Job cuts loom as Group Five files for rescue
The site of the Kpone Gas and Oil-Fired Combined Cycle EPC Power Plant contract in Ghana.
Seven thousand people may soon be facing unemployment as one of South Africa’s largest construction companies - Group Five - filed for business rescue and suspended its shares on the Johannesburg Stock Exchange. This after ongoing financial difficulties, despite 2018 retrenchment, restructuring and rationalisation programmes saw more than 1000 jobs cuts.
In a statement issued on Tuesday (12 March 2018) the company says that “operating activities” have led to “…significant operating losses and negative cash flows in G5 Construction and its direct and indirect subsidiaries (G5 Construction Group)”.
Group Five has now announced that the company faces “financial distress” in terms of the Companies Act and can no longer service its debts.
Large-scale losses have been linked to a US$410 million Kpone Gas and Oil-Fired Combined Cycle EPC Power Plant contract which was terminated in November 2018. Despite restructuring and rationalisation programmes, the company says weak market conditions in the South African construction industry, cost overruns on ongoing projects, and further contract delays or losses have impacted overhead recoveries and affected profitability and sustainability.
Cash flow constraints had led to the company seeking funding from a consortium of lenders which, by April 2018, totalled R650 million, but despite the bailout the company says it has been unable to deliver on its debt obligations. The Group Five financial turmoil was further exacerbated by the calling of guarantees totalling US$62.2 million in November 2018, followed by another of US$43.8 million in December.
In February 2019 G5 Construction returned to the Consortium to request short-term working capital but on 4 March the same year the lending group announced it could no longer provide guarantees or funds for the ailing corporate.
Group Five indicates that retrenchment proceedings are inevitable, but that even layoffs will cost them millions as “...a significant amount of severance pay will become payable to retrenched employees pursuant thereto.”
For this reason, the statement outlines, the Group Five and G5 Construction board of directors have resolved to place each of these companies into business rescue in accordance with Chapter 6 of the Companies Act, with David Lake and Peter van den Steen of Metis Corporate Advisory appointed as business rescue practitioners.
The board, according to the statement, “considers this decision to be prudent and in the best in interests of shareholders while the Company and its business rescue practitioners seek pre-commencement finance…” while exploring solutions to the situation the construction group faces.
Despite the group cutting more than one thousand jobs in 2018, 7000 more workers may soon join the ranks of the estimated 140 000 construction workers laid off across the sector in South Africa in 2017.
In a 2017 report the Construction Industry Development Board (CIDB) noted that unskilled, low-skilled and semi-skilled workers were most at risk for job cuts as the industry struggled to gain footing amidst decreased construction activity and increased challenges faced by contractors.
According to Statistics SA the construction industry is one of only three South African industries that showed marginal employment growth nearing the end of 2018. The construction sector rose with 1000 employees while the trade and business sectors grew with 14 000 people.
But as pressures within the industry continue to rise, insiders warn that this is not enough. According to the CIDB, despite 184 000 new industry-related jobs created between 2008 and 2017, new entrants into the labour force can no longer be accommodated and current labour forces cannot be sustained.
The CIDB says the construction industry has been in steady decline, with the past decade seeing more employees laid off than hired in the building and civil engineering sectors, due to decreased construction activity and a lack of demand for services. The CIDB statement further attributes the industry struggle to “ongoing difficult business conditions, a slowdown in construction activity and increasing pressures of profitability”. According to the organisation these conditions have resulted in ongoing pessimism in the industry since as early as 2009, as reflected in their Business Conditions Survey.
The construction industry is just one of the sectors that will need to adopt a adapt or die approach. According to Statistics SA, the country’s non-agricultural formal sector lost 69 000 jobs between March and June 2018 - a statistic that experts warn will only get worse as belts are tightened and services rationed due to decreased spending across all industries, across board.