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Treasury, Sanral and the construction mafia

Violent demands bring Sanral road construction to a virtual halt.

Road construction in South Africa has taken a serious knock due to members of the so-called construction mafia violently demanding contracts. Their actions are based on erroneous interpretation of new treasury regulations intended to oblige principal contractors to outsource 30% of their work to local subcontractors. (The new Regulations to the Preferential Procurement Policy Framework Act are complicated and don’t create an automatic entitlement to work.)

Louw Kannemeyer, engineering executive at South African National Road Agency (Sanral), told Moneyweb that many of the agency’s existing projects have been disrupted, some for months, and that the roll-out of new projects was halted last August due to the high risk to staff and property.

Sanral usually has between 500 and 600 projects at different stages of development, and 200 to 250 live projects at any given time. Its consistent roll-out of work has been a lifeline for consulting engineers, contractors and suppliers for years and the current contract drought has driven many to the brink of bankruptcy.

The situation is being exacerbated by uncertainty surrounding other new treasury regulations which brought the awarding of contracts for road design to a standstill more than a year ago.

In addition, with the income in Sanral’s toll portfolio under pressure due to the non-payment of e-tolls, there is no money for the construction of major new toll roads.

According to Consulting Engineers SA CEO Chris Campbell, the lack of awards from Sanral is having a “massive impact” on the consulting industry and only compounds the general lack of infrastructure spending by government. He says multinational companies keep their skilled staff busy with work outside South Africa, but smaller companies simply lose road design skills as well as the skills of structural specialists who focus on bridge construction.

Rudolph Fourie, CEO of the country’s largest road builder Raubex, says the group’s volume of work from Sanral has dropped by 50%. This has had a devastating effect on contractors and suppliers and retrenchments are increasing, he says.

Sanral’s contribution to the Raubex order book has plummeted. Source: Raubex

According to Kannemeyer, local communities believe that the new treasury regulations entitle them to 30% of the work in projects in their areas. So-called business forums are now demanding control over that total portion, which could amount to tens of millions. The typical contract for road rehabilitation, strengthening and upgrading is worth upward of R300 million.

Kannemeyer says these groups don’t want to participate in any formal tendering process: “They arrive [at a road building site] in a bakkie, fire shots in the air, and demand their share. They burn equipment and push workers in front of moving traffic.”

A recent incident in Polokwane left three people injured, with two needing to be admitted to intensive care after a group known as the Radical Economic Transformation Forum disrupted a meeting between Sanral and contractors involved in the multimillion-rand construction of the city’s eastern bypass.

In another instance, the thugs dug a trench around a prefabricated office occupied by Sanral staff, filled it with fuel, and threatened to set it alight unless their demands were met.

The risk to staff and property is unacceptable and some contractors have stopped work as a result, says Kannemeyer. Work on the Hammarsdale intersection in KwaZulu-Natal, for example, has just resumed after the Delangokubona Business Forum disrupted it late last year.

He says the activities of the construction mafia were initially limited to KwaZulu-Natal, but have now spread to Limpopo, North West and the Northern Cape. The situation is siphoning management time and attention, with Kannemeyer and Sanral CEO Skhumbuzo Macozoma criss-crossing the country to address “business forums” that insist on speaking to top officials.

Sanral is engaging with National Treasury as well as the Construction Industry Development Board in an effort to get the actual intention of the regulation explained to communities on the ground, says Kannemeyer. Sanral will in fact meet with Treasury Director General Dondo Mogajane this week.

The roads agency has also developed a 14-point plan to deal with the new dynamic on-site through project liaison committees.

National Treasury told Moneyweb that there was no evidence that the rise of the so-called construction mafia was an unintended consequence of its regulation that was implemented in April last year and that requires 30% of projects to be awarded to local subcontractors.

Treasury says it has not been aware of the situation. “There is no evidence to substantiate this assertion. Par 9 of the PPPFA Regulations, 2017 clearly indicates that only if it’s feasible to subcontract, the institution may consider to subcontract. Therefore it is not true that the PPPFA Regulations, 2017 requires 30% of projects to be awarded to local subcontractors.”   

According to Treasury, the Office of the Chief Procurement Officer (OCPO) last year “conducted workshops on the PPPFA Regulations, 2017 throughout the country and participated in many interviews on various radios stations including community radios broadcasting in vernacular languages to inform (and provide clarity) to small businesses and contractors that are doing business with the state or intent to do business with the state.”  

Sanral has resumed the awarding of design contracts after Treasury eventually, in February, gave clarity on the inclusion or not of “provisional sums” in the price for bid evaluation purposes. Kannemeyer says Sanral has since awarded more than ten contracts and that another 15-17 will be awarded subject to Sanral board approval next week.

On this matter, Treasury said it was clear that the issue of provisional and prime cost sums was not about the interpretation of the definition of price, but rather about how these provisional sums were applied in practice. In other words, both in terms of the 2011 definition and the 2017 definition, there are instances when provisional sums may be included in the overall price and instances where they are left out.

