Treasury explains mechanics of costing

This is what The Star asked the National Treasury:

1. Is the “total construction payment” of R684 515 256 the whole amount spent on construction? If not, what’s the construction cost?

2. What do the “operating costs” of R1 766 604 527 refer to? If this is the total operating cost over 25 years, then what’s the rest of the project cost for?

3. There are three sets of debt/loan principal and debt/loan interest payments. In each case, the interest is greater than the debt/loan. Why?

4. Why is there an additional “financing costs and fees” amount of R130 890 096?

5. Why is the government being billed for a private consortium’s borrowing costs?

6. There’s a listing for “corporate tax” for R729 717 265. Surely this shouldn’t be part of a government budget? Does this mean the government is paying the private consortium’s tax bill on this project?

7. There’s a listing for “VAT payable” for R1 201 484 028. This seems to work out at nearly 18 percent, and it’s apparently calculated on everything (including the “corporate tax”, the financing and debt costs, etc). How is this VAT calculated?

8. Why is there a listing for VAT anyway – doesn’t the government or its contractors claim back VAT payments?

9. The first unitary payment is listed as R95.5m including VAT. What’s the unitary payment in the last year of the contract (year 27)?

This was the National Treasury’s response:

The new DEA head office is a serviced accommodation project delivered via a public private partnership. A contract was concluded in July 2012, with the private party (a special-purpose vehicle registered for tax and VAT according to South African laws) to design, build, finance, maintain and operate the building according to a set of specifications, for 25 years.

This required the private party to go to the market and raise funding for the project.

The funding includes both debt of R434.5m and equity of R133m; the debt on which interest is payable over a 20-year period and the equity which earns a return on investment.

The DEA will receive from the private party a monthly tax invoice for the building and services inclusive of VAT (with reference to the questions on the payment of VAT, this is in line with all service providers contracted to the government).

The first monthly unitary payment is due only from the date of service commencement which was in September. The payment is dependent on the performance by the private party according to the contracted performance levels, including maintenance and life-cycle replacements.

Operational costs over the contract will be R1 766 617 and life-cycle replacements will come to R543m. This will ensure that the building is in mint condition at the end of the contract term.

Penalties may be deducted from the unitary payment in cases of non-performance, and repeated non-performance would result in breach and termination.

The unitary payment payable for September to March (end of the financial year) will be R71.6m. For the 12 months from April to March 2016, the unitary payment is forecast to be R130.9m at a level of 6.2 percent. (The unitary payment at year 25 will depend on movements in the consumer price index over the life of the contract.)

To develop the project and contract entered into, as well as design, construct and commission the building from July 2012 to August 2014, cost R889m, including construction cost of R684.5m. The rest is fees payable to the team that put the contract together.