In the past year the German PPP market has seen a strong impact from the world wide financial and economic crisis. The financing conditions for project financing changed rapidly and even well-established market players have struggled to get financing for projects that only months before had seen a lot of competition between banks. In addition to increasing risk and refinancing margins, liquidity itself has become a problem. The number of banks that are in a position to lend money for more than 5-10 years shrunk to a minimum.
Nevertheless deals could be closed successfully: in these increasingly challenging circumstances the third German motorway PPP project, the so called A-Model A1, reached financial close in 2008 and in early 2009 the A-model A5 reached financial close. In the social infrastructure sector the largest health care PPP project, the particle therapy centre in the city of Kiel, closed.Compared to the UK, Germany is still a young market and the total number of projects remains quite small: between 1992 until the end of 2008 slightly more than 110 projects, worth around €4.3bn (US$6.1bn), were closed.
As a result of the economic crisis, the market in Germany has recently seen a significant decrease in new PPP projects, although it has not come to a complete standstill. For example, the JVA Bremervoerde, a PPP prison project in North Germany, is out for tender. The German Ministry of Transport (BMVBS) has announced a second range of eight motorway PPP projects (so called A- and F-Models).For two of these projects the tender process has already started: the A8 motorway between the cities of Augsburg and Ulm in the state of Bavaria with an estimated capital value of €280m, and the A9 motorway between Hermsdorf and Schleiz in the state of Thuringia (estimated capital value of about €120-150m). In the social infrastructure sector the (shrunken) market is still dominated by forfeiting financing structures and small and medium sized projects with an investment volume between €10m and €50m. Some 75% of the projects in 2008 had an investment volume below €30m.
The German government has recently set up economic stimulus programmes providing substantial funding for the short-term renovation of existing infrastructure (schools, streets, etc.). But in general these programmes are for local projects that can be completed within two years, and the authorities are unlikely to favour rather complex and time-consuming PPP project finance structures.
However, once these programmes come to an end, there is likely to be an increasing demand for private financing in the public sector in the near future. From a strategic (mid to long-term) point of view, the increasing public deficit and a continuing enormous delay in social and traffic infrastructure investment are likely to be catalysts for the next round of PPPs.
Strategic measures to improve the PPP market in Germany have also been initiated. The new ÖPP Deutschland AG ("Partnerships Germany Inc."), a joint venture of public authorities and the private sector, has started supporting the public sector – local communities, states and the federal government – to set up new projects. It is hoped that this and similar initiatives will create a more standardised market and reduce time and costs for "normal" projects.
Financing conditions for new projects will not be the same as they were before the crisis. Banks will price the risks at a higher level than before. In particular all projects with user risk will remain difficult to finance as banks will find it more difficult to calculate and price such risks. The focus will be on more detailed legal and commercial due diligence and the continuity of cash-flows will be of high importance.
In the debt market, we expect to see mini-perms rather than long-term financings. Many voices in the market are looking for help through public financial institutions such as the European Investment Bank and KfW. Those organisations are supposed to be involved especially in high-volume projects and in the start-up phase to bridge the financing until completion of construction. There are special programmes being developed in these institutions at the moment to deal with the potential funding gap.
In addition, new players are expected to enter the market, especially funds providing equity and taking sponsors’ risk in the project.
Beyond changes on the financial side, the public sector will also have to change the type of projects that are contemplated. We can expect to see a preference for low risk projects (often including a forfeiting structure). Availability could prevail over volume risk. The issue of refinancing and the sharing of respective refinancing risks will become more relevant. Recently it has been discussed whether to split the financing obligation from the PPP projects and not to commission the private partner to seek private financing but to provide direct payments by the public sector.
However, this seems not an adequate approach, since the risk control of those who invest debt or equity in the project is an essential element of PPP. It might be considered, however, to postpone the requirement of binding support letters to a later stage of the tender process.
While the next one or two years might be a difficult time for the German PPP market, if the market can adjust to the changing financing requirements, there should be good opportunities for existing players but also for new entrants into the German market.