equity finance and risk sharing via ppp - recsputnicproject.rec.org/meetings/3wgmeeting/market...

© BSL Management Consultants GmbH & Co. KG

Equity finance and risk sharing via PPP

The Pforzheim Case

Arne Beck, BSL Management Consultants

Leipzig, 18th April 2008

Z:\60 -Mitarbeiterordner\ARB\Results\2008-04-17-18 SPUTNIC IV Leipzig\90065 SPUTNIC_Vortrag_Pforzheim_fin.ppt

©BSL Management Consultants GmbH & Co. KG

2

� Current challenges for German municipalities

� The Pforzheim Case

� Key Findings

Agenda



3

Compulsory strategic

reorientation for companies and local authorities (as shareholders

and public authorities)

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 infrastructure1)

� 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

Especially economic pressure forces companies and local authorities alike to rethink strategy

Source: BSL Management Consultants

1) According to VDV 35 bn Euro for German public transport from 2003 to 2012



4



� Objectives

� Structure

� Results

� Key Learnings

Agenda



5

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.

City of Pforzheim

Inhabitants: 120.000

Transport carrier: Bus

Number of busses 2006: 83

Performance 2006: around 4.545.000 vehicle km p.a.




6

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

Political challenges

Strategic reorientation of SVP and the municipality of

Pforzheim

Economical challenges:rising need for subsidies

Main objectives

� 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)




7



� Objectives

� Structure

� Results

� Key Learnings

Agenda



8

� 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 munici-pality from privatization exceed gains from in-house contracting?

The guiding principle was to generate benefits exceeding in-house awarding while keeping full power of decision

Four main steps of the process


New organization of PT at Pforzheim

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

1

2

3

4

+

Public Private Partnership (PPP)?



9

SVP GmbH & Co. KG

(new operator)

A detailed contract structure secures the political interests of the city of Pforzheim

� Consortium agreement

� Share purchase

agreement

Overview PPP contract structure


� Business

management

agreement

� Lease contract

� Public service

contract

Articles of partnership

51% 49%

Private consortial

partner (Veolia)City of Pforzheim

Spin-off of former owner-operated municipal enter-prise and spin-off contract



10

A comprehensive control-system is put into place by separating owner from public transport authority

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

Overview of steering mechanisms


Owner

Veolia

Public transport authorityOwner (SVP owner-operator)

City of Pforzheim

Control of public transport services via public service contract (quality, performance, revenues)

51% 49%

SVP GmbH & Co. KG

(new operator)



11



� Objectives

� Structure

� Results

� Key Learnings

Agenda



12

Results

The municipality attains several positive results out of the PPP-model

Aspects

Savings and quality improvement

Equity finance and risk reduction

� Reserve liability for Veolia

� Sharing of ownership risk

Flexibility� Put-option to sell remaining shares at fixed prices

� Call-option to buy back shares at fixed prices

Social needs

� Commitment of private partner to secure existing jobs

� Labor contracts securing wages for existing employees1)

� No supplementary benefits for new employees

� Net savings of about 19 million Euros

� Commitment to quality assurance

Overview results for municipality

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




13

Reduction of municipal funding p.a.

(mean values)

100%

SVP own establishment

68%

SVP optimized In-House

Stand alone (Strategypaper)

Veolia offer

37%

-32%

-45%

The city of Pforzheim attains net savings of about 19 million Euros within 10 year contract period

� 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 Euro1) 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, passenger-oriented transport planning)

Effects in total

Financial and quality effects


1) Social payments out of transitional arrangements are already subtracted



14

The municipality reduces its ownership risk analog to its investment share and benefits from private know-how

Equity finance and risk reduction


� 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%

Proposed solutionChallenges and risks

� Is capacity sufficient to monitor the commercial development of the operator?

� Is proprietary restructuring know-

how 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)



15



� Key Findings

Agenda



16

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

� 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



17

Thank you for your Attention!



18

BSL Management Consultants Berlin GmbHViktoria-Luise-Platz 7 � D-10777 Berlin

T +49 (0)30 23 60 88-0F +49 (0)30 23 60 88-11

[email protected] � www.bsl-consulting.de

Arne BeckProject Manager



19

Utilities/Logistics

Transport suppliers, manufacturers & financial institutions

BSL Management Consultants is an international consultancy specialising in the public transport and rail sector

� Established 1991 in Hamburg, Germany

� Around 60 employees; consultants are qualified in business & economics, engineering, science, transport & urban planning and IT

� Offices in Hamburg, Berlin, London and Sydney

� Experience from more than 600 successfully completed projects around the world

� Management Consultancy of the Lloyd's Register Group

Public transport

(Heavy) Railways

Local authorities and governmental institutions




20

BSL's portfolio is well geared towards our clients’ challenges

� Benchmarking and business analysis

� Cost reduction strategies/improving competitiveness

� Optimisation of all operational functions

� Overhead analysis and optimisation

� Sustainability management

� Marketing and sales strategies

� Revenue management

� Quality management

� Mergers & acquisitions

� Market research

� Market entry strategies

� Strategic consultancy

� Organisational and financialstrategies

� Organisationaldevelopment

� Human Resource management

� Management systems and tools

� Change management

� Strategic Asset Management

� Infrastructure management

� Workshop optimisation andfleet policy

� Strategic Risk Management/ Enterprise Risk Management




21

BSL has carried out projects all around the world, with strong delivery record in Germany and continental Europe

1 2 3

Public TransportHamburgBerlin StuttgartFrankfurtMunichDüsseldorfLeipzigDresdenSaarbrückenCologneHanover...

RailDeutsche Bahn AGHLBAKNnordbahnmetronom...

Public TransportVienna, AustriaBarcelona, SpainBrussels, BelgiumGraz, AustriaAthens, GreeceBratislava, SlovakiaBudapest, HungaryGeneva, SwitzerlandLinz, AustriaLuxembourgLyon, FranceLondon, UK...

RailSNCF, FranceRENFE, SpainNetwork Rail, UKSNCB, BelgiumFS, ItalyJBV, NorwayNS Reizigers, NLBDK, DenmarkSBB, SwitzerlandProRail, NLÖBB, Austria...

Public TransportBangkok, Thailand Beijing, PR ChinaHong KongJakarta, IndonesiaAhmedabad, IndiaAnkara, TurkeyBursa, TurkeyJerusalem, IsraelShanghai, PR China Tehran, IranNew York, USASydney, AustraliaToronto, Canada...

RailAmtrak, USAJR, JapanRailCorp, AustraliaPT Kereta API, IndonesiaJinan Railway Administration, PR ChinaMERVAL, ChileCP, Canada...

IndustrySiemensDaimlerHSBCRailOneVossloh...




22

The competence center public transport authorities and financing offers consulting services at several levels

� Reorganisation

� Service scoping

� Elaboration of contractual relations and design of cash flows

� Development and implementation of funding instruments

1

2

� Conception, coordination, audit, controlling of transport performance

� Monitoring of commercial performance

3

� Sizing/rating organisations

� Cross-comparison

� Marketing

� Contract strategies

4

Political level

City

RegieTransport associations

4

2

OperatorsTransport companies

3 2 TC

1

Competence center public transport authorities: Key aspects of activity


equity finance and risk sharing via ppp - recsputnicproject.rec.org/meetings/3wgmeeting/market...

Documents