EU Makes it Easier for Insurers to Invest in Broadband Infrastructure

The European Commission has today announced new changes that are designed to encourage large institutional investors, such as insurers and pension funds, to put an extra £15bn or so into the development of infrastructure projects (broadband, roads, energy etc.) around Europe.

The European Union already plans to improve related infrastructure development regulation through their Single Telecoms Market proposals and on top of that the €315 billion (£232bn) Investment Plan for Europe (here) also aims to push more money towards the deployment of faster broadband (the EU already commits quite a lot towards related projects in the United Kingdom).

One part of the above strategy involves finding new ways to encourage greater private funding from large institutional investors. At present European insurance firms invest around €22 billion (£16bn) in infrastructure projects, which might sound like a lot but it represents less than 0.3% of their total assets. The EU believes that it can coax this figure up to 0.5% and that alone would mean an extra €20 billion (£15bn) in the pot.

However related investors are often hesitant to increase their commitment because it obliges them to “hold a high level of capital against those investments” and so the EC intends to modify the Solvency II Delegated Regulation to create “better incentives for insurers to invest in infrastructure projects“.

One of the ways in which the EC can do that is by reducing the amount of capital which insurers must hold against the debt and equity of qualifying infrastructure projects (e.g. all infrastructure equity investments will now have a risk calibration of 30% of their value, compared to 49% for unlisted equities).

EC Statement

“The rules that apply to those insurance companies have a major influence on whether or not they decide to take on long-term investments like infrastructure projects. Solvency II is the prudential framework for insurance companies in the EU. It introduces risk-based capital requirements for investments made by those insurance companies. This means that when selecting their investments (in equities, bonds, property, etc.), insurers will take into account the capital charges that apply to them under Solvency II.

Currently, an insurance company wanting to invest in a public project such as a motorway would be subjected to the same capital charge as if it invested in any private company – even though infrastructure projects generally benefit from predictable future revenues (like motorway tolls) and therefore have a better risk profile.

In view of this, the Commission has decided to change the rules under Solvency II to give insurance companies better incentives to invest in infrastructure projects.”

Apparently only investments in infrastructure projects that meet the ‘qualifying criteria’ will benefit from the lower capital charge, which is to say that related projects must be able to generate predictable cash-flows and withstand stressed conditions.

Something like that is surely a lot easier for financially stable / big operators, such as BT and Virgin Media, to achieve than it would be for smaller providers. On the other hand plenty of smaller providers, such as Hyperoptic and Gigaclear, have already managed to attract tens of millions in private investment.

As you’d expect the related investments would also be able to take the form of equities, bonds or loans and the “contractual framework of the project should contain provisions to protect investors“. Assuming there a no objections to the proposals from the European Parliament and the Council then the measures could be ready in time for 1st January 2016.