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‘ Junk status impact on construction widely exaggerated ’
By Nikita Lalla
INSIGHT
There have been highly publicised , widespread concerns about how South Africa ’ s downgraded status by international agencies will affect the local construction sector . Fears of non-payment , rising credit costs and many projects being put on hold are some of perceived threats leading contractors to consider terminating contracts with state owned entities .
The real impact of South Africa ’ s junk status on government led projects is widely exaggerated . Although the cost of borrowing and raising other forms of credit may have increased due to increased beta factors , this will not have an impact on a sponsor ’ s ability to fulfil its contractual obligations .
While I agree that investment coming into South Africa will be significantly impacted by our country ’ s new status , the money the South African Government has allocated to infrastructure and energy projects isn ’ t going to disappear . There are also contracts in place to ensure that contractors on these projects receive timeous payments .
Infrastructure and energy projects won ’ t just disappear According to National Treasury , energy expenditure by government is expected to total R180.7-billion over the next three years and there are countless other large-scale infrastructure projects , such as the Gautrain Commuter Expansion , the Johannesburg- Durban High-Speed Rail Link and the Gauteng Freeway Improvement : Phase II Bulk Distribution System , for example , that are all underway .
Contractors shouldn ’ t have a knee-jerk reaction to the junk status analysis that is published in the media and terminate current contracts due to fear of nonpayment , because infrastructure and energy projects are part of the country ’ s long-term development plans and strategies .
Government allocates funds at the start of the project and many of the projects will take many years , even decades , to complete . A good example of this is our country ’ s nuclear strategy , which has recently been in the media after energy Minister Mmamoloko Kubayi announced that government will be renegotiating its inter-governmental agreements with vendors . South Africa ’ s nuclear plans aren ’ t being put on hold indefinitely ; the purchasing and acquisition processes are simply being restarted .
Payment disputes can be prevented with proper contracts While non-payment is rarely an issue on these types of projects , there are instances where payment disputes arise . These disputes are generally due to inconsistencies in claims that need to be resolved , but even under these circumstances , contracts and processes are in place to help contractors proceed with work in a cash neutral position as soon as possible .
The two main contracts that are used for these types of projects are the NEC and FIDIC Contracts . Under the NEC Engineering and Construction Contracts , employers are obliged to make payment within four weeks . Finalising a dispute under the FIDIC suite of contracts may take longer due to the number of stakeholders involved in the arbitration process , but relevant parties will generally push to resolve the dispute as quickly as possible .
Our advice to contractors is to avoid terminating contracts . Engage in mediation , pursue an amicable solution and research ways to fast track your dispute .
There are many long-term infrastructure projects in South Africa ’ s pipeline and it ’ s financially beneficial for contractors to continue working on these projects and follow the right channels if a payment dispute arises . n
Dentons
Lawyer Nikita Lalla gives her expert opinion on the impact of South Africa ’ s junk status on the local construction industry .
ABOUT THE AUTHOR
Nikita Lalla is a partner at Dentons SA , a global law firm that advises on a wide range matters including infrastructure , disputes , energy , natural resources , private equity and project finance .
40 _ QUARRY SA | JULY 2017