If you’re driving near Fourways in Joburg, travelling north along William Nicol Drive, the road turns to gravel before coming to a dead end. To keep going, you have to make a winding detour through Steyn City. It’s a source of deep frustration for motorists who commute to work in Fourways, Randburg and Sandton along that route — and it’s a deep disruption to companies in the area.
The reason: the project to upgrade the road, the K46 which goes through Diepsloot to the N14 freeway, lies incomplete and abandoned — an emblem of a stalled economy and a flailing construction industry.
The contractor, Lubbe Construction — which in better days described itself as "the biggest integrated construction development & management, infrastructure & property development company in SA" — has applied for business rescue, having missed successive deadlines to complete the project. Lubbe blames this on "financial difficulties".
According to Lubbe’s contract with the Gauteng department of roads & transport, the road should have been completed in September 2017. "The department regards nondelivery of contract requirements by contractors as a serious matter," says roads & transport MEC Ismail Vadi.
Vadi has called in law enforcement agencies "to consider instituting legal proceedings" to recover any money already paid.
As Lubbe Construction rolls away into darkness, Vadi has to pick up the pieces. He says the department will start a new, open tender process to complete the project.
The thing is, this is not an isolated case. There are many similar tales in a sector reeling from various factors — including a lack of infrastructure spending due to a depressed economy, with a GDP growth rate of just 0.7%, as well as some nasty own goals.
This is all too evident in the share prices of JSE-listed construction companies.
The immense destruction of value over the past decade is scarcely believable: construction giants Aveng and Group Five have lost 98% of their value in the past five years. Considering most of SA’s 5,150 pension funds have exposure to some construction stocks, the sector’s implosion has affected millions.
Industry Insight, a construction business information service, estimates the value of the sector at R220bn (in 2010 constant prices) at the end of September 2018 — sharply lower than its peak of R302.8bn in June 2009. These estimates are based on its project database as well as the building plans data from Stats SA and various reports such as those of municipalities, says David Metelerkamp, an economist at Industry Insight.
But it’s not just investors taking the smack. Construction companies are a vital source of employment and the steady decline for a decade has meant jobs have been shed. In the year to September 2018, 22,000 jobs disappeared from the formal construction sector, according to Stats SA. The list of companies that have gone bust or entered business rescue is growing — leaving a trail of casualties.
Take Esor Construction. When it went into business rescue last August, Esor employed 1,200 people. It now has just over 500 staff, says Hans Klopper, head of restructuring at Esor’s business rescue practitioners, BDO Business Restructuring.
There’s also the black-owned construction group Liviero Group, which filed for business rescue in July 2018, with 2,400 employees on its books. Since then, more than 800 of them have lost their jobs.
It’s not as if Liviero didn’t have work either. A year ago, its projects included the Jorissen Street student accommodation in the heart of Braamfontein, Johannesburg — a R278m project which entailed building a 17-storey facility a block from Wits University.
Masimong Group, a company led by Minerals Council SA (formerly called SA Chamber of Mines) president Mike Teke, owns 51% of Liviero, which has building, civil engineering, mining, plant and energy arms.
But when Liviero filed for business rescue, government agencies owed Liviero Civils R81m, says chair Luca Liviero. A combination of the government failing to pay what it owed and work stoppages at its mining subsidiary is to blame. So while there are still some projects out there, any additional strain can tip companies over the edge.
What went wrong for construction?
"Overall building demand levels are poor, against the background of a lacklustre macroeconomy," says Johan Snyman of Stellenbosch-based Medium-Term Forecasting Associates (MFA), an economic consultancy specialising in research on building.
"Public capital expenditure, in total and on new construction, is being cut back. [So] employment and profitability are under pressure," says Snyman.
Metelerkamp of Industry Insight says that in 2018 there was a 15.3% decline in the estimated value of construction tenders awarded compared to 2017. "This is quite a big contraction in activity," he says.
In 2017, government institutions dropped their spending by 4% over one year, from R283bn in 2016 to R271bn.
But the fact is, the government is still spending — and it is spending about 48% more than the R182bn it was spending about a decade ago. While it is fashionable to blame the government, the deeper untold story is that the companies must shoulder some of the blame for shoddy management.
