Foreign Affairs Committee on May 16th, 2017

[The Chair (Hon. Robert Nault (Kenora, Lib.)), Liberal, Bob Nault]

Colleagues, pursuant to Standing Order 108(2), the study of Canada’s development finance initiative, we'll commence this morning.

Good morning. It's good to see you all.

In front of us for the next hour is Marc-Yves Bertin from the Department of Foreign Affairs, Trade and Development. He's the director general of international economic policy.

Good morning, Marc-Yves.

Colleagues, just before we get started with Marc-Yves, you'll notice a notice of motion by Hélène on inviting one of the ministers, based on this study. I just want to remind everybody that, as per usual, the witness list is open. It fits right in. We'll move the motion as normal, but as you well know, around here we've left the witness lists open so that people can add to them as we go. If they feel that based on what they heard they'd like to hear from someone else, it makes perfect sense to me. I wanted to remind all my colleagues of their ability to continue to add to the list as we go, as long as it fits into the slot of how many days we have available for witnesses and the study we're looking at.

With that, I'm going to turn the floor over to Marc-Yves, and he's going to give us opening comments. Then we'll go into our usual Q and A.

Marc-Yves, the floor is yours.

[Marc-Yves Bertin, Director General, International Economic Policy, Department of Foreign Affairs, Trade and Development]

Thank you, Mr. Chair.

I am delighted to be here today to support the committee in its study of Canada's development finance initiative.

My comments this morning focus on two ideas: first, the private sector's role in international development; and second, the positive contribution that development finance institutions, or DFIs, can make in supporting growth and prosperity directed by the private sector.

While public development assistance has contributed to major gains in international development, more resources are needed than what governments can provide in order to achieve the goals of the United Nations' 2030 agenda for sustainable development.

According to the World Bank, there is an annual shortfall of $2,500 billion to meet the needs of developing countries in essential sectors such as infrastructure, clean energy and agriculture.

There is a growing consensus in the international development community that the private sector has an important role to play as the key driver of economic growth and development.

The Addis Ababa action agenda, a foundation working towards the achievement of the 2030 agenda, recognizes that private and public investments are very important for the financing of infrastructure, in particular through development banks and development financing institutions. In fact, the 17 sustainable development goals recognize the need to mobilize additional resources for developing countries from multiple sources, including the private sector.

At the same time, developing countries themselves are turning their attention to increasing private investment, in addition to public development assistance, of course. Direct foreign investment and other private capital currently exceed development assistance by a ratio of five to one.

Yet the private sector is very often unable or unwilling to make what are seen as risky investments in such countries without support. For this reason, international donors have acted to optimize the contribution of private investment to development, with development finance institutions, DFIs, often being the most visible form of support.

DFIs respond to the specific challenge faced by companies operating in developing countries in getting the financing they need to grow their operations and their businesses. In doing so, DFIs provide an innovative, cost-effective financing tool to support economic growth in developing countries. According to some estimates, for example from the Overseas Development Institute, $1 invested by a DFI has the opportunity or possibility of crowding in an additional $12 in private investment, depending on the product, of course. In addition, DFIs are self-sustaining over time because they balance the risk and focus on sustainable business ventures. In turn, these profits can be recycled and reused to further fund projects that have development outcomes. DFIs also complement, not substitute, private investment and ODA, official development assistance.

With respect to Canada's DFI, I note that the new crown corporation will be headquartered in Montreal and established as a subsidiary of EDC. It will be capitalized at $300 million over its first five years of operation and will operate in countries eligible to receive ODA.

I'm sure committee members will have numerous questions about that. As such and in closing, let me simply say that DFIs can play a catalytic role when it comes to supporting private sector-led growth in developing countries, a role that fosters increased investment and development outcomes, leverages additional private finance and expertise, promotes policy objectives such as green growth and women's economic empowerment while creating jobs, and complements traditional aid, which remains important.

With that, I would be happy to take your questions.

[The Chair, Liberal, Bob Nault]

Thank you very much, Mr. Bertin.

I'll go to Mr. Allison.

[Dean Allison, Conservative, Niagara West, ON]

Thank you very much, Mr. Chair.

To our guest here today, thank you for taking the time to meet with us.

When we were in government, one of the things we talked about was trying to get the private sector more involved. You alluded to it in a couple of your comments. I would ask if you could expand on this a little bit. We realize that there's a limited amount of ODA that governments can spend in the world. The private sector, however, and certainly direct foreign investment, is considerably larger. I don't know if you said it was 5:1 in the world versus a 12:1 ratio.

Will you expand a little bit more on the types of projects and investments you see a DFI trying to create?

[Marc-Yves Bertin]

To anchor that comment a bit further, it's useful to take a look at private flows versus ODA for the year of 2014. With flows going into developing countries, private investment was situated at around $420 billion a year, and ODA was at $180 billion. There's a lot of money in play, but still it pales in comparison to the $2.5 trillion in financing deficits.

