• Government Property as a Revenue Generator - Flexing PPPs
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Government Property as a Revenue Generator - Flexing PPPs

07 November 2019

Public Private Partnerships (PPPs) – an agreement between government and private sector where the latter finances, builds and operates a government service for a payment – has now been active in South Africa for over 20 years. However, to date, most PPP arrangements are a cost item to government, such as head office campuses, hospitals or prisons where private sector receives a unitary payment (usually a fixed monthly fee) for delivering the service.

What has been scarce in South Africa is a revenue based PPP or other alternative funding hybrid where government earns an income. Given the tough economic environment and decreasing tax revenues, government has to become more savvy in ensuring it is flexing its resources and aggressively looking for property revenue opportunities.

Although it is possible to flex its current PPPs (particularly head office accommodation) to optimise the revenue sharing opportunities with campus concessionaires ( e.g. from parking fees, second party rentals and sweating of assets), this is not where the big prospects lie. It is well known that government is the largest property owner in South Africa but mostly this is considered to be undeveloped land, own use properties or even derelict properties. It is not always considered that government is also the owner of significant prime property (even whole precincts) in major cities that could be sought after by developers if made available.

These properties lend themselves to a new kind of PPP model, indeed a flexed PPP, where government is not a user of the final product but rather a property owner and income earner. Current projects being considered under the flexed revenue PPP model cover a number of city blocks and will be mixed use precincts with varied opportunities including residential, retail, commercial and entertainment. One use tested was parking only for existing developed prime properties.

Let us then ask the question, why are these developments not already on the market?

  • Reason:The impetus for government to be a “property developer” and generate income from its own resources has not been as strong in the past. The need is higher now.
    BDO view: We anticipate that more of these opportunities will be tested and offered over the next decade.
  • Reason: This type of revenue PPP is new to funders and developers (PPPs require long term commitment) and the term remains a sticking point (private sector wants 50 years plus, whilst government would prefer closer to 30 years).
    BDO view: Significant testing has been undertaken and parties have reached compromises on specific projects. With precedents in place, other projects should reach compromise more quickly.
  • Reason: Pressure is being applied by political interest groups to introduce or increase the affordable housing proportion within the residential offering. This is where government needs to strike a balance between its need to earn optimal revenues from its resources but also deliver to its social mandate. The resulting impact is unfortunately lower project returns.
    BDO view: Further analysis is required to determine the optimum balance of affordable to higher income housing in order to achieve returns that are still attractive to developers. However, it is also evident that interested developers would need to have strong social values to be good partners to government on these projects.

In future, increased flexing of government property resources for revenue purposes is likely to become the rule rather than the current occasional exception.

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