Department of Real Estate and Construction Management Real Estate Economics

Thesis no. 43 Bachelor of Science, 15 credits

PPP in Sweden and Germany

A comparison

Author: BECK, Benedikt Stockholm 2010

Supervisor: LIND, Hans

Bachelor of Science thesis

Title Authors Department Bachelor Thesis number Supervisor Keywords

PPP in Sweden and Germany A comparison Benedikt Beck Real Estate and Construction Management 43 Hans Lind PPP, Sweden, Germany

Abstract
Private Public Partnership (PPP) has been developed in different ways in Sweden and Germany. To assess realistically the future possibilities and potentials of this kind of public procurement there is a need to know the progress of the usage of PPP. This thesis shows the development stage of PPP in the two countries and enabled a comparison. Their respective characteristics, problems and reasons of application are identified based on a detailed view on two examples per country and the evaluation of two interviews. It was shown that in Sweden there is an inefficient market for PPP projects with only five competitors, a lack of knowledge and experience in the PPP sector. To gain advantages of this kind of public procurement, PPP should be seen not only as a financial model. In Germany public forfaiting and the Mittelstandsklausel, which means that most risk is put on the public partner causes sometimes less efficiency, but give smaller companies the chance to take part in the PPP market. A further problem in Germany is the misinterpretation of the need of detailed analysis and hence consequences through late changes in the contract and the plans. Finally this paper shows that both countries have further potentials in application of PPP projects. PPP is an essential tool in challenging economic times even for smaller projects in Sweden and Germany.

II

Table of Contents
Table of Contents .................................................................................................. III Table of Figures .................................................................................................... V

1 2

INTRODUCTION ..................................................................................... 1 PUBLIC PRIVATE PARTNERSHIP ............................................................ 2

2.1 2.2 2.3 2.4 Definition ................................................................................................ 2 Basic idea & differentiation ...................................................................... 3 Specific benefits to the public sector .......................................................... 4 Specific benefits to the private sector ......................................................... 5

FIELD OF APPLICATION FOR PPP ........................................................... 6

3.1 3.2 3.3 3.4 3.5 Sectors for the use of PPP ......................................................................... 6 Project structure of PPP ........................................................................... 6 Types of PPP projects ............................................................................... 7 Financial aspects ...................................................................................... 9 Risk management ................................................................................... 10

PPP UNITS ............................................................................................ 12

4.1 4.2 4.3 Reasons and functions ............................................................................ 12 European PPP Expertise Centre (EPEC) .............................................. 14 PP Germany ........................................................................................ 15

PPP CASES IN GERMANY ...................................................................... 16

5.1 5.2 5.3 5.4 5.5 PPP in Germany .................................................................................... 16 PPP models for infrastructure in Germany ............................................... 17 Main financial model in Germany: Public forfaiting .................................. 19 Procurement process in Germany ....................................................... 20 Examples: ............................................................................................. 22 5.5.1 5.5.2 Infrastructural project: Herrentunnel Lbeck ...................................... 22 Buildings: Schools in Offenbach ...................................................... 24
III

PPP CASES IN SWEDEN ......................................................................... 26

6.1 6.2 Infrastructural project: Norrortsleden, Arlandabanan .............................. 27 Buildings: New Hospital/University New Karolinska .............................. 29

7 PPP PROJECTS IN GERMANY AND SWEDEN: EMERGED CHARACTERISTICS, PROBLEMS AND REASONS ....................................... 31
7.1 7.2 Characteristics & Problems of PPP projects ............................................. 31 Financial motives and reasons (procurement vs. financial model) .............. 31

7.3 Efficiency of PPP projects compared to conventional projects - established facts 32

FUTURE TREND .................................................................................... 33

References .......................................................................................................... 34

IV

Table of Figures
Figur 1: Basic idea of PPP ....................................................................................... 3 Figur 2: Differentiation of PPP ................................................................................. 4 Figur 3: PPP project structure .................................................................................. 6 Figur 4: Type of PPP projects .................................................................................. 9 Figur 5: basic model of PPP project financing ........................................................... 10 Figur 6: Allocation of risks .................................................................................... 11 Figur 7: Advantages and disadvantages of a PPP unit ................................................. 13 Figur 8: Organization and ownership structure of PP Deutschland AG ........................ 15 Figur 9: PPP models for infrastructure in Germany .................................................... 18 Figur 10: Financial models in Germany ................................................................... 19 Figur 11: Example of public forfaiting ..................................................................... 20 Figur 12: PPP procurement process in Germany ........................................................ 21 Figur 13: Project structure ..................................................................................... 23 Figur 14: Key project details .................................................................................. 24 Figur 15: Project structure ..................................................................................... 25 Figur 16: Arlanda Railway ..................................................................................... 27 Figur 17: Key project data ..................................................................................... 28 Figur 18: Construction costs (million EUR) .............................................................. 28 Figur 19: Project details ........................................................................................ 29 Figur 20: The New Karolinska Hospital ................................................................... 30

INTRODUCTION

Private Public Partnership (henceforth PPP) has been differential developed in Europe in the last two decades. Meanwhile PPP projects have gained importance and are used as vehicles for an alternative procurement method in the most of the European countries. Although the UK playing a pioneer role with the most matured marked for PPP, amongst others Germany takes also a leading role in Europe respective to the number of planned and realized PPP projects. However, Sweden hesitantly implements the principle of PPP for public procurement. In the following chapters PPP in Sweden and Germany should be displayed in a more differentiated view. At the beginning the basic idea, principles and benefits of PPP are presented. After a short summary of the different aspects of PPP projects and the possibilities of application of PPP the stage of development of PPP in Sweden and Germany should be described. By the basis of the description of two different examples in each country some specific characteristics, reasons for PPP and problems are worked out. Concluding in the last chapter there is a future trend of application of PPP in Sweden and Germany.

2 2.1

P U B L I C P R I V AT E P AR T N E R S H I P Definition

Public Private Partnerships (PPP) can be described as a long term contractual agreement and relationship between the public authorities and private-sector companies. PPP is a procurement method and aim at financing, designing, implementing and operating public sector facilities and services.

