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Unique Public Private Partnership Models for the insurance (and assurance) of Government Infrastructure

Fasken
Reading Time 5 minute read
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Overview

State Owned Entities (SOEs) are amongst some of the entities in the public infrastructure space that insure their assets against future uncertain events. It is common knowledge that government’s assets are a critical component for service delivery in South Africa as they influence output, productivity, and long-term economic growth. Within the public sector space, SOEs are able to insure their assets due to various regulations that make allowance for the insuring of government assets. Municipalities also insure some of their assets such as substations, office buildings and mission critical equipment.

Governments around the world tend to self insure by setting aside a “kitty” for the repair or replacement of key infrastructure. The South African government is no different in this regard. The investment in critical public assets, usually a large and long-term commitment, is a major financial decision for the Government. As a result, these investments must be safeguarded by both the custodian of the exchequer account (National Treasury) and the caretaker of the Government’s built environment and its fixed assets (Public Works). National Treasury and Public Works must ensure that Government assets are well-maintained and resistant to a variety of threats.

Treasury Regulations issued in terms of the Public Finance Management Act 1 of 1999 (PFMA), inter alios, regulate the management of losses and claims in relation to the State and State owned property and in this respect state that subject to the provisions of Regulation 12 “…or any other legislation or agreement, the State will bear its own damages and accident risks and be responsible for all claims and losses of State property where these arise from State activities by an official who is liable in law and who is or was employed by an institution”. The Regulations more specifically prescribe the thresholds applicable to the insurance of a class of movable State property, including amongst others, motor vehicles and other assets determined by the relevant treasury. However in relation to the insurable movable State property, a cap of R250 000 a year on that vote is applied, unless otherwise approved by the relevant treasury. Although this general allowance to insure exists, it is clearly stated that such insurance may be taken “if deemed economical and based on risk assessment”.

With the recent flurry of damage to Government owned buildings we unpack and analyse the possibility of a unique Public Private Partnership ("PPP") model, which can be used as a vehicle to the insurance (and assurance) of Government assets.

Background

Public infrastructure is the backbone of effective service delivery and if there is any disruption or lack of access to public infrastructure, such vacuum will no doubt negatively impact the citizens who are the ultimate end users of these assets. Public infrastructure, such as schools, hospitals, and essential infrastructure networks like power, transportation, and water, can be vulnerable to damage or service delivery protests.

During the 2021 riots, the cost of damages and vandalism to schools was estimated at over R141 million. 14 schools were targeted in Gauteng with damages totalling R38 million. The impact in KwaZulu-Natal was worse, with 144 schools, eight circuit management offices, and three education centres vandalized and looted costing over R100 million. In 2021 a section of the Charlotte Maxeke hospital caught fire and close to a year later, the Government could not complete the repairs and the Solidarity fund has now stepped into the Governments’ shoes and is completing the repairs.

Noting the recent and escalating damage to Government assets, an area of focus when reviewing and setting out policy should be to examine the source of the funds used to repair and replace damaged State property and the specific Government Department regulatory aspects.

In the recent January 2022 case of the Parliament of South Africa fire, it is reported that taxpayers could be expected to foot the bill for repairs, which could be up to R1 billion. Why would taxpayers be expected to underwrite this debt when the Government has reserved funds? Is it perhaps because the reserved funds cannot cover part of or the full amount or because the reserve funds have been redirected to other priorities? Perhaps the reserve funds mechanism is not the most practical mechanism for the Government and the Government should look into employing other ‘hedge’ mechanisms, like insuring key and strategic public assets through a PPP mechanism.

Insurance and Public Private Partnerships Benefits

Putting insurance in place to cover Government assets leads to a more thorough understanding of how different assets are exposed to various risks.

In addition, the costs and benefits of insurance are more predictable compared to other risk financing options. With insurance, the premium level is known in advance as are the payment conditions. Accordingly, the Government can budget a fixed amount for insurance premiums and base its allocation and budget plans on pre-agreed payments.

Thirdly, putting in place an insurance programme adds a financing option to repair and/or reconstruct public assets after the occurrence of unforeseen events, which can considerably reduce the stress to the economy versus relying solely on ad hoc budget allocations and/or traditional debt instruments.

To lower the insurance premiums, the Government can pool risks through collaboration with other insurers through a sui generis PPP Model, something unique. This could allow for an opportunity to tackle the insurance of Government assets in a more sustainable manner. This can be done for targeted assets by specific entities or by asset type or by a collaboration of all the three spheres of Government and private parties. Furthermore, the parties must regularly maintain assets and promote retrofitting of vulnerable structures to increase resilience. This will ensure that the assets are always in a good condition and used for their specific purpose. Finally, where Government assets are damaged due to theft or vandalism, the Government must diligently pursue the recovery of the costs for such damaged property.

It is worth noting that some risks cannot be insured, either because they can't be accurately evaluated or because they're too big to take on. To address those uninsurable risks, Government entities can seek support from the National Treasury and the Department of Public Works or from a range of organisations committed to helping countries increase their resilience to catastrophes by other means than insurance.

Conclusion

The what, how and when relating to insurance of Government assets varies depending on different legislation and varies across SOEs. Fortunately and unfortunately due to the various legislative frameworks at play, a one-size fits all does not exist within Government regarding its insurance protocols.

Looking outside the various legislative frameworks, there could be the possibility of a unique PPP Model that can pave a new way of insuring important public assets.

This article was prepared by partner Hlengiwe Zondo-Kabini, associate Londiwe Khoza and candidate attorney Thabang Nthatisi.

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