Case Studies: Cargo Center Graz-Werndorf

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Project Overview
Graz1.jpg
Photograph taken from: http://www.cargo-center-graz.at/cms/cms.php?pageName=2
Figure 1: Project Overview
Graz-Werndorf Cargo Center, Graz, Austria
Project Type: Both
Contract duration: 30 years
Budget: EUR 65M (A further EUR 55m was spent on related private investments)
Project Time Line
Conception: 1997;
Tender: December 1998;
Approved July 2000;
PPP contract signed: September 2000;
Financial Close: End of 2000;
Operations started: March 2001.

Introduction

The project is for the construction and operation of a cargo terminal at the interface between road and rail transport. The project cost was EUR 65M, and the total initial investment including investment by private firms was EUR 120M. This project involves design, construction, financing and operation, and its contractual structure is based on a mixed model that leans towards a co-operation agreement with limited risk transfer.

The assets of the cargo center comprise two portal cranes for operating containers, initially 60.000 square meters of storage space, and facilities for combined transport (“Rollende Landstraße”).

Graz2.png

Photograph taken from: http://www.cargo-center-graz.at/cms/cms.php?pageName=2

Figure 2: The role of the Cargo Center Graz (CCG) in regional and international transport

The cargo center is located south of Graz, Austria’s second largest city (approx. 265.000 inhabitants). The region is one of Austria’s major industrial areas and a focal point of the Styrian automotive cluster, a network of manufacturing and research firms integrated into the supply chains of the European car industry.

Total project expenses were EUR 65M, of which expenditure for land comprised EUR 17.1M and construction of railroad infrastructure comprised EUR 47.9M. In addition there were major investments in the infrastructure, which was leased by the operator of the cargo center to logistics companies.

The cargo terminal connects Greater Graz, the region of Maribor/Slovenia and southeast Europe with all important terminals in Europe. It is located at the intersection of major Austrian railway lines (north-south and east-west), it is directly connected to the Austrian highway system, and it serves as a hub for transportation by road and rail. It is integrated into a network of daily freight trains.

The Contracting Authority (Public Party)

The authority responsible on behalf of the public sector is the Schieneninfra-strukturfinanzierungsgesellschaft (SCHIG), a company owned by the Austrian Federal Government, which was in charge of financial management of investment in Austrian railway infrastructure at that time.

For tax saving purposes, SCHIG founded “Güterterminal Werndorf PPP Realisierungs GmbH” (GWP), the company in which the activities of SCHIG related to the Werndorf Cargo Terminal project are bundled.

The Concessionaire (Private Party)

The concession for the cargo terminal was awarded to a special purpose vehicle “Cargo Center Graz” (CCG) company. Federal government ownership amounts to 47% via SCHIG/GWP, the state government of Styria holds 6% via a loan to CCG, and the private partners’ ownership share amounts to 47%.

The private partners are transport companies based in the Graz area which had been the major logistics players in the region and operated primarily in road and rail transport (59,6% of the private stake); interconnectedness of road and rail was of major concern for them. Banks and other financial service companies comprise 40,4% of the private stake and are also based in the region.

Users

Private logistics companies and the cargo division of the Austrian railway company are the major users of the cargo terminal. 20 logistics firms have a base on the premises of the cargo center, although the infrastructure (in particular the rail terminal) can be used by other firms too.

The governments of the State of Styria and the City of Graz are other major stakeholders as the terminal upgrades the region’s quality as a business location. Regional economic agents, which are integrated in international supply chains and therefore rely on reliable and fast cargo transport (e.g. the members of the Styrian automotive cluster) are major benefactors of the cargo terminal.

Key Purpose for PPP Model Selection

The formal reason to choose PPP as a mode of project delivery is the transfer of railway infrastructure from direct government ownership to the SCHIG. The Werndorf Cargo Center was considered a pilot case for trying out this mode of delivery at the interface between rail infrastructure and private logistics companies.

The goals which are typically attributed to PPPs were envisaged in the project: spreading risks, using private management know-how, fast delivery, and relieving the public budget. “While the Werndorf contractual structure has less significance as a PPP model, it is of consequence in that it introduces the private sector into an area that hitherto was the main preserve of government and its agencies.” (Bastin 2003, 12). Budgetary motives – which have been important for selecting PPP as a mode of public goods delivery in Austria (McQuaid and Scherrer, 2010) – seem to have played only a minor role.

Project Timing

The existing transport infrastructure had proven to be inadequate to cope with the increasing transport demand. The increase was particularly due to the development of a major automotive cluster in Styria during the 1980s and 1990s, and the increasing market potential in South-East Europe after the settling of the Yugoslav secession wars.

The decision to finalize this project as a PPP was taken when the Austrian government wanted to collect experience with PPPs as a mode of providing infrastructure and services at the interface of road and rail transport.

The project was conceived in 1997, the tender call was in December 1998, the decision under railway law for the cargo terminal Graz Werndorf was taken in July 2000. The PPP contract was signed in September 2000, and financial close took place at the end of 2000. The terminal started its operations in March 2001.

Project Locality and Market Geography

The location of the cargo center is approximately 10 kilometers south of Graz close to the Slovenian border. The cargo center serves inter-urban and international transport demands.

Several transport infrastructures dominate the structure of the economy and the structure of land use in the locality where the cargo terminal was built. The major highway and the railway connecting Slovenia and Croatia to the south and Vienna, Western Austria and Germany to the north cross the area, and the cargo terminal stretches over a space of more than 50 hectares.

