Mr. Chairman, honourable members, I also want to thank you for the opportunity to come here and speak on this topic that I have long held an interest in. In the last 20 years, I've spent a lot of time both in development finance and in export finance. I was 16 years at EDC and now going on two years at Cowater International.
I want to preface my remarks by saying that the views I'm going to express here today are my own. They don't necessarily reflect the views of my current employer or my past one, but I'll get into it. Bear with me, I have prepared remarks. I thought about what I wanted to say; I'll go through it, and it's timed to about eight minutes.
I'll start with some working assumptions about the DFI and I'll lead into what I would call “danger areas”, what I think the DFI should not aspire to be. I'll explain why, and then I'll move to what I think the DFI should aspire to be and achieve, and what that means for its mandate, its governance, and its strategy. I'll do this through talking through real examples of peer institutions, what I have observed during my time in this area.
I'm starting with assumptions and dangers.
The new DFI will aim to be self-sustaining, i.e., it will need to cover its operational costs and fund its investments and lending through paid-in capital and provisions for losses. Its management and presumably its board of directors will be responsible and accountable for executing its mandate and responsible stewardship of financial results. This means its risk appetite, its scope of operations, and its strategy will necessarily be circumscribed to a certain extent. In other words, it will not able to be all things to all people. It will need to pick areas of operations, both geographic and sectoral, and will need to define its box of deals and structural solutions.
While this is simply reality and not necessarily a problem, it could lead the institution down a path that we don't necessarily want. What do we want? I would argue, first, we want this development finance institution to be additional, so that means it won't do what private sector financial institutions already do, and second, put developmental impact at the very centre of how it measures results.
You may think these goals are self-evident, but we need to fully consider the implications of being self-sustaining: it will certainly face pressure to minimize excess risk and moreover to find projects and deals that minimize the operational burden of originating and leading complex financing transactions, and instead possibly follow the lead of others and follow the market. This is a possible scenario.
We know that DFIs worldwide can compete for the best deals. Everybody wants to be associated with successful projects and companies and, just as in the private sector banking world, DFIs have been known to trip over each other for the best assets.
Again, not to be overly critical and certainly lots of good models are out there for DFIs, I would suggest that kind of behaviour of trying to seek the chosen assets is behaviour we don't want, and by definition that's not really additional.
For the DFI to effectively balance its self-sustaining and developmental priorities, it needs to achieve the right balance through an appropriate governance framework and clear strategic guidance and priorities. These goals can and should be balanced, and the institution—and this is the previous speaker— will then be forced to innovate to find strong, developmentally impactful and additional deals that on a portfolio basis—again coming back to the previous speaker—are not loss-making. That's to frame the risk-balance discussion.
We'll talk about mandate and governance.
My first recommendation is therefore that the DFI be required to demonstrate clear additionality and development impact for every transaction. There are established methodologies in the development world on how to measure development impact, and I suggest the DFI look to learn about them and incorporate them into its own metrics.
For example, GAC has many experts, as we do at Cowater, in designing robust performance measurement frameworks that are fundamental to results-based management. In our projects we must commit to achieving very specific developmental results in the development world, right down to the number of people receiving a certain type of training, or a certain number of enterprises reaching new markets with their products. Why should the DFI not look to use similar practices, adapted of course for the more commercial sphere in which it operates?
This goes to my second recommendation, that the DFI build a robust results-management framework based upon best private sector practices in the sphere of international development.
I will talk a little bit about strategy. I would hope to see GAC develop a capacity to approach its interactions with the DFI strategically and to play a well-defined part in developing the DFI's priorities. This is easier said than done. At a high level and strategically, the DFI should fit into the tool box of policy instruments available to the Government of Canada as it works to support developing economies worldwide, with the ultimate aim of reducing poverty, inequality, and spurring economic growth and livelihoods.
Conceptually and temporally, the DFI fits at a later stage in a country's economic development than traditional development programs, as in the earlier example of CDC versus DFID.
The main idea is that sustainable enterprises exist. They have the capability to pay back their loans and investors but for various reasons, including underdeveloped local financial markets, they cannot access the capital to grow and carry out their business plans.
So how does a DFI relate to traditional development programs? GAC should identify one or two programs, desks, or divisions, focus on economic growth in developing countries, and look to hand off beneficiaries for scaling up by the new DFI, which, in my mind, is the third recommendation. It's really about getting organized and making sure that, if we talk about a coherent development policy where you have early-stage interventions and later-stage interventions, the mechanism exists for that to happen.
Let's look at an example. In our projects worldwide, in Cowater, we work with different donor agencies, and for that reason, we're in a relatively privileged position of seeing various project designs, some good, some bad. I'll pick a good one. DFID, the U.K. Department for International Development, has been a leader in what are called market systems approaches to development. They invest in helping countries, enterprises, and subnational governments address market barriers systematically in least developed countries, and they set the stage for financial sustainability from those interventions.
They are doing this, for example, in renewable energy. They have many large programs helping African countries invest in climate-mitigating technologies and build sustainable business models in the energy sphere. From these programs come candidates for development financing. You could have, for example, a small solar farm operator who has recurring cash flow and proven expertise and wants to replicate her business model across many other projects. Although assisted by DFID, she is without access to capital or is facing high capital costs, effectively hobbling her growth.
These are the kinds of ways GAC and the DFI can work together by taking a long-term coordinated approach, investing in basic enterprise development, and by ensuring that the DFI looks at suitable candidates for scale-up and growth when they are ready.
My fourth recommendation is that the DFI should focus on sectors and geographies where SMEs are viable and have the potential to scale up in a financially sustainable way. Examples include the renewable energy sector, the water sector, and small infrastructure. Incidentally, I do not believe the DFI should consider larger infrastructure projects. These should be the province of private capital and are unlikely to be candidates for capacity building for SMEs or for the micro-level enterprises that are so important to economic development in developing countries.
I'll talk a little bit about instruments and mechanisms. Successful development finance institutions combine their financial instruments with grant-based technical assistance, TA, which is fundamental to providing the capacity the beneficiary needs. For example, in the former Soviet Union, the IFC was quite successful investing in small regional banks and bringing the risk management of those banks to international standards, which was also a risk mitigant to the IFC in their underlying investments and lending. In order for the bank to steer clear of systemic risks and counterparty risks, they needed the risk management practices to do so at the bank.
Donor funding, enough to pay for an embedded team of advisers for a few years, associated with another investment, is the key to accomplishing this and is the reason the IFC was able to achieve relevant and real developmental impact.
The Canadian private sector would be extremely well positioned to provide this kind of TA and to help bring world-class Canadian expertise to developing countries.
My final recommendation is therefore that the DFI set up a mechanism to work with the Canadian private sector to identify pipeline projects with strong developmental impact in the success of which Canadian expertise can play an instrumental role.
Thank you for listening to my remarks. I'm happy to take any questions.