Germany: Choosing a Strategic Partner in PPP Projects

By Ute Jasper and Daniela Schwarz

Introduction

In response to the new duties contained within the new statutory framework for the treatment of residual waste, the city of Halle, like many other German municipalities, decided last year partly to privatize some of its responsibilities connected with the treatment of residual waste and to form a new company in this context, which it intends to manage with a strategic partner.

In order to select a strategic partner, an EU-wide procedure for awarding contracts must be carried out and has accordingly been organized by Halle. There are three types of procedure that may be carried out:

• the open procedure;
• the restricted procedure; and
• the negotiated procedure.

In selecting its strategic partner, Halle has opted for the negotiated procedure, which allows for negotiation between the awarding authority and the bidders prior to awarding the contract.

The EU-wide procedure for the selection of the best strategic partner must be well prepared and well organized. Apart from the strict legal requirements, the sheer number of participants in the process can become problematic, in particular because of their various, often contradictory, interests. Therefore, experienced project managers are needed who can recognize and remove obstacles early on. They must formulate the appropriate requirements and coordinate the interim results with politicians, the municipality's supervisors, the fiscal office and employees. At the same time, however, they must not act rigidly, but must structure the procedure in such a way as allows the ideas of the private partners to be considered and included in the tender procedure. The procedure should therefore follow a 'funnel' model: beginning as openly as possible, with the circle of potential partners and conceivable cooperation models gradually narrowed down.

Project management begins far in advance of the actual competition procedure - as was the case with the city of Halle. It was decisive that Halle wanted to define its targets in the broadest possible manner, in order to select the most suitable partner with which to implement the public-private partnership (PPP) project. Consequently, the public administration had to convince citizens, politicians and supervisory authorities alike of the sense and purpose of involving private entities, and had to apply the greatest diligence to the selection of a partner. The aspects to be examined focused on two key questions: (i) which concept is economically beneficial; and (ii) which models and procedures are legally admissible?

In order to decide on a direction and establish a basis for the decisions of politicians and the supervisory authorities, a preliminary study of these questions was prepared which examined potential procedures and models. It was thus possible for Halle neutrally to determine the benchmarks for the procedures with respect to all potential bidders.

In such cases the project organization, too, must be established and commence prior to the tender procedure. A small negotiating team responsible for the project is crucial for success. This team must form the interface and control centre for all participants, and must elicit preliminary decisions from the politicians. A member of the administration must be informed of all processes, supervise time schedules and be available as a contact person.

The negotiation team steers the tender procedure. In this context, a partner for a private PPP project can theoretically be selected according to all three types of procedure provided in the law on awarding contracts. However, PPP projects can rarely be carried out under the structure of an open or restricted procedure, because of their complexity. Therefore, the EU public procurement legislation allows for the private partner to be selected through a negotiated procedure. The choice of procedure is a decisive point in the entire process, as any mistakes at this point could lead to the cancellation of the project and thus to a considerable loss of time, as well as to subsequent compensation claims against the public sector. Halle had encountered just this experience in a previous attempt to find a partner (European Court of First Instance, C-26/03) and was thus acutely aware of the importance of complying with the public procurement legislation.

In the negotiated procedure, in contrast to the other two types of procedure, the public sector is subject only to very minor legal requirements. Aside from some formal provisions of the public procurement legislation, only the basic principles of EU law on contract awards apply, such as a 'clean competition' (ie, transparency and freedom of discrimination). This flexibility made it possible for Halle to select the private partner in free negotiations and evaluate each possible partner's potential to help the city achieve its individual targets.

As in the example of Halle, a successful procedure for awarding contracts must be structured as a funnel.

The negotiated procedure commences with publication of a public tender announcement in the supplement to the EU Official Journal, inviting potential PPP partners to participate in the procedure by sending in their tender applications. The interested parties must submit, within a certain period, proof of their personal capability and capacity to perform the project. Next, those candidates which have successfully demonstrated that they can be considered for the partner selection are identified. They are provided with the award documents and requested to submit an indicative offer, on the basis of which they will participate in the subsequent negotiations - the 'hot phase' of the procedure. In the procedure, the circles of bidders and models will be narrowed down, and the requirement for offers will be specified.

The negotiations are subject to few formal requirements. However, the principles of transparency and equal treatment must be observed. The participants negotiate the concepts offered and work out, through a cooperative process, the optimal economic, administrative and legal structures for the PPP models. The principal may incorporate particularly intelligent ideas of individual bidders into the procedure, as long as this does not infringe any IP rights. In so doing, the best ideas for models will be used and the most beneficial combination overall will be chosen.

In general, the initial negotiations rarely lead directly to the identification of the best cooperation partner, since the bidders tend to keep an ace up their sleeve which they will show only when presenting their finally binding offers. For this reason, and because negotiations with just a single preferred bidder often prove to be more difficult and tedious than negotiating rounds with several interested parties, it rarely makes sense to select a preferred bidder.

The agreements reached through a transparent and non-discriminatory tender procedure must be coordinated in order to ensure the project's success. In the particular context of the city of Halle, the following basic principles can be established.

If Halle seeks a private partner and wishes to utilize that partner's financial means and know-how, it must grant the partner the necessary flexibility to make the most of its potential. It may not, therefore, interfere with the operative business. Only on this condition will the private partner be prepared to pay a high purchase price for the share acquired. Only if municipality politicians refrain from interfering in non-economic considerations can the private partner manage the joint enterprise in such a way that the anticipated profits can be achieved. This does not mean that the city of Halle will be controlled by the private partner: it can continue to determine and change the scope of performance. This autonomy must also be fixed in the agreements. If the city gives instructions that lead to an increase in costs, it must adjust the remuneration correspondingly.

In turn, the city may also require the private partner to adhere to its commitments. For this purpose, it must determine, in a guarantee agreement, the performance promised by the private partner. For example, this applies to the number of jobs to be created, location advantages and profit expectations. Moreover, the private partner must ensure that the joint enterprise stays within the budget, which is ultimately paid by the citizens through taxes or fees. It must also avoid any risk of insolvency. This, too, must be agreed upon in guarantee agreements, which must include sanctions (eg, penalties, termination rights) that are triggered if the guarantee representations are not observed.

The implementation of a PPP project, such as the part-privatization of the treatment of residual waste in Halle, is complex and requires diligent preparation. Resistance may best be overcome by involving the diverse interest groups (citizens, politicians, administrations, supervisory authorities) as early as possible in an interactive process in the conception of the PPP model. For legal reasons, the private partner must be selected through a tender procedure, or at least through a competitive bid procedure. A competitive process is also recommended for economic reasons. Despite the regulatory framework, there is sufficient flexibility to allow for the identification of a partner which meets the individual requirements of the project and with which the public sector can reach its targets. In order to safeguard the success of the project, all requirements and assurances must be established in enforceable and approved agreements.