Foreign Affairs Committee on June 15th, 2017

[The Chair, Liberal, Bob Nault]

Thank you very much, Mr. Quigley.

I like the start of this discussion because one of the things that we are very interested in is, if we're going to be a new DFI, what does it mean to be bold and higher risk? We would like to see the witnesses reflect on that. Does that mean a lower return instead of the 7% people talk about? Does it mean 4%? These are discussions that need to be had and Canada, I'm sure, would like to lead the world.

I start this conversation by having people think a little bit about that, because if we're going to make recommendations to the government we're going to have to touch on those particular areas. You started it off in a very good space, as did Ms. Greene.

I turn it over to Mr. Allison to start the questions.

[Dean Allison, Conservative, Niagara West, ON]

Thank you very much, Mr. Chair.

To our witnesses, thanks for being here today.

Mr. Quigley, I'll start with you. My thought process is that we look at a DFI as just another tool in the tool kit in terms of what we can do. We do great things when it comes to humanitarian and disaster relief, vaccinations, all those kinds of things. My personal thought, though, has always been that if we don't create economic activity, if we don't create jobs or find a way for some of the things we do to be sustainable and work as part of that stuff.... That's one of the spokes in the wheel, if you will, in trying to make sure that everything happens. We can educate people, get them healthy, but if they don't have work at the end of the day we still have a vicious cycle that continues. That's why I like a DFI, for the potential that I think it can create.

You talked about acting as a catalyst for private capital. Would you talk about that a bit more? I know we've had some people say that $50 million or $60 million a year is not enough, that we may need to float bonds or do other things. I like the idea of being a catalyst for private capital. Can you give us your thoughts on what you mean by that and expand on it?

[Jerome Quigley]

Sure. Let me do that by giving you an example that already exists in the Canadian development space.

The project that I was talking about, INFRONT, which stands for Impact Investing in Frontier Markets, is a Canadian-funded project that provides incentive to the private investors to make their investments.

The incentives are in three forms. The first incentive is that it takes the first loss. This is Canadian government money. If there are private investors in these investments overseas, if there is a loss, the Canadian government takes the first loss. The second incentive is that it doesn't take any upside on its investment. You guys talked about how much is the right amount of return. On this particular one, it's zero return. That's probably too little, but it's another example of why other private investors, to the tune of $260 million, were willing to come into this investment fund.

The investment fund was sold about four years ago. The industry resounded with a lot of private capital. We're trying to do the same thing with the current fund, in which there is no Canadian government support or there is no Canadian government de-risking facility. In that fund, we're having a very difficult time selling to private investors because private investors are, frankly, afraid of investing in these frontier markets. That is an example where, when Canada did de-risk, private capital flowed in. When Canada didn't help to de-risk, it was much harder to raise private capital.

[Dean Allison, Conservative, Niagara West, ON]

Thank you.

That's part of the challenge. We're trying to go back to taxpayers and sell them on the benefit of this, realizing that the government or their taxpayer dollars might take the first hit. I realize you said that was just an example, not the only one but those are the things we also have to balance. That's why I'd like maybe a more reasonable rate of return but still some there.

Let's go to Ms. Greene around the same thing, because you guys have partnered with some DFIs. I love what Desjardins does with microfinance as well. I think those are important tools. The challenge around some of these things is managing those programs on the ground. You talked about making it simpler to be able to participate with a DFI. Why don't you expand on that a bit?

I realize that if you're talking about a 40- or a 50-page shareholder agreement, with these kinds of things it's three years to get a deal done. Talk to us a bit more about what you have in mind.

[Jessie Greene]

The main complication in working with DFIs tends to be that they have very heavy legal departments. This heavy legal approach just doesn't work very well when we have local partners.

We're working with organizations. We invest in microfinance or financial inclusion institutions in different countries. They're having a fantastic impact on the ground, but they might have one legal adviser or maybe they work with an external company. When a DFI comes with a 50-page loan agreement, they'll just sign and not understand everything that's in there, all the consequences that it can have. This is not a development approach. This is an institution trying to cover all the bases for every possible legal eventuality in a country where really the legal system is, let's say, not Canada's.

Thinking practically, looking at the reality on the ground, if you want to work with local partners, you have to adapt to the local situation and to local capacity. If an institution is not willing to do that, it will have to work with large international institutions that then have their own partners on the ground.

In our case, we often do that for our partners, so if a DFI is interested in investing together with us, for example, we would try to act as the legal interpreter between the two. However, the reality on the ground is that this heavy legal approach is not realistic.

[Dean Allison, Conservative, Niagara West, ON]

Thanks.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Allison.

We'll go to Mr. Saini, please.

[Raj Saini, Liberal, Kitchener Centre, ON]

Good morning to you both.

Mr. Quigley, I'm the member of Parliament for Kitchener Centre, so I had the opportunity to visit the MEDA offices last year. One of the things I took away from that visit was the long-term nature of the investment that MEDA had. There was one particular project that you were involved in, and I'm sorry if I don't remember the country correctly. I think it was a dairy plant in Guatemala, which I believe was a 15- to 19-year investment.

Because you are practising investments in areas that require that, can you give us an idea how you decide what the project parameters will be and how you determine the length of the commitment to that project?

[Jerome Quigley]

First of all, thank you. We appreciate your representation of Kitchener. Thanks for visiting our office.

[Raj Saini, Liberal, Kitchener Centre, ON]

Thank you.

