In this deeply honest assessment of the SA construction sector, industry experts Liz O’Leary and Brian Africa expose the real reasons why the SA State has been unable to deliver on its infrastructure investment promises. It’s not just incompetence and a lack of capacity. Those charged with making the decisions of how to allocate tenders and effect timeous payment top the list of avoidable issues causing the high failure rate among mid-sized construction firms – with another bankruptcy happening today when a R400m a year Western Cape business hit the wall. – AH
ALEC HOGG: We’re talking construction today in Biznews.com to Elizabeth O’Leary from Khuthaza. What does Khuthaza do, Elizabeth?
ELIZABETH O’LEARY: We’re a non-profit that works primarily with women in the construction industry, promoting career development and business development.
ALEC HOGG: All right, so you have your eyes very clearly focused on what’s happening in construction. Brian Africa from PCBS, we’ve had some interesting discussions in television in the past, Brian. You walked into the studio and gave us some news – another collapse.
BRIAN AFRICA: Yes, I have. It’s not very good news that I gave you upfront just before the interview started but yes, it’s a sign of the times. We are seeing a number of medium-sized construction companies going into either Business Rescue or into liquidation. I can’t purely say it’s just with regard to non-payment or late payment by employers, but we also see that the number of projects that have been put on hold, has obviously had an impact on small to medium enterprises being able to plan effectively for the year going ahead.
ALEC HOGG: You’re getting a double hit: projects on hold and the cash flow coming under pressure.
BRIAN AFRICA: Correct.
ALEC HOGG: This latest one…
BRIAN AFRICA: This latest one went into Business Rescue approximately two to three months ago – a company called Vusela Construction – which is based in the Western Cape. A final liquidation order has been granted, so we are now in the process of actually having a look and determining the number of contracts that are incomplete at the moment and the value of the incomplete work, as it stands.
ALEC HOGG: Just give us an idea. A company like this – how big is it?
BRIAN AFRICA: A company of this size has an average turnover of approximately R300/400 million, so you are looking at thousands of jobs.
ALEC HOGG: And projects?
BRIAN AFRICA: Projects: Because of their CIBD grading, we’re looking at projects from between R300 million and about R800/900 million.
ALEC HOGG: What happens to those projects when the company goes bust?
BRIAN AFRICA: Essentially, what happens with these projects is naturally, depending on how far they are…if they are towards the end of the project – 70 – 80 percent complete – then normally, the government would put the contract out to retender or give it to a subcontractor to complete the project.
ALEC HOGG: And that takes time?
BRIAN AFRICA: That takes time and it does cost money, because the longer the delays the more it costs at the end of the day.
ALEC HOGG: Elizabeth, I’m from KwaZulu Natal and there’s a beautiful road – or, there was a beautiful road – along the Sterkfontein Dam, which Sanyati were doing, and then they never got paid for it and the company went bust. I’m not sure that the road’s been completed yet, but for some years, it wasn’t. This is an issue that when the smaller companies go bankrupt, it is not easily fixed.
ELIZABETH O’LEARY: Yes, it’s a very difficult challenge. I’ve been working in the construction environment for quite a few years now, and a lot of the work we’ve done with SMME’s…they’ve been growing. They’ve been hiring. They’ve been providing work to subcontractors and local labourers. They’ve been able to grow their credit histories, their CIBD grading etcetera, and their overall ability to take on projects and to add to the economy. We’re really seeing what I’m terming ‘deconstruction’ in the SMME market in construction. Most of the companies we work with are significantly smaller than a company like Sanyati. They are really struggling and companies that you feel shouldn’t be in this position at this point in time – we continuously talk about the need for the development of small business – they are rolling backwards.
ALEC HOGG: Why?
ELIZABETH O’LEARY: There are a large number of factors. Unfortunately, a significant part of it stems from non-payment/very delayed payments. I know the government minister will be the first to say it’s not all government’s problem, but it’s a combination. Some of the factors from the contractors’ side tend to be that if they haven’t done some of their pricing properly; sometimes the contractors can be set up to fail. The projects will be allocated to… For instance, I know of one right now where a contractor…her price was 30 percent lower than all of the bidders or at least, than the other lowest bidder, and she was given the project. Whoever awarded the project knew she could not do the project at that price.
