Académique Documents
Professionnel Documents
Culture Documents
CONTENTS
Acronyms and abbreviations 4
Definitions 4
Executive summary 5
Background information 8
cidb and NCDP 8
The South African Construction Industry 10
Status of contractors grading in South Africa
10
Construction sector analysis 11
Market share by contractor type 12
International Funding models 14
Local contractor financing models 14
Products offered by banks 15
Pros and Cons of current financial support
23
Enterprise Development financing model 23
Constraints of current strategies and products 24
Segmented product innovation 24
Stakeholders participation at the financial modeling workshop
25
Short Term Finance Model Options 28
Option A: Khula Model 28
Option B: Bank in-house Contracting Agency 29
Option C: Use of entity e.g. NURCHA/ECDC model
30
Option D: Contract finance model 32
Medium-term model: Bank in-house Contracting Agency and Enterprise Development
33
Long-term model: Contracting Agency 35
Establishment and role of the Contracting Agency
36
Role of cidb 37
The Role of Government 37
Role of Banks 38
Role of Industry Players 38
The role of Insurance Companies 38
How will the Contracting Agency be funded?
40
Rollout Plan for Implementation of the agency
40
Summary 41
Appendix 1: What is the scenario of contractor performance
43
Definitions
Contracting Agent: A board or commission of the state, or a state institution supported in whole or in
part by state or private sector funds, authorised to enter into a contract to support emerging contractors
both financially and non-financial for Government or private sector projects or to perform a state project
by the direct employment of labour.
Emerging contractor: Any Contractor within cidb level 1 to cidb level 5, to be registered in recognition
of their cidb grading for appropriate development support and progression within the cidb programmes.
Enterprise development: Support for existing, or the fostering of, new black SMEs and BEE companies
in the construction, financial and other sectors of the economy.
Funding: Provision of financial support to emerging contractors through enterprise development finance
and any other financial support provided by Government or private sector for the development of
emerging contractors.
Executive summary
Construction plays an indispensable role directly and indirectly as a contributor to growth in the South
African economy. It is a significant employer of people; it creates numerous economic opportunities for
medium and small enterprises; and the life span of construction products unleash abundant economic
opportunities for their consumers; and it contributes directly to improving quality of life.
The economy is buoyant albeit ending in recent years on growth rates below that anticipated and
the Rand has been strengthening progressively. In early 2011, interest rates are at an all-time low and
the official rate of inflation is at its lowest level in 50 years and well within the range set by government.
The Finance Minister confirmed with the release of the Medium Term Expenditure Framework (MTEF)
that the fiscal framework is growth-orientated and reflected governments commitment to long-term
sustainability, a commitment reinforced through the continued declining cost of servicing debt as a share
of GDP. The release of the MTEF further reaffirmed governments commitment to the rollout of social
and economic infrastructure through the Expanded National Public Works Programme (EPWP) as well as
through increased government and parastatal investment.
Employment numbers and type remain a key challenge to the country: data obtained from the census
indicates that almost 44% of South Africans in the age category 15-65 years are not economically active.
The type of employment presents its own challenges: by occupation and within the employed category
aged 15-65 years, the highest percentages are for elementary occupations, with altogether more than
two in every ten of the employed in elementary occupations (StatsSA). The construction sector has its own
challenges in this regard. It employs the fourth highest number of persons having no education, behind
agriculture, households and mining. Construction also has the fourth smallest percentage of employed
persons with a higher education qualification, behind households, agriculture and mining.
The challenge of infrastructure development in developing countries remains immense. With the worlds
population expected to increase by another two billion between 2010 and 2023 (most of it in urban
centres), the challenge will become acute. An estimated 1.2 billion people globally lack access to safe water;
2.4 billion lack access to adequate sanitation; 2.5 billion lack access to energy supplies and 900 million
people in rural areas have no reliable roads to give them access to jobs or markets for their products (www.
csir.co.za). In Sub-Saharan Africa, less than 8 percent of the population is connected to the power grid.
The World Bank has estimated that the present annual investment levels will need to double from about
US$15 billion to US$30 billion to reach the Millennium Development Goals aimed at reducing poverty
by 2015 (www.worldbank.org). This places huge significance on the efficient use of scarce capital in
developing countries. The 2001 Census indicates that South Africas needs match those included above.
