With effect from 1 April 1998 the South African National Roads Agency (NRA) was established with the purpose of managing the national road infrastructure in South Africa and awarding toll concessions to develop and enhance the national road infrastructure. The NRA is owned by the Government and is a company registered under the South African Companies Act. It is funded through a mixture of grants from the Government, fuel levies and from tolls it charges on the toll roads it operates.

The NRA has been particularly active in promoting private sector investment in road infrastructure. Since its inception, the NRA has achieved financial close on two privately financed toll roads (the N4 East and N3) and has nominated a preferred bidder on a third (the N4 West). The NRA has also instituted a procedure for receiving and assessing unsolicited bids for privately financed toll roads.

The three toll concessions have each involved some distinguishing features of interest.

N4 East

The N4 East project (the first undertaken by the NRA), involved the upgrading of existing road together with the construction of new sections of road between Pretoria and Maputo on the coast of Mozambique. A key feature of this project was its dual jurisdictional nature. From a funding point of view the substantial majority of toll revenue is generated in South African Rand ? thus considerably reducing the exchange rate risk. In addition, the South African government was required to provide certain assurances to the senior debt providers which enabled them to become comfortable with the perceived enhanced political risk profile that the project assumed when compared to a domestic South African project.

N3

The N3 project, which involved the upgrade of existing road and construction of new sections of the main motorway between Heidelberg (just south of Johannesburg) and Cedara (just north of Durban), had two distinguishing features. First, the major component of the new construction works (the construction of the De Beers Pass) is not required at the outset but only when traffic reaches specified levels (currently anticipated to be in the tenth year of the concession). While the commitment to undertake these works is conditional on the requisite finance being available in the future, it is anticipated that the works will be funded principally from existing cashflow from the road.

The second unusual feature of the N3 project is the requirement that the concessionaire make an up-front payment to the NRA of R1.35 billion to be used by the NRA to repay its existing debt relating to the road. Such an up-front payment was possible because of two factors. First, the initial works required to be effected on the route primarily involved the upgrade of existing sections of road and not the construction of a new road. Accordingly, up-front expenditure was comparatively low. Secondly, parts of the route were to be tolled from the commencement of the concession allowing the up-front works to be paid for from cash flow generated from the road.

N4 West

It is expected that the Concession Contract on the N4 West project will be signed in the near future. This project involves the upgrade of the N1 between Warmbaths and Pretoria and the upgrade and construction of new sections of the N4 between Pretoria and the Botswana border. It is characterised by the inclusion of a busy commuter motorway (the N1) with the less frequently used section of the N4 near the Botswana border.

The key issues to address on this project are:

? first, the negative impact that will result if commuters perceive that they are subsidising the development of less well used sections of the road outside the urban areas; and

? second, the fact that the bulk of the toll paying traffic will have alternative non-tolled routes on which to travel and hence the threat of diversion is significant.

Funding structures

The Projects closed to date have involved a mixture of bank debt, inflation-linked bonds and, on the N3 project, EIB funding (supported by project risk guarantees from local banks). Inflation linked loans are particularly suited for toll road projects where toll income is linked to inflation. Their use on these projects represents a ground breaking move for the South African markets where such instruments have not previously been used.

The projects which have closed to date have also been characterised by the lack of involvement of international finance (other than EIB on the N3 project). The domestic banking sector is dominated by a small number of banks. Whether these domestic banks will continue to be enthusiastic for limited recourse project financing of infrastructure projects and whether international banks will fund South African projects will be critical to the long term plans for additional toll concessions in South Africa. While there still appears to be an appetite amongst local banks for such financings, it is unlikely that available domestic funds will satisfy all future needs. Future success may therefore depend upon international lenders being persuaded to take a view on South Africa, the prospects of the economy and the suitability of its currency.

Social Development Obligations

As mentioned previously, the toll concessions granted to date have attached significant importance to the involvement of previously disadvantaged people in the projects. The NRA is concerned to ensure that the benefits of the projects are shared with these people by ensuring that contractors controlled by such people are involved in the design, construction and operations works and that all contractors carrying out the works train their employees in skills which will benefit them in future employment opportunities.

The Future

The NRA has already received a number of unsolicited bids which it is processing pursuant to its previously established procedures for receiving and assessing unsolicited bids. Unsolicited bidders are required to submit at the outset a conceptual framework for a project and, if this is accepted by the NRA, develop a detailed proposal (specifying particular alignments which have necessary approvals of relevant authorities). Following the development of the detailed proposals, the NRA will seek bidders for delivery of the proposals.