Market making
It is happening ? just. Bankers and lawyers working on Public
Private Partnership (PPP) projects in Germany and the Netherlands
have had to contend with plenty of delays in getting the PPP
concept up and running, but the first deals are finally starting to
roll.
In Germany the main focus is upon toll roads and tunnels, with projects in the cities of Lubeck and Rostock having made most progress.
In the Netherlands most of the attention is on the High Speed Line (HSL) which is planned to connect Amsterdam and the Belgian border by rail. The pre-qualifying stage is already over, and four consortia have been chosen to make tenders, with the formal invitation to tender (ITT) scheduled to be sent out during October. There are also consultations in progress which may lead to a Light Rail PPP project connecting Rotterdam, Amsterdam, The Hague and Utrecht.
Despite the headlines being generated by these projects, the reality is that the PPP concept has still not been totally accepted in either country, in contrast to the UK or southern Europe.
Some Dutch bankers doubt whether PPP projects such as the freight line connecting Rotterdam with Germany, or a planned Fl1.5 billion water treatment and sewage plant in The Hague, will actually get done under the PPP format, even though The Hague regional government has got as far as appointing PriceWaterhouseCoopers as its adviser.
?There is still a debate in the Netherlands centred on why we should use private financing when public money is much cheaper,? comments one banker. ?It is not always sensible to apply PPP in many sectors, since we are a relatively rich country, and both the government and the municipalities' finances are in quite good shape.?
The banker does not see much use for a private sector component on projects such as the Hague water treatment plant. ?It is nonsense,? he argues. ?The Hague authorities can borrow on as good terms as the government, but they have read somewhere that PPP is a good way to do things. I just can't see how a private sector party can make the design or operation of the facility so much more efficient that it can make good the difference in cost of capital on such a large investment.?
And he is equally dismissive on the subject of the planned Betuwe Lijn project, which involves a freight rail service from Rotterdam to the German border.
?Betuwe is not far from being a disaster in terms of costs,? he says, pointing out that the service will have to compete with container shipping along the Rhine and other rivers very quickly and cheaply. ?It is difficult to say whether Betuwe will ever come to market, and personally I don't think it will,? the banker predicts.
This may be an excessively pessimistic viewpoint, but there have been a number of public statements from Dutch politicians suggesting that, for many projects, getting through the many complexities of PPP is just not worth the effort.
Local politicians in Amsterdam have recently said that even for expensive projects such as the extension of the underground system, they have enough public finance available and there may not be much of a role for private capital.
The big exception in the Netherlands is the High Speed Line (HSL), where the cost of the basic infrastructure is expected to be anything between E400 million and E800 million, with the separate train service operating contracts being awarded at a later date.
The Dutch government is being advised by Greenwich NatWest on this project, and in May the HSL-Zuid Project Organisation selected four consortia to tender for the construction and maintenance of the superstructure.
These four emerged from the pre-qualification process, and once their bids are in the government will assess the various tenders and open negotiations with one or more of the bidders. The contract could be awarded by the middle of next year.
One of the key issues still unresolved in the infrastructure contract is the kind of guarantees which will be given on the line being operable, since it will serve the train operators in a similar manner to Railtrack in the UK. Guarantees and penalties will be some of the more complex issues to be set out in the final documentation.
One bidding group, Consortium Infraspeed, includes ING Bank on the financing side, allied with Siemens, Deutsche Bank, Fluor Daniel, and NBM Amstelland, and the project has been successful in attracting strong interest from contractors, train manufacturers and banks across Europe.
?We are seeing a lot of anglo-saxon advisory involvement in the Netherlands, which makes the whole bidding process much more international,? comments Peter van Leeuwen, head of project finance at ING Bank in Amsterdam.
He notes that typically consortia bidding on PPP projects will contain a mix of international banks and contractors allied to strong domestic market player. ?Local knowledge is essential, especially when you look at the very long tenors typically involved in these deals,? says van Leeuwen: the contract to build and maintain the HSL superstructure will run for 30 years.
ABN Amro is also bidding for HSL as part of a rival consortium that includes French train manufacturer Alstom, HSBC Investment Bank, Strukton Groep, Koninklijke Volker Wessels Strevin, and TUC Rail.
George van Ramshorst, SVP and group head of infrastructure finance at ABN Amro in Amsterdam says that the level of interest in the HSL has been extremely high. ?If HSL is a success then it will be a stepping stone to doing more PPP deals,? he says.
The third consortium features Ballast Nedam Bouw, Balfour Beatty, Daimler Benz Transportation UK, Arcadis Bouw Infra, Systra and PriceWaterhouse Coopers. And the fourth involves Bechtel Enterprises International, Amey plc, Hyder Investments Ltd and Ove Arup.
