PPP in Germany

1. Transparency 1 PPP in Germany Political framework Component of innovation initiative: The aim is to modernise and streamline administration to enable the State to  concentrate on its core functions. Coalition agreement: Further developing and strengthening PPP, including: policy formulation and commitments to reviewing specific issues; elimination of the previous discrimination of PPP; reaching agreements on improvement of the framework conditions for PPP in civil engineering; number of pilot projects shall increase. Component of innovation initiative: The aim is to modernise and streamline administration to enable the State to concentrate on its core functions. Coalition agreement: Further developing and strengthening PPP, including: policy formulation and commitments to reviewing specific issues; elimination of the previous discrimination of PPP; reaching agreements on improvement of the framework conditions for PPP in civil engineering; number of pilot projects shall increase.

2. Transparency 2 Objectives Key objective Deliver public services more efficiently Infrastructure projects include all capital expenditure of the public sector (in areas such as transport, IT, construction of buildings) Infrastructure projects include all capital expenditure of the public sector (in areas such as transport, IT, construction of buildings)

3. Transparency 3 Subordinate objectives Improve legal framework: The PPP Acceleration Act reduces re-quirements in the fields of procurement law, tax law, law on public fees and budgetary law and the Investment Act. The PPP Simplification Act is being prepared to further simplify the legal framework. PPP Acceleration Act: Key points of the Bill were worked out in cooperation with federal ministries and ministries of the German states, representatives of interest groups and advisors. The Bill will lead to improvements in the framework conditions for PPP in the fields of procurement law (introduction of competitive dialogue, arrangements of treatment of project advisers as later bidders), tax law, law on public fees and budgetary law (allowance made for the risk concept in Art. 7 Federal Budget Code, easing of the prohibition of alienation set forth in Art. 63 Federal Budget Code) and investment law and serves to eliminate existing discriminations. PPP Simplification Bill (proposed PPP Acceleration Act II): The parliamentary groups of CDU/ CSU and SPD have set up a joint coalition working group on the PPP Simplification Bill, following the patterns of the PPP Acceleration Act I. The activities of the main working group with several working sub-groups (transport, defence, health care, budgetary law and financing, taxation) have been delayed, preventing the introduction of the Bill in May as originally scheduled. Meanwhile, the idea of a timetable for introducing this Bill has been abandoned entirely. So far, a major obstacle has been the impossibility of working out a technically sound solution complying with the Constitution for the desired refund of VAT for PPP solutions in cases where no VAT liability would have arisen if the relevant projects would have been implemented by public authorities alone. The Federal Ministry of Finance already considers the issue as closed. PPP Acceleration Act: Key points of the Bill were worked out in cooperation with federal ministries and ministries of the German states, representatives of interest groups and advisors. The Bill will lead to improvements in the framework conditions for PPP in the fields of procurement law (introduction of competitive dialogue, arrangements of treatment of project advisers as later bidders), tax law, law on public fees and budgetary law (allowance made for the risk concept in Art. 7 Federal Budget Code, easing of the prohibition of alienation set forth in Art. 63 Federal Budget Code) and investment law and serves to eliminate existing discriminations. PPP Simplification Bill (proposed PPP Acceleration Act II): The parliamentary groups of CDU/ CSU and SPD have set up a joint coalition working group on the PPP Simplification Bill, following the patterns of the PPP Acceleration Act I. The activities of the main working group with several working sub-groups (transport, defence, health care, budgetary law and financing, taxation) have been delayed, preventing the introduction of the Bill in May as originally scheduled. Meanwhile, the idea of a timetable for introducing this Bill has been abandoned entirely. So far, a major obstacle has been the impossibility of working out a technically sound solution complying with the Constitution for the desired refund of VAT for PPP solutions in cases where no VAT liability would have arisen if the relevant projects would have been implemented by public authorities alone. The Federal Ministry of Finance already considers the issue as closed.

