Standardizing Terms for PPP - A case in South Africa

South Africa: Public Private Partnerships
17 July 2007
Article by Clare Corke

Public Private Partnerships – Government To Relook At Standardisation
In 2000, the PPP Unit of National Treasury published the first draft of the standardised terms for public private partnership (PPP) agreements ("Standardisation"). At the time that the Standardisation was first published for comment a number of concerns were raised by various entities involved in PPPs, including law firms, banks, construction entities and service providers. Many of these issues remained unresolved by March 2001, when the practice manual in relation to PPPs together with the official Standardisation was issued by the PPP Unit.

Since then the projects that have come to the market or closed have continued in the main to be plagued by these issues. In many instances these items have caused projects to be called unbankable by lenders and unpalatable by equity holders, as the risks being placed at the doors of lenders and equity holders cannot be managed effectively by them. Often, however, the risks cannot be managed or controlled by Government either, and are often risks of very low probability, but high impact in the event that they occur. This raises the question of who should bear the risk of an uncontrollable, unforeseen event occurring? Should it be the private sector, on the basis that they are earning a return and therefore should be obliged to bear the risk irrespective of the cost? Or should it be Government, on the basis that the risk is usually of low probability (save that off-site power shortages is and will continue to be a very real risk for the foreseeable future)? These issues have not been the subject of intense debate in a number of projects and a true market position has not been determined.

Accordingly, the review and amendment of Standardisation is critical to the future of PPP. Should Government be able to meet some of the expectations of the private sector, the cost of PPPs should be reduced and the procurement process should be eased. It is therefore hoped that the process will commence during the course of 2007 and that a revised Standardisation will be available for comment later this year for publication early in 2008.

Public Private Partnerships – An Opportunity Missed?
Public private partnerships (PPPs) have been promoted by the Government since before the promulgation of the Public Finance Management Act in 1999. But despite almost 10 years of PPPs, we have still not seen the influx of projects that many people anticipated and feel are needed to help address some of the infrastructure needs and service issues of the Government.

While there are a number of projects which indicate the potential benefits of PPPs to South Africa, there do appear to be difficulties in the roll out. Questions are continually asked as to whether PPPs can be implemented successfully in South Africa.

One project that does indicate the benefits of PPPs is the Inkhosi Albert Luthuli Hospital in Kwa-Zulu Natal, in which Impilo Consortium (Pty) Ltd was appointed not only to provide facilities management services, but also information technology and "state of the art" equipment. When it was first implemented there were concerns about whether a tertiary hospital should be the focus of a PPP. This project has however indicated the ability of the private sector to facilitate the provision of services within the public sector, and is a shining example of excellence within the national healthcare system. The success is due not only to the PPP, but because the working environment permits the provision of medical services by doctors without their having to determine how to manage the operation of the hospital on a budget that is not adequate for the purposes and without having to follow repeated tender processes for the provision of services.

Unfortunately, while this project motivated the Kwa-Zulu Natal Department of Health to implement a PPP to provide certain facilities management services throughout the province, and was used as a point of reference to the Western Cape Department of Health, the model is not being used in hospitals that are desperate for facilities management, such as the Johannesburg Hospital. It is also hoped that when the Chris Hani Baragwanath Hospital Project, which is currently registered as a PPP, comes to the market the scope of the project does not cause it to be unduly delayed.

Similarly, while the two maximum security prison projects have been subject to scrutiny on the basis of perceived cost, the Department of Correctional Services only recently appointed transaction advisors to consider additional prisons being undertaken as PPPs, nearly 10 years after the original project agreements were signed.

While six projects were concluded during the course of 2006, the Government needs to dramatically increase the number of projects being implemented and concluded annually in order to address the backlog of services that can be addressed by the private sector.