CHAPTER 4 THE CONSTRAINTS FACED BY SUBCONTRACTORS •••••••• 61
4.6 CONCLUSION .. "
This chapter has analysed the constraints facing subcontracting firms. The subcontractors operate subject to certain internal constraints stemming from poor management. It is likely that over time these constraints will either correct themselves or be corrected with appropriate management training. The external constraints facing the enterprise relate primarily to the terms of the subcontracting relationship; to constraints on effective demand for housing, and to state land allocation policies.
Further, although financial barriers to entry are generally low in the sector, a significant proportion of operators will require access to external sources of capital to financa future growth.
It is often argued that in most cases the benefits of
subcontracting are skewed towards the contractor, but that in specific instances i t is possible for SSEs to benefit from this contractual relationship (see for ego Lenin, 1977; Banerjee, 1981; Mead, 1984). The low-cost housing industry in the Cape Peninsula is not, at present, one of those instances.
In this paper subcontracting offers a range of important
advantages to LSEs without extending any significant benefits to the subcontractor. While i t is true that LSEs have established the conditions for the founding of most of these firms, i t is important to note that these conditions themselves are a constraint on the firms' growth.
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subcontracting provides an easy contractual 'mechanism where risk and responsibility are Shifted from contractor to subcontractor and income from employees to contractor. As one commentator of subcontracting in the Indian textile sector put it:
The terms (of subcontracting) are usually such that the one who accepts the terms offered by the trade finds himself at the losing end because the trader or employer transfers his problems and risks onto the people he employs (Van Wersch, 1989:37).
A further constraint highlighted in the analysis was the lack of effective demand for housing at existing prices. Clearly, the private sector is unable to meet the budget constraints of those that require housing. This serves to limit the growth potential of existing subcontractors and restricts the extent to which new firms can enter the sector.
Finally, an important component of this country's poor record of housing provision is related to State land allocation policies.
The inadequate provision of suitable residential erven for the Black population is partly a consequence of the Group Areas Act, which forces people to live a ponsiderable distance from places of work. The Act also prevents the fullest use of existing land and housing and limits the extent to which projects may be undertaken, by the private sector. In terms of this study-, constraints on land supply place further limitations on subcontracting.
c
H A p T E R 5 CONCLUSIONS AND POLICY PROPOSALSThis conclusion will integrate the findings of the case study into an assessment of Inward Industrialisation. It will be shown that the trend toward subcontracting does offer some limited advantages for inward industrialisation. It is, however, unlikely to generate the increase in lower-income group incomes required for the policy to succeed.
5.1 SUBCONTRACTING AND INWARD INDUSTRIALISATION The trend toward subcontracting is a relatively recent
development in the building industry. It has occurred in the context of the privatisation of housing in South Africa and, in particular, the promotion of Inward Industrialisation. Inward Industrialisation has been defined as an economic development strategy which relies on a self-generating increase in lower income group incomes. The housing industry is to serve as a leading sector while increased production in SSEs is to provide for the increase in employment and income provision. In this context, the increased use of subcontractors in the building of conventional housing has some limited advantages.
Subcontracting makes possible a reduction in the price of conventional housing, through a 50% reduction in labour costs.
Given that these costs represent 14% - 20% of the total cost of the house (Interviews 1-6), subcontracting allows a reduction of up to 10% on the cost of each house. The exact reduction depends on the extent to which lower labour costs filter through to the price of the house.
Subcontracting also implies a bias in job creation towards unskilled workers, at the expense of skilled labour. This is an important result, as unskilled workers are likely to be hardest hit by unemployment in the region. Further, unskilled work suits the employment needs of the newly- urbanised, and requires little initial investment in human capital.
Nevertheless, i t is important to note that subcontracting does not lead to increased employment per house constructed. Due to the relatively fixed production coefficients in housing, firm size is irrelevant with respect to employment creation.
Finally, the trend toward subcontracting provides increased entrepreneurial and managerial training for local workers who were previously denied access to i t in LSEs. Training of
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subcontractors also extends to the upgrading of the abilities of existing unskilled workers. In this way, the sector reduces pressure on existing scarce resources allocated to training. The skills developed could be subsequently used in the creation of new subcontracting ventures, or in aquiring more highly paid employment.
To the extent that operators are, however, not qualified artisans or do not devote specific attention to training, i t is difficult to assess the quality of the training received. Training of skilled labour in these firms is thus not a panacea for the declining rate of apprentice training in the country. Further, although the sector teaches expertise in a trade, i t does not provide certification which may be an important determinant of future income in LSEs.
The point at issue is not the efficiency or inefficiency of- subcontracting as opposed to that of direct employment; rather i t is' whether the implications of subcontracting are inimical to the viability of Inward Industrialisation as a policy.
