Infrastructure Investment

Shaking the Money Tree

Europe infrastructure generic dpa
Europe needs major investment in infrastucture.
  • Why it matters

    Why it matters

    • Low interest rates and high capital requirements now push many insurance companies to look for alternative investments.
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  • Facts

    Facts

    • The European Commission estimates insurance companies and pension funds manage €10 billion, or about $11.2 billion.
    • The European Fund for Strategic Investments is tasked with mobilizing private infrastructure investments up to €315 billion.
    • For every €100 insurance companies invest in infrastructure, they must set aside between €49 and €59 in capital reserves.
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    Audio

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Dilapidated bridges are closed. Citizens in rural areas wait to no avail for fast Internet. Wind farms in the North Sea can’t deliver electricity to southern Germany for lack of power-lines.

Infrastructure has much catching up to do – not only in Germany, but also throughout Europe. But there’s not enough money to build all the needed roads, railways, electrical lines and optical-fiber networks. In many places, public treasuries are empty, and private investors mostly don’t want to get involved in such big projects.

The European Commission hopes to change that and has set its sights on the huge amount of money held by insurance companies and pension funds.

The European Union’s executive arm in Brussels estimates these institutional investors manage €10 billion, or about $11.2 billion. It believes some of these resources could be “rerouted” – by making infrastructure investments more attractive.

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The E.U. commissioner for financial markets, Briton Jonathan Hill, is focusing on one particular area for adjustment: The requirements concerning proprietary capital.

For every €100 that insurance companies now invest in roads, bridges or power grids, for instance, they must set aside between €49 and €59 in capital reserves. This is required by the 2014 E.U. directive called Solvency II. It regulates risk management for infrastructure investments the same as it does for highly speculative hedge funds.

But the European Commission believes infrastructure projects are comparatively low-risk. Handeslblatt has a obtained a copy of a proposal that would change that.

“We have to assure that Solvency II does not give rise to inappropriate or damaging capital requirements,” the draft regulation reads.

According to the draft, a new risk class for infrastructure investments would be introduced into Solvency II. It would significantly reduce requirements for proprietary capital in this risk class by 22 to 30 percent.

The European Commission initiative fits seamlessly into the most important political undertaking of its president: Jean-Claude Juncker wants to stimulate investment in Europe that has declined for years, and has set up a new fund for that purpose.

The European Fund for Strategic Investments is tasked with mobilizing private investments of up to €315 billion. Infrastructure projects that seek to tap the fund must fulfill certain requirements, such as a forseeable regular yield, for example.

The fund is administered by the European Investment Bank  in Luxembourg and insurance companies are considered crucially important financial backers.

Markus Ferber, a German member of the European Parliament from Bavaria, says that loosening of the proprietary capital requirements are a “goal-promoting approach.”

While a great deal of money is needed for infrastructure projects, low-interest rates push many insurance companies to look for alternative investment possibilities, he noted.

The new ordinance from Brussels, which would deal with that impediment, could take effect as early as next year.

 

Ruth Berschens is the Handelsblatt Brussels correspondent. To contact: berschens@handelsblatt.com.

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