Foreign Affairs Committee on June 13th, 2017

[The Chair, Liberal, Bob Nault]

We're going to go to the next member of Parliament. We're trying to keep this to a particular time. Mr. Sidhu used up the time for both him and his colleagues.

[Some hon. members]

Oh, oh!

[The Chair, Liberal, Bob Nault]

I'm going to go to monsieur Aubin, s'il vous plaît.

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

Thank you, Mr. Chair.

I'd like to thank our witnesses for being here this morning.

Since I come from the French-speaking part of the country, my questions will be in French. If you experience a problem with the interpretation, don't hesitate to raise your hand.

My first question is for you, Ms. Noble, but Mr. Maxwell and Mr. Carter, please feel free to comment as well.

As part of a previous study, we looked at Canada's approach to international aid based on target countries. The United Kingdom was often cited as a model for having deliberately chosen to meet the 0.7% target for foreign aid spending. Does that in any way affect your institute's capacity to generate revenue or attract executives?

In your opening statement, Ms. Noble, you talked about the challenge of recruiting high-calibre executives who will accept to work for less money. Does the U.K.'s leadership in international aid make it easier to recruit people and fund-raise?

[Diana Noble]

I think there are two questions you've asked there. One is whether the U.K. being a leader in aid helps in funding us, and the other is whether it helps us in attracting the right people.

Of course the two questions are linked. The fact that the U.K. does have a large ODA budget is clearly a driver behind the amount of capital the U.K. government wants to give to CDC. The only question is what proportion of that ODA budget they want to put into private sector development and how much they want to put into aid. Sitting here, we feel that the two are totally complementary. In no way would I ever say that investing in private sector development is a replacement for, or better than, pure grant making. They're both needed.

In terms of attracting high-quality people, yes, of course, people can see a growing organization. If they can see an organization that has real political support and real support from a shareholder for the direction we're going in, then high-quality people are much more likely to make that big decision to move from the private sector to work for CDC and really make their careers here.

I do think the two are complementary and consistent.

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

Thank you.

Would you like to add anything, Mr. Maxwell or Mr. Carter?

[Simon Maxwell]

I would like to say very briefly that one of the things that happens as you get going with a DFI is that you start to generate your own funds. For many years CDC was able to self-finance quite a lot of new investments because it was receiving payback on loans or was selling off equity. It has now received another big injection, which enables it to grow faster.

I also want to say, please don't stand for any nonsense that this is not a development organization, because it is. The new DFI needs to be subservient to the overall development imperative of Canadian assistance.

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

My second question has to do with direct investments and not funds.

When a development finance institute like yours, or others you know, decides to invest directly in companies, does it adhere to a code of ethics that would prevent it from supporting companies based in tax havens?

[Diana Noble]

We use tax havens only when we invest indirectly through funds as a pooling mechanism, because investors come from different places and need a tax-neutral place to pool their capital. We invest, directly or indirectly, with a very strong code of responsible investing, as we call it. It doesn't just cover taxes. It covers a whole swath, including health and safety, the environment, land rights, and so on. It's incredibly important. It's at the core of what a DFI should do. It should provide not just capital to the capital-starved private sector in poor countries, but also standards and expertise to help businesses adhere to the right kinds of standards.

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

Mr. Maxwell and Mr. Carter, would you care to answer?

[Paddy Carter]

There's a distinction to be made. Do you have tax havens in the structure between the investors and the underlying business that you are invested in? Then, separately, is the underlying business a multinational enterprise that is using tax havens in its operations?

Some of the European DFIs I have spoken to are starting to take a more proactive stance toward the behaviour of the underlying businesses and whether they're using tax havens to shift profits. This means you have to invest in somebody with tax expertise who is capable of looking at a tax structure and deciding that they don't like it even though it's legal. That's quite a grey area. Not every DFI does it. I'm aware of the fact that one or two European DFIs have now taken it upon themselves to go beyond this. “Is it legal?” isn't good enough for them. That's something you could think about asking your DFI to do also.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Aubin.

Mr. Saini, please.

[Raj Saini, Liberal, Kitchener Centre, ON]

Thank you very much for coming here.

Mr. Carter, I'm going to start off with you, because I read a report that you had written back in October, and you gave two very clear distinctions of DFIs. You spoke about the CDC, and the work it did in Sierra Leone, working with Standard Chartered Bank and trying to make sure that the SMEs affected by the Ebola outbreak in Sierra Leone were financed and that growth was recovered. You talked about OPIC, the Overseas Private Investment Corporation, which is the American DFI, and about their national security interest in the Republic of Georgia in 2008, where they stabilized the residential and commercial market.

You have two distinct and separate usages of the DFIs. When we're looking at our strategic focus, how should we align our national security and humanitarian interests? What should take precedence? What parameters should we look at? If you could provide some general comments, I'd be interested.

[Paddy Carter]

I'm afraid I have to start by confessing that the sections of the paper that you read must have been written by my co-authors. I wasn't responsible for those myself.

Rightly so, there's an awful lot of people asking what role DFIs can play to stabilize situations where you have large refugee populations and sources of instability. Other than giving a generic answer along the lines that one of the things you could ask your DFI to do would be to look for opportunities to create businesses in those sorts of situations, I'm not sure any more tighter alignment than that is necessary.

