the building industry and social transformation (april 2012)

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TowardsMaking sense of the Building-, Construction- and Property-Industry:

THE ROLE OF POLITICS ON THE BUILDING INDUSTRYDr. Llewellyn B. Lewis

APRIL 2012

THE STRATEGIC FORUM

A place of assembly for strategic conversations

THE STRATEGIC FORUMwww.strategicforum.co.za

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GFCFR521,6 BILLION(22% OF GDP)

BUILDING INV.R108,5* BILLION(20,8% OF GFCF)

CONSTR. INV.R174,9 BILLION(33,5% OF GDFI)

GDPR2663 BILLION

GOVERNMENT BUDGETR798,9 BILLION(30% OF GDP)

TRANSFER DUTYR8- R9 BILLION PA

FTHB SUBSIDIES(1,9% OF BUDGET = R13,8 BILLION)

(500 000 HOUSING UNITS)INVESTMENT IN AFFORDABLE HOUSING

(R1,4 TRILLION 2010-2020)

RESIDENTIAL AND NON RES BPP AND

BUILDINGS COMPLETED (BC)

PRIMARY AND SECONDARY PROPERTY MARKET

R267 BILLION PA MORTGAGE ADVANCES PA

R1000 BIO MORTGAGES O/S

LISTED PROPERTY SECTOR MARKET CAPITALISATION

> R100 BILLION

ANNUAL HOUSINGNEED

(POP. GROWTH ONLY)250 000

INTEGRATED HOUSING

EMPLOYMENTIN BUILDING & CONSTRUCTION

> 1 000 000 PEOPLE

* When the UNRECORDED Home Improvement and Affordable Housing is taken into account Building Investment = 30,5% of GFCF

PROPERTY OWNERSHIPENGINE FOR GROWTH

AND WEALTH CREATIONR3,8 TRILLION RES PROPERTY

R1,3 TRILLION NON RES PROPERTY

URBAN HOUSINGBACKLOG > 2,3 MILLION

UNITS IN 2010

GOVERNMENT INFRASTRUCTURE SPEND (R846 BILLION 2010-2020)

THE ROLE OF BUILDING, CONSTRUCTION AND PROPERTY IN THE ECONOMY: 2010www.strategicforum.co.za



GFCFR521,6 BILLION(22% OF GDP)

BUILDING INV.R108,5* BILLION(20,8% OF GFCF)

CONSTR. INV.R174,9 BILLION(33,5% OF GDFI)

GDPR2663 BILLION

GOVERNMENT BUDGETR798,9 BILLION(30% OF GDP)

TRANSFER DUTYR8- R9 BILLION PA

FTHB SUBSIDIES(1,9% OF BUDGET = R13,8 BILLION)

(500 000 HOUSING UNITS)INVESTMENT IN AFFORDABLE HOUSING

(R1,4 TRILLION 2010-2020)

RESIDENTIAL AND NON RES BPP AND

BUILDINGS COMPLETED (BC)

PRIMARY AND SECONDARY PROPERTY MARKET

R267 BILLION PA MORTGAGE ADVANCES PA

R1000 BIO MORTGAGES O/S

LISTED PROPERTY SECTOR MARKET CAPITALISATION

> R100 BILLION

ANNUAL HOUSINGNEED

(POP. GROWTH ONLY)250 000

INTEGRATED HOUSING

EMPLOYMENTIN BUILDING & CONSTRUCTION

> 1 000 000 PEOPLE

* When the UNRECORDED Home Improvement and Affordable Housing is taken into account Building Investment = 30,5% of GFCF

PROPERTY OWNERSHIPENGINE FOR GROWTH

AND WEALTH CREATIONR3,8 TRILLION RES PROPERTY

R1,3 TRILLION NON RES PROPERTY

URBAN HOUSINGBACKLOG > 1,5 MILLION

UNITS IN 2010

GOVERNMENT INFRASTRUCTURE SPEND (R846 BILLION 2010-2020)

THE ROLE OF BUILDING, CONSTRUCTION AND PROPERTY IN THE ECONOMY: 2010www.strategicforum.co.za

It is estimated that for every R1 spent on infrastructure, R1.40 is added to a country’s gross domestic product. PPP’s are the ideal vehicle for funding the gaps in infrastructure in Africa. (Deloittes research, May 2011)

