DEMOLITION RITE

Late payments destroy big builders

● South African construction giant Group Five was pushed to financial collapse partly because the government failed to pay R800m it owed the company.

The nonpayment highlights a systemic problem in the country’s construction industry, which insiders say is crippling companies, especially emerging contractors.

The situation is so dire that the Treasury has threatened to stop funding persistently defaulting departments and discipline public servants breaching the Public Finance Management Act and Municipal Finance Management Act when it comes to nonpayment or delayed payment to contractors.

In March, Group Five went into business rescue, joining a growing list of South African construction firms that are either in financial difficulty or have folded.

The company is reportedly dealing with a nearly R2.4bn cash shortfall.

A source with knowledge of Group Five’s business rescue plan said the company was in financial difficulty because the government owed it more than R800m.

Heidi Geldenhuys, a spokesperson for business rescuers Metis Corporate Advisory, said the amounts the government and stateowned enterprises owed ran into the “hundreds of millions”, but declined to say exactly how much and would not disclose which contracts had not been paid.

“We have been in discussions with government to find ways to recover these amounts. There are also funds held up in foreign jurisdictions and owed to Group Five subsidiaries by those governments, which we are also working on getting paid.”

She said this was one of the most complicated business rescues in SA to date.

“We are progressing with the sale of certain businesses and working on restructuring other businesses.

“Some sales were already in progress before the business rescue. Group Five has many assets which we as business rescue practitioners are focusing on selling at optimal prices.”

Group Five is not alone in failing to get payment from the government.

A Construction Industry Development Board (CIDB) survey revealed that 60% of payments to contractors were delayed by more than 30 days, and Master Builders SA says its members are collectively owed more than R5bn by government departments.

Roy Mnisi, executive director of Master Builders SA, which represents 4,000 contractors, said: “The common denominator of our members closing is that they shut down because of nonpayment by government. Since 2016 we have engaged with government, but these [engagements] have fallen on deaf ears.”

Ishmail Cassim, CIDB’s construction industry performance section manager, said business confidence in the general building sector was at its lowest since 2013, and in the civil engineering sector confidence was at its lowest since 2008.

“Of concern is the underspend by local authorities of about R16bn.”

He said civil construction, residential and nonresidential building had all declined.

Cassim said difficulties experienced by contractors included delayed payments, non-payments and spending cutbacks.

A 2016 CIDB survey showed that 60% of payments to contractors were delayed for longer than 30 days after invoicing, he said.

Cassim said that though the government was clear that payments must take place within 30 days, delays remained an issue.

In December, the Treasury issued a “timeous payment of invoices and claims” circular to all government departments, ordering payments to be made within 30 days, as required by law.

The circular said: “The late or nonpayment of valid invoices and claims has dire consequences for both the public and private sectors. Business, in particular small business, have raised concerns regarding delays and non-timeous payment for services rendered, which results in negative impacts on job creation and the economy.

“Officials responsible for the late or nonpayment of invoices and claims commit financial misconduct … The relevant authorities must institute disciplinary steps against those employees ...”

Professor David Roodt, head of the construction economics and management school at Wits University, said construction companies functioned on tight cash flows.

“Anything disrupting cash flows threatens operations. A key reason for cash-flow problems is late payments. It’s a common problem for companies going bust.”

He said the government was notorious when it came to late payments.

“There is little understanding within government about contractors’ business and the effect of late payments.”

Tinus Maritz, CEO of the Joint Building Contracts Committee, which represents building owners, developers and contractors, said that since 2008 the industry had battled for a prompt payment standard.

The main culprit behind the construction industry crisis was late payments.

“While big companies can initially survive dwindling contracts and late payments, those hardest hit are emerging contractors.

“Many are worse off than they were in 1994 and are cutting their fees to the bone.”

Emerging contractors hardest hit as companies go bust