Guaranteeing delivery in the construction sector

Specialist Business

Guaranteeing delivery in the construction sector

Published: 18 June 2018

Clinton Spence, head: Santam Bonds and Guarantees

On the back of the International Monetary Fund (IMF) recently raising its 2018 forecast for South Africa’s GDP growth to 1.5%, the local construction sector is feeling optimistic, having been in a slump since 2009.

Encouraged by renewed local and international business confidence, as well as the stance taken by President Ramaphosa’s administration, the sector expects more attention to be given to delayed public works programmes. Some of these are complex, large-scale projects such solar PV and CSV operations, others are key to unlocking trade and industry such as SANRAL’s road programme and PRASA’s rail programme while further programmes support both business and social welfare such as water and waste plants, schools and hospitals.

As more organisations expect to ramp up construction projects, there are some challenges to keep in mind given that construction whether traditional, energy or mining related, for the public or private sector, local or cross-border, constantly faces the risk of non-delivery by contractors.

Fortunately, specialist insurance providers are in place to protect clients – such as employers, developers and property owners – with products, in the form of performance guarantees, to assist them recover construction-related costs.  Performance guarantees are vital in any big construction project – an imperative well understood at Santam Bonds and Guarantees. They are a promise given by a guarantor, usually a bank or insurance company, confirming that an employer will be compensated should a contractor negate on the contract. This means that a client (employer, developer / owner) can call against this guarantee should an appointed contractor fail to carry out their obligations in terms of the contract.

A solid business

Santam Bonds & Guarantees, a division of Santam that has been issuing project-specific bonds or guarantees since 2001, is recognised as a leader in this specialised insurance. A preferred Eskom and Transnet guarantor for all construction related guarantees, the company is able to offer A-rated risk solutions locally, as well as internationally based on its strong balance sheet, operational capabilities, and domestic and overseas partnerships.

So, if and when a claim does arise, the business has Santam’s balance sheet to rely on, which is of immense value in a market where third parties need total confidence in the guarantor’s ability to pay a performance-related claim. In this industry, a business can have no losses and then be hit with a single large claim pushing the lost into triple digits. With a Standard & Poor’s rating, Santam’s guarantee is more than worth the paper it is written on.

Some projects that the business has written guarantees for include open cycle gas powered energy plants, ocean going vessels and fuel storage facilities. It is also the provider of performance guarantees issued in support of two 100MW renewable energy facilities built in the Northern Cape.

 Cross-border cover

With the enormous backlog on infrastructure, performance guarantees are critical to development and represent considerable opportunity for Santam Bonds and Guarantees. Due to Santam’s financial solvency and investment strategy in Africa, India and South-East Asia, the business has more opportunities and greater presence, which are proving invaluable in a more challenging and competitive space. As many African countries continue to develop, this has benefitted the company over the past few years, having grown its risk premium by around 20% per annum off a relatively low base. More than 30% of the projects it covers are on the African continent and the company also has capability in Australia, United States and United Kingdom.

It seems the country and the continent are on an economic upswing; a welcome boost for the construction sector.  But as more is built, more risks present themselves.  So, while we may see buildings, plants, roads and other infrastructure erected, we must be careful to ensure contractors fulfil their obligations, and if not, that there are measures in place to protect clients from undo losses.