In a construction market where the public sector is the main driver of contractors' order books, black economic empowerment (BEE) becomes a matter of life or death. As things stand, SA's construction companies are heavily reliant on the public sector for work.
The public sector has been styled as the enforcer of transformation under the country's BEE legislation. The BEE codes of good practice do not have a legal enforcing capacity where the private sector is concerned. The codes, which were enacted in 2007, are a mere guideline for private enterprises. So a company that chooses to overlook BEE will not be subjected to any penalty.
But there is a catch. Public-sector entities are legally required to follow the letter of BEE legislation in their procurement exercises. This also extends to licensing rights where sectors are regulated by the state.
Construction companies that hope to deal with the public sector are then required to show some BEE commitment. The alternative in this kind of a market is tantamount to suicide. Though work has been available from industrial and mining infrastructure development projects, the public sector cannot be ignored. In any case, the private-sector infrastructure development contracts are drying up as a result of the global financial crisis and the downturn in the commodities cycle.
The public sector is by no means immune to the market conditions but a significant portion of its projects will definitely continue. Some of these projects are linked to the 2010 soccer World Cup. Projects linked to the energy sector cannot stop. The same logic applies to other basic infrastructure development such as roads.
The public sector is billed to splash out more than R1 trillion in improving the country's primary infrastructure including energy, telecommunication, ports, roads, rail and dams.
The reality of contractors' overreliance on the public sector can be seen in the string of trading statements released in the construction sector of the JSE early this year. After announcing the cancellation of two contracts in the Middle East, M&R - which is the largest construction group in the country - pinned its hopes and those of its shareholders largely on the local market.
Group Five, which went through similar experiences in the Middle East, joined the chorus. And it is the same tune sung by other first-tier construction players such as Aveng, WBHO, Basil Read and new kid on the JSE block Stefanutti Stocks.
All these companies have had to put in place some BEE initiatives. All are high scorers in the ownership element of the broad-based BEE scorecard as the 2009 Top Empowerment Companies (TEC) data shows. Aveng leads by claiming all the available points in the ownership element. It is followed by WBHO, which claims 19,4 ownership points. Then comes Raubex Group (19,08), Stefanutti (18,8), M&R (18,2) and Group Five (17,8).
Outside socioeconomic development, the ownership points are probably the easiest to secure where the construction industry is concerned. Most players in this sector cite the shortage of suitable skills within the black section of the SA population for slow progress in other elements of the BEE scorecard. These firms are low scorers in the management element and general employment equity. The cry about shortage of suitable skills is normally accompanied by commitments to skills development. But then construction firms listed on the JSE are low performers in the skills development element. This element requires economic actors to spend 3% of the salary bill on skills development initiatives with a bias to previously disadvantaged candidates.
The construction sector's rankings in the preferential procurement element range from good to excellent, largely as a result of joint ventures with emerging contractors. This also feeds the enterprise development element where all the JSE's construction giants claim all the 15 points available.
BEE expectations in the infrastructure development sector are not limited to local players. International players who hope to have a piece of the SA action are also required to tow the BEE line. Though there is recognition that specialised multinationals are in short supply and cannot be cherry picked on a BEE ticket, the public sector has put in place suitable BEE requirements for these companies.
Take Eskom's expansion plan as an example. In the development of its new power stations, Eskom has had to invite specialised multinationals to supply things such as turbines and boilers. Japan's Hitachi has so far secured R38bn worth of contracts from the Eskom programme while France's Alstom has won R26bn. Both these groups are subjected to Eskom's local content policy. This policy requires multinationals who win contracts worth more than US$10m to invest 30% of the total in local industry through procurement. This is in line with the department of public enterprises' competitive supplier development programme. Local companies that benefit from this programme come face to face with the BEE reality.
Multinationals seem to have accepted this demand as a fact of life. Hitachi Africa chief financial officer Robin Duff told the FM that the group has committed to 60% local content. Eskom's local content requirements make business sense, says Duff. SA has capacity which can be re-established to suit Eskom's requirements, he says.
Hitachi Power Africa has also sold 25% of its equity to BEE group Chancellor House.
Alstom has committed to local content of 50% from its R26bn work with Eskom.
