REPORT ON MEETING WITH CIDB
Ronnie Khoza, Chief Executive Officer
Ebrahim Moola, Programme Manager : Construction Register Service
Perumal Pillay, KwaZulu Natal CCC Manager
Master Builders KwaZulu-Natal
Kevin Dicks, Executive Council Member
Ray Basson, Executive Council Member
Brandon Abdinor, Executive Director
Issue 1: Asset and Financial Criteria
It is understood why the asset base and financial condition of a contracting enterprise is looked at when attempting to determine such enterprise's ability to complete projects successfully. However, the arbitrary application of inflexible criteria can often lead to inequitable results and the following highlights some anomalies when looking at this criteria:
i Many construction companies, due to the risk that can be attributable to construction activity generally, do not carry huge asset bases within the enterprises. Assets are held elsewhere and moveable assets are depreciated over short periods. Furthermore moveable assets with zero book values are still worth substantial amounts if maintained correctly
ii Many contracting companies operate as cash positive concerns and therefore do not require credit facilities from their bankers. Some of our members when applying for certain gradings, upgrades or re-grades, have been advised by the CIDB that they must have certain credit facilities in place (such as overdraft facilities) due to the small asset base as explained in (i) above. Therefore, notwithstanding that such enterprises do not require such facilities, and further that the application for, and granting of, such facilities are both time consuming and costly, these enterprises have artificially applied for such facilities purely to prove to the CIDB that they are in place. This amounts to meeting certain bureaucratic requirements for their own sake. This is a practice that ultimately works against the interests of productivity.
The CIDB advised that it needed to be satisfied that an Enterprise being graded (hereinafter referred to as an "EBG" for convenience) had the financial wherewithal to complete the projects of the magnitude covered by a specific grade. CIDB confirmed that sponsorship levels are looked at along with the enterprise's net asset value and that these together determine what its potential grading may be.
CIDB indicated that the 2009 regulations addressed the issue of sponsorship in more detail than previously. It indicated that sponsorship could come in several forms:
- An overdraft facility would be a form of sponsorship in that it did indicate that the EBG had access to a particular amount of cash. It was acknowledged that this was a relatively risky form of sponsorship in that it did not indicate a financial commitment to construction projects. The CIDB emphasised that it did not mechanically insist on an overdraft requirement for the EBG.
- A further form of sponsorship is a sponsorship letter which was issued by the EBG's bankers indicating that it has access to sufficient credit facilities to meet the minimum requirements. The CIDB had concluded M O Us with three of the large retail banks and would be finalising same with the fourth. The CIDB would agree on the format with the banks of such a sponsorship letter as obviously not all correspondence emanating from the banks would necessarily provide the required comfort. The CIDB would provide guidance in terms of what the sponsorship undertaking must contain to assist contractor's even if the banks cannot agree on a common format.
- Where the sponsorship is from a Non-Financial Services provider e.g. a Private Company then 15% of the sponsor's net asset value may be used as a financial sponsorship. If the sponsoring company was CIDB registered it could also provide 100% of this capital. If the sponsoring company owned 50% or more of the EBG, it could effectively sponsor up to 100% of the capital requirements to be graded. If ownership is less than 50% then the EBG will need to provide a level of their own Net Asset Value. Figures are in the application form.
The CIDB confirmed that page 5 of the new application form spelt out some of these requirements.
With regard to accounting practices it was important for the EBG to advise clearly what accounting practice (e.g. GAAP) was used and the enterprise should be provide clear information how assets were valued etc. The more that this information was explained by the EBG the easier the CIDB's job would be and the quicker the grading would be finalised. Wherever in the Construction Industry Development Regulations financial statements are referred to, it means financial statements prepared in accordance with Generally Accepted Accounting Practice (GAAP) or the International Financial Reporting Standard (IFRS), and certified by a person who is by law required to certify those financial statements.
Issue 2: The evaluation for re-grading
Our members have reported instances where they have recently upgraded and, then within periods of less than a year, are requested to supply information for re-evaluation. One would expect that, if it is generally acceptable for a grading to applicable for a three year period, the three year period should run from any point at which the CIDB evaluated the enterprise for grading. i.e. if an enterprise was re-graded in the course of last year, it would be expected that the re-evaluation should take place three years from the date of the upgrade.
