What is a private investment in public equity

Ways to finance public infrastructure

In April 2015, the expert commission on “Strengthening Investments in Germany” delivered its report and thus re-stimulated the discussion about the financing of public infrastructure in Germany. The authors agree on the urgent need for investment - especially among municipalities. It is controversial to what extent private investors can or should be won over, what costs are involved and whether the financing method affects compliance with the debt brake.

The report of the expert commission on "Strengthening Investments in Germany"

Marcel Fratzscher

Germany has a serious investment problem. The public infrastructure - roads, bridges and school buildings - is falling into disrepair. The state has not invested enough to stop this decline in value for a long time, let alone to open up new, future-oriented areas. Private investments in Germany are also among the lowest of all industrialized countries. Instead, German companies are investing more and more abroad, also because the public infrastructure and framework conditions in Germany have lost their competitiveness. Insufficient private and public investment today jeopardizes the prosperity and employment of future generations. Germany lives from its substance.

How big is the investment gap?

But is there really such an investment gap in Germany? This is undisputed internationally. In Germany itself there are still a few who cannot or do not want to recognize investment weakness. This not only reflects an over-confidence in the efficiency of markets, but a different understanding of what such investment weakness is. An example: according to the World Economic Forum (WEF), Germany still had the second best transport infrastructure in the world at the beginning of the millennium. Today Germany ranks eleventh. Any such ranking list certainly has weaknesses and should not be overinterpreted. But if we believe this ranking, Germany still has a comparatively good transport infrastructure, but the lead over many competitors has decreased or even turned into a slight disadvantage.

However, the quality of an infrastructure or of investments can only ever be assessed in comparison and with reference to a benchmark, a target value or a more far-reaching goal. From this point of view, it makes little sense to talk about “optimal” public or private investments. An “investment gap” or “investment weakness” identifies the lack of investment in comparison to a benchmark - such as maintaining the competitiveness of companies, the attractiveness of Germany as a business location and a desired potential growth rate for the economy.

So how big is this investment weakness? In the coalition agreement, the federal government committed itself to closing Germany's investment backlog vis-à-vis other OECD countries. In 2013, this amounted to 3% of economic output or almost 90 billion euros annually. Certainly, many of the figures and targets that are issued by politics should be viewed with caution. But a number of scientific studies show 1 that Germany does indeed have an investment gap of around 3% of economic output. Studies by DIW Berlin, the International Monetary Fund (IMF), the OECD and others analyze how much additional public and private investments Germany needs to secure its current global competitiveness and an adjusted potential growth rate of around 1.5% per year - and thus one moderate growth in prosperity and the safeguarding of employment - in the next two decades. In their calculations, these studies also arrive at an investment gap in Germany of 3% to 4% of economic output.

This figure of almost 100 billion euros annually may seem enormous. However, it is relatively small compared to Germany's net savings, which is reflected in the current account surplus of around EUR 250 billion - or 7.8% of economic output - in 2014. A 3% investment gap accounts for less than half of this net saving.

In addition, this is not an abstract number, but in many areas we know specifically where there is a lack of investment in Germany and how high it should be. In the area of ​​transport infrastructure, 7 billion to 10 billion euros are missing every year just to maintain the value of the existing transport infrastructure.2 This does not take into account the decline in the value of public infrastructure over the past two decades, which according to the national accounts amounts to almost 500 billion euros and which has to be compensated at least in part.

In the area of ​​education and science, the German state spends almost 1% or 25 billion euros less each year than other OECD countries.3 Just to bring the quality of daycare centers and kindergartens to the standard recommended by the OECD, everyone in Germany would have to Year 9 billion euros in additional expenditures are made. Is that a huge sum? Certainly. But it roughly corresponds to the cost of the pension reforms that the German government implemented in 2014. Even if only part of this expenditure is managed as public investment and the quality and efficiency of the expenditure is more important in education and science, these figures show that the public sector in Germany will also be significantly more involved in this area in the coming years Must make efforts.

Most of the investment gap is due to insufficient private investment. In order for the goals of the energy transition to be achieved, more than 30 billion euros will have to be invested in networks, technology and energy efficiency in Germany over at least the next decade. Germany's digital infrastructure is one of the worst in Europe. Estimates show that nationwide fiber optic expansion in Germany would cost a total of 80 billion euros - even if this estimate should be treated with caution, as in this area too it is disputed which solution would be the best for expanding the digital infrastructure.

The fact that there is a “private” investment gap in Germany does not mean that companies are making the wrong investment decisions for them. On the contrary: for many German export companies it is extremely important to be present in global markets through direct investments. Foreign investments often reflect the high attractiveness of other business locations. But they also reflect the comparatively poor general conditions for private investments in Germany. The largest German export companies have increased their number of employees outside Germany by 50% in the past 15 years, but their employment in Germany has fallen. The argument that foreign investments serve to secure employment in Germany is therefore anything but convincing. So the investment gap does not mean that private companies are making wrong decisions. For economic policy there are compelling questions, such as how it can shape the framework conditions for private investments in Germany in such a way that both domestic and foreign companies make more investments in Germany in the future.

Some have argued that there is public but not private investment weakness is contradictory and wrong. An efficient public infrastructure not only serves the private consumption and pleasure of its citizens, but is an essential prerequisite for the competitiveness of private companies. Inadequate public infrastructure therefore also leads to lower private investments.

