CHAPTER SIX
6.5 Analyzing the Identified Gaps within the Public Private Partnership Procurement Process
This section attempts to identify the gaps perceived by the participants within the PPP procurement process. The researcher started by asking the participants to identify areas within the process guidelines that need to be addressed for effectiveness, identify the risks that are associated with the process, and whether these risks are incorporated within the process guidelines and to highlight those that in their view, are not incorporated. This section closes by trying to establish the participants’ views of the relevance of the PPP guidelines in supporting the public sector’s objectives. Notably, it does motivate the private sector to participate regardless of whether it encourages participation from both the public and the private sector or not. According to the National Treasury Strategy Review Records (2012), the intention for developing public private partnership procurement guidelines was to encourage potential private investors to invest in these projects and ultimately relieve the government of funds for other critical community needs whilst allowing the tourism partnership to create sustainable jobs.
6.5.1 Sections within the Public Private Partnership Procurement Process guidelines that need to be addressed towards the effectiveness of the process
The majority (60%) of the participants across the projects had a strong view that the PPP procurement process guidelines have areas that need to be addressed to be effective. Their view is that although this is a guideline, Section 16 of PMFA of 1999 does not address their challenges. It assumes that all public organisations are operating on the same principles, which is not the case. From where they stand, the process does not consider some of the challenges at grass roots level such as community issues, land, and consultative structures.
The guidelines further do not identify the risks or challenges that operational people face.
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Their reason was that their project was still at a very early stage and they could not comment.
30% of the participants held the view that the elements of the process are sufficiently covered. Their view is that there is a general understanding of all the issues within the process and all elements are fully covered within the process. Only 10% of the participants from two projects out of six projects were not sure. Kildow (2011) argues that guidelines are produced by professional organisations and set best practices for operational effectiveness and control.
Table 8: Sections within PPP procurement process guidelines that need to be addressed for effectiveness
YES 60%
NO 30%
NOT SURE 10%
6.5.1.1 The view that all elements are sufficiently covered within the process
The participants felt that all the elements or the views were fully covered within the process and that there was a general understanding of the guidelines as to how they can be effectively utilized
6.5.1.2 The view that NOT all the elements are sufficiently covered within the process a) The Treasury has not contextualized the framework to suit the South African context.
b) Section 16 of PFMA of 1999 is not responsive to our challenges.
c) Section 16 of the PMFA as it is, does not fully protect the public sector.
d) The process does not take into consideration some of the challenges at ground/grass roots level such as community issues, land, and consultative structures.
e) The process does not identify risks or challenges involved.
f) Regulations to assist the process need to be done timeously.
Source: Participants on the research study (Participant 1, 3, 5, 6 & 9) 6.5.1.3 Not sure of the situation
The participants felt that as municipality, they are not involved in the process and it is important to get contributions from those who are involved in the process. They were less familiar with the section under discussion.
From these views, it was clear that the participants believed that not all the elements were sufficiently covered within the public private partnership procurement process guidelines.
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Kildow (2011:188) asserts that “To be fully effective, guidelines must be regularly revised to include newly improved practices and the practices had to consider the countries’ priorities for relevance”. In probing further on this, the participants were asked if there were risks that were associated with this process with the objective of seeing if there were risks that the participants were associating with the process without any knowledge of whether of whether any risks actually existed.
Thirteen types of risks were identified by the participants. These risks were ranked in terms of frequency to establish those commonly identified by the participants. The top three risks identified were regulatory risks, the risk of insufficient demand and supply volume and political risk. These were highlighted by participants from the public and private sector.
Regulatory risks were identified by participants as the inability of the regulator to manage or control the private sector from exercising autonomy within the partnership to the extent that some of the critical elements that should be governing the relationship for example, transferral of skills and the risk are not occurring. Farazmand (2004) argues that the historical aspect of this relationship is that fifteen (15) years ago, the practice was where the government carried the risk the private sector made profits. Farazmand (2004) further asserts that the essential aspect of this practice was that it was contrary to the theory of partnerships.
The second equally important risk identified was that of the private sector not being interested in this partnership process, yet the demand is high because of the developmental needs and the shortage of project funds from the public sector. This, the participants referred to as the risk of insufficient demand and supply volume risks. The third risk, which is also equally important, is the political risks. This is where the participants felt that when there is no political stability from the country or no visible backing from the political leaders of entities, the process may not be successful. Where the risks are fully covered, they believed it helps the process towards success. Wang (2013) argues that while service delivery through a PPP, changes the way the service is delivered, it does not change a department’s accountability to ensure that the services are delivered. Osman (2014) clarifies this by arguing that the department’s focus shifts from managing the inputs to managing the outcomes.