Error! Reference source not found.

The partners put together the resources needed (for example know-how, maintenance resources, capital, personal, etc.) in a corporate organizational association and transfer tasks, responsibilities and risks adequately to the partner with competences for the specific risk area. 1 The key characteristics most of PPP projects include: Private investment and life cycle-management Innovation through output specification, service levels & payment mechanism Long-term (sometimes up to 30 years) service provisions, linked to the performance Risks allocated to the best party to manage it Incentive structures

2.2

Basic idea & differentiation

The basic idea behind PPP is that the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility. 2 Both partner extract advantages from this partnership compared to conventional contracts. PPP projects are primarily triggered by the intention to provide public services more efficiently, to optimize life cycle costs and to secure a know-how transfer.

1 2

Bundesgutachten PPP im Hochbau, Bundeskompetenzzentrum 9/2003

Fundamentals and Issues of Public-Private Partnerships, www.ncppp.org

2

Figur 1: Basic idea of PPP

PPP is not building without costs for the public sector but money = investinves ments are needed in order to save money PPP dont answer all challenges PPP does provide a valuable tool NOT Privatization, NOT just Outsourcing in the strict sense of the term (Difference = The level of public control & oversight)

What is PPP?

What is PPP not?

It is an alternative procurement method for the public authorities

Just a financial model Privatization Magic bullet

What are the purpose and the capabilicapabil ties of PPP?

What are not the purpose and the capabi capabilities of PPP?

Increase in efficiency (risk allocation, long term contracts, service level agreement & performance description, private investors) Benefit from innovation potential Impulses for economic growth

Short term liquidation advantages Building without money Saving money without spending money

Figur 2: Differentiation of PPP 3

2.3

Specific benefits to the public sector4

Better value : PPP will deliver or at least improve value to the public compared to conventional projects through one or more of the following:
Allocated and reduced risk Private sector takes life cycle cost risk : Cost effectiveness and mostly lower cost over life cycle Higher levels of service Access to private-sector know-how and principles Efficiently and quicker completion

Access to capital: PPP reduces public capital investment. PPP joins public and private capital in the hand of the private partner but under monitoring of the public partner. Because of shrinking budgets accessing alternative sources of capital than the public budget is a chance to proceed important and urgent projects when otherwise they may not be possible. Certainty of outcomes: Certainty of outcomes are increased both in terms of on time delivery of projects (the private partner is strongly motivated to complete the project as early as possible to control its costs and so that the payment stream can commence) and in terms of on-budget delivery of projects (the payment scheduled is fixed before construction commences, protecting the public from exposure to cost overruns). Innovation : The private partner has the possibility to implement better solutions, new technology and improvements during the building process. By combining the unique motivations and skills of both the public and private sectors and through a
3 4

Cf. PPP lecture notes, Prof. H. Alfen, 2009 Adapted from: GUIDEBOOK ON PROMOTING GOOD GOVERNANCE IN PUBLIC-PRIVATE PARTNERSHIPS, p.5, United Nations Economic Commission for Europe 2008 4

competitive process for contract award, there is a high potential for innovative approaches to public infrastructure delivery with PPP.

2.4

Specific benefits to the private sector

PPP give the private sector access to secure, long-term investment opportunities. Private partners can generate business with the relative certainty and security of a government contract. Payment is provided for example through a contracted fee for service and the revenue stream may be secure for as long as 15 years or more. Private sector partners can profit from PPP by achieving efficiencies, based on their managerial, technical, financial and innovation capabilities. They can also expand their PPP capacity and expertise or their expertise in a particular sector which can then be leveraged to create additional business opportunities. For example, the company can market its experience in other jurisdictions, once it has established a track record of working successfully with the public sector. 5

An Introduction to Public Private Partnerships, Partnerships British Columbia, 2003

5

3 3.1

F I E L D O F A P P L I C AT I O N F O R P P P Sectors for the use of PPP

Generally PPP projects are conceivable everywhere the public sector is in key role and the main player, so public private partnerships can occur in a wide spectrum of local activities and services. In the course of time, projects with a high initial investment or deployment exposed as suitable. Projects were realized in the infrastructure sector, in municipal sewage and waste disposal, water/wastewater supply, in urban and regional development, in housing construction and environmental protection, as well as in the operation of cultural, educational or recreational facilities. PPP may be set up for all public (local authority) services as long as there are no statutory obstacles to full or partial privatization. 6

3.2

Project structure of PPP

The diagram below illustrates the generally used financial and service structure that has delivered a broad range of facilities around the world.

Error! Reference source not found.

Figur 3: PPP project structure 7

The Public Sector client enters into a concession agreement with the SPC, whose shareholders invest equity and raise debt to design and construct the asset via architects and construction companies governed by subsidiary service contracts. Further service contracts with suppliers of operational services such as maintenance, FM services such as cleaning and catering, Information and Communications Technology (ICT), specialist support, equipment and so on, ensure that the facilities are maintained and operated to the agreed standards throughout the life of the asset. 8

3.3

Types of PPP projects9

There is no binding rule on what form public private partnerships must take. There are different types of PPP projects. Operations and maintenance (O&M) is basic form of PPP, in which a public partner engages a private partner to provide or maintain a facility or service. Under this arrangement, the ownership and management of
6 7 8

