KfW Municipal Panel 2017: Signs of easing but no all-clear just yet

• Good general economic conditions and reduced financial strain open the door to more investments
• Municipal investment backlog is falling but remains substantial at EUR 126 billion
• German municipalities' financing situation on the credit market remains positive

Following an ongoing rise over the last few years, the perceived investment backlog in German local authorities, municipalities and cities has fallen: in 2016, it still stood at EUR 126 billion; this is EUR 10 billion lower than the previous year. "The efforts undertaken by the German Federal Government, states and local authorities have generated their first successful results," said Dr Jörg Zeuner, Chief Economist at KfW Group at the presentation for the 2017 KfW Municipal Panel in Berlin. "However, there is still room for improvement, particularly with regard to roads and schools, both of which are still very high at EUR 34 billion and EUR 33 billion respectively. It is definitely too early to give the all-clear, even though plenty of treasurers are expecting to be able to reduce the investment backlog even further." A total of 35 % of the municipalities questioned predict further cuts to the investment backlog over the next five years. Overall, municipalities aim to invest around EUR 1 billion more than in 2016, equalling an estimated EUR 31.7 billion.

These encouraging signs of increased investment by the municipalities can be traced back to the positive situation in their finances and budgets over the past 12 months. They were able to reduce debt levels and interest payments slightly in 2016 and also achieved a surplus for the third year running. "For the first time in a long time, even municipalities with poor finances have been able to step up investment. However, the regional disparities have not disappeared. All federal levels must continue to work on a solution to this problem," explained Dr Zeuner.

Permanent solutions are required if the investment backlog is to be reduced over the long term. "Sustainable reduction of the municipal investment backlog requires reliable planning for the municipalities and improved structures for their capacity levels. In addition to appropriate financing and staffing, this also calls for efficient administrative structures and processes," said Dr Zeuner.

As well as their own capital and allocation of funds, municipal loans are the most important sources of investment finance for municipalities. Thanks to low interest rates and a satisfactory credit supply, the conditions on the credit market remain positive for the majority of municipalities. In future, treasurers are expecting municipal loans to become even more important. The credit supply has not changed for the majority of municipalities; however, around one third of them, including a number of cities with high levels of debt, have seen a downturn in the number of credit offers available. "Closer assessment of this special topic of municipal credit management this year shows that the municipalities have already developed a range of strategies for dealing with changes on the market. In light of future challenges, such as an economic slowdown, they should continue to optimise these strategies in future," said Dr Zeuner.

Note:

The KfW Municipal Panel was set up in 2009 by the German Institute for Urban Affairs (Difu) on behalf of KfW. The panel is the largest regular survey of German treasurers in urban municipalities, rural municipalities and district communities with over 2,000 inhabitants. The representative survey focuses primarily on the municipalities' financial position, investment activity and financing.

The report, infographics and further information are available at: KfW-Group KfW-Research/KfW-Kommunalpanel - www.kfw.de/s/dekOTcN