Public Private Partnerships

1. Public Private Partnerships Presentation: Xola Ngamlana Senior Project Advisor PPP Unit National Treasury Date: 07 March 2012

2. Public Private Partnerships PPPs: Critical Success Factors to the South African Experience

3. Contents 1. South African Critical Success Factors 2. PPP Unit Challenges 3. Fundamentals of PPPs 4. South African PPP Processes 5. Typical Projects/Examples 6. Questions 3. The South African PPP Unit

4. South African Critical Success Factors Detailed Legislative Framework in Place • Public Finance Management Act • PFMA Treasury Regulation 16 • Public-Private Partnership Manual • Standardised Public Private Partnership Provisions • Public Private Partnership Toolkit for Tourism • Municipal Finance Management Act • Local Government: Municipal Systems Act • Municipal PPP Regulations • Municipal Service Delivery and PPP Guidelines The South African Constitution provides: • “When an organ of state … contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.”

5. South African Critical Success Factors Highly Capacitated PPP Unit In Place • Informed by the Partnerships UK model • A division of the Budget Office Directorate in National Treasury • Reports through the Deputy Director-General: Budget Office to the Director-General and the Minister of Finance • Head of PPP Unit is a Chief Director • Have an established track record – 23 completed PPPs with over fifty in the pipeline

6. South African Critical Success Factors • Has both Technical Assistance and Regulatory Roles • Provides technical assistance on: • Procuring Transaction Advisors • Procuring Project Officers • Acts as a Regulator in terms of: • Approving feasibility studies to permit procurement as a PPP • The development and issuance of tender documents • The selection of the preferred bidder • Approving the execution of the negotiated PPP Agreement • Approving material variations and amendments to executed PPP Agreements

7. South African Critical Success Factors • Work is allocated to staff by sector • HEALTH - ACCOMMODATION • ENERGY - EDUCATION • WATER - BUDGET SUPPORT • TRANSPORT - CONTRACT MANAGEMENT • ICT - PROJECT DEVEL. FACILITY • TOURISM - BUSINESS DEVELOPMENT • WASTE - INTERNATIONAL RELATIONS

8. South African Critical Success Factors • We are also in the process of reviewing the institutional set-up of the PPP Unit within the context of its relationship to other advisory entities within National Treasury • Discussions around spinning off the PPP Unit and the Technical Assistance Unit into a stand-alone “component” have been ongoing for the last couple of years • Affecting these discussions is a proposal that all capital expenditures above a specified floor be required to undertake a feasibility study in an attempt to ensure that all such expenditures provide the best “value for money” for the nation

9. PPP Unit Challenges • The biggest challenge to procuring infrastructure via a PPP is TIME • Procurement of infrastructure is an intensely political process • Politicians are keen: • to produce infrastructure quickly • to preserve their decision-making prerogatives • to reward supporters • PPPs require: • TIME to undertake a proper feasibility study • TIME to secure National Treasury approvals and • TIME to conduct a fair, equitable, transparent and competitive procurement process

10. PPP Unit Challenges • The South African financial community is extremely risk averse • A key requirement for a PPP is the transfer of financial risk to the private party • That includes the private party’s lenders • However, SA financial institutions strongly resist accepting risk • The negotiations around the level of risk transfer they will accept consume huge amounts of time • National Treasury is considering providing a significant capital grant to public sector PPP sponsors to reduce the amount of debt that must be accessed • We have spent a couple of days with representatives of financial institutions to try to panel beat a solution

11. PPP Unit Challenges • Dealing with the lack of capacity within South African governmental entities to undertake PPPs • There is a massive skills shortage in South Africa which affects governmental entities as well • Lack of capacity is particularly acute in terms of the appointment of a Project Officer in a PPP assessment • National Treasury maintains a Project Development Facility which provides funding for the procurement of a Project Officer • Dealing with the lack of reliable information possessed by governmental entities necessary for conducting a feasibility study • Dealing with governmental entity staff turn-over and changes in the political structure of a governmental entity

12. PPP Unit Challenges • The most commonly heard “challenge” is that the PPP process takes too long • A feasibility study can take from six to 18 months • The Request for Qualifications (RFQ) processes can take six to eight months • The Request for Proposals processes, including negotiating with the Preferred Bidder can take a year or more • There is no simple answer – these are complex matters • Worldwide, and in South Africa, the knowledge that a project has undergone the rigours of a feasibility study and a transparent bidding process typically ensures a successful project, whereas a “conventional” procurement may – and often does -- not

13. Fundamentals of PPPs • Three tests for a PPP: • Affordability • Value for money • Appropriate risk transfer • Applied in a set PPP project cycle: • Inception • Feasibility • Procurement • PPP agreement management

14. Fundamentals of PPPs Worldwide experience has shown there are certain requirements before a government can successfully use PPPs to procure public services infrastructure They are: • A functioning judicial/legal system • Capacitated, enthusiastic government officials • Demonstrated, capable private sector interest • An enabling PPP framework

