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Did they fall or were they pushed?

Going, going … South Africa is losing its big construction companies.

The cream of South Africa’s once-great construction industry is all but gone. So dramatic has its demise been that one is forced to ask ‘Did they fall or were they pushed?’

The following table summarises the situation:

Construction firm

Current condition

Future

Aveng (Grinaker/LTA)

Huge financial losses, trying to sell

Sell out of SA

Basil Read

In business rescue; next step will be known on September 3

Unknown

Group Five 

Has secured a bridging loan

Sell (if it survives)

Murray & Roberts

Engineering and building in SA – sold

As Concor?

Stefanutti Stocks 

Restructured and doing okay

More cross-border

WBHO

Best of the bunch but concerned about future in SA

Strong overseas

ESOR

Trying for business rescue

 Unknown

Liviero

In business rescue, trying to secure bridging loan

 Unknown

NMC

Liquidated

Gone

Source: Table compiled by the writer from press releases and Sens statements issued by the construction firms over the past months.

Many of our major contracting firms are in financial distress because of the long delays associated with the R845 billion government planned to spend on infrastructure. In addition, late or non-payment of existing project work, ‘construction mafia’ attacks on projects and staff, and fierce competition all contribute to the very lean margins. The result is an increase in big loss-making projects.

It can be seen in the table that Murray & Roberts has sold its SA civil and building construction businesses, while two others plan to do the same if they survive their current financial problems. This leaves only three of the big six, for now at least. It’s a real and ongoing crisis that doesn’t only affect contractors: many civil engineering consultants are affected, and there are casualties in the form of retrenched employees, joint venture partners, emerging contractors, specialist contractors plus other service and materials providers. And let’s not forget the investors in these troubled companies. 

Aside from these issues, what else is motivating so many of these companies to sell out of the local industry? One possibility is the fact that construction business and project environments have become distressed workplaces at best, and toxic at worst, due to the many layers of legislation and regulation applied in order to force change in the industry. There is a suspicion on the part of some firms that government procurement policymakers would like to see them removed from the market.

Another possibility is that these companies are in trouble because of poor management decisions. While this is doubtless true for some, bear in mind that many firms held onto key resources for longer than normal because of the promised roll-out of the elusive infrastructure spend. One must then ask: did the government hold back on spending without making any announcement to punish these large contractors, or is it simply that National Treasury is short of funds?

Beyond this, roads agency Sanral has had about a 12-month delay to its procurement plan as it awaits new policy decisions, and is in need of funds. It is understood that the new policy will confirm recent procurement practices where large projects are let in small portions, and that the lowest bid will be accepted in all cases. This policy makes it quite clear that large contractors, or even competent contractors, are not wanted for this work.

The impact of the ‘smaller projects policy’ can be seen in statistics provided by the Construction Industry Development Board. They show that the market share of grade 9 rated contractors (majors) over the past 18 months has fallen by 20%, while the next two levels, grades 7 and 8 have seen growth of 20%.

As to why the major players are no longer favoured by the procurement agencies – this may be because of the role they played in stadia and road project bid-rigging. Clearly government lost trust in them at that time, but the construction companies suffered heavy consequences as a result, in the form of large fines (about R1.4 billion). Beyond this, they subsequently agreed to make payments into a development fund amounting to about R1.5 billion, together with a commitment to meet stringent broad-based black economic empowerment (B-BBEE) targets to avoid further legal claims.

Conditions are not expected to improve in the short term economy-wise, because, while public infrastructure spend has been low over the past seven years and negligible over the past 12 months, it’s the private sector that has been the key driver of construction demand in cities and in the suburbs of main cities. However, this is showing signs of coming to an end and it will be the turn of firms active in the private sector to experience problems until investor confidence grows and the government finds money to spend on infrastructure again. 

Perhaps, though, another explanation should be considered. The construction majors and even the Master Builders of SA (MBSA) have noted that various provinces, cities and municipalities have failed to spend their budget allocations for infrastructure, housing and other buildings – by as much as 20% each year. If this is added to the increasing frequency of late payments and non-payments to contractors of all sizes, we can perhaps see the tell-tale signs of capacity problems.

