Infrastructure’s Insular Insurance Invitation
As the G-20 again placed pressing annual physical infrastructure needs at $2.5 trillion just in industrial countries on the agenda, a private advisory group headed by insurer Swiss Re recommended regulatory and financial market changes to tap the $70 trillion in institutional assets currently allocating less than 1 percent, according to pension fund surveys. It noted that the OECD average was 7 percent of GDP for non-residential road, transport, communication, utility and education-health outlays the past decade and that 10 percent additional capital generates 1 percent in long-term output. A banking-securities market mix offers greater scope and lower volatility and mobilization is complicated by the current anemic global economic recovery, European lender deleveraging, and prudential mandates for the safest portfolios under Basel III and Solvency II formulas. Insurers trying to match 10 year liabilities should have 10 percent exposure to project debt, and banks are unable to finance such maturities with heavy reliance on short-term wholesale and retail money. Officials could ease risk weightings and multilateral bodies could create a common database and portal listing technical and borrowing requirements. Such initiatives can supplement US and EU investment bank proposals, as well as pan- Asia bond and BRICS development bank plans. The EIB extended over EUR 50 billion in credit and liquidity lines in 2012, and has encouraged public-private partnerships in cooperation with industry associations. However project bonds often remain low-rated and lack standard features and secondary markets, the report laments. Along with these gaps both industrial and developing world ventures could benefit from further operating and political guarantees from the World Bank’s MIGA and other providers. In the next 15 years around $60 trillion will be sought for power, water and telecom projects in particular although portfolio weighting is just 3 percent for the most active institutions. Emerging economies will account for one-third the total and have recently been hurt by 40 percent loan reductions by French and Spanish banks in Asia and Latin America.
Life insurers, pension and sovereign wealth funds and other sources must double commitments to meet the challenge, but recipient “high-growth markets” should also redouble their own expansion efforts. Non-resident ownership of domestic government bonds at one-quarter the amount outstanding can be adapted to targeted fixed-income instruments. Local contractual saving and alternative asset capacity can be widened further, and private pensions can hike corporate debt and equity engagement. Large state wealth pools in China, the Gulf and Russia can increase outward direct and portfolio investments, and specialized vehicles prominent in Brazil, Chile, Mexico and Peru should be attempted in other regions. Mexican structured products listed on the Exchange are a recent innovation, and may be tested by the bond collapse of a Pemex supplier implicated in a fraud also involving Citigroup’s local subsidiary in a drama at odds with new CEO Corbat’s sedate image.
