PLC CROSS-BORDER CONSTRUCTIONS AND PROJECTS HANDBOOK 2011/12
Overview of the Construction and Projects Sector
1. What are the main trends in the local construction and projects market? What are the most significant deals?
South Africa continues to see a high level of public and private sector infrastructure investment. This is mostly due to public sector infrastructure upgrading and private sector capacity expansion. A significant part of the investment continues to relate to:
Increased electricity generating capacity.
Mineral and natural resource processing capacity.
The most significant transactions in the last 12 months relate to public sector procurement. They include:
The continued construction of (and the continued placing of contracts for) the Eskom Medupi and Kusile Power Stations (each station comprising six generating units of about 600 megawatts each).
Significant road infrastructure upgrades.
Investment in mining infrastructure, including the development of new mines, the expansion of existing mines and the expansion of processing capacity.
Although not yet in construction phase, there has also been substantial activity in the renewable energy sector, mainly due to the government’s Renewable Energy Feed-in Tariff (REFIT) programme.
2. Who are the main parties involved in a project?
The main parties in a construction and engineering project are the:
Contractor or contractors.
3. Which are the most common procurement arrangements if the main parties are local? Are these arrangements different if some or all of the main parties are international contractors or consultants?
The construction and engineering environment is sophisticated (both from a legal and market perspective), and therefore procurement arrangements vary. An open or limited tender process is typically used (and generally required for public sector procurement), although negotiated procurement is not uncommon in the private sector.
The most common procurement arrangement for road works or commercial or residential building works is for an appointed single main contractor to construct the works. The contractor assumes full responsibility for all construction activities and the supply of all labour and materials (whether supplied by the contractor or by subcontractors). The contractor carries out the works according to the employer’s design, under the direction of the employer’s agent. The employer appoints the design team.
For other projects, procurement arrangements vary from turnkey (that is, handing over the project in a ready to use condition)/ engineering procurement and construction (EPC) contracts, to multiple contractor arrangements (with or without the employer appointing an engineering, procurement and construction management (EPCM) contractor or one or more external professional consultants as the employer’s agent). Multiple contractor arrangements typically include mixed design-build and construct only or erect-only contracting arrangements. These arrangements apply equally where the parties are international contractors or consultants.
4. What transaction structures and corporate vehicles are most commonly used in local projects (when the main parties are based in your jurisdiction)
Generally, internationally recognised transactional structures are used. These include special purpose vehicles, joint ventures and consortiums, depending on the nature of the procurement and works
notarial bonds over movable assets;
pledges and cessions over all the project company’s rights against third parties;
security over all the project company’s bank accounts;
A pledge of all shares in the project company.
A range of step-in rights, which are generally exercised through security granted over the shares in the project company (the funders must first be entitled to exercise those rights under the security documents before they can step in).
In the case of PPP projects, investors typically require both:
Security over the project company’s various rights (particularly claims the project company has against the government under the PPP agreement).
Shares in the project company. Generally funders cannot obtain security over the project’s fixed assets, as these are usually the government’s property.
In the case of projects where investors have limited recourse to the employer’s balance sheet, funders will typically require a comprehensive set of financing documents, including a fully termed common terms agreement that contains, among other things, all appropriate representations, warranties, positive and negative covenants, and events of default. In the case of PPP projects, investors will typically require fully termed finance documents.