From the earliest sketchings in caves, we have exchanged ideas. By sharing stories throughout time, we have passed on wisdom to each generation. Without this exchange, each of us would have to learn about the world for ourselves, rather than standing on the shoulders of giants.
Global prosperity depends on extensions of this exchange—to goods, services and finance.
But this mechanism is being eroded by uncertainties and inconsistencies. The asymmetry between capital and investment in global infrastructure is a case in point. There is no shortage of capital but there are many impediments to creating a market for long-term infrastructure and green finance investments. There is no one overriding factor, more a series of systemic challenges.
Poor planning and scoping by governments clearly limits the number of bankable projects. This alone however, isn’t the determining factor. Throw in a lack of liquidity in long term investment asset classes with the need for a broader range of financial instruments and projects simply go unfunded.
The B20 Financing Growth and Infrastructure Taskforce has identified this imbalance, among several G20 must strive to address. Inconsistencies around the rules relating to cross-border investment also need to be tackled, as do the inherent challenges to economic growth in traditional financial regulation. B20 has set out a roadmap for governments to follow. It is a bold agenda.
Asymmetry Between Capital and Investment
If the G20 is to remedy the issues outlined above, it must create more fertile ground for bankable infrastructure and green projects. There are three immediate ways in which it can do this. Multilateral Development Banks must be encouraged to move away from merely investing in infrastructure to actually facilitating private sector finance in infrastructure. Secondly, communication is key and much needs to be done to improve the availability and quantity of information about projects and pipelines – adopting international best practices. Thirdly, G20 needs to encourage the development of a green finance market by standardizing definitions and disclosure requirements and adopting appropriate capital requirements for institutions.
Inconsistency of Rules for Cross-Border Investment
Cross-border investment is impeded by the complexity and inconsistency of rules. This will only increase amid the rise of global protectionism. The lack of adequate risk protection against regulatory and political instability is matched only by the lack of effective dispute resolution mechanisms. Greater certainty and cooperation would facilitate cross-border projects. But amid all this uncertainty in the world, how do we go about this? Creating a predictable international tax environment that prioritizes consistency would be a start. There needs to be a greater focus on simplification which will prioritize economic impact and compliance capacity. The World Bank Group has a part to play here too—improving conditions for domestic and private investment in emerging markets. Why not commission it to negotiate country-specific compacts with African states?
These compacts would address principles for tax and regulatory stability, anti-corruption measures, foreign investor protection, insurance by Multilateral Development Banks and the training of government officials in best practice project finance and PPP frameworks.
Increasing Funding to SMEs and Emerging Markets
As part of global measures to increase financial stability, banks are subject to greater capital requirements. As a consequence of this, they have a reduced capacity to fund infrastructure activity. Fintech may bridge the gap here by increasing the availability of infrastructure funding to SMEs and emerging markets. However, regulators will need to consider the opportunities and risks arising from digitized financial services. G20 has a role to play in this balancing act, addressing inclusive growth and digital innovation. There are three areas that immediately come to the fore.
There is a clear need for greater coherence between the regulatory frameworks in G20 nations. One way of promoting greater cross-border dialogue would be through the Financial Stability Board. Perhaps it could be tasked with establishing a model for this, providing the private sector and regulators with a platform for deeper engagement. Speaking of the FSB, could it—or perhaps the International Organization of Securities Commissions—drive a shift in regulatory focus to ease the process of digitalization, while ensuring consistency across borders, leveling the playing field across institutions. Underserved markets in emerging and developing nations need to be part of this, through the promotion and development of digital financial inclusion.
Growth and Stability
Greater openness benefits many aspects of economies and societies. More opportunities for exchange mean lower production costs, less resource consumption for production, as well as technology and knowledge transfer. The challenges of globalization cannot be solved within borders.
In exchange for these ideas, B20 is seeking a dialogue that leads to closer alignment between capital and investment, greater consistency for cross-border investment and a more innovative approach to financial regulation, one which supports both stable and underserved markets through digital inclusion. Investment in infrastructure has a multiplier effect, generating lasting economic, social and environmental benefits. It is critical to global stability—something the world needs right now.
About the author: John W.H. Denton AO was recently elected Vice- Chairman of the International Chamber of Commerce and is one of the two originating members of the B20 – the business reference group of the G20. He is a Partner and the Chief Executive Officer of Corrs Chambers Westgarth, the leading Australian independent law firm. John was appointed as an Officer of the Order of Australia (AO) last year; the highest recognition for outstanding achievement and service in Australia.
Editor’s Note: This article was originally published in the B20/G20 Summit magazine.