Canada revives efforts to create its own DFI

Canada’s minister for international development has given his full support to the creation of development finance mechanisms, indicating the time may be right for the country to create its own institution dedicated to boosting private investment in low-income countries. “I strongly believe that establishing a DFM would fill an important gap in our development toolkit,” Christian Paradis said during Engineers Without Borders Canada’s national conference last month. According to the minister, such a mechanism would contribute to Canada’s poverty-reduction efforts through private investment, while helping Canadian companies secure deals in emerging markets. In a subsequent interview, Paradis confirmed the Canadian government is indeed exploring creating a development finance institution or mechanism. It wouldn’t be the first time that Canada has shown interest in a DFI. In fact, the notion has been cropping up every few years since the 1970s, yet Canada remains the only G-7 country without its own DFI. Now, supporters claim, it may finally happen. “There is an interest in working in creative ways to make good on the broad development commitments Canada has made, but to do so in ways that require less recourse to government funding,” said Brett House, an economist and senior fellow at the Jeanne Sauvé Foundation in Montreal. READ: Foreign aid 2.0: The rise of bilateral DFIs Why a DFI? House said a DFI would align with the current government’s preference for market-based approaches, and help maintain Canada’s commitment to reduce poverty despite reduced official development assistance spending. Ottawa disbursed $4.9 billion in ODA in 2013, down from $5.6 billion in 2012 and $5.5 billion in 2011. Canada could take advantage of its high credit rating to raise “cheap” capital, the economist noted. “We've gone through the financial crisis well, with our financial institutions and our regulatory oversight seen as very strong. There's a possibility now to leverage all these Canadian strengths together to do something innovative,” House told Devex. A DFI could also help the government leverage the potential of its immigrants, many of whom are keen to create business ties with their countries of origin, but often lack access to financing tools and services to do so. Canada is already contributing to the World Bank Group’s own DFI, the International Finance Corp., but the organization is often seen as too bureaucratic and not keen to take enough risks. Several other DFIs have been criticized for focusing too much of their activities on middle-income economies such as Brazil and Turkey, and not doing enough to promote investment in low-income countries. House noted the risk of investing in low-income countries is often overestimated. The World Bank Group’s Multilateral Investment Guarantee Agency, which provides guarantees to protect investors doing business in developing countries against risks such as political instability and breach of contract, has only paid six claims since its creation in 1988. DFIs should improve their ability to understand and assess risk, and provide risk-mitigation tools for investors, House said. Prioritize development In order to avoid similar pitfalls, some proponents of a Canadian DFI say development should remain the institution’s primary goal. “Not all of the DFIs explicitly have that at the center of their mandate,” said Sam Burton, policy and advocacy director at Engineers Without Borders Canada. “I think that’s something Canada can do to ensure that our investments are very much in line with our goals.” She added that a Canadian DFI should also align itself with partner country priorities, and ensure that its operations should be transparent. Among the many details that need to be determined by the Canadian government is how it wishes to engage in development finance activities. Existing models include incorporating development finance mechanisms into existing government agencies, or creating independent organizations. “I think the optimal scenario would be to have a stand-alone crown corporation that has a mandate and a board that is bent to be risk-loving, much like private equity. Many projects will not succeed, but those that do succeed will likely compensate for the others,” House told Devex. Appetite for impact investing and other forms of responsible private investment has been growing in Canada. A recent survey of investment managers showed there are $1 trillion in responsible investment assets currently under management in the country — a 68 percent increase in two years. This should come as good news to the Canadian government, which has been increasing its efforts in trying to establish partnerships with the private sector to reach its international development objectives. Check out more insights and analysis for global development leaders like you, and sign up as an Executive Member to receive the information you need for your organization to thrive.