However, absent or obsolete infrastructure is not just a brake on growth but, in view of looming climate change, also a burden for coming generations. At the same time, in aging societies a surplus of savings is piling up. More and more money is chasing safe investment options, thus pushing down returns on conventional safe investments. While on the one side we have a vicious circle of weak growth, consolidation pressure and a lack of investment, on the other there is an over-supply of capital. “Low interest rates are not the answer to this dilemma. Rather they are a symptom of the underlying structural problems,“ said Michael Heise, Chief Economist at Allianz. “The solution must lie in unclogging the public-sector investment logjam by mobilizing private savings for infrastructure investment.” In this way the twin challenges of climate change and the aging of society can be tackled together.
To this end, institutional investors such as insurers and pension funds will (have to) play an ever greater role. In Europe banks have traditionally been the dominant force in infrastructure or project financing. But given new regulations and altered business models many banks are increasingly bowing out of long-term financing.
This provides insurers and pension funds with both a challenge and an opportunity. Their liabilities are of a long-term nature and ideally suited to financing infrastructure projects that generate long-term and relatively stable returns. “This turns the vicious circle into something positive: Private retirement savings finance growth-promoting infrastructure projects. And the stable and long-term returns from the infrastructure projects safeguard living standards in old age,” said Heise.
However, the framework needs to be right. True, insurers are increasingly investing in renewable energies, gas networks and other infrastructure projects. But the share of infrastructure in the overall portfolio of institutional investors is still low. In order to raise it, financial market regulation needs to be reconsidered, planning security improved and the division of labor between the state and private investors openly discussed. “This offers a huge opportunity. But without broad public backing it will go unused,” warned Heise.
The cities in particular require massive investment in the coming years. Today roughly half of the world’s population live in urban areas, and the figure is rising. Urban conurbations generate not only the bulk of economic output but also 70% of all greenhouse gas emissions. The renovation of urban infrastructure is therefore not only pivotal for growth and the quality of life, it is also the prerequisite for a successful climate policy. However, most investment projects at the municipal level are too compartmentalized to attract private capital. In a new report “Investment in greener cities: Mind the gap” Allianz therefore argues for platform solutions, enabling cities to bundle their investment needs and pass them on to the private sector.
The European Union is also trying to promote the expansion of infrastructure with a host of initiatives and programs. In the new EU budget, for instance, EUR 30bn has been earmarked for such investment. The European Investment Bank is pushing its “Project Bond” initiative, aimed at making private infrastructure projects more attractive for institutional investors with so-called credit enhancements. However, the EU could go one step further. The issuance of genuine “EU infrastructure bonds” could help speed up the expansion of cross-border energy and transport networks considerably.
Time is pressing. “We need to come up with pragmatic solutions to kick-start the necessary investment. All involved have to co-operate constructively,” said Heise. “The huge challenges ahead, above all climate change, require concerted action, not only in Germany, but in Europe as a whole. Resolving the infrastructure question is key to Europe’s future.”