Public–private partnerships in metropolitan government: perspectives on governance, value for money and the roles of selected stakeholders

Abstract

This paper discusses the nature of public–private partnerships (PPPs) and their governance, with specific reference to the types of risks involved and how these are managed. The paper investigates whether there is any regime responsible for providing resources and enforcing contracts and service standards to make metropolitan governments efficient, effective and economical in designing, managing and exercising control over PPP ventures. In this context, the roles of selected stakeholders are discussed. The basic assumption of this paper is that metropolitan government could improve local economic growth through PPPs when the nature and governance of PPPs and the legalities underpinning them are thoroughly understood.

1. INTRODUCTION

I cannot stress enough the importance of partnerships. The task ahead is too formidable for any single institution or set of institutions to tackle. Every one of us has a role to play: private sector, public sector, civil society, non-governmental organisations, academia, multilateral and bilateral donors, and development organisations. (Mills, 2002:172)

Since the promulgation of the Municipal Systems Act 2000 (Act 32 of 2000) (Department of Provincial and Local Government [DPLG], 2000), which radically reshaped local government's structure and its management of service delivery systems, both the reformation and the transformation of developmental local government have attracted considerable international interest. They have been showcased at various international and national conferences and workshops by their political and managerial architects, who have ‘crisscrossed the globe, extolling their virtues and portability’, and have been studied in detail by a number of representatives of developing countries who have been sent to South Africa (Hanke, 1987:53). Interest has been shown in the new developmental paradigm; and in the service delivery system and local economic development processes that the transfomationists and reformers use to implement developmental programmes and improve local economies (Seidle, 1995:48). The local economic development processes and systems have sought to ensure that local economic growth and development are not the sole responsibility of the metropolitan government or public sector, and to encourage, develop and implement reform initiatives that aim to sustain and strengthen economic ties between metropolitan government and the private sector (Municipal Systems Act, 32 of 2000) (DPLG, 2000).

The concept of public–private partnerships (PPPs) dates from the end of the twentieth century. Countries such as Bulgaria, Croatia, the Czech Republic, Finland, France, Germany, Greece, Hungary, Ireland, Italy, the Netherlands, Poland, Portugal, Romania, Slovenia, Spain and the UK began to improve their local economies and combat poverty through PPPs (Cullen, 2001:2; Grimsey & Lewis, 2004:3–6). South Africa followed suit after 1994, and completed and published its PPP manual in 2004 (National Treasury, 2004a:141). There has, however, been no ‘common genesis’ in the development of PPPs in these countries as the degrees of influence of political, social, technological and economic factors vary (National Treasury, 2004a:254). In addition, some countries' social movements have given PPPs a mixed reception.

In support of government interventions, Roth cites John Maynard Keynes's The end of laissez-faire (1926): the ‘important thing for governments is not to do things which individuals are doing already and to do them a little better or a little worse: but to do those things which are not done at all’ (Roth, 1987:1). The PPP initiative encompasses a variety of metropolitan government and private-sector interactions, with metropolitan government being the ‘enabler’ or facilitator of local economic development and the private sector contracted to be the provider of goods and services, and the ‘grower’ of local economies (Payne, 1999:123).

2. THE NATURE AND CONCEPT OF PUBLIC–PRIVATE PARTNERSHIPS

A PPP is defined as:

a commercial transaction between an institution and a private party in terms of which the private party –

• (a) either performs an institutional function on behalf of the institution for the duration of the PPP agreement; and/or

• (b) acquires the use of state property for its own commercial purposes for the duration of the PPP agreement;

• (c) assumes substantial financial, technical and operational risk in terms of the PPP agreement; and

• (d) receives a benefit for performing the institutional function or by utilising state property, either by way of:

  • (i) consideration to be paid by the institution which derives from a revenue fund or, where the institution is a government business enterprise, from the revenues of such institution;

  • (ii) charges or fees to be collected by the private party from users or customers of a service provided to them; or

  • (iii) a combination of such consideration and such charges or fees. (National Treasury, 2004b:8–9. For the purposes of this paper, read ‘institution’ here as meaning ‘metropolitan government’.)

Grimsey and Lewis define a PPP as a:

risk-sharing relationship based on a shared aspiration between the public sector or metropolitan government and one or more partners from the private sector to deliver a publicly agreed outcome or service. (2004:xiv)

Ireland's Department of Public–Private Partnership defines it as a:

partnership between the public and private sector for the purpose of delivering a project or service traditionally provided by the public sector. (Irish Government Public–Private Partnership, 2001:1)

And the Irish State Authorities (Public Private Partnerships Arrangements) Act 1 of 2002 defines it as a:

contractual arrangement between the public and private sectors (consistent with a broad range of possible partnership structures e.g. design-build, or design-build-operate-finance) with clear agreement on shared objectives for the delivery of public infrastructure and/or public services by the private sector that would otherwise have been provided through traditional public sector procurement. (Irish Statute Book, 2002:14)

The above definitions show that a PPP involves a legal agreement, signed by and binding on the parties concerned, that must provide for the duration of the partnership the value of the projects and the beneficiaries of the projects. The involvement of the private sector in the provision of both services and economic development is not new (Parker & Saal, 2003:14). Most governments around the world have been using the private sector to build and maintain roads, schools, harbours, railways, hospitals, prisons and airports, and to provide waste management services. South Africa can learn the PPP best practices from these countries to make their developmental programmes efficient (Finley, 1989:18; Cullen 2001:2; Grimsey & Lewis, 2004:3–6).

