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OCTOBER 18, 2004
Europe's Private Affair From prisons to hospitals to toll roads, the next chapter in the dismantling of the public sector has arrived The inmates won't feel any freer. But the French government could get a little more fiscal breathing room as it opens 18 new prisons over the next four years. The prisons will be built and run by private contractors who will be responsible for maintenance, food service, even staff training -- although the prison guards will remain on government payroll. France's Justice Ministry predicts the new facilities will cost at least 8% less to operate than traditional state-run prisons. And the contractors, rather than the government, will have to line up the estimated $1.23 billion financing needed for construction. "If the current experiments prove successful, we could well expand [them] to other infrastructure projects," says Guy Garcin, who oversees the projects for the justice ministry. Get ready for the next chapter in European privatization: public services. From hospitals and schools to airports and toll roads, governments are turning to the private sector for public-works projects traditionally handled by the state. These so-called public-private partnerships are long established in the U.S. and have been growing rapidly in Britain, where $18 billion in such deals has been sealed since 2000. But until recently, they have barely made a dent on the other side of the English Channel because of opposition from public-sector labor unions and greater public acceptance of big government. All that's changing fast, as cash-strapped governments adopt new laws and regulations. From 2000 through the end of last year, Continental governments approved nearly $4 billion in partnership agreements. Planned contract awards in France, Germany, and elsewhere will add billions more in the next few months. "The potential is huge," says Alain Madelin, a French parliamentary deputy who sponsored legislation that took effect this year, allowing several projects to go forward. One rationale for the trend: With growth stuck near 2%, euro-zone governments aren't collecting enough tax revenue to rebuild aging infrastructure. Many are also struggling to reduce spending to meet euro-zone budget deficit limits. The partnerships help ease that pressure. Studies of recent projects in Britain show that privately managed public works cost an average 15% to 20% less to build and run than comparable publicly funded projects. Another benefit: European Union regulators have decided that capital expenditures made under partnership agreements can be kept off government balance sheets, so they don't count against budget deficit limits. CONTRACTOR INCENTIVES The partnerships take a big step beyond standard procurement contracts, in which governments buy goods or services from companies. That's because contractors are asked to secure the construction financing -- usually by borrowing from banks or in the debt market, where they can get favorable rates because of the government's implied backing. The payback comes after construction is finished, when contractors begin receiving payments under management contracts -- some lasting as long as 20 or 30 years -- covering their initial investment plus operating costs. That means contractors have an incentive to avoid construction delays, since they can't begin recouping their investment until the work is finished. And they face stiff penalties if a project runs into trouble during construction or operation. Some contractors even take ownership stakes. Hochtief AirPort, an Essen-based spin-off from German construction giant Hochtief, is part-owner of airports that it built under partnership agreements in Athens, Düsseldorf, and Hamburg. Airports are just the beginning. Hochtief estimates that the German government alone will seek bids on more than $7 billion in partnership construction deals over the next few years. The biggest is $4.5 billion in road projects that Hochtief is bidding on jointly with a subsidiary of French construction company Vinci. In the Netherlands, a group of companies led by Fluor Corp. (FLR ) is building a high-speed rail line from Amsterdam to the Belgian border that it will then operate. In France, Vinci has built several police stations and is bidding on the prison project and on a planned hospital in the town of Corbeil-Essonnes, near Paris. "For France [the projects] are a great opportunity for job creation in the private sector, bringing added value to the public sector and restoring confidence between them," says Philippe Ratynski, head of the Paris-based company's Vinci Construction unit. Banks and institutional investors are showing a healthy appetite for financing these deals. The London-based Macquarie European Infrastructure Fund, part of Australia's Macquarie Bank, has raised about $600 million this year toward a total $1.2 billion it expects to invest in partnership projects in Europe. Fund manager Jim Craig says some of the biggest investors so far are European pension funds, such as ABP of the Netherlands, which are attracted by the projects' implied government backing and healthy cash flow. The Macquarie fund's first Continental investment, made this year, was in a rail line connecting Stockholm's airport with the city. So far the trend hasn't attracted much criticism from Europe's powerful public-sector labor unions. That's probably because relatively few of their members' jobs are at stake. Most public-works construction is already contracted out, and key employees in the new privately operated facilities -- such as prison guards, school teachers, and hospital nurses -- are to remain on the public payroll. But that could change. In the meantime proponents have to show that the projects can deliver promised benefits. At least one major deal has already run into trouble. The German government is seeking more than $5.5 billion in compensation from TollCollect, a consortium including DaimlerChrysler (DCX ) and Deutsche Telekom (DT ) that is building a high-tech system for collecting highway tolls from heavy trucks. The project has been plagued with delays and technical problems. Corruption is a risk, too. France in the 1980s launched a program to hand off some public-works projects to private companies, only to abandon the effort amid allegations companies were getting contracts in exchange for political payoffs. Still, backers of the partnerships are confident that the momentum is on their side. "Prisons and hospitals...then why not museums?" asks French lawmaker Madelin. The Mona Lisa under the care of a private contractor? Well, probably not. But this trend looks set to grow as long as Continental Europe keeps trying to tighten its budgetary belt.  By Carol Matlack, with Raphael Kahane, in Paris
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