The big US banks have thus far shown little interest in getting involved in European PPP projects, perhaps because things have been moving along so slowly, or because they have little experience of anything similar in their own home market.
?It is still a local game involving the Dutch banks,? comments one executive with a major US bank. ?Though we are keeping a close eye on it we are not involved in projects right now, and we haven't seen anything we would like to bid on ? it is not really on top of our list of priorities.?
But PPP does have the backing of supra-national institutions within the European Union. The European Investment Bank (EIB) has identified PPP as a form of financing that it wishes to get more involved in. Last year a decision was taken that the range of PPPs that the EIB can support has been widened under the Amsterdam Special Action Program (ASAP) to include investments in the areas of health and education.
The ASAP was drawn up in response to the European Council meeting in Amsterdam in June of 1997, where a commitment was made to step up action in support of job creating investments. But thus far there are few signs of any PPPs under this program in either the Netherlands or Germany.
The acceptance of PPP has also been slow in Germany, and some of the big German banks are busier with PPP in southern Europe than with projects in their home market.
One of the few genuine PPP deals completed in Germany to date was actually a quasi-UK deal, involving the new British Embassy in Berlin, which has already been topped out and is currently being completed.
This Dm65 million deal was arranged by Dresdner Kleinwort Benson, with the Embassy paying a fixed rent over a number of years including full maintenance of the building.
German property investors were brought in via KG Allgemeine, with Bilfinger+Berger leading the construction effort.
The deal is one of the few PPP projects that is actually physically there to see in Germany, even as a construction site.
That may soon change, particularly with regard to toll roads and tunnels, which are at the forefront of PPP activity within Germany.
In 1994 the Road Construction Private Finance Act was passed, allowing for private finance to come into roadbuilding via toll collection.
Since that time the Federal Transport Ministry has published a list of 16 potential toll projects.
To date only two have come to any degree of maturity ? tunnels in Rostock and Lubeck. The Rostock tunnel is being developed by Bouygues, while the tunnel in Lubeck includes Hochtief and Bilfinger+Berger in the consortium. The other projects are all at the preliminary planning stage.
?Our experience is that the negotiation of the concession with the local authority is very difficult,? comments one lawyer. ?And what tends to happen is that the concession will be negotiated, and then there is another lapse while the financing is put in place.?
But the government has appointed Bruckhaus Westrick Heller, Durth Roos Consulting and Deutsche Verkehrsbank to work on a standard concession contract which when agreed, should speed up the process. The rules will govern all aspects of the new private toll roads, including technical matters, plus the legal and commercial side of levying tolls.
Eleswhere in Germany there are another handful of large projects which loosely fall under the PPP umbrella, involving private finance.
The new airport in Berlin is more of a privatization, since the tender involved buying the existing airport operating company, and committing to build a new Dm4.5 billion Berlin Brandenburg International (BBI) airport which will then run on a 50-year Build Operate Transfer (BOT) agreement.
The bidding process was overseen by Credit Suisse First Boston, and the winning consortium was led by Hochtief. But losing bidder, IVG, made a legal challenge asserting that there were irregularities in the Hochtief bid.
IVG's action was successful and now the whole issue of who will build BBI has become bogged down in accusations of industrial espionage and conflicts of interest.
The bidding process will probably have to be re-opened, and as the arguing continues so there are concerns that BBI will not be up and running as planned in 2007.
The magnetic levitated railway, planned to run between Berlin and Hamburg, has proven even more controversial than BBI, and blocking the project has become a cause celebre in the Green Party (the junior partner in Germany's governing SPD-led coalition).
The federal government, which is paying for the magnetic guideway or track, has refused to countenance any costs beyond the Dm6.1 billion originally promised.
That is clearly not going to be enough money.
And the latest plan, announced in mid-September, is for only a single track to be laid, with the Maglev trains passing one another at a junction halfway between Berlin and Hamburg on their one-hour journey.
The Greens have dismissed this single track compromise as a clumsy trick on the part of the SPD, and are sticking to their position that cost overruns mean that the project is no longer viable.
The private consortium led by Thyssen, which is building the trains and views the Maglev system as a potential export winner, is pressing hard, but the project may yet fail to get off the ground.
Political squabbling, plus the difficulties inherent in balancing the interests of the public and private partners, will probably ensure that any form of PPP will remain a slow moving process.
Project finance bankers in Germany and the Netherlands, already used to long delays on conventional projects, are learning the hard way that PPP can drag on even longer.
