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Announcement regarding an agreement concluded with the South African government
Group Five Limited
(Incorporated in the Republic of South Africa)
(Registration number 1969/000032/06)
Share code: GRF ISIN: ZAE 000027405
("Group Five" or "the Company" or "the group")
ANNOUNCEMENT REGARDING AN AGREEMENT CONCLUDED WITH THE SOUTH AFRICAN
GOVERNMENT
Shareholders are advised that Group Five has entered into an agreement (the “Settlement
Agreement”) with the government of the Republic of South Africa (the “Government”),
together with five other construction companies (collectively, the “Construction Companies”),
to implement a programme of initiatives that will significantly accelerate transformation of
the South African construction sector, as well as address the Construction Companies’
exposure to potential claims for damages from certain identified public entities projects (the
“Claims”) arising primarily from the fast-track settlement process launched by the South
African Competition Authorities in February 2011 (the “Fast-Track Settlement Process”) (the
“Arrangement”).
Following an extensive period of negotiation, the Government and the Construction
Companies have concluded the Settlement Agreement which comprises a financial
contribution by the Construction Companies into a jointly administered trust fund (the
“Fund”), as well as certain transformation commitments over and above the current broad-
based black economic empowerment sector requirements.
The Arrangement will focus on the development and transformation of the industry through:
1. Increasing investment in the sector to promote development, educational and upliftment
opportunities for all, especially for black people;
2. Creating employment and entrepreneurial opportunities, especially for young South
Africans;
3. Promoting and supporting black-owned construction companies and small business
development and assisting them to be competitive and sustainable;
4. Identifying opportunities for South African companies in infrastructure projects elsewhere
on the African continent; and
5. Building deeper partnerships with regulators and other key stakeholders such as
Government and organised labour.
The Settlement Agreement commits to a plan which will ensure the repositioning of the South
African construction sector. All parties to the Settlement Agreement acknowledge the need
to foster a better relationship between the Government and the construction industry going
forward.
The Settlement Agreement promotes three elements:
1. Financial Socio-economic
The Construction Companies will collectively contribute R1,25 billion over 12 years to the
Fund, which will be established for socio-economic development. The objective of the
Fund will be the development, enhancement and transformation of the construction
industry, as well as the promotion of social infrastructure for all South Africans.
Initiatives will include the development and promotion of construction companies owned
and managed by black people, the provision of bursaries for black students, and providing
support for learning institutions through bursary programmes and infrastructure
development. It also includes funding the appointment of professionals to provide the
Government with engineering, project management and other services to strengthen its
capacity to deliver the public infrastructure needed through, amongst others, the
secondment to state departments and entities of skilled personnel from organisations
operating in South Africa.
This financial contribution is in addition to existing annual socio-economic development
investment spend by these companies.
In summary, the Settlement Agreement stipulates that:
- Over the next 12 years, the Construction Companies will be required to make a
collective, annual payment of R 104 million into the Fund. In the case of Group Five,
the annual payment amounts to R21,25 million per year, totalling R255 million over
the 12-year contribution period. The Fund will be constituted as a trust (“the Trust”).
25% of the first R21,25 million annual payment is payable by Group Five within five
business days following the Effective Date of the Settlement Agreement, with the
remainder to be paid no later than 90 days following the Effective Date. Thereafter,
each subsequent instalment will be payable annually on 1 July. The Effective Date of
the Settlement Agreement is defined as the date on which the condition precedent,
that SANRAL withdraws its SANRAL claims against the Construction Companies, is
fulfilled.
- The Trust will use the payments made to the Fund to:
o implement initiatives that will develop and enhance the construction industry,
in conformity with the Government's transformation objectives; and
o promote the development of emerging contractors and suppliers in South
Africa. The Trust will be co-operatively governed by a Board of Trustees
appointed by the Government, the Construction Companies and the South
African Forum of Civil Engineering Contractors.
- The total payment to be made to the Trust by the Company may be reduced by any
claims or potential claims for damages that certain, identified public entities have
made, or may be entitled to make, against the Construction Companies in relation to
projects listed in the Settlement Agreement. The value of claims paid by the Company
that can be set off against the amount to be paid to the Trust is limited to the total
contribution of R255 million over the 12-year period.
