Private capital for infrastructure

Despite a number of positive developments, the funds allocated by the German Federal Government do not suffice. Private investors should seek fresh capital. In this interview, Christian Fingerle of Allianz Capital Partners elaborates on the virtues of public private partnerships (ÖPPs).

Mr. Fingerle, the German government wants to use public private partnerships to acquire more capital for investment in infrastructure. This intention falls on sympathetic ears, especially as far as insurance companies are concerned. Why are you so interested in this model?

Thanks to the long-term nature of the investment and the relatively stable revenue, investments in infrastructure fit in extremely well with the business model used by life insurance companies and pension funds, since their obligations towards their customers also tend to have a long-term horizon. We can use these stable and long-term returns from infrastructure projects to guarantee a certain standard of living for our customers when they reach old age.

Who can benefit from this model? Where exactly do the advantages arise?

The PPP model is a partnership between the public and the private sector that yields dividends for both parties involved. A plethora of advantages comes to mind for the public sector, the citizens and the taxpayers: for example, reducing the strain on public funds, multiple risks being transferred to the private sector, projects realized in an efficient, prompt and cost-effective manner and a focus on innovation and customer satisfaction. From the point of view of the private sector, PPP projects contribute to construction firms having more orders on the go and create additional opportunities for capital investment, say for retirement funds and insurance providers. From an economic point of view, these projects increase the total number of people in work and make stable returns a reality for many pensioners and insured persons.

So implementing PPP models would be a win-win situation for all involved?

Definitely, but only provided these projects are structured and bundled in a sensible way, so that as many investors as possible contemplate taking part in them. A procedure that is too long and bureaucratically complicated, or projects that are divided into too many small parts are not attractive to investors because they imply a cost-to-value ratio less favorable than that of comparable alternatives for both domestic and foreign investment.

Critics of the model, for example the leader of Die Grünen, Dr. Anton Hofreiter, retort that a win-win situation is completely out of the question. According to them, insurance companies would win while the taxpayers lose.

Discussions around PPP models are often pared down to a basic comparison between the interest rate currently needed for the German Federal Government to be able to refinance itself, and returns private capital investors strive for when taking on these sorts of projects. Yet it is important to bear in mind that in the current market environment, private investors demand relatively low returns on borrowed capital and that borrowed capital often makes up a very large share of project financing, in some cases over 90%.

Although the returns demanded by equity providers are higher, these also pose significantly more risk. Within an PPP model, the risk is transferred onto the private sector, so the latter has to up its game as far as risk is concerned. Unlike publicly financed projects, whereby taxpayers often have to foot the bill if a delivery is delayed or the total costs are higher than expected, in privately financed projects, this risk is assumed by private companies. This means no nasty surprises in store for the taxpayer, like the billions of additional costs incurred during the construction of the Berlin airport. Moreover, projects set up and financed by the private sector allow for completely different incentive structures to be implemented. They make it possible to exploit the often considerable potential for cutting costs and simultaneously imply pronounced customer orientation and a willingness to innovate.

The Federal Audit Office also voiced concerns about the cost-effectiveness of PPPs.

The report published by the Federal Audit Office in 2014 has resulted in a barrage of criticism from various sectors of society and the economy. An appropriate assessment is sure to break the mold, so allow me to make a few more observations. Firstly, the data available to date is incomplete at best, so it is not really possible to make empirical evaluations, let alone comparisons, between publicly and privately financed projects using relevant scientific standards. This makes it difficult to derive appropriate conclusions as to the political measures that need to be taken. Secondly, in my opinion and based on our own investment experience, the many advantages the PPP models present for the taxpayer, including the transfer of risk, customer orientation and innovative strength, are often underestimated.

Could you hazard a guess about the future? What's in store for PPPs?

Let's take a look at other countries. Countries like Great Britain, the Netherlands and Australia prove that a consistent long-term PPP policy can generate sustainable success. This is subject to the public having a positive attitude to private investment and political and supervisory authorities putting an appropriate framework in place. We will probably have to dedicate a lot of time to this, like other countries have had to, but we can also take advantage of insights that have already been gained in the global context. By announcing a program that will invest seven billion euros in public transport, the politicians are setting a positive example, showing we want to continue using and expanding the PPP model here in Germany.

The interview was conducted by Tim Wohlfarth.