General principles:

PPP’s are a useful vehicle for large infrastructural projects of organs of state which provide essential services, but for which the relevant organ of state lacks both the financial resources to build the infrastructure and the capacity to manage the project once it is in operation.  

If a project were to be established as a PPP, it would be subject to the prescripts of the Local Government: Municipal Finance Management Act 56 of 2003 (“MFMA”) which govern PPP’s and to the Municipal Public-Private Partnership Regulations (the PPP Regulations)  promulgated under that Act.   In addition to the legislation there is a plethora of guideline documents published by National Treasury which give guidance to municipalities regarding the establishment and management of PPP’s .

Section 120 of the MFMA is the empowering provision granting municipalities the authority to enter into PPP’s:

120. (1) A municipality may enter into a public-private partnership agreement, but only if the municipality can demonstrate that the agreement will-

(a) provide value for money to the municipality;

(b) be affordable for the municipality; and

(c) transfer appropriate technical, operational and financial risk to the private party.

The PPP Regulations give a more detailed definition of a PPP :

“public-private partnership” means a commercial transaction between a municipality and a private party in terms of which the private party –

(a) performs a municipal function for or on behalf of a municipality, or acquires the management or use of municipal property for its own commercial purposes, or performs both a municipal function for or on behalf of a municipality and acquires the management or use of municipal property for its own commercial purposes;

(b) assumes substantial financial, technical and operational risks in connection with –

(i) the performance of the municipal function;
(ii) the management or use of the municipal property; or
(iii)both; and

(c) receives a benefit from performing the municipal function, from utilising the municipal property or from both, by way of –

(i) consideration to be paid or given by the municipality or a municipal entity under the sole or shared control of the municipality;

(ii) charges or fees to be collected by the private party from users or customers of a service provided to them; or

(iii) a combination of subparagraphs (i) and (ii).

From this definition, it is apparent that a municipal PPP is conceptualised as a commercial contract which suits both the municipality and the private entity. 

For the municipality, it is a means to create necessary infrastructure and to perform essential services. For the private entity, it is a commercial opportunity, and sometimes an opportunity to gain access to municipal resources and to use these optimally for commercial gain. 

Thus, a PPP is conceived as a ‘win-win’ arrangement.  

It is specifically provided in Section 120 (3) of the MFMA that if the proposed PPP involves the provision of a municipal service, the provisions of Chapter 8 of the Local Government:  Municipal Services Act (“MSA”)   must also be complied with.   

Thus, the Section 78 MSA processes remain mandatory whether or not the project actually proceeds as a PPP.   In essence, this requires a feasibility study to be done to identify the best and most competitive company to partner with.   

The Municipal Service Delivery and Public Private Partnership Guidelines explain that there are two types of PPPs :

Two types of PPPs are specifically defined:

• Where the private party performs a municipal function; or
• Where the private party acquires the use of municipal property for its own commercial purposes.

A PPP may also be a hybrid of these types.