“Unless the Housing Market recovers, the Economy will not recover.” (Warren Buffet, CNN, 4 October 2011)

The UK Government plan to promote building. “It clearly has recognised the need to boost house building, both to address the housing crisis and to create jobs.” (Business Day, 22 November 2011)


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Investment ClimateInvestment Climate

The STRATEGIC FORUM ScenariosFOR THE BUILDING INDUSTRY: 2008-2020

BOUYANT GROWTH> 5 % PA

GDFI > 25 % OF GDP

SUBSIDIES3 - 5 % OF BUDGET

AVERAGE GROWTH 2 - 5 % PA

GDFI 20 - 25 %OF GDP


LOW GROWTH0 - 2 % PA

GDFI 15 - 20 %OF GDP


NEGATIVE GROWTH< 0 % PA

GDFI < 15 %OF GDP

SUBSIDIES< 1 % OF BUDGET

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PROPERTY A POOR INVESTMENT / AVERAGE / GOOD / A PREFERRED INVESTMENTParadigm Regression Paradigm Paralysis Paradigm Shift Paradigm Reinvention

HIGH ROAD COLUMBUS SCENARIO

Property a PREFERRED InvestmentHome Ownership PREFERRED

BUOYANT GROWTHBacklogs eliminated by 2015

UPPER MIDDLE ROAD APOLLO SCENARIO

Property a GOOD InvestmentHome Ownership DESIRED

AVERAGE GROWTH Erosion of Backlogs

LOWER MIDDLE ROAD SOYUZ SCENARIO

Property an AVERAGE InvestmentHome Ownership QUESTIONED

LOW GROWTHKeeping pace with Population

LOW ROAD CHALLENGER SCENARIO

Property a POOR InvestmentHome Ownership AVOIDED

NEGATIVE GROWTHIncreasing BACKLOGS

Inve

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fiden

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MAKING SENSE OF THE FUTUREwww.strategicforum.co.za

Trends in the Building Industry are inextricably responsive to, and influenced by INVESTMENT CLIMATE,

INVESTOR CONFIDENCE and PROPERTY DELIVERY.

Trends in the Building Industry are inextricably responsive to, and influenced by INVESTMENT CLIMATE,

INVESTOR CONFIDENCE and PROPERTY DELIVERY.

Property delivery

Property delivery


The MFA Composite Leading Indicator for the South African Building Industry (CLIBI) recorded a peak of 69 in late 2004. The index dropped to 26 in 2009, reflecting a lower turning point. This building indicator then moved sideways during the next eighteen months. It rose to a level of 33 in the fourth quarter of 2011. The current reading for the first quarter of 2012 is 37. This finding suggests that the long-awaited revival in the South African building industry is presently underway.

ANIMAL SPIRITS AND CONFIDENCEwww.strategicforum.co.za

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George A. Akerlof is the Daniel E. Koshland Sr. Distinguished Professor of Economics at

the University of California, Berkeley. He was awarded the 2001 Nobel Prize in Economics.

Robert Shiller is the best-selling Author of Irrational Exuberance and The Subprime Solution (both Princeton). He is the Arthur

M. Okun Professor of Economics at Yale University.


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Non Economic EconomicMOTIVES

Conventional Economic Theory

Economic theory incorporating “Animal Spirits”.



How the Macro Economy behaves


Akerlof & Shiller believe that the answers to the most important questions regarding how the macro economy behaves and what we ought to do when it misbehaves lie largely (though not exclusively) within the three white boxes)


How the Macro Economy behaves

• The current model fills only the top right hand box; it answers the question: How does the economy behave if people only have economic motives and if they respond to them rationally?

• But that leads immediately to three more questions, corresponding to the three blank boxes: How does the economy behave with non-economic motives and rational responses? With economic motives and irrational responses? With non-economic motives and irrational responses?

• Akerlof & Shiller believe that the answers to the most important questions regarding how the macro economy behaves and what we ought to do when it misbehaves lie largely (though not exclusively) within those three blank boxes)

• Their description of the economy fits the qualitative as well as the quantitative facts, better than a macro-economics that leaves out irrational behaviour and non-economic motives.