4. Transparency 4 Subordinate objectives Meet quantitative targets:“increase the portion of PPP in the total of public investments to 15% in the medium term” Provide central guidance:e.g. in the form of manuals and specimen contracts (cf. transparency 5) Setting up centres of competence (cf. transparency 6)

5. Transparency 5 Guidance and manuals Guidance on “PPP in the construction  of public buildings” with manual  Guidance on “PPP and the law on government grants” with manual Manual on investment appraisals Manual on procurement law Expert‘s opinion on „PPP in the construction of public buildings“ with manual: Summarises the legal bases for the preparation and implementation of PPP models in Germany and makes proposals for the organisational structure of the PPP initiative at the federal level. Manual on investment appraisals: Recommendation of minimum standards for carrying out investment appraisals on PPP projects. Expert‘s opinion on „PPP and the law on government grants“ with manual: In the course of its standardisation work, the PPP Task Force commissioned a detailed study of government grants at the levels of the EU, the Federal Government and the German states and the potential integration of such grants into PPP projects. The expert‘s opinion that has been submitted comprehensively describes the possibilities for giving grants and provides user-oriented guidance which enables the user to check projects envisaged for the possibility of obtaining grants under a PPP model. Expert‘s opinion on „PPP in the construction of public buildings“ with manual: Summarises the legal bases for the preparation and implementation of PPP models in Germany and makes proposals for the organisational structure of the PPP initiative at the federal level. Manual on investment appraisals: Recommendation of minimum standards for carrying out investment appraisals on PPP projects. Expert‘s opinion on „PPP and the law on government grants“ with manual: In the course of its standardisation work, the PPP Task Force commissioned a detailed study of government grants at the levels of the EU, the Federal Government and the German states and the potential integration of such grants into PPP projects. The expert‘s opinion that has been submitted comprehensively describes the possibilities for giving grants and provides user-oriented guidance which enables the user to check projects envisaged for the possibility of obtaining grants under a PPP model.

6. Transparency 6 Centres of competence

7. Transparency 7 Number of projects 46 PPP projects in public building construction:  Total capital expenditure of about €1.4 billion A further 120 projects for the construction of public buildings are being prepared: Total capital expenditure of about € 6 billion Majority of PPP projects at local government level:  Currently 39 projects for the construction of buildings at local authority level, 7 at federal state level Press release of 4 April 2007, No.: 073/2007, Federal Minister of Transport, Building and Housing: 120 PPP projects in preparation – breakthrough achieved; PPP experience report submitted Description: military barracks in Munich The project executing agency intends to have lodgings reconditioned/rehabilitated to the standard of a training establishment and to have the rest of the premises rehabilitated. The premises will in future be used exclusively by the German Armed Forces. The Federal Government is to remain the owner of the site. Project executing agency Federal Ministry of Defence German state Bavaria Services to be performed: Planning, construction, financing and operation Office building (military police, Military District Command IV, lodgings and some smaller military agencies) Size of the site about 31.5 hectares Intended type of contract proprietary model Decision in principle: 27 October 2004 Commencement of continuous use of partial operation , 4th quarter 2009 total Invitation of bids: 21 August 2006 (day on which the public announcement was posted) Conclusion of contract 4th quarter 2007 EU-wide publication Build-Operate-Transfer models include especially the socalled A models: The private partner builds additional lanes for existing motorways, is assigned and operates the entire section of motorway during contract duration and finances the measures mentioned. Press release of 4 April 2007, No.: 073/2007, Federal Minister of Transport, Building and Housing: 120 PPP projects in preparation – breakthrough achieved; PPP experience report submitted Description: military barracks in Munich The project executing agency intends to have lodgings reconditioned/rehabilitated to the standard of a training establishment and to have the rest of the premises rehabilitated. The premises will in future be used exclusively by the German Armed Forces. The Federal Government is to remain the owner of the site. Project executing agency Federal Ministry of Defence German state Bavaria Services to be performed: Planning, construction, financing and operation Office building (military police, Military District Command IV, lodgings and some smaller military agencies) Size of the site about 31.5 hectares Intended type of contract proprietary model Decision in principle: 27 October 2004 Commencement of continuous use of partial operation , 4th quarter 2009 total Invitation of bids: 21 August 2006 (day on which the public announcement was posted) Conclusion of contract 4th quarter 2007 EU-wide publication Build-Operate-Transfer models include especially the socalled A models: The private partner builds additional lanes for existing motorways, is assigned and operates the entire section of motorway during contract duration and finances the measures mentioned.

