INFRASTRUCTURE FINANCE

A Road to Investment

Building a bridge between insurers and public infrastructure. Source imago/caro
Building a bridge between insurers and public infrastructure. Source imago/caro
  • Why it matters

    Why it matters

    Insurers are keen to flee the minimal returns offered by low-interest rates, but strict capital requirements are putting the brakes on infrastructure investment.

  • Facts

    Facts

    • As Germany aims to reduce its borrowing, it is looking to boost private financing of roads, bridges and tunnels.
    • Insurers are one of the biggest investors in Germany, but not in infrastructure.
    • Germany’s partners want Europe’s largest economy to invest more to help spur flagging global growth.
  • Audio

    Audio

  • Pdf

Around the world, insurers are seeking ways to escape low interest rates for their capital investments. At the same time, the German government is desperate for private money to help finance sorely needed public investment in streets, bridges and tunnels. It could be an ideal situation for the two sides to come together.

But it’s not happening. The obstacles hindering privately financed infrastructure projects are simply too big – despite keen support from Germany’s economic minister, Sigmar Gabriel.

The infrastructure of Europe’s largest economy is crumbling, with the public sector only partially able to tackle the task. Money is a huge problem.

Public borrowing options to plug the infrastructure gap are limited, as the German government is determined to balance its budget in 2015 and the country’s states plan a debt cap by 2020. For German Finance Minister Wolfgang Schäuble, observers say, there is no choice but to try new forms of sharing the burden between the state and private sectors.

Though Berlin has long advocated budget austerity, Mr. Schäuble is coming under increasing pressure from his European and U.S. colleagues to do more to help bolster flagging European and global growth.

On Monday, Mr. Gabriel and his French counterpart Emmanuel Macron asked experts to make recommendations on how the euro-zone’s leaders can coordinate investment and modernization efforts.

“As the two biggest economies in Europe, France and Germany have an important responsibility in ensuring Europe’s prompt recovery and return to the growth path,” the ministers stated in a letter describing the new initiative.

Such talk perks up the ears of insurers. The industry is one of the biggest investors in Germany. Capital investments by insurers and reinsurers amounted to about €1.4 trillion ($1.77 trillion) in 2013, according to German financial regulator Bafin.

 

How Insurers Invest-01

 

“Insurers could invest €100 million in a way that’s meaningful economically each day,” Axel Wehling of the GDV German insurers’ association told Handelsblatt.

He made no secret of the industry’s desire to get more involved in infrastructure financing. Currently, it accounts for only €4 billion annually in this sector in Germany.

“We have an interest to delve deeper into entrepreneurial risk,” Mr. Wehling said.

Industry leaders Allianz and Munich Re are both eager to take on infrastructure investment. “We are more or less desperately looking to diversify and simply searching for investment opportunities,” Munich Re chief Nikolaus von Bomhard said.

Patrick Liedtke, an insurance expert at the world’s largest asset management firm Blackrock, agrees. “Insurers need long-term investments,” he said. “That’s why infrastructure investments are ideal.”

“Infrastructure isn’t just about the financing; it’s also the planning, construction and operation.”

Ralph Brinkhaus, Deputy parliamentary leader of the Christian Democrats

Such enthusiasm shouldn’t come as a surprise, given the insurance industry is facing enormous challenges from chronically low interest rates. Many firms have promised their clients returns of 4 percent, which is nearly impossible to find on the market currently without substantial risk.

Although the government and insurers have a common goal, both sides are struggling to come together. Infrastructure projects are often more tailored to the needs of banks rather than those of insurance companies, according to Blackrock’s Mr. Liedtke.

For an insurance industry perspetive, Mr. Wehling sees other problems. “There’s no pipeline with projects,” he said. “Essentially, every town council decides on its own.”

Also, there are no standardized contracts for public partnership projects to speed their realization.

For their part, government officials fear private investors will simply cherry pick the most attractive projects, leaving the state to cover the riskiest investments.

“Infrastructure isn’t just about the financing; it’s also the planning, construction and operation,” warned Ralph Brinkhaus, the deputy parliamentary leader of the conservative Christian Democrats.

Mr. Gabriel hopes such concerns will be resolved by a new advisory committee. The 13-member body meets for the first time on Friday, bringing together top representatives from the insurance industry, academia and lobby groups. Among the executives expected to attend are Deutsche Bank Co-Chairman Jürgen Fitschen, Ergo Chairman Torsten Oletzky and Allianz board member Helga Jung.

But Mr. Gabriel’s talks with these executives won’t be able to eliminate one of the biggest hurdles: namely, new international regulations for the insurance sector that will force firms to back the financing of infrastructure projects with a hefty 49 percent of their own capital. It’s the same requirements for private equity and hedge fund investments – even though those carry considerably more risk than infrastructure investments.

That’s why Helmut Gründl, an insurance industry expert at the University of Frankfurt, is calling for a new class of investments for infrastructure that have lower capital requirements.

“I consider it unhealthy the way insurers currently invest,” he said, pointing out that some companies had over 80 percent of their money in fixed-interest securities, mostly government debt. “That isn’t a good thing.”

 

To contact the authors: drost@handelsblatt.com; leitel@handelsblatt.com and stratmann@handelsblatt.com

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