The Public-Private Partnership Law Review: Netherlands

Overview

Over the course of the past 20 years the public-private partnership (PPP) has been an important and successful tool of Dutch contracting authorities for the realisation of projects. The contract form most used for major PPP projects in the Netherlands is that of the design, build, finance and maintain (DBFM) contract. DBFM contracting came to the Dutch market in the late 1990s and early 2000s. A first push for its use was made in 2004 when the Ministry of Finance introduced a policy whereby, subject to the outcome of a public-private comparator, PPP was deemed the preferred option for all projects with a value above certain thresholds. In 2008 the government embraced the PPP model further and lowered the applicable thresholds (to, e.g., €60 million for infrastructure projects). Standard DBFM documentation was developed and the Netherlands saw a significant wave of PPP projects. Initially these projects concerned certain types of government accommodation and roads. From 2014 onwards the Dutch Rijkswaterstaat agency, part of the Dutch Ministry of Infrastructure and Water Management, added several wet infrastructure works (river and sea locks as well as the Afsluitdijk dam) to its PPP tender pipeline.

However, more recently enthusiasm in the Netherlands for DBFM as a contract form has started to wane. Concerns were raised about the lack of flexibility and the division of risks within the standard DBFM contract, the latter, in particular, because of the increased complexity of the projects tendered. Certain projects, most notably the A15 road project and the IJmond sealock project, saw contractors faced with very large costs as a result of risks materialising. In addition, a difficult market had resulted in contractors submitting low bids for projects. When market conditions in the building sector improved certain large Dutch contractors decided against bidding for new PPP projects, citing risks and costs. This meant that recent Dutch DBFM tenders such as, for instance, the A9 and ViA15 road projects attracted fewer bids.

It is against this backdrop that in 2019 the Minister for Infrastructure and Water Management presented the Dutch parliament with a report entitled 'The Future Task of Rijkswaterstaat'. The conclusion of this document was that change was necessary, both to improve competition in the market and in view of the complexity of the new challenges the government was facing. In March 2020 the report was followed by a transition agenda, 'Together in transition to a vital infra sector', prepared by Rijkswaterstaat in close consultation with market participants (an example of a PPP of a different kind). The aim of the transition agenda is to realise an infrastructure sector that is 'sustainable and innovative, financially healthy and with proper risk control'. The agenda only explicitly refers to PPPs in one of its action points, where it mentions PPP alliance-type contracts, but it is silent on the role of DBFM contracts as part of the new approach.

Further to the transition agenda, Rijkwaterstaat and Bouwend Nederland, a body representing contractors in the Netherlands, jointly commissioned a study into the performance of DBFM in the Dutch market over the past 15 years. The outcome of this study by the universities of Rotterdam and Groningen, published in October 2020, is described in Section II.

The year in review

No DBFM contracts were awarded in 2020. There were also no new DBFM contracts tendered during this period. A very limited number of alliance-type contracts were awarded concerning road infrastructure mostly with a value up to around €100 million.

There are currently several large DBFM projects in the realisation phase, most importantly perhaps the Afsluitdijk dam (contract value of over €500 million; expected availability 2022), the IJmond sea lock (contract value of over €500 million; expected availability 2022) and the A9 Badhoevendorp–Holendrecht motorway (contract value of over €800 million; expected availability 2026).

Most transactional activity has been in the secondary market for PPP projects where the Netherlands saw a few PPP portfolios coming to the market as well as several transfers by contractors of their stake in the special purpose vehicle to infrastructure investors. We also saw one large Dutch institutional investor, PGGM, take a 50 per cent stake in BAM PPP BV. Originally established by the Dutch contractor BAM, BAM PPP BV is one of the parties that has been most active in the Dutch PPP market.

Finally, in October 2020 the 'Learning of 15 years of DBFM projects at Rijkswaterstaat' report was presented by researchers of the Erasmus University Rotterdam and Groningen University. According to the report, which was commissioned by Rijkswaterstaat and Bouwend Nederland, projects realised using DBFM projects are on average of a higher quality, more often delivered on time and realised with less hindrance to the public. The contract form was, however, considered less suitable for more complex projects, and the researchers concluded that DBFM is a suitable contract form for projects of limited complexity with a value of €200 million to €400 million. It seems the government is in agreement with the findings of the report. In a letter from the Dutch Minister of Finance of 1 February 2021 the Minister confirms that the recent transition agenda does not mean a change in the government's policy with respect to DBFM. DBFM remains one of the tools to realise government projects. Where projects are of a sufficient size (€60 million for infrastructure projects), Rijkswaterstaat will still need to determine if the use of DBFM provides the best value for money by using the tool of the public private comparator (PPC). However, the Minister does note that the Ministry of Finance and Rijkswaterstaat are currently working on a new version of the PPC that will take account of recent experiences with the DBFM contract form. It remains to be seen what impact these changes to the PPC will have.

