Equity finance and risk sharing via PPP The Pforzheim Case Arne Beck, BSL Management Consultants Leipzig, 18th April 2008
Agenda Current challenges for German municipalities The Pforzheim Case Key Findings 2
Especially economic pressure forces companies and local authorities alike to rethink strategy Overview of relevant recent developments in German public transport (PT) Legal Regulation Regulation 1370/2007, published 3.12.2007, coming into force 3.12.2009 Economic developments Tight budget of the communities Declining federal and state subsidies for PT Rising costs of operation (energy and labour costs) Need for reinvestment in infrastructure 1) High competitive pressure to open markets further on Consequently higher pressure on efficiency for existing companies and increasing difficulties when restructuring Political developments Political imperative to secure municipal control over public spending and to increase transparency Requirement to secure (and increase) quality of public transport despite reduction of public subsidies and rising costs of operation Compulsory strategic reorientation for companies and local authorities (as shareholders and public authorities) 1) According to VDV 35 bn Euro for German public transport from 2003 to 2012 3
Agenda Current challenges for German municipalities The Pforzheim Case Objectives Structure Results Key Learnings 4
Pforzheim is a medium sized city located in the southwest of Germany Facts about Pforzheim City of Pforzheim Inhabitants: 120.000 Transport carrier: Bus Number of busses 2006: 83 Performance 2006: around 4.545.000 vehicle km p.a. 5
The city of Pforzheim faced several challenges which required a strategic realignment of the municipal operator Changing external framework and need for action Legal challenges Economical challenges: rising need for subsidies Political challenges Main objectives Strategic reorientation of SVP and the municipality of Pforzheim Reducing need for subsidies for the municipal transport operator Ensuring current quality and scope of services (provision of essential public services) Preservation of the sovereignty of the city concerning public transport standards Assuring a long term perspective for the public transport company (and its employees) 6
Agenda Current challenges for German municipalities The Pforzheim Case Objectives Structure Results Key Learnings 7
The guiding principle was to generate benefits exceeding inhouse awarding while keeping full power of decision Four main steps of the process New organization of PT at Pforzheim Public Private Partnership (PPP)? 1 2 3 Separation of contracting authority and operator (market (re-)organization) Goal: Clear distribution of duties and responsibilities Design of a public service contract for PT Goal: Clear description of performance, rights and duties as well as a legally compliant funding Concept for social needs of employees Goal: Reaching a competitive level of wages and agreeing on sound transitional arrangements + Search for an investment partner Important: Looking for an investor according to the framework set in steps 1 to 3 According to objectives of municipality Key question and valuation standard: Will benefits for the municipality from privatization exceed gains from in-house contracting? 4 8
A detailed contract structure secures the political interests of the city of Pforzheim Overview PPP contract structure Private consortial partner (Veolia) Consortium agreement Share purchase agreement Articles of partnership 51% 49% SVP GmbH & Co. KG (new operator) City of Pforzheim Spin-off of former owneroperated municipal enterprise and spin-off contract Business management agreement Lease contract Public service contract 9
A comprehensive control-system is put into place by separating owner from public transport authority Overview of steering mechanisms Veolia Owner Securing owner-interest via ownership controlling of private consortial partner and the city of Pforzheim Business management by private consortial partner Private consortial partner contractual commitment to the social concept of the city 51% 49% Owner (SVP owneroperator) City of Pforzheim Public transport authority SVP GmbH & Co. KG (new operator) Control of public transport services via public service contract (quality, performance, revenues) 10
Agenda Current challenges for German municipalities The Pforzheim Case Objectives Structure Results Key Learnings 11
The municipality attains several positive results out of the PPP-model Overview results for municipality Results Aspects Savings and quality improvement Equity finance and risk reduction Flexibility Social needs Net savings of about 19 million Euros Commitment to quality assurance Reserve liability for Veolia Sharing of ownership risk Put-option to sell remaining shares at fixed prices Call-option to buy back shares at fixed prices Commitment of private partner to secure existing jobs Labor contracts securing wages for existing employees 1) No supplementary benefits for new employees 1) Labor contracts at a wage-level about 20 % above other private transport companies in the region and securing vested rights of older employees till 2013 12
The city of Pforzheim attains net savings of about 19 million Euros within 10 year contract period Financial and quality effects Reduction of municipal funding p.a. (mean values) 100% SVP own establishment 68% SVP optimized In- House Stand alone (Strategypaper) 37% Veolia offer -32% -45% Effects in total About additional 1,8 Mio Euros reduction of municipal funding per year compared to optimized owner-operated municipal enterprise (In-house awarding) Total of 18,5 Mio Euro 1) savings within contract period of 10,5 years, Additional revenues from purchase price: 0,6 Mio. Euro (book accounting value of assets) Commitment to quality assurance (punctuality, maximal age of vehicles, passengeroriented transport planning) 1) Social payments out of transitional arrangements are already subtracted 13
The municipality reduces its ownership risk analog to its investment share and benefits from private know-how Equity finance and risk reduction Challenges and risks Proposed solution Is capacity sufficient to monitor the commercial development of the operator? Is proprietary restructuring knowhow satisfactory? Hedging increasing funding needs Economies of scale/benefits from synergies difficult to obtain Risk of failing restructuring goals Risk of insolvency for owner and employees (e.g. because of loosing concessions and general legal risks) Making use of the partner s know-how Restructuring and management Monitoring efficient performance Economies of scale Equity funding more easy Contractual agreements on guaranteed development of deficit burden for municipality Reduction of restructuring and insolvency risk to 49% 14
Agenda Current challenges for German municipalities The Pforzheim Case Key Findings 15
The Pforzheim model offers new opportunities of financing and minimizing risk while assuring complete sovereignty for cities Key potential of PPP in public transport Separation of owners and public interest in a clear manner Cost reduction and/or New equity Shared risk Retain flexibility Secure quality Full power of decision within the PPP-proceedings and thereafter for municipality necessary 16
Thank you for your Attention! 17
Arne Beck Project Manager BSL Management Consultants Berlin GmbH Viktoria-Luise-Platz 7 D-10777 Berlin T +49 (0)30 23 60 88-0 F +49 (0)30 23 60 88-11 berlin@bsl-consulting.de www.bsl-consulting.de 18
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