Roads, airports, power grids and other means of infrastructure play a key role in countries' economic growth and competitiveness over the long term. But as governments struggle to deal with their high debt burdens, the funding gap for both revamping aging infrastructure and new projects – estimated at USD 50-70 trillion through 2030 – continues to widen.
With a global asset base of around USD 80 trillion, long-term investors such as insurance companies and pension funds could play a pivotal role in bridging this gap given their need for long-term assets. Historically low interest rates also drive attention to such "non-traditional" assets. However, capital charges, fragmentation of the market and a lack of standardization are holding long-term investors back and weakening the incentive to invest in the sector.
In a recent Bloomberg interview, our Group Chief Investment Officer Guido Fürer said that allocating up to 5% of our funds to infrastructure – up from less than 1%
currently – would be "absolutely thinkable" if securities used to fund projects were more easily tradable. If every long-term investor were to follow suit, just imagine the boost in funding – not to mention the positive knock-on effect for the economy.
The international debate has been gaining steam and there are a number of initiatives underway to mobilise private funds. For example, in November 2014 the European Commission announced a EUR 315 billion Investment Plan to address the region's infrastructure crisis. Just recently, the European Insurance and Occupational Pensions Authority (EIOPA) proposed cuts to Solvency II capital charges and in its discussion paper recognised infrastructure as a distinct asset class for the first time. It's one small step in the right direction.
A concrete plan for action
In our publication "Infrastructure Investing. It Matters." we put forward a specific set of actions to address help unlock the potential of long-term investors as well as a Private-Public Market Proposal for a global infrastructure bond market. The biggest risk now would be failure to take advantage of today's opportunity. At stake is not only
meeting tomorrow's infrastructure needs, but sustainable economic growth and job creation.
So, is the journey ahead worth the potential benefits?
Location: Zurich, Switzerland