Public-private partnerships for public infrastructure projects? – Objectives and experiences in Germany and Europe.

Contact : Paul Gerd Löser
T: +352 43 79 31 39
Email: p.loeser@bei.org

In Berlin today, the European Investment Bank (EIB) is holding a conference on the above-mentioned topic at the Representation of the Land Brandenburg to the Federation. EIB Vice-President Wolfgang Roth is chairing this event.

Speakers at the conference include: Federal Minister Wolfgang Clement (Federal Ministry for the Economy and Employment); Parliamentary State Secretary Karl Diller (Federal Ministry of Finance); Parliamentary State Secretary Achim Grossmann (Federal Ministry of Transport, Construction and Housing); Friedrich Merz, Member of the Bundestag; Dr Peter Klaus, Member of the Board of Managing Directors of KfW; Minister Birgit Diezel, Ministry of Finance of Thuringia.

The following is a summary of Wolfgang Roth’s presentation:

PPPs for infrastructure investment in Germany – a lot of discussion, but few results

Public-private partnerships for planning, building, financing, managing and operating infrastructure projects are enthusiastically discussed in Germany, but not much has really happened yet. In the case of our European neighbours and elsewhere it is a different story. Annual investment worldwide through PPPs is between EUR 7.5 and 9 billion, about 40 per cent of this in the United Kingdom, where PPPs were developed in the early 1990s. The European Investment Bank has actively supported this trend from the very beginning and has to date financed around 60 PPP projects in Europe with total loans of EUR 16 billion. The Bank is therefore one of the most important financiers in this sector.

In the last few months the EIB has shared its pan-European experience with various ministries of the Länder and of the Federal Government in order to encourage the progress of PPPs in Germany. The critical state of the budgets of the Federal Government, the Länder and the municipalities gives good reason to apply new financing models and thereby to bridge gaps in budgets and clear backlogs in investment projects. Gross public sector investment has fallen from more than 3 per cent of GDP in the early 1980s to around 1.8 per cent. Major investment is needed in new transport routes, especially east-west connections, as well as in schools, higher education institutions and hospitals.

By using PPPs, infrastructure investment can be implemented at lower cost, more swiftly and often with reduced current operating costs. PPPs therefore make an important contribution to modernising and increasing the efficiency of the public sector and making the best possible use of capital. Experience in the United Kingdom, the Netherlands, Spain, Portugal and Greece shows that potential savings in the order of 10-20 per cent can be achieved, compared with the cost of infrastructure set up and operated under State auspices.

In PPPs the public sector uses competitive tendering procedures to select undertakings as private partners. Depending on the model used, potential partners may be asked to submit a comprehensive tender for financing, planning, construction, operation and all maintenance work. The private partner’s profit derives either from a specific share of revenue, for instance road tolls, or from State payments throughout the contract life, which may be up to 30 years. At the same time, the private partner is liable for possible cost overruns and is subject to penalties if the agreed services are not provided at the agreed time. Detailed studies by the UK National Audit Office have pointed to an average 70 per cent fewer cost overruns and 66 per cent fewer completion delays in public investments implemented as PPPs.

The aim of PPPs is therefore mainly to achieve cost efficiency in the procurement and maintenance of infrastructure services, and not, or at least not primarily, to develop new sources of financing or to obtain finance from sources other than public budgets. The PPP debate in Germany, which is conducted partly in ideological terms and focuses on breaches of the principles of budgetary transparency and accuracy and the creation of shadow budgets, therefore misses the point.

In order to achieve efficiency gains using PPPs, it is important to establish and plan the cost of a project over its entire life cycle. The initial investment, the operating and maintenance costs, investment for upkeep and replacement and financing costs must all be established as early as the planning phase. Only if all the costs of alternative projects are known can the correct decision be taken. Experience also shows that the larger the number of private tenderers for a PPP, the more the implementation process can be standardised, the more the risk can be controlled and the more the successful outcome of the project can be planned (and can, for example, be factored into the lender banks’ basis for calculations), and the lower the costs of setting up an infrastructure project and the charges for its use by the public sector or private users.

In the Federal Republic of Germany, the Federal Budgetary Regulations and similar laws and administrative provisions for regional and municipal administrations require efficient operation, backed by efficiency audits. However, a project’s cost and revenue over the entire life cycle, its risks, interest charges and depreciation are at present not properly determined. This makes it more difficult not only to make a comparative assessment of the efficiency of different State projects, but even more so to make an efficiency comparison between a project implemented exclusively under State auspices and one implemented using a PPP model. This means that, in order to be able to assess accurately the advantages of PPPs in relation to traditional public-sector procurement, a recognised assessment yardstick based on commercial criteria must first be introduced. Such a yardstick is also necessary in order to allow a comparison between different PPP models, since project risks are distributed differently between the public sector and the private partner in each model. Ideally, the project risks, including political and natural risks, will be transferred to where they can best be managed. By partially transferring risks to the private sector, the public sector gains access to the benefits of private risk management. The danger of projects being delayed or even failing is reduced considerably.

Experience throughout Europe shows that the division of responsibilities between the State and the business sector, acting as partners, must adhere strictly to the rule that each side must do what they can do best. It is also apparent that maximum cost savings can be achieved only after a lengthy learning phase. And, of course, it is also clear that PPPs are not a panacea and implementing a project in a public-private partnership is still not a guarantee of success. A bad project remains a bad project, with or without a PPP. It is important for the private partners, and banks in particular, to be involved in the planning at an early stage. The banks will participate in the financing of PPPs if the risks are clearly defined and reduced. Then sufficient external resources can be mobilised on appropriate terms.

In order for PPPs to be applied extensively and successfully, a high degree of coordination, cooperation and exchange of experience between the private and public sectors and between the different public bodies is necessary. An important measure that has been employed very successfully in other countries is to set up a national centre providing consultancy services, from strategic advice in the early stages of projects to the development of guidelines for the appraisal of investment projects. It is likewise essential to devise an assessment yardstick geared to commercial criteria for the purposes of efficiency comparison. In Germany, it is particularly important to involve in this process the towns and municipalities that have to finance the bulk of public infrastructure investment. This is where the greatest efficiency gains can be expected in the medium term and this is also where investment has fallen most markedly. Lastly, there is a need to revise the legal bases for PPPs - in order not to favour PPPs, but to eliminate the large number of remaining obstacles.



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