By way of example, some ten years ago when the construction industry was at an all-time high, the market cap for Aveng was at R27b, and today it sits much lower at R970m.
During the past 12 months, it became abundantly clear that the construction sector in South Africa is under siege by the public sector, state owned enterprises and municipalities across all the provinces of South Africa.
Not only has the spend on public infrastructure been diminishing over the last few years, but a culture of non-payment of accounts has developed. Amounts due to construction companies and a failure to make payment in time led, to the liquidation of NMC in the Western Cape. Omega Construction in the Eastern Cape was owed money by state owned entities and placed in business rescue in 2017, and successfully restructured, saving hundreds of jobs.
The Liviero Group that was owed more than R80m by government related entities, was placed under business rescue in July 2018. Thus far, this led to the liquidation of one of its subsidiaries. Botes & Kennedy, a construction company in the Northern Cape was placed in liquidation because of low margins and onerous contracts, resulting in 400 employees losing their jobs.
Since the 2010 World Cup, spend on construction decreased substantially and the consequence was that margins in the construction industry became increasingly lower, with more and more contracts becoming completely uneconomical and onerous because of that. Where delays in the completion of contracts occur, whether unexpectedly or because of issues such as strikes etc., the low margins make it virtually impossible to catch up, as there will be no “fat” to absorb the losses pursuant to such delays.
The business rescue of NMC was attributed to failure by the Department of Water and Sanitation in the Free State to make payment when such payments were due to the company. Payments were up to 6 months late, and this had a knock-on effect on turnover and cash flow, leading to the subsequent demise of the business; affecting 1300 employees.
The plight of the listed Basil Read was similar in June 2018 when it was placed in business rescue. It employed some 4730 people and approximately 2500 indirectly through sub-contractors.
Another listed entity placed under business rescue in August 2018, Esor Construction, had 1200 employees which have now been reduced to just over 500. Esor too had substantial amounts owed to it by municipalities, and entered into onerous, loss-making contracts.
The Liviero Group employed 2400 people, 800 of which lost their jobs after it was placed under business rescue, affecting 1500 sub-contractors.
When the board of directors of companies in the construction industry are confronted with potential financial distress, they should act immediately. Stakeholders and directors who find themselves in financial distress should review the provisions of section 129 (7) of the Companies Act, as failure to act swiftly when in financial distress may make it virtually impossible to rescue at a later stage, and possibly lead to personal liability.
Construction contracts are mostly incapable of being restructured, save for circumstances where a company can “get out” of a contract by suspending its obligations in terms of the contract pursuant to the provisions of section 136 of the Companies Act.
The only form of restructuring in the construction industry is to ensure that ongoing losses are mitigated and by re-negotiating the contracts and its terms.
Unfortunately, a business rescue practitioner of a construction company cannot have a “discount sale” like the case of a retailer. It therefore takes special skill to ensure that negotiations with guarantors and clients be attempted on the basis that all parties appreciate that there needs to be a “give-and-take”, failing which the restructuring of a construction company’s affairs will be a major challenge.
Read more BDO Insights