Government to review PPP framework

The government plans to revive and increase the use of public private partnerships (PPPs) and other mechanisms to draw in the private sector to deliver its planned massive R2.3 trillion infrastructure investment programme, which is aimed at stimulating the economy post Covid-19.

The other mechanisms include build-operate-transfer (Bot) and build-own-operate-transfer (Boot) project delivery methods.

Minister of Public Works and Infrastructure Patricia de Lille confirmed last week the government is currently reviewing the PPP legislation, saying that PPPs should be used more.

“We are also looking at build, operate and transfer and build, operate, own and transfer [mechanisms]. We need a mix in how we engage with the private sector,” she said during a virtual panel discussion on Gautrain’s contribution to socio-economic development and impact to society.

Read: State’s infrastructure programme criticised for lacking details

De Lille admitted that PPPs have not been that successful in South Africa, with the Gautrain one of the exceptions.

Read: Government assessing multi-billion rand Gautrain expansion

“Only 2% of infrastructure projects are successful PPPs and we are reviewing quite a complex piece of legislation to make it more workable and easier to have PPPs,” she said.

Previous success

Sheila Galloway, founder of PPP and infrastructure specialist Utho Group, said about R11 billion was invested in PPPs in 2010 and 2011 but this dropped to R4 billion in 2017.

Galloway said there is a lack of trust between the public and private sectors because the private sector has been waiting for a long time for infrastructure projects to come to market.

She added that the current PPP framework was built to reduce, if not eliminate, corruption, which might be one of the reasons there has been a decline in PPPs in South Africa.

De Lille added: “As much as PPP legislation is very good, it’s very complex and very time consuming. By the time you finally get to sign PPP two years later, the private sector will have left with their money.”

Private sector investment in public infrastructure PPPs has dwindled particularly since 2011, when the Department of Correctional Services cancelled a PPP to build four prisons.

The cancellation led to threats by several JSE-listed construction companies to seek tens of millions of rand in compensation for the costs incurred to submit bids for the prison PPP.

‘An embarrassment’

Eric Vemer, the then executive committee member at Group Five responsible for investment and concessions, said in 2011 the cancellation of the prisons PPP was “an embarrassment”.

Vemer said the group’s international partners in the consortium that submitted the bid could not believe what had happened, particularly as the same government and ruling party was in power, but “has done a complete about-turn in terms of the philosophy of the execution of this project”.

The government in 2011 also ordered a review of the PPP model but little to nothing appears to have happened until recently.

De Lille admitted last week that the government cannot deliver the infrastructure programme alone and needs private sector involvement to roll out the plan.

“Our country is facing a recession of enormous proportions, even before Covid-19, and therefore on May 27 cabinet approved a first infrastructure investment plan,” she said.

The government in June unveiled the first tranche of its infrastructure plan, comprising 55 strategic infrastructure projects (Sips) and 12 special projects involving a total investment of R360 billion.

De Lille said the new methodology of planning and project implementation – the Sustainable Infrastructure Development System (Sids) Methodology – means there is now a single point of entry for all infrastructure projects across the country and “we will be able to monitor and evaluate and make sure that we unblock big infrastructure projects that are standing still”.

Galloway said one of the issues her company found in a study on PPPs in South Africa is that there has been a reduction in the amount of interest and expertise in the PPP space since PPPs started in the market until today.

Trust issues

“The reason for this is that the private sector has pulled back from engaging government about PPPs because of trust issues and projects are failing to be implemented because of the lack of planning … and the lack of accountability.

“These are elements that need to be addressed now as the government moves forward with the plans for structural economic adjustment through infrastructure development and service delivery,” she said.

A National Planning Commission background paper on ‘Public infrastructure delivery and construction sector dynamism in the South African economy’ published in April said the current regulatory process for PPPs is generally sound but lengthy and costly.

Disappointing

It said PPPs have been disappointing in terms of impact, with less than 2% of public infrastructure in South Africa financed by the private sector compared, for example, to 50% in the UK.

The paper said the current PPP regulatory framework needs to be reviewed and lessons learned from the successful Renewable Energy Independent Power Producer (Reipp) programme.

It said the Reipp programme has procured 6 422 megawatts (MW) of electricity from 112 independent power producers (IPPs) in seven bid rounds, connected 3 976MW of electricity generation capacity from 64 IPP projects to the national grid, and has attracted private sector investment to the value of R209.7 billion, of which 20% or R41.8 billion is foreign investment.

Reipp exemption an example to emulate?

“The Reipp programme required an exemption from the PPP regulatory framework and was characterised by very strong client governance and CEO-level client leadership by the [IPP] office under the Department of Energy.

“The quality of the procurement process, both in terms of strategy and tactics, run by the IPP office resulted in the development of trust in the procurement process among companies in the renewable energy and financial sectors, which in turn contributed to a marked reduction in the cost of renewable energy through successive bid rounds,” it said.

The paper said there is huge potential for increasing private sector investment in public infrastructure in South Africa, adding that there has, for example, been very little private sector participation in the financing and management of municipal water supply and sanitation infrastructure to date despite this being one of the focuses for infrastructure in the National Development Plan and strong motivations for such participation

It said PPPs have attracted some private sector investment in public infrastructure, including toll roads, government office accommodation, prisons, and more recently renewable energy.

However, it said PPPs to date have not resulted in sufficient scale of private sector investment in public infrastructure in South Africa.

No shortage of money

“Given the country’s fiscal constraints, and given that there is no shortage of money or management capacity in the private sector, this is an anomaly.

“The problem is a dearth of properly prepared and bankable projects, as well as a lack of transparent, efficient and effective processes for bringing projects to the market (with the exception of the IPP office),” said the paper.

SA Forum of Civil Engineering Contractors (Safcec) CEO Webster Mfebe said the announcement of a review of the PPP framework “is an important development”.

PPP model ‘abandoned’ too soon

Mfebe said Safcec has consistently stressed in the past that government has implemented the PPP model successfully but it was abandoned when it could have delivered a lot of infrastructure and relieved the demands on the fiscus for infrastructure funding by drawing in the private sector to close the funding gap.

He admitted there are shortcomings in the PPP model, including the elaborate process.

Mfebe said National Treasury previously promised to review and streamline the PPP process to deliver infrastructure, including shortening the process and other perennial problems associated with PPPs that caused the private sector to lose interest in them, but nothing happened.

He expressed the hope that centralising infrastructure in the Department of Public Works and Infrastructure, and creating Infrastructure South Africa (headed by Dr Kgosientso Ramokgopa, head of the investment and infrastructure office in the Presidency), will improve the coordination of infrastructure projects and not complicate it further by creating duplication or an abdication of responsibility.

Master Builders South Africa (MBSA) executive director Roy Mnisi said PPPs play a huge role in terms of expediting national infrastructure development and MBSA has always supported this model despite it not being perfect and the need for it to be reviewed.

Mnisi said MBSA therefore welcomes the review of the PPP framework and looks forward to the outcome.