NHLANGANO-SICUNUSA ROAD: UKRAINE WAR ESCALATES COSTS BY E93M

MBABANE – Russia’s invasion of Ukraine inflated prices for oil and other commodities, resulting in the Eswatini taxpayer footing the bill to cover the shortfalls.

This is because the taxpayer is now liable to about E93 million for the construction of the now complete Nhlangano-Sicunusa road. The money is for costs incurred by the contractor in relation to the purchase of bitumen and oil. This is contained in the Ministry of Public Works and Transport second quarter performance report which has been tabled and debated in Parliament. Worth noting is that the project was undertaken through a public-private partnership (PPP) worth E647 million.

This, therefore, means that the cost of the completion of the road now sits at E740 million. Under the title ‘Project T500: Design Review, Supervision and Construction of Nhlangano – Sicunusa (MR13) Road Project’, the report mentioned that the project was not allocated a budget in the current financial year (FY2024/25) under code 99 (Local Funds) of the Book of Estimates, yet the works contract between the government and contractor has a provision for adjustments in costs for two specific commodities namely; bitumen and fuel.

Man-made material
In the construction industry, it is said that while asphalt is a man-made material used to pave roads, bitumen is a byproduct of crude oil used for its waterproofing and adhesive properties.
As such, it is used to bind asphalt together during road construction and in roofing applications. It is regarded as an essential component in the construction of roads and highways, due to its waterproofing and binding properties. Without bitumen, modern road networks would not be possible. The road has been constructed and successfully completed by Africa’s Leading Business Integrated Partner, Inyatsi Construction. The report said the contract states that should the cost of bitumen and fuel rise above 4 223/tonne and E14.40/Litre respectively, the contractor shall qualify to claim for compensation of the difference.

It was mentioned that given that the war between Russia and Ukraine has resulted in the cost of fuel products increasing exponentially from what they were at the time the contract was signed to now, the costs of the two commodities have increased beyond the parameters that were set in the particular conditions of contract between government and the contractor.
“As such, government now needs to pay the claim of the difference in costs due to this effect. The total cost of the rise and fall subsequent to determination by the supervising team amounted to E93 889 931.59,” reads part of the report.

Attracts interests
It was stated that considering that the rise and fall claim by the contractor attracts interests with each passing day the debt/claim is not settled, the ministry deemed it more economical to settle the debt at the earliest opportunity. The ministry, according to the report, made an E80 million budget available through reallocation with a balance of E13 889 931.59. On 24 February 2022, Russia invaded Ukraine in a major escalation of the war, which started in 2014.  The invasion, the largest and deadliest conflict in Europe since World War II, has caused hundreds of thousands of military casualties and tens of thousands of Ukrainian civilian casualties.

The global impact of the Russia–Ukraine war has been mediated through trade, commodity prices and financial conditions. Russia and Ukraine are major global suppliers of oil, wheat and fertilisers. The war disrupted exports from the two countries, induced uncertainties in global supply chains and has been used to justify export food bans in some countries. These conditions contributed to a spike in global prices of oil, food and fertilisers, putting upward pressures on domestic prices.Worth noting is that most African countries, including the Kingdom of Eswatini, were still recovering from COVID-19, limiting their economic policy space when the Russia–Ukraine war hit.An expert in the local construction industry said there was nothing sinister with the claim, especially since it is what was agreed upon between the two parties.

Price adjustment
“If the contract allowed for price adjustment to rise of fuel and bitumen beyond certain thresholds, then it is justified. Basically, the contractor has to be compensated on actual amount paid for the fuel price increase,” the expert said. With the completion of the road now at E740 million, it means that the taxpayer will now spend around E1.3 billion. This is because when Inyatsi rescued the project after it was abandoned by the joint venture of Kukhanya/Gabriel Couto a couple of years ago, government had already spent E532 701 000 on the incomplete project by March 31, 2019.

Also, government had to fork out a sum of E80 million that was set aside by government to pay the final account of Kukhanya/Gabriel Couto Joint Venture. It was in the 2015/2016 financial year, when the project escalated to E465.9 million. It must be said that E33.72 million had been utilised by March 31, 2014.In fact, government financial records indicate that E8.5 million had already been spent on road design and resettlement project by March 31, 2012. In January 2021, the Ministry of Public Works and Transport announced that Inyatsi Construction had been awarded the tender for the completion of the road. Inyatsi was said to be the only company that tendered for the construction of the road despite other companies being invited and having conducted a site inspection.

