The Gauteng Department of Infrastructure Development (DID) is exploring the possibility of establishing a dedicated construction or infrastructure bank or fund aimed at providing specialised funding or financing services to the construction sector.
Chairing an exploratory roundtable on the construction bank, Gauteng MEC for Infrastructure Development Jacob Mamabolo last week said the concept is one of several possible solutions for small contractors, in particular, who were battling to fund the first phases of a construction project.
This followed the DID’s engagements late last year with the industry, where financing was raised as a critical challenge to embarking on capital-intensive construction projects under tenders.
It was time to consider such solutions to the industry’s challenges, and to also seek out other possibilities or methods to support service providers that make possible the mobilisation of contractors, he said.
“If we find that there is something worth pursuing, then we can start formalising the process,” Mamabolo said of the concept at the inaugural meeting aimed at mapping out ideas.
Gauteng is under significant pressure to deliver high-quality infrastructure and services for its residents; however, service delivery in South Africa’s most populous province is grappling with inefficiencies, in part owing to the difficulties faced by construction companies in marshalling significant initial upfront capital outlay or facing liquidity challenges midproject.
A contractor under an awarded tender immediately needs to ensure insurance cover and payout performance guarantees, and fund the site handover and preparation, often not being able to rely on monthly, on-time payments from government and having to carry over the costs for months.
Further, financing is difficult to secure under commercial banks’ stringent risk analysis, which often is a generic process that overlaps industries regardless of the specific-to-sector risks involved.
In addition, commercial banks are often hesitant to provide finance in the early stages of projects, as full revenue streams only start to flow on commissioning – and that is what can be the downfall of many players.
“Our model of infrastructure delivery and the way we work . . . raises issues whether we have paid sufficient attention to the needs of the industry,” Mamabolo commented, raising what could be done to support the development of small business within this gap.
“I do see a case for a very reliable source of funding with reasonable interest rates,” Mamabolo added, noting the need for a fund to support contractor members that have projects to unlock.
Mamabolo suggested the concept of a member-driven, self-sustaining financial institution undertaking risk analysis specific to the sector, and not employing the blanket tool of the commercial banks, thereby creating a funding mechanism biased and specific to the industry’s requirements and effectively closing the gap.
While the industry is not necessarily limited in access to financing, the packages and types of finance on offer may not be tailored to the requirements of contractors to take their project to bankability stage and beyond.
Other ideas emerging from the first roundtable included doing away with the approach of running a “tender business” as opposed to a construction company, the payment of contractors within a 30-day timeframe, the development of a construction fund, rather than a bank, and value-addition services to cover the required insurance and performance guarantees, along with considerations for further capacity building at the implementation phase of the construction project.