Additional risks that were identified were the time the process takes before being finalized, environmental risks, for example, the stability of the economic situation within the country, and the issue of sustainability and project failure because of the inability of the partners to
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continue with the process for various reasons. Following is the table with the detailed list of all the risks identified.
Table 9: Risks identified by participants No
.
Risk Identified Frequency mentioned
by the participants 1 Regulatory risks: This is where the private sector company has
autonomy in the operation of services or goods and no transfer of skills to state employees
3
2 Risk of insufficient demand and supply volume risks: Private sector is not interested in all our procurement rules or processes, interest of potential partners from private sector
3
3 Political risks 3
4 The time it takes to complete some processes take too long. In our case, after three years, we have only completed the feasibility study and EIA
2
5 It does not mitigate the financial challenges 2
6 Environmental risks 2
7 Project failure: Risks of not finishing the job on time due to gaps to assist with controls within the tool kit, A partner withdrawing from the process
2
8 Construction risks 1
9 Operating risks: It is very broad and the practicalities or realities on the ground are not taken into consideration, Not really as some PPP projects experience problems along the way
1
10 Financial risks 1
11 Full understanding of all role players involved and the assumption that each partner understands his/her role
1
12 Non–compliance with the guidelines. This however is covered by the Treasury approval process which do not allow organisations to proceed unless the process has been signed off by Treasury
1
13 Sustainability of the project 1
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Source: Primary Data (Participants represented in all three sectors: Treasury, private and public)
From the identification of the elements that the participants felt are not covered within the process guidelines, to the list of risks that are associated with the process, without clarifying whether these risks are covered or not covered within the PPP process. The next critical step was to ascertain whether from their understanding, these risks were fully incorporated within the process or not. The response to this question indicated their view towards the effectiveness of the process guidelines. All the participants, interviewed, as covered in table 14 below, felt that the public private partnership procurement process guidelines do not incorporate these identified risks.
Risks incorporated within the public private partnership procurement process
It was important to investigate this further and establish the reasons why the participants had such a view. Following, are the core reasons provided by the participants on why they felt that the public private partnership procurement process guidelines were not incorporating these risks. They felt that the guidelines do not emphasize the period it takes preparing for the process. It focuses on the period where the decision has been made to embark on the process onwards, whereas the challenge lies in the pre-phase. The feeling is that there seems to be no recourse for the failure of each party. The participants also felt that the process guidelines do not address the eventuality of an unsustainable cash flow. Due to the inability to ensure that all loop holes or risks are covered, it affects the sole purpose of risk transfer.
The next section entailed establishing what the risk elements are that in their view, are not incorporated within the public private partnership procurement process. The risks identified were ranked in terms of frequency from a total of nine risks. Thorough consultation and political risks were identified as the top risks that are not incorporated within the public private partnership procurement process. In relation to thorough consultation, they felt it does not emphasize the period it takes preparing for the process, planning time frames and a number of studies that need to be carried out before implementation of the project. Linked to this is that it focuses from the period the decision is made to embark on the process onwards, whereas the identified challenge is in the pre-phase. The Treasury Regulation 16 of the PMFA defines a PPP and sets out the phases and tests it will have to go through and
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provides precise and detailed instructions for PPPs. The political risk and the issue of non- compliance, identified as regulatory issues and risks associated with the process, has also been featured in the top two risks that are not covered by the process. Omissions of these risks according to the participants, creates a huge risk for the process. Below is the detailed table providing the risks arranged according to the frequency of responses.
Table 10: Risk elements identified
No. Risk Identified Frequency of mention by
the participants 1 Thorough consultation does not emphasize the period taken
preparing for the process, planning time frames, a number of studies that need to be carried out before the implementation of the project.
5
2 Political risks 5
3 It focuses on the period the decision has been made to embark on the process onwards, whereas the challenge occurs in the pre-phase
4
4 The issue of non-compliance
5 Financial risks 3
6 Operating risks, non-transfer of skills that should occur in the process
3
7 Environmental risks, community conflicts 4
8 Yearly reviews on the legislative requirements are not done to check the viability and losses that may be incurred through negligence of the private sector
3
9 Lack of knowledge, not to the researchers understanding 2
Source: Primary Data (Participants represented in all three sectors: Treasury, private and public)
The financial risks and environmental risks like community conflicts and lack of understanding were identified within the top ten risks associated with the process. The new risk that was not identified above is the lack of yearly reviews on the legislative requirements which according to the participants, are not done to check the viability of the process and recording
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losses that may be incurred through negligence of the private sector. The objective of this section was to identify the risks that are associated with the process, identify risks which, according to the participants, are covered within the process and those that are not covered within the process. Information gathered and investigated have clarified this issue. The next section probes into the organisations’ business objectives and the support they derive from the public private partnership process. The objective of this section is to gauge the relationship between the objectives of the public and private sector and financial institutions as the key stakeholders in the process. Relevance to objectives influences how organisations respond or react to the process. The first risk is on whether the PPP procurement process guidelines support government entities’ business objectives. The table below indicates that the majority (75%) of the participants feel that it does support government entities’ business objectives and that their processes are aligned to what the government is doing with only 25% of the participants holding the view that they do not support their objectives.