ALEC HOGG: Who would award it?
ELIZABETH O’LEARY: They set her up to fail.
ALEC HOGG: Wouldn’t there be a QS (quantity surveyor) or somebody going through a process of pricing?
ELIZABETH O’LEARY: they are generally proper technical teams, it’s happened for many years on a regular basis, and I think that’s one of the things we struggle with. There’s so much talk about developing small businesses, and if we’re going to do that, we need to protect these small businesses. The same people or the same departments in state-owned entities that are talking the good talk – positive involvement of smaller businesses and taking some action on it – it’s other divisions within those same departments that are killing them.
ALEC HOGG: Maybe it could be very specific, because if you talk in general terms people in South Africa say ‘oh well, it’s their problem’, but power is all of our problem and power comes back to Medupi, where the first set was supposed to come on… What is it now…four years ago, Brian?
BRIAN AFRICA: Yes, in terms of power…once again, as Liz has said we’ve seen that a number of small contractors are becoming involved in the projects. However, if we look at just the major delays taking place on Eskom at the power stations alone… You can imagine that for a small to medium enterprise company operating from a basic office, or basically, working on site and there’s about 30 or 40 people there – they cannot afford to go without payment or late payment for more than two or three months. They can’t sustain their businesses for such a long period of time. The bigger companies – Hitachi or Murray & Roberts – those are companies that can basically carry non-payment or late payment for a few months.
ALEC HOGG: Is it incompetence that’s causing this or is it just antagonism?
BRIAN AFRICA: I think it’s a bit of both. We are taking on…the power stations is a project that has not been taken on at this scale in this country. It’s therefore quite a mammoth task to actually do these projects – two of them – at the same time, and obviously trying to get their electricity produced. There are many teething problems and many small problems. In terms of non-payment, the ripple effect of that alone has put a number of contractors in liquidation. It has caused additional delays and it’s causing severe strain for the financial services industry as well because further credit now needs to be extended for small to medium enterprises, which are unsecured loans.
ALEC HOGG: You get one first strut and everybody runs for cover.
BRIAN AFRICA: Correct.
ALEC HOGG: Going back here Elizabeth, to maybe the focus…the company you’ve been focusing on would be dealing with municipalities and local authorities. We hear from the outside that corruption is a big problem there.
ELIZABETH O’LEARY: I’ve always wondered. You go back and forth and I think sometimes that corruption has been used as an excuse. I’ll sometimes challenge people and say ‘but did you actually tender for that project’ when you hear some negative talk, and people will say ‘no, I didn’t’. I’ll say ‘but then you can’t accuse corruption on this if you weren’t directly involved’. Unfortunately, we are hearing more and more that there are real examples of corruption, nepotism, and I even want to say scams, where sometimes you have a construction company that has been appointed to do several projects or that the same individuals have been appointed under the names of several different companies – are appointed in a certain region. They then find that they don’t have the capacity to take that on, so they’ll bring somebody else in. Somebody we know has basically been used to deliver until a certain level of the construction was completed. They then chased her from site and took over again – she had been subcontracting to them – chased her away, threatened her, and said ‘you don’t talk to anybody about this’ and she didn’t get any payment for it. They’ve taken the payment. They’ve completed the project, and then took the payment themselves.
ALEC HOGG: Isn’t that a criminal action or a criminal case?
ELIZABETH O’LEARY: They are.
ALEC HOGG: What do you do about that?
