The German economy, if not all of the country’s banks, weathered the financial crisis better than many of its European neighbours. Volumes of private funding for infrastructure projects have continued on an upward trend after a decline in the immediate aftermath of the collapse of Lehman Brothers, while the 2011 amendments to the Renewable Energy Act should provide a steady dealflow, especially in the offshore wind sector.

“Germany has a tremendous potential, not just in transportation infrastructure but also in energy infrastructure and other areas” says Thanos Babanikas, managing director for transport and PPP projects at UniCredit responsible for infrastructure advisory. “It will be an exercise for the EnergieWende, the shift away from atomic energy to other areas. There will be a lot of activity in the German infrastructure space in the next few years and you will see a much greater involvement of the private sector.”

But the volume of private funding remains small, relative to the size of the German economy. Its PPP sector continues to lag behind the larger European markets of France and the UK. According to a report issued by the European PPP Expertise Centre (EPEC), a joint venture between the EU and the EIB, the total PPP investment volume in 2011 in Germany was a tenth of France’s.

Whereas the French government made infrastructure the focus of the economic stimulus package in early 2009 and adapted concession structures to make sure that those big projects that were to be launched as PPPs would benefit from economic enhancements, in Germany nearly all of the Eu20 billion that two stimulus packages earmarked for infrastructure was channelled towards public procurement.

Dealflow in Germany remains steady but unspectacular. “In the UK what I understood is that in the past you couldn’t get any investment if you looked at a different procurement form to PFI; that was the only chance to get a new hospital or new school.” says Karl-Heinz Heller, adviser at Partnerschaften Deutschland. “In Germany, it’s quite different. There’s no advantage for PPP and no disadvantage for PPP. In every project we have to prove that PPP is the best procurement.”

Fragmented procurement process

“The German PPP market is still less mature than its equivalents in some other European countries,” says one lawyer active in the German PPP market. “Public opinion is quite hostile, which makes PPPs politically risky, while a lot of the infrastructure that would be amenable to development through PPPs is controlled at a regional, state and municipal level so the project sizes are smaller.”

Public hostility to alternative forms of financing for infrastructure projects to direct procurement has probably increased since the financial crisis, according to market participants. One example is JVA Offenburg prison, a Eu80 million ($106 million) facility in south- western Germany, which was partly privatised by contracting out private security and service personnel, before the government stepped in to overturn this decision. In some sectors, like waste, there is even a trend towards re-municipalisation.

According to UniCredit’s Babanikas there is a general ambivalence to aggressively pursuing PPP as an alternative form of procurement: “Germany is a leading economy in the world, so there’s an attitude that if something works, why change it, and they’ve had a lot of success with the public model so far. The difficulty might come when public funding gets constrained. But they say ‘we will continue on that path until someone gives us a compelling argument to do things differently.’”

“In France, everything is organised out of Paris, more or less; their system is very centralised and the same is true of the UK” says one Frankfurt-based lender. “But Germany is a bit different because each federal state is responsible for different tasks and tendering out separate projects.”

According to the EPEC report, Germany ranked third in total investment volume for PPP, but unlike other large European economies none of the projects which closed last year qualified as “large” projects, which translates into capital expenditure requirements of over Eu500 million. Most deals in Germany have been realised at the state or municipal level and tend to be smaller in scale, usually less than Eu100 million.

The different legal frameworks and PPP models that the 16 German states use also produce some variations in procurement practices. In fact, the origins of PPP in Germany can be traced to the founding of the PPP initiative in North-Rhine Westphalia in 2002. Now each of the 16 states has a PPP unit, albeit usually as subsidiaries of their Ministries of Economy or Finance. The deal flow across the states is fairly even and nearly all states show a preference for the forfaiting model, which involves financings based on the pass-through of a municipal credit and lowered debt costs through guarantees on receivables.

According to Partnerschaften Deutschland’s Heller the forfaiting model offers a viable third way between PPP on the one hand and direct procurement on the other: “There is no big difference in terms of costs of funding between forfaiting and direct procurement. The deal is safe for the bank after the construction phase, so this gives a better risk situation to the public than we have with conventional procurement. So you have not exactly the risk share as in project financing, but there are elements of that.”

A-models remodelled

But for larger deals the preferred route is a conventional project financing. In Germany, the transport sector is still the main source of larger PPP projects. Ever since the then-federal Minister for Transport, Wolfgang Thiense, launched a second wave in 2008, the A-models have been a fairly steady source of deals.

The authorities try to tender several projects consecutively in order to ensure a constant dealflow. In December 2011, DEGES, the project management company responsible for overseeing the procurement process for the A-models, tendered the A7, which entails the widening of a 65km stretch of road between the A7's junction at Bordesholm and the interchange at Hamburg north-west.

The grantor has set a deadline of 21 May for prequalification applications, a process that is expected to pull in five different bidders: BAM PPP/Vinci, Bilfinger Berger, Hochtief, Meridiam Infrastructure and Strabag. Estimates for capital expenditure are fairly substantial and range between Eu300 million and Eu500 million. This is because the project involves some capital intensive work to an existing tunnel.