To understand the nature of PPPs and the reason for the partnership, it is important to know what is meant by public service and private provision. Roth (1987:1) says public services are services accessible to the public and provided by one or two sphere(s) of government (see Schedules 4 and 5 of the Constitution of the Republic of South Africa, 1996). Private provision means the provision of services by the private sector from the organ(s) of state by means of a contract such as a management contract, vouchers or cooperatives (Roth, 1987:1–2). The provision of public services by the private sector is considered (among many benefits) to provide metropolitan government with economies of scale, which exist when a given increase in all inputs in a production process yields a greater proportionate increase. There will be no private provision of services if the agreement is not reached or a contract is not signed between the government and the private sector. The agreement or contract denotes the willingness of the parties and their commitment to a sustainable partnership that provides the right economic incentives to metropolitan government and the people (Grimsey & Lewis, 2004:6). Before a metropolitan government issues a call for a proposal, it must tender for a PPPs project and conduct a public interest test that is an ‘assessment of the impact of the project on effectiveness, accountability and transparency, affected individuals and communities, equity, consumer rights, public access, security and privacy’ (Grimsey & Lewis, 2004:xiv).

The PPP models developed by the governments of Australia, Canada and Britain contain the following elements:

• The metropolitan government defines the services by reference to specific outputs and outcomes, and the key performance indicators or criteria, which the private provider has to adhere to for the duration of the project (10–30 years).

• The metropolitan government must receive the asset or the service before making payment. The funds are distributed after the construction phase of the asset or after the function has been performed according to the agreed standards and performance stipulations.

• The private sector designs, operates and owns the asset for the agreed period in order to ensure that all risks remain its responsibility. Risk refers to a ‘situation where a randomness facing an economic entity can be expressed in terms of specific numerical probability, which could be objective or subjective’ (Grimsey & Lewis, 2004:6).

• The metropolitan government devolves control to the private sector to enable the private sector to manage resources effectively and efficiently for the success of the partnership (Grimsey & Lewis, 2004:6–7).

This paper argues that some of the elements of the above models have been adopted and developed for the PPP models implemented in both the provincial and national governments (see National Treasury, 2004b). In addition, the South African government can learn from these countries and tailor its models to suit its unique socio-economic and political environments, which should serve as a benchmark and barometer for the specific PPP model to be developed by each of the six metropolitan municipalities, as local circumstances vary from municipality to municipality.

3. FORMS OF PUBLIC–PRIVATE PARTNERSHIPS

A PPP is considered one kind of privatisation (Kay et al., 1986:7; Ott, 2002:92), and it can take various forms, the most usual in the six South African metropolitan governments being contracting out, leasing, build-operate-transfer, and build-own-operate (see Table 1).

Table 1: Forms of public–private partnership

Form of PPP	Description
1. Build–operate–transfer (BOT)	An agreement where the private sector takes primary responsibility for financing, designing, building and operating the PPP project or concessionaire for the period of the concession (15–25 years). After the private sector has earned its capital and profit, it then transfers the control and ownership to the metropolitan government.
2. Build–own–operate (BOO)	An agreement where the private sector finances, designs, builds, operates, controls and takes ownership of the PPP project in perpetuity.
3. Leasing	The financial risk is transferred to the private sector. The municipality designs and builds the facility and leases it out or contracts it to the private sector, which takes primary responsibility for operating and maintaining the facility. A leasing or affermage contract is the most usual form of PPP in the six metropolitan governments.
4. Joint ventures (JV)	Both the private and public sectors, with specific reference to the metropolitan government, form a partnership to jointly finance, own and operate a facility or project for a specific duration. The Japanese government considers JVs a ‘third sector’ approach to local economic development, with the public sector considered to be the ‘first sector’ and the private sector the ‘second sector’, respectively.
5. Management contract or operations	The private sector is partially involved in providing infrastructure-related services or partially manages the operations of the facility for a period specified in the contract. Management contract or operations can take the following forms of PPPs: design, build, finance and operate (DBFO); operate, maintain and manage (OMM); or operate and maintain (OM). The length of the management contract ranges from 5 to 15 years.
6. Cooperative arrangements or public–private cooperation	These are informal partnerships between the public sector, in this case the metropolitan government, and the private sector. The metropolitan government provides fiscal incentives and guarantees to attract the private sector to invest in physical or infrastructural development in their respective areas.
Source: Grimsey and Lewis (2004:10–12).

