Final Final European Ppp Report 2009

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EUROPEANPPP REPORT 2009


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ACKNOWLEDGEMENTSThis Report has been published with particular thanks to:

The EPECExecutive and in particular, Livia Dumitrescu, Goetz von Thadden, Mathieu Nemoz and Laura Potten.

Those EPECMembers and EIBstaff who commented on the country reports.

Each of the contributors of a View from a Country.

Line Markert and Mikkel Fritsch from Hortenfor assistance with the report on Denmark.

Andrei Aganimov from Borenius & Kemppinenfor assistance with the report on Finland.

Maura Capoulas Santos and Alberto Galhardo Simes from Miranda Correia Amendoeira & Associadosforassistance with the report on Portugal.

Gustaf Reuterskild and Malin Cope from DLA Nordicfor assistance with the report on Sweden.

Infra-Newsfor assistance generally and in particular with the project lists.

All those members of DLA Piperwho assisted with the preparation of the country reports and nally,Rosemary Bointon, Editor of the Report.

Production of Report and Copyright

This European PPP Report 2009 ( Report) has been produced and edited byDLA Piper*.DLA Piper acknowledges the contribution of the European PPP Expertise

Centre (EPEC)**in the preparation of the Report.

DLA Piper retains editorial responsibility for the Report. In contributing to the Report neither the European Investment Bank, EPEC, EPECs Members, nor any Contributor***

indicates or implies agreement with, or endorsement of, any part of the Report.

This document is the copyright of DLA Piper and the Contributors. This document is confidential and personal to you. It is provided to you on the understanding that it is not to

be re-used in any way, duplicated or distributed without the written consent of DLA Piper or the relevant Contributor. Any part of this document which is used with either the

consent of DLA Piper or the relevant Contributor must be used accurately and not used in a misleading, defamatory or unlawful context, nor for the creation of a database using the

information in this document. Any part of this document which is used with the consent of DLA Piper or the relevant Contributor must be acknowledged as the copyright of DLA

Piper or the relevant Contributor, specifying the title of this document.

Disclaimer: This report is intended as an overview and nothing in this document is intended to provide specific legal advice. DLA Piper does not intend that any person relies on

the information set out in this report unless otherwise agreed in writing.

DLA Piper has sought to ensure that the details of projects contained in this document have been accurately described at the time of publication. However, neither DLA Piper nor

any of its partners or employees nor any other person acting on behalf of such persons makes any promise, guarantee or representation (express or implied) to any person as to the

accuracy or completeness of the content of this document, or of any other information or materials, whether written or oral, that have been, or may be, prepared or furnished by or

on behalf of DLA Piper in connection with this report, including, without limitation, economic and financial projections and risk evaluation. No responsibility or liability is accepted by

any person for any errors, misstatements or omissions in this document, negligent or otherwise, or any other such information or materials to the extent permitted by law. Without

prejudice to the foregoing, neither DLA Piper nor any of its respective employees nor any person acting on behalf of such persons shall be liable for loss or damage (whether direct,

indirect or consequential) suffered by any person as a result of relying on any statement in or omission in this document to the extent permitted by law.

This disclaimer, including any non-contractual obligations arising out of or in connection with it, shall be governed by, and construed in accordance with the law of England and Wales.

*DLA Pipermeans the limited liability partnerships, unlimited liability partnerships, limited liability companies and other entities (whether or not incorporated and whether

or not having legal personality) which form part of the international legal practice known as DLA Piper. Details of the member entities of DLA Piper are available on the

website: www.dlapiper.com.

**EPECis a collaborative initiative of the European Investment Bank, the European Commission and entities from participating EU Member States and Candidate Countries

(EPEC Members).

*** AContributoris an author of a contribution to the Report as identified in the Report.


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The Report is in three main sections. The rst provides an overview of the current state of the European market and ourperspectives on future directions. Section 2 contains the country sections. Section 3 contains project lists derived from theInfra-Newsdatabase.

ACKNOWLEDGEMENTS

SECTION 1

THE FUTURE DIRECTION 5

VIEW FROM EIB 9

CURRENT LOCATION 13

VIEW FROM FRANCE 16VIEW FROM THE UNITED KINGDOM 17VIEW FROM GERMANY 20

SECTION 2

COUNTRY SECTIONS

AUSTRIA 25BELGIUM 27BULGARIA 29VIEW FROM BULGARIA 30CROATIA 33CYPRUS 35CZECH REPUBLIC 37

DENMARK 39FINLAND 41FRANCE 43GERMANY 49VIEW FROM GERMANYFinancing social infrastructurePPP Projects in Germany 51VIEW FROM INDUSTRY 52VIEW FROM GERMANYPPP in Germany the role of the Bundeslnder 54GREECE 55VIEW FROM GREECE 56HUNGARY 59VIEW FROM HUNGARY

Hungarian Procurement 59VIEW FROM HUNGARYThe benefit of the Education Programme 60ITALY 63LATVIA 68LITHUANIA 71VIEW FROM LITHUANIADevelopment of the Lithuanian PPP Process 73MALTA 74THE NETHERLANDS 75NORWAY 77POLAND 79VIEW FROM POLAND 80PORTUGAL 83

REPUBLIC OF IRELAND 86ROMANIA 88VIEW FROM ROMANIA 89RUSSIA 92

SERBIA 96VIEW FROM SERBIA 97SLOVAKIA 98VIEW FROM SLOVAKIA 100SLOVENIA 101SPAIN 103SWEDEN 107VIEW FROM SWEDEN 108

TURKEY 109VIEW FROM TURKEY 111UKRAINE 112UNITED KINGDOM 116

SECTION 3

PROJECT LISTS

AUSTRIA 123BELGIUM 127BULGARIA 135CROATIA 136CYPRUS 137CZECH REPUBLIC 138

DENMARK 143FINLAND 146FRANCE 147GERMANY 168GREECE 192HUNGARY 201ITALY 205LATVIA 224LITHUANIA 224MALTA 225THE NETHERLANDS 226NORWAY 232POLAND 234PORTUGAL 238

REPUBLIC OF IRELAND 249ROMANIA 261RUSSIA 265SERBIA 268SLOVAKIA 269SLOVENIA 270SPAIN 271SWEDEN 288TURKEY 290UKRAINE 291UNITED KINGDOM 293NORTHERN IRELAND 387SCOTLAND 391WALES 396

ABBREVIATIONS 397

CONTACTS 402

CONTENTS


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| European PPP Report 2009 | The Future Direction | Section 1


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Section 1 | The Future Direction | European PPP Report 2009 |

THE FUTURE DIRECTIONINTRODUCTIONThe DLA Piper European PPP Report 2007 was upbeatand buoyant, reporting on an expanding market with good

prospects for sustainable growth. By the end of 2007,the market had changed dramatically, coming close tostopping in its tracks. The spread of the banking crisishas brought about a re-evaluation of whether funders can

provide long term, highly leveraged project nance, giventhe lack of condence in renancing options and in capitalmarkets. Deals have closed, but on signicantly highermargins and more aggressive terms, with general difcultyin reaching nancial close in a timely manner on eventhe best of projects. Equally, the public sector has beensuffering with a reduction in tax revenues and big holes ingovernment budgets, together with rising unemploymentand social expenditure. Thus, governments have had tolook hard at their economic policies and decide whetherthey should use spending on infrastructure as ananti-cyclical measure.

THE BENEFITS OF PPPBroadly, the public sector across Europe is in supportof involving the private sector in the provision of publicservices through a PPP model. This is because it is generallyaccepted that PPPs have provided the following benets:

Signicantly increased proportion of large scale

infrastructure projects delivered to time and budget.

Promotion of the movement from a construction to a

service culture which has increased innovation andcompetition with better design to minimise life cycle

costs, and transfer of life cycle risks.Enhanced project evaluation and due diligence skills

from independent funding parties to test the robustnessof projects.

Widespread innovation and higher quality standards

through the introduction of competitiveness into publicsector services, including across borders.

A change of focus by public sector bodies on outcomes

rather than inputs, in particular with a concentrationon value for money over the longer term as opposed to

concentrating on short term capital expenditure.Innovative ways of nancing, which allow the public

sector to spread its funding of capital expenditure and,in the case of revenue-based PPPs, remove the burdenon tax payers completely.

An alternative asset class for pension funds giving them

the opportunity to match their long term liabilities withrelatively low risk, index linked revenue streams.

Many governments have used spending on infrastructure,including on PPPs, as an anti-cyclical method ofstimulating the economy. In addition, the EU Commissionsrecent Communication on PPP (published in November 2009)has promoted the use of PPPs as an economic tool. In thisenvironment, the majority of European countries are likelyto signicantly step up their PPP programmes or commencemajor PPP programmes for the rst time.

