Proposed amendments to Treasury Regulation 16 and the Municipal Public-Private Partnership Regulations

​​​On 19 February 2024, the National Treasury (Treasury) published its proposed key amendments to the Public-Private Partnerships (PPPs) regulatory framework for public comment.

Treasury has explained that these amendments are "expected to reduce the processes required for planning and procuring of PPPs, resulting in simpler regulations that align with project size and complexity. These proposed new regulations clarify the institutional arrangements in terms of who is responsible for what across the PPP project cycle. Further, the proposed amendments make it easier for the private sector to engage with investment opportunities while taking account of the risks that come with PPPs".

In the 2024 budget speech, the Minister of Finance indicated that the amendments not only aim to ease the procedural complexity of concluding PPPs but also seek to develop the capacity to manage PPPs, create clear rules for dealing with unsolicited bids and strengthen the management of fiscal risk.
The regulations applicable to PPPs procured by national, provincial and local governments have been amended. However, the amendments to regulations applicable at the municipal level are not substantial.

Below is an overview of the key amendments proposed.

Public-Private Partnership Advisory Unit (PPP Advisory Unit)

Treasury Regulation 16 (TR 16) has been amended with a new TR 16.2A, which establishes a PPP Advisory Unit, a division within the Government's Technical Advisory Centre (GTAC). According to TR 16.1, a PPP Advisory Unit is defined as the unit within the GTAC or any functionary instructed in terms of section 10(1)(a) of the Public Finance Management Act (PFMA) to perform a power entrusted or duty assigned to Treasury by regulation 16. According to the Municipal Public-Private Partnerships Regulations (MPPPR), the Public-Private Partnership Advisory Unit is the PPP Advisory Unit within the GTAC, or any functionary delegated in terms of section 6(1) of the Act, a power or duty assigned to the National Treasury in terms of these Regulations.

Furthermore, TR16.2A provides for the responsibilities of the PPP Advisory Unit, which among other things include:

• advising and guiding institutions on the registration of a PPP project with the Treasury;
• providing advice and support to institutions during the entire PPP project cycle process including the feasibility and procurement phases;
• providing technical support to Treasury in relation to PPP project approvals;
• providing knowledge management to institutions and interested stakeholders; and
• any other function that the Minister of Finance may determine for the effective implementation of Treasury Regulation 16.

Nowhere in the MPPPR is there an insertion of a corresponding regulation, ie a regulation in the MPPPR that provides for the responsibilities of the Public-Private Partnership Advisory Unit. The MPPPR does, however, outline the PPP Advisory Unit's responsibilities regarding PPP projects valued below ZAR 2 billion. That being said, the PPP Advisory Unit's function at the municipal level is not restricted to PPP projects valued below ZAR 2 billion.

As defined by Regulation 1 of the MPPPR, a power or duty assigned to the National Treasury under the MPPPR can be assigned to the PPP Advisory Unit. The PPP Advisory Unit is not a novel concept; it is one of the six units of the GTAC and has been in existence since 2000. Before it was a unit under the GTAC, it was a unit that was housed in the National Treasury. The introduction of TR 16.2A legitimises and validates the importance and role of the PPP Advisory Unit as a statutory body to provide guidance and facilitate ease of compliance with the process encapsulated in TR. 16 and the MPPPR.

Financial Commitments and Contingent Liability

TR 16 is amended to include the concept of Financial Commitments and Contingent Liability (FCCL), for which the institution's accounting officer or accounting authority must conduct an assessment as part of the PPP feasibility study. In TR 16.1, FCCL is defined as follows:

1. In terms of financial commitments, financial obligations that the institution expects to fulfil as contractual payment commitments under a PPP agreement in the normal cause of a PPP, which requires direct budget allocation, and does not depend on the occurrence of uncertain future events, even if the quantum may fluctuate.
2. In terms of contingent liabilities, explicit and implicit conditional liabilities in respect of future known risk events assumed by the institution under a PPP agreement, for which the institution will have to make payment on the occurrence of the event.

