Definition and delimitation of Public Private Partnerships The official definition of PPP used by the Federal Task Force based at the Federal Ministry of Transport, Building and Urban Affairs in Berlin is: “The term PPP refers to a longterm, contractually regulated cooperation between the public and private sector for the efficient fulfillment of public tasks in appropriately combining the necessary resources (e.g. know-how, operational funds, capital, personnel) of the partners and distributing existing project risks according to the risk management competence of the project partners.”1

Milestones of the development
The provision of public infrastructure – such as public real estate, road or highways, or water and waste water projects – is usually done by tendering the necessary construction and major repair works to private contractors whereas the design as well as the maintenance and other facility management and operation services are either implemented in force account of the responsible administration or sourced out to specialized private or public entities. Since 2000 so called ‘Funktionsbauverträge’ have been developed in the road & highways sector integrating design, construction and maintenance as a first step to full life cycle PPPs.

Traditionally, financing was taken over by the public sector in the form of classical budget financing. Nevertheless, different models of private pre-financing were introduced, such as the so called ‘Mogendorfer Model’. The private contractor together with banks had to organize the financing of the construction phase, which was then ‘forfeited’ and paid back in 10 to 15 yearly installments by the public principal. In addition, models like ‘Leasing’ (design, build, lease and transfer), ‘Mietkauf’ (design, build, rent, transfer) and ‘Miete’ (design, build, rent), which all included the financing, were introduced – particularly in the public real estate sector. But soon it was realized that the large number of such projects increased the public debt and increasingly restrained the flexibility of the public budgets. Hence, the deal-flow has significantly been reduced.

In Germany, the first PPP projects with a full life cycle approach as described above were applied in the sector of water sewage plants in the early 90s. Since most of them were not very well structured and consequently did not lead to the expected value for money, the number of projects was limited.
In the roads and highways sector the deal-flow with only two signed so-called F-Model2 contracts is also relatively small considering that the legal basis for that model was already laid in 1994 with the ‘Trunk Road Construction Private Financing Act’. Actually, four projects of the so called A-Model3 developed in 2002 along with the introduction of the toll for heavy good vehicles (HGV-Toll) are tendered. Both models are user financed PPP models that transfer traffic related revenue risks to the private partners. The actual financial situation of the two FModels shows that in Germany no efficient traffic risk transfer mechanism could be developed so far.

The most advanced PPP-market in Germany – even if still underdeveloped compared with the UK market - is the public real estate sector. Within this sector more than 25 projects with an investment value of about €551 million were realized during the last few years. A part of them are already in operation. In addition, a much larger number of projects are currently in preparation. Therefore the main steps of the development of PPPs in the sector will be depicted in this chapter.

Seven years after the announcement of the Trunk Road Construction Private Financing Act in 2001 a second important political step in the development of PPP was the foundation of an ‘Inter-ministerial Working Group – Private Finance Infrastructure’. In 2002 the former Chancellor Schröder announced the establishment of the Federal PPPCompetence Centre followed by the constitution of a Steering Committee PPP, which in 2002/03 published the ‘Federal Report on PPP in Public Real Estate’4. This report described the main obstacles and barriers for PPP in Germany at that time and gave recommendations to overcome them. In addition, it defined the PPP procurement process as well as the methodology and tools used for its implementation and the different PPP-models applied in the public real estate sector (the PPP-models will be described in one of the following sections).