?There are a lot of initiatives that people are working on, but they are not yet in the final stage,? says one banker, ?and they may take a long time.?
In Germany the main focus is upon toll roads and tunnels, with projects in the cities of Lubeck and Rostock having made most progress.
In the Netherlands most of the attention is on the High Speed Line (HSL) which is planned to connect Amsterdam and the Belgian border by rail. The pre-qualifying stage is already over, and four consortia have been chosen to make tenders, with the formal invitation to tender (ITT) scheduled to be sent out during October. There are also consultations in progress which may lead to a Light Rail PPP project connecting Rotterdam, Amsterdam, The Hague and Utrecht.
Despite the headlines being generated by these projects, the reality is that the PPP concept has still not been totally accepted in either country, in contrast to the UK or southern Europe.
Some Dutch bankers doubt whether PPP projects such as the freight line connecting Rotterdam with Germany, or a planned Fl1.5 billion water treatment and sewage plant in The Hague, will actually get done under the PPP format, even though The Hague regional government has got as far as appointing PriceWaterhouseCoopers as its adviser.
?There is still a debate in the Netherlands centred on why we should use private financing when public money is much cheaper,? comments one banker. ?It is not always sensible to apply PPP in many sectors, since we are a relatively rich country, and both the government and the municipalities' finances are in quite good shape.?
The banker does not see much use for a private sector component on projects such as the Hague water treatment plant. ?It is nonsense,? he argues. ?The Hague authorities can borrow on as good terms as the government, but they have read somewhere that PPP is a good way to do things. I just can't see how a private sector party can make the design or operation of the facility so much more efficient that it can make good the difference in cost of capital on such a large investment.?
And he is equally dismissive on the subject of the planned Betuwe Lijn project, which involves a freight rail service from Rotterdam to the German border.
?Betuwe is not far from being a disaster in terms of costs,? he says, pointing out that the service will have to compete with container shipping along the Rhine and other rivers very quickly and cheaply. ?It is difficult to say whether Betuwe will ever come to market, and personally I don't think it will,? the banker predicts.
This may be an excessively pessimistic viewpoint, but there have been a number of public statements from Dutch politicians suggesting that, for many projects, getting through the many complexities of PPP is just not worth the effort.
Local politicians in Amsterdam have recently said that even for expensive projects such as the extension of the underground system, they have enough public finance available and there may not be much of a role for private capital.
The big exception in the Netherlands is the High Speed Line (HSL), where the cost of the basic infrastructure is expected to be anything between E400 million and E800 million, with the separate train service operating contracts being awarded at a later date.
The Dutch government is being advised by Greenwich NatWest on this project, and in May the HSL-Zuid Project Organisation selected four consortia to tender for the construction and maintenance of the superstructure.
These four emerged from the pre-qualification process, and once their bids are in the government will assess the various tenders and open negotiations with one or more of the bidders. The contract could be awarded by the middle of next year.
One of the key issues still unresolved in the infrastructure contract is the kind of guarantees which will be given on the line being operable, since it will serve the train operators in a similar manner to Railtrack in the UK. Guarantees and penalties will be some of the more complex issues to be set out in the final documentation.
One bidding group, Consortium Infraspeed, includes ING Bank on the financing side, allied with Siemens, Deutsche Bank, Fluor Daniel, and NBM Amstelland, and the project has been successful in attracting strong interest from contractors, train manufacturers and banks across Europe.
?We are seeing a lot of anglo-saxon advisory involvement in the Netherlands, which makes the whole bidding process much more international,? comments Peter van Leeuwen, head of project finance at ING Bank in Amsterdam.
He notes that typically consortia bidding on PPP projects will contain a mix of international banks and contractors allied to strong domestic market player. ?Local knowledge is essential, especially when you look at the very long tenors typically involved in these deals,? says van Leeuwen: the contract to build and maintain the HSL superstructure will run for 30 years.
ABN Amro is also bidding for HSL as part of a rival consortium that includes French train manufacturer Alstom, HSBC Investment Bank, Strukton Groep, Koninklijke Volker Wessels Strevin, and TUC Rail.
George van Ramshorst, SVP and group head of infrastructure finance at ABN Amro in Amsterdam says that the level of interest in the HSL has been extremely high. ?If HSL is a success then it will be a stepping stone to doing more PPP deals,? he says.
The third consortium features Ballast Nedam Bouw, Balfour Beatty, Daimler Benz Transportation UK, Arcadis Bouw Infra, Systra and PriceWaterhouse Coopers. And the fourth involves Bechtel Enterprises International, Amey plc, Hyder Investments Ltd and Ove Arup.