[Jerome Quigley]

The investment that you're talking about was actually in Paraguay. It was a dairy, so your memory on that is great. It speaks to the history of MEDA. MEDA started 65 years ago as an investment fund. It was an investment fund started by about 10 Mennonite businessmen—they were all men at that time—who thought that development should be done in a different way. They didn't really call it development at that time. They just wanted to help in South America. They all invested their own money into a pool. That pool was used to invest in a number of businesses in Latin America. These members actually went down and mentored. They gave advice. They gave their own money. They did it all from an investment perspective. This is the history of MEDA.

I think what you're referring to there is that those original 1956 dollars still exist in MEDA. We have them as part of a capital pool that we continue to use to this day. I want to quickly make the point that when the Canadian public asks why we should underwrite the investment of, for instance, private entrepreneurs in these areas, part of the answer to that is the fact that this money stays around. It doesn't get spent. It's used very productively, and then it's returned. It can be used again. I think that's very powerful.

How do we decide on how long? I think that's very case specific. It's contextual. We invest in investment funds for very long periods of time because the investment fund lasts for 15 years, for instance. It's a fixed-term investment fund. However, we also invest in banks and microfinance institutions with short-term capital for one year to 18 months. It's a very contextual question. It depends on the issue that we're trying to deal with.

[Raj Saini, Liberal, Kitchener Centre, ON]

Ms. Greene, you talked about sectoral or geographic forms of investment.

The question I have is with regard to when you're making investments. Let's take banking for an example. I know this has happened in India where there's a lack of banking in rural areas. What they've done is to try to give everybody an Interac card to make it easier. The problem is that certain infrastructure is still required on the ground before those services can be utilized.

What is the interplay between ODA and DFI? How do you balance that? There are certain things that official development assistance will have to do prior.... There has to be an infrastructure system there prior to certain services being brought in. How do you balance the two?

[Jessie Greene]

I think that's a very good point. It's a dilemma or one the challenges of investing for development.

The thing with microfinance is that it's been around for quite a long time. Many grants were made throughout the world in emerging countries to help bring up microfinance. Initially, it wasn't seen as something to invest in. Because the infrastructure was built up, eventually they created investable institutions that are profitable and offer great quality services to their members or clients. Eventually, we could invest in them. It takes a long time to build up that infrastructure.

Often what we see now is that, in new sectors or in new geographical areas where these institutions don't exist, investors come in without having in mind the fact that there was such a long history of building up that infrastructure initially with grants. That's why we believe in the need to combine the two.

For example, in agricultural finance, the returns are terrible at the moment in developing countries, even in developed countries, really. You need to create this whole infrastructure with agricultural insurance and capacity building for farmers, using the right inputs. It's quite a complicated system where just investment isn't enough. That's why we advocate for a combination of the two where needed.

There will be sectors where, yes, the infrastructure is in place. They are very investable and have good returns. However, we'd like to see a portfolio approach where at least some of the funds from the DFI are reserved for these more innovative sectors where some donations will still be necessary.

[Raj Saini, Liberal, Kitchener Centre, ON]

Mr. Quigley, do you have any comments?

[Jerome Quigley]

I would agree.

I don't mean to generalize, but the work of investment is more risky and more difficult the further into poverty you want to reach, and I think that requires creative and innovative approaches. We would very much agree with Desjardins on this issue of mixes of investment and technical assistance or grant dollars.

[Raj Saini, Liberal, Kitchener Centre, ON]

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Quigley.

We're going to go to Mr. Aubin, please.

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

Thank you, Mr. Chair.

I want to thank the witnesses for participating in our meeting.

Ms. Greene, I'll start with you. A sentence in your opening remarks really resonated with me. You said that you're pleased with the establishment of a Canadian DFI, but also concerned.

The Canadian government is preparing to invest in a DFI, but has held back on investing in official development assistance for the past few years. Aren't we sending a mixed message to future investors? Aren't we saying that we want to pass the investments on to them rather than embrace this additionality concept, which has been heavily discussed but is harder to measure?

[Jessie Greene]

I completely agree with you. We're very concerned about this.

We were pleased to learn that the government won't use aid money to fund the DFI. We understand the funds will be added to the budget. One doesn't replace the other. It's an additional tool.

However, we want to see the percentage of the aid budget increase rather than decrease, along with the addition of other tools.

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

My second question is for both witnesses.

The Canadian government said it wanted to be among the leaders with this DFI, which has a relatively or even downright modest budget.

The budget's size won't make us a leader. However, could we achieve this goal by focusing on the DFI's ability to distinguish itself from the other DFIs on earth?

I'll ask Mr. Quigley to answer first.

[Jerome Quigley]

I agree that it's a small amount. It needs to have a way to distinguish itself, and I can think of no better way than the blended finance leadership that Canada took over the past five years on the international stage. In my opinion, that is the answer to how this DFI can be innovative.

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

Ms. Greene, do you have anything to add?

[Jessie Greene]

It's certainly challenging to distinguish yourself with a smaller budget and the goal of being profitable as quickly as possible. With a very clear mandate or very specific areas of focus, the DFI could distinguish itself and become a leader in certain areas.

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

Could it be the major bank of small investments, for example?

[Jessie Greene]

Yes. That's one example.

However, if the DFI focuses only on small investments, the operating and administrative costs will be higher.

As an investment manager, I would want the DFI to have a clear mandate and to distinguish itself in one or two specific areas. If the DFI tries to cover all the areas, it won't be able to distinguish itself.