THE CURRENT DIFFICULTIES

The current situation has highlighted the followingdeciencies:

Liquidity shortages amongst commercial banks and

the closure of capital markets has prevented them fromproviding debt nancing and meeting commitments.

The concept of a long term partnership needs to be able

to accommodate the prospect of change in private sectorpartners over the life of the project and seek to rewardand incentivise them throughout the various stages ofthe concession to meet the public sector expectationsand requirements for on going change.

Ad hoc measures introduced to deal with the issues

arising from tensions arising from economic prosperity(eg high private sector prots made through renancinggains) need to be systematised into a more coherentregulatory system which can also cope with issuesarising from economic downturn (eg compulsory

renancing due to mini-perm structures).

It is becoming more difcult for projects to be off

balance sheet, either by reason of the different risktransfers that the economic crisis has brought about or

because of the evolution of international accounting rules.

The expectations are that many of these problems willfade away when the nancial markets and the worldeconomy recover and that it will be back to business asusual. Evidence for this expectation can be seen in theFrench governments policy for its new guarantees they

are to fall away when the project renances. The Britishgovernment loans through TIFU are to be repaid after theconstruction period. Notwithstanding these expectations,we argue that PPP models need to evolve further to dealwith these deciencies.


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| European PPP Report 2009 | The Future Direction | Section 1

SHIFTS IN PERSPECTIVES

The parties to PPPs are continually shifting theirperspective as the market and PPP models develop.In this crisis, the private sector is looking for more supportfrom government. On the other hand, the public sectorwants an end to providing loans and guarantees, if notcompletely, then at least as soon as possible in the life of a

project. Ideally, governments also want projects to be offbalance sheet and to be able to deliver changes in outputsand exibility in the level of committed expenditure byreference to changes in circumstances and public prioritiesfrom time to time. Building contractors, facility managersand equity providers all want an exit strategy so that theycan realise their gains through renancing or throughsecondary sales after a reasonable period. The commercial

banks have changed their terms because of the increased costof nance and the collapse of the syndication and capitalmarkets. They also want to be able to exit the project aftera reasonable period. Pension funds may be willing totake a greater share in the funding of PPPs but only after

their concerns about project risk have been met. All ofthese entities are challenging the current risk allocationmodels. These signicant changes in requirements foreach party to a PPP have developed in an unregulated andunstructured manner in each European country. However,the challenges are the same across Europe.

A NEW PARADIGM

PPP models need to evolve to accommodate thesechallenges and on-going shifts in perspective.

New sources of nance

It is unlikely that the market will return to the samewillingness to nance long term. One of the basic

principles of PPP (which still stands) is that risks shouldbe allocated to the person best able to manage them.Previously, the public sector took market risk up tonancial close and the funders took the liquidity risk forrenancing as equity took the risk of being unable to exit.During the economic crisis, those risks have been starklyexposed as real and unmanageable risks and so we arguethat the illiquidity risk is here to stay. The market is sayingthat it is not willing to expose its institutions to the risk

of a future illiquid funding market such as has developedduring the credit crisis.

Accordingly, the market is discussing solutions, includingthe revival of monolines and wrapped bonds and thedevelopment of new types of bonds, to take the placeof monoline wrapped nancing. If properly structured,these new project bonds could take on an annuity typecharacter, which could appeal to institutions requiringlong term income streams, albeit with some limited shareof project risk in the operational phase of the projectsthey are funding. They could be on standard terms with

homogenous risk proles, thus requiring limited duediligence. Such bonds would be readily tradeable inthe market.

Many observers contend that governments should activelyencourage pension funds to participate in the market

but recognise that there is a limit to the inuence ofindividual governments as the problem is universal. Sincethe problem is Europe-wide, a European wide solution iscalled for. The credit crisis has seen all governments turnto the EIB as an anchor lender for their projects. Perhapsnow is the time for a European wide bond to be created by

our EU institutions that could wrap the risk as the tripleA rated monolines used to. If governments have acceptedincreased risk allocation, then it is logical that theymitigate their risks by sharing them across boundaries.Placing debt instruments of this kind back into the marketwill need careful handling to avoid a rerun of thesub-prime market meltdown (which would need to be dealtwith through the structuring of the bonds themselves),

but it argues for a true public private partnership across asingle market.

Service led PPP

In much of Europe, the focus remains predominantly onPPP as a means of delivering hard infrastructure. Beforethe current economic crisis, governments in the moredeveloped PPP markets were becoming concerned with theequity returns being made on exits post construction phaseand the lack of exibility in the PPP model to delivercontinued innovation and development to meet changing

public needs. In the post crisis nancial environment, therole that PPP can play in modernisation of public servicedelivery will be an increasingly important part of the valuefor money case for private nance. The public sector will

seek an increased emphasis on using PPP to deliver moreefcient responsive and better value for money servicesusing existing assets but resisting the necessity in the short


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Section 1 | The Future Direction | European PPP Report 2009 |

term to totally rebuild these assets. This is service ledPPP rather than construction led PPP. Such a paradigmshift includes recognition that the public sector needs toregulate and structure the medium term nancing of majorasset upgrades to achieve best value for money ratherthan leaving it to the private sector. The private sectorhas taken this market risk on the basis of the possibilityof exceptional upside with limited downside. A moredeveloped model could deliver a properly incentivised

private sector which can also adapt and accommodatechanges to meet ongoing consumer demand.

The project not the partners

In construction led projects, where the investment is madein the rst few years of the project, there is a need torecognise that it is the project, as regulated in the contractdocumentation, which has an on-going life and that theoriginal partners to a deal may not necessarily remain

partners through its complete life-cycle. The shifts inperspective outlined above could be harnessed for the longterm benet of the public sector whilst at the same time

providing practical solutions to the illiquidity risk. Furtherrenement of the model would provide for the publicsector to take a more pro-active role in the selection of anew partner and management of their change. One solutioncould see banks nancing a projects construction phase,while post construction debt would be packaged as anannuity like product and aimed at institutional investors.In effect, this is an extension of the banks response to thecrisis in the form of mini-perms that would also providefor a potential change in partner at a critical stage.A project could be structured so that there was a

contractual provision for a re-tender at a point aftercompletion of the construction phase, so that rather than

purely the private sector being involved in the choice ofnew partner through a sale of the project, the public sectorcould be involved as well. The on going development ofa secondary market for PPP projects is evidence that thereis demand for this kind of change. It had effectively beenmarket practice until the credit crisis albeit achievedthrough renancing or equity sales and not through any

public sector intervention.

CONCLUSION

The public sector approach to long term risk and themarkets ability to manage it within a sustainableaffordability envelope are being challenged. Thesechallenges are affecting all European countries. Whereas

previously we have reported on the fragmented natureof European PPP, now we are seeing the developmentof common approaches to common problems. Commonsolutions will bring signicant improvements in thePPP model: an enhanced ability for both public and

private sectors to be able to manage the long term riskswhich have so sharply been shown up in the economiccrisis as real, the development of the PPP model to delivermore responsive services at better value for money andincreased recognition of the stages in the life of a projectand the changing needs of the partners PPP is here to stay,and the models must continue to deliver the improvementsnecessary to meet the needs of the public for fundableinfrastructure across Europe.


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| European PPP Report 2009 | View from EIB | Section 1

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Section 1 | View from EIB | European PPP Report 2009 |

VIEW FROM EIBINTRODUCTIONAfter the dramatic deterioration of the situation on thenancial markets, and the subsequent development of theeconomic crisis from late 2008, the European InvestmentBank has developed a range of programmes to help theBank play its part in countering the crisis and securingrenewed growth for the European economy.

The Banks anti-crisis response has two main components:

increased lending activity and the development of a rangeof new products and initiatives.

LENDING ACTIVITY

In 2008, the EIB increased its total loans to 57 billionfrom 47 billion in 2007. In both 2009 and 2010 theEIB will be increasing its lending volume by up to 30%compared with the level of previous years.

This is part of a broader package of support measureswhich was announced in December 2008 as part ofthe EIBs Plan for 2009-2011. This broader package

comprises, apart from SMEs and mid-cap companies, theenergy, climate change and infrastructure sectors, cleantransport and convergence lending.

Accordingly, the Banks revised Corporate OperationalPlan envisages borrowing and lending of around

70 billion in 2009. Within this, there will be a particular

focus on the Structured Finance Facility (SFF) the EIBsinstrument for low or sub investment grade lending. TheBanks target for SFF lending in 2009 is some 3.5 billion.

