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INFRASTRUCTURE CONCESSIONS
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Infrastructure Concessions contributed 5.7% (2010: 4.9%) to group revenue and 14.6% (2010: 9.8%) to group total operating profit.
The group currently has active concessions in the transport sector under the Intertoll brand. The group is developing additional concessions in the power and public real estate sector and is targeting the water sector. This report therefore discusses the broader concessions market and focus, as well as the specific transport concessions portfolio of Intertoll.
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Market review - Concessions
Concessions
While South Africa still leads the private public partnerships (PPPs) market in Africa, our exposure to countries such as Uganda, Kenya, Mauritius, Zambia, Botswana, Ghana and Zimbabwe highlights the growing trend in Africa to pursue PPPs as a vehicle for delivery of infrastructure.
Across the continent, different forms of PPPs are being considered as a mechanism to provide roads, water, electricity, public buildings and other services. The political will to initiate contracts and fast-track the process wherever feasible is also present. However, as there is a development period associated with new markets, and while the
opportunities mature, increasing demands are placed on our limited available resources to assist our clients and partners to put in place the regulatory, commercial and financial frameworks which will ultimately allow these contracts to be brought to an implementation stage.Although PPPs remain confirmed as imperative in South Africa, subsequent to the 2010 FIFA World Cup, market activity has been very slow, both in finalising existing contracts and in bringing new contracts to market. For example, in the health sector, where five major hospitals were identified by the government as PPPs in 2009, the procurement process has yet to start on any of these, notwithstanding the urgency to improve hospital conditions.
In Eastern Europe, for both financial and political reasons, there was a reduction in the number of new PPP contracts in our targeted transport and power markets.
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Market review - Transport
Transport
Central and Eastern Europe
As a result of the aftermath of the global financial crisis and political developments during calendar 2010/11, Intertoll Europe’s traditional market of developing and operating PPP motorway infrastructure concessions in the Central and Eastern European (CEE) region remains depressed with no improvement in market conditions now realistically forecast until calendar 2012/13. The graphic below illustrates this trend with no PPP infrastructure concession motorway contracts in the region achieving financial close during 2010 and none forecast to achieve close in 2011.
Number of projects closed and cancelled - Central and Eastern Europe
However, budgetary constraints and a future reduction of available funding from the European Union for motorway construction are forecast to result in a reversal of this trend. Poland is expected to lead this change and is scheduled to come to market with at least three contracts by 2013. Other countries within the CEE are expected to follow.
A number of countries, including Slovenia, Bulgaria and Hungary, are scheduled to come to market with electronic toll collection (ETC) truck tolling contracts within the next two to three years.
Intertoll Europe continues with a strong order book and, due to forecasting the depressed market conditions in its earlier business plan, it has pursued alternative markets. These include the upgrade of motorways to tolling standards in Balkan countries and undertaking sub-contracts for tolling operations. One such contract was secured in April 2011.
Africa
The second phase of comprehensive toll road operations and maintenance (CTROM) re-tenders in South Africa was completed in May 2011. Intertoll Africa was successful in securing the N2 North (KwaZulu-Natal), N1 South (Gauteng/Free State) and N4 West Magalies (Gauteng) contracts. The Mariannhill toll plaza (N3, KwaZulu-Natal), Tsitsikamma route (N2, Eastern Cape) and N2 South (KwaZulu-Natal) CTROMs are expected to be re-tendered from calendar 2012.
The N1 – N2 Winelands toll road situated in the Western Cape and the Wild Coast toll road situated in KwaZulu-Natal/Eastern Cape remain focus contracts for the business. New operating contracts are also at an early stage of development in our targeted countries of West and East Africa and Mauritius.
In addition to the above, a partnership with the Zimbabwean National Roads Administration (ZINARA) was secured. Through this PPP, a loan in excess of $200 million was secured for Zimbabwe from the Development Bank of Southern Africa to fund the rehabilitation of the major routes from Plumtree to Harare and Harare to Mutare. Group Five will lead the construction works (valued at R1,4 billion) while engaging closely with local contractors and suppliers. In addition, Intertoll will manage the toll collection and operations on these routes.
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Delivery
Find below how we delivered on our objectives outlined in our F2010 integrated report.
Key focus areas Desired results Status Concessions The group’s strategy is to progressively expand its concessions portfolio in transport, power, water and real estate. Momentum of concession and PPP contract awards is expected to increase over the next two years.
The team is conservatively optimistic about securing a number of material awards in F2011. Group Five submitted 13 responses to requests for proposals (RFPs) in the past two years which have provided a spread of contracts in different stages of maturity. Evaluation delays were experienced, although there is now a positive indication that evaluations will proceed in the year ahead.
Development of independent power projects
(IPPs) in South Africa and Eastern Europe.A key challenge in South Africa is the clarification of the regulatory framework required to implement bankable purchase and operating contracts. The South African IPP and renewable energy market has been delayed due to a lack of clarity on regulations and tariffs. The group is developing two IPP power contracts in South Africa and Eastern Europe.
