CHAPTER 3 THE CONTRACTORS PERSPECTIVE
3.5 THE CYCLICAL NATURE OF THE BUILDING INDUSTRY
It has often been argued that subcontracting allows firms the advantage of a flexible labour force and supervisors, who may be employed when demand is high and more-or-Iess automatically expelled when demand is low (see Banerjee, 1981 and Bromley, 1985). At first glance the building industry would seem an important case in point.
In both developing and developed countries the output of the civil engineering and building industries tends to fluctuate considerably more than that of manufacturing and the economy as a whole (World Bank, 1986:39). The relative volatility of output is primarily a function of the nature of the product. By and large, the products are first planned, then ordered and finally produced at the particular location where they are required.
This implies that while some of the component parts of a building or other construction may be produced on a continuous basis and stockpiled in times of slack demand, complete buildings or
constructions may not. Thus, to a larger extent in construction and building than in other industries, continuity of production is dependent on the maintenance of continuity in demand (Wells, 1986:5).
continuity of demand is, however, largely denied the construction and building industry. The demand for large construction
projects is, almost by definition, sporadic and discontinuous.
The demand for new buildings is significantly affected by rises in materials costs and interest rates (Kilian, 1976:11-12).
Recent developments in the Western Cape are a case in point.
Following sharp rises in interest rates in the previous six months, the rate of production of new houses at the Blue Downs development slowed substantially (Interviews 1, 4- 6).
56
"
Thus, it would seem that subcontracting allows LSEs to vary employment with business cycles without the concern of large- scale retrenchment in economic downswings. Due to traditional employment codes in the industry, however, the answer is not so simple.
Traditional employment codes in the construction industry have taken cognizance of the variability of output in the industry.
Clause 17(1) of the Industrial Council Agreement requires that an employer furnish an employee with only one day's notice of
retrenchment. Further, if the period of employment has been fewer than three days, no notice is required (Government Gazette, vol.238, no.9704, 1985:20). It is, therefore, unlikely that LSEs experience any significant problems in hiring and firing
unskilled workers according to economic cycles. with the growth of unions in the industry, however, this may be a more important consideration in the future.
Conversely, most contractors did stress that cyclical factors in the industry made it necessary to keep the permanent complement of equipment, foremen and management to a minimum. They argued that firms caught with excess supplies of equipment and labour in the industry in the downturn of the late 1970's, responded by retrenching large numbers of particularly foremen and managers.
Thus, subcontracting enabled LSEs to reduce the required permanent labour force.
Two factors would support this explanation:
First, the use of subcontractors does require a substantially smaller equipment and supervisory complement in LSEs, than if they were responsib,le for the direct employment of all labour.
Second, subcontracting implies that where LSEs face a shortage of foremen and skilled workers, particularly during the beginning of an upturn, they are able to obviate this by gaining access to unqualified foremen and artisans.
3.6 LABOUR PRODUCTIVITY
Contracts managers and owners interviewed differed over the effects of subcontracting on labour productivity. It was not possible to test productivity changes directly in this study and none of the contractors had themselves conducted tests. There may be potential increases in labour productivity in
subcontractors due to the closer degree of supervision afforded in these firms. In practice, however, this would have to be weighed against the use of unqualified artisans and foremen, and, given the high turnover rate of subcontractors, the greater amount of time spent training new workers. Nevertheless, as long as lower productivity does not exceed the 50% lower labour costs, there will be net benefits to LSEs from subcontracting.
a&±!2 ..• -.... ~ -'='
3.7 CONCLUSION
This chapter has shown that, as suggested in the international literature, there are significant advantages to subcontracting for LSEs. If we assume that LSEs are profit maximisers, each of the factors above serves to induce them to subcontract. In the context of set land and rising real building materials prices, direct labour cost considerations must rank as the primary factor motivating widespread subcontracting in the industry at present.
Notably this arises at a time of increased unionisation in the industry.
It. is true that the scale of these cost factors is, at least partially, due to Industrial Council regulation of the industry.
If these Industrial Council regulations were abolished, the weighting of as yet untested differences in labour productivity would become more important in the decision to subcontract.
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..
C H A P T E
THE CONSTRAINTS FACED BY SUBCONTRACTORS
Having focused on the contractor or principal in the last
chapter, we now examine the constraints facing subcontractors in the low-cost housing industry. It will be shown that, although management is weak, subcontractors are also constrained by factors external to the enterprise. Particularly significant are constraints on demand, government policies governing the
allocation of land and the terms of the subcontracting relationship.