Public Private Partnerships: Principles, Opportunities and Risks; Werner Heinz, DIFU 2005 Layout: B. Mller, Federal Ministry of Finance Germany http://www.skanska.com/en/About-Skanska/Our-services/Public-Private-Partnerships/How-PublicPrivate-Partnership-works/PPP1/ Adapted from Partnership challenges in achieving common goals A study of Public Private Partnership in e-Governance projects, p. 9, Alok Kumar Mittal Pradeep Kumar Kalampukatt, Ume School of Business 2010 6

the facility or service always lies with the public partner. In another variant, Operation, Maintenance and Management (OMM), the private partner is contracted in management of the facility or system in addition to the operations and maintenance. Although, the public partner retains the ownership of the system, the private partner has the flexibility to invest its own finance for efficient operation. OMM are generally long term ventures to get the reasonable return on the private investment. Design-build (DB) is another form of PPP, where a facility is designed and constructed by the private partner. The public partner owns the facility and carries all the operation and maintenance. This partnership transfers all the risk during the design and construction phase to the private partner. This type is in mostly similar to conventional contracts. In design-build-maintain (DBM) type, the maintenance of the facility or system is also the responsibility of private partner and the corresponding risk is allocated to the private partner. In the design-build-operate-maintain (DBOM) model, the design and construction responsibilities of design-build procurements are combined with operations and maintenance; whereas, the finance is provided by the public sector. The private partner constructs and operates a facility under build-operate-transfer (BOT) model or design-build-finance-operate (DBFO), as per the agreed specifications with the public partner. The private contractor operates the facility for a long period of time under the agreement with the public partner to get reasonable return on the capital invested in the construction of the facility and then transfers it to the public agency at the end of specified term. If the capital costs are high, they are to be managed by the private sector. The public agency, on its discretion may involve the same partner or may contract to any other private firm for future operation of the facility. In turnkey , another type of a PPP project, a public agency contracts the private partner to design and construct a facility as per the pre specified terms of agreement and quality standards. The risks of cost overrun are allocated to the private partner. Generally in this type, the contractors use the fast track techniques to complete the work well within time and cost to avoid the time and cost overrun. The ownership title may remain with the public sector agency if it provides the finance for the construction. Otherwise, the private partner may retain the ownership to operate the facility under a long-term contract. The major types of the PPP projects and their features are summarized below.

Type of PPP Design and Build (DB)

Feature
Private sector designs and builds infrastructure to meet public sector performance specifications. Risk of cost
7

overruns is transferred to the private sector.

Operation and Maintenance (O&M)

A private operator, under contract, operates a publiclyowned asset for a specified term. Ownership and management of the asset remains with the public entity. The private partner is contracted in management of the facility or system in addition to the operations and maintenance. Although, the public partner retains the ownership of the system, the private partner has the flexibility to invest its own finance for efficient operation. Generally they are long term ventures as to get reasonable return on private investment. The private sector designs, finances and constructs a new facility under a long-term lease, and operates the facility during the term of the lease. The public partner owns the facility and carries all the operation and maintenance. The private partner transfers the new facility to the public sector at the end of the lease term. The partnership transfers all the risk during the design and construction phase to the private partner. The design and construction responsibilities of designbuild procurements are combined with operations and maintenance; whereas, the finance is provided by the public sector. The private sector finances, builds, owns and operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through on-going regulatory authority A private entity receives a franchise to finance, design, build and operate a facility (and to charge user fees) for a specified period, after which ownership is transferred back to the public sector. Transfer of a public asset to a private or quasi-public entity usually under contract that the assets are to be upgraded and operated for a specified period of time. Public control is exercised through the contract at the time of
8

Operation, Maintenance and Management (OMM)

Design-Build-FinanceOperate (DBFO)

Design-Build-OperateMaintain (DBOM)

Build-Own-Operate (BOO)

Build-Own-OperateTransfer (BOOT)

Buy-Build-Operate (BBO)

transfer.

Turnkey

Public agency contracts the private partner to design and construct a facility as per the pre specified terms of agreement and quality standards. The risks of cost overrun are allocated to the private partner. A private operator receives a license or rights to operate a public service, usually for a specified term. This is often used in IT projects.

Operation License

Figur 4: Type of PPP projects 10

3.4

Financial aspects

Financing is the essential part of the life-cycle approach. Financing in this case relates to investment costs for planning, construction and all other costs thereby incurred . The financial feasibility of the project needs to be ensured in advance. The private sector brings this financing to PPP, which provides specialized financing that is different from both public finance and corporate finance. Incentive structures for the private partner to save costs can be more powerful installed through private finance. In context of PPP project financing is understood as all kinds of financing which are related to the expected cash flow of the respective PPP. Main characteristics of project financing besides cash flow related lending are Credits are not linked to credit rating of the private company Credit check, economic analysis and monitoring by the independent bank Risk sharing

The main advantage is, that project financing provides comprehensive risk transfer for the public partner. All risks could be transfered to the partner who can manage

10

Partnership challenges in achieving common goals A study of Public Private Partnership in e-Governance projects, p. 9, Alok Kumar Mittal Pradeep Kumar Kalampukatt, Ume School of Business 2010
9

them best. Disadvantages of project financing are the complex and expensive pr procedure in advance for the bidders and banks, higher interest rates, adverse fiscal regulations and high transactions costs.

Figur 5: : basic model of PPP project financing

3.5

Risk management

In conventional procurement contracts risk management mostly was not an issue. But in order the necessity to discuss risks i.e. to identify them, to try to evaluate and analyze them, to clearly allocate all of them and finally to monitor and steer them consequently through the whole life cycle (contract period) has only be realized by implementing complex PPP-models/ PPP contracts. 11 The main categories of risks are construction risk (covering notably events like late delivery, non-respect respect of specified standards, additional costs, technical deficiency, and external negative effects), availability risk (service-level-agreements) (service agreements) and 12 demand risk (market risk). In PPP projects risk could be easily eliminated for the public sector by transferring these responsibilities including significant penalties linked to bad performance. But of course in principle should a risk always be all allocated to the party best suited to handle and carry the risk. So risk management is

11 12

Adapted from Prof.H.Alfen, BUW Weimar Eurostat: Treatment of public-private private partnerships, 2004
10

not just transferring. The public sector needs to take risks the private partner could not manage (as seen in figure below).

