Private funds for public infrastructure – ways to avoid funding logjam

SFS presents success factors for public-private partnerships

Surveys among public decision makers show that private funding plays an increasingly important role in public-sector investments. Survey respondents expect the significance of equity interest through public-private partnerships (PPP) to increase by 20 percent (Germany: 13 percent) over the next three years. The importance of lease financing is expected to grow by 19 percent during the same period (Germany: 35 percent). Loan financing is widely expected to remain the key financing instrument across Europe. Germany, in particular, appears to lag behind other international markets in realizing PPPs in the infrastructure area.

"When it comes to finding solutions that are not only technically effective but also economically efficient, the appropriate financing solution plays a key role," says Johannes Schmidt, Managing Director of Siemens Financial Services GmbH. "As one of the world’s leading providers of infrastructure solutions, Siemens faces global investment challenge every day."

Schmidt will present a list of success factors for a sustainable and profitable projectbased cooperation between private investors and the public sector at a press roundtable in Frankfurt/Main today. These factors can be used to identify suitable PPPs in Germany and tap the potential for increased integration of private capital providers into public projects. The five criteria are based on SFS’ experience in the international equity-financing business in such markets as Australia, China, India and the United States as well as in European countries where infrastructure-related PPPs have already been realized on a broader scale, for example in the UK, Portugal, Sweden and Spain:

* Identifiability: The object to be financed should be clearly identifiable in geographic and economic terms to allow for efficient risk sharing between the private and public sectors. A power plant, for example, will be more likely to fulfill this requirement than a rail network.

* Stable demand: Given the long service life of infrastructure investments – which, in many cases, amounts to more than 10 years – investors will expect reliable longrange planning of demand for the relevant infrastructure. Such a secure demand base exists, for example, in energy and water supplies as well as in the case of transportation infrastructure.

* Low risk of substitution: Investors become interested in infrastructure projects when risks related to introducing competing solutions and technologies remain low across the entire duration of the project– a criterion that applies, for example, to bridges or tunnels in road construction.

* Flexible contract design: Contracts governing public-private partnerships should be based directly on the requirements of the individual project rather than on standardized stipulations. Internationally successful PPPs like the high-speed rail connection HSL-Zuid between the Netherlands and Belgium generally display this sort of flexibility.

* A low risk of "politicization". Private investors generally shun projects with infrastructure solutions that may become election campaign tools. On an international level, for example, energy and water prices have been "politicized" in this manner in the past.

Without adherence to economic criteria, PPPs can entail substantial risk. Dr. Frank Riemenschneider, Professor at the Institute for Logistics and Facility Management at the University for Applied Sciencies in Münster, also warns against regarding PPPs as a cure-all for empty state coffers. "PPP is not just a financing model, but an efficiency and realization model," says Riemenschneider. But it is one that offers substantial potential if knowledgeable partners cooperate under the right conditions, he notes. "Social infrastructure (public buildings and hospitals amongst others), transportation as well as water and environmental protection will likely be the largest areas to apply this in Germany over the next five years," Riemenschneider projects.

Frank Heudorf, head of overall projects at the city treasury of Frankfurt/Main, believes the increasing realization of PPP projects in Germany is closely related to the perception of the city treasury’s role in municipal practice. "Indeed, the role of the public-sector financial expert is shifting from that of a trustee to that of a financial manager," confirms Heudorf. Anyone hoping to successfully realize municipal projects in cooperation with private partners would have to consider the world from their perspective and be able to explain the private business stance within municipal decision-making processes. The city of Frankfurt has successfully realized various types of PPP projects in the construction sector.

Method:
The views of public-sector decision makers were derived from two surveys:

* In the run-up to the World Economic Summit 2007 in Davos, Siemens interviewed 522 decision-makers in 25 metropolises in cooperation with MRC McLean / Hazel. For the above-mentioned study, SFS evaluated previously unpublicized results on individual financing aspects.

* In addition, the British market research agency Resource, commissioned by Siemens
Financial Services, interviewed 400 public-sector financial managers in the European core markets of Germany, France, UK, Italy, Spain and Sweden in spring 2007 to identify changes in the use of financing instruments for public-sector investments in infrastructure.

Market research data on current and future investments in the water, transport, energy and healthcare sectors provided by Global Insight were analyzed to estimate global and regional investment requirements. The results were used to forecast cumulative investment requirements for the next 20 years.-Simens