“Developmental obstacles adversely affecting emerging contractors in the construction industry of Limpopo province”

This study attempts to identify and quantify factors that adversely affect the growth and development of emerging contractors in the construction industry of Limpopo Province in South Africa. The study is based on a stratified random sample of 229 emerging contractors who operate in the construction industry of Limpopo Province. The degree of entrepreneurial skills in emerging contractors was assessed by using a composite index defined by Beck and Demirguc-Kunt (2012). Quantitative and qualitative research methods were used for data collection and analysis. The study found that 139 of the 229 emerging contractors selected for the study (60.70%) lacked entrepreneurial skills by the standards of Beck and Demirguc-Kunt (2012), whereas 90 of them (40.18%) had adequate entrepreneurial skills by the same standards. The study also showed that 141 of the 229 emerging contractors in the study (61.57%) lacked basic skills in construction engineering. More than half of the contractors in the study had disadvantaged backgrounds in terms of technical and entrepreneurial skills as well as capital and access to finance. The study found that 122 of the 229 emerging contractors (53.28%) were viable financially while the remaining 107 emerging contractors (46.72%) were not viable financially. Results obtained from the study showed that viability in emerging contractors was significantly influenced by barriers such as lack of construction engineering skills, lack of entrepreneurial skills, lack of access to finance, inability to network with well-established contractors, inability to draw up business plans, and delay in payment for services rendered, in a decreasing order of strength.


