Junk status: How bad is it?

by Ofentse Sefolo
Junk status: How bad is it?

There have been widespread concerns about how South Africa’s downgraded status by international agencies will affect the local construction sector. Fears of non-payment, rising credit costs and a number of projects being put on hold are some of the perceived threats leading contractors to consider terminating contracts with state-owned entities.
However, the impact of junk states on the construction industry is widely exaggerated, according to Nikita Lalla, a partner at Dentons SA, a global law firm that advises on matters including infrastructure, disputes, energy, natural resources, private equity and project finance.

“While I agree that investments will be significantly impacted, the money the South African government has allocated to infrastructure and energy projects isn’t going to disappear. There are also contracts in place to ensure that contractors on these projects receive timeous payments,” she says.
Allocated spend
According to the National Treasury, energy expenditure by the government is expected to total R180,7 billion over the next three years and large-scale infrastructure projects such as the Gautrain Commuter Expansion, the Johannesburg-Durban High-Speed Rail Link and the Gauteng Freeway Improvement: Phase II Bulk Distribution System are underway.

“Contractors shouldn’t have a knee-jerk reaction to the junk status analysis being published in the media and terminate current contracts due to fear of non-payment, because infrastructure and energy projects are part of the country’s long-term development plans and strategies,” says Lalla.

She explains that the government allocates funds at the start of a project and that many of the projects will take many years, even decades, to complete. An example is the country’s nuclear strategy, with energy minister Mmamoloko Kubayi announcing that the government will be renegotiating its inter-governmental agreements with vendors. “South Africa’s nuclear plans aren’t being put on hold indefinitely; the purchasing and acquisition processes are simply being restarted,” says Lalla.

Preventing payment disputes
Even though non-payment is rarely an issue on these types of projects, there are instances where payment disputes arise. These disputes are generally due to inconsistencies in claims that need to be resolved, but even under these circumstances, contracts and processes are in place to help contractors to proceed with work in a cash-neutral position as soon as possible.

“The two main contracts that are used for these types of projects are NEC and FIDIC contracts. Under the NEC suite of contracts, disputes must be resolved by adjudication within four weeks. Finalising a dispute through adjudication under FIDC may take longer as the contract doesn’t have a mandatory period to resolve the adjudication, but it is possible to make appropriate amendments to ensure a speedy resolution through adjudication,” explains Lalla.

“Our advice to contractors is to avoid terminating contracts. Engage in mediation, pursue an amicable solution and research ways to fast-track your dispute. There are many long-term infrastructure projects in South Africa’s pipeline, and it’s financially beneficial for contractors to continue working on these projects and follow the right channels if a payment dispute arises.”

Dentons SA
Tel: 011 326 6257
Website: www.dentons.com

Image Credit: Logista

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