Figur 6: Allocation of risks 13

13

www.mannheimerswartling.se
11

4 4.1

PPP UNITS Reasons and functions

It is desirable to have a central consulting service with extensive experience in complex agreements on long-term projects for public-sector clients in all PPP sectors, which serves as a national PPP unit. It is essential that individuals from the private and public sectors come together in the consulting process. 14 Many countries have set up or are in the process of establishing, a dedicated PPP unit. A dedicated PPP united should be defined as any organization set up with full or partial aid of the government to ensure that necessary capacity to create, support and evaluate multiple public-private partnership agreements is made available and clustered together within government. The reference to multiple public-private partnerships is an important distinction to differentiate a dedicated PPP unit for government from a dedicated PPP project unit that may be located in government organizations to support the management of an individual project. PPP units may provide policy guidance, technical support, capacity building, promotion and/or direct funding for public-private partnership projects. They may be located within an independent agency, a centralized unit within the finance ministry, or devolved within dedicated units in one or more line ministries. Arguments exist both for and against the establishment of a dedicated PPP unit (see Table below). These centre on the separation of policy formulation and project implementation, pooling expertise and experience within government, standardisation of procurement procedures, appropriate budgetary consideration of projects, and demonstrating political commitment and trust. However, the move to establish such a unit depends on a combination of factors including: the types on pre-existing institutions in place; the sectoral composition of public-private partnerships under consideration; operation, construction and the various stages of preparation; and the political commitment of the government.

14

The Development of a National PPP Unit: the German Experience, Bernhard Mller, Federal Ministry of Finance Germany, 2009
12

Arguments for a dedicated PPP unit

Arguments against a dedicated PPP unit

A dedicated PPP unit can separate PPP policy formulation and implementation.

PPP policy can be formulated by the same authority that does so for traditional procurement. A dedicated unit may not separate policy formulation and implementation if it can directly fund PPP projects. Knowledge can be supplied by internal and external project advisors appointed directly by individual ministries/agencies with specific expertise in the relevant sectoral area and/or project issues. Line ministries/agencies together with the finance/planning ministry have expertise in assessing costbenefits of projects and political prioritization of projects.

A dedicated PPP unit can act as a knowledge centre on PPP project preparation, negotiation and execution. Centralization of knowledge can provide cost savings for government. A dedicated PPP unit can help regulate the creation of PPP by government organizations to ensure that they fulfill all requirements regarding affordability, value for money and risk transfer. A dedicated PPP unit can ensure that appropriate budgetary considerations are taken for PPP projects and that contingent liabilities are evaluated. A dedicated PPP unit can give a fillip to a countrys PPP programme, soliciting projects, attracting potential partners/investors, building trust and good will with private partners.

The closer a dedicated unit is to the relevant political leadership, the more susceptible it is to the political influence in deciding which PPP project should be initiated. Establishing a dedicated unit may imply an implicit approval of PPP as a policy tool and weaken the case for other viable procurement methods.

Figur 7: Advantages and disadvantages of a PPP unit 15

Adapted from OECD (2008), Public-Private Partnerships: In Pursuit of Risk Sharing and Value for Money, OECD Publishing, Paris.

15

13

The functions of a dedicated unit may include: Policy guidance including advising on the content of national legislation; defining eligible sectors and public-private partnership methods/schemes; project procurement and implementation processes; as well as procedures for conflict resolution/termination. Green lightning projects, i.e. deciding on whether or not a project should move forward. This function refers to the so-called gate-keeping role that some PPP units play at various stages, ranging from the inception stage to final approval of the contract to be signed by the different partners. Technical support to government organizations during the various stages of project identification, evaluation, procurement, contract management. Capacity building including training to public sector officials interested or engaged in PPP. PPP promotion among the public and/or private sector, and possibly in international forums.

Finally, it should be clear that the task of a dedicated unit is not to provide automatic legitimacy for the use of public-private partnerships. Whether or not a PPP is created should, in the first and last instance, depend on the nature of the project and more specifically whether or not creating a PPP will improve value for money compared to traditional public procurement.

4.2

European PPP Expertise Centre (EPEC)

The European PPP Expertise Centre (EPEC) was launched by the European Investment Bank (EIB) and European Commission on 16 September 2008. EPEC is collaboration between the EIB, European Union Member and Candidate States and the European Commission which is designed to strengthen the organizational capacity of the public sector to engage in Public Private Partnership (PPP) transactions. 16 EPEC allows PPP taskforces in EU Member and Candidate countries to share experience and expertise, analysis and best practice relating to PPP transactions. Staffed by experienced PPP transactors, EPEC synthesizes the experience of its members and disseminates this as practical and operational guidance with the aim of enhancing public sector management, reducing PPP costs and increasing deal flow. 17

16 17

Assumed from: www.eib.org EIB Financing for Energy TENs Projects, presentation at TEN-E Information Day, Jochen Hierl, 2010 14

4.3

PP Germany

The PP Deutschland AG (Partnerschaften Deutschland or Partnerships Germany) was founded on 11 November 2008 and has been operational since the beginning of 2009. PP Deutschland AG itself is set up as a PPP project as seen in the figure below.

Figur 8: Organization and ownership structure of PP Deutschland AG 18

As an independent advisory undertaking with a unique pool of public and private PPP know-how, PP Deutschland AG exclusively advising the public sector on projects which can be implemented efficiently within the PPP framework. The main target of the unit is to significantly extend the market for PPP in Germany. The particular advisory approach of PP Deutschland is based on implementing experience in foundation work gained from projects (e.g. further development of standards, distribution of market recommendations for the simplification of PPP processes). The business activities of PP Deutschland are focused on advice in the early phases (financial adviser) of actual PPP projects. The spectrum of PP Deutschlands services will extend beyond these as business adviser during the whole life cycle of a project. 19

18 19

Source: Federal Ministry of Finance Germany Adapted from Prof. Dr. Martin Weber PP Deutschland AG
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5 5.1

P P P C AS E S I N G E R M AN Y PPP in Germany

In Germany, 144 public-private partnership projects (132 building construction; 12 transport) worth EUR 5.6 billion have currently been awarded and a further 126 projects worth EUR 5.2 billion are in the preparation stage. For the next 5 years the federal ministry of finance set an objective for 14 billion EUR for new PPP projects. 20

