SOUTH AFRICA: PUBLIC SECTOR INVESTMENT, PART I OF

UNCLAS SECTION 01 OF 03 PRETORIA 001998

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN EINV ECON SF
SUBJECT: SOUTH AFRICA: PUBLIC SECTOR INVESTMENT, PART I OF
II

(U) This cable is Sensitive But Unclassified. Not for
Internet distribution.


1. (U) Summary. In the late 1990s, South Africa launched its
effort to develop public-private partnership (PPP) policies
and supporting legislation to boost Black Economic
Empowerment and increase services to the poor. PPPs have now
evolved into one of the South African Government's primary
initiatives to advance public sector investment in an effort
to kick start higher economic growth. PPPs will play a
significant role in the R267 billion ($45 billion) planned
public sector investment over the next five years. The
National Treasury created a PPP Unit to usher the process of
approving and monitoring PPP projects. Thus far, South
Africa has had limited success with PPPs in the areas of
water and electricity provision, but has fared better in the
areas of transportation and eco-tourism. End Summary.

What is a South African PPP?
--------------


2. (U) The National Treasury defines a Public-Private
Partnership (PPP) as a commercial transaction between a state
institution and a private entity that performs a government
function or utilizes state property for commercial purposes.
The private entity assumes a measure of risk in exchange for
income. Examples include the construction of an office
building for long-term government lease, or fees collected
from citizens accessing a government service. A national,
provincial, or municipal state institution may enter into a
PPP.


3. (U) The South African concept of PPPs has been evolving
since 1997. In late 1999, the Cabinet endorsed a framework
and in 2000 the Parliament passed the Public Finance
Management Act 1 of 1999 (PFMA) that embodied National and
Provincial PPP regulation. In 2003, Parliament passed a
companion piece of legislation regulating Municipal PPPs
called the Municipal Finance Management Act 56 of 2003
(MFMA). In March 2004, the National Treasury released
guidelines governing all PPPs. In February 2005, the
National Treasury announced plans to spend R267 billion ($45
billion) on public sector investment over the next five
years, about half of which will be through state owned
enterprises (SOEs) (septel). With this extensive framework
and funding in place, PPPs have become one of the South
African Government's (SAG) primary tools to advance public
sector investment to kick start higher economic growth. The
SAG also wants to use PPPs to increase access to services for
the poor, decrease poverty, and achieve Black Economic
Empowerment (BEE) objectives.


4. (U) The South African notion of PPPs extends well beyond
the typical sectors of water and electricity. All
departments and levels of government may enter into PPPs to
pursue their objectives. As of March 2005, the National
Treasury reported that approximately 50 projects were at some
stage in the PPP project pipeline, ranging from conception to
full blown requests for proposals in the areas of education,
health, transportation, and eco-tourism. Since its
inception, National Treasury's PPP Unit has ushered twelve
PPP projects through the project life cycle.


5. (SBU) Although no minimum dollar threshold officially
exists, the PPP Unit wants to establish one. The smallest
PPP project managed by the PPP Unit so far invested R380
million ($63 million). PPP Unit Business Development
Director Kogan Pillay told Econoffs that the PPP Unit was
gravitating toward establishing R1 billion ($167 million) as
the minimum sized project for PPP Unit supervision. In the
future, Pillay figured that the oversight of smaller PPPs
would be the responsibility of contracting/procurement
authorities of the particular government entity involved.
Notwithstanding, all PPP projects would have to follow
National Treasury's guidelines and might be subject to
National Treasury supervision.

The PPP Unit at National Treasury
--------------


6. (U) In 2000, the National Treasury created a PPP Unit
housed within its budget office with help from USAID, the
German Agency for Technical Co-operation (GTZ),and the
British Department for International Development (DFID).
Previously, the PPP Unit has been mostly occupied with
developing PPP legislation and regulation. It is now charged
with supervising the government-wide program. Beginning in
2006, the PPP Unit will no longer rely on any donor funding.


7. (U) The Head of the PPP Unit at National Treasury is Chief
Director William Dachs. He is supported by three Senior
Administrative Officers and eight Senior Project Advisors
(i.e., Directors). Seven Directors cover five
cross-functional divisions: financial (2 advisors),legal (2
advisors),business development (1 advisor),project
evaluation (1 advisor),and municipal (1 advisor). The
eighth Director handles technology and communications PPPs.
Three Project Advisors also serve as Deputy Directors in
charge of the legal, financial, and project evaluation
divisions. The PPP Unit has a staff of 21, but there are
plans to expand each division by about four people.


8. (U) The mandate of the PPP Unit is to approve and monitor
PPP projects, but it also may identify PPP projects and
arrange for technical assistance and training for BEE
enterprises. During a recent public roundtable discussion,
Business Development Director Kogan Pillay explained that
PPPs would also become an important mechanism for the SAG to
achieve its BEE objectives. Long-term PPP project
opportunities for BEE companies could grow BEE equity and
management capability over time. PPP subcontracting and
procurement opportunities should also be important to the
development of small and medium-sized BEE enterprises.
Finally, many PPP projects should provide more affordable and
accessible services to the poor.

