Linking private enterprise and government in a project designed to become the central hub of a future integrated transport project for South Africa’s commercial heart, the Gautrain is the largest Public Private Partnership (PPP) yet launched in South Africa.
With a project value of about R20 billion, the Gautrain project led by the Gauteng Provincial Government (GPG) has been structured to ensure that the government and the concessionaire, the Bombela International Consortium, operate within a strict set of financial and time parameters. The financial parameters are designed to take account of the risk associated with South Africa’s fluctuating macro-economic parameters.
The careful structuring of the responsibilities and risk allocation of all the parties in the PPP will ensure that the Gautrain will be developed within the originally negotiated cost, ensuring that taxpayers funds are optimally utilised and the threat of huge financial ‘over-runs’ are avoided.
2. RISK SHARING
One of the main elements in the agreement is the sharing of commercial risk. This means Bombela takes ‘transfer’ from the government of the responsibility for delivering the Gautrain project at a fixed base price within a certain period. It makes Bombela accountable for the ‘Turnkey Contractor’ appointed to construct the Gautrain system as well as the Contractor appointed to operate and maintain the Gautrain service.
The two parties have also had to make complex projections and calculations on construction programme, spending, sourcing of materials, equipment, labour and skills- some of it internationally sourced due to the unavailability of certain skills in the country- over the life of the contract. All these issues have to be agreed upon between the Province and the Bombela consortium before laying a meter of track.
Bombela’s contractors will import vital machinery and equipment for the project. Through this they will take ultimate responsibility for hedging foreign-denominated costs – shielding the GPG from liability for currency fluctuations and ensuring that costs for this key project are contained.
3. CURRENCY AND INTEREST RATE HEDGING
From their side Bombela has therefore had to fix their costs by making use of currency and interest rate hedging in local and international markets to ensure the integrity and profitability of the project. However, in terms of the contract, adjustments of the base price for local expenditure at CPIX will be allowed to mitigate the impact of increases in the local costs of wages, materials and other factors during the term of the contract.
4. FUNDING BALANCE
The objective of the funding balance is to establish the level of funding the province must contribute towards the capital cost of the project that leaves the project in a commercially viable operating condition with normal business drivers and rewards. Given the green-field nature of the project and the uncertainty surrounding the eventual patronage on the Gautrain System, the province underpins a predetermined level of patronage based on the studies undertaken for the project. This underpin allows for a degree of comfort to the concessionaire and its lenders as to the revenue generation of the project and allows for the funding to be established and committed to.
The level of funding that can be raised by the private sector is a function of the level of free funds available between the patronage guarantee and the operating costs associated with the system. This can be illustrated as follows:
5. FINANCIAL ADVANCES FROM GAUTENG GOVERNMENT
Financial advances made by the GPG for the delivery of the Gautrain system are only paid against the completion of specific verifiable milestones. These milestones are linked to the construction programme of the project and cover all aspects of the project. The milestones are designed and formatted to ensure timeous and integrated delivery of the project.
Milestones are certified on a monthly basis by an independent certifier and consolidated into a monthly payment certificate. Payments will vary from between R100 million to a peak of nearly R800 million during the development period of the project.
6. PRIVATE SECTOR FUNDING FOR THE GAUTRAIN PROJECT
Private sector funding for the project has been provided through equity in the form of shareholders’ funds. The equity made available by shareholders in the Bombela International Consortium covers approximately 20% of the funding necessary for the project.
Of the 80% balance, 71% is provided by bank syndication and 9% through a floating rate mezzanine funding facility.
7. SECURITY STRUCTURE
The financial transactions for the entire duration of the Gautrain project are underpinned by a number of security mechanisms which guarantee the performance of Bombela and their appointed contractors. These cover retentions, performance bonds and collateral agreements.
The ‘performance bonds’ which will be issued by the Turnkey Contractor who in turn is supported by contractors undertaking the various aspects of the project. The performance bond has been set at 8% of the value of the turnkey contractors’ value for the contract. At least 25% of the bond is payable on demand for non-fulfilment of obligations and 75% in the form of an arbitration bond.