A historic and far-reaching agreement between the South African government might give the struggling listed construction sector a new lease on life, close the book on its shameful and collusive past and bring a step-change in transforming the industry.
But it comes at a price that will see them paying millions annually over the next twelve years.
The South African Forum of Civil Engineering Contractors (SAFCEC) announced that six construction companies signed an agreement with government on Tuesday that would see them collectively contribute R1.25 billion over 12 years to a fund, which will be established for socio-economic development.
The six are: Wilson Baily Holmes-Ovcon (WBHO), Aveng, Group Five, Basil Read, Raubex and Stefanutti Stocks. Murray & Roberts will within a week indicate whether it would join the agreement.
Apart from the financial contribution, the agreement also contains far-reaching transformation measures and the CEO of each company gave an integrity commitment.
This follows after a major break in trust between the industry and government following revelations about wide-spread collusion for which companies were collectively fined R1.4 billion by the Competition Tribunal in 2013. In the wake of the collusion scandal the companies, which were often accused of a lack of transformation, found it difficult to secure work in the public sector. Government clients in many cases preferred to award contracts to second tier construction companies.
The R1.25 billion contribution the parties agreed upon on Tuesday is over and above the R1.4 billion in administrative penalties awarded by the Competition Tribunal in 2013.
The fund will be co-managed by industry representatives and government, with the administration of the fund carried out by an entity designated by the National Treasury, SAFCEC stated.
“Initiatives to be supported by the fund will include financial support for young trainee artisans and engineers from disadvantaged backgrounds, support for the teaching of maths and science education at public schools, funding for social infrastructure and the development and promotion of construction companies owned and managed by black people. It also includes funding the appointment of professionals to provide the government with engineering, project management and other services to strengthen its capacity to deliver the public infrastructure desperately needed through, among others, the secondment to state departments, municipalities and entities, of skilled personnel from organisations operating in South Africa.”
With regard to transformation the companies agreed to each transform to a level of at least 40% black equity or to mentor up to three emerging black-owned enterprises to enable them to sustain a cumulative combined annual revenue equal to at least 25% of each of the mentor companies’ annual revenue by 2023. “The referenced revenue is from civil and building works delivered in South Africa and should all companies elect to utilise the partner model, it would result in partner black-owned companies with a combined turnover in excess of R9 billion an annum within seven years,” SAFCEC stated.
In this regard Aveng on Tuesday announced the sale of a 51% beneficial interest, which translates into a 45% economic interest, in Aveng Grinaker-LTA to Kutana Construction, a women-owned emerging black construction company and subsidiary of Kutana Capital.
The transaction is expected to become effective on February 1 2017 and the purchase price is to be determined according to Aveng Grinaker-LTA’s performance in the financial years of 2018, 2019 and 2020. A floor price of R203 million and a cap of R756 million was set. Kutana is locked in for five years.
Aveng’s share price ended the day 1.86% up at R7.13.
In terms of the integrity agreement the companies commit to ethical and legal conduct, to refrain from uncompetitive conduct and to expose corruption. The agreement further provides for the settlement of claims by the industry regulator the CIDB and civil cliams from state entities based on findings in 2013 by the Competition Tribunal as part of the fast-track settlement process of collusion in the period up to 2010.
Chairperson of the Management Committee of the Presidential Infrastructure Coordinating Commission (PICC), minister Gugile Nkwinti, said the agreement is the beginning of a new relationship between government and the companies.
SAFCEC said the parties will address a number of legal, regulatory and administrative requirements that have to be met to ensure the agreement is capable of implementation. It is expected that the fund will be launched in the next financial year and will become operational shortly thereafter.
In statements published on the JSE’s SENS service, the six companies said failure to conclude the agreement could have resulted in them being blacklisted with the CIDB, which would have disqualified them from and public sector contracts.
Group Five’s share price closed the day 4.97% higher at R28.51, Stefanutti Stocks’ share price was unchanged at R4.65, while WBHO saw a 1.67% decrease to R154.00. Raubex’s share price increased by 0.08% to R25.65 and Basil Read saw a 1.92% drop to R2.55.
Murray & Roberts’ share price dropped by 4.11% to R10.50 at market close on Tuesday. The group in a short statement on Tuesday afternoon referred to its recent announcement to dispose of 100% of its infrastructure and building businesses to a black purchaser and exit the general building and civil engineering sector. “The Company is still in consultation with Government regarding its potential participation in the agreement,” it stated.
Company spokesperson Ed Jardim told Moneyweb Murray & Roberts hopes to announce the identity of the buyer company before the end of the month and expects the deal to be concluded early next year.