Sanral: The challenge of financing a national road network

In April of this year the South African National Roads Agency Limited (Sanral) re-entered the bond market after more than 2 years, with a highly successful R500 million bond auction that was close to twice over-subscribed.

The auction was the first since Sanral’s failed auction in September 2011, and served as reaffirmation that investors are no longer unduly worried about the company’s sustainability, despite the ongoing e-toll debate.

Chief financial officer Inge Mulder said Sanral had sold the full R500 million within the price guidance provided by the arrangers.

“This is our first bond auction since the commencement of e-tolling in December 2013. We offered the full HWAY suite of bonds. We wanted to get R500 million, which is what we allocated, with the clearing spreads all within the price guidance indicated by the arrangers. The total bids offered were R956 million,” Mulder stated.

Since 1998, the state of South Africa’s roads has fallen under the remit of Sanral, an independent, statutory company registered in terms of the Companies Act. The South African government, represented by the Minister of Transport, is the sole shareholder and regulator of Sanral.

JOhannesburg IDP Photographs for BIG MediaSanral operates in terms of its founding legislation, The South African National Roads Agency Limited and National Roads Act (Act No. 7,1998). It is governed by a Board of eight people, six of whom are appointed by the Minister of Transport; the Chief Executive Officer, who is appointed by the Board; and a representative of the Minister of Finance.

The company has 3 divisions: corporate services, financial services and engineering services, and 4 regional offices as its implementation arm covering North, South, East and West.

Sanral’s mandate is to finance, improve, manage and maintain the national road network and the engineering aspects of this mandate fall under the leadership of Koos Smit, Engineering Executive in Sanral’s Pretoria head office, who The SA-Mag spoke to last October:

The South African national road network consists of 19,704 kilometres of roads. This network seamlessly connects major cities, towns and rural areas, supporting economic growth and social development and contributing to job creation in the country.

Sanral has 2 primary sources of income. Non-toll roads (84.2 percent of the total national road network) are funded from allocations made by the National Treasury. Toll roads (15.8 per cent of the total national road network) are funded from borrowings on capital markets.

We are a management company and procure road infrastructural services for the development and maintenance of the national road network. We operate with a relatively small staff compliment (250 people) considering an annual budget of 14 billion Rand.

Procurement is done on a competitive basis and documentation is strictly aligned with the prescribed legislation and regulation in the built environment. Engineering requirements and specifications for road construction and maintenance are on par with international standards and the designs are optimised for the environment and type of construction materials in South Africa.”

Smit has been with the agency since it was first established in 1998. “Before Sanral was formed, the roads fell under the mandate of the National Department of Transport, but there was a big drive amongst infrastructural departments around the world to separate the operator from the regulator and consequently in South Africa, many departments created state owned agencies like Sanral,” he recalled.

Over the years Sanral has grown appreciably and its team has almost doubled to the present day 250 employees, half of whom are engineers and technical staff. The road network increased from 7,000 kilometres to almost 20,000 kilometres during the same time.

Sanral operates a hugely successful scholarship programme which was launched 6 years ago; back in October Smit underlined how this is helping to improve the lives of previously disadvantaged individuals:

“We now have 179 learners in South Africa, of which 136 learners are black, benefiting from this great opportunity.

With regard to its projects, Sanral makes every effort to promote transformation by ensuring that small, medium and micro-enterprises (SMMEs) are exposed to work experiences that would otherwise not have been possible,Smit stated. 

In the last year, we awarded 255 contracts worth R11.6 billion for new works, rehabilitation and improvement, periodic and special maintenance, routine road maintenance (RRM), community development, professional consulting engineering and other activities.

Sanral also spent R2 billion on contracts with SMMEs, of which more than R1.2 billion went to 821 black-owned firms. In addition, through SANRAL’s projects, 18,161 people were trained in elements of road-building, of which 7,252 were women,” he continued. 

Toll roads are of course a controversial topic for some people however Smit explained that they are an absolute necessity:

Toll roads account for only 15.8 per cent of the national road network and we support the user-charge principle and the Gauteng Freeway Improvement Project because of the user benefits (savings in time and vehicle operating cost) that will be generated over the life time of the project. 

“Also, 20,000 jobs were created at the peak of construction on the project and currently almost 1,300 staff members are employed at the Electronic Tolling operations in Midrand.

Our challenge is to satisfy demand with scarce resources. The toll funding option allows us to bring projects to fruition that would otherwise not have been possible had we solely relied on money from the fiscus.”

The controversy surrounding e-tolling was considered one of the main reasons for Sanral’s failed auction in 2011 and although revenue collection rates are still low, at 36 per cent, collections are slightly ahead of Sanral’s forecasts since this initiative began.

“From the 4 months of information we have given since e-tolling started, investors are now more comfortable and feel we are able to collect enough money to service our debt in the long term. The biggest uncertainty was whether e-tolling was ever going to start and not whether we were going to collect,” Mulder concluded.