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8/4/2019 Municipal PPP Projects in South Africa_ Obstacles and Opportunities
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About The Authors...
Della Levinsohn(Bcomm, LLB)
Delia Reardon (BA, LLB, MBA) areadmitted attorneys with backgrounds in
commerc ial law and investmentbanking. They both worked in the
Project and Infrastructure FinanceDepartment of Investec Bank beforeleaving to practice as PPP and project
finance consultants at Levinsohn &Associates in South Africa
Home Media Publications Municipal PPP Projects in South Africa: Obstacles and Opportunities
Municipal P PP P rojects in South Africa: Obstacles and Opportunities
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Obstacles and Opportunities
This article examines the implementation of Municipal PPP Projects in South Africa withinthe broader context of existing National and Provincial PPP Projects, assessing thebackdrop against which they were introduced. Key challenges and opportunities will be
addressed and possible solutions suggested to ensure that much-needed infrastructureis provided in the municipal sec tor. The legislative framework contains complexities that
may prove challenging to overcome if not expeditiously addressed. However, there havebeen clear indications from Government that they remain committed to the developmentof Municipal PPPs and are willing to consider effecting the required changes.
I. INTRODUCTION
South Africa arguably boasts one of the most developed PPP legal frameworks in theSouthern African region (SADC), whereby the national and provincial government are
regulated by the 1999 Public Finance Management Act (PFMA) and Treasury Regulation16 (issued in terms of the PFMA), and Municipal PPPs are governed by the 2003Municipal Finance Management Act (MFMA). A dedicated Public Private Partnership Unit
(PPP Unit) has been established within the National Treasury, and is tasked withoverseeing PPPs in South Africa. In 2004, the Standardised PPP Provisions were issued
together with the PPP Manual, providing detailed instructions and guidelines for theplayers in the South African PPP market. The latter was a laudable success in terms ofattempting to standardise the PPP Concession Agreement and expedite the time frame
to financial close. Two provincial PPP Accommodation projects for the Department ofEducation and the Department of Trade and Industry Project were recently implemented
according to this standardized agreement. Both projects involved outsourcing theconstruction of the building and then the operational and maintenance requirements ofthese provincial governmental buildings for employees to a private secto r body.
In order to appreciate the delineation between Provincial and National PPPs, on the one hand, and Municipal PPPs on the other, it isimportant to explain that South Africa is divided into various provinces, each of which have provincial legislatures which are governed bynational legislation and input. The municipal regions (also referred to as "local government") are further subdivisions of these provinces
and in turn have their own municipal system and municipal legislation.
II. The Challenges Facing Municipal PPPs
Overlapping and Complex Legal Requirements
One of the b iggest challenges facing Municipalities is the legacy of complex and interlinked legislation that often involves inherent
confusion and duplication. Both the MFMA and the Municipal Systems Act (MSA) require feasibility studies to be undertaken before a
municipality can proceed with a PPP. However, although the studies required by each act are similar, there are discrepancies that cancause confusion. A municipality is faced with the challenge of having to satisfy the requirements of both Acts, which is often perceived to
be a diff icult task. On average, the PPP Unit confirms that a feasibility study in terms of Section 78 of the MSA takes approximately 2years. To achieve an MFMA feasibility study takes on average a further 6 months. In addition, the level of detail regarding exactly what a
feasibility study should entail is largely absent.
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The MSA's requirements concerning the procurement of services exacerbate the perception that it is quicker and easier to source theservice f rom an internal municipal body or municipal staff, adding a legislative layer of res istance to PPP procurement. In some
municipal sectors, the opt ion of considering a PPP is seen as an indictment on the municipality's own ability or capacity to provide thebasic services required by the community they are meant to be serving. This indicates a lack of appreciation of the benefits of risktransfer and value for money creation that is inherent in the provision of a public service through a PPP.