In South Africa during 2010, the construction industry delivered an output in excess of
R220 billion per annum, of which approximately 58% came from public sector orders and tenders, 13%
from public corporations and 30% from the private sector. This constitutes almost 30% of total investment
in South Africa (StatsSa 2010). National spending priorities include infrastructure to support industry
development, i.e. making sure that the public infrastructure is in place to support industrial investment,
and the future maintenance thereof.
However, there is serious concern within the industry at the high rate of enterprise failure and the potential
consequences of that on the industrys ability to deliver. According to StatsSA there were 532 liquidations
of construction companies in 2007, 554 in 2008, and 371 in 2009. Whilst the drop in liquidations is to
be welcomed, the fact remains that over 1,400 contracting enterprises could not remain viable over the
past three years. The reason for at least some of this failure is to be found in the current lack of profitability
in contracting: a measurement of profitability established within the industry has indicated a continual
decrease in this regard over the long term.
The Construction Industry Development Board (cidb) has identified a need for the financial support to
emerging contractors and the working together of financiers in the development of financial models
to bridge this gap. The cidb by facilitating this research and bringing together financial sector role
players aims to have the recommended models embraced by the sector so as to consolidating existing
financial and non-financial support to contractors, and develop appropriate tailored models, products
and packages that target the needs of the emerging construction contractors.
The project was designed in three phases:
Phase I
Conducting a desk top study of available financial support available to contractors; and
Phase II
Consolidating and proposing appropriate financial model options. Workshops were
conducted by cidb in which relevant stakeholders participated. This included participation by the major banks, construction industry stakeholders, Government and the
insurance industry. It was from these interactions that the need for a phased approach
(short-term, medium and long-term) of models be developed.
Phase III
Proposed packaging and implementation for rollout.
Background information
cidb and the NCDP
The cidb was established to provide leadership to stakeholders and to stimulate sustainable growth,
reform and improvement of the construction sector for effective delivery and the industrys enhanced
role in the countrys economy.
Creating an enabling environment for Contractor Development is a major a focus and deliverable for the
cidb, hence the initiative of developing financing models, which will assist financiers to look at suitable
models, and in turn assist in mitigating their risks. Financiers and the private sector are therefore invited to
participate in this developmental initiative, which will assist in the growth of the economy and contractors.
The cidb is mandated through the Construction Industry Development Board Act 38 of 2000 to
support contractor development and emerging sector participation throughout government and
industry. MINMEC specifically, has mandated the cidb in collaboration with the National and Provincial
Departments of Public Works to devise and implement a National Contractor Development Programme
(NCDP). The objectives of NCDP as indicated in the cidb - Framework National Contractor Development
Programme January 2010 (Updated September 2011) is to:
Improve the grading status of contractors in targeted categories and grades - effectively improving
the supply side capacity available to public and private sector clients;
Increase the number of black, women, disabled, and youth-owned companies in targeted categories
and grades - increasing the representatively of contractors in all categories and grades;
Create sustainable contracting enterprises by enabling continuous work through a competitive process
- and thus creating the platform for sustained employment and skills development;
Improve the performance of contractors in terms of quality, employment practices, skills development,
safety, health and the environment; and
Improve the business management and technical skills of these contractors.
The NCDP is a government programme comprising of a partnership between the cidb, national and
provincial Department of Public Works and other willing stakeholders. The participating stakeholders
commit their effort and resources to develop previously disadvantaged contractors, by:
Establishing an enabling environment for contractor development;
Enhancing and strengthening contractor development mechanisms, including emerging contractor
development programmes (ECDPs), joint ventures (JVs) and other appropriate mechanisms;
Facilitating performance improvement of contractors; and
Supporting the creation of a pool of skilled artisans, supervisors, technicians and technologists for the
construction industry.
It is therefore important for cidb to ensure development of emerging contractors by having access to
funding and non-financial support; which would enable them to execute the contracts awarded to them.
Benefits of participation in the NCDP:
Continuous and profitable work opportunities are provided to learners / contractors within the
programme;
Procurement strategies and development mechanism to target the learners and contractors within the
programme with continuity of work;
Standardised designs and specifications;
Appropriate contract conditions addressing supportive practices regarding sureties, guarantees,
retention policies;
Link to other existing Government or partnering stakeholders and resources e.g. CCC, DTI-SEDAs
NHBRC;
Prompt payment of contractors for work completed satisfactorily;
Client reporting to cidb on Contractor Development initiatives and their various contributions, for
co-ordination and identification of areas for support;
Appropriate contract management and quality assurance oversight is provided by the departments
running the contractor development programmes;
Contractors are able to access finances for working capital, (i.e. to provide sureties, purchase
materials, hire plant and equipment, pay labour etc.);
Contractors have appropriate technical capability and capacity;
Contractors have appropriate construction management and quality control expertise;
Contractors have access to an appropriately skilled workforce;
Contractors have access to cost effective, appropriate, quality materials supply;
Contractors have access to cost effective, quality plant and equipment; and
Contractors have access to information and technology.