Expert commission proposals

In August 2014, Federal Minister of Economics Sigmar Gabriel appointed an expert commission to “Strengthen Investments in Germany”. Its 21 members, including four academics, presented a ten-point plan for investment, growth and employment in April 2015.4 Even if there are different positions within the commission on the subject of taxes and the private financing of public investments, this is how the plan forms but an unusually broad social consensus. It aims both to open up new options for action for the state and, above all, to the municipalities, as well as to strengthen market mechanisms and improve incentives for private investments.

The Commission proposes a stronger self-commitment of the state with regard to public investments. He should be legally bound so that investments are at least high enough to compensate for the depreciation on state assets. The Commission is not questioning the debt brake, but is in favor of a budgetary regulation so that financial leeway due to unexpected surpluses will in future be used as a priority for public investments. This proposal aims to offset the inherent asymmetry of the debt brake. Because in bad times, or when the public budget has to consolidate, it has so far been easy to cut public investments as consumer spending. Conversely, in times of unexpected income, these are often not used to compensate for the investment arrears. A good example of this are the priorities of the grand coalition in 2014, which aimed primarily at increasing consumer spending.

In addition, the Commission recommends the creation of a public transport infrastructure company for federal highways, which can not only operate more cheaply, but also ensure through its autonomy that federal highways meet the requirements in the future. This transport infrastructure company should receive all toll revenues and part of the mineral oil tax directly in order to avoid that these revenues are used for other purposes and that the infrastructure continues to lose value. Furthermore, this company should be organized for the most part in public hands but also under private law so that it can finance itself independently via the capital market in order to be able to cover this in years of high investment needs. The toll and mineral oil tax are sufficient for this company to be able to finance itself from this income in the long term. Whether the company has a state guarantee is of secondary importance. The aim is expressly not to create a shadow budget in order to avoid the debt brake. There are even some arguments in favor of not running such a society independently of the federal budget.

When it comes to public budgets, many municipalities in particular are suffering from a chronic investment crisis. The Reconstruction Loan Corporation estimates the municipal investment backlog at 118 billion euros. The expert commission recommends a “national investment pact for municipalities”, which should at least stop the further decline in assets with EUR 15 billion in the next three years. In addition, municipalities need capacities in order to be able to plan infrastructure projects. The commission therefore proposes the creation of an “infrastructure company for municipalities”, which is to provide advice to the municipalities in economic feasibility studies, the selection of procurement options and the planning process. Surveys of municipalities show that especially weaker and smaller municipalities often cannot even carry out profitability studies in order to systematically evaluate and plan investment projects.

Public-private partnerships

The private financing of public infrastructure - public-private partnerships (PPP) - is a controversial topic in Germany. Many PPP projects have failed, but there are also examples where the state was able to benefit. The Commission of Experts speaks out neither for nor against PPP per se. PPPs should only be installed if they are used by the state and society - that is, if their efficiency gains are greater than the higher private financing costs. The Commission proposes examining both a “public infrastructure fund” for institutional investors and a “citizen fund” for small savers. These funds are intended to bundle public infrastructure projects, thus reducing the risk for citizens and investors and ultimately lowering the financing costs for the state.

The topic of the PPP is a red rag for many in Germany. Indeed, PPPs are not always the best solution and in the past have certainly proven to be more expensive for the public sector in some cases. However, the aim of the public sector must be to provide an infrastructure for the citizens as cheaply and efficiently as possible. The financing costs, the efficiency of provision and maintenance as well as the risk of a project must be taken into account. For a small, financially weak municipality that wants to build a bypass road for 10 million euros, but whose costs could also amount to 12 million euros or 15 million euros, it can make sense in many cases to take out insurance against this risk.

The solutions proposed by the commission of experts are intended to enable such insurance and at the same time avoid the problems of past PPPs (in which, for example, private companies have filed for bankruptcy when there were significant additional costs, so that the risks ultimately remained with the public sector). This is done by bundling both projects and investors so that the overall risk is spread and thus the risk for each individual investor is minimized. This also means lower financing costs for the public sector than is usual for PPPs.

We should be open on the subject of PPP and not be guided by prejudices. It will certainly also be the case in the future that the best solution for many public projects is not PPP, but conventional procurement. Basically, the aim should be to give public decision-makers several options in order to be able to fulfill their mandate to provide a public infrastructure as cheaply and efficiently as possible. If the proposals of the expert commission succeed in improving and increasing public investments in Germany, then this should lead to a "win-win" situation in which there will be more conventional procurement as well as more PPP.

Promote private investment

In order to make Germany fit for the future, one must recognize and promote future issues for economy and society at an early stage. Many of Germany's competitors invest significantly more in research and development (R&D). That is why Germany should be more ambitious and aim for a target of 3.5% of economic output for R&D expenditure. Ways must also be found to support young companies in order to generate new ideas and make Germany competitive in many future-oriented industries. The expert commission has formulated a series of specific recommendations on how economic policy can create better framework conditions for private investments in four core areas - innovation, young companies, energy and digital infrastructure.

