Federal cabinet resolves to establish special fund with retroactive effect from 1 January 2025 – “Infrastructure and Climate Neutrality” special fund – Noerr Insight No. 1

On 18 September 2025, the German Bundestag adopted the Special Fund for Infrastructure and Climate Neutrality Act (the “Special Infrastructure Fund Act”) (Gesetz zur Errichtung eines Sondervermögens Infrastruktur und Klimaneutralität ‒ SVIKG) . Following its publication in the Federal Law Gazette on 2 October 2025, the Act entered into force retrospectively as of 1 January 2025. This Noerr Insight marks the beginning of a series of articles on the “Infrastructure and Climate Neutrality” special fund. The series will take an in depth look at the diverse and pioneering commercial and economic potential the fund offers for private sector market participants and public contracting authorities. Each Noerr Insight will set out and assess the regulatory framework under the various sets of rules. This will enable interested companies and public contracting authorities to prepare optimally for the extensive investment opportunities and to make best possible use of the resulting commercial leeway, with a view to turning it into economic success.

A. Background

The federal government, the federal states and the municipalities will face substantial challenges in the coming years due to the backlog in public infrastructure investment and the targets set for climate neutrality by 2045. In its 2024/25 annual report, the German Council of Economic Experts concluded that there are significant deficiencies in all areas of public infrastructure. To address the resulting additional funding requirements, the legislature added Article 143h to the German Basic Law (Grundgesetz ‒ GG) in spring 2025, thus paving the way for the establishment of a special fund. According to the first sentence of Article 143h(1) of the Basic Law, the federal government may set up a special fund worth up to €500 billion to finance additional investments in infrastructure and to support further investments to achieve climate neutrality by 2045. Pursuant to the first sentence of Article 143h(2) of the Basic Law, €100 billion from this special fund is available to the federal states for investments in their infrastructure.

Based on Article 143h of the Basic Law, the parliamentary groups of the Christian Democratic Union (CDU) / Christian Social Union (CSU) and the Social Democratic Party (SPD) introduced the Special Fund for Infrastructure and Climate Neutrality Act into the Bundestag in July 2025, which was then adopted in September 2025 and entered into force retrospectively as of 1 January 2025.

As the federal government expressly emphasises in its explanatory memorandum to the Special Infrastructure Fund Act, infrastructure is a key locational factor that significantly influences a country’s competitiveness and medium-term growth prospects (see page 1 of the explanatory memorandum to the Special Infrastructure Fund Act).

Parallel to the Special Infrastructure Fund Act, on 2 July 2025 the federal cabinet adopted a draft Infrastructure Financing Act for the Federal States and Municipalities (the “Infrastructure Financing Act”) (Gesetz zur Finanzierung von Infrastrukturinvestitionen von Ländern und Kommunen ‒ LuKIFG), which is to govern the distribution of €100 billion from the special fund provided for in Article 143h(2) of the Basic Law. The Infrastructure Financing Act still requires two readings in the German Bundestag as well as approval by the Bundesrat since it is classified as a consent law under the fourth sentence of Article 143h(2) of the Basic Law.

B. “Special Infrastructure and Climate Neutrality Fund” established by the Special Infrastructure Fund Act

The enactment of the Special Fund for Infrastructure and Climate Neutrality Act establishes the “Special Infrastructure and Climate Neutrality Fund” (“Special Fund”), which will be managed by the Federal Ministry of Finance and equipped with borrowing powers of up to €500 billion. The Special Fund is established retrospectively as of 1 January 2025 and enables the financing of infrastructure projects from that date. However, investments may only be financed from the Special Fund if they are approved by 31 December 2036.

Of the €500 billion in the Special Fund, €100 billion will be made available to the federal states for investment in their infrastructure. A further €100 billion is allocated to the Climate and Transformation Fund in ten equal annual instalments up to and including 2034 to finance additional investments to achieve climate neutrality.

