Special Purpose Entities: Key to PPP success

Public-private partnerships often stumble under bureaucracy and risk. A Special Purpose Entity (SPE) can provide structure, credibility, and operational readiness, offering a safer path to successful mega-project delivery. PROF JOHN MALULEKE and ADV A.M. MATJILA explain further… 

When undertaking a public-private partnership (PPP) project, it is important to recognise that critical steps such as project conceptualisation, awareness, and registration with the concession granting authority (CGA) must be prioritised. In a PPP process, the private sector seeks to invest in public infrastructure, while the public sector makes this infrastructure available for use under a concession agreement.

A major challenge is the bureaucratic complexity involved in planning, implementing, and evaluating PPP projects. These processes can take so long that they risk derailing the entire project.

To avoid this, institutions planning to successfully implement PPP projects should consider establishing a Special Purpose Entity (SPE). The figure below  illustrates the critical stages required in the planning and facilitation of a PPP project. It must be stressed that planning is the most critical phase and includes:

• Identification and establishment of equity investors
• Submission and registration of the project with the CGA
• Procurement and selection of the appropriate concessionaire
• Identification of suitable multilateral funding initiatives
• Formation of a construction contractor agreement
• Formation of an operating and maintenance agreement

A catalyst is required to ensure these activities are properly planned and executed; this is the role of the Special Purpose Entity.

What is a Special Purpose Entity?

An SPE can be established by individuals, consortia, or government agencies to enter into commercial contracts. Typically, a team of professionals may come together to form an SPE in order to deliver a large-scale project. Government may also create an SPE to act as an agency facilitating PPP transactions.

In simple terms, an SPE is an entity created for the specific purpose of executing a project. It enables interim commercial contracts to be established when a new business opportunity is identified. This approach is widely used in the management of mega-projects such as infrastructure development.

In South Africa, it is standard practice for entities to form consortia or joint ventures when responding to calls for pre-qualification, so as to meet the bid’s terms of reference.

Why form a Special Purpose Entity?

During the conceptualisation phase of a mega-project, it is risky to overlook the formation of an SPE. Commercial contracts must be signed between formal entities, and the creation of an SPE allows this to happen.

Forming an SPE provides several advantages to bidders. It allows them to demonstrate their operational readiness, show how they intend to secure funding from multilateral initiatives, and present a more credible bid. An interim formal entity also reduces risk in the early stages of project planning.

Project conceptualisation

The first step in planning a PPP is the conceptualisation of an SPE. This is undertaken by the project initiators, known as the Interim Transaction Advisory Team, usually under the guidance of the line department that owns the infrastructure.

The advisory team facilitates all processes leading to registration of the project as a PPP candidate with the CGA. In South Africa, this means registering with the National Treasury.

Globally, governments are increasingly prioritising investment in public infrastructure, and PPP programmes have become common in developing and maintaining economic assets. The Interim Transaction Advisory Team usually shares a common vision, including:

• Strengthening the resilience of economic infrastructure
• Accelerating the planning and execution of both brownfield and greenfield projects
• Engaging private sector partners to propose innovative technological solutions

The formation of an SPE is central to turning this vision into a practical reality.

Submitting and registering the project

Once the advisory team has conceptualised the project and conducted a pre-feasibility study, it submits the concept to the CGA – in South Africa, this is the National Treasury.

If Treasury is satisfied with the outcome, the project is registered as compliant with Treasury Regulation 16 of the Public Finance Management Act (Act No. 1 of 1999). This means it qualifies for a comprehensive feasibility analysis. Treasury will then periodically review milestones and assess whether sufficient public funds are available for procurement. It may also engage with multilateral funding institutions to determine if blended financing is appropriate.

Procurement and selection of the concessionaire

After registration, the advisory team proceeds with procuring and selecting the appropriate concessionaire. Here, the SPE again plays a key role. Consortia or joint ventures bidding for the project must be registered as formal entities, with their own legal status, tax clearance, and compliance documentation.

An SPE is distinct from its parent companies, with its own assets, liabilities, and legal standing. This structure reduces risk and provides clarity during the bidding process.

Accessing multilateral funding initiatives

An SPE also enables smoother engagement with development finance institutions. Compliance with Treasury Regulation 16 is easier to manage when a consortium has already formed a single legal entity.

This structure allows the consortium to prepare its “best and final offer” during negotiations and to demonstrate its ability to secure project funding from international institutions.

Construction contractor agreement

During bid evaluation, concessionaires must show that construction can commence once financial closure is reached. An SPE reduces risk by ensuring that valid contractor agreements are already in place, addressing supply chain concerns during evaluation.

Operating and maintenance agreement

Concessionaires must also demonstrate readiness to operate and maintain the project. An SPE strengthens a bidder’s profile by ensuring compliance with the South African Companies Act (71 of 2008), Section 8(2), reducing risk and improving credibility.

Summary and way forward

Managing mega-projects through PPPs carries significant risk of failure. Legal and structural safeguards are essential. Chief among these is the formation of an SPE, which acts as a catalyst for managing each stage of the supply chain with minimal risk.

The figure above shows the process beginning with the formation of an SPE by a team of specialists. The concept is then submitted to the CGA, registered as compliant, and advanced through procurement and concessionaire selection. In this way, the SPE provides structure, accountability, and credibility to the entire PPP process.