For this exposition, the existing external problems and growth constraints facing subcontractors may be classified under four subsections, viz. the demand for housing, the supply of land, access to finance and the subcontracting relationship. To these external constraints should be added managerial skill, which in itself represents several internal problems and constraints. In reality, all these categories interact to determine the specific income and employment conditions in the sector at anyone time.
4.1 DEMAND FOR HOUSING
The housing shortage in the country seems to indicate an unlimited demand for the services of subcontractors over time.
Table 4.1
Current and Projected Housing Requirements: 1985-200062 population Group 1985 1990 1995 2000
white Requirements 1262000 1332000 1430000 1517000 Shortage +37000 33000 132000 218000 Coloured Requirement 446000 487000 538000 586000 Shortage 52000 94000 144000 192000 Asian Requirement 185000 200000 218000 234000
Shortage 44000 60000 77000 93000
African Requirement 1004003 2299000 2724000 3161000 Shortage 538000 1833000 2258000 2695000 Source: De Vos, 1986b:3
62. Quantitive estimates of the housing shortage ignore the serious qualitative state of Black housing. 'fhal is, the figures presented do not indicate the state of disrepail' of existing dwellings and the lack of facilities and infrastructure in existing townShips.
R
4
The main problem is the housing requirement of Africans. While the present backlog for Africans amounts to over 500 000 units, an additional 2.7 million units must be built if all Black households are to have a dwelling by the year 2000. In total, approximately 3.2 million homes are needed in urban areas before the year 2000. This amounts to the provision of over 200 000 housing units per annum.
Effective demand for housing, however, reflects not the need for housing but private individuals' ability to pay for it. Table 4.2 shows the total number of residential dwellings completed by the private sector from 1980 to 1985.
Table 4.2
Private sector Provision of Housing Units: 1980-1985G3 Dwellings and Flats (units)
Year White Coloured Asian
1980 24 359 3094 2301
1981 30 265 2792 1969
1982 31 862 3063 2028
1983 37 494 2689 1775
1984 41 415 3646 1982
1985 33 351 4180 3580
Total 198 746 19 464 13 635 (a) Including R.S.A. and the National states.
Source: De Vos, 1987a:24
African 552 1457 1660 1936 1503 7548 14 656
The private sector in South Africa was only able to provide some 41 000 conventional housing units per annum between 1980 and 1985. This does not meet even current backlogs, let alone future needs, particularly amongst Africans. Further, despite the greater housing requirements of the Black population in general, a disproportionate number of housing units are provided for the White population group. The insignificant extent to which houses are built to meet the need for housing among Blacks is primarily a function of affordability.
De Vos (1987a and 1987b) recently estimated the extent to which households in South Africa can afford low-cost housingM in terms
63. The table refers to the limited expansion of conventional housing amongst the formal private sector, just prior and subsequent to the new housing dispensation. The figures exclude informal housing (eg. shacks) and additions and alterations, neither of which form part of this study.
64. A iow-cost house is defined as: "A 50 m2 to 5S'm2 home, containing three living rooms, a kitchen and a bathroom, with no cupboards in the bedrooms and only basic and essential storage space in the kitchen. Splash-back tiles aTC only provided in the bathroom and above the kitchen sink. Ceilings arc provided and the floor finishes are relatively maintenance free. Electricity, hot and cold water and water-borne sewerage are included. This house, when produced conventionally by the building industry, would cost between R15 000 and R20 000 in 1987, including the cost of the land (200 ml to 300 m2) and basic but adequate infrastructure services. The township
60
of their disposable income.~ In terms of this study, the price is nearly double the nominal price of the cheapest house offered on the Blue Downs site and slightly lower than the cost of the cheapest house in the Khayelitsha project.
Without any financial assistance, 92% of White households would be able to afford a low-cost dwelling of the above nature.
However, only 50% of Coloured households, 66% of Asian households and 25% of African households could afford a low-cost dwelling without any form of subsidy (De Vos, 1987a:33). If all households were to receive a one-third interest rate subsidy available to first-time home-owners, 93% of White households would be able to afford a low cost dwelling. The corresponding proportion for Coloureds is approximately 55%, for Asians 74% and for Africans 31% (De Vos, 1987a:34).