Provincial governments have a more streamlined process to procuring National Treasury funds in that once the PPP Unit approves aproject and an allocation is made by National Treasury, it is linked to future allocations for that specific PPP. Municipalities rely onTreasury allocations through conditional shares or equitable grants, which are specific governmental allocations designed to uplift
municipalities and their communities and more discrete and once off in nature. They also rely on municipal tax revenues or feescollected directly from users of basic services e .g. water and electricity and hence they need to collect these effic iently to secure
revenue fund raising on the back of their debtor books. This contributes to the municipalities' inability to build a good debtor book and
they are hence sometimes perceived to be a credit risk when they approach financial institutions f or funding on a PPP. Municipalities arealso often not adept at securing external support from credit guarantees or o ther credit enhancing facilities from development banks.
There is also a considerable amount of political mistrust of PPPs amongst some sectors of the municipal community, which perceivePPPs as a f orm of privatisation of state-owned assets. Labour unions have a fundamental ideological oppos ition to PPPs, viewing themas a threat to job creation, which remains one of South Africa's b iggest challenges, with unemployment at approximately 26%. Labourconcerns are often specifically addressed in a PPP during the procurement by making specific proposal evaluation points available forskills transfer and job creation. It is vital that municipal PPPs also introduce such a sc oring system in order to allay such fears.
Complexity of the Standardised PPP Process
Below is the flow diagram issued by National Treasury on their PPP website (www.ppp.gov.za) indicating the various stages in a
Municipal PPP Procurement. This is a laudable introduction of a c lear process, however, many view it as time-consuming and onerous. I t
is also questionable as to whether it is appropriate for a municipality to have to comply with all these steps in all PPPs, irrespective of thesize or complexity of the project undertaken.
Figure 1 - Stages of Municipal PPP Procurement
III. Opportunities and Positive Steps
Despite the apparent obstacles to PPP provision in the municipal sector, there are many moves afoot that are clearly pointed atpromoting this form of infrastructure provision.
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Clear Support from Government
The Minister of Finance, Trevor Manuel, is quoted at the launch of the Standardised PPP Provisions and the PPP Manual:
"This is what PPP is about. PPPs are about combining the pool of expertise and resources available in the private sector
and managing it in such a way that it accelerates service delivery and allows government to focus on its core mandatesand responsibilities. The public gets better, more cost effective services; the private sector gets new businessopportunities. Both are in the interest of the nation." (August 2004)
Consistent Pipeline of PPP Projects at the National and Municipal Level
Although critics of the SA government argue that the various initiatives to promote PPPs in the country are too little too late, the financialclose of the Gautrain Rapid Speed Rail PPP in March 2007 (a R20 bn rapid rail link between Tshwane, Johannesburg and
Johannesburg International Airport, being the largest single transport infrastructure project in Southern Africa) has been seen by some tobe an indication of a burgeoning of activity in the infrastructure PPP market. Although Gautrain is a national project, there have beenrecent movements in the Municipal PPP market with, for example, the issue of a Request fo r Qualifications for the Tshwane Municipal
Headquarters ("Tshwane HQ Project") in February 2007, the f irst municipal infrastructure accommodation project in South Africa.Despite arguments that the private sector interest in PPPs is waning, there are more than 4 bidding consortia working on the RFQ
submission. The Tshwane HQ Project has a project champion, Peter Aborn, who previously was the driving force behind the DTIProvincial Accommodation Project and has experience in the provision of an accommodation project in the form of a PPP. Thisovercomes one of the key challenges in a project of this nature, namely the need for one spokesperson and project champion who is
prepared to p lay a strategic role and unite the various stakeholders in a common purpose. The Tshwane HQ Project involves theprovision of serviced accommodation to the City of Tshwane Metropolitan Municipality (entailing the design, construction, financing,
operation and maintenance of new headquarters f or the City of Tshwane Metroplitan Municipality).
Six further municipal PPP projects are listed on the PPP Quarterly¹ publication in March 2007, indicative of a desire to ensure that
municipal infrastructure Projects are procured through PPPs.
