The important role of SMEs in public/private partnerships

Online since 31.08.2016 • Filed under Industry news • From Issue 4 - September 2016 - February 2017 page(s) 44-45
The important role of SMEs in public/private partnerships

Slower capital inflows moderating growth in developing economies means fewer funds for infrastructure development. However, small and medium enterprises can contribute to infrastructure development by forming private/public partnerships in the construction industry.

During current market volatility as experienced by developing economies, private/public partnerships in construction enable governments to deliver infrastructure that will assist in growing their economies. Frans Pienaar, Chairman of Inyatsi Construction, explains the role small and medium enterprises (SMEs) can fulfil in public/private partnerships in the construction industry. SMEs provide a means of entry into the industry for start-ups and can be a major driver to develop and grow key skills. Owner-operated businesses are much more efficient than more mature businesses where overhead creep removes the competitive pricing edge. SMEs usually operate with very low overhead costs. The reputation of a business is important – a core (intangible) asset that creates barriers to competitive threats. Reputation can have positive and negative effects on the overall market value of a business and its returns. It goes without saying that reputation is of cardinal importance in public/private partnerships. Public/private partnerships can also alleviate the market volatility experienced by developing economies. There is a trend in developing countries to incorporate the expertise of the private sector into infrastructure projects traditionally carried out as public projects. This is done based on a proper demarcation of roles and risks between the public and private sectors.

Incentivised skills

Private business adds incentivised skills to a project. Government employees often do not benefit directly from their inputs, but employees of private entities directly benefit from their contribution to success. This can be done in the public sector, as seen in the massive success of the SA Revenue Service over the last decade, which can be linked to incentives that directly benefitted employees. However, it is very difficult for government to incentivise employees. This is where private enterprises can contribute an edge to a public/ private partnership project. The projects are usually quite large and long-term, creating stability and predictability in the business landscape, removing the hit-and-run aspect of outsourced business and bringing a longer horizon. The construction of infrastructure can be an enabler for SMEs to invest in African countries because the entry level of skills required in infrastructure projects usually provides easy entry for start-ups. In addition, SMEs can quickly mobilise large numbers and spread the wealth and opportunity much wider than organised business.

Skills retention

Large enterprises often employ personnel and teach them skills. However, at the end of the project this person is unemployed again, virtually in the same position as before. On the other hand, when a SME provides this opportunity, the enterprise also learns the skill of tendering and procuring work for the future to create more potentially sustainable employment. SMEs also have the benefit of total cost to company for an employee that is less than the cost for the overhead structure of big enterprises, making it possible to offer the same product at a lower price.

Investing in infrastructure

Public sector infrastructure spending is normally a good indicator of the construction industry’s performance. Governments are the biggest investors in infrastructure and government spending enables private enterprise to unlock business potential. It is up to government to create the environment conducive to business to ensure investment in long-term business. Private sector funding now accounts for a large portion of the funds entering developing countries from developed countries. The activities of the private sector in developing countries have been expanding and are focusing on new areas, such as public/private infrastructure projects, base of the pyramid businesses and corporate social responsibility activities. These efforts have contributed to creating employment opportunities and human resource development, as well as improving technology. With a global failure rate for new businesses at 50% and a rate of failure of eight out of 10 SMEs within the first three years, these enterprises struggle to stay afloat against corporates. By giving SMEs access to public procurement contracts, the set failure rate can be improved. Public/private partnerships and turnkey-type projects can ensure that risk is managed by the parties best suited to do so. The New African Contract could be replicated for these partnerships to involve a team of professionals for technical design, technical advisory and management. Relevant authorities in South Africa should consider mobilising knowledge, skills and capacity in the private sector.

Government entities should look to the private sector to implement projects on a government-funded turnkey basis, while the New African Contract can assist the industry in overcoming challenges, such a lack of capacity in government and professional structures tasked to implement infrastructure projects, the substandard quality of products, a drop in infrastructure development and the monopoly in the market that follows.

Issue 4 - September 2016 - February 2017

Issue 4 - September 2016 - February 2017

This article was featured on page 44-45 of SABI Magazine Issue 4 - September 2016 - February 2017 .

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