The proportions for CapeTown are no less daunting. In 1984, Glover and Watson argued that private developers could cater for less than 22% of the Coloured housing market in the Western cape (Glover and watson, 1984:33). More recently, De Vos (1987b:27) estimated that the percentage of all Black households in the ·Cape Metropolitan area which are unable to make any contribution towards the cost of a house, in terms of their disposable incomes, are: 5.3% for Whites, 13.4% for Coloureds, 3.1% for Asians and 42.7% for Africans. Further, he shows that without some form of subsidy, approximately 8% of Whites; 26% of
Coloureds; 7% of Asians and 68% of Africans would. not be able to aquire a low-cost housing unit.
Thus, despite the enormous need for housing in the country, existing constraints on income suggest that only a small proportion of this need will be met by formal contractor built conventional housing. The result places significant limitations on the number of subcontractors who are able to find employment in the industry. The ultimate effect of the limitations will depend on the scale to which subcontractors are involved in non- conventional formal housing schemes and additions and
alterations.
4.2 SUPPLY OF LAND
Even if the affordability constraint were met, the extent to which housing could be provided by the private sector would be severely curtailed by constraints on the supply of suitable land.
would have street lighting and stormwatcr drainagej the bus routes only would be provided with permanent surfacing" (Dc Vos, 1987.:31).
65. In the study, a household's di~ble income for housing is calculated as: That portion of the household income which is available for housing after the transport costs of the breadwinner(s) have been paid, as well as aU of the items nec:essary to maintain a minimum standard of health and decency in the shon term' (De Vas, 1987a:32). The estimates of these costs were derived on the basis of the H.S.L calculated by the University of Port Elizabeth.
Although there is some indication that government land policy is becoming more realistic (Oosthuizen, 1989) and flexible (District six and other proposed "Open Areas"), there is, at present, still a shortage of suitable residential erven for Blacks (see Todes and Watson, 1986; Festenstein and Pickard-Cambridge, 1987;
Hendler, 1989 and city of cape Town, 1988).
For instance, Hendler (1989:16-17) estimates the extent to which official allocation of land in the PWV region falls short of land required for housing. He argues that, on the basis of official residential density norms and existing town planning practices, 87 000 hectares would be needed by the year 2000 to house African people. In 1987, existing townships in the PWV occupied some 44 000 hectares. A further 43 000 hectares would therefore be needed by the year 2000. So far, however, official Guide Plans for the region have only recommended the release of some 29 000 hectares for African housing.
A similar study was conducted by the Cape Town City Planners Office (City of Cape Town, 1988), for Coloured housing in the western Cape. The study takes into account underutilised land in existing townships, vacant plots in existing townships and land earmarked for development in existing structure plans. The Council estimated a need for an additional 183 000 housing units for Coloureds in Greater Cape Town by the year 2000. The report concludes, however, that even if households could afford all housing on the market, there would still be a shortfall of land for some 77 660 housing units. Thus, outside of the issue of affordability, existing state land allocation policies limit the production of low-cost housing. 66
If the amount of land released for Blacks is an obstacle to the provision of housing, so too is its distance from places of work.
Restrictions on the identification and release of suitable land close to sources of employment are primarily a consequence of the Group Areas Act. Where residential areas have been established for Blacks in terms of the Act, they are far from metropolitan centres and places of work (Morris, 1981:136; Wilson and Ramphele, 1989:217).
The artificial scarcity on land imposed by the Act serves to compound the affordability problem by raising the price of land, particularly in those areas where the shortage of land is greatest. In the cape Province, Whites can obtain plots of land in Table View at half the price of comparable land in areas demarcated for Coloureds. Similarly, when the White suburb of Eerste Rivier was reallocated for Coloured housing, the price of land doubled from R4000 to R8000. Land for Coloured development
66, It is likely that higher residential densities per hectare will help alleviate land shortages, but only if planning encourages and facilitates multi-storey buildings, cluster housing, etc. The government Guide Plans Cor the various regions do not make provision for this (see City or Cape Town, 1988 and Hendler, 1989).
62
costs Garden Cities on average R40 000 per hectare, while similar land in White areas is purchased at only R10 000 per hectare (figures from De Vos, 1987b:23).
In sum, state land allocation policies and the Group Areas Act restrict the amount of suitable land available for low-cost housing and prevent the fullest use of existing supplies of land.
This implies that even if the affordability problem were obviated, any increase in housing provision would be severely curtailed by the under-supply of suitable residential erven. In turn, limitations on the provision of low-cost housing constrains the extent to which existing subcontractors can grow and new firms can enter the industry.