General framework

i Types of public-private partnership

The vast majority of major PPP projects in the Netherlands are structured as DBFM or design, build, finance, maintain and operate (DBFMO) contracts and therefore include private financing. These contracts are mostly tendered by central government. On a local government level, we occasionally see alliance-type contracts, where the decentralised authority and the market operator share most relevant project risks. For smaller projects, other integrated forms of contract (D&C, DBFM, DBFMO, etc.) are being applied more often, although it could be questioned whether these contract types qualify as PPPs.

ii The authorities

There is no centralised Dutch PPP authority. In practice, however, the vast majority of PPP projects are tendered by central government, in particular by the agencies Rijkswaterstaat (part of the Ministry of Infrastructure and Water Management) and Rijksvastgoedbedrijf (part of the Ministry of the Interior and Kingdom Relations). Occasionally, the Ministry of Defence acts as the contracting authority in PPP projects.

There is no restriction, legal or otherwise, which prohibits local government bodies from entering into PPP contracts, but so far this has rarely happened, at least with regard to DBFM. Examples of DBFMO projects by decentralised authorities are a new city hall in the municipality of Westland and an international school in the municipality of Eindhoven.

iii General requirements for PPP contracts

There is no comprehensive legislative framework for PPPs in the Netherlands. The use of PPP is policy-based. The current policy of central government with regard to DBFM is that it can be a tool to achieve better quality for less money (value for money). A possible choice for DBFM is made on the basis of a comparison between different contract forms by means of the PPC. For every project above €25 million for accommodation projects and €60 million for infrastructure projects, this assessment is made. If the outcome of this assessment is that DBFM is the appropriate contract form, the project is tendered making use of existing (EU-based) procurement legislation (especially by way of the competitive dialogue).

All Dutch PPP projects tendered by central government are governed by standardised DBFM contracts developed by such government. Currently, version 5.0 (June 2018) of these model contract forms applies. Contracting authorities adhere strictly to these standard forms and are unwilling to deviate from these, other than on project-specific matters.

Bidding and award procedure

i Expressions of interest

The tendering of Dutch PPP projects is subject to the EU public procurement directives. These directives allow for the use of various types of tender procedures, but in PPP tenders normally the competitive dialogue procedure is used. The award criterion in this procedure is the most economically advantageous tender.

ii Requests for proposals and unsolicited proposals

The competitive dialogue tender for PPP projects consists of two stages. The first stage starts with an EU-wide announcement of the tender inviting market parties to submit their interest in the project. Market parties can express their interest by submitting a request to participate. When submitting their interest parties need to provide the contracting authority with the information requested for qualitative selection. The assessment of the expressions of interest is based on requirements concerning a party's technical and economic capability to perform the contract.

Only those parties invited to do so by the contracting entity following its assessment of the information provided in stage one may submit a bid in the subsequent tender (stage two). Contracting authorities may limit the number of bidders invited to participate in stage two of the process.

In principle, contracting authorities can consider unsolicited proposals for PPP transactions. However, if such unsolicited proposal would include a public contract subject to the EU public procurement directives, such contract could only be awarded following a public procurement tender taking into account the principles of transparency and equality of treatment. This means that the party that submitted the unsolicited proposal would need to put in a winning bid in such tender. Perhaps unsurprisingly, unsolicited proposals are rare.

iii Evaluation and grant

In tenders for DBFM contracts, the candidates are putting in a bid for the draft DBFM contract provided by the contracting authority as part of the tender documentation. During the second phase of the tender candidates can ask questions about and provide comments to the draft contract. When submitting their bid candidates must also submit a financing plan, a financial model, support letters from their debt and equity providers and a financial close guarantee. The tender guidelines will contain requirements for the content of the financing plan and financial model. One of these requirements is that candidates must enclose term sheets for each source of financing. Bidders also need to use specific formats for their support letters and the financial close guarantee.

The award criterion used by the contracting authority in the competitive dialogue procedure for a DBFM project is the most economically advantageous tender. The sub-criteria used for awards are a combination of price-related criteria and qualitative criteria, including a risk management plan.

The winning bidder will enter into the DBFM contract with the contracting authority after the contract has been finally awarded (contract close). The DBFM contract contains a maximum term within which financial close will then need to occur.

