Public-Private Partnerships (PPP)

Philip Nedelcu, Ludwig Maximilian University of Munich

Relevance of the Practice

When looking for means to implement cost- and knowledge-intensive projects (mostly infrastructure), governments of all levels in Germany have for quite a while resorted to Public-Private Partnerships (in the following: PPP) as a mode of financing and/or operating ongoing or one-time projects within their sphere of influence.[1] PPPs in the field of education infrastructure rank first by number, whereas the highest investment volume in recent years occurred in the area of road construction.[2] In terms of government entity involved, the biggest group is made up of PPPs commenced by local governments (LGs).[3] Examples from the state of Bavaria include the development of schools, public swimming pools and sports facilities.[4] In other German Länder, LGs also realize projects such as the handling of sewage[5] or waste facilities under a PPP model.

Description of the Practice

The term PPP describes a wide variety of different ways and approaches to conduct projects involving both a public authority and (a) private actor(s) that are based on a contract between the LG and the private company. While there are many different ways for an LG to fulfill the tasks assigned to it,[6] the PPP model was ‘born’ out of the desire to minimize public debt by running public projects more (cost-) efficient. However, a PPP goes beyond a (debt) financing of projects in that it constitutes an alternative means of organization and procurement of public projects. It is however different from a ‘normal’ procurement process, as the LG and one or several private companies actually conduct a project together, thereby covering both financing and construction and maintenance. It is important to note that LGs may only decide to pursue a PPP if the project could not be realized in a more efficient way under a ‘normal’ procurement process.[7] However, the (partially) private financing in itself is not the reason for the model’s popularity.[8] The potential of a PPP lies in the idea and its structure (especially the allocation of risks), setting certain incentives for both parties that can make the project indeed more (cost-)efficient overall.[9]

As mentioned, there are many different ways to structure a PPP. The models differ in terms of risk allocation and in terms of the ownership of the developed property, but also in terms of the administration of the project once the construction phase is completed.

Before going into these differences in more detail, a summary of the stages common to all PPPs will be outlined.[10] At first, the LG has to evaluate whether it is at all feasible to conduct the envisaged project as a PPP. Secondly, the authorities should clarify the responsibilities within their own organization, focusing on the question which tasks they can/want to fulfil themselves and which tasks they want to delegate to external parties (i.e. the private partner or other private entities). Based upon these findings, the LG (thirdly) has to compare the potential PPP with a ‘normally’ procured project to see whether resorting to a PPP is in fact economically beneficial. Only then the procurement proceedings (as a fourth step) might be commenced. After the procurement process, the selected private partner and the LG conclude an agreement (PPP contract) that outlines each party’s rights and obligations, especially describing who is responsible for which parts of the project. It is within this contract that the risk allocation and property situation are regulated. Afterwards, the project enters the development stage and – upon completion – is implemented and (jointly) run for the duration of the contract (normally between 10 and 30 years). For most PPPs, the private actor conducts the development and maintenance himself or by employing subcontractors, while the government is tasked with controlling the progress and reacting to potentially necessary adaptations or changes to the contractual framework.

Having outlined the timespan and stages of a PPP, the following part of the entry will deal with the different models of PPPs employed by taking up the above-mentioned examples from Bavaria involving both rural local governments (RLGs) and urban local governments (ULGs).

Firstly, there are several ways to allocate the economic risks, mostly pertaining to a sufficient usage/turnout. In that regard, the project can be structured in two main ways.[11] One way is to allocate these risks to the government, meaning the private company just constructs and runs the project without bearing any subsequent risk (Verfügbarkeitsmodelle ohne Marktrisiko). The other way allocates the risk of sufficient usage and other risks concerning e.g. pricing to the private company (Marktrisikomodelle mit Preis- und/oder Auslastungsrisiko). The idea behind this approach is to generate an incentive for the private company to conduct the project as efficient as possible, maximizing the gains for both partners.

In Bavaria, most municipal PPPs follow the former model.[12] This is due to the fact that they deal with the provision of services for which citizens cannot be charged (e.g. schools, roads), as the later model only works for projects that are offered on a fee-basis (e.g. public pools, waste management), as the collection of the fee enables the private company to get its costs reimbursed and create profit.

The second decisive point is the question of ownership. As the PPPs deal mostly with the construction of tangible objects such as buildings or roads, the parties have to agree in the contract who is vested with the ownership of the constructed property.

