Nordrhein-Westfalen`s green policy delivers credit positive economic

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SUB-SOVEREIGN
Nordrhein- Westfalen, Land of
ISSUER IN-DEPTH
Nordrhein-Westfalen’s green policy
delivers credit positive economic boost
16 SEPTEMBER 2015
NRW's economy benefits from the Land's environmental policy
RATINGS
The German Land (state) of Nordrhein-Westfalen’s (NRW, Aa1, stable) pioneering
environmental policy commits it to investing in measures designed to limit damage resulting
from climate change. We view the policy as credit positive despite its high upfront costs
because it attracts green industry and investment, laying the foundations for a more resilient
economic performance in the future. At the same time, Germany’s “debt –brake” law, which
takes effect in 2020 and restricts regional borrowing, might make additional expenditure cuts
necessary in order to preserve NRW's financial equilibrium. NRW’s economy also benefits
from the Land's cooperation with local governments in the implementation of environmental
policy, achieving efficiency gains compared with the costs of a piecemeal approach.
Nordrhein-Westfalen, Land of
Issuer
Aa1
Senior Unsecured (Foreign)
Aa1
Senior Unsecured (Domestic)
Aa1
Senior Unsecured MTN (Domestic)
(P)Aa1
Other Short Term (Domestic)
(P)P-1
Outlook
Stable
Source: Moody's Investors Services
KEY METRICS:
2014
2013
2012
Gross operating
balance/
operating
revenues (%)
1.7%
0.1%
-1.4%
Capital
expenses/ total
expenses (%)
8.4%
8.7%
8.5%
-3.8%
-5.6%
-6.8%
Interest
6.2%
7.2%
payment/
operating
revenues (%)
Source: Issuer, Moody's Investors Service
7.9%
Financing
deficit/ total
revenues (%)
»
NRW is becoming a European hub for green industries. NRW is the first German
Land to adopt a climate protection law requiring concrete action to reduce green house
gas emissions. The Land has a comprehensive climate strategy complemented by a large
investment programme. NRW’s policy of climate change mitigation boosts the Land’s
economy by advancing structural economic changes, attracting green firms and foreign
direct investment (FDI), and boosting employment.
»
Long-term gains will outweigh the cost of “greening” NRW’s economy. Since
2012, several hundred million euros have been invested in local and regional green
initiatives. The Land's expenditure is growing at a higher pace than the sector average,
driven in part by the cost of investing in climate-neutral infrastructure. We believe
the costs of regenerating and refocusing NRW's economy will be offset by a stronger
economic performance in the future. However, Germany’s “debt –brake” law, which
takes effect in 2020 and restricts regional borrowing, might make additional expenditure
cuts necessary in order to preserve NRW's financial equilibrium.
»
NRW benefits from cooperation with local governments on environmental
issues. By including a multitude of stakeholders across politics, finance and civil society,
NRW has created a broad consensus in favour of its environmental policy. This is
illustrated by the Land’s close cooperation with local governments, aimed at ensuring
the economic stimulus reaches the local level while reducing the inefficiency costs of a
piecemeal approach.
ANALYST CONTACTS
Juliane Sarnes
4420-7772-1392
Associate Analyst
[email protected]
Harald Sperlein
4969-7073-0906
VP-Senior Analyst
[email protected]
MOODY'S INVESTORS SERVICE
SUB-SOVEREIGN
NRW is becoming a European hub for green industries
The green investment programme mandated by NRW's climate protection law boosts the Land’s economy by promoting structural
economic change, attracting green firms and foreign direct investment (FDI), and boosting employment - a credit positive trend.
NRW's environmental policy helps its economy shift away from sectors in decline to growth industries. In January 2013, NRW became
the first German Land to adopt a climate protection law (Klimaschutzgesetz NRW) requiring concrete action to reduce the emission
of green house gases. Over the past years the Land has begun to implement a comprehensive climate strategy flanked by a large
investment programme focusing on replacing fossil and nuclear energy with renewables, and reducing energy consumption by making
buildings more energy efficient. This not only revives multiplier industries such as construction, but accelerates the Land's structural
shift away from the declining coal mining and steel industries with about 6% of regional GDP stemming from green sectors in 2012.
Businesses in NRW are now refocusing on resource and energy efficiency, as well as the water sector.
Among the German federal states, NRW is one of strongest in the field of environmental technology. With a volume of EUR70 billion
of green technology exports or a 2.1% share of the global market in 2012, NRW is the biggest player in Germany's green economy.
According to NRW's first Green Economy Report (“Umweltwirtschaftsbericht”) published in August 2015, the green segment of the
Land's economy grew by 15.6% over 2009-2012, significantly faster than the 11.4% expansion achieved by the economy as a whole.
Green exports including gasket and waste paper recycling systems grew by 26% over the same period.
The expansion of the green economy also has positive implications for the Land's labour market, which has been sluggish in recent
years. The green industries are expected to create 100,000 new jobs by 2025 - a significant increase relative to the sector's current
workforce of 320,000 jobs and about 6.5% of total employment in NRW across all sectors. Job creation has previously been supported
by an influx of foreign capital into the region. According to the 2014 UNCTAD report, growth in green sectors has boomed since the
start of the new millennium, with more than US$0.5 trillion of FDI flowing to the sector globally between 2003 and 2014. NRW
ranks very highly among the German Länder in terms of foreign direct investment (FDI), and is leader of the pack when it comes to
harnessing FDI to create jobs. In 2013-14, foreign investors created almost 5,000 jobs in NRW - roughly a quarter of the employment
generated through FDI in all of Germany (Exhibit 1).