NEW PRODUCTS AND INSTRUMENTS

In addition to its enhanced lending volumes, the EIB hasalso developed a range of new instruments which have

been deployed as a component of the Banks anti-crisisactivities. These include the development of facilities to

guarantee debt obligations of corporates and the public sector.

The Bank has also explored, in conjunction with theEuropean Commission, the possible roles that could be

played by new initiatives designed to support investmentin the Trans European Network Transport area. Thenew initiatives could include instruments which provideimproved leverage on the use of EIB funding, as wellas the resources of risk sharing partners. Use of suchinstruments could build on the contribution made by theLoan Guarantee for TEN Transport (LGTT see below)of which three were signed in its rst year.

Other options could include facilitating the issue of projectbonds for TEN-T through the development of subordinateddebt tranches which would enhance the credit of projectsor portfolios. The purpose would be to uplift the credit

prole of the higher ranking senior debt nancing to A/

LOAN GUARANTEE FOR TEN TRANSPORT (LGTT)

LGTT is a guarantee instrument introduced by the Bank in 2008, and for which 2009 was the rst full year ofoperation. This instrument is a mezzanine product, which provides coverage of trafc volume related revenue risksduring the critical early operation phase of eligible TEN-T projects. The nancial plan for LGTT projects providesfor a standby credit facility (offered by commercial banks) which may be drawn in cases in which the initial rampof trafc volumes is insufcient to meet senior debt service obligations. Once drawn, the repayment of the facilityis guaranteed by the LGTT, with the risks of recovery of the guarantee payment shared between the EIB and theEuropean Commission. LGTT can signicantly improve the economics of eligible projects by improving thecredit rating, and thus reducing the margins, on senior debt. It also represents a highly effective way of leveraging

European Commission funding for TEN-T projects.


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AA/AAA, which would interest institutional investors inthe sector (see www.eib.org/attachments/documents/issues-paper-on-facilitating-additional-ten-t-investment.pdf).

The Bank has complemented its senior debt and guaranteeinstruments with a programme of investment in equityfunds. In some cases, this has enabled the EIB to takesenior, mezzanine and equity stakes in projects a goodexample is the A5 Motorway project in Germany(see above). In 2009, the Bank, along with its partners, willsignicantly step up its activity in the equity market with

the launch of the Marguerite Fund (see right).

EIB AND PPP

Since 1990, the EIB has progressively broadened thegeographic scope and sectoral spread of its PPP lending.The Bank is now Europes foremost funder of PPP projectswith a portfolio of 120 projects and investment of around

25 billion.

As a result of the crisis, governments have increasinglylooked to IFIs to support their key, strategic PPPs. Inthis context, the EIB has become a cornerstone lender

on a wide range of European PPP deals. EIB nanceis recognised by the market and public sector as key toclosing major, strategic deals in the current environment.Examples of agship projects closed in 2009 include theM25 and M80 motorways and Manchester Waste (UK);Grouped Fire Stations (Greece), Liefkenshoek Rail Link(Belgium) and the A5 Autobahn, (Germany) (see left).

Notwithstanding the challenges of the nancing market in2009, an important impact of the crisis in much of Europehas been a renewed interest in PPP models. This is notonly because infrastructure investment will play a keyrole in delivering renewed growth, but because budgetary/ scal constraints will limit the ability of governments tofund infrastructure investments directly.

The European Commissions Communication on PPPsidenties PPPs as a core component of both anti-crisisstrategy and structural reform. In particular, theCommission has committed to clarifying the regulatoryframework for PPP, identifying obstacles to thedevelopment of PPPs and nding ways to address these.

THE A5 MOTORWAY, GERMANY

The A5 Motorway project in Germany demonstratedclearly how a relatively limited investment can havea signicant effect in a carefully structured nancing

plan. The project, which reached nancial close inthe middle of the crisis in 2009, employed threespecialised EIB instruments: (i) a Structured Finance

Facility (SFF) loan (ii) the Loan Guarantee for TENTransport (LGTT) and (iii) equity investmentthrough the Meridiam Infrastructure Fund. TheLGTT facility of 25 million supported senior debtof several hundred million euros. Similarly, byinvesting through an equity fund, EIBs proportionalinvestment in the project amounted to a few millioneuros, but made a signicant contribution to a 500million project being fully funded without recourseto public sector budgetary nancing.

THE MARGUERITE FUND

The Marguerite Fund was initiated in September2008 as a key measure of the European EconomicRecovery Plan, and at the request of the ECOFINCouncil. Agreement has now been reached to launchthe Fund before the end of 2009, with core sponsorsincluding the EIB, Caisse des Dpts (France),Cassa Depositi e Prestiti (Italy) and KfW (Germany),as well as Instituto de Credito Ocial (Spain) andPowszechna Kasa Oszczednosci Bank Polski (Poland).The Fund will raise 1.5 billion equity, as well as aDebt Co-nancing Initiative (DCI) of 5 billion from

both public and private institutional investors. TheFund will operate on market principles and invest inthe areas of energy and climate change, as well astransport infrastructure. In view of the approach takento combining market principles while supporting

public policy objectives, the Fund is expected to be amodel for future public and private funds.

| European PPP Report 2009 | View from EIB | Section 1


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| European PPP Report 2009 | Current Location | Section 1


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Section 1 | Current Location | European PPP Report 2009 |

CURRENT LOCATIONINTRODUCTIONIn the process of pulling together the country reports, wehave identied a number of themes which were not evidentat the time of the 2007 report. These themes are commonacross most European countries and we have broughtthem together in this current location report. Clearly themost important theme has been the impact of the creditcrisis on delivering and structuring PPPs but we have alsoseen the European Commission take a more active role in

promoting PPPs along with governments and a dynamicresponse from the private sector to the emerging Europeancross border PPP markets.

THE FINANCIAL POSITION

The nancial crisis and investment in infrastructure

Infrastructure investment has a key role to play as ananti-crisis measure. With the pressure on public resourcesset to increase for the foreseeable future, unlocking the

potential of private nance becomes ever more urgent.

Across Europe, PPP is established as a valuable additionaloption for investment in infrastructure and strategic publicservices. Different countries place different emphases onthe relative contribution from PPP and conventional

procurement. Some countries are explicitly committed totargets for proportion of public investment to be procuredthrough PPP (for example, Germanys target of 15%).

The effects of the nancial crisis on funding PPPs

The main effects of the nancial crisis on the PPP fundingmarkets can be summarised as follows:

The nancial crisis has substantially reduced the

nancing available for PPP projects.

Project nance and PPP lending is competing for

scarce regulatory capital and the opportunity costfor banks and capital market investors of PPP lendinghas, therefore, increased.

The bank syndicated loan market is not operating and

deals are closing as club transactions.

Bank margins have increased substantially from pre

crisis levels, and senior debt tenors have reduced,although the increase in rates is partially offset by thereduction in base rates.

There is a high degree of selectivity on the part of

banks and a general lack of consistency in the termsand conditions required by funders, making forward

planning more difcult for procurers.

No viable capital market solution has emerged to

replace the wrapped bond market which closed with thedemise of the monoline business.

As a consequence, there has been a signicant reduction

in the number of deals that have reached nancial closesince the onset of the crisis.

The response of the banks

Although there are signs of easing, there have been somefundamental changes in the attitudes of banks towardsthe PPP nance market. Some banks have partially orwholly withdrawn from the project nance market. Thereis also evidence that previously active international playershave become more orientated to their domestic markets.Although margins have eased somewhat from their 2009

peaks, tenors remain restricted. Where resources are

scarce, the banks are concentrating on their long-termcustomers and relationship banking is back in force.Project nance lending continues to have to compete forscarce regulatory capital allocations with more attractivecorporate opportunities. The opportunity cost of lending toPPP projects has undoubtedly increased as the returns onother lending have improved. The reduction in the numberof banks able to fund, and the unwillingness of nanciersto underwrite, PPP transactions has also resulted in moreuncertainty as to nancing terms and an increase in price.

One of the most important basic parameters for thedevelopment of future PPP projects is the presentsituation of the international nancial markets.International comparisons display that, even at timesof a nancial market crisis, solid and well structured

projects with a fair risk allocation and a debtrequirement of between 200 million and 500 millionare bankable. The German PPP projects meet theseconditions.

