Sanral on a rocky road in wake of billion-rand infrastructure projects awarded to ‘disqualified’ Chinese firms

Sanral CEO Reginald Demana defends what he calls ‘a rigorous process’. (Photo: X/@MbalulaFikile)

By Ray Mahlaka and Tim Cohen

30 Sep 2023

Board members, executives and CEO of state-owned enterprise Sanral launch a passionate defence of bid adjudication process after Chinese companies awarded road and bridge construction project tenders worth billions of rands.

Two of South Africa’s largest road and bridge construction projects were ultimately granted to Chinese companies despite the bidders being disqualified early in the bidding process, tender documents show.

The contracts, granted by the Development Bank of Southern Africa under rules determined by the South African National Roads Agency Limited (Sanral), were for the R4.05-billion Mtentu Bridge contract, South Africa’s largest bridge, and the R4.1-billion EB Cloete Interchange project, the largest road project ever allocated by Sanral.

These infrastructure megaprojects are among government initiatives to strengthen the country’s logistics and transport corridors, grow the economy and create jobs.

Construction on the N2 interchange in Durban near Westville, KZN, 29 September 2023. (Photo: Mandla Langa)

Construction vehicles along the N2 interchange in Durban near Westville, KZN, 29 September 2023. (Photo: Mandla Langa)

An artist’s rendering of the Mtentu Bridge. (Photo: Dissing Weitling Architecture)

The EB Cloete Interchange project will involve the widening of the N2 and N3 national roads in KwaZulu-Natal. The upgrade of the N2 will focus on 55km of road from Lovu River on the south coast to Umdloti on the north coast.

The N3 upgrade will focus on 80km from Durban to Pietermaritzburg. The project will take eight to 10 years to complete.

Once completed by the end of 2027, the Mtentu Bridge will be 1,132m long and form part of Sanral’s N2 Wild Coast Road programme, which involves a 410km stretch from East London to the Mtamvuna River on the border between the Eastern Cape and KwaZulu-Natal.

With the decline of South Africa’s railways, the national road network run by Sanral has become a vital commercial artery.

However, the decision-making and methodology used by Sanral, a state-owned enterprise (SOE), have become increasingly questioned by business and the construction industry, which is already in a parlous state.

In the case of the Mtentu Bridge, tender documents show that neither of the only two applications, the Stefstocks G-LTA Mtentu Joint Venture (JV) and the China Communications Construction Company Mecsa JV, met the eligibility requirements set out by the tender documents.

These requirements are normally assessed early in the process of adjudicating a tender, so it’s worrying that neither of the applicants was considered eligible.

The tender documents show that, on hearing about the disqualification of applicants, “Sanral’s accounting authority sought a legal opinion and resolved that the two bids must be considered as qualifying and therefore be handled as such”.

Sanral chairman Themba Mhambi overruled two bid disqualifications. (Photo: X / @RoadsAgency)

Sanral’s accounting authority is its chairman, Themba Mhambi. He issued a “formal directive”, which read: “The Accounting Authority of Sanral has noted the recommendation for the disqualification of the two bids for the Mtentu Bridge tender. After, however, considering a legal opinion at its disposal, the Accounting Authority [of Sanral] has resolved that the two bids must be considered as qualifying and therefore be handled as such.

“The relevant committees are therefore directed to proceed with the consideration of the two bids as qualifying”.

Sanral CEO Reginald Demana defends what he calls ‘a rigorous process’. (Photo: X / @MbalulaFikile)

On 27 September, Sanral board members and executives, including CEO Reginald Demana, launched a passionate defence of the company’s project approval processes, saying all recently awarded contracts, including the Mtentu Bridge project, were above board.

“They [the contracts] have been run through a rigorous process. It was the board’s prerogative to waive … any process as the accounting authority.

“In the end, there was nothing in the process that was material enough to say the process was fatally flawed and should be cancelled. And those contract awards went ahead,” said Demana during a briefing to journalists.

He said Sanral believes the tender process was run “normally” by the SOE despite neither of the bidders meeting the tender requirements at the evaluation stage, and being chosen after the board’s intervention.

The process in the case of the EB Cloete Interchange was slightly different. The appointed contractors, Base Major together with China State Construction Engineering Company, also did not pass the first round of tender evaluations.

This joint venture, which also won the contract for the Ashburton Interchange on the N3 close to Pietermaritzburg, also did not get through the first round of tender evaluations on this project.

In these cases, the project was readvertised and subsequently granted to the Base Major-China State joint venture. However, according to insiders, the awards were made subject to the provision of documentation.

Intense criticism

The Development Bank of Southern Africa, which had been roped in to oversee Sanral’s tender bidding processes, has been approached for comment but has yet to respond.

In recent months, Sanral has come under intense criticism from the construction industry for how it adjudicates and awards tenders, and for the inclusion of Chinese companies in South Africa’s infrastructure megaprojects.

South Africa’s embattled construction industry is a third of the size it was a decade ago, mainly because of the weak economy and a decline in infrastructure spending by the government and state agencies, including Sanral. Since 2018, Sanral has spent less than half of the grant it receives from the government to embark on infrastructure projects. In 2021/22, it left R10.4-billion of its R15.4-billion budget unspent.

