By Bongani Mankewu – Associate of the Infrastructure Development & Engagement Unit at Nelson Mandela University. He writes in his personal capacity

Traditionally, supply chain governance has been viewed from two theoretical perspectives. The first perspective is based on transaction cost economics (TCE) - conflict and opportunism. Another perspective emphasizes the importance of agreements known as Agency Theory.

It is important to distinguish between TCE and Agency Theory within PPP finance. Unquestionably, these two are uniquely positioned at the outset. Agency theory views the company as a nexus of agreements, while TCE views it as a governance structure.

The Eskom Transmission Division will begin relying more heavily on the engineer, procure, and construct (EPC) contracting model once the National Transmission Company of South Africa is created later this year. The company intends to accelerate the pace at which transmission infrastructure is built. This is in the context where the lack of a grid has become a key barrier to the growth of new-generation facilities it is reported.

Public-private partnerships (PPPs) to build and operate grid assets appear to be under discussion separately. Hindsight informs us that Eskom has a governance deficiency, whereas both EPCs and PPPs emphasize governance architecture to harmonize relationships for managing risk between stakeholders.

Furthermore, the specific structure or design of the public-private partnership matters. To ensure public administration is not exchanged for private interests in PPPs, legitimate safeguards, strong political commitment, and effective administration by a strong, equipped government are necessary.

Increasingly, Public-Private Partnerships (PPP) for infrastructure projects use the Design-Build-Finance-Operate-Transfer model (also called the DBFOT model or the BOT model). A matrix-like questioning could be relevant to the EPC model as envisaged by Eskom; 1) Who designs, 2) Who finances, 3) Who constructs, 4) Who operates and maintains, 5) Who owns land and assets, and 6) Will the asset be transferred back? A hybrid of EPC and DBFOT will certainly be considered in response to these questions. The EPC alone implies that the government is responsible for all aspects of the raised question except construction. After experiencing power plants that plagued the nation into a progressively accelerated apocalypse, can we allow government-led mega infrastructure projects?

Governments are exposed to a great deal of moral hazard due to the unrelenting conflict-driven packaging of infrastructure financing. This has an adverse effect on the entire population, as it makes the local economy fragile and weak. Since rent-seeking leads to agency problems due to the conflict between corrupt politicians and public obligations, it ultimately destabilizes institutional frameworks; citizens therefore must bear the burden of debt accumulation.

To ensure the proposed powerline succeeds and contributes to industrialization, Eskom must carefully consider governance and the nexus of agreements that include shareholder compact scrutiny. Conversely, the EPC model can result in inequitable transaction costs, which impair economic stability and promote reckless bankability and investability practices.

What is evident in South Africa’s mist of infrastructure ecosystem is neither the National PPP Policy nor the institutional structure is viewed from a regulatory perspective. Nor is it explained from a TCE and/or agency theory or governance and nexus of agreements perspective. Thus, the EPC model is likely to be limited by these conditions, therefore careful consideration must be given to the regulation of transaction advisory firms through the PPP regulatory framework.

Considering the impact of EPC in infrastructure rollout South Africa must develop the nascent local EPC firms and advance industry and engineering standards to be integrated with global standards.

To make this a reality in infrastructure delivery and financing, judicious, enlightened, and technocratic governance practices must be sacrosanct. The reality is that SOEs today operate as inefficient quasi-government departments that do not offer meaningful competitive advantages to global value chains.