Table 11: PPP support of business objectives YES 75%
NO 25%
The reasons provided for the responses of those that felt that they do support the business objectives were that Public Private Partnership procurement processes bind parties to commit themselves as the process usually ends with an agreement in place, assists government in fast tracking service delivery and maximizing revenues for entities, benefits through unitary payments from the government and contribute to the IDP, the business and through job opportunities it would provide. The PPP procurement process guidelines monitored by the Treasury provide the guidance, support and road map. Within the supporting role, the Treasury provides someone to assist Provinces to implement the process.
As the key challenge is funding, these guidelines facilitate the process of securing funding and even provide project funding for implementing the process and even fund some of the activities. The fundamental support is in terms of providing the process guideline.
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On the view that guidelines do not support government entities’ business objectives, 25% of the participants do not see any support, but see them as too complicated and hard to follow, and not sensitive to the challenges faced on the ground. The feeling is that they are cumbersome to manage, with elements that frustrate the process, do not allow for different business case scenarios and become bureaucratic. They need to take into consideration the environment in which they operate as well as their role as implementers. With that view about the public sector, the next step was to investigate what the participants view was the motivating factor for the private sector to be in partnership. According to Robinson (2010), the effectiveness of the policy framework influences the outcome of the policy guiding the development of the PPP procurement process. This however, depends on key ingredients such as policy theory, company objectives, institution involved and policy environment.
Robinson continues and argues that understanding the policy environment is fundamental in developing and implementing policies and the effective policy should according to Robinson (2010), encourage the movement from ‘Bad to Best’ procurement practices for PPP procurement processes.
The motivating factors for the private sector to be in partnership within this process are according to the participants, categorized into four areas namely; business growth, profit maximization, community development and political positioning. Business growth is prominent and seen as the reason for the private sector to engage in this process. Following are the key points provided:
a) Growing their business in partnership with the state.
b) For positive exposure that will enable their business to grow.
c) Provision of funds as an investment.
d) To share the risk as it is absorbed by the other partner.
e) Opportunity for business development and business growth.
f) The private sector has the financial strength, which makes it easier to implement desired business initiatives.
g) Providing the necessary and needed expertise to the public sector.
Source: Participants on the research study (Participant 4, 7, 9 & 12)
The prominent condition category of profit maximisation provided by the participants were that if the project is their initiative, the private sector emphasizes and prefers that the full ownership and control on the process should be theirs. Other reasons within this category were profits maximization was seen as beneficial with opportunities to make money,
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maximizing its objectives of making money and above average returns. Davidson (1998) argues that the risk of ‘crony capitalism’ where government accedes to the demands of powerful business interests at the expense of the public’s benefit. The third category was community development as a motivation for the private sector to be in a PPP, with the following reasons provided by the participants:
a) Provides a needed service within the community.
b) Passion for development within the country.
c) Bringing expertise to support development within communities.
d) For social responsibility purposes.
Source: Participants on the research study (Participant 1, 5, 9, 11 & 12)
The emphasis on community development may be an important element in the South African context and supports the explanation given as the respondent’s understanding of the relevance of the process in South Africa. The Public Private Partnership Manual (2004) highlights the point that the PPP procurement process was born out of the shortage of funds from the government for capital investment projects aimed at improving the lives of people.
The last category was that of political positioning. Some of the participants felt that the although the above points or categories may be a business and moral reason for the private sector to be in this process, political positioning is also a key driving factor. They provided the following points as reasons for this view within this category:
a) Extension of their profile.
b) Political protection.
c) To be seen to be working together with government entities.
d) The opportunity to support the government in its developmental initiatives.
Source: Participants on the research study (Participant 3, 7, 9 & 11)
This last element supports the private sector in building its reputation and for protection against various business forces. From the motivating factor for the private sector to be in partnership, the next question sought to establish whether the PPP procurement process encourages partnership with the private sector or not. With knowledge of the reasons that attract the private sector to a partnership, this part then expounded whether the PPP procurement process was able to match the private sector’s desire to be in partnership by exposing the participants’ views about whether they believe PPPs encourage a partnership or not.