Until now, the government has largely supported the financing of infrastructure projects on its own, but the time has come to reduce the balance sheet impact by involving the private sector.
South Africa’s slow economic growth combined with its acute infrastructure deficit, means the government needs to find ways to reduce the intrinsic pressure of having to fund the majority of infrastructure projects itself.
One of the most obvious ways to resolve this challenge is to actively engage in public-private partnerships (PPPs). Over the past decade, there has been a high increase in the use of PPPs globally. PPPs are growing in significance as an alternative delivery mechanism for addressing infrastructure deficits.
According to the World Bank, 499 infrastructure projects with private participation in 47 African countries reached financial closure in sub-Saharan Africa between 1990 and 2013.
The use of PPPs is particularly meaningful where a political imperative exists to meet rising public demand for better infrastructure and public services or where there is a need to reduce balance sheet impact of delivering large-scale infrastructure projects.
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PPPs are often confused by the public as privatisation, and by government officials as traditional procurement. PPPs are in fact an innovative, if complex, alternative financing option for the rapid delivery of enhanced public sector assets and services.
They are a financial innovation that leverages private sector interest and delivery capacity to help accelerate infrastructure development, but are not a panacea for all projects and are not necessarily cheaper.
For a PPP project to proceed, it must first be deemed bankable, suitable as a PPP project, and sufficient market interest must exist to justify proceeding to procurement.
Typically, PPPs must, among others, include the following key traits:
* Ownership remains with the government, while the private sector takes on a lease or licence to operate the asset or offer the service.
* The contractual relationship spans a set length of time, which may range from five to 30 years.
* PPPs usually involve the private party raising both debt and equity to finance the project.
* Private sector assumes the responsibility to build and operate the asset or service for a negotiated term to pre-specified output requirements in return for future cash flows.
* Responsibility for reliability, quality and safety remains with the public entity.
Unlike traditional procurement, PPPs require the appointment of a transaction adviser to support the process of managing and aligning the interests of contracting parties.
Optimising the use of PPPs would be a particularly effective strategy for social infrastructure projects such as housing, roads, water and energy.
Fortuitously, South Africa has a well-established enabling and regulatory legislation aimed at facilitating these types of transactions, which includes the PFMA, Treasury Regulation 16, the MFMA, the MSA, the municipal PPP regulations, the municipal supply chain management (SCM) regulations, and the Code of Good Practice for BBBEE.
Furthermore, the country has one or two success stories, notably the renewable energy independent power producer procurement (Reippp) programme which is now a model for successful PPP implementation in Africa.
The Reippp has seen the private sector invest R194bn (including foreign investment) into renewable projects over a period of five years.
More effort needs to be directed at creating a conducive environment for the implementation of PPPs at local government level.
Assistance
* We must build the institutional capacity in local government to understand and deliver PPPs. While the National Treasury’s PPP Unit, established in 2000, is the lead government agency for PPPs locally, it needs to perform an increased role in providing direct technical assistance to municipalities in addition to its regulatory function.
* We must invest in training that is focused on assisting procurement officials at local government to understand the existing institutional and PPP legal framework.
A high degree of political will to promote PPPs is required. This demands a concerted public effort by government to support and promote the use of PPPs.
* We need to simplify the process of procuring PPPs without necessarily compromising the transparency and integrity of PPPs - the current process is too lengthy and cumbersome and has the unintended consequence of acting as a barrier.
These steps, combined with a more deliberate and informed approach to PPPs, can go a long way towards helping government leverage private sector capabilities in delivering infrastructure and alleviating pressure on the balance sheet.
Muzi Siyaya is the Group Business Development Executive at GIBB Engineering and Architecture.