The potential role of public-private partnerships in the South African economy: An innovative conceptual public-private partnerships model for small and medium enterprise development by Patrick Velaphi Mabuza submitted in accordance with the requirement for the degree of Doctor of Literature and Philosophy in the subject Economics at the University of South Africa Supervisors: Prof P M D Rwelamila and Prof Busani Moyo August 2016 Declaration Student No. 44944152 I, Patrick Velaphi Mabuza, declare that “The potential role of public-private partnerships in the South African economy: An innovative public-private partnership model for small and medium enterprise development” is my own work and that all the sources that I have used or quoted have been indicated and acknowledged by means of complete reference. _________________ ________________ SIGNATURE DATE Mr Patrick Velaphi Mabuza ii Acknowledgements It is through the integrated effort of liaising with individuals and organisations listed below that I was able to complete the work of this magnitude. I therefore find myself indebted to acknowledge the contributions made by the following people and organisations to my study:  The National Energy Regulator of South Africa (NERSA), for assisting me financially for the successful completion of my research;  Special thanks and appreciation goes to my family: my wife Nokuthula Mabuza, and my children, Iphokuhle Waziwe Mabuza, Mandisi Sibubone Mabuza and Inesu Sangiwe Mabuza for their patience and continuous support through my academic journey;  Mr Cliff Smuts for carefully editing the entire research study so it could be in line with and also keep track with the current academic flavour; and  Lastly and most importantly, my sincerest appreciation goes to my promoters Prof Rwelamila Pantaleo and Prof Busani Moyo for their constant support and constructive criticism that eventually made this thesis of an acceptable standard and quality. I strongly believe that it is the support and power of the Lord, God the Father that made this achievement a reality. iii Abstract The introduction of PPPs in infrastructure provision has changed the way in which governments around the world now view infrastructure provision. However, the introduction of PPPs to deliver the needed infrastructure has benefited only a few companies. Most of these companies are the big construction firms that possess technological know-how and those that have the financial ability to execute large infrastructure projects. Although SMEs are important for employment creation, inequality and poverty reduction, the participation of SMEs in these PPP projects is very low. This is because PPP models in developing countries are based on those used in developed economies, and such models ignore the socio-economic problems facing developing countries. Therefore, this study argues that PPP projects in developing countries present an opportunity for growing the SME sectors in developing countries. It challenges the viewpoint of seeing infrastructure backlogs only as providing opportunities to big private sector companies and argues that infrastructure backlogs can be used by governments to reduce the triple challenges of unemployment, poverty and inequality by linking SMEs to PPP projects. The traditional PPP model that is being applied by many developing countries does not fully encourage the participation of SMEs in PPP projects, as most of the projects executed through this model are bundled into big projects that SMEs cannot execute due to a lack of technological know-how and weak balance sheets. The study therefore suggests different ways in which the participation of SMEs in PPP projects could be improved based on the results of the survey conducted for this study. The study then proposes an “innovative conceptual PPP model for sustainable SME development” that takes into account the needs for developing countries to create jobs, reduce poverty and inequality. It also takes into account all challenges for SMEs identified through the review of literature and the study survey. iv Key terms public-private partnerships; preferential procurement regulations; concession; efficiency-risk-adjusted profits; special purpose vehicle; delegation of tasks; ex-ante and ex-post competition; small and medium enterprises; legal environment; transparency; regulation, good governance; institutional framework; political commitment; institutional PPP models; PPP firms, survey-monkey and innovative conceptual PPP model. v List of acronyms AfDB African Development Bank AFP Alternative Financing and Procurement BBBEE Broad-Based Black Economic Empowerment BEE Black Economic Empowerment BOOT Build-Own-Operate-Transfer BOT Build-Operate-Transfer CIDB Construction Industry Development Board CSIR Council for Scientific and Industrial Research CTC Competitive Tendering and Contracting DBFO Design, Build, Finance, Operate DoE Department of Energy DTI Department of Trade and Industry FDI Foreign Direct Investments HDI Historically Disadvantaged Individuals IDC Industrial Development Corperation IGFRA Intergovernmental Fiscal Relations Act IMF International Monetary Fund IPP Independent Power Producers MFMA Municipal Finance Management Act MSA Municipal System Act MTEF Medium-Term Expenditure Framework NGO Non-Governmental Organisations OECD Organisation for Economic Co-operation and Development PFI Private Finance Initiative PFMA Public Finance Management Act PPP Public-Private Partnerships PPR Preferential Procurement Regulations PSC Public Sector Comparator SADC Southern African Development Community SAMAF SA Micro-finance Apex Fund vi SANRAL South African National Road Agency Limited SEDA Small Business (Enterprise) Development Agency SMEs Small and Medium Enterprises SOE State-Owned Enterprises SPAID Support Programme for Infrastructure Development SPV Special Purpose Vehicle TEA Total Entrepreneurship Activity TIA Technology Innovation Agency UNECE United Nations Economic Commission for Europe VfM Value for Money vii TABLE OF CONTENTS CHAPTER 1: INTRODUCTION ............................................................................................ 1 1.1 Introduction ......................................................................................................... 1 1.2 The role of infrastructure in economic development ............................................ 2 1.3 New developments in financing infrastructure projects ........................................ 6 1.4 Public-private partnerships and SME development ............................................. 9 1.5 Infrastructure funding gap for Africa and South Africa ....................................... 11 1.6 Trends for South African PPP projects .............................................................. 14 1.7 Why use PPPs to create jobs through SMEs? ................................................... 17 1.8 Reasons for the research .................................................................................. 18 1.9 Problem statement ............................................................................................ 19 1.10 Focus of this study ............................................................................................ 20 1.11 Purpose and objective of the research .............................................................. 22 1.12 Research objective ............................................................................................ 