Evidence of meeting #67 for Foreign Affairs and International Development in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was dfi.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Diana Noble  Chief Executive Officer, CDC Investment Works
Simon Maxwell  Senior Research Associate, Overseas Development Institute, As an Individual
Paddy Carter  Senior Research Fellow, Overseas Development Institute, As an Individual

9:05 a.m.

Liberal

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

Colleagues, we'll now begin our discussions, pursuant to Standing Order 108(2), on Canada's development finance initiative.

Before us this morning is Diana Noble, executive officer, CDC Investment Works. From the Overseas Development Institute, we have Simon Maxwell, senior research associate; and Paddy Carter, senior research fellow.

Welcome to our witnesses from the U.K.

As is customary, the committee will give witnesses an opportunity to make a short presentation and then we'll get right into Qs and As.

I want to turn it over to Diana Noble. Diana, do you want to start your presentation?

June 13th, 2017 / 9:05 a.m.

Diana Noble Chief Executive Officer, CDC Investment Works

Let me start with a small clarification. You read out our organization as CDC Investment Works. It's actually just CDC. “Investment Works” is the tag line of the organization. We're the U.K.'s development finance institution. CDC have been investing across emerging and difficult countries since 1948. That's the background.

The background for me is that I was hired in November 2011 to undertake a pretty large transformation of CDC, which is, I would say, half done. It's a work in progress, but my testimony will be very much based on my experience over the last six years.

In many ways I feel a great affinity with an institution starting this journey, because in 2011, there was so much new that we wanted to do that was different.

I'm going to divide my comments into six themes that cut across questions one, four, five, and six. I'm not going to answer things that are particularly relevant for the Canadian context. You will have many witnesses who do that much better than I do.

Theme one is my advice to the committee that you shouldn't be too prescriptive at this stage about your strategy until you have your CEO and maybe even some of your key senior executive positions filled.

Relating it to my case, I accepted some of the direction I was given, but a lot of the pre-thinking I was given wasn't right and needed a fairly significant reboot. My view is that the ultimate success of the institution is as much down to the calibre of the people you are able to attract as to the precise strategy and mandate they are given. My advice is to leave some flexibility for them to set the strategy they think they can execute. I obviously understand the need for strategic clarity now, but I suggest it might be false precision. That's theme one.

Theme two is—and I'm sure I'm talking to the converted here—that a dual mandate is inherently hard. When you have the objective of both achieving financial return and impact, that creates a state of what we call at CDC perpetual paranoia, of oversteering one way or the other. You only have to look at the history of CDC to see that there were times in CDC's history when it achieved impact at the expense of financial return and was criticized, or it achieved financial return at the expense of impact and was criticized. Trying to steer in the middle of the road is really hard.

How do you do it? I think there are a couple of elements that are incredibly important.

The first thing is to make sure that you have commercial DNA at the heart of the skills of your organization. We're really lucky, because we sit in the city of London, and therefore there are a lot of people we can hire from. I would also say that a Canadian DFI has an inherent advantage because you have such great commercial investing institutions that you can draw people from: CPPIB, the Ontario teachers, the Caisse de dépôt. These are really high-quality investment organizations.

My feeling is that you shouldn't compromise here. Your aim at its core is to build a high-quality investment organization, with everything that is implicated in that statement. If you do that, you actually will achieve impact.

Then, on the impact side you need to be clear about what you're trying to achieve. Impact, as I'm sure my good friends at ODI will tell you, is a very broad church and can be turned, if you're not careful, into a long shopping list of things you might want to achieve. Unless you have a strategic focus, your team will be able to justify any investment, because any investment in a hard place achieves some impact. You need to be clear about what you're going to say yes to and what you're going to say no to, and of course what you're going to measure.

Also within this, recognizing that this is a hard mandate, you shouldn't make that mandate too hard. Yes, there aren't enough start-ups run by women in rural Africa, but it's not an executable strategy. Remembering that unless businesses are successful, no impact happens is incredibly important. Pushing into white unoccupied spaces sounds great in principle because they're white, but they're also white because other people think they're too hard. That's theme two.