• Thus, they occasionally use statistics but for the most part, rely on history and on stories. (Akerlof & Shiller: 2009: 168)



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Animal Spirits drive almost everything.

Animal Spirits are more than just confidence as measured by confidence indicators.

Declining Animal Spirits are the principal reason for the recent severe economic crisis.(Akerlof and Shiller: 2009: vii)


We are facing the same problem today as in the later years of the Great Depression – business today is inhibited by uncertainty about the future, about the tolerance of an angry public, about a disaffected labour force, and about what further government actions may be coming.

Animal Spirits are the forces that drives all of this.

Five psychological factors are of particular importance;

1. Confidence;2. Fairness;

3. Corruption and bad faith;4. Money illusion; and

5. Stories. (Akerlof and Shiller: 2009: ix)


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A confident prediction is one that projects the future to be rosy; an unconfident prediction projects the future as bleak.

But if we look up confidence in the dictionary, we see that it is more than a prediction. The dictionary says that it means “trust” or “full belief”.

The word comes from the Latin “fido”, meaning “I trust”.

The confidence crisis that we are in at the moment is also called a “credit crisis”. The word “credit” derives from the Latin “credo”, meaning “I believe”. (Akerlof and Shiller: 2009: 12)

If this is what we mean by confidence, then we see immediately why, if it varies over time, it should play a major role in the business cycle. Why?

In good times, people trust. They make decisions spontaneously. They know instinctively that they will be successful. They suspend their suspicions.

Asset values will be high and perhaps also increasing. As long as people remain trusting, their impulsiveness will not be evident.

But then, when the confidence disappears, the tide goes out. The nakedness of their decisions stand revealed.

When people are confident, they go out and buy; when they are unconfident they withdraw, and they sell.

Economic history is full of such cycles of confidence followed by withdrawal (Akerlof and Shiller: 2009: 12,13)


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The theory of animal spirits provides an answer to a conundrum:

1. Why did most of us utterly fail to foresee the current economic crisis?2. How can we understand this crisis, when it seems to have come out of the blue with no cause?3. Why have the measures to forestall it falling short, while the economic authorities publically express surprise at their ineffectiveness?

We need to answer these questions if we are to feel any confidence in economic policy in the (future). (Akerlof and Shiller: 2009: 167)

The real problem is the conventional wisdom that underlies so much of current economic theory. So many members of the macro economics and finance profession have gone so far in the direction of rational expectations and efficient markets, that they fail to consider the most important dynamics underlying economic crises. Failing to incorporate animal spirits into the model, can blind us to the real sources of trouble. (Akerlof & Shiller : 2009 : 167)

What has happened in the current financial crisis, corresponds to what causes most of our economic ups and downs: over-confidence followed by under-confidence. The story in this case was that the price of housing had never declined (that is only a story, and it is actually untrue) and therefore, that it would just continue to go up and up. There was nothing to lose. This is the story of our time; it is the story of the business cycle that began in 2001. (Akerlof & Shiller, 2009 : 170)


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For some reason in the late 1990s and early 2000s, the idea that homes and apartments were spectacular investments, gained a stronghold on the public imagination in the United States and many other countries as well.

Not only did prices escalate, but there was palpable excitement about real estate

investments; one could see the animal spirits in action everywhere.

It was the biggest home price boom in U.S. history. It extended over nearly a decade, beginning in the late 1990s.

Prices nearly doubled before the bust began in 2006. While it lasted, this spectacular

boom mirrored in other countries as well, helped drive the entire world economy and its stock markets.

In its wake, it has left the biggest real estate crisis since the 1930s. The so-called sub-prime crisis, as well as a global financial crisis, the full dimensions of which still have to be grasped. (Akerlof and Shiller: 2009: 149)


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It is hoped that business leaders will also find their voices to speak out boldly. In this regard, the recent comments by Dr Johann Rupert to the Anton Rupert memorial lecture, was enlightening.

“I’ve kept my word to Mamphela Ramphele, who said that whites should start speaking out a little bit without having the fear of being branded racists.”

Quoting from his own experience he went on to say that even “Big Business with Government” meetings were orchestrated “powerpoint exchanges”. It was not frank dialogue.