It added that the Sanral board has the authority to resolve issues and Treasury’s responsibility is to advise.

Kannemeyer told Moneyweb that the construction of major new roads that form part of Sanral’s toll portfolio will only proceed once there is certainty about the way forward with regards to Gauteng’s e-tolls. This is currently on President Cyril Ramaphosa’s desk.

Sanral has not been able to raise money for its toll portfolio on the market for more than a year and is nearing the debt ceiling of about R48 billion.

According to construction data service Industry Insight:

  • The value of Sanral contract awards dropped 71% in the 12 months to April 2018. The total value of roads contracts awarded (all clients) in the same period dropped by 8%.
  • Sanral’s contribution to the value of road projects awarded has shrunk from 53% in 2012 to 19.4% in 2017 and 12% in the first four months of 2018.

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Most informative article; it reveals just what is happening on the ground, away from the boardroom talk. While South Africans are unlikely to miss new toll gates being built, what’s happening to engineering companies in road construction is most disconcerting.

That SA has turned into a Mafia state surprises anyone is what surprises me. The fabric of SA society is falling apart.

Call me paranoid but in my opinion this politically motivated by the EFF and I cannot for the life of me understand why the ANC stands by and watches this happen without action. Unless of course the EFF is and always has been part of the ANC plan.

Mactheknife, I think your opinion is not far from wrong. The ANC is silently letting the EFF thugs do their dirty work. And in this case is the the construction companies that suffer, as if life as a contractor is not difficult enough as it is without thugs interfering in it.

True Mac; I think there is a strong touch of a Zuma faction as well. SANRAL (how well we know them – etolls) are pretty lax and spineless in my view. They have long played fast and loose with coughing up extra cash to the “BEE” connected in the guise of “subcontractors” or incompetent main contractors. Just another Azanian day; thank goodness the ANC isn’t in charge of the weather; in KZN anyway.

Paul, you may have a valid point there. The hand of a “3rd force” at work, be it the Zuma-faction or EFF trying to gain political points.

Another dynamic one comes to realise (@Mac)…as to why the ANC is so “spineless”: the police representing the ruling regime, is too afraid to act with force (like in Marikana), as the ANC has hige fear that such incidents will costs them votes in 2019. That’s my the riot police mostly “monitor” a situation (like in Riebeek Kasteel earier this week), instead of shooting to kill (like in the USA).

The problem is, the criminal elements in SA (count the EFF & Zuma-faction in) realize the SAPS cannot act with force, so they use anarchy to their benefit illustrating that “they’re doing something to the establishment, hence vote for us”.

Even more stronger motivation to take investments direct offshore. SA continues on its (long-term) trend, i.e. a downward trajectory. CR-effect just a temporary upward blip on SA’ downward path. There is NO other way after colonialation. One can see it in town/city/provincial & national infrastructure crumbling. After the year, 2035 S’Africans (those still left) will forget politics at last, as they will fight over WATER-crisis. Population may be 100 million (mostly beggars, so your insurance costs going to be astronomical), while the employed will be a smaller % of overall population. Can’t stop it…population growth is out of control…SA will feel the effects down the line. TODAY SA is still doing well, despite some gloom.

Good article on something that amazingly is not in the mainstream media especially with such violence involved.

Being somewhat involved in the Construction Industry, the sense that I get from the industry is that these “local subcontractors” are of the opinion that the large construction companies that get the main contract are making huge profits (this is probably a bias based on the large total sums of the contracts). However if they bothered to do some research and get informed as I am sure most of MW readers are, these large construction companies are barely making ends meet on paper and is probably worse in practice by delayed payments from Government (this is not only applicable to road construction that the article focuses on). Construction margins at the moment are razor thin with the focus to “keep the doors open”.

One phenomenon that I would like to see some investigation into in this industry is the mismatch between budgets (even if you allow for a substantial deficit) and currently what is being spent and paid for (there seems to be lack of funds when payments need to be made). So where is the “budget money”.

How can you blame them? They have learned by looking at events like “Fees must fall”. The students caused R300 million damage to various campuses and exams were disrupted but not a single person was ever held accountable. At the end of the day, they got free education with violence and threats of violence. In parts of the Eastern Cape the average fertility rate (the number of children a woman would bear during her lifetime) is now 4.1. And guess what, they will all get free university education! Violence, therefore, gets you what you want- that is the law in prison and now also in this country.

I fail to understand why Sanral or the companies receiving the contracts aren’t hiring security to protect these construction sites?

Take the word “mafia” seriously, albeit almost worse in its disfunctional brutality here: it is hard and dangerous being a security guard that has to live somewhere, often within that same township where the mob – the self-appointed sub-contracting agents – live; and operate. Being a security guard with a family is even worse.

This situation demonstrates why policing and law and order should be a state function and the state should diligently and with its supposed extensive and wide-ranging official powers, address situations like this. When the state fails, the problems becomes very hard to solve.

