Earlier in 2025, the 20th Bundestag paved the way for a new Special Infrastructure and Climate Neutrality Fund amounting to EUR 500 billion through the new Article 143h of the German Basic Law (Grundgesetz, “GG”). The Basic Law stipulates that 100 billion of this special fund be allocated to the federal states for their infrastructure. The Federal Ministry of Finance has now published draft bills on establishing the special fund and distributing the financial resources to the federal states.
Background and objective
Faced with both the public infrastructure gaps that have become increasingly apparent in recent years and the need to meet ambitious climate neutrality goals by 2045, the German legislature enacted, in spring 2025, the constitutional basis for a new Special Infrastructure and Climate Neutrality Fund worth EUR 500 billion in Article 143h GG. It was no longer possible to remedy the investment backlog – notably in the areas of transport, energy, hospital, and education infrastructure – using resources from the regular budget.
In response, the Federal Ministry of Finance has now presented draft bills setting out the federal statutory basis for establishing the special fund and distributing resources from it. The draft Act to Establish a Special Fund for Infrastructure and Climate Neutrality (Sondervermögen-Infrastruktur-und-Klimaneutralität-Gesetz, “SVIKG-E”) defines the fund’s technical structure and the purposes for which it can be used at the federal level. EUR 100 billion from the fund is expressly earmarked for the Climate and Transformation Fund (KTF), for which the Climate and Transformation Fund Act (Klima- und Transformationsfondsgesetz) is to be amended by the new Budget Accompanying Act (Haushaltsbegleitgesetz 2025). The draft Federal States and Municipalities Infrastructure Financing Act (Länder- und Kommunal-Infrastrukturfinanzierungsgesetz, “LuKIFG-E”) sets out how EUR 100 billion share intended for the federal states will be allocated and used.
Both legislative proposals have the objective of strengthening economic growth through an “investment offensive”. In this context, public capital is to be expanded and the economic conditions for business improved through additional investment in infrastructure.
Establishment of the special fund by the SVIKG-E
Under the proposed SVIKG, a “Special Fund for Infrastructure and Climate Neutrality” with credit authorisation of up to EUR 500 billion is to be established. This fund will be able to conduct legal transactions, sue and be sued in its own name, although it will not possess its own legal personality.
The special fund is intended to finance additional investment in infrastructure and in the achievement of climate neutrality by 2045. Eligible federal investments particularly include (but are not restricted to) investments in civil defence and civil protection, transport infrastructure, hospital infrastructure, energy infrastructure, education-, childcare-, and research-related infrastructure, research and development, and digitalisation.
Funding for climate neutrality investment will be provided by transferring up to EUR 100 billion to the Climate and Transformation Fund (KTF) in tranches until 2034. However, this funding is limited to “additional investments”. Investments budgeted from the special fund are considered “additional” under this legislation if the investment spending provided for in the federal budget comprises at least 10% of federal budget spending in the respective budget year. Certain items (such as outlays that amount to financial transactions) will be factored out for calculation purposes.
The special fund may only finance investments approved by 31 December 2036. The SVIKG-E requires that adequate cost-benefit analyses pursuant to section 7 Federal Budget Code (Bundeshaushaltsordnung, “BHO”) be carried out in the planning phase and performance reviews during the project and after its completion for all measures to be funded by the special fund. Accordingly, sufficiently specific objectives must be defined for the measures, and methods for the performance reviews determined, with these defined objectives aligning with the purposes of the special fund. Federal budget rules also apply in all other respects (section 113 BHO).
Distribution of funds to the federal states under the LuKIFG-E
The SVIKG-E provides for EUR 100 billion to be made available from the special fund to the federal states for investment in their infrastructure. Article 143h(2), sentence 4 GG requires the details to be set out by statute, which the proposed LuKIFG is intended to do. As this implementing legislation, the LuKIFG-E sets out how the EUR 100 billion will be distributed among the federal states, which infrastructure sectors qualify for funding, the duration of funding, and the reporting mechanisms to the Federal Government.
The allocation of funds among the 16 German federal states will be based on the so-called “Königstein” formula (Königsteiner Schlüssel), which takes into account both the federal state’s tax revenue and population size. In turn, the federal states are to designate a portion of these funds for municipal infrastructure, with particular attention paid to financially weak municipalities, while also taking into consideration the specific circumstances in each federal state. At least 60% of the funding allocable to each federal state must be dedicated to municipal infrastructure. These municipal regulations do not apply to the city states of Berlin, Bremen and Hamburg.