Herr Torsten R. BgerGeschftsfhrer

VIFG (Verkehrsinfrastruktur-finanzierungsgesellschaftmbH, Germany)[email protected]


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Enduring change

The impacts on the nancing markets are likely to endurebecause:

Banks believe that the conditions which prevailed

before the crisis (very long tenors up to 35 years, withsub 100 bps pricing and structures) are unlikely toreturn in the medium term. These terms were mostlydriven at the margin by banks repackaging their loans

and selling them as highly rated CDOs in capitalmarkets (a source of funding that is currently notavailable in large volumes) and intense competition

between banks, and between banks and the capitalmarkets. Many banks see the current crisis as a returnto normal rather than a temporary aberration.

Many large players have left the market. Smaller

players may be attracted by the opportunity presentedby the funding gap, but they are likely to prove moreconservative than the more established players.

Capital markets are not likely to ll the gap unless a

solution is found to replace the monoline model orprovide PPP structures more acceptable to institutionalinvestors.

Book building and funding competitions

Prior to the crisis, one or two banks typically committedto provide all of a projects senior debt prior to the awardof a PPP contract. On larger projects, this debt was thensubsequently sold (or syndicated) to a wider bankinggroup. The current scarcity of bank capital, the lack ofsyndication and capital markets and a general aversion totaking large, single risks on balance sheet mean that banksare no longer willing to underwrite a projects debt prior tosyndication.

To optimise access to scarce banking resources and tofacilitate access for the preferred bidder to the broadest

possible funding market, current practice for major PPPprojects now generally consists of selecting a preferredbidder on the basis of conditional nancial offers, andproceeding to nancial close by running a book buildingexercise or other form of funding competition with the

preferred bidder.

In consequence, senior debt is only committed after thepreferred bidder is selected. For large transactions(eg the UKs M25 Widening PPP) this can result in avery large number of banks (15 or more) having to agreethe terms of the senior debt before nancial close withconsequent impacts on timetable and complexity.

Funding competitions and procurement considerations

This inability of the banks to provide rm nancialcommitments at tender stage sits somewhat uneasily withthe requirements of the EUs procurement procedures,which are predicated on the existence of competition. Thecompetitive dialogue procurement procedure requiresthat nal offers must contain all elements requiredand necessary for the performance of the project andafter submission of their nal offers, bidders may only

be asked to clarify aspects of the tender or conrmcommitments provided this does not have the effect ofmodifying substantial aspects of the tender (EU Directive(2004/18) see further below). Procuring authorities needto be sensitive to the reduced capacity of bidders to offernancial commitments in the period before nancial close,whilst at the same time complying with the requirementsof procurement law. Before the credit crisis, tendersspecied particular funding requirements such as the

provision of fully committed nance at the initial bidstage. This has become very difcult to achieve in currentcircumstances and has resulted in a number of failed bids.

Mini-perms and their effects

Mini-perms structures have become more usual. There aretwo varieties of mini-perm, the hard and the soft. In a hardmini-perm, there is a contractual obligation to renanceafter a given period, generally at a reasonable time after

projected completion of construction. If the project isunable to renance, then the project terminates andcompensation on termination is payable: ie renancing riskis shared between the public and private sectors. Under asoft mini-perm, if the project is unable to renance thenmargins ratchet upwards and there is a cash sweep towards

repayment of the loan.

Whilst the sharing of renancing risks and associatedcosts could deliver value for money, the use ofmini-perms raises a number of issues for procurers, in

particular the loss of cost certainty going forward. Inthe longer term, shorter debt maturities may in timelead to shorter concession periods. This in turn mightrequire a modied risk allocation to improve the relativeattractiveness of PPP to funders. Such wider structuralchanges to the PPP model may affect both the affordabilityof deals and the value for money they deliver.

Funder or guarantor

Looking across Europe, a number of EU Member Statesor regional governments are exploring two main avenuesfor direct nancial support for PPPs: state guarantees(supporting project debt or bonds) and co-lending



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facilities. In virtually all cases, these initiatives are beingdesigned not to replace commercial lenders but to buildmarket condence to bring other funders into a deal. Withthis in mind, these facilities are being priced at commerciallevels also essential to ensure that the initiatives do notfall foul of EU state aid regulations.

Public sector lending facilities of the type offered by theUK and France are, perhaps, the most immediate andtargeted response. Under this model, the public sector

meets funding shortfalls through loans on identical termsto those offered by commercial banks. The underlying

principle is usually that these loans will be sold backinto the market as and when conditions normalise. Themodel is, however, not without its challenges for the

public sector, not least the practicality of establishing andmanaging a fully edged lending unit, the risk of crowdingout (when is a shortfall a shortfall?) and the implications ofselling down public stakes in due course.

An alternative model, tested by the UK Treasury with itsCredit Guarantee Facility some years ago and currently

under consideration in France, Germany and Italy,involves public sector provision of liquidity to projects buton the basis of guarantees provided by the private sector.This model is particularly relevant to the extent that theconstraint on commercial lending is a liquidity shortageamongst commercial banks in this case, the opportunityfor the private sector to offer (unfunded) guarantees tothe public sector maintains the principles of risk transferwhilst enabling transactions to complete.

Where the lending of private banks is more constrainedby the availability of capital allocations for project nance

than liquidityper se, an alternative guarantee mechanismmay be more appropriate. Amongst others, both Franceand Portugal are offering direct guarantees to projectnance lenders in order to facilitate banks participation inlarge projects by reducing their exposure to project risks.Various forms of indirect guarantee (in other words, wherethe state limits lenders exposure via project documents)are also being made available. These range from revisedcompensation on termination provisions to the use ofdirect irrevocable payments from the public sector (suchas French cession de crancesor Germanforfaiting

structures) and to renancing guarantees (which have beenused by the Regional Government of Flanders in Belgium).

THE PUBLIC SECTOR POSITION

Notwithstanding the challenges of the current nancingmarket, an important impact of the crisis on much ofEurope has been a renewed interest in PPP models. Thisreects not only an appreciation of the role that efcientinfrastructure investment can play in promoting economicgrowth but also the reduced capacity of governments tonance these investments directly due to their increasedindebtedness. The record of delivery to date has, however,

been disappointing. There are a number of reasons for this.Of these, capacity constraints within the public sector have

been foremost. In many countries, the public sector lacksthe expertise necessary to devise and deliver effectivePPP programmes. However, there have been other factors,such as inexperience amongst regional contractors andweaknesses and lack of depth in local debt and equitymarkets. The importance of the latter has been exacerbated

by the impact of the credit crisis a number of fundershave withdrawn from the project nance market, and thosethat remain are more focused on domestic markets andrelationships. This has meant that some public authorities

have reverted to traditional procurement and others haveput projects on hold due to affordability constraints.

POLICY

Facilitator of new funding sources

There is strong, general consensus that the institutionalcapital markets are the natural lenders to PPPs. The

public sector could consider at least three options to revivethe institutional market for infrastructure and facilitate theentry of new investors:

Restructuring of the PPP model to access the

unwrapped bond market;

Revive the monoline model for wrapped bonds;

Develop a debt fund concept.

Unwrapped bonds

In the absence of monoline insurers to wrap bond deals,the challenge is to implement measures to get investorscomfortable with project risk. The public sector could have arole to play here, for example, through implementing mixedstructures in which it would guarantee some project risks,with institutional investors covering the rest. Alternatively,

public authorities could insist that sponsors offer sufcientcredit support to ensure higher project ratings, or exploreother project modications to improve credit quality.



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Public sector wraps

A further avenue that could be explored is the revivalof the monoline model, or rather to use the monolineconcept to design a public or quasi-public credit enhancer.Whilst sponsors and investors recent experiencewith monolines will be difcult to overcome (there isunderstandable dissatisfaction about paying an AAA pricefor a guarantee signicantly below AAA quality) somevariant of this model may be the key to re-opening the

deep, institutional funding markets to project bonds.Debt funds

Debt funds could provide an alternative means of bringinginstitutional money to the infrastructure market. Theconcept involves using institutional funds to nance an

investment vehicle which, in turn, issues long term debtto project SPVs. This vehicle would provide structuring,due diligence and monitoring services to the lendinginstitutions thus addressing a hitherto unresolved issue the lack of capacity on the part of institutional investorsto undertake project risk assessment. The concept is not,however, without disadvantages notably that investorsmay be reluctant to enter into complex securitisationarrangements in which there is little or no visibility of theunderlying projects.

Green Policies

Concerns about the ozone layer, carbon emissions, climatechange and the wasteful use of the limited resources of the

planet have driven policies everywhere. Public pressure

VIEW FROM FRANCE

PPP STIMULUS MEASURES IN FRANCE

A number of large, and strategically signicant,projects are due to hit the French market in the comingmonths, and the government has been acutely awareof the possible impact of the nancial crisis on these.As a mitigating measure, in February 2009, the French

Parliament adopted a three pronged scheme designed tofacilitate private funding of PPPs. The scheme focuses

particularly on improving the availability of senior debtand extending the tenors available for this nancing.