The South African government has identified
the health sector as a priority focus for the
development of PPP contracts.Group Five is well placed through the solid consortia we have formed for this sector. Hospital contracts are now anticipated to be tendered in calendar 2012. South African public building PPPs. The group’s concessions knowledge and its construction capabilities are expected to position the group competitively. There have been several process and adjudication delays.
As disclosed on the South African national PPP unit contract list, Group Five-led consortia were awarded preferred bidder status on two contracts.
Demand for water-related contracts is expected to increase over the next few years, in particular at municipal level. A key challenge for water markets in Africa is a clarification of the regulatory framework required to implement bankable purchase and operating contracts. Water contracts have been slow to market, although two contracts are being considered in the Southern African Development Community (SADC) region. 
Key focus areas Desired results Status Transport Intertoll Europe
Secure the Polish electronic truck toll contract. Successful award after pre-qualifying in April 2010. Tender submitted by August 2010. Our consortium withdrew from the tender process along with a number of others due to unrealistic timeframes and unacceptable risks in the contract documentation. The contract was awarded to a European company in November 2010. Position for the next major PPP infrastructure contract to be targeted by Intertoll Europe. Successful positioning when contract comes
out, scheduled for the first quarter of F2011.We are well positioned and involved in the process of the upcoming PPP infrastructure contracts in Poland. A strong consortium was created to tender for these contracts. However, the tender process was delayed by the Polish government by 12 months. Secure government support for concessions contracts post elections in Slovakia. Succeed in closing the D1 contract during F2011. The new coalition government cancelled all PPPs which had not yet achieved financial close in the third and fourth quarters of F2011. This included both D1 concessions. Our consortium was the preferred bidder on one of these. Intertoll Africa Secure a concessions contract for Intertoll Africa. Target N1 – N2 Winelands as a priority. Our consortium was selected as one of two bidders to submit best and final offers (BAFOs). Final offers are due at the end of July 2011. Continue to improve our BBBEE rating. Achieve Level 2 status. Level 2 status achieved. Ongoing activities to maintain and enhance this position. Grow the Intertoll Africa business over-border. Secure a confirmed position on at least one African contract. Long term operating contract in Zimbabwe signed. New contracts being targeted in West and East Africa and Mauritius. Position Intertoll Africa effectively for the CTROM contract re-tenders. Selected as a winning bidder on CTROM contract re-tenders. Successfully secured the N2 North (KwaZulu- Natal), N1 South (Gauteng/Free State) and N4 West Magalies (Gauteng). Targeting further CTROM re-tenders in South Africa during calendar 2012. -
Financial overview
Year ended
30 June 2011Year ended
30 June 2010Revenue (R'000) 522 870557 227 Total operating margin (%) 14.015.4 Core operating margin (%) 14.015.1 The segment delivered pleasing results in the year under review despite the government’s cancellation of the D1 (Slovakia) project, which was a focus contract at the time of setting F2011 forecasts. The strong performance was mainly as a result of an acceleration of the A1 Phase 2 (Poland) project roll out programme and mild European winter conditions.
Revenue, which consists primarily of fees for the operations and maintenance of toll roads, decreased by 6% from R557,2 million to R522,9 million. Despite this, the core operating profit margin decreased only slightly from 15% to 14%, with core operating profit of R73,2 million (2010: R84,0 million). In addition, the segment also recorded fair value upward adjustments of R33,2 million (2010: R13,5 million) on its investments in its Eastern Europe concessions businesses.
Material issues within the business and how these have been managed
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Concessions
Adoption of the PPP model
Although the benefits of PPP models are accepted across the world, delays in contract delivery in emerging economies occurred due to a lack of sound regulatory arrangements, with political issues also negatively impacting PPPs in Europe.
Against these challenges, Group Five is well positioned, has the tolerance and long term strategy to tender on and innovatively tackle the major PPP opportunities currently underway or anticipated in our target geographies of South Africa, the rest of Africa and Eastern Europe and in our core target sectors of renewable energy contracts,
power plants, new building and hospital contracts and major toll motorways.Effective human capital management
Our targeted contracts require substantial teams to prepare the technical, environmental, legal and financial submissions. Unforeseen delays continue to be experienced in the rollout of these contracts, particularly in relation to public sector matters. A key challenge for Infrastructure Concessions is therefore to manage our resources efficiently within the context of delays which severely influence the optimal allocation of our limited skilled resources.
By targeting selected contracts with the highest probability of implementation, we have managed to build a portfolio of contracts in various sectors and at various stages within their lifecycle to optimise the opportunity cost of allocated resources.
Geographic and sector spread and focus
The business has qualified and submitted, or is in the process of reviewing, proposals for PPPs in a number of African countries, including Uganda, Kenya, Ghana, Mozambique, Mauritius, Zambia, Namibia and Zimbabwe.
The contracts, as well as their regulatory framework, are unique to each country and sector and require a particular approach in each case. Our established risk management system allows us to manage these potential risks.
