Over the past five years Essen based Hochtief has established itself as one of the leading players in the global public private partnership (PPP) market, with contracts ranging from the Lane Cove Tunnel in Sydney, to the Americo Vespucio Nor-Poniente toll road in Santiago, and the North Luzon Expressway in the Philippines.

During those years the domestic market in Germany has been slow to develop, while Hochtief has also not been a major player in the biggest European PPP market – the UK. But all that is now changing. Last year the company won the Offenbach Schools contract, also signed up for the new City Hall in Gladbeck, is expected to be a major contender for the upcoming A-Model shadow toll roads, and most recently won the 25 year Eu125 million Cologne Schools PPP concession.

Last December Hochtief also acquired the PFI bidding team at Jarvis plc for £1.2 million, bringing on board 12 Jarvis employees, as well as three PFI projects with Preferred Bidder status, in Manchester, Cork, and Bangor (Northern Ireland). As a result, the volume of German and UK transactions looks set to increase significantly, giving Hochtief a more European focus than has been the case up to now.

Meanwhile, late last year, it was decided to set up a new operating division within Hochtief, which had previously done all its PPP work via Hochtief Projektentwicklung. Since January 2005 this new unit has been operating as Hochtief PPP Solutions, led by Managing Director Bernward Kulle.

Developing global footprint

"The PPP market is developing strongly, especially in Germany and across Europe, and we have a sizeable portfolio of projects, and have reached critical mass," says Kulle. "We wanted to position ourselves better in the market," – hence the name Hochtief PPP Solutions.

"Hochtief is one of the few players in the market that can deliver everything out of one hand, from planning, to design, build, operate and financing," he notes. "In practice, a construction or an FM contract for Hochtief would come from a different profit centre within the company, but Hochtief PPP Solutions would act as the integrator."

To start with around one-third of the entire Hochtief portfolio of PPP projects have been bundled into Hochtief PPP. These are; Offenbach Schools; the City Hall in Gladbeck; The Herren Tunnel in Lübeck, which opens later this year; the Americo Vespucio Nor-Poniente tollroad in Santiago, Chile; the San Cristobal Express tunnel in Santiago, Chile; The Chiloe Bridge in Chile; and the Puentes del Littoral toll route in Argentina. In addition to these seven projects, there are another four where Hochtief PPP has reached the point where it has preferred bidder status.

Hochtief is also a very big player in the Australian PPP market, via its 53% owned subsidiary Leighton Holding. However, on the principle of never changing a winning team, the activities of Leighton will continue outside of Hochtief PPP Solutions, with the Australian team also responsible for projects in Asia such as the North Luzon Expressway in the Philippines.

Similarly, the African projects such as Huguenot Tunnel near Cape Town, continue to be developed and run by Hochtief associated company Concor Limited, which is one of Africa's biggest construction companies. Hochtief is also a major player in airport development, but this is handled by the separate and specialised Hochtief Airport.

PPP development in Germany

"The German market is becoming more important for us, with both toll roads and public buildings such as schools increasing in volume," says Kulle. "I believe that within a few years PPP involving schools and other social infrastructure will actually be bigger in volume than transportation. There is a backlog in investment in Germany for social infrastructure, and just in the education sector this backlog is estimated at Eu130 billion for the current decade. If only 10% of that gets done by PPP, which we see as a realistic estimate, that would mean Eu13 billion worth of business between now and 2009."

In fact last year was already quite busy, and Hochtief was the winner in the high profile Offenbach Schools deal, involving refurbishing and managing 49 schools in the state of Hesse, with a contract volume of Eu410 million.

The next big wave of projects in Germany are the A-Model shadow toll roads, where concessionaries will carry out road widening on stretches of autobahn, and then maintain these stretches of road. They will be paid out of shadow tolls collected across the entire autobahn system, where heavy trucks must now have an on board transponder and pay a fee per kilometre.

In late February, Minster for Transport and Infrastructure Manfred Stolpe announced that the bidding process on the first projects will at last get underway. This is over a year later than expected, but a series of glitches with the computerized shadow toll collecting system mean that it was itself introduced late, and did not get underway until January of this year. But this Toll Collect system is now running smoothly, so the revenue flows have begun.

The first road awarded is expected to be the A8 which runs from Augsburg to West Munich and Allach. This will be followed by the A4 in Thuringia, the A1 in Lower Saxony, and the A5 in Baden Württemberg.

"The A-Model road concessions are concentrating upon the most heavily used, core sections of the highway system, and these stretches of autobahn will need to be enhanced from four to six or eight lanes," says Kulle. "One advantage is that the traffic risk is low, because there is tolling on the entire German autobahn network. And the toll is paid only by heavy trucks, and not passenger cars. It is this segment of traffic which will increase most over the next 10 years, because Germany is a transit country, and the roads in Germany will be most impacted by the expected growth associated with the enlargement of the EU."

