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4 The Role of the Construction Industry in the Delivery of Infrastructure in

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 4 The Role of the Construction Industry in the Delivery of
Infrastructure in South Africa
ANDREW MERRIFIELD
Introduction
Since the advent of South Africa's first democratically elected government, the
construction sector has been expecting a sustained revival in the industry. After
experiencing the longest economic recession since the 1940s, which left the
construction sector at perhaps a third to a half of its 1980 capacity, the industry
now faces the prospect of vastly increased demand from both the public and
private sector if the policy objectives of the new government are to be realized.
This chapter therefore sets out to review the role of the South African construction
industry in the delivery of infrastructure. It analyses the industry over the last 30
years, and then attempts to assess its ability to deliver infrastructure in terms of
the new government's stated policy objectives. In seeking to understand the
industry's potential to address infrastructure backlogs, this chapter seeks to
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identify key structural weaknesses. In particular, it identifies recent changes in the

production regime on site and indicates how these changes have undermined the
institutional framework that previously supported the development of the industry.
It briefly describes the industrial strategies adopted by the new government to
address these problems and then assesses their feasibility in terms of trans-
forming the organizational, institutional and industrial practices of the industry.
A Historical Review of Infrastructure Delivery
Since a more comprehensive analysis of infrastructure investment trends is
covered in another chapter, this chapter merely focuses on the effect of those
trends on the construction industry itself. In the chapter on infrastructure
investment (Chapter 5 "Financing of Public Infrastructure Investment in South
Africa"), it is shown that investment in construction goods and services, as
measured by Gross Domestic Fixed Investment (GDFI), grew consistently between
1946 and the early 1980s. Since then, GDFI on construction goods and services
declined significantly until 1994 when, with new government policies, some sectors
began to revive. The historical evidence presented indicated that investment in all
sectors declined by at least 50% since the early 1980s. However, since 1994,
investment in civil engineering works and non-residential building has increased
steadily.
Although the sustained decline in investment on construction goods and services
between the early 1980s and the mid-1990s gave rise to the structural changes
described below, the volatility of construction demand exerted the most significant
effect. Construction demand has fluctuated more than demand in the economy as
a whole (see Chapter 5 "Financing of Public Infrastructure Investment in South
Africa"). The excessive movements in demand have provided a greater impetus for
construction firms than for other firms to adopt more flexible production strategies.
The Structure of the Construction Industry in South Africa
The South African construction economy is highly skewed: a few large firms
dominate an industry comprising a very large number of much smaller firms. The
latest Census of Construction 1994 (CSS, 1997) enumerates 12,386 firms.1 It also
indicates that 14% of the firms were responsible for more than 75% of the total
construction output although this varied for each sector. Approximately 19% of the
civil engineering firms accounted for 80% of civil engineering output, 18% of home
builders accounted for 70% of home-building output, while 17% general