These benefits go beyond direct benefits to emerging contractors but contribute to an environment with
enhanced quality performance, and decreased risk to the likes of clients, financiers, established main
contractors and the industry or country at large.
10
CE
EB
ME
SW
Total
Grades
21,243
1,093
2,449
57,119
2,743
11,779
96,426
83%
65%
80%
92%
79%
92%
88%
1,497
138
107
1,988
184
473
4,387
511
88
50
552
83
99
1,383
759
151
147
809
121
128
2,115
594
143
172
544
185
193
1,831
624
40
65
542
76
53
1,400
218
21
33
207
35
27
541
79
13
72
17
189
40
16
28
21
12
121
4,322
587
603
4,742
722
991
11,967
17%
35%
20%
8%
21%
8%
12%
25,575
1,680
3,052
61,861
3,465
12,770
108,393
1
% of total
Total (2 -9)
% of total
Total
EP GB
11
13%
9%
55%
24%
Large
Medium
Small
Micro
The construction market share is further demarcated into various class of works as depicted in the
table 2 below.
Table 2: Market share by contractor type
Large
R million
Medium
R million
Small
R million
Micro
R million
Total
R million
1,754
428
98
26
2,306
Construction of buildings
17,629
8,028
3,153
4,307
33,117
Construction of civil
engineering structures
22,396
4,021
363
518
27,478
165
485
323
542
1,515
1,233
1,517
559
770
4,079
357
591
374
790
2,112
1,039
1,700
985
1,918
5,642
169
335
202
119
825
5,870
1,992
503
627
8,992
403
355
309
544
1,611
Other building
completions
3,071
3,363
1,519
672
10,625
Renting of construction
equipment
1,099
694
194
153
2,140
55,185
23,689
8,582
12,986
100,442
Type of construction
Site preparation
Construction of other
structures
Construction by specialist
trade contractors
Plumbing
Electrical contracting
Shop fitting
Other building
installations
Painting & decorating
Total
12
13
14
Purpose
Finance provided
Process
Terms
Providing a loan
facility for the working capital requirements of qualifying
contractors who
participate in the
CDP.
In the process of
submitting tender
documents, the
contractors are also
required to complete
NEF Loan Application forms.
15
Purpose
Finance provided
Currently no direct
funding to contractors.
The DBSA is currently
working on a venture
fund related to enterprise development
buts its in the early
stages of development.
Process
Terms
16
Purpose
Finance provided
Khula was established Khula provides a guarto facilitate access antee to the bank.
to finance for SMEs.
It is a wholesale financier. Khula finance is a
good option for business owners who have
insufficient or no assets
to offer as collateral.
Process
Terms
An entrepreneur needs
to approach the bank
that then applies for
finance on behalf
of its client to Khula.
A contractor needs to
contribute a percentage of the amount they
want to borrow, either
in cash or equipment
that will be used in their
intended business.
An annual fee is
required in advance for the duration of the loan.
Khula also provides
services to guide
and counsel contractors in various
aspects of managing their business.
Purpose
Finance provided
Process
Terms
To provide finance to
emerging black contractors in Grades
1 to 6 who have
been awarded tenders by the Eastern
Cape Department
of Public Works.
Bridging Finance.
The fund finances
work in the following
fields: civil engineering,
electrical engineering,
general building, mechanical engineering
and specialist works.
The contractors are those
that have been assessed
by Construction Industry Development Board
(cidb) to have the capacity to handle projects
up to a maximum of
R10 million.
The applicant
must have a
business account
which they are
willing to have
the Fund Manager (BFPA) sign
as a co-signatory.
Purpose
Finance provided
Process
Terms
A contractor needs to SEDA offers entrepreregister with SEDA. neurs help with business
plans, technical advice
and marketing, and information on exporting,
Some provinces e.g.
tenders and incentives.
KZN have partners with
both a client (eThekwini)
and financier (ABSA) to
offer incubated support
to construction entities.
