TSHWANE HOUSENEW MUNICIPAL HEADQUARTERS PPP

for the

CITY OF TSHWANE

GUIDE TO UNDERSTANDING THE PUBLIC COMMENT PROCESS

in the context of

THE OVERALL PPP APPROVAL PROCESS)

as basis to inform your

INVITATION TO COMMENT

on the

DRAFT TSHWANE HOUSE PPP AGREEMENT

in compliance with the

MUNICIPAL FINANCE MANAGEMENT ACT SECTION 33

1

Peter Aborn

Project Officer

24 February 2014

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__ CONTENTS OF THIS GUIDE __

IntroductionMFMA Section 120Affordability

Value for Money

Risk Transfer

MFMA Section 33 ReportYear to Year Obligations of the City

Impact of those Obligations on the City’s Future Tariffs and Revenue

Creation of a Significant Asset

Generation of Significant Financial or Economic Benefit

TVR3 Report (Application for Treasury Views and Recommendations No. 3) Project Background

Aims of the Project

Why the Project is being Procured as a PPP

History of the Procurement Process

PPP Description, Scope, and Responsibilities of the Parties to the PPP

Affordability

Sources and Conditions of Funding

Value for Money

Contingent Liabilities

Risk Transfer

Legal Due Diligence

City’s Capacity to Manage the PPP Agreement

Conclusion Reached and Justification

Annexures to the TVR3 Report

The Draft Tshwane House PPP Agreement for Public Comment

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___________________THE GUIDE____________________

Introduction

The PPP Approval process requires compliance with both Section 33 of the MFMA

(Municipal Finance Management Act) and Section (4) (3) of the Municipal PPP

Regulations (Municipal Service Delivery and PPP Guidelines), and, as well, compliance

with Section 120 of the MFMA relating to PPP’s as explained below.

In respect to the above, two reports must be prepared and submitted to National

Treasury as required by the PPP regulatory oversight process.

1. The first is the MFMA Section 33 Report

2. The second is the TVR3 Report (Treasury Views and Recommendations No. 3).

Neither of these reports, as such, is subject to public comment.

The TVR3 report, due for separate submission to National Treasury after completion of

the MFMA Section 33 comment process now underway, will contain information that

could assist readers of this Guide to better understand the overall PPP process, thus

better informing their formal comments on the Draft Tshwane House PPP Agreement

which accompanies this guide.

Notwithstanding that the MFMA Section 33 and TVR3 reports, though not subject to

public comment, and not yet compiled, the City has elected to provide indicative

information within the report formats of these two reports, or to provide descriptions of

what the various sections of these two reports will contain, in the public interest.

Information in the final reports may vary or be more extensive.

All of the above is provided to enable you to articulate your comments on the Draft

Tshwane House PPP Agreement which you are hereby invited to comment upon in

compliance with the provisions of Section 33 of the Municipal Finance Management Act.

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An table of contents of the Draft Tshwane House PPP Agreement appears at the end of

this Guide, as further basis for facilitating your comment as a member of the public.

The draft Tshwane House PPP Agreement and all applicable schedules, along with a

copy of this guide are available in all of the City’s 57 branch libraries, in the City’s 7

regional offices and on the City’s website www.tshwane.gov.za .

The locations of these libraries and regional office are provided at the end of this Guide.

Your written comments may be conveyed to the City as follows:

By post to:

Office of the City Manager, for the attention of:

Mr. Leonard Manamela, PO Box 6338, Pretoria, 0001; or

By email to:

leonardma@tshwane.gov.za

For more information, please call 012 358 4755.

The Tshwane House PPP Agreement and Schedules will remain in developing draft

form until full and final action by the Council of the City at a formal meeting open to the

public approving the final draft of the proposed PPP agreement between the City of

Tshwane and Tsela Tshweu Consortium.

Your comments will be recorded in a formal Register on the Public Comment and will be

considered in preparing the final draft agreement.

The public comment period, based on adverts appearing in the press on Tuesday 4 March 2014 will close on midnight of Friday 4 April 2014.

The matter is expected to be heard at the Council’s regularly scheduled meeting of May

2014.

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City of Tshwane residents and other interested parties who may have occasion to view

the site of the proposed new Tshwane House municipal headquarters, should not be

surprised to see preparatory bulk earth works under way at the site starting early in

March 2014.

The site, former Munitoria remnants now demolished, is bounded by Sisulu, Madiba,

Lilian Ngoyi and Johannes Ramokhoase Streets in the City CBD.

These early works were approved by Council as part of its in principle approval of the

project granted on 24 August 2006, along with authorization to the City Manager as

Accounting Officer to proceed with procurement of the proposed PPP at that time,

including early works as defined by the CM.

Council also approved the adoption of Module 5 of the PPP Guidelines (Treasury

Practice Note Number 6 of 2004) as an integral part of the City’s Supply Chain

Management Policy in respect of PPP’s

The section headings below in respect to the MFMA Section 33 report and the separate

TVR3 report are taken directly from the guidance documents issued by Treasury

(Municipal Service and PPP Guidelines).

