Although government considers the construction sector as part of the country’s economic fibre, the sector is confronted with major delivery challenges, says Public Enterprises Minister Malusi Gigaba.
Banks’ limited ability to finance long-term projects opens up opportunities for other types of funders to make returns and help SA implement its R3.4-trillion infrastructure programme.
The City of Johannesburg is to spend about R30 billion on infrastructure developments and service delivery in the next three years, says Johannesburg Mayor Parks Tau.
The government’s ambitious but slow infrastructure spending programme has been focused on municipal needs, South African Federation of Civil Engineering Contractors (Safcec) president Norman Milne said on Thursday.
\"While civil engineering work has struggled in a slow-growing economy and low budgetary allocations from the government, we have seen greater activity in municipal work,\" he said.
The state announced a R4-trillion infrastructure plan last year, with roll-out expected in the next 15 years. It focuses on improving the economic performance of lower-income provinces, but also intends to leverage the busy trade and service corridors between Gauteng, KwaZulu-Natal and the Western Cape.
However, South Africa’s private sector had criticised the slow pace of the roll-out of major infrastructure projects in the country.
And firms involved in the construction industry complained that development of municipal infrastructure, which would provide them with low cost, consistent work, was still too slow to get off the ground.
They said that the paper work around tenders for such projects had been cumbersome and the process long-winded, Mr Milne said. These included the building of basic housing, and water reticulation and sewerage works.
\"The tender process is heavily complicated. It’s too complicated for municipal work. We have to find other ways,\" Mr Milne said.
Safcec had recently proposed its Adopt a Municipality initiative. This was to get experts in multiple sectors to look at individual needs of municipalities.
But Mr Milne said this had faltered amid red tape. \"Because tenders for basic projects needed by many municipalities — especially those in poor areas — are so political, or just slow to get going, the construction industry just loses out,\" said Fred Platt, CEO of AltX-listed Accentuate.
Last week, Ketso Gordhan, CEO of PPC, South Africa’s primary cement producer, unveiled his vision for a special negotiating process to get the country’s infrastructure spend on track. He wanted this to be modelled on the Convention for a Democratic South Africa (Codesa) in the early 1990s, which brought together diverse groups in the country to chart the democratic future.
This \"economic Codesa\" would be a planned series of talks between government, business and labour, and the subsequent execution of critical infrastructure projects in the country.
\"Safcec has met with Ketso Gordhan. We told him we wanted to play a role in his idea. It is early days now, but business is coming together to tackle this infrastructure challenge,\" Mr Milne said.
However, he also said that he was concerned Eskom’s Medupi power station delay would cause some contractors to shy away from big infrastructure projects.
This week, Safcec released its State of the Industry report for civil engineering covering the second quarter of the year. It said that many contractors had struggled, but this was expected to ease.
\"Some of the challenges that continue to impede growth potential in the industry include corruption in the tender process, delays and postponements in tender awards, and a shortage of qualified and skilled engineers,\" it said. But the report put faith in government spend nonetheless.
It said spending on infrastructure would remain a priority and there were growth opportunities in renewables. But getting infrastructure planning and execution right was critical.
Ketso Gordhan, CEO of the leading supplier of cement in southern Africa, PPC Ltd, has called for the creation of an infrastructure negotiation body similar to that of the Convention for a Democratic South Africa (Codesa) as a critical step to kick start implementation of much needed infrastructure development in South Africa.
“It is clear that infrastructure bottlenecks by both the public and private sectors need to be addressed, not through agreeing to generic accords but rather through implementable plans with clear roles, responsibilities and deadlines. The methodology is simple. Before 1994 people wanted a democratic South Africa. The National Party and the ANC both raised issues that were preventing them from moving forward in this regard. So, they put together a working group on each of those issues and came back with solutions. All the things that we see today were compromises that emerged from discussions and negotiations,” said Gordhan.
Speaking at an International Project Finance Association (IPFA) event in Sandton last week, Mr Gordhan was adamant that negotiations between the national government and the private sector would substantially increase the number of infrastructure developments completed.
“Moves like this are where we can make the most significant impact on our global competitiveness as a country. We continue to score poorly in the World Economic Forum’s Global Competitive Index and we have to come to terms with the fact that we cannot boost the competitiveness of our economy, boost sustainable infrastructure growth and boost job creation by doing more than agreeing to the ideals of a plan,” he said.
By getting the national government and private sector together in one room, Gordhan said that many problems currently facing the industry would be solved. One of the biggest issues government has is that they believed they overpaid on previous public–private partnerships (PPP).
“Let’s use the prison example. Government had a description of the sort of prison it wanted to have; if you had a look at the description it looked like a 5-star hotel. Instead of the private sector coming back and saying that it is not very functional, now we have something that is way too expensive. It costs us around R75,000 a year for one prisoner per year; a pensioner gets R1,200 a month. If you weigh up those two things; here is a guy who has done something wrong so we lock him up. The reality is it is costing us that much money each year, it just doesn’t sound right,” he said.
Regarding previous sectors in the PPP arena, Gordhan believes there are three reasons why success has been experienced in the last 15 years. Firstly, it was due to a strong political will to get the job done.