Germany is not the only country with major investment weaknesses. Europe is still deeply in crisis and growth and jobs must first and foremost be generated through increased private investment. The future of Germany and Europe are inevitably linked. Germany can only secure its prosperity if Europe emerges from the crisis and grows. The Expert Commission therefore welcomes the Juncker Plan to involve private capital in future investments. If it can be successfully designed, the Commission recommends that this Juncker Plan be made permanent. This would also require higher funding from the federal government for a joint European investment plan.

Germany is at a crossroads. Thanks to the favorable economic situation, low interest rates and the strong labor market, we have a unique opportunity today to arm Germany for the future and to lay the foundation for prosperity and employment for future generations. This requires higher private and public investments in a strong infrastructure, an efficient education system and an investment-friendly framework. The ten-point plan of the expert commission shows ways in which this can be achieved. We currently have all the prerequisites to achieve these goals. What is needed now is a stronger political will to implement it.

  • 1 C. Lewis, N. Pain, J. Strasky, F. Menkyna: Investment Gaps after the Crisis, OECD Economics Department Working Papers, No.1168; International Monetary Fund: Uneven Growth: Short- and Long-Term Factors, World Economic Outlook, April 2015; B. Barkbu, P. Berkmen, P. Lukyantsau, S. Saksonovs, H. Schoelermann: Investment in the Euro Area: Why Has It Been Weak ?, IMF Working Paper, No. 15/32, 2014; S. Elekdag, D. Muir: Das Public Kapital: How Much Would Higher German Public Investment Help Germany and the Euro Area ?, IMF Working Paper, No. 14/227, 2014.
  • 2 DIW Berlin and Handelsblatt Research Institute: Private Investments in Germany, Study on behalf of the Joint Committee of the German Commercial Economy, 2014, http://www.diw.de/sixcms/detail.php/489225.pdf (07/07/2015).
  • 3 G. Baldi, F. Fichtner, C. Michelsen, M. Rieth: Weak investments dampen growth in Europe, in: DIW weekly report, No. 27/2014, pp. 637-651.
  • 4 Strengthening investments in Germany, report by the expert commission on behalf of the Federal Minister for Economic Affairs and Energy, Sigmar Gabriel, http://www.bmwi.de/BMWi/Redaktion/PDF/I/investitionskongress-report- Gesamtbericht-deutsch-barrierefrei, property = pdf, area = bmwi2012, language = de, rwb = true.pdf.

Between (in) efficiency, (in) transparency and political interests

Holger Mühlenkamp

The need for a renewal and, in some cases, an expansion of the infrastructure in Germany and other countries, which has been discussed in specialist circles as well as in public, is largely undisputed. The expert commission “Strengthening Investments in Germany”, set up by the Federal Minister of Economics and Infrastructure, recently noted a general “investment weakness” in Germany affecting both the public and private sectors and presented recommendations on how to overcome it.1

In this article, the recommendations / proposals of the commission for securing sustainable public investments and for the provision of public infrastructure are presented first. The background to this is then examined and the recommendations assessed from an economic point of view. This contribution does not deal with the Commission's proposals to improve the general conditions for private investment and to improve the conditions for investments in private infrastructure.

Expert commission proposals on public investments and public infrastructure

In connection with the safeguarding of sustainable public investments, in the second chapter of its report the commission first discusses the reintroduction of an investment orientation as an addition to the new debt rule or a modified return to the “golden rule of financial policy”. According to this rule, a national debt that increases productivity and income opportunities in the future can be justified. This is in contrast to the strict “debt brake” currently in force. However, due to the bad experience with the old constitutional borrowing limit in accordance with Article 115, Paragraph 1, Clause 2, old version, and above all because of the problems with delimiting the concept of investment, the Commission rejects this idea. In the opinion of the Commission, a minimum investment quota, which is necessary in this context, would entail the risk of neglecting the state's advance payments for the private sector - education, health, public security, etc. - due to the problems in defining the term investment. In doing so, she takes the side of the scientific advisory board at the Federal Ministry of Finance.2 The Expert Council for the Assessment of Macroeconomic Development (SVR for Economy), on the other hand, had spoken out in favor of a (net) investment-oriented debt rule

Instead of a credit limit based on net investments, the Expert Commission prefers three other approaches to safeguarding sustainable public investments, which in their view are in line with compliance with the current debt brake:

  • The budgetary obligation to make public investments at least in the amount of the depreciation on the public fixed assets,
  • the budgetary obligation to prioritize the use of surpluses for public investment and
  • the creation of specialized institutions, i.e. independent legal entities that have sufficient income of their own to perform their tasks independently of the public budget.

In the third chapter, the commission then presents more specific recommendations for action for the provision of public infrastructure at local and federal level. Three measures are proposed to secure the municipal infrastructure:

  • The agreement of a national investment pact for municipalities (this means the provision of federal and state funds in the amount of the arithmetical consumption of municipal infrastructure in the last three years in the amount of at least 15 billion euros),
  • the establishment of one or more infrastructure company (s) that support the municipalities in planning, project selection and project implementation, as well as
  • “Public cooperation”, which means the increased cooperation between municipalities.

At the federal level, considerations are limited to trunk roads. To remove the "investment backlog" there, the Commission proposes the establishment of an infrastructure company for the federal highways ("transport infrastructure company"). This should meet the following characteristics:

  • Financing at least predominantly from usage fees without additional burdens for the car users,
  • its own "borrowing capacity" without a state guarantee as well
  • the guarantee of public control over federal highways, for which the company should be majority or exclusively owned by the public sector.

