Public-private partnerships can ride to SA’s rescue
As Eskom continues to face challenges, SA’s private sector can no longer be ignored as a vital funding and expertise partner in solving the country’s desperate power and other infrastructure needs.
As the country’s overall debt passes levels that are prudent and the interest bill crowds out other government spending, it is clear that the government needs to enlist the private sector to help deliver infrastructure via public-private partnerships (PPPs).
SA’s banks, and other capital providers such as insurers and asset managers, have been successful at helping with this previously. And a sound PPP framework already exists and has been in place for decades, even before the successful renewable energy procurement framework which helped stave off even worse Eskom blackouts over the past five years.
So far, PPPs have only been used to a fraction of their potential mainly due to a limited understanding of the PPP framework across parts of government and incorrect perceptions about PPPs being more expensive and taking too long to deliver.
But using the private sector’s expertise in managing projects and costs would help to ensure value for money and prioritise the pressing infrastructure needs. State-led political ideology, where some in government believe it should build, own and manage infrastructure, is perhaps an underlying inhibitor to progress.
There are generally two categories of infrastructure: social and economic. Economic infrastructure such as toll roads, trains and independent power producers, places little or no reliance on the government’s budget because the user pays directly and the capital comes from the private sector. These are well suited to PPPs.
Social infrastructure, on the other hand, requires long-term government budget commitments such as paying for a new hospital, school, courts and prisons. This approach allocates the risk to the private sector which is good at constructing and operating a facility while government is well placed to decide what social services to provide. '
These can be structured as PPPs with some obligations and annual budget commitments on the state, as you would expect given the type of services involved. With the right template, social infrastructure can also be managed via PPPs.
But what is most important? As already announced, one priority area would be to separate the electricity grid unit from the rest of Eskom to make it more immune to bankruptcy. There should also be a liberalisation of the generation sector to allow licensed independent power producers to feed power into the grid and sell it to any customer. As in many other countries, the grid company should be able to earn a regulated return by charging the generator or customer a fee for the service.
But power is just the start. The country’s backlog in water and sanitation is growing. This can be addressed through PPPs. Similarly, PPPs can help the state cost effectively deliver health services. The list goes on.
While there seems to be renewed interest from the government in exploring more PPPs, the lack of capacity and resources within government is hindering progress. In the past, several projects have been successfully delivered via the PPP procurement approach. In addition to the independent power producers, these include the N3 Toll Road, Bakwena Toll Road, N4 TRAC Toll Road, Albert Luthuli Hospital, Bloemfontein prison and the Gautrain.
Multilateral and development finance institution funding could easily be leveraged to help improve the affordability of mega projects. They are standing by and waiting for the go-ahead to help kick-start billions of rand of improvement to the lives of all South Africans, particularly those most in need.
These projects are also an exceptional opportunity for active BEE, in a move away from more passive BEE ownership that has traditionally been done through corporate BEE schemes. The bidding rules of any PPP can be used to promote and deliver active BEE by requiring certain levels of procurement from BEE companies, skills transfer, job creation, ownership and operational responsibility.
Off the current low base of confidence and growth, a clear and bold commitment to some PPPs that could make a difference to South Africans could be one of the catalysts to start turning our economy.
Their success can be used to showcase a new model for SA and start to reduce inequality, in the interests of government, business and all South Africans.
• Formby is CEO of Rand Merchant Bank