“If there is a strong political will to get something done, the chances of success are much higher. We saw that with the Gautrain project; it was because the MEC, Premier and the national government really wanted the project to get done,” he explained.
Secondly, the existence of strong officials on projects was crucial. “They knew how to get the decisions through the various mechanisms in government; how to interact with the private sector; and how to get the best advice to make things to happen. A strong official makes a huge difference”.
Gordhan believes that the third reason was the combination of all of these and the existence of a very simple transparent process with a clear allocation of risk. “If all these things are present there will be no debates about who should be doing what. Once you have a clear-cut mechanism for dealing with the project, the chances of success improve immensely.”
Ministers are at odds over empowerment weightings in infrastructure spending.
Minister of public enterprises Malusi Gigaba is spearheading a campaign to ramp up economic reform by boosting the preferential access black-owned businesses have to government contracts, especially those associated with the state\\\'s R827bn infrastructure drive. The state-owned companies (SOC), which Gigaba oversees, will spend the bulk of this budget over the next three years. They will be investing R113bn in infrastructure in the coming financial year.
Gigaba is pushing for national treasury to change its preferential procurement regulations so black-owned firms are further advantaged by even higher empowerment weightings. He also wants SOCs to be allowed to build \\\"set-asides\\\" into tenders, which would mean only black-owned firms could bid for specific parts of the contract.
Treasury believes that set-asides are unconstitutional and, in 2006, issued a practice note prohibiting them. But Gigaba disagrees, and has the powerful backing of black business. His campaign has been bolstered by the findings of President Jacob Zuma\\\'s review of SOCs.
Changing procurement rules would provide tangible proof that the ANC is looking far ahead of the 2014 election to show it\\\'s honouring the recommitment it made at its conference in Mangaung last year to speed up economic transformation. Government officials describe the stand-off between Gigaba and finance minister Pravin Gordhan on this issue as \\\"more robust than usual\\\", and cabinet has instructed a team of officials from treasury, the department of public enterprises and the department of trade & industry to investigate the matter and come up with recommendations.
But there\\\'s growing pressure for Zuma\\\'s presidential infrastructure co-ordinating commission to intervene and make a decision so that there\\\'s no delay in \\\"leveraging\\\" infrastructure spending to transform the largely white-owned economy.Aside from concerns about set-asides precluding white-owned companies from bidding on some tenders, Gordhan isn\\\'t enthusiastic about Gigaba\\\'s bid to increase empowerment weightings in the tender process because of the potential to increase costs.
Treasury\\\'s argument is that government\\\'s existing preferential procurement regulations already protect and advance black-owned companies that bid for state contracts. The Preferential Procurement Framework Policy Act requires a weighting ratio of 80:20 in tenders worth less than R1m, which means 80% is adjudicated on price and 20% on empowerment. In contracts over R1m the empowerment weighting decreases to a 90:10 split. Treasury argues that this split adds a 10% premium to the cost of contracts. But Gigaba says this isn\\\'t doing enough to grow black businesses. The Black Business Council agrees.
\\\"We are boxing in Gigaba\\\'s corner,\\\" says the council\\\'s Sandile Zungu. The council has also promised to challenge the prohibition of the set-asides in court and argues that the current state procurement policy doesn\\\'t advance black-owned companies as it should. Instead it advantages multinational firms, which \\\"scoop the lion\\\'s share\\\".
SA Women in Construction MD Vuyiswa Ndzakana-Mabutyana, says the organisation\\\'s 1,3m members are frustrated because SA\\\'s empowerment regulations and laws haven\\\'t led to better business opportunities for them. This is made worse by two things: not all state entities implement empowerment regulations, and established companies in the industry collude, making it impossible for smaller firms to compete.
\\\"Look at the soccer World Cup. We got zilch out of that,\\\" she says.Public enterprises director-general Tshediso Matona says government\\\'s infrastructure programme provides a \\\"unique strategic\\\" opportunity to leverage the \\\"massive quantum\\\" being invested so that black-owned firms have a better chance of entering the mainstream economy. Developing and nurturing businesses has always been the role of SOCs, says Matona, and he points out that some of SA\\\'s biggest companies wouldn\\\'t have grown without state support in the past.
Treasury\\\'s argument, however, is that government has to strike a balance between paying a premium to empower firms and firing up the economy. It would prefer government to stick to existing empowerment parameters and secure infrastructure on time and on budget so that this can stimulate the economy and, ultimately, make it easy for black-owned businesses to thrive.
Eskom, for example, will spend R200m over the next five years buying coal. Gigaba wants 50% of all coal to be bought from black-owned miners by 2018. The question is whether it\\\'s better, in the name of economic reform, for Eskom to buy half of its coal from small suppliers even if their prices aren\\\'t competitive and it puts supply at risk. Or should the power utility buy only a small share from small suppliers and the bulk from established companies which offer the most competitive prices and better supply guarantees? In the end this would contain electricity prices and make the economy as competitive as possible.