The proposed amendments to the regulations differentiate between two types of contingent liabilities: explicit and implicit contingent liabilities. An explicit contingent liability is liability assumed by the institution in respect of the occurrence of certain future known risk events and the quantum of liability assumed is calculated in accordance with a contractual mechanism. An example of an explicit contingent liability would be indemnities. An implicit contingent liability, on the other hand, is liability assumed by the institution in practice for other known future events, but which are not set out in the PPP Agreement. An example would be the lockdown of the economy due to a pandemic. In respect of both, the timing and the full impact of the contingent liability is unknown and the institution's duty to pay stems from either a contractual obligation or a residual duty as the grantor of the rights under the PPP Agreement.

In relation to the obligation to undertake a FCCL assessment, the proposed amendment to the regulation requires that the assessment be undertaken at the following stages.

1. In terms of TR 16.4.1(c), the assessment should be undertaken at the feasibility study stage. The FCCL assessment report is required to be submitted as part of the feasibility study to the National Treasury.
2. In terms of TR 16.5.4(c), the assessment should be undertaken after the evaluation of bids but before the appointment of the preferred bidder to assess the FCCL impact of the Project on the institution having regard to the FCCL assessment report submitted pursuant to TR.16.4.1.
3. In terms of TR. 16.6.1, the assessment should be undertaken after the conclusion of procurement but before the conclusion of an agreement. This assessment must be undertaken having regard to the FCCL assessment completed pursuant to TR. 16.4.1(c).
4. In terms of TR 16.7.4, the assessment should be undertaken on an annual basis when the accounting officer reports on all known contingent liabilities of the department in its annual report.

Before the proposed TR 16 amendments, the institution's obligations in relation to contingent liability were not provided for in the PPP manual. However, in practice, such assessment was undertaken at the feasibility study stage as part of an affordability assessment submitted to the Treasury as part of the institution's application for Treasury Approval: III issued in terms of TR 16.6.1.

Unlike amendments to TR. 16, the MPPPR amendments do not provide for FCCL assessment. However, in accordance with section 168(1)(d) of the Municipal Finance Management Act, 56 of 2003 (MFMA) and section 86A of the Municipal Systems Act, 32 of 2000 (Systems Act), the municipal service delivery and PPP guidelines issued jointly by the Minister of Finance and Minister of Co-operative Governance and Traditional Affairs stipulate that a contingent liability assessment is one of the issues that must be addressed as part of a municipality's submission to Treasury for Treasury's views and recommendations. After the conclusion of the procurement process but before execution of the PPP Agreement by the municipality. Furthermore, every municipality and municipal entity is required by section 122(1)(b) read with section 125(2)(c) of the MFMA to prepare, for each financial year, annual financial statements which disclose, among others, the particulars of any contingent liabilities of the municipality or entity as at the end of the financial year.

An FCCL assessment is necessitated by the requirement of affordability that is so integral to a PPP project and the acknowledgement that the government does not have infinite funds. The requirement for the assessment also recognises, particularly with respect to implicit contingent liability, that private parties would find it impractical to assume contingent risk not provided for in the PPP Agreement, which could eventually result in the termination of a PPP project, and incurring exorbitant termination costs that the government would be required to pay. This therefore offers protection to the private party and ensures the continuation of the project if events that give rise to such liability arise. Moreover, there are political or moral obligations that arise from expectations that government would intervene in the event of a crisis or a disaster.

Unsolicited Proposals

TR 16.11 also provides for and regulates Unsolicited Proposals (USPs). For a USP to be considered and accepted, the proposed PPP project, if developed, must be innovative and pursue a project within one or more of the strategic sectors or objectives relating to the institutional function of the institution to which the USP is made.

A definition of "innovative" has been inserted in TR16.1. to mean:

1. a USP that introduces a novel idea, method, technology, or process that enhances the efficiency, effectiveness, sustainability, the overall performance of a PPP or infrastructure development, or both; and
2. the delivery of PPP or infrastructure projects, or both, through collaboration between public and private entities. The novel idea, technology, method or process should either be original or be an enhancement of the original idea, technology, method, or process.

