The Future of Project Financing in Germany

I. Starting point

Germany with regard to project financing is very much like a developing country. This form of the assessment of large-scale projects on the basis of future profit potentials of the investment to be financed is from a German perspective the domain for the extraction of raw materials in developing countries, exotic foreign infrastructures or worldwide telecommunication projects. Therefore, German law firms, advisors and banks are mainly focussed on foreign project financings.

The dividing lines between the various forms of financing are fluid. The more important and significant the project to be financed is in comparison to the size of the company, the more the risks of the project are in the foreground, even without considering project financing. Frequently however with German infrastructure projects there exist (concealed or open) reverting rights (Full Recourse Financing) so that the characteristics of project financing are not being fully realised. As far as the press discusses German project financing, it is mainly concerned with funds and tax-orientated models. Quoted advantages are here particularly the reduction of time taken for construction, the lowering of building costs as well as the general advantages of outside construction management.

Local financings are based regularly on very favourable public sector loans or guarantees. A changed market situation and increased tougher legal requirements have forced the employment of new forms of financing. Thus the international project-financing model can be viewed as part of the future market in Germany.

II. Framework conditions

1. Project financing and privatisation

   In the sector of local government the financing of local infrastructure measures by project financing often means a privatisation of previously original municipal areas of responsibility. Here one has to take the restrictions into account, which result from the German constitutional law. Large areas are from the view of the public law "belong exclusively to and are held in reserve" for the sovereign, so that they are the sole and final responsibility of the municipal monopolies. Thus in accordance with current thinking waste management particularly, i.e. wastewater purification and refuse incineration belongs into this category. This public law problem however does not occur in the areas of traffic, public utility and telecommunications.

   There is an urgent need for investment for example in the refuse incineration sector. In Germany housing estates currently account for about 30 million tons refuse. About two thirds go straight to one of the 350 disposal sites. About one third is incinerated. The clinker is partly stored, partly used. In 2020 at the latest no refuse should be going to such disposal sites. After the year 2005 only pre-treated refuse can be permitted to be deposited. This results from the technical instructions regarding refuse from housing estates ("TASi"), which has already been passed as a regulation in 1993. As currently the about 60 operating refuse incineration plants or refuse heating power stations have an annual capacity of normally up to 400,000 tons, the requirements for investment and financing are obvious.

   In addition to refuse incineration, Germany has an important investment need for the redevelopment and the extension of the sewage water disposal plants, the extension and maintenance of the traffic infrastructure, the revitalisation and recycling of industrial sectors, the creation of high-quality housing estates as well as the provision of further public facilities and urban development projects.

   Particularly in Germany the European electricity market is under a strong pressure to liberalise. The loss of regional monopolies and with that the right to distribute electricity in the framework of the new energy law enables new providers entry into the market. This makes the future construction of merchant power plants i.e. power plants without fixed energy purchase contracts by energy suppliers possible.

   For the market of possible project financing it is, however...