LUNGILE MASHELE: Beware of PPPs as a Trojan horse for privatisation

The electricity minister has announced that an independent transmission project office will be set up to procure new transmission grids using a build, operate and transfer model. The idea is that the private sector will fast-track the process of overcoming the 14,000km transmission infrastructure backlog in two years, competing with the 10-year outlook provided by Eskom.

This assumption is no doubt based on the quick connection time for independent power producers on their 5km self-build transmission projects, not on the complexity of building 5,000km of lines traversing three provinces and 25 farms. It is not based on projects that require land agreements and servitudes negotiated with hesitant and litigious landowners.

Transnet is also considering leasing arrangements for its locomotives and container terminals due to the challenges that have plagued them. These are certainly not the first, but are among a long list of proposed and executed public-private partnerships (PPPs). 

PPPs are loosely defined as long-term contractual agreements between the public and private sectors to develop public infrastructure or deliver a public service, where the latter provides the finances and there are shared risks between the two parties. 

The PPP model was conceptualised in 1992 in the UK as a tool to bypass debt limits and has become popular with governments seeking alternative funding for public projects because of austerity measures. However, they can be a Trojan horse for privatisation, masking debt and prioritising profit over public needs. 

One must ask: what will the private sector do that the public sector cannot? More importantly, why can the private sector do it if the public sector cannot? The private sector’s advantage has always been competitive procurement and efficient execution. Due to reduced state capacity, the work was always going to be done by the private sector, but the question now concerns ownership.

People have questioned the various proposed PPP models and referred to them as quasi-privatisation. While some may term this fearmongering, there is an established pattern globally of PPP models succumbing to privatisation. This is more pronounced in the EU, where numerous regulating bodies have highlighted PPP failure in sectors such as roads, healthcare, transport and energy.

PPPs can be financially beneficial for investors, private companies and politicians but may require significant public investment and raise concerns about environmental and social impact. One shudders to think what would have become of the numerous energy projects in SA over the past decade if they hadn’t come with strict socioeconomic development imperatives tied to their licence conditions. The concern in the EU is that there is no governing body for PPP oversight. 

PPPs are typically more expensive because of the financing structure — instead of using public funds they attract higher interest rates through private funding. They also expect to realise a profit, which makes them inherently pricier. PPPs can also be more corrupt and lack fiscal transparency, as many countries do not disclose the guarantees and contingent liabilities associated with PPPs. However, they tend to be politically profitable due to the speed of implementation, particularly between election cycles. 

In PPPs the private sector often assumes the project risk while the government looks at political, economic and regulatory risk. This gives rise to additional costs, such as what will happen when the projected Gautrain commuter numbers do not materialise. This is termed demand risk, which means the state must give capital injections to the concession holder as part of the concession agreement.

PPPs are not inherently good or bad. They operate within a certain context, design and regulatory framework. While some PPP models share characteristics with privatisation, they shouldn’t be automatically equated. PPPs need to have strong safeguards to ensure public accountability and service quality, even with long concession periods.

Carefully designed and implemented PPPs can offer benefits such as improved infrastructure and efficiency, while maintaining public control. However, it’s essential to be aware of potential risks and ensure strong public oversight to maximise the benefits for society.

• Mashele, an energy economist, is a member of the board of the National Transmission Company of SA.