8. Transparency 8 Examples at federal level Federal Ministry of Defence: HERKULES (IT project)Military barracks in Munich Federal Ministry of Transport, Building and Urban  Development: Build-Operate-Transfer contracts for the construction of buildings and roads

9. Transparency 9 Facts from the German Institute of Urban Affairs Number of contracts in 2005 increased by 50% compared to previous year due to expectations of enhanced efficiency and speeding-up effects At local government level, average efficiency yields of 10% are achieved Average capital expenditure at local government level: €13-16 million per project Average capital expenditure at federal/state level: €70 million per project The present study is an up-to-date and comprehensive ‚stocktaking‘ of public-private partnership projects (PPP) at German federal government, state and local levels. It includes statements on the frequency and types of PPP projects as well as on related capital expenditure, obstacles and appraisals of success. The study was carried out by the German Institute of Urban Affairs on behalf of the PPP Task Force in the Federal Ministry of Transport, Building and Housing. The study exclusively addressed ‚PPP projects for project-related infrastructure measures‘. Given that a complete survey was made of 1,500 municipalities and of all county districts and the response rate was nearly 70%, the results give a representative picture of local government PPP projects. Concerning the federal and state levels, statements about trends can be made. The present study is an up-to-date and comprehensive ‚stocktaking‘ of public-private partnership projects (PPP) at German federal government, state and local levels. It includes statements on the frequency and types of PPP projects as well as on related capital expenditure, obstacles and appraisals of success. The study was carried out by the German Institute of Urban Affairs on behalf of the PPP Task Force in the Federal Ministry of Transport, Building and Housing. The study exclusively addressed ‚PPP projects for project-related infrastructure measures‘. Given that a complete survey was made of 1,500 municipalities and of all county districts and the response rate was nearly 70%, the results give a representative picture of local government PPP projects. Concerning the federal and state levels, statements about trends can be made.

10. Transparency 10 Requirements of the external audit institutions regarding PPP Requirements of external audit institutions at federal and state levels (10 findings): 1. In the case of PPP projects, debt-service expenditure  (interest and debt repayment) are replaced by other re- curring expenditure and place a similar burden on future  budgets. Only efficiency gains that impact the budget are capable of reducing the burden on the budget.  2. Where the public sector cannot afford a project under  conventional funding, it must not go through with such  projects under alternative funding arrangements. During their conference held in Munich on 3-4 May 2006, the presidents of the Bundesrechnungshof and the state courts of audit agreed about a common stance on PPP. The German external audit institutions demand a careful and realistic assessment of the chances and risks involved in meeting the demand for public infrastructure via PPP models. According to this, PPP is only one option among other types of funding. Especially, PPP is not to be considered a last resort for funding constraints to be used in order to implement capital projects which cannot be financed conventionally. Given that PPP contracts tie up considerable budget funds in the long term, the conference of the external audit institutions has developed principles which each local executing agency must observe when deciding about PPP projects. During their conference held in Munich on 3-4 May 2006, the presidents of the Bundesrechnungshof and the state courts of audit agreed about a common stance on PPP. The German external audit institutions demand a careful and realistic assessment of the chances and risks involved in meeting the demand for public infrastructure via PPP models. According to this, PPP is only one option among other types of funding. Especially, PPP is not to be considered a last resort for funding constraints to be used in order to implement capital projects which cannot be financed conventionally. Given that PPP contracts tie up considerable budget funds in the long term, the conference of the external audit institutions has developed principles which each local executing agency must observe when deciding about PPP projects.

11. Transparency 11 Requirements of the external audit institutions regarding PPP Only once the need for a project has been established, officials in charge may consider whether the project is suitable for PPP.  The efficiency of a project must have been proven in each individual case and over entire project duration (life-cycle approach). Risks must be shared by the public sector and the private partner in a reasonable and efficient way.

12. Transparency 12 Requirements of the external audit institutions regarding PPP The public sector must not circumvent procurement law by pursuing PPP projects.  The complexity of PPP projects requires particular focus on contractual arrangements. Inadequate contracts have a direct negative impact on project efficiency.  8. The cost impact of PPP projects must be clearly presented in budgets for the entire contract duration. The burden on future budgets must be transparent.

13. Transparency 13 Requirements of the external audit institutions regarding PPP Audit access by external audit institutions must be ensured.  At local government level, PPP projects are often similar to borrowing, which requires approval by the supervisory authorities in almost all German states. Federal and state governments should impose minimum standards for PPP projects.

