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PPPs – The Pros, the Price and the Perception

“Public Private Partnerships or PPPs are a way to structure an infrastructure project that allows the private sector to not only construct and operate a project but also to finance the project” says Deloitte’s Associate Director, JP Labuschagne. “While there are a number of acronyms in this space, essentially the government asks the private sector to design, build, finance and operate (DBFO) an asset to provide a service on its behalf, for which the private sector is paid a fee over the life of the project” says Labuschagne.

“PPPs have from time to time attracted criticism for a number of reasons. This criticism is at times appropriate. There have been a few PPP projects that have dismally failed in South Africa and, which have tarnished the reputation of PPPs in South Africa. The well-publicized prisons PPP procurement process is a good example of a project that did not work. Policy stability is one of the most crucial factors when it comes to seeing PPPs to fruition. DBFO Infrastructure projects are long term in nature and require robust policy to be successful” says James Bircher, Corporate Finance Manager at Deloitte.

The size and complexity of any large infrastructure project must be taken into consideration before criticism can be justified. The process requires a detailed feasibility study to clearly understand the needs, the possible solutions, the technical feasibility and, importantly, the cost implications. The process then moves into procurement where the project is put out to public tender, the proposals received are rigorously evaluated and thereafter the bid is awarded to the most suitable service provider (in terms of ability and price). This is only the beginning of the process as the asset has not yet been constructed, or operated.

The challenge facing the timing of these projects is that most Government departments will only ever do one project at a time, so understanding the dynamics of a large infrastructure project is crucial and having good advisors is essential. However, the ability or inability for government to make key decisions quickly is one of the biggest challenges facing any large infrastructure project, not just PPPs.

Governments worldwide are facing increasing demands to improve, refurbish and develop new social and economic infrastructure projects. Social infrastructure generally encompasses schools, health and other social services, while economic infrastructure is typically road, rail and ports. These types of projects are hugely expensive and there is often not enough public funding to pay for these projects upfront. For this reason, Government can benefit from entering into a contract with a private sector party to design, build, finance and operate the asset/project. “Government will generally pay out the private party during the life of the project delivery to cover the costs of the construction, operations, finance costs of the project, and the profit margin built in by the private sector party. However, these amounts are agreed upon upfront so any overrun in costs are typically fielded by the private sector party. This form of risk transfer is a major benefit of PPPs to Government. A good example of this type of risk transfer is the Gautrain project where the private sector party incurred financial losses during the construction phase but the delivery of the project was still achieved” says James Bircher.

“Other than the typical economic infrastructure projects, the greatest potential lies in social infrastructure projects. Schools and health projects as well as Broadband internet access are currently being developed via PPPs, and bulk water and sewage treatment plants are options with further potential” says Labuschagne.

PPPs create the space for linking private sector expertise in not only delivering the infrastructure needs, but also in obtaining the much needed funding for these large projects.

The KZN Infrastructure Funding Fair will be taking place on 24 October 2013 at the Royal Showgrounds, Pietermaritzburg.  For more information and to register for this event, visit www.kznfundingfair.co.za

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