The federal government will use the remaining amount of the Special Fund to finance additional investments in infrastructure, particularly in the following areas pursuant to section 4(1) of the Special Infrastructure Fund Act:

• Civil protection and civil defence,
• transport infrastructure,
• hospital infrastructure,
• energy infrastructure,
• education, care and science infrastructure,
• research and development,
• digitalisation
• construction and housing, and
• sport.

According to section 4(3) of the Special Infrastructure Fund Act, investments are only considered “additional” if the investment expenditure planned in the federal budget (e.g. for non-military construction projects or land purchases) exceeds 10% of the total federal budget expenditure. The provision thus employs a quantitative approach to determine the “appropriate investment ratio” required of the federal government under the second sentence of Article 143h(1) of the Basic Law.

The Special Fund, which is managed by the Federal Ministry of Finance in accordance with section 5(2) of the Act, does not have legal capacity; however, it may act under its own name in legal transactions, initiate legal proceedings and be subject to litigation pursuant to section 5(1) of the Special Infrastructure Fund Act.

Finally, section 10 of the Special Infrastructure Fund Act also provides mechanisms for monitoring outcomes. These mechanisms ensure that the achievement of objectives attached to the Special Fund is assessed before, during and after implementation. They are therefore central to promoting a sustainable and credible growth outlook for the Special Fund (see page 12 of the explanatory memorandum to the Special Infrastructure Fund Act).

In accordance with the first sentence of section 10(1) of the Special Infrastructure Fund Act, appropriate cost-benefit analyses under section 7 of the German Federal Budget Code (Bundeshaushaltsordnung ‒ BHO), including the related administrative regulation, must be carried out and documented during the planning phase for all new federal measures with a financial impact that the Special Fund finances. Specific objectives must be formulated and defined for each measure and a review carried out to determine whether these objectives have been achieved. In addition, it is necessary to carry out and document monitoring of progress and final outcomes.

Once its purpose has been fulfilled, the Special Fund will be dissolved. Once the Special Fund’s borrowing authorisation has been fully utilised, and at the latest from 1 January 2044, the loans taken out by the special fund will be repaid within a reasonable period of time.

C. Planned allocation of financial resources to the federal states through the Infrastructure Financing Act

Under the first sentence of Article 143h(2) of the Basic Law and section 3 of the Special Infrastructure Fund Act, up to €100 billion from the “Special Infrastructure and Climate Neutrality Fund” will be provided for investment by the federal states in their infrastructure. The draft Infrastructure Financing Act adopted by the federal cabinet now sets out the key points for how the portion of the Special Fund intended for the federal states and municipalities will be allocated.

In particular, the draft law defines the allocation of financial resources to the individual federal states and the infrastructure areas in which the funds may be invested in line with the Special Fund’s objectives. Furthermore, the draft law sets out the period for the use of funds as well as the procedures for implementing the federal states’ reporting requirements on the use of funds (as stipulated in the second and third sentences of Article 143h(2) of the Basic Law) and for ensuring funds are used for their intended purpose (pursuant to the third sentence of Article 143h(2)). Finally, the draft law establishes the legal framework for recovering funds from the federal states.

I. Allocation according to percentages

According to the draft law, funds will be distributed among the federal states based on the “Königstein” formula (Königsteiner Schlüssel), which takes into account the tax revenues and population size of each federal state. Section 2(1) of the draft Infrastructure Financing Act specifies the percentage distributions: North Rhine-Westphalia, as the most populous federal state, is allocated approximately 21.10% of the funds, whereas Bremen, the smallest, is allocated “only” around 0.94%

Under section 2(2) of the Infrastructure Financing Act, the non-city federal states determine how much of their share of the funds will be used for municipal infrastructure. The Federal Ministry of Finance’s original draft included a minimum share of 60% for this purpose. However, this requirement no longer appears in the current draft law. Furthermore, the second sentence of section 2(2) of the Infrastructure Financing Act explicitly requires the federal states to specially consider the needs of financially weaker municipalities. The Bundesrat as the upper house of German parliament has expressed scepticism about this provision in an initial opinion and proposed its deletion (see Bundesrat document 314/25 (resolution), page 3). Each federal state determines which municipalities within its territory qualify as “financially weak” according to its own specific circumstances, pursuant to the third sentence of the section 2(2) of the Infrastructure Financing Act.

