The Western Cape Black Business and Professionals Alliance (the Alliance) is an alliance of black professional bodies and business groupings in the Western Cape whose main aims are:

• To bring together black organisations from different sectors and to begin to speak with one voice on matters of mutual concern
• To collectively agitate for the greater integration of black business into the mainstream of the economy

The Alliance articulates its mission as follows:

The Alliance does not seek to duplicate any existing structures, and actively seeks to work in harmony with all black business entities in the region, both formally and informally.

The members of the Alliance are:

• The Black Management Forum (BMF) Western Cape
• The Foundation for African Business and Consumer Services (FABCOS) Western Cape
• South African Black Technical and Allied Careers Organisation (SABTACO) Western Cape
• African Builders Association (ABA)
• Black Lawyers Association (BLA)
• National Black Contractors and Allied Traders Forum (NABCAT)
• Association for the Advancement of Black Accountants in Southern Africa (ABASA)

The role of banks in the growth of the SMME sector of the economy and, particularly the black SMME sector, is a highly charged and, increasingly emotive issue. Where once the barriers of entry into the mainstream of the economy were defined by restrictive racially biased policies of recent governments, these have given way to new, progressive forms of legislation that seek to promote and facilitate the emergence of a strong black SMME sector in the country. For many, recent legislation has opened doors and presented black companies with a range of new opportunities and access to new business.

However, despite all of these positive developments, major challenges still face the black SMME sector. One of those challenges is overcoming the mindset still prevalent in our banking institutions that black business equals high risk and, therefore, will not be supported to the extent of white business. Despite the proliferation of "SMME desks" within our banking institutions, very little is being done to provide start-up capital, guarantees and bridging finance for small (black) businesses.

In preparing this submission, the Alliance has opted to focus on the experiences of its members operating within the construction industry where these problems are particularly acute.

The following Alliance members are active in the construction sector, and have participated in the discussions leading to the compilation of this submission:

• Nabcat Western Cape
• Sabtaco Western Cape
• ABA

The Alliance is in the process of consulting a wider stakeholder base with a view to gathering and compiling definitive case studies for presentation to the portfolio committee.

This submission will serve to highlight some of the typical major obstacles placed in the path of black construction companies, by banks, resulting in the loss of contracts, lower revenue streams and bankruptcies. The feelings of members are that many of these obstacles are not placed in front of their white counterparts and are, to a large extent, racially motivated.

1. The Problem Areas

Three key areas have been identified by black construction companies as being particularly problematic in relation to the banks. These are:

• Provision of bank guarantees
• Access to bridging finance
• Banks’ credit ratings of construction companies

The majority of government and parastatal building contracts are awarded on the basis of an open tendering system. The tender documents usually take the form of a bills of quantities prepared by a quantity surveyor in accordance with JBCC (Joint Building Contracts Committee) contract guidelines. A successful tenderer is required to sign a contract with the client known as the Principal Building Agreement (the Agreement) recommended by the JBCC.

Between 1994 and the present (the period of review of this submission), the JBCC formed the basis of the majority of building contracts in the construction industry. In accordance with this form of contract, a successful tenderer is required to submit, within a stipulated period of time, a construction guarantee for the value of the works. The Agreement defines this guarantee as:

Simplistically speaking, the contractor would be informed of his/her successful tender by means of an appointment letter from the client conditional on his/her ability to furnish the client with a construction guarantee within a stipulated number of days. Failure to do so would result in the contract not being signed and the contractor forfeiting the project.

Banks demand collateral, fixed assets and/or personal life insurance before granting guarantees. The complaint from black contractors is that banks view them as being particularly high risk businesses and apply these requirements in a manner far more stringent than their white counterparts.

One complainant cites a case where he offered his house in Gugulethu as collateral on a small building contract. His application was nevertheless rejected on the grounds that a house in Gugulethu had no value.

Many black contractors encounter resistance from the banks, despite being presented with letters of appointment from government verifying the award of the works. The banks refer the contractors to Khula, who will only guarantee 80% of the amount required. Furthermore, the applicants are subjected to the same rigorous procedures at Khula as they are at the banks. The applicants are, in many cases, sent on a vicious cycle between Khula and the banks and, ultimately cannot secure the guarantees.

The black contractor is the faced with two options:

• Forfeiting the job
• Entering into a joint venture relationship with a white company that will be furnished with a construction guarantee by the banks.

