The impact of the COVID-19 pandemic on the engineering and construction industry is unprecedented. Based on our discussions with clients, construction projects are expected to be delayed or cancelled. Global, as well as local supply chains, are under pressure whilst the health and safety of employees is a concern. Most importantly, many construction and development companies operate without substantial capital reserves, the impact of the lockdowns could force some to restructure debt, seek new sources of capital or risk insolvency.
Also, even if conditions return to normalcy, it will be more challenging for the construction companies especially with declining government spending in infrastructure in recent years, and competition from foreign contractors.
Based on our Post Recovery Strategies webinar on Real Estate & Construction, it was highlighted that for most of the engineering and construction companies, working capital and liquidity are the top priority. Achieving or maintaining financial stability amid so much uncertainty requires reviewing capital and corporate cost budgets as well as options for raising funds.
The Government of Sri Lanka may support companies in the form of releasing payments due to the construction firms, debt moratoriums, and concessionary working capital loans given to the SME sector that could potentially be extended. This could help sustain the industry in the short term. However, given the weak economic backdrop, the government’s hands may be tied.
There’s no perfect answer to this uncertainty, but a robust scenario analysis — using models that estimate financial needs and opportunities, based on a wide range of scenarios for COVID-19’s duration and impact — can help companies navigate it. These models require the most accurate data available, typically detailed at a project level due to the bespoke nature of and contractual arrangements for each project. Many companies that haven’t already started using advanced data analytics may, therefore, want to consider doing so. These tools will prove their worth in helping navigate this crisis — and will continue to create value after it’s over, by supporting better-informed decision-making.
Almost all companies are facing a financial impact, especially on their cash flow. In the short term, firms should conduct an extensive project-by-project forecast. Management teams should consider the contractual terms of each project, the recoverability of receivables, and improving labour productivity created by social distancing. In the medium term, many organizations will need to renegotiate lending arrangements and raise new equity.
However, in the long run, as firms navigate through this crisis, it is of paramount importance to build resources for the future too. If one could come through this period with a robust balance sheet, they will be well-placed to gain market share when the economy is picking up again. Also, in order to develop and execute a financial strategy to survive this crisis, enterprises need to make sure that the finance team has accurate, reliable information and forecasts, supported by data analytics.
The biggest risk seems to be the continuation of work and providing accommodation in line with social distancing measures. Unlike other companies, the workforce of Engineering and Construction companies must be on the job site.
Beyond providing them with appropriate protective gear, you can take additional steps to help them stay safe, such as staggering shifts, mandating safe distances between workers, and banning visitors.
In other countries, there are Apps that can help keep a track of workers’ locations while on the job, in full compliance with privacy regulations, so management can quickly identify potential exposures to the virus.
The economic consequences of COVID-19 are spreading faster and stronger as much as the virus itself. Hence, there is a possibility of insolvency for some vendors and subcontractors. Given the dependency on overseas suppliers by Sri Lankan Engineering and Construction companies, it is an extraordinary challenge to obtain visibility into and manage the behaviours of their supply chains.
To find vulnerabilities in the supply chain and choose how to respond, you need to maximize visibility. Reach out to your suppliers, gather data, and build a dashboard that you continue to update and refine over time. Based on what the dashboard reveals, consider the legal and financial implications, as well as their impact on margins, cash flow, loan repayments, and terms. Make sure that your project controls, risk management, and governance processes can handle all the supply chain changes you consider.
For critical suppliers whose long-term prospects are sound, Companies may want to offer contractual flexibility (if appropriate) and technical support, including help in tapping government funding as part of the recovery and stimulus programs all over the world. Yet you also must be ready to pivot to new suppliers as needed.
When the pandemic ends, companies will face a new world. The dynamics of the marketplace will change, as the Government may have different views on infrastructure development. Meanwhile, in other countries, portfolios are also changing rapidly due to the new emphasis on sustainability and resilience. For example, the EUR 750 billion stimulus package – European Green Deal, and a set of policy directives by the European Union to make Europe climate neutral by 2050.
Cities are likely to have a shift, to accommodate more residents who are working from home. Hence, commercial real estate is likely to undergo a prolonged downturn.
Based on our discussions with Developers, the market for condominium apartments is expected to be depressed in the short-medium run.
However, that being said, companies that can emerge from this crisis with solid finances, a resilient supply chain, skilled workers, and the capacity to gather and analyze the data that decision-makers need, will be well-placed to pivot and seize new opportunities. Those organizations will be market leaders no matter how the post-COVID world evolves.
To sum up, as engineering and construction companies, your survival depends on
Ability to make reasonable estimates of your future cash flows. Companies go bankrupt not because they are making losses, but as they do not have enough money to meet the commitments.
Data analytics may prove their worth in helping navigate this crisis — and will continue to create value after it’s over, by supporting better-informed decision-making.
Maintain a fine balance between efficiency and redundancy when managing the supply chain. You need to be profitable while there are no major disruptions.
Make sure that your project controls, risk management, and governance processes can handle all the supply chain changes you consider.
Adapt to the realities of the new normal in managing day to day affairs including the employees.
Advisory Leader / Chief Operating Officer, PwC Sri Lanka
Tel: +94 11 771 9700 ext.5002
Director - Corporate Finance, Valuation Consulting, and Real Estate Advisory, PwC Sri Lanka
Tel: +94 77 787 2962
Senior Manager - Corporate Finance, Valuation Consulting and Real Estate Advisory, PwC Sri Lanka
Tel: +94 77 787 3048