Public-Private Partnerships

By South African law, public-private partnerships (PPPs) are defined as a contract between a public sector institution and a private party


By South African law, public-private partnerships (PPPs) are defined as a contract between a public sector institution and a private party, in which the private party assumes a substantial financial, technical and operational risk in the design, financing, building and operation of a project

While, recently, it has become very quiet on the PPP front in South Africa, it is seen as a key factor to improving the country’s economy and speeding up the process of ensuring the availability of services.

In the South Africa context, the most well-known PPP is probably the Gautrain project. It was a contract between the Bombela Concession Company and the Gauteng Provincial Government and is widely seen as a success today despite its challenges at the time and the over-budget spend.

Construction for the Gautrain started in May 2006 and in August 2011, it officially opened its doors to the public. But, today it transports between 90 and 110 000 people per day, according to a 2016 study.

There have been other successful PPP ventures but in reality, there have been far too few in a country that needs it more than most. It is not often talked about due to the many other issues our nation faces, but corruption has played a major role in stifling possible PPPs.

Our country has been left on the brink of bankruptcy, our creditworthiness in tatters, which has affected every aspect of South African lives. While it has cost the country billions, it will never be known how many PPPs our economic state has cost the country.

In essence, PPPs takes a lot of pressure off the government to produce infrastructure, both financially and with regards to the necessary skills required to produce the project. Like the Gautrain, many other PPPs have made life not only more convenient, but they have helped the country’s citizens and business become more efficient.

In the late 90s and early 2000s, there was a big push from the government for PPPs, but that has slowed down in recent times. This is mostly due to the economy and the private sector’s lack of trust in government structures.

Any project undertaken by the private or public sector or, indeed, a joint venture between the two requires one thing right from the start—backing from a bank. And a bank looks at the economy and creditworthiness before anything else and makes a decision based on those factors. Little emotion comes into play; cold hard facts are what matters.

However, all is not negative. South Africa can have a brighter future, as can PPPs, and we might be heading in that direction if we can weed out corruption in both sectors, especially in the government.

In an interview with Service magazine last year, Lara Bezuidenhoudt, a Partner at the law firm, Fasken, explained: “PPPs are generally long-term contracts, often 25 to 30 years, between the private and public entity.”

The nature of a PPP is often not easy to understand, and many people mistake a normal government project for a PPP because the private sector is still used in that scenario. However, a simple way to understand it is to look at who owns the asset.

A PPP is a development of a government asset or a delivery of a public service that is not financed by the government, but rather by the private entity, via banks and shareholder input. The private entity then has a license from the government to derive value from what is, in essence, a government function, in exchange for it taking substantial financial, operational and technical risk—a concession of sorts.

The reason PPPs benefit the country is because of their efficient nature. The government has little risk and until the concession period is over, it has minimal input. This means that the discipline on the project is extremely high because both the private entity and the bank have a lot to lose, should the project fail. This means that the two with much to lose work very closely together to ensure the project is not only delivered, but also that it is highly functional during the concession period in which they need to make their money back and hopefully make a profit.

The difficulty for banks and the reason they have to work closely with the private entity is because they have little to fall back on, should the project fail. This is why the bank will take great care in the decision to get involved or not. There are no assets that they can attach to the loan to recoup the money if the project fails because the assets all belong to the taxpayer and that cannot be attached.

However, when a PPP works, the benefit is there for all to see. The bank gets their money back, the private entity makes their profit for the risk they took and the public sector receives an improved and fully functional service or project, which they can use after the concession period. Needless to say, perhaps, but, should the project fail, it could be catastrophic for the private entity and bank.

Thus, in theory, it all works out well for the taxpayer. Projects are still going up, treasury even set up a PPP Unit over a decade ago, but in recent times, they have failed to reach their objectives—could it be that the trust between the government and the private sector has eroded to the point where no one wants to get involved? The banks most certainly won’t jump into a relationship where there is no trust.

It is a combination of everything, I would argue. But it is the taxpayer who pays the price when all is said and done. While complex, PPPs are the most financially viable way forward and because the banks and private sector are involved and stand to lose the most, there can always be trust that the chance of it working is reasonably high.

Service delivery, schools, hospitals and other infrastructure is desperately needed in our country, and PPPs are the best way forward for most of these projects, there just needs to be the will to do it.

It not only has the capability of improving the infrastructure and taxpayers’ lives, but it also creates jobs, sustainable jobs. The Gautrain is a prime example, as is the toll road between Maputo and South Africa, which has created great growth opportunities for both nations.

While creating jobs, it also helps with skills development among South Africans. At this point, South Africa is sitting in a difficult spot. Our debt has risen to above R3 trillion, more and more people lose their jobs daily and we have an unemployment rate that is scary to think of. This means the negatives, such as crime, continue to increase.

PPPs might not offer an immediate route out of this, nothing does in reality. The cancer that is corruption needs to be weeded out first, but PPPs will assist in job creation, increasing people’s skills, which makes them employable and, most importantly, provides the taxpayers with improved infrastructure.

Within the PPP, there is one P that should never be forgotten—the final one. Partnership. There needs to be political will from the government to engage with the private sector, despite the process being a lengthy and time-consuming one. A partnership approach must be taken—the most successful PPPs have developed from this approach.

There is a lot of paperwork and there are legal requirements to get through before a PPP can actually get off the ground but, if anything, the past has proven that this is the way to go and taxpayers are the ones who benefit the most.

It is suspected that capacity, manpower and financial constraints are the reason for the government’s sluggish roll-out of infrastructure projects, but ways have to be found around this.

Perhaps, our focus in the immediate future should be to keep the country’s lights on but, once achieved, let the excitement for PPPs return. 

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Issue 68