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In 2021 the European Union (EU) instigated the NextGenerationEU programme of grants and loans to member states based on their National Recovery and Resilience Plans (NRRP). The aim was to speed up the bounceback from the steep costs of Covid, and to ‘build back better’. Consequently, underlying infrastructure advancements, from green to digital, have received a continent-wide focus. In what the EU has called “the largest stimulus package ever”, many central European states applied for their share of the €800bn available and the handout of funds began in September 2021.
But just when it seemed like a renewed focus could be placed on investment to match recovering GDPs, Russia’s invasion of Ukraine threw those plans into disarray. The World Bank has predicted that globally, “as economic stimulus slows, credit conditions tighten, and uncertainty from overlapping crises intensifies, there will be even greater need for reforms and for scaling private investment in infrastructure”.
The reality, however, is that most of central Europe has now put the brakes on PPPs this year, although for some nations the inflationary, energy supply chain and ultimately recessionary impacts of the war have not been the only culprits for this outcome.
Despite EU recommendations that Germany should increase public and private investment to boost its infrastructure development, amid accusations of poor public authority maintenance of what already exists, the German PPP pipeline for large-scale projects is running dry. Hopes of a significant jump in the number of new PPP projects thanks to the €25.6bn in non-repayable support Germany expects to receive from the NextGenerationEU recovery fund, have so far been disappointed. Instead, authorities have focused on projects that can be implemented quickly by the public sector itself.
Christian Diringer, managing director for Germany and Switzerland at investor Invesis, suggests this is no surprise. He has noted that political opinion has always been split between those who have experienced the benefits of PPPs and those who saw it as an unwanted step on the road to privatisation. This resistance has not been eased by the change of government in December 2021, with the new coalition partners expressing criticism of PPP contracts in recent years.
Nevertheless, Germany is not the only western state in continental Europe where the prevailing political position is currently unfavourable for PPPs. The pipeline in the Netherlands, for example, is virtually empty, and Sebald van Royen, Invesis director for Netherlands and Belgium, attributes that much more to the negative sentiment of the country’s leaders around PPP than to current crises.
Like Germany, the Netherlands has not generally needed private funding, but historic difficulties in some of the largest Dutch PPP projects doesn’t necessarily mean that it is entirely without merit. In fact, the Netherlands has now seen numerous mid-sized projects where PPP has proved itself to be a very valuable model, but political appetite is low after some difficulties in some of the country’s largest projects.
On the other hand, neighbouring Belgium has a very busy 2022 PPP schedule, particularly in social infrastructure such as schools, prisons and psychiatric clinics. Van Royen suggests the difference is partially down to the fact that Belgium has often required injections of private investment to drive projects forward, meaning its leaders and public authorities are more comfortable with the PPP model.
Regardless of political sentiment, however, the impact of the war in Ukraine is clearly being felt. After Germany shut down its nuclear power stations several years ago, Jon Phillips, deputy CEO & director of corporate affairs at the Global Infrastructure Investor Association, says: “The anticipation was that Russian gas would be a solution at least in the near-term, but now there is the prospect of Russia cutting off Germany’s gas supplies.” Finding any kind of energy has therefore trumped sustainable and renewable sources for the immediate future.
In the past, the biggest supporter of the use of PPPs has been the Ministry of Transport and Digital. In 2022 two of the projects within its remit have been the German battery powered trains PPP involving Niederbarnimer Eisenbahn (NEB) and Siemens, and the £2.4bn NeuConnect UK-Germany Interconnector project, which will create the first direct power link between the UK and Germany, connecting two of Europe’s largest energy markets for the first time.
Nevertheless, what some consider to be a true PPP approach involving significant private equity investment, continues to be somewhat elusive in the German market.
Even without the obstacles presented by changes to the political and economic context, the Ministry of Transport and Digital’s PPP activities have been hindered over the last 18 months by an administrative change: at the start of 2021, responsibility for the motorway network was shifted from the federal states to Autobahn GMbh - a centralised company controlled by the government. This has required a complex handover, huge reorganisation and ongoing development of new processes that have delayed the establishment of new road projects throughout the country.
