Germany Special funds: Leverage effect of public funds

Special funds are the strategic instrument through which the State deliberately combines public resources with private capital. They create planning certainty, mitigate financing risks, and provide investors with access to projects that would not be market-viable without seed funding.

A new ecosystem of State-backed investment structures is emerging, offering significant leverage effects and increasing attractiveness for institutional investors.

From Federal resources to real-economy financing – how special funds work

Although special funds are financed from Federal budgetary resources, they are granted independent financial management and a clearly defined earmarked purpose.

Via development banks and project sponsors, the funds are channelled into concrete programmes – for example in the areas of energy, defence, infrastructure, or digitalisation.

Funds may be allocated in various forms, including:

• Grants (direct funding, e.g. investment grants)
• Loans and guarantees (via KfW, EIB, or regional development banks)
• Guarantees or equity participations (particularly in technology-driven sectors)

In this way, the state transitions from a mere provider of funds to a co-investor and risk-sharing partner.

How special funds leverage private capital

Special funds mark the beginning of a new financial architecture.

They are not traditional grant schemes, but instruments designed to mobilise private capital – and thus the lever through which public investment is translated into real-economic impact.

With clear legal guardrails and multi-billion-euro budgets, they create an environment in which public capital builds trust and private capital generates momentum. When properly structured, every euro from a special fund can attract several times that amount in private investment. This is achieved through blended-finance structures that combine public seed funding with market-based financing.

These include, in particular:

• Matching funds between the Federal government, the Länder, and private investors
• Co-lending structures with development banks
• Public anchor funds acting as signalling mechanisms for institutional investors
• Guarantee mechanisms that partially mitigate risks and facilitate access to capital markets

The focus is not on subsidies, but on leverage: public funds create market confidence.

 

Why PPP has so far played only a marginal role in Germany

In Germany, public-private partnerships (PPP) have so far remained marginal. While other countries have for years delivered infrastructure through mixed financing models, Germany has been characterised by fragmented responsibilities, a lack of standardisation, and political scepticism.

As a result, the market has remained small: in 2024, PPP volume fell to a fraction of previous years, while countries such as the United Kingdom, Canada, and the Netherlands maintain standardised contractual models and stable project pipelines.

At the same time, pressure is increasing to structure public investment more efficiently. The 2025 coalition agreement refers to a “three-pillar model” consisting of the public budget, user-based financing, and private capital and explicitly endorses investment partnerships that address areas where the State alone reaches its limits.

 

Looking abroad – what other jurisdictions demonstrate

United Kingdom:
PPP and DBFM contracts are institutionalised, supported by Regulated Asset Base (RAB) models and Contracts for Difference (CfD). This results in projects with clear payment mechanisms, predictable cash flows, and regulated returns a blueprint for bankability and institutional investment.

Netherlands & Canada:
DBFM(O) and progressive P3 models are standard. They emphasise early involvement of private partners, transparent risk allocation, and centralised procurement authorities – an approach that significantly reduces transaction costs.

France & Australia:
France integrates PPP directly into procurement law through marchés de partenariat. Australia uses asset-recycling programmes to refinance existing infrastructure and fund new projects – a mechanism that could also become relevant for German Länder and municipalities.

 

KfW, EIB & Co. – the backbone of the financing architecture

Development banks play a central role in implementing special funds.

They act as intermediaries, risk mitigators, and co-financiers:

• KfW: the Federal Government’s central development institution – financing energy, infrastructure, and digitalisation
• EIB: co-investor in trans-European projects (TEN-V, TEN-E)
• Regional development banks: supplement Federal programmes with regional funding
• Project sponsors (e.g. DLR, NOW, PTJ): operational management of funding programmes

These intermediaries form the operational infrastructure of the funding state – and play a decisive role in determining access to capital.

 

From grants to capital markets – the building blocks of project finance

Projects today are rarely financed solely through grants.
The future lies in layered financing models that combine public and private components:

Level	Instrument	Objective
1	Grant / subsidy	Reduction of equity requirements
2	Development loans / KfW financing	Interest advantages, refinancing stability
3	Private project finance	Market participation and scalability
4	Capital market instruments	Bonds, green bonds, infrastructure debt

 

Legal dimension

Each financing model must comply with public procurement law, budgetary law, and State aid law – and be aligned with ESG and taxonomy requirements.

