2010 World Cup Stadiums: National Treasury on Funding Status

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Finance Standing Committee

06 March 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
07 March 2007
2010 WORLD CUP STADIUMS: NATIONAL TREASURY ON FUNDING STATUS

Chairperson:
Mr N Nene (ANC)

Documents handed out:
Treasury presentation on status of funding of 2010 World Cup stadiums

SUMMARY
Host cities and national Departments had done great work in preparing plans and cost estimates for 2010 FIFA World Cup Projects. The work commenced in earnest in March 2006. A decision was made to cap the stadium funds from national government at R8 billion. It was also decided that R600 million would be uplifted from the October adjustments to enable cities to commence construction. The disbursement instrument would be a conditional grant administered by Sports and Recreation South Africa. The conditional grant was designed in such a manner that the funds would be directly transferred to the host cities. It was believed that the construction contractors would have to have two teams working 24 hours a day on the sites to ensure that the stadiums were constructed on time.

An analysis of tenders indicated a high level of provisional sums. Provisional sums were a concern in that the contractor preparing the tender did not know what the client actually required. Only 40% was fixed in some instances. Contractors would possibly inflate prices in case where the prices were provisional. The approach of asking cities to negotiate prices with contractors had resulted in reduced costs of approximately R2 billion. There could have been costs overrun of about R4 billion had Treasury not taken this step.

Members raised many question which included the following:
- How the government could be expected to subsidise private companies after the World Cup What benefits would the government get from this?
- What was the other source of income apart from government?
- What government was doing about allegations that the private sector was increasing raw materials prices now that the deadlines for the construction of stadiums were looming.
- How to counteract the negative perceptions created about the project.
- What impact the cost of the stadiums would have on the current account deficit.
- How the Cape Town problem was resolved.

MINUTES
The Chairperson said that the Committee wanted to have a better understanding about the debates that were taking place on stadiums funding. The Committee exercised oversight over Treasury and it was appropriate for it to get the briefing.

Presentation by National Treasury
Mr Malcolm Simpson (Chief Director Public Finance: 2010 World Cup Unit) made the presentation (see document attached). He said that host cities and national Departments had done great work in preparing plans and cost estimates for 2010 FIFA World Cup Projects. The work commenced in earnest in March 2006. R9 billion was allocated to transport in the host cities. If the money was to be used within the thirty-month period, an equivalent of R300 million per month should be moved from bank accounts into fixed assets. The 2010 World Cup was not just about the building of stadiums but had 24 sub-projects. The projects included the provision of training venues, procurement, stadium precinct development support and supporting infrastructure.

He said that a decision was made to cap the stadium funds from national government at R8 billion. It had also been decided that R600 million would be uplifted from the October 2007 adjustments to enable cities to commence construction. The disbursement instrument would be a conditional grant administered by Sports and Recreation South Africa. The conditional grant was designed in such a manner that the funds would be directly transferred to the host cities.

The cash flow determined for the MTEF, was as follows:
The cash flow was as follows:
- R600 million for 2006/07
- R2, 7 billion for 2007/08
- R3, 8 billion for 2008/09 and
- R1, 3 billion for 2009/2010.

Moving this
money over a period of 30 months would mean spending R260 million a month. At the peak of the construction of the new stadiums municipalities would be expected to "burn" between R80 million and R100 million a month. This was the transformation of cash into fixed assets. This was significant work and it was believed that the construction contractors would have to have two teams working 24 hours a day on site to ensure the stadiums were constructed on time.

Mr Simpson said that in November 2006 there were indications that there were overruns. Treasury then analysed the tenders and communicated with cities on 15 December 2006, advising them to negotiate
with contractors to reduce costs and to ensure that the designs were compliant with FIFA requirements.

An analysis of tenders indicated a high level of provisional sums. Provisional sums were a concern in that the contractor preparing the tender did not know what the client actually required. Only 40% was fixed in some instances. Contractors would possibly inflate prices in cases where the prices were provisional. The professional teams probably did not do good work to finalise the tender documents. The approach of asking cities to negotiate prices with contractors had resulted in reduced costs of approximately R2 billion. There could have been costs overrun of about R4 billion, had Treasury not taken this step.


Discussion
The Chairperson pointed out that many government departments were involved in the World Cup and an invitation had been extended to the Sports Portfolio Committee to attend this meeting but it had another engagement. Members should try and confine themselves to issues that pertained to Treasury and this Committee's oversight work.

