Private Public Partnerships

K.F. Sturmfels

1Introduction

The Term “Public Private Partnership” (PPP) is used for a long-term cooperation in the form of contracts between the public and private sector of the economy, for services that are within the public’s scope of duties. The resources required for the realization of a “Public Private Partnership” – mostly infrastructural projects – are keyed in one project for which the existing risks are shared proportionately and cost-advantageously to the partners’ individual competence of risk-management.

The term Public Private Partnership does not stand for a distinct type of contract. In fact it is a collective term for different cooperation schemes such as business management, BOT (Build, Operate, Transfer), business transfer, short-term operator, lease, and management schemes.

PPP projects primarily focus on building, redevelopment, extension, or modernization of infrastructural services by the public sector, for example, of schools, administration buildings or hospitals. Normally the contractor of the private sector has the necessary duties of planning, building, financing and operating the project, and fulfils his responsibility of providing services for the entire time of the project’s existence. Beyond that, the private sector contractor takes over additional services such as catering and security, depending on the instructions of the public sector contractor.

Characteristic for PPP schemes is the transfer of risks to the private businesses. As contractor, the private enterprise assumes responsibility for the asset’s financing entirely or in part. Not only the building but the subsequent operation of the asset is then reimbursed.

In contrast to the ordinary planning and execution of construction projects, there is no separate call for tenders for every part performance within a PPP project, but the public sector’s contractor for the project purchases an entirety of services. Therefore, the PPP project is not only a financing plan, but rather a comprehensive model for organization and procurement. Accordingly, the public sector no longer invests in concrete and brick, but purchases the services required to be provided (provision of office space, school buildings and hospitals, etc.) for a predefined user fee. This fee contains components for wear and tear, operation

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maintenance, refinancing of proprietary and outside capital, return on proprietary capital, and an appropriate profit and interest calculation for the funding.

A PPP project is subjected to a so-called life cycle consideration. Even in the planning stage, the expenses for operation and maintenance must be taken into consideration.

The period of the contract depends on the purpose of the PPP project, but, as a general rule, should not fall below 20–30 years. The volume of a PPP project should not fall short of € 10 to € 15 million.

2Starting Point

Due to an increasing deficit in the public budget and the related decline of capital expenditure there is a considerable stop of redevelopment and modernization in the area of public infrastructure in Germany.

The model for PPP projects in Germany is the Private Finance Initiative (PFI) developed in Great Britain. At the beginning of the 1990s, lack of funds lead to the realization of investments of the public sector with the help of the private sector of the economy. Today about 20% of all public investments in Great Britain concerning schools, hospitals and road construction are realized in the form of PFI plans.

In international relations, such projects are often referred to as “DBFO projects” (Design-Build-Finance-Operate).

Experiences from Great Britain, the Netherlands and other countries show that the use of PPP projects can achieve a significant saving of expenses. Furthermore, it is advantageous that the public sector official has to deal only with one single contractor regarding a PPP project. The typical structure of a PPP project earmarks that the private contractor and investor binds all performing parties to him by establishing a partnership for the project. In this way the user’s tasks, are transferred to the private investor, minimizing the public contractor’s duties.

The benefit of PPP projects is their financing. Private pre-financing results in a postponement of the public authorities’ obligation to pay to the period of the asset’s operation. In addition, the specific know-how of private enterprises can be utilized for the invitation to tender, the building and the operation of infrastructure projects.

3Participants in a PPP Plan

The public sector official transfers the tasks such as planning, construction, financing, and operating to a single contractor established in a partnership for the project. The partnership for the project is founded by the contractor who succeeded in the call for tenders (possibly a syndicate formed by several companies) and represents the direct contact for the public sector’s official through the project’s duration.

Private partners are involved in PPP projects on a long-term basis and supply the partnership’s equity capital. They also provide the management and lead the project’s partnership. They control the performance of construction and operation. These tendered performances are normally assigned to subcontractors.

The partner for construction assumes the performance of planning and construction. The combination of both tasks reduces the number of intersections, allows early coordination between planning and building and consequently provides profitable results.

