Increased demand for the security of construction guarantees

"The recession of 2008 and the year that followed resulted in decreased construction activity in South Africa resulting in more contractors chasing a smaller market,” says Sparks.

Within this economic climate, the number of contractors who have been placed in business rescue or liquidated has increased dramatically.

 

"The result is that principles are increasingly seeing the value of having the security of knowing that all contractors they use have construction guarantees in place. We have experienced an increase in the number of requests for guarantees. In short, the benefits of construction guarantees in today’s world are twofold; peace of mind coupled with trust, as well as the financial stability regarding the delivery of contractual obligations of contractors. Should the contractor not perform in accordance with written obligations, the principle will be compensated. It is no surprise that more and more employers are insisting on contractors purchasing construction guarantee cover.”

According to reports, financial advisors and brokers play key roles in making sure their clients are adequately protected against all possible risks. This requires a full understanding of current realities, including the back up of experts and specialists in this industry category.

"Only then can they ensure their clients operating in the construction space are wisely guided in order to ensure cover is adequate to meet any potential risk.”

Recently, the Medupi Power plant has been one of the most dramatic examples of how projects can stumble and how guarantees have been part of the complicated scenario which does not feature as the headline material in most press stories.

 

"The insurance side of the story is that a large contractor employing in excess of 2500 people was placed under business rescue and subsequently liquidated. The company had multiple guarantee facilities with various guarantors and the impact on the insurance industry will exceed R150 million. The impact of such a large claim has far reaching effects on the industry as a whole. Our reinsurance markets will certainly feel the pinch and we envisage a hardening of rates as well as new terms and conditions as the market firms,” says Sparks.

 

From an ongoing and financial perspective, advisors will appreciate the cash flow advantages.

"Guarantees provided by insurance companies generally have lower requirements in respect of collateral required. This can have a significantly positive impact on the cash flow of contractors who need not tie up large amounts of collateral required by banks for the same guarantee products. The process involved in securing the guarantee also acts as an additional audit process of the contractor and provides the principle with the necessary protection and reduced risk in doing business,” Sparks explains.

Encouraging to the construction and engineering industries, as well as the brokers and financial advisors who serve them, is the fact that over the last two budget periods the Minister of Finance allocated large amounts of funding to developments in infrastructure and other much needed facilities.

 

Significant sums of that money remain unspent and represent growth opportunities ahead. These projects include a wide variety of major infrastructural development which are exciting opportunities where engineering underwriters can add real value and find opportunities for growth.” They include:

o The creation of the dugout port in Durban and associated opportunities

o Upgrading hospitals and schools

o Overhauling the rail network

Sub-Saharan Africa is also booming with opportunities. Their combined growth statistic is 6.5%, excluding South Africa. This figure is significantly higher than our forecast which is around 2.3% according to Cannon Asset Managers.