This latter trend is a disturbing one in that it makes a mockery of black empowerment. In many instances the white company charges the black company a "management fee" for the service and takes a percentage stake in the project.

The result is that the black company is forced into a joint venture situation on a project which it has the capacity to handle on its own, and must further sacrifice a significant portion of the profits.

Empowerment loses as "fronting" takes over and black SMME growth is stunted.

With the completion of a successful tender and the attainment of a construction guarantee, the black contractor faces the challenge of accessing bridging finance. Once again, he/she is confronted with the stringent requirements of the banks regarding collateral, or is referred to Khula.

As earlier stated, Khula will only grant 80% of the amount required (in successful cases). The problem lies now with the high "risk premium" attached to the loan in the form of the interest rate.

• Many of the small black construction companies do not have money, (acceptable) fixed assets, etc. to offer as collateral
• In an open tendering environment, profit margins are kept to a minimum to ensure the success of the tender (Most black companies rely heavily on government contracts, which are awarded on an open tender basis). The high interest rates the banks and Khula attach to their loans offset any profit margins and, even in cases where bridging finance was availed, the cost of servicing loans nullifies the profits expected from projects.

Before appointing a contractor to a project, the adjudicating consultant (e.g. The architect, quantity surveyor or project manager), is requested by the client to obtain a credit rating for from the contractor’s bank. A contractor with a poor or unknown credit rating is normally disqualified from a project, despite having submitted a competitive tender.

Black contractors are perceived as being high risk. A new black company is given a credit rating of F (unknown) despite the previous banking records of the individual members of the company. This is often prejudicial to their chances of being awarded contracts.

This credit rating is communicated in confidence from the bank to the clients’ consultant without affording the contractor the opportunity to engage with the bank. This is important in cases where there have been mitigating circumstances as illustrated in the following scenario;

Government, as a client body, is notorious for being slow to pay contractors’ interim monthly payment claims. Black contractors, in particular, are dependent on the timeous payment of their claims in order to maintain cash flows and, in turn pay their suppliers and subcontractors. Add to this, the time it takes for banks to clear the cheques, and you have a situation where contractors exceed their 30-day credit extension periods. To exacerbate the situation, bank officials have been reported to be reluctant to assist the contractors to implement mechanisms for the speedier clearance of government cheques.

The result is that suppliers rate the contractors poorly when consulted by the banks. The unfortunate aspect of this is that the contractors are not made aware of their poor ratings until a later stage when they are disqualified from future projects. The main problem in this scenario lies in the unwillingness of bank officials to engage, negotiate and understand the circumstances of the contractors.

1. Financial institutions’ attitudes to financing property developments in black areas

Of concern to the Alliance is the reluctance of financial institutions to fund retail property developments in underdeveloped areas such as townships. The buzzwords on the lips of white property practitioners are that retail developments in South Africa are "oversubscribed"…that the market for shopping centres is saturated.

It is patently clear that this is made in reference to shopping centres in white urban areas, as any visit to Khayelitsha or Soweto will clearly attest to a decided shortage of retail facilities. The situation is such that only one institution in the Western Cape will consider funding retail centres in C and D income areas. The funding of projects in such areas is seen as a niche activity, because none of the traditional banks will do it.

Even in cases where national tenants such as Shoprite have indicated a willingness to enter the townships, and where schemes are supported by strong viability studies showing good returns, banks are unwilling to invest or fund. In contrast, neighbourhood shopping centres in the heart of white suburbia are greeted with enthusiasm. Clearly, a shift in mindset needs to happen if we are to develop this country.

 

2. Conclusion

This submission has highlighted many of the negative experiences black contractors have had in their interactions with the banks. The Alliance is continuing the process of gathering case studies supporting the claims that have been made in this submission. Having said this, the Alliance does not see this forum as being one in which black organisations come to level accusations and point fingers. The Alliance regards this as the beginning of a very important process of engagement through which the plight of our constituencies can be highlighted, discussed and addressed in an interactive manner.

Through this process can we begin to find solutions to the massive problems facing small black business. Only through this process can we hope to unlock the enormous economic potential of the disadvantaged peoples of this country.

Alistair Sparks wrote:

"The road to the future is always under construction"

The government at the national level has largely played its part insofar as black empowerment legislation is concerned. This hurdle with the financial institutions is one of the last major hurdles to be overcome before real participation by black contractors in the construction industry can become a reality.

All we ask is to be given the chance to participate meaningfully in the construction of that road to the future.