If you pore over the annual reports of the construction firms, it’s clear that some large contracts were either priced incorrectly, or delivered late. The upshot: plummeting margins, or fines for being late.
After all, the construction firms are earning more money than they were a decade ago, when profits were sky-high.
In 2007, revenue for all construction companies was around R60bn, and around R80bn a year later. Fast-forward to 2015, and revenue was R144bn, and R130bn a year later. But in 2008, its net profit was around R6bn — which dropped to R2.9bn by 2016.
This shows the problem starkly: the years of fat left the companies ill-prepared for the years of lean. Whereas a decade ago, a company could absorb a productivity-sapping strike, or mispriced project, it can’t afford such missteps today.
In an interview with the FM, Afrimat CEO Andries van Heerden says as much: "We know there have been problems of execution with some companies."
The trick, says Van Heerden, is to deliver flawless projects on time.
Metelerkamp points out that the SA construction sector remains a multibillion-rand sector, employing more than 1-million people formally and informally.
"In the run-up to the 2010 Soccer World Cup, industry players spent vast amounts of funding to increase capacity, up-skill and expand the labour force," he says. "The industry, therefore, currently operates at an elevated level, and because of this … now finds it difficult to cope with the slow and paralysing downturn."
So can the existing construction companies be saved? Is there any value still left for investors? Or should they be avoiding the sector at all costs?
Experts say there is value still there — but to remain profitable, the companies must be realistic about the current environment.
"The likes of Aveng, Basil Read, Esor and others were far too slow to scale accordingly, and it hurt them," says Metelerkamp.
This appears to be borne out by the fact that some companies are still prospering, despite the depressed environment. But they have done so largely by diversifying, consolidating or reinventing themselves.
Murray & Roberts, a company with a proud 117-year history of building such landmarks as the Carlton Centre, has taken the radical option: exiting construction in SA and transforming itself altogether (see page 25).
To get a sense of how badly the construction sector has hurt investors, consider that over the past five years, the JSE’s construction & materials index has fallen 56.53%. By comparison, the JSE all share index is up 16.21% over that time.
At Wilson Bayly Holmes-Ovcon (WBHO), the share price was down 29% over the past year, and at Aveng it had fallen 97% in one year. When contacted, they declined to comment on where the industry was going.
But analysts say the construction industry moves in cycles — often swinging from boom to bust. How sustainable a company is depends on how it manages these cycles, and if it can keep working capital aside for the dark times.
What is clear is that should President Cyril Ramaphosa’s GDP growth plan pay off, the construction companies would benefit too. This is because, largely, construction activity tracks GDP growth. So it’s no surprise that their fortunes reflect the country’s lethargic growth rate in recent years.
Throw in policy uncertainty in mining, and sordid governance and corruption in state-owned companies (which typically spend a lot on building), and you have a recipe for disaster. Even today, SA’s economy is set to grow by a modest 1.3% in 2019.
Roelof Botha, economic adviser at the Optimum Group, says the economic environment does not bode well for construction companies. "The high interest rates are a burden to individuals who rely heavily on debt financing. It is not cheap to build. People build on the back of debt such as mortgage bonds. The interest rate in SA is one of the highest in the world," he says.
Metelerkamp says the stagnant economy has failed to grow above population growth every year since 2013. "In per capita terms, the average South African has become poorer and poorer since then, and this filters directly through to the construction industry, with a severe lack of demand and affordability."
And while government spending may not be what some would want, the truth is that complete lack of confidence by business has meant the private sector has also failed to invest in new projects. This inertia has become even more pronounced in the lead-up to the May 8 elections.
It didn’t help that when Ramaphosa took over last year, belts were tightened as government budgets were consolidated.
"Infrastructure spending for roads, water and sanitation, power stations, schools and hospitals declined from an estimated R947.2bn to just R834.1bn — a decline of 11.9% in nominal terms," says Metelerkamp.
This represents the biggest cut to infrastructure spending, once inflation is stripped out, since the late 1990s. It is "the main reason the construction industry fell so hard in such a short time last year", he says.