” Before the Roman came to Rye or out to Severn strode, The Rolling English drunkard made the rolling English road”

G.K.Chesterton (1874-1936)

In the rural areas methinks SANRAL should start converting thousands of failed tarred surfaces to gravel surfaces. Budgeting constraints bad road managements, to gravel roads they are common in less-developed nations, and also in the rural areas of developed nations such as Canada and the United States. Approximately 35 % (1.42 million miles) of all roads in the US remain unpaved.
In South Africa’s rural regions, the volume of traffic so is low that paving and maintaining a paved road is not economically feasible.
Thousands of unemployed people could be employed and trained to understand gravel road design, construction and maintenance.

The civil engineering consultancies who specialise in road works are really suffering. It is difficult enough to be awarded a single tender from SANRAL to keep the doors open in a regular business year. After the bad years leading up to this, personally felt, an established local company of approximately 100 plus technical staff may soon declare bankruptcy… overdraft facility will only go so far. Salary increases to meet inflation have been missed. Salary cuts have been made.

Is action being taken to get these companies back on track?

Are the criminal going to be dealt with, so the innocent don’t suffer?

Are government employees, politicians and SOE employees feeling the same difficult times? (It might help that they do)

If not… don’t encourage your children to pursue the field of engineering, construction and the built environment.

This mafia sounds like the hand of the ANC trying to promise false jobs.

There is a general perception of huge profits in construction, and which in boom periods and a well-run economy sometimes is true, but the risks and trough periods are often overlooked; and the downright absolute necessity to have major contractors around: who does these violent self-esteemed “sub-contractors” think would have prepared the country in time and to quality and requirement for the football world cup when South Africa succeeded at least for one event?

Whether you like large-scale operators or not, they are a dire necessity, and in South Africa disaster is looming.

Group Five, Aveng (remember LTA, Grinaker?) (almost) gone, Basil Read bit smaller but more capability (almost) gone, Murray & Roberts exited? WBHO and Stefstocks must be grinning somewhere in the background, IF they themselves last to ride out this period of downright disaster to the country’s infrastructural capability. Watch the construction costs rising and rising for the next power stations, dams and other major infrastructure requirements.

And it has become a jungle out there for the mid-sized and smaller operators whose numbers are rapidly shrinking, and ironically, the juniors and new entrants’ options becoming more and more difficult. There are no winners here, since once there are no main contractors to attack any more, the “sub-contractors” will have less opportunity than ever before.

Well at least we can say the industry has been decolonized! Throw in some undeserved BEE deals and Government will see this as another great story to tell. More seriously, can we be far away from Nigerian-style thugs stopping one on the highway demanding payment in order for you to proceed. The level of policing I see is almost non-existent so it is no surprise people take chances and even when you are stopped a little cash solves the problem. Get used to it because this is how Africa rolls.

Unlawful demands…misinterpretation of laws…bullying …bypassing procurement good practice…

How sweet it is to watch SANRAL be subjected to the exact same behaviour they have meted out to the public and construction companies.

An article published in 2003 set out in gory detail how Nazir Alli was central to the creation of a my-way-or-the-highway pecking order among the construction companies. This subsequently morphed into full scale collusion and SANRAL has yet to recover those costs.

Meanwhile, SANRAL managed, in one particular year, to account for fully one-third of the entire irregular expenditure bill of ALL government’s SOEs. That’s quite apart from their unlawful behaviour in the implementation of numerous tolling projects and their arrogant attempts to bulldoze all before them. It’s convenient for SANRAL to forget how dire their history is while they plead for lawfulness, but those of us on the opposite side certainly won’t.

Sorry SANRAL – what you are currently experiencing is the wheel turning full circle. This has been on the cards (and repeatedly warned about) for at least 15 years, and my only response is schadenfreude.

There is a simple solution – undo the the Par 9 of the PPPFA Regulations as it is simply not working.

The ANC government is trying to create employment in areas with high unemployment by legislating “sub-contracting” and it failed to clarify ” only if it’s feasible to subcontract, the institution may consider to subcontract”

You cannot get efficient and cost effective service delivery if you keep on legislating business conduct. If government wants to create employment it must find other ways to stimulate the economy – the PPFA regulations, 2017 have proven to be a total failure.

ANC own up to this failure and fix it before more jobs are destroyed.

While everyone is busy sharing their views on a very serious issue, and after reading some of the comments….i thought I should just ask if anyone of you ladies and gentlemen, know where I can find a job? I am recent wits graduate, 2018 march! I have a Bsc Construction Management honours degree.

Even if you know anyone at Sanral, maybe Sanral needs someone like me to steer that ship in the right direction. I am sure after at most 2 years of working with them, and they accelerate my growth with hard work and learning, I can easily sit in the decision making making committees and make this industry get back to a much more healthy state!

Without going into to much detail, I will say this. We are a firm of attorneys representing a client in the construction business. We have been running to court for a few months now to interdict these groups of people from extorting/blackmailing our client. Police are of no assistance, and we had to go as far as citing the minister as a party to ensure when our client approaches the relevant office, the police will have to act.

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