In 2 December 1999 the ground-breaking ceremony for the Warnow Crossing in the city of Rostock took place, marking the start of the first privately financed road infrastructure project in Germany.

Since then, the documentation has been completed, the first drawdown has taken place and work has begun on the site. Six years after the law on private road financing was passed and four years after Bouygues S.A. won the tender, this is still the only deal which has reached financial close (a second concession has been awarded to a consortium of Hochtief and Bilfinger&Berger for a road in Lübeck, also on the baltic coast).

The Law on private toll roads (Fernstraßenbauprivatfinanzierungsgesetz ? FstrPrivFinG) was enacted in 1994, shortly after Reunification, when it became apparent that the backlog of infrastructure investment in Eastern Germany could not be overcome by conventional budgetary means. To comply with EU rules on road pricing, the law is restricted to bridges and tunnels on federal highways with dual carriageways. It took many people by surprise that the first ? and until today only ? projects are located in cities, where the Federal Government has a very limited role to play.

A few months after the Law was enacted, the Hanseatic City of Rostock in former East Germany announced the tender for the first project. Rostock extends like a large ?U? around the river Warnow, around 15 km away from its confluence into the Baltic Sea. The city centre, at the bottom of the ?U?, had always had problems with traffic congestion. After Reunification, traffic levels rose dramatically and the situation became unbearable. The solution is a crossing of the Warnow between the residential areas in the west and the harbour and industrial areas on the east bank. The tender was eventually awarded to the French contractor Bouygues S.A., who were later joined by Macquarie Infrastructure Group, an Australian investment fund as sponsors of the deal. Bank finance was arranged and underwritten by a consortium led by NORD/LB and Deutsche Bank and including Kreditanstalt für Wiederaufbau and the European Investment Fund.

This article will outline some of the hurdles that had to be overcome for successful completion of the Warnow Crossing and future developments in this sector.

Traffic forecast

The tender documents included a traffic forecast for the tolled Warnow Crossing with an expected demand of 30,000 cars per day on average. After the concession contract had been concluded, this had to be verified by an in-depth study commissioned by the Sponsor and audited in the process by an independent expert on behalf of the banks. The task of the forecasters was made more difficult by two factors:

? The general uncertainty in former East Germany with an extreme break in the demographic development and economic structure after Reunification.

? On top of that the Warnow Crossing is a pilot project: there was no experience of toll roads in Germany. With very broad data collection, extensive modelling and a careful definition of parameters for the forecast scenarios banks and sponsors tried to balance these handicaps. Maybe the sponsors exaggerated a bit when they claimed that banks ?interviewed all car owners and then assumed that most of them would move away?. But it is true that when defining the banking case we used conservative assumptions regarding population and economic growth, so that in the prognosis traffic flows only grow at a rate of 0.6 % per year on average during the 30 year concession term. Hopefully this will help to avoid past mistakes made on toll road projects which had to be financially restructured when optimistic growth predictions could not be achieved.

Planning and construction

In Germany, as in many other countries, you need a permit for just about everything, and for things as complex as infrastructure projects the construction permit may take a long time to obtain. So another obstacle in the project's planning was that the tender had been conducted as a ?competition of ideas?. This simply implies that bids are invited on a functional basis (hence the name ?Warnow Crossing?) and bidders can submit a variety of technical alternatives ? bridges, bore tunnels, immersed tunnels. The tender is awarded for one specific proposal and design, and the complete documents for the planning permission have to prepared by the successful bidder.

As a consequence, the planning risk (e.g. the risk of cost increases or delays because of changes in the alignment or increased security standards in the course of public hearings and administrative restrictions) is left with the operator, which doesn't help to speed up financing negotiations and security documents. In Rostock, the permission was given after little over one year, which compares well with planning periods of up to 10 years which have been observed for other infrastructure projects in this country.

For future projects we expect that the tender takes place on the basis of planning documents already prepared by the local road agency, and that the tender runs parallel to the planning permission hearing. This will also help in the evaluation of bids, which will be easier to compare than a variety of dozens of technical alternatives.

Concession contract and toll collection

The legal basis for planning, construction and operation of the tunnel is the concession contract. It was concluded between the City of Rostock and the operator, Warnowquerung GmbH & Co KG in July 1996. The concession has a term of 30 years starting after completion and opening of the tunnel for tolled traffic. Like every other road, the tunnel will be designated to public traffic, and therefor the actual ownership is of little relevance (the land is owned by the city). The concession and the right to levy toll is the only significant asset of the project company. Main elements of the security package include a pledge of shares in the project company and step-in rights into the concession in an Event of Default.