MFMA Section 120

Compliance with MFMA Section 120 is of the essence of a PPP procurement.

A PPP Agreement may not be legally signed by the Accounting Officer of a Municipality

(in our case the City Manager) unless all three of the following attributes of a successful

PPP are achieved.

These three requirements, directly quoted from the MFMA (Municipal Finance

Management Act No. 56 of 2003), are: that the proposed PPP must:

1. “Provide value for money to the municipality”

2. “Be affordable for the municipality; and”

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3. “Transfer appropriate technical, operational and financial risk to the private

party”, that is the City’s PPP partner.

It is on this basis that the Tshwane House PPP Agreement is being brought to Council

for its final approval.

Provincial Treasury and the Department of Cooperative Government and Traditional

Affairs will have separately received the draft Tshwane House PPP Agreement for

comment during the same period as the public comment period.

MFMA Section 33 Report (indicative form and content)

Year to Year Obligations of the City

A spread sheet produced by the project’s financial advisor indicating the direct financial

obligations of the City over the 25 year portion of the 27 year PPP will be provided with

the formal Section 33 report to National Treasury.

During the period of the PPP, monthly payments by the City to its PPP partner must be

made to fund the PPP.

The first two years of the 27 year PPP agreement constitute the construction period

during which time the City will have no payment obligations.

Over the construction period, the City will prepare itself for the month to month unitary

payment provisions which will begin one month after moving into the Tshwane House

complex, first buildings targeted for occupancy from 29 April 2016.

These unitary payments are made in monthly tranches in order to manage the PPP

performance, including provisions for payment of penalties in the event of any failure to

meet prescribed levels of service.

The mechanism for setting these penalties is set out in Schedule 13 to the draft PPP

Agreement.

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In layman terms these unitary payments represent a single all inclusive payment

covering all net costs of the PPP, including the cost of construction, the cost of all

furniture and fittings, and the full cost of period to period operating costs and the life

cycle replacement costs.

As part of the latter, the life cycle replacement costs of the project throughout the term

of the PPP are such that the building will be in as new condition, with in addition an

additional five years of life beyond expiry of the PPP agreement..

Moveable assets such as furniture including seating will also have been managed on a

live cycle refresh basis, including replacement as needed.

The Tshwane House building complex, on hand back to the City at the end of 27 years

will have no deferred maintenance burdens, and a renewed life cycle extending for five

years beyond expiry of the PPP, as a capital asset of the City.

The extra five years of life cycle beyond expiry of the PPP represent a value for money

benefit in respect of the future going forward to the 2055 horizon, which is the

overarching goal of the Tshwane House project.

Impact of those Obligations on the City’s Future Tariffs and Revenue

The intent of the Tshwane House project is to ensure that the burden of the PPP as a

mechanism for procuring fully serviced accommodation, not just a building, be less

onerous to the City’s citizens and rate payers than if the City continued under its current

operating practices in respect of serviced accommodation in the City’s current buildings,

leased or owned.

The cost of productivity ineffectiveness arising from the fragmentation of its office

facilities in very space inefficient buildings that hinder the application of state of the art

space planning parameters is taken into account in respect to generating cost savings

to correct such inefficiencies.

The City intends that the PPP should be not just budget neutral, but should rather be

budget impact positive.

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The Section 33 Report to National Treasury must establish that the PPP procurement

model is the best option for Tshwane House in both measurable cash flow terms, and in

year to year budget terms as compared to year to year budget terms on a business as

usual basis in mainly leased facilities in the CBD, and some owned facilities including

Sammy Marks, also taking account of productivity improvements.

The plausibility of such an outcome is supported by a cost benefit study produced by

the Independent Value for Money Assessor engaged by mandate of Council as a

condition of its in-principle approval of the project in 2006.

The Independent Value for Money Assessor Report, in addition to indicating the sources

and quanta of funding under the PPP, constitutes a cost benefit analysis confirming the

comparative wisdom of the PPP procurement option for Tshwane House, compared to

an own resources procurement at an onerous burden on the City’s capital budget and a

less favorable risk transfer profile.

The Independent Value for Money Assessor Report effectively constitutes the City’s

sources of funding model for the Tshwane House PPP.

This study will underpin further discussion in the Affordability Section of the separate

TVR3 Report to be submitted to Treasury after the close of the public comment period.

The Tshwane House PPP is and has been from the outset a means to achieve

consolidation and cost benefit optimization of serviced accommodation in originally13

named buildings housing approximately 2400 staff at project commencement end 2005.

These buildings included the Munitoria remnants now demolished.

The project RFP, by mandate of Council, requires recapture of as much value as

possible from office and meeting room capacity built at great expense in the early

1990’s as part of the Sammy Marks complex.

Sammy Marks includes the meeting and banquet areas where Council now meets in

Sammy Marks, the public library, upper level space in the library housing operational

units of the City, and the separate Clinic building.

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Achieving the full cost benefit available in Sammy Marks under the requirements of the

Sammy Marks development partnership documents will require that the City consider

conversion of the upper levels of the Library currently occupied under space efficiency

ratios completely inconsistent with best practice.