Especially in large PPP tenders, unsuccessful bidders receive a fixed payment for costs incurred in connection with the tender. The amount of compensation bidders are entitled to is included in the tender guidelines. It only covers part of the actual costs. Most recent practice has been that bidders that make it to the best and final offer stage receive a (significantly) larger financial contribution than participants that were excluded in the first stage of the process.

The contract

i Payment

All recent DBFM projects in the Netherlands have had availability-based payment mechanisms. Under this payment mechanism, the contracting authority pays the contractor a periodic fee that is based on the availability of the project (the availability payment). This availability payment is due in full during the operational phase of the project. During the realisation phase, the contractor normally receives a relatively small percentage of the standard gross availability payment. The Dutch payment mechanisms have evolved over time (including, for instance, carve-outs for lost vehicle hours in road projects).

Depending on the project, availability payments are either made monthly or quarterly. The gross availability payment is subject to any applicable availability corrections and performance corrections. Availability corrections can be imposed if the object is not available. For instance, in road projects, availability corrections can be imposed for each quarter of an hour that a lane is not available. Performance corrections can be imposed if the contractor fails to comply with certain, specifically described contractual obligations, for example, regarding traffic safety.

In addition to the availability payment, in more recent projects the contracting authority also pays one or more lump sum milestone payments to the contractor. This happens on either or both the availability and completion of the project. The financing of such projects will consist of short-term bridge funding alongside long-term facilities.

ii State guarantees

In PPP projects in the Netherlands the state does not provide state guarantees to the sponsor. Furthermore, the state does not participate in the equity or debt financing of the delivery vehicle.

iii Distribution of risk

The starting point of standard Dutch DBFM contracts is that all risks in relation to the project are for the account of the private party, unless a supervening event occurs. To achieve this division of risk, nearly all statutory risk allocation provisions included in the Dutch Civil Code are excluded in the standard DBFM contract. Only certain mandatory Dutch law provisions, which cannot be excluded contractually, remain relevant, such as the provision that one cannot exclude liability for gross negligence or wilful misconduct.

As mentioned above, the contractor only escapes contractual liability for risks in the case of a supervening event. There are three categories of such supervening events: compensation events, delay events and force majeure events.

If a circumstance arises that qualifies as a compensation event, the contractor is fully compensated for any damage suffered. Contractual deadlines are postponed for the duration of the delay caused by the relevant circumstance. Examples of compensation events are contracting authority defaults, contracting authority changes, a relevant change in law, damage to the infrastructure caused by traffic accidents and measures by the contractor to mitigate force majeure events.

In the case of a delay event, all contractual deadlines are postponed for the duration caused by the relevant circumstance. The compensation contractor is entitled to limited certain financing costs attributable to the delay. All compensation events as well as force majeure events constitute delay events. Other examples of delay events are no (or late) accessibility of the project site and no (or late) coming into force of zoning and planning decisions.

The occurrence of a force majeure event gives the contractor broadly the same rights as in the case of a delay event. However, to the extent that the contractor is unable to fulfil certain obligations as a result of a force majeure event, the contractor shall be entitled to payment or continued payment of the availability payment minus certain cost savings. Force majeure is a precisely defined concept, referring to a limited number of events. Examples are war, armed resurrection, hurricanes and earthquakes.

iv Adjustment and revision

The standard DBFM contract contains a detailed mechanism for changes to the scope of work of the project. Both the contracting authority and the contractor are entitled to propose changes.

A change proposed by the contracting authority qualifies as a contracting authority change. In principle, the contractor is obliged to accept such change (except in limited circumstances, for instance when the contractor would have to act contrary to regulations). A contracting authority change qualifies as a compensation event, entitling the contractor to compensation in money and time. A contracting authority change may not involve a significant change of the works compared to the original scope of the DBFM contract.

The contractor is also entitled to propose a change. Such change qualifies as a contractor change. The contracting authority is not obliged to accept such change, except in limited circumstances, for instance if without the change the contractor would have to act contrary to regulations. Unless the parties agree otherwise, the consequences of a contractor change are for the account of the contractor.

Furthermore, the Civil Code contains an unforeseen circumstances provision. If this applies, the court may modify the effects of a contract or it may set it aside, in whole or in part, on the basis of unforeseen circumstances of such a nature that the other party, according to standards of reasonableness and fairness, may not expect the contract to be maintained in unmodified form. However, the standard DBFM contract contains a specific provision stating that the parties agree that the contract itself intends to cater exhaustively for such unforeseen circumstances. The intention is to limit the possibility of either party to invoke the unforeseen circumstances provision of the Civil Code.

v Ownership of underlying assets

Typically, ownership of the asset that forms the basis of a PPP contract remains with the public party throughout the entire term of the contract (i.e., no transfer of ownership between the public party and the private party takes place).

vi Early termination

The standard DBFM contract may be terminated by the contracting authority in the event of:

  1. an immediate termination event (these events would typically include the non-issuance of a bank guarantee, not reaching specific milestones (e.g., commencement, availability, completion) before set longstop dates, suspension of work during a certain period of time, bankruptcy and suspension of payments);
  2. a (material) contractor default, not remedied before set longstop dates;
  3. discretionary termination by the contracting authority;
  4. certain prolonged delay events (typically longer than two years); and
  5. a force majeure event (that continues longer than 180 days).

