Marcus Mecklenburg (pictured), head of Legal at German Investment Funds Association BVI, argues that German legislators should do more to facilitate investments in infrastructure.
Given the relative low levels of investments in German infrastructure, what should legislators do to encourage direct investments in infrastructure?
Until now very few German infrastructure projects are open for retail investors. We believe that legislators should relax the regulatory straight jacket for institutional investors. We have seen a couple of positive steps on both the European and national level which demonstrates the commitment towards non-governmental investment in infrastructure. Firstly, the European Commission recently introduced European Long Term Investment Funds (ELTIFs). This new fund type aims to tackle barriers to collective investments in European infrastructure projects. Secondly, in Germany, we have seen changes to the Capital Investment Act earlier this year, which means it is now possible for closed-ended debt funds to give out loans to infrastructure projects.
Overall, we believe there are many opportunities where public infrastructure projects can be financed through private investors. If regulatory barriers can be overcome, and if the number and liquidity of infrastructure investments can be enhanced, we are confident that more private investors will invest in their own country rather than infrastructure projects abroad.
What are the main regulatory obstacles for German institutional investors to conduct direct investments in infrastructure?
The introduction of Solvency II next year is definitely one of the main barriers. Under the new regulation – which applies to insurance groups across the EU with a gross premium income exceeding €5 million – they will be allowed to invest in infrastructure companies but with higher capital requirements compared to government bonds. The European Insurance and Occupational Pensions Authority (EIOPA) is currently discussing a more advantageous treatment of infrastructure investments within the Solvency II framework. We welcome EIOPA’s approach but the strict criteria for eligible projects will still make it difficult. Other German institutional investors, such as pension funds or smaller insurance companies are restricted by the German Ordinance on the Investment of Restricted Assets of Insurance Undertakings (AnlV). One way for them to access infrastructure loans is via open-ended Spezialfonds but the investment ratio is tighter than in the investment legislation. This will affect smaller institutional investors as they are often not able to invest directly in infrastructure so the fund wrapper is the most common vehicle for them. We believe that institutional investors and the public sector would both benefit from less regulatory hurdles.
To what extent would investors in Germany benefit from model similar to that applied in Austria in which infrastructure projects are financed by issuing bonds?
We think to finance an infrastructure company for federal highways similar to the Austrian model would be highly beneficial. Bonds issued by such a company would be much more liquid assets than single project loans. As infrastructure projects are often longer-term, one of the challenges is to offer exit possibilities, especially for retail investors. Investment funds with a diversified portfolio of infrastructure bonds, loans or equity would be able to provide appropriate redemption rights. However, it is important for the infrastructure company to be privately organised. A quasi-governmental infrastructure company could distort competition in this sector and rather lead to a crowding-out of private investors.
This interview is part of a series of comments collected for the InvestmentEurope cover story for the September issue on alternatives.