Annual develpment of the volume of investment in PPP projects (building & road construction)
in million
1600 1400 1200 1000 800 600 400 200 0

1501 590

1407 1102

350 65 2002/03 2004

504 2005

2006

2007

2008

Aug 2009

Figur 9: Volume of investment in PPP projects 21

Build-transfer-operate models are the most common type of public-private partnerships. Other types include build-renovate-operate-transfer and lease-developoperate. The majority of projects relate to building construction, a few to transport. A large proportion of the approved projects (42 of the 144) are geographically concentrated in the federal state of North-Rhine Westphalia. To date, public-private partnerships have accounted for 2-4% of the total public sector investment. The government aims to increase the contribution of private partnership projects to 15% of total public sector investment. 22 In the current situation there are uncertainties on the part of the public sector about the financeability of PPPs. The federal ministry of finance has however made clear that PPP projects can be supported under the Konjunkturpaket II (economic
20 21 22

German Ministry of Finance, 2009

Source: PP Deutschland AG

German Ministry of Finance, 2008

16

stimulus package II). The majority of PPP construction projects in Germany have not currently been much affected by the crisis in the financial markets. 23 Since 2009 there is a new law to ensure the possibility of participation of smaller and mid-size building companies in public procurement contracts 24. This law directs that procurement projects need to be divided in parts with suitable size not only for bigger companies. Because of the difficulties of dividing PPP contracts which would be against the basic sense of this kind of contracts, this new law could be implemented through a so calledMittelstandsklausel. According to this term in PPP contracts, in each case a specified part of the subcontractors need to be smaller and mid-size companies.
Projects awarded Number Project value of pro(million euros) jects 54 1 375 36 25 8 670 655 115 Projects in the pipeline Number of proProject value jects (million euros) 42 29 17 18 1 260 415 675 280

Schools/training centres Sports/cultural facilities Administrative buildings Car parks/logistics centers/ miscellaneous Hospitals Federal buildings (barracks) Prisons Total

4 2

490 315

17 11

1 860 565

3 132

200 3 820

2 136

100 5 155

Figur 10: PPP in public construction works in Germany (June 2009) 25

5.2

PPP models for infrastructure in Germany

In the infrastructure sector in Germany there are basically 3 different PPP models. Under the A-model a concession for building on to an already existing highway is awarded with the concessionaire responsible for maintenance and operation of the new asset. The concessionaire is to return the asset to the State qualitatively at a standard set out in the contract. The concessionaire receives either all or some of

23 24 25

European PPP Report 2009, p. 20, EPEC 97 Abs. 3 GWB

Source: Federal Ministry of Finance, Partnerships Germany. 17

the tolls collected for freight vehicles in addition to a possible stimulus payment by the State. 26 Under the F-model a private firm can receive a concession to build a new or extend an already existing road, as well as assume responsibility for its maintenance and operation. Unlike in the A-Model tolls may be collected from all motorists and not just freight vehicles. A stimulus payment may generally be made at the initiation of the project, the amount of which is decided in the tender process. The private sector firm is obliged to handover the asset at a contractually defined quality standard at the end of the concession period. The model is considered applicable to bridges, tunnels and mountain passes, as well as multi-lane federal roads. 27 The last one is the so called Verfgbarkeits-model (availability model, Functional Construction & Maintenance Contract). The private contractor takes in this model planning, building (construction and/or reconstruction), financing and operation of a traffic infrastructure by order of the public customer. The refinancing is not carried out by the users but the public customer pays a monthly productivity compensation which is connected to the availability of a road and/or the quality of the performance. This covers the costs of initial investment and operation as well as the risk and the benefit of the private contractor. The ownership of the asset belongs to the public customer .

F-Model

A-Model

FStrPrivFinG (from 1994, modified in 2002 & 2005) Construction, maintenance and operation plus financing through a private operator Source of renumeration: o Direct tolls o Subsidy of max. 20% of the building costs from the budget Only tunnels, bridges and passes on motorways and some kind of trunk roads

- Construction,
maintenance and operation plus financing through a private operator - Source of renumeration: o HGV-(shadow)-toll o Subsidy of max. 50% of the building costs from the budget - Extension of motorways from 4 to 6 lanes - 5 pilot projects (in tendering phase)

Functional Construction (& Maintenance) Contract - Construction and maintenance - Source of renumeration: o Payments by the state - Building and maintenance by a private firm

Figur 9: PPP models for infrastructure in Germany 28

26 27 28

Report by German Federal Court of Auditors on PPPs in roads, 2009 Report by German Federal Court of Auditors on PPPs in roads, 2009

Lecture notes, Prof. Dr. von Hirschhausen, TU Dresden

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5.3

Main financial model in Germany: Public forfaiting

The overriding financial model for PPP in Germany is public forfaiting (65%). In this context all financial models are to be understood as forfaiting which include a partly or full assignment of the repayment to the financing bank and a waiver of future claims aims of the public sector. I.e. the public partner will pay to the bank in case of bad performance of the private partner, too. The main reason for public forfaiting is to get loan conditions like the public sector, but this is less efficient because of the th missing incentive mechanisms caused by the (private) finance structure. This model contradicts the idea of risk allocation, because in the case of bad performance the private partner doesnt lose the payment. But loosing (step by step) the investment is a very powerful threat and causes the basically reasons of efficiency advantages.

Financial models in Germany

14%

21% Public forfaiting Project financing unknown

65%

Figur 10: : Financial models in Germany

Project financing and public financing distinguish in terms of scope of risk transfer (and as a consequence different interest rates), amount of transaction costs amount of equity in the project.

19

The main advantages of public forfaiting are the convenient and uncomplicated f financial structure, the extensive experience and standards in Germany, lower inte interest rates and low requirements for equity of the private partner. Disadvantages are obviously the enforceability of claims towards the private partner, therefore the necessity of a monitoring concept and extra effort for project con controlling by the public sector.