Under section 2(3) of the Infrastructure Financing Act, the federal states are responsible for establishing the procedures for distributing the funds to which they are entitled. This process involves consulting with the municipal associations in each federal state to decide how the funds will be allocated within that federal state and among its municipalities (see explanatory memorandum to the Infrastructure Financing Act, page 12).

II. Funding areas and eligibility requirements

According to the draft law, the funds earmarked for the federal states are to be used for investment purposes. Section 3(1) of the Infrastructure Financing Act contains a non-exhaustive list of eligible areas where tangible investments may be made, provided they serve to fulfil state or municipal tasks. The draft law lists the following areas of investment

• Civil protection,
• transport infrastructure,
• hospital, rehabilitation and care infrastructure,
• energy and heating infrastructure,
• educational infrastructure,
• care infrastructure,
• scientific infrastructure,
• research and development,
• digitalisation.

Funding is provided on a neutral basis, meaning that, in addition to state or municipally owned projects, projects run by independent, private or church organisations are also eligible so long as they serve public purposes. Public-private partnerships (PPPs) may also be included in the implementation of these programmes, enabling private capital to be mobilised.

According to section 3(5) of the Infrastructure Financing Act, only investment projects with a minimum investment amount of €50,000 are eligible for funding. In addition, the federal states must ensure that the investment measures are aimed at the long-term utilisation of the relevant infrastructure, taking into account foreseeable demographic changes.

The federal states are responsible for managing the funds and, in turn, designate the competent state authorities. The authorities designated by the federal states may instruct the federal treasury to release funds as soon as they are required. However, it is not permissible to authorise payments for advance lump sums or other forms of pre-financing.

Section 4(1) of the Infrastructure Financing Act sets 1 January 2025 as the starting date for funding, meaning that only investment projects which did not commence before this date are eligible for financing. Approvals must be granted by the competent authorities no later than 31 December 2036; actual disbursement of funds is then possible until 31 December 2042.

An additional acceleration requirement obliges the federal states to have committed at least one third of their allocated funds to concrete projects by the end of 2029. This provision aims to address the urgent need to promptly invest in infrastructure to remedy existing deficits (see explanatory memorandum to the Infrastructure Financing Act, page 14). Final disbursements via the federal treasury are only permitted until 31 December 2043.

III. Ensuring the appropriate use of funds and reporting obligations

To ensure that funds are used for their intended purpose, the draft law sets out a multi-level control system in section 5 of the Infrastructure Financing Act.

Primarily, responsibility for ensuring proper use of the funds lies with the federal states, which must establish suitable procedures under section 5(1) of the Infrastructure Financing Act to ensure adequate monitoring. For subsequent monitoring at the federal level, the federal states must submit an annual report to the federal government under section 5(2) of the Infrastructure Financing Act, providing an overview of how federal funds have been used for completed investment projects. The federal government then reviews these projects in accordance with section 5(3) of the Infrastructure Financing Act, applying a risk-based approach involving random sampling. In-depth audits are only conducted in specific cases. The legislation expressly requires that disproportionate administrative burdens be avoided.

In addition, the draft law imposes various reporting obligations on the federal states: according to section 6(1) of the Infrastructure Financing Act, the federal states must submit a one-off report to the federal government detailing the procedures established for implementing the Act at the start of the funding period. This reporting obligation is significant for the federal states because the design of these procedures forms the basis for the federal government’s assessment of whether there is a risk that funds might be used for purposes other than those intended. Furthermore, in accordance with section 6(2) of the Infrastructure Financing Act, the federal states must provide the federal government with a summary report each year on 1 January, beginning on 1 January 2026. This report must cover the investment projects that are planned, have commenced or have been completed.

