McLeod Group Blog, May 15, 2017
On May 5, Development Minister Marie-Claude Bibeau announced that Montreal would be the headquarters of Canada’s new Development Finance Institute (DFI). This follows Finance Minister Bill Morneau’s Budget 2017 declaration that the DFI was to be Canada’s new “innovative finance” tool to help investors in developing countries. This step is far from innovative and a poor substitute for increasing foreign aid.
The Trudeau government’s announcement is actually the repackaging of the “Development Finance Initiative” promised by Stephen Harper and his Conservatives in their April 2015 budget (see MG backgrounder). Lack of subsequent action caused many observers to think that the idea of a DFI had been left to discreetly fade away by both the Conservatives and Liberals.
What is this DFI? Calling it an “Institute” makes it sound very academic. Actually, it is a wholly owned subsidiary of Export Development Canada (EDC). EDC’s job is to help Canadian businesses, which may be in competition with ones based in developing countries. Adding an advisory panel to the EDC team will hardly change the corporate culture of an organization that has no interest or experience in poverty elimination. Moreover, the proposed Cdn$300 million capitalization, provided over five years, sounds very modest when compared with Canada’s US$1 billion subscription to the new Chinese-led Asia Infrastructure Investment Bank’s initial US$100 billion capitalization.
DFIs have been around for decades. The oldest, dating from 1948, is the UK’s CDC, originally an investment bank for Britain’s colonies, now a modern development finance institution with a $3.9 billion portfolio. It is firmly controlled by the UK’s Department for International Development, not the trade ministry. One of the biggest DFIs is the US’s Overseas Private Investment Corporation, which helps American businesses of all sizes expand to emerging markets, now threatened with termination by President Donald Trump. The World Bank Group’s International Finance Corporation has existed for 60 years with a 2016 portfolio of US$37 billion.
Against this array of capabilities, it seems a little late for Canada to be so eagerly playing catch-up. Indeed, the trend in DFI-type mechanisms has been a shift to DFIs owned and managed by developing countries themselves, typically funded by multilaterals such as the World Bank/IFC.
“Innovative Financing” remains in fashion today because the international community and budget-constrained aid agencies have formally recognized that massive private sector investment will be a critical component for meeting the UN target of eliminating extreme poverty by 2030. The private sector, especially small and medium enterprises (SMEs) based in poor countries, has to play a major part in economic and social development. The challenge is that this role is rarely internalized in the business models of large corporations that are required to be responsive to their shareholders, not to fight poverty and inequality. While there have been private sector conferences galore on the subject of poverty, they have not been followed by a surge of new private investment. Indeed, recently private foreign investment flows to developing countries have fallen, except to some relatively favoured emerging economies. These trends seem to be as true for Canadian investors: more fine words, but no surge of private sector action on investing in the Global South, especially in least developed countries (LDCs) or fragile states.
The Canadian DFI’s mandate is rather vague but, as outlined by Minister Bibeau, its formal goals such as green growth and gender inclusiveness are laudable. These are also core objectives of Canadian development cooperation as delivered by Global Affairs Canada (GAC). However, these goals do not characterize the EDC, whose lending experience and professional skills are about promoting Canadian exports. Splitting these roles between EDC and GAC will increase the risk of weak coherence and credibility in Canada’s development cooperation strategies. Being under EDC could also undermine transparency and shield the DFI from access to information requests.
Significantly, the African Union and others are now saying that the key priority for donors should be to help in building domestic business management skills within capital-starved African LDCs. Canada’s DFI, to be relevant now, will need a working mandate tightly focused on the poorest countries, with new capabilities in providing professional support to those countries’ SMEs, rather than supporting Canadian companies.
How should the Canadian government best mobilize and focus the work of a DFI? First by institutionalizing the target population, those without decent work. Then by setting target countries: LDCs and fragile countries. It should also hire staff with experience in development work. The projects the DFI supports should recognize that while profit-making is legitimate, foreign aid must meet the requirements of the Official Development Assistance Accountability Act and be delivered as part of a broader development partnership.