The Civil Engineering Contractor June 2018 | Page 29

INSIGHT
close. An example is the last round
of tenders awarded in government’s
REIPPP programme: After the
tenders were awarded, it took two to
three years for those projects to reach
financial close. The delay was caused
by political interference and the lack
of commitment on the part of Eskom.
Such delays could certainly affect the
a ppetite for private parties to tender
for future projects.
Project bond option
An important source of funding
infrastructure projects by both the
private and public sectors, is the
issuance of project bonds. Project
bonds as an alternative source of
funding infrastructure projects is well
developed in Europe, Latin America,
and the Middle East. Many SOEs have
used bonds to finance projects. The
difficulty that SOEs might experience
with this method of funding, is that
those bonds are usually unsecured,
and with the current financial position
in which many SOEs find themselves,
investors may not have much appetite.
Further, the credit ratings of SOEs
will also play a role. A decrease in the
credit rating will influence investors’
appetites to fund. A decrease in credit
rating may also lead to a higher cost of
funding to an SOE.
Municipalities such as City of Cape
Town, Ekurhuleni Metropolitan
Municipality, and City of Johannesburg
have successfully used bonds to
that the project will generate during
its operation by the private party.
The revenue derived from the project
will have to cover operating expenses,
payments to contractors, and the
repayment of dividends, principal and
interest to the equity funders and banks.
Advantages of PPPs include limiting
dependence on government’s balance
sheet; providing better infrastructure
solutions and management than a
project that is wholly publicly, or
wholly privately driven; risks are
appraised early in the process to
determine project feasibility and
faster project completions; and
reduced delays by including time-to-
completion provisions as a measure of
performance.
Disadvantages of PPPs comprise
high transaction costs that may
discourage small service providers
from participating in the bidding
process; profits of the project can
vary depending on the assumed risk;
complexity and the size of the project;
and political risk, among others.
Political risk would include the long
negotiating process with government
or a municipality on the PPP
Agreement, which could take one-
and-a-half to two years and which
would delay financial close. The longer
it takes to financial close, the higher
the initial project costs would be.
With respect to municipalities, if
there is a change in the political party
governing the municipality, the new
municipal council could repudiate
the PPP Agreement negotiated by the
previous regime, which would have
massive financial risks for both the
private party and its funders. Another
disadvantage could be the time delay
from when the project is awarded
to a tenderer to the date of financial
fund their capital requirements.
Their success in raising financing
through the issuance of bonds can
be attributed to their sound financial
position, good corporate governance,
and credit ratings assigned to them.
Project bonds could supplement
existing infrastructure funding, but
the project bond market has not really
developed in South Africa. I am of
the view that one causal factor for
a lack of project bonds in the South
African market is construction risk
(that is, the initial period where the
project is built or constructed, which
could be three years or more, and
which risk to investors is highest
because no cashflows are generated).
Construction can be delayed for
several reasons. Another factor could
be that banks are content to keep the
loans on their balance sheets as an
asset for a long time, as opposed to
relinquishing those assets to capital
market investors.
If the challenges in securing funding
for projects set out above is properly
and expeditiously addressed, the
appetite of banks and other financial
institutions to provide funding to
infrastructure projects will certainly
increase. President Ramaphosa’s
statement is a welcome indication
that government is committed to
drastically improve legislation,
governance frameworks within SOEs
and municipalities, and to restore
confidence in SOEs. nn
About the author
Richard Roothman obtained a BCom LLB (Law) degree from the
University of Pretoria, a master’s degree in commercial law from
Cornell University in the USA, and a master’s degree in tax from
the University of the Witwatersrand. He is the head of the Banking
and Finance practice group at Werksmans Attorneys and has been a
director at Werksmans Attorneys for 11 years.
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