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projects, a key role for the Federal Ministry of Finance is to ensure that the capital project
portfolio fits into the long term capital budget envelope. The appropriation
allocated in the
budget is not for a single capital project. Rather, the appropriation mandates spending on
a portfolio of capital projects within a relevant category (e.g. road or rail investment).
Naturally the political level plays a key role in deciding which projects will be part of the
portfolio appropriation. As in most countries, political support for a project can be more
important than what technical cost/benefit estimates indicate. During budget execution
the appropriation framework allows some possibility for the government to change and
reallocate the funding within the portfolio. This has, however, been
subject to intense
debate as some members of parliament disapprove of the executive using such flexibility
with regards to the allocation of appropriated funds.
In a typical project cycle in Germany, the Federal Ministry of Finance acts as the
gatekeeper at key moments in the projects’ progress towards completion. The Federal
Ministry of Finance negotiates the budget for the planned projects of a given year with the
relevant ministry. It checks the contracts of certain projects with regard to their soundness,
realism and budgetary viability. The Federal Ministry of Finance will usually be part of the
steering committee of projects and will thereby ensure that it can monitor
the project as it
moves from the project identification stage to the preparation stage, procurement stage
and implementation stage. At the end of both the preparation stage and the procurement
stage the Federal Ministry of Finance must give its approval for the project to move
forward. At the same time the Federal Ministry of Finance notifies the Parliament’s Budget
Committee. For example, regarding transport infrastructure, the Federal Ministry of
Finance negotiates the budget for the planned projects for a given year with the Federal
Ministry of Transport. For the federal trunk roads, the projects
are listed in the road
construction plan (
Straßenbauplan
) and are attached to the federal budget as a supplement.
Major projects in the sectors of rail and waterways are listed in the budget itself. This is to
ensure, that public money is spent only for the listed projects. In addition, the Federal
Ministry of Finance checks any important draft contracts in the railway sector which
provide the legal basis for financial relations with the state owned rail company Deutsche
Bahn AG. As noted above, contracts are checked with regard to their soundness, realism,
and budgetary viability. In the case of construction of buildings etc. according to Section 24
of the federal budget code the Federal Ministry of Finance has to approve the necessary
documents (see below) before expenditure is allocated in the budget.
If these documents
are not available during the preparation of the budget, the expenditure is blocked until they
are presented to the Ministry of Finance, where a unit of architects and engineers is
employed to check and approve them.
Section 24 of the federal budget code stipulates the documentation that has to
accompany the project appropriation (Box 12). The documentation includes plans, cost
calculations and qualitative explanations of the project as well as the proposed method of
financing and the time table for the project. In addition, the
project documentation must
include an estimate of the required annual operational expenditure that is to be expected
after the asset has been constructed. The appropriation is made on a commitment basis.
Investments taking place using the Public-Private Partnership procurement model (PPP) are
budgeted into the annual budget on the basis of the annual charge that has to be paid to
the operator. The federal budget documentation contains an annex that gives an overview
of all PPP projects and life cycle commitments of the federal government derived from the
PPP contract.
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The capital budgeting process in Germany provides a sound and transparent model for
allocating and authorising resources, but as in many OECD countries
the Federal Ministry
of Finance is concerned with the observed difference between budgeted costs and actual
costs of projects; and the time it takes for a project to move from the pre-feasibility phase
to completion. One recent response has been to create a real estate agency as a new actor
in the costing process, with the mandate to cost projects better. It is currently too early to
say whether this initiative will have the desired effect. OECD evidence shows that PPPs are
better with regards to the construction costs and timeliness of construction (Burger and
Hawkesworth 2013). However, there is no evidence to judge whether PPPs in general
outperform traditional infrastructure procurement (TIP) with
respect to operation and
whole of life costs. It would seem, however, that OECD countries employ various tools to
mitigate some of the traditional shortfalls in the capital investment framework. For
instance, many countries now use initiatives to counter optimism bias. Optimism bias is
the tendency of capital budgets to underestimate significantly the construction costs and
time of most capital projects.
21
These issues should not detract from the overall picture of
a strong capital budgeting system in Germany. It is characterised by a systematic, clear and
coherent process
that incorporates planning, a traditional cost-benefit assessment
framework and a strong link to the budget process in the short and medium term.
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