KfW Research: Public-Private Partnerships (PPPs) better than their reputation

• More than 80 per cent of those involved happy with financing
• Careful planning and financial expertise key factors for success
• Practical guideline for future projects aids standardisation

The degree of happiness with the financing of municipal projects where the costs, risks and implementation are shared between the state and private sector (PPPs) is better than its reputation - although there is still significant potential for improvement. These are the findings of a market survey conducted by KfW on experiences with PPPs in Germany. The survey looked at more than 140 projects carried out since 2002, and was addressed to those responsible for the planning, financing and implementation of the projects. “Uncertainties most often arise during the initial stages of a project. A clearly defined invitation to tender process that also takes matters of financing into account can help optimise procedures from a very early stage, and thus avoid additional costs,” said Dr Jörg Zeuner, Chief Economist of KfW Group.

Specifically, the survey identified six key success factors:

1. Political support: If a project has political support it is usually implemented in accordance with the planned timeline and budget.
2. Experience: Among other things, experience with implementing projects improves the ability to assess procedures, which lends certainty to planning.
3. Ideal tailoring of the financing and collateral package to the requirements of the project: The bigger and more complex a project is, the more differentiated consideration must be given to the functions that a bank can perform within that project.
4. Careful planning of procedures: If the public sponsor's requirements can be reasonably harmonised with those of the banks and the bidders, this allows streamlined and economical financing structures to be created for this form of procurement.
5. Standardised financial documents: Most banks see the quality and diversity of invitation to tender documents as a major shortcoming. Standardised guidelines that still allow leeway for project-specific peculiarities could be of use.
6. Making use of financial expertise: The results of the survey make it clear that it is advisable for municipalities to involve internal or external financial experts at a very early stage of the PPP.

More than half of the municipalities surveyed had only conducted one PPP project thus far, while most of the banks and construction companies had more than ten projects under their belt. “This is reflected in ideas regarding the ideal distribution of risk, the evaluation of the financial documents and also the need for standardisation. These are differences that need to be reconciled. Because only then processes can be created that are ideal and efficient for everyone,” said Dr Zeuner.

That is why a practical guideline containing pointers for the municipal project sponsors was added to the study. “This procedural guideline represents a first attempt to describe the financing process for the contracting authorities and explain the complementary work and decision-making processes on the part of the companies and banks. This provides support to the municipalities, and will result in a higher level of standardisation,” said Detlev-W. Kalischer, Director at KfW and Head of the Municipal and Private Loans division (Kommunal- und Privatkundenbank).

Note:

All 205 banks, construction companies and municipalities involved in municipal PPP projects implemented in Germany since 2002 were included in this market survey that was carried out between July and September 2014. The response rate was 26 per cent. The sample is representative. The survey was conducted by Partnerschaften Deutschland (ÖPP Deutschland AG) on behalf of KfW.

You can access the study and the PPP guideline "Finanzierung kommunaler ÖPP- Projekte - Verfahrensleitfaden Finanzierung" (Financing municipal PPP projects – a guide to the financing process) at www.kfw.de/research.