56
 contractors accounted for 70% of general contracting work (CSS, 1997, pp. 22-
3).2 On the basis of the interviews conducted between 1991 and 1997, it is
possible to assume that this pattern of concentration still holds.3
The construction industry can be disaggregated into a number of categories. There
are the eight largest contracting companies with an annual turnover of between
R400 million and R1,600 million from construction activities (1994 figures). These
are all publicly listed companies. All these companies can handle projects of
greater than R100 million, and their competitive advantage becomes evident in
projects of greater than R20 million.
They can be referred to as the national contractors in that they have divisions
operating in most regions. The structure of these companies is that of a holding
company with operational divisions (with an annual turnover of R50-R100 million
each) that act as separate business units. The national firms serve both the
building and civil engineering sectors, and have several specialist contracting
entities, a centralized plant facility and a common source of funds. Most, but not
all, have a property development division as well as industrial or commercial
interests 4 A significant proportion of their work comes through negotiation or own
development and they generally tender on an invited basis only. These national
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entities have aggressively pursued an offshore strategy since 1994, and now
obtain up to 30% of their turnover from non-South African work.
Below the national contractors are the large regional contractors, with an annual
turnover of R30-R80 million, who may be capable of competing with the national
companies in their specific region on contracts of R10-R40 million, although, like
the national contractors, they seek work at lower values. It is more difficult to
estimate the number of such firms, but on the basis of the author's interviews, it is
possible to suggest that there are about 35-50 firms in the country that could be
classified in this category. Generally they are privately owned, many are family
companies or still owned by the original founder(s).
Their competitive advantage seems to be at the level of jobs of R5-R10 million.
They are generally slightly smaller than the regional divisions of national
companies, whose divisions can draw on the resources of their national holding
companies. This enables the regional divisions to compete with greater flexibility
than the regional firms. The regional firms tend to specialize as building or civil
engineering contractors. Many of these firms get their work through negotiation
and, like the national firms, they generally tender on projects above R2 million.
Due to their limited resources, self-initiated property development rarely exceeds
20% of their turnover.5
Beneath the two above categories, the industry broadens out dramatically. There
is a grouping of firms, referred to as a 'smaller regional contractors', with a
turnover of between R6-R15 million. These firms compete for contracts in the
R0.5-R5 million category with the contractors mentioned above, and their
competitive advantage seems to rest around the R1-R2 million level. It is difficult
to estimate the precise number of firms in this category, but it is unlikely that
there are more than 250 firms nationally that fit in this market segment. Until
1994, this category and those above it comprized mainly firms which were
predominantly white in composition and ownership. About ten new black-owned
and black-managed firms have emerged in this category recently.
It would seem that the rest of the construction industry competes for construction
work below the R500,000 level. There are perhaps between 7,000 and 10,000
such firms formally registered with employer organizations. Further to the bottom
of the pile is the small-scale contracting enterprises in the informal sector. It is
estimated that there may be between 2,500 and 40,000 such enterprises.6
Although we may distinguish the informal sector from the formal sector, there is a
clear productive relation-ship between the informal sector's labour-only sub-

57
 contractors and the formal industry that employs them (Merrifield, 1994, pp.16-
17). It is at this level that the majority of black-owned firms are concentrated,
while many of the formally registered firms would be white-owned and white-
managed.

Type Number Annual Contract Competitive

turnover limit (R advantage (R
(R millions) millions)
millions)
National 8 400-1,600 >100 20
Large 35-50 30-80 <40 5-10
regional
Small 250 6-15 0.5-5 1-2
regional
Small 7,000- <0.5 0.1(?) (?)
formal 10,000
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Small 2,500- <0.5 0.1(?) (?)

Informal 40,000

Evidence from interviews and supporting statistics suggest that the vast majority
of the firms operating in the R500, 000 and less category are specialist contractors
or sub-contractors. There are however no clear statistics indicating the prevalence
of sub-contracting in the building industry. The assumption was nevertheless
confirmed by the interviews, with many firms indicating that sub-contractors are
performing most labour, with the exception of security, clear-up crews and site
staff.
The use of sub-contractors was highest in general contracting, averaging 65-95%
of all labour employed on site; home building averaged 40-85%, while civil
engineering generally averaged about 10%. Labour only sub-contracting (LOSC) is
used in most wet-trades and carpentry, with only the traditional plumbers,
electricians and specialist sub-contractors supplying their own materials. The LOSC
firms are often formed by previously retrenched employees and, because they tend
to remain unregistered, are not reflected in the official employment statistics.
The above breakdown is generally confirmed by data of the BIFSA/NHF survey7
conducted in 1994. Ten respondents (1.78% of those answering the question) had
a turnover of greater than R50 million in 1993. It is likely that these were mainly
regional divisions of national firms. Another 32 (5.69%) had a turnover of R10-R50
million, white yet another 35 (6.23%) had a turnover of R5-R10 million.
This seems consistent with the qualitative assessment presented above (see Graph
1 below).