Introduction 
The study was conducted in order to identify and quantify key predictors of failure and underperformance among emerging contractors operating in the construction industry of Limpopo Province in South Africa.The study is based on data collected from a random sample of size 229 emerging contractors operating in the construction industry of Limpopo Province as an extension of the study conducted by Tshivhase and Worku (2012).According to reports issued by the Limpopo Business Support Agency (LIBSA, 2015), the failure rate among newly established emerging contractors in Limpopo Province is above 50%.Similar reports have been published by the South African Construction Industry Development Board (CIDB, 2013(CIDB, , 2014(CIDB, , 2015)).Reports published by the South African National Department of Public Works (2015) and Tshivhase & Worku (2012)  that are demanded in the local market.A report issued by the Limpopo Provincial Economic Development Enterprise (2015) indicates that nearly half of all start-up Small, Micro and Medium-sized Enterprises (SMMEs) in Limpopo Province fail before operating for three years or more due to shortage of mentoring, shortage of entrepreneurial skills, inability to network with potential clients, and lack of access to finance.The report shows that not enough assistance is provided to newly established businesses in all sectors of the economy.Annual reports issued by the Limpopo Provincial Department of Public Works (2014,2015) show that newly established SMMEs in the construction industry of Limpopo Province are characterized by lack of technical skills in construction engineering, lack of finance and lack of basic entrepreneurial skills that are essential for networking and attracting clients.
Studies conducted by Ahlstrom & Ding (2014), Baloyi & Bekker (2011) and Bateman (2014) have shown that efforts made by the South African Government since April 1994 to improve the performance of emerging contractors in the construction industry of South Africa have not resulted in tangible results.According to Beck & Demirguc-Kunt (2012) and Beetsma, Giuliodori, De Jong & Widijanto (2013), emerging contractors lack technical and entrepreneurial skills as well as skills that are essential for networking with business partners and clients.Blaauw (2015) and Cassia & Minola (2012) have pointed out that there is a significant association between poor quality of education and shortage of artisan skills in most developing nations of the world including South Africa.Based on a study conducted in Australia, Bourne & Walker (2006) have shown that a sound educational system takes the practical needs of customers and stakeholders into account, and that educational systems used in most developing nations in Sub-Saharan African countries lack emphasis on practical and industrial expertise.Similar findings have been reported by Ugwu & Haupt (2007), Lee, Hwang & Choi (2012) and Yi (2013).
Studies conducted by Kassim (2011) and Kang & Park (2009) have shown that it is beneficial to monitor and evaluate the performance of newly established and emerging contractors on a continuous basis as a means of ensuring the quality of service delivery in the construction industry.Jepsen & Eskerod (2009) and Lin & Germain (2003) have shown that competition with the private sector is essential for ensuring adequate performance in state owned enterprises.The study conducted by Hatmoko & Scott (2010) has shown that supply chains in developing countries are often characterized by lack of respect for the fundamental principles of good governance, accountability and transparency, and that emerging contractors often struggle to secure contracts.El Asmar, Hanna & Loh (2013) the quality of service delivery by emerging contractors in the construction industry is often poor, and that start-up businesses in the construction industry often struggle to compete with wellestablished contractors.
The degree to which emerging contractors in developing nations Such as South Africa are adversely affected by factors such as lack of technical, artisan and entrepreneurial skills has been pointed out by researchers such as Chan (2011), Chanut-Guieu & Guieu (2014), Jensen (2010), Cho, Hong & Hyun (2011) and Hajji & Lewis (2013).In the Province of Limpopo, emerging contractors are required to be registered with the South African Construction Industry Development Board (CIDB) in order to compete for market opportunities and contracts.The study conducted by Tshivhase and Worku (2012) shows that emerging contractors in Limpopo Province are characterized by lack of artisan and engineering skills, lack of capital, inability to network with well-established construction firms and failure to penetrate the local market.Newly established construction firms in Limpopo Province are often placed at low grades of the CIDB.This fact makes it difficult for them to compete for large contracts.They often struggle to acquire practical skills by rendering services at the marketplace.
The study attempts to identify and quantify key obstacles to sustained growth and development in newly established construction companies in Limpopo Province based on data collected from a stratified random sample of size 219 emerging companies in the construction industry of Limpopo Province.The study conducted by Milford, Hodgson, Chege & Courtney (2012) has shown that poor entrepreneurial and engineering skills are key barriers to growth in start-up construction companies in Limpopo Province.The authors argue that the foremost reason of enterprise stagnation in Limpopo Province is attributed to the acute shortage of engineering skills, lack of access to finance and the absence of mentoring and coaching programmes.Start-up companies often do not have access to market opportunities due to their low CIDB grades and lack of capacity.Barriers such as lack of access to finance, poor technical skills, poor entrepreneurial skills, poor strategic planning and inability to network with wellestablished construction companies adversely affect growth and development in newly established construction companies.Cumbersome regulatory restrictions pose challenges to the development of SMMEs although structural reforms have achieved improvements.According to Statistics South Africa (2016), the construction industry of South Africa has made an average contribution of 2.2% to the South African Gross Domestic Product (GDP) in the years between 2004 and 2013.However, the degree of support provided to the sector in the same period has been minimal.Although newly established and emerging construction companies were expected to grow their market share during the period 2004 and 2013, their market share has failed to grow mostly due to lack of capacity, lack of skills and difficulty in penetrating the local market.Cumbersome bureaucratic procedures and low CIDB grades have often frustrated and discouraged newly established and emerging contractors during the same period.In particular, no attempt has been made to transform the academic curriculum provided to trainees during the period.
Emerging contractors often fail to fulfil expectations of stakeholders due to lack of capacity, lack of technical skills and inability to complete projects according to approved time tables of actions.They are often characterized by inability to maintain service level agreements with clients due to lack of capacity and expertise.As a result, they are given low grades by the CIDB.This practice denies them the opportunity to compete with large construction firms in the local market.Experience from China, Japan and South Korea shows that emerging and newly established construction firms need a lot of support from the state as a means of creating a vibrant construction sector in Limpopo Province (Hyun, Hong, Ji, Yu & An, 2011; Hwang, Park, Lee & Kim, 2010).In order for the construction industry in Limpopo Province to be self-sustaining and viable, the state has a duty to create an economically enabling environment for new entrants into the construction industry of the province.Investments in construction drive the global economy and have become one of the yardsticks with which to measure the growth of Gross Domestic Products of countries.Stimulating activity in the construction sector encourages economic activities and employment multipliers.Hwang, Park, Lee & Kim (2010) have reported that the construction industry creates more than half of total national capital investment in most countries.The authors have reported that Small, Micro and Medium-Sized Enterprises (SMMEs) in the construction industry are vital for creating jobs and livelihoods in all developing nations of the world including South Africa.
According to the CIDB (2013), South Africa has achieved substantial expansion in infrastructure investments in both the public and private sectors since April 1994.The CIDB (2013) has reported that the public sector accounts for about 65% to 70% of all investments made into the construction industry of South Africa in the years since 1994.Government spending on infrastructural development has created jobs in many parts of South Africa.National spending priorities include infrastructure to support industry development.These government infrastructure priorities have encouraged restructuring and downsizing of some established contractors and SMMEs that have come to participate progressively in South Africa economy and growth.Before 1994, collaboration between large and small enterprises was systematically discouraged due to Apartheid era policies.