The Eastern Cape\\\'s drive to eradicate the province\\\'s 395 mud schools has also been used by the department of basic education as an example of the potential risks in appointing less experienced contractors in order to empower them. In 2009 government promised that it would have replaced 49 mud schools with new ones by March 2012. But by March this year only 17 had been finished because one contractor, in charge of 12 schools, had been liquidated and another didn\\\'t have the expertise to meet required specifications.
But Zungu says it\\\'s mischievous to blame government\\\'s inability to manage contracts on empowerment, and wrong to assume government isn\\\'t paying a premium for contracting with big companies. \\\"The reality is that even when government appoints a big multinational company it ends up paying more [than the quoted price]. That company will come in with the lowest price, and guess what? The scope of work changes, and in the end [the state] ends up paying much more. Look at the soccer stadiums. Government was robbed in [broad] daylight because it didn\\\'t have the skills to oversee contracts,\\\" Zungu says.
The presidential review of SOCs, which was released last week, also flags government\\\'s inability to adjudicate and manage contracts. The review echoes concerns that SOCs aren\\\'t meeting existing preferential procurement and empowerment requirements and calls for empowerment weightings on state procurement deals to be increased to a 70:30 split. The report also argues that SOCs need more flexibility in building set-asides into contracts so that it\\\'s easier for small black firms, especially women-owned firms, to access contracts.
The review proposes that SOC executive bonuses be linked to how well they drive tender transformation. Transnet hopes its R35bn deal to buy 1064 new locomotives will show treasury that allocating bigger weightings for empowerment can work to everyone\\\'s advantage if properly managed. The structure of the deal, which took six months before treasury agreed to it , allows a 60:40 weighting. The 40% empowerment component will be split, with 20% weighted in favour of localisation and industrial commitments and 20% on a range of empowerment criteria.
Transnet CEO Brian Molefe says there\\\'s no proof that such deals will automatically increase costs. He echoes Gigaba\\\'s argument, and says the accounting costs of state procurement can be justified by the potential multiplying effect for the economy. Transnet structured the locomotive deal so that any premiums that arise because of the empowerment weighting will be financed by the company. This, says Molefe, makes a stronger argument for bigger empowerment weightings because there\\\'s less of a direct cost to the fiscus.
Deloitte director Shamal Sivasanker says an added advantage of any premiums for set-asides or increased weightings being funded by the SOCs\\\' own balance sheets is that companies will be forced to become more efficient. This, in turn, will be the same as an additional capital investment.
SA should take the slowdown in the global commodity market to invest in minerals used in industrialisation and to grow the country’s infrastructure, says Ernst & Young’s head of Africa.
SA should take the slowdown in the global commodity market to invest in minerals used in industrialisation and to grow the country’s infrastructure instead of continuing to focus on gold and platinum, Ernst & Young’s head of Africa, Wickus Botha, said yesterday.
A change in mining companies’ shareholder registers, with an influx of investors demanding dividend yields, has forced big mining houses to shift their focus to capital allocation and protecting their margins to drive dividend payments. This, instead of investing in growth, thus resulting in potentially negative consequences in the future, he said.
The change in investors, who are largely focused on short-term gains, altered the way those companies perceive risk around capital allocation and access to capital, which is the top of the business risk list this year, rising from eighth place last year, Ernst & Young said.
In its latest annual Business Risks Facing Mining and Metals 2013-14 report, Ernst and Young said margin protection and productivity improvements came in at number two on the list, up from fourth place.
The mining industry in SA has long argued that by expanding rail and port infrastructure to increase the export capacities of coal, manganese and iron ore, as well as improving the investment climate, the overall mining sector in SA could expand strongly.
The report noted that this could add tens of thousands of jobs and offset a decline in gold production. SA has two major iron-ore producers, one big copper miner, a limited number of manganese miners and a large number of thermal coal producers. The country is heavily dependent on platinum and gold production, Mr Botha said.
“The one thing we’re underexposed to is production of base metals, the stuff that builds cities, the stuff that makes steel, copper.
“We have a great opportunity to sort out our basket of commodities and, as a country and as an industry, we need to really think how we relieve the pressure we are putting on two industries that are not really the driving force behind building cities or factories,” he said.
Big mining companies have scaled back on new mining projects and are looking to sell assets to address the top two risks they are facing this year. SA should take advantage of these decisions by snapping up skilled mineral resources people cut adrift globally in this restructuring, Mr Botha said.
“SA was once considered top of the list as a mining destination. We’ve perhaps lost a little bit of colour and flavour in the global mining industry,” he said.
“We should invest now for when the appetite returns for new investment so we are better positioned than we are currently. We didn’t respond too well to the commodity super cycle,” he said.
“There’s a great opportunity to change that and influence that, to make SA competitive and attractive again,” he said. “We need to sort out policy stability and make sure we deal with the availability of skills and infrastructure.”
President Jacob Zuma told Parliament yesterday that the state would take a hard line against those fomenting violence in the turbulent labour environment on the country’s mines. “Our law enforcement agencies have been instructed not to tolerate those who commit crime in the name of labour relations. They will face the full might of the law,” Mr Zuma said.
Deputy President Kgalema Motlanthe, a former general secretary of the National Union of Mineworkers, is heading a three-minister team to address problems in the embattled mining sector.