ROB ROSE: Behind the demise of SA’s iconic building firms

The corporate graveyard is crowded with the newly built headstones of iconic companies that built the face of SA: Basil Read, Esor and now Group Five. Others are on life support: Aveng clocked up an operating loss of R484m for the six months to December and even the hitherto bulletproof WBHO made a R23m operating loss for that same period.

Khathutshelo "K2" Mapasa, the CEO of Basil Read (now in business rescue), says the situation is now so bad that the government must intervene to bail out the sector. "Look, I agree with the capitalist philosophy of creative destruction, that things have to fail. But the thing is, at Basil Read, I’ve realised we [affect] far more than just shareholders. This isn’t about one company," he says.

At last count, the industry employed 618,000 people — more than the entire mining industry in this country.

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So Mapasa proposes a solution that leans on the playbook the government used in the 2014 rescue of African Bank. In that case, the Reserve Bank split it into a "good bank" consisting of loans that could be salvaged, and a "bad bank" of sour loans that customers weren’t repaying.

Mapasa, a chemical engineer who began his career at De Beers, says that model could be used for construction. "What you’d do is split the contracts that construction companies have with government entities — like Eskom and Sanral — into ‘good contracts’ and ‘bad contracts’, on which the companies are losing money trying to finish."

They’re always talking about the size of their order book, how many contracts they’ve got

For the "bad contracts", you’d ask the government to prepay, or waive penalties for any delays, to stop builders going bust. "The alternative scenario is even worse for the government: they have to go out and ask for tenders again, those employed under the current contracts will be retrenched, and everything starts from scratch," he says.

But many of the construction companies are in trouble because they mispriced contracts — jostling to undercut each other. Why should the government save the private sector from its own mistakes? Especially since, a few years back, they cheated taxpayers by colluding illegally to rig contracts for several World Cup stadiums.

Says Mapasa: "There’s this view that we shouldn’t bail out the guys that colluded, especially since these companies made mistakes in their pricing of contracts, and should bear the punishment. That’s true, but it’s beyond that now — it’s a national issue with many people now suffering."

When Basil Read went into business rescue last year, says Mapasa, the first meeting of creditors was packed with many of the 1,800 companies that relied on Basil Read for income. "I remember this one guy whom we owed less than R200,000. When we went into business rescue, all payments were suspended, and he ended up losing his house, his kids were kicked out of school, he lost everything."

And the government also played a role in sinking these firms as it often pays late, or not at all. "In Basil Read’s case, when we went into business rescue, we had a total of R700m in outstanding payments and claims associated with the government," he says. If Basil Read had got its hands on even half that R700m, it could have avoided business rescue.

But not everyone agrees with Mapasa’s solution.

This includes Themba Mosai, an electrical engineer who was CEO of Group Five until January this year. Six weeks after Mosai resigned, Group Five went into business rescue.

Mosai agrees that the government should intervene — but not to rescue companies from their own poor decisions. "Sure, the government should do something, because it’s a systemic issue — it’s not just a few companies that have made bad calls. But bailing them out isn’t the way to go."

Mosai argues that if you do what Mapasa suggests, it would keep some poor companies in business — when they actually need to go bust. Rather, he says, the government should select a panel of companies, and back them.

"Most SA companies who compete for overseas contracts compete with French or Turkish companies, which are backed by the government in their countries," he says.

But in that scenario, the industry will still have to absorb the pain (and the inevitable job losses) of several big-ticket failures. The fact is, says Mosai, this has to happen — there just isn’t enough work to support all the companies.

"Construction companies get far too excited about revenue, without looking at the bottom line. They’re always talking about the size of their order book, how many contracts they’ve got, without bothering about how profitable these contracts are," he says.

When Mosai took over as CEO of Group Five, he took a conscious decision to pursue only the high-yielding contracts. "We shrank our revenue substantially. Sure, we still had legacy projects which we had to close out, but anything new, we needed to ensure we got a proper margin," he says.

Not everyone thought like this, though. Many companies still chased business by doing projects at a loss, hoping to keep the business ticking over until things improved.

It didn’t work. In documents filed at court for business rescue this month, Group Five says some of its construction projects "were underpriced, which resulted in these projects being loss-making". So much so, in fact, that it burnt through R880m in cash last year. For this yearWe, Group Five estimated it had "a cash shortfall of approximately R2.3bn".

At this rate, Group Five won’t be the last to end up in that position. Perhaps it’s time the government began listening to people like Mapasa, who’ve seen the implosion from the inside — and have ideas on how to stop the rockfall.