Capital projects are developed by project sponsors as either a commercial endeavour in the pursuit of profits or in the case of public sector projects, projects are developed to serve a broad socio-economic benefit.

Projects can and will go sideways in spite of having a good business case for this one reason: the mismanagement of stakeholders’ interests and expectations. 

Stakeholders are mismanaged when their interests are not properly understood and served and/or serves narrow interest groups for the following reasons:

  • Some categories of stakeholders are often seen as “external” to the project.
  • Not adopting a proper risk management regime;
  • Projects are driven by technocrats who practise siloed thinking and fails to follow an integrated approach to project development;
  • An attitude of “we know what is best for you”;
  • A focus on extracting rents which in many instances may be accompanied by corruption;

The Gauteng Freeway Improvement Project (GFIP) e-toll initiative in South Africa is a clear example of the consequences of mismanaging stakeholder interests and underestimating their influence. The project was approved by the SA parliament in 2007 on the user-pay-principle as the fairest means of financing the project, after considering other funding alternatives such as additional fuel levies. 

The National Road Agency raised capital for the project by selling high yield bonds to the public as well as borrowing money from various banks and the treasury. The funding was guaranteed by the South African government.

The intention to institute e-tolling on the project drew immense public opposition after it was announced. Several court cases was brought against the project by public interest groups. 

So what went wrong in the planning of this project?

Firstly, the courts agreed that there has been a lack of genuine consultation prior to the project implementation and the financing mechanism via tolls being presented as a fait accompli by the government. 

Secondly, the economic analysis of the project was flawed both in terms of taking into willingness to pay and estimating demand and income. 

It seems that international experience in tolling urban roads was ignored, despite the availability of many examples. Based on case studies performed in Latin America and Eastern Europe, the standard assumptions that toll road users are willing to pay high tolls to compensate for reductions in travel time and vehicle operating costs are not as realistic as many academics would like them to be. This is especially true for tolling of city ring roads. In addition, as every project financier will know, user statistics projected in studies for urban transit projects is usually flawed and difficult to predict.

Similarly, international evidence indicates that adding lanes to highways increases congestion over a period of time due to induced demand. Additional highway space also promotes urban sprawl as developers see the opportunity to develop housing estates and commercial space that would link to improved transport infrastructure. This should have been picked up in the economic analysis.

A key factor was that the project’s financing structure, coupled with government guarantees, removed any strong incentive to meaningfully engage stakeholders. Had the project been structured as a Public-Private Partnership, it would have benefited from the experience and risk assessment frameworks of international project financiers. The issue of willingness to pay would likely have been identified early as a critical red flag in the proposed e-tolling model.

In conclusion, the trajectory of this project might have been significantly different had two key factors been considered: a comprehensive review of international experience with urban tolling projects, and an evaluation of the project through the lens of a project financier.

At Camdebo, we have created a robust project development model that pinpoints the critical success factors essential in guiding projects in the right direction. Contact us today to help you create optimum value in your project.