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When you visit thriving, growing cities like Shenzhen in China, Seoul in South Korea or Dubai in the UAE; the number of cranes peppering the skyline tells the story of economic growth and a buzzing construction sector. The steady decreasing number of cranes in South Africa’s major cities paints a picture of an industry and economy that is struggling. The hit that the industry took in the last years is evident in the sharp dive in the Construction and Material Index on the Johannesburg Stock Exchange. The index has more than halved from where it stood at the beginning of 2015. If you look at the graph from 2015 to today, there are little signs of the cyclical fluctuations that is normal for the construction industry; there is just one trend and that is sharply downwards. Sara Gon writes in the Daily Friend of the number of construction companies that are battling to stay afloat and about those that have landed in administration. President Cyril Ramaphosa announced a R100bn infrastructure development fund in his SONA, which the Minister of Public Works and Infrastructure, Patricia de Lille said in September would be ramped up along with a drive to stamp out corruption and technical capacity in her department. Looking at the dismal state that the country’s construction industry is in; it would not come a moment too soon. – Linda van Tilburg
Construction in crisis
By Sara Gon*
The state of South Africa’s construction industry is a sign of the state of the economy as managed by the African National Congress (ANC): it’s in terminal decline.
For decades, big construction companies were seen everywhere – Group Five, Murray & Roberts, WBHO, Aveng and Raubex.
After 45 years of trading on the JSE, Group Five filed for business rescue in March 2019.
In June, Probuild Construction Group applied to be placed in business rescue as it was financially distressed and unable to pay all of its debts.
Basil Read, Liviero Group and Esor Construction have all been placed in business rescue. LBC Lenco Construction applied for debt-freezing agreements, but has since been liquidated.
The construction industry is notoriously cyclical, but there is a current mix of a depressed economy, high levels of national debt, uncertainty and low infrastructure-spending, and contracts are drying up. Thousands of jobs have been lost, 8,000 at Group Five alone.
The past nine years have proved to be ruinous. Construction companies that are South Africa-orientated were badly affected from mid-June 2018 to mid-June this year.
Says Marc Ter Mors, the head of equity research at Johannesburg-based SBG Securities: ‘In South Africa, volumes are low, pricing is under pressure and companies are taking on more risk to win contracts, so margins are thin and that hits cash flow. There are no real segments to hide in.’
Murray & Roberts anticipated the crash and sold its building and infrastructure units in 2016 to move into international businesses focused on projects like underground mining, and oil and gas. Although M&R’s market valuation is a fraction of what it once was, the stock has gained 44% in the past year amid takeover interest from 40% shareholder, Aton GmbH.
The industry was on a high in the build-up to the FIFA Soccer World Cup in South Africa in 2010, which required major national infrastructure spend, particularly on new stadiums. However, the Competition Commission had already started to investigate collusion in the industry. The Commission settled with 15 firms in 2013, while Group Five was granted immunity for co-operating.
President Cyril Ramaphosa recently said that although government’s infrastructure spending had slowed, the State would contribute R100bn into a fund over 10 years. The plan is to use this to get financing from both private and state-owned companies to reboot the industry.
Meanwhile the FTSE/JSE Africa Construction & Materials Index is down 27% in the past 12 months, compared to a 6% drop in the FTSE/JSE Africa All Shares Index.
There is also a risk that if South Africa’s local construction industry is wrecked, future building projects will become more expensive, Ter Mors said.
‘As South Africa depletes its capacity to build its own infrastructure, when the cycle turns again, it will be forced to rely on international companies and their pricing,’ the analyst said.
By way of example, Aveng was among the top 40 largest companies by market value on the JSE in 2010, but now has a market value of R582m from a peak of R28bn in 2008. Then, as the Zuma presidency took hold and the money that was meant for infrastructure was stolen, the big construction industry went into freefall.
But in recent years another problem has been putting a nail in the coffin of many of the smaller companies that subcontract to the large construction groups: unpaid debts.
Recent business failures and job losses in the sector have been blamed on the non-payment or late payment of contractors.
As at September 2019, the government owed construction and building industry contractors about R5.5bn. This is according to an article in Moneyweb “Government owes construction contractors R5.5bn” (19 September).
The article quotes Roy Mnisi, executive director of Master Builders South Africa (MBSA), as saying that late payment or non-payment by government is the single greatest challenge facing the industry.
Despite government ministers and President Ramaphosa’s talking about the issue, nothing has been done to ensure that contractors are paid within 30 days after invoicing, as required by National Treasury regulations. In most cases, the work has been completed but the government doesn’t pay.
MBSA has already postponed a class-action claim for work done for municipalities, provincial and national departments, and state-owned entities. The postponement was intended to allow Treasury time to resolve the problem.
The reasons Treasury has given for this situation will not come as a surprise to anybody:
- Bad budgeting;
- A lack of proper financial management;
- No ‘consequence’ management for invoices that are over 30 days overdue.
Many of MBSA’s members have gone into business rescue and liquidation. Suppliers apply for liquidation of construction companies to recover some of the losses.
The president of the Black Business Council says that contractors are scared to exercise their legal rights against big companies because no further contracts will be forthcoming.
The economic situation ensures that things can only get worse for all those in the industry.
* * *
Another sector that is likely to meet with the same problem, only more so, is healthcare, should the government press on with the National Health Insurance (NHI). We have no confidence that an ANC government can afford, develop or manage a project as huge and unaffordable as the NHI.
The provision of chronic medication is just one example; it’s almost certain that government facilities will run out of the medication so many desperately need.
The risk of this happening is one of many reasons why the NHI must be opposed. You will cease to exercise control over your own life.
- Sara Gon is a Policy Fellow at the Institute of Race Relations. If you like what you have just read, become a Friend of the IRR if you aren’t already one by SMSing your name to 32823 or clicking here. Each SMS costs R1.’ Terms & Conditions Apply.
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