17
Standard Bank
Role players
Purpose
Standard Bank
Government
Department
Blue Chip
companies
Finance provided
Process
Terms
Written, signed contract
to supply goods or services for a defined rand value within a specified time.
It is essential that the contractor have a complete,
written, signed contract to
supply quantified goods or
services to a blue chip company or government department for at least 12 months.
ABSA
Role players
Purpose
Finance provided
Process
Financial Support ABSA Contract and other Funding is provided in SMME fund application.
SMME FUNDs
finance offerings to line with the contract
SMEs who portray e.g. term.
entrepreneurial skills
and have the potential
ability to service their
debt.
Terms
Signed contracts, orders
and ONCE of orders
from Government or
blue chip companies.
No security required
and clients with bad
credit history will not be
excluded.
Non- Financial Support D u e t o t h e h i g h Varies other financing Finance limited on the Any SMME.
Enterprise Growth business failure rate options available.
customers behalf for
Programme
in South Africa, ABSA
credit guarantees
has implemented the
Enterprise Growth
Programme to assist the
SMMEs to grow and
sustain their businesses.
Enterprise Development EDCs offer financial Support
Centres
advice and non financial
support to SMMEs at no
cost.
Business Advantage
18
FNB
Role
players
FNB
Purpose
Finance provided
Process
Terms
Nedbank
Role players
Nedbank
Purpose
Assist you in realising
the opportunities in your
enterprise. We are dedicated
to providing qualifying
business with innovative
ways to develop and grow.
PS: Nedbank are the current
N.DPW EPWP financier
and are up-ramping their
resources and tailoring to
construction delivery and
up-skilling.
Finance provided
Process
Businesses can
SMME application
obtain credit facilities
such as medium
term loans, vehicle
and asset finance
and working capital.
Terms
Nedbank Business
Banking offers tailormade solutions to
black-owned (25%
and more) businesses
that are generating
an annual turnover
between R5 and
R35 million.
19
Nedbank
Role players
Tusk
Alexander
Forbes
Hannover RE
NURCHA
COFACE
Purpose
Finance provided
Process
Terms
Infrastructure and
Community facilities
projects (roads, drainage, water reticulation, building of clinics,
schools, libraries), the
refurbishment of buildings building of subsidy
houses or RDP houses.
Nurcha
Role players
Nurcha - which also offers management support to the contractors
would have discontinued bridging
finance loans this year were it not for
the partnership with Future growth.
On behalf of its pension fund clients, Future growth contributes 70
percent of the partnerships capital
used to fund the contractors bridging finance requirements and thus
facilitates private sector investment directly into rural infrastructure projects.
20
Purpose
Finance
provided
Process
Terms
Ithala
Role players
Ithala
Purpose
To provide bridging
finance and performance guarantees (guarantees linked to bridging finance only) to
small contractors in
the building and allied trades based on
a secured contract.
Finance provided
Process
Terms
Purpose
Nthabi
Finance provided
Wholesale finance
Process
Minimum of $50
million
Terms
None
Revolving credit
Contract financing
CPF
A business mortgage
offers contractors the
opportunity to purchase,
extend, or improve a
residential property
where up to 50% of the
property will be used
for business purposes.
What are the benefits of this product?
The repayment period
can be up to 20 years.
A contractor could normally get a loan of up to
80% of the propertys assessed value and linked
to an AccessBond facility.
21
22
Traditional
finance models
Equity
Venture Capital
Development
Finance
Banks determine Bank overdrafts Owners normally Limited high net Early stages of develwhat projects to fund. Asset based finance dont have equity. worth individuals. opment and not availBonds, commercial
able to the market.
property finance.
PROS
No interference in Less security re- Minimum security rebusiness. New inves- quired, share risk. quired.
tors could participate
sustainability.
CONS
23
Compared with other forms of empowerment, such as bringing in a black shareholder, enterprise
development is relatively inexpensive. It also has the advantage of building the capacity of smaller
contractors, giving them the ability to do larger deals and improving their profitability.
Enterprise development should not be confused with procurement. Buying goods from empowered
companies is a continuous activity, while enterprise development can be a one-off event.
There are cases where enterprise development and procurement can work hand in hand. For example,
if a company offers its truck drivers the opportunity to become subcontractors instead of remaining
employees, it is empowering them. By giving them business skills training and providing terms for them
to pay for the trucks, the company earns points for enterprise development. If the company goes on to
lock these drivers into a long-term contract, it then also gets points for procurement.
