3 March 2017
Statement delivered by Black Business Council in the Built Environment (BBCBE) Secretary General: Mr Gregory Mofokeng
The South African government and seven listed construction companies signed the Settlement Agreement (SA) on 11 October 2016 paving the way for the implementation of the Voluntary Rebuilding Programme (VRP). The VRP is a program for redress post the findings of the Competition Commission (CC) and subsequent Fast Track Settlement Process between the CC and the fifteen (15) construction companies. It was initially concluded between the South African Forum for Civil Engineering Contractors (SAFCEC) representing seven listed construction companies and the Black Business Council in the Built Environment (BBCBE) representing the emerging sector on 10 December 2013.
The BBCBE and SAFCEC presented the VRP to government in early 2014 for its support and implementation. Throughout this process the BBCBE received unqualified support from its mother-body the Black Business Council (BBC).
Since the signing of the Settlement Agreement, the narrative around this programme has served to undermine the role of the BBC and BBCBE (collectively referred to as Black Business) and has effectively diluted our role to be that of beneficiaries and not architects of the programme. As far as some of the stakeholders are concerned, (especially the listed companies), an impression has been created that we have been mere spectators from being the co-architects of this very important programme.
Government released a media statement on 13 February 2017 updating the nation on the implementation of the VRP. The statement outlined two pillars of the VRP.
Tirisano Trust Fund Pillar
The first pillar is the establishment of the Tirisano Trust Fund (the Fund) to be capitalized to the tune of R1.5bn over the next 12 years. Black Business agrees broadly with the objectives of the Fund. In addition, we have made a submission to government proposing that 50% of the funds (R600m) should be invested back in the industry in the form of working capital and construction guarantees for emerging companies.
Our proposal envisages the creation of a fund to be managed by a development finance institution such as the IDC or NEF, with the provision that they match the funding from industry to ensure the Funds’ sustainability and better coverage nationally. This will ensure that the benefits of the VRP reach beyond companies that will benefit from work packages and equity from the listed companies, thus facilitating economic justice.
The second pillar relates to transformation: Under this pillar established companies have an option to either make available 25% of their annual turnover to be implemented by the emerging sector consortia or to sell equity of not less than 40% to black investors.
Black Business’ position on the transformation pillar is that it must benefit a broad beneficiary base.
There must be absolutely no room for narrow BEE transactions previously employed in the country and specifically in the construction industry which resulted in the industry being one of the least transformed sectors of the economy.
With regards to the annual turnover option, Black Business’ position is that it must be accessed by consortia as opposed to individual companies. Emerging companies that have been accommodated thus far under this programme have already joined forces with other black-owned emerging companies to form consortia that are geared towards implementing the work packages. These consortia are constituted by a maximum of five (5) companies. They are expected to subcontract black subcontractors and further to procure from black consultants, suppliers and manufacturers. Thus enabling empowerment in the industry value chain.
We have worked closely with WHBO and Raubex to select black consortia that will benefit from the allocation of work packages. We note with interest from the government’s media statement that Stefanutti Stocks has identified two emerging companies to partner with.
We state categorically that should Stefanutti Stocks not open discussions with us on the regularization of these companies and their willingness to partner with other black companies and buy into our broad based beneficiary model we will not support their partnership.
Black Business’ position is that the 25% turnover target must be effective from year one of implementation and not progressively over a seven year period. The established companies should not be allowed to include the emerging companies’ turnover (generated from their own business initiatives) as part of the turnover generated from the VRP. The established companies have played no role in generating such turnover and therefore can’t lay claim to it.
Murray and Roberts, Aveng and Group Five have decided to embark on the equity transaction route. Our position is that consortia that are going to buy into these companies must be led and majority owned by contractors. The established companies colluded in the construction industry. Therefore, the primary beneficiaries must be contractors and not only black investors with the financial muscle to buy such equity without the necessary demonstrable track record of successfully running a construction company.