The standard DBFM contract may be terminated by the contractor in the event of:

  1. a contracting authority default;
  2. certain prolonged delay events (typically longer than two years); and
  3. a force majeure event (that continues longer than 180 days).

The standard DBFM contract provides for a sophisticated termination compensation regime, whereby compensation is related to the cause of termination.

Maximum compensation (including make whole of lenders, compensation of subcontractors and compensation for the loss of expected profits (return on equity) of the shareholders of the project) is paid in the event of termination for contracting authority default or discretionary termination by the contracting authority.

Compensation for costs (including make whole of lenders and compensation of subcontractors) is paid in the event of termination for force majeure or prolonged delay events.

Limited compensation is paid in the event of termination for an immediate termination event or contractor default.

Finance

Funding of Dutch DBFM projects usually consists of roughly 10 per cent equity and 90 per cent debt.

Equity is provided by the bidding consortium, usually formed by the relevant contractors together with one or more infrastructure investors. The latter could be infrastructure funds as well as institutional investors. According to the recent 'Learning of 15 years of DBFM projects at Rijkswaterstaat' report, on average the IRR of the projects included in this research was 11 per cent.

In nearly all Dutch PPP projects the debt element of the funding is provided by way of project financing. Financing is mostly provided by European and Asian banks. Dutch government-owned bank BNG and the European Investment Bank play an important role in the Dutch market. Over the years the involvement of infrastructure funds and other institutional investors has increased. The government explored the possibility of index-linked financing for PPP projects in a pilot in 2013. Although the pilot was successful, the conclusion was that index-linked financing structures were not necessary to induce institutional investors such as pension funds and insurers to participate in PPP projects. Similarly, the first bond financing of a Dutch PPP project (Zaanstad prison) in 2013 was successful, but did not lead to increased use of capital market solutions for projects in the Netherlands. Traditional project financing is still the favoured financing method for PPP projects in the Netherlands.

The role of the contracting authority in the financing of Dutch DBFM projects is limited to the direct agreement relating to the DBFM contract that it signs with the security agent of the lenders and the contractor. The contracting authority does not provide any guarantees to the lenders. It has, however, become standard practice to include milestone payments in the DBFM contract, mostly payable on either or both the availability and completion of the project. This alleviates to a degree the need for long-term debt for the project.

Over the years several PPP projects have been refinanced. Under the DBFM contract the consortium will need to notify the contracting authority of any such refinancing. In certain cases a refinancing requires prior permission of the contracting authority. If a refinancing leads to financial gain for the consortium it will need to share these gains with the contracting authority. The more recent DBFM contracts contain a 50/50 split of these gains between the contracting authority and the consortium.

Recent decisions

As for major PPP projects, little case law exists regarding the tender procedures or award decisions. In the 2017 DBFM tender for the Blankenburgtunnel, the awarding decision was unsuccessfully challenged in summary proceedings initiated by the runner-up consortium. We are not aware of other recent proceedings of this nature. As for the realisation and performance of these projects, some disputes have arisen, but the outcomes thereof, if any, have not been made public. Based on the standard DBFM and DBFMO contracts, such disputes are handled by expert committees whose judgements are not publicly disclosed.

Outlook

After what has been a period of 15 years of mostly successful DBFM projects, there currently is no pipeline for new PPP projects in the Netherlands. Although there have been difficulties in a few projects, these difficulties were not caused by the fact that they were tendered by way of a DBFM contract. In view of the successes with DBFM in the Netherlands it is a positive sign that the Dutch Minister of Finance recently confirmed that DBFM remains a contract form the government will consider when tendering new projects. It will, however, amend the PPC assessment tool to decide for which projects DBFM provides value for money. The future will show whether this new assessment tool and the positive endorsement of the Minister of Finance will lead to a new pipeline of Dutch PPP projects in the coming years.

Footnotes

1 Jessica Terpstra and Michel Klijn are partners and Sander van den Boogaart is counsel at Houthoff.

Get unlimited access to all The Law Reviews content