The Commission is striving for "a clear delimitation of responsibilities between the infrastructure company and the state". "This applies in particular with regard to a debt of society that cannot be assigned to the state sector and should therefore not be taken into account when checking compliance with the European Stability and Growth Pact." 4

Furthermore, the expert commission advocates new procurement and financing structures that would enable additional private funds to be used to finance public infrastructure. In doing so, “public institutions should play a stronger role than in PPPs (public-private partnerships), but the possibility of private financing in the sense of real risk transfer to private individuals should be retained” .5 In this context, two possibilities are outlined, namely

  • the establishment of an infrastructure fund for institutional investors, if necessary with the involvement of development banks and
  • a so-called citizen fund aimed at individual savers.


As already mentioned, the proposals of the expert commission are to be seen against the background of the so-called debt brake and the monetary policy of the European Central Bank (ECB). The debt brake adopted in 2009 makes financing infrastructure more difficult, ceteris paribus, since, unlike the old debt settlement, investments do not allow borrowing. The new debt brake, however, has two loopholes - apart from the question of adequate cyclical adjustment and the possibilities for interpreting particularly severe recessions, natural disasters and shocks - which was pointed out at an early stage in specialist articles.6 These are, on the one hand, PPPs and, on the other hand, so-called PPPs financial transactions.

With the cameralistic budget management practiced by the federal government and most of the federal states, the payment and expenditure flows of PPP differ from the timing of the payments or expenditure incurred in conventionally implemented projects. In the case of conventional projects, high expenditures and a corresponding borrowing must be shown as early as the investment phase, while private pre-financing can take place in the case of a PPP, which only gradually becomes effective for the budget when the “PPP installments” are paid. According to the payment-oriented finance statistics that are decisive for the German debt brake, more projects can be realized in the short term using PPP than in the conventional way. Politicians with a short-term orientation will hardly be able to resist this temptation, even if it entails higher budgetary burdens in the long term.7 This incentive is reinforced by the easy possibility of structuring PPPs in such a way that they are not assigned to the government sector according to the European System of National Accounts (ESA) become. This means that they do not affect the deficit in accordance with the so-called Maastricht criteria or the European Fiscal Compact. 8

Since, as noted by the expert commission, PPPs are viewed increasingly critically by the public, it is not surprising that other or further ways of circumventing the debt brake are now being sought. The politically attractive proposal to create institutions with their own borrowing facilities, whose borrowing does not count as national debt, is therefore not surprising. Politically, it becomes even more attractive if you combine it with the loophole “financial transactions”.

Financial transactions include expenses for the acquisition of equity interests, for repayments to the public sector and for lending. Conversely, the corresponding income is also included. The variables relevant for the German debt brake (and the Maastricht criteria) are to be adjusted in order to adjust financial transactions. This allows the federal and state governments to finance the acquisition of (shares in) companies by borrowing without affecting the debt brake. If the federal government now founds a transport infrastructure company, it can also finance its equity with loans. This would achieve the respectable feat of complete loan financing for the federal infrastructure company outside the borrowing limits

The current monetary policy of the ECB, which in turn is a consequence of the failed construction of the European monetary union, hardly allows institutional investors as well as private investors (without taking significant risks) to achieve significant returns. In the meantime, this represents a considerable problem for individual and institutional investors. This, for example, jeopardizes the return promises of funded (insurance) systems.

The proposals of the expert commission now bring together the interests of capital investors and (short-term thinking) politicians. Certain recommendations for action by the Commission, despite claims to the contrary, circumvent the debt brake and thus serve the interests of politicians. At the same time, they offer investors higher returns on capital than under current conditions.

Economic evaluation of the Commission's proposals

The proposal for a budgetary obligation to make public investments at least as high as the depreciation on public fixed assets is inconsistent with the argument put forward by the Commission that a minimum investment quota should be rejected because of the threatened neglect of areas such as education, health and safety. Investments in the amount of depreciation on fixed assets as a special minimum investment quota have exactly the same problem, because depreciation can only be determined on the available fixed assets. This does not include investments in education, health, safety, etc.

The budgetary obligation to use surpluses as a priority for public investments is problematic due to the procyclical effects. The creation of specialized institutions that have sufficient income to perform their tasks independently of the public budget leads to (increased) user financing. A source-based financing, e.g. of trunk roads - if it is intended - is on the one hand to be welcomed from a control point of view. On the other hand, the Commission would like to shape this institution (s) so that their debts are managed outside the state budget. This is diametrically opposed to a transparent disclosure of all government debts.

With regard to securing the municipal infrastructure, the proposal to provide federal and state funds once is generally acceptable if it is assumed that some of the municipalities' financial bottlenecks are due to insufficiently compensated delegated tasks. In the long term, however, establishing real connectivity is preferable. If municipalities then do not invest enough, it becomes clearer that the reasons for this cannot be assigned to higher-level local authorities. The proposal for increased cooperation between the municipalities is to be approved, because this can reduce efficiency losses due to uncoordinated action by neighboring municipalities and unnecessary multiple capacities. The establishment of one or more infrastructure companies to support the municipalities also makes sense. However, unlike, for example, the mixed-economy PPP Deutschland AG, these companies must or must operate independently of the business interests of private shareholders or be able to advise cities and municipalities genuinely independently and neutrally.

