The PPP programme has just undergone almost a year of reappraisal, in a fully inclusive process worthy of South Africa's new tradition. The result appears to be a trade-off between the potentially high profits local banks were able to factor into their pricing in the past and the reduction of risk along with a steady flow of projects coming to market.

The South African project market is still largely a local affair, but that could change once the legal and management framework established by PPP programme begins to influence major port, rail and road schemes proposed by the public enterprises. The public enterprises are not obliged to follow the National Treasury Department's PPP rules, but these set a benchmark for which there is an established consensus. A greater momentum for private sector deals in mining and manufacturing could follow once major transport infrastructure investment gets under way.

For the moment PPP is the only show in town on realised project deals. The most recent closes have been on high profile medium-scale projects, such as the R506 million Department of Trade and Industry office campus, R155 million Chapman's Peak road, and the R163 million Cradle of Humankind World Heritage Site in Guateng Province. The majority of the National Treasury Department's 45 PPP projects in progress are small, but the programme is addressing a wide range of needs from major infrastructure projects through to equipment supply and management of public services.

The current jewel in the PPP programme is the R10 billion high-speed Gautrain between Pretoria and Johannesburg. The Bombela and Gauliwe consortia presented their BAFOs at end-February and the winner should be announced in June. Bombela comprises Bombardier Transportation, Bouygues Travaux Publics, Basil Read, Concor Holdings, Murray & Roberts and French train operator RATP. Standard Corporate Merchant Bank and Rand Merchant Bank are joint arrangers and the consortium is advised by SG. Gauliwe includes Alsthom , Siemens, Dragados Concessiones, Grinaker LTA and Canadian operator Canac. Investec and Nedbank are the arrangers and PwC is advising. UK firm Masons is providing offshore legal advice to the government.

The Gauteng provincial government will put up most of the cost and this money has already been budgeted. The public share of funding will be 80% in total. The commercial banks will take on the rest. The financial split between public and private sector reflects the need to keep ticket prices affordable and predictable. This is not a project where costs can be easily passed on to the consumer. But it is expected to be a glittering success. Although it is an untypical PPP project in size and public involvement, it is also expected to crystallise local bank views on risk.

Another major project is the Dube trade port, representing investment of around R2.5 billion. It will establish trade and industrial facilities near the new King Shaka International Airport at La Mercy near Durban. The zone could also serve Durban's seaport. The government wants to create a world class logistics and industrial hub around Durban with integrated transport links. The feasibility study for Dube is due for completion in next two months, after which international treasury will be sought prior to initial government approval.

Refining the rules

In February the Treasury finalised standardised PPP contract clauses, including a 50:50 public/private split of the gains from refinancing. This follows extensive consultation since last May with the banks, contractors and other sponsors, facilities managers, lawyers and consultants, government departments and other players involved in the programme. An independent review group will continue to update and modify the clauses as the need arises.

These rules will be applied to the refinancing of toll roads signed in the late 1990s, and the reappraisal of two build-operate-finance prisons, Manguang and Louis Trichardt, projects originally signed in 2000. The Treasury's problems in establishing affordability for prisons prompted it to issue the previous set of PPP rules in April 2000 and to set up its dedicated PPP Unit in July of that year. The Unit's hands-on approach and direct engagement with all parties has helped establish a more realistic framework for the programme, which should move forward more rapidly from now on. The new template for prisons, once established, will unlock four new prison deals.

The government has shown its capacity to move quickly to solve problems. It has enacted tax changes to avoid income tax being applied to government capital grants, a problem which arose during the negotiation of the Chapman's Peak road project last year. VAT will only be applied if the service provided by the PPP attracts VAT.

One of the first PPP projects, the N4 toll road between Witbank near Johannesburg and the Mozambique capital Maputo signed in 1998, has undergone equity restructuring. In January this year CDC's fund Actis raised its investment in TRAC, which holds the 30-year concession for operating and maintaining the road, from 15.2% to 26.8%. South Africa Infrastructure Fund and Old Mutual acquired Bouygues' and Basil Read's 25.4% stake. According to CDC, this is the first South African infrastructure scheme in which the concessionaire is owned by financial investors rather than by contractors and sponsors.

