Transparency 1

1
PPP in Germany

• Political framework

Coalition agreement of 11 November 2005
Component of the Federal Governments innovation
initiative
2
Objectives

• Key objective
• Deliver public services more efficiently

3
Subordinate objectives

• Improve legal framework
• The PPP Acceleration Act reduces re-quirements
  in the fields of procurement law, tax law, law
  on public fees and budgetary law and the
  Investment Act.
• The PPP Simplification Act is being prepared to
  further simplify the legal framework.

4
Subordinate objectives

• Meet quantitative targetsincrease the portion
  of PPP in the total of public investments to 15
  in the medium term
• Provide central guidancee.g. in the form of
  manuals and specimen contracts (cf. transparency
  5)
• Setting up centres of competence (cf.
  transparency 6)

5
Guidance and manuals

• Guidance on PPP in the construction of public
  buildings with manual
• Guidance on PPP and the law on government
  grants with manual
• Manual on investment appraisals
• Manual on procurement law

6
Centres of competence
7
Number of projects

• 46 PPP projects in public building
  construction Total capital expenditure of
  about 1.4 billion
• A further 120 projects for the construction of
  public buildings are being prepared Total
  capital expenditure of about 6 billion
• Majority of PPP projects at local government
  level Currently 39 projects for the
  construction of buildings at local authority
  level, 7 at federal state level

8
Examples at federal level

• Federal Ministry of Defence
• HERKULES (IT project)Military barracks in
  Munich
• Federal Ministry of Transport, Building and
  Urban Development Build-Operate-Transfer
  contracts for the construction of buildings and
  roads

9
Facts from the German Institute of Urban
Affairs

• Number of contracts in 2005 increased by 50
  compared to previous year due to expectations of
  enhanced efficiency and speeding-up effects
• At local government level, average efficiency
  yields of 10 are achieved
• Average capital expenditure at local government
  level 13-16 million per project
• Average capital expenditure at federal/state
  level 70 million per project

10
Requirements of the external audit institutions
regarding PPP

• Requirements of external audit institutions at
  federal and state levels (10 findings)
• 1. In the case of PPP projects, debt-service
  expenditure (interest and debt repayment)
  are replaced by other re- curring expenditure
  and place a similar burden on future
  budgets. Only efficiency gains that impact the
  budget are capable of reducing the burden
  on the budget.
• 2. Where the public sector cannot afford a
  project under conventional funding, it must
  not go through with such projects under
  alternative funding arrangements.

11
Requirements of the external audit institutions
regarding PPP

• Only once the need for a project has been
  established, officials in charge may consider
  whether the project is suitable for PPP.
• The efficiency of a project must have been proven
  in each individual case and over entire project
  duration (life-cycle approach).
• Risks must be shared by the public sector and the
  private partner in a reasonable and efficient
  way.

12
Requirements of the external audit institutions
regarding PPP

• The public sector must not circumvent procurement
  law by pursuing PPP projects.
• The complexity of PPP projects requires
  particular focus on contractual arrangements.
  Inadequate contracts have a direct negative
  impact on project efficiency.
• 8. The cost impact of PPP projects must be
  clearly presented in budgets for the entire
  contract duration. The burden on future budgets
  must be transparent.

13
Requirements of the external audit institutions
regarding PPP

• Audit access by external audit institutions must
  be ensured.
• At local government level, PPP projects are often
  similar to borrowing, which requires approval by
  the supervisory authorities in almost all German
  states. Federal and state governments should
  impose minimum standards for PPP projects.

14
Audit access rights and PPP

• The public partners
• Extensive audit access
• The private partners
• Audit access only where public budget funds are
  used
• Therefore
• Stipulate full audit access in the contract

15
Audit activities

• Currently, the Bundesrechungshofs audit work
  focuses on defence and road construction
  issues.
• However, most projects have not been underway
  long enough to evaluate effectively the
  lessons learnt or conclude on the potential
  efficiency and risks of the projects.
• Any statements of principle have been derived
  from the risks identified in the cases audited

16
Audit results

• Based on the lessons learnt with the HERKULES
  IT project, the Bundesrechnungshof has developed
  general recommendations on investment appraisals
  in connection with PPP projects
• Investment appraisals for PPP projects must be
  carried out before committing funds and
  commencing contract-award procedures.
• Any decisions about PPP projects must be preceded
  by a comprehensive evaluation of the Federal
  Governments relevant options. This evaluation
  must not be restricted by the annual expenditure
  ceilings.

17
Audit results

• The valuation of the benefits of PPP must be
  designed so that the chosen priorities reflect
  the objectives of the PPP fully and
  transparently.
• The risks of any alternative options have to be
  examined in detail and quantified where possible.
  Their impact on the decision-making process needs
  to be illustrated.

18
Audit results

• Further lessons learnt from auditing the PPP
  sector can be found in the cross-boundary annual
  report item on investment appraisals / efficiency
  studies in the federal administration
• Sometimes, the authorities responsible for
  planning the PPP projects have
• based their decisions on assumptions and
  forecasts going
• beyond a realistic conservative estimate of
  future
• development
• subsequent costs, especially personnel costs
  that cannot
• be cut immediately, were taken into account
  inadequately or
• not at all

19
Audit results

• used incomplete data, especially in evaluating
  optimised purely public-sector solutions
• focused on intended benefits to the detriment of
  the quantitative results of the investment
  appraisal
• in their appraisals stated the impact of
  potential risks in qualitative terms only
• during the operational phase of project, failed
  to adapt their investment appraisals to changing
  conditions.

