The first toll project to come to market in South Africa since the Bakwena Platinum Corridor in 2002 and the largest PPP deal since 2007 – the R10 billion ($1.5 billion) N1/N2 Winelands toll road, a design-build-finance-operate-maintain 30-year concession, signals a returning momentum to Africa’s moribund PPP transport sector.

The new impetus is not just confined to South Africa. IFC and Eiffage have closed financing for the Eu230 million ($310 million) Dakar-Diamniadio toll road in Senegal. Mozambique recently announced plans to grant concessions on three sections of road in an initial pre-selection tender. In Mauritius, three bidders are tendering to rejuvenate the road network around Port Louis and the Zambian government has announced various PPP road projects too. And in Nigeria, where no toll road financing has closed since the 2008 N50 billion ($332million) Lekki-Epe Expressway, project financiers expect more deals to market after next year’s election. The deal pipeline could include greenfield ports, like the $1 billion Lekki port concession in the Lekki freetrade zone, trams, roads and airports.

Furthermore, once the South African government has announced its preferred bidder of the three consortia in the frame for the Winelands route, it will also invite bids for the Wild Coast stretch of the N2. “There is overall progress in transport PPP projects,” says Brigette Baillie, partner at Johannesburg law firm WebberWentzel. “More than anything it is down to a mindset and positive approach by governments towards concessions.”

Central to the new energy galvanizing deals is a growing acceptance amongst African governments that they have to provide more finance themselves to ensure bankability. “It’s a precursor to doing more deals now, particularly with a five-year tender and beyond, and Africa’s governments are finally waking up to this,” says Mike Peo, head of infrastructure at Nedbank Capital.

More government backing

More direct government involvement is evident in the Mauritius government providing the debt finance for its toll road, with the project sponsors taking equity stakes. In Lagos’s new light rail network, not yet closed, the bulk of the $1.4 billion financing for the Red and Blue Lines – two out of a total of seven – has come from the Lagos State Government with private operators investing in rolling stock and other assets. But it’s a shift that throws up new challenges for governments too. None more so than World Bank stipulations under the HIPC framework that restricts the amount governments can commit to large infrastructure projects.

It is not just more debt funding that banks are looking to governments for. Government guarantees, common in the power sector, are now becoming commonplace in transport deals too. In toll road projects, banks want guarantees like a regulatory framework that gives investors the ability to change toll pricing, or compensation clauses if the road is overloaded and damaged by heavy trucks. Strong government backing from robust institutions like South Africa’s National Road Agency (SANRAL) is essential for getting deals off the ground, says Theuns Ehlers, head of project finance at ABSA Capital. “SANRAL is very good at getting deals through feasibility and to financial close – it takes a while to develop these projects and the feasibility process finalized,” he says. It is starting to happen in Nigeria where the International Concession Regulatory Commission (ICRC) now demands every government ministry carries out viability studies on mooted infrastructure projects. It drags the procurement process, but is ultimately essential, explains Wale Shonibare, head of infrastructure at UBA Capital in Lagos. “Projects have to be proven as financially viable before they can be awarded to the private sector,” he adds. Gerhard Urschitz, Director, International Projects at Austrian construction giant Strabag believes Egypt – where the company is involved in the Rod el Farag Toll road project – and the Mauritius government are also getting it right. “We are very hopeful these deals will close. The governments seem well prepared; the documents look professional and the timelines reasonable.”

Government guarantees also help secure long term local currency financing from domestic banks. It is hard to come by in Africa’s shallow capital markets outside South Africa, and a particular headache for road projects, where the toll revenue is in local currency and the market is mostly limited to local investors.

Encouragingly, experts say African deals are starting to attract broader investment. More funds are targeting African infrastructure projects and some banks, like Standard Bank, have launched infrastructure focused private equity funds. “More deals are being structured to suit the wider investment community. It makes sense for the life insurance community to take up infrastructure paper and there are some funds that are interested,” says Ehlers.

