Lurking behind confident rhetoric, something is wrong with South Africa's public-private partnership programme.

On the one hand, the Department of Treasury – whose job it is to identify, evaluate and pursue bankable deals for the government – is publishing a rapidly growing list of target deals. On the other – deal closures have become rare at best in what was one of the more vibrant emerging PPP markets two years ago.

Even the government is at a loss for explanation: "It's very difficult to come up with a general explanation [for the lack of deal flow]," says a top official at the Treasury. "There's been no change in government policy. If anything there's been a strengthening of the government's policy to explore private financing for infrastructure development."

The systems, says the government, are in place: the market is by and large comfortable with the norms and standards – themselves painstakingly hammered out over recent years. So the current lull, they say, is just a coincidence of factors – natural delays on some of the earmarked big-ticket deals, and hold ups on environmental assessments on others, such as the road projects like the South Coast Toll Road. In other cases, large public enterprises like Transnet (itself the holding company for the ports authority, a major potential source of PPP deal flow) have themselves been busy restructuring.

But there's another, more insidious explanation. Well placed market sources say that there are growing signs that political expediency might in fact favour public procurement for infrastructure development over the more drawn out, costly and complex PPP process. If true, this is likely to unnerve a vast number of financiers, developers and consultants that have dug into this market over the last few years. It could in the extreme also spell the undoing of one of the most promising markets for public private partnerships in emerging markets.

A reversion to public procurement?

There are some signs that the government might indeed be stealthily reverting to public procurement. Last year, for example, the Trans Caledonian Tunnels authority, a quasi government entity, closed two publicly procured water deals – with the full blessing of the government.

In one, the TCTA, acting as an agent for the Department of Water Affairs and Forestry, awarded the contract for the construction of the R550 million Berg River Dam on the Berg River near Franschhoek, Western Cape to a consortium of South African construction companies and empowerment partners led by Grinaker-LTA.

The deal was backed by a successful capital markets take out, but sent jitters through the country's PPP market. "You basically had a public entity raising bonds on the capital markets. The market generally felt that, yes, the deal happened quickly and the government got good pricing, but the private sector was backing something that went against all principles of risk allocation."

In another case, at the end of last year the Department of Correctional Services opted to build four new publicly procured prisons – again, with the full go ahead of the Treasury.

"This begs the question 'why?'" says a financier close to the PPP market. "It also asks the question 'what power does the Treasury really have in directing the PPP programme in the first place?'My view is that we've got a government that's only partially committed to private participation in infrastructure – notwithstanding what the PPP unit at the Treasury says."

The underlying argument is quite simple: on the one hand, there remain certain deeper and longstanding ideological misgivings within the public sector: there is still a mistrust of private developers and operators in what are essentially public goods. Moreover, there "simply aren't enough successful precedents here yet," says a local banker. "The prisons – our only real examples – were overpriced. People say the government got ripped off. That doesn't bode well."

Prime Minister Thabo Mbeki, now in his second and final term in office, in his state of the nation address last month renewed his commitment to get infrastructure and services delivered within his tenure. "The government's capital investment program will be speeded up, focusing on housing, rural and urban infrastructure, public transport and national logistics systems, water and electricity," he said. "In part to facilitate this, urgent steps will be taken to strengthen the Public-Private Partnership mechanism in government by December 2005. At all times these partnerships should involve local communities."

Yet it is precisely this urgency, some say, that has, ironically, led to problems. " Mbeki has got all his ministers under the wood to deliver infrastructure and services. So they say, let's do it the old-fashioned way – through public procurement."

Says one local financial adviser on PPPs: "I've been urging ministers to expand their PPP teams, to double the number of people. But there are certain individuals who are watching their careers, and are more interested in short-term gain than moving this forward." He goes on: "there's such a fear of falling afoul of the authorities." Add to this the fact that "there are questions about the ability in various ministries for people to get their heads around this [PPP] process," according to the adviser.

Even the government agrees that, in general, the problem is lack of capacity. "What we need across government ministries are good project managers and they're in very short supply. That's genuinely where our real challenge lies – actual human resources," says a Treasury official.

The other issue is that most large PPP schemes are handled directly by the public enterprises concerned. The Treasury's PPP Unit keeps the public companies informed of progress on the national programme, but the latter are not obliged to follow the Treasury's lead.

