Foreign Affairs Committee on June 13th, 2017

[Paddy Carter]

I think it's probably fair, on the assumption that you're already doing everything you can to invest in women-led deals at the large scale when the opportunities present themselves.

[John McKay, Liberal, Scarborough—Guildwood, ON]

You made a second comment about the returning diaspora which I didn't quite understand, just at the end of your comment. We have enormous diaspora communities in our country, which are a huge benefit to us. What did you mean by “returning diaspora”?

[Paddy Carter]

I was looking at a piece of research that went into countries such as South Sudan, Somalia, and Sierra Leone. They approached all the businesses they could find and asked them where they got their money from, and whom they employ. One of the facts that popped out is that a very large percentage of them were run by people who had come back from the United States, the United Kingdom, France, or Canada. They had come back to their home country and set up a business.

From my understanding of the DFI model, that would be something for a DFI to interact directly with. Maybe there are other parts of the development landscape, such as NGO partners that the DFI could work with, to tap that potential of people who have been in Canada, see an opportunity to go back and set up a business, and need some money to do it. That's just one of the advantages that you have. You have this large community to exploit.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you for that. That's an interesting observation. I represent a riding that has pretty well every group of people known to mankind in it. I take that as good advice.

My final question is for Ms. Noble.

You talked about political interference or political cover. All politicians have short-term agendas. I'm not quite sure what the British short-term agenda is, given your political situation these days, but how is it that structurally your organization is inoculated against the imperatives of short-term and possibly even confusing agendas?

[Diana Noble]

It's two things. It's the governance structure, but it's also investment in relationships. Let me take the second first.

No governance structure will protect you if you don't get out there and explain what you're doing and why you're doing it to all the people who matter. A great example of this was that the bill supporting the new capital for CDC received, quite rightly, a great deal of attention in the last year. It was only because we knew a lot of people; we had explained what we were doing, and a lot of people got it and liked it that we got through that period intact. In an institution like this, there's no point trying to make friends when you're already on the back foot. Investment in relationships, frankly, on both sides, really matters.

The governance structure obviously helps too. Certainly over the last 20 or 30 years, CDC has had a very similar governance structure. Although we have one shareholder—the British government—they devolve responsibility to an independent board. They don't have anyone sitting on the board, and they also don't have anyone sitting on the investment committee, so they have no involvement in investment decisions. The board consider themselves responsible and fully accountable for the execution, and for ensuring that the executive team, myself included, fulfill our mandate and execute our strategy as well as possible.

It's really for the board to provide that extra buffer, if I can put it that way, between what the executive need in terms of continuity to keep going, and to have those conversations with government and politicians who might have short-term agendas. They can explain that whatever the politicians are suggesting might make a great deal of sense on paper but actually isn't necessarily in the best interests of the U.K. or the institution.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Finally, Mr. Carter and Mr. Maxwell were bouncing around the idea of whether the investment in DFI is in fact aid or not. From the vantage point of the chief executive officer of this organization, does it actually matter to you whether it's counted in 0.7% or not?

This question is directed to Ms. Noble.

[Diana Noble]

There was a difference when it changed from a system where every investment we made and every receipt we received were counted to a system of, when we're given capital, just that figure counts. Because the U.K. has a target of 0.7% each year, you can imagine how hard it was for us and for our shareholders in December to try to land an exact number when we have a lot of investments going out the door, a lot of which we don't have any control over at all, and a lot of receipts coming in, which again we have no control over. December became this remarkably fraught and tension-ridden time between us and our shareholders, because they looked to us to manage it, and a lot of it wasn't manageable.

Moving to a system where ODA is counted just when we get capital works very well for us. We have a very careful liquidity policy so that we don't take capital we don't intend investing within a period. We don't want to take the capital that other people could use and just sit on it. That's really important to us, but I have to say the way we do it now is much more manageable.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. McKay.

Mr. Benzen, please.

[Bob Benzen, Conservative, Calgary Heritage, AB]

Thank you, Mr. Chair.

Thank you, witnesses.

I'm really reluctant for the government to get involved in areas in which the private sector can do a better job. Over the last couple of decades, we've seen a large expansion of the private sector into this area.

You talked about supporting entrepreneurs, female entrepreneurs. Whether they are female or male, if they have really good ideas or bright ideas, they are going to find support from the private sector.

Looking at your numbers here, in the past, you guys were doing almost 8% in return, and now it's down to just over 2%. I think that may be a function of private enterprise finding those good ideas out there and supporting them, and the government just finding itself picking up the second best idea or the third best idea, and hence its returns are falling.