GUARANTEE PROVISION

The rst provision consists of an amendment to thebudgetary law for 2009 that allows the state to guaranteeup to 80% of the private sector nancing required forPPP and concession projects be it senior debt or bonds

provided the projects are signed before the 31/12/2010.

The total value of guarantees that may be issued willhave an overall ceiling of 10 billion. However, theguarantee can be in addition to any regional or localsubsidies made available to projects. It will be pricedaccording to prevailing market rates, in accordance withEU state aid regulations. The MAPPP (the French PPPtask force at the Ministry of Finance) is in charge, withthe support of nancial advisors, of determining theexact terms and conditions applying to every projectfor which the public contracting authority asks for thisguarantee. The general provisions of the guarantee term

sheet were nalised in April 2009, and the rst project

reviewed was the Tram Train (LRT) of La RunionIsland. Subject to nalisation of terms, this project could

benet from a guarantee of up to 800 million.

ADJUSTABLE FINANCING TERMS

Secondly, the revised version of the French PPP lawalso states that bidders no longer need committedfunding letters from banks at BAFO stage. Adjustable

nancing terms would be considered enough to submita nal offer. Whilst the intention is clearly not toencourage bidders to submit uncommitted offers, givencurrent market conditions (and in order not to undulyrestrict limited bank resources), the intention is to allow

banks which are backing competing bidders to be able tosupport the winning proposal.

CO-FINANCING FACILITY

Finally, a 8 billion envelope of Caisse desDpots-managed fonds dpargne (centrally managedsavings & loans) has been earmarked over 5 years, to

be allocated to co-nance projects and Special PurposeVehicles alongside private sources, particularly forlonger tenors, at slightly lower than market rates.

Taken together, these mechanisms aim to providethe required supply of nancing to privately nanced

projects, while limiting the immediate impact on thebudget. An unresolved aspect, however, is the treatmentof the State Guarantee with regards to Eurostat criteriaon public debt.

Franois BergreSecretary General of the PPP Taskforce

France



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has determined the adoption of national policies, includingthe transfer of travel from roads to rail, through the

building of high speed rail links, light rail urban transportand the rethinking of waste management practices.

The introduction of strict EU standards in theenvironmental eld with which each of the memberstates of the EU must comply is playing a large role.Many countries have a lot of work to do to reach the highstandards on time and, with limited funds, this is provingan incentive to use PPPs for solid waste, waste water and

water projects. For example, the EU Landll Directive,which requires the diversion of a signicant amount of thecontinents waste away from landll, has necessitated aradical change in the way most countries manage waste,and has led to a scramble to construct new waste treatmentfacilities. As a result there is a strong pipeline of waste

projects. This coupled with the amount of money beingdiverted by governments to this sector, has resulted inseveral new players entering the market.

VIEW FROM THE UNITED KINGDOM

PPPs (PFI in the UK) represent one of the principalmeans by which Government procures the delivery oflong-term infrastructure assets and related services. Inthe UK it has a track record of on-time and on-budgetdelivery and receives high levels of user satisfaction.

The crisis in the nancial markets in late 2008 and early2009 left many of our PFI projects unable to secure

sufcient debt from the private sector, thereby causinga signicant backlog in their achieving nancial close.These were projects that were already in procurementand a key part of the Governments investment plans.

Throughout this period the Treasury worked withindividual procuring authorities, Partnerships UK andthe EIB to develop a range of solutions to help projectsto reach nancial close. However, it became clearthat traditional measures, such as increased capitalcontributions and increased EIB funding, could not giveGovernment sufcient condence that its pipeline would

be delivered in a timely fashion.We considered re-procuring these projectsconventionally but concluded that would have causedunacceptable delay and placed value for money atrisk. We therefore needed a PFI-based solution whichcould get the market moving again whilst maintainingthe benets of private sector involvement in publicinfrastructure procurement over the long-term.

The Government therefore announced in March 2009that it was prepared to lend to PFI projects that couldnot raise sufcient debt nance on acceptable terms.

This arrangement was designed to be both temporaryand reversible so that it could be withdrawn once marketconditions improved.

The Infrastructure Finance Unit (TIFU), which wasset up to implement this policy, has already proved itseffectiveness in reducing the backlog of PFI projects.In particular, it has provided 120m of funding forthe Manchester Waste PFI project which, through thecontract and associated works, is expected to provide401m of capital investment in improved waste facilitiesin Greater Manchester and create or safeguard over5,000 jobs.

However, the overall success of TIFU should not bemeasured solely in terms of its lending but in its impacton the market as a whole. In 2008/09 only 18 PFI

projects, worth 1 billion, closed. The period post theestablishment of TIFU has already seen 20 projectsworth 3.45 billion successfully reach nancial close;including the key M25 widening project and 12 school

projects. This increase partly reects an improvement inthe long-term nancing markets as a whole, but cruciallyTIFU has given funders condence that PFI deals willreach nancial close and given sponsors and authorities

a lever with which to secure greater funder engagementand on-market terms. The result has been a clear andsubstantial improvement in the rate at which PFI projectsare reaching nancial close.

Whilst our long-term infrastructure funding markets doshow signs of recovery they remain fragile, and marginsand other terms, remain unattractive by recent standards.The condence that TIFU provides to the PPP marketin the UK therefore remains crucial and continues to

be a key element in the UK Governments ongoingprogramme to provide essential national infrastructure

and world-class public services.Ian Pearson MPEconomic Secretary Responsible for PPP PolicyHM Treasury



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Social policies

Another trend in the PPP market across Europe is theincreasing prioritisation of achieving social welfareobjectives, such as better health care and education, ratherthan the provision of infrastructure, such as roads andrailways infrastructure which are more aimed at supportinggeneral economic objectives.

DEVELOPMENTS AT EU LEVEL

There is in a new emphasis from the EuropeanCommission on PPP as a component of its anti-crisisstrategy. The Commission has indicated that it will shortly

publish an important Communication on mobilisingprivate nance and PPP in the context of the EuropeanEconomic Recovery Plan. President Barroso has alsoreferred explicitly to the importance of PPP in settingout the political orientations he would wish to see forthe next Commission. For the rst time, therefore, theCommission is explicitly committed itself to clarifyingthe regulatory framework for PPP, identifying obstacles

to the development of PPPs and nding ways to addressthese obstacles.

Within the Member States, this renewed interest in PPPsexplains the welcome that has been given to the initiativeof the EIB and Commission in establishing EPEC asa collaborative initiative to help share information,expertise and good practice in respect of PPPs acrossthe public sector.

It has been recognised, that a state of the art publicinfrastructure is a key precondition for sustainable

growth. It has been common sense for a long time thatPPPs are a very useful tool to procure, build, nanceand maintain infrastructure projects in an efcient andsustainable manner.

Peter RamboldVice PresidentDexia

EPEC

It is signicant that when the banks operatinginternationally have not been able to provide the nancing,

particularly for larger infrastructure projects, governmentshave turned to the European Investment Bank which nowis the anchor lender in virtually every major nancingthroughout Europe. The role of the EIB has been considerablyextended in the services it offers and the decision to found

the European PPP Expertise Centre, in conjunction withthe Commission, is a signicant sign of the acceptance thatthe PPP model now has throughout Europe.

The blending of EU funds with PPPs

The impact of EU grants has also been a factor.Governments understandably often regard grant nanceas a preferred alternative to loan funding. However,this neglects the role that PPPs can play beyond being

simply a source of additional funding the benets offully engaging the private sector in all aspects of project

planning and implementation, as well as a whole lifeapproach to asset management. There is considerableinternational evidence that well structured PPPs can deliver

better value for money than conventional procurement asa result of optimising risk sharing between the public and

private sectors. It is in recognition of the benets that PPPscan bring to large infrastructure projects that JASPERS has

been engaged on the drafting of guidance on grant loanblending. The publication of this work is imminent andrst pilot projects have been identied in Poland, Romaniaand elsewhere to put into practice what may well developinto a major market segment over time.

The EU Interpretative Communication on PPPs

At European Community level there are no specicrules governing the founding of PPPs. In February 2008,the European Commission published an InterpretativeCommunication explaining the EC procurement rules thatapply when private partners are chosen for a PPP. If thetask assigned to the PPP is a public contract fully covered

by the Public Procurement Directives, the procedure

for selecting the private partner is determined by thoseDirectives. If the task is a works concession or a publiccontract that is only partially covered by the Directives, thefundamental principles derived from the EC Treaty applyin addition to the relevant provisions of the Directives.Finally, if it is a service concession or a public contractnot covered by the Directives, the selection of the private

partner has to comply with the principles of the EC Treaty.

