PPP in South Africa is a relatively new concept for both the private and public sector and has yet to deliver on its potential. But spadework done by the Treasury's PPP Unit (founded in 2000) over the past two years, and the success of PPP test case deals in toll road finance, look set to pay off.

South African PPP documentation ? based on the UK model ? is currently undergoing standardization. And market consensus is that within 18 months ? when the standardised contract has come into play and more benchmarks are in place ? momentum will pick up and deals should start to close at a rate of about four or five per year. Currently deals are closing at a rate of about one-and-a half a year.

With the majority of state infrastructure being partially or fully or state-owned, the potential for South African PPP is more wide- ranging than in Europe. Prime examples are the current plan for a PPP aluminium smelter incorporating its own port and eco-tourism projects, such as the La Bombr natural beauty site and the Cradle of Humankind paleontology attraction.

Numerous reasons are cited for the slow dealflow to date. For sponsors, the bid process is slow, cumbersome and costly. According to one private sector source, ?generally, bids are coming out and they are not well conceived in terms of output specification. Government needs to clearly define what it wants and the advisors must follow. The up-front homework has to be done ? although feasibility and affordability research takes up to a year for each project, the time is not spent productively and it then manifests itself within the bid process.?

Some government departments are also still relatively unsure of the private sector and wary of PPP, although the necessary trust is being established with every deal done. And the domestic banking community is small ? just five ? although liquidity at these banks is sufficient to meet the needs of current dealflow.

Changing dynamics behind PPP

But criticism of South African PPP development is partially misplaced. The market is moving faster than in many developed European states ? Italy for example. And although development is not on a par with the UK, South Africa cannot afford the mistakes of rapid PPP progression made and still being made (notably the UK PPP refinancing controversy and the London Underground) in the UK.

Furthermore, all parties involved in South African PPP have demonstrated an ability to learn from past problems. For example, although it was one of the first markets to open to PPP, the prison sector has been blighted by teething troubles. According to a banking source, ?eleven deals were identified by the government, but only two [Manguang and Louis Trichardt] were deemed affordable and reached completion. It looked like bad planning. Due diligence back then was not what it is now. The original tender would be very different today. If something goes wrong, everyone learns a valuable lesson.?

South African PPP also looks set to be far more wide-ranging than other PPP programmes. Diverse areas such as eco-tourism, ports and casinos are on the agenda. As Mike Edington, manager of the infrastructure and public sector project finance department at Nedcor, says, ?the major force behind PPPs has been toll roads. Three have closed so far and six more are in various stages of development. I don't think there will be a dramatic increase in projects ? it will be more of a steady stream. The toll road programme could slow down a little but in the short term more government buildings ? offices, prisons, schools ? are expected. In the longer term the private sector is waiting for the government to conclude their feasibility studies regarding ports and the electricity industry.?

The public sector is also steadily growing in confidence. According to Ziyaad Sarang in the infrastructure lending team at Standard Bank: ?Originally there seemed to be a lack of good advice on the government side, because it was an unfamiliar concept. There was a problem in demonstrating affordability and value for money. It was a case of the departments being nervous. But that scenario is changing and the public and private sector are beginning to trust each other now.?

The typical structure of a South African PPP project is not dissimilar to the UK. But there are some distinct differences. Mike Meeser, head of project and infrastructure finance for South Africa at Investec says: ?The typical concessionary structure should be around 30 years, but the market has not been prepared to go out that far yet. The tenor and leverage band range also varies wildly depending on the sector, the structure and the risk profile. For instance, where toll roads generally have a 20-year tenor, accommodation projects have a 15-year tenor.? Others cite the norm as being an 80/20 gearing and pricing between 160-250bp.

