2 Background Information and Literature Review
2.6 Outsourcing and Public-private partnerships
A further problem is that LA's are channelling funds from the electricity revenue to fund non-electrical projects in preparation for the loss of this income. Many LA's have not yet undergone the prescribed ring fencing and asset valuation procedure which, will be used to determine the dividend payment to these councils. At this stage the amount of income that will be foregone by the LA's due to the restructuring is still anyone's guess.
The above is confirmed by a recent press article;
"Meanwhile, uncertainty generated by the prolonged restructuring process left question marks hanging over electricity projects, said the DA.
According to the DA, the question of what income Local Authorities will get from the proposed regional electricity distributors and the R2.4 bn a year mooted in the restructuring committee's report must be clarified and resolved by the Government before the process can be finalised" (DA minerals and Energy Spokesman Ian Davidson, quoted in the article by Bernard Sathekge, DA: Settle on-off lights deal, The Citizen, 6 January 2004)x x x i v
outsourcing can be implemented from a simple labour only arrangement to a comprehensive fully managed service.
Concession: Where a service normally rendered by an LA is implemented and operated by a private company. In a concession the private company would provide the necessary capital for the required infrastructure, construct the necessary facilities and operate them for a predetermined period on behalf of the LA. Normally at the end of the period the infrastructure becomes the property of the LA. A variety of options exists such as BOOT (Build Own Operate Transfer) or BOO (Build Operate Transfer). (T.E Manchidi and A Merrifield, 1999)
In the municipal environment the term Municipal Service Partnerships (MSP's) is often used as a substitute for PPP
Government has set up the PPP unit at National Treasury and also established the MIIU (Municipal Infrastructure Investment Unit) to facilitate the establishment of these partnerships.
Public and street lighting maintenance is a service that can be easily outsourced and in the case of some LA's has been to a greater or lesser extent with varying degrees of success. There is however reluctance in many LA's to embrace this route due to a number of reasons which are well summarised in the following extract.
"• Ideologically, the idea of partnerships often meets with opposition from the larger municipal unions, as illustrated by the implementation of the Nelspruit water partnership. The whole idea of "alternative service delivery" (ASD) is likely to raise more political problems than many Councils are prepared to face at this stage.
• Many municipalities cannot address any partnership options, because their decision- making processes are not at a sufficiently strategic level. According to Gugu Moloi (Head of MIIU), "political leadership is a very important ingredient in the process". Many Councils are pedalling hard simply to stay upright, and do not
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have the skills, time or staff to investigate more strategic partnerships.
One of the key elements in a successful partnership is an effective contractual arrangement. Contracts should be structured so that everyone wins: The service provider secures a return on investment that is commensurate with the risks; the municipality maintains its monitoring and regulatory role, but has the opportunity to attract new investment to reduce critical backlogs; and consumers get better standards of service and value for money.
However, in Councils with relatively inexperienced councillors, such win-win solutions may not be easily identified. Many councillors, especially those without previous business experience, are uncomfortable with a situation in which a private company makes a profit from a municipal function." (Doreen Atkinson et al, HSRC publication on Third Generation Issues Facing Local Government in South Africa, p72-73, June 2002)
From an international perspective streetlight maintenance has been outsourced for some time, in the UK for example 55% of LA's utilise contractors for street light maintenance. Many of these contracts are medium term contracts between 3 and 6 years; a few are long term for periods of 20 years usually where investment capital is involved. (Institution of Lighting Engineers, Lamp Replacement Policy in Local Authority Street lighting Services, p 66, 1998).xxxvi The Rationale behind infrastructure PPP projects is as follows;
• Operating expertise/enhanced efficiency - The private sector has access and exposure to technology and operations management that the public sector may not have. Efficiency in the private sector comes from greater accountability and financial discipline, which are underlain by the principle of profit maximisation and shareholder value increase.
• Access to capital - The private sector has access to numerous forms of capital that the public sector does not. The public sector is often restricted in the methods it may use to fund capital assets. Also the private sector will tend to impose capital market discipline and rigorous budget controls over the projects which discipline and controls are often missing from publicly funded projects.
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• Addressing social needs - The provision of additional finance through PPP's enables economically justifiable projects to be freed from public expenditure constraints and to be brought forward in time, thus generating economic benefits.
• Leading-Edge Technology - PPP projects have the potential to transfer new technology and expertise to South Africa. This includes innovation in financial technology.
• Investment Promotion - PPP projects by virtue of their long term capital investments will lead to the stimulation of the local capital markets and increase the investment potential of local participants. Adapted from (T.E Manchidi and A Merrifield, Empowerment through Economic Transformation, Chapter 14 Public Private Partnerships, Public Infrastructure Investment and Prospects for Economic Growth in South Africa, 1999)xxxvii