Obvious examples include, amongst others, projects for building and operating toll roads, ports, railways, schools and hospitals and providing power, water and sewage utilities.
The global trend of public and private entities creating partnerships to design, plan, finance, construct and/or operate projects that would previously have been within the sole remit of the public sector is gaining an increasing foothold as a financing mechanism in Africa.
Typically, public-private partnership (PPP) arrangements are structured in one of four ways. The first focusses on the management of public facilities, where a private entity operates an existing facility for a contractually predetermined time either for a fee or for a percentage-based commission. The second approach involves a private entity receiving concessions in return for fronting a substantial investment in an existing public service and then entering into an operation contract for its provision and sale to the public. The third involves a private entity financing, constructing, operating and managing a utility for a long period before transferring it back to a public authority. The final method involves a private entity taking an equity stake in a State-owned utility so it either owns the utility outright, or owns it in partnership with other companies and/or the State.
The opportunity for such PPP relationships to flourish within Africa is significant. Obvious examples include, amongst others, projects for building and operating toll roads, ports, railways, schools and hospitals and providing power, water and sewage utilities.
Ultimately, the private sector helps to fill a vacuum in the provision of public services, the need for which has inexorably increased as result of the current growth in the economies of certain African states. The importance of developing Africa’s infrastructure to enable African countries to exploit the continent’s vast material resources more efficiently is self-evident.
From the public sector side, authorities may have a great need for foreign investment from international operators providing the required capital to build and run public utilities at a reduced cost to the State. The work and risk load can also be shared with the private partner who ultimately should have the necessary experience, efficiency and business acumen to deliver a product in a timely fashion that satisfies customer needs.
The principal advantages for the public authority are that the risk of delivery transfers to the private partner. In addition, the State is able to immediately fund more infrastructure projects for the future.
In turn, the private partner benefits from full government support and approval and the certainty of a long-term economic activity and assured client base. This contributes significantly towards the potential for long-term income generation and profit. Further, the private partner acquires, through its association with the public authority, an enhanced profile, thereby potentially increasing its marketability for future projects.
The South African government has entered into a number of PPP arrangements in recent years (primarily in the health care and public transport sectors), with the most prominent PPP project being the Gautrain Rapid Rail Link developed and operated by the Bombela Consortium, with a capital value of circa R23 billion.
Of course, not all are proponents for PPP relationships primarily because, on occasion, they may result in a lower quality product or service being delivered, particularly if the private partner compromises quality to lower cost and improve profit margins.
To mitigate the risk of this, public entities should avoid divorcing themselves entirely from the management or regulation of the PPP project. Their participation should, as a matter of course, include the express contractual terms specifying that applicable industry performance criteria are required to be met. They should also ensure that ongoing quality checks and performance tests are carried out during the construction or modification of the facility as well as during the management and operation stages.
The proof is in the pudding and the future potential for PPPs to become commonplace within the African context will no doubt be dependent on the success of the initial projects that proceed on this basis; the proper development of the regulatory environment to enable private sector participation in PPP projects within; and private sector investor confidence in the political stability and geopolitical or socio-economic conditions pertaining to the particular country.
Spencer Naicker is a partner at Webber Wentzel
(This article first appeared in DealMakers, SA’s quarterly M&A magazine)
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