LIST OF ABBREVIATIONS AND ACRONYMS
2.4 ROLE OF THE CONSTRUCTION INDUSTRY IN SOCIO-ECONOMIC DEVELOPMENT
2.4.2 Public procurement and SME (contractor) development goals
Previous sections have described the significant role of the construction industry, both directly and indirectly to national economic growth and sustainable development. The procurement of construction works has also been shown to provide governments with economic, regulatory and public-sector policy and capacity delivery mechanisms which can be used to achieve various broad socio-economic objectives (Fellows et al., 2002; Hillebrandt, 2000; van Wyk, 2003). The importance of adequate construction capacity for national development is well- documented in the literature. Government’s understanding of the construction industry’s significant role in the economy has led to the increasing need to intervene in the construction industry that is largely dominated by albeit specialized, underperforming small and medium- sized enterprises (Wolstenholme, 2009; BIS, 2013). For instance, an estimated 99.7% of construction firms in the United Kingdom (UK) can be classified as small and medium-sized businesses (Cabinet Office, 2011; BIS, 2013). In South Africa, Grades 2 to 6 SME contractors account for 89% of the total registrations in Grades 2 to 9 (cidb, 2017a).
Based on the classification of the National Small Business Amendment Act, No. 26 of 2003 (2003), SMEs in the construction industry are categorised into three broad groups: very small, small and medium enterprise. Very small and small contractors are businesses that employ 6 to 50 people, generate between R200,001 and R6 million turnover per annum and/or have gross assets valued between R500,001 and R1 million. They are usually owner-managed and are likely to operate from business or industrial premises, be tax registered and meet other formal registration requirements (Berry et al., 2002; Jewel et al., 2005; Rebello, 2005). They also employ skilled personnel to carry out the work required (Shakantu et al., 2006). Medium-sized contractors are a wide range of companies employing from 51 to about 200 employees and generate between R6.1 million and R26 million turnover per annum and/or have gross assets valued between R1.1 and R5 million. Moreover, like small enterprises, medium-sized enterprises are also usually owner or manager-controlled (Department of Trade and Industry, [DTI], 1995; Jewell et al., 2005; Rebello, 2005) and employ skilled people (Shakantu et al., 2006).
SMEs are not peculiar to the construction industry or developing countries, rather they are regarded as engines of economic growth in all sectors of many countries. For instance, in the
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OECD, SMEs employing less than 20 persons account for over 95% of enterprises and 69 to 95% of total employment (OECD, 2013), and generate a large share of new jobs (OECD, 2004).
SMEs also make up 91 to 93% of industrial enterprises in the South-East and East Asian countries, contribute 35 to 61% of employment, and account for 22 to 40% of total value-added (Shakantu, 2012). Moreover, SMEs produce about 50% of the GDP of most countries, and up to 55% of all technical innovations (Burke, 2006).
Although these figures highlight the relevance of SMEs to the national economy of all countries regardless of stage of development, Palma (2005) noted that SMEs are especially important to developing economies with major employment and income distribution challenges (as cited in Shakantu, 2012). Putting this in proper context, South Africa with an unemployment rate of 27.7% also has one of the most unequal distributions of income in the world with approximately 10% of the population earning 55 to 60% of the country’s income and holding 90 to 95% wealth (StatsSA, 2017). Palma (2005) further observed that rapid growth of small-scale enterprises usually precedes the process of industrialisation; however, such companies continue to remain relevant during and beyond the industrialisation phase because at any level of a country’s development, some activities that are needed involve few or no economies of scale.
Shakantu and Kajimo-Shakantu (2007) noted that for small businesses to contribute effectively to the economy, they should be able to evolve into efficient, well-organised, technically competent and well-managed operations that are able to respond to opportunities and challenges in their environment. They should be able to offer reliable products with dependable delivery and conformance to quality. They should be price-competitive and continuously improve upon their performance. They should focus on cost effectiveness, integrated quality actions, customer responsiveness, information technology management and human resource management. In the context of the construction industry, the complexity of construction activities and factors that influence construction processes constitute certain constraints and challenges on construction businesses (Shakantu, 2012). Therefore, contractors must have the capacity to deliver the necessary volume of works required for socio-economic progress within the specified time, at reasonable and predictable cost, and to the specified quality, while paying attention to the health and safety of the public and the workers on site, as well as using materials, equipment and methods that are least harmful to the environment (Ashworth, 2006;
Barrie and Paulson, 2001; Harris et al., 2006; UNCHS, 1996).
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There are limited contractors with such capacity in developing countries and in scenarios where contractors with adequate capacity are available, they are faced with several challenges including but not limited to managerial, technical skills, resources, regulations and client procedures (Ibrahim et al., 2010). For instance, due to lack of adequate capacity among SMEs, the cidb estimates that 88% of government infrastructure spend in South Africa is concentrated at cidb Grades 7 to 9 contractors who represent only 11% of registered Grades 2 to 9 contractors (cidb, 2017a). The increasing complexity of projects and concentration of capacity in the higher grades provides a compelling need for targeted contractor development which aims to increase the delivery capacity and capability, as well as sustainability of emerging SME contractors who constitute an estimated 89% of registered Grades 2 to 9 contractors.
The sustained significance of construction small businesses has led to the focus of government policies on promoting the advent of capable small contractors and supporting their continuous development and sustainability (Adediran and Windapo, 2016). Consequently, some governments have implemented prescriptive measures to promote small contractor development (Gounden, 2000; Hawkins, 2012; Ofori, 1996; Watermeyer, 2003). Others have initiated and set-up supportive procurement programmes (demand side interventions) and well- structured contractor development models (supply side interventions) (Dlungwana and Rwelamila, 2004) to improve technical and managerial skills, knowledge and, hence, competitiveness of these contractors (Shakantu, 2012).
These interventions in the construction industry are usually implemented through public procurement where the government serves an active participant in the market economy as a major client. For example, at the end of 2016, public-sector infrastructure investment in South Africa was amounted to about 6% of total GDP (South African Reserve Bank, 2017), with a long-term plan of 10% GDP by the year 2030 (The Presidency, 2012). Moreover, the demand from public-sector clients is estimated at 63% of total domestic construction expenditure in South Africa (StatsSA, 2017). Osabutey (2010) also observed that, central and state governments and government agencies in most developing countries are responsible for up to 80% of construction output. Therefore, governments progressively use their purchasing power to intervene in the construction industry towards achieving a broad range of national socio- economic goals including the development and sustainability of the de facto drivers of economic growth, that is, local SMEs (Adediran and Windapo, 2016a; 2017a).
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Public procurement has been shown to be an effective vehicle for achieving a broad range of socio-economic objectives, such as supporting local and domestic small firms, assisting historically disadvantaged or minority and woman-owned businesses (Erridge, 2004).
Researchers and policymakers agree that increased emphasis on public procurement contract awards to small businesses increase innovativeness, entrepreneurship and contributes to job creation and economic development (Reed, 2004). Moreover, government policies structure the environment within which SMEs function (OECD, 2014). Therefore, SME-friendly public procurement represents a major component of government policy in many countries.