PPP and concessions
A new bridge over the St. Lawrence River in Montreal, a metro in Sydney, highway expansions and a lot of refurbished schools in Germany—HOCHTIEF’s public-private partnership activities (PPP) have many facets and one common ground: They improve the life of many people. Urgently necessary measures are planned sustainably, financed, built at a high quality standard and operated long-term in an economically viable way. In Europe and North America, we implement this together with our company HOCHTIEF PPP Solutions, and in Australia and Asia with Pacific Partnerships.
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We finance, plan, construct, refurbish and operate public buildings and transportation infrastructure, such as the People Mover at Los Angeles International Airport or the German Federal Health Ministry in Berlin.
Since the end of the 1990s, HOCHTIEF has been operating toll roads. With the acquisition of a 20-percent interest in Abertis in 2018, HOCHTIEF also has a substantial share in the leading international toll road operator.
PPP—what exactly is it? A definition
PPP stands for public-private partnership. PPP is a kind of cooperation between public-sector clients and businesses in the private sector who act as contractors.
Their purpose is to realize public-sector infrastructure projects as quickly as possible and to a high standard of quality, and make them available to the public. In public-sector building construction, for instance, such projects take in schools, town halls, hospitals, police stations or cultural buildings. In the area of long distance road construction, they include highways, bridges or tunnels. The business model is also known as P³ or private finance initiative (PFI).
Complete offer from a single source
No matter whether public buildings, roads, bridges or tunnels are to be expanded, converted or newly constructed—HOCHTIEF provides a complete offer: financing, design, construction and operation. We thereby pursue the goal of realizing individual, client-oriented solutions.
We do this for completely different types of public buildings. In addition to educational institutions, such as schools, this also includes property in the area of public administration, such as city halls, hospitals and cultural facilities, and also security facilities such as police buildings, barracks and penal institutions.
We operate in a similar way in transportation-related construction, whether this is in Canada, California or in the Hamburg region, where HOCHTIEF has expanded a long section of the Autobahn 7 highway and is now operating it. The operation provides for the continuous care and control of the infrastructure, thus ensuring its largely unrestricted availability in compliance with the highest safety standards. In project companies, HOCHTIEF takes over all risks of operation for the entire term of the concession.
Creating value with certainty
A PPP project with HOCHTIEF not only sustainably relieves public budgets, but also provides a great number of additional benefits:
Certainty: the certainty of cooperating with an equally experienced and innovative provider of construction services
360-degree view: taking into consideration the interests of all project participants and third parties in environmental and design/planning issues
Efficiency: enduring quality for the projects; high-quality materials, outstanding engineering expertise, professional project management, schedule reliability and holistic operational management
Minimized risks: long-term contracts, balanced distribution of risks, dependable planning, transparency, investment orientation and security
Rapid implementation: access to know-how of one of the biggest international providers of construction services
Optimized life cycle costs: integrated project management with long-term planning right from the outset, involvement of investors, ongoing cost control
Creating sustainable value for all stakeholders
Characteristic for HOCHTIEF’s PPP projects are a shortened planning and realization phase as well as long-term optimized life cycle costs. This is made possible through holistic planning right from the outset. This enables the follow-up costs for repair and maintenance to already be minimized at the beginning of planning. In this way, a private financing of public facilities becomes a successful model. HOCHTIEF operates some projects for a period of 15 to 30 years.
This is how PPP functions
Why all participants benefit from this partnership
We understand that the topic PPP is seen in a critical light. However, the answers to the questions frequently posed with regard to this indicate that in the end everyone benefits from PPP: the clients, the contractors and above all society.
How does PPP work?
Businesses in the private sector are contracted by the public sector with the planning, financing, construction or refurbishment of public buildings or transportation projects. After completion, they operate the projects for several years or even decades. In doing so, as a rule the company will provide all services from a single source—delivering an all-in package.
In exchange it receives regular payments from the public-sector client throughout the contract term of up to 30 years. All services and remuneration are set out in the contract. This means that remuneration depends on the contractor fulfilling its duties: only if the performance is delivered does the company receive money. At the end of the contract term the buildings, roads, bridges or tunnels are returned to the public sector in perfect condition and debt-free. Ownership generally remains with the public-sector cost carrier during the entire period.
What are the advantages?
PPP makes it possible to realize urgently needed infrastructure projects quickly, economically, and to a high standard of quality. At the same time, the business model is not a purely financing vehicle. PPP projects are also completed faster and deliver high quality. These two points are set out in the public-sector client’s contract and are guaranteed by the private-sector partner throughout the entire contract term. The private-sector contractor invests its capital in the project and brings in its technical know-how. This is efficient because it provides all services from a single source—from planning through financing and construction to operation.