Lenders are bullish about the government accommodation sector where the projects currently being assessed by the PPP Unit for affordability are numerous and the government's vested interest makes for an attractive package. Construction of a ZAR650 million ($74.5 million) Department of Trade and Industry (DTI) building is currently under negotiation. Rand Merchant is mandated lead arranger, with Drake & Skull (facility manager), LTA, Grinaker, Wilson Bayly Homes-Ovcon and RMB Properties as sponsors. The concession period is for 25 years. Credit Agricole Indosuez is advising the Treasury and Deneys Reitz is providing legal advice. Debt comprises one term loan of ZAR500 million and the rest is funded from equity, though the margin remains undisclosed.

New deals, new benchmarks

The three pathfinder toll roads that closed before 2000 are the Rand/Investec-led ZAR1.9 billion N1 (the first to close), the Rand-led ZAR2.5 billion N3 and the Investec-led N4. There are dozens more road deals in the pipeline, all at various negotiation or tender stages. Thought to be the next to reach financial close is the Rand-arranged Chapman's Peak toll road awarded to the Capstone 252 consortium led by Concor and comprising Thebe Investments, Marib Holdings and Haw & Ingles. Transaction advisers are Ignis, Jeffares and Green, Hofmeyr, Herbstein & Gihwala and Intertoll (Pty) Ltd.

The N4 (East) is also up for refinancing fairly soon and is being looked to as a benchmark ? the first PPP refinancing in South Africa. In addition smaller projects are coming to market, such as the scheme developer deal for the N1/N2, on which Basil Read, Bougues, Group 5 and Concor are working on. A Dragados/Grinaker consortium led by joint advisers Rand and Standard Bank is working on the proposal for a part of the forthcoming Super Highways deal, which will link Johannesburg and Pretoria.

Of last year's deals the ZAR4.5 billion (Eu480 million) Inkosi Albert Luthuli hospital, based in the city of Durban, has had the biggest impact. It set a benchmark for the region as the first health PPP project to be completed. The Kwazulu Natal Provincial Government awarded the 15-year concession to the Siemens-led Impilo consortium, comprising Mbekane Health & Wellbeing, AME International, Vulindlela Holdings, Siemens, Drake & Skull and Omame. Rand Merchant Bank was the arranger. Advisors were PwC, White & Case, EC Harris, Aloecap and Hiltron. Inkosi is one of the largest projects to be financed in the country, including all toll roads.

Inkosi incorporated one of the most important political components of South African PPP transactions ? black economic empowerment participation. This was brought in on an unprecedented level, with participation at shareholding and service content.

Black empowerment on any project in South Africa is now a mandatory requirement from the government. Leslie Silverstone, vice-president infrastructure finance at Rand Merchant Bank, says: ?We are happy to facilitate black empowerment. It's not an obstacle ? it is designed to help grow skills and grow sustainable black businesses. Corporate South Africa has a duty to grow and uplift black people, it is a good philosophy especially for long-term concessions. A way to improve this would be for the rules of procurement on this to change, so black empowerment partners bid for that position.?

Politics aside, financing was also particularly innovative. Rand developed a structured term currency swap element. The currency risk of ongoing capital refreshment over the 15 years was mitigated by this structure which involved South Africa's first 15 year Rand-Euro swap, at Eu250 million.

It is undeniable that South Africa is experiencing some growing pains with its PPP programme and this is likely to be the case for some years to come. But with its first PPP refinancing coming up and more projects in the pipeline, progress is being made. PPP is strongly supported by the government and an immensely strong and wide-ranging project base is emerging.

As the market develops banks will be bidding for larger deals and the element of funding competition will right itself with more international banking interest in the small-to-medium project market. The public sector will also, theoretically, get the longer concessions it wants and more value added.

The next major project is the proposed high-speed rail link connecting Johannesburg, Johannesburg Airport and Pretoria. It has come to market with an initial cost of between ZAR7 and 10 billion. Two consortiums are now bidding for the contract, although it is currently only in tender. The first comprises Siemens and Alstom, the second Bombardier and Adtranz. This will be the first rail project of its kind in South Africa and its development will be a critical test of PPP maturity. It is expected to reach preferred bidder in just under two years' time.