Government injects R202bn into economy, a bulk of which went to new construction works

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.

 

Wednesday, 03 July 2013 11:17

PPC CEO calls for infrastructure CODESA

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.


\"Ketso“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.


\"\\"Malusi\"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.

Published in Construction Industry
Wednesday, 26 June 2013 11:12

The time is now to invest in infrastructure

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.


\"\\"Wickus\"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.

Infrastructure roll out and construction are often two sides of the same coin.


\"\\"Peter\"Given today’s expanding regional economies - with surging development in the rest of Africa a prime example — infrastructure rollout and construction are often two sides of the same coin.

Peter Labrum, MD of SRK Consulting (SA), says that in mineral projects around Africa, the economic spin-off generally gives a boost to both the local economy and the host country’s state revenue.

Typically, his company’s involvement is on the mining side but often extends to the infrastructure elements of these projects, including roads, rail, ports and water supply.

“Mining operations usually require a range of infrastructure before they can be viable,” Labrum says. “Where these facilities exist, they will need to be improved and/or extended to cater for the mine’s needs. Where they don’t exist, the mine often has to take the lead in building them from scratch.”

This creates huge opportunities for host economies, as the mine provides a valuable kick-start to economic activity — especially in remote or previously underserviced areas. He says the building of infrastructure — be it roads, rail lines, electricity supply or water pipes — is an expensive capital investment, deserving the best possible planning, implementation and maintenance.

Good planning of infrastructure ensures it can be leveraged widely, not just optimising the operation of the mine for which it has been built, but also fostering other economic opportunities in the vicinity and beyond. “Such planning requires good governance in the political sphere, as local, regional and perhaps even national government could be involved,” he says.

To implement the plan successfully, effective project management is vital, backed by solid engineering skills that ensure the resulting facilities are fit for purpose. “It should also be remembered that infrastructure is not just a technical matter. The benefits of these facilities are felt by local people, and they need to be engaged and consulted when interventions are made that affect them.”

Finally — and crucially — there are the demands of maintenance. “Given the high capital costs of infrastructure development, there needs to be far more emphasis placed on maintaining these costly resources,” Labrum says.

“This is not just a matter for a project or a particular scheme, but highlights what should be a central tenet of national development: to accumulate infrastructure over time, rather than get into the habit of having to replace what has stopped working. “Our experience is clearly that much of the infrastructure around the continent does not last as long as it should.

“And this severely undermines our ability to build a developmental highway to the future.”

He believes the more constructive approach — now evident in those regions of Africa that have been more successful in building modern economies — is to progressively add to the levels of infrastructure over time, while maintaining the effectiveness of previous generations of public facilities.

“Our Deputy President Kgalema Motlanthe recently told the annual convention of the Road Freight Association that SA needed to increase its use of rail freight to boost economic growth and preserve the country’s roads.

“This comes in the context of the comment in the National Development Plan (NDP) that SA’s rail sector performs `significantly worse’ than in comparable nations, and needs to be maintained and expanded,” he says.

“Infrastructure planning at all levels needs to be carefully co-ordinated to avoid imbalances in the way public facilities are used, and to ensure they make the economy more efficient. Only by regularly maintaining the continent’s extensive infrastructural investments can we effectively build upon them. New business can then thrive, supported by affordable public services that make them efficient and competitive.

“The NDP’s recommendation for SA is equally applicable to the continent as a whole: we need to maintain and expand the electricity, water, transport and telecommunications infrastructure in order to support economic growth and social development goals.”

Basil Read’s Marius Heyns believes it will probably be another 12 months or so before the roll-out of the South African government’s planned multibillion-rand infrastructure programme gains significant traction.

“To say nothing is happening would be unfair — it’s just that, given the enormity of the proposed programme, it’s taking some time to get the roll-out under way. But it needs to happen soon because one of the quickest ways to boost job creation is through construction.”

Given the high capital costs of infrastructure development, there needs to be far more emphasis placed on maintaining these costly resources.

An article dealing with legislation aimed at fast-tracking strategic infrastructure delivery and boosting infrastructure development.


\"\\"\\\\"Nikita\\"\"The Draft Infrastructure Development Bill empowers the Presidential Infrastructure Coordinating Commission (PICC) to determine and develop infrastructure priorities in South Africa, designate Strategic Infrastructure Projects (SIPs) and ensure that infrastructure development in respect of any SIPs is given priority in planning, approval and implementation.