The proposal aimed at the state level to found an infrastructure company for federal highways, in the form proposed here, clearly serves to lift the debt brake, conceal state debts and increase returns for capital investors.10 By borrowing without a state guarantee, private financiers are enabled to demand an (additional) risk premium that would not be up for discussion in the case of direct government debt or in the case of a government guarantee. De facto, however, the federal government will not be able to let such a company become insolvent, so that a “no bailout statement” is ultimately untrustworthy. Therefore, the default risk of investors is fictitious and should - as it looks - only serve to justify higher private returns.

Since the funds proposed by the Commission to attract new groups of investors should not receive any government guarantees either, investors are at least pro forma exposed to a loss and, because of the risk of not being able to sell their units prematurely, a liquidity risk. These risks are priced into the return expectations of investors and thus induce correspondingly high financing costs for the public sector or, in the case of user financing, correspondingly high fees to be borne by the users. Here, too, the question arises to what extent the public sector can afford to let the funds really fail, or whether private risks are not being faked again.

Moreover, if investors were actually to bear real risk, it would have to be examined whether this corresponds to an efficient risk allocation. Such funds are likely to be subject to so-called systematic risks (such as the traffic volume risk determined by the economy and global political developments) to a not inconsiderable extent. Such risks, which cannot be influenced by the fund (managers) and cannot be diversified, should, from the point of view of risk costs, be assumed by the taxpayer.11 There is therefore the risk of an inefficient risk allocation.

Overall, the basic direction of the Commission's proposals for state infrastructure financing is politically and economically understandable, but should be rejected from the point of view of efficiency and transparency. The recommendations basically point to an inefficient risk allocation and therefore expensive infrastructure financing with a reduction in the transparency of public debt. Significant, generally regressive12 redistribution effects are also likely to arise. Obviously, the costs of the smoldering euro crisis are to be shifted from investors to taxpayers and infrastructure users.

What are the alternatives? The creation of transparency in public debt would be easily achievable.13 All that would have to be done was to change the rules of German financial statistics and those of the European System of National Accounts (ESA 2010). Of course, a supplementary disclosure of the total debt or an adaptation of the double with full consolidation ("consolidated balance sheet") would be possible.14 This would, however, be tantamount to admitting that under the current rigid debt rules, ceteris paribus, adequate infrastructure financing is not possible or expenditure reallocations and / or higher Taxes are necessary.

Contrary to what the Commission of Experts saw, the current debt rules could also be changed. The introduction of a new indebtedness rule that allows borrowing up to the amount of the net infrastructure investment is technically relatively easy to accomplish. The necessary determination of the depreciation is not only possible under a double regime, but also by means of an extended cameralistic.Of course, it is important to ensure that no new workarounds are introduced. In fact, as noted by the Commission of Experts, this would mean that certain economically advantageous investments would be left out. Nevertheless, this path should be preferable to the threatened condition of a formally strict debt brake, which is, however, increasingly circumvented by indirect indebtedness and burdens future taxpayers more heavily than openly disclosed indebtedness.

The problem of low returns remains. Causal can only be based on the construction flaws of the euro zone and not on the national level. If capital investors are to be helped to higher returns in another way, the demand for transparency is both economically and democratically legitimate.