58
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Graph 1 Proportion of firms by firm size (in turnover categories)

Below R5 million the industry seems to broaden out significantly, with 153
respondents (27.22%) operating in the R1-R5 million range. Another 89
respondents (15.84%) operated in the R0.5-R1 million range, while 243 (43.24%)
operated below the R500, 000 level. In line with the above discussion on
concentration, only 13.7% of the respondents had a turnover of more than R5
million, while 86.3% completed contracts for less.
In comparing the census figures with the survey, and the qualitative picture
described above, we find general confirmation of the deployment of construction
firms in the industry. The overall pattern confirmed by the statistics and interviews
is that the South African construction industry is dominated by a relatively small
number of large firms who, through sub-contracting relations with much smaller
firms, produce the bulk of the construction output. As will be discussed further
below, one of the primary aims of the new government is to change the structure
of the industry.
Capacity and Performance Constraints
Research by the author and others (Merrifield, 1994; Ngoasheng, 1994) on
capacity and performance suggests that there was excess capacity nationally in the
contracting and materials sectors in 1994, varying between 20% and 50% in
different sectors and in different regions. Subsequent research by the author
suggests that with the post-election upturn in construction spending, capacity
limits were approached in the Western Cape and Gauteng which experienced
greater GDFI increases.8 Until the 1998 downturn in construction activity, capacity
averaged around 80% utilization, close to the industry's long-term norm.9
The studies of the materials sector conducted in 1994 suggested that most of the
materials sector was operating at below 50% utilization if long-term capacity was
taken into account (Ngoasheng, 1994). More recent interviews with contractors
suggested that capacity constraints did arise between 1996 and 1997 for specific
materials but that the materials supply sector remained below its capacity

59
 constraints. These interviews also suggested that since 1994, materials imports
have increased and are likely to make up any local shortfall in the future
(Merrifield, 1997).
The most likely consequence of capacity constraints if construction demand is to
increase is that of cost escalation. The historical evidence, reflected in Graph 2
below, shows that construction costs in both civil engineering and building have
generally increased at a rate greater than that of other industries (as represented
by the Production Price Index (PPI)).10 The graph below also indicates that the
periods of greatest cost
escalation
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Graph 2 Building cost escalation

occur after a recession and at the onset of a boom. Although comparable capacity
measures are not available for the earlier period, interviews and the author's own
experience in the industry indicate that the periods of cost escalation shown below
arose largely due to capacity constraints.
The first significant period of cost escalation shown above was the 1978-1983
boom driven by rising gold prices. After the 1976-77 recession the construction
boom saw building casts escalate 89% between 1978 and 1983 as opposed to the
60% PPI increase. This period saw a 27% increase in building costs in 1980 and a
32% increase in 1981 as compared to the PPI increase of 16% and 14%
respectively. The cost indices show significant construction cost escalation when
the industry is experiencing boom conditions (as in 1987-1988 as well). It is
therefore reasonable to assume that significant increases in construction
investment as anticipated by government policy are likely to generate further cost
escalations until capacity constraints are overcome.
The incidence of cost escalation in the construction sector can of course be related
to productivity trends in the industry. Evidence collected by the National
Productivity Institute (NPI) as well as through interviews indicates that
construction productivity has fallen significantly since the early 1970s and has only
seen sustained improvement over the past three years (NPI, 1997, p. 5).
Labour productivity declined 41% from its highest level in 1972 to 1987,
recovering only 5% by 1994, before showing an 11% increase in the last three

60
 years.11 Fixed capital productivity has declined almost 62% since its high point in
1960, and has shown only a 3% increase in the last three years (see Graph 3).
The combination of capacity constraints, cost escalation above that of other
industries, and significant productivity declines would support the contention that
the construction industry is in a poor shape. It is therefore worth describing same
of the reasons for this state of affairs before turning to government policies
designed to address the problems.
Supply-side Constraints in the Industry
The trends described above have together transformed production in the
construction industry in a manner which has led to a significant decline in capacity
and performance. Structurally the industry reacted by adopting more flexible
production practices, but these do not suit the institutional relationships that
previously defined the dominant farms of production in the industry.
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Graph 3 Productivity in construction

