Holding on in SA but busy abroad
Aveng now works mostly overseas but CEO is optimistic the state infrastructure drive will take off
IN spite of drastically cutting his company’s reliance on South Africa for future work, Kobus Verster, CEO of construction company Aveng, says he is more optimistic about the country’s future now than two years ago.
“Maybe I’m the odd one out, but I don’t necessarily think I’m alone in that,” he says.
The construction industry has been hammered by the government’s failure to deliver on its mammoth infrastructure spend promises.
Most of the big construction companies have been moving offshore, and Aveng, the largest by revenue, has been looking increasingly to Australia and Southeast Asia.
It announced at its recent annual results presentation that building and engineering work in South Africa would contribute only 37% of its pipelined projects for the next two years. That is down from 56% last year.
Its withdrawal from South Africa is underlined by the fact that Australia and Southeast Asia now account for 60% of its two-year order book of R28-billion, which is up from 40% the previous year.
Verster is a 50-year-old from Parys, in the Free State, who completed BCom and honours degrees at North-West University and the University of Pretoria respectively and an executive management programme at Darden School of Business in the US. He joined the company as financial director from ArcelorMittal South Africa in 2010 and became CEO in 2014.
In spite of Aveng growing its operations offshore while it cuts back locally, he says there is still a concrete business case for staying in South Africa.
“The strongest argument for staying in South Africa is that the economy will at some point in time turn, government will start spending on infrastructure, the commodity cycle and the steel cycle internationally will normalise, and we will be able to grow our business in South Africa,” he says.
One wonders how a downgrade to junk might affect his optimism?
“Well, of course, that would shake everybody’s optimism,” he says. “I hope that we are not going there.”
How will it affect Aveng if the country’s rating is downgraded?
“That would put us into territory where none of us has had to operate before. So let’s make every effort to avert that.”
What about signs that the ANC and the government seem hellbent on doing the opposite?
“My personal view is that a downgrade is not going to happen,” he says. Based on what? “I think there is a lot of effort being made by business and by government as well.”
He points to the latest GDP data, released by StatsSA this week, showing that the economy grew by 3.3% in the second quarter — the highest quarterly growth since the fourth quarter of 2014 — after contracting by 1.2% in the previous quarter.
“There have been positive signs of growth this week, so I don’t think we are there [about to be downgraded] yet.”
The ratings agencies have indicated that they are at least equally concerned about political and institutional instability.
Verster refuses to go there.
“I am not a politician,” he says. “I am a positive person.”
Can the CEO of a South African company afford to ignore the politics?
“You can’t ignore any of your stakeholders,” he says.
These include “the government, the social environment, labour and shareholders”.
Being positive is all very well, unless it means that you don’t prepare for the worst. This could have extremely expensive consequences.
Has he positioned Aveng for a downgrade to junk?
“No,” he says. “We have done some analysis on that, but we will deal with that if it happens. Hopefully, it won’t happen.”
With the government not delivering the infrastructure spend every finance minister has promised in every budget speech since at least 2010, Aveng has had to rely on projects from the corporate sector.
How badly might a downgrade affect the ability of his private sector clients to keep those projects coming?
Surprisingly, in light of the analysis he refers to, he says he doesn’t know.
“As I said, it’s territory where none of us has been before.”
At least Aveng is not too exposed to the local renewable energy sector and so won’t be badly affected by Eskom’s decision not to sign any further agreements with independent power producers.
But it will hurt nevertheless, he admits. Aveng has built a wind and solar farm and been a supplier to some other renewable projects.
“It’s not a big part of our business, but there will be less work for us, that is obvious,” he says. And fewer jobs.
Has the government been made sufficiently aware of the broad damage this kind of action by state-owned enterprises, as well as the failure to honour its commitment to infrastructure spending, is having?
“I think government is aware of the benefits that improved infrastructure spend can bring in various areas such as employment,” he says. “Through our industry body we have a very open and healthy conversation with government.”
Aveng has shed 8 500 jobs this year alone because of the lack of infrastructure spend. How effectively, then, has the industry body communicated this message?
Most of the job losses in the case of Aveng are related to mining and steel, he says. And he likes to think that at least the mining industry, which Aveng services, is close to a turnaround.
“I generally sense more optimism in talking to the mining fraternity. They are more optimistic than they were eight months ago.”
The government has consistently blamed the global commodity downturn rather than its own bungling, policy uncertainty, political instability and general hostility to business for South Africa’s poor economic growth. Verster tends to agree. “If your iron ore price drops from $120 a ton to below $40, that changes the landscape and employment capability of a business substantially.
“The political uncertainties obviously add to the difficulties of our current macroeconomic environment, but our problems relate to international steel markets and commodity prices.”
Although Aveng’s revenue has declined almost 50% in the past two years from Australia, Southeast Asia and New Zealand largely because of cutbacks from the mining sector, he admits to being “much more optimistic” about its medium-term prospects in that region than he is about its prospects in South Africa.
This is because although Australia and South Africa are both largely commodity-based economies, the Australian government has increased infrastructure spend in the face of the same pressures that have led to South Africa cutting down. Why does he think this is? “A difference of affordability,” he says.
What this means is that the government doesn’t have any money and is likely to have considerably less in the event of a downgrade. Where does this leave his optimism about that crucial infrastructure spend coming through? And his argument for staying in South Africa?
“If we had normalised markets from a commodity and steel perspective we would be in a much better condition,” he says. In other words, Aveng’s problems are not all related to the lack of infrastructure spend.
Although “there are more positive signs of spending starting to happen”.
How hard will it be for Aveng to get a slice of the action if proposed changes to the government’s BEE procurement policies are implemented?
“These will change the rules of the game a bit, but we’ll have to adapt to them,” he says.
At least the rules will be the
The strongest argument for staying in SA is that the economy will at some point in time turn
It’s territory where none of us has been before
Australia has increased infrastructure spend in face of pressures that have led to SA cutting down
same for its competitors.
“We’re all in the same boat, and it will depend on how smartly we’re able to adapt.”
Policy issues like this will not accelerate the company’s move offshore, he says.
“We are very clear that our home market is in South Africa and Australia. A 50-50 split. Our strategy is to be as strong as possible in our home market, and use that as a base from which to export our capabilities wherever there are opportunities.”
Verster’s predecessor, Roger Jardine, left Aveng when the stress of coping with the fallout from the cartel scandal became too much for him.
Verster likes to think it is behind them at last. “We’re getting on very well with government entities,” he says.
He may or may not be in for a nasty surprise on that front, among others.