Private Parties in public construction projects

25 March 2015 |

South African public construction projects are increasingly being funded by private entities by wasy of Private Public Partnerships (PPPs).

PPPs are provided for in both national and municipal legislation, and can be defined as a contract between an organ of state and a private party which performs an institutional function or uses state property, and in which the private party assumes substantial financial, technical and operational risks in the designm financing, building and operation of a public project.

In exchange for this risk, the private party enjoys the benefit of generating income through fees from the organ of state or private persons utilising the services provided by the project.

Typical examples of PPP projects are where a national or municipal organ of state identifies the need, in upholding its Constitutional obligations, to develop infrastructure projects and stimulate the economy, but does not have a budget sufficient to undertake the project.

It is here that a PPP will step in to provide the finance and design, building and operational skills required for the project.

The private party will form a special purpose vehicle (SPV) to implement the project. This SPV will usually be a company or trust and limitis the liability of the PPP. Financers then lend money to the SPV which in turn will exchange contractors and subcontractos to execute the project.

The SPV will generate revenue from the project once completed and will service its debts from that revenue.

While PPPs provide and excellent opportunity fro growth of private enterprises, the private party must be mindful of the risks it assumes, particularly with regards to project financing.

The inherent risks for the financers are overrunning budgeted costs, projects not being completed timeously (or at all), and the danger of poor quality construction work being executed, leading to remedial costs.

To be effective and profitable, a PPP must ensure proper risk allocation.

For example, food management of the obligations imposed by the public party, the choice of either a lump sum or re-measurable construction contract, and the various dates  or phases of completion must be realistic to prevent delays and the resulting increased cost.

It is therefore crucial for the proper contractual framework to be in place between the PPP, the SPV, the organ of state and its contractors to ensure that all parties are aware of and comply with their obligations.

PPP projects benefit society by developing infrastructure and stimulating the economy. Provided that risk is properly managed through the PPP's participation in contract administration, these projects will continue to benefit both the private sector and public sector, and fill the void often left by budgetary constraints.


Published by

Philip Thompson | Mercury Network


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