US embassy cable - 05PRETORIA1998

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