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Tshwane set for construction of R2bn HQ - 2014-01-17

The City of Tshwane hopes to start construction of its multibillion rand new headquarters in May next year, but an expert in municipal finances is concerned that the extra debt might be too big a burden for the city to carry.

“The new headquarters will accommodate 1500 municipal employees considered to be the nerve centre of the municipality, and will thus reduce costs and provide for efficient decision-making,” Jason Ngobeni, city manager, earlier said. Peter Aborn, the City of Tshwane’s project officer adds the building will be 35 000 – 40 000m² and the city is hoping for a five or even six star grading by the Green Building Council.

Elsa Strydom, an official in the National Treasury unit for Public Private Partnerships (PPPs) confirmed to Moneyweb that the “Tshwane House” project is at the stage of final negotiations.

The project was registered as long ago as December 2004 and progress has been extremely slow over the years, often hampered by changes in political and administrative leadership in the city.

Listed construction company Group Five reported in June 2011 that the Tsela Tshweu Construction Joint Venture under its leadership was selected preferred bidder to construct Tshwane House and operate and maintain it over 25 years. Thereafter the building will be transferred back to the municipality.

Since the selection of the preferred bidder there has been very little visible progress towards financial closure of the transaction.

In July this year the existing building was spectacularly imploded in a separate contract, leaving a barren site in the heart of the capital.

Strydom told Moneyweb: “Plans are for the city to submit the project for Treasury Views and Recommendations as required by the MFMA during the first quarter of next year.”

Aborn confirmed this and added that “the fundamentals” should be in place by the end of January and bulk earthworks might start in February. That would also require a separate contract in anticipation of financial close of the PPP later.

Aborn hopes that final Treasury approval, public participation and council approval might be obtained by 24 April and financial close about a week later. If that is achieved, construction may start in May next year.

He says the construction phase might take two years and the total net present value of the contract, including the 25-year operations and maintenance phase will be within the R2 billion range.

The structure of the deal can be compared with buying a house using a bond over 25 years, he says. The city still has to decide whether it would put down a “deposit”, which can be funded by issuing of bonds, or keep the upfront payment to a minimum and pay all or most over the period by committing future revenue.

Leon Claassen, analyst at Ratings Afrika that specialises in analysis of municipal finances, is however concerned that Tshwane might be over-committing itself. He says Tshwane’s debt is already high at 65% of its net operating revenue (after deducting bulk purchases). “For every R1 billion more, the ratio increases by 8 percentage points. That means an obligation of R2 billion can increase their debt level to 81%, which is very high and increases the city’s financial risk.”

In his experience projects like these often see cost overruns and the efficiency benefits and savings are usually over-estimated, says Claassen.

He says Tshwane’s liquidity has improved marginally during 2013, in spite of a deteriorating collection rate of 93%, compared to 97% in 2012.

The previous municipal headquarters, called Munitoria, which imploded in July, was built in the 1960s. A fire destroyed the West Block 16 years ago and that was imploded early in 1998. The South Block was saved and in use until it was evacuated earlier this year.

Article: www.moneyweb.co.za

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