The objective of the VRP is to engender fundamental transformation throughout the operations of the established companies and not only at the ownership level. The modus operandi employed by classic BEE investment companies and private equity players often serve only to temper with the ownership profile of businesses. We need black investors who will become operationally involved and make sure that transformation cascades to all operations of the business all the way to construction sites.
We don’t need black investors who will acquire these shares and spend all their time playing golf and dining at upmarket restaurants, drinking expensive whisky and smoking exotic cigars and bragging to their friends about their impressive investment portfolio in the construction industry whilst waiting for their dividend cheques or on the trot to conclude another BEE transaction in a different sector of the economy. We want black shareholders who understand how construction companies operate in order to maximize the benefits that must accrue to black players along their companies’ value chain such as subcontracting, material and equipment supply.
The reality is that companies that are opting to sell shares to black investors will end up either being wholly-black owned, majority black owned or significantly black owned. We have informed government that we expect these companies to appoint black executives. These includes the CEO, commercial and operations executives. We are strongly opposed to the current norm of appointing black executives to non-core positions such as human capital development, corporate services and government relations.
We expect them to also transform operationally in how they engage black consultants, subcontractors, suppliers and manufacturers. These companies can’t be black owned and continue business as usual in their operations. We expect them to subcontract the majority of their subcontracting opportunities to black owned, managed and controlled subcontractors and to procure services from black consultants, suppliers and manufacturers. We are unapologetic about this stance.
Thus far we have had very meaningful engagements with Group Five. However, it must be highlighted that this was under the impression that they will take the annual turnover route and not the equity transaction option as recently reported. We will continue to engage with them under this recently-preferred approach. We want to make it clear to Group Five that the consortia, they had gone through a protracted and meticulous process to select, must be given preference to other companies that might be considered in constituting a consortium to acquire shares in their business. We will strongly oppose any deviation from this.
Discussions are ongoing with regards to the Kutana Construction transaction with Aveng. We are encouraged by the willingness of the principals at Kutana to acknowledge the position of black business with regards to the consortium/SPV being majority contractor owned and led. This message must be sent to the Aveng shareholders, they must understand that Black Business will accept nothing less.
We are extremely disappointed with the opportunistic manner in which the Murray and Roberts and Southern Palace transaction was concluded. The Murray and Roberts CEO, Mr. Henry Laas was involved in the VRP discussions from the onset. In these discussions, there was acknowledgement that traditional BEE transactions didn’t bring about the desired transformation outcomes for the industry and that future transactions must be led by contractors who have vested interest in the industry.
The structure of this deal is irrefutable proof that Mr. Laas was disingenuous in his engagement with industry stakeholders and he has since cowardly avoided having a meeting with Black Business to discuss this transaction.
In light of this, we have since written a letter to Southern Palace requesting a meeting with them. This letter remains unacknowledged nor responded to. We subsequently wrote another letter spelling out our two options that they have in order for this transaction to enjoy our support. The first option is for them to allow a contractor consortium to own an effective 51% equity in Murray and Roberts and the second is to make available 25% of their annual turnover to black contractors. A corrupt company remains such, notwithstanding the racial profile of its ownership and management.
Basil Read remains uncooperative and recalcitrant. We have written letters to its CEO, Mr. Neville Nicolau and he simply hasn’t bothered to even acknowledge their receipt. Basil Read must know that we will oppose any transaction that will not meet our demands. We urge them to come to the negotiation table now before seeking shareholder approval and announcing their transaction to the market. If they don’t, they will be compelled by circumstances to review the transaction and this will be very uncomfortable for the executives involved including Mr. Nicolau.
We also have a problem of black companies who seem to think that they have a birth right to benefit from the VRP. We want to make it very clear that if you are a black company and you don’t want to share the benefits of this programme with other black companies either as consortium members, subcontractors or suppliers of goods and services we will make sure that you are effectively removed from this programme. This programme must and will drive transformation throughout the construction industry value chain.
