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Government owes construction contractors R5.5bn

Paying late – or not at all – is leading to job losses and business failures.

Government currently owes construction and building industry contractors about R5.5 billion and recent business failures and job losses in the sector have been blamed on the non-payment or late payment of contractors.

Roy Mnisi, executive director of Master Builders South Africa (MBSA), says this practice by government departments and government entities is the number one challenge facing the industry.

Read: Construction industry in survival mode

Mnisi says there has been no improvement in this area year-on-year, despite government ministers in the built environment and even President Cyril Ramaphosa talking about the issue.

“We see no action on the ground to see that contractors are paid within the 30-day period after invoicing, as stipulated by National Treasury regulations.”

Read: What government should do to save the construction sector

Mnisi adds that situations where non-payment or delayed payment is the result of a query on an invoice are isolated instances. The majority of cases are, he says, where the work has been completed but for one or other reason the government department or entity is unable to pay.

Routine occurrence

The Construction Industry Development Board (CIDB) has reported that 60% of payments to contractors are delayed for longer than 30 days after invoicing.

MBSA in January last year postponed a planned class-action court application against government, to recoup billions owed to its members for work done for municipalities, provincial and government departments and state-owned entities (SOEs) to engage with National Treasury in a last-ditch attempt to resolve the problem.

Mnisi says National Treasury highlighted some of the reasons for the non-payments and late payments during a meeting with MBSA earlier this year.

The reasons include:

  • Bad budgeting
  • A lack of proper financial management in the department or government entity
  • Corruption, and
  • The lack of consequence management.

The latter point means managers who sit with invoices and fail to comply with Treasury’s requirement that they pay them within the 30-day period face no consequences.

Mnisi says the reasons provided for departments and government entities struggling to pay invoices within 30 days are unacceptable to MBSA, because they involve efficiencies that ought to exist in any government institution.

He says the payment issue has been the direct cause of many of MBSA’s members going into business rescue and, in some instances, filing for final liquidation, with the companies citing non-payment as one of the reasons they have had to close shop.

Listed construction companies in business rescue include Group Five, Basil Read and Esor while others, including Aveng, have experienced severe financial difficulties.

Mnisi says many sub-contractors rely on payments from the main contractor, and if these payments are not made, they cannot pay their employees or suppliers.

Suppliers then often apply for liquidation of the company so they can get a little of the money they are owed, resulting in the company’s employees losing their jobs, he adds.

Majute Kgole, president of the Black Business Council in the Built Environment, told MBSA’s congress last week it laments the state of the construction industry, largely because contractors in the main don’t exercise their rights in terms of their contracts.

“For me, this is the biggest problem. Most of the contracts that are used for construction do have payment and claiming clauses and have a lot of other things, including extension of time,” he said.

“But we find that for some reason contractors are not exercising their rights in terms of their contracts. Contractors normally say they are a little bit scared to exercise their rights because they will not get the second contract from the client.”

In reference to projects being disrupted and stopped by business forums or the construction ‘mafia’, Kgole said he believes this is “a myth”.

Read: Engineers leave SA due to ‘construction mafia’

He stressed that contractors could not just go into a community and start setting up camp and militarising the site, adding that many years ago there was a process to engage all the stakeholders in the area before moving onto a site.

However, Joseph Montisetse, president of the National Union of Mineworkers, says the business forums or construction mafia exist because some projects have been stopped.

Montisetse agreed that consultation is very important, but said these people do not need to take the law into their own hands by stopping projects that are intended to bring about service delivery in that particular geographical area.

“It must be condemned and the government must take action against these people because they are not legally operating to bring whatever economic assistance to the communities.”

Thembinkosi Nzimande, past president of the South African Forum of Civil Engineering Contractors, says it is painful to see that some companies would not have gone into liquidation if two or three of their major clients had paid them.

“People don’t understand the human impact of a liquidation and retrenchments.

