Last Thursday, the Constitutional Court, the country’s highest court, overturned a lower court’s April order blocking the implementation of electronic tolling on the Gauteng Freeway Improvement Project (GFIP), the country’s largest toll road. The ruling is credit positive for the South African National Road Agency Ltd. (SANRAL, Baa2 negative), the toll road’s operator, because it can begin collecting e-toll revenues that are key to servicing the R20 billion ($2.4 billion) of debt used to build the road. However, the ruling does not entirely resolve the e-toll saga, as GFIP awaits a full review by the courts in November.
The e-toll on GFIP has generated extensive debate in the country. Public opposition prompted the national government to reduce toll road tariffs and postpone June 2011 implementation of e-toll collections. As of April 2012, delayed implementation and lower- than-anticipated tolls resulted in SANRAL reporting a revenue loss of about ZAR2.7 billion ($325 million), which is equal to 40% of its 2012 annual revenue. The South African government responded by providing SANRAL ZAR5.8 billion ($745 million) to compensate for the lack of e-toll revenue and to defray operating costs, including debt service payments on the GFIP debt, a large proportion of which the South African government (A3 negative) guarantees.
The GFIP is responsible for most of the rapid surge in SANRAL’s debt, which rose to ZAR37.5 billion ($4.5 billion) as of August 2012, or a high 5x its 2012 annual revenues, from ZAR6.2 billion ($747 million) in March 2007. Implementation of e-tolls will alleviate SANRAL’s cash tension and reduce its dependence on government funds. Negative pressure on SANRAL’s liquidity and the risk that tolls would not be allowed were some of the factors in our May downgrade of SANRAL’s rating to Baa2 from Baa1. At the end of June, SANRAL’s cash reserves and governments funds totaling ZAR7.1 billion ($855 million) were sufficient to cover operating expenditures and short-term obligations, including debt service, over the next 16 months. SANRAL indicated that it would start collecting e-tolls in approximately six weeks.
The favorable court ruling does not entirely resolve SANRAL’s e-toll matter. The court kept a requirement that the GFIP receive a full review by the high court, which we expect will begin at the end of November. An unfavorable ruling in that review would negatively affect SANRAL’s cash flows and threaten its business model. Furthermore, operational risks associated with the e-toll collection remain. In particular, we note that the new legislation aimed at augmenting SANRAL’s power to collect e-toll fees from drivers who don’t pay them has not yet been approved by Parliament.