While there are several large roads projects - such as the £1.3bn A6 expansion - in construction, Autobahn GMbh has not yet announced how many PPP projects it intends to procure in the future.
Meanwhile, other states such as Austria and Hungary seem to have had a love/hate relationship with PPPs in the last decade. In Hungary, a recent model has been to use Chinese debt finance to the Hungarian government for large infrastructure projects, covering everything from railways to a lithium battery plant. There is little visibility of other infrastructure funding models.
In July 2022, Thomas Hamerl, infrastructure & PPP partner at law firm CMS, reported: “The federal government in Austria is hardly using project models like PPP or other forms of co-operative implementation, but has rather returned to traditional general contractor contracts.” One bright spot, though, is the potential for private investment in schemes like Broad Band Austria 2030, which has over £1bn of investment subsidies to cover the county with fibre optic networks by 2030.
As another of the European countries with higher reliance on Russian energy imports, the Czech Republic has taken the advice of the IMF, which said in August: “with respect to investment, countries should devise plans to strengthen energy security that also facilitate the transition to greener energy. This may require recalibrating investment plans, including within the Next GenerationEU Program, and strengthening the incentives to attract private investment into energy infrastructure.”
In April this year, the European Investment Bank (EIB) and Správa železnic (SŽ), the national railway administration, announced an agreement to work on developing PPP schemes by putting in place suitability assessment tools to help identify future rail PPPs in the country. In June, Czech Transport Minister, Martin Kupka, referenced spending of €2bn a year on Czech railways from both state and private sector sources, having perhaps been influenced by a visit to the country’s inaugural road PPP, the D4 Expressway.
As for Poland, local commentators suggest that its slow PPP development to date will inevitably speed up because of the deepening financial problems faced by local governments across the country - something that will only be heightened by a Europe-wide recession. It also appears that PPP is gaining more interest at the higher levels of central government and last year’s announcement of the €9bn central airport and deep-water sea container terminal PPP was certainly evidence of policymakers paying much greater attention to the financial resources available through the model.
Tomasz Korczynski, managing counsel in Dentons’ Warsaw office, explains: “There are 61 potential PPP projects at present, worth over PLN8bn [€1.7bn]... We’re seeing increased interest in this formula, with medium-size projects generally to the fore.” They include the National Digital Archives State project to finance the reconstruction/extension of the existing State Archives building and the Czernica Wastewater Treatment plant project.
However, there are still restraints on the market: “Covid and the inflation crisis have translated into a very cautious private sector approach to PPP projects involving the commercial use of infrastructure,” Korczynski adds.
Outlook
In the immediate future, the central European PPP market is clearly laden with obstacles and opportunities. In the short term, uncertainty over economic conditions and supply issues is a huge problem. One experienced PPP player put it starkly: “Right now it would be very difficult to find construction companies that would be willing to offer a fixed price and fixed date for a big infrastructure project with a construction period of say, four or five years. In the current environment, probably no construction company would give this, because they could go bankrupt on such a project.”
Yet, there is also general agreement that recession will be a driver of the model’s attractiveness in the medium to long term, with a growing need for private finance to close the massive infrastructure gaps that exist around the continent.
Infrastructure investment needs in the CEE region have been estimated at more than €500bn to 2030 and while on time, on budget and high-quality delivery have traditionally been the reasons for PPP use in Germany, Diringer recognises that funding could now become a much more highly-prized benefit.
He is optimistic about the progression of PPPs in the country, citing the best endorsements of the model as “the projects themselves”, adding that “the vast majority of German PPP projects have been very successful”.
Both van Royen and Korczynski share that positivity. “Overall, despite the obstacles of recent years, the prospects for the PPP market look optimistic,” says Korczynski. “In times of crisis, both public and private parties will seek more partnerships and PPP is well-placed to respond to this need.”
One major, ongoing concern though, is that those with the expertise to successfully undertake large infrastructure projects are in high demand across Europe. There is a lack of qualified staff, particularly in the public sector. For Diringer the only real solution is for the public and private sectors to join forces and pool valuable resources to tackle the most challenging tasks together.