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Germany risk: Infrastructure risk(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentA17A19Infrastructure riskA3 A6 Note: E=most risky; 100=most risky.SUMMARY Germany has excellent infrastructure, which is well integrated into European networks. Transport infrastructure is of a very high standard, so that disruption due to operational problems is rare. Although roads are increasingly congested, an improving fiscal position should ensure that levels of investment are sufficient to maintain a high quality system. Civil aviation has been liberalised and is well developed. As a result, the cost of flying has come down substantially. Retail and distribution networks are of high quality. The quality of infrastructure in former East Germany is still improving thanks to major public investment. The risk of energy shortages in the short and medium term, either resulting from the phase-out of nuclear power or from political problems with major foreign suppliers, is low. SCENARIOS Congestion on transport infrastructure increases (Moderate Risk) In recent years spending on investment in infrastructure was cut back because of budgetary constraints. Although this is being reversed now, the impact infrastructure quality may be felt into the future. The drive to improve the profitability of Germany's main railway operator, Deutsche Bahn, has led to weak investment in capacity maintenance and expansion. Local authorities, responsible for the local road network, also cut back their spending on repair works and new projects. The relatively decentralised structure of Germany, with no major metropolitan area even approaching the size and density of London or Paris, reduces the pressure on infrastructure, but congestion could still increase. This also raises the prospect of heavier fiscal intervention to contain road usage, for example through higher road usage fees for lorries and new usage fees for private cars. Companies should factor in the risk of increases in transport costs. Energy supply becomes a problem for businesses (Low Risk) Spats between Russia and its neighbours over gas and oil contracts have led to brief interruptions supply, including one to western Europe. Combined with instability in the main oil-producing regions, and the prospect of even higher tensions, concerns have grown in Germany (and elsewhere) about the security of energy supplies. Russia, Germany's main supplier of gas, has an interest in rebuilding its reputation as a reliable supplier, not least because any threats of unstable supply would lead to shifts to other sources (eg liquefied natural gas or a return towards greater use of coal) in the long-term. However, Russia has a record of overplaying its hand in international affairs and further interuptions in supply cannot be ruled out. The risk of oil supply disruptions, for example result from a crisis over Iran's nuclear ambitions, is significant, and a serious escalation in tensions would considerable upward pressure on prices. Meanwhile, the decision by the previous (SPD-Greens) government to phase out the use of nuclear power for electricity generation is unlikely to raise any electricity supply problems, as the transition period is long enough for alternative capacities to be built. Nonetheless, companies with a substantial dependence on energy should prepare for temporary and even long-term price increases. BACKGROUND (Updated: September 14th, 2006) Natural Resources and the Environment Germany has a temperate climate. In winter the east is colder than the west, and Bavaria in the south is colder than the north, partly because it is so far from the sea and partly because of its higher altitude. Much of the terrain is hilly, although it is flatter in the north and mountainous in only a few areas. Despite its fertile soil, Germany is a net importer of food. Two great rivers, the Rhine, which runs down the west of the country between the Netherlands and Switzerland, and the Elbe, which flows from the Czech Republic into south-east Germany and enters the sea at the port of Hamburg, have traditionally played an important role as waterways within and beyond Germany. There is now also a canal linking the Rhine via its tributary, the Main, with the Danube, which originates in Germany and flows through Austria to the Black Sea. In the 1980s Germany acquired a reputation as one of the world leaders in environmental protection, building up a substantial body of legislation and incentives that prompted other EU countries to take similar action, either through legislation initiated by the EU or by direct emulation. According to the Federal Statistics Office, in 2002 total expenditure (including investment) on environmental protection was euro34bn (1.6% of GDP), divided mainly between industry (euro7.2bn), public authorities (euro9.5bn) and independent public companies, including local government-owned sewage companies (euro17.3bn). In 2003 industrial companies spent euro1.6bn