The federal, state and local authorities provide an essential part of public services for millions of citizens. Whether infrastructure, hospitals or energy supply - the areas that are financed by the public sector are diverse and vital. However, public budgets have recently also come under pressure due to rising interest rates and high investment requirements. The demands on banks as reliable financing partners are also becoming more complex as a result.
Increasing financing requirements
The challenges for public budgets are complex. The turnaround in interest rates by the European Central Bank is also causing interest expenditure by federal states and local authorities to rise noticeably. This increase should not be underestimated, especially for cities and municipalities that are already heavily indebted, as the burden of expenditure is rising particularly sharply here. In addition, there has been an enormous need for investment in the public sector for years. In its municipal panel, KfW estimates the investment deficit at around EUR 160 billion at municipal level alone.[1] Added to this are necessary investments in future areas such as climate protection and digitalization, which also amount to hundreds of billions of euros.[2]
Digitalization is gaining momentum
In addition to public life, digitalization is also becoming visible in the financing process. Digital platforms such as komuno make it easy for public sector customers to obtain funding and communicate directly with potential lenders. ING Germany has been on the platform since March of this year and has already realized its first financing deals. For Michael Spahn, Head of Public Sector at ING Germany, the advantages are obvious: "Fast, simple, digital. What we want from banks in private life, we can also realize for public sector companies with the help of komuno. A win-win situation for everyone involved!"
Federal states issue green bonds
In addition to digitalization, federal states, cities and municipalities are increasingly addressing the issue of green financing. Linking interest rates to certain sustainability criteria or financing green projects is also worthwhile for the public sector, as investor interest in green bonds and long-term sustainability strategies has grown steadily in recent years, with some minor exceptions.
Two recent examples impressively demonstrate this interest. In order to finance sustainable projects from the 2021 and 2022 budgets, the state of Hesse issued a green bond for EURO 1 billion in June 2023 - the largest green bond issued by a federal state to date. The financing is allocated to specific sustainable projects and was assessed by the independent rating agency ISS ESG. The projects include, for example, investments in the expansion of local public transport, the reforestation of Hessian forests or a CO2-neutral state administration. The issue was more than 2.4 times oversubscribed.[3]
The state of Baden-Württemberg also issued its third green bond in June 2023 with a volume of around EURO 600 million. The financing will flow into energy-efficient new construction projects, the expansion of municipal infrastructure and reforestation measures, among other things. This third green bond was even more than 8 times oversubscribed.[4]
The megatrends of digitalization and sustainability will keep the public sector busy in various ways. Banks should support municipal companies with their specialist expertise to ensure that financing, whether via banks or the capital market, is successful in the end. After all, it is not only investors and public institutions that benefit, but ultimately the citizens too.
Society is transitioning to a low-carbon economy. So are our clients, and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on ing.com/climate.
[1] Raffer, C. und H. Scheller (2022), KfW-Kommunalpanel 2022, KfW Bankengruppe.
[2] Brand, S. und D. Römer (2022), Öffentliche Investitionsbedarfe zur Erreichung der Klimaneutralität in Deutschland, KfW Research Fokus Volkswirtschaft, 395, 19. Juli.
[3] https://finanzen.hessen.de/presse/hessen-begibt-groesste-gruene-anleihe-eines-bundeslandes-fuer-nachhaltige-investitionen
[4] https://fm.baden-wuerttemberg.de/de/service/presse-und-oeffentlichkeitsarbeit/pressemitteilung/pid/dritter-green-bond-bw-hohes-investoreninteresse