Public Private Partnerships in Germany

The need for investment in new infrastructure within Germany is significant as a result of a number of factors including general growth in the economy, the continuing demands arising from reunification and, particularly in the transport field, the geographic proximity to expanding economies such as those in Poland, the Czech Republic and Hungary. Given that Germany is subject to similar budgetary constraints to other western European economies it is somewhat surprising that the use of private sector capital in the provision of that new infrastructure has, to date, been relatively limited.

Certain reports claim that there have been public private partnerships (PPPs) in a number of sectors such as hospitals, schools and prisons. On a broad interpretation of what constitutes a PPP this is undoubtedly correct. However, a closer examination of some of the projects indicates that they are often closer to a property development model than to a Private Finance Initiative (PFI) model such as that used in the UK. The Waldeck Detention Centre Project in Mecklenburg - West Pomerania, for example, is effectively a lease arrangement with the private sector having financed and developed the building and receiving lease payments, but having no ongoing role in the operation of the facility. This contrasts with the UK’s DBFO prisons model where in addition to the financing and development, the private sector has an ongoing long term role in operating the facility: indeed, it is this long term "service" element which is at the heart of the UK’s PFI concept and the achievement of off-balance sheet accounting treatment for such projects.

The PPP concept has moved somewhat further within Germany in the transport sector, particularly for highway projects. There have been two long term concession arrangements awarded, the first to a Hochtief/Bilfinger & Berger led consortium for a tunnel under the River Trave in Lübeck and the second to a Bouygues led consortium for a tunnel under the River Warnow in Rostock. However, there are some 13 further potential projects at the feasibility study stage, the ultimate implementation of some of which at least will depend on either changes in law being implemented or significant structural changes from the deals that have been completed already.

Plans for involving private finance in highway development were launched in 1994 with the introduction of the law on the private financing of the construction of highways (the Fernstraβenbauprivatfinanzierungsgesetz). However, progress has been relatively slow, at least in part because the limited scope of that legislation which only applies to bridges, tunnels and mountain roads. The 1994 law is limited in this way because of a 1993 EU Directive which prohibits the imposition of both distance based tolls and time based tolls and because there is an existing German law imposing time based tolls on heavy goods vehicles.

A further factor which has inhibited progress concerns the accounting rules governing the calculation of tolls. There has been much debate over whether tolls can be set by reference to costs and returns over say a 30 year concession term or whether, as appears to be the currently prevailing view, they must be set by reference to costs and returns over a much shorter period. Whilst there are advantages and disadvantages to each calculation method, the short term approach means much higher tolls in the early years - when there are high construction and financing costs - and this can obviously have the effect of suppressing traffic.

The combination of these two problems means that either the law needs to be changed to encourage private finance in highway infrastructure or alternative payment mechanisms need to be considered. One alternative would be for the private sector partner to be paid based on either a shadow toll calculation (ie a charge per vehicle paid by the public sector rather than the road user) or an availability payment (ie a charge paid by the public sector based on the road being up to standard and free of accidents or other blockages). In most countries, such payment mechanisms require no specific enabling legislation since they do not involve the imposition of a charge on motorists for the use of a public highway. Views in Germany remain divided over whether shadow tolls or availability payments would be possible without new legislation.

In general, Germany seems to lag behind other countries such as the UK (where PFI/PPP structures are now well established) and, for example, Holland (where although the structures are less well established there is a very strong indication from projects such as the High Speed Rail Link from Amsterdam to the Dutch border that the PPP approach whilst new, is one which is enthusiastically embraced).

Another factor that the UK and Holland have in common is that they have each established a central body (in the UK, the Treasury Taskforce and now Partnerships UK and in Holland, the Kenniscentrum) to promote PPPs and to disseminate and share information. The establishment of a similar body in Germany would be most helpful and would also evidence a degree of enthusiasm for the PPP concept which, whilst it may exist in Germany, has not been readily apparent to date.

For further information please contact Trevor Butcher at [email protected] or on +44 (0)20 7367 2517.