October 14, 2016 / 12:13 PM / 10 months ago

German towns fail to tap into government's investment funds

* Government has earmarked billions for more investment

* But local authorities struggle to cope with windfall

* Lack of planning capacity partly blamed for bottleneck

By Michael Nienaber

BERLIN, Oct 14 (Reuters) - Germany has earmarked billions of euros to increase investment in schools, nurseries, hospitals and housing, but so far local authorities have spent only a fraction of the money because of their lack of planning capacity, data showed on Friday.

Facing international pressure to increase public investment and spend a record budget surplus on infrastructure and education, Finance Minister Wolfgang Schaeuble has made fresh money available through different funding pools.

But government figures show heavily indebted municipalities and states, which historically manage a large chunk of public spending in Europe's biggest economy, have not tapped most of the federal money put at their disposal.

Of the 3.5 billion euros earmarked in an Municipal Infrastructure Fund for investment in schools and hospitals, local authorities so far have used only about 1 percent, figures from the Finance Ministry show.

The fund was created in June 2015 and was initially meant to last until 2018. In light of the slow take-up of the funds, Chancellor Angela Merkel's cabinet agreed this year to extend the deadline until 2020.

"A lot of towns don't have sufficient planning capacities," said Marcel Fratzscher, head of the DIW economic institute. "Also, tendering procedures often take long on a local level."

Municipalities admit that local officials struggle to cope with the sudden but welcome windfall after years of austerity.

"The delay in tapping the federal funds is also due to the fact that local authorities were overwhelmed by last year's record-influx of migrants, which left them fully occupied with ensuring accommodation and integration," said Helmut Dedy, head of the Association of German Cities.

The authors of the report suggest tinkering with the formula for distributing the funds. That would involve weighting for population and tax revenues, so more money is available for urban states like Hamburg and Berlin, which need it more than rural states like Mecklenburg-Vorpommern or Saxony.

The organisational bottleneck on the local level is also reflected in the relatively slow tapping of federal money from another fund to expand and improve day care for children. So far, less than half of this year's 230 million euros have been paid out to municipalities, the Finance Ministry figures show.

In another investment programme, the government promised to transfer 5 billion euros to the regional governments of the 16 states until 2019 if they spend the money directly on new social housing projects.

But an internal report by the Finance Ministry, seen by Reuters, shows that less than 15,000 public housing units were built in 2015, with three states investing nothing at all.

"Especially in urban areas, more new residential construction and more affordable housing is needed urgently, also to accommodate the refugees who are allowed to stay," the authors of the report say.

"It's now up to the states to act quickly and create affordable housing with their construction subsidy programmes." (Reporting by Michael Nienaber, editing by Larry King)

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