Tshwane House will thus be but one component of the City’s CBD and regionalization

plans already anticipated in the original TVR1 Feasibility study of 19 December 2005.

Creation of a Significant Asset (per MFMA Section 33 sub section 1(C)(1))

The independent Value for Money Assessor cost benefit analysis to be submitted to

Treasury, subsequently to Council with Treasury’s views, will show that the PPP on

expiration after 27 years will provide the City with a nearly as new, state of the art

municipal HQ building complex with a projected capital asset value of R650 million or

more.

In addition, the replaced life cycle value of the moveable assets, including furniture will

have a terminal asset value to be calculated under the asset valuation rules of the City.

The City asserts that the PPP procurement model adopted by the City will in fact

produce a significant asset in the form of the Tshwane House complex on land made

available to Tsela Tshweu under a land availability agreement for the term of the PPP.

Generation of Significant Financial or Economic Benefit (per MFMA Section 33 subsection 1(C)(1))

The significant financial and economic benefits of the Tshwane House PPP, including

socio-economic benefits will be set out in the Value for Money section of the TVR3

report to Treasury.

Annexures to Section 33 Report:

These will include:

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Annexure 1- Certification of Compliance with Section 21A of the Municipal Systems Act

Annexure 2- Register of Public Comments and Representations

Annexure 3- Copy of the TVR3 Report

Annexure 4- Spread Sheets Showing Obligations as Year to Year Unitary Payments

Annexure 5- Report of the Independent Value for Money Assessor

TVR3 Report (Application for Treasury Views and Recommendations No. 3) (indicative form and content)

The TVR3 Report independently submitted to National Treasury as part of its basis for articulating its views and recommendations to the City, will then inform Council’s final approval of the Tshwane House PPP agreement.

The TVR3 Report as set out in Treasury’s Municipal Service Delivery and PPP Guidelines follows the format below.

In the interest of enabling informed public comment, the City has provided information in sections of the indicative TVR3 report below without prejudice to the TVR3 process as such.

The information officially submitted to Treasury in its TVR3 Report, may vary from, or be more extensive than the information below.

Project Background (factual)

The genesis of the Tshwane House project was the March 3 rd 1997 fire that destroyed

the West Wing of the Munitoria complex (main wing), leaving only portions of the lower

two floors at the south, including the Mayoral suite then already moved into the Sammy

Marks bridge, and the Council Building, effectively a separate add on building for 82

councilors, and limited office space at the south end of the first and second floor.

The West Wing had accommodated most of the senior staff, effectively the then “strong

center” equivalent to what the City now seeks to establish in the new Tshwane House.

The West Wing also included a large rates hall at ground floor level.

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Although the proximate driver of the Tshwane House PPP was the 3 March 1997 fire,

the real driver of the Tshwane House project was already the realization then that the

vaunted Munitoria built in 1946 had fallen short of its original intent to sustainably house

all of those operating units or the essential portions of those operating units constituting

the head office complement of the City’s staff in scattered sites in the CBD.

The Council Chamber designed to seat 82 councilors was already packed above its

intended capacity.

The Mayor could no longer be housed within the structure.

The reason for building the Munitoria in the first place, consolidation of scattered office

accommodation and staff, loomed once again, giving impetus to the Sammy Marks

project as part of a new CBD revitalization plan, some components of which have yet to

be achieved (like the 22 story hotel tower still in abeyance across the street from the

Reserve Bank).

The City is determined, in respect to Tshwane House, not to repeat planning horizon

mistakes that made the Munitoria effectively obsolete before the fire, before its time.

That the City’s investment in the new Tshwane House would become inadequate to the

executive side of government as a strong center of regionalized inter-governmental

service delivery facilities, or, that the Council Chamber and support space for the

legislative wing of local government would become inadequate would be irresponsible.

Starting with 250 council seats, with possible enablement of more, is expected to be

adequate, noting, that the municipality may one day be even further expanded.

In the wake of the 1997 fire, a number of initiatives ensued in the dual context of

consolidation of staff for efficiency reasons, and pursuit of a CBD revitalization plan from

the State Theater to Church Square.

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The first post fire plan for a new municipal HQ was Project Phoenix (arising from the

ashes like the mythic bird), a very ambitious project put out to a design competition won

by a proposal retaining the remaining east wing of the Munitoria, with parallel expansion

wings to the north.

This project ultimately failed for a host of reasons, some of these disputed.

From a choice of a PPP as a procurement option point of view, the decision ultimately

taken to abandon the Project Phoenix option in favor of the then brand new in the

country PPP approach was based on the City’s then conclusion that it could not afford

Project Phoenix in capital budget capacity terms.

The City, still keen to rebuild, reconsolidate and move forward, then formally embarked

on a PPP process, nevertheless still based on a proposed head count of nearly 4000,

far in excess of the total number of CBD staff housed in about 13 scattered site

buildings, including the Munitoria East Wing.

