Remarks by Angel Gurría, OECD Secretary-General
Moscow, Saturday 16th January 2013
Ladies and Gentlemen,
The choice by the Russian Presidency to put financing for investment high on the G20 Finance agenda is a welcome one. Lack of investment in advanced economies is holding the recovery back; and FDI is not at the level that it used to be in developing countries. This outcome reflects the lack of confidence in future prospects for growth but also the drying up of traditional sources of financing for investment. If we want to ensure a better economic outlook, we need to mobilize all sources of financing, starting with the financing by banks, which has not resumed at a normal rate.
Over the last two decades, the business model of banks has evolved towards structures that are much more vulnerable, involving high levels of leverage and counterparty risk. We need to understand better how changes in banking business models may limit traditional bank lending activities for infrastructure and SMEs and raised the cost of capital for these sectors. These structural changes have been compounded by the banking crisis: in the absence of adequate recapitalization, some of them are still in trouble and many banks are still not performing the role they are called to do.
- A second key development in the financial sector is the decline of the role of stock markets as a destination for high-growth companies. Across the globe, the number of IPOs has fallen by half over the last decade compared to the previous one, while the volume of IPOs has shrunk by over 20%. This also means that the stock market is attracting increasingly fewer small companies with high growth potential. Further analysis is needed to understand these developments.
- Last but not least, because of the existing uncertainties, non-financial companies are piling up idle cash and shunning investment, instead of innovating, developing their business and creating jobs. This is of course bad news for future growth, and calls for immediate action to change the perspective.
• What should be done, in this context, to unlock financing for long-term investment?
- First, we need to unlock the credit channel to restore finance for investment, long-term investment in particular. The FSB has done an impressive job at developing and implementing regulatory reforms of the financial system. But we need to have a broader look at the financial reform agenda and figure out how the latter could help banks to perform their basic duties again - which is to lend to the real economy. I am not going to mention again OECD’s proposals in this realm. Just let me say that we need simpler rules for bank capitalization and a clear assessment of the health of the financial system.
- Second, we need to improve companies’ economic prospects and give them the incentives to invest so that they put their large amount of hoarded cash to work. For the non financial corporate profits to be reinvested in the economy, we need in particular to improve the business environment in G20 countries through specific structural reforms that I suggested yesterday evening at our dinner. We need to put productivity and growth back to the center stage of our policy agenda.
- We also need to ensure that governments are in a position to raise an adequate level of tax revenues and raise domestic resources to finance public outlays such as long term public investment. Fighting against tax avoidance as well as addressing base erosion and profit shifting – i.e. the possibility of double non-taxation of multinational companies - is instrumental in harnessing appropriate level of financing for investment, public investment in that particular case. The OECD is playing a leading role in these matters - I will hopefully report about this later on today.
• The potential role of institutional investors in the financing of long term investment
Let me finish by highlighting the need, given the ongoing strains on the public purse and the weakness in the banking system, to tap alternative source of long term investment financing, such as the growing assets held by institutional investors.
Around the globe, institutional investors such as pension funds, insurance companies, mutual funds, and, sovereign wealth funds are holding around USD 80 trillion in assets. Institutional investors could fill some of the emerging financing gaps, such as infrastructure and low-carbon projects. This is an urgent issue: the OECD estimates global infrastructure investment requirements to 2030 to be in the order of US$ 50 tn.
Today however, less than 1% of institutional investors’ assets are actually invested in infrastructure projects with an even smaller proportion allocated to green infrastructure. Major challenges indeed remain before a substantial increase in allocations takes place across the industry:
- First, there is policy uncertainty - such as the difficulty of governments to price pollution or to remove fossil fuel subsidies, which are impediments to the development of green infrastructure;
- There is also a lack of suitable investment vehicles (such as green bonds or funds) providing the liquidity and risk/return profile that institutional investors need;
- Last but not least, there are investment barriers such as market distortions and regulatory obstacles - ranging from restrictions to foreign equity ownership to local content requirements, and from preferences for state-owned electricity providers to vertical bundling requirement.
The OECD stands ready to help the Group to better understand the policy constraints that may be limiting the supply of long-term finance, as well as those that reduce the appeal of long-term investment projects. For instance, the OECD has embarked on an ambitious project aimed at documenting and analyzing the various obstacles to long term investment by institutional investors and the development of related policy recommendations. To do so, we are building on large networks of institutional investors.
Let me recall also that the OECD has strong institutional ties to the financial authorities in charge of institutional investors, as our organization is hosting the secretariat of the International organization of pension supervisors (IOPS). In other words, the OECD has much to offer to the G20 and can help the Presidency to deliver concrete and meaningful outcomes on the issue of financing for investment.
OECD & G20
Secretary-General in Moscow, for the G20 Finance Ministers and Central Bank Governors meeting (14th - 16th February 2013)