Construction World April 2019

COMMENT

As much as the recent news that Group Five had filed for bankruptcy protection was not wholly unexpected, it does emphasise three things: a battling construction industry is an indicator that the economy of a country is in dire straits, timeous business decisions are vital for the survival of a company and lastly, the construction industry – as we know it – is being demolished by the depressed South African economy, low infrastructure spending, and high levels of national debt.

Group Five is the fifth local construction company that has entered into business rescue in less than 12 months. As Group Five is one of the biggest construction companies in the country, the ripple effects can be severe. At its peak in 2007, Group Five was worth R8,2-billion. When its shares stopped trading in early March (after having traded on the JSE for 45 years), it was worth R100-million. More than 8 000 jobs are at risk. Seen against the background of a country with a 27% unemployment rate, the gravity of the situation hits home. In the current South African construction industry the number of tenders is low. This results in companies taking risks to win contracts, margins are squeezed to the limit which in turn negatively affects cash flow. Group Five has blamed the under- pricing of construction projects for the company's downfall. Yet, the current state of the economy alone is not to blame for Group Five’s demise. Its agility has to be questioned: only in 2018, many years after clear signs of an impending slump, did they actively

start restructuring the company. WBHO restructured in time and is doing well, while Murray & Roberts saw the writing on the wall and sold its building and infrastructure units in 2016 to focus on underground mining, oil and gas. The fact that the FTSE/JSE Africa Construction & Materials Index is down 27% while the FTSE/JSE Africa All Shares Index is down 6% in the last 12 months indicates the real possibility that the South African construction industry will be demolished. The implications are dire: construction is one of the biggest employers – even bigger than the mining industry. Government needs to intervene urgently to arrest this swift demise or face an escalating unemployment figure. If the local construction industry meets its demise, the country will be dependent on foreign construction companies to meet its infrastructure needs. Current confidence The most recent barometer of confidence,

Confidence Index, showed a 7-point decrease which means that confidence is now at the lowest it has been for eight years. The index dropped to 25 in the first quarter of this year, from 32 in the fourth quarter of 2018. This means that 75% of respondents are dissatisfied with prevailing business conditions. The fall in confidence was mainly due to a deterioration in building activity, off an already low level. The further decline in the index this quarter was supported by the fall in building demand. The index does not expect the low level on confidence to change in the immediate future. Amidst the doom and gloom is the uptick in the confidence from architects to 36, from 26 in the fourth quarter of 2018. This is on the back of an improvement in activity.

Wilhem du Plessis Editor

First National Bank (FNB)/Bureau for Economic Research (BER) Building

@ConstWorldSA

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EDITOR & DEPUTY PUBLISHER Wilhelm du Plessis constr@crown.co.za ADVERTISING MANAGER Erna Oosthuizen ernao@crown.co.za LAYOUT & GRAPHIC ARTIST Katlego Montsho CIRCULATION Karen Smith

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CONSTRUCTION WORLD APRIL 2019