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Thursday, 21 May 2015

Jump-starting infrastructure investment in Germany: what role for public private partnerships?

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Speaker: Jeromin Zettelmeyer, Director-General, Economic Policy, Ministry of Economic Affairs and Energy, Germany
Chair: David Vines, Department of Economics, University of Oxford

Germany is considering restructuring how it finances domestic infrastructure. This is of interest to non-Germans too, since infrastructure spending could eat into some of Germany’s 8% current account surplus, helping to correct the macroeconomic imbalances currently plaguing Europe.

But while that might be a pleasant side effect, that’s not the German motivation for this investigation. Instead, Germany wants to rejuvenate its domestic infrastructure, some of which is languishing after municipalities’ spending on construction and maintenance dropped to an all-time low.

In May, Jeromin Zettelmeyer, currently Director-General of the Economic Policy unit at the Ministry of Economic Affairs and Energy in Germany, delivered an excellent PEFM seminar on strategies for fuelling infrastructure investment in Germany.

In the World Economic Forum’s 2014-2015 competitiveness rankings, Germany’s infrastructure ranks 7th globally, ahead of France (8), the UK (10), the USA (12) and Canada (15). But a gap has accumulated between the desired and actual infrastructure stocks: the German infrastructure is in some cases not meeting the public or the economy’s needs.

Other advanced economies, especially the UK, have worked with private funding to augment public sector investment in infrastructure. In spite of the UK’s difficult experience with public-private partnerships (PPPs), such partnerships are thought to correct for some of the inefficiencies of public infrastructure investment.

Since maintenance commitments are written into the original contract, PPPs take a ‘life cycle’ approach and don’t exhibit the same bias against maintenance that publicly funded projects sometimes do. Laying foundation stones for new projects presents photo ops, while routine maintenance does not.

PPPs can also be more cost effective with respect to procurement than traditional, government-funded infrastructure projects. Similarly, PPPs can be less prone to cost and time overruns than traditional government projects.

Yet, PPPs have not taken off in Germany. Only in the last five years have some municipalities experimented with private funding for infrastructure investments. Zettelmeyer and his team wanted to find out why this was, so they conducted a wide-ranging survey of CFOs of German municipalities.

Their findings were surprising: while there was agreement that PPPs were probably more cost-effective and efficient, the majority of civil servants had a very negative view of PPPs. The main reason: anxiety about long-term dependence on private parties. This skepticism was less if a municipality had had a previous experience with a PPP.

These results reveal a deep-seated German suspicion about private finance in public projects. Responding to these trends, a series of proposals have been put forward that could improve the quality of infrastructure investment in Germany, connecting available private finance to much needed projects, and also assuage concerns about the conventional PPP model.

Firstly, Germany is considering introducing a federal roads and motorways corporation. Austria already has such a company, which issues bonds and directly finances the country’s roads. Germany is contemplating a similar model, but without government guarantees for the company.

A second option would be a public municipal infrastructure agency, advising municipalities in planning and implementing public investment, maintaining a strict neutrality between conventional procurement and PPPs.

Finally and most radically, the country is considering a public infrastructure fund that would pool investor funds by selling equity, and then invest in municipal infrastructure projects. For investors this would generate bankable projects, accessible to investors who might be unable to go into a PPP independently. For local government it may address trust issues that come from dependence on private investors.

Germany is exploring innovative solutions to funding infrastructure. Britain’s experience suggests the PPP model could do with improvement, and the US is also looking for strategies to tackle its crumbling infrastructure. Perhaps these German experiments could be instructive for others.

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