I'm not sure the government should really be doing this, so don't you think private enterprise is picking up the best things here and crowding you guys out now? It seems a little schizophrenic to me what we're doing here. Either this is making money and we should be doing it like a private business, or it's aid and it should be strictly looked at as aid. If you have the mandate of trying to do both things, I don't know how you accomplish that.

Can you address some of that private enterprise part of it now? Are they doing that? Are they getting the best returns because they are crowding out the government, and the government's not getting the best returns because they are not getting the best ideas anymore?

[Diana Noble]

The picture you paint is a reasonably accurate one, and this is good news; this is what we all want to achieve, the private sector in time crowding out the DFIs. That's nirvana for all of us. However, there is no question that there is still a big gap where DFIs are needed. It's quite right that we should have what we call additionality guidelines so that, for every single investment we make, we must be able to justify that we're doing something the private sector won't do. It's really important. When you think about it in terms of Canada, those guidelines have to be enforced really heavily.

Let's look at the provision of long-term debt in Africa. The commercial banks do not do this. The local banks do not do this. That's what DFIs do, and that is clearly needed and is a huge gap. Commercial investors are not making investments in smaller businesses or setting standards on environmental and social.... I've talked about it before.

Our role is definitely getting harder, and I think that's fine. That's the pressure that should come on us to make sure we are going to a place like Ethiopia that doesn't have enough large companies and really grafting on those opportunities that might take a year or two to happen.

I can tell you that your big pension funds would not invest in two years to make an investment in Ethiopia or in DRC. They wouldn't have put capital alongside standard charter during the Ebola crisis. No one was investing in Sierra Leone during the Ebola crisis, except a DFI like us.

There absolutely is a gap. Is it hard? Yes, it's hard. Are returns hard to deliver? That's why you need great people to do it, but the role is still very important.

[Bob Benzen, Conservative, Calgary Heritage, AB]

Thank you.

[Simon Maxwell]

We live in a world of market failure. If the markets were perfect, then we might not need organizations like your DFI or CDC. However, there are information failures, misunderstandings of risk, and coordination failures in markets, and DFIs help to overcome those failures.

One key one is that we're living in a world of very rapid technical change. For example, in renewable energy, the price of solar energy has fallen by over 90% in something like five years. The early investors, often with state support, are the ones who have been able to create the markets and the regulatory framework that enable the second round investors to come in and make more profit. So, I don't disagree with what Diana said, but I do think there is a role for DFIs as pioneers in areas where there are high market failures and where new technologies are rampant.

One of the great advantages of publicly owned DFIs is that they can work with other elements of the aid program. It's not to say that you have an aid program over here and the DFI sits somewhere working completely independently. You know, when we talk about building the private sector, dealing with the regulatory constraints, building the infrastructure that private entrepreneurs need, and creating the next generation of investable businesses, that's where a collaboration between the DFI and the rest of the aid program can be especially valuable.

[Bob Benzen, Conservative, Calgary Heritage, AB]

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you.

Mr. Levitt.

[Michael Levitt, Liberal, York Centre, ON]

Thank you to you all for joining us this morning.

My question actually follows the last comments that you just made, sir.

The government's priorities with regard to development goals have been quite clear, and I think we stated recently, there's a particular focus on women's economic empowerment and poverty reduction, a focus on women and girls and particularly economic growth, job creation, those sorts of things.

As it relates to a kind of focus on women, we had witnesses last week and the issue came up of whether there is an appropriate, modest level for directing the DFI to prioritize those types of projects that would empower and enable women entrepreneurs or local women actors on the ground. There were concerns that too robust a direction creates an artificial barrier to the success of these things because it's the market element that obviously makes them succeed.

Is there, maybe in the case of the British example, a modest level, a small level of direction toward those sorts of priority areas? Again, are development goals working with the DFI? These things don't operate in a vacuum. What's your feeling on there being a modest level of direction toward such a priority? Is that going to hamper it? What do you think an appropriate level might be if you do agree with the notion? I just want to see if we can get some discussion around that.

[Diana Noble]

Sure, would you like me to kick off?

[Simon Maxwell]

We all have views on that.

Paddy, why don't you start?