A formal PPP feasibility study, equivalent to our own TVR1 study of late 2005,

concluded that a project based on the then stipulated head count of nearly 4000 was

unaffordable to the City.

The formal PPP process then in place was thus cancelled with completion of Phase 1 of

that process in October 2004.

The present PPP initiative was then undertaken with appointment of a Project Officer in

November 2004, who, with the a new Transaction Advisor team appointed in June

2005, determined that a properly projected and sustainable headcount, to this day

proved sound, was in the range of 2400/2500 as the basis of a new feasibility study

completed by end 2005.

That study considered a number of alternative solutions including, inter alia, purchase of

the ABSA bank high rise building now being refurbished at the corner of Lilian Ngoyi

and Pretorius Streets.

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The finally selected option was to rebuild on the existing Munitoria site, this involving

demolition of the extant Munitoria remnants, all to be replaced with a new facility,

Tshwane House.

Accordingly, with the intent of applying the fast track approach pioneered for the dti

consolidated campus in Sunnyside under working in partnership between the dti and

City, the present low rise, multi block approach was adopted for a new municipal HQ.

This approach envisaged pre-contract early works for both demolition and site

clearance to vacant possession, followed by bulk earth works to a generic foot print that

could be adapted to any choice of preferred bidder.

This fast tracking notion was then set out for public comment in the Report on the

Feasibility Study of 19 December 2005, approved by Treasury in February 2006,

ultimately approved by Council in August 2006, noting that the process was interrupted

by local government elections which saw a new City government taking office on 19

March 2006.

The new mayor and a new Council exercised their own duty of care in respect of an

inherited project, approving it in August 2006 with an affordability cap of R117m in

annual payments escalating at CPIX over the PPP term.

Over the course of the PPP procurement process the notion that the bidders should be

given the opportunity to propose a solution that retained the Munitoria remnants was

introduced, provided that such decision was supported by a confirming cost benefit

analysis in terms of the project output specifications.

All bidders rejected the retention option as qualified in the RFP, effectively reconfirming

the original intent of the project output specs for an all new solution

Four bids were received at the tender office on the RFQ closing date.

One was withdrawn, leaving three. All three were prequalified to submit RFP’s.

During the adjudication process one of the three withdrew, leaving two.

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Following the PPP regulatory process from National Treasury, the Tsela Tshweu

Consortium was selected as Preferred Bidder with alternative bidder Mesong

Consortium, appointed as Reserve Bidder.

Aims of the Project

The primary aim was to procure sustainable rationalization of the City’s CBD

administrative office space, with optimization of the direct and indirect costs of

managing this complement of buildings, preferably consolidating everyone into one

facility at that time, should this prove cost effective.

Based on the results of the ASD (Alternate Service Delivery) organizational

development plan, the original notion of a single facility consolidation was rejected in

favor of the strong center approach under which client level service provision and

support would be devolved to the regions where people live, with Tshwane House to

house all top level silo and cross silo policy development, implementation and

monitoring officials with their immediate support staffs primarily.

Tshwane House is to serve as a secure command post capable of operation under all

conditions.

The strong center head count was set at 1501 with the then remaining CBD head count

of 900 to be housed in Sammy Marks as a preferred option under two scenarios both

becoming part of the TVR2b Value for Money Report approved by National Treasury.

One scenario considered short to mid-term retention of Isivuno House, notwithstanding

higher availability risks, as well as higher public safety risks of a high rise building.

The second scenario, was also a high rise solution on the vacant former hotel tower site

at the east of Sammy Marks, to be privately built on a mid-term build to suit lease that

would simultaneously provide a definitive and sustainable completion of the still

unfinished Sammy Marks master plan.

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Directly associated aims were to obtain greatly improved decision support systems,

increased productivity and decreased security challenges among many workplace

efficiency management issues.

As the City broadened its vision to include a whole range of spatial development and

whole-city socio-economic revitalization concepts, a new Tshwane House became far

more than just a place where work is done, more even than a place which is a tool of

the work itself.

Tshwane House has become an essential foundation and catalytic project in support of

the City’s overarching Vision 2055 and beyond.

The delivery of Tshwane House is thus of enormous import to full realization of city wide

spatial development goals, a critical first out of the box project of now five catalytic

projects which can build momentum for the entire city wide vision.

The project, finally, will be a visible symbol and proof of the City’s two guiding compass

points:

Building an African Capital City of Excellence and, complementing this, demonstrating

its new motto, Igniting Excellence.

Tshwane House will be proof of the City’s commitment to CBD revitalization to the

highest standards in the context of the entire range of catalytic projects supporting its

IDP already at advanced stages of implementation.

Tshwane House will launch a new history, while memorializing the old.

It will sustainably support regionalized service delivery management, be the cornerstone

of a now advanced regionalization effort already foreseen in the TVR1 Feasibility Study

of December 2005, and will include a Council Chamber meeting international best

practice enabling the hosting of high level international bodies between monthly

meetings of Council, possibly producing cost off-setting revenues as well as

international prestige.

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In practical terms, Tshwane House will immediately and sustainably increase inner city

real estate values, lead to increased rates revenues to be better quantified in formal

socio-economic impact studies to be undertaken in support of full realization of the

project’s goals during the construction period.