“And whenever any of us wanted to speak out our fellow businessmen made sure that we were kept quiet. So even the business leaders were very reluctant to criticise, preferring the lobbying route.” (Business Times, 26 October 2008).

COURAGEOUS LEADERSHIPwww.strategicforum.co.za


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Ramphele said it was astounding that SA’s business sector had remained largely silent, even on failures that directly affected it.

This included the system of 23 sectoral education and training authorities (Setas), funded by a levy of 1% of payroll for businesses with an annual turnover of more than R500 000, that was “clearly not working”. (Business Day, 3 December 2008)

The Setas, the labour department’s near-destruction of SA’s working apprenticeship system and SA’s further education and training (FET) colleges were producing “unemployable” graduates. This was because there was not enough synergy between the college curricula and industry needs.

“The private sector is too scared to upset (the government) ... but its silence is creating the seeds of social instability. Our people can’t read, write, or be usefully engaged,” she said. (Business Day, 3 December 2008)


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“We need more civil society mobilisation. We can’t let people lie to us about what they are going to do with our taxes, and keep on voting for them.”

What SA required was strong leadership of the enabling kind, instead of the traditional authoritarian kind, Ramphele said. The country’s leadership needed to create a milieu in which South Africans could commit to tackling the country’s dilemmas collaboratively. (Business Day, 3 December 2008)

(Other) conundrums included how to develop a professional, performance-based, civil service; how to create an inclusive society while redressing lingering historical imbalances; and how to deal with the “huge” unintended consequences of some of the government’s “very good” policies.

These policies included black economic empowerment (BEE), and the mass dismissal of white professionals from the civil service, particularly the country’s engineers. (Business Day, 3 December 2008)


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Khoza, writing in Nedbank's latest annual report . . . , said the country's “strange breed” of leadership needed to adhere to the institutions that underpinned democracy. The political climate was not a picture of an accountable democracy, he said. “Our political leadership’s moral quotient is degenerating and we are fast losing the checks and balances that are necessary to prevent a recurrence of the past.” Khoza said South Africans had a duty to build and develop the nation, but also to hold their leaders accountable. “We have a duty to build and develop this nation and to call to book the putative leaders who, due to sheer incapacity, cannot deal with the complexity of 21st century governance and leadership, cannot lead,” said Khoza. (Busreo.co.za Newsletter, 6 April 2012)


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Business . . . challenged as wrong a suggestion by the ANC that business must leave politics to politicians.

“We disagree in the strongest possible terms with the idea that business leaders should not participate in our nation’s political discourse,” said director for Business Leadership of South Africa Friede Dowe in a statement.

“Businesses are corporate citizens. They and the individuals who lead particular businesses have not only a constitutional right of equal importance but also a patriotic duty to join the debate about a post transition South Africa.

“To suggest that politics should be left to politicians is just wrong.” (Busrep.co.za, 6 April 2012)



“I see myself as a person with vision in our industry about building things and innovating things and that is not a CEO function necessarily” (Adrian Gore in Gleason: 2011; 164)

“. . . the Board is there to understand the big picture, to understand the relationship of the business with the society, particularly with the environmental issues, particularly with the political issues, but to think in 30 year terms, not to think in three-year terms.” (Bobby Godsell in Gleason: 2011: 149)


“A mission statement in a corporate sense is a definition of purpose: it circumscribes and defines what you do. In a personal sense a mission statement, as opposed to goals, is not what you want to have, it’s not even what you want to do, it’s who you want to be, and that takes some thinking.” (Mark Lamberti in Gleason: 2011: 149)




Productive capacity

Alliances,Joint Ventures

Cross functional

Networking

Enterprise Development,

BEE

Skills Training and

Development

Leadership,Lobbying,Advocacy

Modeling cooperative behaviour

REINVENTION

The Hot Spot Scenario: mapping emergence(Based on Gratton: 2007: 145)

Building: The Engine for Growth and Wealth Creation. Property a preferred investment

Management Training and

Development

INDUSTRY

Government Labour



Productive capacity

Alliances,Joint Ventures

Cross functional

Networking

Enterprise Development,

BEE

Skills Training and

Development

Leadership,Lobbying,Advocacy

Modeling cooperative behaviour

REINVENTION

The Hot Spot Scenario: mapping emergence(Based on Gratton: 2007: 145)

Building: The Engine for Growth and Wealth Creation. Property a preferred investment

Management Training and

Development

INDUSTRY

Government Labour

The more peers we can bring online for the business of saving the world, the easier the effort will be, and in a sense, the stronger we will each be. (Ramo: 2009: 240)

Research has indicated that we can create jobs in six priority areas. These are infrastructuredevelopment, agriculture, mining and beneficiation,

manufacturing, the green economy and tourism.

