WEEKLY COMMENT 28-05-2015
By Barry Edwards
Increasing Investment in Germany
The German government recently published a report by a commission that was set up and sponsored by the Federal Ministry for Economic Affairs and Energy. It is about increasing infrastructure investment in Germany specifically but is also very relevant for all EU countries. The report is 20 pages long and is easy to read, click on the link below if you would like to read it;
The following is taken from the summary to the report;
“This report concentrates first of all on analysis and recommendations for action in the area of public infrastructure investments, particularly at municipal level, and in the area of federal trunk roads. Moreover, it is the task of the state to establish adequate conditions for private investment. The objectives in this connection must be to ensure that the markets function and to improve the way they function. The Expert Commission stresses that public investment and private investment are highly complementary. Employment, economic growth and prosperity depend on a dynamic, innovative economy which in turn requires an efficient public infrastructure and a corresponding environment.
Weak investment is not a purely German phenomenon by far. The current level of public and private investment is too low in many other countries in Europe as well. In light of this, strategies for boosting investment in Germany should be integrated into a pan-European investment initiative such as the “Juncker plan”.”
The main problem for most countries around the world with the exception of China, Japan and a few others is a lack of infrastructure investment to enable their economies to expand and encourage businesses to invest to compete with successful companies around the world. Globalisation has meant that the world is the market place and any company large or small has to be competitive if it wishes to survive. To be able to do that it is necessary that the operating infrastructure in their country has to be well planned and capable of supporting the vital facilities companies need to compete successfully.
In many developed countries this has been seriously deficient and is beginning to affect the ability of some companies to expand and employ more people. This is why it is important that more attention is paid to keeping the infrastructure up to date and well maintained. Unfortunately, it is a very expensive business and most countries struggle to find the vast resources necessary to fulfil this ambition in these days of large budget deficits. Therefore, the report mentioned above and other efforts around the world are important in finding the mechanism to combine state funding with the vast resources available from the private sector.
In the main, investors are keen to get involved providing the risks are manageable because the yields attainable match the outgoings pension funds have to provide for their pensioners which has recently been a big problem in this low interest environment. Many professional investors have a low risk culture, which in effect means that private investors are unwilling to be exposed to the construction risk of infrastructure investment but very willing to invest once the project has been built and the returns are clear for all to see.
The other main point is that the investment in this category has to be made some time before it generates economic return either by better communications or new facilities to encourage private investment, such as ports, airports, toll roads and the like. The balance between the two is what this German report is all about and all sectors of government are beginning to understand that a better finance structure must be put in place.
Public Private Investment (PPI) is the term used to describe this approach and the UK has been a leader in this field for some time. However, many of these investments proved to be more expensive over many years for some projects, hospitals are one example, where the funding costs for private loans under the Private Finance Initiative (PFI) are greater than government can obtain directly.
The perfect method of combining public and private investment will evolve over time and create a new class of financial instruments to mitigate the risks involved. It is very likely that the City of London will be the innovators of the structure for these bonds and derivatives which will probably be adopted throughout Europe and the rest of the world. The vast sums now required to update infrastructure worldwide according to various studies fluctuates between $200-300 trillion, making it well worth while becoming involved.
The potential and the massive boost to the world economy over time is very attractive in today’s slow growth environment and a perfect method of utilising the vast accumulation of savings that are looking for a better return than the meagre rates on offer at the moment.
That’s all for this week, more observations next week.