4. VALUE FOR MONEY IN PUBLIC–PRIVATE PARTNERSHIPS

Value for money (VFM) is one of the requirements for a PPP. The National Treasury cannot approve the feasibility studies and fund the PPP project if it is not satisfied that this requirement has been met by the project sponsor. For the purpose of this paper, VFM means the ‘optimum combination of whole life cost and quality (or fitness for purpose) to meet the user's requirement’ (Grimsey & Lewis, 2004:135). There are six determinants of VFM:

• risk transfer;

• long-term nature of contracts;

• competition;

• performance measurement and the use of an output specification;

• performance measurement and incentives; and

• private party's management skills (Grimsey & Lewis, 2004:135).

The most important requirements for achieving VFM are that PPP projects be awarded in a competitive environment where various bidders bid for the construction of the project, and that economic appraisal techniques be applied so as to allocate risk fairly and reasonably between the private and public sectors. The feasibility study, which is conducted before implementing the PPP, serves as a means to achieve VFM and socio-political stability in the area within the metropolitan government's boundary where the project will be built. The first step in the feasibility study process is calculating ‘the benchmark cost of providing the specified service under traditional procurement which is called the public sector comparator’ (Grimsey & Lewis, 2004:137). Grimsey and Lewis define the public-sector comparator as a ‘hypothetical constructed benchmark to assess the value-for-money of conventionally financed procurement in comparison with a privately financed scheme for delivering a publicly funded service’ (2004:xiv). The second step is comparing this benchmark cost with the cost of providing the specified service under a PPP scheme (National Treasury, 2004b:4). The question remains: How would a metropolitan government know that VFM is achieved? The answer is that the ‘total present value cost of the private party supply will be less than the net present value of the base cost of the service, adjusted for: the cost risk to be retained by the metropolitan municipality; cost adjusted for transferable risk; and competitive neutrality effects’ (Grimsey & Lewis, 2004:137). The decision-makers and policy-makers should consider the factors that illustrate the VFM comparison and a PPP bid so as to be aware of costs and risks involved in each PPP transaction.

1. Base or raw cost is the cost of providing the services required by the metropolitan government.

2. Retained risk is the risk, which by its nature rests with the metropolitan government, including changes in the enabling bylaws, or municipal regulations and relevant provincial ordinances.

3. Risk adjustments are made for transferable risks that reflect the probability that services may not be delivered at the cost shown in the base because of cost overruns or technical problems.

4. Competitive neutrality ensures that the analysis of private sector bids does not lead to preferences by reason only of redistributive mechanisms or other policy arrangements affecting either the private or public sector. (Grimsey & Lewis, 2004:137)

It is important to examine the sector in which the metropolitan government would be able to improve and sustain local economic growth through PPP. The private sector would not only be helping the metropolitan government to grow local economies, but also helping to provide services to the whole of the metropolitan citizenry. Attention must be paid to physical capital or infrastructure, which means that the private sector is improving local economic growth and providing services to the people through infrastructure facilities. Hirshleifer (1970:100) defines infrastructure as ‘the sum of material, institutional and personal capacities available to economic agents’. The following is a brief description of these three categories:

• Material infrastructure – that part of the physical capital stock of an economy used as fundamental input into other directly productive activities. In the subfields of Public Administration (Economics of Public Administration) and Economics (Development Economics), it is referred to as social overhead capital.

• Personal infrastructure – the entrepreneurial, mental and commercial skills (e.g. accounting, banking, economics, commercial law, procurement and management) that contribute to economic production.

• Institutional infrastructure – internal and external norms that shape the economic decision-making process and behaviour as governed by the country's constitutional framework (the choice of rules governing economic and social behaviour) and unwritten conventions and other forms of implicit economic behaviour (the choice within rules) (Grimsey & Lewis, 2004:22–3).

What must be considered is not infrastructure financing but infrastructure investment. Grimsey and Lewis say the former ‘involves development, operation and ownership either by the private sector alone or in a joint venture with the metropolitan government. In addition, it is a tangible capital stock owned by the [metropolitan] government’ (2004:19). Physical or infrastructure capital such as tollgates, highways, airports, hospitals, schools, clinics, (municipal) power generation and distribution, sewerage, water, roads serve as examples. The infrastructure investment happens when the metropolitan government privatises its infrastructure facilities. The infrastructure investment incorporates three inter-related public–private arrangements:

1. The private party constructs a new infrastructure asset or refurbishes an existing one. The construction is done by designing, building and financing at a fixed price within a specified time frame.

