The results of CESA Bi-annual Economic and Capacity Survey for the period July to December 2020 were recently released. An analysis of questionnaires completed by active firms in the consulting engineering profession provides a proxy for current and expected working conditions for the profession, which can be measured and benchmarked on a regular basis.

“The results are indeed interesting after what is expected to be the biggest contraction in global economic activity since 1930,” says CESA CEO, Chris Campbell. Stats SA has confirmed that the South African economy collapsed a staggering 7% in 2020 year on year. “The construction industry again got the short end of the stick, being the worst performing industry in the economy in 2020, with construction GDP down a crippling 20.3% in the year. This is largely due to the sector not being declared an essential service during hard lockdown, as it was in other countries,” comments Campbell.

The report states that a serious injury to the economy in the medium to longer term is contractions in construction investment, with the civil industry contracting by just over 18%. Looking at investment by client, the private sector heavily disinvested in the construction sector. “This was expected. But what was more unexpected is that state-owned entities also massively disinvested in the industry – by 27.2% to be exact,” adds Campbell.

Confidence reaches an all-time low
The consulting engineering confidence index dropped to a new all-time low of 19.2%, from what was a previous all-time low of 29.6 points in the prior six-month period. “This is the most negative consulting engineers have ever been, although the outlook is slightly better when looking at confidence for the next 6 and 12 months. This is a marked decline in just a six-month period,” explains Campbell. The large firms are by far the least confident in the current state of the consulting engineering industry.

A dim outlook for small and large firms; medium firms getting by
The survey found that fee earnings for the period contracted 10.6% compared to the first six months of 2020. While medium sized firms managed to increase their fee income by 5.9%, small and micro firms found their fee income decrease by 43.1% and 146%, respectively. “This does not bode well for small and micro enterprise development in the sector, however, all the survey respondents expect fee income to be better in the next six-month period,” says Campbell.

The industry’s return on working capital moderated quite considerably again, to just 16.9% in the December 2020 survey. There was a greater variance between the different sized firms, with large firms reporting dismal figures of just 9.7% on average, who seem to have been harder hit, at least in terms of return on their assets. Medium sized firms were the only group that managed to grow their return on working capital in the latter part of 2020, up to 26% from 19.2%

In terms of the ratio of fees not yet invoiced for confirmed appointments in order books in relation to current earnings, there was a deterioration in the current survey. “A decrease in the order book to income ratio suggests a deterioration in pipeline earnings, suggesting worse conditions in the next six to 12 months, which is to be expected given the pandemic and the economic fallout,” explains Campbell. Medium firms again came out the best, with the highest proportion of 0.9. The large, small and micro firms all reported much lower ratios.

Attitudes about profit during a pandemic
Most engineers reported that they expect their profits to increase over the next six-month period. “This could be testament to how bad things actually were during the hard lockdown of April and May last year,” says Campbell.
Another interesting development is that 70% percent of respondents are satisfied with their profit margins. “This could be because of how bad the economic collapse has been; people are just happy to have work.”

A look at the labour force
Employment decreased by an average of just 0.2% in the latter half of 2020, compared to the previous six months of 2020 which had seen a 5% decrease. This is a modest decline given the state of the overall economy but comes off the back of 18 months of decreases. The biggest decreases in employment were in medium and micro enterprises of 5.8% and 4.6% respectively. Looking at the percentage of firms wanting to increase staff in the next half of the year, the numbers are mixed, but up considerably for engineers and technologists. A total of 54.9% of respondents wanted to increase their number of engineers, while 62% want to increase their technologists.

Government continues to hold off
The private sector contributed most to fee earnings, with 42%. “This is more or less in line with the longer term averages, but has increased over the last ten years or so, with the private sector playing a bigger role in the construction industry, as the state disinvested from the broader industry over time. It is however quite surprising, given the economic collapse, as government were expected to make up a bigger share.,” comments Campbell.

“The general industry outlook is not positive. Consulting engineering firms are struggling to stay afloat. Large firms are generally geared up for large infrastructure projects and smaller firms have limited access to international markets, both face the challenge of survival in a significantly reduced local market. This landscape needs to change urgently and there is no doubt that the pace of the much spoken about investment in infrastructure development as a catalyst for economic recovery of the Country needs to pick up,” concludes Campbell.