Financial Support to Assist Municipal ities in PPP Implementation
The cos ts involved in appointing transaction advisors to ass ist a municipality in implementing a municipal PPP has also been addressedby the creation of the Pro ject Development Facility. The Project Development Facility (PDF) is a single-function trading entity, createdwithin National Treasury in accordance with the PFMA. Its function is for remitting moneys for services rendered by c onsultants
(transaction advisors) in accordance with the terms of a contract between a department or public entity, to which the PFMA applies, andthe transaction advisor. As of April 2006, the PDF has extended its scope to provide grant funding to municipalities with the purpose of
paying monies for services rendered by transaction advisors for the development of Municipal Services Partnerships to which the MFMAand the MSA apply. This is to ensure support that was previously provided to municipalities by the Municipal Infrastructure InvestmentUnit (MIIU), which had a term that ended in March 2006.
The PDF also acts in collaboration with the Department of Provincial and Local Government's Municipal Service Partnerships Unit(DPLG MSPU), which is designed to facilitate partnership arrangements at municipal level, monitor municipal partnerships and create aframework for municipal investment. The MFMA specif ically provides that national government is required to provide support to
municipalities in terms of their service delivery.
The PDF has a wide ambit, including providing a municipality which does not have internal capacity to manage a PPP process andappoint a suitably qualified project off icer, with funds to procure such a project officer who can then assume the responsib ility ofmanaging the PPP process on behalf of the municipality. Furthermore, the PDF can also be utilised to f und the preparation of f easibilitystudies in terms of MSA Section 78 and the procurement of service providers in terms of MFMA Section 120.
Standardised Municipal PPP Guidelines
Despite considerable delays, the draft Municipal PPP Guidelines are currently being reviewed and finalised. Fortunately the World Bankprovided grant funding to employ more consultants to finish the Guidelines. The PPP Unit attributed the delays to "the fact that municipal
outsourcing, including PPPs, are governed by two diff erent pieces of leg islation - the Municipal Systems Act (MSA) and the MunicipalFinance Management Act (MFMA) - and at least two sets of MFMA regulations - Regulations 309 (dealing with PPPs) and 868 (dealingwith municipal procurement). Any Municipal PPP Guidelines then, must be agreed upon by the respective ministries - the Department for
Provincial and Local Government (DPLG) in terms of the MSA, and National Treasury for the MFMA and the existing Municipal PPPRegulations."² The article also comments on the f act that National Treasury is focused on producing a set of guidelines that "suggest asimpler, more effic ient process f or assessing whether a PPP is appropriate in the municipal context. The aim is to craft a set ofguidelines that will point the way to needed legislative and regulatory changes. The Municipal Desk at the PPP Unit has beencoordinating this effort with its counterparts in DPLG."
IV. Possible Solutions
The following are recommendations to continue to improve the environment for municipal PPPs:
A more streamlined process in PPP Procurement
More efficient utilisation of the resources provided by Government to source the skills required if they are lacking within themunicipality as well as build PPP capacity within the municipality. For example, the more eff ective communication of the PDFsystem that is not well known in the South African PPP industry.
Real political championship of municipal PPPs,Correct credit enhancement of Municipal PPPs to ensure bankability of projec ts by providing Government guarantees or seeking
international credit guarantees for projects that are not otherwise bankable.
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Funding of specialised teams to work with municipal agencies or bodies to drive PPPs to financial closure. For example, if a newGreenfield project in a different sector is introduced, it is crucial that sector specific skills are introduced.
V. Conclusion
The various players in the South African PPP market have voiced concerns that the Government is not implementing the amount of PPPprojects that is required in order to provide the country with the infrastructure that is desperately required both by the community and in
order to comply with the substantial obligations attendant with hosting the 2010 World Cup. At the national and provincial level, many
perceive there to be a lack of political will and public sector capacity to bring the many planned projects to fruition. These same criticswould argue that the foc us on the municipal PPPs is even more fraught with obstacles and premature until the higher level projects canbe correctly implemented. However, there are admirable attempts by the SA Government to empower municipal departments with theability to choose their own projects and follow a clear and legislated process to procure them through PPPs. The next few years will be
crucial in determining whether there is sufficient motivation, commitment and capacity in the municipal sector to utilise the f ramework toachieve this.
Please address questions about this article to the authors at:
Levinsohn & Associates (Pty) [email protected]
[email protected]: + 27-11-884-7562
¹ The PPP Quarterly is available for download from the National Treasury PPP Unit website, www.ppp.gov.za/News.htm.
² PPP Quarterly, October 2006
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