Building for prosperity

2008-04-17 00:00

It is estimated that $40 trillion will be spent worldwide on infrastructure projects by 2030.

Emerging economies like ours are investing heavily in transport and energy infrastructure (not forgetting the magnificent stadia going up around us) to sustain growth, while developed economies are upgrading existing infrastructure and investing in “softer” infrastructure like education and healthcare.

Public sector bodies are finding it increasingly difficult to fund these projects.

Society has higher expectations of infrastructure assets and services, while political parties and communities in general are questioning just how “public” money is being spent.

This has resulted in an increase in public-private partnerships (PPP) and in the wide range of delivery mechanisms used to bring private expertise and public money together.

PPP has emerged as a favoured method of financing major infrastructure projects because:

• For governments, it has the advantage of managing the risks of major projects and helping achieve best value from tax monies.

• For the private sector, it represents an opportunity as a growing number of projects are planned around the world.

• For investors, such as pension fund managers, these long-term projects represent steady-investment returns.

The increasing attractiveness of this market makes it increasingly competitive: those already in want to extract maximum value; those on the outside want to get in.

The public and private sectors have worked closely in recent years, however, they still have different agendas and approaches to getting things done.

Reconciling these two approaches continues to be a challenge including:

• Time frames — infrastructure projects rarely move quickly and are measured in years, not months.

• Commercial focus — patience is needed to maintain commercial focus throughout the life of a project.

• Refinancing, contract variations and disputes — these may surface because of the length of time required to see these projects through.Over-ambitious expectations, or ill-conceived or mismanaged project contracts, can hinder projects from the start. If not thought out properly, aspects of the contract can have ramifications throughout the life of the project.

• There is a limited pool of skills globally for the implementation of major projects, particularly within the public sector.

So what should organisations do?

PPPs must be properly structured. There is evidence that they can be more efficient and produce better value for money than traditional procurement. The private sector’s efficiency outweighs the public sector’s ability to borrow money cheaply. PPPs tend to result in greater competition and increased innovation; more attention is paid to costs across the whole project lifecycle.

The key words are “properly structured”. Getting the planning right from the start has a major bearing on any project’s outcome: from outlining a tender proposal to choosing a preferred bidder, from contract negotiations to the financial close, any number of issues can arise.

A mutual understanding between the public and private sector representatives on either side of the deal is essential, as is ongoing management of the project once it is running.

In essence:

• PPPs are one of the preferred routes for government bodies wanting to make proper use of public monies to provide or upgrade public facilities.

• Planning and preparation is crucial if both sides are to realise the value they hope for from the significant outlay of capital expenditure.

• Proper and continuous project management ensures not only that the entity is “doing the right project” but that it is “doing the project right”.

Ugen Moodley

Director: internal audit services

031 327 6000

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