Municipal PPP Projects in South Africa: Obstacles and Opportunities

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Municipal PPP Projects in South Africa: Obstacles and Opportunities

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Obstacles and Opportunities

Della Levinsohn (Bcomm, LLB)

This article examines the implementation of Municipal PPP Projects in South Africa within the broader context of existing National and Provincial PPP Projects, assessing the backdrop against which they were introduced. Key challenges and opportunities will be addressed and possible solutions suggested to ensure that much-needed infrastructure is provided in the municipal sector. The legislative framework contains complexities that may prove challenging to overcome if not expeditiously addressed. However, there have been clear indications from Government that they remain committed to the development of Municipal PPPs and are willing to consider effecting the required changes.

I. INTRODUCTION

Delia Reardon (BA, LLB, MBA) are admitted attorneys with backgrounds in commercial law and investment banking. They both worked in the Project and Infrastructure Finance Department of Investec Bank before leaving to practice as PPP and project finance consultants at Levinsohn & Associates in South Africa

South Africa arguably boasts one of the most developed PPP legal frameworks in the Southern African region (SADC), whereby the national and provincial government are regulated by the 1999 Public Finance Management Act (PFMA) and Treasury Regulation 16 (issued in terms of the PFMA), and Municipal PPPs are governed by the 2003 Municipal Finance Management Act (MFMA). A dedicated Public Private Partnership Unit (PPP Unit) has been established within the National Treasury, and is tasked with overseeing PPPs in South Africa. In 2004, the Standardised PPP Provisions were issued together with the PPP Manual, providing detailed instructions and guidelines for the players in the South African PPP market. The latter was a laudable success in terms of attempting to standardise the PPP Concession Agreement and expedite the time frame to financial close. Two provincial PPP Accommodation projects for the Department of Education and the Department of Trade and Industry Project were recently implemented according to this standardized agreement. Both projects involved outsourcing the construction of the building and then the operational and maintenance requirements of these provincial governmental buildings for employees to a private sector body.

In order to appreciate the delineation between Provincial and National PPPs, on the one hand, and Municipal PPPs on the other, it is important to explain that South Africa is divided into various provinces, each of which have provincial legislatures which are governed by national 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 biggest 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 can cause confusion. A municipality is faced with the challenge of having to satisfy the requirements of both Acts, which is often perceived to be a difficult task. On average, the PPP Unit confirms that a feasibility study in terms of Section 78 of the MSA takes approximately 2 years. 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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Municipal PPP Projects in South Africa: Obstacles and Opportunities

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The MSA's requirements concerning the procurement of services exacerbate the perception that it is quicker and easier to source the service from an internal municipal body or municipal staff, adding a legislative layer of resistance to PPP procurement. In some municipal sectors, the option of considering a PPP is seen as an indictment on the municipality's own ability or capacity to provide the basic services required by the community they are meant to be serving. This indicates a lack of appreciation of the benefits of risk transfer and value for money creation that is inherent in the provision of a public service through a PPP.

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Provincial governments have a more streamlined process to procuring National Treasury funds in that once the PPP Unit approves a project and an allocation is made by National Treasury, it is linked to future allocations for that specific PPP. Municipalities rely on Treasury 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 fees collected directly from users of basic services e.g. water and electricity and hence they need to collect these efficiently 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 for funding on a PPP. Municipalities are also often not adept at securing external support from credit guarantees or other credit enhancing facilities from development banks.

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There is also a considerable amount of political mistrust of PPPs amongst some sectors of the municipal community, which perceive PPPs as a form of privatisation of state-owned assets. Labour unions have a fundamental ideological opposition to PPPs, viewing them as a threat to job creation, which remains one of South Africa's biggest challenges, with unemployment at approximately 26%. Labour concerns are often specifically addressed in a PPP during the procurement by making specific proposal evaluation points available for skills transfer and job creation. It is vital that municipal PPPs also introduce such a scoring system in order to allay such fears.

Complexity of the Standardised PPP Process

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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 clear process, however, many view it as time-consuming and onerous. It 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 the size 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 at promoting this form of infrastructure provision.

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Municipal PPP Projects in South Africa: Obstacles and Opportunities

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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 mandates and responsibilities. The public gets better, more cost effective services; the private sector gets new business opportunities. 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 financial close 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 to be an indication of a burgeoning of activity in the infrastructure PPP market. Although Gautrain is a national project, there have been recent movements in the Municipal PPP market with, for example, the issue of a Request for Qualifications for the Tshwane Municipal Headquarters ("Tshwane HQ Project") in February 2007, the first 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 DTI Provincial Accommodation Project and has experience in the provision of an accommodation project in the form of a PPP. This overcomes one of the key challenges in a project of this nature, namely the need for one spokesperson and project champion who is prepared to play a strategic role and unite the various stakeholders in a common purpose. The Tshwane HQ Project involves the provision of serviced accommodation to the City of Tshwane Metropolitan Municipality (entailing the design, construction, financing, operation and maintenance of new headquarters for the City of Tshwane Metroplitan Municipality).

Six further municipal PPP projects are listed on the PPP Quarterly publication in March 2007, indicative of a desire to ensure that municipal infrastructure Projects are procured through PPPs.

Financial Support to Assist M unicipalities in PPP Implementation

The costs involved in appointing transaction advisors to assist a municipality in implementing a municipal PPP has also been addressed by the creation of the Project Development Facility. The Project Development Facility (PDF) is a single-function trading entity, created within National Treasury in accordance with the PFMA. Its function is for remitting moneys for services rendered by consultants (transaction advisors) in accordance with the terms of a contract between a department or public entity, to which the PFMA applies, and the 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 MFMA and the MSA apply. This is to ensure support that was previously provided to municipalities by the Municipal Infrastructure Investment Unit (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 a framework for municipal investment. The MFMA specifically 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 and appoint a suitably qualified project officer, with funds to procure such a project officer who can then assume the responsibility of managing the PPP process on behalf of the municipality. Furthermore, the PDF can also be utilised to fund the preparation of feasibility studies 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 Bank provided 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 different pieces of legislation - the Municipal Systems Act (MSA) and the Municipal Finance Management Act (MFMA) - and at least two sets of MFMA regulations - Regulations 309 (dealing with PPPs) and 868 (dealing with 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 PPP Regulations." The article also comments on the fact that National Treasury is focused on producing a set of guidelines that "suggest a simpler, more efficient process for assessing whether a PPP is appropriate in the municipal context. The aim is to craft a set of guidelines that will point the way to needed legislative and regulatory changes. The Municipal Desk at the PPP Unit has been coordinating 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 the municipality as well as build PPP capacity within the municipality. For example, the more effective communication of the PDF system 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 projects by providing Government guarantees or seeking international credit guarantees for projects that are not otherwise bankable.

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Municipal PPP Projects in South Africa: Obstacles and Opportunities

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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 new Greenfield 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 PPP projects 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 critics would argue that the focus on the municipal PPPs is even more fraught with obstacles and premature until the higher level projects can be correctly implemented. However, there are admirable attempts by the SA Government to empower municipal departments with the ability 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 framework to achieve this.

Please address questions about this article to the authors at:

Levinsohn & Associates (Pty) Ltd della.l@mweb.co.za della.l@mweb.co.za Phone: + 27-11-884-7562

The PPP Quarterly is available for download from the National Treasury PPP Unit website, www.ppp.gov.za/News.htm. PPP Quarterly, October 2006

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