The most important condition for inward industrialisation is that subcontracting should enhance income generation amongst lower- income groups. The implications here are mixed. For the operators, the sector does provide a viable alternative to employment in LSEs. For the workers, however, employment by subcontractors, as opposed to LSEs, implies a 40% reduction ~n
wages on site.
Given the requirement of an increase in lower-income group incomes for Inward Industrialisation, i t is important to ascertain the effect on the total wage bill. . This will be predicated on the price elasticity of demand for housing.
If a reduction in the price per house leads to a more than proportional increase in the effective demand for them., then, with fixed input costs, the total wage bill may rise despite the reduction in income per employee. If i t does not lead to a more than proportional increase in effective demand for housing, then the net effect is simply the redistribution of the proceeds ·of housing production from subcontracting employees to LSEs and subcontracting operators.
without extensive further research i t proved difficult to
estimate the elasticity ·of demand fcir low-cost housing. Economic theory informs that the larger the proportion of income
represented by the purchase price, the larger the price elastici ty·. of demand. . Further, if the. demand curve is linear, the less saturated the market, the higher the price elasticity of demand.
Conversely, one could argue that low-income accommodation should be price inelastic as a result of interest rate volatility.
After witnessing the effects of recent bond rate changes, aspirant homeowners are unlikely to buy a house on the strength of minor changes in its nominal price. Apart from expectations of bond rate changes, i t is likely that demand for housing is more responsive to changes in incomes and political factors (such as expectations of changes in the Group Areas Act) than to
changes in price (Moolman, 1981).
Unfortunately, a precise answer as to the effects of
subcontracting is dependent on an accurate measure of the price elasticity of demand. The results of this study provide a more indirect answer to the question. They suggest that, on balance, the required increase in housing production and income generation among low-income groups is unlikely to be forthcoming.
The issue is primarily one of affordability. To the extent that housing has been provided, i t has been primarily accessible to higher-income groups, particularly to state employees and those with access to state subsidies. The minimum of R20 000, at which conventional houses are currently provided by the private sector, is still well beyond the means of the majority of those in need of housing.
The point is simply illustrated in the following example. On the Khayelitsha site, a R20 000 house, repayable over 20 years, at an interest rate of 18%70
requires monthly repayments of R308.66. In this case, the minimum monthly income is R925.98,71 and only 3.7% of workers are able to afford a house of this nature. If the first-time home buyers subsidy is applied, only 8.8% are able to purchase the home. Thus the vast majority of workers are unable to purchase the houses they produce.
If the houses were constructed in LSEs without the use of subcontractors, wages on site would be 40% higher and the price of the house 10% higher. A reworking of the above calculations on this basis shows that the net effect of the trend to
subcontracting has been a reduction in effective demand for housing.
Despite the higher cost of a house associated with production by LSEs, a significantly larger proportion (11.2%) of the workers involved would be able to afford a R20 000 house without a subsidy; while 28.6% would be able to afford this house with access to the first-time homeowners subsidy. Clearly,
constraints on affordability severely limit effective demand for
70. The average monthly mortgage rate on new bonds from three major financial institutions at the end of 1988 (sec Hall, 1989).
71. A 30% affordability rule is applied at Khayelitsha and Blue Downs with some downward flexibility (IntclVicws 1-6 and 14).
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housing and thereby the incr~ase in income required to boost a programme of Inward Industrialisation. The trend to
subcontracting has only served to heighten these constraints by further reducing effective demand for housing.
constraints on affordability are not the only limits to I~ward
Industrialisation. Even ff the financial constraint were to be met, existing state policies governing the allocation of suitable land for development would curtail the response of supply to effective demand. Finally, the terms of the subcontracting relationship only serve to further limit prospects for employment and income generation in subcontracting firms.
In sum, this dissertation has examined the recent trend toward subcontracting in the building industry and the implications for Inward Industrialisation policy. It has been suggested that the development will not necessarily lead to the required increase in effective demand. In fact, i t seems plausible that i t will reduce effective demand among low-income groups.
If the development does not generate any increase in housing production, its limited effects will have been twofold. The primary effect has been to redistribute the proceeds of housing production from the employees of subcontractors to the large contractors. The second effect has been to create an increasing disparity between a small well paid group of operators and their workers.
It has been shown that the income and employment conditions within building SSEs are more favourable than those reported for SSEs in other industries. If one includes activities of SSEs in other industries, constraints on effective demand are a major constraint to a successful Inward Industrialisation policy.
Nevertheless, the analysis in this paper does suggest that, .under different circumstances, the provision of housing, through SSEs can serve to significantly increase the provision of income and employment. The industry is labour-intensive and the costs of job creation are low. In addition, there are advantages for unskilled employment and training if housing production is undertaken through subcontracting.
5.2 POLICY GUIDELINES