The operator of the facility management is already integrated in the partner for construction’s activities during the development of the project. In this way experience regarding expenses of operating the property can be taken into consideration at an early stage of the project.

The operator purchases the plot of land or takes over the property after complete performance of construction within a so-called “permitting-the-use plan” or “provision plan” and takes care of the operation during the duration of the project’s contract. These performances may range from technical property management and infrastructure management to commercial property management. In addition to that, the operator may also take care of further services like catering, cleaning and security, etc.

4Essentials of the Legal Relationship Between the Public Sector and the Private Investor

PPP plans either emerge from the establishment of a joint company (shares may be distributed differently depending on the project) or the foundation of a partnership fulfilling services that are within the public’s scope of duties. Determination of the project’s purpose as well as the spread of task and risk are defined in a partnership agreement. Above that, primarily in construction engineering – the purpose of the project can be determined in creating a service or licensing agreement between the public sector and an all-private partnership.

4.1Contracts

The public sector official and the contractor in the private sector conclude a comprehensive contract for the planning, the construction, the financing, and the operation of the project. Usually these contracts are referred to as licensing agreements, construction and service agreements, PFI or PPP contracts. Great importance is attached to the definition of the project’s performances, for example, the room temperature, cleaning, water and electricity supply and the like. The payments are made dependent on the accomplishment of the performances’ requirements.

The relationship between the project’s partnership and the operator of the object is defined in the operator/property management contract. It stipulates the operator’s

all-embracing duty for operation, maintenance and repair of the object as well as other services.

The financing conditions are stipulated in the form of loan contracts for the project’s outside capital.

4.2Model of Operation

It is recommended to conclude a skeleton contract between all participating parties, that includes all important principles for the cooperation in every part of performance as well as in all general provisions. Secondly, the provisions for every part of performance have to be defined in individual contracts or descriptions of the performance. Accordingly, there is a structure in two hierarchies. Particularly high demands are to be placed on the specification of content and scale of the performances to be rendered. It is always advisable to define any description of a performance as precisely as possible.

4.3Service-Level-Agreements

Service-Level-Agreements are usually defined as quality standards for performances based on measurable quantities. Furthermore, such agreements provide provisions for sanctions in cases of non-performance or defective performance. Therefore, Service-Level-Agreements belong to the key-elements of any contract.

5Outline Conditions in Germany

The cooperation between public authorities and the private sector in the sense of public private partnerships, practiced successfully in other European countries, is still in its infancy by comparison in Germany. The legal framework used to constrain the realization of PPP projects in the past. Questions of the awarding and preparation of contracts and the execution of those projects were long unsolved. Provisions of tax law discriminated PPP schemes in favor of projects built by public authorities on their own responsibility. There were further obstructions with regard to financing as well.

Criticism eventually led to legislative activity. The Act for the Acceleration of the Realization of Public Private Partnerships and the Improvement of the Legal Framework for Public Private Partnerships (PPP Acceleration Act – “ÖPPBeschleunigungsgesetz”) came into force as of September 1, 2005 and resulted in amendments to several German acts. It aims at the elimination of obstructions and ambiguities previously impeding the implementation of public private partnerships in Germany. The act’s most important provisions are outlined in the following.

5.1Act Against Restraints on Competition and Regulations for Awarding Contracts

In adding Section 99 (6) to the Act Against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen), a clear picture has been achieved with regards to the definition of mandates that are concerned with supplies as well as services and construction work: While the distinction between supplies and services is made according to their respective value, services and construction work are defined according to the contract’s priority independent from their respective values. These definitions follow the jurisdiction of the European Court of Justice (ECJ).

Furthermore, the amendments to Section 101 GWB (“Gesetz gegen Wettbewerbsbeschränkungen” – Act Against Constraints of Competition) have brought about important changes. The section’s first paragraph regulates the kinds of award procedures. In accordance with the new EC Procurement Guidelines (Directives 2004/ 17/EC and 2004/18/EC), the so-called “competitive dialog” was introduced as a new independent procedure.

This is an award procedure of three stages, consisting of a competition at the pre-selection stage, a dialog stage, and a final tender stage.