As I mentioned, a number of countries have gone out there, with DFIs being a notable expression of the desire to bring the private sector into play and to deal with some of the challenges.

Let me give you a couple of project examples of what other DFIs are doing in the world. Swede Fund has financed the growth of a network of private women's hospitals and clinics, nursing schools, and other projects in developing countries. These countries often lack the track records required to receive bank loans. By being able to fill this gap through patient capital, they're able to establish themselves and establish a track record, which enables them to be sustainable and then to go to commercial lenders over time.

Another really good example is one from FMO in the Netherlands. The Netherlands has provided a mix of loans and equity investments to agricultural service companies in developing countries in order to build up the capacity to produce fertilizer. By producing fertilizer locally, you're reducing the transportation costs and the local access to that fertilizer in these countries. Therefore, you're enabling the agricultural sector to take off while fostering food security locally. This includes countries such as Nigeria, countries that face a lot of conflict.

[Dean Allison, Conservative, Niagara West, ON]

Explain a little bit how this would differ from an infrastructure bank. I assume DFI could make investments in infrastructure, or is it limited in scope? We've seen a number of other countries.... We're a little bit later to the dance on this one.

In scope, where do you see this? What are the recommendations on what we should allow this DFI to do here in Canada?

[Marc-Yves Bertin]

The priorities for this DFI will need to be set out in a corporate plan, after having received direction from the government in terms of what the priorities are. Already, we can see that the government is favouring green growth and climate change, as well as support for youth and women entrepreneurs. At this point, these are the early signals. We'll have to wait for more to come on that front. However, in terms of the areas where it could work, I think we're talking about an organization or a new crown corporation that will be able to work in the gamut of areas that have high development impacts, such as infrastructure, agriculture, water or what have you, climate change, and green growth. The question will become an issue of emphasis and not necessarily of exclusion.

With regard to the second point you mentioned, we're late to the dance. Obviously, being late to the dance has its opportunities, its advantages. Otherwise, discovering VHS a couple of years later is probably not the most innovative thing. What we've been able to do is to learn from others. We learned a lot of things from the other DFIs, a lot of things not to do. We looked at a number of the debates that occurred domestically in those countries, for example, in the U.K. and the United States where they only had certain instruments as opposed to the full gamut of instruments. What we were able to do was to develop a robust suite of recommendations as to how to structure this that gleaned all these best practices.

What we've learned is important is that we actually have the gamut and not just, for example, offer alms. The private sector, depending on the deals, may require loans in order to get off the mark, but over time may take an equity stake in order to keep an operation sustained. This is an institution that will have an ability to adapt to the various needs of its client groups.

The other dimension that is important is that some countries actually have a national benefit dimension to their work. Our American friends very much tie their DFI's operations to domestic commercial interests or domestic firms. In contrast, the British have taken the opposite approach. In both instances, reviews in those countries yielded the revelation that they should be focusing on development outcomes, not necessarily on the client group. Therefore, much like these two DFIs and the new directions that they have gone in, this DFI will be able to work with any private sector entity, whether it's a local foreign entity in a developing country or a Canadian firm. The emphasis will be on the expertise in the projects.

[Dean Allison, Conservative, Niagara West, ON]

You mentioned women and women entrepreneurs, so microfinance could be part of this. I mean, the government has done microfinance in the past, but this could be a vehicle to deliver microfinance.

[Marc-Yves Bertin]

Absolutely.

[Dean Allison, Conservative, Niagara West, ON]

I'll move on to my last question then.

Three hundred million dollars was the amount that our government committed, the same amount that this government is going to commit to. Do you see that being able to grow? I mean, internally, you see it obviously trying to attract other money. The $300 million will get other money involved, maybe not in the DFI specifically, but certainly on a project-by-project basis. Do you see that being able to grow? I'm assuming that you want us to see some returns or some sustainability piece other than the fact that governments from time to time may want to increase.

Do you see that being able to grow by just the natural nature of doing good deals?

[Marc-Yves Bertin]

I have just two comments on that question.

The first is that in the initial years—over the next five years—the DFI will have a steady flow of capitalization basically injected by the current capital base of EDC. That will enable it to have a good stable foundation upon which to plan its deals. The government will have to make a determination in the future, depending on the track record of the organization and the government's objectives, as to whether or not that capitalization will be grown, whether through further injections, through further capitalization, or by borrowing. That's a question that people need to revisit in the future.

In terms of returns, the objective, of course, is to have a self-sustaining DFI. DFIs have actually demonstrated a high ability to be self-sustaining, depending on the DFIs and their composition, and their shareholders, in particular. Some DFIs actually have a mixed public-private shareholder model. Depending on whether or not there is a private entity presence or private sector presence in the capitalization, you will see in those DFIs a higher return sought. Other DFIs that are purely public-owned go for lower margins or break-even sustainability. I think this DFI will need to structure its portfolio to balance out risks and to pursue the government's objectives, obviously, in terms of alignment with what it's trying to achieve, but in doing so be able to balance that out. Basically, it will need to take a portfolio approach, counterbalancing higher risk with more stable deals.