There are many different models in this regard[13], the parties can ia agree to give the ownership to one of the parties or decide to realize the project through a jointly-owned corporation, but can e.g. also agree that the private actor owns the property for the duration of the contract and then transfers it to the government. As a description of all models available would go beyond the scope of this entry, the following paragraph will only address the most common model employed in Bavaria, the so-called ownership model[14]. Under this model, the LG becomes the owner of the property upon construction.[15] In exchange, the LG pays a fixed sum to the private partner that covers the construction, maintenance and further services provided for by the private partner. This model is mostly employed if the project is limited to construction, renovation or maintenance of a building.[16]

Both ULGs (Nuremberg) and RLGs (Poing, Kirchseeon, Weiden) have relied on PPPs to build new school buildings. There are also examples of both ULGs (Ingolstadt) and RLGs (Sonthofen) constructing public baths/spas under a PPP.[17]

There have also been attempts to comprise projects from several LGs in one PPP to realize these projects more efficiently, e.g. in Offenbach county in the state of Hesse. However, the project costs increased massively over time contrary to the prognosis in the initial assessment of the project.[18] An additional independent assessment conducted after the increase criticized the complexity of the contractual relationships and a lack of control on the governmental side.[19] This shows that cooperation (e.g. between several RLGs) in the form of a joint PPP should be considered carefully as it might make the implementation of each single project more efficient at first sight, but will also increase complexity.

Assessment of the Practice

The practice of PPPs gives LGs the potential to realize projects in a more economical way[20] while at the same time making use of the experience and skills of the private partners. The continuous involvement of one company distinguishes PPPs from other projects that are divided into different stages with different private actors involved on each stage, leading to a potential lack of efficiency.[21] Both these aspects can make PPPs extremely helpful for smaller LGs when it comes to a one-time, large-scale project for which the LG itself lacks the necessary experience. Another potential advantage compared to the ‘classical’ procurement lies in the different timing and maturity relating to the LG’s financial obligations. Normally, LGs will have to pay all costs as soon as the construction project is finished. In a PPP, the construction costs are normally borne by the private partner (and/or banks) in the first place, with the LG reimbursing the private partner subsequently by paying periodical fees or a lump sum when the contract expires.

Nonetheless, LGs have to keep in mind that PPPs are not a means of (debt) financing to ease their financial commitments, [22] as the costs are still incurred by both parties (i.e. also by them) depending on the contractual set-up. Specifically, LGs may not resort to a PPP to bypass budgetary restrictions that would otherwise prohibit the project.[23] Additionally, the PPP model is not feasible for all projects. To the contrary, there can be various reasons that speak in favor of the ‘classical’ implementation in terms of efficiency, e.g. the high transaction costs caused by the complex contractual relationships between the partners.[24] A proper pre-assessment is indispensable to get a clear picture before the project is commenced.

Criticism relating to PPPs focuses on the fact that private actors might make use of the necessity for PPPs on the government side by allocating risks to the government that would otherwise be incurred by them. However, the government should be able to mitigate this by conducting a thorough preparation and early examination of the project to identify its demands and its position towards potential private partners.

These and other points of criticism could also explain why LGs recently also resort to public-public-partnerships (i.e. cooperation between governmental agencies in a similar manner)[25] for the realization of complex projects.[26]

References to Scientific and Non-Scientific Publications

— — ‘Public Private Partnership (PPP)’ (Bavarian State Ministry for Housing, Construction and Transport, undated) <>

Advisory Board to the Federal Ministry of Finance, ‘Chancen und Risiken Öffentlich-Privater Partnerschaften‘ (expert opinion, Federal Ministry of Finance 2016) <>

Arbeitskreis Partnerschaft Deutschland im Bundesverband Public Private Partnership e.V., ‘Argumentationskatalog Pro und Contra ÖPP’ (Netzwerk Infrastrukturmanagement 2009) <>

Burgi M, Kommunalrecht (6th edn, CH Beck 2018) para17 Rn 68ff

Pauli C, Entwicklung einer Entscheidungshilfe zur Beurteilung der PPP-Eignung kommunaler Bauvorhaben (Kassel University Press 2009)

Tarek-Leander B, ‘Geschäftsmodelle beim kommunalen Ausbau von Breitbandnetzen und deren vergaberechtliche Qualifizierung’ (2014) 4Neue Zeitschrift für Bau- und Vergaberecht 208

[1] See for a list of examples of (mostly Länder) PPP: Presidents of the Courts of Auditors of the Federation and the Länder (eds), ‘Gemeinsamer Erfahrungsbericht zur Wirtschaftlichkeit von ÖPP-Projekten’ (14 September 2011) 50ff (hereinafter cited as: Report); see also the project database of Partnerschaft Deutschland, accessible via <> accessed 25 June 2020.