Objective of study
The key objective of study was to identify key barriers that adversely affect the development and growth of emerging contractors in the construction industry of Limpopo Province.

Research questions
The study had the following research questions:

Results from binary logistic regression analysis
Table 5 shows odds ratios estimated from binary logistic regression analysis.At the 5% level of significance, influential predictor variables of viability are characterized by odds ratios that are significantly different from 1, P-values that are smaller than 0.05, and 95% confidence intervals of odds ratios that do not contain 1.

Results from in-depth interviews
In-depth interviews were conducted with 5 emerging contractors (one from each of the five districts of Limpopo Province).The following key findings were obtained from in-depth interviews: CIDB regulations require contractors to reapply every three years and an assessment is conducted as if contractors are registering for the first time.According to the CIDB, downgrading is deemed appropriate in cases when the contractor loses skills related capacity to perform work at the same level.

Unfair competition from well-established contractors.
There are generally fewer projects that are advertised in public bulletins now compared to two or three years ago which has resulted in higher grade contractors competing with small contractors.Normally, it is emphasized that Grade 9 contractor looks upon lower grades projects to be unsustainable but due to rigorous competition, bigger contractors want small projects to preserve their workforce and sustain operations.
12.4.Poor culture of saving profit among emerging contractors.This challenge emerges when a profit has to be invested into the business, which competes with personal luxuries and self-interest owners wish to pursue.Attempts to address business development matters were reported and stakeholders in the industry talked to owners about their responsibilities to build and nurture their businesses.The importance of investing intensively on businesses is urged but the uptake of this advice is not tangible because there is no interest on the side of contractors.Four of the five respondents indicated that the temptation to use profit money was quite high among emerging contractors.
12.5.Shortage of adequately qualified construction engineers.The CIDB requires the contractors to appoint a professional when applying for Grade 7 or higher.Professions are needed to assist emerging contractors in attaining a threshold of quality standards because projects of Grade 7 or high are regarded as complex projects.While the regulation of professionals and their operations has a good intention, the scarcity of professionals in the country poses a real challenge.This lack of professions in the field of construction could deprive emerging contractors even those contractors having superior track record but struggling to secure a professional.However, it was commended that professionals may be the requirements when tendering projects especially if the client appreciated the complexities of a particular project and insisted the contractor to access professionals during implementation stage.
12.6.Backlog in infrastructural projects.There are exceptionally large inherited backlogs for infrastructure development, which are reflected by technical directors from both local and district municipalities.Ultimately, there is an urgent need to mobilize additional funds to address this deficit.Josie (2008) indicated that increasing infrastructure backlogs was an indication that current methods were not adequate for municipalities to deliver service.District municipalities were found to be more dependent on national government for funding while local municipalities which participated were more dependent on their own income, equitable share and Municipal Infrastructure Grant (MIG) funding from government.MIG funding provided by government to support municipalities has limitations to meet the demands for infrastructure.Further challenges to municipalities arose from the culture of non-payment of services within the municipalities.Eventually, funds generated to cater for infrastructure projects are never adequate to meet growing demand.
12.7.Shortage of funding for contractor development programmes.Contractor development programmes are provided by district municipality through funding from National Department of Public Works programme while interviewed local municipality does not have any leverage on the developmental programme or ownership.In the district municipality, for contractors to be selected into the programme, a registered certificate is a precondition and the process requires contractors to go through a learnership for about three years.As a result of limited funding, the programme was being implemented at a very limited scale with only three contractors finishing the programme in 2010.
12.8.Shortage of funding for low level construction projects.The respondents indicated that there was an acute shortage of low level construction projects that could be handled by emerging contractors due to lack of finance in the Province of Limpopo.Local municipalities in the province were generally poor with regards to funds for low level construction projects.As a result, emerging contractors had to compete with well-established firms for large construction projects.As a result of the lack of commitment displayed by emerging contractors, one of the municipalities interviewed reviewed policy of surety deduction for small, medium and large enterprises and mandated that only small projects were deducted for surety in the payment certificate.In this amendment, for all medium and larger-scale projects, contractors have to get surety guarantees to cover risks to clients.