  • 1 Cf. Expert Commission on behalf of the Federal Minister for Economic Affairs and Energy: Strengthening Investments in Germany, Berlin 2015. The commission included representatives from science, business and trade unions. The union representatives sometimes formulated differing positions, which for reasons of space cannot be presented or discussed in more detail here.
  • 2 See Scientific Advisory Board at the Federal Ministry of Finance: On the debt brake for the federal and state governments - For a revision of the debt limits in the Basic Law, letter to the Federal Minister of Finance, Berlin 2007.
  • 3 See Expert Council for the Assessment of Overall Economic Development (SVR for Economy): Effectively Limiting Public Debt - Expertise on behalf of the Federal Minister of Economics and Technology, Wiesbaden 2007, pp. 45 ff. And pp. 73 ff.
  • 4 Commission of experts on behalf of the Federal Minister for Economic Affairs and Energy, loc. Cit., P. 41 f.
  • 5 Ibid, p. 44.
  • 6 Cf. H. Tappe: The new “debt brake” in the Basic Law, in: The public administration, 62nd year (2009), H. 21, pp. 881-890; C. Magin: The ineffectiveness of the new debt brake, in: Wirtschaftsdienst, Vol. 90 (2010), no. 4, pp. 262-268, http://www.wirtschaftsdienst.eu/archiv/jahr/2010/4/ the-ineffectiveness-of-the-new-debt brake / (07/07/2015); C. Hetschko, M. Thye: Adjusting for financial transactions - Achilles heel of the German debt brake, in: Deutsches Verwaltungsblatt (DVBl), June 15, 2012, pp. 743-746.
  • 7 Even or even the Federal Ministry of Finance sees this danger, but is of the quite naive or not really tenable view that it would be averted by profitability studies. In addition, the PPP volume is currently so low that state budget control is only marginally affected (see Federal Ministry of Finance - BMF: Compendium on the Federal Debt Brake, Berlin, undated, p. 18 f.). It should not be forgotten that the municipalities that book double-entry and do not fall under the debt brake have an incentive not to carry out PPP (solely) for economic reasons. If the PPP are designed in such a way that they do not have to be included in the balance sheet, the otherwise necessary disclosure of debts can be avoided. For the balance sheet approach, beneficial ownership is decisive (see the relevant decrees of the interior ministries of the federal states on legal transactions similar to credit), which falls to private individuals if the contract is appropriately structured.
  • 8 See H. Mühlenkamp: PPP and Government Debt, in: DICE-Report, No. 3, 2014, pp. 24-30.
  • 9 In anticipation of the political temptations, Magin cites the establishment of a federal highway company as an example; cf. C. Magin, op. cit. Not only the acquisition can be financed by credit outside of the debt brake, but also losses or the consumption of the equity of this AG can be compensated by issuing new shares, which the federal government acquires and financed with loans without affecting the deficit.
  • 10 If this idea were taken up, there would also be a distortion in favor of road construction. For example, the neglected and probably more environmentally friendly rail network would be left out.
  • 11 Criteria for risk distribution (“risk allocation”) are the ability of the risk taker to influence risks and the costs associated with assuming risk, which among other things depend on the risk aversion and risk-bearing capacity of the investors. In principle, influenceable risks should be transferred to those who can best influence them, but at the same time the risk costs must be taken into account so that a conflict between incentive and risk-bearing capacity can arise. If we assume that the risks of the funds can hardly be influenced and that the risk costs of the state are lower than those of private individuals, there is little to nothing in favor of private risk assumption in the present context.
  • 12 This is based on the hypothesis that the representative capital investor is wealthier than the representative taxpayer.
  • 13 See H. Mühlenkamp, ​​loc. Cit.
  • 14 In the event of full consolidation, the infrastructure company proposed by the Commission would be immediately unattractive because the company's liabilities would be recognizable as federal debt.

Public infrastructure: It doesn't work without additional funds

Fabian Lindner, Katja Rietzler

In Germany, there is a lot of catching up to do when it comes to investments in public infrastructure. There is now a broad consensus on this finding, which was controversial a while ago1. After the Federal Ministry of Finance downplayed the question of an investment backlog in the public infrastructure last year, 2 the German stability program also points out additional public investment needs and at the same time shows how this is to be covered Investing in Germany ”at the Federal Ministry for Economic Affairs and Energy, the topic has been given a prominent place. However, the final report4 presented by this body in April 2015 offers only a few concrete solutions for overcoming the investment backlog in the public sector.

Significant investment backlog

Since the implementation of the new European System of National Accounts (ESA) in 2010, the situation of public investments is at first glance not quite as dramatic as it was before the revision: By considering expenditure on research and development as investments, public investments are Net investment has not been consistently negative since 2003 as it was before. In particular, the federal states' spending on university research has significantly increased the reported level of public investment.

If you look at the net investments for the various local authorities, it becomes clear that the investment backlog is essentially a problem for the local authorities. Since 2003, the depreciation has consistently been greater than the new investments. The cumulative net capital consumption at current prices is 50 billion euros. The municipalities would have had to invest so much more in the period under review in order to at least keep the capital stock constant. In many areas, however, there are additional needs - for example to ensure inclusion - so that a mere stabilization of net investments is not sufficient.

In parallel to the data from the national accounts, figures on the public investment backlog are also published, which are based on surveys of the municipalities. In a recent survey, the Federal Ministry of Economics found a municipal investment backlog of 156 billion euros5 and the municipal panel of the Kreditanstalt für Wiederaufbau put the backlog at 132 billion euros.6 The investment backlog is particularly concentrated on municipal roads and schools. In the survey by the Reconstruction Loan Corporation, the municipalities stated that the investment backlog in roads and transport infrastructure accounted for 26% of the investment backlog, and 24% for schools and adult education. It must be taken into account that half of the surveys relate to the actual state sector and half to municipal companies and that, in contrast to the negative net investments in the national accounts, replacement prices and not acquisition costs are used as the basis.

Burden on municipalities through social spending as a major cause

Although various studies have also found major deficits in the federal transport infrastructure, 7 the large deficit in public infrastructure in Germany is primarily a municipal problem that originated in the early 2000s. A number of stressful factors came together at that time. In addition to the economic downturn following the bursting of the dot-com bubble, the massive tax cuts by the red-green federal government had an additional negative impact on the revenue side of the state budget.8 The subsequent austerity measures to comply with the Stability and Growth Pact exacerbated the economic downturn and had further negative repercussions on the revenue side . While this affected all local authorities and the income situation improved again due to the upswing in the middle of the decade and the VAT increase in 2007, the municipalities were also exposed to massive financial burdens after 2000 due to the sharp rise in social spending. In the process, the municipalities were given a considerable amount of additional tasks and standards were raised, without this being accompanied by higher funding.