[2] ‘Chancen und Risiken Öffentlich-Privater Partnerschaften‘ (expert opinion by the Advisory Board to the Federal Ministry of Finance, September 2016) 11ff (hereafter cited as: Opinion); see also ‘ÖPP-Projekte mit Vertragsabschluss im Hoch- und Straßenbau nach Investitionsvolumen getrennt’ (Partnerschaft Deutschland 2019) <> accessed 25 June 2020.

[3] Opinion, 11, 21.

[4] See the examples listed in the first part of the PPP guidelines published by the Ministry of the Interior (hereinafter cited as: PPP Guidelines), ‘Public Private Partnership zur Realisierung öffentlicher Baumaßnahmen in Bayern’ (Gesprächsrunde PPP 2016)                <> accessed 22 April 2020 21ff.

[5] See for this practice in general report section 4.3. on Central Water Management.

[6] See Martin Burgi, Kommunalrecht (6th edn, CH Beck 2018) para 17 marginal no 69.

[7] This is part of the general obligation to manage the public budget in an economic and efficient way under Art 61(2) of the Bavarian Municipal Code. The same paragraph also encourages LGs to engage in public partnerships or other alternative means of financing where this is feasible. The Bundesrechnungshof (Federal Audit Agency) has ia criticized the federal government for pursuing a PPP model for a highway where a classical realisation would have been more economical. See Steven Geyer, ‘Rechnungshof rügt Scheuers Autobahn-Plan‘ Hannoversche Allgemeine (13 October 2018) <> accessed 24 June 20.

[8] To the contrary, public actors usually get more beneficial rates for financing models like loans. Opinion, 8, 26ff.

[9] See ibid 15ff, 23.

[10] See for these steps the PPP Guidelines, 12ff.

[11] These are described in the PPP Guidelines, 10.

[12] c.f. ibid 21ff.

[13] See, for an overview of the variety of models, ibid 10ff; see also the short summary by the Partnerschaft Deutschland, accessible via <> accessed 18 June 2020.

[14] Another common model being based upon a leasehold (Erbbaurecht) granted within the PPP contract. This model is usually employed in cases where the private company also runs the constructed facilities, e.g. for the public pools in Ingolstadt or Sonthofen, see PPP Guidelines published by the Ministry of the Interior, 28ff.

[15] If the project concerns the renovation/remodelling of existing property, the government remains the owner of the property throughout the project period.

[16] c.f. the PPP Guidelines, 21ff.

[17] See ibid for a detailed list of examples including the ones mentioned in this entry.

[18] Opinion, 21.

[19] ibid.

[20] E.g. one project concerned the replacement of several public baths that used to create massive losses by one public bath/spa that was constructed and operated by a private actor, with the government paying a subsidy equalling 1/3 of the losses previously incurred, see PPP Guidelines, 29.

[21] ‘Öffentlich Private Partnerschaften unter Berücksichtigung des IT-Sektors‘ (WD 5-3000-053/09, Research Services of the German Bundestag 2009) 10.

[22] This is also emphasised in Opinion, 28.

[23] Report 3ff, 43.

[24] See, e.g., the recommendation against PPP for smaller infrastructure projects in Opinion, 21, 35ff.

[25] See, therefor in general Heinz J Bonk and Werner Neumann, ‘Teil IV. Öffentlich Rechtlicher Vertrag‘ in Paul Stelkens, Heinz J Bonk and Michael Sachs (eds), Verwaltungsverfahrensgesetz (9th edn, CH Beck 2018) para 54 marginal nos 82ff.

[26] See for a study about public-public partnerships and a summary of the most relevant findings, Sascha Knauf, Frederike Milde and Christoph Stumpf, ‘Studie Öffentlich-Öffentliche Partnerschaften 2018’ (CURACON 2018) <> accessed 25 June 2020.