The concession contract includes a detailed formula for fixing and adjustment of the toll during its 30 year term. However, the legal basis for levying a toll will be an ordinance which has to be issued by with the Federal Ministry of Transport (BMV) and the supreme road administration of the relevant federal state (in our case, the Ministry of Economics of Mecklenburg ? Western Pomerania). These are not parties to the concession contract, so that the contract on its own does not establish a basis for toll collection. Obviously the Law had been designed for the Bund or Federal States to award concessions for highways, but not for cities. Ironically, this is just what happened with both concession projects in Rostock and Lübeck. The problem is not that those entities acted ultra vires, i.e. without legal competence, but that the public law framework, which is rather complex, has not entirely been reflected in the drafting of the Law.

The solution has been developed in a series of consultations between all parties involved, and mainly consists of a declaration of the BMV that it is aware of the concession contract and the toll formula and will apply it within their competence when drafting the toll ordinance. The result of these discussions demonstrated that there is a far-reaching political consensus to promote the model of private infrastructure financing. At the same time it became clear that individual toll road concessions would probably not be a large-scale solution to the budgetary constraints that the BMV is facing.

Framework for private toll road financing

The BMV started several initiatives in order to define and expand the framework for privately financed infrastructure:

? A high-level group of finance and transportation experts was appointed by the Minister of Transport. The group shall develop conceptual ideas for the future of private transport infrastructure finance and shall make proposals for their implementation. Their report is due this summer.

? Last year a consortium of legal, financial and technical consultants led by the law firm Bruckhaus, Westrick was mandated to develop templates for tender documents, the concession contract and the toll ordinance for future projects. The draft documentation shall be based on an efficient risk distribution between the public sector and private investors and shall reflect the existing public sector framework as well as international experience. The Ministry has widely discussed the advisors' interim results ? including proposals for an amendment of the Law ? and the results are expected for August this year. This draft documentation will hopefully increase transparency and speed up the negotiation of subsequent deals a lot.

? Early this year, the installation and operation of a toll collection system for trucks on all federal highways was put out for tender by the BMV. Operation of the system will probably be based on mobile phones in combination with the Global Positioning System. With the planned putting into operation of this system by the end of 2001, the door would be opened for the introduction of general road pricing in Germany. The legal implications ? in particular data protection issues ? are challenging, but if this can be made to work, an extension from trucks to cars is easily possible in subsequent years. This will immediately re-open the discussion over the privatisation of the federal Autobahnen.

Conclusion and outlook

It took a long time to plan the Warnow Crossing and to finalise all contracts, which seems natural because it is the first deal of its kind. Although the principles of project finance are internationally established, their implementation in a German legal framework as the first application of the Law on private road financing entailed a host of uncertainties and deadlocks. The BMV has published a list of almost a dozen deals that it hopes to tender soon after the draft documentation has been finalised. Hopefully, a number of lessons learned will help to save time, money and nerves on their implementation:

? The tender on the basis of a ?competition of ideas? leaves bidders with complete freedom to select and offer the most efficient of all conceivable technical solutions using a life-cycle costing approach. On the other hand, the concession company is burdened with planning risk beyond its control. Unless this risk is largely assumed by the public sector, implementation of the project may be delayed.

? There are numerous administrative bodies on the federal, state and municipal level which interact in planning, approval, concession granting and toll levying and have influence on the project's viability. In order to avoid case-by case solutions as for the Warnow Crossing, the Law may have to be amended and ? however unlikely that may be ? planning procedures streamlined.

? With more private projects in transport and other sectors, the discussions in other countries on the appropriate sharing of risks and returns in public-private partnerships will gain momentum. In some instances people argue that all road operator's returns have to be capped uniformly, overlooking that all roads are part of a network with different kinds of alternatives, hence different degrees of competition and operating risk. And if the private operator is burdened with risks of the public sphere which are beyond his control, he has to calculate with a risk premium or the project may not be realised altogether. It will simply require a few more deals for expectations on both sides to become more compatible and make the process more efficient.

Shadow tolling, which is quite successfully implemented in the UK and Portugal, has been ruled out because it leaves future governments with an uncertain financial obligation. So in the foreseeable future we expect to see more toll concessions and the first steps towards general road pricing.