In fact there are forecasts of 65% growth in heavy trucks on the autobahn system within the next 10 years. One interesting part of the planned A-Model PPP structure is that it is proposed that the tolls will be pledged starting from commencement of construction. This will, unusually, give concessionaires a cashflow from day one, which should lead to some innovative financing structures.

Hochtief PPP has allied itself with Eurovia, part of the Vinci Group, for it's A-Model bids, in a 50:50 joint venture. For each individual road, smaller regional constructors will also be brought in. Deutsche Bank is financial advisor.

Hochtief works with different bank lenders on each project, and is currently negotiating to put in place a group of lead arrangers for senior and mezzanine debt on the A-Models.

The A-Model roads will be done with project debt, but for the schools and public buildings there are still various financing models, mainly the use of a forfaiting structure, where a bank buys the future payments due from the municipality or county at a discount, and project debt.

"I do not think that it has yet been decided what will be the main structure in the future- for example we used forfaiting structures in Offenbach and for the Gladbeck City Hall, while we are planning a project finance structure in Cologne," says Kulle. "To a certain extent it is logical to use a project finance structure, and so put all the project risk in the hands of one party. Also the counties and cities are changing their accounting systems in order to look more like private companies, so in future they will have to be more transparent, and look at the effect that giving guarantees has on their balance sheets. But we are open to using forfaiting structures too, and we can do both with the same team at Hochtief PPP Solutions."

Establishing a bigger UK presence

Schools is also a big area of opportunity in the UK, and Hochtief currently views the UK market very positively. As is well known, the PFI cycle in the UK took the form of many early deals having very high returns for the private sector sponsors, while later deals saw returns get quite thin.

"We did the deal with Jarvis in the last quarter of 2004 because we wanted to establish a bigger platform in the UK, and we think it is a good moment to get involved in the UK," Kulle says. "The market is in a consolidation phase, and it is a very interesting place for newcomers like us, since there are a lot of projects coming, but some players are running out of balance sheet capacity, and cannot bid on many projects. I do not expect returns to get lower in the UK, but rather to become slightly higher than they were in recent years."

Hochtief is starting with the education sector, and is Preferred Bidder on three school deals, in Manchester, Cork, and Bangor in Northern Ireland.

Outside of Germany and the UK, Chile continues to be a major source of business for Hochtief PPP. Last year long term financing was put in place for the Americo Vespucio Nor-Poniente road, which has a total investment of around Eu500 million. The concession issued a 24-year bond in the local Chilean capital markets, wrapped by MBIA.

Last September Hochtief also won the concession for the San Cristobal Express tunnel, which will connect Santiago's business district with the northern suburbs, and which itself connects with the Vespucio Nor-Poniente toll road. With a total volume of around Eu70 million this deal is a bit small for a bond offering, so the intention is to close a local currency bank debt financing during 2005. Hochtief will hold 50% of the project, with Spanish and Chilean partners holding the balance.

The most recent project was awarded by the Ministry for Public Works in January, and involves the building of the longest toll bridge in South America, connecting the mainland with the island of Chiloe. Hochtief PPP is concession leader with a 27% stake. Construction work on this Eu400 million project will begin in 2007, and the operating concession will run for 30 years from 2012.

A less positive experience has been the only Hochtief project in Argentina, which was originally planned when the Peso was linked at parity with the US Dollar, but has been hit hard by the economic problems in Argentina.

"The traffic levels on the Puentes del Littoral toll route are okay, so there has been no danger of bankruptcy at the concession company, but the Peso is at one-third of its value against the Dollar in 2000, and we are currently negotiating with the Argentine Government about changes to the concession agreement, and especially the level of subsidy," Kulle explains. In the meantime, Hochtief is not planning any new projects in Argentina.

Future portfolio change?

With regard to the entire global portfolio of projects, up to now Hochtief has not been an active seller of completed projects (with the exception of the Leighton venture in Australia where the portfolio has traded quite actively). But that may change.

"On the asset management side, we do intend to actively manage our portfolio, and we may sell shares on a partial basis after two or three years of ramp-up, when most of the performance risk is out of the project," explains Ansgar Bendiek, Head of Business Planning and Asset Management at Hochtief PPP Solutions.

"We definitely have a long term commitment to projects, and we want to remain as the operator during the project lifecycle, but we do not feel it is necessary to be the 100% shareholder during the entire lifecycle, so we will sometimes offer part of our shareholdings to institutional and financial investors," Bendiek says.