CIDB explained that the system of a three year cycle was well established and working. To provide for a three cycle to commence from scratch after an upgrade or re-grade has been issued would create considerable administrative difficulties. The three year cycle created certainty both on the CIDB's part and on the part of contractors, particularly those who have different gradings due to diverse activity. It was therefore suggested that, if at all practicable, an enterprise should consider submitting its application for re-grade at the same time as it renewed its registration. This would allow for easing of the administrative burden as there were large overlaps in the documentation required for re-grading and renewal.
To avoid delays the CIDB is now strongly recommending that contractors submit renewal documentation three months prior to the expiry date.
Issue 3: Application of grading system
Our members have also indicated that they have come across certain issues relating to the application of the grading system in practice. It is accepted that many of these issues relate to conducts on the part of CIDB clients, rather than CIDB itself. Nonetheless, it is the CIDB system that is being applied and we would be interested on your views on these issues, along with having discussions on how these matters could be resolved. Some of the issues raised include:
- Tenders that can be undertaken by P E (Potentially Emerging Contractors) should be specifically indicated as such in a tender documentation.
- We are aware of a number of instances where certain public works departments do not apply the grading system as it is intended.
These practices result in our members not being able to compete according to fair and objectively ascertainable criteria.
The CIDB is naturally aware that many state departments and other clients are not applying the grading system properly. Firstly it indicated that such clients must be using the I-Tender System as on the CIDB website. Other methods of advertising were also permissible but i-Tender is obligatory. There is a challenge educating the broad range of clients on how the whole grading system should be used and the CIDB is consistently involved in information dissemination, awareness programmes and training of state departments to ensure that the grading system is used properly. They also indicated that an audit unit is being established which will audit the conduct of clients in this regard.
The CIDB also reiterated that it was clamping down hard on fraudulent activities both on parts of any staff members as well as contractors in relation to grading matters.
Issue 4: General Service Delivery
Our members have reported significant frustration with communicating with your offices in relation to the above and other matters. This frustration relates to communication with the Head Office in Pretoria predominantly. Members report not being able to get through to any officials at CIDB. Apparently the switchboard will not put members through to various officials stating that the CIDB has no notification that the said official has indicated that he wants to speak to a specific member. The switchboard also refuses to give out email addresses. Surely this approach is not acceptable for a statutory organisation which it is a legal requirement to deal with.
In addition, regular complaints about the CIDB are received from members stating that:
- Response time is poor
- Phone calls are not returned
- Response time for renewals are not achieve
- There is no acknowledgement of receipt of documentation
- Status is reflected as "AWAITING DOCUMENTATION" when the documentation has been sent.
- Name changes are not implemented despite revised details having been forwarded.
CIDB indicated that it was working hard to address to service delivery challenges. There are currently some eighty five thousand registrations in the system which makes the whole activity of registrations and gradings particularly administration intensive. This made it prohibitive for the CIDB to proactively interact personally or telephonically with contractors on matters relating to their grading. The CIDB was now going around the country engaging with all levels of stakeholders to ensure that these problems get ironed out.
Issue 5: Gradings in the Industry
Our members have often indicated that they are aware of contractors who are operating in the industry with CIDB gradings that they could not possibly legitimately have obtained. We are aware that the CIDB has revoked certain gradings where it has been discovered that the contracting enterprises have obtained such gradings fraudulently. This action is lauded and we trust that the CIDB will remain vigilant in this regard. We are constantly asking for information in this regard from our members and will forward same to you in the appropriate fashion should it be forthcoming.
The CIDB was establishing a procedure whereby non-compliance both on the part of clients and contractors can be reported to an independent unit and the CIDB would follow up. CIDB would provide the contact information to the Association.
Both parties agree that the discussions were most fruitful. The Association indicated that it supported what the CIDB was purporting to do and that this was an important element of best practice and keeping the industry professional. The CIDB emphasised that it was taking all steps to ensure stakeholder satisfaction. Both parties agreed that they could work well together to ensure best possible outcomes for all concerned.
Discuss this report on the Forum.
Brandon Abdinor | Executive Director