Discussion of results
The Province.The fact that the majority of small contractors are emerging on their own makes it difficult to overcome some challenges in the process.
Lack of practical assistance and mentoring programmes to emerging contractors.Because of the financial considerations of professionals in terms of remuneration and exposure to valuable experience, emerging contractors have had to contend with lack of suitably qualified professionals.During interviews, CIDB affiliate stated that it was a regulation of CIDB that contractors appointed a qualified professional when upgrading to Grade 7 or higher.This is because higher CIDB grades require advanced skills and necessitate best engineering practices.Currently, the shortage of professionals is a barrier particularly to contractor development as most professionals with superior proven track record do not find it attractive to work for emerging contractors.
Lack of investment in infrastructure development projects.The challenge confronting the construction industry is insufficient investments in infrastructural projects which largely depend on relative economic growth (Milford et al., 2002).This study has established the vulnerability of emerging contractors in the Limpopo Province, because they are primarily dependent on the availability of infrastructure budgets of municipalities.Compounding the problem further for emerging contractors is the reality of inefficient municipal administrative and management processes, which have rendered them prone to national government administration.While preference would be one in which there is budgetary realignment in municipal allocations, this remains an ideal.It was also important to note that in those municipalities that formed part of this study, there were widespread backlogs for projects that were supposed to be implemented.However, such projects remain pending with allocated funding not accounted for.This reality has contributed significantly to the growth of civil discontent in municipalities -arising from lack of progress and the improvement in people's lives.
Lack of transparency in tender procedures.Generally, there are challenges regarding tender transparency arising from inherent inconsistencies in the handling of relevant tender documentation.Further, the process is also prone to deliberate human irregularities to influence pre-determined outcomes.One's ability to influence tender outcomes is a valuable asset against which there is a premium.Inevitably, uncertainties over the outcomes of tender processes rank amongst the highest factors contributing to the dissatisfaction and despair of small contractors.The need for transparency in the tender adjudication process through the implementation of standard operating procedures, which are subject to scrutiny, would contribute significantly toward restoring the credibility of the process.
Failure to compete favourably with wellestablished construction companies.All five respondents who were interviewed indicated that emerging contractors were not adequately equipped to compete with well-established businesses, and that they needed tangible assistance from the South African Government as a means of building capacity for sustained development and growth.There were rivalries between emerging and wellestablished contractors.This could be as a result of the high number of emerging contractors chasing after a few number of construction projects.Employees of the CIDB indicated that there was a general trend of decline in the average number of projects advertised in the contemporary period compared to the past few years.Overall, this has led to established contractors competing with small contractors.This has disadvantaged small-scale emerging contractors due to intensified competition for small-scale projects.Thus, the sustainability of emerging contractors remains precarious under these circumstances.If this trend continues, many such contractors would eventually be marginalized out of business.Such an outcome would be very undesirable as it would directly undermine government intentions through Black Economic Empowerment.It would inadvertently undermine the determination to improve the skills of black contractors and maintain the current reality of skewed CIDB grading and ownership along racial lines.

