Sanral's ‘arbitrary’ modification of huge construction contracts has cost taxpayers ‘billions’

19 Sep 2023

A controversial decision by Sanral to modify its contracting policies has led to the cancellation of contracts worth R17-billion, and caused delays in construction projects and an exodus of experienced staff members.

The board of state roads company Sanral has come under heavy fire from industry figures and staff for allegedly “arbitrarily” modifying its contracting policies in such a way that could endanger large scale construction projects, including Africa’s largest bridge project, the R4-billion Mtentu Bridge and Sanral’s largest project ever, the R5-billion N2/N3/EB Cloete interchange upgrade.

This decision and many others like it have strained the relationship between the board and the Sanral executive, particularly after it suspended earlier this month two of its most senior staff members, following which it has emerged that several senior staff members have recently resigned, joining a steady exodus of experienced staff members in the past year.

Sanral spokesperson Vusi Mona claims the suspension is because the staff members in question refused to implement a board resolution. However, insiders claim the staff members in question did in fact implement the decision, but did not implement it retrospectively, because the board resolution was unclear and had not specified that the directive should be applied to consultants’ contracts that were already in place.

The subsequent retrospective application of this controversial decision by the Sanral board resulted in the cancellation of contracts worth about R17-billion, with three of the four largest contracts subsequently being won by Chinese companies when they were retendered. The cancellation has caused substantial delays in several Sanral roads projects, and helped exacerbate large-scale underspending by the SOE, which is responsible mainly for SA national roads network.

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Sanral would not comment on the allegation that it had suspended CFO Inge Mulder and head of Supply Chain Management Inba Thumbiran because they did not apply the board decision retrospectively.

“Sanral does not manage employee relations in public or through the media,” Sanral said following a request for comment.

For a board to insist on a policy change retrospectively in such a way that dozens of existing contracts would have to be renegotiated causing major delays and extra costs would normally be highly irregular. Both the suspended staff members are experienced, long-serving career civil servants with outstanding credentials. Neither provided Daily Maverick with commentary for this article.

The debate about the intensified BEE rules and changed contractual terms at Sanral have gradually leaked out into the press over the past year, after Sanral cancelled the five mega contracts in May last year, ostensibly on the basis that the board had discovered a flaw in the tender process.

Industry representatives question whether this “flaw” — the fact that project designers were involved in bid evaluation — is the real reason the contracts were cancelled, pointing out this is normal industry practice. Far from being “in conflict”, it makes sense for project designers, who understand the project intimately, to advise on the technical aspects of bid evaluation, assuming they are not also bidders on the contract. In addition, no other domestic state-owned enterprise considered it a “conflict,” nor is it considered a conflict in international construction contracts.

When asked to clarify why it regards the involvement of project designers in bid evaluation as “a conflict”, Sanral said the “separation and segregation of duties” was a “well-known governance principle”. It added that National Treasury last year conducted its own investigation into the issue of the five cancelled tenders and came to the conclusion that the board’s decision in this regard was correct.

Even though BEE rules were intensified, local industry figures are somewhat perplexed as to how the three Chinese companies in question managed to be awarded BBBBE Level 2 status, beating out local companies with Level 1 BBBEE status, and how appointing foreign construction companies supports local BEE. It is assumed their bids came in much lower than the subsequent bids by the SA companies who had retendered at a higher rate because of cost increases in the interim.

Sanral said it appointed the Development Bank of Southern Africa (DBSA) to act as an independent infrastructure procurement and delivery management support agency on the cancelled tenders. The credentials of two of BEE companies in winning tenders have since been questioned. Daily Maverick reported that the Sanral bridge contract was awarded to a “defunct business with R418-million debt pile”.

Read more in Daily Maverick: R4bn Sanral bridge contract awarded to ‘defunct business’ with R418m debt pile

Earlier this month, Sanral told News24 that it was legally compelled to award a contract of R4.7-billion to a KwaZulu-Natal company whose directors are on trial for fraud.

Insiders said a crucial component is a new requirement regarding SMME outsourcing, insisted on by the board, against the advice of Sanral senior management. For tenders where the price counts 90 points out of 100, tenderers gain zero additional points for complying with the minimum 30% black-owned SMME outsourcing, but now gain five additional points for 50% outsourcing and above. Tenders also receive zero points if their black ownership percentage is less than 51% but four extra points for being 100% black-owned. BBBEE gradings which in all other state entities procurement counts for the full 10 points now only score one out of 10. Several major construction companies including H&I and WBHO, both of whom have BBBEE Grade 1 rating but less than 50% black ownership, are challenging this new Sanral procurement policy in court.

Read more in Daily Maverick: Sanral doubles down on new procurement rules despite signs of tension in its corridors

Some members of Sanral management had apparently argued that this requirement to increase SMME outsourcing was just not feasible for the majority of large Sanral contracts. N2 Wild Coast Mtentu Bridge, for example, is a massive concrete viaduct bridge with complex integrated foundations. To divide this project into hundreds of separate small SMME contracts would be “extremely risky”, according to one insider.

The original contract for the Mtentu Bridge, which will be one of the highest in Africa at 223 metres, included 30% SMME subcontracting, but it included road projects worth about R500-million surrounding the bridge which would have been appropriate projects for smaller construction companies. This scheme was specifically excluded from final tender allegedly on direct instructions of the board.

In response, Sanral said “there was an irregular exclusion of subcontracting in the Mtentu tender and the reduction, by a massive 50%, of the routine 30% subcontracting in the GFIP tender. This exclusion and reduction was decided by unauthorised individuals and structures without Board approval.”

This appears to contradict the actual cancelled Mtentu contract, which is still available on the Sanral website, which says in Section C1.2.2 that the required subcontracting proportion was 30.5% - 0.5% larger than Sanral’s then minimum requirement. DM

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