Construction | Fin24
 
  • New Notes

    Long queues have formed in Harare after Zimbabwe released new bank notes and coins.

  • Open Book

    Former President Jacob Zuma says the public protector can access his tax records.

  • Electricity

    Sowetans should pay rate of R150/month to foster a payment culture, says an ANC councillor.

Loading...

Construction

Jun 02 2010 15:47
Antoinette Slabbert
When the Dubai property bubble burst the effects were experienced early last year even in South Africa.

Group Five, which felt earlier its work was reasonably safe since it accepted only government contracts, had to move 3 700 of its 5 000 workers in the Middle East from Dubai within three weeks.

Two of the group’s state contracts – with a combined value of R4bn – collapsed.

The contracts of most of its workers were cancelled and they were sent back to their countries of origin.

Ripple effect

By April 2009, around R20bn of Murray & Roberts’s work in the Middle East was cancelled or postponed, including the iconic Tameer Towers in Abu Dhabi.

Murray & Roberts had already laid off 3 900 workers due to cancellation or suspension of Middle East contracts.

Most were South Africans.

Share prices responded in sympathy and Murray & Roberts’ R109/share in August 2008 tumbled to R33.60/share by February 2009.

That was the start of a difficult year for SA’s construction industry.

Credit sources worldwide dried up and clients started reconsidering their spending.

However, there was a lot of work in SA.

Soccer boon

Mega projects – such as the Soccer World Cup stadiums and the Gautrain kept contractors busy.

Group Five, Murray & Roberts, Wilson Bayly Holmes - Ovcon (WBHO) and Basil Read were among the big guns that showed their mettle with this complex building work, often in partnership with foreign construction groups like the French Bouygues and Dutch Interbeton.

Despite labour unrest, the work progressed and, especially Basil Read, was proud of the opportunity to add new skills to its CV.

The group had never built stadiums before and hopes that, thanks to its successful completion of the Mbombela stadium in Nelspruit, it will be able to win similar contracts in Brazil, where the next Soccer World Cup tournament is to be held, and in the Middle East, where several stadiums are apparently being planned.

SA’s Government confirmed its intention of investing R787bn in infrastructure over three years, SA’s National Road Agency Ltd (Sanral) awarded large road contracts as part of its project to improve Gauteng’s highways and Eskom’s capital spending started reaching the market.

At first sight, business conditions didn’t look too bad.

Most construction groups had already started moving away from the declining residential building market in the previous year, focusing rather on civil work and Government contracts.

Turnover and profit figures were still impressive, mostly thanks to contracts signed in the boom period and now maturing.

Nevertheless, especially the large contractors started worrying.

The South African Federation of Civil Engineering Contractors’ (Safcec) confidence index apparently fell sharply, owing to concerns about where the next mega projects would come from, credit was scarce and SA was on the eve of a general election.

Political stability


Safcec warned its expectation of 1.5% real growth for the industry over 2009 could be jeopardised by those factors and could even shrink.
 
By mid-year, Safcec’s confidence index showed medium-sized contractors were officially pessimistic, with a score of 31 out of 100: 50 is the cut-off point between optimism and pessimism.

Growth in available tenders slowed.

Materials suppliers were suffering.

Cement sales in SA dropped by almost 14% in first half 2009, and in June they were 17.5% lower than the year before.

Suppliers of tiles and sanitaryware, including Ceramic, Italtile and Iliad, reported negative growth after first half 2009.

Those groups could limit their exposure to the dead residential building market only up to a point, while some benefited from livelier trade in rural areas.

Government’s dawdling with the building of low-cost houses hurt both them and suppliers of sand, aggregate and building blocks.

There was serious concern about building materials group WG Wearne, and Afrimat and Infrasors were also worried.

WG Wearne described its year to end-February 2009 as the most difficult in its 90-year history.

In September, building material group Dawn announced its insurance policy had let it down.

Dawn repositioned itself the previous year to reduce exposure to the private building industry and benefit from Government’s infrastructure spend.

Government let-down

Dawn’s operating profit for the year to end-June fell by R131m.

CEO Derek Todd attributed R80m of that to delays with Government projects.

