UNDER CONSTRUCTION - JSE MAGAZINE

UNDER CONSTRUCTION

In light of SA’s desperate need for better infrastructure, public-private partnerships are fast becoming the preferred solution to overcoming a previously insurmountable problem

UNDER CONSTRUCTION

For at least a decade, inadequate power supply as well as transport and logistical backlogs have been identified as the crucial factors stifling the country’s ability to boost its sluggish economy. Government has ambitious plans to spend around R4.3 trillion on infrastructure over the next 15 years and has budgeted R847 billion on investment over the next three years.

According to the South African Reserve Bank, however, fixed investment as a percentage of GDP has fallen from an average of almost 30% in the early 1980s to 19.4% in the final quarter of last year.

On average, SA’s emerging market peers have investment rates of about 30% of GDP. World Bank research sets China’s investment activity at 47% of GDP for 2012, India’s at 30% and Russia’s at 22%.

SA is lagging behind. The Reserve Bank estimates that if the country does not build new infrastructure rapidly (especially enhanced power-generation capacity) and fix transport bottlenecks, it will be unable to achieve economic growth of over 3.5% a year on a sustainable basis. This is nowhere near government’s target of 5% growth per year.

‘In effect, South Africa has missed a generation of capital investment in electricity, water, roads, rail, ports, sanitation, public transport and housing,’ says Mike Peo, head of infrastructure, energy and telecommunications at Nedbank Capital.

Public-private partnerships (PPPs) are widely recognised as one of the best ways to efficiently and cost-effectively deliver certain types of infrastructure, says Nedbank senior economist Nicky Weimar.

Despite the government’s acknowledgement of the vital role PPPs should play in infrastructure build, only about 12 large-scale projects have been delivered in the past decade, Peo told an infrastructure roundtable in Johannesburg in June, adding that while the National Development Plan makes specific provisions for private-sector involvement, ‘the actual intent as to how to get there is really very poorly defined’.

Out of the trillion-rand infrastructure spend earmarked over the next five years, only about R15 billion has been identified for PPPs.

In contrast, governments globally are increasingly looking to the private sector for support. According to a 2013 paper by Boston Consulting Group, PPPs can effectively ‘accelerate infrastructure programmes by tapping into the private sector’s financial resources, as well as its skills in designing, building and operating infrastructure on a whole life-cycle cost basis’.

They are also ‘the most appropriate mechanism for transfer of risk to parties best suited to assume them, price them and manage the risk associated with taking them on’, says Peo, adding that these projects tend to be completed on time and on budget, which cannot be said for many state infrastructure projects.

The government, however, is sceptical. It believes that the private sector extracts ‘economic rent’ or makes enormous and unjustified profits from these deals. This could easily be avoided if partnerships are properly structured, says Peo.

Nevertheless, the private sector’s case is not helped by the distrust created by the uncovering of widespread collusion among construction companies involved in building infrastructure for the 2010 FIFA World Cup.

In an effort to deal with this trust deficit, Ketso Gordhan, CEO of cement supplier PPC, has been lobbying government and industry players for an ‘infrastructure Codesa [Convention for a Democratic South Africa]’, similar to the negotiations that set the country on the path to democracy in the early 1990s.

‘It is clear that infrastructure bottlenecks by both the public and private sectors need to be addressed, not through agreeing to generic accords but through implementable plans with clear roles, responsibilities and deadlines,’ says Gordhan. ‘Gathering the national government and private sector in one room could create a platform where many of the problems currently facing the industry are phased out.’

Gordhan’s call inspired Manglin Pillay, CEO of the South African Institute of Civil Engineering, to organise a congress named Civilution, a play on the words ‘civil engineering revolution’, to encourage engineers to do things differently. The congress looked at the role of engineers in transforming society and creating better-quality lives.

Pillay wants the private sector to align itself with government’s aspirations for a better SA and engineers, in particular, to reclaim their role in the government’s infrastructure development strategy.

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‘Gathering the national government and private sector could create a platform where many problems are phased out’

KETSO GORDHAN, CEO, PPC

At the congress, Gordhan called for the reform of SA’s infrastructure procurement processes to include transparent tendering processes and the centralised, standardised and faster delivery of high-volume, recurrent projects such as schools, hospitals and sewerage plants, according to a Business Day report. Projects could be developed using the best design at a predictable, agreed upon cost, he says.

