Foreign Affairs Committee on May 16th, 2017

[Raj Saini, Liberal, Kitchener Centre, ON]

Good morning, Mr. House. Thank you very much for coming here this morning.

I'm going to ask you three questions, but I am first going to refer to one of your quotes. You mentioned during your preamble that there is anywhere from $500 billion to three trillion dollars' worth of annual aid required to reach these sustainable development goals. We also know, according to some experts, that there is about $22 trillion in dead money locked in the capital reserves of many corporations.

In one of your briefing notes, you wrote that developing countries need patient capital, not hot money looking for a quick return. How do we harmonize business interests with what we're trying to do with aid, so that profit generation is equivalent to poverty reduction? How can we do that?

[Brett House]

Would you like me to respond now or go through all the questions?

[Raj Saini, Liberal, Kitchener Centre, ON]

We'll do it one by one.

[Brett House]

I think the important thing here is, first off, to align the financing terms we're providing with a likely horizon for financial returns from any project. As I mentioned, issuing debt right now at very long tenors would allow us to provide financing in a way that is consistent with the likely return profile on the projects we're looking at.

Secondly, in aligning impact, the most important thing, I believe, is setting at the outset clear metrics and clear processes for measuring performance on those metrics that are just as rigorous as the fiduciary or financial metrics we might set beside them. In economics there is a tradition of thought and modelling known as principal-agent theory, which essentially means that the incentives you provide yield the activities you want in accordance with your initial targets and measurements. If we measure or target the wrong things, we will get the wrong things back.

Unfortunately, one of the salient critiques of most existing DFIs is that they do a good job of setting financial targets on their projects but not such a good job of setting development-impact targets, which they often fail to establish and measure. Reaching development-impact targets requires incentives equal to those required for reaching financial targets. They need to be baked right into the DNA of the institution when it comes to how the board sets its goals, how the staff at the project level designs the expectations for financing opportunities, and how that staff's performance is evaluated.

[Raj Saini, Liberal, Kitchener Centre, ON]

We're blessed in this country to have a large multicultural society with certain mature communities. People have come over and become successful. Do you think we're doing a good job leveraging those links in terms of trade and development for those people who have knowledge on the ground and experience in the countries that they originally came from, but may not have access to capital or may not have access to insurance or loan guarantees to do something?

[Brett House]

The numbers imply that we're not. The share of Canadian foreign direct investment in some of the strongest centres of growth in the world, in Asia, Latin America, and Africa is in 10ths of percentage points compared with the vast majority of our foreign direct investment that is located in developed markets and some of the largest emerging markets.

Take India for instance. A tiny fraction of our total FDI has been put into India, despite the fact that we obviously have a large diasporic and ethnic historical Indian community within Canada. We don't seem to be exploiting those potential cultural, familial, and historical roots in a way that leads to dollars following them. We certainly are not using them in non-traditional areas, the 40 or 50 countries I mentioned in the world that receive almost no foreign direct investment from the rest of the world.

[Raj Saini, Liberal, Kitchener Centre, ON]

I want to talk about.... Sorry.

[Brett House]

I was just going to add that I do think the Canadian DFI is a great way to potentially improve upon that track record. It really provides a way to convene the conversations, the activities, and the potential flow of capital with Canadian cultural expertise and direct personal links that will allow it to be successful.

[Raj Saini, Liberal, Kitchener Centre, ON]

I want to talk to you a little bit about geopolitics and the 40 or 50 countries that you mentioned. The 40 or 50 countries will be, in most cases, fragile states politically or economically. You may have other sovereign powers that may decide they want to invest there. If we set up some sort of partnership between the DFI and a private investor or private sector business, and they decide to go into that country, there's going to be an imbalance. The imbalance is going to be that one sovereign power may have a different way of conducting their business interests, and because we follow Canadian law and Canadian regulations, we may have a different approach to development there.

How do you see us aligning and making sure that there's not competition within that fragile state? How do you see us deploying our aid with private sector partners when they may be at a disadvantage in terms of their business interests as compared with other countries that may have a different outlook towards how they want to deploy it and their private sector interests?

[Brett House]

That's a danger that we face in every context, whether it's in the context of providing development assistance, in our trade relationships, or in our private investment flows. The existence of a Canadian DFI will not change that dynamic, but I think what it will do is provide an additional incentive for a lot of governments to treat either the projects that we're involved with or others on a more even-handed basis.

We still have backstopping, the kind of investment that Canadian DFI would be providing, and international dispute settlement mechanisms like ICSID under the World Bank Group, which would provide some investor protection here. The success of private sector investment in higher risk countries always relies on strong personal and institutional relationships. We would not, I think, be engaged in spraying Canadian investment in these 40 countries in a willy-nilly fashion. It would need to be based on a strong understanding of the context and good relationships with the local environment.