Theme three, going back to people, is pay really matters. Pay your team too much and it becomes toxic. Pay your team too little and you won't hire the commercial skills you need. That is a very delicate balancing act. You need to see who can manage that balancing act and attract the right people. They need to attract people who are extremely high calibre. They need to be top-notch commercial ambassadors because, frankly, this is the hardest kind of investing you can do. They have to have commercial judgment, but they also need to be happy to discount themselves relative to what they can earn in the market because of the inspiration and interest of the mission. These people do exist—we think we've proven this—but they don't exist in great numbers. You have to find them and then set a culture where these people will stay. A revolving door will undermine your mission. That's theme three.

Theme four is be realistic with your minimum return hurdle. You're going to need to set for the team what financial hurdle you need to meet. Commercial global returns—and you'll hear this from all your pension funds—are really low, as we all know, at the moment. Obviously, a DFI needs to be below that. And look long term. We take a 10-year rolling measure because there's so much volatility short term. You will want to be holding your investments, because patient capital is at the core of a DFI for many years.

Theme five is the same theme, be really patient. We think in decades, not in years, and therefore stakeholders of the DFI need to have the expectation that results, both in terms of financial return and impact, are going to take a long time to come through. To lose patience halfway through, say after five years, would be disastrous.

The last theme is linked to that, which is the governance structure you put in place must give political cover. Nothing undermines the achievement of the mission more than lurches in policy. Look at sovereign wealth funds. They embed this into their governance to stop, frankly, politicians with a short-term agenda changing the long-term policy of their sovereign wealth fund. There needs to be a framework for consistency over the long term. That doesn't mean to say there doesn't need to be immense scrutiny, of course, but also scrutiny from people who understand high-quality investment organizations.

I'll stop there.

9:10 a.m.

Liberal

The Chair Liberal Bob Nault

Thank you, Ms. Noble.

Either Mr. Maxwell or Mr. Carter, you guys get to pick.

9:10 a.m.

Simon Maxwell Senior Research Associate, Overseas Development Institute, As an Individual

Thank you for having us, first of all.

ODI is very pleased to be here. I am Simon Maxwell. I am formerly lots of things, including director of this institute and, until the election, specialist adviser to a counterpart committee of yours in the British Parliament, the House of Commons international development select committee.

We are really excited about the opportunities this DFI presents for Canada.

ODI has a lot of work on two things which are relevant. The first is what the developing countries want in terms of finance, a program called “The age of choice”, which demonstrates that they are not put off by having multiple offers from different people and that clearly there is a need for capital in developing countries. Another is the future development agencies program, which is also relevant to this, because the question we always ask development agencies is why they are doing what they are doing, and what their comparative advantage is in doing it.

It would be very easy not to have a DFI for Canada. I sometimes think that having a DFI is a kind of virtue-signalling operation by countries, a bit like a computer game where you have to collect a sword, an invisibility cloak, and the elixir of life—and we'll throw in a DFI at the same time. Form has to follow function.

It's been very interesting to read the mandate letter that was sent to Minister Freeland by your Prime Minister when she was appointed, and then to read the new development strategy. It is clear that all the virtues we associate with Canada—your commitment to multilateralism and a rules-based international order, and the huge depth of development expertise you have in Global Affairs Canada but also in IDRC and in the research and NGO communities in Canada—provide you with the basis for having a unique and distinctive voice in the world. That is reflected in the new development strategy: the themes of gender, human dignity, growth, environment, governance, and peace.

If you have that kind of mission, then it is really helpful to have the opportunity of a development finance institute that complements the bilateral program. Being mission-driven, in other words, is really important in thinking about the role of this new institution, even with a relatively small amount of money, $350 million Canadian, and with some constraints around what it can do, because it doesn't look as though it is going to offer very much in the way of concessional finance. However, that combination of loans, loan guarantees, and equity gives you the opportunity to pursue the objectives.

A question we have asked ourselves, and I'm sure you as a committee will ask, is why not just give all the money to the other multilateral institutions. Why not give it especially to the International Finance Corporation of the World Bank, which provides very similar kinds of services? The answer has to be that by using this money you can leverage additional money from your own aid budget and leverage the Canadian private sector.

