A Snail’s Pace

Concerns are growing that a potentially prosperous PPP market is beginning to dry up in South Africa, as deals continue to drag and the pipeline looks a little bare. Is the country suffering a World Cup hangover, asks James Kenny
 
 
A recent report by the PPP Center in the Philippines found that South Africa, along with the UK, has the longest turnaround time when it comes to PPP projects – an energy-sapping 35 months from publication of the invitation to prequalify through to the start of the construction.


In spite of this, when it comes to its neighbours, South Africa has had one of the most successful programmes at implementing PPPs on the African continent, completing an impressive 50 national and 300 municipal projects. 


PPPs first emerged in the country in 1997 and in 2000 the National Treasury formalised PPP regulations and created an active PPP unit to provide technical assistance. With the run-up to the World Cup in 2010, the country embarked on a blitz of PPP projects covering transport, stadiums and hospitals. 


However, now with the dust settled and the pre-tournament building frenzy focusing on Brazil, are there lessons to be learned from the South African experience, and can the country get to grips with its interminably slow procurement process?


World Cup ambition
South Africa had originally tabled a bid to host the 2006 World Cup but was turned down due to what organisers deemed the country’s inadequate infrastructure. So in its ultimately successful bid to host the 2010 event, the government outlined and then set about delivering an ambitious programme of infrastructure investment. 


Between 2006 and 2010, that investment totalled a remarkable $78bn, with the vast majority being directed into transportation infrastructure and transport PPPs. While the UK spent much of the past decade concentrating on social infrastructure such as schools and hospitals, South Africa placed the emphasis firmly on upgrading airports, renovating stadiums, and expanding road and rail networks. 


The most iconic of these, and certainly the most significant in terms of its long-term impact on the lives of ordinary South African citizens, was the Gautrain PPP rail project.


The project embodied the ambition and preparation needed for such a worldwide event and comprised building a modern state-of-the-art rail connection, linking Sandton, Johannesburg, Pretoria and the Johannesburg International Airport. The network consists of approximately 80km of railway line and was completed just in time for the World Cup in 2010.


But despite successes like these, has this translated into a steady stream of diverse PPP projects for the future?


De Buys Scott, senior partner and head of the KPMG Global Infrastructure advisory in Africa, suggests that the World Cup has had a lasting impact on PPPs and infrastructure, but there are concerns that the initial spur of work has begun to fade away.


“It is fair to say the World Cup has been a trigger for more infrastructure and PPPs being created and there was some lasting momentum. Airports, road and stadia were all developed and currently there is not a single sector of industry that is not in some sort of development,” he explains. “However the overall process times for PPPs remain slow and it is only certain sectors like hospitals, power generation and basic transport where significant development is happening.” 


Claire Barclay, South African director at law firm DLA Cliffe Dekker Hofmeyr (CDH), agrees. “I’m not sure if you can directly link a boom or bust in PPPs to the effects of the World Cup, but what is plain is that the current project pipeline is not strong. People are becoming worried and complaining about projects taking too long.”


PPP stadium projects and their long-term economic benefit is an issue raised by Scott, who says it is something Brazil should be keenly aware of as it has a number of large stadium PPP projects underway.


“The stadiums overall have been a bust. Places like Johannesburg attracts a lot of soccer games and concerts and such, but the further away the economies are from stadiums that were built the more they are struggling to cope with the burden. So Brazil will have to be cautious. With these events you’re left with an investment worth billions that is just not economically viable. So it will be interesting to see how it plays out in Brazil.”


One recent fallout from the World Cup has been the revelations and outrage that some of South Africa’s largest construction companies were corrupt when it came to contracts such as the Moses Mabhida Stadium in Durban. 


Healthy returns
In spite of this current pessimism, there remain some sectors that are on the move. Health and power PPPs are in development and seen as the “leading lights” of projects going forward.


The PPP Health Flagship Programme was prioritised by the president in 2011. The programme includes the development or redevelopment of seven central teaching hospitals and in some cases, redevelopment of the school of medicine attached to them – all through PPP (see box).


CDH has been appointed to three of the six hospitals currently in the market, while the appointment of transaction advisors on the remaining hospital is pending. 


“These are exciting, huge projects but their scale is also what’s holding up the pipeline,” explains Barclay. “The political will is there but there are a lot of stakeholders both nationally and provincially, which is another reason for the slowdown.”


Power is the other sector where enthusiasm is high and projects appear to be moving through the pipeline. The Department of Energy has launched an ambitious power programme that encompasses solar photovoltaic, biomass, landfill gas and small hydro power. 


“It’s an innovative programme covering a number of areas and will help address the poor public planning in the 1990s,” Barclay adds. “Projects there are ongoing and there is a mad rush for financial close early next year.”


Such a rush will certainly be welcomed in the country, not least because it might mean people can begin to concentrate on other areas.According to a recent report by KPMG, South Africa needs to increase its expenditure on infrastructure by 38% to fill the growing gap in the National Development Plan (NDP).
That document announced in February this year that the country needs to spend 10% of its annual budget on infrastructure development to meet the growing gap in the market. 


KPMG’s report found the country is currently spending closer to 8%. Lullu Krugel, KPMG associate director, says that the country will most likely miss the NDP target. In the medium term expenditure period, Finance Minister Pravin Gordhan indicated that $85bn would be spent by government on infrastructure development over the next three years.


Whether the gap is filled with PPPs remains to be seen, as some have warned that there may be an even more fundamental problem to getting projects off the ground. 


“PPPs in Africa, including South Africa, are just not bankable or feasible in 2013,” argues one banker. “If we’re looking at emerging markets there are two real problems with PPPs. Number one, private sector equity is too expensive because the returns demanded by the equity funds or bilateral investors are typically within the 25% range, and maybe even higher.”


He argues that the only way a project would be viable today for the investors would subsequently make services unaffordable for families or those with very low incomes.


“The second problem is that the banks don’t want to lend,” he continues. “If a project can be refinanced after construction then it might be possible, but then you have to consider what is the refinancing mechanism in Africa? Equity pricing is too high and lender appetite is too low.”