Among other studies, all fundamentally dependent on state of the art space planning will

be a human capital productivity and decision support systems study to determine those

enhancements needed to incrementally decrease the burden of remuneration costs as a

percentage of service delivery cost over a target period while improving the working

conditions and career opportunities of its employees from a batho pele perspective.

No retrenchments are intended nor needed to achieve the above.

Why the Project was Procured as a PPP

All of the City’s succeeding chief financial officers from the 1997 fire through Council

approval in 2006 each declared that the City did not have capital budget capacity to

fund such a massive project on an own resources basis.

Capex, operations and financing costs in process of finalization under the PPP

approach are expected to be consistent with the Independent Value for Money

Assessor Report to be part of the MFMA Section 33 report submitted to National

Treasury for its views before going to Council.

The total net present value cost of the project is expected be comfortably below the high

side cost of R2bn reported to the press by the City’s Executive Mayor.

Whether the City could contemplate a project of such magnitude now on an own

resources procurement is of only academic interest at this point of the PPP process.

History of the Procurement Process.

The Tshwane House PPP began with engagement of the Project Officer in late 2004,

noting that a decision of the City to pursue the project as a PPP had already been taken

prior to that point.

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That first attempt at a PPP solution failed for a host of reasons otherwise irrelevant to

the present Tshwane House PPP except for hard knocks experience gained.

November 2004 - engagement of the Project Officer by the City Manager. November

2004, submission of a formal letter of application to Treasury to register a new PPP

attempt, this constituting the Inception Phase of a PPP project under guidelines in

effect.

December 10 2004 - receipt from Treasury of a formal letter officially recognizing the

new PPP initiative, with the next prescribed step of the process being compilation and

submission of a Feasibility Study (then TA1, now TVR1) in manner and content set out

in the PPP Guidelines,

Early 2005 - Recruitment of a Transaction Advisor (TA), with a supporting decision to

engage specialist legal counsel separately..

June 2005 - Appointment of a TA Team Joint Venture between PDNA (engineers) and

Kagiso Financial Services.

December 19 2005 - Submission of the TVR1 Feasibility Study to Treasury and Report

on the Feasibility Study to public comment.

6 March 2006 - close of public comment, report to City (Mayoral Committee)

19 March 2006 - new government and Mayor named iro just concluded local

government elections held in late 2005.

24 August 2006 - Council provides in principle approval of the PPP and authorizes the

City Manager to proceed with procurement of the PPP with additional authority to

procure the early works including demolition of the former Munitoria remnants, as well

as any further early works as he might define.

The RFQ and RFP processes began thereafter, with the RFP issued on 22 December

2008, closed on 4 May 2009.

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The selection of Preferred Bidder process, with delays arising, was, at the end of the

City evaluation process, submitted to National Treasury review on 10 March 2011, with

Tsela Tshweu Consortium appointed preferred bidder, and Mesong Consortium

appointed as reserve.

The original bids of both bidders have been extended and remain valid.

PPP Description, Scope, Responsibilities of the Parties

Detailed response will be provided in the final report to Treasury.

Affordability

Will be indicated generally in the Independent Value for Money Assessor Report as part

of the MFMA Section 33 Report to National Treasury, to which the TVR3 Report will

itself become an Annexure.

As a stipulated cap by Council, the affordability threshold was established in 2006 terms

at R117m/ as an annual PPP Agreement payment escalating at CPIX, now CPI.

As the project was threatened by periods of potentially massive inflation on the way to

2010 and beyond, it became evident in 2009 that the affordability threshold should take

contingent account of offsetting savings generated by the project as well as any other

possibilities for offsetting third party revenues generated by the project.

This notion, approved in Council submissions, has been applied in the report of the

Independent Value for Money Assessor to be submitted to Treasury, for review and

recommendations, subsequently to Council with Treasury’s comment.

In addition, in mitigation of potentially disastrous inflation risk over any period of

extended delay, Council was approached to approve indexation of the unitary cap over

any delay period at CPIX now CPI, a number that has been remarkably stable for as

long as 30 years.

That R117m/year threshold number has now become R183m as of 1 January 2014.

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Since 2006, a number of factors have modified the scope, these including the adoption

of a proviso that Tshwane House be built to meet GBCSA Five Star green building

standards.

The City is now determined to achieve a Star 6 rating and is already articulating plans at

technical level to bring this about.

The City, now grown to the second largest municipal area in the world integrating two

new district municipalities and the reasonable requirement to future enable addition of

another, has planned Tshwane House accordingly.

A good portion of the otherwise expected cost of expansion of service delivery capacity

will be achieved by productivity enhancements enabled by the new Tshwane House on

the executive side of municipal government.

The needs of the Legislative Branch, in terms of numbers of councilors commensurate

with experienced and future growth in voter numbers, has long exceeded the 82 council

seats in the former Munitoria.

The new Chamber will be built for 250 initially.

