Experts share PPP lessons from South Africa

At the recently-held third annual public private partnership (PPP) conference in Windhoek a number of lessons learnt in neighbouring South Africa came to light.

Both Mpho Kubelo from the Development Bank of Southern Africa and Dr. Andrew Shaw, partner for capital projects and infrastructure for PwC, shared their respective experiences with PPP projects in South Africa.

Shaw was eager to point out South African laws prohibit strict public private partnerships with state-owned companies, which led to the creation of a private sector participation framework for partnerships with such companies. Both Transnet and Eskom have implemented such formal policies.

In an attempt to meet the targets of South Africa's national development plan and national growth plan, the need for significantly higher levels of investment in economic infrastructure was identified.

“State-owned companies have a key role to play in delivering efficient economic infrastructure and accelerating growth in the economy,” Shaw said.



SOEs

However, the capacity for state-owned companies to deliver the required levels of infrastructure investment is limited by their weak financial positions and constrained capacity to prioritise and develop large projects, he said.

Also, limited state support is available in South Africa, he said.

Currently South Africa is faced with a N$145 billion annual shortfall in public sector investment needed to achieve the desired growth in gross domestic product (GDP).

“Therefore, it is necessary to crowd-in the private sector as an additional source of infrastructure funding and with strong emphasis on greater discipline, efficiency, risk mitigation, innovation and inclusion of skills in the state-owned company space,” he said.

To achieve this, state-owned companies must first assess their own capacities and capabilities to prepare, procure and manage private-sector participation projects, he said.

“They must also critically assess their capabilities to implement the project themselves.”

Legal requirements must be met as well as constitutional requirements that demand such projects are fair, equitable, transparent, competitive and cost-effective.



Procurement

A particular area of concern is procurement, which must be subject to strong governance to ensure that reversing decisions to procure through such partnerships is avoided once procurement has started.

“To promote confidence, only bankable projects should be taken to the market,” he added.

Also, a transaction strategy that optimally allocates the risks between the parties must be chosen.

Private-sector participation will create the best value when focused on lower capital costs through innovation and fixed-cost schedules, reduction of operational expenditure through greater system efficiency, new technology strategies, optimised use of existing assets and the growth of markets or access to new markets, Shaw said. Detailed commercial analysis of each prospective opportunity is a must.

“Robust, up-front analysis is critical to developing a successful value proposition, the distribution of risks and rewards, and a long-term sustainable transaction,” he said.

“The key to unlocking value in the private sector is creating a competitive bidding environment.”

Other success factors include strong political support, a clear commercial framework with accountability, strong governance processes and consistent transparent regulatory environments.



Risks

In his presentation, Kubelo listed three examples where the Development Bank of Southern Africa (DBSA) had to manage and mitigate risks for successful completion and return on investment of public private partnership projects.

One project entailed the building and operation of a new hospital.

The risks were that shareholder disputes may derail the project while the strain on the South African government's treasury could lead to delays or even defaults in repayments.

Clearly-defined dispute resolution mechanisms were essential while the development bank also had to restructure loans in order to accommodate the public partner.

Another example was of the rollout of a fibre optic network in a city which faced a change in political leadership leading to the challenge of the procurement process. The bank's own resources were needed to ensure the legality of the contract and that it provided value for money. In the third example, the bank funded a PPP whereby the private sector partner was to provide petroleum on the government's behalf. Again the newly-elected government revoked the original concession and scrutinised the procurement and awarding processes of its predecessor. The DBSA had to ensure a transparent and fair procurement process before allowing the law to take its course in that case.

In summary, Shaw said: “In our experience the procurement process is important, risk and reward balance must be maintained on both sides, governments do not have unlimited resources. Appropriate risk allocation is key, and we had to remain neutral throughout all disputes.”

The PPP conference was hosted by the ministry of finance, PwC Namibia and Standard Bank Namibia.



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