Some companies are providing more hands-on assistance with financial support, operational guidance
and infrastructure. This could also include mentoring, coaching and training.
Benefits of centralising Enterprise Development in the Construction Sector:
Recognition by banks;
Recognition by and of large construction companies;
Enterprise development done by specialists who understands enterprise development;
Recognition for and of insurance companies; and
Enterprise development is focused and the results are measurable.
Contractors are often first-time borrowers without any track records at the bank;
Contractors are unable to fulfil the collateral requirements of the bank;
Contractors cannot present financial statements to the bank (Appendix 1);
Contractors are unable to finance 20-50 % of the investment from their own resources as required
by the bank; and
It takes a long time from securing a contract to securing finance.
The line of credit model is the general banking facilities that are offered to any client with enough
security for the required financing, yet this is not suitable for contractors in this industry.
The Project Finance model is generally recommended for construction contracts but the problem for
small contractors is lack of collateral/ security.
25
26
Short Term
Medium Term
Long Term
31 March 2011
31 March 2011
31 March 2011
15 February 2011
February 2012
February 2013
Approval of models by
cidb
Presentations to all
major banks
30 April 2011
30 April 2012
30 April 2013
Presentation of roll-out
plan by banks
(to cidb)
31 January 2012
31 December 2012
31 December 2013
31 January 2012
31 March 2013
30 June 2014
15 March 2012
Establishment of
Contracting Agency
31 March 2013
Approval of mandate of
the Contracting Agency
15 April 2013
30 April 2013
27
{Application at
branch level}
Performance
Guarantee
Apply
for
funding
Government
Department of Works
Programme
Issue
contract
Bank Account
jointly
controlled
by Bank and
Contractor
Working
Capital
Contractor
Other Clients
Bank in-house
department
Performance
Guarantee
Apply
for
funding
Government
Department of Works
Programme
Issue
contract
Bank Account
jointly
controlled
by Bank and
Contractor
Working
Capital
Contractor
Other Clients
Bank will have their own in-house Contracting Agency (centralised unit within the bank);
Financing will be arranged by the contractors themselves;
The Bank will confirm the contractor grading with the cidb;
Khula or insurance companies will issue a guarantee to the bank;
Banks will provide working capital to contractors on the basis of contract profitability;
Bank account will be controlled by the bank and the contractor (ring fenced cash flows/Escrow
account);
Money will be released to suppliers and employees of the contractor in accordance with a payment
plan; and
The client will pay the money into bank account and once the bank has been repaid the balance
left in the account will be paid to the contractor.
29
Insurance
Companies
Wholesale Finance
Entity e.g
NURCHA/ECDC
Performance
Guarantee
Apply
for
funding
Government
Department of Works
Programme
Issue
contract
30
Working
Capital
Contractor
Other Clients
Bank Account
jointly
controlled by
NURCHA/
ECDC and
Contractor
An alternative model is for banks to provide funding to the Contracting Agency on the back of a
guarantee issued by an insurance company. Only contractors registered with the cidb will be able
to apply for this funding;
The bank will provide a facility to the Contracting Agency based on a guarantee by Government or
an insurance company;
This is another way in which insurance companies may participate in the process;
This will have significant benefits for the banks as they only have to provide a single facility to the
Contracting Agency as oppose to thousands of contractors;
The Contracting Agency will provide funding to the contractor;
A bank account will be opened for the contractor and jointly controlled by the Contracting Agency
and the contractor;
The client of the contractor will agree up-front to pay directly into the joint bank account and agrees
to a session of contract to the Contracting Agency (Appendix1) (e.g. Investments, Guarantees,
Insurance, Retentions, etc);
The Contracting Agency will assist the contractor to negotiate better terms with the client and
the insurance company as the overall risk of contracting with a small contractor will be reduced
through the intervention of the Contracting Agency;
The Contracting Agency will not be involved in grading contractors; the grading process has to be
independent in order to provide credibility to the various stakeholders;
The Contracting Agency will provide the contractor with enterprise development support in the form
of technical assistance, personal development, financial management, business management,
contracting procedures etc;
The Contracting Agency will assist in facilitating and negotiating a performance guarantee and
retention guarantee on behalf of the contractor, which may speed up the process of financing and
free-up working capital for the contractor;
Insurance guarantees may be funded from CSI or parts of enterprise development contributions
but the contractor has to refund this to the Contracting Agency at the end of the contract in order
to ensure sustainability;
The contractor receives the opportunity to build its own track record with the bank and the insurance
company;
The cidb is able to track the progress of the contractor; if the contractor does not perform, the
Contracting Agency will be able to take the necessary steps to protect all stakeholders; e.g.
additional mentoring or project management support;
Government is able to track the progress of contractors; and
Centralise enterprise development in the construction industry.
