B20 Panel: The next wave of global investment: what and where?

 

Remarks by the OECD Secretary-General, delivered at the B20 Summit


Sydney, Australia, 18 July 2014


Treasurer Hockey,
Dear colleagues,
Ladies and gentlemen,


Investment - together with competition, employment and trade - is one of the main drivers of growth that the Australian Presidency of the G20 has identified as key to achieving the Group’s collective ambition of an additional 2% GDP growth by 2018 over the current projections.


However, six years after the start of the global financial crisis, international investment continues to struggle. Global FDI outflows have only minimal increased in 2013 to $1.3 trillion, leaving them 40% below their peak in 2007. International M&A activity also remains well below the record level reached in 2007 and might decline by almost 20% in 2014 if the current trend holds. Since the start of the crisis, a growing number of OECD countries have been reporting declining inward and outward FDI, a phenomenon that could be described as ‘investment de-globalisation’.


These are worrying trends: FDI indeed represents the movement of capital to where it can be most productively allocated. It brings benefits such as technology transfer and increased competition. It also plays a major role in the organisation and optimisation of Global Value Chains.


Governments must take immediate and vigorous action to reverse such trends by removing unnecessary barriers and complexities that hinder investment. Since 2008, the OECD and UNCTAD have been monitoring new protectionist and liberalisation measures implemented in G20 countries. Our assessments indicate that although investment measures in G20 countries point in the general direction of liberalization, progress has not been spectacular.


Investment remains vulnerable to risks of hidden protectionist measures whether they are for the purpose of protecting national security or in the form of government support to so-called national champions. Some sectors, such as infrastructure, remain relatively closed to foreign investment as indicated by the OECD FDI restrictiveness index.


And some trends – such as the increasing use of local content requirements in areas such as renewable energy – are truly worrying.


Against this background, Governments should work together, notably in the context of the G20, to level the playing field and enable investors to compete, invest and innovate freely but also fairly - i.e. on an equal footing, with clear and predictable rules of the game. For this reason, we welcome the B20 recommendation to G20 members and other countries to adopt the OECD Code of liberalisation of capital movements and the OECD Declaration of international investment and multinational enterprises.

Governments should however go one step further and take a hard look at the fragmentation of the international investment landscape. There are now over 3000 bilateral investment treaties! Governments need to come together and modernise, simplify and achieve some coherence in this area – starting with broad agreement on some core principles. To achieve this, we should consider something similar to the “International Model Investment Treaty” suggested by the B20. This is an area where the OECD has strong competencies and could serve as a platform for the necessary international discussions. Furthermore, the OECD is working to increase coherence, cooperation and coordination in the way national governmental agencies and competition authorities are enforcing domestic competition policies and are working together to investigate global mergers and cartels.

We also need clearer rules of the game and smarter regulations to increase long-term financing for investment, including by unlocking financing from institutional investors.
This is critical in a context of reduced funding from governments faced with tight fiscal constraints and shrinking credit from banks that have to comply with new, stringent, prudential rules. This position is fully shared and supported by recent work of the B20 Task Force on investment and infrastructure.

There are however numerous obstacles including regulatory uncertainty (certainly the number one issue for investors), inadequate investment climate, lack of profitable and “bankable” projects or appropriate financial vehicles. This brings us to what I recently referred to as the “infrastructure investment and institutional investors puzzle”: on the one hand, you have an investment financing gap in terms of trillions USD; on the other hand, available assets under management by institutional investors around 80 trillion US $, and on paper - at least – a perfect match between the profile of these assets and the long-term liabilities of institutional investors. And yet, the paradox is that a mere 1% of their assets are being invested in infrastructure.

In order to solve this puzzle, the OECD has taken the lead in developing recommendations such as the G20/OECD High level principles on long term investment financing by institutional investors for which we are now developing effective approaches to facilitate their implementation - they will be delivered to G20 Leaders at the Brisbane Summit. We are also currently analysing government and market based incentives and instruments to promote long term investment financing, including the pooling of capital, a model which has been successfully used in Australia for instance.


Let me conclude by underlining that although it is critical that we develop the relevant tools and mechanisms to link potential investors with the appropriate investment projects, we must also focus on developing a more integrated approach to investment which takes into consideration factors such a governance, competition, anti-corruption and green investment.

The OECD is currently working to develop an architectural framework that integrates all these dimensions and can assist governments in developing multiyear national strategies to stimulate investment, including long term investment in infrastructure. By creating such a comprehensive investment framework we can reignite the engines of investment, taking us one step closer to achieving our overall 2% growth target and the OECD stands ready to champion this mission!

Thank you.

 

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