Eligible sectors and funding requirements under the LuKIFG-E
Under the LuKIFG-E, only investments in tangible infrastructure assets belonging to certain sectors are eligible for funding, provided they serve the performance of state or municipal tasks. The eligible sectors are:
- Civil protection
- Transport infrastructure
- Hospital infrastructure
- Energy infrastructure, particularly heating and energy networks
- Educational infrastructure
- Childcare infrastructure
- Research infrastructure
- Research and development
- Digitalisation
Entities that are fully financed by fees, contributions, or private-law charges are not eligible. Conversely, facilities that receive only partial financing through these means may be eligible. One particular challenge in further implementation will be structuring the financing of assets such as network infrastructure, given that they are largely financed by network charges.
Funding is not precluded if the public administration uses a private entity under a contractual arrangement to perform tasks for which the public administration is responsible throughout the lifecycle of the project associated with the tangible investment. Thus, projects in public-private partnerships can also be financed.
Furthermore, only investments with a minimum investment volume of EUR 50,000 are eligible. Additionally, any tangible investments must be aimed at long-term use and take demographic changes into account.
To prevent the special fund from serving merely as substitute financing for existing investments, the principle of additionality applies. In respect of the federal states, the additionality of an investment is assessed using the adjusted amount of consolidated capital expenditures of each federal state and its municipalities. Although this requirement, like its federal-level counterpart, is aimed at ensuring that investment increases overall during the eligibility period, it should not be conflated with the federal-level additionality requirement.
Double funding, meaning a combination of multiple sources of funding, is generally precluded. However, the special fund are to be able to finance independent investment segments within a larger project if those segments can be clearly demarcated. In such instances, the other segments can be funded from other sources without jeopardising special fund financing.
With respect to timing, only those investment measures begun on 1 November 2025 or thereafter will be eligible to receive special fund financing. Exceptions are made solely for earlier preparatory measures related to qualifying investment projects within the funding period. The latest point at which funding approval will be able to be granted is 31 December 2036, and expenditure of funds may continue until 31 December 2042.
Obligations of the federal states under the LuKIFG-E
Under the LuKIFG-E, the federal states must ensure that the funds are used for their intended purpose and must set up appropriate processes to accomplish this. For monitoring purposes, they must submit an overview of completed investment projects to the Federal Government twice a year. The Federal Government will review the projects on a risk-determined sample basis. In this context, the Federal Government has the power to inspect books, records and other documentations, to request explanatory reports, and to conduct on-site investigations – although it is required to avoid disproportionate administrative expenses. The highest federal state authorities must provide any requested information to the Federal Government.
Federal states’ reporting obligations play a significant role. They must provide the Federal Government with an initial, one-time report on the procedures for implementing the funding. Subsequently, they must send comprehensive semiannual, and later annual, reports on planned, ongoing, and completed investment measures. States must also report on their compliance with the additionality requirement.
Repayment obligation in the event of breach of the LuKIFG-E
If a federal state violates the funding requirements, the Federal Government can demand repayment of the funds granted. Its right to demand repayment applies where funds have been used for non-eligible purposes (i.e. outside the permitted infrastructure sectors), where the ban on double funding has been violated, or where funding was granted outside of the relevant funding period. It can also demand repayment if the requirement of additionality is breached, or if the federal state does not adhere to the prescribed share of municipal infrastructure funding. The wording of the statute is: “The Federal Government may require the repayment of funds from a federal state,” which suggests the existence of administrative discretion. Any repayment claim must be asserted by the end of 2045, unless the Federal Government does not receive the relevant information until subsequently. No repayment will be enforced if the amount in question is under EUR 1,000 (de minimis limit). Any returned funds may be made available to the federal state again.
Structural Component for the Federal States Act
In addition, with the Structural Component for the Federal States Act (Strukturkomponente-für-Länder-Gesetz, “StruKomLäG”), the federal government plans to grant the federal states their own debt leeway amounting to 0.35% of the gross domestic product (GDP). The possibilities for the states to take on net borrowing were previously strictly limited due to the debt brake (e.g. during periods of economic weakness, natural disasters and extraordinary emergencies). With the StruKomLäG, the debt leeway is allocated to the federal states using a mechanism based on the so-called “Königstein” formula (Königsteiner Schlüssel), so that the federal states have the option of structural new borrowing.
Conclusion and outlook
These draft bills provide an ordinary statutory mechanism for implementing the special fund already enacted by Article 143h GG. They set explicit requirements for distributing the total of EUR 500 billion and establish initial allocation criteria. They also address municipalities’ infrastructural burdens by stipulating that at least 60% of the funding allocated to the federal states must be channelled into municipal projects. The principle of additionality is particularly significant, and ensures that neither the Federal Government, the federal states, nor the municipalities can simply shift their existing budgetary costs to the special fund by relying on substitute financing. This approach aims to secure a real, effective increase in tangible investment beyond current capital projects. However, the ultimate success of these proposals will likely depend on their compatibility with EU state aid law.
The Structural Component for the Federal States Act grants the federal states their own scope for debt. This enables, for example, further investments in infrastructure by the federal states by taking out loans.
Forward