This violation of the principle of connectivity (“whoever orders, pays”) is one of the reasons for the financial misery of many municipalities. While the expenditures of the municipalities in the delimitation of the national accounts increased by 83% in the period from 1991 to 2014, the social benefits increased in the same period by 170%. As a result, their share of the municipalities' expenditure increased significantly. In parallel, the share of municipal investments fell. At the same time, the municipalities have greatly expanded their holdings of cash advances since the late 1990s. These short-term loans are actually intended to bridge liquidity fluctuations during the year and not as a long-term financing instrument. In fact, however, they have been increasingly used since the late 1990s to compensate for an insufficient income base of the municipalities. At the beginning of the last decade in particular, there was a considerable expansion here as a result of reduced tax revenues and rising social spending. At the end of 2014, the cash loans of the municipalities and municipal associations (excluding city-states and special-purpose associations) amounted to almost 50 billion euros.

However, the municipalities as a whole have recorded significant financial surpluses for several years. The supposed contradiction between surpluses on the one hand and growing cash advances on the other is resolved if one takes into account the strong regional differences in municipal financial resources and expenditure. Municipalities affected by structural change, which are already struggling with high unemployment, declining population numbers, weak financial strength and social problems, were mainly hit.9 They have taken out a particularly large amount of cash loans and at the same time invest significantly less. This is especially true for the municipalities in North Rhine-Westphalia and Saarland. As the study by the Reconstruction Loan Corporation shows, the disparities between the municipalities continue to increase

The report of the expert commission leaves essential questions unanswered

Against this background, how should the proposals of the expert group “Strengthening Investments in Germany”, which Economics Minister Sigmar Gabriel set up, be viewed? The Commission's report11 recognizes that the investment backlog in the government sector is largely at the local level. However, it contains hardly any practical suggestions as to how the problems can be solved there. The “National Investment Pact for Municipalities” that the report calls for is not wrong, but it does not bring anything new either. In addition, in view of the above figures, a total volume of 15 billion euros over three years is not likely to be sufficient by far. In addition, a real solution must take into account the heterogeneous financial situation in the individual municipalities. Since this is significantly influenced by social spending, a solution that focuses on social spending would be expedient. To this end, the Bertelsmann Stiftung recently proposed increasing the federal contribution to the cost of accommodation from around 30% to 65% at present.12 A very important aspect of this proposed solution is that it should apply permanently and not just temporarily like this in the "National Investment Pact for Municipalities" is being considered.

In addition, the report recommends “strengthening municipal capacity” and an “infrastructure company for municipalities” as well as examining whether public cooperation is superior to previous procurement procedures or public-private partnerships (PPP). Here it says: "If there are no longer sufficient capacities in the municipalities, these should be (re) built." That costs money. Even if funds can partially be saved through more efficient organization and cooperation, viable solutions must show how additional needs can be met. The federal government also has to somehow finance additional aid for the municipalities.

The report of the expert commission does not provide a satisfactory answer to the most important question, namely where additional funds should come from for additional investments. This is hardly surprising, because two conceivable solutions - tax increases and loan financing - were ruled out by the federal government from the outset and are only addressed by the minority of union representatives within the framework of the expert commission. The recommendation to use unexpected federal budget surpluses primarily for public investments13 makes little sense. This would result in investment activity based on the cash situation, which would also have a procyclical effect. The maintenance and expansion of the public infrastructure is a constant and long-term task.

One focus of the Commission's report is on the “mobilization of additional private infrastructure financing” - either through a “public infrastructure fund”, in which private investors can also invest, or a citizens' fund. At the municipal level, PPPs should also be implemented more cheaply and with less risk, 14 although the Commission takes a critical view of PPPs. The problem with all three measures: They do not generate any additional income for the state, but rather represent forms of credit financing or a credit-like legal transaction. However, credit financing for the public infrastructure is only possible to a limited extent due to the debt brake and the European fiscal pact. But if credit financing is severely limited politically, new funds will be of little use as lenders. Even if investments could be made more efficiently through these instruments, how can they contribute to additional investment? The main effect may be higher returns for investors.15 The question the report was supposed to answer, however, was how investments in Germany can be strengthened and not how, given the current low interest rate environment, returns can be increased.

Private capital is actually only considered for two purposes: loan financing and privatization, whereby in the case of the latter it would first have to be clarified whether this would be politically desirable at all. In any case, privatization would mean that the respective users would pay for the provision of the infrastructure in question. Conversely, user financing is also possible without privatization. Indeed, it is the only alternative to tax hikes and credit financing, given that revenue-neutral budget shifts are limited. However, user financing would not be suitable for many infrastructure areas - especially municipal roads and buildings, which account for a large proportion of the investment backlog.

The only serious contribution to be discussed by the commission relates to the federal level. It consists of the proposal to transfer the federal highways into a separate public company that could independently take on debts and finance its interest and other expenses through a toll. This model has existed for a long time in Austria with the so-called ASFINAG. It is a publicly owned company, but according to Eurostat rules it is not assigned to the government sector and its debts and deficits are therefore not taken into account in the European fiscal rules. The most important criterion for the distinction between the sectors “state” and “non-financial corporations” is the type of income that the respective institution realizes. If most of the income is generated from the market - as is the case with the 100% state-owned railway - then the institution is not assigned to the “state” sector, but to the “non-financial corporations”.Insofar as a possible infrastructure company for the federal highways would finance itself primarily through tolls, this would also apply to them. 16

The majority of the expert commission recommends waiving state guarantees for the infrastructure company for the federal highways, and justifies this with the need for a clear sector delimitation.17 This is misleading because the company's debts are not included in the "state" sector, even with a state guarantee, if the criterion of predominantly financing through market revenue is met.18 The expert commission should be well aware of this, because the report confirms that the debts of ASFINAG, for which the Republic of Austria guarantees, are not attributed to the state sector If the company's financing costs and thus ultimately the necessary tolls are reduced, the recommendation of the commission means an unnecessary increase in the cost of the federal transport infrastructure for users. In any case, these would be more heavily burdened with toll-financed federal highways compared to tax financing. However, this additional burden can be justified more easily with the transport infrastructure, which also has negative external effects, than with education.