We cannot create these jobs alone. We have to work with business, labour and the communityconstituencies. (Pres Jacob Zuma: SONA: 2011)


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DEVELOPING A NATIONAL VISIONwww.npconline.co.za

Based on extensive research, engagement and consultation, the National Planning commission (NPC) has identified nine challenges that constitute obstacles in meeting our objectives.

The challenges are:

1. Too few South Africans are employed;

2. the quality of education for most black people remains poor;

3. Poorly located, inadequate and poorly maintained infrastructure;

4. Spatial challenges continue to marginalise the poor;

5. South Africa's growth path is highly resource-intensive and hence unsustainable;

6. The ailing public health system confronts a massive disease burden;

7. The performance of the public service is uneven;

8. Corruption undermines state legitimacy and service delivery;

9. South Africa remains a divided society.

http://www.npconline.co.za/

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1. A democratic state, rooted in the values of the Constitution, working with all sectors of society to improve the quality of life.

2. People are united in diversity, recognising the common interest that binds us as a nation, and we have achieved greater equality for women in all aspects of life.

3. High-quality education and health care, and adequate provision of housing, water, sanitation, energy and transport, give impetus to human development.

4. Natural wealth is harnessed sustainably, in a way that protects our environment, using science and modern technology to ensure a growing economy that benefits all.

5. People who are able to work have access to jobs, workers’ rights are protected and the workforce is skilled.

6. Business is afforded an environment to invest and profit while promoting the common interests of the nation, including decent work.

7. An efficient state protects citizens, provides quality services and infrastructure, and gives leadership to national development.

8. Individuals and communities, at work and at play, embrace mutual respect and human solidarity.

9. Government, business and civil society work to build a better Africa and a better world.


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1. A democratic state, rooted in the values of the Constitution, working with all sectors of society to improve the quality of life.

2. People are united in diversity, recognising the common interest that binds us as a nation, and we have achieved greater equality for women in all aspects of life.



5. People who are able to work have access to jobs, workers’ rights are protected and the workforce is skilled.



8. Individuals and communities, at work and at play, embrace mutual respect and human solidarity.


The Vision must be a dream and must be made much more compelling than what the NPC is trying to do in its 10 point plan (perhaps it is rather a mission?). Why not something like “together we increase sustainable welfare and quality of life of people” ? (Prof Stef Coetzee, Sakebeeld, 22 June 2011)

This is a well considered document that deserves the attention of all thinking South Africans. We need the political will to implement this and the plan which follows later in the year. (Prof Stef Coetzee, Sakebeeld, 22 June 2011)


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A democratic state, rooted in the values of the Constitution, working with allsectors of society to improve the quality of life, build a better Africa and a better World.

This is achieved through:



3. People who are able to work have access to jobs,




VISION

MISSSION


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1. People are united in diversity through Ubuntu;

2. An efficient state protects citizens;

3. Individuals and communities, at work and at play, embrace mutual respect and human solidarity;

4. Equality for women in all aspects of life;

5. Workers’ rights are protected, including access to decent work;6. The workforce is skilled;

7. Promoting the common interests of the nation through Openness, transparency, collaboration and accountabilty.

VALUES

SLOGAN

A democratic state, rooted in the values of the constitution


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The NPC plays a role mobilising society around a vision and a development plan. It does this through active engagement with the public, ensuring that experts’ views are canvassed on its proposals, and through a wide range of interactions. The commission has to carry out its functions representing all South Africans, taking into account their views irrespective of political outlook.

The NPC invites all South Africans to participate in this process to define a shared vision for our collective future.

The Building Industry leadership needs to engage with the NPC in order to contribute to the development of the National Vision for the Country and for the Building Industry.