In the past all of the A-models exposed sponsors and lenders to traffic risk, but declining post-crunch traffic volumes and the general state of the banking market prompted the Ministry of Transport to rethink the second wave of A-models. The A9, which closed last year, was the first of the latest slate of projects to be backed by availability payments for the life of the concession, and this model is being repeated for the A7. The elimination of any traffic risk has certainly helped stimulate debt and equity appetite. Whereas previous A-models have typically relied on EIB financing and quite often a loan guarantee instrument to get projects off the ground, the A9's sponsors, Vinci and BAM PPP, were able to close their financing without recourse to the multilateral funding on offer.

Although banking appetite is expected to remain strong, long gaps between projects are not conducive to a booming PPP sector. “Out of the second wave of A-models, all of these projects have been identified four years ago” says Babanikas. “When they tendered out the A8 II and the A9, it could have been a whole series of projects but instead they tendered just the two.” He adds: “It may be that for the latest round of projects, the A6 and the A7, the banking appetite will be very strong. However, if you don’t allow the PPP model to develop you won’t have the structuring and financing innovation. If you only really have the A-models and the traditional plain vanilla public sector funding model, nothing will change.”

The EIB has, however, earmarked the A7 as a potential pilot project for its 2020 project bond initiative, which is currently in consultation, and is designed to help sponsors access debt from institutional investors, using either some sort of guarantee or a first loss piece. The tender documents for the A7 have been drafted to allow for the project to benefit from this product. “The government has a chance in helping market development if they allow other types of investor to participate in these projects” says Babanikas. “The German insurance companies and pension funds want to invest in a core European economy. The yield they get from government bonds is extremely thin. There are other alternatives such as covered bonds, but these are diminishing. That said, the European (and German) PPP market has been traditionally dominated by banks and this trend is expected to continue at least for the near future as there is enough bank liquidity for the projects currently in tender.”

Forfaiting front and centre

The tender for the A6, which involves the upgrade of a 46km stretch of road between Wiesloch-Rauenberg and Reinsberg in Baden- Wuerttemberg, is expected imminently. Rumours persist that the German government is also likely to bring forward the tender for two of the other A-models – the A1 and a second stretch of the A7 in Lower Saxony – this year. But, dealflow outside the transport sector for PPP is fairly minimal. “It’s only really the A7 and the bridges in Frankfurt at the moment that are in the market” says the lender. “There are some smaller deals at the municipal level and the landesbanks are quite active in that market but these tend to be procured through a forfaiting model rather than a traditional project financing.”

The Eu500 million Frankfurt bridges PPP project, which entails the refurbishment of 130 bridges and flyovers in and around the city area under a 30-year concession, was tendered by the city of Frankfurt two years ago. But, the project has run into numerous delays, partly due to an unusual requirement for banks to provide a breakdown at the bidding stage between liquidity costs and project risk. “When the public sector pay for PPP contracts they pay a premium and that’s why they want to have complete transparency from banks” says one adviser. “But everyone knows banks cannot reveal their cost of funding.” In January, two prequalified bidders – Alpine and Max Boegl – pulled out of the project, leaving only four bidders remaining – Hochtief, Porr, Strabag and Vinci/Meridiam. Bids have been pushed back until November.

One further challenge is that several of the bridges are currently in good condition and will not require refurbishment until the later stages of the concession, meaning that banks will have to accept some construction risk after the end of the initial building phase in year 5. High margins and conservative gearing are likely, and there are rumours that banks are looking at offering a hard miniperm.

But many market participants wonder whether future opportunities justify making a competitive bid for the assets on offer. “People have taken a wait-and-see stance so right now there is no competitive tension for the bridges, whereas I think the state should maximise competitive tension by generating interest” says one adviser. “If they say there is just one standalone project, they will never generate a strong market.”

In November 2008, Partnerschaften Deutschland, a public-private bodydesignedtoadvisethepublicsectoronPPP,wasformedat the federal level and became operational in January 2009. It hopes to draw together different practices and establish a more standardised PPP framework. Partnerschaften Deutchland has already advised the Federal Ministry of Education on financing of a new headquarters under a PPP concession model – BMBF. The deal, whose sponsors are BAM and Amber Infrastructure, closed in August 2011 through Eu79 million in long-term debt, provided by SMBC and DZ Bank, and is the first civil federal PPP deal at the federal level aside from the A-models.

The deal is one of several projects on which Partnerschaften Deutschland is advising. The next one in the pipeline is the Haus der Zukunft, a museum that will seek to showcase Germany as a home for innovation, and which the Federal Ministry of Education is procuring. The Ministry is expected to launch the bidding process for the House of the Future in 2013.

Sea change?

The German government has committed to procuring 15% of projects through PPPs and according to the EPEC report, Germany was the only market to experience growth in PPP volumes in 2011, aside from France and Italy. Both of these, unlike Germany, benefited from the closing of large deals – Tours-Bordeaux HSR and Strada dei Parchi.

But this is also part of the problem. Although BMBF should serve as a blueprint for procuring projects at the federal level, the German market is still characterised by a number of smaller deals at either the state or municipal level. Even for BMBF, the deal attracted a lot of attention because of its location in the heart of Berlin rather than its size.

“There are two strong voices in Germany – one coming from the construction industry, several banks and possibly some think tanks like the VerkehrsInfrastrukturFinanzierungsGesellschaft, which are in favour of the private sector” says Babanikas. He adds: “There is also another voice, coming from certain departments of the state, saying that Germany has a well-functioning public sector and unbeatable funding situation at the moment.”