Construction pay drain

These companies are facing a financial crisis of sorts as local and provincial governments in some provinces allegedly continue to fail to pay them timeously for commissioned work.

Small and medium-sized construction companies depend on government projects for survival.

Late last month one of these companies, Sanyati, said it would be liquidated as it was owed millions of rands by the Free State and Limpopo provinces. It said 2 500 employees would lose their jobs.

There are many other small construction companies that are closing down for the same reasons. Their cases are not as well publicised because they are privately owned.

Sanyati's case became headline news because the medium-sized construction company is listed on the JSE, making it a public company.

The late payment for completed work is adding insult to injury to these small and medium-sized construction firms, which are already feeling the pinch as the entire sector is in the doldrums. 

According to Industry Insight, a construction think-tank, the number of contracts awarded for construction sagged by 12% in June this year. Civil contracts have seen a 13% contraction during the period.

The construction industry is still at a lower turning point of what was hoped to have been the start of a recovery period.

The current slow pace at which contracts are awarded suggests difficult times will remain for longer than may have been anticipated.

Unfortunately this, together with slowing overall economic activity, makes me think that the sector should expect even greater numbers of payment defaults in the months ahead, with further potential company closures.

This means the number of voluntary liquidations in the construction industry in particular could surge as activity in this sector fails to take off.

And local and provincial governments keep assigning work to these contractors, and allegedly failing to pay them on time.

The voluntary liquidation of emerging companies in this sector has been an ongoing thing in this and other sectors. I first learnt about this problem when I was a Johannesburg-based construction correspondent 13 years ago.

Since then, however, each effort by homegrown South African boffins to heal the bug of government's failure to pay up for work done on time has always generated no more than a brief remedy.

Even more nerve-wracking is the fact that the relapses after each treatment are happening sooner and sooner.

The emerging construction sector's chances of avoiding intensive care are receding to near vanishing point.

This will also affect the national government's most important priority, job creation. Employment in construction has sagged by 4.4% year-on-year in first quarter of this year to 986 000.

It was down 6.7% compared to the fourth quarter of last year. And the outlook for construction employment remains bleak, given the depressed conditions.

The government will get a rude awakening when one of the big four construction companies collapses in a heap. The global financial crisis has taught us that no company is too big fail.

 - Fin24