I think we are on the verge of a new industrial revolution, driven by climate action, by automation, and by the response we have to the crisis of globalization, all of which are going to need a complete rethinking of the way the world economy works, and great investments. The new DFI in Canada helps to leverage Canada's assets in that sphere, and that can only be a good thing. I have more to say about some of the detail, which I'll save for later.

You'll surely know that the U.K. government has made a huge new commitment to Diana Noble's organization, raising its lending ceiling to £6 billion, with the possibility of going even further to £12 billion, therefore on a very different scale from Canada's. It has done that because our development strategy in the U.K. has overlapping priorities with yours but puts growth and jobs absolutely at the centre.

If you read the new aid strategy from the end of 2015 and then through to the bilateral development review that was published at the end of last year, you will see that the British government is really keen on growth and jobs, and therefore the investment in CDC is designed to support that.

Having a clear narrative about why you need this DFI is part of the contribution your committee can make to the future debate in Canada.

Paddy, go ahead.

9:15 a.m.

Paddy Carter Senior Research Fellow, Overseas Development Institute, As an Individual

Hello. My name is Paddy Carter. I am a senior research fellow here at ODI where I have worked on DFIs. Previously, I was an academic economist.

I'm going to hop around the questions that you've posed to try to identify some areas that haven't already been so ably covered by Simon and Diana. I'm going to start with your orientation around women and young entrepreneurs, and also with the reality of the budget that you have set. To me, those things say that you are likely to be looking at a business model that is based on intermediaries, that is based on providing a line of credit for onlending to a local organization, perhaps an NGO or a commercial entity, which is then going to, for example, lend money to small farmers or something like that.

I think one of the innovations that Diana brought to the CDC was the reorientation of the CDC around direct investments. A question that you have to ask yourselves is whether, within the budget you've set for yourselves, it makes sense to also try to have a direct investment line of business as well.

You may find yourself being asked why, because there's already a lot of money being put into DFIs. The CDC's budget envelope is increasing. There's the new World Bank private sector window. At the same time, one often hears about there being a lack of bankable projects. There's always the question that maybe this market is getting close to saturation. Maybe there aren't any projects that have everything you want: that they're additional, that they are things that the private sector would not do by themselves, that they also fit your development mandate. Maybe the world doesn't have enough of them.

However, if you're going to focus more on the SME side of things, then those worries needn't necessarily concern you so much. If you look around the world, there are a lot of very successful examples of small funds targeting SMEs in particular localities. They may all be looking for money to expand in the new territories. The world certainly isn't saturated with organizations lending to small farmers, for instance. So, you could very well start by asking your team to look around the world and identify some successful funds in other models that you would wish to support the expansion of.

Something else that DFIs will often say is that they decide whether or not to put money into something, but they do not create investment opportunities. This maybe echoes something that Diana said. If you instruct your DFI to go out and support businesses that are either female-led or female empowering in some other sense, maybe there are only so many of those. There's a finite number of those opportunities out there, and if you just focus on those, in practice what that can mean is that you don't do other things. It doesn't mean that you do more of those because there aren't any more of those.

That raises the possibility of collaboration and co-operation with other parts of the Canadian development architecture, which is one of the themes of your questions. That suggests maybe there could be scope for other parts of Global Affairs Canada to work on increasing the supply on the female entrepreneur side of the problem, and then have the DFI seen as the source of money to finance those entrepreneurs as they are created.

I want to say a quick word about transparency. Because you are starting afresh, you have an opportunity to lead the world in terms of the transparency of the DFI's operations. All the other DFIs in the world are moving rapidly in this direction anyway, but you can start out ahead. That means it should be possible for Canadian citizens to look at where you have invested; to understand the rationale for that investment; if there are questions to be asked about the tax arrangements of those investments, to be able to see what the taxation arrangements are; and also to be able to see beneficial ownership. This is a tricky one because there are, potentially, sometimes reasons why a DFI is not in a position to insist that all the owners of an investment are public information. Nonetheless, you can find ways of pushing this frontier forward. You could maybe experiment with insisting on beneficial ownership information as a requirement for your investments.