Figur 11: : Example of public forfaiting

5.4

Procurement process in Germany

The procurement process in Germany follows an agreed procedure between central and regional government. It concerns about a comparison compa rison of the economic efficiency considering the cashflow including costs for taking risks - over the whole life cycle of the project. This process will be carried out in 4 stages including 3 decisions for or against PPP procurement as seen in figure below. bel

The main stages are:

20

Stage I: Determining project efficiency Test for PPP suitability

Stage II: Calculation of the public sector comparator Estimate of PPP costs

Stage III: Final comparison of the bids received with the PSC If PSC > present value of the PPP-solution, solution, award contract to the successful bidder and signing of contract.

Stage IV: project controlling

Figur 12: : PPP procurement process in Germany 29

29

Own drawing, Layout: B. Mller, Federal Ministry of Finance Germany

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5.5 5.5.1

Examples: Infrastructural project: Herrentunnel Lbeck

In the city of Lbeck two traffic arteries regularly caused traffic jams. The problem lem with the heavily frequented national al road B104 and the Trave waw terway was that once the dilapidated bridge over the river Trave was opened, vehicle hicle traffic broke down. Lbeck's beck's dream was to have a tunnel to prevent such interruptions to traffic once and for all. The federal governgover ment, however, ever, only had the financial means for a new bridge structure. For the additional tional costs of a tunnel, an ala ternative financing source was found: public-private partnership. The Herrentunnel was opened to traffic in August 2005. Herrentunnel Lbeck GmbH & Co. KG (HLKG) financed, built and now operates the new tunnel as private inve investor. HLKG is a partnership between HOCHTIEF and one further partner, each with equal shares. It is responsible for traffic running smoothly, as well as for the general servicing and maintenance of systems and installations. The tunnel will remain fully operational over the entire 30 year concession period. For its services, HLKG rec receives the toll charges paid by tunnel users (1.10 ). In this way, the cost difference between the construction of a bascule bridge and a tunnel is compensated. After the end of the concession period in 2035, the tunnel will be handed over ov er to the city of Lbeck. 30 Key project data: Contract for planning, financing, construction and operation of Herrentunnel Lbeck Consortium's investment volume: EUR 78.5 million Concession period: 30 years (including construction time) Term: 20052035 Concession provider: Hanseatic City of Lbeck Project parties: HOCHTIEF Concessions via HOCHTIEF PPP Solutions (50%), BilBi finger Berger Project Investments GmbH (50%)
30

http://www.hochtief-concessions.com/concessions_en/43.jhtml concessions.com/concessions_en/43.jhtml, 02.05.2010

22

As seen in the figure of project structure, the public sector provides I large part the loans via the KFW 31 bank, a public sector owned promotional bank. The private par partners brings in the equity and are the general contractor of the SPV

Figur 13: Project structure

31

Kreditanstalt fr Wiederaufbau, www.kfw.de

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5.5.2

Buildings: Schools in Offenbach

The city of Offenbach needs to renovate and modernize their school buildings and bring them to a required level in fire prevenpreve tion and energy efficiency. In oro der to save the public budget and use advantages like a shorter construction period and to assure planning reliability, reliability Offenbach bach set up a PPP project for the renovation, modernization ernization and operation of their school buildings. ings. The project is divided in two parts, 50 schools at the eastern area (batch East) and 41 schools in the western area (batch West). At the moment it is the biggest surface PPP project in Germany. For both contracts the private partner and the city of Offenbach establish a special purpose vehicle. Batch East Batch west

Project size

50 schools /284 buildings 2005 100 Mio. Euro / 410 Mio. Euro

41 schools/ 234 buildings

Contract placing Investment volume | Project volume Financial model Duration Efficiency advantages
Figur 14: : Key project details

2004 100 Mio. Euro / 370 Mio. Euro Public forfaiting 15 years

18,1 %,

19,3%,

24

As seen in the project structure, the financial model is public forfaiting. The Mittel Mittels32 tandsklausel ensures that 50% of the subcontractors need to be smaller and mid midsize companies from the region Offenbach.

Figur 15: Project structure

32

See 5.1 PPP in Germany

25

P P P C AS E S I N S W E D E N

The PPP concept has so far gained little support from the government: the Arlanda Rail Link. Connecting Arlanda Airport with Stockholm city Center and completed in 1999, is essential the only project developed on a PPP basis in Sweden. After the election in 2006, the new centre-right government indicated that it was open to new ways of procuring infrastructure and showed increases interest in private participation in the implementation and funding of investments, primarily within the infrastructure sector. They appointed a joint working group comprising representatives from the Swedish Road Administration, the Swedish Rail Administration and the Nordic Road and Transport Research Institute to analyze the legal, financial and technical prerequisites for PPP in the road and rail sectors in Sweden. The terms of reference for the joint working group also included presenting a proposal for a Swedish PPP model. However, recent government bills relating to infrastructure imply that such investments are not envisaged to be implemented on a PPP basis. Future decisions to implement PPP projects are more likely to be made at county council and municipal level, where the issue of whether benefit is to be gained from procuring hospitals, sports arenas and similar facilities on this basis will be considered. In this context, the experience gained from the New Karolinska Hospital (NKH) project will be highly significant. Special characteristics of Swedish PPP-projects:

o o

Various social democratic governments were against PPP because of the strong tradition of public responsibility of infrastructure PPP-projects in Sweden could be a general cooperation (leasing solutions) as well as common partnerships as known in many other countries A few Swedish municipalities already have PPP-projects ranging in project-size from <$1 million to > $ 10 million. Mainly to build sport and cultural facilities. 33

Main questions of the public authorities for PPP-projects in Sweden 34:

o o o

Capital intensity Risk allocation/sharing Market opportunities

33 34

Peter Stein, CEO Stein Brothers AB Linda Andersson, E&Y Sweden

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6.1

I n f r a s t r u c t u r a l p r o j e c t : N o r r o r t s l e d e n , Ar l a n d a b a n a n

The Arlanda a Express is a high-speed high speed link that provides a frequent, reliable shuttle service between Stockholms city centre and the international airport at Arlanda, 40 km to the north. It is a combination of a new 22 km fast-track fast track railway and the exis existing tracks. Till ill 2010 it was the only national PPP project in Sweden.