The Interpretative Communication expresses the view ofthe Commission that under Community law one tendering

procedure sufces when a PPP is set up. Accordingly,

Community law does not require a double tendering onefor selecting the private partner to the PPP and another onefor awarding public contracts or concessions to the PPP.

The Interpretative Communication acknowledges thatPPPs are usually set up to provide services over a fairly


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long period and must be able to adjust to certain changesin the economic, legal or technical environment. It isonly where the change to the PPP moves outside thescope of the original PPP that new procedures under the

procurement laws are required otherwise the changes canbe agreed between the parties.

Remedies Directive

The Remedies Directive was published as Directive

2007/66/EC in December 2007. Member States have until20 December 2009 to implement the new Directive intonational law. The new Directive requires public authoritiesto wait a certain number of days, known as a standstill

period, before concluding a public contract. This givesrejected bidders the opportunity to start an effective review

procedure at a time when unfair decisions can still becorrected. If this standstill period has not been respected,the Directive requires national courts under certainconditions to set aside a signed contract, by renderingthe contract ineffective. The Directive also seeks tocombat illegal direct awards of public contracts, whichis the most serious infringement of EU procurement law.

National courts will also be able to render these contractsineffective if they have been illegally awarded withoutany transparency and prior competitive tendering. In thesecases, the contract will need to be tendered again, thistime according to the appropriate rules. The introductionof these new rights for rejected bidders should assist inremoving barriers for EU businesses to bid for contractsanywhere in the EU.

Competitive Dialogue

Historically, the European Commission questioned theappropriateness of using the negotiated procedure for the

procurement of PPPs, arguing that substantive negotiationswith a preferred bidder could distort competition and thatthe public sector was struggling to negotiate successfullyin the absence of competitive tension. The competitivedialogue procedure was introduced to ll the gap betweenthe restricted and negotiated procedures. The procurementdirective introducing competitive dialogue (Directive2004/18/EC) required national governments to implementits provisions into national law by 31 January 2006(other than Bulgaria and Romania who were obliged toimplement them by 1 January 2007, when they accededto the European Union) and each of the member states hasimplemented it.

Competitive dialogue can only be used for particularlycomplex contracts where the public authority:

is not objectively able to dene the technical means (...)

capable of satisfying its needs or objectives; and/or

is not objectively able to specify the legal and/or

nancial make-up of the project, and

must consider that the use of the open or restricted

procedure will not allow the award of the contract.

Constraints of competitive dialogue

In the three years since its introduction, relatively fewprojects using competitive dialogue have closed acrossEurope. Experience has shown that following thecompetitive dialogue procedure is not easy and requiresa great deal of work by all parties to succeed. One

problem that has emerged is that the public sector needsto have experienced personnel to oversee the tendering

procedure currently these seem to be in short supply.

A major problem for all parties is that procurement

costs are signicantly higher than under any other formof procurement including the negotiated procedure.The increased competitive tension of dialogue iscounterbalanced by the need for more negotiations andmore written submissions for both the public sectorand bidders to deal with. This is because of the need totake two or three bidders through a dialogue processright up to the time of award of the contract rather thana negotiation with one preferred bidder. It is particularlyhard on bidders who fail to win the award as they mustspend as much on their bid as the winning bidder does.

This is proving to be a considerable disincentive to biddersto participate in tenders and is resulting in some failedtenders through lack of bidders.

Bidders are also concerned about protection of theirintellectual property, specically the risk of bidders ideasor commercially sensitive information being shared withcompetitors during the dialogue process.

EU enforcement actions

A recurring theme in comments on the economies ofCentral and Eastern Europe is general lack of transparency.

In the case of some newer members of the EU, this hasresulted in an increase in the numbers of investigationsand charges in respect of procurement practices by theEuropean Commission. In countries further aeld,


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the difculties of navigating the procurement processcan discourage investors, particularly without local

partners and knowledge.

Internationalisation

One of the EUs original objectives was the introductionof the single market to promote economic growth. Public

procurement regulations, which require internationalpublication of tenders, have gone a long way to open upmarkets internationally. The PPP market has demonstrated

that the best skills from each country can be utilised acrossthe whole of Europe. The construction companies of Spainhave exported their skills in rail and airport infrastructure.The water and road companies of France have brought

innovation in their sectors throughout Europe. Austrianand German construction companies have developed roadsthroughout Central and Eastern Europe. British consultantsregularly advised on PPPs internationally. PPP marketshave demonstrated the single market in action.

DIRECTIONS FOR THE DEVELOPINGPPP MODEL

More than one PPP model

No single model for PPP exists across Europe and adogmatic denition is best avoided, recognising insteadthat the concept can embrace a wide range of arrangementsfor sharing risks and responsibilities between the public and

VIEW FROM GERMANY

In the current situation there are uncertainties on thepart of the public sector about the nanceability ofPPPs. The Federal Ministry of Finance has howevermade clear that PPP projects can be supported under theKonjunkturpaket II (economic stimulus package II).The majority of PPP construction projects in Germanyhave not currently been much affected by the crisis in

the nancial markets. Although there has been a certainreticence on the part of individual banks in the eld ofproject nance, it is our perception that the road to moresettled markets is already open.

The PP Deutschland AG (Partnerschaften Deutschlandor Partnerships Germany) was founded on 11 November2008 and has been operational since the beginningof 2009. As of 1 July 2009, the team of experts willcomprise 22 advisers in total and will be furtherstrengthened in the foreseeable future.

With a unique pool of public and private PPP know

how, PP Deutschland AG is extremely well placedto successfully perform the tasks entrusted to us. Asan independent advisory undertaking, we want tosignicantly extend the market for PPPs in Germany.For this purpose, we are exclusively advising the publicsector on projects which can be implemented efcientlywithin the PPP framework.

Against this background, we are pursuing the goal ofacting for the benet of the state, the economy andsociety. The particular advisory approach of PPDeutschland is based on implementing experience in

foundation work gained from projects (e.g. furtherdevelopment of standards, distribution of marketrecommendations for the simplication of PPP

processes). The business activities of PP Deutschlandwill be focused on advice in the early phases of actualPPP projects. The spectrum of PP Deutschlandsservices will extend beyond these as business adviserduring the whole life cycle of a project. In the contextof advice in the early phases we will offer the public

employer the opportunity of obtaining free initial advicefrom PP Deutschlands helpdesk on PPP projectswhether planned or already running. Currently PPDeutschland is working on PPP projects in Dresden andBerlin. For PP Deutschland, the PPP Culture Projectin Dresden is the rst communal advisory mandate fora groundbreaking PPP project in the nature of a pilot

project. With the planned new build of the FederalMinistry for Research and Development in Berlin, PPDeutschland is supporting another challenging PPP

project in the administrative sector.

In future, PP Deutschland will act as nancial adviserfor a PPP project for a research institute as well as for aPPP project planned in the hospital sector. In addition,we envisage stronger PPP projects in the areas of IT andhealthcare. We would like to contribute to the better andmore economic implementation of public infrastructureand to the increase of the share of value for money PPP

projects in public investments.

Prof. Dr. Martin WeberPP Deutschland


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Indirect guarantees to the private sector . Indirectguarantees are typically applied through specic

provisions of project agreements. These may range fromfavourable compensation on termination provisionswhich have applied, for example in Spain, to directirrevocable payments from the public sector to lendersafter project completion examples are the Germanforfaitingmodel or the French cession de crances.

Renancing guarantees . A number of Europeanauthorities, for example, in Belgium, have proposedforms of renancing guarantee to address theuncertainties related to short term debt tenors (so calledmini-perm structures).

I am condent that in the partnership approachbetween the public and the private sector, which is atthe heart of PPPs, solutions will be found to align theinterests and requirements of the nancial sector withthe needs of the public sector. This will lead to newnancing structures based on a fair sharing of risksand rewards between the PPP parties.

Peter RamboldVice PresidentDexia

The risks of de-risking

These models are characterised by greater or lesserdegrees of de-risking private sector debt. In assessingthese, it is important to recognise the key risk managementrole performed by equity and third party debt in PPPtransactions. Indeed, it is arguable that the role of nancein scrutinising the economic and nancial performanceof projects is the principal reason for the superior timeand cost performance of PPP vis a vis conventional

procurement. To state the issue starkly, the more debt isde-risked, the greater the probability that the public sectorwill, eventually, be called upon to pay out project lenders.This underlines the importance of a clear analysis on the

part of the public sector of reasons for de-risking debt.There is a signicant difference between guarantees onthe one hand for poorly structured projects with weakeconomics which could not otherwise be bankable and, on

the other, guarantees which address reasonable lender riskaversion on the very largest deals.