The cost of building a sustainable chamber with more seats against a 2055 horizon

exceeds the expectations inherent in the project in 2005.

Technical fit out of the chamber to support translation booths for 8 or more official

languages, properly designed locations for the required two person team for signing for

the deaf, and upgrading to international standards were not foreseen in 2006.

The United Nations, with hundreds of languages spoken worldwide, translates in 8

languages.

The new Tshwane House will equal or better that.

The net Star 5 green building cost impact has been calculated to be approximately

R24m, an amount now expected to be absorbed as value for money.

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The above and any other changes in scope arising since 2006 will be formally

accounted for as Variations to TVR1, such changes to be considered by Council along

with any associated costs at its meeting of May 2014. At this point no additional costs

are expected, with the City obtaining the extra scope as value for money.

Unitary Payment

The Independent Value for Money Assessor Report is conservatively based on the

R117m Council mandated cap, this number now R183m.

No negative impact from Variations to TVR1 is expected.

Pass Through Costs

These costs including electric and water bills are paid as such outside of unitary on the

basis that the PPP partner does not have control of these costs.

Offsets Against Unitary

The notion of allowing savings directly achieved as a result of the project, such as

parking cost savings, as a contribution to unitary, was proposed to Council and

accepted.

The annual savings from parking is in projected in current rand value terms in the range

of R7m per year.

Also considered were possible third party revenues from street level store front

commercial retail or service to the public tenancies (like a tourist bureau), primarily at

the “back of the house” along Johannes Ramokhoase Street .

While the project has now enabled such store front occupancies, the current

affordability model conservatively excludes any potential net revenue from retail either

as direct commercial income or as savings from relocating City agency tenancies from

other locations.

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Budget Sources

These are identified in the Value for Money Assessor Report to be part of the MFMA

Section 33 Report to Treasury, to which this TVR3 Report will become an Annexure.

Affordability

Based on the findings of the Independent Value for Money Assessor, the project is

expected to be affordable.

Sources and Conditions of Funding

These will be as set out in the Independent Value for Money Assessor report.

Impact of the PPP Obligations on Future Municipal Tariffs and Revenue

These will be set out in the MFMA Section 33 Report.

Value for Money

This will be calculated on a number of benchmarking studies to be completed with the

final TVR3 report to Treasury. Substantial value for money is expected.

Project Infrastructure, Operations and BBEEE

Infrastructure is not part of the Tshwane House project.

Very ambitious BBBEE targets have been agreed between the PPP Partners as set out

below as value for money achieved by the project to an extent unachievable under a

conventional procurement approach.

Value for Money (Project compared to Public Sector Comparator, PSC)

Supporting analysis, favorable, is being prepared for the TVR3 report to Treasury post

Section 33 public comment.

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Value for Money in Terms of Risk Adjusted Market Related Costs, Achieved Best Practice and Benchmarking Against Comparable PPP Projects

Unlike conventionally procured projects under routine public sector procurements, PPP

procurements involve a complete reversal of responsibility for design risk, specifically

for the design and construction of a building, Tshwane House in our case.

In routine public sector procurements under common supply chain management

procedures, the specifications for a new building project would be meticulously

established in advance by a Bid Specifications Committee in support of bidder selection

on price, that is to say, price per spec.

Design risk lies primarily with the producer of the specifications.

In a PPP, the detailed specifications are provided by the bidders, ultimately recorded in

a Schedule to the PPP Agreement, in a reversal of roles that directly engages or

compels a selection of bidder on the basis of comparative creativity within a common

ball park defined in part by a cap on costs (unitary payment).

In the PPP, the City sets the performance specifications as “output” specifications,

placing design risk entirely in the lap of the bidders, while at the same time obtaining a

selection based on comparative creativity, expecting, of course, a level of creativity and

problem solving exceeding what the public sector entity would be capable of in-house.

To the point, risk transfer comes at a cost that generally tends to become a trade-off in

comparing unit costing, say cost per GLA meter (Gross Lettable Area) that may be

higher than prices achieved without transfer of risk or advantage of competitive

creativity.

Accordingly, the City has applied the notion of benchmarking against comparable PPP’s

by government in South Africa as a better basis for judging comparative value for

money.

The relevant studies will be submitted to Treasury with the final TVR3 Report.

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The original and still challenge of the Tshwane House PPP was to build a strong center

for service delivery on a cost effective basis for the operational or executive branch of

municipal government as overseen by the City Manager.

Notwithstanding this, the City is pleased to confirm that the cost of a state of the art

Council Chamber has been effectively absorbed within unitary as value for money and

the office complex as such provides accommodation for the Speaker of Council, and all

supporting structures of Council.

Beyond the above, indeed supporting the above, the building space planning output

specification requirements from the TA space planner, jointly with the TA architectural

advisor, have resulted in a building that competes well against achieved best practice,

and, in particular, betters the conservative space efficiency numbers conservatively

used by the Independent Value for Money Assessor.

Supporting data will be provided in the final TVR3 report to Treasury.

