by Patrick Velaphi Mabuza submitted in accordance with the requirement for the degree of Doctor ...

328 Pages·2016·2.57 MB·English

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

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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.

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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.

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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
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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

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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
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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
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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
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