“The wave of modernisation has got off to a good start”

Things are moving – though not everywhere at the same pace or to the same extent. Significant activity is already underway in the defence sector, where the government has permitted exemptions from the debt brake. The situation regarding the special fund for infrastructure is more nuanced.

Of the total 500 billion euros, the federal government is spending 300 billion; 100 billion is going to the federal states and municipalities, and another 100 billion to the Climate and Transformation Fund. A considerable amount has already been disbursed at the federal level. At the regional level, it took a bit longer to establish the necessary legal frameworks. However, I am quite confident that investments will soon accelerate there as well – provided that planning and approval processes become even more efficient and faster.

500 billion euros sounds like a huge amount at first, but it will still fall far short of what is needed to modernise Germany. That requires additional capital. There are various ways for the public sector and private investors to jointly finance projects – and each has its strengths, depending on the specific context.

There are various ways for the public sector and private investors to jointly finance projects – and each has its strengths, depending on the specific context.

In first-loss arrangements, for instance, the state assumes the initial portion of any losses incurred. This is particularly suitable for new technologies and markets where adoption rates or chances of success are difficult to predict. By cushioning some of the risk, the state makes it possible for investors and banks to participate in such projects in the first place.

For major infrastructure projects like road construction, traditional public-private partnerships are often more appropriate: private providers typically handle the construction and operation of the project, while the state pays regular fees over the long term – essentially like rent. This way, the public sector does not have to provide all the capital upfront, thereby retaining greater financial flexibility. There are also various other ways the state can provide security for private investors. One example is through Contracts for Difference, under which the state guarantees a certain level of demand or a minimum price.

The actual leverage achieved depends heavily on the specific instruments used. Some purchase guarantees make an investment possible in the first place, whereas other structures yield a lower leverage effect. All in all, however, that order of magnitude is realistic.
There is one other important point here: beyond the leverage effect, the state uses these instruments to send a strong signal that it believes in the projects in question.

You have to look at the project’s entire life cycle. Even if a project appears more expensive at the outset, it often works out cheaper for the public sector in the long run. The reason is that private providers possess extensive expertise in planning, implementing, operating, and maintaining projects. And, to state it clearly once more: many projects would never get off the ground without private capital, simply because the state lacks the necessary funds and capacity. However, to avoid misunderstandings and speculation, project costs and milestones should be transparent from the very beginning.

Many projects would never get off the ground without private capital, simply because the state lacks the necessary funds and capacity.

The wave of modernisation in Europe has got off to a good start – and everyone realises that Europe cannot remain competitive without significant investment. The list of encouraging projects is long: from renewable energy in Spain and offshore wind power and heating infrastructure in Denmark to the fact that a pension fund in the Netherlands is co-financing investments in roads and bridges. Where we can do even better is by acting together – for instance, regarding a European energy strategy that pays greater attention to the strengths of individual regions.