Recommendations
Based on the findings of the study, the following feasible recommendations are made to the Limpopo Provincial Government: The promotion of capacity building programes in Limpopo Province.This research has established that Limpopo has limited CDPs to develop and nurture emerging contractors to become autonomous independent sustainable entities.It is recommended that resources are allocated to CDPs to address constraints associated with such critical requests as project management, technical skills, contractual matters, business and financial management skills.Overall, there is an urgent need for support and guidance for the sustainability of emerging contractors.
Increasing funding for infrastructural projects in Limpopo Province.Emerging contractors are more dependent on municipalities for contracts followed by provincial departments.However, this reality is largely an inevitable outcome of insufficient funding, which has resulted in serious infrastructure backlogs.It is therefore recommended that government should inject more funds to municipalities, especially rural municipalities where there are large infrastructure backlogs.Overall, there is an urgent need to increase funding to provincial agencies in support of small business enterprises in the province.
More transparency in tender procedures in Limpopo Province.To restore confidence in the procedures and regulations governing tender processes, it is recommended that all provincial government in Limpopo adopt a standard tender process and procedure.This would greatly enhance opportunities for contractors to identify their capacities and minimize recurring risks of failures.It is also recommended that tender specifications should also inform contractors that they receive formal feedback about the reasons of their unsuccessful bids when requested in writing.For purposes of transparency, feedback should be provided at different stages of the application process.
Attracting more investments into Limpopo Province.With the knowledge that contractors renew their registrations with CIDB after three years, it is therefore recommended that emerging contractors should develop three-year invest plans for their businesses consistent with CIDB registration intervals.This should enable contractors to improve their capacity systematically and register for higher CIDB grades since their financial, project execution experience and available capital would have been improved.
Reviewing the policy on upgrading emerging contractors.It is important to state that CIDB has progressed well in promoting emerging contractors.However, the current requirements for upgrading are cumbersome, particularly for high grades.For instance, contractors are required to have professionals when registering for Grade 7 or higher.This requirement is perceived negatively as a barrier to emerging contractors in light of a shortage of professionals in the country for higher CIDB grades.It is therefore recommended that professionals should only be a requirement of registering for Grade 8 and 9 registrations since projects which fall in those grades are larger and very complex.
Injecting more capital into agencies that finance SMMEs.Analysis has established that emerging contractors fail to access finance and perform poorly on their projects due to lack of financial assistance.It is thus recommended that more funding should be injected into provincial agencies funding small contractors in the Limpopo Province.

Restricting entry into the Limpopo construction industry.
The study has shown that Limpopo Province is home to a large number of emerging contractors who compete for a few number of market opportunities.As such, it would be helpful to restrict entry into the Limpopo construction industry as a means of protecting emerging contractors.
show that the key barriers to sustained growth and development among newly established construction firms in Limpopo Province are shortage of technical skills in construction engineering, shortage of capital and inability to network with well-established construction firms.A study conducted by the Limpopo Provincial Department of Trade and Industry (2014) shows more than half of newly established businesses in Limpopo Province are not viable financially mostly due to shortage of entrepreneurial skills and inability to render services  Zeleke Worku, 2016.Zeleke Worku, Ph.D., Professor, Business School, Tshwane University of Technology, South Africa.
Tshivhase and Worku (2012)Worku (2012), emerging contractors in the construction industry of Limpopo Province need assistance in terms of skills and finance.There is a shortage of studies conducted in this area of study.The study aims to fill the gap by gathering data from emerging contractors operating in the five districts of Limpopo Province.

Table 1 .
CIDB grades of construction companies in Limpopo Province tractors (one from each of the five districts of Limpopo Province).Saturation was reached at the end of five in-depth interviews (Ritchie, Lewis, Nicholls & Ormstone, 2013).

Table 1 .
Number of respondents selected for study

Table 2
shows the general characteristics of the 229 emerging contractors who took part in the study.The table shows actual numbers of respondents out of 229 as well as percentages of attributes.

Table 2 .
Number of respondents selected for study

Table 2 (
cont.).Number of respondents selected for study

Table 3 .
Barriers to viability in emerging construction companies

Table 5 .
Factors that affect viability in emerging construction companies

12.1. Unfair criteria used by the CIDB for grad- ing contractors
Financial capability considers annual turnover.Available capital looks at the net asset value of a company.
. In terms of CIDB requirements for upgrade, contractors are required to build a track record based on the number of projects completed, timeframes of such completions, and project grade.Three of the key requirements are works capability, financial capability and available capital.Work capability is measured as the number of successfully completed projects by a particular applicant.