The emerging German PPP contractor market has become a three horse race with the buyout of Walter Bau by Strabag.

A subsidiary of Austrian holding company FIMAG, Strabag is making a major push into the European PPP market, with road and infrastructure projects in countries such as Croatia, Austria and Ireland, as well as its first schools project in Germany.

The buyout of the main operating divisions of the insolvent Walter Bau has strengthened Strabag's position in the German construction industry. That deal makes Strabag the biggest construction company in the German market. Its two main construction industry competitors – Hochtief and Bilfinger Berger – are currently leaders in the German PPP sponsor market. But the Walter Bau acquisition gives Strabag critical mass in Germany, making it better placed to win contracts in the developing German PPP market.

Strabag will be bidding on some of the German A-Model Motorway concessions (shadow tolls with revenues allotted from the national electronic toll collections system) scheduled to be tendered this year. Those bids will be handled by A-Way, the Strabag infrastructure PPP division. Other PPP activities – schools, prisons and hospitals – are managed by Bauholding Strabag through its various PPP units.

Pilot PPP

Strabag has already made small inroads into the German PPP market. Last year Strabag Projektentwicklung (SPE) led the PPP SchulManagement GmbH & Co KG bidding group in its first deal: "Witten Schools was a pilot project of the North Rhine Westphalia Taskforce, and it was the first PPP project that Strabag got involved in Germany. We were awarded the 25-year contract in August 2004," says Petra Nowacki, PPP department head at Strabag Projektentwicklung in Cologne.

The project, which has an option for a further five-year extension, involves the renovation, financing and servicing of two schools plus building some new facilities at each site. Although a small deal, with an initial investment of only Eu13 million, Witten is nonetheless one of the high profile first wave of German schools deals, and so an important first step for Strabag in this market.

The construction work will be carried out by Strabag. But since the project was being worked on at an early stage in the development of the PPP division, in 2003, the repair and maintenance contract is with a Berlin-based partner. This will not be typical in future deals, where Strabag will likely keep contracts in-house.

The German market is beginning to pick up after years of very slow progress during which the Herrentunnel and Warnow Crossing (for more details search www.projectfinancemagazine.com) were the only projects actually under construction. That situation has now changed dramatically.

Regional market picking up

Planned regional deals include two prisons in North Rhine Westphalia, and one in Saxony Anhalt. There are also hospitals coming up, including a deal in Bremerhafen, and there was recently a pre-qualification for a proton therapy centre at the University in Essen. Federal deals include a Bundeswehr barracks in Munich.

A number of German states are now interested in PPP, encouraged by the Federal Government in Berlin. In March, at a meeting at the Ministry of Construction in Berlin, government officials asked for the names of contact persons ultimately responsible for PPP in each state. Berlin clearly wants action, especially given the poor state of public sector finance in Germany, and the increasing tension between the various states about how tax revenues are divided up.

Forecasts vary as to the volume of PPP projects over the next five years, but even a conservative estimate suggests in excess of Eu3 billion per year for schools, prisons and hospitals, to which must be added at least Eu1 billion per year of toll motorway projects.

There is very little foreign competition for German PPP equity, which is both good and bad news for the major sponsors. "The German market is still at the development stage, and we are now seeing some funds being set up that are interested in providing some or all of the equity on PPP projects," says Nowacki. "Strabag will carry out construction work, and be involved in service contracts, but it is not our strategy to keep all the equity on our own balance sheet."

On the debt side some German deals done so far have involved project debt, though most have involved low margin loans to public sector entities. A forfaiting structure is used, where the lending bank has a claim to the payment flows to be made over the life of the contract by the local authority or state government.

However this may change as public sector entities look more closely at managing their own balance sheets along private sector accounting lines.

German PPP method

"Under German law it is not possible for State governments or local authorities to become insolvent, so financing can be done via a kommunalkredit, which carries a very low interest rate," says Nowacki.

"There are two possible ways to finance a PPP project," she explains. "One is to have project finance, where the bank looks closely at all the risks of the project. The other is with a kommunalkredit, where the lenders are looking at the State government or local authority guarantee. The kommunalkredit has a lower interest margin, but the risks in the transaction are managed better if you have a project financing."

Prisons, hospitals and schools are all on the agenda at Strabag, via its Cologne based unit. But Vienna based A-Way, the infrastructure unit, is also expected to be a high profile bidder on the A-Model roads.

The Ministry of Transport has 12 projects planned in the first wave, with more to follow in the future. These include the A8 in Bavaria, and the A5 in Baden Wuerttemberg, plus concessions in Thuringia, Lower Saxony and North Rhine Westphalia.

In addition to being one of the largest construction companies in Germany, Strabag is well placed for the road PPPs because it already has experience in bidding successfully in countries such as Croatia and Ireland.

One of the first A-models expected to be awarded will involve the upgrading and widening of a 52km stretch of the A8 in Bavaria. Building costs are estimated at Eu198 million, with another Eu163 million worth of maintenance and operating costs over the 25 years of the PPP contract.
Similar sized PPP contracts will also be out for tender near Bremen, Baden Baden and between Cologne and Aachen.

Creating a European footprint

Like Hochief and Bilfinger, Strabag will be determined to gain a foothold in this market by getting in on the first wave of deals. And it will be able to point to experience in the sector with A-Way, in Ireland and Croatia.

In fact before the takeover, Walter Bau AG and Strabag had already formed a joint venture with the Croatian government to rehabilitate, extend and maintain the 60km real toll motorway which runs from Zagreb to Macelj on the Slovenian border. The motorway will help ease congestion in the Pyhrn Corridor linking Western and South Eastern Europe, and falls under the Trans European Network system.

Total project cost is around Eu360 million, which includes work on the existing 40km stretch of road, the construction of 20km of new road, plus tunnels through the mountains on the border.
For the deal Walter Bau set up a special purpose affiliate Walter Concession Holding, which holds 51% of the Autocesta Zagreb-Macelj concession company. The other 49% is held by the Republic of Croatia.

In addition to holding a large stake in the project, the government is also putting up traffic shortfall support. Financing includes toll revenues from the existing road, uncovered senior debt, plus a debt tranche covered by German ECA Hermes. Mandated lead arrangers on the financing, which closed in July 2004, were KfW, HVB, Bank Austria Creditanstalt, and HSH Nordbank.

Also in summer 2004 a consortium led by Strabag was awarded the Design, Build, Finance and Operate (DBFO) contract for the N8 Rathcormac-Fermoy Bypass in Ireland. The contract involves the construction of a toll motorway and its operation for 30 years. Strabag is also involved in the N18 Ennis Bypass, which is a Eu119 million project, that should be completed in summer 2007.
These projects have gained Strabag valuable experience, and all the signs are that Strabag and A-Way are going to be high profile players in the European PPP market in the coming years. n