The most important shift, especially in the building sector, is the rise of labour-only
sub-contracting (LOSC) in the face of declining turnovers and narrower profit
margins in traditional markets.12 The growing predominance of LOSC on South
African construction sites is not only cause for concern amongst sub-contractors
who face the difficulties mentioned below, but it also creates new complications for
the general contractor or project manager.
Sub-contracting has transformed the main contractor's control of labour on site,
which in turn has profound implications for productivity. Unlike other forms of
manufacturing where further investment in technology has brought about greater
productivity through a greater degree of labour control (Braverman, 1974),
contractors have, through sub-contracting, shifted labour control on site to the
sub-contractor. This constrains the general contractor's capacity to directly
improve productivity. Further-more, because the formal institutions of the industry
exclude LOSC firms, sub-contracting probably also militates against indirect efforts
at improving productivity, such as training.
Recent developments in 'post-Fordism' have brought about a similar change in
manufacturing in that sub-contracting has enabled firms to adopt flexible
specialization despite technological advancement (Carson, 1987; Hirst and Zeitlin,
1991; Harrison, 1994). By contrast, sub-contracting in the construction industry
61
 has brought about greater flexibility although labour utilization has remained
extremely unproductive (Bennett and Ferry, 1990; Werna, 1993; Aniekwu, 1995;
Arditi and Mochtar, 1996).13 The low and even declining level of productivity in the
contemporary construction industry in South Africa can be partially attributed to
the manner in which the increasing use of sub-contractors has disrupted the
existing training process.
It would seem that many of the LOSC firms are made up of farmer employees who
were encouraged to become independent small-scale contractors, and who were
offered some assistance from their former employers in starting up their businesses.
Other research, however, indicates that this assistance was primarily in terms of
providing the sub-contractors with work, and most small contractors surveyed
indicated that they had received very little training or financial assistance from their
previous employers (Cattell, 1993, pp.106-7).
Most firms interviewed argued that LOSC was cheaper than employing their own
labour. They recognized that this was the result of LOSC labourers not being paid
statutory rates and not receiving statutory benefits. Very few firms checked on the
employment conditions of their LOSC labour force, and most emphasized the cost
savings but overlooked the lack of productivity (Merrifield, 1994, pp. 27-8).
Indeed, unlike the expectation elsewhere (Casson, 1987, pp. 165-b), many
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admitted that both quality and productivity were sacrificed with LOSC, but that
economic conditions dictated its use.
A number of firms admitted to an economic and political agenda when promoting
LOSC. Economically (and politically to some extent), they promoted LOSC in
response to growing unionization and the expectation that labour costs would
escalate unmanageably. Politically, they promoted LOSC because they believed
that if their former employees were to have a greater stake in the economy, they
would be less likely to support political alternatives which would cause them to lose
that stake (Casson, 1987; Merrifield, 1992a).
One of the more intransigent problems is the status of LOSC firms in terms of the
statutory wage regulation system. They have been able to avoid paying statutory
rates and benefits, and as a result they depress labour prices and give contractors
(usually the larger firms) who use LOSC an unfair competitive advantage over
contractors (usually smaller regional builders) who employ their own labour in
terms of statutory employment conditions. This situation thus further undermines
the statutory wage regulation system in that firms that are disadvantaged through
complying with statutory conditions are encouraged to disregard these conditions.
Research indicates that the most significant constraint facing LOSC and other
informal firms is their lack of managerial expertise. The lack of managerial
expertise gave rise to problems with cash flow, labour control and turnover. For
instance, problems concerning the cost of labour actually had more to do with the
inefficient use of labour. Similarly, problems with cash flow and requests for
bridging finance arose from poor planning and poor job control (Krafchik, 1990;
Merrifield, 1992a, 1994; Cattell, 1993).
These findings should not be interpreted as a suggestion that LOSC firms are to
blame for their problems. Rather, contractors operating in this market have limited
access to the training programmes offered by the formal industry, which means
that they are not in a position to improve their productivity. The primary constraint
facing small contractors is access to training both for themselves (to improve their
business skills) and for their labour force (to improve trade skills). Without formal
training, and given the erratic availability of construction work which diminishes
the value of on-the job training, the current generation of semi-skilled labour will