22 1.13 Research questions ........................................................................................... 22 1.14 Research methods ............................................................................................ 23 1.15 Demarcation of the study ................................................................................... 23 1.16 The importance and contribution of the study .................................................... 24 1.17 Limitations of the study ...................................................................................... 24 1.18 Chapter overview .............................................................................................. 25 CHAPTER 2: PUBLIC-PRIVATE PARTNERSHIP: THEORY AND PRACTICE ................. 27 2.1 Introduction ....................................................................................................... 27 2.2 Public-private partnerships (PPPs) .................................................................... 27 2.3 The economics of public-private partnerships .................................................... 31 2.3.1 Contracting-out: The foundation of PPPs........................................................... 32 2.3.2 Delegating design and/or operation to the private firm ....................................... 34 viii 2.4 The costs and benefits of public-private partnerships ........................................ 35 2.4.1 Do PPPs minimise on-budget government expenditure? ................................... 35 2.4.2 Do PPPs provide services at lower cost? .......................................................... 37 2.4.3 Does the public sector borrow at lower costs than the private sector? ............... 39 2.4.4 Do private firms sacrifice quality for profits in a PPP? ........................................ 41 2.4.5 Does the PPP model manage risks better? ....................................................... 42 2.4.6 Do PPPs hinder accountability? ........................................................................ 43 2.4.7 Do PPPs make it politically feasible to impose user fees? ................................. 45 2.5 The efficiency notion of the private sector.......................................................... 46 2.5.1 Private sector efficiency versus public sector inefficiency .................................. 47 2.5.2 Trade-off between public- and private-sector provision of services .................... 49 2.6 Institutional and regulatory requirements for PPPs ............................................ 51 2.7 Institutional requirements for PPPs .................................................................... 52 2.7.1 Legal environment ............................................................................................. 53 2.7.2 Regulatory environment .................................................................................... 54 2.7.3 Domestic debt market requirement .................................................................... 56 2.7.4 Corruption and unethical activities ..................................................................... 57 2.7.5 Transparency and easy access to information ................................................... 58 2.7.6 Political institutions ............................................................................................ 59 2.7.7 Economic and financial institutions .................................................................... 61 2.8 Regulation and public-private partnerships ........................................................ 62 2.8.1 The advantages of regulations in PPPs ............................................................. 63 2.8.2 Over- or poor regulation of PPPs ....................................................................... 64 2.9 Institutional framework for public-private partnerships ....................................... 65 2.9.1 Development of an appropriate legal framework ................................................ 66 2.9.2 Dispute resolution mechanisms in infrastructure projects .................................. 66 2.9.3 Development of PPP expertise within the public sector ..................................... 68 2.9.4 Refinement of project appraisal and prioritisation criteria ................................... 69 ix 2.9.5 Reforms on public-sector procurement requirements ........................................ 70 2.9.6 PPP monitoring framework ................................................................................ 71 2.10 The South African PPP institutional developments ............................................ 72 2.11 Chapter summary .............................................................................................. 74 CHAPTER 3: THE ROLE OF PPPs IN DEVELOPING AN SME SECTOR ......................... 77 3.1 Introduction ....................................................................................................... 77 3.2 The role of SMEs in economic development ...................................................... 79 3.3 Challenges facing SMEs ................................................................................... 85 3.3.1 Lack of finance .................................................................................................. 86 3.3.2 Human resources .............................................................................................. 87 3.3.3 Low technological capabilities ........................................................................... 89 3.3.4 Access to markets ............................................................................................. 90 3.4 The potential role of PPPs in addressing the challenges of SMEs ..................... 91 3.5 South African governmental initiatives to support the development of SMEs ..... 96 3.6 Chapter summary .............................................................................................. 98 CHAPTER 4: RESEARCH METHODOLOGY................................................................... 100 4.1. Introduction ..................................................................................................... 100 4.2. Theoretical overview of a research framework................................................. 101 4.2.1 Two types of theorising in research ................................................................. 101 4.2.2 Research methodologies ................................................................................. 102 4.2.2.1 The quantitative method .................................................................................. 102 4.2.2.2 The qualitative method .................................................................................... 103 4.2.2.3 Mixed-method research ................................................................................... 104 4.3 The research approach and design for the study ............................................. 106 4.4 Research question .......................................................................................... 108 4.4.1 Main research question and propositions ........................................................ 108 4.4.2 The research propositions ............................................................................... 109 4.5 Research setting ............................................................................................. 109 x