THE LAW BEHIND THE TRIPLE P

Many PPPs have turned out to be great success stories, but there are far to few going around

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Public-Private Partnerships, or PPPs, have become more commonplace in South Africa since the rise of South Africa’s constitutional democracy. Despite the initially successful roll-out of PPPs, they have not taken off as many had expected they would.

When PPPs first became a tool for the delivery of infrastructure and services by the government, South Africa had a positive economic outlook, a much-lauded constitutional democracy and a very competitive private sector. Some of this still stands, however, more recently, our economic growth has hit a downward spiral, which seriously affects the ability of both the private and public sector to continue infrastructure development. Banks will ask a number of questions before getting involved in this type funding and they always look at the country’s creditworthiness.

According to the National Treasury, “South African law defines a PPP as a contract between a public sector institution/municipality 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.”

This is a high-level overview of a PPP, behind which lies a multitude of complexities that can make or break a PPP. From the outside, one doesn’t get an accurate perspective on all that is happening behind the scenes, so we sat down with an expert on the law behind the law when it comes to PPPs and project finance, Lara Bezuidenhoudt, a Partner at the law firm, Fasken Martineau.

“You literally cannot do a PPP transaction without lawyers—with many other types of commercial transactions, a contracting entity might be able to get away with not obtaining the advice of a law firm but the contracting structure of a PPP is the core of the PPP model and there is always a raft of complex contracts that need to be drawn up,” emphasises Bezuidenhoudt.

She continues to explain that PPPs are generally based on a long-term contract, often as long as 25 to 30 years, between the private and public entity.

It is often not clear which projects procured by the public sector are PPPs and which are not, but it is sometimes helpful, when trying to distinguish a PPP from other government procurements, to look at “who owns the asset because this is what drives the typical approach” from a project finance perspective, notes Bezuidenhoudt.

She continues, “A classic PPP is the development of a government asset or delivery of a public service that is financed, not directly by the government, but rather by way of private sector finance being provided to a special purpose private vehicle, which has a right or licence from the government—a concession of some sort—to utilise and derive value from what is, ultimately, a government function or asset, in exchange for it taking substantial financial, technical or operational risk.”

In South Africa, there are three spheres of government—national, provincial and local. Interestingly, Bezuidenhoudt notes that national and provincial government PPPs are governed by different PPP regulations to municipal government PPPs. At a municipal level, PPPs are to be dealt with under the Municipal Finance Management Act, while at a national and provincial level, they are dealt with under the Public Finance Management Act.

To simplify, Bezuidenhoudt uses the example of toll-road PPPs. “The government gives a private special purpose company a concession for 30 years to develop and use a stretch of national road. You have to upgrade and maintain it and that company is permitted to collect tolls on the road for its own account,” she explains.

She continues to explain that the private company would typically borrow in the order of 80% of the funding required for the initial development from banks and obtain the other 20% from its own shareholders with the intention of making back this money (with some return) over the concession period. One of the great benefits of this is that the banks become the ‘co-drivers’ of the project and stand shoulder to shoulder with the concessionaire.

“This brings an enormous amount of discipline to the project because for the banks, the largest investors in a PPP project, if the project performs as planned and receives the revenues as expected, they will be repaid,” Bezuidenhoudt says. PPP’s are more likely to be completed within budget and on time than other public sector projects of similar size and scope.

The difficulty for banks and the reason they have to be so careful is that when loans are granted on a project finance basis, there is either insufficient or no fixed assets to which they could lay claim in order to recover the loans owed to them, should the project fail.

Usually, the assets are not available for the banks to take as security, as the assets belong to you and me as the taxpayer. For this reason, a great amount of effort is expended by the banks and the private entities to ensure that the project is likely to achieve its forecasts. When a PPP succeeds, it is a win-win for all involved as the banks receive their money back, the private party makes a return for its shareholders and the government ends up with an improved piece of infrastructure or public service for taxpayers.

The final P in PPP

In theory, PPPs are beneficial to all involved, as well as the taxpayer who reaps the ultimate benefits. However, as Bezuidenhoudt explains, “One must never forget the final ‘P’, which stands for Partnership.”

While the rewards can be high, the adverse consequences can also be very damaging should everyone not do their part in this ‘partnership’. But there are examples within and close to our borders where PPPs have shown the positive impact they can have. The Gautrain is a prime example.

Another PPP, and one that Bezuidenhoudt has been personally involved in for more than 20 years, is the Maputo toll road. She explains that this PPP had its genesis in a treaty between South Africa and Mozambique.

“It was designed to develop the corridor from South Africa to Maputo and that corridor, in my opinion, has been a great success—it has created growth and opportunities for both South Africa and Mozambique and if you think back to how underdeveloped that area of the country was before this project was completed, the transformation is obvious,” she says.

Playing both sides

When it comes to PPPs, Bezuidenhoudt says she has spent most of her time advising on the private side, although, on occasion, she has advised the government too. However, working on PPPs for 22 years equips one with the sort of experience that not many have, and provides a unique understanding and perspective on the complexities of these kinds of transactions.

Bezuidenhoudt likens PPPs to a marriage and especially when things do not go according to plan, she can find herself playing the role of the marriage counsellor, she says with a laugh. “We have developed quite a niche at Fasken Martineau—while we continue to advise on the negotiating of PPPs, at the early stages we often also assist with advice on PPPs during the concession period when contractual or other difficulties arise,” she says.

She continues, “We have quite a few partners in our litigation team who are very au fait with PPPs, so while I don’t do the litigation myself, I always tell them to remember that we need to try to come out the other side with a solution, not a divorce. Again, the third ‘P’.”

PPPs—are there enough?

While complex, PPPs are clearly a beneficial way of delivering certain types of projects. More than a decade ago, Treasury set up a division called the PPP Unit and while it lists a long pipeline of prospective PPPs, more recently it does not seem to be managing to achieve its goals in the way of infrastructure and service delivery roll-out using PPPs. “Projects that can really assist citizens in terms of service delivery, schools and hospitals, have seen substantial delays in coming to market”, says Bezuidenhoudt.

She says that there are a large number of renewable energy projects currently underway, which although perhaps not a typical form of PPP, still utilise much of the technology used to finance PPPs.

If you discount the renewable energy projects, however, there is really not very much happening in the government infrastructure sphere.

Bezuidenhoudt continues to explain that it is not specifically anyone’s fault. Not only is the process intricate and time-consuming, but setting up a PPP takes an awful lot of expertise and man/woman-hours. “This is true for all three major participants—the concessionaire (and its shareholders), the lender parties and the government parties, and below them are multiple layers of PPP related contracts,” she explains.

Each of these parties has their own financial, legal and technical advisors and all these people have to come to some sort of agreement for things to actually move forward.

“Having observed the PPP landscape for a number of years, I suspect that the sluggish roll-out of infrastructure has a lot to do with capacity, manpower and funding constraints in government,” Bezuidenhoudt says.

Conclusion

There needs to be political will from the government to work with the private sector in order for PPPs to thrive. Importantly, PPPs have worked when the partnership approach has been evident.

Bezuidenhoudt says, “I believe in PPPs as the way to go—the Gautrain is a prime example. There were many people who said it wouldn’t work for various reasons. One criticism that I remember well is, ‘How are you supposed to get your car to the station?’”

She concludes, “I simply said, ‘Remember, the banks and the private sector are funding a large portion of this project. There will be discipline and focus because they will not invest in a project if they do not believe that it will be successful’. Of course, the commercial solution was ultimately the Gautrain bus system, which has assisted in making a success of this fantastic public transport system, and created jobs, too.” 


 

 

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