Analysis

South Africa's process for developing possible PPPs involves several kinds of analysis relevant to the management of contingent liabilities.

Cost-benefit analysis. The PPP Manual (module 4, p. 40) notes that "[a]n economic valuation may be warranted in: greenfield projects, capital projects, and projects that warrant an analysis of externalities (such as major rail, port, airport projects)." It also refers to the Public Finance Management Act 1989, which requires the head of a government agency to ensure that the agency has "a system for properly evaluating all major capital projects prior to a final decision on the project" (sections 38.1 and 51.1). The PPP Manual does not describe the requirements of an economic valuation in detail, and cost-benefit analysis is apparently not well developed in South Africa (Jenkins 2008, 16). But the PPP Manual states that an economic evaluation should, among other things,

Give a clear economic rationale for the project.

Identify and quantify the economic consequences of all financial flows and other impacts of the project.

Detail the calculation or shadow prices/opportunity costs for all inputs and outputs, including: foreign exchange; marginal cost of public funds; opportunity cost of public funds (discount rate); high, medium and low skill labour; tradable and non-tradable inputs; tradable and non-tradable outputs (including consumer surplus, where relevant, based on financial or other model quantities).

Identify an appropriate 'no-project' scenario and calculate the associated economic flows, treating them as opportunity costs to the project…

…

Provide a breakdown of the economic costs and benefits of the project into its financial costs and benefits, and various externalities.

Do a detailed stakeholder analysis, including the project entity, private sector entity, government, and others.

Comparison of public and private financing. As part of the feasibility study required for Treasury Approval I, departments considering a PPP must compare the costs and benefits of a PPP with the costs and benefits of a publicly financed project. The PPP Manual (module 4) provides detailed guidance on the nature of the required analysis. Its approach is similar to, and partly based on, practice in Australia and Britain. Departments must specify the outputs they want from the project and then estimate the costs of a "PPP reference model" and a "public-sector comparator". The Manual underlines the fact that (p. 1)

An institution cannot have definitively chosen a PPP before it has done the feasibility study. A PPP is still just a possible procurement choice and must be explored in detail and compared with the possibility of delivering the service through a conventional public sector procurement.

Quantification of contingent liabilities. In discussing the comparison of the costs of a PPP and the public-sector comparator, the PPP Manual does not refer to contingent liabilities by name, but it does pay close attention to analysis of risks borne by the government. The estimated costs of both the public-sector comparator and the PPP reference model need to include the expected discounted cost to the government of the risks the government bears.

For the public-sector comparator, the idea is that there are risk-related costs that the government bears in a typical publicly financed project that are, however, seldom quantified. For example, the estimate of the cost of construction may not take full account of the likelihood of delays and cost overruns. The risk-adjusted public-sector comparator is intended to remedy this problem by adding to the "base" public-sector comparator an estimate of the expected cost overrun.

The manual gives a hypothetical example (based on an example constructed by the government of Victoria) of the expected risk-related costs of a publicly financed hospital. In the example, those expected costs are divided into categories, such as construction-cost overruns, delays, "upgrade costs", and "operating risk." Under each heading, the additional risk-related cost of the public project is estimated as the probability-weighted average of the estimated costs associated with each of four or five scenarios. Table 5 reproduces the part of the illustration dealing with construction costs. It is assumed in the table that the base cost of construction is 100 million rand.

Table 5 Estimating the expected cost of construction in the risk-adjusted publicsector comparator in South Africa

Source: Government of South Africa (2004b, Module 4, 51).

For the PPP reference model, the idea is that the project company will not bear all the project's risks, so to estimate the full cost of the PPP it is necessary to estimate not only the costs for which the PPP company will charge but also the additional risk-related costs that the public sector will bear. The Manual doesn't give detailed guidance on what those risks might be or how the expected cost of bearing them might be calculated. But the guidance on estimating the risk-related costs of public provision is presumably relevant.

In the case of the Gautrain, the report for Treasury Approval III included a fifty-page report on the contingent liabilities created by the project for the Gauteng province. The report described the liabilities, set out the rationale for the contractual provisions that created the liabilities, and commented on their magnitude. In some cases, the report (justifiably) declined to estimate the probability of payments or their expected value. In others, it quantified the maximum payments and gave rough estimates of expected payments. The analysis of the possible cost of the patronage guarantee, for example, employed Monte Carlo simulation to get an idea of the probability distribution of the government's payments.