on environmental investment and euro9.3bn on current costs of environmental control. Debate continues about the extent to which stringent environmental standards affect the competitiveness of German industry and private-sector decisions on investment location. As part of the EU's commitment to cut greenhouse gas emissions by 8% by 2012 at the latest, using the 1990 level as a base, in June 1998 Germany agreed to cut emissions by 21% by 2010. In 2003 greenhouse gas emissions were down by 18.7% on the 1990 level, but more than one-half of this reduction was the result of the large-scale closure of inefficient and extremely polluting heavy industry in eastern Germany in 1990-93. This shows that the target is challenging, and it is hoped that the emissions trading system, introduced in Germany in January 2005, will facilitate further reductions, as it will increase incentives for industrial investment in emissions-reducing equipment. A substantial increase in taxes on energy in several steps between April 1999 and the beginning of 2003 also increased incentives for energy conservation. Great emphasis is put on recycling. Municipalities require households to use separate dustbins for biodegradable, paper, packaging and other wastes, and collection facilities for other forms of recyclable waste, particularly glass and tin cans, are within easy reach of most households. There are also networks for the recycling of packaging, such as the Duales System Deutschland (DSD). At the beginning of 2003 a deposit on most non-reusable beverage containers was introduced, which is paid back to consumers when empty containers are returned, leading to a massive reduction in one-way packaging. Transport, Communications and the Internet Germany has a modern, comprehensive transport infrastructure. The transport network in the eastern states has gone through a massive upgrade following reunification in 1990. In some areas it may still be behind the standards in the west, but this is partly also related to the relatively low population density. The introduction of an automatic toll system for lorries finally came into operation in January 2005, after major delays. Under the system lorries on motorways are charged on average 12.4 euro cents/km, and the expected revenue of more than euro2bn per year will mainly be used to finance the repair and maintenance of existing motorways. There is currently no plan to introduce a similar system for passenger cars, although there has been some discussion about this. In 2003 the total length of roads, excluding streets in cities and villages, was 231,400 km. Of these, 12,044 km were motorways (Autobahnen). Transport infrastructure('000 km; year-end)20032004Classified roads231.4231.4Motorways12.012.0Railways43.8n/aWaterways7.57.5Source: Statistisches Bundesamt, website.The railway system is extensive and of a high standard, but passenger travel is costly. In 2004 the number of passenger rail journeys amounted to 2.1bn, and the volume of goods transported by rail increased by more than 2% year on year to 310.3m tonnes. The railway market has been liberalised cautiously. Track is managed by DB Netz, a subsidiary of the former monopolist, Deutsche Bahn (DB). DB Netz charges all carriers, DB as well as its competitors. Since January 2006 DB is supervised by the new Federal Network Agency, which is in charge not only of securing fair conditions for third-party access to the railway network to foster competition, but also of approving the pricing structures of dominant players to prevent the abuse of market power. So far, competition is marginal. The suspicion is that continued links between DB and DB Netz put the company at an advantage, although there is a case to be made for keeping close ties between the main train operator and network managers in the interest of safety. Partial privatisation of DB, originally planned for 2005, has been postponed to after 2008 for reasons of insufficient profitability. In 2004 the number of registered sea-going merchant vessels in excess of 100,000 tonnes was 508, including 352 dry freighters. Numbers of ships are on a strong downward trend, as the regulatory environment does not make Germany an attractive location for merchant shipping. Freight traffic through seaports in 2004 totalled 272m tonnes. At the end of 2004 the sea-going merchant fleet was 7.9m gross registered tonnes, up from 6.1m in 2003, but still down from 9.9m gross registered tonnes in 1999. The most important port for Germany is Rotterdam in the Netherlands. Hamburg, by far the largest domestic port, accounts for about 37% of all freight shipped from German ports. Bremen/Bremerhaven, Wilhelmshaven, Lubeck and Rostock are the other major freight terminals. In 2004 a total of 157m passengers were carried by commercial air services. The busiest airport in terms of aircraft movements, passengers embarked and freight traffic is the Rhein-Main Airport outside Frankfurt am Main, which accounted for 32% of all passenger traffic in 