The local construction industry wants Sanral to include it in infrastructure projects.

However, Sanral’s Demana also defended the involvement of Chinese firms in the agency’s contracts. He said such firms are usually experienced and competitive in delivering projects cost-effectively and on time.

“This is not to say that our local contractors are inferior. Some of the local companies have not invested in skills for 20 or 30 years and don’t have expertise in a particular area,” he said.

“Therefore, they tend to bid incorrectly for projects. The costs can come up much higher than a firm that is experienced. Price is often a key determinant in the tenders.”

But what Demana failed to mention is that Chinese firms in some of Sanral’s contracts, including the one involving the Mtentu Bridge, had the advantage of knowing the prices from previous bids, including those submitted by competing bidders based in South Africa, because the projects were being adjudicated for the second time.

The Chinese firms would have had information about the pricing when they moved up the bidding stages and were getting closer to being selected as preferred bidders.

Although they are active in the rest of Africa, Chinese construction firms have not gained a large foothold in South Africa. One of the main reasons is that South Africa has a well-developed construction industry and most local companies have strong empowerment profiles, as many firms are 100% black-owned. This is an imperative when state agencies like Sanral adjudicate tender bids.

Chinese firms often have little to no empowerment credentials. To win contracts from Sanral, they often have to partner with local companies, piggybacking on their empowerment credentials.

Most Sanral contracts, like the ones for the Mtentu Bridge and EB Cloete Interchange, carry a 30% local participation requirement for all bidders. The Chinese firms would have to subcontract some of the project work to local communities and companies (mainly small and medium enterprises).

Although local communities and companies are being brought into the value chain, Chinese companies would still lead the execution of a project.

Even though these mechanisms for the participation of local companies and communities in Sanral contracts have largely been welcomed, the industry is still puzzled by how the agency handed contracts to Chinese firms for the Mtentu Bridge and EB Cloete Interchange projects.

Chris Campbell, the CEO of Consulting Engineers South Africa, an industry body, questioned the fairness of the Sanral tender process that gave a price advantage to the Chinese firms.

“As much as we see ourselves as part of the global village and partnership, it would have been much better had we placed more emphasis on localisation and growing our own local companies,” said Campbell.

Webster Mfebe, the CEO of the South African Forum of Civil Engineering Contractors, was not concerned about the awarding of contracts to Chinese firms, but he hoped that Sanral applied the principles of fairness, competitiveness and transparency during its tender adjudication process, and followed the requirements of the Constitution.

But he was concerned that the principle of fairness and competitiveness may not have been followed, considering that the information about the Mtentu Bridge and EB Cloete Interchange projects, especially pricing in previous bidding rounds, was in the market and known, potentially benefitting the Chinese companies.

Sanral has also ruffled feathers with changes to its Broad-Based Black Economic Empowerment (BBBEE) and a new preferential procurement policy it applies when adjudicating tenders, which major construction firms believe will make it difficult for them to win contracts from the agency.

In the latest development, at least two construction firms, H&I Construction and SMEC South Africa, have obtained interim court orders to stop Sanral’s evaluation of projects using its new preferential procurement policy. Both interim interdicts were granted pending court applications to review and set aside the new policy.

H&I Construction and SMEC South Africa have accused Sanral of not consulting the industry widely on the changes to the policy before implementing them.

Sanral currently has about 200 tenders advertised in the market, with a value of about R33-billion. Sanral has estimated that a third of the issued tenders (with a value of R11-billion) will be affected by the court interdicts, but the roll-out of most of its planned projects will continue.

Controversy about new system

Preferential procurement is the system that paves the way for historically disadvantaged groups and companies to earn extra points in the scoring of tenders, helping them to emerge successful in the bidding process.

In the past, Sanral used a bidder’s BBBEE rating to allocate a maximum of 10 or 20 points out of 100 (depending on the value of the project) for compliance with the agency’s preferential procurement requirements, mainly its empowerment criteria.

Companies with a Level 1 BBBEE rating (the highest and most coveted empowerment status) could automatically receive the full number of points.

In May, Sanral abruptly changed the weighting of the 10 and 20 points for preferential procurement to provide maximum benefit for 100% black-owned firms. Sanral’s changes, argued H&I Construction, would relegate a bidder’s BBBEE rating to a mere 1 point, in the case of a tender valued at more than R50-million, or 2 points when a tender has a value between R30,000 and R50-million.

Essentially, Sanral’s new preferential procurement would render some construction companies unable to compete for contracts.

Despite the court challenges, Sanral is sticking to its new procurement policy. Mhambi, the board chair, said the SOE believes that transformation is a constitutional imperative, and “we will drive it as long as we are the governing structure of Sanral”.

Mhambi said that, despite all the transformation initiatives that Sanral is pushing, the biggest construction companies in South Africa are still the top beneficiaries of its contracts.

“We will continue to support big companies in the construction space, but we will not do that at the expense of the small companies,” he said.

“We will do that within a context that makes use of the big companies to assist the smaller companies to benefit, hence our subcontracting requirements, request for skills transfers to smaller companies, our insistence on the employment of local communities wherever we are doing business and our insistence on progressively increasing the ownership of black people in businesses in South Africa.” DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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