[Paddy Carter]

I'll start, although as I start talking, you will hear that it's Diana who completes this thought. CDC has, in my view, a wonderful way of looking at its investment decisions, and it has a great virtue of simplicity. It has this thing called the grid. You can google it and have a look at it. They plot their investments on just two dimensions. First, how difficult is the place where they're investing? Second, how job rich is the investment; that is, how many jobs is it going to create? They can locate every investment on that grid, and then they can count up the score that they get at the end of the year and say, “Our investments average 4.2 this year.”

Imagine giving your DFI quite a simple way of assessing its potential investments, one where doing things that contribute toward female empowerment is one of the dimensions that is measured. However, because it's not the only dimension that's measured, when other opportunities come along that don't happen to be particularly female-led but that score on the other dimensions, you'll do them. It's a way of sort of rewarding and encouraging a style of investment without being overly descriptive and saying that you have to hit this particular target or everything has to look like that. That's potentially a promising way of looking at it.

[Simon Maxwell]

Let me come in before Diana rounds up.

This is one instrument among many. When I last looked at a DFID's private sector work, they had something like 30 to 40 different instruments available to them for working with the private sector—some large, some small. There is a large number of large companies that were trying to look at their supply chains, for example, or their distribution networks and create opportunities for women within those.

Coca-Cola, for example, is looking at how they can involve women entrepreneurs in the last mile delivery commodities. DFID has capital grants available to those kinds of programs, which are pretty numerous and pretty diverse in the food sector. We have work in manufacturing. There's work going on, as I say, with Coca-Cola and others.

A question that Diana might want to pick up is, what does the DFI bring that is value-added over and above those kinds of challenge funds? It's probably—to put words in her mouth—around the long-term commitment and the long-term investment she talked about earlier. This reinforces the point that the DFI needs to be seen as one tool among many in the work you're doing to help women entrepreneurs get going.

[Diana Noble]

I think it is doable. It's easier, obviously, when you have a smaller investment amount. We're investing about $1 billion or $1.5 billion every year within a relatively small geography. If every company we invest in had to meet certain standards, that would be very hard.

For you, with a smaller amount of capital, there are definitely things you could do. They're on sort of a sliding scale. The easiest thing you could do is make sure that in your due diligence processes every investment you make does not have any discrimination towards women. That's the starting point. As you go up, you could encourage your team to make investments that would benefit women in some way, but don't be too prescriptive about it. Everyone likes the idea of women leaders, but it could be that this has a higher proportion of women managers than it appears in the sector. It could be that it employs more women. It could be that it has more women in its supply chain, or fewer customers.

One of our most successful investments in the past was Celtel. When we first invested, this was about bringing mobile telephony to Africa. Everyone thought it was a luxury item for businessmen, a tiny market. Look at it now. Probably one of the biggest impacts is the network of air-time sellers, the large proportion of which are women. It's giving them an economic opportunity.

I would encourage you to expand your minds about how business can improve people's lives. It's not necessarily just the obvious things.

[Michael Levitt, Liberal, York Centre, ON]

Thank you very much.

[The Chair, Liberal, Bob Nault]

Thank you very much.

I want to take a moment to ask a question which I think we're all thinking about. In 2010 when the U.K. did its review to respond to some criticism that it had wandered off and become risk averse, as was suggested by some of my colleagues this morning, it became very business oriented. I was just reading the comments by the Honourable Andrew Mitchell when he was the minister in charge. He said that the CDC would be a development-maximizing not a profit-maximizing enterprise that would become bolder and more pioneering in the approach to innovation and risk.

Perhaps you could give us a little insight. Does the CDC lead the world in the whole idea of pioneering the approach to innovation and risk? As these organizations move along in their mandates it seems that they become less risk averse.

If this organization that we're creating is not at all capable in managing risk, then we won't be able to succeed in our mandate that politicians are looking for, which is to be in the poorest countries and working with the poorest people, who happen to be women and children, generally. That's the argument of the feminist agenda, that when you're in the poorest countries, you find that the women are usually the poorest. They don't go to school. They're given usually the manual tasks, and the story goes on and on.

From the committee's perspective, there are two things. Are there places in the world where they are very much into managing or having a mandate for risk? Of course, politicians are risk averse themselves, because the opposition will come after the government and say, “Look at how much money you lost in this organization because you took too much risk.”

If the business community isn't going to go into these poorest of the poorest countries and the government believes in the ODA and the whole development assistance initiative, then we have to find a way to converse, be transparent and accountable, and make sure that the country and the people in it support the amount of risk that an organization like this is allowed to take.