The City concludes in respect of all of the above that the project has fully achieved the

requirement of MFMA Section 120 that the proposed PPP “Provide value for money to

the municipality”

Contingent Liabilities

The single most significant contingent liability of the Tshwane House PPP, in common

with PPP’s generally, is “compensation on termination” of the PPP at any time prior to

expiry.

The impact in such event, however unlikely, could be onerous.

Such an event is roughly equivalent to the impact on a normal facility in the event of

acceleration of a debt, such as a bond, with the entire remaining unpaid debt due and

payable immediately on default.

A normal citizen might lose her home in such circumstance.

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A PPP, however, as a limited recourse financing instrument, prevents any lender from

attaching assets produced under the PPP, Tshwane House in our case.

This is a complex matter dealt with in detail in the relevant schedules to the PPP

Agreement.

PPP agreements, including ours are thus crafted to manage this risk to the fullest

possible extent.

The quantum depends on when during the PPP such an event might occur under a

formula set out in the PPP agreement.

Precise information on this matter is provided in the draft PPP agreement submitted to

public comment.

Risk Transfer

The costed analysis of effective transfer of risk to the PPP partner will be part of the

City’s final formal TVR3 report to National Treasury.

The City concludes that the Tshwane House will meet the risk transfer requirements of

MFMA Section 120

Legal Due Diligence

This work will be done as part of the final TVR3 submission to National Treasury.

City’s Capacity to Manage the PPP Agreement

The City has effectively no current capacity to manage the PPP Agreement, though it

does have on board an empowerment candidate to be mentored and trained as a

member of an overall PPP Project Management Unit already contemplated by the City

in anticipation of other PPP projects.

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The unit will be fully supported by an administrative support team to manage the coal

face challenges of the project, notably management of the fundamental payment and

penalty regime as set out in Schedule 13 of the PPP Agreement.

A Contract Management Plan will be attached to the final TVR3 report to Treasury

Roles and Responsibilities of the Municipality During Each Phase of the Project

These will be set out in the final TVR3 report to Treasury

Contract Management Processes of City to Assess its Performance of in Respect of the

PPP Agreement and Related Legislation (MFMA)

These will be set out in the final TVR3 report to Treasury

Means for Addressing Issues such as Attitude and Behavior

These will be set out in the final TVR3 report to Treasury

Conclusion Reached and Justification ( indicative language)

The City concludes that the proposed PPP Agreement comfortably meets the requirements of Section 120 of the MFMA, i.e. that the Tshwane House PPP demonstrates all of: affordability, transfer of appropriate risk to the private party and value for money as a basis for the City Manager to legally sign the PPP Agreement upon prior final approval of the PPP by Council in May 2014.

The project, has, moreover, (to be confirmed post public comment) achieved each of the above in measure exceeding expectations of TVR1, and levels equal or higher than those presented in the TVR2b Report of 10 March 2011 in respect of the selected Preferred Bidder proposal from Tsela Tshweu as negotiated on the basis of its RFP proposal.

Accordingly the City will apply to Treasury for its favorable recommendation to complete the project through financial close and full delivery in 2016, such recommendation in support of the City’s own recommendation to Council that it duly approve the proposed PPP Agreement, as submitted, without further change as required by law.

The formal vehicle for application to Treasury is the TVR3 Report described above.

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Annexures to the TVR3 Report

These will include:

Annexure 1: Final Draft Agreement

Annexure 2: PPP Agreement Management Plan

Annexure 3: Written Statement of Affordability by the Accounting Officer

The Draft Tshwane House PPP Agreement

The table of contents for this draft agreement appears below to assist your navigation

through the PPP Main Agreement and its Schedules.

Note that the draft remains a working document in active progress, with discussion

points and positions present in the documents subject to further elaboration.

All of the principles of the agreement, as well as the requirements and principles at

issue, these reflecting the requirements of the RFP project bidding process are present

within the draft document.

Much of the content of the draft is highly technical and may be difficult to understand by

lay readers. Still we hope that every reader will find points of interest that will elicit

comments that will contribute to a better project.

Among the schedules that may be of particular interest to the public iro design,

operations management or broad based black economic empowerment are Schedules

5, 6 and 13, respectively covering BBBEE, design and space planning principles and

requirements, and operations management principles and requirements over the term of

the PPP.

Tshwane House is expected to be ready for occupancy from 29 April 2016 on a block

by block basis as set in the one page summary programme to delivery at Schedule ??

Thank you for your interest and for any comments or representations you may submit in

respect to the accompanying draft Tshwane House PPP Agreement.