A definition of "strategic sectors" has also been inserted in TR 16.1 to mean sectors identified by Treasury and listed in Treasury's guidelines regulating the preparation, submission, and evaluation of USPs.

Summarised, the process governing USPs in the newly inserted TR 16.10 is as follows:

1. A USP must be submitted in the form prescribed by the National Treasury to the institution responsible for the institutional function to which the PPP project relates.
2. The accounting officer or authority must evaluate the USP and decide on whether the USP and the PPP project to be developed pursuant to projects are acceptable to the institution. If such are accepted, the accounting officer or accounting authority is to notify the proponent of its decision to accept or if not, of its decision to reject it.
3. If the USP is accepted the accounting officer is to attend to the registration with Treasury and the development of the feasibility study for the PPP project proposed in the USP.
4. If the USP is accepted, the proponent is required to submit a statement stating which protection, confidential, proprietary, or otherwise is claimed in relation to its USP and the PPP project to be developed pursuant to the USP.
5. All costs incurred by the proponent in the preparation and submission of a USP are required to be borne by the proponent (ie a natural or juristic private sector party that submits a USP).
6. Before the development of the feasibility study for the proposed PPP project, the relevant treasury must provide the institution with written approval:
• authorising the proponent to commence with the development of the feasibility study;
• authorising the accounting officer or authority of the institution to appoint a transaction advisor to assist the institution with its responsibilities in the development of the feasibility study for the proposed PPP project; and
• determining its validity period which must be equivalent to a reasonable period required to develop a feasibility study and processing of approvals contemplated in TR 16.4, ie Treasury Approval: I.
7. Upon receiving the previously mentioned approval, the proponent must pay the institution a review fee to enable the Institution to appoint a transaction advisor.
8. The feasibility study developed by the proponent must be submitted by the institution to Treasury for Treasury Approval: I. Pursuant to the feasibility study contemplated in the USP obtaining Treasury Approval: I, Treasury Approval: IIA and IIB and Treasury Approval: III applies to the procurement of a PPP project to be developed pursuant to the feasibility study.
9. In the case where a PPP project developed pursuant to the feasibility study contemplated in the USP is procured through a bidding process that includes a pre-qualification stage, the proponent must be automatically pre-qualified and be shortlisted to submit a bid proposal in response to the procurement documentation. If the proponent submits a compliant bid and is not selected as the preferred bidder, the institution must pay the proponent a development fee as a contribution by the institution for costs incurred by the proponent in relation to the development of the feasibility study for the proposed PPP project.
10. The proponent will not be entitled to payment of the development fee where, following the issue of a request for proposal in relation to a USP as a PPP project, the proponent does not participate in the procurement, participated but failed to submit a compliant proposal, the procurement fails for any reason, or the project fails to reach financial close.

Please note that regulation 16.15 provides that proponents listed on the Treasury's database of restricted suppliers and those convicted of a criminal offence related to professional conduct or in terms of section 214(1)(a), (b) or (c) of the Companies Act, 71 of 2008 are prohibited from submitting USPs to an institution.

To ensure compliance with section 217(1) of the Constitution, the procurement of PPP projects as unsolicited proposals is a welcome amendment to TR 16. It allows for private sector initiatives and projects that the institution may not have considered, and it provides the relevant framework and guidelines for private sector participation. However, instead of encouraging private sector involvement in the procurement of PPPs via USPs, the forfeiture of the development fee may be prohibitive in situations where the proponent is not a preferred bidder, the procurement fails for any reason, or the project fails to reach financial close. As a result, Treasury should consider easing the requirements for USPs and decreasing the instances where the development fee would be forfeited.

Furthermore, the MPPPR has not been amended to allow for the use of USPs in the procurement of PPP projects. Whether the MPPPR will be amended to provide for and regulate them is left to be seen.

Finally, the amendments, especially the relaxation of Treasury Approvals for PPPs procured by national and provincial governments and Treasury views and recommendations for PPPs required by municipal governments will facilitate and go a long way in ensuring quick implementation of PPP projects. USPs are a mechanism that would unlock innovative solutions to the delivery of much-needed government infrastructure and government service delivery mechanisms. Their introduction is thus a welcome development.