Off balance sheet nancing

For many countries, being able to classify a project as offbalance sheet is an important factor in the choice of PPPas a procurement model for particular projects. This canassist with meeting the Maastricht criteria, which limitthe amount of budget decit that a country can incur. TheEU has made exceptions to these obligations because ofthe credit crisis but has already started to bring countriesto account for excessive breaches. As the world economystarts to recover, these pressures will increase. In 2004,Eurostat recommended that the assets involved in aPPP should be classied as non-government assets, andtherefore recorded off balance sheet for government, if

both of the following conditions are met:

1. the private partner bears the construction risk, and

2. the private partner bears at least one of eitheravailability or demand risk.

If these conditions are met, then regular paymentsmade by government to the partner will have an impact

on government decits/surpluses only by reference topurchases of services and imputed interest and the assetsthemselves will be considered as off balance sheet in acountrys national accounts.

But now new interpretations of international accountingrules, such as whole of government accounting, requirea government to disclose all liabilities and the analysesof risk transfer are becoming more rigorous. It is thoughtthat such treatment might result in assets which revertto the government at the end of a contract, such as tollmotorways or government buildings, for example, coming

on balance sheet, whilst moveable assets with a shorterlife, such as aircraft, which do not revert to the publicsector at the end of the contract, would remain off

balance sheet.

Further, the dilution of risk transfer brought about bythe credit crisis means that fewer projects are qualifyingas off balance sheet because insufcient risk is beingtransferred. For example, if the nancing of a project isfully guaranteed by a state or the state has acted as lenderto the project, it becomes harder to assert that the PPP can

be classied as off balance sheet. It has been suggested

that by 2014, nearly all PPP projects will be regarded as onbalance sheet and some of the incentive for governments touse PPPs will have gone.


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losses. Early in 2008, the monolines themselves weredowngraded by the rating agencies which meant that manyof the bonds that they insured were also downgraded. Aslosses mounted, the monolines were no longer able to

put up the additional collateral that was required to meetinsurance regulations and some ceased to trade. Creditrating insurance became so expensive that it is no longereconomic to use it and the market for wrapped bonds has,so far as PPPs are concerned, collapsed.

Building businesses

An emerging trend is the use of PPP programmes, such asthe Building Schools for the Future in the UK or the Greek

programme for provision of government accommodationsuch as re stations. In each case, the government isallocating funds for a programme which will transform a

particular sector. In doing so, it is transforming the way inwhich the private sector looks at its business. It opens upnew possibilities of developing an ongoing business ratherthan just bidding for a one off project.

Renancing gains and prots on sale

In the past, the private sector has been willing to takerenancing risk on the basis that it could take the upsidefrom such renancing. Governments had been concernedabout the excessive prots being made through suchrenancing and introduced mechanisms to share theupside. Now that renancing can no longer be regardedas a certainty, the private sector is arguing that if there isa sharing of renancing gain when the project goes well,then there should be a sharing of pain when the projectdoes not go well, particularly as it may be beyond the

control of the private sector rather than by reason of itsown failures to perform. Similarly, there is discussionabout the gains realised from the selling off of a project bythe private sector partner.

PPP A TOOL FOR THE LONG RUN

PPP has proved its worth as a tool for the delivery ofinfrastructure. In most of Europe, the focus remains

predominantly on PPP as a means of delivering hardinfrastructure. It is also clear that, as a result of thenancial crisis and difculties suffered by the bankingmarket, the price of risk has increased and is unlikelyin the foreseeable future to return to pre-crisis levels.To survive in the post-crisis world, the PPP model mustevolve and develop to continue to deliver innovation andthe value for money that it promises.


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Section 2 | Austria | Country Section | European PPP Report 2009 |

UPDATE

The Austrian Government has declared the need to

invest in infrastructure, particularly in the transportsector, but it is not clear whether such investment will

be directed through PPP schemes.

Despite the highly publicised A5 PPP motorway project,

major new road schemes will not be implemented asPPPs although regional roads may be.

As a response to the current situation, the Governmenthas suspended its plan to establish a competence centrefor PPPs.

RESPONSE TO THE CREDIT CRISIS

The IMF, in its report of June 2009, characterisedAustria as having performed better than average in theEurozone during the credit crunch. The governmenthas stimulated the economy by tax cuts and taken swiftaction to regulate and support its banks, with only one

bank going into liquidation. However, Austrias openness

to Eastern European markets together with a lack ofliquidity generally has raised fears that the credit crunchwill continue to bite. The economic downturn continuesto be felt: for example, ASFINAG, the Austrian stateowned motorway operator, reported that the toll incomefrom heavy vehicles on Austrian motorways decreasedin 2009 by more than 10%. The government is lookingto investment in infrastructure as a way of stimulatingthe economy but no priority is being given to make suchinvestments on a PPP basis and most investments seemlikely to be procured on a traditional basis.

Companies face difculties in their attempt to securenancing. In particular, those who seek long termnancing are failing to do so, with only short term fundingat less favourable rates being available. This means thatof the few PPP projects coming to market, even fewer arelikely to reach nancial close, or if so on less favourableterms than in more prosperous times.

GOVERNMENT AND LEGISLATION

In its programme of 2007, the government had sought tofacilitate efcient and fast implementation of superregional

infrastructure projects by uniform streamlining,simplication and shortening of the planning processes,

particularly for road, rail and energy projects. Thegovernment considered establishing a competence centre

for PPP to facilitate this process further. However, in 2009this plan was suspended. This reects the general centralgovernmental policy that investment in infrastructure will

be made through traditional means.

Policy varies from one region to another within Austriaand some regions are looking at PPP more closely.

Procurement

The Austrian Procurement Act was amended in 2006 to

comply with EU regulations but as yet no sizeable PPPhas been conducted under the new competitive dialogue

procedure.

PROJECTS

ROADS

At the beginning of 2007, the rst section of the A5motorway project, leading from Vienna north towardsthe Czech border, reached nancial close. This projectwas widely considered as a catalyst transaction, which,

if successful, would lead to further PPP road projects,including further sections of the A5. However, themanagement of ASFINAG recently announced that it willnot carry out the forthcoming parts of the AustrianA5 as PPPs.

On the other hand, PPP is being considered for other typesof road, such as regional roads. While the Styrian RegionalGovernment decided against PPP, the Government of theRegion of Lower Austria has recently launched a tenderfor a by-pass around the village of Maissau.

RAILWhilst a number of rail projects are under consideration,it is unlikely that any will be implemented as PPPs.Examples include the Summerau Spielfeld railwayannounced some time ago, which has been put on hold andwill not be implemented as a PPP.

WASTE/WATER

For some years, PPP structures have been appliedparticularly to waste collection and waste water treatmentschemes. In December 2008, a tender for refuse collection,

sewage management and refuse transport was issued bythe city of Villach. The project is currently in progress andit is expected that it will be awarded in 2009.

AUSTRIA


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| European PPP Report 2009 | Country Section | Austria | Section 2

HEALTHCARE

Similarly to the waste sector, some healthcare PPP projectswere started in 2008 and 2009. The hospital in Oberndorfhas operated since 2008 under a PPP scheme betweenthe municipality of Oberndorf and a private partner,holding 49%. Under a very similar scheme, the operationof the Nursing Home Neudr has been transferred toa joint venture between the KRAGES BurgenlndischeKrankenanstalten Ges.m.b.H. as the public partner anda minority private partner. Further, a PPP project for the

Nursing Home Hirschenstein was commenced and, as atSeptember 2009, the competitive dialogue is in process.

THE FUTURE

PPP has been implemented in some form in Austria foryears but the current pipeline is particularly sparse. Thewaste and healthcare sectors seem to be the only oneswhere any signicant activity can be expected. Overall,companies will continue to nd the nancing of projectsdifcult until the credit crisis diminishes.


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Section 2 | Belgium | Country Section | European PPP Report 2009 |

UPDATE

The PPP climate in Belgium is optimistic.

There are a number of signicant PPP projects in

preparation including: NZK, R4, Spartacus,Lige Tram.

The Flemish Region has, to date, taken the lead in

PPP developments; however PPP also has signicantpotential in the Walloon Region and Brussels Capital.

The Flemish Region has responded proactively to the

crisis and instituted guarantees which are available tosupport nancing of PPPs.

