If it ain't broken ...

IFR Germany Report 2014
8 min read

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Overall, Germany’s infrastructure is enviable. Germany scored an overall 6.2 out of 10 on the infrastructure rankings of the World Economic Forum’s 2013–14 Global Competitiveness report. It fared better than the US, which was only rated 5.7 out of 10 for the overall quality of its infrastructure.

Today, though, roads and other infrastructure built more than 20 years ago are starting to show some serious signs of decay, and although the German authorities have said infrastructure is a concern, no one is quite sure whether anything significant will be done in the near term. Infrastructure spending has been, and still is, a small part of the German budget – a mere 0.6% of GDP, said Aaron Visse, portfolio manager at Forward Investing, which is insufficient for a developed economy.

“Germany has had an irrational fear of inflation and that has led the country to follow policies of austerity for years,” he said. “The amount that’s spent on infrastructure is far too low for its proper upkeep and maintenance.”

Proper infrastructure is the backbone of any economy, Germany’s included, and more needs to be done to keep the country’s infrastructure networks in a good state, said Thomas Brehler, global head of transport and social infrastructure at KFW-IPEX Bank in Frankfurt

“Our aim now should be to concentrate on maintaining the infrastructure we have,” said Brehler. “We’re seeing a number of warning signals now that the time has come to do something about heavily trafficked roads, railways and bridges, which are showing signs of over-usage and wear and tear.”

“Germany has had an irrational fear of inflation and that has led the country to follow policies of austerity for years. The amount that’s spent on infrastructure is far too low for its proper upkeep and maintenance”

A number of groups have issued reports stating that failure to invest properly in areas such as transportation and schools could hamper future economic growth. A report from the German Institute for Economic Research issued in June 2013 stated that Germany’s potential annual growth could slip to 1% from 1.6% by 2017 if infrastructure concerns were not addressed. Germany’s response thus far has been either to increase tolls on heavily trafficked roads or even close some of them down.

The way forward

Brehler believes one of the best solutions for upgrading infrastructure would be to bring in the private sector through the increased usage of public-private partnerships .

PPPs have not been as common in Germany as elsewhere in Europe, but there has been some interest. PPPs have been employed in a number of ways, such as motorway-widening projects to increase autobahn lanes. The A-model A8 Motorway project is a good example.

The first of four pilot projects, the PPP scheme that involves Dutch company BAM PPP, aimed to widen a stretch of one of Germany’s most heavily used motorways. The scheme was financed in 2007 and is backed by vehicle tolls collected on behalf of the federal government through a 30-year concession. The first A8 project was followed by several other A-Model road schemes, while other projects such as the A7 and the A94 are expected to follow.

Experts are also hoping that the rolling out of the European Investment Bank’s Project Bond Initiative, which aims to shift the burden of infrastructure financing across Europe away from the states and banks – which have always played an important part in extending loans – to the institutional investor market, will also take hold in Germany.

Certainly, the idea has appeal in Germany, and although there are still some legal hurdles to be cleared, both the public sector and bond investors are willing to overcome these obstacles, said Daniel Reichert-Facilides, a partner at law firm Freshfields Bruckhaus and Deringer, “the former, by structuring the procurement process [so] that bonds can effectively compete with loans, and the latter by offering committed pricing for significantly longer periods than customary in the capital markets”.

“There is definitely appetite for bonds in German infrastructure assets in the institutional investor market and this is evidenced by the success of several loan-to-bond acquisition financings of energy grid assets in recent years,” Reichert-Facilides said. “On the PPP side, the A7 availability scheme road project would be the first one to close – except for an early attempt a few years ago, which ended up on banks’ balance sheets and therefore does not quite count if you look at the institutional investor market.

“The public sector in A7 clearly indicated its interest in a bond financing, subject to competitive pricing of the overall bid, so my impression is that the EIB project bond initiative has helped a lot to promote the idea in Germany, even beyond the potential use of its own credit enhancement instrument,” he added.

Across Europe, project bonds are starting to play a bigger role in infrastructure funding, and the refinancing of the R1 motorway in Slovakia, where KFW-IPEX Bank was a major investor, is a good example of this, Brehler said, adding: “In Germany, many investors are now showing an interest to build up an infrastructure portfolio and Germany is a country everybody wants to invest in.”

Despite the great potential that project bonds offer, the idea has not yet produced concrete results in Germany. Eric Heymann, senior economist at Deutsche Bank, puts it down to a lack of political will.

“There would be more than enough private money that could be integrated in infrastructure financing, in areas like the autobahns, for example, where you can really calculate how much traffic goes through and monetise properly,” he said. “The autobahns are not a greenfield project, which could draw opposition, but it just seems that in Germany there’s little agreement between the two leading parties and little willingness to include private capital to support PPPs.”

In Germany, too, banks and private investors were still willing and able to provide even larger portions of debt and equity for German infrastructure and PPP projects at competitive terms, said Juergen Bufka, managing director at Amber Infrastructure, which is why the EIB’s project bond initiative has not been applied so extensively as it has elsewhere in Europe.

Ecological consciousness

Bufka also said that one of the biggest impediments to infrastructure revamping overall was the strong opposition by local environmentalists and the political parties they support.

“Every time there’s a proposal – even if it’s a green project such as wind power or new power grids – there is strong local opposition to it; so in Germany, it’s not so much a question of money as it is one of mentality,” Bufka said.

The well-known case of Stuttgart 21 is a prime example of the power of German public opinion. The ambitious and costly infrastructure project, which was announced in 1994 and aims to link Stuttgart to other cities with high-speed, underground and overground rail links, as well as building a new station, met with ferocious opposition.

Nicolas Painvin, head of infrastructure at Fitch, believes that the opposition to Stuttgart 21 underscores the difficulty of clearing large-scale infrastructure projects in Germany. Nevertheless, he said, the Stuttgart station was more of a “new, urban construction than infrastructure per se. Germany does need to play catch-up with its railways and roads, but I’d say that there has been and continues to be an effort to do that by funding renovations to existing roads and railways.”

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