Engineering projects slowdown likely, says insurer

Despite the overwhelmingly obvious developments to infrastructure in South Africa, the global recession lurks ever-present in the background. And since large-scale engineering projects are planned years in advance, the activity which is apparent with World Cup developments to roads, airports and stadiums represents business long-concluded; the same applies to major works such as the Gautrain. As a consequence, says Trevor Kerst, Senior Underwriter Technical Lines; ACE Insurance Limited, there is a possibility that the South African specialist insurance industry may be facing lean times ahead.

“Make no mistake, the last five to seven years have been particularly good; with the multitude of large scale projects, insurers have written good business through this period,” says Kerst. “However, while there is much hope that the World Cup will deliver substantial economic benefit to the country, there is an alternate future in which the country will have to deal with massive debt.”

Estimates to date indicate that South Africa has spent some R33-billion on preparations for the sporting event. With estimates of tourist numbers to the country now hovering between 300 and 400 000, the return on that investment is by no means assured; add to that the reality that FIFA pays no taxes and institutes ‘exclusion zones’ around the stadiums where matches take place, and tax income is curtailed. Within these exclusion zones, only FIFA and its partners may sell any goods; nothing from these sales accrues to the government.

“With debt will come a marked slowdown in public sector spending especially on large capital projects,” Kerst asserts. “Already there has been a slowdown in the number of new big projects; the big deals of the past are no longer cropping up quite as often.”

Mining looks more promising

Turning his attention to the mining sector, one in which capital intensive engineering projects are par for the course, Kerst believes the situation is likely to improve. “The South African economy is apparently bouncing back from the recession quite rapidly and robustly; indications are that the economy, which contracted last year, may grow by as much as 3% in 2010,” he says.

The many projects which were put on hold in the eye of the recession may now see renewed focus. “The global economy and the rand/dollar exchange rate point to a possible revamp of these projects, whether in terms of progress at a slower rate or even full steam ahead,” he says.

Other projects, like the expansion of the Medupe coal reserves are necessary to provide the raw materials for Eskom’s new power stations. “These are non-negotiables; the country has to have an energy-secure future if any development is to take place,” Kerst states.

Africa the savior?

Even though South Africa may be looking at curtailment of public sector spending, those insurers with operations in Africa are likely to enjoy a steady stream of business. Kerst explains that in many countries in the hinterland, development funding is assured while there is absolutely no shortage of demand for infrastructural development projects. “Obviously Africa is a diverse place, but there is some commonality in that engineering projects for roads, dams, power generation and much more is broadly required,” he notes.

An interesting issue which insurers face is related to the high level of activity in many African countries by Chinese contractors. “While enjoying the ability to go into Africa and write policies which contribute to the sustainability and performance of the insurance business, risk has to be managed closely,” he says.

“That means working with contractors which are sufficiently qualified and experienced to delivert on these projects.”

By no means does he imply that all contractors are deficient, but some certainly are. “While a lot of the insurance goes back to China, not all of it does. The ones which are available to insurers have to be assessed very carefully, or the insurer and reinsurer may expose themselves to unnecessary risk.”

Avoiding such a situation, says Kerst, depends on depth of skills, a perennial issue for specialist insurers. “An unusual combination of skill is required, from the perspectives of underwriting as well as engineering. However, this skill is absolutely essential, or the insurer may find themselves in serious trouble.”

Dealing with an uncertain future

While the future is always uncertain, in the face of tougher times Kerst believes it is those insurers which have a broad spread of services which are likely to survive and prosper even if the number of projects is reduced. “There’s no question that we are in a very competitive environment. The pot is smaller, so there is less risk around to insure. However, those which have maintained good customer relationships, offer a good spread of services over a wider geography, will survive well.”