The establishment of Public Private Partnership (PPP) as a financing technique in The Netherlands received a boost in May, with the signing of a Memorandum of Understanding between the Dutch government and the Infraspeed high speed rail consortium.

The Siemens-led Infraspeed consortium, which also includes Fluor Daniel and the developer/construction group Royal BAM NBM, has been selected for a contract to design, build, finance and maintain the superstructure (signalling, track, power systems etc) of the High Speed Line Zuid (HSL-Zuid) which from 2005 will run south from Amsterdam and into Belgium.

The Infraspeed sponsors are putting up Eu120 million in equity, with a debt to equity split of 90:10. Another Eu400 million in debt with a 28-year term is being provided by the European Investment Bank (EIB). The remaining Eu780 million is being lent by a syndicate made up of ING, Dexia, HypoVereinsbank, KBC, Rabobank and Kreditanstalt fur Wiederaufbau (KfW).

But bankers in Amsterdam note that financial close is still some way off, and that there are still opponents of PPP within Dutch political circles. Even the Infraspeed sponsors are using the term ?preferred bidder? to describe their current status with regard to the HSL.

?The pricing on the debt has been put forward to Deutsche as the consortium's financial adviser,? explains David Shepherdson, Director and Head of Project Finance at ING Barings in London. ?The term sheet which has been agreed between the financial adviser and the lending banks. The debt is floating rate, and whether it becomes efficient to put a swap in place and obtain fixed rate debt will be a consortium decision. We are very encouraged by the process so far, but we are waiting for it to be actually signed, and we are not quite sure how long this process will take,? Shepherdson adds. ?It is positive so far, and we are hoping that Infraspeed will move forward and trigger other deals in the Dutch market, but there could still be a slip or twist in this process before it finally gets signed.?

Feeling in the marketplace is that the deal will reach financial close, but the battle is still being fought in the Netherlands over whether the concept of PPP is really applicable in a country where public sector finances are in such a healthy state.

Getting in line with Maastricht criteria on annual budget deficits ahead of joining the single currency never seriously troubled The Netherlands. And the economy continues to expand rapidly. GDP growth came in at 4.3% last year and is targeted to hit 4% this year. This is being achieved with low inflation and little risk of a boom and bust. In fact some of the political disagreements between various parties in the so called Purple Coalition headed by Wim Kok involve what to do with what has been described as ?a budget windfall from rapid economic growth.? Even with tax cuts coming into effect for the financial year 2001, state finances are in good order.

There are two tiers of sub-sovereign government in The Netherlands. The 12 provinces (provincien) are responsible for strategic planning, environmental protection and major highways etc. They also supervise the 550 municipalities (gemeenten) whose responsibilities are more resource intensive, covering areas such as social welfare, housing and education. In fact 90% of sub-sovereign government spending is undertaken by the municipalities.

These entities tend to be very creditworthy. The Netherlands has a system of channelling money to poorer provinces and municipalities, and the stable and supportive financial and legal system is likely ?to be reflected by high investment grade ratings being applicable for most of the sector,? according to Standard & Poor's.

At present there are no public Dutch local government ratings, but S&P anticipates that this will soon change. It notes that the implementation of PFI in the UK has seen National Health Service Trusts, local authorities and central government agencies participate in investment arrangements with the private sector, and that credit ratings have been used to assess this risk as part of the project transaction structure. As the PPP is adopted in the Netherlands, the same patterns should emerge.

?We assign a rating to the project company which is issuing the debt, but part of that process is obviously to look at the offtaker, and we have to form some kind of credit opinion on that entity, such as a municipality,? says Jonathan Manley, analyst at S&P in London. ?The market is taking off for bank loan ratings as well, since having a bank loan rated is helping with syndication,? says Manley, who anticipates that bank loans will also being rated on future Dutch PPP projects.

But the very strength of the Dutch public sector, reflected in its low borrowing costs, has made some observers question whether PPP is being pursued as some sort of fad rather than a sensible answer to public sector finances. The problem of getting PPP up and running seems to be less of a problem for the government, and more of a problem for the private sector bankers and advisers to show that it really saves money.

?In the UK there is simply often a lack of budget, whereas that is not the case in the Netherlands, so if the only reason to implement this is cost savings, whereby the cost of private finance has to be set off by efficiency and gains, it might be very difficult to improve on the situation, so that has hindered progress,? comments one Amsterdam-based banker. ?What is making PPP happen is the Dutch government. It looks like PFI from the UK, and all the government advisers are from the UK. I couldn't tell you what the Dutch angle is.?