Black economic empowerment

TRAC has a good record on black economic empowerment (BEE), which is a central feature of the PPP programme. It has provided community development, training, job creation and support for small business in the operation and maintenance of the road. Road accidents have also fallen by 40% since 1997. This outcome sits well with CDC's project requirements.

The government's new BEE rules, published in January, set targets of 40% black equity and 55% operational control, 30% of capex subcontracting, 30% opex subcontracting and 30% of procurement, with 10% black women managers and 5% of payroll to be spent on training to raise the skill base. Because of the lack of black equity and the difficulty for black enterprises to raise debt, with the extra cost of this given the greater perceived risk, the government requires targets to be achieved through the life of a PPP rather than from the start.

The DTI campus (with 55% black equity and 50% black facilities management) and Cradle of Humankind (with 53% equity, 40% subcontracting and 25% facilities management) have met at least some of these criteria from the start, but they are one-off projects with strong political backing. The challenge is to extend this to more commercial schemes.

South Africa Infrastructure Fund and the Industrial Development Corporation are among the few local funds taking equity in infrastructure development. The IDC has solid experience of supporting black empowerment, with half of its R4.2 billion lending in South Africa going to empowerment projects in 2002. Development Bank of South Africa provides grant funding and debt finance in a facilitative role. The government is now doing preparatory work for a BEE fund, which will be offered as a new PPP to local and international banks.

Local bankers and consultants welcome this move, which will help build and sustain the capacity of the black business community. The government's Project Development Facility, which began operations last autumn, reimburses project preparation costs for schemes with a Treasury-approved feasibility study, following financial close. This should develop opportunities for project preparation by black companies and attract more black professionals into this field. The government is also launching an internship programme to train black transaction advisors, of whom there are too few.

Altering perceptions of PPP

The success of the PPP programme will be measured more in the smaller projects than in high-profile schemes like the Gautrain. The economic development effect will spread out as hospitals, schools, bus companies operate more smoothly, and generate more jobs and income in deprived areas and for local government. These projects may be small beer for the banks, but the more they are seen to work, the more acceptable a mix of public and private ownership will become.

Most large PPP schemes are handled directly by the public enterprises concerned. The National Treasury's PPP Unit keeps the public companies informed of progress on the national programme, but the latter are not obliged to follow the Treasury's lead. The synergy with the National Roads Agency is well advanced, as NRA templates for feasibility, tendering and bid evaluation fit with those of the Treasury's PPP Unit. The N1-N2 road bid documentation is expected later this year.

But there is some resistance to the government's PPP policy. The John Ross toll road was cancelled just as it neared financial close because the provincial government decided against the toll. Water projects have been placed on hold because water is seen as a necessity, not a sector where companies should make profits. The N2 Wild Coast PPP gained environmental approval from the national government in December, but the project managers have to meet a series of public objections before the scheme can proceed.

Privatisation of public assets is causing similar concerns. Objections to privatising management of the proposed new Durban container port have held up progress on the scheme, thought to be worth at least $100 million, and caused frustration to banks, leading international port operators which have registered their interest, and the government in its aim to modernise and establish world class facilities. With the former Treasury Director General Maria Ramos now heading up port company Portnet, there are hopes that the container port management will come to market later this year.

On a more positive note, Western Cape and other provinces have colocation hospital projects where excess capacity in public hospitals is taken up by private hospitals, generating new revenue. White & Case was recently appointed transaction advisor for facilities management of 54 hospitals in KwaZulu Natal.

The Western Cape provincial government's Conradie Hospital project, the largest of its health schemes, is moving forward fast. The R92 million construction of the state-of-the-art 240-bed accident rehabilitation hospital at the deprived Mitchells Plain suburb outside Cape Town will be completed in July. The Health Department hopes that the facility will become the preferred reference hospital for the Road Accident Fund, taking patients from all over the country. The department will conclude a short-term management contract if it has not finalised the capital cost conversion and long-term management details by July. It expects to reach close by the end of the year at the latest.

Several accommodation projects are in the pipeline. The R160 million Department of Education head office is expected to achieve close in August. The preferred bidder is the Sethekgo consortium and finance is being arranged by SCMB. A ceremonial ground breaking event will take place in April.