62
 probably be unable to pass on their skills to their operatives in the future. Hence
the standard of skilled work on site will deteriorate progressively (Merrifield,
1992a, pp. 66-72).
Research on programmes designed to support small-scale contractors in the low-
income housing sector in the pre-1994 period indicated that many of these
programmes did not equip the builders with the skills of 'risk management' that
would enable them to survive in a competitive market. While the programmes
provided managerial support, they restricted the builders' operations to a level
which did not guarantee them self-sufficiency (Merrifield, 1992a, pp. 60-6). Since
1994, support has been emphasized less and providing work opportunities to
small-scale black contractors has been emphasized more. To some extent, support
programmes have been replaced by joint venture contracts between black (small
under-resourced) and white (large well-resourced) contractors. In many cases
these joint ventures have developed small contractors' skills and increased their
exposure to larger contracts, but they have apparently not provided the 'risk
management' experience necessary to become competitive in the market.
The training of small-scale contractors is central to both the transformation of the
existing formal sector and the promotion and development of historically
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disadvantaged contractors who operate primarily in the informal sector. New

government policy aims to develop a new generation of contractors by providing
them with work experience, training and mentoring. With adequate support, new
firms can be developed and grown. However, this advancement of the historically
disadvantaged sector should not lead to the undermining of the formal industry
since most construction skill and expertise remain there.
The Policies Created to Address Constraints in the Construction Environment14
When the new government came into power, a range of infrastructure delivery
departments at national and provincial level developed policies in an attempt to
address some, if not all, of the above problems. Notable among them were the
departments of Public Works, Housing, Water Affairs and Forestry, and Transport.
In some instances, provincial departments associated with these functions also
became active in defining policy.
Arising from strong political lobbying for real transformation in the industry, all the
above policies emphasized the creation opportunities for previously marginalized
black contractors. Both Housing and Public Works extended this emphasis to
address client concerns about the cost and quality of the construction goods and
services delivered in their respective sectors (residential and non-residential).
However, the emphasis on labour-based construction initiatives seems to have lost
a lot of its' momentum in recent years (Public Works, Transport and Water Affairs
contributed to this situation). A fourth emphasis, which is only beginning to have
an effect, is the promotion of public-private partnerships in the delivery of
construction goods.15
Government policy has clearly impacted on two main areas of the industry:
affirmative procurement for those previously marginalized, and construction
industry development. Affirmative procurement has been designed to address the
structure of the industry that saw the bulk of construction work going to large
firms which were historically owned and managed by whites. As we have seen,
with the possible exception of half a dozen newly emerging black firms in the
smaller regional market segment, the majority of black firms are small or micro
enterprises, and many continue to operate in the informal sector.
Recent research by Public Works has indicated some success for their affirmative
procurement policies. Having applied their ten-point plan and affirmative
procurement policy since August 1996, the department has experienced a ten-fold
increase in the participation of affirmable business enterprises — from less than
3% prior to the introduction of the policy to almost 30% by March 1998
63
 (Gounden, 1998). An independent review of the contracts confirmed that the cost
premium for such policies is in the order of 0.8% (ibid.). While the department
achieved a phenomenal growth at the bottom end of the market, it was not
satisfied with the growth of black prime contractors16 and recently announced a
programme to promote this sector.
The second area where government policy impacted is the development of a
comprehensive industrial strategy for the construction industry (DPW, 1995; DPW,
1996; DPW, 1997).
The strategy to create an 'enabling environment' for the South African construction
industry largely rests on the problems identified above. Since the volatility and
decline of construction investment is seen to be one of the prime reasons for the
shift towards more flexible production practices, the strategy seeks to moderate
the construction cycle (the difficulties with this are addressed in Chapter 5
"Financing of Public Infrastructure Investment in South Africa"). The strategy also
attempts to address the type of flexibility that has arisen in South Africa, giving
support to the legislation being promulgated by the Department of Labour.
It is assumed that by stabilizing labour relations, and by withdrawing incentives for
the employment of greater numbers of temporary employees, the industry will be
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motivated to invest in training, which should help improve productivity and output
quality. In order to encourage the industry to change, the strategy adopts
procurement incentives which include the affirmative procurement procedures
discussed above, but also procurement incentives that cover minimum and best
practice standards in areas of training, productivity and quality improvement,
safety and environmental management. The industry will largely be encouraged to
adopt these measures through positive incentives such as gaining a procurement
advantage, but the state may also use penalties if necessary.
The main instrument for promoting and monitoring the transformation will be the
Construction Industry Development Board (CIDB) and a register of construction
enterprises. The CIDB will provide a means of including stakeholder participation in
the definition of industry development programmes, while the register, which will
be housed by the CIDB, will provide these stakeholders with a mechanism to
monitor progress on these programmes. There are other programmes concerned
with restructuring the institutional arrangements around training, promoting small
businesses, encouraging regional and international competition and
institutionalizing labour-based construction, but the above components capture the
essence of the restructuring strategy.17 In the section that follows, the author will
raise some questions about this strategy.18
Industrial, Organizational and Individual Learning for Construction delivery
In this section, the government's policies for addressing the problems in the
construction industry are assessed. Although the author believes that these
policies are appropriate for the long-term transformation of the industry, it is
unlikely that they will have a significant effect on the industry in the short term.
This may mean that these policies will not help the government achieve its well-
publicized delivery targets and may cause the post-1999 government to change
these policies even before they have taken effect.
Research on construction industry capacity and performance has questioned
whether the industry (both formal and informal) as presently constituted can
increase its output much beyond the peak output levels of the early 1980s
(Merrifield, 1994). In other words, if the industry were to increase output by 20-
30% beyond 1994 levels, its marginal costs will start to rise due to shortages of
key input factors. As the problem is understood in terms of the above trends, this