The sectoral distribution of Belgiums projects is wide

with relatively small programmes in each sector. Theoverall value of planned transactions is neverthelesssignicant.

Smaller PPP projects (city regeneration, sports facilities,

etc.) not using a full project nance type of structure arealso continuing albeit progress is somewhat slower due

to the market conditions.


The federal government is seeking to support the economyand, in particular, employment in the building sector byundertaking major infrastructure works. The PPP modelwill be used for part of these works.

The credit crunch has impacted Belgiums PPP market intwo main ways that are largely common across Europe: (i)more lenders are participating in club transactions as theindividual stake that banks are willing to take in a single

project has reduced signicantly, and (ii) banks will nolonger enter into very long term nancing agreements, butwish to limit these to a term of 7 or 8 years after whichloans need to be renanced.

In order to counteract the constraints of the nancemarket, a renancing guarantee scheme was introducedin the Flemish region in April 2009 under which projects

procured byDe Lijn, the Flemish transport authoritywill benet from a guarantee from the Flemish regionto provide renancing at the same rate as its originalnancing plus 25 bps if the project company is unable torenance on similar terms. A similar guarantee will beapplicable to the Flemish Schools project.


Regional elections in both Flanders and Wallonia in June2009 resulted in a hiatus in progressing new projects in therst half of 2009. However, ongoing projects such as theFlemish Schools PPPs have progressed.

A Flemish draft decree (the VIPA decree) is in preparationin order to allow alternative forms of nancing forinvestments in infrastructure for social welfare purposes

(e.g. homes for the elderly, health, education, medicalequipment, facilities for the disabled, etc.)

The Flemish PPP centre has been very active in Flandersin giving advice to players in PPP, providing guidelines(such as the DBFM handbook), investigating issues ofconcern and seeking to standardise contracts.

The Walloon government has not been so active but is nowlooking more closely at PPPs as a means of promoting theregions economy. It is concentrating on social welfare

projects and currently has a number of social housingPPP projects in preparation. Towards the end of 2008, the

Walloon parliament adopted a decree allowing alternativenancing through PPPs for the renovation of school

buildings.

The Brussels capital region has only entered into one PPP,the Aquiris waste water treatment plant, and that was in2006. The Brussels capital region does not appear to haveany particular interest in PPP although it has been involvedin a number of signicant procurements.

PROJECTS

ROADS

The outlook for roads projects is positive in Belgium.The main challenges are local resistance to some largescale projects and, as a result of the credit crunch,difculties with nancing.

The Kempense noord-zuid highway PPP has procured thedesign, build and maintenance of the project separatelyfrom the nance. A nancing tender was issued in April2009 requiring the private partner to provide debt for the

project in addition to 51% of the equity required from thesuccessful tenderer. Capital investment is estimated to bein the region of 100 million. Another noteworthy featureof this PPP is that it is being run by Via Invest, a jointventure between public company ParticipatieMaatschappij

BELGIUM


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Vlaanderen (51%) and the Flemish Region (49%) set upfor the specic purpose of improving road infrastructure inthe Flemish region through PPPs. Over the next three yearsnew road projects in Flanders are likely to be tendered.

RAIL AND LIGHT RAIL

The outlook for rail and light rail projects is also positiveon the whole. During the last year, rail PPP projects closedin relatively short time frames. As a result of the credit

crunch, the main challenge for rail projects is difcultywith nancing of large scale projects. Lenders are nowonly willing to provide limited nancial resources, (bothin terms of maturity and amounts) and usually requiregovernment guarantees.

In June 2009, a preferred bidder was announced for theBrabo 1 tram project in Antwerp. Whilst nancing for thecapital expenditure of some 124 million is available froma consortium of banks, the project qualies for the Flemishregions renancing guarantee. The project consists ofthe construction of two 4 tram lines in the Antwerp area,

connecting Mortsel to Boechout and Deurne to Wijnegemand their ongoing maintenance and operation for 37 years.

In April 2009 the Walloon region published a tender forthe preparation and development of the Lige light rail

project with a view to issuing a tender for the project itself.

SCHOOLS

The outlook for schools projects is positive. The1.5 billion Flemish schools project for the constructionand renovation of school buildings appointed a preferred

bidder in June 2009. It will take several years to completethe project which includes 221 schools. The Flemishgovernment is proposing to guarantee up to 1billionof senior debt as part of its strategy to supportinfrastructure projects.

A PPP in relation to German speaking schools is also closeto being nalised.

PRISONS

In June 2009, the Belgian federal government issuedtenders for four DBFM prison projects in Antwerp,

Charleroi, Mons and Dendermonde. Capital expenditureis expected to be between 40 million to 70 million foreach of the four prisons which will each have capacity for

between 300 and 400 prisoners.

PORTS

The Flemish region closed an unusual PPP in April 2009:the 98 million project for the provision of a eet of pilotvessels for the Scheldt estuary. The winning consortiumis responsible for designing, building and maintaining the

pilot vessels which will then be chartered on a bareboatbasis (i.e. without crew) to the Flemish government for aperiod of 14 and a half years. Payment is made on the basisof availability.

THE FUTURE

The outlook for PPP is cautiously hopeful. It is the policyof the federal government to use PPP as a tool to boostthe economy and it has taken measures to support PPP,

particularly through the prisons programme. The Flemishregion is more active but the Walloon region is beginningto develop proposals, particularly in the area of socialhousing. It is likely that PPP will be limited in the comingyears to classic sectors such as transport infrastructureand real estate, but with an increasing bias towards social

welfare sectors such as education and social housing.


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Section 2 | Bulgaria | Country Section | European PPP Report 2009 |

UPDATE

Since 2007 Bulgaria has made both legislative and

institutional progress in the area of PPP. Although thereis no specic PPP law, sector specic legislation has

been amended to accommodate PPPs.

The sectors attracting most attention for PPP development

are education, IT/Telecoms, infrastructure, health care,waste management and renewable energy.

Some of the continuing obstacles to successfuldevelopment of PPP projects include the need forfurther legislative clarity and more transparent

procedures for awarding PPP projects.

Trakia highway, a major project, was cancelled due

to lack of nancing.

One of the main priorities of the Government elected

in July 2009 is to adopt measures which will lead to theunblocking EU funds and the creation of a favourableenvironment for PPP development.


The timing of the elections of summer 2009 acted to limitthe ability of the government to take decisive action in theface of the crisis. While, at the time of writing, it is tooearly to know what the response of the new Governmentwill be, the unblocking of the frozen pre-accession EUfunding is expected to be one of the main priorities. Shouldthe new Government be successful in its endeavours torelease EU funding, this could have a positive impact onthe PPP climate in the country. Negotiations to release

these funds are nearing completion.Currently there are no explicit government measuresaiming at the Bulgarian PPP market. However, theBulgarian Government instigated a BGN 500 million(Bulgarian lev - 255.6 million) capital increase at state-owned Bulgarian Development Bank (BDB). The aim ofthe capital increase is to support small and medium sizedenterprises (SMEs) through various nancial instruments,including credit line agreements with other banks.

In addition to the support of 500 million 700 millionper annum already committed over the period 2007-2013

for Bulgarias national transport and infrastructureinvestment plans, in May 2009, the EIB signed amemorandum of understanding with the Bulgarian

Ministry of Regional Development and Public Works(MRDPW) and the Ministry of Finance for assistingBulgarias largest municipalities with drawing upintegrated urban development plans and projects. Thismemorandum of understanding allows also the fundingof urban development projects via a specially establishedholding fund. The fund will come under the Joint EuropeanSupport for sustainable Investment in City Areas(JESSICA) initiative


There is no specic PPP legislation in Bulgaria, so PPPprojects are carried out in the form of concessions underthe 2006 Concessions Act or contracted out in compliancewith public procurement legislation. A draft PPP billwas submitted for discussion to the previous BulgarianParliament. Due to the fact that the new Governmentintends to undertake big infrastructural projects in the formof PPPs, it is thought that it will bring in PPP legislationalthough it is not yet known whether it will support the

existing draft PPP bill or develop its own PPP bill.Two legislative amendments to facilitate PPP projects wereimplemented by the previous government. These wereamendments to the Waste Management Act to introducethe possibility of partnerships for creation of landlls on aregional basis and amendments to the Privatisation and Post-Privatisation Control Act allowing privatisation of hospitals.A third measure on education was introduced but was notadopted. The new Minister of Environment and Water hasannounced that by October 2009 further legislation forfacilitating investments in the waste/water treatment sector

will be introduced and it is expected that the

Final Final European Ppp Report 2009

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