In a forest of options, PPP trees are being ignored

Decades of talking about public-private partnerships in SA have delivered much too little progress, writes

WILL public-private partnerships energise Africa’s idling infrastructure build? Yes, no, maybe, say the region’s corporate leaders in a frank dissection of the issue.

Public-private partnerships (PPPS) should be the golden key that opens the way to an all-out assault on Africa’s stuttering infrastructure build. They are anything but, and reasons are legion why so little has come from decades of talking about PPPS’ potential.

One solid fact has emerged from a survey of corporate chiefs in the region: money is not the problem. The currency in shortest supply is the will for the two sectors to work together.

The South African government says it has a few trillion rand to spend on new and madeover infrastructure in the next 10 years, but lacks the capacity, presumably in skills, experience and management, to do so. The private construction sector’s order books are all but empty in a sluggish economy after the frenzy of the 2010 Soccer World Cup. According to the South African Institution of Civil Engineers serious unemployment levels are looming for the industry because of a lack of sustainable project work in spite of government commitment to spend large amounts on infrastructure.

And, says Finance Minister Pravin Gordhan, SA is unlikely to meet its target of creating 5million jobs by 2020.

This reporter canvassed some of the biggest private sector players in Africa and abroad to test their views on why the region in general and SA in particular is not a beehive of public-private partners busily building the continent. Their responses were unexpectedly diverse.

The inquiry was set rolling by a finger-wagging by Deputy President Kgalema Motlanthe to the effect that local business should be more serious in helping to build SA. The construction industry sees the issue the other way round.

Some quarters put the stalemate down to the intransigence of hard-line leftists in the governing tripartite alliance who insist on big build being undertaken by government resources. Others believe that PPPs as a solution are dying, while yet others contend they are alive and well; they’re simply going about their business in another guise.

Palpably, trust is virtually nonexistent, leading to lengthy and technically stifling negotiations that delay and in some cases kill projects before they start. A real problem seems to be that in a forest of possibilities, the PPP trees are being ignored.

Arnold Ekpe, CEO of Ecobank, one of West Africa’s big financial institutions, holds that public-private partnerships are vital if Africa is to get on with its infrastructure build, but that banks are limited in how they can help to hurry the process along.

“Banks are sometimes asked to do what banks are not equipped to do,” he said from Accra, Ghana. “We are equipped to provide financing, to look at projects and evaluate them, but we are not equipped to change rules and regulations and make projects happen. Only governments can do that. But governments, typically, have not GETTING THINGS DONE: The FNB stadium in Johannesburg in progress ahead of the Soccer World Cup in 2010. Around the world, public-private partnerships have shown that they are an efficient way of making infrastructure development work and making it affordable, say the experts. changed the rules. And if they don’t change the rules and allow public-private partnerships to happen — rules in terms of contracting and in terms of enforcement of rights — we can not expect PPP initiatives to work as well as they should.

“In fact, the issue has not been

Trust is virtually nonexistent, leading to lengthy and stifling negotiations that delay and in some cases kill projects

a lack of financing, but a lack of enabling environments for PPP initiatives to be effectively deployed.”

There is often little trust between the potential private partner on the one hand and the government partner on the other, Mr Ekpe observes.

“Unfortunately, governments in Africa sometimes have the reputation for going back on their word. If you’re going to do a 20-year PPP project and come with money and in that time there’s a change of government and the rules under which an investor expected a return have changed, you’re not going to do a second project in a hurry.”

Unfortunately, governments in Africa sometimes have the reputation for going back on their word

Mr Ekpe believes a binding code for governments’ behaviour as the public partners could at least get the ball rolling.

But who would write it and how it would it be regulated is another question entirely.

Rowan Goeller, director of investments and concessions at South African construction giant Group Five says despite a long litany of promises, not much has changed over the years.

“We have been following the whole infrastructure issue for many years and it has been disappointing for the private sector. If you go back five years and read (former finance minister) Trevor Manuel’s speeches, they were full of infrastructure with very big numbers, but not much of it has translated into order book for the private sector and construction companies or otherwise.

“All that happens is that the numbers get bigger every year and they talk about the same projects, and those projects are still there and haven’t been done.”

The government seems to be struggling with how to get the private sector involved in infrastructure that in the past has been built, owned and operated by state-owned enterprises or the government itself.

“There has been talk about the PPP model, but there hasn’t been much action on the basis of really big projects,” he says.

“All private sector construction companies have seen is a few government head offices and some toll roads. But where the country needs economic development — such as in health, education, electricity, water, ports and railway lines — there has been no action whatsoever in getting the private sector involved, even though there are a number of companies geared up, ready and willing.”

Then there’s the question of trust: the private sector is wary of the government and vice versa.

“We see that in the projects where we are chosen preferred bidder. The negotiations stretch on for ages and there’s always politics and the rules get changed and there is mistrust going either way. But if you look around the world, PPPs are actually quite an efficient way of making infrastructure development work and making it affordable.

