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14 Jul 15 15:58

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?


Category: Other

Location: Zurich, Switzerland


4 Comments

Alicia Montoya - 21 Jul 2015, 10:13 p.m.

Smart grids allowing two-way energy exchange, driverless (and shared) transport, and interconnected devices (IoT) are some of the necessary developments happening today in order to power, transport and service the world's growing population.

Population has nearly doubled in my lifetime (and expected to grow to 9 or 10 billion by 2050), putting tremendous pressure on resources. The UN expects 6.3 bn people (or 68% of us) to be living in urban areas by 2050, with the highest increase occurring in high growth markets. 

Moreover, many of these cities are located on the coast and are threatened by floods, storms, earthquakes and other natural hazards.

So investing into smart, resilient infrastructure is not only key to our growth but also for our long-term survival. As the financing gap continues to grow, I think we should be looking to all sources of stable financing that have a vested interest in long-term, smart infrastructure being put in place. Swiss Re would clearly fall into that bucket.

Alicia Montoya - 22 Jul 2015, 6:56 p.m.

... and a day after my comment above, the European Commission publishes its Investment Plan for Europe new factsheet, following the signing of a number of legal docs to get implementation under way: http://europa.eu/rapid/press-release_MEMO-15-5419_en.htm

In summary, the investment plan is a package of measures aimed at "unlocking public and private investments in the real economy of at least € 315 billion over the next three years (2015-2017) via
(1) mobilising investment finance without creating new public debt;
(2) supporting projects and investments in key areas such as infrastructure, education, research and innovation and
(3) removing sector-specific and other financial and non-financial barriers to investment."

Infrastructure investment is especially a focus in countries like the UK (check out the country factsheet here:
http://ec.europa.eu/priorities/jobs-growth-investment/plan/docs/country_profiles/uk-country-file_en.pdf).

Soooooo sounds like a perfect match to me, Steven, or am I missing something?

mdb - 4 Aug 2015, 7:57 a.m.

Alicia, many thanks for your reply. Absolutely, the Juncker Investment Plan is a unique opportunity to overcome several impediments to long-term investing, helping to diversify Europe's funding sources and support the economic and financial market environment. Still, a successful implementation also requires bringing long-term investors on board and hence the creation of an accessible and harmonized infrastructure debt asset class. This goes hand in hand with a further reduction of political and regulatory uncertainty.

More broadly, we think that a capital markets union needs to become reality in Europe. The European Commission's intention to work on this topic is encouraging, e.g. see their Green Paper published earlier this year: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=COM:2015:63:FIN&from=EN. At this stage, however, there is no clear vision on a harmonized, efficient and properly supervised financial market architecture.

Yacine Rouimi - 27 Oct 2016, 2:16 p.m.

This is a great piece Stephen!
Thanks for sharing!


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