TOLL ROADS: SANRAL Denies Ballooning Costs on Toll Projects
Recent Gauteng Business News
The supposed increased amount of R14bn reflected in some media reports is an incorrect interpretation that the original cost for this project has escalated. This amount is an escalation of the original project cost over the 10-year-duration for this project. The newspaper report, therefore, wrongly included future estimates related to contract price inflation, as well as added VAT which and compares it to the original contract amount, which excludes VAT, inflation and provisions. The original scope of works has never changed.
The application of Contract Price Inflation is in accordance with international best practise (FIDIC Conditions of Contract) as compiled by the International Federation of Consulting Engineers. SANRAL also confirms that the effect of inflation and VAT is accounted for in the financial model which is applied to determine toll tariffs. This financial model was recently independently audited by two international auditing companies which concluded that the model is correct. Therefore this alleged “ballooning of costs” does not affect the toll tariffs previously announced or that may be announced following the conclusion of the public participation process currently underway by the Steering Committee appointed by the Minister of Transport for the review of, amongst other, the proposed toll fees.
SANRAL hereby clarifies the incorrect impression created in the media with regard to the operational cost of the Gauteng Open Road Tolling project. It is unfortunate that the figures in the leaked document were misinterpreted, to reflect an increased amount, different to the original contract amount.
As was quoted in the media, SANRAL previously indicated that the contract amount of R6.2bn awarded to ETC, excludes “...allowances for inflation, provisions, contingencies and VAT. Provisions are allowances for the procurement of parallel and support services for the implementation and operation of the Open Road Tolling system, such as the clearing /transaction fees, marketing and communication services, and utilities, etc.”
The following information serves as a detailed clarification of the above.
Contract Price Adjustment
For ad-measure contracts, which are contracts where a contractor is compensated in terms of tendered rates for the works completed, the contract makes provision for the application of inflation which is referred to as Contract Price Adjustment. The contract model generally applied in the civil engineering industry and therefore also the road construction industry is referred to as the FIDIC Conditions of Contract. The FIDIC Conditions of Contract is an international standard used and is compiled by the International Federation of Consulting Engineers. In terms of the contract model “the Contract Price and the Rates and Prices shall be adjusted in accordance with the Schedules of cost indexation as contained in the Schedule of Payments.” (Clause 13.8 of the General Conditions of Contract for Design Build and Operate Contracts).
The reason for allowing contract inflation to be calculated during the contract period is to ensure that the risk associated with inflation is not a risk consideration to tenderers at the time of tendering. For the ORT operations contract, the contract period extends to almost 10 years. If contractors were expected to include the estimated future effect of inflation, it is anticipated that such an immeasurable risk that is dependent on a multitude of external factors would be reflected in the tender prices submitted, i.e. it would increase the tender amounts. This contract model has been applied for at least the past 40 years in South Africa and there is nothing sinister or underhanded about the manner in which SANRAL managed this contract.
The amount quoted is an estimate of future CPI and will continuously be adjusted in terms of the actual inflation indices. In order to illustrate the impact of different inflation predications, we provide a couple of scenarios. The inflation figure indicated in the document shown in the media, shows a predicted contract price adjustment for inflation of R3.386bn until the end of the contract period which is April 2019. In the event that the current inflation rate of approximately 4% is applied this figure will be R2.15bn. For a 6% and 9% future inflation rate the figure would be R3.27bn and R5.16bn, respectively.
It has been noted that similar misinterpretation of costs for other large infrastructure projects, implemented by others in South Africa, have unfortunately been made in the past as well.
The contract also makes provisions for related services, costs and equipment that are procured separately in accordance with requirements by the Public Finance Management Act. Some of these provisions have been procured already through separate tender processes, such as the banking services and costs, as well as electronic tags (e-tags), and the distribution of these e-tags, by retailers. Furthermore, it makes provision for direct costs such as rates and services accounts from municipalities.
Contingencies are allowances for unforeseen expenses, subject to approvals and compliance to the procurement policy. To date no such contingency amount has been used.
Value Added Tax (VAT)
VAT is applied to any product or service provided and is paid over to SARS.
SANRAL hereby re-confirms that it’s a non-profitable Agency of the Department of Transport, that is responsible for the management of approximately 16 170km of national roads in South Africa. The tolling implemented for the Gauteng Freeway Improvement Project is required to service debt incurred from Capital Markets to fund the R17.5bn capital investment made towards the betterment of travelling on freeways in Gauteng by means of increased freeway and interchange capacity. It should be noted that no funds from the central fiscus were used.
This much needed infrastructure is pivotal for sustainable economic growth and associated job creation in South Africa.
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