Why should we worry about the loss of the majors? Won’t this provide great opportunities for small and emerging firms?

  • These construction majors are at the high-tech end of the construction sector and have skill sets that are quite unique, rare and in great demand in other countries where the challenges are not as great as they are in SA (see next point).
  • Large numbers of these skilled people have already left SA to staff cross-border or overseas projects with these same companies. Many others have left over the years, because of stress and burn-out caused by conditions summed up as a ‘distressed operating environment’ found on construction projects in SA.
  • It’s a setback for those B-BBEE partners and specialist contractors that these firms employ in SA (and don’t forget the black investors with shares in these companies).
  • When major capital projects are again required, it is doubtful that there will be sufficient national capacity to handle the work – the result being that foreign contractors will likely fill the void (and if it’s the Chinese, they will probably insist on doing things their way).
  • We are now losing most of our construction capacity-building because these large firms were responsible for most of the skills training that occurred at all levels. Who will now offer ‘in-service training’ for our current and future university graduates, for example? Each of these firms offered the type of experience that graduates need to become registered professionals.
  • All of the above negative aspects will become common knowledge, and young people are likely to avoid construction as a career choice.

Perhaps you see it as an opportunity?

  • Perhaps, as in the case of M&R trying to buy out Grinaker/LTA, an existing firm or a group of investors will try to buy the survivors who want to sell. In this way these companies could be back in business, possibly with a much higher percentage of black ownership.
  • Perhaps existing medium-sized firms will seize the opportunity to grow and replace the majors.

But a little caution here:

  • When will the country again have enough large projects to keep so many majors busy?
  • Will existing smaller firms be able to find sufficient numbers of experienced people to staff their operations?
  • Don’t be fooled. Big league construction is not an easy entry business.

 This national asset will be rebuilt, but how well?

The South African construction sector’s major contractors have suffered a crushing blow and a national asset is all but lost. The broader construction industry will cope with many of the current needs of the country, at least until new major infrastructure projects are rolled out. However, it will be a very different industry, lacking in major project experience and skills but offering many new opportunities for growth, perhaps more in line with demographics that better match the national targets. But it’s a very tough business with many internal and peripheral challenges that will need to be overcome for sustainable development to take place, not least of which is capacity building in public sector procurement departments. All in all, it is likely to be many years before we will be able to match the capacity we had in 2009.

So – did they fall or were they pushed? Well, ask yourself which entity believes construction is an easy entry business and controls procurement policy, infrastructure investment and payments to those who undertake public sector work? Or could it perhaps be a question of competence and capacity? What do you think?

* Bob Hindle is a construction business development consultant at ProjCore. 

*The article initially indicated that Group Five was in business rescue, this is not the case, Moneyweb regrets the error and has amended it. 

COMMENTS   15

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There used to be four sectors in the formal economy that employed the unskilled worker: Agriculture, Mining, Construction and Heavy Industry.
The ANC government has completely destroyed the first three of these, while the fourth is already over the edge of the precipice, hanging on by its fingertips. As soon as Eskom turns off the power in the Vaal Triangle, which is imminent, Heavy Industry will be gone as well.
Then the unskilled worker and his five to ten dependents will have no hope of ever finding employment again, and be fully at the mercy of SASSA and the social grant system. Freedom achieved. I’m sure the cadres are proud.

Excellent comment, the consequences will be (are) catastrophic for the unemployed and unemployable. The cadres give zero coitus

We are fiddling as Rome is burning. The warning lights surrounding the state of SA’s economy is flashing bright red. Remember the rest of the world is probably in its best shape since the 2008 crisis – the real economy not the markets.

What sate will we be in when the next dowturn comes?

If this does not raise RED flags for the Economy then nothing ever will.

South Africa rotting away at 300km/hour

Wait there is more, they still have to vote for the EFF so that the RSA finally goes to Sub-Zero like Zimbabwe.

Well it is simply a failure of the state. The construction industry imploded because their source of business, their largest client, the state, is a criminal who does not honor contracts.

