Address by the South African Minister of Foreign Affairs, Dr Nkosazana Dlamini Zuma, on Public Private Partnerships: The South African experience, Tokyo International Conference for African Development (TICAD) IV Ministerial Preparatory Meeting, Libreville, 21 March 2008

The private sector has a key role to play in the development of Africa, especially in terms of advancing the vision and framework of the New Partnership for Africa’s Development (Nepad). Nepad provides the direction for Africa to move decisively towards sustainable growth and development, and at the same time to open up an opportunity for the continent to participate actively in the world economy. These objectives are also aimed at achieving the Millennium Development Goals. The core of Africa’s growth and development paradigm is centred on trade and economic liberalisation and integration, including the free movement of goods, services, factors of production and intra-regional investment and foreign direct investment. As a prerequisite for this trade and economic liberalisation, efficient cross-border infrastructure and services are needed to facilitate the free movement of people, goods and services across the regions.

It is often stated that inherent factors that inhibit Africa’s productivity and international competitiveness can be found at the national level, in terms of inefficient public infrastructure and unreliable energy supply, as well as at the regional level, which is characterised by poor integration of physical infrastructure and the lack of regional energy networks. To respond to these challenges, in terms of the desire for greater efficiency and better services, as well as Africa’s limited volume of public resources available to finance such services, African governments are increasingly embracing the Public Private Partnerships (PPP) model.

Over the last decade PPPs has emerged as a development finance model as one of the best ways to foster development, fuelled by insufficient investment, growing pressures on government budgets and a general concern about service provision by state enterprises and agencies. Whilst initially slow to adopt the model, African governments have now realised that the model has the potential to radically improve the continent’s infrastructure networks as well as to enhance service delivery to the African people. The rationale behind the strong move towards PPPs can be found in terms of the increasing opportunities in Africa to draw on private sources of capital to support projects, in particular infrastructure projects. Private and public sector collaboration is necessary for project enlisting, while skills development in the public and private sector is critical.

Generally, private sector participation in the public sector takes the form of concessions and or the privatisation of public sector assets. In PPPs, a state shares risk and responsibility with private firms, but ultimately retains controls of assets. PPPs can be defined as a contractual arrangement whereby a private party performs part of a government organisation’s service delivery or administrative functions, and assumes the associated risks. In return, the private party receives a fee according to predefined performance criteria, which may be:

a. entirely from service tariffs or users charges

b. entirely from a Ministry’s budget or

c. a combination of both.

Both sides therefore stand to benefit from the contractual agreement:

a. Government earns revenue by leasing state-owned assets or alternatively pays the private sector for improved infrastructure and better service delivery

b. The private sector, on the other hand, can often do the job more efficiently, which can lower prices and improve rollout.

PPPs are commonly utilised for service delivery and infrastructure projects that are typically long-term and capital intensive in nature. Whilst PPPs are aimed at improving services, it avoids some of the pitfalls of privatisation, for example unemployment, higher prices and or corruption. Since 1999, PPPs in South Africa have been regulated under the Public Finance Management Act (PFMA), providing a clear and transparent framework for government and its private sector partners to enter into mutually beneficial commercial transactions, for the public good.

Over the past nine years, we have progressively increased the number of PPP transactions covering a wide range of sectors, including transport, office accommodation, health care, eco-tourism, social development and correctional services. By 2007, there were twenty PPP projects in active implementation with no fewer than six projects reaching financial closure during 2006/2007. Amongst these PPPs projects are two significant infrastructure projects: the Gautrain Rapid Rail Link Build Operate Transfer concession of 20 years, which we signed in September 2006, and the interstate Maputo Development Corridor Build Operate Transfer concession.

