I'm sorry I'm not in Ottawa. I love going to Ottawa. I go about twice a year. I go for the sugar pie and the maple syrup, so I'm sorry I'm not there with you in person, but I'm in Rome instead.
It really is an honour to be with the distinguished members of this committee. Thank you for inviting me to testify before you today.
I hold an endowed chair at the Center for Strategic and International Studies, CSIS. It's not that CSIS, not the intelligence agency. Although my mother still thinks I'm a spy, I'm not a spy.
In past experiences I was in the Bush administration at USAID, which is the foreign aid arm of the U.S. government. I worked at the International Finance Corporation, which is the development finance arm of the World Bank Group. I had previous lives at Citibank in Argentina, working in commercial banking, and I started my career in investment banking in corporate finance at what is now Deutsche Bank. I bring a lot of experience in international development and development finance to this presentation, to what we're going to be talking about.
I want to first congratulate Canada on deciding to create a development finance institution. I spoke before to this committee, I believe in 2011, when I suggested in my prepared remarks that Canada ought to develop certain forms of development finance authorities or instruments. I didn't go so far as to say to stand up its own institution, though that was certainly at the back of my mind, and I think it's great that Canada is doing that.
I also wrote an article in Forbes.com in 2015, talking about the fact that the previous Canadian government had included in its budget contemplating creating and standing up a DFI, so this is not something that's new for Canada. I know there has been a lot of thought that's gone into this by many of your professionals in Global Affairs Canada and EDC. I know many of the folks who have been thinking about this and working on this. You have some really very fine civil servants who have been thinking about this for a long time, but also one of the things that's great about this is that I think it enjoys broad support across the political spectrum in Canada.
The other thing I'd want to note is that Canada is, if not the last, the second to last G7 member to stand up a DFI. All the other countries, including France, the United Kingdom, the United States, and Japan, have a stand-alone development finance institution, so Canada will be in very good company standing up this institution.
I want to also remark on the following. This is not your grandparents' developing world. It's richer, freer, more capable, and with more options, and as a result of that the role of the private sector in development is critically important. Countries develop by having good governance, like Canada has, like the United States has, and by having a robust, formal private sector like Canada has and countries like the United States have. So it's very important that we find ways to work and empower a formal private sector.
I'm going to submit for the record a report we did with the European development finance institutions called “Development Finance Institutions Come of Age”, which was published in October. I commend it to all of you, and I hope the clerk will share that with the committee.
If you look at all the foreign assistance that's being spent right now by all the countries like Canada and France and the United States and others, as well as multilateral institutions, you'll see it's about $130 billion or $140 billion U.S.
We looked at the amount of all the development finance investments catalyzing private sector activity by development finance institutions, and we saw that last year it was about $70 billion. There has been a doubling of traditional foreign assistance in the last 15 years, and there has been an increase of seven times the amount of private capital catalyzed in the last 15 years by development finance institutions.
I would submit to this committee that sometime in the next five years those lines are going to cross and there will be more private sector activity catalyzed by development finance institutions than traditional foreign aid. That's not because we still don't need foreign aid. We do need traditional official development assistance as provided by Global Affairs Canada and institutions like USAID for things like good governance, certain instances of humanitarian assistance, fighting corruption, promoting good democracy and human rights, and certain kinds of technical assistance to governments, and in some cases providing basic human needs or supporting fragile and weak states, in particular.
But what you're going to see, because the developing world is evolving and you have 60 or so states that are proving to be middle-income countries that are going toward following the path of South Korea and Taiwan, is that their needs are very different.
What they need much more, instead, are things like infrastructure or enabling private investment or encouraging more trade, not so much financing basic human needs. I think the development ecosystem, things like Global Affairs Canada or the new development finance institution.... It's important that we have these different instruments to meet the changing world that we're in.
Let me make some points about Canada's new DFI.
I think that Canada's new DFI should reflect strategic and geographic interests of Canada, as well as global business opportunities for Canada. I would just name some. The Francophonie is certainly very important to Canada, so I would think francophone Africa should be very important for this new DFI. I think Haiti and Ukraine should be very important to this new DFI.
I also think that the new DFI should be willing to take on heavier investment risks if it's going to be asked to operate in francophone Africa and countries like Mali or Haiti or Ukraine. There's an implicit expectation that it's going to be taking on a higher level of risk than if it were investing in telecom projects in Brazil or Turkey or China, which, let's agree, are perhaps a bit of a more benign risk profile than the kinds of places that are important to Canada.
I'd encourage the DFI, if it's going to operate in countries of priority to Canada, to take on a higher risk profile as a result of that. I think the political leadership that stands behind the DFI needs to be prepared to support that higher level risk. That's my second point.