2004. Munich is the second-busiest in terms of passenger traffic, and Cologne-Bonn is the second-busiest in terms of freight traffic. Other major passenger airports are Berlin-Tegel, Dusseldorf and Hamburg. The federal government and cities such as Berlin and Cologne are preparing to sell their shareholdings in airports. Frankfurt airport was floated on the stock exchange in May 2001 as the Fraport company. The most important airline continues to be Lufthansa, but in 2004 its share shrank to about one-third of the market. The most important national competitors are Air Berlin, with a market share of around 8.3%, and the co-operation of Deutsche BA and LTU, established in March 2006, with a market share of about 6.3%. Foreign low-cost airlines also play an increasingly important role. The transport of crude oil by pipeline increased from 74.1m tonnes in 1990 to 93.8m tonnes in 2004. At the end of 2004 total long-distance oil pipelines amounted to 2,370 km. Numerous daily, weekly and monthly newspapers and periodicals, as well as trade journals and specialist journals are published, of which about 20 have a print run of more than 250,000. Most of the 400 or more daily newspapers have regional rather than nationwide distribution. The main four quality newspapers are the left-leaning Suddeutsche Zeitung (daily circulation in the fourth quarter of 2005, 463,00), the conservative Frankfurter Allgemeine Zeitung (386,000), the conservative Die Welt (287,000), and the leftist Frankfurter Rundschau (159,000). The leading tabloid, Bild (3.6m), follows a centre-right editorial line and has considerable political influence. Three weekly publications are also of great importance: the left-leaning intellectual newspaper Die Zeit (510,000/week), and the news magazine Der Spiegel (about 1.1m), which has a strong tradition of investigative journalism, and Fokus (about 760,000). In 2004 households held 42.2m radio licences and 36.7mtelevision licences. A limited amount of advertising is carried by public radio and television companies, which operate under the supervision of the authorities of individual states. They are financed by a licence fee, which currently amounts to euro17.03 per month and generates total revenue of around euro6.9bn per year. A substantial number of private TV and radio stations also broadcast. In an important development the media empire, Kirch, collapsed in March 2002. The group included the TV channels ProSieben and Sat1. In August 2003 the US billionaire, Haim Saban, acquired a 72% majority stake in ProSieben and Sat1, and subsequent restructuring was very successful and led to record-high profits in 2005. In 2005 a deal that would have allowed the Axel Springer Verlag, which publishes Bild and several other newspapers, to take over the ProSiebenSat.1 group for euro4.15bn failed. The Cartel Office indicated that it would not authorise the deal, as it would give the Axel Springer Verlag too much market power in the mass media. The number of people who had Internet access at home was 62% in 2005, compared with an EU15 average of 53%. However, the share of people with Internet access using asymmetric digital subscriber line (ADSL) broadband technology, which allows fast Internet access, was only the 11th-highest out of the 23 EU member states for which relevant data are available, although a study of the European Commission from January 2004 revealed that broadband charges in Germany were the second-lowest among 17 members of the European Economic Area. The federal government is seeking to bring government services online. A platform for tendering and issuing public contracts, for example, was launched in 2002. Despite this, data from the Commission indicate that the availability of e-government services in Germany was still slightly below the average of the EU15 in 2005. Telecoms Radical changes in the regulatory regimes governing communications utilities were put in place during the 1990s, and the sector is still subject to regulatory change. Until January 1998 Deutsche Telekom (DT) held the monopoly on fixed handset voice transmission, which was then liberalised under EU legislation. DT has been part-privatised: after an initial share offering in November 1996 and further sales in 2000, 2003 and 2004, by early 2006 the direct and indirect share of the federal government had been reduced to 37.5%. The remaining federal share will be sold off progressively. Minority shareholdings in DT's Internet service provider, T-Online, which had been floated on the stock exchange, were repurchased by DT in 2005. Liberalisation brought an important number of new service providers into the telecoms market, so a process of fierce consolidation is still under way. DT continues to dominate the fixed-line market. In any case, liberalisation has already brought consumers substantial benefits. According to the Federal Statistical Office overall consumer telecoms charges, including mobile-phone charges, fell by a total of 30.3% between 1996 and 2005, with