[Raj Saini, Liberal, Kitchener Centre, ON]

Do you feel that maybe because of the uncertain political environment in these 40 or 50 countries, aid does not flow there as much as in the more middling countries or middle-income countries where there might be some structure to governance, whether it be business structure or political structure? If we want to make sure that our companies invest in those countries that need the aid more significantly than the other countries, is that where we should focus and try to provide some sort of governance or infrastructure improvements?

[Brett House]

Yes. You're speaking to the distinction that I was making earlier between the public goods that aid is ideally suited to help create and finance, and the private goods or other market-driven activities that private capital is more ideally suited to finance. Building legal institutions, helping to reinforce the rule of law, building regulatory agencies on finance, and ensuring that regulation in individual sectors is provided in a way that's even-handed are all the things that ODA is ideally suited to provide to create the environment in which private capital flows will be more likely to come in.

These 40 or 50 countries I'm mentioning do receive aid dollars in decent numbers, not as much as they probably should and in proportion probably too little compared with the very large emerging markets that still receive a disproportionate amount of international aid. These 40 or 50 countries receive almost no private capital aside from investment in their resource sector, and that's the flow that I'm hoping a Canadian DFI would help stimulate.

[Raj Saini, Liberal, Kitchener Centre, ON]

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Saini.

We'll go to Mr. Aubin, s'il vous plaît.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you, Mr. Chair.

Thank you, Mr. House, for being here with us this morning and for sharing your expertise.

I completely agree with you when you said at the outset that this DFI would be in addition to the investment of 0.7% of GDP in international assistance, even though not all countries have reached that level.

That is exactly what my first question is about. Since Canada invests approximately 0.26% of its GDP in international assistance, which is very far from 0.7%, does that send a signal to potential DFI investors that this is not a very a attractive sector?

[Brett House]

Honestly, I don't think so, because the two always complement each other. There are cases, however, that call for more private than public investment, just as there are cases that call for the two types to complement each other.

It is not at all necessary for public assistance to be a precursor to private investment. We must bear in mind, however, that public assistance always complements investment.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you.

In this regard, you said in your presentation that you hope that Canada will reach the target of 0.7%.

There is currently no plan to do that. Drawing on the experience of the United Kingdom, do you know what steps Canada could take to achieve that objective and balance out these two avenues for supporting international development?

[Brett House]

What happened in the United Kingdom is impressive. The government reached the 0.7% target while the country was in the midst of the global financial crisis of 2008. The government maintained its objective. That tells me that there is never a good time to define the 0.7% target. We have to set the objective and have a plan to achieve it. It is always a good time to do that.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you.

Depending on their point of view, some people might think that $300 million for a DFI is a vast sum of money. You seem to be saying, however, that it is not enough. That amount is spread out over five years, although you mentioned several times the need for tolerance of investments.

With $60 million per year, I sense there is not have a lot of room for tolerance. Would that $60 million per year be invested to create a tool that would make us look good without really have the necessary resources to achieve its purpose?

[Brett House]

I'm going to respond in English, only because I will discuss a couple of accounting notions concerning which my vocabulary is a touch weaker.

The important notion of the $300 million as capitalization, I believe, resides in its accounting treatment for the Canadian government. It ensures that the $300 million does not add to the public debt and is essentially outside of the budget because it's treated as an investment. That's great, and I think it's appropriate, because that $300 million could easily be repaid over time through the returns of the institution, if we were to look at the experience of other DFIs at all.

If $300 million means $50 million per year in portfolio commitments, we are looking at an institution that's unlikely to catalyze private investment for infrastructure, for any large-scale projects, for the kind of catalytic bottleneck-relieving investments that I mentioned earlier. Yes, it may be able to invest in small and medium-sized enterprises, but it's unlikely to bring forward the truly large-scale investment into impactful projects that I think we have the opportunity to engage in and that I would hope for the institution.

[Robert Aubin, NDP, Trois-Rivières, QC]

I would like to get back to the combination of the DFI and international development assistance. The DFI is part of Export Development Canada. In your opinion, do these two vehicles operate in parallel? What might be the relationship between International Development and La Francophonie and this DFI?

[Brett House]

I think these two vehicles work more or less in parallel, but they also complement each other. One supports the other. Some projects and activities involve more private financing, while other projects and activities can better be achieved through public financing.

Moreover, certain public assets do not offer enough return on investment to be of interest to the private sector. They must therefore be subsidized through public assistance, but that also supports the environment for private investment.

[Robert Aubin, NDP, Trois-Rivières, QC]

In your experience, what would the main obstacles be for the DFI? Would it be local capacity and infrastructure, the uncertainty in certain regions or something else? What are the main obstacles that existing DFIs currently face?

[Brett House]

I think the first obstacle is finding professionals with expertise in both development and financing. That means professionals who can achieve both developmental and financial objectives.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you.

I have one last question. What role do public-private partnerships play in broader development efforts? Can you name a project that was carried out in that way in the poorest countries?