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Big investors cautious on German public-private partnership plan

By Jonathan Gould and Caroline Copley

BERLIN/FRANKFURT (Reuters) - A German government plan to boost investment by involving the private sector more in infrastructure projects has been given a cautious welcome by some large investors.

Germany is currently investing around 100 billion euros (£71.55 billion) too little per year, the head of the Berlin-based DIW economic institute says, and is under pressure to help pull the rest of Europe out of the doldrums by spending more.

Big institutional investors such as insurance companies are also keen to get involved in so-called public-private partnerships (PPP) for road building or power projects to obtain higher returns than the current 0.16 percent they can earn by investing in 10-year German government bonds.

A 21-member panel of experts convened by Economy Minister Sigmar Gabriel was tasked with identifying options on how to proceed with investment projects. But it found it difficult to meld the views of its trade union and investor representatives, said the committee's chairman and DIW head Marcel Fratzscher.

"The task we‎ had in front of us was not how can we make sure insurance companies can get 'x' rate of return‎," Fratzscher said. He said some committee members questioned why the state should pay a premium for the involvement of the private sector, which seeks a higher return on its investment, rather than financing projects from public coffers.

German insurance industry trade association GDV said it would look closely at the expert group’s recommendations and emphasized that insurers must be certain of conditions before they lock up their clients’ money in long-term investments.

"We as the insurance industry will not exclude ourselves from any serious discussion over how private capital can be put to work to further develop Germany’s infrastructure," said Joerg von Fuerstenwerth, management board chairman of the GDV, whose members such as Allianz and Munich Re want to invest billions of euros in infrastructure projects.

German insurer Talanx said infrastructure investment could offset some of the damage the European Central Bank's artificially low interest rates were doing to insurers' investment income.

"The return on capital must correspond to the risk, so the yield should be higher than on German government bonds," Talanx Finance Chief Immo Querner told Reuters.

Talanx says it ultimately buys into only about one in five of the projects it studies, so boosting total investment would entail a vast increase in the number of opportunities it vets.

Smaller insurers face an even tougher challenge as they lack the manpower and expertise to assess available projects.

The Gabriel committee suggested creating separate infrastructure investment funds that would be available to institutional investors and to individual citizens as a way around the problem, but the terms have still to be worked out.

Germany's experience is being watched closely at EU level in the hope that a greater portion of European insurers' 8.5 trillion euros in assets under management can be directed towards infrastructure.

EU insurance watchdog EIOPA is looking at ways to make infrastructure investing easier and plans to report its suggestions to the EU Commission this summer.

But for the talk of greater private sector involvement in German infrastructure, the role of the state as the principal financier is unlikely to be shaken, said Deutsche Bank economist Oliver Rakau.

"We favour more investment but we think most of that will be fulfilled by the government's current budget plans," he said. "It (PPP) will remain a discussion in a tea cup."

(Editing by Hugh Lawson)