By Dr Terence G Sibiya; Managing Executive, Client Coverage at Nedbank CIB

Despite South Africa’s challenging economic situation, the pipeline of large capital infrastructure development projects planned for the country remains extensive. However, as the demand for such development keeps on outstripping its supply, a significant infrastructure backlog is developing, made more challenging by difficult local market conditions and the resulting increases in the price of finance.

Despite this very challenging backdrop, capital infrastructure development remains central to government’s ability to deliver essential services to South Africans and a vital foundation needed for sustainable economic growth.

On the positive side, in recent years, we have seen a clear recognition by both the public and private sector of the imperative to work together to move the country’s economy forward. However, while there is a desire by all stakeholders to enter into public private partnerships (PPPs), this has been tempered recently by heightened financial risks and the uncertain potential for return on such investment.

Of course, there’s also a big difference between recognising the vital need for PPPs and actually entering into them. Which then begs the question, what is it going to take for SA’s public and private sectors to focus on these partnerships and leverage them for the good of the nation?

The first, and possibly most important requirement for effective PPPs is the reprioritisation, by government, of its pipeline of capital infrastructure projects. It’s understandable, given the country’s current severe budgetary constraints, that government isn’t able to offer any type of guarantee or facilitation mechanisms to attract private sector partners. However, what it can do is consider the major crises that currently face SA – such as the country’s growing water constraints and aging water infrastructure – and ensure that most medium-term infrastructure development focuses primarily on those critical areas of need.

Once this reprioritisation process has been completed, government and private sector stakeholders could work together to ringfence particular projects that could viably be funded through limited recourse project finance structures.

Of course, even with such reprioritisation, many of these large-scale capital projects are far too big for a single financial services entity to carry on its balance sheet alone. As such, the collaboration imperative extends beyond a government department and a single bank ‘teaming up’; it requires a willingness for all the participants in SA’s financial services sector to work together.

The third vital pillar that is needed if PPPs are to be effective in catalysing infrastructure growth, is a commitment to innovation. This again cuts across both the public and private sector participants, but is especially relevant to the companies that are needed to finance these infrastructure projects. Interestingly, the challenging market conditions since the 2008 global financial crisis have meant that the majority of finance institutions have already developed the types of innovative funding structures that could be highly beneficial to infrastructure projects. Therefore, if government commits to reprioritisation and ring-fencing, and  finance institutions take a collaborative approach, the job of applying innovation to funding mechanisms is already more than halfway completed.

Lastly, it falls to government to create a political and policy environment that is conducive to limited recourse PPP projects. While SA’s private sector is working hard to help government find ways in which  the country might effectively ‘trade’ its way out of the predicament in which it currently finds itself, only government can take the steps required to lay the groundwork for large-scale infrastructure investment and development.

Ultimately, all the stakeholders in SA’s socio-economic future know that, as an emerging economy, this country desperately needs infrastructure development to enable effective delivery of social services and sustainable economic growth. But if the National Development Plan is to achieve even some of its development goals, PPPs have to be a fundamental component of the NDP strategy. Given that the will for such partnerships exists, all that’s required now is the right plan of action to enable them to deliver to their full potential.