Standardization and institutional set up In addition to the installation of the PPP Task Force at the federal level, several PPP competence centers at state level were installed during recent years in Germany. Table 1 gives an overview of where they are located. It shows that their institutional set up as well as their integration in the local administration is quite different. Four of the existing 10 institutions at state level are integrated in the individual ministries of finance, which internationally has proven to be the most successful approach for a quick and sustainable development of PPP. Others are attached to the ministries responsible for the building and infrastructure sector or the ministry of economics. The individual participation of the private sector also differs from state to state. It varies from an explicit leading role in Brandenburg, where the PPP competence center consists of a private industry network over a more or less equal partnership between the public and the private sector (such as in the Bavarian PPP-Work Group or in the Federal Task Force, which is supervised by a steering committee with a 25% participation of the private sector represented by the main contractors and banking associations), to a more or less intensive advisory role as in most of the other states where the dialogue between public and private sector takes place. As far as the standardization process is concerned it can be stated that the PPP Task Force of North Rhine Westphalia has taken a kind of ‘pole position’. The first German PPP guidelines on the procurement process, the general PPP test, the value for money test and on other important PPP-subjects have been developed by them and published on their homepage. The other PPP competence centers followed more or less the same approach while taking into consideration the state specific legal, political and administrative framework and conditions. At present, both the Federal PPP Task Force and the PPP competence centers at the state level are mainly focused on public real estate like schools, universities, administration buildings, hospitals, prisons, etc. Consequently, most of the PPP projects are actually carried out in this sector. Besides the developing of standards the main objectives, especially of the PPP competence centers at state level, are the general know-how transfer to public project executing authorities on the municipal level as well as the support of pilot projects on all levels. This support can be in the form of advisory services or in some cases also of a financial contribution made during the project preparation phase. The organigram on the next page shows the position of the Federal PPP Task Force within the Federal PPP network. Even if some pilot projects are also presently under preparation at the federal level, one of the main objectives of the Federal PPP Task Force is to identify and remove obstacles for PPP on the federal level as well as to actively support the harmonization of standards in the federal system and in the different sectors. Regular meetings of the PPP competence centers are organized in order to exchange experiences and harmonize as much as possible the standardization. Certainly, one of the most important results of that network cooperation became apparent when the Federal Minister of Transport, Building and Urban Affairs (BMVBS), Wolfgang Tiefensee, announced in early September 2006 the unanimous adoption by the Conference of the States’ Finance Ministers of the ‘recommendations for the implementation of value for money tests for PPP-projects’ developed in intensive collaboration between the states under the lead of North Rhine Westphalia, and the Federal Government under the lead of the BMVBS as a milestone of the standardization process of PPP procurement in Germany.

PPP-FM-Leasing-Model
The third model is the PPP-FMLeasing- Model. Similar to the PPP-Purchase-Model the assets are owned by the private partner. However, the public authority retains a call option to purchase the asset at the end of the contract period at a predefined price. In cases where the public agent doesn’t use this call option the private partner keeps the ownership even after the contract period and needs to look for an alternative use of the building. Hence, during the contract period all ownership risks are born by the private partner including the utilization risk. The regular payments should normally not cover the full investment costs. Unlike a normal leasing-model the private partner also takes responsibility for more or less extensive elements of operation. The design and construction are not part of the contract, but a pre-condition for concluding the contract between the public agent and the private partner. The contract period normally lasts between 20 to 30 years.

PPP-Rent-Model
The PPP-Rent-Model is similar to a normal Rent-Model except that it contains the operation of the building. The private partner as owner of land and property has to deliver the design, the construction, the financing, and the operation, including the maintenance of an asset. Hence, this model is comparable to the PPP-FM-Leasing-Model, however, with the distinction that the public partner usually does not reserve a call option for the purchase of the asset at the end of the contract period. Payments correspond to the usual rent level plus an amount for the facility management services. Therefore, the private partner should not be able to amortize the investment cost during the contract period, which is also between 20 to 30 years. That means that the utilization risk is in every case and to the full extent borne by the private partner.

PPP-Contracting-Model
The PPP-Contracting-Model is limited to the design, installation and/or optimizing, maintenance and operation as well as the financing of technical equipment, such as heating installations or air conditioners. Therefore the contract period takes only between 5 to 15 years depending on the lifespan of technical equipment. Since the installation of the technical equipment is carried out within an already existing asset, the ownership of the equipment will be transferred to the public authority at the moment of installation. Consequently, the private partner bears all risk during the contract period except for the utilization risk. The focus of this model is the optimization of the life cycle and energy costs of this equipment. The remuneration of the private partner is based on the savings in the energy costs prior to the contract and after the optimization. The liability of the contract can be extended to energy supply and consequently the remuneration covers the energy costs as well.

