Remarks by Angel Gurría, OECD Secretary-General, delivered at the Conference of Montreal
Montreal, Canada, 9 June 2014 – 15h00
Ladies and Gentlemen,
It is a great pleasure to be here for today’s important discussion on the role of long-term investors in economic development.
A modest pick-up in growth in the advanced economies is finally helping heal the wounds the great recession has wrought on our societies. To cement a durable, sustainable and inclusive recovery, however, the global growth engine needs to be firing on all cylinders – and we’re not there yet!
Despite some bright spots, investment – one of these cyllinders of growth - is still lagging. In fact, according to the latest OECD Economic Outlook, released last month, it will remain below pre-crisis levels in the euro-area and in Japan in the near future, undermining the longer-term productive capacity of businesses and whole economies.
Institutional investors can be the lynchpins of long-term investment
In part because our banks are still rebuilding their balance sheets in the wake of the global financial crisis, credit growth remains feeble, making the financing of investment more challenging than ever.
In any case, banks tend to depend on short-term funding, meaning they are not well suited to funding costly long-term and often illiquid investments. This is why non-bank sources of funding are so important, and this is where institutional investors with stable funding bases come in!
This is nowhere more relevant than for infrastructure – a quintessentially long-term investment! In many countries – advanced, emerging and developing economies alike – significant investment in infrastructure is needed to upgrade the capital stock and productivity potential of our economies, and to lay the foundations for sustainable growth over the longer-term.
Between 2007 and 2030, for example, some USD 71 trillion of investment will be needed globally in telecom, transport, water and electricity infrastructure. On the face of it, infrastructure should be a rather appealing investment category, but it accounts for less than 1% of the $80tn assets under management globally. Clearly major barriers to investment still remain.
Identiying such barriers was the first step in the OECD’s recent and substantial work in the area of long-term investment. We then moved “from problems to solutions” by reviewing policies aimed at removing these constraints, and by putting forward the G20/OECD High Level Principles presented at the St. Petersburg Summit in September 2013.
Operationalising the OECD High-Level Principles on Long-Term Investment
We now need to “walk the extra mile” and move “from solutions to actions” by focusing, as G20 Leaders have requested, on the practical and effective implementation of measures to encourage long-term investment financing by institutional investors. This necessity underpins today’s discussion. Addressing the challenge was one of the objectives of the roundtable the OECD co-organised with the G20 Australian presidency only last week in Singapore. We are focusing, in particular, on four sets of issues:
- First, we need to bridge the gaps between policy makers, entrepreneurs and institutional investors. To this end, reducing regulatory uncertainty is essential.
- Second, we need to better match the most relevant and innovative financial instruments to specific investment projects, taking account of the stage in the project’s life-cycle. This will support a better “division of labour” between the various funding providers. Pooling mechanisms dealing with how to get large and small institutions to participate in debt and equity financing are important. And the OECD presented preliminary work on this to G20 Finance Ministers in Washington earlier this year.
- Third, there is the issue of institutional governance. Institutional investors’ governing bodies need to be able to properly identify, measure, monitor and manage the risks associated with their portfolios, including environmental, social and governance risks. Fourth and finally, we need to look at the accounting treatment of long-term investments by institutional investors. There is a need to better reconcile fair-value standards for accurate and reliable information with long-term investment business models.
Important Role for the Public Sector
The public sector has traditionally played an important role as a long-term investor in economic development, particularly for infrastructure projects. Increasingly, we want to see private sector funding ‘carry the torch’, but the public sector will retain an important influence, both as a provider of finance and in defining the ‘rules of the game’.
The impact of public investment depends to a large extent on how governments manage it. When done right, it can serve as a catalyst to leverage private investment. Well-governed public investment strategies can have a knock-on impact by creating favourable conditions to attract private investment and generate a multiplier effect.
Precisely to encourage better management of scarce state resources, the OECD adopted in March 2014 a Recommendation on Effective Public Investment Across Levels of Government. The purpose is to help governments at all levels assess the strengths and weaknesses of their public investment capacity, using a whole-of-government approach, and to set priorities for improvement. It addresses3 systemic governance challenges that all governments face as long-term investors:
- Coordination challenges across levels of government;
- Capacity challenges - in particular at the sub-national level;
- Challenges in framework conditions (budgeting, procurement, and regulatory quality).
In more recent years, we have seen the rise of Sovereign Wealth Funds, which now account for upwards of USD 6.3 trillion in assets under management. Given that many are mandated to provide for future generations, they can certainly be considered to be long-term investors!
Sovereign Wealth Funds can also play a role in economic development, whether domestically or globally. In fact, there is a notable recent trend in their mandates and investment strategies towards greater domestic investment. This is not an unwelcome development, but again, it needs to be managed properly to avoid common pitfalls like politically directed lending and poor transparency.
With this in mind, the OECD has helped develop the ‘Santiago Principles’ on good corporate citizenship for sovereign funds investing abroad. We have also developed the OECD Guidelines on Corporate Governance of State-Owned Enterprises to help governments ensure the highest standards of governance, transparency and accountability.
Going forward, we are going to need new and better models of partnership between public and private sectors – and within the private sector – if we are to achieve our long-term investment goals.
For example, co-investment platforms have emerged as a way for investors to align interests, achieve larger scale, and invest in assets without the expense of fund managers. The Canada-based Global Strategic Investment Alliance (GSIA), and the Canada Pension Plan Investment Board (CPPIB) -led syndicate model are examples of different co-investment structures that may help institutional investors access long-term investments more efficiently.
Solving the long-term investment ‘puzzle’ must, by its very nature, be a joint effort between public and private sectors. Policymakers need to partner with institutional investors to find workable solutions.
This is the reason why today’s discussion is so important and why I personally attach a lot of importance to the OECD’s Institutional Investors and Long-Term Investment projects. These initiatives help us convey to the highest level policymakers actionable, evidence-based, policy solutions that have been ‘road-tested’ with the private sector. Together, we are laying the foundations not only for better investment policies for better lives.
Mr. Angel Gurría, Secretary-General of the OECD, in Montreal, 9-11 June 2014