The demise of the construction industry is merely a consequence of the implosion of the state. South Africa is ruled by a loose affiliation of criminal factions. There is no functional government any more. The construction companies disappear first, followed by the infrastructure they built. The state of the construction sector is a leading indicator of the state of infrastructure.

The rule of law is only a crumpled pamphlet lying outside a pit latrine in rural South Africa.

No fall, maybe pushed. Think IQ, a lot. Needed for projects like Hoover, three Gorges dams. Or ship Great Eastern. If not available, for whatever reason, only posh car dealerships are booming.

“…the Chinese, they will probably insist on doing things their way”

It’s nauseating reading the suffocation of business by the ANC

If the big construction companies, with Int.exposure have left because of red tape…then let the Chinese in. I will sit back and watch them whip this government’s idea of BEE

http://iaafrica.com/china-heavily-overcharges-namibia-for-railway-projects/

http://www.xinhuanet.com/english/2018-02/10/c_136964590.htm

http://www.chinaafricarealstory.com/2010/08/real-cost-of-chinese-railway.html

yeah and if you bring the money, then you can get special exclusions from laws.

You can still make money in corrupt countries if you just strip out resources and pay the politicians their cut. The people of the country remain poor, it happens everywhere.

It’s purposefully done without a doubt.

The construction industry probably pays the best unskilled wage in the country whilst upskilling and sharing knowledge.

If you want to know how China works the Google Sri Lanka Harbour that the Chinese own.

The lend you the money, provided you use the construction company, eventually you cannot afford the loan and boom there it is they now own your town.

Politicians always want to get rich quick .

Maybe Bob Hindle should comment on the “second tier” construction companies, some of whom are doing quite nicely due to political connections? I’ll give him a hint or clue – Edison Power.

The destruction of the Construction industry in SA is, in my opinion, due largely to four factors.
1. To a degree the larger firms were being punished for what happened 2010. However in this regard many Professional firms got away with far larger % profits. Also the allocation of sites and the award of work involved those in the State who also took their bit. At the time the Govt was so determined to prove to the world that SA could host the World Cup the contractors etc were told to make it happen no matter what, but this is now conveniently forgotten.
2. The reasons for the imposition of the BEE requirements were originally sound but then we veered off from trying to create work, train and uplift people. The Minister keeps changing the goal posts in the forlorn, stupid or misguided belief that he can force compliance. Not sure he has any clue of how the construction industry works. The cost to Contruction firms to meet the requirements have become onerous and instead of achieving the original aim it has hampered growth and employment. A few well connected people became incredibly wealthy but the workers lost out as firms scaled back. BEE Consultants also aprung up and scored at the expense of the contractors.
3. The Construction companies that secured Govt or semi Govt work took a beating because of non payment or extremely long periods of payment. Margins in the Construction industry are unbelievably small and non payment is a killer.
4. Certain Construction companies have themselves to blame for taking on more work than they could handle, chasing turnover, taking all sorts of potential but not certified claims in as revenue, failure to provide for liabilities and generally failing to grasp the link between contracting and financial reporting. Management by contractors who dont understand accounts or by accountants who dont understand contracting
Sorry for the long tale of woe.

Rob Davies is supposed to be our Minister of Trade and Industry.
The fact that he is a dyed in the wool communist aside, he has presided over the single-handed destruction of every industrial sector that we had.
To build a business from scratch, into an employer of thousands of people can take a generation or more.
Rob has managed to destroy over one thousand such businesses in less than ten years.
In any other country in the World, such a man would have been hung from a lamp-post and left there as a warning to other terrorists.
In this sad country, he is lauded by the ruling party and given free reign to mumble and bumble along on his Leninist inspired swathe of destruction.

Couldn’t agree more. His incompetence is unreal. A complete clown. Still thinks like a
red from the 1960s.

He is old, a zupta cadre and totally unsuitable for his role. He should join the pot bellied implats advising mine minister…retire on a dagga farm and get stoned dreaming of karl marx. Useless!

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