Foreign Affairs Committee on May 16th, 2017

[Brett House]

The issue is that there is not a lot of money for projects in the poorest countries. The problem with current institutions is that they provide financing to countries that are already developing. I think we would have to concentrate on countries that are less developed, that are not yet in a virtuous circle that could help them grow, that do not have the necessary conditions to create the private investment that is needed for sustainable growth.

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

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Aubin.

We'll go to Mr. Sidhu, please.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

Thank you, Mr. Chairman.

Thank you, Mr. House, for sharing your knowledge with the committee this morning.

The World Bank estimates that the global economy needs to create 600 million jobs by 2027 and 90% of those jobs must be in the private sector, in order to maintain the current employment rates given the current demographic trends. Moreover, the World Bank underscored the importance of creating better jobs, in order to achieve goals of shared prosperity.

How do you envision the role of the public-private partnership evolving to achieve this goal and provide support to meet the current and future development challenges?

[Brett House]

I think one of the things that the financing provided by a Canadian DFI could focus on is sectors, activities, and projects that are particularly labour-intensive and that really do require large-scale involvement by people, in either their realization or their day-to-day conduct.

When we look at the history of development across the last 200 years or so, no country has moved into the middle income ranks without basing, from its early stage, development in agriculture and then very labour-intensive manufacturing, and then later in some more sophisticated and higher-tech industries. I think we need to look at those sectors as some of the places that can be most likely to generate jobs in low-income countries and that provide the stepping stone upward to higher value added.

When we look at the history of development across most of east and southern Asia, we have seen what some economists call the flying geese model of development, where early developing areas have seen wages go up to the extent that some of their activities are no longer affordable. They then move to other neighbouring areas that have a greater supply of labour, more unemployed people, and as a result, lower wages.

We continue to see those shifts, whether it's from China's coastal regions that have become relatively high wage, moving some industry inland where wages are lower, or moving some of their activities to neighbouring countries like Bangladesh or Burma, or in some cases, into lower income countries in Africa as well. That kind of chain, or moving geese pattern—where rather than trying to jump multiple rungs up the ladder too quickly, but instead focusing on a deliberative process of moving up the value chain—I think is one of the best ways that we've seen over decades to create jobs.

At the same time, we need to ensure that basic labour rights and basic standards in the conditions of those working environments are respected. Those should not be ways in which countries or companies compete on cost, and that's where we can play a substantial role through our engagement through multilateral bodies to ensure that's the case.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

Are you saying that we need to start with a bottom-up approach and that good-paying jobs won't happen just from the start?

[Brett House]

I think it's important to remember that what we mean by a good-paying job differs from country to country. The cost of living in many countries is substantially lower than they are in a place like Canada. What constitutes a living wage in those environments is substantially lower than it would be here.

That's not to say that we look at those standards as ones that we wish to remain in place for anything more than a moment. Our hope is that those wages and those living conditions will improve, but there's no free lunch by jumping to a much higher wage level simply by mandating it.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

Thank you.

You've spoken extensively on the merits of aid and private, profit-driven investment working as an integral and innovative manner to help towards goals of poverty alleviation. Can you underscore a few factors that would prove essential to determining whether or not our proposed development finance institution succeeds and what they would be?

[Brett House]

The critical thing in my mind, to define whether it has been successful, is whether it has both met our development impact objectives and been at least self-financing, so that it is truly able to return the amounts invested and perhaps a bit of premium on top of it to the Canadian purse, and recycle that into future financing.

Certainly, if we look at the experience of other DFIs, we see that they've been pretty good at the financial imperative. As I mentioned, the British CDC has not drawn on the public purse for 15 years. OPIC earns about eight dollars for every dollar invested in its budget by the U.S. government on an annual basis.

I'm advocating that we go into riskier situations, and into riskier projects and sectors. That means our returns probably aren't going to be as high, but I think that if we were able to ensure that we're at least returning to the DFI that which it has put in, with a slight premium to finance its operations, we'll be doing extremely well.

The other thing is that if we are taking the development impact objective as seriously as the financial impact, that may also reduce our returns. OPIC, CDC, and other DFIs have been criticized—rightly, I think—for not putting enough emphasis on setting, monitoring, and incentivizing those development objectives. If we actually do so, that's going to be a mark of our success. That will be a mark of our distinctiveness. It may somewhat reduce our fiduciary returns, but if it's a question between earning two or three dollars on every dollar we put in, rather than the eight dollars that OPIC gets out, I actually think that's a pretty decent trade-off, and a reasonable and very responsible use of the public purse.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Sidhu.