Seven contractors
The tender that the ministry issued was a design, finance and build public private partnership tender that invited Category C1 registered contractors with the Construction Industry Council. The aforementioned category had a total of seven contractors at the time of tender in 2020. During a tender briefing, all the seven contractors participated, but at tender submission, only Inyatsi Construction submitted a bid.  Inyatsi’s tender was evaluated and found to be compliant with the requirements of the tender document, hence award was made.
In May this year, it was announced that Inyatsi Construction had completed the project and this was followed by an official opening of the road by His Majesty King Mswati III.
The official opening took place on October 1, 2024 in a ceremony that was attended by Parliamentarians, dignitaries, stakeholders and community members around the Sicunusa-Gege-Nhlangano corridor.

In his keynote address, His Majesty said he could imagine how the people living along this road were frustrated and had lost hope after the first construction company could not complete the project, as initially planned. “We are well aware that this project experienced glitches and contractual disputes, causing major delays and a heavy cost burden during its downtime. We must ensure that such issues do not arise again. We all have a responsibility and remain accountable to the people, who have entrusted us with ensuring that we bring these projects and services to them in the most cost effective way possible,” the King said. The completed road signifies an important advancement for the region that will enhance commercial enterprises, national development and the welfare of emaSwati.

Important connection
The 43.5km-long Nhlangano-Sicunusa Road in the southwest is part of the main road network of Eswatini and provides an important connection between agricultural areas and urban centres. Works carried out under the project include upgrading the gravel the road with a bitumen surface, designed to accommodate speeds of 100km/hour, installation of culverts, and construction of bridges over the Mkhondvo and Ndlotane rivers. Both rural and urban populations will benefit from enhanced local, intra-regional and international exchange of goods, as well as from improved access to social amenities. Additionally, owing to the scenic nature of the region, tourism is expected to rise, thus increasing employment and business opportunities.

It has been planned that both rural and urban populations are to benefit from enhanced local, intraregional and international exchange of goods, as well as from improved access to social amenities. Justifying the continuation of the project, government said the completion of the road will facilitate growth in the tourism industry. It was listed together with the Bulandzeni-Pigg’s Peak-Bulembu Road. Government understands that these projects are significant because they will improve the standard of living in the country.

Razieh Gilani, the Sales Manager of Infinity Galaxy, narrated how the Russia-Ukraine war disrupted global trade. He said the financial and commodity markets of the world experienced a turbulent time, filled with unpredictable fluctuations. Some of the global economists believe that it is probable to face another wave of inflationary stagnation in the world. Considering the current week’s economic situation, Gilani says it seems that the economic growth of Europe and the rate of production will be negatively affected as a result of the sanctions imposed against Russia.

On the other hand, the probable increase of the rates of energy carriers can lead to the continuity of inflation in the world. Considering these two factors, the assumption of ‘Inflationary Stagnation’ gets stronger. In such a situation, a significant part of the capital will move to safe markets, and the current safe market can be ‘gold’ and its growth is expected. The record-breaking of crude oil continued in the last week and it exceeded US$116 when Russia invaded Kherson city in Ukraine. On  March 2, 2022, the price of fuel surpassed E9 990 (US$557) and Singapore announced its bulk price at E8 820 (US$490) per ton.

Range of competitions
In Iran, the range of competitions on vacuum bottom varied from 16.5 – 34  per cent during the last week. Besides, finalisation of the nuclear negotiations was strongly affecting the equity of US dollar against Iran Rial and the FOB price of packed bitumen will outstrip E9 000 (US$500.) Such a severe and sudden surge of bitumen price might seem to be attractive at first glance but carries the risk of stoppage or fall of export due to high finished costs in the road construction projects. “As it was mentioned in previous articles of Infinity Galaxy, Indian refineries had no choice but to adjust their rates with global markets, as a result after the significant increase on February 15 up to E1 080 (US$60), another increase of US$29.5 was recorded on 1 March. Hence, the highest increase in bitumen prices within one month was experienced in the India market. However, considering the current global situations and international crises, the best decision can be instant sales and purchase.

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