Low margins eroded SA construction
Basil Read CEO says companies settled for 0% just to keep capacity and workforces
SA’s construction industry erred by securing work at low margins to maintain capacity when infrastructure spend dried up, says Basil Read CEO Khathutshelo Mapasa.
Basil Read went into business rescue in June 2018. At the time it said its construction business, which consists of roads, buildings and civils, had experienced cash-flow problems because of “mismatched cash inflows and cash outflows”.
The company attributed the cash-flow difficulties to, among others, claims taking longer to resolve. “You have to tender with margins that support your business. You must tender for profitable projects. Then you must have a very strong execution capability. The reason construction companies are in this state is because we have so much capacity, we ended up undercutting each other to secure jobs. Before the 2010 Fifa World Cup, we were pushing work away,” Mapasa said.
Since the World Cup, infrastructure expenditure has been in decline, he said.
Despite the fall in the number of projects, construction companies had been reluctant to reduce their workforces, hoping the government would increase infrastructure spending.
“You end up securing work at zero percent margins just to keep your capacity. That has been the fundamental flaw in the thinking. You can only sustain the lean period for a short period. That is where we got it wrong. If I look at the portfolio of Basil Read projects, almost all were loss-making from the word go. We believed that this infrastructure spending is going to come back,” Mapasa said.
Analyst Ian Cruickshanks said on Friday construction companies should resist the urge to settle for low margins.
“No business should tender for a job where the return on capital employed is not better than what you would get if you had put it in the bank. There is no point of doing so just to hold on to staff. Nobody knows how long this downturn is going to be,” Cruickshanks said.
Mapasa said Basil Read had to be “in better parts” of the construction value chain. The group should aim for so-called design, build and operate contracts, citing the St Helena airport project.
“You have to focus on what you are capable of doing. One of Basil Read’s problems is that we grew from a R400m company to a R6bn company through acquisitions. We acquired all sorts of businesses. You look at this and ask what is your core competence,” Mapasa said.
The company’s future plans include reducing its work in construction “to a minimum” and paying off its debt. When Basil Read went into business rescue the company owed R400m. “The claims now are north of R1bn,” Mapasa said.
Basil Read’s mining and developments businesses, which are separate legal entities, are successful and self-sustaining.
There is a reasonable prospect that the company can be rescued, he said. The objective of the business rescue plan is to wind down loss-making contracts within construction.
“Most were governmentrelated. Within the loss-making contracts, we had a number of claims against government institutions. Some of the claims go back to 2014. In 2017, when we lost R1bn, we had R700m worth of claims in various stages,” he said.
At the beginning of the business rescue process, Basil Read had 25 projects. “We are now sitting with six projects. Some of [the original] projects have been completed and handed over to the clients, others we terminated and some have been terminated by the clients,” he said.
As a result, the company has retrenched more than 1,000 people from a total of more than 2,000 workers in the construction business.