?A 5% cost reduction has been mentioned for the HSL, compared to a pure state financing, but I would consider 5% within the margin of error, so from that perspective it is maybe not the best argument to do PPP,? the banker adds. ?With the water project there is also an issue with the cost savings. The water board has been convinced that private finance will help them in achieving cost savings, but that may be difficult to achieve, because the cost of private finance is so much higher than if the water board finances itself.?

Water

The water deal referred to is the Delfland wastewater purification project, which along with HSL Zuid and the A59 road project is one of the three PPP projects at the most advanced stage. In the Delfland deal the design, development/redevelopment and commercial operation of two water purification plants is being put out to tender, with the aim of increasing capacity and comply with new environmental standards at the lowest possible cost per household. The project is made necessary by the EU Urban Wastewater Directive. In fact the current site has little room for expansion, so the project is being split between two sites, and the government has had to do a compulsory purchase on the new site, which has added a complicating factor.

Three private sector consortia received the schedule of requirements last year, and presented their bids in May. The contracting authority is Hoogheemraadschap Defland, the local water authority. One consortium features Vivendi, advised by Rabobank. The second includes Thames Water, HBG and Ballast Nedam. And the third includes Yorkshire Water and developer/construction group BAM-NBM.

Signature of a contract is expected sometime next year, with the project estimated to cost somewhere between Eu200 million and Eu250 million. And financial close may not happen until 2003.

Meanwhile the A59 project involves the construction of a new stretch of motorway near the city of Den Bosch, running between Rosmalen and Geffen, which will also strengthen the regional economy. Five consortia have been selected to tender for the design, construction, financing and management of the A59. It is hoped that a contract may be signed later this year. The contracting authority is the Province of Noord-Brabant.

One financial institution which is involved is NIB Capital, which is one of the sponsors of a consortium bidding on the A59.

?The view of the Dutch government is that inviting in the private sector in a PPP setting will bring innovation with it, and the government is starting to accept the idea of not buying an asset, but buying a service,? comments Paolo Guertsen, manager at NIB Capital in Amsterdam.

?The A59 is a project where there is major congestion in the Province of Noord Brabant, and funds have been promised by the state to the province to realise a freeway. But the province wants to resolve this congestion problem as soon as possible so they are tendering this project on a PPP basis,? says Guertsen.

Bankers and lawyers are also working on the second phase tendering process for the HSL Zuid, which involves choosing an operator to run the actual train services. Four consortia have qualified, and there has been lots of international interest. Arriva Nederland is a unit of Deutsche Bahn und Touristik, while Stagecoach Holdings are also tendering. The other two bidders are ConeXXion, which is made up of SJ International and CGEA Connex, and finally NS-Reizigers-KLM.

In all these various projects the Dutch state or province will be paying the concessionaire a fee for the measured availability of the project. This fee is not directly linked to the number of trains/cars/passengers actually using the project, or in the case of Delfland the water flow levels. Penalties may be deducted from the fee if certain pre-agreed performance levels are not achieved, but there are no direct market risks for the concessionaires.

In spite of many delays, there is solid progress being made on introducing PPP to the Netherlands, and there is a pipeline of other projects planned by the government. These include more roads such as the N201 running eastwards from Schiphol Airport, the re-development of a former naval dockyard, and development of the Rotterdam Central Station and the Hoog Hage station in The Hague.

Some of these are at very early stages, while others are quite advanced, but if they are to proceed bankers, lawyers and government officials are all keeping their fingers crossed that the Infraspeed deal moves ahead as planned. Any de-railment of this deal will cast a shadow over other PPP projects.

Critics of PPP in the Netherlands will no doubt be making themselves heard in the coming months, saying that PPP does not save money, and that the government would be better off paying for infrastructure projects in rail, road and water out of its own coffers. Others will vocally argue that putting in place alternative sources of funding is a sensible course for any country, just as corporations diversify their funding sources even in good times when bank debt may be plentiful.

?The Dutch market has traditionally been quite closed to any external participants, with a lot of reliance upon public sector banks ? Bank Nederlandse Gemeeten and Nederlandse Waterschapsbank ? in providing finance for all of the activities of the provinces and municipalities, and that is quite a hard culture to break,? comments a local banker.

?The Dutch are not going in to PPP with the enthusiasm that we have seen in the UK market, and there is a difference between the Anglo Saxon model and continental Europe, where there is still a feeling that the public sector should be run by the public sector, and the private sector- with its profit motive- is viewed with some suspicion,? he says.