Botha says that while the Ramaphosa administration has made public commitments to prioritise infrastructure expenditure to boost growth, implementing projects doesn’t happen overnight.
"We will see progress only after the elections. We will not see much until the second half of the year," he says.
Speaking in parliament last week during his second state of the nation address, Ramaphosa admitted that the government’s infrastructure spending had slowed.
"Our infrastructure provision is too fragmented between the different spheres of government," he said. "It does not fully integrate new housing development with economic opportunities and with the building of dams, water pipelines, schools and other amenities."
So he proposed a remedy: the government will contribute R100bn into an infrastructure fund over 10 years, which will be used to leverage financing from the private sector and state-owned finance institutions.
Only, there was scant detail on what this R100bn will be used for, so it is difficult to assess whether it will really breathe new life into ailing construction firms.
"If it is additional funding," says Metelerkamp, "this will have a small but positive impact in the short term, as it would effectively increase overall infrastructure spending by R30bn over the next three years — from the R855bn announced in the medium-term budget policy statement (MTBPS) at the end of last year, to about R885bn."
Tito Mboweni’s budget speech next week may add flesh to these bones.
Though it looks unbearably grim right now, analysts believe the construction industry can still be saved.
However, Deloitte Africa’s Jean-Pierre Labuschagne says for that to happen, the government must begin spending on infrastructure again. While he says "the near collapse of the construction industry in SA is worrying", he remains optimistic.
And, as anyone whose life has been affected by Eskom knows (read: everybody), money also needs to be spent on maintaining existing infrastructure.
"It is not a sexy thing to do, I know. Maintenance is the first area to cut when money runs dry. It is easy to put it off," says Labuschagne.
But the fruits of this neglect were very evident this week, as Eskom tumbled into last-stage load-shedding — the biggest power crisis in the country’s history.
For a full recovery to take place in construction, however, a number of other pieces need to fall in just the right place too.
Says economist Mike Schüssler: "People are not going to build if there are still question marks over mining or land expropriation. We need stability and certainty."
Botha says that in light of government’s anaemic spending, only lean and mean companies stand a chance of surviving.
Construction companies also need to stop relying so much on government work — one of the main factors in many crashes.
Take the case of Basil Read, an iconic construction brand whose journey dates back to 1952. The brainchild of Basil Leonard Read, the company started out small and grew to become one of the leading construction firms in the world. Its projects included building Nelspruit’s Mbombela Stadium for the 2010 Soccer World Cup, various Gautrain stations, and revitalising the Chris Hani Baragwanath hospital in 2005.
Back in 2009, CEO Marius Heyns said in the annual report: "We have often stated our aim was not to be the biggest construction group in the country but one of the best and this is definitely now a goal we are nearing." At the time, Basil Read’s goals included R10bn in turnover by 2013.
Today, a decade later, the company is a shadow of its former self. In June 2018, it applied for business rescue.
But there is more to it than simply a poor economy. The fact is, when Basil Read went into business rescue, it had more than 20 construction contracts on its books.
One of those projects was plagued by bad luck — the contract to design, build and operate an airport on St Helena, a 16km by 8km island in the Atlantic Ocean. Basil Read’s client was the government of St Helena and the project was funded by the UK’s department for international development.
But in October 2018, the St Helena government terminated the contract, leading its banks to call up guarantees of more than R140m. It was a disaster and Basil Read’s business rescue practitioners, John Dymoke Lightfoot and Siviwe Dongwana, claim it was unlawful too.
The sector is strewn with similar stories of contractual disasters, and work cancelled — in stark contrast to the boom years leading up to the 2010 Soccer World Cup.
But not all construction companies have been playing dead. Some are still fighting to stay afloat.
Take Aveng, which traces its roots back to 1889, and which built the FNB Stadium in Joburg, among others. Now it plans to cut its exposure to SA construction and become an "international infrastructure and resources group" over the next three years. It plans to keep assets like Australian-based subsidiary McConnell Dowell and surface mining contractor Moolmans, while selling others.
New Aveng CEO Sean Flanagan, who took over the reins on February 1, will be hoping last year was a turning point for his company. Revenue rose from R23.5bn to R30.6bn, while its net operating loss narrowed from R5.4bn to R401m.
