The South African National Roads Agency (Sanral) on Friday announced aggressive new transformation measures that may hit struggling large construction companies hard if implemented in its current form.
The policy set the bar higher than what is required by legislation and means contractors complying with the requirements agreed upon in an industry agreement with government concluded a year ago, may still fall short of Sanral’s new rules.
This comes at a time when most of the big contractors are in dire straits and getting little work from the public sector. Aveng, which last week reported a R6.7 billion annual loss, stated that Sanral is virtually the only government client that continues to make new awards.
Government clients have adopted a new strategy of packaging projects into smaller parcels less suitable for large, listed entities. This strategy is aimed at distributing the opportunities wider and might be a response to the reputation damage in the wake of the construction giants’ earlier admissions of widespread collusion.
Murray & Roberts earlier exited the local construction and engineering industry when it sold its local business to an empowerment consortium. When asked if a similar move is on the table as part of Aveng’s strategic review, executive chairman and acting CEO Eric Diack said: “Not at the moment”, but added that it cannot be ruled out as the review unfolds.
Sanral’s draft transformation policy determines that it will only do business with companies with a Construction Industry Development Board (CIDB) generic grading of 8-9 (large contractors) if they are minimum 51% black-owned with at least 30% black management control and level 2 B-BBEE rating.
This also applies to consultants and suppliers with a turnover of more than R50 million and toll concessions. This could affect listed companies supplying cement and aggregates among others.
Last year’s agreement with government required the private sector participants Murray & Roberts, Aveng, Group Five, Basil Read, Stefanutti Stocks, Wilson Bayly Holmes-Ovcon (WBHO) and Raubex to reach a level of at least 40% black equity, but also offered an alternative to mentor and develop three emerging black enterprises according to strict conditions.
The agreement further cost the companies a collective R1.5 billion contribution to a socio-economic development trust over 12 years. It was aimed at putting the earlier collusion scandal to rest and unlocking government spending on infrastructure.
This is over and above the aggregate R1.46 billion administrative penalties that the colluding construction companies in 2013 agreed to pay as part of the Competition Commission’s fast-track settlement process.
Apart from the equity requirement, the companies might also find their B-BBEE rating lacking when bidding for Sanral business. From information on their websites it seems Group Five is the only one of the remaining six construction groups (after M&R’s exit) that currently complies with the required level 2 rating at a group level.
If Sanral’s new transformation policy is finalised it will also ensure that no entity will be awarded more than 15 tenders per year for capital projects nationally and three per province. Companies operating in only one province will qualify for no more than five tenders per province per year.
Sanral CEO Skhumbuzo Macozoma on Friday said the agency’s research shows that the awards were previously concentrated to the extent that a single entity would get up to 25 contracts in one year.
Successful bidders will appoint sub-contractors from Sanral’s approved sub-contractor list.
Sanral will encourage joint ventures, consortia and other partnerships and structure projects to guarantee “balanced and fair access” to black contractors at CIDB levels 1-9, the agency states. Macozoma said: “The blacker the joint venture is, the more projects you will get and the less black, the less projects you will get, forcing more sub-contracting.”
Contracts for toll operations will be limited to three per operator where the operations period overlaps or is concurrent and the terms will be limited to six years with an option to extend by a further two years.
The draft policy also covers real estate and property development, information and communication technology, finance and audit services, legal services, marketing, advertising and communication services and human resources.
Sanral is inviting written submissions and will go on a road show until the end of the year to consult stakeholders on its transformation policy and wider new corporate strategy named Horizon 2030.
It hopes to implement the final policy by April next year.