Mr S Asiya (ANC) noted that the financial side of the World Cup was on track. The Mayor of Cape Town had said that Treasury should give an additional amount of R800 million to the City of Cape Town. There was some contradiction in terms if Treasury was saying that financially everything was on track while the City was saying that it still needed more money. The country had budgeted for stadiums, some of which belonged to government and others to private companies. It had been said that stadiums would be subsidised even after the World Cup and this was good. However, the question was how the government could subsidise the stadiums of private companies after the World Cup. What benefits would the government get from this? Would the money disbursed serve the intended purposes?

Mr Simpson replied that the national government had made a contribution of R1, 9 billion to the City of Cape Town. The province and the City had added some money. The City had committed R400 million. The amounts from the national government and the City amounted to about 72% of the total costs of the stadium. It was emphasised that cities would have to participate. Cities had resources and the metros had borrowing capacity to fund the stadiums.

On stadium ownership, he said that Treasury had insisted that there should be an agreement spelling out the construction issues, how funds would be received and what the stadium authority would give back in return in terms of community projects. The agreement also spelt out the role of the accounting officer in the disbursement of funds.

Mr L Johnson (ANC) said that a point had been raised about the fact that not all funds would come from the government. This implied that there would be funding from elsewhere. The Royal Bafokeng Nation had already assisted. What was the other source of income? Vodacom owned the Vodacom Stadium. It had been said that the ownership of stadiums would reside with municipalities and communities so that in the end they would not be used by private individuals. There was a conspiracy about the pricing of raw materials. As soon as it became clear that the country was running out of time on construction side, suppliers began to increase prices in order to maximise profits. He asked for a comment on the conspiracy.

Mr Simpson replied that Vodacom Park and Ellis Park stadiums were owned by the cities but were on long leases to rugby. The same could be said about Kings Park but this stadium was not a 2010 stadium. The government was concerned about the pricing of raw materials. It was looking at how best to deal with this. There did not seem to be significant price increases. It would monitor this and set a working group to look at the areas affected by the price increases.

Mr Y Bhamjee (ANC) said that the Committee should accept that the World Cup was a project that belonged to the nation. People should make it a success. It was unlike the cricket or rugby world cups. It was completely beyond everybody's imagination in size and scale. The whole nation should be brought on board. The presentation made no mention of a public relations team. The question was how to counteract the negative perceptions created around the project. There was a number of projects and sub-projects. The government would spend a lot of money but it seemed that there was no total commitment. There should be proper accounting procedures to ensure transparency and accountability. He wondered if each project had its own strategic and operational plans. It was important to give as much information as possible so that the media could also come on board. It would reflect badly on the entire nation should some people not come to the party. Treasury should lead the way to ensure that all departments were onboard. It should give regular reports to all constituencies.

Mr Simpson replied that the government had committed resources to the Government Communication and Information System (GCIS) and the International Marketing Council. He agreed that it was important to communicate what the government was doing and how it was doing it. With regard to financial reporting, the major funds that were being disbursed were the R8, 4 billion for stadiums and R9 billion for transport. The money flowed through the conditional grant frameworks and host cities were required to report monthly on the implementation of their construction programmes and cash flows. GCIS and not Treasury should lead the whole communication programme.

Mr A Moloto (ANC) asked what Treasury had established in terms if impact of the stadiums on the current account deficit. Was it a significant and how did Treasury plan to deal with it? There was a concern on the possibility of litigation as a result of tender documents that were not clear on certain issues. It was indicated that 60% of the money was made up of provisional sums. There was an intervention by Procurement Task Team in order to deal with this issue. He asked to what extent the intervention had helped to fix the prices. He also asked how the Cape Town problem was resolved. The City of Cape Town was experiencing shortfalls and it wanted Treasury to come in and be responsible for the escalating costs.

Mr Simpson replied that the impact on the current account deficit was not significant when taking into context the additional infrastructure that would be installed with Eskom and other State owned enterprises. With the reduction of costs, more materials will be purchased locally. The Procurement Task Team did an evaluation of the procurement in November 2006. A report was compiled and host cities were advised of challenges in the tender processes. The accounting officers in the host cities took the ultimate responsibility for tenders. Certain issues where flagged for consideration.

He said that the issue around the R180 million was being resolved and the private sector had offered to contribute the amount. He did not know the details about the offer since he had not seen the agreement. He commended the Mayor and her Team for the sterling work done in reducing costs and bringing in other sources of funding.

Mr K Marais (DA) said that Dr Irvin Khoza had made a speech at the South African Sports Confederation and Olympic Committee (SASCOC) General Assembly on the previous Saturday. Dr Khoza had said that his real concern was Cape Town and that intervention was required. The presentation had indicated that the construction of stadiums was to commence in January 2007. Construction in Cape Town had not yet commenced. Cape Town was a problem. He asked if the differences of opinion between Cape Town and Treasury had been resolved. What was the real problem? Roads in Cape Town would never be able to accommodate the additional 2010 traffic. There should be communication to the people so that they could change their perceptions to positive perceptions. People knew what was happening in airports but there was no information besides that.

