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

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

Contents 3. The South African PPP Unit 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

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.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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)

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)

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

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

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

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

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

Questions QUESTIONS?