German Public Sector Looks for Private Help

Once more, 2005 was a negative year for city and town treasuries in Germany. Municipalities around the country were 2.3 billion euros ($2.76 billion) in the red. It was an improvement of 1.6 billion euros over 2004, but the situation of German cities is not positive.

The city of Dresden has taken the radical approach of eliminating its debts by selling its complete real estate holding -- 48,000 apartments -- for 1.7 billion euros to the US investment company Fortress. The transaction met with some skepticism from politicians and economists who feared that Dresden was surrendering an important core asset. But as local German governments search for alternative financing possibilities to offset their shrinking revenues, privatization deals look more and more appealing to many.

The new trend: PPP

What has been a phenomenon primarily in the Anglo-American world is beginning to take root in Germany, namely the public-private partnership, or PPP. The main goal of public-private projects is to allow cash-strapped local and state governments to undertake projects that are for many no longer feasible, such as hospitals, schools, and administrative buildings and even highways.

The PPP concept is relatively simple. A private contractor, or frequently a consortium of companies, provides the financing and construction of a building. The consortium acts as a landlord and also takes care of building maintenance. The municipality, like a tenant, pays for use of the hospital or school. After a period of time, usually 20 to 30 years for a school or hospital, the local government assumes ownership of the facility.

Its proponents stress that there are numerous advantages to such partnerships. According to the PPP task force of North-Rhine Westphalia (NRW), which provides assistance to cities and districts in such matters, the biggest plus is savings of 6 to 15 percent compared to when a municipality plans, builds, finances and runs the building itself.

Efficiency, spreading payments over time

One of the first PPP projects in NRW was a school and adjoining sports gymnasium in the city of Frechen in the Rhine-Erft district between Cologne and Bonn. Not only was 12 percent saved compared to if the district had itself overseen the construction process, the consortium was able to hand over the keys just 15 months after the contract had been signed.

"We were very pleased with how quickly the project was completed," said Rhine-Erft district project director Anton-Josef Cremer. "We are also happy about the efficiency when something must be fixed or attended to in the building. It takes much less time than before."

Earlier, a crew from the responsible city or district would have been called in to fix a faulty boiler or replace a broken window, but the work was not always done quickly.

Besides the practical aspects, the district is relieved from immediately coming up with a large sum of money to pay for the project, according to Cremer. The Rhine-Erft district will spread out the payments in the form of rent for 25 years, which substantially eases its tight financial situation.

But there is a downside. The district no longer dictates who can use the building and how. When they draw up usage contracts with the facility managers, the district officials must be specific about which clubs can use a school or gym. If one group is forgotten, as the Rhine-Erft district did in the school pilot project, the contract must be renegotiated or the group must pay.

"Naturally we can subsidize some groups, but we are going to have to make some hard choices about who receives how much money," said Cremer.

Convincing politicians proving difficult

Local leaders are treading new waters when dealing with public-private partnerships. The PPP task force in NRW, the first of its kind in the country when it was established in 2002, has sometimes found it difficult to convince politicians that PPPs are worthwhile.

"Local leaders can be somewhat skeptical when it comes to public-private projects. Some politicians don't like letting go of the reins of control in such matters," said task force director Frank Littwin.

Nevertheless, Littwin said, city halls and the state government in Düsseldorf have been turning more and more to his group for assistance with large projects. One of its most recent plans is to help NRW to build a new prison, a the first projecct of its kind in Germany.

Reflecting the money-saving measures almost all states and municipalities in Germany are taking, the PPP task force has ever more work on its hands.