ELIZABETH O’LEARY: Well unfortunately, she is afraid to do anything. Her life has been threatened. You hear many different types of stories. Unfortunately, we also know that what’s happening is that in some cases the clients are actually using the consultants – quantity surveyors and architects etcetera – who may be in charge of the project on their behalf, to almost mess around with the smaller contractors if they know that they haven’t budgeted properly, planned, or used their budgets properly. They therefore trying to buy themselves a little bit of time and so they’re saying ‘this wasn’t done completely the way it was supposed to be’ or ‘we now need to include the ground floor in this project. It wasn’t originally included, so we actually think you overcharged on this floor’. People are finding ways of….
ALEC HOGG: We do have a Finance Minister who has, for years, been talking about bringing in different procurement issues because a lot of these – let’s not worry about the private sector right now – but focusing on an area where our taxes are going… Has it made any difference yet that we have this procurement tsar who is overseeing everything in government, Brian
BRIAN AFRICA: Personally, I feel that we haven’t seen any change whatsoever. As Liz mentioned, from an underwriting perspective and from a financial services perspective, we are still seeing a number of contractors who are under-pricing contracts and we can clearly see that in terms of the supply and procurement process that has been followed – that process is flawed. How can you allocate or award a contract to somebody that has no access to supplier credit and has no access to other financial products, and they’re 30 percent under the actual contract or the actual tender.
ALEC HOGG: So is that where the problem lies?
BRIAN AFRICA: Correct.
ALEC HOGG: The allocation of the contract is incorrect in the first instance.
ELIZABETH O’LEARY: That’s one of the problems.
ALEC HOGG: That’s one of the problems. All right, help us out here.
ELIZABETH O’LEARY: That’s the greatest challenge.
ALEC HOGG: It’s been raining in Johannesburg for two weeks. We’re all feeling gloomy from that. Is there anything you can give us where we might be able to start tackling it?
ELIZABETH O’LEARY: I was going to say it’s been raining in the industry for a few years, and they now keep saying the industry is stuck in a big old puddle. Look, I think the intention seems to be there, but we need the leadership from the top. I think we need it from both government as well as the private sector and we need both of the parties to come together. PPC has called for an infrastructure CODESA and it’s one of the things, which we support.
ALEC HOGG: So Ketso Gordhan is one the shining lights, perhaps.
ELIZABETH O’LEARY: Absolutely. I think unfortunately, because of Competition Commission issues, so many of the leaders within the bigger listed construction companies feel a bit as though they have their hands tied behind their backs.
ALEC HOGG: On that one…just to close off with, has it made an impact in the confidence – this reputational hammering, which the construction companies have had?
BRIAN AFRICA: It has definitely had an impact. Most of our reinsurance for these performance guarantees that were issued…all of our reinsurers are based offshore, so the Competition Commission has definitely had an impact on how they perceive the construction industry. They question whether the construction industry is a sustainable industry, and they also question obviously, the relationship between public and private sector because that’s very important for our reinsurers. They want to be sure that when government puts out contracts, that there is a rapport between the public and the private sector, which is going to ensure that the projects are completed on time. Over and above the Competition Commission debacle, we’re also looking at the massive delays on Eskom. We’re not really seeing any positive stories coming from the construction industry and if we do want to attract foreign investors and if we want to retain the current foreign investment we have, we’re definitely going to have to look at changing. There’s definitely going to have to be a shift in policy.
ALEC HOGG: And a shift in mindset, Elizabeth.
ELIZABETH O’LEARY: I think that’s where it starts, to be honest. I think we need that everywhere. I’ve also been calling for a leadership CODESA that I think each of us in the industry – now – we need to stand up and to take our leadership moment together. The only way we can really deliver all of this infrastructure we’ve been talking about for years, which we know is needed within the country… In order to jumpstart the industry and the economy again: we have to work together and we have to be able to have people who can draw us together – government and private sector – and say ‘step up. We’re now going to step beyond the ‘us’ and ‘them’ and ‘you’ and ‘us’ and the pointing of fingers that’s been going on, and now say ‘what can we work together on? How can we solve these issues?’
ALEC HOGG: An issue of trust rebuilding – perhaps trust beginning. Elizabeth O’Leary is with Khuthaza and in this Special Podcast – Brian Africa from PCBS.
