THE government’s infrastructure spending programme will see larger construction companies weather the global economic storm, but smaller contractors faced the prospect of failure, says advisory services group Ernst & Young.

At a presentation yesterday on some of the key risks that construction companies faced, Ernst & Young business development director John Wetton said while most of the larger companies would remain profitable due to long-term contracts, smaller contractors were facing even tougher times.

This reinforces views that the government’s stimulus package will keep bigger construction players with exposure to infrastructure projects busy well beyond next year.

JSE-listed companies including Aveng, Murray & Roberts, WBHO, Group Five, Basil Read, Stefanutti Stocks, Sanyati, Raubex and Sea Kay — have continued to report growth in their order books despite the downturn. Even when projects were cancelled, especially in mining and overseas markets, some of these companies still managed to replace them with local infrastructure projects.

“Listed companies will carry on making money, even though this will be at a lesser rate than in the past couple of years, thanks largely to spending on infrastructure.

“If there was no infrastructure programme, we would be having a different conversation about the construction sector as a whole now.

“Small to medium sized contractors, which have relied on new contracts from bigger companies to sustain themselves, are the ones being battered as bigger companies cut costs,” Wetton said.

He said several big companies were not yet distressed but were reshaping their businesses in preparation for the economic upturn. They were focusing on cost reduction, cash flow and liquidity management as well as reassessing their markets.

“Companies we’ve been talking to are doing reasonably well and are busy putting themselves in shape for the economic upturn, which should happen sometime at the end of the year or beginning of next year. They are living off long term contracts,” Wetton said.

“But smaller companies that were subcontracting to bigger companies are now already distressed.”

Wetton cited several risks that construction companies around the world faced, top of which were the continued uncertainty and effects of the global credit crunch economic and market fluctuations.

“We have seen different projects in mining, for example, being put on hold around the world because of the crisis, as lenders have become reluctant to fund them. You can tell by the cancellation of projects that the sector has also become stressed. To survive, companies will have to improve costs and liquidity, reduce bad debts and take advantage of distressed assets.”

He said even though the construction sector in general would survive the economic crisis, funding of infrastructure projects was beginning to be a challenge.

“It’s no longer easy to put projects together because of the credit crunch. It is getting more complicated and difficult to find funding. Private-public partnerships may be the answer,” Wetton said.