31
Issue
contract
Financial Institutions
Apply
for
funding
Working
capital
{Application at
branch level}
Escrow
Account
jointly
controlled
by Bank and
Contractor
Government
Department of Works
Programme
Other Clients
Payment
32
Implementation
The project contract finance model is existent in South Africa as part of general banking products. This
can then be modified to suit the construction industry and be implemented immediately as the banks
have resources in their specialised and structured finance divisions.
Guarantees:
Government
Insurances
Khula etc.
Financial Institutions
Bank in-house
department
Performance
Guarantee
Apply
for
funding
Government
Department of Works
Programme
Issue
contract
Bank Account
jointly
controlled
by Bank and
Contractor
Working
Capital
Contractor
Other Clients
33
Implementation continued
A bank will have its own in-house Contracting Agency (centralised unit within the bank). This
is the hybrid of the short term model as it combines enterprise development and internal risk
management;
The bank could use part of their enterprise development contributions ( or CSI Dev funds, etc) to
fund contractors, including the cost of guarantees;
Enterprise Development is offered by banks (support in various forms, including assistance with
financial management);
Financing will be arranged by the contractors themselves;
The bank will confirm the contractor grading with the cidb;
The bank may cover the cost of Khula guarantees;
The banks will provide working capital to contractors on the basis of a contract profitability;
Bank account will be controlled by the bank and the contractor (ring fenced cash flows/Escrow
account);
Money will be released to suppliers and employees of the contractor in accordance with a payment
plan; and invoices as vetted by client, contractor and agency department; and
The client will pay the money into bank account and once the bank has been repaid the balance
that is left in the account will be paid to the contractor.
Implementation of medium term option by banks
The banks will have to make a decision on their preferred funding model for all cidb registered
contractors and mobilize their resources to implement this within a period of 12 months.
34
Large
Financial Institutions
Construction
Companies
Apply
for
funding
Insurance
Companies
Contracting Agency
Issue performance
guarantees to
clients
Funded by
Enterprise Development
Contributions
Debtors Insurance
Government
Government
Department of Works
Programme
Issue
contract
Working
Capital
Contractor
Other clients
Registered with
CIDB Rating
Payment
The Contracting Agent could be established as an arm of Government and private sector (Public Private
Partnership) which will be responsible for developing and training (mentoring) of contractors. This
can be a joint venture between Government and private sector or a private sector initiative. Highly
skilled manpower could be recruited to manage the Agency, which will include Engineers, Consultants,
Accountants, Bankers, Insurers, Trainers and other relevant professionals. Ownership of the Contracting
Agency will be decided at a later date depending on private sector and Government needs and
commitments.
35
The Contracting Agency will assist the contractor to negotiate better terms (e.g. interest, guarantees,
insurance retentions etc) with the client, the insurance company and the bank, as the overall risk
of contracting with a small contractor will be reduced through the intervention of the Contracting
Agency;
The Contracting Agency will not be involved in the grading of contractors. The grading process has
to be independent in order to provide credibility to various stakeholders;
The Contracting Agency will provide the contractor with enterprise development support in the form
of technical assistance, personal development, financial management, business management,
contracting procedures etc.;
The Contracting Agency (Secretariat and Chair will be appointed by participants and the secretariat
could initially be government / cidb) will assist in facilitating / arranging performance guarantee
and retention guarantee on behalf of the contractor, which will speed up the process of financing
and free up working capital for the contractor;
Insurance guarantees may be funded from CSI or parts enterprise development contributions
but the contractor has to refund this to the Contracting Agency at the end of a contract in order to
ensure sustainability of both the agency and the Contractor;
The contractor receives the opportunity to build its own track record with the bank and the insurance
company;
Government is able to track the progress of contractors;
Centralise Enterprise Development in the construction industry; and
Assist in co-ordination and centralisation of Enterprise Development in the construction industry.
