Public-private partnerships provide evidence for value of co-operation
Budget reviews are generally good platforms from which to announce plans to boost economic growth, create jobs and alleviate poverty. They are also good mines of information and are often read over and over again to get those important bits the finance minister did not mention directly in his speech before Parliament.
The Budget Review for 2017-18 is no exception. Tucked away, almost at the back of this lengthy document, is an update on public-private partnership (PPP) arrangements and the role they have played in meeting infrastructural development objectives. It remains compelling evidence for what the government and the private sector can accomplish together.
This was seen as recently as 2016, when Finance Minister Pravin Gordhan brokered some détente with corporate SA in averting a downgrade in the country’s credit rating. While this risk remains, damage inflicted should be seen in the context of shifting higher the cost of the debt the Treasury has to service and the consequence this extra cost carries in crowding out funds needed elsewhere in the economy — as in social and welfare dependency payments, a contentious issue.
Although no standard definition exists, the International Finance Corporation, which is widely regarded as a go-to guide on these matters, broadly defines a PPP as a "long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance".
More can probably be added to this definition in the sense that it is the government on whose shoulders the responsibility largely lies in driving the process, identifying the PPP infrastructural project that is required, the form this structure will take through various stages in the project cycle such as the tender process, and identifying which of the bidders are successful in the award of the project.
PPPs are not new to SA. Their usefulness in accelerating GDP growth can be traced back as far as 1997, when the government appointed a task team to develop a package of policy, legislative and institutional reforms that would create an environment in which PPPs could function. Pioneering projects were undertaken between 1997 and 2000 by the South African National Roads Agency (Sanral) for the N3 and N4 toll roads, by the departments of public works and correctional services for two maximum security prisons, by two municipalities for water services, and by South African National Parks for tourism concessions.
Drawing from lessons learnt from these projects and from international experience, a strategic framework for PPPs was endorsed by the government in 1999 and by mid-2000 a PPP unit was established in the Treasury.
Deal flow remains a trickle of what it could be, though, averaging three deals per annum since the PPP unit was established. However, it is certainly worth highlighting Africa’s largest PPP, the R23bn Gautrain Rapid Rail Link, part of which was completed weeks ahead of SA hosting the soccer World Cup in 2010. The form this structure took was one commonly used in PPPs for public rail transportation systems — the DBOT model (design, build, operate and transfer).
Another notable project was the R870m unitary payment for 25 years of head office accommodation for the Department of Trade and Industry in 2003.
PPPs have emerged as a credible tool in meeting infrastructural development challenges. They harness the strengths of what the private sector and government have to offer. Neither side should take the other for granted. Each has strengths the other can rely on. The private sector provides technical know-how, skills, management and the means of financing projects, be they in electricity, transport, water and sanitation, or any other key infrastructure scheme.
The public sector offers security for investment by the private sector and guides the PPP process through the legal and regulatory framework, which can often be complex.
A special-purpose vehicle is established by the private sector, which raises a combination of debt and equity to finance the project. This structure is particularly important for state-owned enterprises in that the financier will tend to look more at this structure than it will at the cash-strapped public entity.
However, the design of an appropriate model can be difficult and the recovery of costs is an important aspect of the structure for which investors will seek comfort.
If PPPs are the important tool they are said to be in elevating GDP growth, the obvious question to ask is why they are not used more often. The answer is, political motivation. The Infrascope Africa project, which was researched by The Economist in 2015 and financed by the World Bank, found that among the 15 largely sub-Saharan countries analysed in how prepared they were to undertake infrasctructural PPP development initiatives, SA ranked number one across almost all spheres of the methodology. The only exception was in political will, where it ranked a lowly 14th.
Widely regarded as an insightful piece of research, the Infrascope project found that PPP projects were not without challenges. They can be difficult to execute, legislative and regulatory processes are at times tricky, let alone the high level of financial skill, sectoral knowledge and familiarity of the different structures that is needed to make each PPP successful.
A general observation among international investors is that bids contain a large element of nonprice factors, among which are the promotion of black economic empowerment, job creation, socioeconomic development and industrialisation. Foreign bidders were of the opinion that these local-content factors were too demanding and played a much larger role in the process than they should, while local stakeholders such as trade unions were somewhat sceptical of PPPs, mistaking them for privatisation of government assets, and growing concerned that job losses could accompany such projects.
Considering the political sensitivity PPPs may have, the structure chosen is important. For instance, trade unions may be against the outright privatisation of a state asset, but may approve of a structure in which, hypothetically, Transnet leases part of its railway lines on a concession basis to the private sector for a predetermined length of time.
In this time ownership of this asset remains vested in the state-owned enterprise and may be returned to it by the private party when the lease terminates, probably in a better condition should the PPP be structured to include a maintenance contract for the duration of the concession.
The role of the private sector will become an important aspect of the debt-financing requirements of a growing number of SOEs in SA. The debt numbers that have been pencilled in by the Treasury for the next three years are conservative, if worked on the assumption that existing state-owned enterprises do not seek further funding in excess of existing guarantees or that a larger number of state-owned enterprises approach the fiscus for assistance.
That is entirely probable considering the government agencies that have recently made headlines by asking for funds that have not already been budgeted for — the South African Social Services Agency, the Passenger Rail Agency of SA, PetroSA and the SABC come to mind immediately.
Students are likely to also want to know where the funding for their tertiary education will come from. The solution to a mounting debt burden is not as difficult as it appears to be, theoretically anyway — embark on a drive to privatise state assets, or at the very least engage with the private sector on PPP structures, where state assets can be leased to generate the income increasingly needed to service and wind down debt. In short, debt levels may be closer to the debt trap than the Treasury numbers suggest. Inevitably this counts against SA’s sovereign rating.
While investment spending by the private sector has flattened, historically it has not been uncommon for such spending to be fourfold that of general government and the state-owned enterprises combined. This attests to the significant role the private sector plays in the local economy, and how valuable its contribution potentially is though the structures PPP arrangements offer.
While chances recede of SA retaining its sovereign investment-grade credit rating, the challenge for policymakers in government and decision-makers in the private sector will be to leverage against the strengths each offers the other and to reduce the debt carried on SA’s balance sheet, which is crippling economic growth.
• Garrow is an independent economist