Treasury's PPP Approval Process
--------------


9. (U) The PFMA's National Treasury Regulation 16 lays out
the three stages of a PPP project life cycle. A National PPP
is initiated when an authorizing official from a government
institution suggests an idea to the PPP Unit and provides for
the project in its budget. The PPP Unit then assigns a
project officer and team to the project. The government
institution then commissions a feasibility study to assess
project risks, returns, and affordability. The PPP Unit
hires private sector transaction advisors (e.g., consulting
firms such as PriceWaterhouseCoopers) to assist with the
studies. Upon completion, the PPP Unit must sign off on the
feasibility study as the first of a three-step approval
process. This first stage generally takes about six to eight
months and results in a decision on whether to proceed as a
PPP or through normal procurement.


10. (U) In the next stage, the PPP Unit solicits private
sector interest through requests for qualification and
requests for proposals. Qualified parties submit project
proposals, which the PPP Unit compares to the government's
feasibility study. Selection of the preferred bidder is
based on the government's "value for money" criteria. The
PPP Unit negotiates a draft contract with the selected bidder
at the end of this stage, which typically runs 12 to 18
months.


11. (U) In the third and final stage, the PPP Unit approves
the contract and a management plan for the chosen bidder.
Each PPP Unit Director must sign off on the project before
the Chief Director issues Treasury approval. On average,
this final stage takes about four months. Once the contract
is signed, the PPP Unit transfers project responsibility to
the private and public sector partners. However, the PPP
Unit continues to monitor the project, focusing on the
achievement of set targets and the transfer of financial risk
to private sector partners. The PPP Unit may be called on to
settle disputes and has the power to terminate a PPP
contract, if necessary.

BEE's Leading Role in PPPs
--------------


12. (U) BEE plays a prominent role throughout the PPP
approval process. In 2004, National Treasury developed BEE
guidelines for PPPs which are outlined in its Code of Good
Practice for BEE in PPPs. The code is extensive and includes
specific BEE requirements for feasibility studies and the
selection of transaction advisors, project managers, and
contractors. For example, the feasibility study must assess
BEE costs and benefits in equity, management, employment,
subcontracting, and local socio-economic impact. During the
selection process, a transaction advisor or project bidder
could get up to a 10% advantage for meeting BEE requirements.
Project bid winners must comply with a minimum of 50% of
established BEE criteria for PPPs, including equity
ownership, management control, skills development, and
procurement.

Will the Past Predict the Future?
--------------


13. (U) According to a study by the South African Institute
of International Affairs (SAIIA),released on February 8,
2005, PPPs across Africa over the past 15 years achieved some
success in telecommunications, transportation, ports, and
eco-tourism, but did not do as well when it came to the
provision of water and electricity. South Africa's
experience follows this continent-wide pattern. One of its
PPP (moderate) success stories is the N4 toll road that runs
from Pretoria to Kruger National Park and onto Maputo,
Mozambique. Over 500 kilometers of highway were improved,
facilitating transportation along the route, but it has not
yet stimulated the massive development envisioned for the
Maputo Development Corridor.


14. (U) In some cases, PPPs have led to more expensive
services and problems for the consumer. For example, the
30-year concession of water provision on South Africa's
Dolphin Coast saw French multinational SAUR Services earning
a 21% return while its local partner, SIZA, did not profit at
all. Higher water charges caused consumers to look for
alternative, often unhealthy water sources --contributing to
a rise in the incidence of cholera.

General Buy-in and a Willingness to Improve
--------------


15. (U) The ruling ANC coalition, other political parties,
think tanks, as well as public opinion appear to buy the
SAG's notion of using PPPs to advance economic growth and
development. Only labor unions have offered up some
criticism. During a PPP roundtable discussion hosted by
SAIIA in February 2005, Congress of South African Trade
Unions (COSATU) economist Neva Makgetla complained that PPPs
were really "a form of privatization," and argued that
private sector participation should complement, not replace
government's role to provide certain services. She argued
that only government would be willing to undertake or
maintain an unprofitable service that a company could not.
Makgetla claimed that private-sector contractors often lied
about their capacity to deliver, especially to poor markets.
She added that controlling corruption was another issue when
public sector officials were charged with signing contracts
with private sector companies. Notwithstanding, Makgetla
ultimately concluded that private sector involvement was
acceptable as long as it did not compromise the government's
development objectives.


16. (U) The roundtable itself concluded that for South
African PPPs to serve SAG objectives, government needed to
have accurate, complete, and impartial feasibility studies
with which to judge private sector project and contract
proposals. In any model, getting the price right was
essential, especially for the sustainable provision of basic
services to the poor. Other areas to pay close attention to
included risk management, contract enforcement, and making
sure that there were a range of service options for consumers.

Comment
--------------


17. (SBU) The SAG has positioned PPPs to play a central role
in raising the level of economic growth and achieving more
balanced development. PPPs will lead the charge in spending
the $45 billion planned for public sector investment over the
next five years. National Treasury has taken extensive
measures to establish its PPP Unit and produce national
guidelines for all government entities to follow. Whether
one size fits all is a question that has yet to be answered.
The process has been slow to develop so far, and could
overwhelm National Treasury's nascent PPP Unit when the pace
quickens.
MILOVANOVIC