a reduction in mobile-phone charges of 48% and in fixed-line charges of 25.6%. Internet connection charges fell by 37.8% between 2000 and 2005. Partial flotations of Deutsche Post (DP) took place in November 2000, December 2003, November 2004, June 2005 and July 2005, reducing the government's direct and indirect shareholding to 41.7%. DP retains the exclusive right to deliver post up to 50 g until 2007, when the monopoly is scheduled to be completely abolished. It has also conducted an ambitious series of takeovers (including the acquisition of the logistics company, Exel, for euro5.5bn in November 2005) and joint ventures to establish itself as the largest European parcel distribution system and the largest logistics company world-wide with more than 500,000 employees. Energy Germany imports around three-fourths of its primary energy requirements, including almost all of its oil, which accounted for 36% of primary energy consumption in 2005, while natural gas accounted for 23%, hard coal for 13%, lignite for 11% and nuclear energy for 13%. Other sources, including renewable energy sources, accounted for only 5% of primary energy consumption. Renewable energy production is, however, showing strong growth, not least as a result of heavy subsidies. In June 2001 the coalition government of Social Democrats and Greens and the power-generating companies agreed the details of the programmed gradual withdrawal from nuclear power, which currently provides 50% of German electricity supply. Under the scheme, the last of Germany's currently 17 nuclear power stations would be taken off the grid by around 2020. Finding alternative electricity sources will pose a considerable challenge. The emphasis is being put on the construction of gas-fired generators. Renewable energy is also being developed and is heavily subsidised, but there is little prospect of it contributing in any major way towards replacing nuclear electricity. Ironically, Germany might have to rely more on substantial imports of nuclear energy from France. The general difficulty of building replacement plants and the sharp recent rise in the cost of alternative energy sources (gas and coal) may lead the current or any subsequent government to extend the operating times of nuclear stations. The case for this has been strengthened by concerns that the decommissioning will make it more difficult to meet targets on greenhouse emissions and that the supply of natural gas, particularly from Russia, may not be reliable in the long term. The Christian Democratic Union/Christian Social Union (CDU/CSU) is clearly in favour of an extension, but the SPD wants to stick to the current programme. The construction of new nuclear plants, however, is very unlikely. Germany pays significant subsidies to hard coal and lignite producers that are gradually being reduced under pressure from the Commission. Electricity and gassectors State and municipal governments participate in local energy utilities, while large private-sector companies predominate at generation and inter-regional supply levels. Although around 900 localpredominantly municipalutilities are in operation, dense cross-shareholdings sustain a vertically integrated structure of provision. German electricity and gas prices used to be among the highest in the EU, but electricity prices fell substantially after the liberalisation of the electricity market in April 1998, when Germany implemented EU liberalisation directives ahead of many other countries. Initially, Germany relied on negotiated third-party access (nTPA) to networks by competing suppliers, but this proved to be unsatisfactory, and in July 2005 the Federal Network Agency, formerly the Regulatory Agency for Post and Telecommunications (RegTP), took charge of regulating network access fees in the gas and the electricity market. It is hoped that this will stimulate competition, which remains very low, particularly in the gas sector. An important step has been the introduction of free choice of gas suppliers for consumers in April 2006 and new regulations by the Federal Network Agency for third-party access fees to gas networks from October 2006. The rapid restructuring of the electricity supply sector by large regional generators has led to the creation of the four industry giants: RWE/VEW; Eon, through the merger of Viag and Veba; EnBW, in which Electricite de France has a substantial minority stake; and the German subsidiary of the Swedish energy company Vattenfall, which has acquired a number of providers, including Veagand HEW. Restructuring continues in the gas sector, as electricity companies have bought up regional gas distributors. By far the most important of the deals was the acquisition of Ruhrgas, the supplier of 75% of Germany's natural gas imports, by Eon. After the Cartel Office had refused the proposed merger, the government decided to approve it, arguing that Germany needs a strong energy company to secure long-term supplies. Copyright 2007 Economist Intelligence Unit |