Federal government measures still inadequate

The problem of the investment backlog is now recognized, and the federal government is increasingly contributing to municipal social spending. For example, since 2005, the federal government has borne part of the accommodation costs for jobseekers and, since 2014, the costs of basic security in old age and in the case of reduced earning capacity to 100%. In addition, the municipalities are to be relieved of 5 billion euros annually within the framework of the planned Federal Participation Act, with the federal government providing the municipalities with additional funds in advance. In addition, the municipalities receive 5 billion euros directly for municipal investments, of which 3.5 billion euros are to flow into a special fund to promote investment in financially weak municipalities. With these and other measures, the federal government is relieving the municipalities considerably. At the same time, additional funds are also planned for the transport infrastructure in the coming years.20

The federal government is thus tending to be on the right track. Investment promotion measures especially for financially weak municipalities are particularly helpful in overcoming the investment backlog. In order to reduce the growing disparities in municipal finances, the federal government could tailor its measures even more to the particularly needy municipalities. In doing so, he could follow the proposal by Geißler and Niemann21 and implement the already planned relief for the municipalities by significantly increasing the federal share of the cost of accommodation for jobseekers. Against the background of the debt brake being exceeded by almost EUR 120 billion by last year, the measures to relieve the municipalities in particular could have been taken much earlier. In addition, solutions to the problem of cash loans also need to be found. Since these are closely related to the violation of the principle of connectivity, the federal government has a duty to help overcome this legacy.

If you wanted to gradually reduce the investment backlog and work on expanding the portfolio at the same time, this would result in additional requirements of around EUR 10 billion to EUR 15 billion annually over a longer period of time. Both the debt brake and the fiscal pact allow limited indebtedness independent of the economy. A loan-financed expansion of investments would therefore be compatible with the current fiscal rules. This applies all the more to an expansion of net investments, which the Council of Economic Experts22 wanted to exempt from a debt brake. Any additional needs should be financed through tax increases. Against the background of the ruling by the Federal Constitutional Court, a significant increase in inheritance and gift tax would be appropriate, in particular by abolishing the privileges for business assets. Long-term deferral options and the option of silent participation for the state are sufficient to protect jobs in inherited businesses.

  • 1 Deutsche Bundesbank: On the development of government investment spending, monthly report of the Deutsche Bundesbank, October 2009; Expert council for the assessment of macroeconomic development: Against a backward-looking economic policy, annual report 2013/14, Wiesbaden 2013; Federal Ministry of Finance (BMF): Weak investment in Germany? An analysis of investment activity in an international comparison, BMF monthly report, March 2014.
  • 2 Federal Ministry of Finance, loc. Cit.
  • 3 Federal Ministry of Finance: German Stability Program, 2015 update, Berlin, April 2015.
  • 4 Expert Commission "Strengthening Investments in Germany": Strengthening Investments in Germany, Report of the Expert Commission on behalf of the Federal Minister for Economic Affairs and Energy, Sigmar Gabriel, Berlin, April 2015, http://www.bmwi.de/BMWi/Redaktion/ PDF / I / investment congress-report-overall-report-german-barrier-free, property = pdf, area = bmwi2012, language = de, rwb = true.pdf (24.6.2015).
  • 5 Federal Ministry of Economics and Technology: Online survey shows great need for municipal investment, in: Schlaglichter der Wirtschaftsppolitik, Monthly Report May 2015, pp. 34-42.
  • 6 Reconstruction Loan Corporation: KfW Municipal Panel 2015, Frankfurt a.M., May 2015.
  • 7 K.-H. Daehre et al .: Report of the Commission “Future of Transport Infrastructure Financing”, December 2012, http://www.verkehrsministerkonferenz.de/VMK/DE/termine/sitzungen/12-12-19-uebergabe-bericht-kommission-zukunft-vif /Report-Kommm-Zukunft-VIF.pdf;jsessionid=9F54FE7E40078A224E39495AA9986159.2_cid382?__blob=publicationFile&v=2 (24.6.2015); U. Kunert, H. Link: Transport Infrastructure: Preservation of Substance Requires Significantly Higher Investments, in: DIW weekly report, No. 26/2013, Berlin, pp. 32-38.
  • 8 A. Truger: Economic and social costs of tax cuts: The example of the red-green tax reforms, Prokla 154, March 2009.
  • 9 German Association of Cities: Social benefits of cities in need, facts and figures on the development of municipal social spending, Cologne 2010.
  • 10 Kreditanstalt für Wiederaufbau, loc. Cit.
  • 11 Expert Commission "Strengthening Investments in Germany", loc.