According to paragraph 5, a competitive dialog is a procedure to be applied to awarding particularly complex contracts. Within this procedure an invitation to participation is followed by negotiations with selected enterprises about all particulars of the contract. Contracts of particular complexity are for instance major integrated traffic infrastructure projects, huge computer networks, or projects which involve complex funding whose legal and financial constructs cannot be described in advance. The newly adopted procedure is meant to guarantee competition as well as respond to the requirement of sufficient flexibility in providing a continuous dialog with the enterprises involved, covering all aspects and corresponding with the special complexity of the contract.

The procedure of competitive dialog is explained in more detail in the newly added Section 6a VgV (“Vergabeverordnung” – Regulation on the Award of Public Contracts). However, the newly introduced award procedure is not the only permissible one to be used for contracting out a PPP project, rather another option. The future bidder is meant to cooperate early on, even in determining the technical specifications provided by the contracting body.

If the companies involved in the competitive dialog incur costs for the preparation of drafts, diagrams, drawings, or other documents, newly added Section 6 (7) VgV provides the basis for claims against the contracting body for the reimbursement of respective expenses.

The Regulation on the Award of Public Contracts was amended in other sections as well.

The provisions of the Contracting Regulations (Verdingungsordnung für Leistungen, VOL/A) are now applicable to awarded supply contracts and contracts for services.

However, the previous requirement for a personal contribution by the contractor has been abandoned because, according to German Courts, the contractor had been

The prohibition to sell, stipulated by Section 63 (2) BHO, according to which federal assets may only be sold if they will not be needed for the fulfillment of federal functions in the foreseeable future, has been moderated. By the addition of a new sentence to Section 63 (2), it is now legitimized that property which is still required for the fulfillment of federal functions may be sold for long-term selfoperation if federal functions can evidently be executed more cost-efficiently by this measure. Until this revision, sale and leaseback transactions were problematic. The amendment to the code removes this obstruction.

5.4Tax Law

The framework of PPP will make it necessary in most cases for the public authorities to entrust the investor with real estate for a designated time. Section 4 no. 9 Grunderwerbssteuergesetz (Land Purchase Tax Code) contains a specific provision for tax exemption. Before the revision came into force, this course of action led to taxation (property tax) twice, namely at the time of the investor’s entrustment and at the time of property reassignment to the public authorities. By the revision, this proceeding of assignment and subsequent reassignment is treated as if no purchase had happened in the first place, i.e. as if the public authority had continued to be owner over the entire term of contract.

5.5Investment Act

The Investment Act (Investmentgesetz) is made applicable to PPP projects by the following amendments: In Section 67 (2) of the Investment Act, the institutional property funds and investment corporations with fixed capital are permitted to acquire interests and shares in PPP project companies. However, this admission is limited to the operating stage subsequent to the development or redevelopment of the infrastructure projects. The investment is also limited to a maximum 10% of the value of the institutional fund, as the provision aims only at an addition which will not materially alter the nature of an open real estate fund.

Furthermore, amendments to this provision expanded the investment opportunities of “open separate estate property funds” to allow the purchase of usufructuary rights of properties which are used to fulfill public duties. Up to now an “open separate estate property fund” could only invest in real estate, if it acquired either the title or leasehold rights of the property.

However, many states’ ordinances did not permit local authorities to sell property that was needed for public duties to private contractors or to encumber such property with leasehold rights. Therefore “sale and leaseback” operations between local authorities and property funds have been possible only to a limited extent.

6Outlook

The act shows the German legislature’s intention to implement PPP projects into German administrative practice for increased application. If this opportunity will be seized by the parties involved, i.e. the public authorities and the business community, cannot be definitely said yet. However, it can be stated that the PPP scheme has often been applied in the sector of cleaning contractors over the last years, owing to an increasing public budget and liquidity squeeze. The popularity of PPP schemes in other countries is an indication for a similar future development in Germany. The legislature has made the first step by the provision of a number of statutory facilitations. If construction projects in particular will be realized by means of PPP in the near future depends on the extent to which the administration will mainly consider financial aspects in planning the realization of projects. In view of the squeeze in public households, the structure of choice will quite occasionally be a PPP, as a PPP scheme optimizes both spreading of risks and economic efficiency.