2. In terms of the PPP contract, the development of the infrastructure facility should take between 25 and 30 years.

3. Within this period, and with respect to the relevant contract, the private party must collect revenues generated from the proceeds of designing, operating and maintaining the facility (i.e. returns on investment). It is important to bear in mind that the private party is a bearer of risk, so the price of operating and maintaining the facility should be informed by such risks (see Table 2).

Table 2: Classification of infrastructure capital by type

Classification	Hard	Soft
Economic infrastructure	Roads, motorways, bridges, airports, electricity or power generation and distribution, ports and railways.	Vocational training, financial facilities for business (payments, credit, equity, derivatives and venture capital), R&D facilitation, technology transfer, export assistance and productive cooperation among individuals, government and business entities.
Social infrastructure	Clinics, hospitals, schools, water supply, housing, child care, prisons, aged care homes.	Social security, community services, environmental agencies.
Source: Grimsey and Lewis (2004:21).

Investment in physical or infrastructure capital is said to be investment in ‘basic services to the industry and households’ as a means to an end, or inputs to economic activity and growth (Grimsey & Lewis, 2004:20). Investment in infrastructure capital is not done in isolation from other developmental capitals; that is, human, social and economic capital (Binza, 2004:2). The classification of infrastructure by type provides evidence in an integrated manner and is related to these capitals.

The economic infrastructure enables metropolitan municipalities to provide key intermediate services to business and industry so as to enhance innovation, economic performance and productivity. The hard economic infrastructure is considered the core of physical capital, as development would not take place without it (Officer, 2003:7). Like economic infrastructure services, social infrastructure services are accessible to all citizens irrespective of race, gender and creed, but the degree of accessibility and consumption is determined by the depth of a consumer's pocket; for example, those consumers who can afford them would use private hospitals and schools, while those who cannot would use public ones. Grimsey and Lewis (2004:22) say hard or soft economic and hard or soft social infrastructures are interdependent.

5. THE GOVERNANCE OF PUBLIC–PRIVATE PARTNERSHIPS

In a bid to realise governance in PPP, metropolitan government must have knowledge and skills in contract management so as to avoid taking unwarranted risks. Contract management is defined by Grimsey and Lewis as the ‘processes undertaken to maintain the integrity of the contract and to ensure that the roles and responsibilities contractually demarcated are fully understood and are carried out to the contracted standard’ (2004:199). Good governance can be realised when municipalities are able to manage risks or allocate risks to the party that is able to manage them best. Other equally important factors that the municipalities should consider in the local governance of PPPs are communication, accountability, participation, consultation, triple bottom-line reporting, and openness and transparency (Grimsey & Lewis, 2004:84). Although management of risks is the governance factor considered here, this is not to argue that other factors are not important.

5.1 Management of risks

Improving local economic development through PPPs is not a risk-free initiative (Charoenpornpattana & Minato, 1999:436). However, when there is high certainty about the success of the project, the local economy will grow. Low certainty, on the other hand, means a high risk for both the project and economy. The difference between risk and uncertainty is that with the former the ‘probabilities of the various future outcomes are known’, whereas with the latter the ‘probabilities of the various future outcomes are merely wild guesses because the instance in question is so entirely unique that there are no others or not a sufficient number to make it possible to tabulate it to form a basis for any inference of value about any real probability in the case we are interested in’ (Grimsey & Lewis, 2004:148). However, the private sector is faced with a different uncertainty called the ‘nonactuarial nature of uncertainty’ (Grimsey & Lewis, 2004:150). Blatt explains this as follows:

The threats of disaster and bankruptcy to a private firm are very important factors. The future is too uncertain to predict at all, but a businessman wants to have a reasonable chance of avoiding disaster, not merely for the next project, but for his entire time before retirement. He must, therefore, choose between projects available right now in a sufficiently conservative fashion so that he retains a fair chance of not sitting in the poorhouse or debtors' prison at retirement age … The precise meaning of disaster can vary considerably: to a businessman, it is a loss so great that it drives him bankrupt, to a manager, employed by a firm, a much smaller loss than that can result in him being dismissed, without much of a chance of finding alternative employment as a manager. (1983:73)

There are 11 interrelated PPP-induced risks faced by the six metropolitan governments, including all South African local authorities (see Table 3).