20
Findings of the Bavarian State Court of Audit

• No cost benefits found for road works PPPs
  compared to conventional procurement!

21
Consequence

• Decisive justification for PPP from the point of
  view of external audit institutions obtaining
  efficiency yields
• For each individual project, an
  efficiency yield must be proven by means
  of a transparent, full and appropriate
  investment appraisal.

22
Efforts to achieve nation-wide uniform approach

• ACTING PARTIES
• Joint working group of the Federal Government
  and the
• states
• OBJECTIVE
• nation-wide uniform (minimum) standards for
  investment
• appraisals
• setting up uniform terms and techniques and
  thereby
• reduce the transaction costs incurred
• continuous further development with regard to
  lessons learnt in practice

23
Principles

• uniform project definition
• practical procurement situation
• figures are based on reliable estimates
• risk assessment
• tax impact considered
• quantitative investment appraisal on the basis of
  discounted cash-flows

24
Stages of the PPP procurement process
Stages of PPP procurement process
Stages of the PPP-related investment appraisal
Stage I
Levels of detail and precision of the data
available increases
Stage II
Stage III
Stage IV
25
Stages of the investment appraisal

• Stage I
• Determining project efficiency
• Test for PPP suitability
• Stage II
• Calculation of the public sector comparator
• Estimate of PPP costs
• Stage III
• final comparison of the bids received with the
  PSC
• If PSC gt present value of the PPP-solution,
  award contract to the
• successful bidder and signing of contract.
• Stage IV
• project controlling

26
Project efficiency

• Analysis of potential advantages and
  disadvantages of the planned project from a
  macro-economic perspective
• If advantages are found to prevail
• Identification of the procurement option that
  provides best value for money

27
Test for PPP suitability

• QUESTION
• Does the planned project meet pre-defined
  requirements which, based on the lessons learnt
  from previous projects, have proven essential
  for the success of a PPP solution.
• EVALUATION CRITERIA
• project volume
• legal and / or project-specific restrictions
• structure of project risks
• remuneration mechanism
• specifications
• interest of market participants
• market structure
• DIFFICULTIES
• little concrete information about the project is
  available at this time

28
Preliminary investment appraisal

• Analysis of the economic benefit of the PPP
  before opening the contract-award procedure.
• Comparison of estimated PPP cost and
  the PSC

29
Methodology

• type of investment appraisal based on assessing
  discounted cash-flows (net-present-value
  method)
• for projects having an overall economic impact
  cost-benefit analysis
• qualitative aspects can be evaluated by means of
  utility analysis
• use of nominal cash-flows (assumptions about
  expected price trends have to be stated
  explicitly )
• for determining the applicable discount rate,
  the guidance recommends that the interest rate
  should be derived from the yield curve. In
  principle, using an average (nominal interest
  rate) is possible.
• sensitivity and scenario analyses
• separate assessment of individual risks
  (determination of so-called security
  equivalents and payment equivalents)

30
Public Sector Comparator

• Sum of all risk adjusted costs of and, where
  applicable, proceeds of conventional procurement
• Only those approaches that have already been
  implemented, or at least decided on, may be taken
  into account This requirement continues to be
  controversial.
• The PSC needs to be adapted if framework
  conditions change e.g. if there is a change in
  risk allocation.

31
PPP Costs

• Reliable estimates of the costs of implementing
  the PPP project as planned
• PROBLEM
• How do I arrive at a reliable estimate with a
  reasonable input of resources
• Approaches used in practice include
• Back-tracking method
• Method of complete financial plans

32
Further discussion points

• Remanent costs (the guidance calls for
  allocation of remanent costs to the PPP
  model).
• However, this requirement is controversial
• Treatment of tax effects? (The guidance says
  the project-executing agency has to decide
• whether and to what extent direct tax effects
  are
• taken into account).
• appropriate remuneration for risks
  (risk-adjusted
• cash-flow vs. risk adjusted interest rates)

33
Final investment appraisal

• Demonstration of the efficiency of a PPP solution
  at the end of the procurement process. The PSC
  is the yardstick for evaluating the bids from the
  private sector.
• Prerequisites for juxtaposition and
  comparability
• uniform performance and quality standard
• uniform project duration
• risks are taken into account
• Where necessary, adjustment of the PSC but
  optimisation from private sector bids must not be
  adopted into PSC!

34
Status of implementation

• In 2006 the Federal Government and the
  German states decided to recommend using guidance
  as a non-binding minimum requirement.

35
Conclusions and Outlook

• An important step towards standardisation has
  been taken. The guidance provides those
  responsible with methodological and substantive
  assistance enabling them to develop sound and
  reliable statements about PPP project efficiency.
• Application of the guidance in practice ?
• Evaluation of the lessons learnt by
  using the guidance in the course of
  an audit is planned by the German SAI for
  2009. The guidance will be the yardstick for
  the audit but it is not considered
  sacrosanct and unchangeable.