4.3 ACCESS TO FINANCE
A proportion of 19.6% of operators in the sample indicated that access to finance constitutes a constraint on the operation of their enterprise (Appendix B, Table B11).
On the one hand, the subcontractors are largely excluded from access to institutional finance. On the other hand, in the wet trades and painting the scale of initial capital required implies that access to finance is not a significant barrier to entry.
Most of the operators in these trades required less than one- third of an artisans' monthly minimum wage to start. Access to finance does, however, constitute a greater barrier to entry'in the plumbing and electrical trades. In these trades operators required, on average, the equivalent of 'nine-months minimum wages for artisans to start their firm.
In terms of future growth, most operators will need to purchase additional tools and equipment and a suitable vehicle. A vehicle would be needed to transport the additional tools and equipment and would also allow operators to work on more than one site simultaneously.
Given existing levels of income in the sector, i t is likely that most operators will be able to fund these purchases out of reinvested profits. The operators indicated that they considered profit to be any income they receive over and above a minimum basic wage for artisans. If we use this as a basis, levels of prof i tabili ty in the sector are indicated in Table 4.3.67
67. Calc"laled (rom Tables 2.19 and 2.20.
Table 4.3
Operators by Monthly Profits Profit p.m. No
Less than R1 32
R1
-
R199 2R200 - R499 9 R500 - R999 9 R1000 - R1499 7 R1500 - R1999 11
R2000 - R2499 5
R2500 + 7
Total 82
Mean R598.97
Percent 39.0
2.5 11. 0 11. 0 8.5 13.4 6.1 8.5 100.0
On average, operators earn R598.97 profit per month, however, 52.5% of operators earn below R500 profit per month and 39% earn no profit at all. For these operators the purchase of transport and additional tools is not possible without access to outside sources of finance. The result demonstrates the importance of financial institutions geared to cater specifically for the small firm.
4.4 THE SUBCONTRACTING RELATIONSHIP
The operators complained that certain aspects of the
subcontracting relationship stunted the growth of their firms. In the building sector, as in many other subcontracting
relationships, the two parties to the subcontract agreement meet under conditions of extremely unequal bargaining power. This inequality exists because the subcontractors often have no other source of employment, have invested previously in building- specific human capital, and have no negotiating experience. The extent of inequality in this relationship, however, is primarily a reflection of the size and inherent strength of LSEs, as well as their oligopsony over low-cost housing construction. The latter is a consequence of government policies in the allocation of land.
LSEs have dominated the first phase of low-cost housing privatisation in the 1980's. with the exception of 20% of the Blue Downs project, the smallest contract allocated in the first phase was in excess of 100 units. In the Khayelitsha project the smallest contract alloc;:ated was 100 units.
64
These allocations do not offer sufficient opportunities for smaller-scale enterprises, which have less access. to finance, to engage in housing construction, or for homeowners to buy a single plot to develop as they wish. The consequence is that
subcontractors can only work in the growth area of mass housing if they enter into this together with large contractors. If subcontractors had had a choice of contractual relationships to enter into in this field (for example, with small firms or homeowners), their bargaining power would have been enhanced.
In addition to this fundamental issue, the survey identified more specific problems that are contained within the subcontracting relationship, and that reflect the unequal bargaining power of the parties.
4.4.1 Raw Material Shortages
The largest proportion (29.6%) of operators complained of raw material shortages (Appendix B, Table B11). The situation is such that, except for some of the electricians and plumbers, the contractor undertakes responsibility for raw material provision'.
Subcontractors complained of delays and bottle-necks in the supply of raw materials. It was clear from responses that these delays occurred frequently and that the average period of delay was at least one day.
Raw material shortages may be due to bottle-necks in production or management inefficiencies on the side of suppliers or
contractors. However, what is important here is that the nature of the subcontracting relationship and the reality of most of the contracts to date, enables developers to divest all
responsibility for the delay onto the subcontractor. The entire direct cost of the delay is borne by the subcontractor, which limits income generation within the subcontracting firm.
4.4.2 Rates of Pay
A number of subcontractors complained that unreasonably low rates of pay per job prevented them from paying higher wages to their workers and, often, from making any profit themselves (Appendix B, Table B11). As shown in Table 4.4,68 if subcontractors were to have paid their ,workers at minimum wages, 80.8% of firms would have made a loss of up to 40% of the rate they were receiving for a particular piece of work.
68. See Appendix F. question 33 and 39 for the survey questions.