Role of cidb
The cidb will play a facilitation and co-ordination role, which will include lobbying Government and
Private Sector to work together in developing emerging contractors, adopting the models, packaging
and tailor making products, and establishing the agency. The promotion of the models and agency,
promoting standard application process, streamlining procurement processes amongst government
client departments, promoting contractor support, training and mentorship, and profiling of contractors
will be the major roles that the cidb will play. The cidb will encompass and promote the financial
modeling options as part of the NCDP (National Contractor Development Programme).
37
Role of Banks
As mentioned earlier the major challenge for contractors is access to working capital. Banks and
other financiers will be invited to be the leading players in this initiative. The Contracting Agency will
provide the risk management process to all participating banks while managing the risk. Managing
risk will include training, mentoring and providing the necessary business management skills to
contractors. Contractors will be able to deliver on the contracts issued to them as they will be assessed
for profitability before the contractors can start working on the project. The benefits to banks include:
Reduction in bad debts;
Economic growth as a result of contractor performance; and
Employment creation which will result in more people opening new accounts.
Banks will be expected to adopt the models, package and tailor make targeted and construction
specific products, and support the establishment of the Agency.
38
39
Implementation period
February 2011
March 2011
June 2011
June 2011 to June 2014
40
Summary
Development of emerging contractors is one of the Governments priorities. The Government is inviting
all interested stakeholders to participate in the development of emerging contractors. It is Governments
intention to lead and allow the private sector to participate, contribute and mutually benefit in this project.
The impact of the success of this project will include:
Creating an enabling environment for emerging contractors to core exist with large
contractors;
Allowing sharing of resources and skills within the industry;
Sustainable empowerment and economic growth;
Access to EPWP where the Government has budgeted to spend R300 billion over the next
three years in infrastructure development; and
Growth and employment creation in the construction industry and other feeder industries
like insurance, banking and service sectors.
41
42
What if, due to the nature of the project, the progress The borrowing plan/contract should be in accordis non-linear and results in an abrupt increase in ance with progress, whether linear or non-linear.
working capital requirement, thus rendering the
start-up money arrangement with the bank futile?
The project will be pre-evaluated by the Contracting Agency to ensure that its a viable contract.
Progress will be evaluated at various stages and
appropriate action taken by the Contracting
Agency if required. Insurance cover will have to be
pre-signed and Guarantees from agency to bank.
Agency to recover losses from contractors.
What if the client rejects some material Defective material will be covered by warranty.
that has been paid for by the bank, but Damage due to accidents will be covered by insurhas not been paid for by the owner yet? ance.
What if the banker is not knowledgeable Assistance from Contracting Agency/ support entity
enough to understand the construction will be available and there will be buy in from all
process in order to oversee disbursement? major banks.
43
10
Why should the banker be assigned as a The Banker is to receive and control
third party beneficiary to all of the invoices if payments into the bank account.
the payment bonds already indemnify him?
11
Why should a client cooperate with a contractor Numerous hidden benefits for the client, the
with such an arrangement if he can find an- country, enterprise development, contractor
other contractor who can operate traditionally? development, banks and insurance companies
meet developmental goals and minimises risk.
Risk sharing and management. Although no
contract between client and bank, in context of
a CDP developmental objects could be derived.
12
If a contractor has a track record of having success- Security to bank and incentive for contractor to
fully and profitably executed projects, why should he finish early.
agree to retention of his profit in the bank account?
13
14
Risk in this model is low, hence insurance company could consider increase in bonding capacity.
15
16
Why should a bank lend without collateral or Contractors are a high-risk segment to bankers
with minimum collateral when currently they yet the segment is currently not exploited. The
seek and get collateral for their lending?
country needs the development of contractors in
various forms, whilst the banks need the clients,
turnover, credit facility extensions. Mutual benefits.
17
18
19
What if the bank makes a mistake or de- The bank will have insurance in place to cover this.
frauds and authorises release of more
money from the joint bank account?
20
44
iww | 1147
EMAIL: cidb@cidb.org.za
TEL: +27 12 482 7200/ +27 86 100 cidb
FAX: +27 12 349 8986/ +27 86 681 9995
ANONYMOUS FRAUDLINE: 080 011 2432
POSTAL ADDRESS: PO BOX 2107, BROOKLYN SQUARE, 0075
PHYSICAL ADDRESS: BLOCK N&R, SABS CAMPUS, 2 DR LATEGAN RD,
GROENKLOOF, PRETORIA, SOUTH AFRICA