IV. Repayment

Finally, section 8 of the Infrastructure Financing Act also sets out specific conditions under which the federal government can reclaim funding from the federal states. According to section 8(1) of the Infrastructure Financing Act, the federal government is entitled to demand repayment if a funded project is not used for its intended purpose or if it is not carried out or properly settled within the funding period specified in section 4.

The wording of section 8(1) of the Infrastructure Financing Act suggests that the federal government retains discretion in exercising its right to reclaim funding (“may”). With regard to the case law on revoking administrative acts for failing to achieve their intended purpose under the first point in the first sentence of section 49(3) of the German Administrative Procedure Act (Verwaltungsverfahrensgesetz ‒VwVfG) ), it remains open whether the discretion conferred by section 8(1) of the Infrastructure Financing Act is genuinely “free”, or constitutes an “intended” discretion, i.e. providing for repayment as the rule. In the case law on section 49(3) of the Administrative Procedure Act, such intended discretion is predominantly assumed with reference to the budgetary principles of efficiency and economy (see German Federal Administrative Court (Bundesverwaltungsgericht – BVerwG), judgment of 16 June 1997, 3 C 22/96), although this question has long been the subject of considerable controversy in the scholarly literature.

Under section 8(2) of the Infrastructure Financing, any repayment claim is in principle time‑barred after 31 December 2045, unless the federal government only becomes aware of the grounds for repayment at a later date. No amounts under €1,000 can be reclaimed.

If the federal government seeks repayment of funds from a federal state, the state must pay interest on the sum in accordance with section 8(3) of the Infrastructure Financing Act for the period until repayment is made. This interest requirement also applies if funds are disbursed earlier than permitted under section 7(1) of the Infrastructure Financing Act, covering the period between disbursement and their proper use. The Bundesrat has criticised this clause, recommending its removal on the grounds that it introduces uncertainty about when a disbursement is required within the meaning of section 7(1) of the Infrastructure Financing Act (see Bundesrat document 314/25 (resolution), page 10).

V. Administrative agreements

Section 9(1) of the Infrastructure Financing Act requires the federal government and the federal states to enter into an administrative agreement specifying detailed provisions on funding conditions, safeguards for the intended use of funds, reporting obligations of the federal states, management by the federal states and arrangements for repayment. This administrative agreement is crucial for accessing funds from the Special Fund: according to the second sentence of section 9(1) of the Infrastructure Financing Act, the federal states may only access the Special Fund’s resources once the agreement has entered into force.

Pursuant to section 9(2) of the Infrastructure Financing Act, the Federal Ministry of Finance is responsible for implementing the Infrastructure Financing Act at the federal level.

D. Outlook

By retrospectively establishing the “Special Infrastructure and Climate Neutrality Fund” as of 1 January 2025, the legislature has created the basis for urgently needed investment in climate-friendly, future-proof infrastructure projects.

In contrast, the Infrastructure Financing Act remains under parliamentary consideration. In its initial opinion, the Bundesrat submitted a number of comments and suggestions for improving the draft law. However, the federal government has rejected many of these suggestions in its draft, meaning that there is still a need for discussion on several points. Since the draft law requires the Bundesrat’s consent, the outstanding issues and the Bundesrat’s criticisms could delay the legislative process.

Another key element remains the administrative agreement to be concluded between the federal and state governments under the Infrastructure Financing Act. Only once this agreement has been reached can the funds from the Special Fund actually be used in a targeted and legally certain manner. The upcoming negotiations on this agreement could again delay the actual start of investments.

The key players from the private sector as well as the entities eligible for funding should therefore follow the further parliamentary process closely, in particular to see whether the Bundestag addresses the Bundesrat’s points of criticism by making appropriate amendments to the Infrastructure Financing Act.