Mr Simpson replied that significant resources would go through the Public Transport Infrastructure Fund administered by the Department of Transport. Significant amounts (about R700 million) would come to Cape Town for upgrading transport. Moving this amount within a period of 30 months would be a tall order.

Ms R Mokoto (ANC) focused on skills shortage in finances and engineering. A lot of municipalities had skills shortage. To what extent was such shortage affecting the entire budgets allocated to municipalities. The Development Bank of Southern Africa (DBSA) had been kept busy in terms of assisting with project management. She wondered if the Procurement Task Team had considered women and the youth as beneficiaries in the procurement processes. The presenter had referred to increasing prices. She asked which areas were affected and what steps had been taken to prevent price fixing. The World Cup would benefit cities within the parameters of the events and those outside were less likely to benefit. It has been said that it was an African tournament. She had thought that it would have effects in terms of economic development in most of the cities and across the borders. She asked for a comment on this.

Mr Simpson replied that the shortage of skills in host cities was a cause for concern. There was a shortage of technical and overall project management skills for stadiums and related projects. The World Cup was a big project for any city to take onboard. The DBSA was engaged in working out plans to assist cities through the Siyenza Manje project. The escalation of prices was difficult to manage. Treasury did not want to interfere in the market but it was watching the developments. It would hold discussions with suppliers and challenged them on price increases should it become necessary.

He said that the Legacy Programme had been set up in Sports and Recreation South Africa. An amount of about R337 million had been committed for the programme. There was a workshop on the legacy issue yesterday and today. It was necessary to engage the private sector so that they could support some of the legacy programmes.

Mr Asiya was not satisfied with the response to the Cape Town issues. The big construction companies like Murray and Roberts were expected to build the stadiums but were also engaged in other projects like roads and housing. They were threatening to pull out if there was no agreement on prices and the deadline was around the corner. He asked if this issue had been addressed. He wondered if the training venues would be upgraded. He asked if the training venues where included in the cost outlined by the presenter.

Mr Simpson replied that large contractors were a concern and there were only six or seven operating in the country. They were all bidding for as much work as possible. With the skills shortages, there could be price variations and Treasury was concerned about this. Consideration was being given to opening the market to foreign companies to come and do the work. The government would like more foreign construction companies to bid for work and add competitions in the market.

He said that FIFA and the Local Organising Committee should put down some specifications for the training venues. It was up to the association of the competing team to determine the base in which it would be based and train. This area still had to be resolved.

Mr Mnguni requested clarity on slides 12 16 and 21. He asked what was meant by business cases. Did this refer to business plans or full plans for the stadiums? The figures reflected in the three slides were different. He asked if the R9 billion for infrastructure was a pool from which hosting cities could apply for funds or if it had already been allocated per hosting city. The National Commissioner of the Police had a meeting with Interpol. Police from other countries would also be part of the security network in 2010. He asked who would pay the costs.

Mr Simpson replied that slide 12 dealt with the disbursement of the R241 million given to cities for their business cases for stadium development. Some cities had gone further and considered all projects that had to be implemented for the 2010 project. Slide 16 figures were business cases for stadiums and other utilities and services around stadiums. The slide was mainly for comparison purposes. Slide 21 gave the allocations to cities after the evaluations. The funds were for the stadiums and other services that should be brought to stadiums. The amount of R9 billion would flow through the public transport infrastructure fund to determined projects.

Mr Johnson said that the presentation had alluded to prices of raw materials as one of the financial risks. There were capacity problems in implementing projects and programmes of Departments. He asked if there were any risks factors in relation to this. What were the benefits for other African countries? With regard to the infrastructure roll out, he asked if Treasury was entertaining any constraints in terms of budgets.

Mr Simpson replied that R666 million was approved for the South African Police Service to enlarge the police service and to purchase capital equipment. The financial risk was clearly the escalation of costs. The project cash flow should be linked to the cash flows of the contractors so that any additional interest could be minimised. Another risk was financing issues that cities would have to take onboard for their contribution to stadiums.

With regard to benefits to businesses, he said that a workshop would be set up to explore benefits and opportunities for small, medium and micro enterprises. This would be facilitated by the Department of Trade and Industry. On infrastructure roll out, he said that this was a large project and all Departments involved should work to ensure speedy roll out and project implementation.

The Chairperson hoped that the next engagement would be broader and would involve other committees and departments concerned.

The meeting was adjourned.

 

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