The development of a mature PPP market, takes place through three stages. The maturity of the market depends on the countries’ developmental needs and capacity. For instance, developing countries lack more sufficient infrastructure to develop, hence their focus is
86 on construction, and is usually an isolated sector. Developed countries would invest more in services such as health, education, capital markets, information and communication technology (ICT), and so forth. Countries that have achieved the second and third stages of maturity typically engage in partnerships in more than two sectoral areas (Eggers & Startup 2006:2). Hence, the PPP market in a country depends on the demand for growth in the country. Thus, the importance of PPPs for rapid economic development in countries cannot be understated, because government alone does not possess the necessary supply for the demand.
The three steps in PPP development range from low, to sophistication, to high. The following figure indicates the market development curve.
High
Sophistication
Low Activity High Source: (Adapted from Eggers & Startup 2006:6)
Figure 3.1: PPP Market Development Curve
The development in the curve upwards depends on the activity on the left axis of the curve. Most countries are still at the first stage of development. The more activity that takes place in the right quadrant, the more the PPP market develops. The UK, Japan and Australia are examples of countries in the third stage of PPP development. In order to move up the development curve, countries should gain experience from lessons learnt in other countries. Countries in the lower areas of the PPP development curve should introduce ‘soft’ services to improve capacity in the public sector.
Stage One
Stage Two Potential to leapfrog
Eggers and Startup (2006:6) provide an outline of the characteristics of each stage:
Stage One
create policy and legislative framework;
establish central PPP policy unit to guide implementation;
cultivate deal structures;
accomplish transactions and develop public sector comparator model;
start building marketplace; and
apply early lessons from transport to other sectors (Eggers & Startup 2006:6).
Stage Two
create dedicated PPP units in agencies;
begin developing innovative hybrid delivery models;
enlarge and assist the shaping PPP marketplace;
influence towards new sources of funds from capital markets;
use PPPs to motivate service innovation; and
PPP market gains depth and the use is expanded to multiple projects and sectors (Eggers & Startup 2006:6).
Stage Three
enhance new innovative models;
more creative, flexible methods applied to roles of public and private sectors use of more sophisticated risk models;
more focus on total lifecycle of project;
sophisticated infrastructure market with pension funds and private equity funds;
public sector learns from private partner methods as competition changes the way government operations function;
underutilised assets leveraged into financial assets; and
organisational and skill set changes in government implemented to sustain a greater role of PPPs (Eggers & Startup 2006:6).
In order for countries to become more competitive, they should focus on gaining capacity in the development of their PPP marketplace, and should strive towards the processes and steps outlined by Eggers and Startup (2006:6). The aim of this study is to make recommendations for SA to move up the development curve and to develop their PPP market. Hence this study will identify the challenges in PPP development, and aims to provide solutions to overcome these impediments to growth.
88 As mentioned earlier, governments use PPPs in different sectors depending on their developmental needs. In developing countries, Jooste et. al. (2009:4) explains that PPPs “have specifically been aimed at overcoming two broad public sector constraints: i) lack of public capital and ii) lack of institutional capacity (the resources and specialised expertise to develop, manage, and operate infrastructure assets)”.
PPPs have successfully been applied internationally in the major infrastructure sectors in transport (including road, rail and ports), water, waste, hospitals, schools, public housing, prisons and defence (Eggers & Startup 2006:2). However, there is still a great demand for improvement on infrastructure internationally. A projection of infrastructure needs internationally by 2010 (Eggers & Startup 2006:2), shows the need for stimulation of new infrastructure.
The projections indicate a great demand internationally; this is of great concern, considering that there is a lack of capacity and resources to increase the current rate of infrastructure development. The European Union ran into trillions of dollars for infrastructure demands. The energy sector alone in Europe necessitates $1.2 trillion (Eggers & Startup 2006:3). Another example of the importance of infrastructure development through PPPs is the Southern African Development Community (SADC). The SADC countries are dependent on corridor PPPs for the transport of goods to and from sea ports.
Hence, the development of alternate delivery to landlocked countries is of great importance. These countries are dependent on the corridors for the necessary import and export of goods and services. For instance, it can have an economic effect on the respective countries if the transport pipeline is disturbed.
The projections for the envisaged infrastructure demand internationally are illustrated below.
Table 3.8: International Infrastructure Demands
REGION/COUNTRY PROJECTED INFRASTRUCTURE NEED BY 2010
Canada $125B
United States $1.6T
Latin America & the Caribbean $71B Middle East & North Africa $28B
Sub-Saharan Africa $26B
India $250B
China $132B
East Asia & Pacific $178B
Australia $18B
New Zealand $3.6B
Germany $843B
Ireland $127B
Source: (Eggers and Startup 2006:3)
The above projections are alarming because the infrastructure output is vital to support and/or maintain targeted GDP growth rates in individual countries.
Countries across the globe are introducing Hybrid PPP models to stimulate PPP development. Hybrid PPP models are innovative alternatives to address various challenges posed to PPPs in specific sectors in infrastructure (Eggers & Startup 2006:17). These models include:
Alliancing
This entails that the public and private sectors conjointly design, develop, finance and in some cases, build, maintain and operate a project.
90
Bundling
Under this model, the public partner will contract with one private partner to provide numerous small-scale PPP projects in order to reduce the length of the procurement process as well as the transaction costs.
Competitive Partnership
Several partners are selected to deliver a different aspect of a project in competition with each other. The public partner can reallocate projects among partners in competition with each other. An outcome of this process is that the public partner can use the cost and quality of other partners’ outputs as a benchmark for partners.
Incremental Partnerships
When contracting with a private partner, the public partner reserves the right to call off or stop elements of the work if considered fruitless. The public partner can commission work incrementally. In addition, the public partner can use alternative partners if suitable.
