 2013 the first of three power plants will come online. Plans are also in place to rebuild the country's electricity surplus, with five nuclear power plants in the pipeline, the first of which will be ready by 2016.

The South African construction industry has displayed impressive growth in the last few years and holds immense scope for future expansion. The forthcoming 2010 FIFA Football World Cup is expected to provide a tremendous boost to infrastructure development in the country. BMI expects the industry to grow at 6.14% during 2008-2012.

State-led projects in the areas of energy and transport infrastructure currently form the bulk of ventures in the construction industry. The government is also committed to the development of low-cost housing infrastructure. High levels of economic growth in South Africa and other emerging nations such as China and Russia are expected to boost activity at the country's ports. Furthermore, the 2010 World Cup has spurred hotel construction in South Africa. Major projects planned or currently underway include the construction of the Medupi and Matimba B power stations, the Coega Aluminium smelter in Eastern Cape, the Gautrain rapid rail link and the Ngqura deep-water port.

The South African construction industry is dominated by a few large players, which account for as much as 75% of the total output in the industry. The rest of the industry is rather fragmented. The country suffers from an acute shortage of skilled labour, limited access to power and inadequate financial and legal infrastructures, which have much scope for improvement. The industry is also excessively dependent on government contracts. Furthermore, the country may be underprepared for high growth, which may result in a shortage of building materials, including cement, in the coming years.

The South African construction industry is engaged in a black empowerment exercise in response to the low numbers of blacks in positions of power among the country's leading contractors. The president of the South African Association of Consulting Engineers recently said black empowerment was the most important and pressing issue faced by the industry. Fewer than 5% of the registered engineers in South Africa are black.

With less than 3% contribution to the country's gross domestic product (GDP), there is immense scope for growth in the South African construction industry. Despite all the risks, the industry is expected to be valued at ZAR94.80bn (US$9.97bn) by 2012, making up 3.31% of that year's GDP.