The Settlement Agreement does not address or eliminate any outstanding claims by
the Competition Commission of South Africa with regards to administrative penalties
which have been or are to be levied on any of the Construction Companies.
2. Transformation
In addition to existing enterprise development programmes, each of the Construction
Companies will commit to initiatives that will result in each of the companies mentoring
up to 3 emerging black-owned enterprises so that they develop the necessary skills,
systems, status and quantity of work to be able to sustain a cumulative combined annual
revenue equal to at least 25% of each of the mentor companies’ annual revenue by 2024.
The referenced revenue is from civil engineering and building works delivered in South
Africa.
The development of these emerging black-owned enterprises will be broadly in line with
the Construction Charter Codes with respect to enterprise development.
The Settlement Agreement stipulates that the Construction Companies have individually
undertaken to launch development initiatives with the aim of identifying, developing and
mentoring up to three emerging contractors (“Emerging Contractor/s”), to ensure that
the Emerging Contractor will have the necessary skills and quantity of work required to
generate a cumulative combined annual turnover equal to at least 25% of the annual
construction works turnover of the relevant Construction Company within 7 years.
Aligned to this obligation are fixed interim period transformation targets on each
Construction Company, as well as penalties calculated in accordance with a formula for a
failure to meet such targets.
The Settlement Agreement also stipulates that the Company will be released from its
responsibility for the development initiatives of the Emerging Contractors above if the
Company disposes of not less than a 40% economic interest in its South African civil
engineering and general building construction business, to an enterprise that is more than
51% black owned, managed and controlled.
3. Integrity Commitment
This involves the Construction Companies, as leading companies in the industry and
Government, committing to business practices that are based on integrity, transparency
and fair competition. As part of the Settlement Agreement, each company has signed a
declaration to promote ethical and legal operations, free of collusion or corruption and to
confirm that they will expose, confront and eradicate any sign of wrong-doing in the
industry.
Additional salient features of the Settlement Agreement include:
1. Limitation of liability
The maximum notional aggregate liability of Group Five per the Settlement Agreement
arising from: (i) its annual contribution payments described under the socio-
development section above; and (ii) from any financial effects from the transformation
activities above, shall notionally not exceed R884 million as at the signature date of the
Settlement Agreement. This notional amount would be reached only in the unlikely
event that the Company did not deliver against any of its undertakings in terms of the
Settlement Agreement.
2. Benefits of concluding the Settlement Agreement
(a) Creates a concrete new working platform between the construction industry
and the Government focused on:
(i) increasing investment in the sector,
(ii) creating quality jobs and entrepreneurial opportunities (including for
young South Africans),
(iii) driving transformation in the sector,
(iv) promoting innovation,
(v) combatting collusion and corruption,
(vi) identifying opportunities for South African companies in infrastructure
projects elsewhere on the African continent,
(vii) promoting industry supply chains and helping them to be competitive,
and
(viii) building deeper partnerships with regulators and other key
stakeholders including labour.
(b) Allowing the Construction Companies to focus on their businesses as opposed
to engaging in lengthy, costly and protracted litigation.
(c) Gives certainty to stakeholders that any existing or potential claims from
identified public entities on identified projects, as well as the associated
litigation costs and disruptions to operations are addressed.
(d) By committing to the critical transformation initiatives of the Settlement
Agreement, the construction sector in South Africa will be a more sustainable
and competitive industry, ready to partner with Government and related
public sector entities for the advancement of infrastructure development in
South Africa and across the African continent for the benefit of all South
Africans.
(e) This settlement brings resolution and conclusion to the Construction Industry
Development Board (“CIDB”) enquiry and proceedings against the companies
who are signatories to the Settlement Agreement.
The impact of entering into the Settlement Agreement, with its resulting financial effects,
would not have been incorporated within the segmental revenue & margin guidance or
prospect statement as contained in audited group results for the year ended 30 June 2016,
released on SENS on 15 August 2016.
The settlement signifies the Government’s and Construction Companies’ commitment in
promoting growth, investment, sustainability, inclusivity and transformation in the
construction sector.
Sandton
11 October 2016
Investment bank and sponsor
Nedbank Corporate and Investment Banking
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