New Chapman's Peak Contract a Significant Improvement from the Previous One

The Department of Transport and Public Works and Entilini Concession (PTY) Ltd on 8 March 2011 signed a new contract for the Chapman's Peak Drive Public Private Partnership following more than 12 months of lengthy negotiations between the two parties.

The negotiations for the revised agreement were triggered by Minister Carlisle's concerns with the previous contract which was not favourable to the provincial government.The new contract is, in practical terms, the fairest possible deal for the provincial government and the Concessionaire, and by extension for the users of this historic roadway and the people of the Cape Peninsula in general.

"The old contract was seriously flawed and proved very costly to the provincial government. The new deal is a significant improvement from the previous one. Accordingly, the provincial government will recover almost every cent it will be required to pay Entilini by way of a revised revenue support regime" says Carlisle.

"Chapman's Peak is one of the world's most scenic coastal drives, and one of our top tourism icons. This agreement demonstrates our mutual commitment to making sure that it stays that way for generations to come" added Minister of Economic Development and Tourism Alan Winde.

Background

The Concession Agreement between the two parties for the design, construction, financing and management of the Chapman's Peak Drive project was first concluded in May 2003. The first amendment to the Concession Agreement was executed in July 2003 and another one was signed in June 2004. The original agreement involved the construction of two toll plazas on the drive: one in Hout Bay and the other in Noordhoek. All the necessary environmental authorisation was obtained for both toll plazas. Subsequently, there was a legal challenge to the construction of the Noordhoek toll plaza.

Toll plazas and related matters

As part of the new contract, the two parties have agreed to construct one toll plaza at the Hout Bay end of the road whilst retaining the right to construct a permanent plaza at Noordhoek should this become necessary in future. The single toll plaza may result in some motorists entering CPD from the untolled southern side and exiting through the same route to by-pass the Hout Bay plaza. However, the anticipated miniscule loss of revenue resulting from this and the high costs associated with earthworks on the side of the mountain and the ongoing legal challenge outweigh the need to construct an additional toll plaza.

The provincial government will contribute R25 million to fund the new toll plaza out of an estimated cost of R53 million. For its part, the Concessionaire will contribute R11.6 million and a further R13 million comprising of its contribution to penalties and adjustments to previous invoices.

Furthermore, the Concessionaire has agreed to contribute an additional R13 million to settle all disputed and outstanding penalties levied against it by the provincial government. The settlement is the most reasonable intervention to avoid unnecessary legal costs. This reduces the province's contribution to the project.

The Concessionaire will be required to cover any extra costs exceeding the estimated R53 million. It will also be responsible for all risks associated with the design and construction of the toll plaza. The provincial government will only make payments for agreed milestones.

Road closures

Previous road closures were often controversial and contested between the two parties. In terms of the new contract, the two parties will jointly determine closures and deal with them. The new contract allows the province to insist on keeping the road open, if it is convinced that the risks of doing so do not pose a danger to road users. In turn, the provincial government will take responsibility for those risks associated with the decision to do so. This will be done on a case by case basis.

This is a marked improvement from the previous manner of deciding road closures as the province will now be directly involved in determining when the road can and could be closed and the duration of that closure.

Revision of province's future support

The essence of the new regime of support reached by the two parties is that:

• The Provincial Government will underwrite the Concessionaire in respect of a defined and known set of costs, which will be fixed in real terms and escalate only by CPI;
• Once the cash flows of the Concessionaire exceed this defined set of costs the Provincial Government will receive an income equal to the previous support granted; and
• Once the income has covered the previous support, the parties will share the surplus cash flow on a 50/50 ratio.

This approach was largely necessitated by the significant changes in cash flows which will occur once the debt obligation of the Concessionaire has been settled. The province and concessionaire will now become true partners and all the money paid out in previous years will be more than recovered throughout the lifespan of the contract.

Reserve account

The parties agreed to implement a new system for reserving funds to provide for unexpected events due to the ad-hoc nature of events in the past few years. The key features of the Reserve Account are:

• It will be funded on a six monthly basis by an amount of 10% of the turnover for that period up to a maximum of R20 million.
• The funding will come from the cash flows of the project except in the event these are insufficient and the province will duly underwrite such a contribution.
• Withdrawals are permitted for Unplanned Major Maintenance (excluding routine maintenance to be carried out by the Operator), Catch Fence Maintenance, and Specialist Costs.
• The Concessionaire will account to the Provincial Government for the use of the Reserve Account.
• The Concessionaire must obtain the approval of the Provincial Government for withdrawals more than 5% of the Reserve Account balance or R500 000 CPI adjusted.

The new contract also dictates that there must be consultation between the two parties should the expense to be incurred exceed the available funds in the Reserve Account.

Termination of the designated event

The Designated Event, under which the contract has operated since inception due to the delays in obtaining environmental approvals and the pending litigation, will be terminated from the first day of the month following the signing of this new contract. Certain costs payable in terms of the Designated Event will continue to be payable until the completion of the Hout Bay toll plaza. These costs related to additional staff, extra security, transport and handling, and administration fees resulting from the temporary toll plazas.

Contract management

There will be quarterly meetings between the senior representatives of the two parties in order to deal the management of the contract more effectively than it was in the past.

Status of the catch fences

The Concessionaire was advised by Geobrugg AG, its supplier of the catch fences, that it will no longer be in a position to honour the guarantees provided at the time of the original supply due to adverse conditions along Chapman's Peak Drive. The supplier offered a "severance package" comprising a cash settlement of approximately R3.2 million and an additional R3.2 million worth of auxiliary materials for the catch fences in lieu of the guarantee.

The two parties have accepted the offer as the best available solution under the circumstances. The alternative was to enforce the original guarantee in a Swiss court which would have been costly and time consuming.

Free day pass system

The two parties have not yet reached an agreement on the status of the free day pass system. Meanwhile the status quo remains - that the free day pass will remain.

"I am confident that if the people of Cape Town honour the free day pass system, I can persuade the concessionaire to accept it on a permanent basis," says Minister Carlisle.