Figur 16: Arlanda Railway 35

The Arlanda link investment is a finance-build-transfer-operate finance operate agreement between Swedens government and a private consortium which formed project company A ATrain AB with responsibility for designing, financing and building the Arlanda E Express. The private partner built sections B and C and paid for the investment costs but A-Banan Banan was made owner of the infrastructure from that construction w was concluded. A-Train Train is, however, entitled to run passenger trains for a 45-year 45 year period,

35

Own drawing, adapted from Jan-Eric Jan Nilsson, vti

27

with an option for a 10-year extension. After that, the control over infrastructure is to be handed over to the government. 36 The process for this project started with a competitive procurement in 1993-94 with prequalification (more than 30 companies) and final bidding (four consortia). The private consortium accepted the full cost risk; it designed the investment in order to balance investment costs against future maintenance costs. The government could save 170 Mio. Euro and did not have to face any cost overruns and the project was on time.
Client: Partners: Swedish Government, ARC (Arlanda Rights Company) NCC and John Mowlem together with ALSTOM in ALC (Arlanda Link Consortium). Contract: Turnkey system, the entrepreneur builds and maintains infrastructure and operates services 45 + 10 year contract 40 km, involving 9.2 km of tunnels, 3 underground stations 19951999

Contract period Length of the line: Construction period:

Figur 17: Key project data 37 Because of taking all risks, the consortium doesnt open their books. So there are only the basic project data and some construction costs public. The table below shows the construction cost overruns the consortium had to face Section A B C Rolling stock Ex ante 1 90 2 60 85 60 Ex post 2 40 2 70 85 85

Figur 18: Construction costs (million EUR) 38 The Arlanda Airport Rail Link: Lessons Learned from a Swedish Construction Project, p. 81, Jan Erik Nilsson
37 36

Adapted from www.alstom.com

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The unique characteristics of this very first PPP project in Sweden are that the private project company bears responsibility for all construction and current management of everything, from tracks to stations including all marked risks. The governments only responsibility is to operate traffic-control tower. The assets belonging to the project company intersect with national railway system

6.2

Buildings: New Hospital/ Uni versity New Karolinska

The New Karolinska Solna University Hospital is a new university hospital to be built in Stockholm region. The first part of the hospital is to be opened in late 2015. Construction and facility management of the hospital will be set up as a PPP project. This project will be the worlds largest PPP project within the healthcare sector. The rationale from Stockholm County Council (SCC) to procure the New Karolinska Solna hospital as a PPP is primarily threefold: Predictability of cost: to be achieved through an effective risk allocation and stringent contractual structure; Predictability of delivery: to be achieved by structuring a strong incentive for the private sector to deliver on time as well as to leverage in full from its competence and experience; and Added value in terms of design: to be achieved by e.g., taking life cycle cost into consideration

Private partners: Contract period

Skanska & British investment fund Innisfree 30 years (including construction period) + option of extending for 15 years 2010 -2015

Construction period: Figur 19: Project details

The project in itself has the potential of being a global landmark project since it is, the largest single site hospital PPP in the world. In Sweden, it is probably a prerequisite that it is seen to be successful if the PPP market is to take off Sweden and Scandinavia. 39

38

39

THE ARLANDA AIRPORT RAIL LINK LESSONS LEARNED FROM A SWEDISH PPP CONSTRUCTION PROJECT, Jan-Eric Nilsson Erik Gjtterberg, Administrative Director New Karolinska Solna 29

The construction of the hospital, according to the decision, will cost 1.45 billion EUR (monetary value of 2010). This investment includes construction as well as financing, but not equipment. From august 2017, when the hospital is quite ready, the County Council pays a charge to Skanska and the other companies in 200 Mio. EUR annually for 25 years for operation and maintenance, so there are no costs for tax-payers until the day of opening. The construction period of the hospital will be as follows: Phase Utility plant Parking facility Hospital, phase 1 Hospital, phase 2 Research laboratory Patient hotel and parking Building no 1 2 3 4 5 6 Completion March 2014 October 2012 April 2016 August 2017 August 2016 April 2016

Figur 20: The New Karolinska Hospital

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P P P P R O J E C T S I N G E R M AN Y AN D S W E D E N : E M E R G E D C H AR AC T E R I S T I C S , P R O B L E M S A N D R E AS O N S Characteristics & Problems of PPP projects

7.1

In Sweden there is an inefficient market in the building industry with only five big companies. There are even no more competitors for smaller projects with an amount of up to 10 Mio. EUR. But on one hand international companies need a Swedish partner to take part in the market for smaller projects; on the other hand of course Swedish companies dont want to open the market for them. In the resulting efficiency advantages could not be achieved through free competition for PPP contracts. Another problem in Sweden you can find in the incompetence of politicians to decide about PPP project vs. conventional project. 40 In Sweden there was a big discussion that the public sector could borrow money at a much lower interest rate level than the private sector. But PPP gains more efficiency not because of borrowing money but because of risk allocation between the public and private partner. In Germany the market for PPP is quite big. Public forfaiting and the Mittelstandsklausel give smaller companies the chance to take part in the PPP market. However there are only some big players who work on the most of the projects on national level. Most of the problems in Germany with PPP projects occurred through late changes in the contract and the plans, partly after the construction phase. This kind of flexibility costs money, of course, and enables the intention of output specification for PPP-projects to gain desired efficiency advantages. Accordingly such interventions cause discussions in the public about efficiency of PPP projects. As well detailed analysis and planning are essential. At the Herrentunnel project, for example, there is average utilization of only 20,000 cars a day, forecasted have been 37,000 cars a day. This discrepation of course affects the profitability of the private partner. Often in this situation former partners, the public sector and the private consortium, become opponents.

