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The readiness of the South African infrastructure delivery sector to respond to the SIPs

4 March 2015

The answer to this question is that industry is in bad shape. Most of the contracting major players have been over exposed to the Eskom contracts and this has placed tremendous pressure on their financial resources. These projects are a model for how not to set up and run construction contracts.

It is also true to say that the players to the industry are polarized and dysfunctional. The polarization is also the product of the traditional apartheid era industry structure.

Contracts in South Africa are traditionally administered on the basis of an adversarial model. The polarization, dysfunctionality and distrust that has been the product of such events as the Competitions Board Enquiry findings of collusive tendering and a misunderstanding of the Employer body’s insistence on the promotion of the BEE agenda has exacerbated this situation.

Many of these issues have been addressed by Manglin Pillay (the CEO of the SAICE) in his Civilution initiative where he advocates the bringing together of engineers from all sectors with each other and with government to actively try and understand what this new dispensation is all about and to seek solutions via dialogue.

The perception is that many employer bodies make their decisions for political rather than contractual and sound commercial reasons. One of the results of this approach has been interference by the employer on certain contracts in the employment conditions and remuneration levels of the work force. Whether this is for altruistic reasons or to enhance the political standing of the employer body is questionable. The result is the same,

the Contractors management have been emasculated and their ability to discipline labor and to achieve acceptable levels of productivity has undermined.

There can be no doubt in anyone’s minds that the labour/ contractor relationship is equally dysfunctional to that of the Contractors and Employers.

Jonathan Jansen, the Rector and Vice Chancellor of the University of the Orange Free State has observed that since Marikana, there has been a change in attitude from the Black work force. Where previously the perception was that to get ahead you needed education and training, the governments’ inability to deliver an acceptable level of education has now resulted in the work force deciding that to get ahead one needs to act collectively. Hence the emergence of more militant unions whose strategy is to strike and picket at the same time as they negotiate.

Most modern and in particular long duration Contracts are governed by some means (usually a formula) by which the price is escalated to compensate the Contractor for price increases experienced as a result of inflation. These formulae are dependent on the publication of indices by the Department of Statistics. The indices are calculated using the changes in price on a month by month of a basket of commodities. Obviously the performance of the indices is dependent on which commodities you choose for the basket of commodities.

The main driver for inflation in South Africa as in the rest of the world is the cost of fuel. This is price controlled in South Africa by the government and is not included as one of the commodities used for the basket on which the indices used in the formula are based.

The movement of the formula over the past three or so years must lead an objective observer to conclude that the basket of commodities does not include commodities that are sensitive to variations in the cost of fuel. Announcements from the Reserve Bank that inflation of our economy is operating within the target range of between 5.5 of 7 percent would also reinforce this impression.

There are two obvious consequences to this scenario. The first is that contractors are likely to lose money on the recovery of escalation. Secondly, their ability to pay salary and wage increases commensurate with the actual rate of inflation but in excess of the escalation recovery will be compromised.

From the labor movements perspective, the consequences of what can only be described as a misrepresentation by the government of the true inflation position (for whatever reason) is that what ever they ask for by way of wage increases will look like they are being unreasonable and greedy.

The project labor agreements implemented by the various employer bodies make no reference to productivity. The reality of our industry is that productivity is poor to non existent.

The combination of what appear (by reference to under reported inflation statistics) to be excessive wage demands and declining productivity is a sure road to ruin.

This situation cannot be resolved under the prevailing circumstances described above of a polarized and dysfunctional employer, contractor and labour relationships.

In this observers opinion, the thinking and momentum created by the Civilution initiative must be broadened. The time for inspired leadership is here. Leaders from the Contractor Employer and labour representative bodies with credibility and integrity need to intervene. Communication must be opened up and understanding and trust created and established. Adversarial contracting strategies must be avoided. People must be taught to work collaboratively.

The consequences of sitting tight and doing nothing are too awful to contemplate. We will lose our construction industry. The Infra structural growth that we need to allow the economy to grow will not happen. Our economy will die. The tax base will disappear, gone will be the government grants and gone will be the gravy train!

Author: Ian Massey – director