This means that early on in the planning stage, the company can already give thought to what will be necessary during later operation, and optimize workflows. This can help to reduce construction time. The public-sector client does not need to use any of its own resources for the construction work and thus makes savings. In addition, the client can plan its budget reliably and over the long term because the private-sector contractor’s remuneration has already been determined for the entire term of the contract. Once the contract expires, the private-sector partner is required to hand over the project to its public-sector partner in a previously defined perfect condition. Another reason why it is in the former’s interests to use the very best materials.
What is the difference to conventional construction bidding?
With a conventional bid, the public-sector client will put the services such as planning, construction and maintenance out to tender individually, awarding the contracts to private-sector companies. It remains responsible for financing the construction project and must therefore either use available public funding or take out a loan. It has to organize operation with its own personnel and own equipment or have it handled by specially contracted external service providers. In this case, the public-sector client bears all investment and operating risks.
If the contract is awarded on a PPP basis, the private contractor provides all services from a single source: it handles planning, financing, construction and/or refurbishment, as well as operation and maintenance. The contractor bears the investment and operating risks.
Critics say that PPP is more expensive than conventional models. Is this true?
PPP is not more expensive that conventional procurement. On the contrary: A comparison of costs usually shows in favor of public-private partnerships. This is easy to explain: An all-in package of services from a single source is more likely to be more competitively priced than the sum of many individual contracts. At the same time, it is in the company’s own interests to constantly optimize project costs—after all, it wants to make a profit. To achieve this it dovetails planning, construction and later operation. This is efficient and, as a rule, it saves more money than the public-sector client could save by taking out a low-interest loan itself. In addition, the company’s remuneration depends on whether it provides the contractually agreed services in full and on time. If the public infrastructure is not available to the citizens as agreed, the company has to expect significant deductions from its remuneration.
Last but not least, the public sector benefits from PPP thanks to the low administration costs because PPP projects tie up only few public-sector administrative resources. In case PPP should not be the best economic solution for a project, the project has to be awarded under a different model–that’s something all parties involved agree on. Economic viability continues to have top priority.
But the Audit Office cites examples which actually became more expensive. What caused this?
In almost all cases, the reasons for deviations from the agreed price are the client’s changes in requirements in the scope of works. In addition, in every construction project, unknown risks arise that cannot be calculated before contract conclusion.
But HOCHTIEF wants to earn money with PPP. That is only possible if the project becomes more expensive for the tax payer, isn’t it?
No. Obviously, we want to earn profits with our projects, just like every other private enterprise. But this doesn’t mean that PPP projects are therefore more expensive for the taxpayer. On the contrary: Generally, the public-sector client has to pay less money and hence use less tax revenue for PPP projects than if it executed the construction project itself. Because everything comes from one source, it generally saves a considerable amount of money. The public sector is obliged to choose the economically most favorable procurement variant.
But PPP projects are above all something for major corporations. Don’t they disadvantage small and medium-sized enterprises?
No. For the current projects to expand the A7 highway in Northern Germany and the A6 highway in Baden-Württemberg, SMEs are our consortium partners. Generally, SMEs and regional construction companies participate in PPP projects, usually as direct contractors or subcontractors. This not only applies to public building construction but also to transport infrastructure.
To further improve the chances of small and medium-sized enterprises, the awarding process is being simplified. If applications are less complicated and cost intensive, more small and medium-sized enterprises can participate in the bidding process. Furthermore, large-scale projects from a certain volume upwards can also only be handled by larger companies even in conventional procurement.
In our PPP projects, involving local and regional small and medium-sized enterprises plays a key role. For instance, more than half the contracts for refurbishment of 50 schools in the Offenbach district were awarded to companies in this district and from nearby. To place cooperation with local partners on a firm basis right from the outset, bid invitations and awards for construction work and ancillary construction work—for instance, for facades and technical building systems—take place in work packages suitable for small and medium-sized enterprises, which are tailored to local craft businesses.
If the government now builds roads or schools with PPP, which it currently cannot afford, aren’t we living at the expense of future generations?
No. For PPP projects, the remuneration of the private contractor also already includes the repayment. This ensures that at the end of the contract period, the project is handed over to the public sector debt-free. Hence, through the regular payments to the private contractor during the contract period, only those generations who benefit from the project are burdened through their taxes.