SANRAL carrot attracts 36% of e-toll users; expecting sharp increase soon

As you'll see when watching this interview, getting me to believe SANRAL's statement that its cash flows are ahead of target took some convincing. With almost three quarters of Gauteng's freeway users still refusing to pay – Gauteng accounts for half SANRAL's revenues – it defies logic. Except that it doesn't. SANRAL aimed low, very low, and as a result was able to tell potential investors in its bonds that it is ahead of the financial plan. Investors bought the story and duly applied for double the R500m in bonds available at yesterday's auction. You get the feeling, though that the real test is yet to come. SANRAL chief financial officer Inge Mulder explained in this CNBC Africa Power Lunch interview that from here the cash flow projections ramp up. The spreadsheets estimate half of Gauteng's road users will pay for e-tolls in 2014, rising sharply next year. Mulder says for the moment SANRAL's approach remains incentive based. She wouldn't say for how much longer. – AH

ALEC HOGG:  Well, Sanral, the company many people love to hate, re-entered the bond market last week after almost a three-year absence, with a successful R500m bond.  It was done on an auction – close to twice oversubscribed.  Joining us is Inge Mulder, who is the Chief Financial Officer at Sanral.  I guess if you told the average Gauteng resident that Sanral has gone and raised money in the market now and in fact, could have gotten double as much as it wanted, they would shake their heads in disbelief.  Certainly, many people I'm acquainted with are refusing to pay the e-tolls.  It's a political issue.  How did you manage?  In your statement, it says that your cash flows that have been coming in are ahead of what was anticipated at this stage.  If so many people are not paying their e-tolls – supposedly – how come your cash is ahead of target.

INGE MULDER: Alec, I think it's good to understand that Sanral's business is not only a Gauteng freeway-approved project.  It's only 200 kilometres out of a toll portfolio that Sanral has, which is 1800 kilometres.  In terms of years passed, we did not go out into the market because investors were obviously a bit hesitant in terms of a big part of our business, which is GFIP.  Because we start tolling, we could show them what the numbers are.  They see our forecast.  They see how we look into the future…what our assumptions were, and they were comfortable with that.  Yes, in terms of GFIP, its early days still and we do have a fairly conservative model that we work on, but we are ahead in terms of that cash flow.  However, also take into account that we have several other toll routes that we also maintain, and those are across the country.

ALEC HOGG:  I don't get this.  You're ahead on the Gauteng cash flow on e-tolls.

INGE MULDER: Yes, we are.

ALEC HOGG:  But people aren't paying.  Who's paying?

INGE MULDER: Well, we have 36 percent of people paying.

ALEC HOGG:  Is that mainly government?

INGE MULDER: No, that's not.  The government fleet is fairly small.  They are registered just as everyone else is, and they have to pay, but we've registered one-point-three million users so far since the start of tolling.  I think people see the benefits more and more when they use the e-tag as a payment method on other toll roads as well.  There is benefit in terms of time savings, not just in Gauteng where the improvement obviously has had huge impacts on people's timesaving and travelling experiences.

ALEC HOGG:  So 36 percent of people in Gauteng are paying.

INGE MULDER: Yes.

ALEC HOGG:  And what percentage of that would be government?  I just want to understand the numbers.

INGE MULDER: Government's fleets number about five thousand vehicles, so it's actually very small.

ALEC HOGG:  So it would be single digits, if that.

INGE MULDER: If you look at the current population in Gauteng using the freeways, there are two-and-a-half million vehicles, so the government fleets are really very small in that.  Even if you look at the taxis and buses, which are exempt, that is about 110-thousand vehicles.  To see it in perspective, there is still a huge amount of people, including bigger fleets that are actually paying there e-tolls.

ALEC HOGG:  Of the 1800 kilometres – of which you said 200 kilometres are in Gauteng where all the conflict is – of the cash flows, what percentage is that?

INGE MULDER: It would be about half, in terms of revenue coming in, would be from GFIP.  However, because we have an existing cash flow, which is constant from the other routes, it's easier to build a business on that as well.

