adminrequirements for goods and services from other industries is considerable, its easing of unemployment is highly recommendable.
The development of the construction industry therefore stimulates these ancillary industries, thus encouraging economic growth.
Having considered challenges being faced by local building and civil contractors; including lack of competitive power, lack of contracts, lack of finance and necessary equipment, questions now arise as to whether these construction companies need more civil, structural, mechanical or electrical engineers.
According to AfDB Zimbabwe needs US$16 billion for the rehabilitation and development of its national infrastructure and this leaves one wondering where all this money will come from.
Innovate or Shrink
Like many other sectors, the construction industry also faces a stark choice: innovate and adapt or shrink.
This is because construction firms are largely dependent on derived demand. They are mainly passive within the marketplace reliant on others to generate demand for their services.
In times of low demand construction firms may have to look to themselves. This may mean creating work for themselves through private/risk sharing real estate development since low demand for construction services does not mean low demand for the end-product, i.e. the house. In this respect, a construction company should be ready to assess just where the industry adds value and look beyond construction to a broader view of the built environment
Develop smarter financial models
Be prepared to back ventures with investment of risk-sharing.
If this approach is to work, construction firms must:
- Find sufficient talent to build the financial models and engineer the tools necessary to build innovative and more effective financial propositions.
- Find people who know how to slice, dice, package and sell risk.
- Must also be able to deconstruct project risks and repackage and sell them to maximum effect within the financial markets. It offers the potential to generate a vast source of new construction work through tapping more efficiently and effectively private finance and contributions of public funds.
The real question is whether construction firms are looking to create opportunities or do they expect the Government or another party to provide them with ready-made packages of work?
Projects worth millions of dollars that are less obvious and more marginal are currently on ice. For example, several road rehabilitation projects are on the cards but because of lack of financing strategies, considering the huge capital outlay required the local contractor is eventually sidelined.
Rehabilitation of the Harare-Masvingo Road near Mukuvisi Bridge had to be taken as a Government project after local contractors were not forthcoming.
To cite lack of contracts as an impediment can also be misleading. The question is whether with a different approach to financing, a different appetite for risk and reward will be achieved and some of these projects might be freed and bring an early Christmas to the construction sector.
If financial models were re-engineered, risks were reallocated or passed on or new funding streams found, there could be more work for contractors. There is also a host of other potential projects currently not being considered that might be given life if smart financial engineering can better capture the value of the project to help support the initial capital cost.
If the industry remains reliant on derived demand, its firms must be prepared to grow and shrink with the market fluctuation and they must accept the scourge of destructive price-cutting that comes when times get tough.
This brings back the debate on whether these guys need a bunch of effective civil, structural, mechanical and electrical engineers or financial engineers during such conditions.
Construction bills
Why not seek to sell bills or shares in a project to local residents, businesses, landowners, long-term commercial tenants, or indeed prospective tenants and residents within the project in the form of neighbourhood bills?
The bondholders/shareholders would not only receive a dividend but would also benefit from the capital value uplift from the project.
This might provide cheaper capital finance than is available from the market and so capture some of the value of the regeneration uplifts that is normally lost in the sands. It might also provide a useful vehicle for targeted tax breaks in less developed areas.
I cannot guarantee it to work, but we do need new ideas if construction activity is not to dwindle.
House constructors and residential developers could also consider residential derivatives to hedge against adverse price fluctuations.
In conclusion, construction companies need to be less reliant on clients and more reliant on their own wit and wherewithal by innovatively playing with their finance.
LET FINANCE BE ENGINEERED!
Thomas Muserepwa is a Financial Engineering student at the Harare Institute of Technology and president of the Financial Engineering Society (FES). He is currently attached at GMRI Capital.
Online Reporter