At first glance the market for education PPP in Germany looks unpromising, writes Simon Ellis. Student numbers are in decline and there is a negligible market for new build school projects.

However, the market to restore and renovate Germany’s existing education infrastructure is a different prospect entirely.

In 2001 Offenbach county council – in need of a solution to fix its aging schools infrastructure – decided to work with a private partner to finance and manage the renovation of 92 schools around the county.

The county instructed Freshfields to act as legal advisor and opted to split the project into two projects – a western circle (containing 43 schools) and an eastern circle (49 schools) – in order to conform with stringent German procurement laws.

The scheme passed the county and state legislatures without significant opposition. Local Christian Democrats and Social Democrat parties unanimously approved the project.  Only the Green Party was split with four members in favour of the PPP scheme and four against.

As Freshfields partner Christian Bunsen says: ‘There is little opposition to PPP in Germany along party lines. It tends to be conservatism on the part of some local authorities that restricts opportunities.’

Germany’s first major schools PPP was always likely to attract a beauty parade of construction companies – and there was little surprise at the line-up when Bilfinger Berger, Hochtief and Vinci subsidiary SKE Construction tendered for the western circle in late 2002.

Of the three, only one – SKE – could claim domestic experience with education PPP as it manages and maintains schools and facilities for US military personnel.

In late 2003, SKE won the first project on an offer of €370m (US$480m) for the 43 schools.

Bruised but unbowed, Hochtief returned for the eastern circle bidding and undercut the other consortia with an offer to complete the work on the 49 schools for €410m (US$530m).

The project

The Offenbach schools project will follow the established German political maxim – No Experiments – operating a fairly straightforward PPP contract and using bank forfaiting to offset capital costs.

Under the terms of the agreement, Offenbach and Hochtief have set up a SPV company in which Hochtief holds 94.4 per cent stake and the Offenbach local authority holding the balance.

Hochtief will renovate the school buildings over a five year period then maintain hard services at the schools for the duration of the 15 year contract.

As part of the contract, 60 school caretakers will transfer from the local authority to the SPV to provide cleaning, maintenance and graffiti removal duties. Consortium staff will also provide security to the school buildings.

In return for the work, Hochtief will receive a fixed non-performance related fee of €27.3m (US$35m) a year.

Hochtief will finance the estimated €100m (US$129m) initial construction cost on balance sheet before refinancing through a 50:50 banking JV between WestDeutsche ImmobilienBank and Helaba.

Upon completion of construction, the project will be refinanced using a forfaiting mechanism. Future receivables from the Kreis Offenbach district will be sold on a non recourse basis to Westdeutsche and Helaba.

Lovells lawyer Ulrich Helm, who advised Hochtief, says: ‘The project is not structured on a true project finance basis but still allows the bank to benefit from a low interest rate equivalent to that on a public loan.’

Another benefit of the PPP is that project risk is AAA-rated. Hochtief will guarantee breakage costs for any non-performance and or failure to meet the forfaiting schedule.

Conclusion

Hochtief executive Dr Herbert Lütkestratkötter, understandably bullish after closing the deal,  predicts at least a further €6bn (US$7.7bn) worth of health, government and education PPPs in Germany by 2009.

His optimism seems justified. Ten PPP school maintenance projects are slated for 2005 alone in a mixture of rural and urban areas including Moldheim, Leverkusen and Cologne.

The pick of the 2005 tenders will be a 30-40 school project recently announced for the city of Frankfurt.But can this handful of examples overcome the scepticism of ingrained conservatism and spark a PPP revolution of the type seen in the UK?

In practice, a lot will depend on the success of the Offenbach project, as Christian Bunsen predicts: ‘Offenbach on its own is bigger than all other German school PPPs put together,’ he says. ‘The better the news coming out of Offenbach, the better the news will be for future German PPP projects.’

Bunsen identifies legislation as the way to overcome local reticence: ‘There needs to be a greater enforcement of German federal law which stipulates that German local authorities must procure the cheapest solution. By ignoring PPP they are breaching this law.’ 

The need is certainly there, as Jutta Hobbibrunkan from Hochtief says: ‘We have the same situation here as in Britain, there is no public money to support the necessary modernisation of the school system.’

Still, whatever the scale of the new projects, they are unlikely to knock Offenbach from its perch. Ulrich Helm argues: ‘The proposed projects will be on a large scale to ensure value for money, but they are unlikely to match the scale of Offenbach. The Offenbach project will remain the largest German school PPP for the next few years.’