Table 3: PPP-induced risks and causes

Type of risk	Causes
1. Economic	Devaluation risk, foreign exchange risk, inconvertibility of local currency, inflation risk, interest rate risk, and small capital market.
2. Legal	Inefficient legal process or disregard of legal process by the processing party, legal barrier, and changes in [relevant] laws, regulations and policies.
3. Operational	Incapability of investors, infrastructural risk due to low quality of or limited physical infrastructure, demand and supply risk, improper regulation, liability risk, price escalation, management risk as a result of high operating costs and maintenance costs, and technical risk that is due to engineering and design failures.
4. Political	Internal resistance of employees to change and transformation, labour or union resistance to privatisation or PPP initiatives and programmes, a move by government towards nationalisation in the middle of the PPP project, political influence by the ‘lefts or rights’ to liberalisation, uncertainty of government policy, instability of the political environment, which results in internal instability, and unsupportive government policies.
5. Transactional	A delay in privatisation, improper privatisation, ineffective or incompetent administration, limited number of (interested) investors, and unfavourable investment conditions.
6. Force majeure	War and other natural calamities and acts of God.
7. Construction	Faulty construction techniques and cost escalating or delays in construction.
8. Revenue	Traffic shortfall or failure to extract resources, the volatility of prices and demand for products and services sold leading to revenue deficiency.
9. Financial	Inadequate hedging of revenue streams and financing costs.
10. Environmental	Adverse environmental impacts and hazards.
11. Project default	The PPP project fails because of a combination of any of the above.
Source: Grimsey and Lewis (2004:172).

The PPP-induced risks show that in risk management or allocation there is nothing free. For example, a metropolitan municipality could design and issue a tender, and thereafter the private party would respond by bidding for the project. The private party would set premiums in consideration of the risks involved in the project and their potential impact on profit in order to insulate itself from the financial risk of the project (Grimsey & Lewis, 2004:179). Charoenpornpattana and Minato (1999:436) have developed a risk matrix framework to, inter alia:

• set out a possible metropolitan government position in risk allocation and management by means of optimal risk allocation to minimise risks from materialising, and the risk consequences thereof; and

• identify the range of possible risks that may emerge in various project phases. (See Table 4).

The party that provides the capital for the development, implementation and maintenance of the project must be committed to ensuring efficiency and effectiveness so that the project will be successful. The National Treasury Regulation 16 of 2004 therefore requires all PPP project proposals to be approved by the National Treasury, and municipalities must conduct feasibility studies (National Treasury, 2004b:6). The metropolitan governments must undertake a risk analysis from two perspectives: from that of the metropolitan government procurer to ensure that VFM is achieved, and from that of the private sector as the project sponsor who must ensure that there is low equity in the project and that the project will generate revenues to cover the capital and operating costs.

Table 4: Risk matrix

Type of risk	Source	Risk management by
1. Site risk	Ground conditions, supporting structures	Private party (the construction constructor)
• Site conditions	Site redemption, tenure, pollution/discharge, obtaining permits, community liaison, and pre-existing liability	Private party (the project company)
• Site preparation	Native title and cultural heritage	Metropolitan government
• Land use
2. Technical risk	Fault in tender specification	Metropolitan government
	Contractor design fault	Private party (the construction constructor)
3. Construction risk	Inefficient work practices and wastage of materials, changes in law, delays in project approvals	Private party (the construction constructor)
• Cost over-run	Lack of coordination of contractors, failure to obtain standard planning approvals	Private party (the project company/investors)
• Delay in completion	Insured force majeure events	Private party (the construction constructor)
• Failure to meet performance criteria	Quality shortfall/defects in construction/commissioning test failure	Private party (the insurance company)
		Private party (the construction constructor)
4. Operating risk	Project company request for change in practice	Private party (the project company/investors)
• Operating cost over-run	Industrial relations, repairs, occupational health and safety, maintenance, etc.	Private party (operator)
• Delays/interruption in operation	Government change to output specifications	Metropolitan government
• Shortfall in service quality	Operator fault	Private party (operator)
	Government delays in granting or renewing approvals, providing contracted inputs	Metropolitan government
	Operator fault	Private party (operator)
5. Revenue risks	Contractual violation by (metropolitan) government owned support network	Metropolitan government
• Increase in input prices	Contractual violation by private supplier	Private party (supplier)
• Change in taxes and tariffs	Fall in revenue	Private party (the project company/investors)
• Demand for output	Decreased demand	Private party (the project company/investors)
6. Financial risks	Fluctuations with insufficient hedging	(Metropolitan) government/private party
• Interest rates	Payments eroded by inflation	(Metropolitan) government/private party
• Inflation	Floods, earthquake, riots and strikes	Shared
• Force majeure risk	Construction period	Private party (the construction constructor)
• Regulatory/political risk	Operating period	Private party (the project company with metropolitan government compensation as per contract
• Changes in law	Breach /cancellation of licence	Metropolitan government
• Political interference	Expropriation	Metropolitan government/private party (investor/insurance company)
• Project default risks	Failure to renew approvals, discriminatory taxes, import restrictions	Metropolitan government
	Combination of risks	Equity investors followed by banks, bondholders and institutional lenders
	Sponsor suitability risk	Metropolitan government
	Technical obsolescence	Private party (the project company)
	Termination	Private party (the project company/investors)
	Residual transfer value	Metropolitan government, with compensation for maintenance obligations
Sources: Adapted from Grimsey and Lewis (2004:180–2), Charoenpornpattana and Minato (1999:436).

