Remarks by Angel Gurría, OECD Secretary-General, delivered at the APEC Finance Ministers Meeting: Session 2, Cooperation on Infrastructure Investment and Financing
22 October 2014, Beijing, PRC
(As prepared for delivery)
Minister Lou, Ministers, Dear colleagues,
The downturn in fixed investment among advanced economies from the onset of the global crisis was unusually severe, widespread and long-lasting relative to comparable episodes in the past and investment gaps are set to remain large relative to projected future long-term trends.
Investment has also slowed down, alongside growth, in a number of emerging market economies. This is a major cause of concern as prospective needs for investment, notably global investment in infrastructure, are huge: they are estimated by the OECD at approximately USD 70tn by 2030.
Newer, but highly important infrastructure demands to increase connectivity through broadband and information and communication technology solutions makes this need even greater.
Family photo of the APEC 2014 Finance Minister's Meeting. Angel Gurría, Secretary-General of the OECD, first from the right in the last row, Beijing, China. Photo: APEC
But to bring these investments on stream, we need to light up the other cylinder of the growth engine: credit. And this engine, I’m afraid, is still working at very low power. In many parts of the world, banks are indeed still adjusting to bad loans made before and during the crisis.
The problem is not a lack of funding for investment however. There are plenty of liquidities out there that could be put to productive use – such as the USD80tr. of assets under management by institutional investors or the cash being piled up by big corporations.
The challenge – and a key concern for policy makers going forward is to effectively harness these resources – notably those of institutional investors - for investment - and in particular for long-term investment financing.
There are indeed numerous obstacles to long-term investment financing by institutional investors - including regulatory uncertainty (certainly the number one issue for investors), inadequate investment climate, lack of profitable and “bankable” projects or appropriate financial vehicles.
OECD Investment Policy Reviews in several APEC countries suggest that various policy impediments to infrastructure investment remain in the region.
These include restrictions to foreign ownership in infrastructure sectors, as well as aspects of competition, pricing and corporate governance regimes that continue to limit the efficiency of infrastructure markets and impede competitive neutrality between public and private investors.
To help address those difficulties, the OECD elaborated the High-Level Principles on Long Term Investment Financing by Institutional Investors – which you officially welcomed last year and are referring to their effective implementation this year. These principles precisely encapsulate our recommendations for policies conducive to higher levels of long term investment.
We are now “walking the extra mile” and moving “from solutions to actions”, by crafting operational and effective approaches to facilitate the implementation of these policy principles and unlock finance for long-term investment.
These approaches, based on an in-depth survey of many countries – including several APEC members - provide examples of successful and sometimes very innovative practices in such areas as regulation, governance, data collection and the development of financing instruments and vehicles for funnelling institutional investment into infrastructure.
I am thinking for instance of innovative approaches such as the “asset recycling initiative”, promoted by Treasurer Hockey and implemented in Australia’s federal budget 2014-15 - that provides incentive payments to state and other sub-national governments to sell their state-owned assets and reinvest the proceeds into economic infrastructure.
The OECD, in association with many partner countries, including several members of the APEC, is also developing practical tools, such as a voluntary checklist to assist governments in self-assessing their support schemes for long-term investment financing.
This checklist will make it possible for APEC countries to identify the strengths and weaknesses of their policy framework in such areas as regulatory and governance structures, or the development of long term savings and local capital markets.
Let me recall that one key challenge faced by Asian countries is the development and deepening of local capital markets: this is a prerequisite for institutional investors to share in the financial risks and rewards of infrastructure projects. Traditional bond and equity instruments are not always well fitted for this job – hence the need for new instruments.
Concrete measures are needed for example to foster the development of local currency bond markets, the issuance of project bonds and the development of derivative products and hedging instruments.
In the same vein, the OECD continues to work on a major project aimed at analysing government and market-based incentives for long term investment financing. As part of this project, we are developing a taxonomy outlining the wide range of options and instruments available to institutional investors for investing in infrastructure, focusing on new forms of investment – such as partnership and co-investment models between banks and institutional investors – as well as on risk mitigation mechanisms.
The aim of this taxonomy is to create an agreed framework of instruments and incentives needed to facilitate the development of infrastructure as an asset class, in order to leverage private sector capital.
Last but not least, the OECD is maintaining a Network of Senior PPP Officials that has been meeting annually for the past 7 years. Their collective wisdom for managing PPPs has been brought together in a set of OECD Principles on Public Governance of PPPs - which have relevance for countries at all stages of development, from emerging and developing economies which are just starting out their involvement with PPPs, through to advanced economies that want to keep up with best practices among their peers around the world.
There is ample scope for developing PPPs further in the APEC region: indeed, Asia-Pacific only accounted for 20% of the PPP transaction volume recorded between 1985 and 2013 (against 45% for Europe).
Building on these instruments and guidelines, we believe the OECD could make a very useful contribution to the design and implementation of a roadmap for infrastructure PPPs in the APEC Region.
We have been working very closely with the Indonesian authorities last year in the context of their Presidency of the APEC; with Minister Jiwei’s administration this year and we joined the newly-established APEC PPP Experts Advisory Panel; we stand ready to continue supporting your efforts, under Philippines’ Presidency next year, to move this debate from Principles to Actions, in the pursuit of better policies for better lives.