Fall of construction giant Group 5 ‘is the government’s fault’
Thousands of jobs on the line as firm's business rescue bodes ill for SA's ability to take on large building projects
The looming demise of SA construction giant Group 5 shines the light on a cash-strapped government unable to pay for large-scale projects, say economists and business rescue experts.
On Monday, the company announced it was going into voluntary business rescue, plunging its share price to an all-time low of 89c. Five years ago its shares were valued at R45.
Its financial woes put the jobs of thousands of blue-collar workers and skilled professionals at risk.
Founded in 1878, the company has been behind some of the country’s biggest build projects, including power generation, petro-chemical and mining facilities, and commercial builds such as Gauteng’s Mall of Africa.
Group 5 announced it was going into business rescue because lenders were unwilling to provide more funding and major build projects were not materialising.
It’s the third major construction company to be faced with closure in the past five years. In June 2018, Basil Read shut its doors, and four years ago Erbacon narrowly staved off closing shop.
Business rescue experts have blamed Group 5’s financial situation largely on the government, with construction economists saying the announcement potentially threatens the country’s ability to take on large infrastructure projects.
Eripio business rescue consultant Tiaan Herbst said while it was possible that Group 5’s current clients had failed to pay it timeously, the business rescue announcement pointed to a much broader economic picture.
“This is due to its [government’s] absence in supporting the construction industry as a whole. Group 5 and similar companies have had to face unprecedented economic conditions accompanied by rigid legislation to stay afloat.
“There is consensus South Africa’s economic growth for 2018 was about 0.7% which, as a result, had severe repercussions on the construction industry.”
Herbst said that in all likelihood Group 5 would begin retrenchments to reduce input costs.
For a company of Group 5’s size, “not being able to resolve its financial difficulties outside of business rescue, entails that it will probably be wound down within [the] business rescue”.
“It is possible all job opportunities that existed will be lost. It is uncertain at this stage if employees will receive their severance packages.”
Herbst said that for companies to be considered financially distressed it had to be shown that they were either unable to settle their debts or would become insolvent within the next six months.
“Business rescue plans look at the restructuring of a company’s affairs, business, property, debt, liabilities and equity to maximise the likelihood that the business remains solvent.”
If it was not possible for a company in business rescue to continue to exist the plan would look at ways of securing better returns for its creditors and shareholders.
“In the case of Group 5, the board voluntarily filed for business rescue. Business rescue practitioners will have to be appointed and will have full management control of the company.”
Herbst said that because of the business rescue, Group 5 would likely propose that it finalise its current projects on the condition that existing creditors provide construction material on a cash-on-delivery basis.
Prof David Root, head of the Wits school of construction economics and management, said the announcement was a sign of what had been building up for a long time.
He said large firms depended on large projects.
“There is relatively little coming out in terms of tenders. The problem is money that is not being spent. And when it does happen, it is being spent more on manufacturing than infrastructure construction.
“With no big projects coming up there is no rationale for the survival of large construction firms. What has happened to Group 5 reflects there is limited business in a very competitive market, with government’s policies designed to break large projects into smaller ones so small-scale companies can also bid for tenders.”
Root said Group 5’s business rescue put the industry in a bad position, “especially if large projects now start to appear”.
“While the vacuum could be filled in future, we could also be hit by capacity constraints, which translate into increased tender prices. This could create issues around whether companies have the financial capacity to handle the risk that comes with large projects.
“Losing teams, networks and supply chains will have consequences including increasing risks which lead to rising project costs and prices.”
Root said that while business rescue was meant to prevent companies from being liquidated, so they could sort out their finances and return to viability, they could become a “self-fulfilling prophecy”.
“The trouble with firms going into business rescue is that people don’t have faith in them being able to complete work, with future work flows drying up. This leads to businesses less likely to be able to get out of business rescue.”