Stop and Gautrain

Yet by all accounts, where there's political will, there's still a way – and priority deals will get done, regardless of what happens to the PPP market more generally. The consensus is that the country's biggest transport project to date, the Gautrain rapid rail link, a state of the art high speed train between Pretoria and Johannesburg, will finally get done.

The 80km railway network – a classic light rail project – will be built at a cost of roughly R7 billion (or possibly R7.3 billion, if local residents win their lawsuit). Two prequalified bidders – the Gauliwe and Bombela consortia – are in the running for the contract. Both consortia had originally presented their best and final offers last year, and a winner was expected by summer 2004. That schedule subsequently slipped and revised (and "significantly improved") BAFOs were submitted on January 26.

"After the original proposals were received from the bidders, it became clear that the procurement process should be extended to include a best-and-final-offer phase," says Jack Van der Merwe, CEO of Gautrain.

Bombela comprises Bombardier Transportation, Bouygues Travaux Publics, Basil Read, Concor Holdings, Murray & Roberts and French train operator RATP. Standard Corporate Merchant Bank and Rand Merchant Bank are joint arrangers and the consortium is advised by SG.

Gauliwe includes Alsthom , Siemens, Dragados Concessiones, Grinaker LTA and Canadian operator Canac. Investec and Nedbank are the arrangers and PwC is advising. UK firm Masons is providing offshore legal advice to the provincial government.

The preferred bidder should be announced by mid-April, so that construction can begin in November; the idea is to get the rail link up and running in time for the 2010 football world cup. Van der Merwe is confident they will make it: "We will start constructing in November this year and we will be operational in 2009, in time for the Soccer World Cup a year later."

The Gauteng provincial government will put up most of the cost, and the public share of funding is likely to be around 80% in total. The commercial banks will take on the rest – somewhere on the order of R2 billion, and the deal is described as being highly leveraged on the private sector portion. Bankers also describe the deal as "the most secretive" they've ever worked on.

The financial split between public and private sector reflects the need to keep ticket prices affordable and predictable, since this is not a project where costs can be easily passed on to the consumer.

Both bids are said to be closely aligned in terms of pricing and funding structure. "It's very tight right now. Both consortia have strengths and weaknesses and ultimately it will depend on relationships, in terms of who Gauteng (the provincial government) wants to work with." At this stage, "the unwelcome surprise would be if they went to last and final offer," says a member of one of the consortia, although he expects the project to wind up successfully either way.

In any event, the success or failure of Gautrain is unlikely to have broader ramifications for South Africa's PPP market. As one banker close to the deal puts it: "At the end of the day Gautrain will involve players across the funding spectrum, but it's a concentrated deal and only addresses one small aspect of South Africa's infrastructure needs."

"There's a huge number of players in the PPP market not involved in Gautrain, so I don't there would be any knock-on effects," he adds.

Whither the deal flow?

What is needed for a successful PPP market is deal flow. But another concern is that right now even the deals in the Treasury's pipeline are not the right deals. According to another banker in the market: "I'd like to see a streamlining, a prioritization of the deal list within the PPP unit. We need a focus on higher impact deals," he says. "I'd like to see a reprioritization of the deal pipeline which is better aligned with the developmental ends of this country."

Quite a few of the projects currently approved – such as accommodation deals – are not necessarily high priority and there needs to be more focus on water, hospitals and schools, he adds.
Aside from Gautrain, some of the deals in the pipeline are: the head office for Gauteng provincial government (Gauteng precinct), the head office for the department of foreign affairs, several co-location hospitals, IT services projects, and the Dube trade port.

The latter project, which will establish trade and industrial facilities near the new King Shaka International Airport at La Mercy near Durban, has been languishing for some time, although market observers expect movement on the R2.5 billion deal this year. The zone could also serve Durban's seaport – the government wants to create a world class logistics and industrial hub around Durban with integrated transport links.

Also this March, regulations for municipal PPPs will become law, thereby opening up the prospect for municipal PPP deals. Water and wastewater deals, as well as metro and IT systems projects are all on the government's stated priority list, although so far nothing concrete has been tabled. "If we think we have capacity constraints at the national level we have it times ten at the municipal level," admits a Treasury official.