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Peter Aborn

Project Officer

Tshwane House PPP Project

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Contents of the Tshwane House PPP Draft Agreement

(Main Agreement and Schedules)

CONTENTS

PART A: PRELIMINARY 7

1 INTERPRETATION 7

2 EXECUTION AND DELIVERY OF DOCUMENTS 7

3 COMMENCEMENT, FINANCIAL CLOSE AND DURATION 8

4 PROJECT DOCUMENTS 9

5 THE PROJECT DELIVERABLES 9

6 ASSISTANCE AND CO-OPERATION\l 1 10

PART B: GENERAL PROVISIONS 11

7 GENERAL OBLIGATIONS AND RESPONSIBILITIES OF THE PRIVATE PARTY 11

8 HEALTH AND SAFETY 12

9 BROAD BASED BLACK ECONOMIC EMPOWERMENT 13

10 WARRANTIES 13

11 INDEMNITIES AND LIABILITY 15

12 LIMITS ON LIABILITY 19

13 BACKGROUND INFORMATION 20

14 REPRESENTATIVES 20

15 EMERGENCY REACTION PLAN 22

PART C: LAND ISSUES 22

16 NATURE OF LAND INTEREST 22

17 CONDITIONS OF THE SITE 26

18 CONSENTS AND PLANNING 29

19 HERITAGE RESOURCES 29

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20 UTILITIES 30

PART D: DESIGN AND CONSTRUCTION 31

21 THE DESIGN, CONSTRUCTION AND COMMISSIONING PROCESS 31

22  RIGHT OF ACCESS OF CoT'S REPRESENTATIVE 33

23 PROGRAMME AND DATES FOR COMPLETION 34

24 INDEPENDENT CERTIFIER 36

25 PRE-COMPLETION COMMISSIONING AND COMPLETION 37

26 FINAL COMPLETION COMMISSIONING 41

PART E: QUALITY ASSURANCE 43

27 QUALITY ASSURANCE 43

PART F: ICT PROJECT 46

28 INFORMATION AND COMMUNICATION TECHNOLOGY PROJECT 46

PART G: SERVICES 47

PART G: SERVICES 47

29 THE SERVICES 47

30 MAINTENANCE 47

31 MONITORING OF PERFORMANCE 51

32 COMMERCIAL DEVELOPMENT ACTIVITIES

33 SITE SECURITY AND PERSONNEL ISSUES 55

34 STOCKS, CONSUMABLES, MATERIALS AND EQUIPMENT 56

PART H: PAYMENT AND FINANCIAL MATTERS 58

35 PAYMENT 58

36 INSURANCE 59

37 INFORMATION AND AUDIT ACCESS 69

PART I: CHANGES IN LAW AND VARIATIONS 73

38 UNFORESEEABLE CONDUCT 73

39 VARIATION PROCEDURE 76

PART J: COMPENSATION EVENTS, RELIEF EVENTS AND FORCE MAJEURE 77

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40 COMPENSATION EVENTS 77

41 RELIEF EVENTS 79

42 FORCE MAJEURE 82

PART K: TERMINATION 84

43 PRIVATE PARTY EVENTS OF DEFAULT 84

44 CoT EVENTS OF DEFAULT 87

45 NON-DEFAULT TERMINATION 89

46 EFFECT OF TERMINATION 89

47 COMPENSATION ON TERMINATION 92

48 FINAL MAINTENANCE SURVEY 93

PART L: MISCELLANEOUS 94

49 ASSIGNMENT, SUB-CONTRACTING AND CHANGES IN CONTROL 94

50 INTELLECTUAL PROPERTY 95

51 CONFIDENTIALITY 98

52 TAXATION 99

53 CORRUPT GIFTS AND PAYMENTS 100

54 NOT USED 103

55 DISPUTE RESOLUTION PROCEDURE 103

56 NOTICES 103

57 AMENDMENTS 105

58 WAIVER 105

59 NO AGENCY 105

60 ENTIRE AGREEMENT 105

61 CONFLICTS OF AGREEMENTS 105

62 SEVERABILITY 106

63 COUNTERPARTS 106

64 COSTS AND EXPENSES 106

65 NO PRIVITY 106

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66 MITIGATION 107

67 GOVERNING LAW AND JURISDICTION 107

68 FURTHER ASSURANCE 107

69 WAIVER OF SOVEREIGN IMMUNITY 107

70 NO BETTER, NO WORSE POSITION 107

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SCHEDULES

1 DEFINITIONS AND INTERPRETATION

2 COMPLETION DOCUMENTS

3 BENEFICIAL OWNERSHIP OF THE PRIVATE PARTY

4 EMERGENCY REACTION PLAN

5 BROAD BASED BLACK ECONOMIC EMPOWERMENT

6 SPECIFICATIONS

7 THE PROGRAMME

8 REVIEW PROCEDURE

9 COLLATERAL AGREEMENTS

10 OUTLINE COMMISSIONING PROGRAMME

11 NOT USED

12 INDEPENDENT CERTIFIER AGREEMENT

13 PERFORMANCE STANDARDS AND PAYMENT MECHANISM

14 INSURANCES

15 VARIATION PROCEDURE

16 COMPENSATION ON TERMINATION

17 FINAL MAINTENANCE SURVEY

18 NOT USED

19 REFINANCING

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20 DIRECT AGREEMENT

21 DISPUTE RESOLUTION PROCEDURE

22 CERTIFICATES

23 THE SITE

24 COMMERCIAL DEVELOPMENT ACTIVITIES

25 ICT INTERFACE AGREEMENT

26 SECTION 37(2) PRINCIPLES

27 RELOCATION PRINCIPLES

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