64
 is not merely an issue of gross individual inputs (labour, materials, plant), but
whether the industry has the organizational capacity to execute a significantly
greater amount of work in a short period of time.
From the level of the site (which requires the complex co-ordination of labour, sub-
contractors, plant, materials and cash flow) to the level of the firm (which co-
ordinates a number of such projects, raises finance for investment, determines the
mix of business activities to ensure profitability and survival) to the level of
relationships with other firms and institutions (developers, professionals, suppliers,
finance institutions, local authorities) there is a system which has been producing a
certain quantity of construction goods at current levels of activity. Its output
defines what can be seen as the organizational capacity of the industry as a whole
in its current form.
In the above analysis of supply-side constraints, a number of levels of
organizational learning were identified.19 At the most basic level, new contractors
and sub-contractors have to learn how to manage their sites efficiently, while
established contractors need to employ, train and develop new site supervisors
and managers. It should be recognized that it is easier for supervisors/managers
to increase their experience and broaden their responsibilities within the formal
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construction sector, but even here the development of charge hands to section
supervisors to foremen could take between three and five years, depending on
previous experience, skills and training. Unfortunately, few small-scale contractors
are likely to fallow this route20 and will thus lack the broader site exposure that
would assist them in managing their own contracts.
Beyond direct site management, small-scale contractors (and their large-scale
counterparts) need to Learn to manage their businesses effectively. Business
management is different to construction or production management, focusing as it
does on the commercial activities of the enterprise. Even good site managers do
not necessarily make good business managers, since business management
involves a much greater degree of risk management.
From research and discussions with those involved in business training it is clear
that a learning cycle is involved. As contractors become more competent, they can
learn further skills, but the pace of development depends on the individuals'
exposure to business opportunities and their ability to manage risk. Interviews and
informal discussions with small-scale contractors suggest that urban small-scale
contractors develop more quickly because they get greater exposure to
opportunities and risks, but even these contractors acknowledge that it took them
more than ten years to learn the rules of the game.
Beyond the formal and informal learning process there is also the need to account
for business failure. Overseas research indicates that 30-50% of small firms fail in
their first three years, and only 40-45% of firms remain in business after ten years
(Burns, 1989; Storey et al., 1987; Johnson, 1986). Since these examples derive
from relatively sophisticated samples,21 it is likely that small business (and
contractor) development in South Africa will experience a much greater failure
rate.
The issue, however, is not whether businesses fail, since business failure is part of
the learning process, but to what extent they fail, and how does this affect the
overall growth of the industry. To quote from the British experience, the probability
that small firms will grow to employ more than 100 employees is 0.5-0.75%
(Johnson, 1986). Johnson, in writing on the economics of new firms, concludes
that 'the vast majority of new firms however remain small and die small' (Johnson,
1986). Thus while many new firms may enter the market, because of the high
degree of business failure it is unlikely that the overall capacity of the industry will
grow as quickly.

