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South African Government proposes strategic partnership between the public and private sector

25 February 2016
– 5 Minute Read


In yesterday’s Budget Speech, Minister Pravin Gordhan gave further details about the private sector’s role in stabilising the economy.

The Budget (together with President Jacob Zuma’s State of the Nation Address on 11 February 2016) gives some useful indications of where to start looking for opportunities.  For a start, Minister Gordhan specifically stated that in energy, transport, telecommunication and urban development, there are many opportunities for joint public and private investment and facilities management.” He also focused on “appropriate” private sector participation in the financial uplift of several State Owned Entities (SOEs).

Minister Gordhan spoke of three key priorities in the restructuring of SOEs: entities that are no longer necessary should be “phased out”; SOEs with overlapping mandates should be rationalised and potential private sector minority interest investment in such rationalised SOEs should be explored; and “co-funding partnerships” with the private sector should be considered to bring in private sector investment.

“Phasing out” of those entities that are no longer relevant to the “development agenda” could see the disposal of non-core assets as Government looks to unlock value in the phase-out process.

The last wave of rationalisation of SOEs in South Africa occurred during the late 1990s and early to mid-2000s when there were a number of high profile transactions in which Government similarly approved the disposal of non-core assets. The resources raised or saved were redirected to the balance sheets of SOEs allowing them to focus on their core mandates.

For example, in the mid-2000s Transnet pursued a successful rationalisation programme, selling off a number of assets which were no longer part of its core mandate.  Commenting at the time of the sale of the V&A Waterfront, Transnet said this was, “part of Transnet’s strategy of selling its non-core assets and enables Transnet to pursue its vision of being the custodian of the ports, freight rail and pipeline businesses in our country.” 

In his State of the Nation Address, President Zuma emphasised that Government is looking to “streamline and sharpen” the mandates of SOEs and ensure that where entities have overlapping mandates, rationalisation options will be pursued. In this regard, Minister Gordhan specifically identified Government’s investment in four SAA entities and referred to the possible merger of SAA and SA Express. He also proposed to engage with a potential “minority equity partner”.

The concept of a minority equity partner is likely to evolve into a “strategic equity partner” as has been the case both internationally and in South Africa previously.  The strategic partner is generally expected to bring management competencies into the SOE. Often the minority stake is specifically coupled with a management agreement and some freedom to implement market based reforms within the entity.

One of the earliest examples of this in South Africa was the sale in 1997 of a 30% stake in Telkom, at that time the monopoly telecom operator, to a consortium which included SBC or Southernwest Bell Corporation (now AT&T) and Malaysia Telecom.  This sale paved the way for a subsequent IPO of Telkom on the JSE with the government still retaining a material minority interest, giving Telkom access to capital and putting it on a more secure economic footing.  Bowman Gilfillan advised the SBC consortium on what was, at the time, a ground breaking transaction.

With balance sheets of several SOEs “stretched to their limits”, Minister Gordhan identified a range of co-funding opportunities with private sector investors.

The renewable energy procurement programme run by the Department of Energy was identified as a model for co-funding initiatives.  An important feature of this programme, which distinguishes it from more traditional public private partnerships, is that the private sector makes all the investment in the generation facility and takes all of the risk on the generation asset.  These assets do not come onto Government’s balance sheet.  The investment is secured and financed based on a power purchase agreement for the output of the facility.

Similar types of initiatives in terms of which private sector assets contribute to service delivery but Government simply purchases the output are likely to find favour with National Treasury in future. (Bowman Gilfillan advises the National Treasury and the Department of Energy on this programme and also acts, on a ring-fenced basis, for lenders and developers.)

All indications from both President Zuma and Minister Gordhan are that partnerships with the private sector are likely to be a significant feature of the South African economic landscape over the next couple of years, in the hope that private sector capital and expertise can trim the exposure of the fiscus to underperforming SOEs and harness the investment that is essential to get the South African economy back on track.  Black economic empowerment is likely to be a significant feature of any renewed partnering initiative and we also expect that the Department of Trade and Industry’s Black Industrialists Program to feature in any restructuring undertaken.