Importantly, its operating free cash flow improved from a negative of R308m in December 2017 to an inflow of R34m last year. Its two-year order book, however, shrank 28% to R17.9bn
During 2018, Aveng sold assets worth R387m — including Aveng Rail (for R133m) and water treatment business Aveng Water for R95m. It plans to sell other "noncore" assets by June 2019.
But selling assets in a depressed market is easier said than done. In the current environment, there cannot be many players looking to buy Aveng’s construction arm.
It won’t be Murray & Roberts (M&R), which walked away from construction before the industry went bust. Last year M&R tried (and failed) to buy Aveng, as part of an attempt to lay its hands on Aveng’s better-performing Australian business, McConnell Dowell, and its local open-cast-mining business, Moolmans. M&R never wanted the construction assets anyway.
Then there is Group Five, which listed on the JSE in 1974. Among other achievements it built Durban’s 70,000-seater Moses Mabhida Stadium and King Shaka International Airport north of Umhlanga. It also worked on Eskom’s Kusile power station.
But last week, CEO Themba Mosai resigned and left immediately — igniting speculation about boardroom clashes.
Mosai’s hasty departure was by mutual agreement, says Group Five.
"The group is evaluating a number of expressions of interest and the best strategic direction," it says. "His departure was therefore mutually agreed to be the best time before we move into the next phase of our expression of interest process, which requires continuity"
So, like Basil Read, Group Five is in no shape to make signature acquisitions.
Nor is WBHO likely to be buying anything. It has been doing better than most, but has been focused on expanding its international footprint.
Esor, now in business rescue, is even more precarious than most of its peers.
About four years ago, Esor, which also does above-surface civil engineering and pipeline construction services, shifted its focus away from the building-related construction market.
Instead, it turned towards water infrastructure. In part, this was because the government said it planned to invest in major water infrastructure.
But this promise wasn’t backed by any tangible action.
Instead, claims of corruption surfaced at the department of water & sanitation, previously headed by Nomvula Mokonyane (who has since been accused of taking bribes from Bosasa).
That department is now teetering on the brink, with irregular expenditure having ballooned to R6.5bn since 2014.
Esor’s story is yet another of wasted potential. It began life as Franki in 1946, and listed on the JSE in 2006, shortly before it hit a target of R1bn in annual revenue for the first time. In 2016, it expanded north of SA’s borders.
It meant that in 2018, 16.2% of its revenue came from projects in Zimbabwe, Swaziland and Botswana.
But that same year, Esor also clocked up a mind-numbing R300m loss, while its order book shrank from R1.5bn to R900m.
Klopper says the construction industry has taken strain not only from diminishing spend on public infrastructure but also from a culture of nonpayment of accounts.
He says the Free State provincial government failed to pay NMC Construction in the Western Cape, which led to it also being placed in business rescue. "Payments were up to six months late, and this had a knock-on effect on turnover and cash flow, leading to the subsequent demise of the business, affecting 1,300 employees," he says.
And, while many companies initially believe they can trade themselves out of the mess, Klopper says they lose vital hours by acting late. "The failure to act swiftly when in financial distress may make it virtually impossible to rescue [a company] at a later stage, and may lead to personal liability," he says.
This month, Esor’s business rescue practitioners, BDO Business Restructuring, are supposed to present a rescue plan to the firm’s creditors.
There has been a spectacular destruction of value in some construction companies over the past few years
— What it means
So what must be done to get the sector back on its feet?
"In the short term, confidence needs to return to the SA economy in order to see any major influx of investment into the construction industry," says Metelerkamp.
He says a "decent" win by the ANC in the national elections would embolden Ramaphosa to implement the market-friendly policies introduced in 2018.
"In the medium to long term, the economy simply needs to grow by at least 3%-4% for a start," he says.
"This will have a twofold impact on the construction sector. It will stabilise the government’s finances and allow the National Treasury to again increase spending on infrastructure." This higher growth should then filter through to the sector.
"A growing economy is also very likely to attract an array of foreign and local investors who might want to invest in a new mine or a power plant, for example," he adds.
The alternative is not just the absence of companies with histories that date back decades: thousands of jobs are on the line.
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