Some good reasons for choosing a PPP include:

a. PPPs can leverage private party capital to fund expensive infrastructure projects.

b. PPPs can also leverage much needed skills and advanced technology.

c. PPPs are designed so that risks are allocated to the party best able to manage them, especially in cases where the private sector has the right skills and capacity to manage the project over the long term than governments.

d. PPPs deliver budgetary certainty. When the PPP agreement is signed, the future cost of a PPP project is clear: government will receive specific outputs, at specific costs and will budget accordingly. In traditional procurement, on the other hand, the costs of completing the project and maintaining the assets in the future are not certain, and are the responsibility of governments. In addition, government may not budget appropriately for the maintenance and operating costs of its assets.

e. The private partner has to maintain the same standard of service delivery for the duration of the contract.

The increased number of projects attests to the growing body of experience related to PPPs, both within the South African government and across the private sector (nationally and internationally). Ultimately, the objective of good PPP projects is to achieve win-win outcomes. Such outcomes are best achieved when government institutions have a very clear idea of what type of infrastructure in services are required to meet the needs of the public in a given sector. By communicating these needs precisely to the market, private sector players can come together in consortia that offer the best mix of skills to devise creative solutions through cost-effective designs.

I must emphasise that although PPPs are but one avenue for procuring capital projects, the process followed must be characterised by diligent planning and transparent bidding. Only then can it be a success. These features must be encouraged for all procurement methods. We have recognised, as the South African government that, due to the pressing service delivery challenges across all spheres of our government and country, PPP projects can play an even greater role in achieving South Africa’s development needs. PPPs in South Africa are an important service delivery mechanism because they can facilitate rapid infrastructure delivery as envisaged under the Accelerated and Shared Growth Initiative for South Africa (AsgiSA). In the South African context, the promotion of local enterprise development, particularly the Black Economic Empowerment (BEE) is another consideration for pursuing PPP procurement options. South African PPPs are structured to advance this policy, which is a key criteria in evaluating a private parties bid. Once the preferred bidder has been chosen and the project is underway, the private party has to meet the agreed BEE targets.

Furtherafield, the experience of PPPs in Africa has shown that they have generally been more effective in sectors such as ports, telecommunications, transport and eco-tourism projects. Concerted regional efforts increase chances of PPP success. Unfortunately, there has been limited success in terms of electricity provision and water. In some cases, the private sector was found not to be more efficient than government, with service provision in fact being more expensive to the consumer. Without the necessary experience, situations have arisen where big complex government contracts were prone to abuse by unscrupulous individuals, firms or politicians.

In conclusion, I have to state that there is no easy way when it comes to PPPs. The African experience of PPPs has proved that they are complex, highly demanding and time consuming. Under the right conditions, and in the right sectors, however, they can offer significant benefits to African governments, the private sector and the ordinary citizen. From a government perspective, these conditions include the following:

a. The critical aspect concerning the design of PPPs is that governments must fundamentally improve their systems for dealing with the private sector to realise the efficiency and effectiveness gains promised by these partnerships. This requires strong and stable regulatory frameworks and government structures, as well as serious political commitment.

b. Secondly, for PPPs to be successful, governments need to undertake thorough feasibility studies that address the issues of affordability, value for money and risk transfer. Countries entering into PPPs must recognise that they will require professional contract drafting and monitoring skills.

c. From a practical point of view, this may necessitate countries to start with small PPPs, for example building and maintaining government offices, to learn and develop the ability to work more effectively with larger PPPs. This approach will allow governments to build up disciplined, highly transparent procedures and expertise in dealing with PPPs.

The main reason for using PPPs is that they can deliver better value for money for governments than traditional procurement. When weighing up the advantages of whether to go the PPP route, value for money should be the main objective. PPP procurement is only one of a number of options for procuring infrastructure and associated services. Government managers must carefully consider whether the delivery of a project is suitable to a PPP. Before considering a PPP as a delivery mechanism, it is essential that government managers need to ensure that project planning takes place within an enabling environment, including essential political support, proper regulatory frameworks and buy in from key stakeholders, regional and international partners.

There is certainly a need, as we progress towards a united continent, to ensure that our regions are adequately linked through sufficient cross-border infrastructure. PPPs can play an important role in ensuring that this costly, but vital ingredient to our development and unity is achieved.

Issued by: Department of Foreign Affairs
21 March 2008