In his opening of Parliament address on 18 July 2024, President Cyril Ramaphosa strongly hinted that going forward, public-private partnerships (PPPs) would be the preferred arrangement in tackling infrastructure deficiencies and other service delivery problems. To this end, he stressed, “We are simplifying the regulations on public-private partnerships to enable greater investment in both social and economic infrastructure development”. This policy option is viewed as more palatable than privatisation.
Definition of PPPs
According to the World Bank, a PPP is “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”. Its Reference Guide further explains that the definition includes “PPPs that provide for both new and existing assets and related services, where the private party is paid entirely by service users, and those in which a government agency makes some or all payments and encompasses contracts in many sectors and for many services, provided there is a public interest in the provision of these services”. In essence, project functions transferred to the private sector entity include design, construction, financing, operations, and maintenance varying from contract to contract. However, in almost all cases the private sector entity is responsible for project performance and bears significant risk and management responsibility.
The South African Experience with PPPs
South Africa has a mixed track record with PPPs, with some notable successes and significant challenges. For instance, the partnership between banks and the Department of Home Affairs for issuing passports and smart IDs has shown promise but remains limited in scope. Similarly, Transnet has engaged in partnerships to enhance logistics infrastructure, yet the scale and impact of these initiatives have been constrained by broader economic challenges and the financial instability of state-owned enterprises (SOEs).
In the context of energy, Eskom’s dire financial situation has made it difficult to attract private investment for critical infrastructure expansion, such as grid development for renewable energy. With a debt burden of around R400 billion (US$21.3 billion), Eskom’s capacity to finance new projects is severely limited. This highlights the challenges of implementing PPPs in sectors where state entities are already struggling financially.
The pros of PPPs
First and importantly, PPPs provide access to private sector finance and expertise, a fact acknowledged by the President in his opening address to Parliament. Furthermore, the state can leverage innovative solutions that the private sector brings onboard to projects, thus improving the efficiency and quality of public services. Thus, the utilization of private sector practices and standards enables public services to be delivered more effectively and efficiently
Secondly, PPPs allow the sharing of risks such as financial, operational, and technical risks. This has got the effect of reducing the burden on either the state entity or the private entity. Using the private sector expertise in project execution and management, cost savings could be achieved as opposed to the state managing projects alone.
Thirdly, PPPs may accelerate the development of infrastructure projects in South Africa where deficits are glaring. For instance, in the energy and logistics sectors, the main state players Eskom and Transnet are so heavily indebted to fund both refurbishment and expansion of infrastructure.
The cons of PPPs
Despite PPPs being able to offer significant benefits, as outlined above, they also bring some challenges that need to be managed. Firstly, PPPs are complex contracts that require expertise and resources to negotiate them. In South Africa, this is further complicated by the high indebtedness of state-owned enterprises (SOEs). For instance, Eskom needs about R390 billion (US$21.30 billion) to expand its grid to accommodate renewables, but because it is already unsustainably indebted to about R400 billion, it is not easy to attract private sector partners for its grid expansion project. One option in such complex contracts is to consider creating escrow accounts whereby a neutral third party holds the funds and releases them when both the SOE and private sector partner have met their obligations. Another option is to establish offtake agreements with private firms that would fund construction in exchange for future earnings
The second challenge linked to the complexity of PPP contracts is that allocating risks appropriately between partners can be challenging and requires expertise. Deficient skills in the South African public sector are likely to result in poor risk allocation causing financial losses for the public sector. A good example illustrating the complexity of PPPs is the Department of Home Affairs’ partnership with banks in the issuance of passports and smart IDs. Despite its relative success since its inception in 2016, it has remained a pilot project with only a mere 30 bank branches enrolled for the e-Home Affairs service in the entire country. It is speculated that the obstacle to rolling out the service country-wide is the delay in finalising the PPP agreement between the Department of Home Affairs and the Banking Association of South Africa.
The third and critical challenge is that the private sector is driven by the profit motive, and this can have the effect of raising costs of public services. The fact that present costs of services are already high because of the inefficiencies of SOEs, raising them up further in a PPP arrangement can cause social unrest. The present energy tariffs of Eskom are considered too high, and consumers are protesting by non-payment and going to the streets. Therefore, PPPs can become a highly contested terrain of social objectives versus economic profit.
The fourth challenge is that PPPs are often long-term projects that can run for 20 years or more so that the private entity can recoup its outlay and profits. This reduces the state’s flexibility to respond to changing needs, priorities and circumstances. Thus, once the state is locked into a poorly structured PPP it may not easily exit without penalties.
Structuring Effective PPPs
For PPPs to be successful, they must be carefully structured to balance cost-effectiveness with social well-being. This requires aligning the profit motives of private partners with the public interest goals of the government. Comprehensive feasibility studies are essential to determine the economic viability of projects, governance structures, and oversight mechanisms. Risk should be allocated to the party best equipped to manage it, and contracts should include provisions for monitoring and evaluation to ensure ongoing accountability.
The Way Forward for South Africa
Given the high levels of public debt, which amount to over R5 trillion (74% of GDP), alongside the financial difficulties faced by SOEs and municipalities, the government may find it challenging to attract private sector partners for PPPs. Those who do engage are likely to demand safeguards, such as escrow accounts or offtake agreements, to secure their investments. Therefore, a blended approach to private sector participation, incorporating privatization and concessions alongside PPPs, may be necessary to meet South Africa’s infrastructure and service delivery needs.
Furthermore, addressing the skills gap in the public sector is crucial for the successful implementation of PPPs. Training programmes, such as the 6-module PPP online course that is offered by the World Bank, can help equip public sector officials with the expertise needed to negotiate and manage these complex contracts effectively.
In conclusion, while PPPs offer a promising avenue for addressing South Africa’s infrastructure challenges, their success will depend on careful planning, skilled negotiation, and a balanced approach that considers both economic and social outcomes.
