Getting the details right on the development finance initiative

The recently announced $300 million initiative could be the beginning of a new era in Canada’s contributions to boosting prosperity and reducing poverty in poor countries.

By: /
30 April, 2015
Brett House
By: Brett House

Deputy chief economist, Scotiabank

Following an extensive process of internal government deliberations, Canada’s 2015 federal budget saw the announcement of a new $300 million development finance initiative. This marks the beginning of a potential new era in Canada’s contributions to boosting prosperity and reducing poverty in poor countries. By providing targeted public financing to catalyze much larger investments of private capital, this initiative could help enterprises create jobs and growth throughout the developing world.

With this undertaking, Canada finally joins the ranks of its G7 counterparts, all of whom have partnered public money with private finance for many years in their efforts to support global development. Canada is tip-toeing into this space. Rather than creating a stand-alone development finance institution (DFI) as other countries have done, Ottawa is starting with a small fund housed at Export Development Canada (EDC).

By most measures, $300 million over five years is a modest beginning compared with the portfolios managed by some of the long-established DFIs in peer countries. If Canada applies the lessons gleaned from their experiences, however, this initial allocation could stimulate much greater private financial flows into low-income countries. So let’s consider the next five years a prudent pilot phase that will allow the Canadian government to get this concept right and build toward the eventual creation of a proper DFI.

The proposal to locate this fund in EDC is cautiously pragmatic: placing the initiative in an existing crown corporation will cut down on set-up costs and allow it to get started quickly. Moreover, EDC has representatives around the world and is the most outward-facing of Canada’s parastatals.

Still, EDC is not a perfect fit for this work. It’s an export promotion agency, not a development institution, so it has little experience working on integrated development challenges, including the fight to end extreme poverty. Its mission, governance and financing instruments will need to be adjusted, made more risk-loving and expanded to include a serious anti-poverty mandate that is pursued just as vigorously as financial returns. Both of these goals will need careful monitoring and transparent reporting. Otherwise, investor profits could quickly come to trump local development needs. It’s no good if this fund becomes simply a finance initiative. We’ve got lots of those already: they’re called banks, private-equity funds and insurance companies.

EDC will have to hire development experts or form a partnership with the relevant staff in the Department of Foreign Affairs, Trade and Development (DFATD) to ensure EDC’s financial skills are balanced by development acumen and advisory insight. The constraints that bind EDC to working with Canadian companies will need to be loosened as well. The most successful DFIs aren’t limited to working with their own nationals: they partner with the best businesses on the most impactful projects. And like these DFIs, Canada’s initiative will need to be empowered with a full range of tools — a variety of debt facilities, equity investing, guarantees and insurance products — if it is to use its capital effectively and efficiently.

Crucially, this new initiative needs to be understood as a complement to, not a substitute for, grant aid. Public investments in priorities like disease control, education and basic infrastructure are essential to fostering returns on private capital, even if they don’t produce direct yields to investors themselves. It is unfortunate, then, that this week’s budget continued Canada’s long freeze on official development assistance. The aid budget has now fallen to a meagre 0.24 percent of national income during a pivotal year of global development negotiations and at a time when key international institutions for health, education and agriculture remain starkly underfunded.

Canada needs to ramp up its private and public development finance hand-in-hand. Successful development policy efforts require thoughtful coordination across a range of interconnected goals and instruments. Canada will get there if the good intentions driving this week’s budget announcement are matched with smart implementation at scale.

The post was originally published by the Ottawa Citizen.

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