ALEC HOGG:  So you must have thought or you must have considered that there would be opposition to e-tolls.

INGE MULDER: We built in a ramp-up phase.  That would be a normal practise across the world.  We've looked at several other toll roads in developed and underdeveloped countries, to look at what the growth is in the first/initial periods.  Certainly, there isn't as big an open road-tolling project in the rest of the world.  This is the biggest, but we've looked into that.  We've used even more conservative assumptions than that, but the 36 percent we currently have is well in our current assumptions, in terms of getting to where we want to be.

ALEC HOGG:  So how does it ramp up from here?

INGE MULDER: For the first year, we've set 50 percent on average, and then we ramp it up further than that.  We have to say that there are certain things you have to put in place.  You have to do certain things to get it there.  You can't just sit back and wait for it to grow.  You have to do certain things.

ALEC HOGG:  And those things would be legal?

INGE MULDER: Firstly, we do the incentive route, so we first say 'please pay within 30 days.  We'll give you a 60 percent discount.  If you register as well, we'll give you another discount', so you actually have 30 days in which to pay the standard tariff.  After 30 days, we still give you another 30 percent discount.  Firstly, we've gone for the incentive route to get people to pay and thereafter yes, then the legal route, but it's still a normal debt collection process before you go to a criminal procedures act.  We still endeavour, after the first 60 days, to try to convince you to pay before we hand over.

ALEC HOGG:  I used to work for a bank once, 20 years ago, and I remember every time I was in a social environment people would flay me because people love to hate banks.  While you're engaging with your social circle, are they saying 'you people at Sanral have caused us to pay for e-tolls and we don't want to', from a personal perspective?

INGE MULDER: Yes, it's very challenging.  I think the biggest we face as a company, and as employers of the company, is to get the correct information across.  In most of my experience so far, in the past three years with this, is that as long as you get the opportunity to actually give the full picture, people tend to understand where we're coming from.  They understand where this price is coming from.  There is still huge resistance, but you sometimes get the feeling the resistance is not so much against the fact that we're tolling Gauteng, but against the broader service issues, which we have across the country.  Yes, certainly e-tolling is getting the brunt of it, but in terms of explaining where it comes from, why we need it in South Africa, and why we have to pay for infrastructure…if you get all of that across, people tend to understand where it comes from.

ALEC HOGG:  Do you expect that it will get better after the elections?

INGE MULDER: Yes, not so much.  I think people already understand that this isn't going to go away.  In order to pay less, it's better to start – register and pay.  The longer you wait the bigger the amount becomes, so I think that realisation has set in.

ALEC HOGG:  The penny is starting to drop.

INGE MULDER: It looks like it.

ALEC HOGG:  Even with those who haven't paid their R85.00 to go to the airport…and that's the irritation.  In the past, you could drive to the airport, but now you go through the e-toll.  I guess we have to build this infrastructure as you're saying, and the investors are telling us they believe you're going to get it right.

INGE MULDER: Yes, I think you should also think we were travelling to the airport on perhaps a three-lane highway.  We're now travelling on a five-lane highway, guaranteed to take you 20 minutes where, in the past, you maybe budgeted for an hour-and-a-half, and that's the benefit people need to understand.

ALEC HOGG:  I think you're changing many minds, probably mine, too.  Just to finish off with, the price that you were paying for the R500m that you've raised this time: is it in line with what you anticipated?

INGE MULDER: Yes, all four bonds we issued, were all within price guidance, so even where we ended in September 2011 and the prices we got now are more or less the same, so for us that is brilliant.  That is what makes this auction successful for us.

ALEC HOGG:  And is there a government guarantee?

INGE MULDER: Yes, we have two bond programs.  The one we issue last week was on the back of a government guarantee.

ALEC HOGG:  The other program…not.

INGE MULDER: Not yet.

ALEC HOGG:  And what's the difference in the interest rates?

INGE MULDER: The basis points difference is that one is 16 and the other is about 120 basis points above government.

ALEC HOGG:  Well, that's fascinating, thank you.  Inge Mulder is the Financial Director of Sanral and I've certainly had my eyes opened up a little there…maybe you, too.