Three wishes for Canada’s new Development Finance Initiative

Much has been said in recent weeks about the feasibility and effectiveness of a Canadian development finance initiative (DFI) since the Government of Canada announced the creation of a $300 million DFI in the 2015 Federal budget. Despite fears that a profit-driven DFI will belittle the seemingly downtrodden aid agenda, it remains abundantly clear that if the world is to continue making progress in cutting global poverty rates, wealthy countries like Canada must do more to leverage our assets and expertise, crowding in new and different forms of capital.

Recent estimates, calling for roughly $1 trillion of new annual investment in order to achieve the Sustainable Development Goals to be launched by the UN in September, pointedly illustrate the urgent need for more diverse sources of development finance. In view of such broader global trends, Canadians should welcome the establishment of a DFI that will provide loans and equity finance on near-market terms for commercial activities that will help to reduce global poverty.

Over the past 10 years of working across sub Saharan Africa, I’ve witnessed countless capital-starved businesses struggle to grow and provide greater economic benefits.  There is little doubt that an increase in capital flows and financing will help unlock the brimming entrepreneurial potential that is present across Africa. My own observations of the struggles faced by entrepreneurs and African businesses is underscored by the fact that roughly half of the world’s total output and annual growth comes from emerging and developing countries, yet private lenders typically find it too risky to provide affordable capital to businesses expanding or entering into these regions.

This is precisely why the establishment of a Canadian DFI is so critical — it will allow our government to fill the gaps left by private finance, all the while crowding in a diverse range of commercial investors eager to take advantage of opportunities in the frontier and developing markets.

Together with a well-managed foreign aid program, a DFI can pack a powerful punch in Canada’s efforts to address global inequality and deeply entrenched poverty. If anything our government is decades late in committing itself to the catalytic benefits of risk-tolerant development finance to spur economic activity and poverty reduction in the poorest countries.

Still, the devil is in the details. The recent tabling of the budget implementation bill (Bill C-59) raised a number of important questions about the specific way that Canada’s DFI will be implemented. These details need to be shared, ensuring the new DFI enables Canada to amplify its efforts to encourage investment, job creation, and most critically, reducing poverty.

In particular, if the following criteria are addressed, Canada will be one step closer to ensuring the creation of the world class DFI that many others have been advocating for over the past several years:

1. Put poverty reduction at the heart of the DFI’s mandate

First, poverty reduction, and specifically Canada’s development goals, should be at the very heart of the DFI’s core mandate. The purpose of the DFI should be clear: to create significant advances in development that improve the lives of millions of people, by supporting the building of businesses in low-income and middle-income countries.

Canada’s DFI can and should invest in building local economies, ensuring that those capital-starved regions of the world can too benefit from enterprise growth and the myriad social and economic benefits associated with a vibrant local private sector. It is promising that the DFI is not mandated to only invest in Canadian businesses.

2. Keep aid funds separate

Second, as fellow OpenCanada contributor Brett House and I argued in a joint submission to Standing Committee on Finance, the DFI’s investments should complement–but be distinct from–Canada’s ODA. The government should allocate additional funding to invest in this new endeavour, and not finance it using funds from the existing aid budget. Canada’s ODA and its DFI are two different tools, and for both to be effective they should continue to be treated as separate mechanisms.

While the DFI may not be bound by the same rules that guide Canada’s aid, it is critical that the DFI investments adhere to rigorous principles of accountability and oversight, aligned with overarching Canadian development objectives. This could be articulated in the accountability framework that guide DFI investment decisions, ensuring both economic and social impacts for people in low income and middle-income countries.

3. Ensure a strong role for the Minister for International Development

Finally, as the DFI will be housed in Export Development Canada, it is vital that there be strong coordination between the Minister for International Trade, as the responsible minister, and the Minister for International Development. Bill C-59 states that before making a decision related to the DFI the Minister for International Trade “shall consult the Minister for International Development.” The Minister for International Development can and should play an integral part in DFI decision-making to ensure those vital links to development priorities remain at the heart of DFI investments.

Until this year, Canada was the only G7 country without this sort of financing tool. The establishment of a Canadian DFI is a positive step in expanding and modernizing our development toolkit. Effective aid will continue to play a critical role in improving the management of global public goods — still, I see this as an opportune time for Canada to expand its poverty reduction efforts beyond aid. We must draw on the hard earned lessons of other global DFIs, many of which have been operating for decades, to launch a DFI that enshrines the primacy of poverty reduction in its mandate.

Canadians should expect nothing less than a world-leading DFI that fulfills its core purpose: to help improve the lives of millions of people by supporting the building of sustainable businesses in some of the world’s poorest places.

Brett House and John McArthur’s analysis of the new DFI can be found here.