[Dean Allison, Conservative, Niagara West, ON]

Thanks, Marc-Yves.

[The Chair, Liberal, Bob Nault]

Thanks, Mr. Allison.

Mr. Fragiskatos, it's your turn, please.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you very much, Mr. Chair.

Thank you for being here today.

You mentioned in your presentation every dollar invested has the opportunity to yield $12 from private sources. You talked about crowding in. What are some examples of best practices to ensure the maximum is reached?

[Marc-Yves Bertin]

This figure is based on an Overseas Development Institute study. I believe they may be some of the witnesses to appear here.

When it comes to best practices and the approach, it comes down to an assessment of the deals themselves: are they in the right sectors in terms of high impact? The DFI will need to develop an investment decision-making framework that tries to properly assess on the one hand the development outcomes it's seeking and the risks associated with that, taking a look at the sector and the potential impacts both financial and developmental, the partners themselves and their track records, and the people they are working with as well as the context within which they are operating.

As part of the crafting of its investment decision-making framework the DFI is going to have to figure out how it wants to appreciate, if I can use that term—a bit of a French term—how it wants to gauge and act upon its assessment of these different considerations.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Internationally speaking, the experience with DFIs is not new. Britain's experience goes back to 1948. In the United States it goes back to Nixon in 1971.

Could you talk about the success of these initiatives or lack thereof. How effective a policy tool have they been for either Britain or the U.S.? I think you mentioned Sweden and the Netherlands, if I'm not mistaken, or any other examples you would like to cite.

[Marc-Yves Bertin]

There's success in two ways. I think there's the success of the enterprises within themselves. As I mentioned earlier, DFIs have demonstrated a high degree of sustainability and an ability to not only get returns on the investments they are making and to fulfill their organizational fiduciary responsibilities, but they have been able to reinvest those sums into development.

That's an important contribution, and it's a contribution and a success that's borne out by the fact that all the projections suggest that DFIs are only going to take on more of a role. Just how much of a role they will take over the next decade remains to be seen, but investment in DFIs has increased significantly. Just over the past three years there have been notable increases in the level of capitalization and portfolios of these DFIs. I think that speaks to the first issue.

The second issue is the service they provide and the success that has been. DFIs are situated, if you will, in the spectrum between international development grants, which are concessional. There are loans, of course, that are concessional that are offered by regional development banks for example, and private sector banks and the commercial terms they have. Therefore, the DFIs have played a significant role in being able to generate economic activity where on the one hand the development enterprise doesn't permit it. For example, under Canadian laws Canadian development cannot support for-profit initiatives. That's a significant handicap in the manner that the government could go about in supporting economic growth in countries and supporting the development of firms in developing countries.

On the other hand, of course, you have the banks that are on the one hand unable to appreciate and gauge the actual risks on the ground because they are not necessarily present there, and therefore unwilling to offer the financing that's needed for these companies.

Through their ability to appreciate risk on the ground much more effectively, through their more patient capitals, DFIs have had a remarkable track record in being able to unlock this ability to assume the risks in a manner that the private sector needs.

[Peter Fragiskatos, Liberal, London North Centre, ON]

I have one final question for you. The legislation governing the Overseas Private Investment Corporation in the United States, its development finance institution, requires that it give “preferential consideration” to projects in countries with per capita incomes below $984.

Is there a certain threshold where success and a lack of success can be measured? I'm thinking of the lowest developed countries. Perhaps they don't have the existing and necessary resources and infrastructure in play to maximize potential investments. You have mentioned experiences, and I think you have touched on what's happened in the United States in part. How critical is it to target investments in states where there is a great need, but does that also bring a certain danger in maximizing investment? What has the experience been?

[Marc-Yves Bertin]

The experience has demonstrated the wisdom of taking a portfolio approach. On the one hand, there's no doubt that these arm's-length organizations want to ensure their sustainability, but they also want to obviously pursue the policy objectives of their governments.

Within that context, it may be that there are some huge development impacts to be had in a riskier area of activity, and of course they're going to be looking at this on a transaction-by-transaction basis, but within the context of that transaction. There may be significant development gains to be had, but the risks may be riskier, and—

[Peter Fragiskatos, Liberal, London North Centre, ON]

Not to interrupt you, but I think my time is running out.

In summary, there is evidence to suggest that projects focusing on the poorest countries yield important benefits.

[Marc-Yves Bertin]

Absolutely.

[Peter Fragiskatos, Liberal, London North Centre, ON]

They're viable there.

[Marc-Yves Bertin]

Absolutely.

It depends on the project and the considerations around it. The management of that project, from the financial sustainability perspective of the organization, just needs to be balanced out with less riskier initiatives and projects.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Fragiskatos.

Next we have Monsieur Aubin, please.