The sad reality is that we have black owned construction companies that rely on an ecosystem dominated by white owned subcontractors, suppliers and manufacturers and they are not prepared to give a chance to other black owned value chain players because they are considered small and unreliable. We must change such a perception by giving them an opportunity to participate in programmes such as the VRP thus allowing them a chance at growth and sustainability.
We look forward to companies benefiting from both the annual turnover arrangement and the equity transactions procuring their core and non-core services from black owned companies. Non-core goods and services procured by the construction industry include but are not limited to:
· Legal Services;
· Accounting & Auditing;
· Office Accommodation;
· Temporary Site Accommodation;
· Contract Cleaning;
· Construction Guarantees;
· Marketing & Advertising;
· Safety Clothing.
We reiterate our resolute stance that companies that would be found not supporting other black companies in their respective value chains will be kicked out of the programme.
In our discussions, some of the established sector companies have threatened to close down their businesses instead of aligning themselves with the vision espoused by Black Business to empower more people under this programme. They want to empower a few individuals they are connected with at the expense of the many in the industry. We want to encourage them to stop threatening and simply proceed to close down such businesses. It will be one less competitor to the companies that are doing the right thing.
In order to make certain that their exit from the industry is permanent, we have written to the Construction Industry Development Board (CIDB) informing them that we will take decisive action against it should it allow for the transfer of track record from any of the colluders to a new or alternative company.
Black Business has significant levers at its disposal, notwithstanding the signing of the Settlement Agreement, including but not limited to deregistration and blacklisting to ensure compliance with our vision by the established companies. We will not hesitate to utilize these should it be absolutely necessary.
Construction Industry Transformation Experiment
This is an opportune time for black players in the construction industry to define how they must be empowered and how should the sector be transformed. Since the implementation of transformation laws were implemented white monopoly capital has always dictated the pace, shape and form of transformation.
Black businesses are still subjected to a demeaning process of “beauty contesting” themselves before white capital who have the final say on which black consortia or investment holding company is prettier and sophisticated compared to the rest and as such deserves a seat at their dinner table. It is the same white capital that has the audacity to blame government for the slow pace of transformation and for creating narrow BEE, when in practice they are the ones to blame.
Black Business is adamant that things must change under the VRP. We want to realize permanent Radical Economic Transformation using this programme. We consider the design and implementation of the VRP as an experiment. We therefore must be allowed the space to implement it because everything else that was implemented thus far hasn’t worked. We must define and be co-implementers of our own transformation journey.
To those black companies who view this programme as a get-rich-quick scheme and have a false sense of exaggerated self-importance to a point where they want to benefit alone to the exclusion of others, there is no room for you in this programme.
Black Business is alert to the real risk of black beneficiaries engaging in fronting with their white partners. We will expose such nefarious arrangements and make sure that the conspirators face the full might of the law as their activities will undermine the objectives of this programme.
Deregistration and Blacklisting of non-signatories to the Settlement Agreement
We have written to the CIDB requesting that it initiates the investigation process that will lead to deregistration of the rest of the companies found guilty of collusion but have opted not to be part of the VRP. We are looking forward to receiving a progress report from them in this regard.
In conclusion we must remind all and sundry that the established companies colluded. This programme is not being implemented simply because the established sector had a Damascus Moment, it is being implemented because they want to continue enjoying the benefits of doing business with the public sector.
Had they not colluded we wouldn’t be talking about the VRP. This programme is to punish them for breaking the law. Therefore, they must not parade themselves as genuine messiahs and champions of transformation who have always wanted to deliver the industry to the promised land of real and meaningful transformation but somehow miraculously dismally failed to do so for the past 23 years.
To us the alternative is simple, they must be blacklisted from doing business with government and deregistered with industry regulators for contravening their respective codes of conduct because they were found to be CORRUPT.