“For certain officials to withhold payment to a company that was literally borderline and that could have been saved is a blight on all South Africans.

“This is one thing we have to solve.”

Nzimande says there are two lessons from the large companies that have survived and those that have collapsed.

Those that thrive seem to have evolved to infrastructure developments, as opposed to pure construction. A lot of the companies that have a balance sheet where they own and operate projects seem to have survived, while many companies that are highly dependent on expenditure by government are experiencing a lot of problems.

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COMMENTS   33

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The money is going into the black hole called Eskom where it keeps 60 000 fat cats in the luxury to which they have become accustomed.

There’s nothing left for the productive sector, and that’s what the ANC policies do.

In farming parlance, it’s feed the house pets and starve the sheep, cattle and other productive animals.

No Worries – The Chinese construction firms will take up the slack left by SA firms insolvency – just as they did in the rest of Africa.

And the Chinese will absolutely smash the unions the end for Irvin and Joseph.

….and their debt collection methods can lead to a “terminal solution”!

You load risk on your balance sheet to provide finance to the party that takes 30% of your business and 30% of your potential profits, with the aim of getting government contracts. Then, if you do get the contract with the government, they simply don’t pay you for your services. You have been robbed in so many ways. This is business as normal in a socialist state. Then they have the gall to invite investors to come and invest.

This invitation is an insult, a manifestation of the Dunning/Kruger effect.

You really are fascinated by the Dunning/Kruger effect. Every platform. Most of your comments. You know it may well apply to you? Time for some new material? It is getting a bit boring.

@ Anything
Sensei writes some of the best comments on this site. When nothing changes for the better and one is highly frustrated I think it stands to reason that one might want to repeat one’s position or thoughts in the faint hope that intelligent life is out there somewhere.

@ Anything
I too have also repeated myself in many comments because the same old mistakes get repeated by Government time and time again. We continue to hope in vain that they will someday realize their mistakes and make the necessary changes (says the eternal optimist). I do think all of us commentators are generally on the same side.

Sensei calls a spade a spade. I value and enjoy has opinion.Please don’t call a spade a static device to enable usually human muscle to move movable material from one place to another. So call a spade—-

@Anything….well, of the many years I have been on this forum, Sensei has been one of the few to constantly deliver – always intelligently descriptive and to the point

So, besides your vague nom de plume and DK rant, can we ask what have you contributed ?

‘constantly deliver’… The same comment on all platforms.

Copy paste. Time for some new material.

I have never met an intelligent person who is fascinated by this effect. But this, this is beyond autism.

Anything, it is very obvious that I touched a nerve here. When most people read something familiar they just go past it and forget it. They take what is of value and discard what is not. They even skip posts that are boring. They ignore stuff that is irrelevant.

From where I stand this point explains the dire state of our economy, the deterioration of local politics and the unemployment crisis. This lies at the basis of most of our socio-economic problems. People come here to learn about financial matters. This issue is current and problematic and leads us to understand why there cannot be an easy solution. This point explains why we have a brain drain and capital flight.

The way you are gravitating to this point proves that you identify with it, that you are painfully aware of it, that you don’t want to be reminded of it and that you are trying to escape from it. I wish you well in this process. Acknowledgement is the first step in healing.

The construction mafia wont be happy with this.

Does not bode well for the newly “transformed” construction industry either. But who know’s you now have an incapable client and incompetent (connected) contractors working together.

Hmm but this is not one size fits all. My little knowledge added to some extrapolation tells me there are a good number of contractors of a special type that get paid in advance for work and even overpaid for work i.e. work not and never done. Quite a bit depends on one’s closeness to the ANC I believe.

@Paul Kearney….yes

One can almost equate it to this now:

1] Be connected, fail the job, and get paid
2] Be honest [ therefore NOT ‘connected’ ], and have no hope of getting the job…..or, even worse, doing the job but not getting paid

= Downward spiral

SMH !

