African PPP Deal of the Year 2003
The DTI was one of the first government departments to initiate a PPP solution to its real estate needs following the new SA PPP regulations in 2000. Consequently the precedents set by this project - particularly in terms of an equity solution for empowerment entities - and the boost to potential deal flow are disproportionate to its size.
New head offices and environmental upgrades for the Department of Foreign Affairs, Department of Arts Culture Science and Technology and the Department of Environment Agriculture and Tourism have yet to appoint advisors but are at feasibility stage. And a DTI copycat deal is already underway: SCMB is also arranging and underwriting the R160 million head office for the Department of Education advised by KPMG. The preferred bidder is the Old Mutual Properties-led Sethekgo consortium and close is expected by August 2004.
The government is also said to be interested in bringing the private sector in to meet the huge demand for low-cost housing in the country.
The project was launched with the appointment of financial and empowerment advisors Ignis and Utho Capital, local construction advisor BIA and facilities management advisor Turner & Townsend, in January 2001. Treasury approval was given six months later for the feasibility study, which set detailed benchmarks for the services, price and affordability limits. A request for qualifications - undertaken in two phases - was issued in August and 10 pre-qualified parties were then given Treasury-approved bid documents in November 2001.
Three consortia submitted comprehensive proposals to the DTI in March 2002 and were evaluated against the feasibility study benchmarks and each other. Six months of negotiation followed between the DTI and its preferred bidder, which failed to reach fruition. Reserve bidder Rainprop was called in April 2003 and the deal fast-tracked to close in just 27 weeks.
The major contractual issues overcome by the DTI deal are numerous - not least establishing whether the DTI could actually outsource ancillary operations. The participants structured a risk sharing mechanism against insurance being voided in the future. Similarly, the deal puts a peg in the ground with a liquid market clause to determine compensation. SCMB both advised, arranged and underwrote finance for the project with legal counsel from Bell, Dewar, Hall. Masons and local law firm Ledwaba Mazai advised the DTI, while the consortium was counselled by Berman Gilfillan.
The debt equity split on the funding package is 90/10 and is structured on a non-recourse basis. The deal comprises a R475 million senior tranche and a mezzanine tranche - in effect a participation instrument to push the equity level to 10% whilst making the size of equity input from empowerment groups affordable - which SCMB has also underwritten and sold to Old Mutual Asset Management. The loan has a 21-year tenor and may be refinanced and handed over to institutional investors in the future.
The project has the highest amount of empowerment equity in any PPP deal to date.
The majority shareholding in Rainprop (55%) consists of companies controlled by historically disadvantaged enterprises, including Rainbow Construction, Prop 5 Corporation, Zwelinzima Holdings, Women's Development Bank Holdings and the Association of People with Disabilities. The other shareholders are Rebserve Facilities Management, Propnet, WBHO Construction and Atterbury Property Holdings.
The deal incorporates an innovative equity solution to fund the investment in Rainprop by its empowerment shareholders. For example, the Women's Development Bank Holdings and the Association of People with Disabilities are both passive investors in the project, together holding a 10% share in the consortium. The construction joint venture has provided the two organisations with an interest-free loan to fund their equity commitment and the loan will be repaid with dividends from the project.
Under the concession agreement Rainprop, will design, construct, operate and manage the main 48,000 square-metre building under a 25-year public private partnership. The campus consists of seven new buildings. This includes a building at private party own risk, three renovated existing buildings to house a training center, a high security ICT center, a large capacity crèche, and adjacent site construction by third parties of a health and fitness center and a special purpose conference center. Total bulk development is approximately 52,000 square meters, with an underground garage for 1200 cars.
Built on land owned by the Tshwane Metropolitan Council, the project is also expected to add significant new rates revenue for the local authority.
The DTI will make monthly payments to Rainprop to cover costs of providing the facilities management service and servicing the capital raised. Net present value of the unitary charge payable by the department for the complete, fully serviced working environment over the contract period is R870 million, 30% of which represents the facilities and operational management component of the project.
South African DTI Accommodation Project
Status: Financial close 3 August 2003
Description: First central government accomodation PPP
Size: R506 million
Concession awarder: DTI
Concession: 25 years
Sponsor: Rainprop consortium
Sole arranger: SCMB
Legal counsel to DTI: Masons; Ledwaba Mazai
Legal counsel to sponsor: Berman Gilfillan
Legal counsel to lenders: Bell, Dewar, Hall
Financial adviser to DTI: Ignis
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