Construction sector's transformation deal awaits finishing touches
Great change is imminent in the sector; less certain is where this leads
A settlement agreement between the government and major construction firms to fast-track transformation in the industry is still being held up, despite sea changes in the sector.
In late 2016, seven construction and engineering groups agreed "voluntarily" to pay R1.5bn over 12 years into a transformation trust administered by the government, the companies and the South African Forum of Civil Engineering Contractors.
Murray & Roberts had said the settlement agreement was conditional on the South African National Roads Agency (Sanral) withdrawing legal claims against the construction companies, after which the agreement became binding.
The parties to the settlement — Aveng, Murray & Roberts, Group Five, Wilson Bayly Holmes-Ovcon (WBHO), Stefanutti Stocks, Raubex and Basil Read — say the agreement settles their exposure to potential claims for damages from "identified public entities".
These arose primarily from the fast-track settlement process launched by SA’s competition authorities in 2011.
Murray & Roberts, Stefanutti Stocks, Group Five, Basil Read and WBHO have now confirmed that Sanral has withdrawn all claims against them. Aveng, SA’s largest construction and engineering group by turnover, says: "Aveng has not been served any legal notices from Sanral, who continues to remain an important client."
In October 2016, Economic Development Minister Ebrahim Patel indicated there was still a "formal process" taking place between parties to the agreement. Some matters still had to be managed with a "degree of delicacy" including counterparty claims.
Mish-al Emeran, equity analyst at Electus Fund Managers, said at the time Sanral appeared to have made claims of between R600m and R760m against each of the construction companies.
Sanral itself remains cryptic, saying this week that: "Sanral is party to the settlement agreement reached between government through the Presidential Infrastructure Coordinating Commission and the contractors. Note that Sanral, as an agency of government, is awaiting a follow-up announcement from government on concluding certain matters as per the October 20 Cabinet statement."
The statement says the agreement has a number of elements including financial contribution for development projects; transformational commitments in the sector; a framework to settle claims by the public sector; and integrity commitments by CEOs.
Key to this was payment of a collective R1.46bn fine imposed on 15 construction firms during the fast-track settlement process by SA’s competition authorities. Six of the companies participating in the latest settlement agreement were part of this group.
Group Five did not accept the fast-track settlement fine, proclaiming innocence over charges. But it now confirms that Sanral has withdrawn all claims against it.
To this end, in terms of the latest settlement agreement, Group Five will also contribute to a further R1.5bn paid over the next 12 years into a fund to support social investment initiatives targeting previously disadvantaged communities.
Meanwhile, each of the seven companies must commit to selling at least 40% of their shares to black South Africans, or must partner with up to three black-owned construction companies to help them generate turnover equal to 25% of their own earnings.
Aveng and Murray & Roberts are selling a majority or entire stakes in their domestic construction businesses to black economic empowerment interests. WBHO has agreed to mentor three black-owned construction firms for a period of seven years.
In the case of Murray & Roberts, the group is exiting the South African infrastructure space to focus on global projects. This means SA’s new construction sector codes on empowerment "will not apply after the disposal of our infrastructure and building businesses, which we hope to become effective in the first quarter of ... 2017", says Ed Jardim, Murray & Roberts investor and media executive.
Trade and Industry Minister Rob Davies says a unique feature of the draft sector code is that the target for black ownership in SA’s construction industry is set at 35%.
"This is higher than the ownership target for the generic codes," he says.
The draft code also stipulates that at least 50% of black shareholding in construction companies needs to be held by "professionals", to discourage passive shareholding. This is to ensure the construction sector becomes dominated by joint ventures and outsourcing.
To ensure that outsourcing does not dilute actual benefits accruing to black people, the amended code also states that no more than 25% of the value of a contract can be outsourced to any entities with a lower broad-based black economic empowerment status level.
Great change is imminent in the sector; less certain is where this leads. Webster Mfebe, CEO of the South African Forum of Civil Engineering Contractors, says this is "good news" that will have a positive effect on the government rolling out infrastructure in SA.