Recent commentators and media coverage of the Gautrain suggest the average taxpayer is picking up the bill of this R25 billion project, regardless of whether the Gautrain is used or if it's a financial success. A different picture, however, one where the private investors could also stand to make a loss in this public-private partnership (PPP), is painted by Dr Barbara Jensen of the Gautrain Management Agency (GMA), as well as Errol Braithwaite and Kelebogile Machaka of Bombela Concession Company (BCC), which, after an international tender process, was appointed by the Gauteng provincial government to design, build, operate, maintain and partially finance the Gautrain project.
Says Braithwaite: “A public-private partnership is a partnership in every respect. [The government] puts in finances, approval processes and strategic outlines, and private companies bring money in the form of investors, expertise, and operate and manage the project. Without these partnerships, nothing would be possible.”
Misconceptions
He says it's important to dispel misconceptions about public and government utilities and the PPPs used to construct them: “We need to have a bigger-picture perspective: public utilities and PPPs don't necessarily make money. For instance, if the government wants to trade with overseas countries, we need maritime ports and airports, regardless of whether they are going to be profitable. Roads are the same; they will never be profitable, but we can't run the country without them.”
The Gautrain is not intended to make a profit, because profit implies charging fares in a way that optimises revenue and not ridership.
Dr Barbara Jensen, Gautrain Management Agency
He suggests the same is true of the Gautrain - it is a necessity in and of itself. For the smooth and effective running of cities like Johannesburg and Pretoria, a system like the Gautrain is necessary and a PPP is the mode to make it possible.
Dr Jensen is quite clear, however, that it is still a public transport project and “is not intended to make a profit, because profit implies charging fares in a way that optimises revenue and not ridership”.
And public usage (ridership) of the Gautrain - not necessarily profit - is at the top of the list of priorities for the Gauteng provincial government, the Gautrain Management Agency and Bombela Concession Company.
To this end, the GMA and Bombela are invested on all levels in the project. Says Braithwaite: “Bombela has incurred debt from commercial banks to contribute to the financing of the Gautrain project, so we are fully invested in it.”
He also stresses how important a project like this has been for the brand 'South Africa' and how other sectors of the economy are benefiting from the successful completion and operation of the Gautrain. “If [in 2001] the financial deal had fallen through or we couldn't close the deal, if we had failed in the development stages or if we couldn't deliver the project, can you imagine the impact that would have had on corporate South Africa's reputation? So when Eskom was doing its road shows around the world, wanting to borrow millions, the world out there would have said, 'Thanks guys, we've seen the South African road show once before. They actually can't deliver on these big deals and they don't know how to deliver on big projects.'
“That's the scenario we would have faced had the Gautrain project fallen over. But South Africa being able to close the deal and then deliver the project - bearing in mind that we delivered phase one ahead of schedule, in time for the Soccer World Cup - to me that bears testimony to the [investment] of the people on the project.”
As for the taxpayer picking up the bill if the Gautrain runs at a loss, Dr Jensen notes that national and provincial government contributed almost R23 billion towards its construction. Operational costs have to be covered by the income from the operations but until such time as Bombela's forecast revenue is met, the province pays a patronage guarantee.
Operating risk
“This is not an uncommon practice; it's being done around the world... In the Concession Agreement between the province [of Gauteng] and Bombela, there is a provision for the province to underwrite the patronage revenue [the income received from selling the Gautrain gold cards] collected by Bombela by means of a patronage guarantee [which the Gauteng provincial government is liable for until Bombela's forecast revenue is met]. This was the basis of the initial tender and has always been a part of the project design. This is in accordance with international best practice and has been fully budgeted for [in the Gauteng provincial government's Medium Term Expenditure Framework (MTEF)].”
In short, government is paying for it.
Comments Jensen: “It's not, however, all risk-free returns for Bombela. During operations, Bombela takes all operating risk other than full demand risk. The provincial government provides a patronage guarantee in months where the revenue from the system is greater than the Bombela forecast revenue, but less than predetermined minimum required total revenue. The estimated annual liability is R360 million, based on the current provincial government forecasts of 'ridership'. However, in the event of trains or buses not running according to scheduled service or in the event of security breaches on the system, the patronage guarantee diminishes and ultimately falls away.
“It's also important to note that, unlike any other public transport model, a large part of the capital costs are recovered in the operating period. During the concession period, these will all be paid off. Once this is achieved, the revenue will exceed the operating costs, leaving the province and the taxpayer with a long-term, sustainable and world-class system.”
'Car is king'
Further than this, Bombela has undertaken a large-scale advertising campaign to ensure and even exceed expected 'ridership' revenue. That's not an easy task as most urban South Africans have the mindset that 'car is king'. Not only is it a formidable status symbol, but it also has connotations of bringing freedom of movement; against this mindset, Gautrain marketing was launched.
The marketing strategy is based on the fact that this is a completely greenfields project where the objective is to not only affect a simple purchase decision of the consumer, but to produce a fundamental change in consumer behaviour and lifestyle.
Says Braithwaite: “Bombela has rolled out a comprehensive marketing and advertising campaign aimed at educating the public to the convenience and cost-effectiveness of using the train and bus services.
“The campaign was built on three pillars: to excite the market about the project and generate interest and anticipation of the launch, utilising television, radio, print, outdoor, digital and social media platforms; to inform and educate people in the use of the system, leveraging radio, print (both bought and earned), outdoor, digital, AV and social media platforms.
“Lastly, to persuade customers of the continued benefits of using the Gautrain. This last pillar entails aspects of each of the preceding phases as well as aiming to deliver value-added benefits to customers through partnerships and associations with third-party businesses such as car rental companies, insurance companies, etc.”
In response to one of the main questions of concern, that of actual usage of the Gautrain and its sustainability, Dr Jensen sums up by saying: “'Ridership'... is a big issue, both to the province [of Gauteng] and Bombela because the long-term sustainability of the project and the public private partnership model depend on the project being successful over the long term. The full system isn't open yet and already the system is carrying over one million passenger trips per month and this is expected to increase over time.”
First published in the February 2012 issue of ITWeb Brainstorm magazine.
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