Treasury Regulation 16 of 2004, issued under the Public Finance Management Act 1989, sets out rules that govern the development and execution of a PPP contract. Among other things, it prescribes a four-stage process for the approval of national and provincial PPPs by the National Treasury. The approvals are known as I, IIA, IIB, and III. Among other things, they give the Treasury the opportunity to ensure that the contingent liabilities created by the contracts are acceptable. (Municipal PPPs are reviewed but not approved by the National Treasury.)
Treasury Approval I must be obtained before procurement begins. The rules concerning this approval requires that the contracting agency
To determine whether the proposed PPP is in the best interests of an institution, the accounting officer or the accounting authority of that institution [generally the chief executive] must undertake a feasibility study that-
(a) explains the strategic and operational benefits of the proposed PPP for the institution in terms of its strategic objectives and government policy;
…
(c) in relation to a PPP pursuant to which an institution will incur any financial commitments, demonstrates the affordability of the PPP for the institution;
(d) sets out the proposed allocation of financial, technical and operational risks between the institution and the private party;
(e) demonstrates the anticipated value-for-money to be achieved by the PPP; and
(f) explains the capacity of the institution to procure, implement, manage, enforce, monitor and report on the PPP;
Treasury approval IIA must be obtained before bidding documents, including the draft PPP contract, can be issued. Treasury approval IIB must be obtained before appointing a preferred bidder. Treasury approval III must be obtained before the contract is signed. The last two approvals are designed in part to ensure that the contract still has the benefits identified earlier and that the agency will be able to manage the contract.
The National Treasury has established a PPP unit, which has led the review process. The unit has also produced a PPP manual and a set of standard provisions for PPP contracts to guide contracting agencies.25
The PPP manual (module 5) suggests that the application for Treasury Approval III include a section on contingent liabilities, which it explains as follows: "A contingent liability is a liability that accrues to the institution through the PPP agreement but only has an actual, financial impact if a future, uncertain event occurs. An example is compensation payable upon early termination of the PPP agreement."
In addition, section 66 of the Public Finance Management Act 1999 states that departments (and other entities) may not
borrow money or issue a guarantee, indemnity or security, or enter into any other transaction that binds or may bind that institution or the Revenue Fund to any future financial commitment, unless such borrowing, guarantee, indemnity, security or other transaction … is authorized by this Act.
In the case of the national government, the Act authorizes the Minister of Finance to enter into all such transactions and to authorize responsible ministers to grant guarantees, indemnities, and securities if they have the written concurrence of the Minister of Finance. Within the Treasury, a Guarantee Certification Committee advises the Minister on whether to concur with proposed guarantees. This provision is considered to be relevant to any thirdparty guarantees of obligations in a PPP contract, but not to financial commitments that might be considered guarantees. (The PPP standardization document refers to this part of the Public Finance Management Act when it discusses indemnities, but not when it discusses termination payments.)
The standardized PPP contract provisions document discusses the provisions that should be in PPP contracts and provides examples of drafting. Among other things, it sets out in some detail the provisions that should govern early contract termination and associated compensation payments. It thus plays a key role in controlling the contingent liabilities that the public sector incurs in PPPs.
In 2006, influenced in part by the potential size of the contingent liabilities associated with the Gautrain, the National Treasury reviewed the way it managed contingent liabilities in PPPs. One of the outcomes of the review was a reallocation within the Treasury of responsibilities for reviewing proposed PPPs. Part of thinking behind the change was that the PPP unit was not in a position by itself to judge whether large liabilities associated with PPPs were acceptable to the government; that judgment required the involvement of parts of the Treasury, such as the asset-and-liability-management group, that could take a broad view of the government's financial position. In particular, the Guarantee Certification Committee now reviews liabilities associated with (large) PPPs during Treasury Approval III and, to reflect the change, was renamed the Fiscal Liability Committee. Although the PPP unit remains the key advisor on PPPs, the control function is now shared with other parts of the Treasury. The Fiscal Liability Committee has so far reviewed and approved several new PPPs-and its members have remarked that contingent liabilities associated with PPPs, although they may be important in the context of a project, are usually small in comparison to some of the government's other direct and contingent liabilities.
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25 Government of South Africa (2004a,b)