65
 In the literature on industrial growth and the growth of firms it would seem that
growth adopts an S-shape curve. Young firms grow more quickly than older firms
but this growth rate slows down as the growth coefficient (in this case representing
organizational learning)22 declines and/or becomes negative (Marris, 1979; Kumar,
1984). The literature suggests that growth brings added complexity, which can
slow down or prevent further growth. Thus, although it can be expected that the
growth of individual firms will be faster than that of the industry as a whole, this
might not lead to the expansion of the industry.
Given the S-shaped curve, firms and the industry will probably go through an
initial phase of rapid development, which will then slow down as organizations
acquaint themselves with operating at greater scales and with greater degrees of
complexity. Even those well-established firms that have survived the recession can
expect a period of slow growth as they replace staff lost through downsizing.
Hopefully, if not too many firms are lost in this learning phase, there will be a
further period of growth as firms and the industry consolidate. But as this
consolidation can be expected to take time, and if, as in the past, growth is
interrupted by cyclical downturns, the consolidation of the industry at a higher
level of production may not occur or could be further delayed.
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In addition to the development of firms and the industry, the organizational

learning of other role players also needs to be accounted for. Both the state (as a
regulatory and financing agency) and the clients have considerable influence over
delivery. State regulatory and financial agencies are undergoing considerable
restructuring as provinces and metropolitan governments are consolidated and
central powers are handed down. Previous research on the construction sector
suggests that such restructuring could take three to five years before state
agencies consolidate their organizational learning (Merrifield, 1992a, 1992b,
1994). The recent Presidential Review Commission confirms this negative
prognosis for the whole of government (PRC, 1998).
Beyond the state, there are the recipient communities and civil society. There is
little reason to expect that communities will become less political than before,
especially if, as may be expected, the promises of the new government are not
met timeously. In considering construction growth therefore, delivery delays due
to the volatility of community involvement can be anticipated. Depending on the
cohesion and representativeness of local civil society structures, delays of anything
between three months and three years (or project abandonment) need to be
accounted for in growth estimates (Merrifield, Van Horen and Taylor, 1993).
Finally, in considering individual and organizational learning, it can take
considerable time to create the environment to promote innovation and
entrepreneurship. Overseas research shows that areas which have promoted
innovation such as Route 128 outside Boston, or Silicon Valley in California, took
20-30 years to create the climate in which new innovative companies could flourish
(Birley, 1989; Castells, 1989; Bahrami, 1992; Harrison, 1994; ISP, 1995). Since
new government policy assumes that the construction industry would grow much
faster than before, it is perhaps prudent to suggest that it will require a similar
period before the enabling environment promotes similar innovation and growth.
Conclusion
The construction growth phase in South Africa will presumably take longer and
cost more (in terms of risk) than current government policy anticipates. This
means that without a substantial transformation of the existing formal sector and a
vigorous development of new contractors from historically disadvantaged
communities, the service delivery objectives of the new government are unlikely to
be realized. Having reviewed the above learning processes, it is possible to
conclude that although the government's current policies for the construction
industry are likely to address many of the historical problems in the industry,

