LEXOLOGY / 25 MARCH 2022 - 15.44 / HERBERT SMITH FREEHILLS LLP
Public–private partnerships have been used as a means of procuring public infrastructure, fulfilling government and parastatal service obligations and generating energy in South Africa since the late 1990s.
During the late 1990s and until 2010, the PPP model was used constantly in the national, provincial and even municipal spheres of government to develop capital intensive infrastructure, namely national and provincial toll roads, hospital facilities, prisons, government office accommodation and rapid rail transit systems.
During this period, the Gautrain Rapid Rail System was undertaken as a provincial PPP; the Bakwena Platinum Corridor Toll Road and other toll roads were undertaken as national road PPPs and the Chapman's Peak Toll Road was undertaken as a provincial road PPP. Various government head office projects were undertaken as PPPs for serviced accommodation, such as the Department of Environment head office. PPPs in the prison sector were undertaken in the form of the Mangaung Correctional Facility and the Louis Trichardt Correctional Facility. PPPs were carried out in the hospital sector, such as Inkosi Albert Luthuli Central Hospital.
However, since 2010, the PPP model has shifted away from its previous focus on the sectors listed above to focus on the independent power producer (IPP) sector, with the primary focus being the Renewable Energy IPP Procurement Programme, which was launched in August 2011 and under which four separate procurement rounds have been conducted, resulting in the procurement of 64 projects, investment of US$14 billion by the private sector in these projects and the procurement of 3,922 megawatts (MW) of renewable energy.
For the foreseeable future, the IPP sector will continue to be an area of PPP activity.
In addition, renewed activity is expected in respect of PPPs focusing on infrastructure during 2021 and 2022, with the National Treasury website listing a number of PPPs that are in various stages of procurement.
The principles applicable to the procurement of PPPs of all forms are set out in Section 217(1) of the Constitution, which states that, when an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system that is fair, equitable, transparent, competitive and cost-effective (the five principles). These five principles are repeated in the two pieces of general legislation that govern the conduct of the three tiers of government, and the state-owned enterprises and agencies (SOCs) in the three tiers of government, namely the Public Finance Management Act,7 which governs the national and provincial tiers of government and the SOCs in those two tiers; and the Local Government: Municipal Finance Management Act, which governs the municipal or local tier of government and the SOCs in the municipal sphere.
Regulations promulgated under the Public Finance Management Act (namely, the Treasury Regulations), set out, in Regulation 16 (called Treasury Regulation 16) thereof, the requirements and rules to be satisfied in respect of PPPs in the national and provincial spheres. These requirements and rules are mandatory and prescriptive. Likewise, the Municipal Public–Private Partnership Regulations set out the requirements and rules to be satisfied in respect of PPPs in the municipal spheres, which requirements and rules are also mandatory and prescriptive.
The government uses public procurement to drive forward its policy of broad-based black economic empowerment and the development of the local economy through the requirements to procure goods and services within South Africa (namely, localisation). This is particularly the case in respect of PPPs, in respect of which the requirements for black economic empowerment and the localisation can be greater that the requirements imposed generally on economic activities outside of PPPs. The legislation that drives forward this agenda comprises the Preferential Procurement Policy Framework Act and the Preferential Procurement Regulations promulgated in terms of that statute, and the Broad-Based Black Economic Empowerment Act and the various codes of good practice on broad-based black economic empowerment that are promulgated under that statute, including a code that is specific to PPPs.
In addition to the legislation detailed above, sector-specific legislation may also apply to the relevant PPP. Often, this legislation sets out procurement requirements and principles that apply in addition to the requirements set out in Treasury Regulation 16 and need to be reconciled with the requirements of Treasury Regulation 16. Examples of this legislation are the Electricity Regulation Act (in respect of IPPs), the provincial legislation in respect of hospitals, the Correctional Services Act (in respect of prison PPPs), the provincial legislation applicable to roads and railway lines, and the legislation that creates and governs the various SOCs, such as Eskom SOC Ltd and Transnet SOC Ltd. In respect of municipal PPPs, the requirements of the Local Government: Municipal Systems Act (which sets out various processes that are applicable to the entry into contracts by municipalities that need to be reconciled to the Municipal PPP Regulations and the provisions of the Municipal Finance Management Act) will also need to be fulfilled.
The year in review
There were two main developments in the PPP sector in the past 12 months. The first was the announcement in March 2021 of the successful preferred bidders in respect of the Risk Mitigation IPP Procurement Programme (RMIPP PP), which seeks to procure 2,000MW of new generation capacity from a range of energy technology sources. Initially, eight preferred bidders were announced and subsequently, an additional three preferred bidders were announced. Initially, commercial and financial close required to be achieved four months after the announcement of the preferred bidders, in July 2021. This was subsequently delayed to September 2021 and is now expected to occur in the first quarter of 2022. Commercial and financial close have been delayed due to the launch of litigation proceedings in the High Court of South Africa by an unsuccessful bidder, challenging the disqualification of its projects and the award of preferred bidder status to the three projects successfully bid by Karpowership. The matter was argued in late November 2021 and judgment is expected to be handed down imminently. In addition, the Parliamentary Portfolio Committee on Energy has announced the launch of an enquiry into allegations of corruption and impropriety in the RMIPP PP. Neither this enquiry nor the High Court judgment are anticipated to delay the achievement of commercial and financial close in respect of the majority of the preferred bidders in the RMIPP PP during the first quarter of 2021.
The second main development was the launch of the Renewable Energy IPP Procurement Programme Round 5 (REIPP R5) in March 2021 for 2,600MW, with the bids being submitted in August 2021 for evaluation. REIPP R5 was limited in respect of technology to solar PV and onshore wind. The preferred bidders were announced on 28 October 2021, with 25 preferred bidders being announced for a total of 2,583MW. These projects are expected to achieve commercial and financial close in April 2022.
We are still awaiting the launch by the Department of Energy of the sixth round of the Renewable Energy IPP Procurement Programme for 2,600MW and the seventh round for 1,600MW. At present, there is no certainty as to when these rounds will be launched. There is also no certainty as to when the other IPP procurement programmes, namely the procurement of approximately 500MW of energy storage, done as IPP projects, and the procurements of 1,500MW of coal-fired power projects and 3,000MW of gas-fired power projects, as IPP projects, will be launched. There has obviously been slippage from the originally announced launched dates.
In addition, there seems to be movement in respect of the long anticipated PPP for various border posts in South Africa, with potential bidding consortia firming up and tentatively appointing transaction advisers. We await further developments on this PPP.
Progress has not been as swift in respect of the Kopanong Precinct Project PPP as originally expected, primarily due to the impact of the covid-19 pandemic and the lockdowns of various levels that have been imposed from time to time.
Further, we await further developments in respect of the draft Public Procurement Bill that was launched for public comment on 19 February 2020. Due to the impact of the covid-19 pandemic and the various types of lockdown that have been put in place from time to time, there has been an inevitable slowdown in the progress of this bill.
The PPP regimes continue to hold up well under the strain of the covid-19 pandemic, with affected PPP project companies continuing to be treated fairly and equitably by the relevant government institutions, when the PPP project companies seek relief under the relevant contractual regimes, and all parties to the PPPs continue to comply with the various contractual regimes, which are still proving robust enough to withstand the tests imposed by the covid-19 pandemic. As yet, the position remains that none of the PPP project companies have been driven into business rescue or liquidation as a result of the covid-19 pandemic.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER