South Africa's construction industry pleads for government help
Following the spate of companies that have filed for business rescue.
A South Africa-based lobby group has asked the government to prevent further destruction of the country’s construction industry, following the spate of companies that have filed for bankruptcy protection.
Group Five, one of South Africa’s largest construction companies, has become the latest company to file for business rescue, a process aimed at saving financially distressed companies from the worst-case scenario of liquidation.
Business rescue is part of the mergers and acquisitions process as it entails the restructuring of a company and selling its loss-making units. It also allows a financially distressed to temporarily delay creditors’ claims against it or its assets.
After 45 years of trading on the JSE, Group Five’s stock was suspended last week after the company filed for business rescue. Group Five’s market value was less than R100 million when its shares stopped trading on March 12 – a far cry from when its market value peaked to R8.2 billion in 2007.
Group Five is the fifth major South African construction company to file for business rescue in less than a year, with other companies including Basil Read, NMC Construction, Esor and the Liviero Group.
Roy Mnisi (pictured), executive director of Master Builders South Africa, which represents contractors and employers in the construction industry, expressed concern about the matter. “We still have many other small-medium sized firms facing financial difficulties and yet, there has not been any government-industry engagement to develop a plan to halt the trend.”
Construction companies have been struggling to make money for years in an industry squeezed by stagnant economic growth and a pullback in infrastructure spending by the government and private sector.
The industry had boom years in the build-up to the 2010 Fifa Soccer World Cup in South Africa, which required major infrastructure investments, including the building of new stadiums and public transport networks throughout the country.
However, the Competition Commission, South Africa’s competition watchdog, investigated and found construction companies guilty of engaging in collusive behaviour while building stadiums for the Fifa World Cup. The Competition Commission settled with 15 firms in 2013, while Group Five was granted immunity for co-operating. Companies that colluded around Fifa World Cup stadium, included WBHO Construction, Group Five, Murray & Roberts Holdings and Steffanutti Stocks.
Some construction companies have buckled under the weight of late payments from the government for completed projects. According to Roy, the industry has continually engaged government on the adverse impact of late/non-payment of contractors for work completed but the matter remains unresolved.
“The decline has reached a very concerning level, so much that it is no longer a sectoral problem but a national crisis. We appeal to the government to open up to the industry and urgently find concomitant solutions to save it from a total collapse”.
The business rescue process inadvertently leads to job losses as companies attempt to cut costs. Construction companies that have filed for business rescue have threaten jobs cuts in country where about one in five is unemployed or the unemployment rate stands at more than 27 percent.
At Group Five alone, 8 000 jobs are at risk.
“When you consider that the construction industry employs more than 11 percent of the workforce in South Africa, the negative impact on the economy as a whole is dire. There is also a knock-on effect across the industry because subcontractors, suppliers and service providers are equally affected,” said Roy.
“In the long-term, we will lose our capacity to develop infrastructure and will have to depend on foreign companies in the future. That is why we are appealing to the government for engagement.”