Weimar believes that government’s slow delivery of infrastructure build is a key issue. Construction of Eskom’s Medupi and Kusile power stations, for example, has been hit by repeated delays and large cost overruns.

The bulk of infrastructure spend is channelled through provincial and local governments, as well as public organisations such as Eskom and Transnet. ‘We need to relook this altogether. Is this the most efficient way that we can deliver infrastructure? Based on historical experience, you’d have to say no, they have not been delivering,’ she says, adding that government should consider other channels of delivery, particularly PPPs, ‘to break the deadlock in growth’.

‘If capacity does not reside in the public sector, we need to aggressively push it into the private sector,’ says Weimar.

SA has shown it can run excellent PPPs with the success of government’s Renewable Energy Independent Power Producer Procurement (REIPPP) programme which, according to Peo, ‘can be heralded as the most successful large-scale procurement programme ever undertaken between the private and public sector in South Africa’.

In 24 months, 66 renewable energy projects have been banked at a project value of over R150 billion.

Peo says the programme offers important lessons on how to achieve successful PPPs. These include a large focus on upfront preparation involving input from all affected parties, policy and regulatory certainty, a well-formulated best-practices bidding process and a proper contractual framework.

Government hired top local and international advisors to properly structure the programme and established an interministerial commission to prevent potential bottlenecks.

‘To attract the amount of capital required to bid for large-scale infrastructure projects … it is critical that there is certainty in the process – confidence that the projects will proceed after capital is invested in developing such projects, certainty as to the bidding requirements and assurance that the obligations of all parties involved will be fulfilled,’ says Peo.

Prior to the renewables programme, SA had made some blunders, leaving investors wary. A classic example of this was government’s call for bids to build four prisons. According to Peo, international and local developers spent between R10 million and R20 million on tenders, only for the new Correctional Services minister to cancel the programme.

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‘If the programme had been structured properly upfront, that decision to scrap it would have been made before people spent proper capital on tenders that could be spent on infrastructure,’ says Peo.

SA is certainly not alone in trying to bridge its infrastructure gap. Across the world, countries are struggling with infrastructure deficits. This has led to a call for more innovative, efficient and broader ways to address the problem.

In May, international management consulting firm McKinsey held a Global Infrastructure Initiative meeting in Rio de Janeiro to promote ‘practical global solutions aimed at raising the productivity and efficiency of every aspect of infrastructure’, according to Martin Neil Baily, (a senior fellow at the Brookings Institution and former chairperson of President Bill Clinton’s Council of Economic Advisers) and Robert Palter (director and global leader of McKinsey’s Infrastructure Practice), said Business Day.

The pair went on to say that by 2030 ‘more productive infrastructure could reduce the world’s infrastructure bill by 40%, or $1 trillion annually, savings that could boost economic growth by about 3%, or more than $3 trillion’. This could be done, for example, by systematically evaluating the costs and benefits of new projects based on precise criteria that look at broader economic and social objectives.

South Korea has taken a similar approach, and officials now reject 46% of the proposed projects they review, compared to 3% previously.

More streamlined delivery of projects could also save billions through accelerating government approvals, land expropriation, innovative contracts and better collaboration with contractors.

Baily and Palter say that governments could save $400 billion a year by increasing the efficiency and productivity of existing infrastructure.

‘For example, smart grids could cut power infrastructure costs by $2 billion to $6 billion a year in the US, while reducing costly outages,’ the pair wrote.

However, Stephan Jooste, civil engineer and PPP consultant at Aurecon Group, cautions that the implementation and success of PPPs differs from country to country.

In an article on the company’s website, Jooste says that ‘all too often governments still believe that implementing new schemes and procedures will lead to successful projects, particularly if they mimic the successful PPP regimes in other countries’.

However, he adds that his research has shown that it is ‘virtually impossible to transplant PPPs across regions. Innovative ways must be found to tailor PPPs to their local environments’.

Meanwhile, the private sector is waiting in the wings for its opportunity to be invited on stage by government and participate fully in unlocking the country’s infrastructure potential.

By Gene Michaelson
Image: Andreas Eiselen/HSMimages