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Has Commercial Property Been Shot in the Foot by Construction Collusion?

mbombela-stadiumSo have you hung out with commercial property developers lately? The complaining, the belly aching- it’s like being in the room with an unoiled machine. One may sympathise with much of it, we’re all under the same pressure – inflation, weak Rand, strikes, higher electricity prices and corruption. Oops did I say corruption?

The construction industry and commercial property development are a two piece bathing suit and one piece has just shot the other in the foot. So the news has been out for a while. Those squeaky clean corporates who’ve been tut-tutting at government corruption with the rest of us have had their snouts in the trough all along apparently.

But before we join the rest of the rabble and chorus: “off with their heads,” we may wonder what the implications are for the future of construction, commercial or otherwise. The rot runs so deep and apparently for so many decades that prosecuting authorities may struggle with the implications of action against this network of crooked scaffolding.

images (4)It’s possible that upon the conclusion of investigations, top executives and manages could face jail time and companies are looking at burdensome fines. Twenty of the country’s largest construction firms continue to be under investigation by the competition authorities for running a cartel over a number of decades and roughly 20 more subsidiaries will also face the music after being fingered by the larger firms, the penalties have been awarded, but the singing isn’t over yet.

The investigations have left the industry in a royal flap, with firms doing damage control to minimise the impact on their bottom line and executives and managers who have only just managed to avoid going to jail. The effects on the bottom line will be passed on to – you guessed it, future clientele, future development- that include private sector commercial property developments.

Moses Mabida

Moses Mabhida Stadium

But here’s a twist: the country’s currently engrossed in one of the most momentous infrastructure rollouts in its history; the NPA is faced with the predicament of pursuing the culpable parties with the necessary force and potentially decimate the sector. The knock-on effect could have dire consequences for large scale construction in general but also for private sector commercial property development.

There are calls to black list guilty firms. However the collusive practices are so widespread that there would be scant companies left in the country with the ability to handle major construction projects if the blacklisting is carried out. Of course this would only effect the most sizable private development– but the effects would be felt down the line.

The government is faced with some hair-raising decisions as the private sector has been one of the most vocal in the cries for an end to government corruption. Now the construction industry’s dirty washing is out for the world to see, some of those cries have become quite muffled as arguments calling for the government to think of the good of the industry and the future of jobs emerge. No doubt all with some merit perhaps.

Schalk-Ackerman

Schalk Ackerman -Guilty

Senior executive from Stefanutti Stocks Holdings, Schalk Ackerman, was been granted Section 204 immunity by the NPA. Others followed. But now as we face the aftermath of this saga it’s difficult to tell whether commercial property development will suffer until the full consequences of corruption, exposure and prosecution take place. One optimistic fellow is Afrifocus analyst Hugan Chetty who despite the debacle told media: “I think a recovery in earnings will only take place in 2014. I would start looking at construction stocks’ earnings from the third quarter of 2013.”

In the words of Aveng Group chief executive Roger Jardine, responding to the collusion activities: ” this is a thorn in the side of our economy,” and that may be the rub, a thorn doesn’t go deep enough to kill but pierces sufficiently to cause widespread infection. Perhaps it would be best for the industry in the long run to rid the industry of all its infected members. Time will tell.

Aveng Grinaker-LTA, Shows Clean Hands and is Ready to Work

Stadia+2010+FIFA+World+Cup+3APHlxny1WDlSA Construction Industry May Need to Wash their Hands before Going to Work.

Avenge Grinaker-LTA has been twiddling its thumbs waiting for the government to stop sitting on its hands. CEO Roger Jardine has a few choice words to say about the future significance of government infrastructure spend and corruption in the sector too.

Roger Jardine - courtesy IOL

Roger Jardine – courtesy IOL

“South Africa is on the verge of one of the most significant infrastructure rollouts in our country’s history. A growing economy needs a strong and vibrant infrastructure and engineering sector. It is important that the procurement process around infrastructure projects be handled with integrity and transparency. Public money matched with private sector capacity can deliver an ambitious vision to grow our economy, create jobs and develop our people. For us to deliver sustainable value for all South Africans, each and every stakeholder needs to clean up all elements of the industry and its relationship with its government and private sector clients.” Announced Aveng Grinaker LTA CEO Roger Jardine on the company website recently.

This comes as South African construction companies wait with baited breath for government to get a move on with its many promised infrastructure projects. The announcement by Jardine is not an exaggeration as time immemorial has seen how government infrastructure projects in history have either been stunning swan dives providing jobs and attending to a country’s failing infrastructure or disappointing belly-flops of red tape, white elephants and corruption. We could be faced with one or the other. Hopefully not the latter, especially in the light of possible investigations by the Hawks and the National Prosecuting Authority into allegations of fraud and corruption in the construction industry.

Since 2008 the South African government’s public infrastructure spend has decreased significantly. Despite ambitious plans announced by government in the 2012 National Budget totalling R844.5 billion, the construction sector has not seen this impact on the order book and only expect this to impact results in the next 18-24 months

Aveng Grinaker -LTA Event Pic 10Aveng Grinaker-LTA is active in the commercial, industrial and retail sector and has an extensive track record of successful contracts in all types of buildings. The Group’s capabilities encompass design, engineering, material selection, procurement and construction. Though last year the firm announced that while most of Aveng Grinaker-LTA business units delivered improved results, a number of problem contracts in Australia and South Africa, combined with the continued challenging construction market in South Africa, negatively impacted the headlines earnings which are down by 58%. .

In Roger Jardine’s press release he said: “We have a big thorn in the side of our economy. Collusive and anticompetitive behaviour, which appears to have been entrenched in the construction and other sectors of the South African economy, has left our country with a disgraceful economic and ethical legacy that must be rooted out as a matter of urgency. We need not only the right skills but also the right ethics and values if South Africa is to thrive and jobs are to be created. It is not only the responsibility of elected politicians to foster trust and integrity in our society. The private sector has a vital role to play. This goes to the heart of the society that we want to build.”

It’s clear that Jardine is taking the allegations very seriously and steps have been taken within the firm to create transparency even including anonymous hotlines for whistle-blowers. In its SENS announcement on the Aveng website the firm advised the market that a provision had been raised for a potential penalty by the Competition authorities.

It’s clear that Aveng Grinaker-LTA are not taking the corruption in the sector allegations lying down, but it’s also evident from Jardine’s statements that he is neither unaware nor doubting the truth of those allegations. South Africa’s construction industry is going to have to wash its own hands before putting them to work.