Grimsey and Lewis agree that risk management is important for a local economy to grow and to combat poverty and unemployment. The project should begin to generate profit or surpluses in its second decade:

Once built, projects have little use beyond the original intended purpose. Potential returns can be good but they are often truncated. The journey to the period of revenue generation takes ten years on average. Substantial front-end expenditures prior to committing large capital costs have to be carried. During the ramp-up period, market estimates are tested and the true worth of the project appears; sponsors may find that it is much lower than expected. (Grimsey & Lewis, 2004:175)

Analysing the risks requires project managers to do a ‘sensitivity analysis by analysing the effects on an appraisal of varying the projected values of important variables’ (Grimsey & Lewis, 2004:xv). Next is risk allocation, where the responsibility for dealing with the consequences of each risk is allocated to one of the parties or partners to the contract. The contract may compel the parties to agree to deal with the risk through sharing (Grimsey & Lewis, 2004:xv). It is important to note that ‘specified service obligations, payment or pricing structure, and contractual provisions adjusting the risk allocation implicit in the basic structure’ serve as determining factors for success in risk allocation (Grimsey & Lewis, 2004:177).

Thereafter, the metropolitan governments have to do a risk evaluation so as to have ‘intimate knowledge of the project’ (Grimsey & Lewis, 2004:171). Risk analysis and evaluation are necessary (see Table 5). Common to PPP projects is a high probability of failure, hence the risk must be detected at an early stage of the project (the listening phase) (Cypher & Dietz, 2004:34).

Table 5: Risk analysis model

Institution	Risk perspective	Key variables	Major risk	Risk analysis
Metropolitan government	1. Value for money	Net present value of contract	Bid qualifications	Expected cost and sensitivity risk
	2. Contingent risks up to financial close		Interest rates
Private party	Impact on return	Equity IRR	Demand factors	Monte Carlo simulation
			Mid-life CAPEX
			OPEX
			Performance
Investor	Default/delays on interest and principal	Debts service covers ratios	Demand factors	Downside sensitivity
			Mid-life CAPEX
			OPEX
			Performance construction
Source: Grimsey and Lewis (2004:188).

There are various types of risk analysis that institutions can use to minimise risks; for example, sensitivity risk analysis and Monte Carlo simulation. However, the success of these analyses depends on how knowledgeable and skilful the institution is. In most cases, owing to lack of capacity, the metropolitan municipalities outsource risk analysis to the private sector. Besides this commercial analysis, economic, geo-political and engineering reviews must be conducted. Current developmental patterns in each metropolitan area, the forecast economic growth with specific reference to small, medium and micro enterprises (SMMEs), and the growth of physical capital (investment in infrastructural development) must be assessed. The capital and operational costs of possible PPP arrangements must be broadly identified (Irish Statute Book, 2002:14).

The PPP-induced risks are the subject of debates in all spheres of government, with the focus on the negative aspect of the inclusion and the role of the private sector in the mainstream of local economic development and the delivery of public goods and services. There are risks related to negative perceptions, such as the possibility of PPPs contributing to price increases in public or municipal services, a decline in the quality of municipal goods and services, an increase in unemployment and Gini-coefficient rates, a private-sector monopoly and corruption (United Nations, 2002:184). According to Ireland's Department of Public–Private Partnership (Irish Statute Book, 2002:10), at the heart of the PPP approach is the concept that better VFM can be achieved by using private-sector enterprise since this allows enhanced scope for innovation and allocates the risk to the party best able to manage it.

5.2 The Process of Public–Private Partnership

This section explains the process by which a PPP is developed so as to improve local economic growth. Each PPP project must achieve its set objectives and thus meet the expectations of all stakeholders, in particular the communities, since the project is financed from the taxpayers' and consumers' pockets (Natrass, 1989:18). The metropolitan government plays a variety of roles. The National Treasury, as required in terms of the National Treasury Regulation 16 of 2004, must know all of the steps the metropolitan government takes and the roles it assumes. Prior to the construction phase of the PPP project, the metropolitan government must make sure that the procurement principles and procedures are adhered to, and that the steps for marketing the project successfully are followed. According to Grimsey and Lewis (2004: 82), the procedures for public procurement are as follows:

1. Establish alternatives;

2. appraise options;

3. draft terms of reference, and recruit consultants to assist metropolitan government in conducting a feasibility study;

4. conduct a feasibility study by involving metropolitan experts and consultants (included in the feasibility study are the preliminary design and cost estimates, market analysis, economic analysis, and financial analysis);

5. carry out a safety study to avoid societal risks (consultant);

6. arrange an environmental impact study (consultant);

7. make a sound project recommendation with positive spin-offs;

8. submit project recommendations to parliament for their decision and support;

9. establish a project team to implement the project;

10. apply for the required permits from the National Treasury, National Department of Provincial and Local Government, Provincial Department of Housing and Local Government, and metropolitan council;

11. raise funds by directing the proposal to the Municipal Infrastructure Investment Unit (MIIU);

12. prepare a detailed project design or plan (consultant);

13. appoint contractors;

14. begin construction and supervise it;

15. commission works; and

16. begin operations, after which the project generates income and employment opportunities are created.