66
 industry transformation may take many more years than current political
expectations may accommodate.
Notes1 It is difficult to enumerate the number of firms active in the
construction market because many firms come into or go out of business weekly,
depending on changes in construction demand. In 1994, at the bottom of the
construction recession, the author estimated that the industry comprised
between 7,500 and 10,000 firms, based on industry records (Merrifield, 1994).
With the new government, and especially the introduction of affirmative
procurement policies, many new firms have entered the market. Often they are
formed merely to tender for available work and are only properly constituted if
the con-tract is obtained. Tender lists in civil engineering alone indicate the
presence of more than 4,000 new tendering entities (Henk Langenhoven,
personal communication).
2
The variation in the percentages is due to the manner in which CSS categorizes
firms and outputs in each sector. The basic pattern is the same.
3
In 1991-92 the author interviewed 161 construction stakeholders in the low-
income housing market (Merrifield, 1992a, 1992b). In 1994, he interviewed 51
of the leading construction firms in the five major metropolitan centres
(Merrifield, 1994): In 1996, 54 stakeholders were interviewed nationally (DPW,
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1996, 1997), while in 1997, 4 firms were interviewed in the Western Cape,
although another 8 firms were interviewed nationally for another project
(Merrifield, 1997). In many cases, the same firms were interviewed on different
occasions, providing some comparative perspective. The interviews in 1994
primarily focused on issues of capacity and performance, and while these
issues were covered in other years, the 1994 data are most comprehensive on
these issues.
4
In some cases, their industrial and commercial interests can equal if not
completely overshadow their purely construction activities, although the
turnover figures given above refer to their direct construction involvement. In
the case of one firm, only 8% of its 1994 turnover came directly from
construction, yet it remained the largest construction firm in the country.
5
The exception being property development firms which were not examined in
much detail in the study, as the 1994 interviews focused on construction
performance and capacity.
6
The extremes of the range are due to the difficulty of procuring data from a
plethora of emerging contractor associations. The author tends to favour the
lower figure, but Cattell's calculations favour the higher estimate (Cattell and
Rwelamila, 1993).
7
The author helped process the data, but unfortunately his advice on sampling
was ignored. As a result the data are likely to be skewed by a sampling error.
Only 612 construction firms out of more than 8,000 polled replied to the
questionnaire. His analysis of the data indicates that the survey findings
correspond with the more qualitative impressions of the interviews.
8
The 3% growth in 1994-1995 and 1995-96 is calculated from SA Reserve Bank
figures which are becoming increasingly suspect. The regional estimates were
based on interview data in 1996 and 1997.
9
The Bureau for Economic Research (BER) estimated capacity utilization around
70-75%, while the South African Federation of Civil Engineering Contractors
(SAFCEC) supported the 80% figure (Merrifield, 1997). The 80% utilization rate
probably represents the industry's long-term full employment rate, which can
only be exceeded for short periods.

67
 10
The graph only shows building cost escalation, but CSS figures suggest that a
similar trend is found with civil engineering costs. The present graph was
chosen because it represents a longer time series than those available from the
CSS data.
11
Multi-factor productivity seems to follow that of labour, possibly an artifice of
the manner in which it is measured.
12
The arguments here are mast applicable to the building sector where, as we
have seen above, sub-contracting and especially LOSC is prevalent, but similar
arguments concerning flexibility can be made for the civil sector.
13
Only Japan's construction industry seems to have taken the manufacturing
route (Bennett, 1993).
14
The author was active in the policy environment from 1991 till the present and
contributed to policy around housing (Merrifield, 1992a, 1992b, 1994) and
construction industry development (Merrifield, 1994; DPW, 1995; DPW, 1996;
DPW, 1997), and has recently contributed to finalizing the White Paper based
upon DPW documents. The information presented in this section draws largely
upon his exposure to that policy environment and he assumes that the policies
will be analyzed in depth elsewhere.
15
This aspect will be dealt with more comprehensively in Chapter 5. ("Financing
of Public Infrastructure Investment in SA")
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16
Prime contractors are the main contracting parties with the client. Traditionally
they employed the bulk of the workforce but in recent years prime contractors
act as project managers or management contractors and make use of sub-
contractors to complete the work.
17
Other factor inputs such as materials and plant are not seen to be as critically
constrained (Merrifield, 1994). In other countries, other factors such as
procurement reform are seen to be critical (Ofori, 1991; Werna, 1993;
Aniekwu, 1995; Arditi and Mochtar, 1996).
18
As one of the primary authors of the strategy, the author believes that he not
only has a right, but a responsibility, to raise these questions.
19
The concept of 'organizational learning' is still quite new and has been applied
in a variety of contexts similar to those described in this chapter (Hirshman,
1958, Senge, 1990; Morecroft and Sterman, 1994; Senge et al., 1994).
20
Cattell's comprehensive 1993 survey of black contractors indicated that only 2-
5% of these people have a background in the formal sector (Cattell, 1993).
21
Almost 80-90% of people starting small businesses were white-collar
employees, and 50% were managers, foremen or professionals (Burns, 1989;
Storey et al., 1987; Johnson, 1986).
22
Neither Morris nor Kumar provided an explicit definition of the growth
coefficient, but their analyses are not dissimilar to those above (Morris, 1979;
Kumar, 1984).
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