The last thing I want to mention before we move on to Qs and As is the Canadian comparative advantage. The evidence shows that the vast majority of businesses in fragile and conflict-inflicted states are run by a returning diaspora. Of course, every country has a comparative advantage in that it has connections with the diaspora communities within its own borders. That is something you could look to exploit.

I'll stop there.

9:20 a.m.

Liberal

The Chair Liberal Bob Nault

Thank you, Mr. Carter, Mr. Maxwell, and Madam Noble.

We're going to go right to Qs and As, and we're going to start with Mr. Allison.

9:20 a.m.

Conservative

Dean Allison Conservative Niagara West, ON

Thank you, and my thanks to our witnesses for being here today.

Ms. Noble, I'll start with you. You talked about the mandate changing a couple of times over the last little while. Talk to us about the thought process. I appreciate the short-term gain versus the long-term gain, that kind of thing. As a new DFI starting up, mandate is very important.

Talk to us about the capitalization. I mean, $300 million is really not a whole lot. You guys have been doing this for a lot longer. Is it something we should be looking to the markets for, whether it's bonds or debt, whatever the case is? Should we be looking at raising more capital? Obviously, more capital will have more impact. I've also referred to Mr. Maxwell's comment about giving this money to more multilaterals so that you lessen the impact you have.

As I said $300 million Canadian is not a whole lot over five or six years. Ultimately, if we want more impact, we're going to have to look at ways of going out and raising more money and figuring out, just as you guys have, ways to have that impact. Do you have any comments on that for us?

9:25 a.m.

Chief Executive Officer, CDC Investment Works

Diana Noble

For an investing organization, it's always made up of what I always call the holy trinity of deals—that's addressable market, whatever strategy you choose—people, and money to support it. They have to be consistent. You have a choice. The more money you want to give it, the more ambitious the people you hire, and the larger you set the addressable market, the more you can do.

It's probably wise to start reasonably cautiously and see how it goes. For a new team, it's quite daunting to have investment pressure, if I can put it that way. No one in a high-quality investment organization wants to sit around their investment committee table and feel that they have to do something because they don't have a strong enough pipeline and enough choices. You want to have all those things in balance.

Very simply, the more capital over time you give it, the more you can do, and the more impact you can have.

9:25 a.m.

Conservative

Dean Allison Conservative Niagara West, ON

Could you talk a bit about your experience in the U.K. and how mandate changes have evolved?

9:25 a.m.

Chief Executive Officer, CDC Investment Works

Diana Noble

I'll try to make it short because it's a long story.

CDC started in 1948, had a lot of impact and achieved a great reputation for being pioneering, particularly in Africa. If you go around Africa today, you see plantations, financial institutions, and cement factories that simply wouldn't exist without CDC. Roll the clock forward, though, and by the end of the 1990s, it had become a pretty big and not very commercial organization. It was making very long investments, plantations and things like that.

Tony Blair and his team looked at it and said that surely they could improve the commerciality of the organization and suggested they PPP it. They wanted to bring in commercial capital alongside government capital. Their timing was terrible. It was just after the Asia crisis, and all commercial capital looked at CDC and said that the balance sheet was far too scary for them and were put off by the idea of investing alongside government.

Because they brought in a very commercial team to run that process, that team wasn't happy with the status quo and came up with plan B, which was to split CDC into two. They basically split us along private equity norms. They created a new investment organization called Actis, which took virtually all of the people and did all the direct investments from then on. What was left was a very small lump of people with their mandate staying within public ownership of providing capital to funds, including Actis. Aureos had also started within CDC. During the period 2004 to 2011, all that CDC did was seed the private equity market across emerging markets.

Lots of good was done, even though over time that model became unpopular, because it was felt by politicians in time that wasn't developmental enough, because you're giving your capital to third parties who were making the investment decision on your behalf. Therefore, it's unlikely, given that those fund managers were also raising capital from third party commercial funds, they're going to be doing the hardest things.

