The government of the republic of Zambia is desirous to dualise the Lusaka Ndola road, a stretch of approximately 300km. Making the current single carriageway into a dual carriageway is estimated to cost the government a whooping USD1,200,000,000.00. Due to other financial spending commitments, the government is unable on its own to undertake such a mammoth spending task. In order to still push the project forward, a private partner is invited to organize the cash requirements and carry out the construction. In fact, a BOT type of PPP relationship is agreed upon. The terms of the agreement are such that the investor is to finance 75% of the construction cost, whereas the Government is to finance 15% of the construction cost. Due to the importance of the project, the Zambia National commercial bank puts in 10% as equity. It is envisaged that the equity from ZANACO will be used for the feasibility studies, preliminary design, final design and cost estimation of the whole project. There is a further sunk cost on the project incurred by the NRFA/RDA who did the initial pre-feasibility studies of the project worth USD10,000,000.00
The private partner has managed to secure funding from HSBC Hongkong branch at a discount rate of 5% - flat rate, to be repaid in 15 years. Meanwhile, the roads agency in Zambia has agreed to give concession of 20 years, of which, 1 year 6 months is envisaged for the
preliminary and detailed design of the project, and 3 years 6 months will be for the construction.
Further terms of the agreement are such that the developer is to maintain an acceptable service level of the road and shall carry out maintenance activities worth 2.5% of the initial construction cost every 4 years over the course of the concession period and a further final rehabilitation worth 7% of the initial cost a year before handing over the asset to the roads agency. The private partner is envisaging to recoup the investment as well as create profits for the shareholders through toll collections. It is envisaged that 5no. toll collection points will be constructed along the 300km stretch. At Km.0, 10km from Lusaka CBD, at Km 50, right before the Chisamba turn off, at Km 180, the current manyumbi toll plaza, at Km220, at the current Kafulafuta toll station and the final one at Km 288, at Indeni in Ndola, right before the railway way crossing.
According to the pre-feasibility studies that was conducted by the RDA, the following traffic data was obtained and it is envisaged that this traffic is expected to grow at an annual rate of 1.5% for the first 10 years, and 3% for the remaining 10yrs.

 

s/n	Traffic Description	Daily Traffic Count	Toll Fees (ZMW)
1	Motorcycles/bikes	200	20
2	Saloon cars	600	80
3	Small cars up to 2tons	650	80
4	Light trucks up to 10 tons	200	100
5	Trucks up to 15 tons	180	100
6	Heavy trucks up to 35tons	800	120
7	Truck and trailer	800	150
8	Passenger buses up to 20 seats	200	80
9	Passenger buses up 45 seats	100	80
10	Passenger busses up to 65 seats	100	100
11	Abnormal loads	5	500
12	Ultra-abnormal load	0.1	1500

 
You have been engaged by the project sponsor to carry out the due diligence for the project. Your tasks are as follows;
1. State the risks that this project is likely to face and propose the mitigation strategy.
2. Accordingly, state which risks should be mitigated by which party – GRZ, PPP Partner, RDA, ZANACO, etc,.
3. Design a financial model and state whether the project should go ahead or not using the project finance tools to assess the profitability of the venture.
4. State some of the economic benefits and costs that are likely to be encountered on the project. Allocate 2.5 points for every benefit and -3.5 points for every cost and state the final score of your CBA analysis.
5. State the maintenance regime that should be followed by the project sponsors in order to maximize the value of the asset.
6. In your final analysis, state whether the project should go ahead or not.