Taiwan:Govt and insurers work together on funding public infrastructure projects

Financial Supervisory Commission (FSC) Chairman Wellington Koo has proposed to securitise long-term returns for public projects such as PV power plants and offshore wind-power facilities, according to a report on the website of the American Chamber of Commerce in Taipei.

This is to address concerns over mega risks as well as calls for government guarantees or other protection mechanisms for insurance companies investing in public infrastructure projects in Taiwan. For example, in offshore wind power, should a typhoon destroy a set of wind turbines, the loss will be hundreds of millions of NT dollars, says an insurance company executive.

The Taiwanese government is keen for insurance companies to tap into their NT$23 trillion (US$789 billion) in insurance funds to help support national infrastructure and development projects.

At the top of the list is the green energy portion of the government’s “5+2” key innovative industry programme. With the ruling Democratic Progressive Party committed to ending the use of nuclear power and reducing reliance on fossil fuels, the only way to avoid major power outages will be dramatic expansion of renewable energy facilities for electricity generation.

Besides its inclusion in the “5+2” industries, green energy is also one of the eight major components of the government’s Forward-looking Infrastructure Development Programme, designed to lay the groundwork for the island’s development over the next three decades. It is estimated that the goal of creating 20 gigawatts (GW) of installed solar photovoltaic (PV) capacity by 2025 will require some NT$1.2 trillion in investment, while another NT$1.4 trillion would be needed by 2030 to build and operate 4GW of offshore wind power facilities.

In March 2017, the FSC began approving – on a case-by-case basis – the use of insurance funds for investment in green energy and other “5+2” industry projects. Other elements of the “5+2” plan, aimed at injecting fresh momentum into Taiwan’s economy, include industries related to the Internet of Things, biomedicine, defence, smart machinery, advanced agriculture, and a circular economy.

Last September, the FSC launched a two-year programme to actively encourage such investment, setting a goal of NT$30 billion in investment for the first phase, scheduled to end on 31 August this year. The amount for the second phase will be determined based on the first-phase performance.

Insurers and investments

So far, four life insurance firms – Cathay, Fubon, Shin Kong, and Taiwan Life – have invested NT$5.6 billion in six solar power projects. Taiwan Life and Fubon Life, for instance, have each invested NT$300 million in Setex Solar, an affiliate of AU Optronics. With initial paid-in capital of NT$1 billion, Setex currently has 43 megawatts (MW) of installed PV power capacity. Taiwan Life also plans to invest NT$327 million to increase the capitalisation of a PV power subsidiary of Gigastorage Corp, which already has over 30MW in PV power capacity.

Insurers are now allowed to invest, without the need for prior FSC approval, in special “5+2” industry funds set up by a newly established national investment company, Taiwania Capital Management Corp. Consideration is being given to extending that privilege to private equity funds for investing in green energy and infrastructure projects raised by investment trust firms. The FSC is also studying the provision of incentives for insurance firms to invest in “5+2” industries, such as permission for them to engage in more new innovative businesses and payment of a decreased premium for the insurance stabilisation fund.

In response, Cathay, Fubon, and Taiwan Life have announced investments of NT$300 million, NT$400 million, and NT$400 million respectively in the NT$4 billion Taishan Waterloo Fund floated by Taiwania Capital Management.

In addition to the “5+2” industries, the government hopes to channel insurance funds to other major infrastructure projects, such as the development of industrial land, in order to facilitate private investment. Two major targets are the third phase of the Changhua coastal industrial zone, with a projected area of 1,000 hectares, and the 32-hectare first phase of the Tainan technological industry zone. Each calls for an initial investment of NT$10 billion. The government plans to carry out the two projects using the BOT (build-operate-transfer) model, giving developers a 40-year management franchise for collection of stable income from rentals.

Previous attempts to promote investment in public projects by insurance funds were disappointing. Industry sources note that for investments by insurance funds, which is essentially money owed the insured, the risk must be controllable and returns sufficiently attractive. Kuei Hsien-nung, Chairman of the Taiwan Insurance Institute, explains that given the long-term nature of their financial obligations, insurance firms tend to be unwilling to invest unless there is adequate liquidity and a return on investment of at least 3% or 4% annually.