The big US banks have thus far shown little interest in getting involved in European PPP projects, perhaps because things have been moving along so slowly, or because they have little experience of anything similar in their own home market.
?It is still a local game involving the Dutch banks,? comments one executive with a major US bank. ?Though we are keeping a close eye on it we are not involved in projects right now, and we haven't seen anything we would like to bid on ? it is not really on top of our list of priorities.?
But PPP does have the backing of supra-national institutions within the European Union. The European Investment Bank (EIB) has identified PPP as a form of financing that it wishes to get more involved in. Last year a decision was taken that the range of PPPs that the EIB can support has been widened under the Amsterdam Special Action Program (ASAP) to include investments in the areas of health and education.
The ASAP was drawn up in response to the European Council meeting in Amsterdam in June of 1997, where a commitment was made to step up action in support of job creating investments. But thus far there are few signs of any PPPs under this program in either the Netherlands or Germany.
The acceptance of PPP has also been slow in Germany, and some of the big German banks are busier with PPP in southern Europe than with projects in their home market.
One of the few genuine PPP deals completed in Germany to date was actually a quasi-UK deal, involving the new British Embassy in Berlin, which has already been topped out and is currently being completed.
This Dm65 million deal was arranged by Dresdner Kleinwort Benson, with the Embassy paying a fixed rent over a number of years including full maintenance of the building.
German property investors were brought in via KG Allgemeine, with Bilfinger+Berger leading the construction effort.
The deal is one of the few PPP projects that is actually physically there to see in Germany, even as a construction site.
That may soon change, particularly with regard to toll roads and tunnels, which are at the forefront of PPP activity within Germany.
In 1994 the Road Construction Private Finance Act was passed, allowing for private finance to come into roadbuilding via toll collection.
Since that time the Federal Transport Ministry has published a list of 16 potential toll projects.
To date only two have come to any degree of maturity ? tunnels in Rostock and Lubeck. The Rostock tunnel is being developed by Bouygues, while the tunnel in Lubeck includes Hochtief and Bilfinger+Berger in the consortium. The other projects are all at the preliminary planning stage.
?Our experience is that the negotiation of the concession with the local authority is very difficult,? comments one lawyer. ?And what tends to happen is that the concession will be negotiated, and then there is another lapse while the financing is put in place.?
But the government has appointed Bruckhaus Westrick Heller, Durth Roos Consulting and Deutsche Verkehrsbank to work on a standard concession contract which when agreed, should speed up the process. The rules will govern all aspects of the new private toll roads, including technical matters, plus the legal and commercial side of levying tolls.
Eleswhere in Germany there are another handful of large projects which loosely fall under the PPP umbrella, involving private finance.
The new airport in Berlin is more of a privatization, since the tender involved buying the existing airport operating company, and committing to build a new Dm4.5 billion Berlin Brandenburg International (BBI) airport which will then run on a 50-year Build Operate Transfer (BOT) agreement.
The bidding process was overseen by Credit Suisse First Boston, and the winning consortium was led by Hochtief. But losing bidder, IVG, made a legal challenge asserting that there were irregularities in the Hochtief bid.
IVG's action was successful and now the whole issue of who will build BBI has become bogged down in accusations of industrial espionage and conflicts of interest.
The bidding process will probably have to be re-opened, and as the arguing continues so there are concerns that BBI will not be up and running as planned in 2007.
The magnetic levitated railway, planned to run between Berlin and Hamburg, has proven even more controversial than BBI, and blocking the project has become a cause celebre in the Green Party (the junior partner in Germany's governing SPD-led coalition).
The federal government, which is paying for the magnetic guideway or track, has refused to countenance any costs beyond the Dm6.1 billion originally promised.
That is clearly not going to be enough money.
And the latest plan, announced in mid-September, is for only a single track to be laid, with the Maglev trains passing one another at a junction halfway between Berlin and Hamburg on their one-hour journey.
The Greens have dismissed this single track compromise as a clumsy trick on the part of the SPD, and are sticking to their position that cost overruns mean that the project is no longer viable.
The private consortium led by Thyssen, which is building the trains and views the Maglev system as a potential export winner, is pressing hard, but the project may yet fail to get off the ground.
Political squabbling, plus the difficulties inherent in balancing the interests of the public and private partners, will probably ensure that any form of PPP will remain a slow moving process.
Project finance bankers in Germany and the Netherlands, already used to long delays on conventional projects, are learning the hard way that PPP can drag on even longer.
?There are a lot of initiatives that people are working on, but they are not yet in the final stage,? says one banker, ?and they may take a long time.?
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