15. Fundamentals of PPPs • A functioning Judicial/Legal System • At the end of the day, all PPP agreements must be enforceable by both parties • Lenders, particularly require this certainty • PPP contracts may include dispute resolution and arbitration clauses, but must have a legal underpin • Capacitated, enthusiastic government officials • Undertaking the assessment and procurement of infrastructure via PPP requires diligence and an understanding of the processes • Government requires a “Project Champion” with zeal and keen interest in the project • The failure of government in this regard is often cited as being a reason for no – or poor – PPPs

16. Fundamentals of PPPs • Demonstrated, capable private sector interest • Private sector interest should include • Interest from contractors, facility operators • Interest from the financial sector • Banks • Development Finance Institutions (DFIs) • Other financial organisations • In South Africa are many regional contractors, facility operators and representatives from most aspects of the financial sector

17. Fundamentals of PPPs • An enabling PPP framework • Objectives: • Clear policy framework to ensure that PPPs are a coherent option • Refining legislation to remove unnecessary obstacles to assess and procuring PPPs • Regulations to ensure sound expenditure control and prudent use of government assets • Enhancing capacity of government departments • Providing simple yet effective institutional framework to ensure that PPPs provide value for money • Providing clear direction and comfort to private sector participants, including financial institutions

18. South African PPP Processes • Inception • Institution registers project with PPP Unit • Meets with Unit to discuss • Nature, parameters of project • Appointment of Project Officer • Procurement of Transaction Advisors • Procures Transaction Advisor • Procures Project Officer • Project Development Facility (PDF) available

19. South African PPP Processes • Feasibility Study • Needs analysis • Options analysis • Project Legal Due Diligence • Value Assessment • Public Sector Comparator (PSC) • Risk-adjusted PSC • Private Sector Reference • Value-for-Money determination • Economic Valuation • Procurement Plan • Environmental/other consents • Treasury Approval (TA I)

20. South African PPP Processes • Procurement • Fair, equitable, transparent, competitive, cost-effective bid process • Request for Qualifications (RFQ) • Short List • Request for Proposals (RFP) • Treasury Approval IIA (TA IIA) • Issue RFP to short-listed bidders • Compare with feasibility study and each other • Select preferred bidder • Prepare value-for-money report • Treasury Approval IIB (TA IIB)

21. South African PPP Processes • Procurement, continued • Negotiate with Preferred bidder • Prepare PPP Agreement Management Plan • Treasury Approval III (TA III) • PPP Agreement Management • Development • Obtain environmental/other consents • Construct infrastructure • Delivery • Service delivery • Exit • At expiry, Institution takes over

22. Typical Projects/Examples • By the end of 2010, the South African PPP Unit had closed 23 PPP projects in the following sectors: • Health Care, including medical equipment installation, operation and maintenance, hospital co-location, provision of renal dialysis services, and hospital refurbishment, maintenance and operation at various hospitals • Office Accommodation, for the financing, design, construction, maintenance and operation of office accommodation facilities for government departments • Toll Roads, for commercial and tourism activities • Social Grants, for the distribution of social grants, including the accounting therefor • Fleet Management, for the provision and maintenance of motor vehicle fleets for government departments • IT, for the provision, maintenance and upgrading of IT equipment for government departments • World Heritage Site, for the design, construction, maintenance and operation of the Cradle of Humankind World Heritage Site • Rapid Rail, for the partial financing, design, construction, maintenance and operation of a Rapid Rail system

23. Typical Projects/Examples • At the end of 2010, the South African PPP Unit had some 60 PPP projects in the pipeline, at both the national/provincial level and the municipal level, including: • Office accommodation • Management of monies in trust • Clinical services • Airports • Correctional facilities (prisons) • Emergency call centres • Fleet • Pharmaceutical supply chain services • Hospital rehabilitation • Juvenile detention centres • Provincial legislature • Eco-tourism facilities • Private sector use of state land for commercial purposes • Municipal solid waste management • Municipal water services

24. Conclusion • Founded in 2001, the PPP Unit at South Africa’s National Treasury has been an important driver for the development of government services infrastructure • Gautrain Rapid Rail one of the largest PPPs on the Continent • The success has been possible because of an enabling legislative and regulatory environment, together with robust support from our Minister of Finance • Capacity in government and maintaining our staffing with capacitated professionals has been, and will continue to be, challenging • Prospect of expanded capital expenditure oversight role exciting

25. Contact Details Xola Ngamlana Senior Project Advisor PPP Unit National Treasury 240 Vermeulen Street Pretoria South Africa Tel: +27 12 315 5027 Fax: +27 12 315 5477 xola.ngamlana@treasury.gov.za www.ppp.gov.za www.treasury.gov.za

26. Questions QUESTIONS?