Remarks by Angel Gurría, OECD Secretary-General, delivered at the G-20 Finance Ministers and Central Banks Governors’ Meeting
Cairns, Australia, 20 September 2014
(As prepared for delivery)
Ministers and Governors,
Six years after the start of the global financial crisis, investment continues to struggle – which is holding back the recovery in many of our economies. Global foreign direct investment flows, for example, increased by only 4.5% in 2013 and remain 30% below pre-crisis levels, while international mergers and acquisitions, an important component of FDI, were down sharply in the first quarter of 2014.
With respect to investment in infrastructure, companies in many countries have strong balance sheets and money sitting on the side-lines waiting to be invested. Institutional investors and other intermediaries, which are flush with funds and liquidity, readily invest in equities and fixed income of companies. While it is helpful to make it easier for intermediaries to invest in infrastructure via risk sharing and suitable financial instruments, it must always be remembered that it is the companies themselves that do the actual investing.
Policy has generated plenty of financial risk taking on the part of institutional and other investors, but the greatest paradox today is the decoupling between this, on the one hand, and ‘the great hesitation’ of companies to invest in real projects, and most notably in the area of infrastructure, on the other.
Debt finance, while necessary at certain stages, has never been a great way to invest for the long-term, as students of the Asia crisis will attest. Investing retained earnings is very important for truly long-term investment, so that shareholders carry a lot of the risk which varies with the success or failure of each project.
But this risk may be perceived as too high where institutional and governance problems persist or regulatory reform is lacking.
All of these factors contribute to ‘the great hesitation’ in putting these plentiful funds to work and we thus have to revert this trend. The key task for governments is to resolve institutional and governance issues in order to increase the prospect of bankable returns for companies. This diagnosis is fully shared by the business community – as reflected by the recommendations unveiled at the B20 Summit held in Sydney mid-July.
To help address those difficulties, the OECD delivered to you and G20 Leaders, last year, the G20/OECD High-Level Principles on Long Term Investment Financing by Institutional Investors.
We are now going one step further by sharing with you very practical suggestions – dubbed “effective approaches” - to facilitate the implementation of these policy principles. These approaches provide examples of successful and innovative practices in such areas as regulation, governance, data collection and the development of financing instruments and vehicles for funnelling institutional investment into infrastructure and SMEs.
I am thinking for instance of ‘inverted bid model‘, whereby the traditional infrastructure bidding process is reversed by first having the government tender for the long-term owner-operator, then followed by separate bids for construction, operation and maintenance; or of innovative approaches such as the “asset recycling initiative”, 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.
We are also helping countries self-assess their long term investment strategy and policy framework for the promotion of long-term investment and SMEs financing – including by institutional investors. In April, in Washington, you asked the G20/OECD Task Force on Institutional Investors and Long-Term Financing to develop a checklist on long-term investment financing strategies and institutional investors.
As agreed by the Task Force, this checklist will make it possible for G20 members to anonymously position themselves vis-à-vis other countries and identify the strengths and weaknesses of their policy framework in such areas as regulatory and governance structures, or the development of long term savings - just to cite a few examples.
The next step will consist in the development of a joint World Bank/OECD checklist in the areas of public-Private Partnerships and Project Preparation.
In the same vein, the OECD continues to work on a major G20/OECD 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.
At any rate, the involvement of private investors in this work is critical to moving the debate on long-term investment to the next stage. This is why the OECD not only welcomed the recent B20 recommendations, but has also launched a new very large network of private investors – including institutional investors - engaged in long-term investment financing, with the objective of enhancing consultation and dialogue.
For the very same reason, we are supportive of the Presidency’s Global Infrastructure Initiative: this kind of multi-stakeholders platform can be instrumental in improving coordination between policymakers, the financial industry and the international organisations – a prerequisite to addressing the infrastructure challenge.
The OECD stands ready to support and collaborate with the Global Infrastructure Initiative and the incoming Turkish presidency of the G20 to take its infrastructure investment agenda forward.
Investment has been sluggish and this has predictably slowed global growth down. Let’s wake it up and provide the proper incentives for this crucial cylinder of the growth engine to be firing at full speed!