Procurement & Contractual Structure

Tendering

An EU-wide search process for a partner to be in charge of operating the cargo terminal was started. The project was awarded to a local consortium consisting of major local logistics companies and regional banks, which subsequently founded CCG. The number of bidders in the 1st stage was less than ten, and the contract was awarded 18 months after the initial call for an expression of interest.

Contract Structure

The payments of CCG to SCHIG/GWP comprise two components: First, there is a fixed minimum payment of EUR 2.8M per year (2003, indexed to price level changes). Second, there is a variable payment depending on the turnover of CCG which is due if the estimated minimum turnover is surpassed; incentives are included in the contract which should ensure that this is achieved. It is agreed that the maximum of payments is 60% of the total cost of the infrastructure (which means that in the best case the public sector’s share of the cost will be 40%).

The contract between SCHIG/GWP and the private operator CCG terminates after 30 years; there is an option to continue the contract and an option for CCG to buy the cargo center at a fixed price, which is equivalent to the estimated residual value in 2031.

Risk Allocation

The public partner financed the whole infrastructure of the cargo center; the private partner operating the center pays a rent over a period of 30 years. While federal and regional governments did not provide formal guarantees, SCHIG/GWP (and thus the public sector) nevertheless bears the ultimate financial risk if CCG is not able to earn enough revenues to cover the repayment to SCHIG/GWP. Maintenance and operation are the sole responsibility of the private partners. While the private partners were not in charge of building the cargo center they were closely involved in the center’s design and construction from the very beginning.

Although the cargo center has a regional monopoly concerning the interface between rail and road it basically operates under market conditions. User fees are the source of revenue.

Graz3.png

Figure 3: Risk allocation

Performance

The ex-ante estimation of cost was EUR 79.6M. The actual cost of procurement of land fell short of estimates by EUR 2.8M, construction cost fell short by EUR 12.2M.

SCHIG has attributed the cost savings to the close involvement of the private operator of the cargo terminal in all phases of design and construction. A major cause of the difference between the estimates and the realized cost is the difference in timing between the estimates (which were made in a period of favorable business cycle conditions and thus yielded high prices) and the time of procurement (which was in a period of weak demand in the construction industry and thus entailed lower prices).

The project was completed on time. For this achievement close contact with the private operator of the cargo terminal in all phases of design and construction seems to having been beneficial too.

The whole of the storage space was leased to private business within a few months by year-end 2003. Already in 2004 CCG had initiated an extension which was to add another 80.000 square meters of storage space, thus more than doubling the initial capacity. This was financed by a leasing company, which was also involved in the initial PPP.

Key Success Factors

Several key success factors for this project can be identified:

  1. Strong political support was important for speeding up legal procedures in the initial stages;
  2. As nearly all important logistics companies operating in the region have become partners in CCG a near-monopoly situation was created. This reduced traffic and competition risk and warranted good economic performance of the project;
  3. Financing through central government (SCHIG/GWP) allowed use of cheap financing conditions because of the AAA credit rating of federal government;
  4. The number of neighborhood conflicts was small due to the compact size of the project;
  5. Construction cost was low due to favorable (although unintended) timing of the project, with works starting at the trough of the business cycle;
  6. Construction risk was low because the project contained neither tunnels nor complicated bridges.

References

  • Bastin, J., (2003) Public-Private Partnerships: A Review of International and Austrian Experience, in: Studiengesellschaft für Wirtschaft und Recht, "Public Private Partnership", Wirtschaftsuniversität Wien, Vienna .
  • Brenner, W., (2009) PPP und Schiene, in: Privatisierung der Verkehrsinfrastruktur. Erfahrungen mit Public Private Partnership (PPP) in Österreich und Europa. Tagungsband, Kammer für Arbeiter und Angestellte für Wien, Wien.
  • Bundesministerium für Verkehr, Innovation und Technologie, (2008), Ergebnisbericht über die PPP-Projekte der Bundesministerien sowie der ausgegliederten Bundesgesellschaften, Wien
  • McQuaid, Ronald W., and Scherrer, Walter, (2010) Changing reasons for public private partnerships, in: Public Money and Management, 30(1), 27-39
  • Puwein, W. et al., (2004) Modelle der “Public Private Partnership” im Lichte der theoretischen Diskussion und der empirischen Erfahrungen, Österreichisches Institut für Wirtschaftsforschung, Wien, Dezember 2004.
  • Puwein, W., M. Weingärtler, (2010) Public Private Partnerships in Österreich. Aktuelle Bestandsanalyse und Trends, in: Monatsberichte des Österreichischen Insituts für Wirtschaftsforschung, 11/2010, 899ff.
  • Schaffhauser-Linzatti, M., (2003) Risk management in an Austrian standardized public-private partnership model, in: Akintoye, A. (ed), Public private partnerships, Blackwell: Oxford, 245ff.
  • Schieneninfrastruktur-Dienstleistungsgesellschaft mbH, website, download 10 February 2013, http://www.schig.com/ueber-die-schig-mbh/aufgaben-und-rechtliche-grundlagen-chronologie/
  • Schuster, G., (2006) PPP – Erfahrungen im Schienenbereich, September 2006, www2.iv-eventnet.at/upload/doc/726/Panel_A_Schuster