Promote the “investments of the future”. This idea may seem somewhat provocative at a time of crisis when deficits and government debt are soaring. But it is a fundamental challenge that must be met, for without such investments there can be no sustainable growth, no new jobs and no long-term economic prospects. And it is the motivation behind the Long-Term Investors Club, which brings together financial institutions from Europe, Asia, the Gulf and North America, with total assets of $3 trillion.
This is the dilemma: the crisis is forcing governments to think in the short term and companies to think in terms of cash flow and profitability, at a time when the global challenges we face require massive investments in projects that will only become profitable in 20 or 30 years. In total, it would take a global investment of nearly $2 trillion to cover the investment needs in the transport, energy, water and telecommunication sectors by 2020-2030. This sum does not include the investment needs in the innovation and research sectors, both of which are crucial for stable production levels.
The purpose of the club is to bridge the gap between the priority of tackling short– term problems and the need to address long-term challenges. There is obviously no magical solution, but the use of a new type of financial engineering that brings together public and private partners may prove to be productive.
From this standpoint, long-term investors– i.e., financial institutions that have low or no short and medium-term liability obligations, such as public financial institutions, sovereign funds and certain pension funds and insurance companies–have a key role to play. Their ability to plan over the long term enables them to finance projects that will only generate income later, and thereby act upon the factors that will determine potential growth, in particular by financing the innovation, research and major projects essential to the creation of new jobs.
These long-term investors will be able to contribute much more effectively to financing these needs if they can rely on a global financial regulatory framework that encourages a long-term perspective, rather than one geared to short-term value, which makes corporate assets vulnerable to the volatility of markets. This is the message that we are conveying to European and international regulators with regard to the revision of the prudential reserve ratios and IFRS (International Financial Reporting Standards) standards.
There must also be greater co-operation among long-term investors. This is the role that the club that I chair intends to play. The InfraMed Fund, a fund for investment in urban, energy and transport infrastructures in the southern and eastern regions of the Mediterranean, and the Marguerite Fund– 2020 Fund for Energy, Climate Change and Infrastructure in the European Union–that we have just launched jointly, are the initial successful examples of this new type of financial engineering. In the MENA region, for example, a volume of investments between €3-4 billion per year over the 2009 2014 period would make it possible to raise the public and private funds needed to carry out priority projects in the urban, transport and energy sectors, representing a total of €150 billion.
The aim, then, is to recognise the role of long-term investors, but also to define their area of responsibility and clarify their relations with shareholders and governments. The discussions that are under way, in particular in the OECD, on the governance of sovereign wealth funds, have lost none of their relevance. But we must go further. The exceptional nature of the crisis that we are going through calls for new thinking about the contribution of infrastructure investments to sustainable growth, and the means of mobilising longterm savings.
Gary Campkin (2009), “Encouraging Investment”, in OECD Observer No 275, Paris.
Angel Gurría (2009), “Why governance and investment matter for development”, in OECD Observer No 275, Paris.
©OECD Observer No. 279, May 2010