How to make infrastructure investment work for all

With citizens, communities and politicians increasingly questioning the benefits of globalisation and the multilateral trading system, the OECD’s Greg Medcraft looks at what we can do to ensure foreign infrastructure investment is high quality, sustainable and works for all.

The 2017 OECD Business and Finance Outlook demonstrated the importance of a level playing field to ensure the benefits of trade and investment fall more evenly and fairly. It described how OECD standards can help set the ‘rules of the game’ for a level playing field, by promoting mutual market openness, fighting cross-border cartels, discouraging undue government support for internationally-active state owned enterprises (SOEs), preventing transnational bribery to win contracts, and avoiding competitive advantages based on compromised labour and environmental practices.

BFO-2018-coverpage-250x333The 2018 OECD Business and Finance Outlook turns to cross-border infrastructure investment, using China’s Belt and Road Initiative as a case study. China’s Belt and Road Initiative is an ambitious development plan based on infrastructure investment. It aims to increase connectivity between countries that together make up over one third of the global economy. It represents a significant contribution to meeting global and regional infrastructure needs. These needs, however, are too great to be met by any single country or investor.

There are two key issues from a supply side perspective. First, the Belt and Road Initiative will need to engage with other investing economies and institutions if it is to meet its stated aims, and if it is to maximise its contribution to filling the global infrastructure gap. All international infrastructure efforts should be mutually reinforcing, which requires transparent ‘rules of the game’ that will help ensure a level playing field for investment.

Second, investment projects must be viable, cost effective and appropriately selected, regardless of the source of funding. This is particularly important given that the Belt and Road Initiative’s investments will be largely debt-funded, and often directed to jurisdictions with challenging business environments.

The OECD Code of Liberalisation of Capital Movements can help address both of these supply-side issues. The Codes are a long-standing instrument that builds openness to competition amongst international investors, and helps improve the policy environment in investment destinations, all while taking into account countries’ differing levels of economic development.

But openness on its own is not enough. From the demand side, countries receiving investment need to focus on the project level to ensure infrastructure translates into sustainable economic growth and positive social outcomes. The OECD Business and Finance Outlook considers potential concerns that could accompany foreign infrastructure investment, including bribery and corruption in large scale projects, national security concerns arising from the proximity of infrastructure assets to foreign governments through SOEs, and due diligence practices in supply chains.

International organisations like the OECD play an important role in developing the ‘rules of the game’ that seek to avoid many of these potential pitfalls. International standards like the OECD Anti-Bribery Convention, OECD Guidelines for Fighting Bid Rigging in Public Procurement, the G20/OECD Principles of Corporate Governance and the OECD Guidelines for Multilateral Enterprises make up a toolkit for recipient countries to manage the risks and get the most out of foreign infrastructure investment. These instruments are available to OECD members and non-members alike.

The Outlook presents advice to policy makers on how to better position the financial system to serve the real economy, and how to ensure foreign infrastructure investment works for both investors and recipients. But the key to turning policy advice into positive outcomes is implementation. As always, the OECD stands ready to assist any country looking to implement these best practices, build capacity, and develop policies to make sure international trade and investment bring benefits for all.

 

References

2018 OECD Business and Finance Outlook

2017 OECD Business and Finance Outlook

OECD Seminar on Quality Infrastructure Investment, Tokyo, 12-13 September 2018

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