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Construction Industry In Survival Mode

There appears to be little light at the end of the tunnel for South Africa’s beleaguered construction industry, with many major listed construction companies still fighting for their survival.

Construction IndustryBasil Read, Group Five, Esor Construction and Liviero Group are in business rescue while others, such as Aveng, have been forced to downscale their operations to strengthen their balance sheets and improve their liquidity.

The problems in the industry have been largely attributed to a combination of a lack of large government infrastructure contracts because of government’s strained financial resources and problematic and loss-making contracts.

This resulted in construction industry employment dropping by 3.6% year-on-year in the first quarter to an estimated 618 000 as the industry shed a further 23 000 jobs in the quarter.

Group Five’s auditors, PwC, resigned earlier this month with immediate effect following the resignation of a number of non-executive directors of the group and several senior executives and key finance staff employees.

The group reported last week that its business rescue practitioners planned to publish a business rescue plan by August 30 after creditors last month agreed to extend the original June 28 deadline for publication of the plan.

Construction market intelligence firm Industry Insight reported this month that “we have most probably seen the last of Group Five” with business rescue practitioners telling shareholders in June their shares were basically worth nothing and the group was not in a position to fully reimburse creditors.

Industry Insight added that the contractors index was at 25.6 points at the end of June, which was slightly down from May, and remained at the worst level ever.

Industry Insight described this as “an absolute destruction of a sector never before seen on the JSE”.

Group Five’s financial difficulties became a crisis in December when the group’s bank guarantee providers paid $106.5 million to Cenpower Generation for the $410 million Kpone power plant in Ghana in delay damages.

The group is still involved in contractual disputes with Cenpower and indicated earlier this year it expected a ruling on these disputes by the end of this year.

Group Five’s business rescue practitioners reported that since inception of business rescue proceedings, payments under certain guarantees have been called for and made, amounting to about R105.1 million.

“There have also been further notices received calling for payment under other guarantees. However, these notices are being considered and may, where appropriate, be defended. Updates regarding further payments under the guarantees will be provided in future reports,” they said.


Selling off

The business rescue practitioners reported they were continuing to engage in many sale processes related to subsidiary companies, operating divisions, properties and/or shareholdings that may be disposed of to relieve the burden of the secured debt owed by the company as well as to provide working capital for the business rescue proceedings.

Aveng has been active in selling identified non-core assets to improve its financial position.

This month it agreed to sell its Rand Roads business as a going concern plus the value of inventory for R30 million to Ultra Asphalt; its Aveng Grinaker-LTA Engineering (GEL) geotechnical contracting business to a newly formed investment special purpose vehicle for R7.5 million; and Aveng Dynamic Fluid Control (DFC) to wholly black-owned investment company Copaflo for R165 million.

Aveng last month also reported the conclusion of the sale of its water business to wholly black-owned Infinity Partners for R85 million.

David Metelerkamp, the senior economist at Industry Insight, said the amount received for Aveng Water was a reduction to the original selling price of R95 million and seemed a small sum of money given Aveng’s financial difficulties.

Metelerkamp said Aveng’s share price continued to flat line and hovered between 2c and 3c, which was a far cry from over R40 a share in 2007/8 and also down by almost 80% over the last year when the share price was at 10c a share.



The majority of the more than 20 construction contracts Basil Read had at the commencement of business rescue had either been completed or terminated.

The company’s business rescue practitioners reported last month that three of the remaining contracts were continuing to completion, five contracts were in the process of being descoped or ceded to other contracts and three had been handed over to the clients and the company was engaged in a defects remediation process.

They added that performance guarantees had been reduced from R1.1 billion at the outset of business rescue proceedings to about R744 million and the company continued to pursue a number of contractual claims valued at more than R200 million.

With the exception of the employees required to assist with the completion of the contracts, including the various Medupi power station contracts and the remaining staff at head office, all other employees had been retrenched.

Basil Read has relocated it head office to reduce costs, has continued to sell surplus plant and equipment, and is pursuing expressions of interest from a number of parties for its remaining non-core assets.

The group said the business rescue practitioners remained of the view that a full implementation of the plan would achieve a better result than a liquidation.

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