We're going to go to Mr. Fragiskatos, please.

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

Thank you, Chair, and thank you, Mr. House, for your very interesting presentation.

You mentioned OPIC. I have a question about its mandate and the different ways that DFIs can be structured. OPIC's mandate, as you know, includes the promotion of the U.S. private sector, especially small business, and we can compare that with the CDC that does not require support for UK business.

Could you speak about that distinction and what approach could be more effective? Let me emphasize that last point—effectiveness defined as success for achieving development goals.

[Brett House]

I think that at the outset, the success of the Canadian DFI should not be measured by the extent to which it benefits or drives business to Canadian companies. Canadian small, medium, or large businesses should be competing for financing from the DFI on more or less equal footing with other organizations, people, or investors.

We're not going to generate the best projects, the best ideas, and the best returns by limiting the DFI to working only with Canadians or with a subset of Canadian businesses. That hasn't been a recipe for success with other DFIs, and in the case of OPIC, they've actively worked to step around the requirement for the local mandate.

The German company Siemens qualifies as a U.S. institution or organization for work with OPIC because, as I mentioned, they've kind of elastically defined “U.S.” to include any company that operates with a substantial amount of activity on American soil. I think that kind of disingenuous..., which congress has forced on OPIC, shouldn't play any part in setting up a clean institution from scratch. We should be clear that a Canadian DFI is meant to work with the best ideas and the best capital to produce impact for those developments and those financial objectives I mentioned.

Inevitably, a Canadian institution based in Montreal and staffed largely by Canadians is going to be one that Canadian companies and investors are able to access relatively easily, and where Canadians will have a cultural advantage in working with that institution. They will have networks of relationships. They will have sensitivities to the environment of that institution that exceed those of foreigners. I don't think we need to put our finger on the scale and provide them with additional advantages, and I don't think that we should try to commeddle regional or sectoral development in Canada with the objectives of international development under this institution and an adequate financial return to ensure that it's self-financing.

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

I have one last question for you.

In your previous comments, when Mr. Sidhu was asking you questions, you stated that you would advocate that the DFI focus on “very risky situations”. Wouldn't that have to be written into the mandate of a Canadian DFI? If left on its own, I don't think the private sector would tend to focus on those risky situations in terms of an investment focus.

Is that what you're calling for, for that to be expressly written into the mandate of the institution?

[Brett House]

In short, yes. I do think that the DFI's mission and vision, and then the articulation by which those will be operationalized, should have that risk-loving focus written into their DNA from the start. It should be there to the extent that it even is defined in some ways in complementary or even oppositional terms to the work that other DFIs are doing, to ensure that it truly is, in a way, expanding on the realm of financeable possibilities that other DFIs do. It should not be replicative.

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

Are there other DFIs that have that written into their mandates—to focus on the LDCs most in need of investment?

[Brett House]

There are rhetorical references to this in different parts of their founding or operational documents. Where it then needs to actually be complemented is in the development objectives and in the finance objectives, the metrics by which the DFI's performance is measured, to ensure that it gets translated into actual activity. Otherwise, it's words on a page.

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

Thank you very much.

[The Chair, Liberal, Bob Nault]

Thank you very much, Mr. Fragiskatos.

Thank you very much, Mr. House.

Our time has lapsed again.

As I understand it, colleagues, the bells will start at 11:05 a.m., so you will have plenty of time to get yourselves to the House.

On behalf of this committee, Mr. House, I want to thank you very much. I've noticed over my 18, almost 19 years in Parliament that mandates and what we call the design of these institutions are extremely important, so we very much appreciate your comments today. It brings to mind the federal development bank of Canada. When it first started, it was supposed to be a bank for high-risk and/or risk-loving lending because, of course, in regions like mine, you couldn't get loans from the regular banks. However, they changed the mandate over the years. It became just like a regular bank; in many ways, it was not prepared to take any risk.

The design of this institution is extremely important, and I appreciate the opportunity to use your expertise to explore that somewhat. I'm sure the committee will do more of that over the coming discussions with other witnesses. Again, thank you. We very much appreciate the opportunity to dialogue with you today.

Colleagues, that will wrap it up for today. We'll see you on Thursday. It's been a good meeting with good questions.

The meeting is adjourned.