The process for the implementation of SIPs as set out in the bill can be summarised as follows:

  • SIPs are identified and designated by the PICC;
  • A project plan is prepared by the applicant and must be approved by the relevant steering committee;
  • The necessary authorisations are obtained;
  • The tender process commences;
  • The necessary land rights are acquired through expropriation; and
  • Construction commences.
  • Identification and designation of SIPs
  • A project will qualify as an SIP if it satisfies the requirements set out in s7 of the bill, namely that the project must be an installation, structure, system, service or process relating to any matter specified in schedule 1:
  • Airports;
  • Communication and information technology;
  • Education institutions;
  • Healthcare facilities;
  • Mines, oil or gas pipelines, refineries or other institutions;
  • Ports and harbours;
  • Power stations or other installations for harnessing any source of energy;
  • Public roads and railways;
  • Human settlements;
  • Sewage works, waste management and disposal;
  • Water works and water infrastructure; and
  • Industrial facilities.

The project must:

  • Be of significant economic or social import to South Africa or to a particular region of the country;
  • Contribute substantially to any governmental strategy or policy relating to infrastructure development; or
  • Be above a certain monetary value prescribed by the Minister of Economic Development.

Once a project qualifies as an SIP, the minister must designate the project as such by publishing a notice to that effect in the Government Gazette

The PICC must then determine whether the project should be implemented by an organ of state or whether the project must be put out to tender. If it is determined that the state has insufficient capacity to implement the SIP, the minister of the relevant department must call for tenders by publishing a notice in the Government Gazette and in at least two national newspapers.

Conflicts

The bill provides that where an SIP has been designated for implementation or where such project is provided for in any national infrastructure development plan, any state-owned entity or other organ of state must ensure that its planning or implementation of infrastructure, or its spatial planning and land use is not in conflict with any SIP implemented in terms of the bill. If any such conflict arises, it must be resolved in terms of the Intergovernmental Relations Framework Act (IRF Act).

The IRF Act sets out procedures for the resolution of intergovernmental disputes, which are defined in the act as disputes between different governments or between organs of state from different governments concerning matters that arise from statutory powers or functions assigned to any of the parties. The application of the IRF Act will be subject to any legislation regulating spatial planning and land use management, such as the proposed Spatial Planning and Land Use Management Bill, which was introduced in 2012 at the request of the Minister of Rural Development and Land Reform.

Expropriation

In line with the emphasis on streamlining the implementation of infrastructure projects, the PICC is empowered by the bill to expropriate land for the SIPs. The procedure set out in the bill is in line with the constitutional requirements for public process and compensation.

As with traditional expropriation, the PICC may only exercise its powers for a public purpose, and must compensate the land owners. Its actions must comply with the requirements of constitutionality, administrative justice and any other regulatory requirements.

However, the legislature has learnt from past experience that expropriations were often bogged down by negotiations over compensation. In order to expedite the PICCs projects, the expropriation process may not be impeded or stopped solely on the ground that the value of the property is affected by such exercise of power.

Where there are objections to the expropriations, these will not hinder the implementation of the projects, but will be dealt with after development is complete. Minister Patel has stated that ...the state carries on with development even where there is court action. The state will be expected to take that risk.

Time-frames

In line with the overall emphasis on ensuring delivery of infrastructure projects, the bill imposes tight deadlines on authorities tasked with approving aspects of the projects. In order to expedite regulatory hurdles such as approvals, licences or exemptions, the bill provides that such processes must run concurrently. Furthermore, it sets out specific time-frames which may not be exceeded. These include the following:

Once a project plan has been approved, and the relevant steering committee has determined the applicable legislation and authorisations which are required for the project, the applicant must compile and submit an application and project plan for consideration by the relevant authority within seven days.

The public consultation process may not exceed 30 days.

Once public consultation has been concluded, the application and project plan must be amended and re-submitted to the relevant authority for consideration and approval within 52 days.

Once the project plan is approved, a detailed development and mitigation plan must be prepared and submitted to the relevant authority within 60 days.

Public consultation on the development and mitigation plan must then take place, and comments must be reviewed by the relevant authority within 44 days.

The relevant authority has a further 57 days in which to consider and assess the development and mitigation plan, and to make a regulatory decision.

The Management Committee oversees compliance with these time periods. Because it contains representatives from all three spheres of government, it is well placed to pull the relevant levers of power to ensure that infrastructure development projects are not hindered by unnecessary red-tape or slow implementation.

This bill, which clearly has political will behind it, will have widereaching impacts on both government and business. It will bring together numerous departments and spheres of government, and will affect, among others, the construction industry, mining industry, banks, state-owned enterprises and transport industries (including rail and road).

Nikita Lalla is a director, Mbali Lembede an associate, and Zama Ngcobo and Kate Swart candidate attorneys, in ENS Construction and Engineering Department.

The Management Committee is well placed to pull the relevant levers of power to ensure that infrastructure development projects are not hindered by unnecessary red-tape or slow implementation

Source: The Times

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