Public-private partnerships will get SA back on track
Two major governance challenges facing SA should get us to urgently engage in a conversation about the need to emphasise the use of publicprivate partnerships (PPPs) as a means to deliver efficient and effective services at the various spheres of government.
One such governance challenge relates to issues highlighted by the auditorgeneral in his 2016-17 general report on the local government audit outcomes. In the report, the audits of municipalities again identified a number of shortcomings in the development and maintenance of infrastructure. These included the underspending of grants, delays in project completion, poor quality workmanship and inadequate monitoring of contracts.
According to the auditorgeneral, these are symptoms of the larger problem that local government has with managing finances, performance and projects and with taking accountability for outcomes.
The second major challenge relates to the discussion about the functionality of most stateowned enterprises. On their own, both municipalities and SOEs have demonstrated an inability to render important functions as required by the country’s growth trajectory.
For some time the government has looked to municipalities and SOEs to be the levers through which it can deliver critical functions, such as the building and maintenance of key economic infrastructure. To date, this remains a deferred dream, with both having been gutted through years of underperformance, maladministration and, in some instances, an inability to attract the best talent. This calls for a need to once more look into and diligently encourage PPPs to drive growth and development, while supplementing and rebuilding the capacity of municipalities and SOEs in the medium to long term.
PPPs are important in that they can facilitate rapid infrastructure delivery at a reasonable cost and at minimum risk to the government. In fact, according to South African law, PPPs are a contract between a public sector institution and a private party, in which the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project.
Since 1999, PPPs have been regulated under the Public Finance Management Act, providing a clear and transparent framework for the government and its private sector partners to enter into mutually beneficial commercial transactions for the public good.
According to a document released by the Treasury a few years back, the main objective of PPPs all over the world is to ensure the delivery of wellmaintained, cost-effective public infrastructure or services, by leveraging private sector expertise and transferring risk to the private sector.
In traditional procurement of public services or infrastructure, the government pays for capital and operating costs and carries the risks associated with cost overruns and late delivery. Capacity issues — in terms of human capital, financial and management skills — are welldocumented challenges that confront most institutions of government. Poor management of risk, late completion of projects and budget overruns are some of the most commonly occurring issues in large government infrastructure projects.
With PPP procurement, the public sector buys a full set of services including infrastructure and other services, from the private sector. It pays these over the term of the PPP agreement, based on successful delivery. In this case, the private sector typically puts its own capital at risk, funding its investment in the project with debt and shareholder equity. The private sector partner is motivated to provide a high level of service, as good returns on equity will depend on the quality of the services it delivers.
SA has in the past experimented with a number of PPP projects including the successful Gautrain Rapid Rail Link, Inkosi Albert Luthuli Hospital, the DTI Campus as well as the Port Alfred and Settlers hospitals in the Eastern Cape. There is still room — in fact a dire need — to undertake more projects of this nature, utilising the PPP model.
Perhaps one of the reasons there has been a limited appetite for adopting more PPP projects has been a form of ideological orientation. To some extent social partners, led by labour, have viewed PPPs as a form of back-door privatisation. Another ideological standpoint has been that in a developmental state, SOEs are the levers to deliver on most infrastructure projects.
The other fear relates to the loss of jobs, with a view that the private sector is more concerned with economic returns, often at the expense of social returns such as employment creation.
There has also been a concern on the part of black business that only the previously advantaged will participate in the PPP transactions, leaving the previously disadvantaged out in the cold. It may well be argued that some, if not all, of these views are based on unfounded fears. In fact, SOEs currently have no capacity to take on major projects since they also have no equity in their balance sheets, rendering their financial positions severely compromised. The state has continued to issue guarantees to SOEs, without which they have no reasonable borrowing power. Entities such as Denel have been confirmed to have severe liquidity constraints as a result of financial institutions withdrawing credit lines.
Therefore, there are a few urgent choices we must make if we all agree that infrastructure development is key to stimulating the economy.
Some of the most pronounced benefits of PPPs include leveraging private sector skills and expertise such as good project planning and minimum risk to the government. And payment is only made once the project is completed. This motivates private sector companies to undertake and complete projects within agreed timelines and set budgets.
The nondelivery of key services, such as the development and maintenance of infrastructure, negatively affects communities and tampers with the basic objective of a better life for all. It therefore can no longer be business as usual.