In 2011, I was brought in and asked to continue the funds business—because it's a great business, and it's very developmental—but to start investing directly again from scratch when CDC had lost its direct connection with the market. That was the big part of the mandate.

The other thing I was asked to do was to shrink the geographies—no more China, no more Latin America, no more Southeast Asia—and to really focus it on the poorest parts of the world. There was a big change in mandate. At the core of it, the government felt that CDC could achieve much more impact. That's really what we've been trying to do for the last five years.

9:25 a.m.

Conservative

Dean Allison Conservative Niagara West, ON

Thank you.

9:25 a.m.

Liberal

The Chair Liberal Bob Nault

Thank you, Mr. Allison.

We'll go to Mr. Sidhu, please.

9:25 a.m.

Liberal

Jati Sidhu Liberal Mission—Matsqui—Fraser Canyon, BC

Thank you, Mr. Chair.

Thank you, all three of you, for your remarks this morning.

Ms. Noble touched on the focus on the poor countries. Witnesses last week came in front of the committee and spoke about the DFI mostly operating in low-income to middle-income countries rather than the poorest countries. I'd like to hear if you agree with this notion and how DFI could improve its approach to encourage the private sector to invest more into more vulnerable countries.

Anyone can respond.

9:30 a.m.

Senior Research Associate, Overseas Development Institute, As an Individual

Simon Maxwell

If I may, Mr. Sidhu, first of all on CDC, it's just worth googling CDC, and I'm sure Diana won't mind my saying this, just to see how controversial the kinds of decisions she's been talking about can be, and why it is so important to have the political cover that she talked about.

CDC was very much criticized for a number of reasons. The level of remuneration to the fund managers was one issue, but there was also exactly this issue that you've put your finger on, which is where is the money going? There have been periods in the past where CDC money has gone disproportionately to not the poorest countries—let's call them that—including India and China, and when it's also been used for investments that don't look as though they're tremendously poverty reducing. There has been a big debate in the U.K. about whether investing in shopping malls in West Africa—in Nigeria, I think—counts as a poverty-reducing investment or not, though a key lesson from that experience is that you need a crystal clear investment strategy that is consistent with the overall mandate of the new feminist development policy in Canada, and that will shape both the geography and the sectoral content of the program.

Now, Paddy made a really important point. With the amount of money you have available, you're not going to be a retailer, or it's very unlikely you're going to be a retailer, or if you are a retailer, you will be a kind of large NGO in a Canadian context.

What DFIs bring to the table in a multi-donor and multi-actor context is a kind of virtue signalling to other potential investors. The fact that the new DFI has given its seal of approval to a program means that it's okay for other investors to come in. Where that is particularly useful is in the poorest countries and in fragile states, because that's where many private investors find it hard to get information and where the risks look, at least, as though they are much higher. Having the imprimatur of the DFI means that it looks plausible that other people will come in, in some form of either co-partnership or blended finance.

In order to perform that role, you need to know the markets and you need to know the political and social environments in which you are working. I think one of the most important jobs that DFIs do is, through their due diligence work, make sure that projects are up to scratch and that intermediaries are up to scratch. That's really hard, and one of the things you are going to need in your new DFI is a group of people who can carry out that kind of analysis.

My final advice would be to not open yourself up to the criticism that you have a new DFI and that all it is doing is investing in casinos and shopping malls in relatively wealthy countries. That's not why Canada wants to have this institution, so you need to write the investment strategy in such a way that you make sure the money and the effort and the intelligence go where you want them to.

9:30 a.m.

Liberal

Jati Sidhu Liberal Mission—Matsqui—Fraser Canyon, BC

Mr. Carter, do you want to add something to that?

9:30 a.m.

Senior Research Fellow, Overseas Development Institute, As an Individual

Paddy Carter

No, I won't on that. We'll hear from Diana on that question, if that's all right.

9:30 a.m.

Liberal

Jati Sidhu Liberal Mission—Matsqui—Fraser Canyon, BC

Okay.

9:30 a.m.

