City bond — How citizens can participate in infrastructure investments
SG-IMBTUDD, CC BY-SA 4.0 <https://creativecommons.org/licenses/by-sa/4.0>, via Wikimedia Commons
The term “city bond” may sound a bit brittle, but it almost embodies an investor's dream: attractive returns, 100 percent security and, on top of that, the good feeling of being committed to the common good. In November 2024, the Left Party planned such a city bond for the reconstruction of the Carola Bridge that collapsed in Dresden. In doing so, the Saxon state capital would set a good example for other municipalities - because in times of empty coffers, citizens are increasingly in demand as financiers when it comes to infrastructure investments.
Earning money on the reconstruction of Dresden's Carola Bridge
In Dresden, for example, the expensive reconstruction of the Carola Bridge is currently being discussed: One of Dresden's most important Elbe bridges partially collapsed on September 11, 2024. Following the defusing of a World War bomb, demolition work is now continuing, but reconstruction is still a long way off. Among other things, because financing raises questions. The new Carola Bridge is estimated to cost over 140 million euros - money that the city of Dresden cannot easily raise. A proposal from the left in the Council therefore provides for the use of a so-called city bondto raise the necessary funds. With a city bond, a municipality borrows money from its own citizens for a specific purpose at predetermined conditions. The planned city bond “Carola Bridge” is intended to finance the demolition and reconstruction of the bridge for a specific purpose and financially relieve the city. This would be a win-win situation for both sides, as investors could expect a safe investment with good interest rates. However, the specific framework conditions, such as the total amount, term and return, still need to be developed.
Prototype: Munich city bonds
The proposed city bond for the Carola Bridge is based on an example from the Bavarian state capital Munich, which has already issued two government bonds in recent years.
Die Munich City Bond 2020 was the first so-called “social bond” of a major European city. The issue was supported by Bayerische Landesbank and Stadtsparkasse München and met with great interest from institutional and private investors. A total of 120 million euros are said to have flowed into the city treasury with the citizens' bond. On the one hand, the funds are used to buy residential buildings in the urban area. On the other hand, the bond is also to be used for the construction of new rental apartments by municipal housing associations and cooperatives in order to be able to offer residents socially acceptable rents. For investors, the bond offers a fixed annual interest rate of 0.25% with a term until 2032.
In 2024, the city of Munich then placed a “green bond” on the market. According to the finance department, the first German municipal bond of this type was oversubscribed 2.5 times. The city has therefore decided to increase the originally planned issue volume from 250 million to 300 million euros. The city bond has a term of seven years, offers a yield of around 2.8% and is used to finance environmentally friendly buildings from the municipal school and daycare building campaign. In addition, the funds will also be used to finance the transport revolution.
Infrastructure investments attractive for private investors
As the example of Munich and the discussed Dresden City Bond show, this form of financing enables the city to implement important projects. This is because by issuing city bonds, cities can reach out to investors to implement important projects without relying exclusively on government subsidies or tax revenue.
At the same time, they offer investors and citizens a secure and sustainable investment opportunity, as city bonds are bonds from a legal point of view. It works like this: Investors lend money to the city and receive regular interest payments (coupons) in return. At the end of the term, the nominal value of the bond is repaid. The interest rate and term are set when issued. City bonds are often traded on stock exchanges, which means that their value is subject to fluctuations. If the general interest rate level rises, the price of the bond may fall, and vice versa. Investors should therefore consider the city's credit rating and current market conditions. In principle, however, city bonds are considered a very secure and calculable form of investment.
In the area of infrastructure investments in particular, city bonds or others are likely to Forms of citizen participation continue to gain weight. Because modern, sustainable and efficient infrastructures and social projects are essential for economic growth, quality of life and climate protection. At the same time, public participation is becoming more important due to empty coffers in order to finance such projects and promote their acceptance. At the same time, investors are increasingly interested in portfolio components such as infrastructure investments, which were previously reserved primarily for institutional investors - thanks to innovative platforms such as FINEXITY But now they are also open to small investors.