14. Transparency 14 Audit access rights and PPP The public partners: Extensive audit access The private partners: Audit access only where public budget funds are used Therefore: Stipulate full audit access in the contract

15. Transparency 15 Audit activities Currently, the Bundesrechungshof‘s audit work  focuses on defence and road construction issues. However, most projects have not been underway  long enough to evaluate effectively the lessons  learnt or conclude on the potential efficiency and  risks of the projects. Any statements of principle have been derived from the risks identified in the cases audited

16. Transparency 16 Audit results Based on the lessons learnt with the HERKULES IT project, the Bundesrechnungshof has developed general recommendations on investment appraisals in connection with PPP projects: Investment appraisals for PPP projects must be carried out before committing funds and commencing contract-award procedures. Any decisions about PPP projects must be preceded by a comprehensive evaluation of the Federal Government‘s relevant options. This evaluation must not be restricted by the annual expenditure ceilings. The official ‚go‘ for the public-private partnership on the HERKULES IT project was given on 28 December 2006. For this purpose, the Federal Ministry of Defence set up the joint venture BWI Informationstechnik GmbH (BWI IT) together with the private sector firms Siemens Business Services GmbH & Co. OHG and IBM Deutschland GmbH. The joint venture is to cover the information and communication technology of the Armed Forces which is not of a typically military nature. This includes the more than 140,000 computer terminals, 300,000 telephones and the computer centres. BWI will modernise and operate these facilities during the next ten years. The funding volume is about €7.1 billion. 2,950 Armed Forces staff will be employed in the cooperation project. The official ‚go‘ for the public-private partnership on the HERKULES IT project was given on 28 December 2006. For this purpose, the Federal Ministry of Defence set up the joint venture BWI Informationstechnik GmbH (BWI IT) together with the private sector firms Siemens Business Services GmbH & Co. OHG and IBM Deutschland GmbH. The joint venture is to cover the information and communication technology of the Armed Forces which is not of a typically military nature. This includes the more than 140,000 computer terminals, 300,000 telephones and the computer centres. BWI will modernise and operate these facilities during the next ten years. The funding volume is about €7.1 billion. 2,950 Armed Forces staff will be employed in the cooperation project.

17. Transparency 17 Audit results The valuation of the benefits of PPP must be designed so that the chosen priorities reflect the objectives of the PPP fully and transparently. The risks of any alternative options have to be examined in detail and quantified where possible. Their impact on the decision-making process needs to be illustrated.

18. Transparency 18 Audit results Further lessons learnt from auditing the PPP sector can be found in the cross-boundary annual report item on investment appraisals / efficiency studies in the federal administration: Sometimes, the authorities responsible for planning the PPP projects have:  based their decisions on assumptions and forecasts going beyond a realistic conservative estimate of future development; subsequent costs, especially personnel costs that cannot be cut immediately, were taken into account inadequately or not at all;

19. Transparency 19 Audit results used incomplete data, especially in evaluating optimised purely public-sector solutions; focused on intended benefits to the detriment of the quantitative results of the investment appraisal; in their appraisals stated the impact of potential risks in qualitative terms only; during the operational phase of project, failed to adapt their investment appraisals to changing conditions.

20. Transparency 20 Findings of the Bavarian State Court of Audit No cost benefits found for road works PPPs compared to conventional procurement!

21. Transparency 21 Consequence Decisive justification for PPP from the point of view of external audit institutions: obtaining efficiency yields For each individual project, an efficiency yield  must be proven by means of a transparent, full  and appropriate investment appraisal. 

22. Transparency 22 Efforts to achieve nation-wide uniform approach ACTING PARTIES: Joint working group of the Federal Government and the states OBJECTIVE: nation-wide uniform (minimum) standards for investment appraisals setting up uniform terms and techniques and thereby reduce the transaction costs incurred continuous further development with regard to lessons learnt  in practice

23. Transparency 23 Principles uniform project definition practical procurement situation figures are based on reliable estimates risk assessment tax impact considered quantitative investment appraisal on the basis of discounted cash-flows

24. Transparency 24 Stages of the PPP procurement process Figure 1: Stages of investment appraisal source “Leitfaden „Wirtschaftlichkeitsuntersuchungen bei PPP-Projekten“ (Guidance on investment appraisals of PPP projects), September 2006, p. 7. In the course of the repetitive process described above, ever clearer and project-relevant bases and pieces of information are condensed into a consistent overall monetary picture to be able to make estimates as riliable as possible of life-cycle costs and / or expenditures. Figure 1: Stages of investment appraisal source “Leitfaden „Wirtschaftlichkeitsuntersuchungen bei PPP-Projekten“ (Guidance on investment appraisals of PPP projects), September 2006, p. 7. In the course of the repetitive process described above, ever clearer and project-relevant bases and pieces of information are condensed into a consistent overall monetary picture to be able to make estimates as riliable as possible of life-cycle costs and / or expenditures.