Perhaps you could give us a sense of whether since the mandate was changed in 2010 there is a bigger debate among politicians and among citizens in the U.K. about risk and the importance of it, because that means you don't do as well on the percentage basis. I'd be very interested in your comments on that, because with every organization—and this is my 20th year in politics—we start off with a significant amount of risk and as time goes on, it seems that governments and/or bureaucracy whittle away at that and make it less risk averse.

We have a federal development bank that we used to be very proud of and its mandate was changed so it does nothing in rural areas like mine anymore. It's just like a regular bank, but when it first was created, it was intended to take risk where banks wouldn't go in rural parts of Canada. I just use that as an example.

This is very much the same kind of thing. From a political perspective I need to make sure that my Conservative friends and my NDP friends accept the risk and don't beat up on us in Parliament about the risk that we would take. I'm very interested in that. I think that's important because the minister just announced our feminist policy, which means that in the 30 countries we're focusing on exceptionally it will be a higher risk because it's poorer and women are involved. I would be very interested in your comments on that.

Ms. Noble, do you want to start or do you want to work backwards and come back?

[Diana Noble]

No, I'm very happy to start.

Yes, you describe what we call the perpetual paranoia of running a DFI. I would say our stakeholders think about impact, impact, and impact. They don't, at the front of their minds, think about the risk that they assume in order to deliver that impact. That's why I think your question is very astute and very thoughtful, because it is so much easier for the institution in time if its stakeholders understand the risks that are being taken in order to deliver this impact. Risk isn't only low financial returns or losses. It's reputational risk as well.

We know we work with the wrong people, who do the wrong thing, and we also know that in the countries where we work, that is the majority of what happens. We know that the appetite in the U.K. to accept that risk is incredibly low.

How do we manage that? I think it's two things. As I say, I go back to the importance of hiring people with commercial judgment, people who can look at a situation and understand the risk that they're taking, and mitigate it, and structure it, but who can also say no. We're full of people here at CDC who have the commercial judgment to work hard on something, but to say that we don't want to do something because the risks are too high.

As an example of how we support that, we don't have annual volume targets, because we always want to be able to say no and not to feel that pressure to make the wrong investments. That's incredibly important.

Then, around those people, you have to wrap really good processes around risk. We have a risk committee. We have a risk structure. We built this all from the bottom up. We talk about it a lot. Risk is our business, and we have to do it well.

[Paddy Carter]

There's a very simple point to make here, which is to do with your ability to diversify risk within your own portfolio, because you have lots and lots of different investments. If you are quite a small entity, one way of coping with risk is to have lots and lots and lots of very small investments so they don't all fall over at the same time, whereas if you had some chunkier investments, obviously your risk exposure would be a lot higher.

Maybe it would be wise of me not to mention who they are, but there was a small European DFI who was told to go out and take more risks and do more business in the harder places. They lost a bunch of money. They turned around to their government and said they needed some money, and the politicians said, “What are you doing? You're not supposed to be losing money.” So this is something that definitely can happen.

If the reality is that a Canadian DFI has quite a limited risk-bearing appetite, then this is maybe where partnership can come in. Let's say, around the world right now there are a dozen universities and start-ups working on small-scale, low-cost desalination technologies. It's the perfect thing for a DFI to put its money into, because discovering which of these technologies works would be of fantastic benefit to the whole world. You could try and commercialize a dozen of these technologies, and if you did all that, you'd probably, across the portfolio, stand a large risk of losing a lot of money.

The Bill & Melinda Gates Foundation, however, might be really keen to see that sort of desalination technology happen and offer to put up some first loss grant capital so that if things do turn out toward the bad side of things, you're not left wearing all the losses. If you are thinking about ways of doing more risky things without exposing a relatively small entity to too much risk, then finding people to work with who might be able to put up money to help with that might be the way to go.

[Simon Maxwell]

I have three quick points.

The first is that there's a difference between having a risk appetite and being foolhardy, so you need to be able to demonstrate that you have a good risk assessment procedure in place and a good risk register.

Second, the value of well-informed and active politicians can never be underestimated. You have that kind of committee in Canada. In the U.K., the international development select committee is the last bulwark between the popular press on the one hand and, it sometimes feels, sensible decision-making on the other.

The third point to make is about another Andrew Mitchell innovation. He introduced completely independent evaluation by creating the Independent Commission for Aid Impact, which reports not to the government but to the select committee and has been able to look at DFID's private sector strategy, for example, and is another way of providing an intelligent assessment and, if necessary, some cover for the people at the sharp end.