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Summarised MBSA Summit Decisions To investigate the establishment of a multi-representative Industry Forum that would meet 2 to 3 times per annum

To promote building as the Engine for Growth, nation building and wealth creation (through home ownership) by way of effective communication with leaders in all the economic sectors

To establish a Task Force to unpack the R846 billion infrastructure budgets and investment for all public sector work, including affordable housing; to determine the impediments to the delivery thereof; to ensure a constant work flow and uphold quality standards, measured against annually assessed programmes, and to explore and prioritise the effective implementation of national infrastructure maintenance strategies.

The formation of an inclusive forum to analyse the 8 000 projects within the Department of Human Settlements.

To maximise employment opportunities by correct retro-fitting of existing buildings; maximise reduction of carbon emissions, and pursue green best practice approaches for engineering services in line with” green building”. (February 2011)

STRATEGIC RESPONSE OF THE BUILDING INDUSTRYwww.strategicforum.co.za


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Summarised MBSA Summit Decisions To investigate the establishment of a multi-representative Industry Forum that would meet 2 to 3 times per annum

To promote building as the Engine for Growth, nation building and wealth creation (through home ownership) by way of effective communication with leaders in all the economic sectors

To establish a Task Force to unpack the R846 billion infrastructure budgets and investment for all public sector work, including affordable housing; to determine the impediments to the delivery thereof; to ensure a constant work flow and uphold quality standards, measured against annually assessed programmes, and to explore and prioritise the effective implementation of national infrastructure maintenance strategies.

The formation of an inclusive forum to analyse the 8 000 projects within the Department of Human Settlements.

To maximise employment opportunities by correct retro-fitting of existing buildings; maximise reduction of carbon emissions, and pursue green best practice approaches for engineering services in line with” green building”. (February 2011)

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Asking the right questions. Turning known unknowns into known knowns.

First step towards developing a Vision for the Industry?

Towards developing a Co-operative mindset and cross boundary networking for the Industry?

STRATEGIC RESPONSE OF THE BUILDING INDUSTRYwww.strategicforum.co.za


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NATIONAL ISSUES

GROWTH WEALTHEMPLOYMENT PROPERTY

ORGANISATION’S ROLE

INVESTMENT ENVIRONMENT

MARKETING LOGISTICS MANUFACTURING

SLOGANBuilding: An engine of growth & wealth creation

REINVENTIONDoing well while doing

good.

REINVENTIONDoing well while doing

good.

YESTERDAY’S ECONOMY

TOMORROW’SECONOMY

NARROW FOCUS ON COMPANY

NARROW FOCUS ON COMPANY

BROAD FOCUS ON CONTRIBUTION TO NATIONAL ISSUES

BROAD FOCUS ON CONTRIBUTION TO NATIONAL ISSUES

Overarching vision aligned with National Issues and Vision, adapted and customised by Industry and organisations for their own vision and values.

BORROWBUY

BURN

ENVIRONMENTALSUSTAINABILITY

SOCIALSUSTAINABILITY

ECONOMICSUSTAINABILITY

STRATEGIC RESPONSEwww.strategicforum.co.za

VISIONThe Building Industry is an engine for growth and wealth creation through redistribution, property development, ownership and investment.

MISSIONThe elimination of social backlogs and inequities is achieved through the provision of sustainable integrated developments, and providing skills, employment and entrepreneurial opportunities for growth.

VALUESThe Industry has an igniting vision, a culture, or mind set of co-operation, collaboration and cross-boundary networking; and the productive capability to deliver SUSTAINABLE Environmental, Social and Economic solutions and based on

the unashamedly ethical values and code of conduct of:• Ubuntu• Integrity• Respect • Accountability• Law abiding



TowardsBuilding: An Engine for growth and wealth creation in

A democratic state, rooted in the values of the Constitution, working with all sectors of society to improve the quality of life, build a better Africa and a better

World.Dr. Llewellyn B. Lewis

April 2012

THE STRATEGIC FORUM

A place of assembly for strategic conversations

THE STRATEGIC FORUMwww.strategicforum.co.za

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Reg. No. 2002/105109/23

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the building industry and social transformation (april 2012)

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