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Transport
European politics
The last two years have produced a change in political affiliations with nationalistic political parties being voted into power in a number of CEE countries. These political parties have campaigned against foreign domination of certain markets with PPP concessions being one of the areas perceived to be in the domain of foreign players and financial institutions.
This has been particularly evident in Hungary (where three of Intertoll’s major contracts are located), Slovakia (which resulted in the cancellation of all contracts in the PPP motorway programme which had not achieved financial close by the third quarter of 2010) and the Czech Republic (which had planned four motorway PPP concessions
and was a target area for Intertoll).To limit risk, Intertoll has been cooperating with our concessions partners to ensure that our performance as concessionaire and operator is beyond reproach.
Diversification
Over the last two years, Intertoll has been cautiously diversifying its business activities and scope to mitigate the risk of adverse developments in specific markets or countries.
Geographic
While South Africa and the European Union (EU) still constitute the preferred operating regions, increased emphasis has been placed on investigating new countries, particularly Mauritius, Zimbabwe, Zambia, Ghana, Kenya, the Balkans (Macedonia, Kosovo and Bosnia), Turkey and certain of the Commonwealth of Independent
States (CIS) countries.The business was successful in securing a significant new long term operating contract in Zimbabwe as a result of these activities.
Scope of services
In addition to the core road concession business, Intertoll has been actively investigating alternative projects related to our current business. These include the tolling of existing motorways where this is financially viable for countries outside the European Union.Tolling sub-contracts, such as those incorporated into the Polish electronic toll collection (ETC) truck toll contract, are also being pursued. Intertoll was successful with the first of these after securing the manual toll operating project for a 100 kilometre section of the Konin-Strykow motorway in Poland.
Tolling technology
Investigations continue into the viability of developing our own tolling systems. Work has successfully commenced on the development and testing of our own manual toll collection system in South Africa.Partnering
The currently depressed market conditions in the core European PPP market could potentially create a risk to Intertoll’s preferred partner status with many of the major construction companies due to new market strategies being adopted by other tolling industry players. This risk is being mitigated through continued interaction with our partners and by constantly adding value to their activities.
Key achievements 
In South Africa, two major concession projects were adjudicated and preferred bidder status conferred. During the year, the Group Five-led consortia were selected as the winner on both the new headquarters for the Department of Land Reform and Rural Development and the new City of Tshwane municipal offices The Group Five consortium was selected as one of the two final bidders to submit best and fi nal offers for the R10 billion N1 – N2 Winelands toll road concession in the Western Cape Intertoll Africa secured a new long term operating contract in Zimbabwe for operations and maintenance of the national toll road network on behalf of the Zimbabwean National Road Administration (Zinara). In addition, Intertoll Africa secured a new eight-year operating contract for the N1 South (Johannesburg to Bloemfontein) toll road route in South Africa Intertoll Europe successfully continued with the timeous roll out of the second phase of the A1 concession in Poland, with a target date for opening of January 2012. The business also successfully secured a three-year operating contract for a section of the manual tolling system component of the Polish national electronic truck toll system In Europe, we are well advanced with putting together a PPP for a gas-fi red 115 MW power plant in Bulgaria -
Looking forward
Key focus areas for F2012 Desired results Concessions Secure at least two concessions. Finalise negotiations and obtain financial close on at least two contracts in F2012 Tender on no less than two major PPP requests for proposals. Submit tenders on at least Mauritius Port Louis bypass toll road, Kalahari Concentrated Solar Project and Baragwanath Hospital Reduce development costs. Manage and develop strategic relationships with selected partners, consultants and advisors and optimise resource allocation between contracts, teams and countries Ensure a geographic spread of contracts. Continue to develop the contracts being pursued in Eastern Europe, while also developing new PPP opportunities in southern, East and West Africa in line with the group’s strategy Transport Intertoll Europe Phase 2 of the A1 project in Poland. Achieve an efficient on-time and on-budget opening in the second quarter of F2012 Electronic toll collection (ETC) development
in Poland.Conclude negotiations with Gdansk Transport Company and the client to award full implementation of the ETC operation of the A1 to Intertoll New project development in Poland. Conclude a consortium agreement with preferred partners for new PPP projects, secure pre-qualifi cation and position the consortium as a potential preferred bidder Manual tolling sub-contracts in Poland. Commence on-time and on-budget tolling operations of the secured A2 tolling sub-contract and secure at least one additional sub-contract on acceptable commercial terms Intertoll Africa New project roll out in Zimbabwe. Focus execution resources on implementation of a new long term operating contract in Zimbabwe, with commencement of operations targeted for the fi rst quarter of F2012 N1 – N2 Winelands toll road concession,
South Africa.Secure this concession with our partners, including the long term operations and maintenance and tolling equipment supply contracts Tolling upgrades and operations. Pursue possible opportunities in the Balkans and position Intertoll to secure one if these proceed Truck toll ETC projects. Position Intertoll to be part of a consortium with preferred partners and a signifi cant contender for ETC projects in our target geographies Tolling technology platform. Become an integrated toll system supplier and operator through selective proprietary technology development, acquisition and key industry strategic alliances