7.2

Financial motives and reasons (procurement vs. financial model)

PPP projects are not only a financial model. PPP is not a means to financing but a way to make building and maintenance more efficient. 41 So they are a procurement model that supports the whole life cycle of a project and not only the very beginning (like in conventional projects). The financial model is an important part that includes the life cycle costs and Value for Money (VfM) testing over the whole project time. A big argument used against PPP is that this kind of financing is too expensive be40 41

Compare interview with Linda Andersson Jan Erik Nilsson

31

cause the public sector could borrow money much cheaper. Of course private financing is always more extensive than public, but cost savings are never coming from there but from other effects and impacts off a PPP procurement structure. And this higher level of capital costs are an expression of the risks the private partner takes. The key value for money argument is that PPP makes use of private sector skills.

7.3

Efficiency of PPP projects compared to conventional projects - established facts

The efficiency of PPP projects compared to traditional public procurement is the crucial legimitation for private participation and private investment in this kind of projects. Completed and ongoing PPP projects indicate possible extensive economies up to 20%. To reach this, it is essential to apply an appropriate risk sharing between the partners and to ensure a fair and transparent competition to avoid new monopolies. 42 The evaluation of 75 PPP projects in Germany shows that the average efficiency advantages change depending on the investment level of the project. Projects with an initial investment up to 10 Mio. EUR the efficiency advantages are at an average level of 12%, projects with an initial investment up to 25 Mio. EUR the average advantages raise up to 14% and projects with an investment over 25 Mio. EUR have an average efficiency advantage of 16%. 43 This study indicates economies of scale which could be achieved in bigger projects.

42 43

ffentlich Private Partnerschaften, Eine Zwischenbilanz im Jahre 2009, Dr. Klaus Funken, 2009 ffentlich Private Partnerschaften, PP Deutschland AG, 09/2009
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FUTURE TREND

For Sweden a successful procurement and delivery of the Karolinska Hospital PPP could also influence future government policy. Because of the lack of PPP projects on the Swedish market, no trends can be ascertained at the moment. But there is an increase of PPP-projects in Sweden within the last three years and at the municipal level there is a much better opinion about PPP. 44 New call for tenders of national PPP projects should attracts both national and international interests like at the NKH with the international investment partner. For further development of PPP at national level in Sweden, a new PPP unit in Sweden is essential to bundle competences and implement gained experiences. The Swedish government has already appointed a committee to analyze the prerequisites for high speed railways in Sweden. Maybe it could be a reasonable combination of this already existing committee, the research of VDI, KTH etc. in a new Swedish national PPP competence unit. In Germany related to the financial crisis there is a decline of PPP projects at the moment. Main reasons are on the one hand the growing public spending in the building sector. As a result the impression is created that there is no need for involvement of private investments anymore. On the other hand there are restraints in the bank sector for this kind of project financing with big liquidity requirements at the moment. Finally this paper shows that both countries have further potentials in application of PPP projects. Obviously Sweden is at a lower level than Germany and other countries, but that is also a big chance to benefit from already the lesson learned on this field. But, like shown in the examples of projects, the development of PPP projects is an individual task for every country with particular resources and specialties in mind. Despite all that PPP is an essential tool in challenging economic times even for smaller projects in Sweden and Germany.

44

Linda Andersson
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References
Linda Andersson, E&Y Sweden; Interview 11.05.2010 Jan-Eric Nilsson; Public Private Partnerships: Why and How Jan-Eric Nilsson; THE ARLANDA AIRPORT RAIL LINK LESSONS LEARNED FROM A SWEDISH PPP CONSTRUCTION PROJECT Prof. H. Alfen; PPP lecture notes BUW, 2009 Prof. Dr. von Hirschhausen; Lecture notes TU Dresden Werner Hein; Public Private Partnerships: Principles, Opportunities and Risks, lecture notes 06.05.2005 Alok Kumar & Mittal Pradeep Kumar Kalampukatt; Partnership challenges in achieving common goals, 2009 Dr. Klaus Funken; ffentlich Private Partnerschaften, Eine Zwischenbilanz im Jahre 2009 Peter Stein, CEO Stein Brothers AB; PPP for infrastructure Financing Evolving Good Practices, presentation 05.09.2007 Peter Stein, CEO Stein Brothers AB; Swedish Experience with PPP, presentation 06.09.2007 Bernd Joachim Romanski; PPP im Kreis Offenbach: Ein Projekt macht Schule, presentation 03.06.2005 Bernhard Mller, Federal Ministry of Finance Germany; The Development of a National PPP Unit: the German Experience, presentation 03.12.2009 Bernhard Mller, Federal Ministry of Finance Germany; Impacts of the credit crisis on the German PPP market? presentation 15.10.2009 Andreas Pfnr, Klaus Hirt, Patricia Egres; Ganzheitliche Wirtschaftlichkeitsanalyse bei PPP Projekten dargestellt am Beispiel des Schulprojekts im Kreis Offenbach, 2008 United Nations Economic Commission for Europe; GUIDEBOOK ON PROMOTING GOOD GOVERNANCE IN PUBLIC-PRIVATE PARTNERSHIP, 2008 PP Deutschland AG; ffentlich Private Partnerschaften , 09/2009 OECD, Dedicated PPP Units, A survey of institutional and governance structure, 2010 OECD; Public-Private Partnerships: In Pursuit of Risk Sharing and Value for Money , 2008 EPEC, European PPP Report 2009
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Working group from Banverket, VTI, SRA; A Swedish Model for PPP in Infrastructure Investment Stockholm County Council; Information Meeting PPP procurement , presentation 03.10.2008 PPP Task Force Germany; Bundesgutachten PPP im Hochbau, 9/2003 Hauptverband der Deutschen Bauindustrie; Memorandum - Finanzierung von PPPHochbauprojekten, November 2006 Partnerships British Columbia; An Introduction to Public Private Partnerships , 2003 Eurostat; Treatment of public-private partnerships, 2004

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