The third point I want to make is that while it's excellent that Canada has stood this up, I want to encourage the committee to begin to plan ahead and think out three to five years from now on a number of fronts. There's going to be a period of time, three to five years, to stand this institution up, to create an investment track record, to create various processes for making decisions about what transactions should be in. I expect that it will piggyback on other DFI deals, and I'll come back to that in a minute.
I think it's going to require that the DFI is given some time to demonstrate its worth, so I want to encourage this committee to provide a bit of patience and give it several years to get its sea legs.
Those are my three points: focus on strategic and geographic interests of Canada, as a result of focusing on country interests and priority interests of Canada; accept a higher level of risk; and then, third, I ask that this committee give the DFI several years to stand up and get its sea legs.
Also, as an additional point, consider perhaps a different kind of structure in the future. It may need to make different kinds of structural arrangements, and I'll get to that as well.
Let me address those three points.
I want to re-emphasize that the success of a country's private sector is critically important to development. The best social program in the world is a good job. The World Bank has data that says that in the developing world nine out of 10 jobs are in the private sector; so if nine out of 10 jobs are in the private sector, standing up this DFI makes a lot of sense.
Let me come to my first point, that Canada's DFI should reflect regional and topical interests, strengths, and relationships of Canada. As I said, francophone Africa, Haiti, and Ukraine would be a first area of focus, a first bucket of focus.
A second would be Afghanistan and Pakistan, given that Canada has put a significant amount of resources into and focus on Afghanistan and Pakistan over the last 15 years. Those are two countries where it would make a lot of sense for this DFI to be operating.
Third, I would posit the northern triangle of Central America as a region of importance to Canada. I've met with Global Affairs Canada representatives in Honduras, Guatemala, and El Salvador in the last couple of years when I've been down there. I'd also posit Colombia as a country of focus, given Canada's significant investment of time and effort in enabling the peace process that's going on there.
Regionally, those are the three buckets I would consider geographically.
Thematically, I want to suggest a couple that also reflect the priorities of the Canadian government.
I think women's economic empowerment, of course, is a central focus of the Trudeau government. I think Canada's DFI should also prioritize this.
I would specifically look to the International Finance Corporation, which has spent at least 10 years looking at how to enable women's business both in terms of analysis and technical assistance and in providing lines of capital to a number of different banks to provide lending to women-owned small and medium-sized enterprises around the world. The new Canadian DFI could piggyback on what IFC is doing in that specific area.
I want to also encourage post-conflict recovery and fragile states as an area of focus for post-conflict situations. It will be very important.
A third area is global health. I want to make reference to Canada's incredible legacy of leadership on mother-child health. What is not known about health is that there was a study done about 10 years ago by the International Finance Corporation, which I will also submit for the record, showing that about one half of all health care expenditure in sub-Saharan Africa in 2005—this is a little bit dated, but it's important for you to understand—was through for-profit private sector health care providers. If that's the case, and I believe it's still the case in sub-Saharan Africa, then it would make sense for this DFI to make investments in the health care sector. We need to make a bit of a mental mind shift to think about how health care is actually delivered. It's not always done through non-profit NGOs or government; it's often done through the for-profit private sector.
A fourth theme for Canada's DFI should include what I'm going to describe as an “all of the above” energy strategy. I absolutely think this DFI should be financing oil and gas projects. I frankly think that on an appropriate basis, it should considering financing coal projects. I know that's not necessarily where the Trudeau government is going to be, but I want to emphasize that a number of other DFIs are going to be doing so.
I met with the leadership of the Asian Infrastructure Investment Bank and the New Development Bank in the last month, and they are clearly going to be doing that. In certain contexts, say in the case of Haiti or francophone Africa, if it's the best option, then coal ought to be considered.
I'm not saying we should invest in coal willy-nilly, but I think we should consider it. I certainly think oil and gas are going to be a part of it. I believe that 53 of the 54 sub-Saharan African countries have oil, gas, and mining activities going on right now, and so I think this is only appropriate, especially in francophone Africa as well. Of course hydroelectric, wind, geothermal, and solar are a given, but I want to emphasize an “all of the above” energy as a fourth sector.
Finally, given Canada's excellent companies that work on global infrastructure, the 30 or so fragile states need certain kinds of assistance, but the 50 or 60 countries that are on their way to middle-income country status are extremely hungry for infrastructure. Look at the Asian Infrastructure Investment Bank's success. Canada is a member of the Asian Infrastructure Investment Bank, and the fact that it has 80 or so members now speaks to the fact that there is a major infrastructure deficit. I hope that the new DFI will consider this as a fifth area of focus.
Let me talk about planning for risk. I think that—