Integrator
A private partner is commissioned as an integrator to manage project development. The private partner has a less direct role in service provision and in some cases is forbidden to be involved in direct delivery. In other cases, the integrator is commissioned in the first phase and prevented to carry out the subsequent phases of the project. In sum, the integrator is tasked with arranging the required delivery functions and is compensated according to the overall project outcomes where possible, with necessary penalties for poor quality, cost and time overrun and so forth.
Joint Venture
A company made up with a number of private partners is commissioned. One strategic partner is selected on the basis of a competitive process, to carry the first phase as a benchmark for the remainder of the project (Eggers & Startup 2005). Various countries are leading the way with various PPP technologies. For instance, the UK focus is on developing new models for alliancing and incremental partnering (CBI
2007:6). Furthermore, recent literature suggests that the type of PPP is also dependent on the size and nature of the project. For instance, this study focuses on both Greenfields and Brownfields projects. Brownfields entail sites or infrastructure with prior development (Adams & Watkins 2008:18), whereas Greenfields entail new developments. Some PPPs may be more complex than others, as can be noted in megaprojects. Megaprojects have received little attention in the literature and are typical of complex large-scale projects with noticeable expansion of global networks and increasing collaboration, these projects are risky as they are highly capital-intensive, they entail a high-level impact, and extreme complexity exists with the multiple stakeholders. An example of such a project is the Gautrain in SA (Kardes, Ozturk, Cavusgil & Cavusgil 2011:1-3).
PPPs have been developing very rapidly in Europe. The largest contracts in Europe in infrastructure PPPs, over the period 2001–2006, were contracts in Belgium, Holland and Italy (CBI 2007:10). France has engaged PPPs in hospitals, public safety and protection, specifically in prisons, the police and justice services, and national road works (CBI 2007:13). The Netherlands introduced a competitive market for the welfare sector (CBI 2007:22). Norway applies PPP contracts in road works construction (CBI 2007:15), whereas Australia focuses on toll roads and the UK focuses on health and education (CBI 2007:6).
Spain applies PPPs in healthcare, education, prisons, government buildings and accommodation, and is noted as an exemplar on PPP usage (CBI 2007:13). Spain and Singapore apply the UK model of building and refurbishment programmes for schools (CBI 2007:8).
Canada and Spain have applied the UK model for establishing operational PPP hospitals (CBI 2007:8). Canada has outsourced public safety to the private sector by applying the use of technology for public transport services. This has allowed numerous service delivery improvements of rapid, transparent and efficient services. An example is licence applicants booking tests online (CBI 2007).
PPP models should focus on managing procurement through early contract involvement. For instance, in Japan the Project Delivery Organisation (PDO) manages delivery of a
92 project through procurement, construction and operation. The PDO delivers the service to the public sector client on the completion of the procurement phase. This allows for reduced procurement time, enhanced procurement proficiency, and early private sector involvement in projects (CBI 2007:10-11).
Lessons can be learnt from Japan and the Netherlands. Japan is moving frontward in market testing policy development aimed at transparency, and is opening up the public service to competition. The Netherlands has made significant progress towards competitive neutrality (CBI 2007:22).
Prior to 2001, Japanese state law did not permit government to enter into contracts of longer than five years duration. After the introduction of the PFI in 2001, Japan now allows a contract period of more than 30 years, and more than 94 projects are currently running in Japan. Japan’s progress in PPP development has been more rapid than that of the UK over an extended period. Japan focuses on engaging the private sector in providing ‘hard’ services on a principle of trust rather than in explicit contracts (CBI 2007:14).
Overall, the major countries leading the way in PPPs development and implementation include:
The UK, especially in health and education;
Australia is leading the way on PPP toll roads;
Canada is testing non-asset based Public Finance Initiatives (PFI); and
Japan is strongly developing PFI models (CBI 2007).
On a macro level, countries engaged in PPPs should focus on a number of key elements; these include:
develop governance structures fit for specific purpose (CBI 2007:5);
develop project capacity through implementing programmes and processes;
use innovation as a means of delivering competitive services (CBI 2007:5);
guarantee maintainable deal flows through managed markets to inspire new providers (CBI 2007:5);
develop a competitive neutral model that levels the playing field for all providers (CBI 2007:5);
apply and build on models and strategies that other countries have tried and tested (CBI 2007:5);
develop great quality and professional public procurement (CBI 2007:5); and
understand and respond to the needs and capacity of the market (CBI 2007:5); PPP policies, approaches and political strategies must be tailored to the unique characteristics of each individual sector. For instance, in the education sector, less rigid and shorter term policies must be developed (Eggers & Startup 2006:2).
The following table outlines some of the major sector-specific highlights across the globe.
Table 3.9 PPP Sector Highlights around the Globe LOCATION PROJECT HIGHLIGHTS
Ontario 30 hospital infrastructure PPPs
Ireland Over 100 PPP projects in wastewater
UK Largest schooling PPP programme with over 98 PFI deals with the value of £3.5B
Netherlands Global leader in PPPs for social housing or urban regeneration
India $35.5B in highway PPP projects
Australia Global leader in transport sector. First to use PPP in transport. 25% of all PPPs in transportation
Africa
14% of energy, transport and water projects, through private infrastructure firms during 1990–2004, higher than rest of the developing world
94 Brazil PPP investment in transport, waste and water, prisons
France $1.25B in prison projects
Spain $113B or 1/3 of investment in roads and rail to be done through PPPs by 2020
Portugal 31 Hospitals to be privatised
Texas One of the world’s largest transportation PPP programs
United States More than 7% of prison population in private prisons
British Columbia 20% of infrastructure done through PPPs Source: (Eggers & Startup 2006:23)
3.5 Challenges and Issues for Consideration in the Development and