South Africa's N4 West reached financial close on August 27, more than 10 months after the original concession contract was signed. The deal marks the third toll road concession and the largest project financing in the country to date. However, the hold up has been put down to exhaustive environmental legislation rather than a lack of financing appetite.

The Platinum Toll Highway comprises 95KM of the N1 and 290KM of the N4 running west from Pretoria to the border of Botswana. 85KM is to be new build. A sponsor statement points to the road's pivotal role in creating an efficient East/West transportation corridor, stimulating existing agriculture, manufacturing, mining and tourist opportunities.

The 30 year concession was awarded to the Bakwena Platinum Corridor Consortium (BPCC) on October 4 2000. BPCC is a joint venture including Murray & Roberts, Hochtief subsidiary Concor Holdings, Wilson Bayley Holmes-Ovocon, Grupo Dragados SA and a number of local contracting, engineering and empowerment groups.

Third party equity has boosted sponsor shareholdings. Debt:equity ratio now sits at 75:25, compared to 83:17 on the N3. The largest third party investments came from South Africa Infrastructure Fund and Spanish development finance company COFIDES, who joined alongside Dragados. Others include Old Mutual, Real Africa Holdings and The Royal Bafokeng.

The R320 million foreign investment from Spanish groups Dragados and COFIDES was hailed as a particular success. There are a number of large project finance deals in the pipeline in South Africa, many of which will be looking to woo international players. The EIB also has a significant presence, providing a Rand tranche for the first time.

R2.3 billion of limited recourse debt has been raised for the N4W. Nedcor Investment Bank (NIB) acted as arranger on the senior debt, totalling R1.25 billion. This breaks down into a term loan, a subordinated loan and a standby debt facility. The latter is available to the borrower to fund specified costs not within the original project budget. NIB underwrote the full amount with Nedbank and ABSA Corporate and Merchant Bank on allocations of R213 million, R453 million and R588 million respectively. There will be no further sell down. The senior debt package also includes a guarantee put up to cover the R350 million EIB loan.

Complementing this, Investec have arranged a R1.04 billion CPI linked tranche. Underwritten by Investec and Standard, the whole amount has been placed with institutions. Guarding against an immature bond market, a mechanism allowed for any surplus to be converted to straightforward bank debt. However, it has not been necessary to put this into play, with Michael Meeser, project finance, Investec in Johannesburg stating that the tranche came in oversubscribed. ?This is indicative of a maturing market,? he continues. ?The government has now issued three sets of CPI linked bonds. Further, interest rates are currently at an all time low.?

Exact margins are undisclosed. ?Pricing is slightly higher than on the previous two South African toll road deals,? states Mike Eddington, structured and project finance, Nedcor Investment Bank. ?This reflects a slightly riskier deal.? The centre of concern is a busy stretch of commuter motorway between Warmbaths and Pretoria, where travellers will have a number of alternative routes. Moreover, Meeser points out that the Platinum Highway, unlike the N3, does not have a history of tolling. Public resistance to even increases in tolling charges has proved to be greater than forecasting predicted. Commuters on an hitherto free road are likely to be even more sensitive.

These concerns have been fuelled by accusations from the Pretoria Metropolitan Council that commuters will be paying a disproportionate amount, thus substituting the upkeep of the rest of the road. In response the architects of the deal had the Saturn traffic model specifically upgraded. A complex discount system for commuters has been designed. The physical difficulty of tolling an estimated 60 000 vehicles a day has been addressed with the design of an electronic tolling system.

In addition to increased pricing and a drop in leveraging, the South African banks have demanded a straight amortising package for repayment. The result is a lower minimum service cover ratio than would have been possible if repayment had followed the expected revenue stream. Tenor on the loans is 20-years.

Comfort in the form of guarantees is said to be exactly the same as that seen in the N3. Lenders into the first toll road to come to the market, the N4 East or Maputo Corridor Toll Road, were shielded from true project risk by a government guarantee. This has been replaced in the following two by letters of comfort from the Ministry of Finance and Ministry of Transport.

Toll roads are leading the way for large scale project financings in South Africa and local markets are undoubtedly warming to them. It has been a steep learning curve, with no real experience prior to the Maputo Corridor of 1998. With each closure, progress is made and lessons learnt. But the process is not smooth yet. The time span between deal conception and financial close, duplication of past processes and extensive use of advisers leads to very expensive bidding.

The National Roads Agency (NRA), born in 1996, has been instrumental in progressing the toll road program. Six unsolicited bids are in the pipeline and other major transport deals are emerging. At the top of the pile of this latter category is a high-speed rail link from Johannesburg to Pretoria to Johannesburg International Airport. The question then turns to depth of funds. Domestic bank appetite seems to be strong, but it will not be limited and international banks remain at a safe distance. Even if perceived project risk has diminished in South Africa, sovereign risk is still rife.