PPP-Concession-Model
The PPP-Concession-Model as well as the PPP-Joint-Venture- Model are used in combination with all other models described above. The PPP-Concession-Model can be used in cases where the public asset can be financed by user charges (e.g. arenas, indoor swimming pools or exhibition centers), but also with roads or water supply systems a concession is given to the private partner transferring him the right to levy user charges in order to cover the costs for design, construction, and operation of the asset. Consequently, the private partner is not reimbursed by regular contractually predefi ned periodical payments but bears an additional user specific market risk. The tariffs usually have to be publicly regulated, which may sometimes cause additional risks to the private partner. The contract periods vary from 10 to 30 years.

PPP-Joint-Venture-Model
The PPP-Joint-Venture-Model means that both the public and the private partner are shareholders of the project company, consequently, the rights and obligations of the partners are ruled by a shareholder agreement rather than a PPP-contract. It is quite obvious that a clear, transparent and sustainable risk allocation in such a so-called ‘horizontal’ (as opposed to ‘vertical’) partnership is much more challenging. The model is used predominantly in urban development projects where the public authority often provides the land and determines the main urban objectives of the project, whereas the private partner is responsible for the development, design, construction, fi nancing, operation as well as the use and marketing of the properties.

The deal flow in public real estate
Since 2003 the German market for PPP-projects with a full life cycle approach in the sector of public real estate has been growing constantly. Corresponding to the distribution of investment needs in the federal system but certainly also due to the easier decisionmaking structure, the biggest part of the deal fl ow by number as well as by volume emanated from the municipality level. Only a few projects – in most of the cases prisons – are the states’ responsibility. Only one project has been prepared and recently publicly tendered at the federal level – the Fürst-Wrede-Barracks in Munich a project in the defense sector. As can be seen from table 3, which shows the PPP-contracts signed as of March 2006, most projects at the municipality level were schools with administration buildings following closely behind. The biggest projects in this sector were the two bundled school projects in Offenbach with approximately an investment of €100 million each.

However, the number and the investment value of the projects currently in preparation are much higher compared to that what has already been awarded so far. The pie chart shows that the actual project pipeline in the relevant sub-sectors has a total estimated investment value of approximately €6,344 million, again with a remarkably high proportion of school projects. The main reason is due to the fact that at present in Germany the needs for investments as well as their political visibility are particularly high in that sub-sector. One-third of the projects have already been publicly announced, the second third is currently in preparation whereas the actual status of the last third is unknown. Conclusion and outlook After a quite long and hesitant start in the 90s PPP procurement has reached a certain dynamic in Germany today. Since 2000 political support has increased considerably. The major barriers and obstacles for PPP have already been identifi ed and have been or will soon be removed. By setting up PPP Taskforces the regional and sector specifi c development of competence has increased considerably. Because of its federal structure and some other particularities, the British approach could not simply be copied but had to be carefully adapted to the German legal, institutional and political framework. This process of standardization leading amongst other things to guidelines and standard documents for application by the project executing authorities is still going on at a different speed in the federal system and in the different states in Germany. Most of the projects that have been realized are at the municipality level and located in North Rhine Westphalia. In some sub-sectors the development was faster than in others. At the beginning a clear focus was on schools regarding both the standardization as well as the deal fl ow. Other sub-sectors with a very high potential but which are also quite complex (e.g. hospitals and universities) are only now starting. Actually not more than 2% to 3% of the public procurement in construction has been realized by PPP. More then 10 times the volume (including the road sector) is actually being analyzed or is in concrete preparation. In its coalition agreement the government expects a portion of up to 15% equivalent to an amount of about €5 billion per year within the next 10 years. Even considering the still retained acceptance or even resistance of some quite powerful stakeholder groups the development clearly shows that PPP has acquired the status of an acknowledged alternative procurement method of the public domain in cases where it is economically viable and justifi ed, and offers new and interesting opportunities for the private sector. Therefore, PPP as a still developing but undoubtedly dynamically growing market has very good chances in Germany to reach the 15% portion of public procurement earlier than expected.