McLeod Group Blog

The Latest on Canada’s Development Finance Institution

The Latest on Canada’s Development Finance Institution

McLeod Group Blog, November 2, 2017

Back in April 2015, the Harper government announced the creation of a Development Finance Institute (DFI) with $300 million of funding to be disbursed over five years. Canada’s DFI was to join a worldwide array of similar investment organizations that provide loans for private sector investments in developing countries. As our May blog indicated, this new initiative quickly disappeared into a political black hole from which it suddenly re-emerged as a new Liberal initiative in the 2017 Budget. After that long silence and no doubt some backroom arm-twisting, International Development Minister Marie-Claude Bibeau announced that Export Development Canada (EDC), Canada’s longstanding for-profit body for financing exports, had “agreed” to take on this task.

The donor community, including Global Affairs Canada, has been full of talk in recent years about needing new “innovative finance” tools to mobilize the trillions of additional dollars that the poorest developing countries require to implement the UN’s 2030 Agenda for Sustainable Development. Canada’s new DFI will be a very late entrant, the last in the G7, in an increasingly competitive international financing arena.

The Harper proposal is now becoming an institutional reality. EDC is frantically trying to have the DFI operational in Montreal by year-end. Candidates for the role of DFI managing director have been interviewed. His/her mandate is to set up shop and recruit suitably experienced staff, hopefully able and willing to work in developing countries. EDC has also already held consultations with business and CSO representatives. Bibeau recently appeared at the House of Commons’ Standing Committee on Foreign Affairs and International Development to spell out the latest steps towards “walking the talk”.

It is looking positive, but can Canada’s DFI really meet the challenge of becoming a development vehicle able to reach the poorest, especially women? Or will it slip into an easy default option of being a vehicle for loans to businesses based in middle-income countries, to finance their regular, profit-making ambitions? Is EDC, designed to finance Canadian exports, the right choice as host? Many details are still not clear.

A poverty-focused model would respect the principles of Canada’s Official Development Assistance Accountability Act and Bibeau’s Feminist International Assistance Policy (FIAP) goals, along with our commitment to the UN’s 2030 Agenda with its core goal to “leave no one behind”. But many established DFIs, such as the World Bank’s International Finance Corporation, have never seemed comfortable with a pro-poor mandate. Can EDC’s beginner DFI do better in building a business model blending pro-poor investments with prudent lending?

Some think its clients will be small Canadian businesses looking for opportunities in Africa. This seemed to be Bibeau’s message to the House of Commons committee. A committee member alerted her to revelations that the UK’s DFI had invested in luxury housing facilities, sometimes via organizations based in tax havens. Such risks are further heightened if a proposed EDC-selected advisory committee provides development guidance and quality assurance.

A key challenge is that there is no bubbling pool of adventurous Canadian private investors waiting to invest in the poor countries in Asia and Africa. There are also hard lessons to be learnt from the Canada’s failed Industrial Cooperation (INC) program. There is talk of the DFI looking for opportunities in “high impact” sectors and supporting small and medium entreprises (SMEs), but also of Canada’s trade commissioners providing technical assistance. But where do the plans and priorities of developing country governments or the insights of GAC’s own development experts fit?

To have any hope of success, the DFI will need to find the way to hire new staff drawn from the community of development practitioners, people with lots of field expertise and well-tuned sensitivity to developing country politics and governance. This can be blended with the banking expertise and administrative services that EDC possesses. Meeting these goals will need professionally astute DFI managers – and a Chinese wall separating them from EDC’s profit-making business. DFI staff will need capabilities in deal-making built around partnerships with assertive and confident developing country governments.

Perhaps the biggest challenge for the DFI may emerge as how best to respond to the core goals of Bibeau’s feminist foreign aid policy. She, or her representative, will have a seat on the DFI’s executive board. A credible DFI board needs substantial female membership, some civil society representatives, and ideally members from the Global South, maybe based upon a working partnership with an experienced DFI.

There are obviously a lot of challenges ahead when the DFI has its own office with committed new, non-EDC, staff: new competitors from among emerging economies with their own investment ambitions in developing countries; mega-institutions like the $100-billion Chinese-led Asian Infrastructure Investment Bank; and possible SME partners in poor African countries that are wary of being squeezed by profit-hungry Northern investors.

As a latecomer to the game, Canada’s DFI will need to be simultaneously bold and in learning mode from past missteps and established best practices of other DFIs in the fast-growing economies of the Global South.