This creates stability, but also complexity – which must be carefully structured.

 

Learning from other markets – what is opening up in Germany

While countries such as the United Kingdom or France have relied for years on public anchor funds, PPP, and infrastructure guarantees, Germany has historically been more cautious.

Special funds change this:

For the first time, the state is creating a systematic link between the public budget, capital markets, and industrial policy.

This opening enables:

• Institutional investors as co-financiers
• Fund structures with public participation
• Bilateral guarantee and risk-sharing programmes

Germany is thus opening itself to a financing model that has long been international standard – but has now been legally recalibrated at national level.

 

Which models could gain traction in Germany

With special funds – particularly the Infrastructure & Digitalisation Special Fund – a financing base for modern partnership models is emerging once again.

They can provide grants, seed financing, and guarantees that revitalise traditional PPP structures.

Possible structures include:

• Availability-based PPP (DBFM): design, build, finance, operate – with performance-based remuneration. Ideal for transport, education, healthcare, and energy. Special funds could reduce CAPEX and enhance bankability.
• RAB-type models: regulated remuneration already during the construction phase, e.g. for networks or large-scale facilities.
• Progressive P3 / alliance models: early integration of private partners to improve cost transparency and risk management.
• Asset recycling: partial divestment or leasing of existing assets, supplemented by special-fund matching.
• CfD mechanisms: price stabilisation for new technologies (hydrogen, storage, carbon capture) backed by special-fund budgetary coverage.

 

Political and regulatory signals

In its coalition agreement, the Federal Government deliberately opens the door to private engagement: multi-year investment programmes, administrative simplification, and standardised procurement procedures are intended to reduce transaction costs.

The Federal Ministry for Economic Affairs and Climate Action (BMWK) is reviewing PPP pilot projects with co-financing from special funds; insurance associations are calling for stable project pipelines.

At the same time, EU-level initiatives are emerging to link national special funds with European funding instruments – creating an additional lever for cross-border investment.

 

Financing architecture – how public funds reshape capital flows

Special funds create a new intermediate layer between the public budget and capital markets.

They are refinanced through Federal bonds or earmarked green instruments and effectively act as quasi-sovereign issuers.

This results in a State-guaranteed flow of capital into defined sectors, stabilising financing costs and credit ratings.

 

Leverage and multiplication

Each special fund functions as a stabilisation mechanism that attracts private capital:

• First-loss tranches or guarantee components reduce downside risk
• Co-financing with banks, the EIB, or development institutions multiplies impact
• Matching funds and blended-finance structures directly integrate institutional capital

This creates a macro-economic leverage effect of two to five times the public input – while simultaneously reducing capital costs.

 

Hybrid financing models

New structures combine grant, debt, and equity layers:

• Public anchor funds with the State acting as anchor investor
• ESG-linked project bonds with State backing
• Guarantee facilities enabling banks to achieve capital relief

These models make institutional capital investable without breaching regulatory constraints (Basel III, Solvency II).

 

Financing impact

State-secured payment streams improve the credit profiles of projects:

Interest spreads decline, debt capacity increases, and insurers and pension funds can invest in investment-grade assets that simultaneously deliver transformational impact.

Special funds are therefore not off-budget vehicles, but the architectural foundation of a new, mixed financing order.

 

Law, finance, and structuring – from a single source

We support investors, developers, and public authorities in building and using these new financial architectures:

• Structuring funding and financing models
• Reviewing co-financing and matching structures
• Ensuring compliance with State aid and procurement law
• Contract structuring, financing, tax, and ESG integration

How we support you:

• Investors & funds: access to projects with State-backed risk structures and reliable return profiles
• Banks & financiers: structuring financings with grant, guarantee, or first-loss components
• Project developers & operators: establishing co-investment and PPP structures across the entire project lifecycle
• Public authorities: developing State-aid-compliant governance and contractual frameworks with legal certainty

We connect public funding architecture, market logic, and regulatory expertise – and create structures in which public capital unlocks private capital.