Outside South Africa, progress to tempt Nigerian and Kenyan institutional investors into infrastructure has been slower. “Pension and insurance funds would seem ideal to offer long term finance but nobody has cracked this nut yet,” says Ziyaad Sarang, Head of Infrastructure at Standard Bank although he notes encouraging signs of change. Nigeria’s National Pension Commission is reviewing criteria to allow pension fund managers to invest 40% of their portfolios in corporate and infrastructure bonds and 5% in private equity funds. The pension funds, worth around $11 billion, are currently restricted to only three asset classes – equities, government bonds and bank deposits. Kenya’s four infrastructure bonds tempt local institutional investors with fiscal incentives including tax free earnings.

Procurement processes laboured

Most project financiers argue that access to finance for developers is less of a problem than Africa’s perilous procurement processes. “Finance is not the issue – there is more than enough finance to go around,” says Baillie. “There is enough liquidity in the market. It’s more of a question of their not being enough deals to invest in,” adds Urschitz at Strabag AG, lead sponsor in the Sh67 billion Nairobi toll road project, still waiting for the World Bank to complete due diligence and a compliance audit on the project.

In another laborious Kenyan project that is still miles from the finish line, Kenya Railway’s tender for advisors for the standard gauge railway line between Mombasa and Malaba, with a branch line to Kisumui, has been challenged twice in the procurement process. WebberWentzel first advised lenders on the project two years ago. “Each time it has gone back to re-bid and will now be delayed until next year because of the ability to challenge in the procurement process on technicalities. Procedures and processes are not deal friendly,” says Baillie.

Nigeria’s N89.5 billion Lagos-Ibadan Expressway is another example. The 25-year concession was awarded in 2009 to Nigerian construction group Bi-Courtney. Yet doubts over the procurement process means the group has found it difficult to raise finance and the deal still hasn’t closed. “Essential long-term DFI funding is hard to come by if the bidding process isn’t clear and transparent. DFIs are very particular that projects have competitive tendering process,” says Shonibare at UBA in Lagos.

Other projects get bogged down by new governments coming in and starting the procurement process again. Nigeria’s biggest construction company Julius Berger won the contract to build a second runway at the Nnamdi Azikiwe International Airport in Abuja last February but now faces the prospect of losing the N64 billion deal. The group is waiting to hear whether the contract will be revoked and the bid process commenced afresh under claims it was unfair. Even projects that have closed are still subject to wrangles, like fresh squabbles regarding toll prices on the Lekki peninsular.

Another challenge that blights projects getting off the ground is the absence of local partners. Foreign investors like partnering with local companies, yet many domestic construction groups struggle to raise finance locally and toll roads particularly, are deemed risky by local banks. Airports, ports and even railways have more reliable revenue streams. “A toll road in the middle of Africa doesn’t have a guaranteed income. Banks don’t want this kind of uncertainty,” says Standard Bank’s Sarang. And if local project sponsors aren’t investing it puts off international investors too. “The thinking is that if locals don’t invest what chance have international groups of understanding the project risks?” asks UBA’s Shonibare adding that Nigeria’s own ARM group invested in the Lekki expressway first followed later by Macquarie’s African Infrastructure Investment Fund (AIIF) as co-investor.

African governments need to look at a projects entire life cycle as a single process, encompassing preparation, planning and marketing right through to financial close with a “wholesale engagement with the market,” suggests one critic. Others point out that DFIs should concentrate on developing the more tricky projects, rather than fund those with dollar earnings that are easily bankable. “DFIs should steer clear of dollar denominated, commercial projects. They are employing their firepower in the wrong direction. They should be looking at the less bankable projects,” he suggests.

Some bankers claim that the size of South Africa’s Winelands project will suck up liquidity for a while and that it will also be another year before closure. SANRAL says it will select a preferred bidder in early 2011 and hopes to close the deal by the end of the year. But the project does herald a returning zeal to PPP transport projects in Africa where most governments now have PPP units and are increasingly aware that private investors will only flock if the structure is right. “If projects are structured properly they will get done,” concludes Standard Bank’s Sarang.