As if that wasn’t bad enough, the companies that won Government contracts were increasingly struggling to be paid.

Andries van Heerden, CEO of Afrimat, which supplies much building material for housing projects, said in November 2009 late payments by Government were causing problems for especially smaller businesses.

Pieter van der Schyff, executive director at Sea Kay, a contractor that specialises in building low-cost houses, said Government uses contractors like banks.

This group approached the court for assistance in getting its money and its auditors warned its continued existence was in the balance.

Other groups fighting for survival included crane suppliers SA French, whose sales dried up, and glass and aluminium group AG Industries.

Even large construction groups indicated things were more difficult.

WBHO chairman Mark Wylie said pressure on project financing in the public and private sectors was undermining profit margins.

Raubex, a company specialising in road building in SA, started extending its wings elsewhere in southern Africa to spread its risk.

Some good

Nevertheless, some companies fared well.

Esorfranki, a geotechnical and civil engineering group, pushed turnover for the six months to end-August up by around 76% and moved from the JSE’s alternative exchange (AltX) to the main board.

Glass and aluminium group Mazor made the same move.

Esorfranki CEO Bernie Krone said delays with Government projects aren’t all negative: the group still worked to its full potential and said if some contracts came later there was at least something to look forward to.

Murray & Roberts pushed its turnover for the year to end-June up 27%, despite the 7 000 jobs it had to end when work worth R25bn was lost owing to the global economic crisis.

Aveng showed 18% growth in September compared with the previous year’s order book.

Basil Read carried out a R780m merger with listed mining engineering group TWP in a move it believes will ensure ongoing growth.

However, all in all 2009 was a year of consolidation for the construction industry, says Fred Platt, CEO of Accentuate, which specialises in fittings such as floor covering, tailor-made aluminium frames and glass covering.

Companies cut the fat, called in debts, reduced debt levels and built up cash reserves.

In addition, the industry had the Competition Commission breathing over its shoulder throughout 2009 due to pending investigations into dishonest practices with the granting of tenders for Soccer World Cup stadiums and building materials prices.

Cement manufacturers suffered raids on five sites in Gauteng and KwaZulu-Natal in June.

Documents and electronic data were seized.

No findings have yet been reached in those investigations.

BEE bombed

Empowerment in the construction industry had its ups and downs last year.

Progress was made when SA’s construction codes were published in June.

Those codes – adapted to the specific needs of the industry – acquired the same status as the Department of Trade & Industry’s generic codes.

On the other hand, Group Five took the drastic step of kicking out its empowerment partner, iLima, after allegations it had submitted a fraudulent tax certificate with tender documents and the Gauteng provincial government said the company was financially unsound.

Group Five says several attempts to save iLima failed.

As for the future of SA’s construction industry, there are many questions.

Safcec says it’s extremely important for institutional handicaps in the Government’s spending path to be eliminated.

Construction heads are in agreement about their disappointment that expected Government contracts aren’t being realised.

Public private partnerships (PPPs), where Government doesn’t even have to find the financing itself, are simply not granted.

Four PPPs for private jails and for the Tshwane metro council’s new head office are clear examples of PPPs where many years of preparation were undertaken that have cost a great deal of time and money.

Looking ahead

Due to apparent indecision in Government circles – something that’s been strangling the economy since the April 2009 general election – the granting of those contracts has been delayed for months.

By mid-March, when most companies have finished reporting, the picture is expected to be clearer and there may be more certainty about whether Safcec’s prediction of a 10% shrinkage in SA’s construction industry for 2010 is correct.

An analyst says the debate is still whether the downturn will last one or two years.

About 18 months of suffering have apparently already been discounted in share prices.

However, there’s consensus infrastructure spending must pick up momentum some time or other.

SA will simply be unable to postpone the upgrading of its roads, power network and water and sanitation systems indefinitely.

But over the long term, SA’s construction industry’s future is assured.

 - Finweek

NEXT ON FIN24X

 
 
 

Read Fin24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
0 comments
Comments have been closed for this article.
 

Company Snapshot

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...

Voting Booth

What do you think about private healthcare in SA?

Previous results · Suggest a vote

Loading...