I infer from your question that the United States felt that it had a particular strategic interest in Georgia. If Canada feels that it has a particular strategic interest in particular territories, the DFI could be asked to look for opportunities in those territories in particular. However, you have to recall that, again, DFIs cannot create investable opportunities.

I have heard other DFIs complaining about the fact that they are asked to do something about refugee crises or an instability and they find that there's not a lot they can do. I even had one DFI tell me that they are sometimes put under pressure to make up a story that they've done something useful when they really haven't. That's just a word of caution about what you can expect from a DFI in those situations.

[Raj Saini, Liberal, Kitchener Centre, ON]

Mr. Maxwell.

[Simon Maxwell]

That sounds entirely plausible to me.

[Raj Saini, Liberal, Kitchener Centre, ON]

Okay.

The second point I want to raise is that with DFIs you have an opportunity at the project model level to determine what the outcome is in terms of jobs, investment, and the social climate, but there seems to be a problem in assessing how they contribute to the overall aid system around the world, especially in terms of charting a path forward towards the sustainable development goals of 2030. Is there some better way we can measure to make sure that the project aligns with a more global focus?

[Paddy Carter]

You've put your finger on a tremendously hard question, because elsewhere in the development world everybody is quite rightly expected to be rigorous about the impact they're having, but elsewhere they're doing things where they're trying to achieve quite a well-defined effect on quite a well-defined group of people. An example might be if you open a health clinic in a region that hasn't had a health clinic before, and you should expect to be able measure improvement in the health outcomes of the people in that area. Investment is very different from that. It's very rare that you have a well-defined group of people in whom you would expect to be able to measure a benefit, because economies are integrated. If you open a new restaurant in Toronto, you could set off a chain of events that sees somebody in Ottawa getting a job they wouldn't have got before.

In a simple economic model, which isn't realistic but might not be a bad place to start, adding one extra piece of investment to an economy raises wages across the entire economy by a small amount. That's an extremely hard thing for anybody who has the job of measuring the contribution of DFIs towards the sustainable development goals to put a number on. I don't think anybody sensible can doubt that the accumulation of investment is what takes a poor country from being unproductive and poor to being wealthy and productive. We know that the only way to go from poor to not poor is by accumulating investments, so I think you can have confidence that a DFI is contributing towards a sustainable development goal, but you are left with this difficult problem of how to measure and articulate that contribution.

At the moment, the DFIs all use something called the—and I've written down the acronym. They have agreed to a bunch of indicators to get a harmonized set of indicators, which I imagine would be sensible for the Canadian DFI to adopt. However, this is a very live discussion with all the DFIs at the moment, to try to find ways of capturing how they contribute to the transformation of the economies they invest in.

[Raj Saini, Liberal, Kitchener Centre, ON]

I have one final question, and this is for Ms. Noble.

When we look at the CDC, as you mentioned, there were two points. One was where there was investing in a “fund of funds” model, where the rate of return was very high, and the focus changed and the rate dropped very low. I think your goal generally is around 7% to 8% in terms of what investment return you're looking for. Am I correct?

I'm basically asking whether you have a defined rate of return, some ballpark figure you look at. It won't always be accurate but, generally speaking, do you look at a ballpark figure? That's just to give us an idea, when we're investing in certain places, what numbers we should be looking at.

[Diana Noble]

We have a minimum hurdle and that's tied to our long-term remuneration scheme, so we don't want to flirt with it too much. If people don't get paid, they won't stay.

The minimum that we want to deliver over a 10-year horizon is 3.5%, but we definitely want to be above that, so probably in the 5% to 7% range. With these things, it's really hard, and I would counsel this, to be precise.

We looked at our historic returns, deal by deal, and of course the distribution is all over the map. It's as much driven by your failure rate, so how many actually lose all their money, as it is by how you're structuring each deal and what you're looking for from each deal.

[Raj Saini, Liberal, Kitchener Centre, ON]

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Saini.

Mr. McKay.

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

Thank you.

Thank you to all of you for very clear advice. It's very good.

The law of unintended consequences prevails in all matters, and the government has emphasized, rightly in my judgment, its feminist views.

Mr. Carter, you talked about, if you will, some finite ability or finite concept there, as to it only taking you down the road so far. I wonder if you could expand on your thoughts in that respect.

[Paddy Carter]

I think a difficulty here is whether we are thinking in terms of quite large deals which a DFI might invest in directly. In that case, in any given country, at any given time, you may be able to count those opportunities on the fingers of one hand. Or, are we thinking more about microenterprises, businesses with a handful of employees that are looking to expand? In the microenterprise case, it is easier to believe there are regions of the world where there is an undersupply of finance and there are small, investable opportunities, or an intermediary of some sort, and it doesn't have to be a bank or a private equity fund.

If you look out there, there is a remarkable range of business models, sort of quasi-charitable, with commercial elements that target SMEs. Those are potentially organizations which DFI could support. There it is plausible to think that if we just supply more money, there will be female-led enterprises which are looking for money, and we can say to that fund that we want the fund to target them. They will be able to find people to give their money to, and that will work out fine.

It's more as you go up into the larger propositions...and there are a finite number of them out there. The way that one DFI described it to me is that as soon as their shareholders started giving them targets—“we want you to be doing this sort of deal”—they started subtracting ones that they don't do. They don't add extra ones that they can do.

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

An unfair summary of it is that if you want to do larger deals, the feminist issue may have to go to the side for the time being, and if you want to do micro deals, it's a lot easier to achieve feminist goals. Is that a fair summary?