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money for nothing from the usa
German cities and towns have profited for at least 10 years from complicated financing transactions known as "cross-border leasing" deals that involve the leasing of German assets by U.S. investors. City accountants in Germany have cashed in hundreds of millions of dollars for leasing their streetcars, purification plants, sewage systems, town halls, and school buildings. No one knows exactly how many millions American investors have paid. But since the spring of 2003, the complicated transactions have come under increasing public scrutiny of their legal and ethical implications.

Why cross-border leasing?

Imagine you are the city accountant, and instead of a nicely filled treasury you're staring into a black hole. That is the situation in nearly all German municipalities. The German economy has suffered three straight years of little or no growth, and as a result, the federal and state governments have shifted the burden to cities and towns. The local authorities' budgets are on the verge of collapse. Social services, youth welfare, and cultural activities are only some of the areas that have been short of funds for years now.

It is no surprise, then, that city accountants all over the country are desperately searching for new ways to fill their empty cash drawers. So-called "creative financing operations" such as cross-border leasing are highly welcome in this situation. In a cross-border leasing transaction, an investor -- in this case, a U.S. company -- leases an asset up front from a foreign entity -- in this case, the German municipality. The owners immediately lease back their asset from the investor, so that they still own and operate the asset. The U.S. investor, on the other hand, gains a quick tax benefit for writing off the up-front lease payment.

Until recently, hardly anyone has stopped to consider that even experienced financial experts and government officials have bluntly admitted that they were far from understanding the complicated transactions. The deals were handed over to highly-paid lawyers and consultants on whose judgement city officials had to rely.

So, imagine you are the city accountant. Imagine you had to decide whether the kindergartens or the youth clubs of a German city should be closed down, whether the opera house should offer no more than two new productions a year, or whether the public swimming pool should open only once a week. Maybe you, too, would prefer to cash the quick and easy check from the U.S. -- perhaps $15, $20 or even $50 million -- and hope the deal doesn't turn out to be a disaster. In the end, you acted with the best interests of your town in mind. You may not feel entirely at ease, of course. You may not understand the 1,000-plus page contract that you had to sign. You may feel queasy about the secrecy demanded by the U.S. investor. Maybe you even know that U.S. authorities are beginning to find fault with the cross-border leasing deals.

Too good to be true?

Whenever critical questions have arisen about cross-border leasing, German politicians and bankers have calmed the public by reminding them that the U.S. tax system allows these kinds of transactions. But it still seems hard to imagine that American taxpayers are spending gigantic sums every year in order to restore German municipal budgets. The story of the million-dollar risk-free blessing from the USA, in fact, sounds too good to be true.

Indeed, the backers of these deals cannot or will not answer the simplest questions: Who is the investor? What exactly are the terms of the lease contract? These pressing questions keep haunting more and more Germans. Politicians and citizens alike are beginning to ask whether these deals are in fact as legal as they are told and whether they are morally justifiable.

Cross-border leasing contracts appear particularly hard to justify because all property rights remain as they were even after the deal is signed. The Cologne purification plant keeps cleaning Cologne's sewage water. The Dortmund streetcars keep transporting Dortmund's steelworkers to their jobs. The town hall of Gelsenkirchen remains the site of city council meetings. Town managers argue that nothing has changed: the town still owns and uses its facilities and the U.S. investor has no influence on the town's business policies. They admit the deals are tricky, but insist upon their legality. In the words of the Cologne city accountant, "After all, the Americans should know themselves what they do with their money. If they subsidize this kind of transactions, we gratefully accept."

The movement against cross-border leasing

A few years ago, any mention of cross-border leasing in German newspapers was accompanied by enthusiastic headlines, such as "Cities Milk U.S. Tax Cow" or "Make Money with U.S. Leasing." However, these mentions were few and far between -- for example, years passed after deals had been signed in Stuttgart and in Cologne before the papers made them public.

In the beginning, the German public was amused that U.S. companies were paying huge sums to lease sewage systems. As a few journalists dug into the matter, however, the transactions attracted the attention of anti-globalization activists, such as Attac, who raised public awareness about the issue. Public discussion of the deals increasingly became dominated by questions of principle. What was at stake if public property was put up in obscure international financing transactions? Concerned citizens founded action groups, held meetings and workshops, and criticized municipal officials and their consultants who had kept the contracts secret.

The U.S. investing community's insistence upon secrecy is one of the factors that contributed to the cross-border leasing industry's defeat in the city of Frankfurt -- it's biggest defeat so far. The city government had intended to lease its subway to a U.S. investor over 99 years for the sum of $2.7 billion. Within a few weeks, the opposition came up with 48,000 signatures against the deal -- and published the details of the transaction on the Internet -- forcing a public examination that ultimately led the city council to reject the deal in October 2003. Cross-border leasing deals also failed in Stuttgart and Dresden, because the citizens did not consent to lease the municipal facilities to a nameless investor.

The future of cross-border leasing deals is also being affected by politics across the Atlantic Ocean. German municipal authorities are disturbed by reports that the U.S. government is considering moving against leasing transactions and took notice of the Senate Finance Committee's October 2003 hearings on "Tax Shelters: Who's Buying, Who's Selling, and What's the Government Doing About It?" as well as recent Bush administration proposals to curb abusive leasing transactions.

At present, hardly any city accountant would dare to sign a cross-border leasing contract, because the legal basis of these deals just seem too uncertain. And in fact, in February, a committee of the Cologne city council decided to open a potential cross-border leasing transaction up to public scrutiny -- exactly what U.S. investors have always been desperate to avoid. Time will tell whether the money for nothing from the USA is too good to be true after all.

Jochen Bülow is a freelance journalist who lives in Cologne, Germany. He was a field producer of "Tax Me If You Can." This article was translated from German by Susanne Issig.


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posted february 19, 2004

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