The Civil Engineering Contractor March 2019 | Page 28

FEATURE: FINANCE
explains that the difficulty of working
on a project-by-project basis (with
no accumulated working capital) is
that “it only becomes profitable when
the defect liability payment is made.
Furthermore, if you are losing money
on a project, then it erodes your
working capital immediately.”
When the big listed companies such
as Aveng or Group Five lose money
on a large international project, that
immediately affects their capital, and
they may have to raise new shareholder
capital. In fact, some of these large
companies are in difficulty, with
business rescue and even bankruptcy
a prospect.
“At the moment, nobody is making
acceptable margins and at current
profit levels, it is better to invest
since the 2010 Soccer World Cup —
companies should have been building
up their working capital for when
the cycle turns, as now. Turning over
one’s working capital just three times
a year because of late or slow payment
at low or negative margins, rapidly
eats into one’s working capital and
is unsustainable even in the medium
run.
“Large companies like the big six
should be steadily accumulating profit,
giving them a war-chest [working
capital] to take on more, or bigger,
projects. If you do a turnover of
R30-million/year, you need working
capital of R10-million to cover
wages, materials (on 30-day credit),
and other costs until the project is
fully drawn down,” says Massey. He
Candice Pretorius, head of specialised and capital equipment finance at Sasfin Bank.
26 | CEC March 2019
In 2010, a few months into a
rehabilitation contract awarded
to Sanyati Civil Engineering and
Construction, the Free State
roads department ran out of
money. The main contractor,
Sanyati, entered financial distress
when a number of government
departments failed to settle
in excess of R70-million for
contracts completed over a year
earlier. The province later paid
Sanyati’s liquidators R25-million
in a court settlement. Company
documents seen by amaBhungane
hint that factional battles within
the ANC government may have
underpinned the province’s
failure to pay.
that money in the post office,”
explains Massey. “Government lists
construction as one of the economic
engines with the capability to create
many jobs. At this rate, our industry
will go out of business as contractors
from outside the country complete
local works.”
Massey highlights another issue
affecting the sector’s cash flow: the
fallout of the 2010 Soccer World
Cup collusion fines levied on the
top-six firms, with a further R1.25-
billion agreed as part of the Voluntary
Reconstruction Programme. “There
has been no quid pro quo from
government for the business they
direct the way of smaller, mentored
companies. That means there has
been an aggregate R2.5-billion
deterioration in the working capital
of these companies, and the top-six
are not making the kind of money
to cover these payments. I have also
www.civilsonline.co.za