Exhibit 1
NRW created more jobs through FDI in 2013-14 than any other German Land
Source: Ernst & Young, 2015
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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NORDRHEIN- WESTFALEN, LAND OF: NORDRHEIN-WESTFALEN’S GREEN POLICY DELIVERS CREDIT POSITIVE ECONOMIC BOOST
SUB-SOVEREIGN
Long-term gains will outweigh cost of “greening” NRW’s economy
As mandated by its climate protection law, NRW has invested several hundred million euros in green initiatives since 2012. This
investment in climate-neutral infrastructure has the effect of a green stimulus package, reviving and refocusing the economy, but it
comes at a cost. The Land's total expenditure has been growing at a higher pace than the sector average, contributing to a belowaverage financial performance (Exhibit 2). While capital expenditure levels are close to the sector average, NRW's efforts to consolidate
its budget through expenditure cuts are less ambitious than those of some peers. We view the Land's environmental policy as a
revenue-driven consolidation effort designed to increase tax revenues through the regeneration of the Land's economy.
Germany’s “debt –brake” law, which takes effect in 2020 and restricts regional borrowing, might, however, make additional
expenditure cuts necessary in order to preserve NRW's financial equilibrium over the longer term. At the same time, we expect NRW
and other Länder to continue to take steps to comply with the clear consolidation path the debt brake prescribes, protecting their
financial metrics. According to recent announcements, the Land plans not to add to its debt burden from 2019 onward, one year before
the debt brake mechanism puts a halt to new borrowing.
We believe the costs of regenerating and refocusing NRW's economy will be offset by a stronger economic performance in the future
with growth trends in the green industries projected to accelerate due to rising global demand for green technologies as well as
continuing regional investment. According to the German central government's report GreenTech made in Germany 4.0, the global
green economy is expected to double in the next decade, growing to about EUR5.4 billion from EUR2.4 billion in 2014. NRW is very
well positioned to benefit from this growth through technology exports. In addition, regional investment will continue to stimulate
the Land's green economy. In the 2015 Green Economy Report, NRW announced its Green Economy Masterplan involving green
investments totaling EUR800 million over the next five years, a sizable green economic stimulus package.
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SUB-SOVEREIGN
Exhibit 2
NRW: Higher spending growth and below average financial performance over the past five years
Source: Moody's Investors Service
NRW’s 2015 sustainability bond
NRW is the first German Land to successfully issue a sustainability bond, diversifying its investor base and promoting overall
credit quality. In March 2015, NRW raised EUR750m with its first sustainability bond. The issuance met with very high demand,
drawing EUR1.8bn of interest, including from investors that do not usually buy NRW’s bonds. We view this as credit positive as
it improved NRW’s already excellent capital market access by opening up a new subset of environmentally-minded and socially
responsible investors. The bond also confirmed the Land’s position as one of the most active and internationally recognised names
among the German Länder.
The proceeds of the sustainability bond will be used for a range of sustainability-related initiatives in the areas of education, research,
and social cohesion as well as climate protection. Apart from the earmarking of its proceeds, the bond does not differ from other
bonds previously issued by NRW. Given increasing funding needs stemming from NRW’s climate protection law, and further
investments expected as part of the Land's recently-announced Green Economy Masterplan, we expect it to issue more debt in this
format in the near term.
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16 SEPTEMBER 2015
SUB-SOVEREIGN
NRW's economy benefits from cooperation with local governments on environmental issues
Cities and municipalities play a major role in implementing NRW's environmental policy. By including a multitude of stakeholders
across multiple levels of government, NRW has created a broad consensus in favour of its environmental strategy. The Land’s close
cooperation with local governments not only ensures maximum effectiveness of the policy, it also ensures that the stimulus reaches
the local level while reducing the inefficiency costs of a piecemeal approach to greening the economy.
Successful green initiatives on the local level range from large-scale projects to grass-roots innovations. A recent initiative is part of
the Land's programme to improve power heat coupling, i.e. the cogeneration of heat and electricity, backed by investments totalling
EUR250 million. This includes EUR25 million set aside for municipal projects including the cities of Remscheid (not rated), Solingen
(not rated) and Wuppertal (not rated). NRW's Ministry for Climate Protection and Environment also initiates and supports many
small initiatives fostering green development. Examples include the town of Bocholt (not rated) which, along with the municipality of
Saerbeck (not rated), emerged as the winners of the Land's “Klima plus” (Climate Communities of the Future) competition due to their
green infrastructure projects. With a combined population of about 80,000, these local governments not only benefited from regional
government support of several million euros, but also from their status as sustainability pioneers, which drew national and international
attention.
Another prominent example is the city of Essen (not rated), which recently won the European Green Capital Award for 2017. With a
population of 570,000, Essen is the 9th largest city in Germany and one of the major industrial centres in the country. Over the past
decade Essen has developed into one of Europe’s leading locations for environmental and water industries, with a core competence
in water supply and wastewater management in conurbations. The Green Capital Award is expected to draw international attention,
boosting the city's economy and attracting highly qualified labour.
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16 SEPTEMBER 2015
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Moody's Related Research
Credit Opinions:
»
Nordrhein-Westfalen, Land of
»
Baden-Wuerttemberg, Land of
»
Brandenburg, Land of
»
Berlin, Land of
»
Saxony-Anhalt, Land of
»
Bavaria, Free State of
Special Comment:
»
Peer Comparison: Berlin and Nordrhein-Westfalen, September 2014
»
Moody's Approach to Assessing ESG Risks in Ratings and Research, September 2015
Rating Methodology:
»
Regional and Local Governments, January 2013 (147779)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.
6
16 SEPTEMBER 2015
SUB-SOVEREIGN
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Nordrhein-Westfalen`s green policy delivers credit positive economic

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