The requirements for procurement differ from country to country. In South Africa, metropolitan governments are required to ensure that the contractor they appoint for the job is BEE compliant.

5.2.1 Steps determined in getting the project to market successfully

What makes a PPP project succeed? It is the focus on service and the certainty of the process and the steps that are followed in carrying out the project. The following steps for getting the project to market successfully must be clearly understood before the project begins, so that all the required conditions are fulfilled:

1. Develop a policy;

2. appraise options;

3. publish policy for the first time;

4. prepare terms of reference;

5. develop performance specifications;

6. commission consultants and municipal PPP experts to conduct a feasibility study;

7. develop a public or stakeholder participation plan (consultation policy);

8. evaluate and analyse the feasibility study;

9. issue or implement a consultation policy, and consult with all regulators, stakeholders and public;

10. establish a regulatory regime for the PPP project, and analyse the cost and risk management plan (involve experts or consultants);

11. after receiving feedback from the first round of consultation then issue the consultation policy for the second time to allow for the second round of comments;

12. formulate an internal decision document to identify performance specifications, financing conditions for operation, risk management, mode of operation, tender procedures, regulatory regime, and cost estimates and financing conditions for associated costs;

13. formulate legislation and submit to Parliament for approval;

14. undertake pre-qualification of bidders;

15. prepare shortlist and ask for bids;

16. evaluate bids;

17. select a concession holder, negotiate and sign preliminary agreement;

18. circulate an Information document subject to being reviewed by the metropolitan council, Auditor-General, and National Treasury;

19. appoint a private party to initiate final designs to obtain final permits from regulatory authorities and bids from contractors;

20. negotiate an agreement to be approved by relevant authorities and concession holders;

21. draft a detailed project design;

22. obtain a final clearance from environmental and safety authorities;

23. implement the agreement; and

24. audit and manage the contract (Grimsey & Lewis, 2004:84).

The State Authorities (Public–Private Partnership Arrangements) Act 2002 (Act 1 of 2002), Ireland, provides that the above steps are determined to ensure PPP projects are commercially bankable and attract substantial private finance and sufficient interest from the private sector to ensure good competition at bid stage, and ultimately result in increased VFM for the metropolitan government. The metropolitan municipalities must have knowledge and skills in contract management to be able to manage and monitor the projects and partnership with the private sector in a bona fide manner (Cullen, 2001:2–3).

5.3 Framework for assessing a public–private partnership

The components (definitions and dimensions) of the framework for assessing PPPs were drawn up in the early 1990s from the experiences of four developed countries, Australia, Canada, the UK and Ireland, and the US. It is suggested that the components of the framework be included in all PPP documentation, but to tailor the framework to suit the socio-political and economic environments of a country or metropolitan municipality in which the PPP project will be constructed (see Table 6).

Table 6: Framework for assessing PPP

Definition	Dimension	Characteristics
Rights: the various rights given by metropolitan government to a private entity in return for carrying out a specified set of obligations	Possession	Real assets, intellectual assets, equity, ownership
	Revenues	Whole or part allocation of rights
		Basis for generation and allocation to parties
Obligation: the promises that the private entity and the government agree to be bound by the agreement	Development	Planning, design, construction and improvements
	Operating Environment Financing	Operation and maintenance
		Biophysical (air, marine & terrestrial)
		Social (labour issues, provincial benefits and business impacts)
		Extent of financing, source of security and government guarantee
Liabilities: the real and potential liabilities and risks assumed by either party under the agreement	Legal liability	Tort liability, business interruption and physical loss
	Risk	Construction, business, financial and force majeure
	Taxes	Exemptions and liability assumption
Source: Grimsey and Lewis (2004:88).

6. THE ROLES OF PUBLIC–PRIVATE PARTNERSHIP FUNCTIONARIES

A PPP brings various functionaries together. In South Africa it is used to improve service delivery, to boost local economic growth and development, and to speed up the programmes for improving shared governance by including the private sector in the process of municipal governance and job creation. For the purpose of this study, PPP functionaries are divided into two categories: the ‘public sector procurer ([which] includes all the three spheres of government and parastatals); and the private sector which includes sponsors or investors; financiers (financial institutions such as banks, World Bank, etc.); subcontractors; PPP advisers; insurers, rating agencies and underwriters’ (Cullen, 2001:2). Local economic development through PPPs requires strong and visionary leadership that is committed to high growth in the economy (Weis, 2002:16).

6.1 The public-sector procurer

The role played by the public-sector procurer or the government in PPP is different from the role it plays in the privatisation process. In privatisation, the government plays a more active role in the beginning stages (designing the privatisation policy, issuing tenders and selling the assets). In PPP, the government is actively involved in all the steps of getting the PPP project to the market; and when the project is in the market, the metropolitan government retains a permanent interest, because when the period of agreement or contract ends it will automatically take ownership of the facility.

