KfW Municipal Panel 2016: German municipalities report investment backlog of EUR 136 billion

• German municipalities report EUR 136 billion investment backlog
• Investment need is particularly high in schools and education, road and transport infrastructure
• Municipal treasurers anticipate rising spending needs to integrate immigrants and refugee children

The observed investment backlog declared by municipalities, districts and cities rose from EUR 132 billion in 2014 to EUR 136 billion in 2015; investment activity thus remained below expectations. Funding conditions were good for most municipalities, with 15% to 32% identifying improvements for loan with certain maturities. The municipalities also generated a total financing surplus of EUR 3.1 billion. "However, the disparities between financially strong and financially weak municipalities with respect to budget balance, debt and investment levels have deepened further", said KfW Group Chief Economist Dr Jörg Zeuner today at the presentation of the 2016 KfW SME Panel at KfW's Berlin branch. Investment by municipalities operating with an unbalanced budget (some 28%) was more than one third lower in total. These municipalities also find it significantly more difficult to ensure the maintenance of existing infrastructure. "Municipalities with weak finances in particular still need to be strengthened financially so they can invest, as otherwise the downward spiral will accelerate. Not just the federal government, but also the state governments and local governments themselves have the duty to ensure that they have adequate financial resources and an effective local administration", said Zeuner.

Municipalities expect investment expenditure to rise by just under 9% for the current year to a total of EUR 26.7 billion (EUR 24.5 billion in 2015). The lion's share will go to road and transport infrastructure (EUR 8 billion) and the school and education sector (EUR 6 billion). These are also the sectors with the highest investment backlog, with EUR 35 billion needed in road and transport infrastructure (EUR 34 billion in the previous year) and EUR 34 billion in schools and education (EUR 32 billion in the previous year). Asked which area will have the greatest financial impact, 80% of the surveyed municipalities pointed to the schools sector as the one with the highest increases in the years ahead. A large portion of expenditure will go to integrating immigrants and refugee children. "The city treasurers have definitely made an accurate assessment of the situation. We will have to invest significantly more in our schools and educational institutions. This is necessary not just to integrate young refugees, but also to make our country fit for the future", Zeuner added.

For many municipal treasuries the past year was already marked by the refugee influx. By their own accounts, personal and financial pressure weighed heavily on the municipalities, for a long time creating great uncertainty about how to plan and fund necessary measures. The results of the KfW Municipal Panel hence indicate that investments can be delayed or even fail to materialise not just because of financial bottlenecks, but also as a result of organisational deficits and staff shortages.

Municipalities currently have easy access to funding on the credit and capital market. Their growing use of the credit market to fund investments goes hand-in-hand with a reduction in municipalities' own funds. The low-interest phase is hardly leading to broader investment activity, so the backlog remains on a high level. "The municipalities should therefore make use of this favourable financing environment to start urgent investments with more determination than before", Zeuner concluded.

Note:

The KfW Municipal Panel is a survey conducted by the German Institute for Urban Affairs (Difu) on behalf of KfW Group since 2009. It is the largest periodic survey of treasuries in cities with district status, districts and district towns in Germany. The core areas covered by the survey are municipal finances, municipal investment and its funding. The report and further information can be accessed at www.kfw.de/kommunalpanel.