11/08/2021 - 15:01

State government rated Pindan 'medium risk' 18 months ago

11/08/2021 - 15:01

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The state government awarded Pindan two multi-million dollar contracts despite having assessed the company as a financial risk because of its failure to meet several financial thresholds.

Photo: David Henry

The state government awarded Pindan two multi-million dollar contracts in February despite having assessed the company as a financial risk 18 months ago because of its failure to meet several financial thresholds, according to confidential documents obtained by Business News.

The Department of Finance was earlier this year forced to defend the veracity of its financial due diligence process after the construction giant collapsed with losses that could reach more than $80 million.

The group’s 80 active projects, 280 staff and hundreds of subcontractors and trade suppliers were left in limbo after administrators were appointed to three Pindan Group entities and liquidators were appointed to a further nine in May.

Documents released to Business News under Freedom of Information laws have revealed that Pindan Group entities Pindan Contracting and Pindan Constructions were subject to at least six business risk assessments by the Department of Finance between January 2020 and March 2021. All identified the two companies as medium or high risk.

In November 2020, Pindan Contracting lodged a tender with the department in a bid to secure work on Hedland Senior High School, including a new gym, four classrooms, STEM facilities, IT labs and an education support centre.

The risk assessment, informed by the company’s financial reports from 2018 to 2020, found it to have insufficient working capital to meet the cash flow requirements associated with a project of that scale.

In fact, the assessment found Pindan Contracting to have a working capital deficit of $14.5 million.

The company also fell well short of the capital to contract value ratio requirement of 10 per cent, sitting at -121.8 per cent, based on its 2020 financial report.

Despite not meeting the financial criteria, not meeting the minimum requirement for payment performance and being found not to hold "strong assets", the company was still awarded the contract on the basis that fellow Pindan subsidiary Pindan Projects was willing to act as guarantor.

One month later, Pindan Constructions requested a business risk review in a bid to obtain a level-five prequalification that would make it eligible to be awarded contracts for projects worth up to $50 million.

An assessment of the company against the department’s financial criteria found it failed to meet the minimum requirements, with a working capital to prequalification value ratio of -14.52 per cent.

The assessment found the company to hold a working capital deficit of $7.2 million, with insufficient levels of working capital to meet the cash flow requirements.

Despite being deemed a medium risk, Pindan Constructions was granted pre-qualification at level five with the support of guarantors Pindan Projects and Moselle Holdings; despite the two guarantors having combined equity of less than $6.7 million.

According to internal correspondence released to Business News under Freedom of Information laws, Pindan was asked to explain the downward trend in its financial position during the assessment, after a report on its turnover found it had decreased by almost $50 million in the space of 12 months.

A representative of the company, whose details were redacted from the document, told the department it put the trend down to the challenges posed by the COVID-19 pandemic and prospective clients delaying projects.

But the Pindan representative insisted the company was expecting turnover to improve during the 2021 financial year and was actively trying to improve its working capital, revealing it had sold off its Forrestfield yard in September 2020.

Pindan Contracting also applied for a $3.2 million contract for the expansion of the Muresk Institute Campus based on its November risk assessment in January 2021, with the contract awarded in February.

The state government defended its February decision to award contracts to Pindan in the days after the group's collapse amid questions over the veracity of its financial due diligence processes.

At the time, a spokesperson from the Department of Finance told Business News it had conducted three levels of due diligence checks on two Pindan entities in November and December 2020, including a general capability assessment, a review of liquidity ratios, asset position, payment performance, aged creditors and a check of the tenderer’s suitability.

A spokesperson from the department had told Business News all three levels of checks were completed for the contracts awarded to Pindan, none of which indicated the company was experiencing any financial difficulties.

The checks were valid for six months and were due to be re-evaluated in May 2021.

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