25. Transparency 25 Stages of the investment appraisal Stage I: Determining project efficiency Test for PPP suitability Stage II : Calculation of the public sector comparator Estimate of PPP costs Stage III: final comparison of the bids received with the PSC If PSC > present value of the PPP-solution, award contract to the successful bidder and signing of contract. Stage IV: project controlling

26. Transparency 26 Project efficiency Analysis of potential advantages and disadvantages of the planned project from a macro-economic perspective If advantages are found to prevail: Identification of the procurement option that provides best value for money

27. Transparency 27 Test for PPP suitability QUESTION: Does the planned project meet pre-defined requirements which, based on the lessons learnt from previous projects, have proven essential for the success of a PPP solution. EVALUATION CRITERIA: project volume legal and / or project-specific restrictions structure of project risks remuneration mechanism specifications interest of market participants market structure DIFFICULTIES : little concrete information about the project is available at this time Basic guidance on the approach to be taken when checking a project for PPP suitability is found e.g. in the guidance issued by the Finance Ministry of the German State of North Rhine-Westphalia under the title of: “PPP im Hochbau Erste Schritte: Der PPP-Eignungstest“ (PPP in building construction; first steps: the test for PPP suitability) from 2003. Basic guidance on the approach to be taken when checking a project for PPP suitability is found e.g. in the guidance issued by the Finance Ministry of the German State of North Rhine-Westphalia under the title of: “PPP im Hochbau Erste Schritte: Der PPP-Eignungstest“ (PPP in building construction; first steps: the test for PPP suitability) from 2003.

28. Transparency 28 Preliminary investment appraisal Analysis of the economic benefit of the PPP before opening the contract-award procedure. Comparison of estimated PPP cost and the  PSC

29. Transparency 29 Methodology type of investment appraisal based on assessing discounted cash-flows  (net-present-value method) for projects having an overall economic impact: cost-benefit analysis qualitative aspects can be evaluated by means of utility analysis  use of nominal cash-flows  (assumptions about expected price trends have to be stated explicitly ) for determining the applicable discount rate, the guidance recommends  that the interest rate should be derived from the yield curve. In principle,  using an average (nominal interest rate) is possible. sensitivity and scenario analyses separate assessment of individual risks (determination of so-called security  equivalents and payment equivalents)

30. Transparency 30 Public Sector Comparator Sum of all risk adjusted costs of and, where applicable, proceeds of conventional procurement Only those approaches that have already been implemented, or at least decided on, may be taken into account This requirement continues to be controversial. The PSC needs to be adapted if framework conditions change e.g. if there is a change in risk allocation.

31. Transparency 31 PPP Costs Reliable estimates of the costs of implementing the PPP project as planned PROBLEM: How do I arrive at a reliable estimate with a reasonable input of resources Approaches used in practice include : Back-tracking method Method of complete financial plans

32. Transparency 32 Further discussion points Remanent costs (the guidance calls for allocation  of remanent costs to the PPP model). However, this requirement is controversial Treatment of tax effects? (The guidance says:  the project-executing agency has to decide whether and to what extent direct tax effects are taken into account). appropriate remuneration for risks (risk-adjusted cash-flow vs. risk adjusted interest rates)

33. Transparency 33 Final investment appraisal Demonstration of the efficiency of a PPP solution at the end of the procurement process. The PSC is the yardstick for evaluating the bids from the private sector. Prerequisites for juxtaposition and comparability: uniform performance and quality standard uniform project duration risks are taken into account Where necessary, adjustment of the PSC but: optimisation from private sector bids must not be adopted into PSC!

34. Transparency 34 Status of implementation In 2006 the Federal Government and the German states decided to recommend using guidance as a non-binding minimum requirement.

35. Transparency 35 Conclusions and Outlook An important step towards standardisation has been taken. The guidance provides those responsible with methodological and substantive assistance enabling them to develop sound and reliable statements about PPP project efficiency. Application of the guidance in practice ? Evaluation of the lessons learnt by using the guidance in  the course of an audit is planned by the German SAI for  2009. The guidance will be the yardstick for the audit  but it is not considered ‘sacrosanct’ and unchangeable.