G20 Finance Ministers and Central Bank Governors Meeting
Session 5: Investment and Infrastructure
Remarks by Angel Gurría,
Chengdu, 24 July 2016
(As prepared for delivery)
Ministers and Central Bank Governors,
A critical dimension of the 'low-growth trap’ is a lack of investment. Weak investment is undermining productivity growth and lowering potential output by holding back capital deepening and hindering the pace at which innovation is embodied in plant and equipment.
Advanced and emerging economies both have substantial infrastructure needs and low global interest rates provide an important opportunity to prepare for the future. Indeed the global economy requires around USD 93 trillion of investment in infrastructure (e.g. buildings, transport, energy) between 2015 and 2030 to support economic growth and the broader development agenda. The needs for investment are so vast however that private sources of financing are indispensable.
Channelling more private money to infrastructure is possible because it is fundamentally a policy issue - as we have amply documented in our contributions to the G20.
The G20, under the Chinese Presidency, called upon the OECD to organise a country-driven effort to deliver a G20/OECD Guidance Note on how to scale up and diversify private financing in infrastructure.
This requires a pragmatic set of policy recommendations, and calls upon diversified and innovative sources of finance from banks, institutional investors, and corporates to design and structure an optimal blend of finance.
The guidance note illuminates the leading practices used to activate private infrastructure investment from the array of financing instruments and institutions, to risk mitigation techniques. Emerging financing models include asset recycling, investment platforms, equity and debt funds and project bonds.
The clean energy sector offers an excellent case study in which to discuss the use of a diverse set of financing instruments and the importance of supportive public policies. Growth of this sector, like others, is often constrained by inadequate access to bank credit; climate goals and investment policies are often misaligned; and the energy industry operates in fractured domestic and international markets.
In spite of this, significant innovation in financing models coupled with policy support have increased Investment in renewable energy to an all-time high of USD 286 billion in 2015 with innovative equity financing in OECD countries, and strong green bond issuance in China. Indeed China estimates that 85 % of its total green investment will need to be financed by private capital.
Here, like in other sectors, a new strategy of recycling capital from the balance sheets of traditional funding institutions has emerged. By buying into projects and/or refinancing existing projects, institutional investors free up debt and equity capital in construction and operating-stage renewable energy projects. Banks, private equity funds, project developers and utilities can then redeploy the proceeds into the development and construction of new projects.
The recent OECD Business and Finance Outlook 2016 looked at the financing of wind energy projects in Europe. It found that public utilities were the largest sources of finance in 2010, backing 62% of wind energy deals. By 2015, utility finance had diminished to 39% while institutional investor finance grew to 37% of all wind energy deals, from only 6% in 2010. This is one example indicative of the overall trends.
Strengthening connectivity is also a priority of the G20. Infrastructure connectivity plays a critical role in facilitating global integration, particularly participation in global value chains. The close links between infrastructure, trade and investment calls for integrated strategies that better align infrastructure strategies with overall industrial and development goals. To further this goal, we are eager to work closely with our colleagues from the World Bank Group on the development of the “Global Infrastructure Connectivity Alliance”.
The OECD will continue to review emerging practices in innovative finance and investigate how public policies can help. We will continue supporting the implementation of the G20/OECD Corporate Governance Principles with the revision of the assessment methodology and report on the development of effective approaches to support the implementation of the G20/OECD High-Level Principles on SME Financing. Together these will lead to more effective and concerted efforts in the G20 to finance investments in the future and escape the ‘low-growth trap’.