“For five years running there has been massive infrastructure potential, and the private sector has been geared up for it, but we haven’t made much progress.”

Global port operating companies are itching to invest in infrastructure in South African ports. They lament that discussions between local and foreign companies and the government have been held for years, but nothing concrete has materialised.

“From our group’s point of view,” says Jonathan Horn, executive at Safmarine, now a subsidiary of the Danish shipping giant AP Moller, “there’s a lot of interest in becoming more involved in investing in the development and operating of South African port infrastructure. This interest was initially expressed a number of years ago and I’m confident that the view of the group will not have changed.

“If the opportunity were there to participate in some form or another there would be a lot of interest. The group’s APM Terminals company comes with strong expertise, as I’m sure other port operators do as well, from running ports in different parts of the world across a wide range of operating conditions. It adds up to an enormous resource of valuable experience.”

The deeper the research goes into the PPP landscape the more it is clear that funding, often quoted as infrastructure build’s handbrake, is really freely available, and that well-structured PPPs are considered favourable options by prospective funders.

Andrew Berg of the research department of the International Monetary Fund (IMF) refers to it as private investment in public infrastructure and says the right projects will always get funding.

Another view proposes that close public-private relationships are already happening in SA, but not in the generally accepted way. Nearly 20 years of headbutting between the government and the private sector have metamorphosed into a kind of quiet economic diplomacy that keeps everyone happy for the low profile at which it operates.

“For me,” says Ken Robinson, senior executive at management consultants Accenture SA, “the minute you call it a public-private partnership, it’s the kiss of death. But there is widespread private sector involvement in public sector delivery. Accenture is massive in public sector delivery, so whether we’re developing systems for SARS, or the cities or Eskom, those are effectively PPPs. We don’t call them that. We develop projects under contracts. A recent Eskom system implementation involved 200 personnel from Accenture, 200 from Eskom and 100 from other companies.

“So 500 people worked on one project to produce Eskom’s current system. And even the maintenance contract is a 50-50 arrangement and we certainly haven’t called it a PPP.

Years of headbutting have metamorphosed into a kind of quiet economic diplomacy that keeps everyone happy

So as long as you don’t call it a PPP, it seems to work very well. It’s only when you call it a PPP and it is publicised as such and it fails, (that) everyone starts making assumptions. Should we call it something else? It is something else already. It is massive private sector involvement in public sector delivery.”

Should the interplay be formalised to a by-the-book PPP? Mr Robinson thinks not. “There’s absolutely no need for it to be formalised. If it’s not broken.…”

Donald Kaberuka, president of the African Development Bank, maintains that lack of political will is standing in the way of vital regional infrastructure projects in Africa. Pulling no punches, he told African heads of state at a recent African Union meeting that “the lack of inter country co-operation, rather

Governments don’t always have the money to finance the build, but there is third-party capital to solve these problems

than funding, is often the main barrier to the launch and completion of critical regional infrastructure projects in Africa”.

Jeff Immelt, CEO of General Electric (GE), the world’s biggest infrastructure company, believes that the best kind of development happens when the public and private sectors get together, each with their own definitive role.

So why is this so difficult in Africa, where public and private development components need one another as nowhere else? Does PPP involvement to make Africa work have a future?

“These are great questions,” responds Mr Immelt during a recent visit to Johannesburg, adding that the answer lies in long-term value commitment.

“If you’re going to do a PPP big project, like a power plant, the partners have to sign up to a 20-year commitment. You must have politicians who can sign up for that period, or a country in which the contract survives regime changes.

“Typically these are threeway deals, not two-way deals.

“For GE to do a PPP in SA without a local South African private sector partner would be insane. They are invariably complicated, with legal and longterm requirements and someone has to take the risk on market movements.”

For Mr Immelt, PPPs are an important part of the development mix and the advantage of involving a company like GE is that most office bearers have been in the company for 30 years, and whoever takes their place someday is unlikely to break the deal.

“Companies like ours are long-term players and we like to have PPPs and although they’re hard, they have to be part of the solution. Governments don’t always have the money to finance the infrastructure build, but there is third-party capital that can solve these problems.”

There is plenty of cheap capital around looking for a home. “If the US 10-year Treasury is 1,9% and you can finance a 20year infrastructure project that has a long-term purchase price agreement earning 4%-6%, that’s a pretty good trade. You have a big corporate guarantee or a sovereign (one). You will find capital for projects like that.”

Mr Immelt repeats that GE is interested in all aspects of Africa’s infrastructure market, including the financing.

“The way we look at it,” he says, “is that we don’t have to hold 100% or even 50%; we can be 10% of the project and our partners trust our underwriting and our technical capabilities. So that’s the way we play — not concentrated but with many PPP bets over the region.”

GE wants a role in Africa’s infrastructure build and would be a willing partner.

“PPPs are essential in Africa,” he insists. The challenge in Africa isn’t technical, it’s business.”