6.1.1 National Department of Provincial and Local Government

The DPLG is responsible for issuing PPP mandates to the metropolitan government, and providing the resources needed for the success of the project. It develops regulations and departmental policies and circulars to guide the whole of the local government sphere in developing PPP systems and processes. Its primary responsibilities are to:

• Develop and monitor the implementation of national policy and legislation seeking to transform and strengthen instructions of governance to fulfil their developmental role;

• develop, promote and monitor mechanisms, systems and structures to enable integrated service delivery within government; and

• promote sustainable development by providing support to provincial and local governments (Hlahla, 1999:558).

The DPLG has to assure the National Treasury that the PPP project meets the requirements of the National Treasury Regulation 16 of 2004, the Municipal Finance Management Act 2003 (Act 56 of 2003) (DPLG, 2003), and the Public Finance Management Act 1999 (Act 29 of 1999), as amended (National Treasury, 1999).

6.1.2 Municipal Infrastructure Investment Unit

The MIIU is a non-profit-making organisation established in April 1998 by the DPLG to provide grant funding and technical assistance to developmental municipalities that investigate and deliver services through partnerships with the private sector. The MIIU is a response by government to meet the challenges of building and expanding municipal infrastructure investment – a bottom-up approach to sustainable local economic development. The MIIU has funded more than 18 PPP projects with a total contract value of R5.9 billion since 1 March 1998 and with lifespans ranging from 1 year to 20 years.

The objectives of the MIIU are, inter alia, providing advice and guidance on PPP project conceptualisation, designing and negotiating contracts, and setting up appropriate means and buy-in strategies to win the support of relevant ministries and labour unions to implement PPP projects. The MIIU seeks to enhance and optimise private investments to sustain the core municipal services such as water, electricity, sewerage reticulation and health, and other core services where the municipality shares responsibility with the national and provincial spheres of government. It seeks also to establish a municipal market for investments in infrastructure that must involve local authorities, service providers, private advisors and investors, and civil society or clients (Hlahla, 1999:567).

6.1.3 Local government

The need to face socio-economic challenges and to capitalise on opportunities and the ‘retreat’ of the national sphere of government have authorised many municipalities to assume responsibility for building and sustaining their local economies through PPPs for the benefit of the citizenry. Success in meeting the basic needs of the citizenry can be achieved if local authorities embrace the ideal of good governance that is a sine qua non for local economic development and stability. Table 7 summarises the roles of local government in PPPs.

Table 7: Roles of the local government

Role	Description
Concession granter	Authorises contracts
Network planner	Evaluates infrastructure needs
Funder	Provides support services and funding for the project
Customer	Defines and sets performance outcomes and standards
Project manager	Carries out detailed procurement planning/process
Inspector	Ensures that facilities are constructed, used and maintained in a satisfactory manner for the benefit of all
PPP overseer	Must require compliance with set project standards and specifications
Contract manager	Monitors business and financial viability
Protector of the environment	Assesses environmental impacts
Representative of the public	Must guarantee community access to all PPP projects and thus achieve the objective of the (local) government and municipality's social policy
Source: Grimsey and Lewis (2004:128).

6.2 The private sector

The private sector plays various roles in PPPs: advisor, insurer, project manager, operator and, most importantly, investor. The sector is seen as a functionary that generates substantial economic activity because of the density of its resources, ranging from skills and knowledge to financial resources. It also has the potential to ‘improve and sustain economic productivity and foster technological innovation that is needed to attract [foreign] investment, promote trade and compete effectively in global markets’ (Weis, 2002:3). Metropolitan government would not be able to ‘go solo’ in local economic development (Binza, 2004:6). Therefore, advice from the private sector and skills transfer is the solution for shifting metropolitan government from the ‘tail of growth and development to its head where prosperity for all is no longer a political slogan’ (Grimsey & Lewis, 2004:148).

7. CONCLUSION

The wisdom of conventional unionists, experts and technocrats, with their superficial blueprints against PPPs, has been challenged and exposed as being out of touch with the developmental needs and experiences of South Africa's fledging liberal democracy. This paper has mentioned almost all of the risks involved in PPPs, with the aim of helping the PPPs' leadership and policy-makers to improve local economic growth with minimal disruptions. It has also dealt with the nature and the governance of PPPs, to help realise the objectives of value for money, accountability and transparency as required by the National Treasury Regulation 16 (National Treasury, 2004b) and the Municipal Finance Management Act (Act 56 of 2003) (DPLG, 2003). The paper has shown that the functionaries must act with as much probity as possible so as to ensure that the sustainability of PPPs does not depend only on legality or contract, but also on the ethics and integrity of leadership as required by the King Report II (Institute of Directors, 2002).