Chief Executive Officer, CDC Investment Works

Diana Noble

If I may, I would add a couple of things on the hardest countries. In a way that's almost been CDC's specialist subject over the last six years. Actually, we now have a portfolio that has significantly more weighting to the hardest countries than any other DFI does. We've done that pretty much from a standing start six years ago.

It is hard, though. First, there aren't many immediately investable opportunities in these countries. Let's take, as an example, Ethiopia, actually, which isn't the hardest, by any means, of the countries that we invest in. In the U.K. there are 10,000 businesses with revenues of more than $50 million. In Ethiopia, I think it's seven, so you can't get off a plane and say, “What established, relatively safe businesses can I grow here?” The other thing is that you get off a plane and these are really difficult environments. You need to build up networks of trust and a reputation that the right people will come to you as well, and this takes a long time. It's very easy in these countries to make a misstep, and once you're stuck you don't have legal redress in most of these countries either. It takes time.

In lots of ways it's easier to work with established businesses to encourage them to start businesses in these hard places than it is to try to build what is already there. We've been pretty successful with that as well.

I'll stop there. It's doable, but it takes a lot of effort. A lot of the things we invest in take a year or two years from when we first see them, when they're totally uninvestable, to the point of saying that we've now shaped it well enough that we can put our money behind this.

9:35 a.m.

Liberal

Jati Sidhu Liberal Mission—Matsqui—Fraser Canyon, BC

Previous witnesses also expressed concern that DFIs are being treated more as aid agencies than institutional investors. I'd like to hear your thoughts on that sentiment by previous witnesses. Do you also see that as a concern?

9:35 a.m.

Chief Executive Officer, CDC Investment Works

Diana Noble

I think it was actually a comment I made earlier. My feeling is that the owners and the stakeholders of a DFI should be thinking about it as a high-quality investment organization. This is a problem of language, because if you have an aid agency essentially as the owner, they talk a different language to a high-quality investment organization. Aid agencies and investing organizations work so very differently in terms of generating opportunities and making selections, the controls that you have to actually achieve impacts. These are all completely different.

Certainly, I would say, sitting as a CEO of a DFI, it really helps to have your governance people really empathize with and understand the investment world.

9:35 a.m.

Liberal

The Chair Liberal Bob Nault

Thank you.

9:35 a.m.

Senior Research Fellow, Overseas Development Institute, As an Individual

Paddy Carter

Perhaps I may add a few words on that. I'd like to talk about the issue of whether you recognize what the DFI does as official development assistance. Now, the rules on that are not finalized yet. Understandably, there can be a political imperative to try to announce or report as much ODA as you can so you get as close to the 0.7% target as you can, which is something that everyone wants to dom, but that can create problems.

In the U.K., they have chosen to report all the money they put into CDC as aid at the moment they put it in, 100% of the face value. That's an option open to you as well. What that means, though, in the U.K. is that every pound that goes into CDC at that moment in time is a pound that isn't going into the traditional aid budget of DFID, because we have this fixed 0.7% cap on how much we spend. That changes the attitude of the rest of the development community towards the development finance institution because they really see that money going into that place means money not going into some other place.

There's no need for things to be that way. I don't know the details of how the Canadian national accounts work and what the politically salient numbers are that people look at, but in the U.K., money into CDC is counted as non-fiscal expenditure. It doesn't add to the national debt because there's an asset that offsets the borrowing that you might have undertaken to fund it.

In principle, the amount of money that you choose to put into your DFI, there's no reason that has to have any effect on the amount of money you choose to put into any other of Canada's development activities. Just be careful, maybe, about implicitly creating that link by whatever decision you take about whether you score it as aid. There are arguments that it would be easier for you if you did not try to count everything you put into your DFI as aid, but I understand that's a given.

9:40 a.m.

Senior Research Associate, Overseas Development Institute, As an Individual

Simon Maxwell

But don't stand for any nonsense—

9:40 a.m.

Liberal

The Chair Liberal Bob Nault

Excuse me. Thank you.

Colleagues, can people on the other end hear us when we're talking?

9:40 a.m.

A voice

Yes.