Maluti-a-Phofung Municipality did not even pay staff in 2017. Could not collect “The Palace Group” debts for smart meters. Recently read that the CFO then who never answered my calls is up for corruption.
Corruption and non payment of suppliers is almost everywhere.

Shame, you sound more hurt about the phone calls than anything else.

Yep, guavamund can’t find the R5.5bn because it is already stolen by themselves.

This is happening. But I will bet that if you had to check the payment times for Certificates submitted by Papa Gavin and the Zupta Clan this would be impressive probably within days of submission.

“Government owes construction contractors R5.5bn”
Gov + parasitals (SOEs) also has a rapidly rising debt of more than 90% of our GDP, more than R 4 Trillion.

In a similar situation, the systemic failure of government to pay medical professionals for services rendered – one division, Workman’s Compensation Fund, currently owes private sector service providers hundreds of millions of Rands – is proof of what is to come under NHI.

Lack of cash flow will encourage or force doctors and specialists to work overseas, where timely payment for services rendered is the norm.
Good luck running a pathology or radiology service, where you have to pay staff, rental, and equipment and consumable suppliers on time, yet under NHI most probably carry a multi-million Rand book dept for months to years.

The current government brought oncology to its knees in KZN by not paying for maintenance of equipment.

IMHO, the construction sector’s woes are are precursor of what is to come under NHI.

Starting with nothing in 1986 our business is now in it’s 33 year. I venture that we must have made more good decisions than bad ones to survive that long. Here are a few principles that helped us avoid disaster.
1) Large business and government all expect SME’s to accept their terms and conditions without question. We only do business on our own terms.
2) Buffett’s 1st law of investing is “do not lose money”. That should be the 1st law of business too. Therefore we never do business where the risk of not getting paid or where the payment may be delayed is a possibility. We will rather do no business than bad business.
3) A signed contract, quotation or undertaking is not worth the paper it’s written on in South Africa especially if you are an SME. Only money secures a deal, money that the other party will lose if they are in default.

Given the above 3 principles we do not do business with government. We have many more business maxims that guide our operation.

We also have a unique way of speeding up payments;
Cash flow is critical to all business, more critical than profit, that is especially so in an SME. Since we started our business we always dated our statements on the first day of the month. That means that there are never any current invoices, the ageing is accelerated by 30 days. I cannot remember any argument or issue about this but I do know that it has been a great for our cash flow for 33 years.

Great if you can pull this off and have a unique product or attractive price. My experience with sizable projects for some of SA sizable businesses; Toyota, Mondi, some mines etc is that you won’t even make the vendors list if you insist on your unique terms and conditions. We try.

@Paul Kearney…agreed

As, these guys will always be ready to exploit the next SME just trying to get going

And once they’ve burnt that SME, and said SME wises up, these guys just wait for the next victim

Rinse.repeat

I’ve seen this play out too many times

Its really really sad..and I feel so sorry for those SME’s as I know often its just honest guys trying to make a living [ Noseweek often reveals stuff like this too ]

Certificates? Have you never done or received a payment in your life? Hard to take you seriously on this one.

This is not the first sector brought to its knees by this government! Consider what happens in the health sector to private suppliers of medicine in Gauteng and maybe elsewhere.
Consider an entire government department dedicated to small business with millions of invoices to small businesses outstanding for months on end! These are always punted as the so-called “engines of growth and job creation” but the very government that says this over and over is the one that causes the demise of small businesses.

@LouiseBCook……100% agreed !!

Its getting worse

I remember not so long ago, in our industry getting a govt tender was something to brag about

Now,most of us ignore these govt tenders – often there’s an email or fax for million rand quotes from govt……..hah, we dont even bother to read anymore [ and just turn the fax sheet around to reuse and save paper Lol ]

We have seen this Movie so many times.This is exactly what will happen if the National Health Scheme goes ahead.
The difference then will be that peoples lives will be at stake

The ANC is the enemy that must be defeated if South Africa is going to have any future.

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