Foreign Affairs Committee on June 15th, 2017

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

I was also struck by your comment that it could be worthwhile to ask citizens to help fund the DFI. That's likely the main purpose of Desjardins, a co-operative movement. Did you have a model in mind when you suggested this?

I find the idea interesting, especially since it could result in a vision that looks less like an act of charity and more like a duty to share on a global level.

[Jessie Greene]

I don't know of other DFIs that have a model like this one. The Dutch have the FMO, which is funded partly by the government and partly by the banks.

However, there are a number of European funds. European law allows for much greater risks in retail banking, so there are a number of funds in Europe. These funds are registered in particular in Switzerland, Luxembourg and the Netherlands. They enable citizens to invest amounts that are then directly invested in developing countries. They offer benefits when it comes to tax credits, for example. A similar mechanism isn't possible under Canadian law.

We must take this challenge into consideration when determining the product to design in partnership with the Desjardins members. We do have a large pool of people who may be interested in investing in development. However, no structure in Canada currently allows for this. I dream of a model that would allow for this. Perhaps it could be created through the DFI or another way.

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

To make the returns good or attractive for citizens who want to invest part of their savings, which should probably be used for their retirement, we must combine tax deductions with returns that would obviously be lower that those provided in other markets. We must have a type of hybrid model.

[Jessie Greene]

Personally, I don't think the returns would necessarily be lower. A fund can be structured to make the returns acceptable. In any case, the returns are very low right now. Tax benefits could certainly promote investment.

However, in my experience, European citizens don't ask for a very high return. They're simply happy to invest in development and to recover their capital, nothing more. The Kiva institution in the United States takes loans from citizens and invests the money in microfinance in developing countries. It doesn't offer any return. However, it's very popular. Each year, it attracts more members, who loan their money and recover it later. Their return is actually a social return. The lenders have access to information and can even choose which institution and client will receive their loan. For example, they can choose that their money be used to help a woman in Ghana launch a business. It's satisfying enough for them to take the risk.

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

Mr. Quigley, what do you think?

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Aubin.

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

Oh. That's too bad.

[The Chair, Liberal, Bob Nault]

I'll go to Mr. Sidhu, please.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

Thank you, Mr. Chair.

Thank you both for your engaging remarks this morning.

My question is on the issue of accountability and good governance practices in the context of public-private partnerships, such as in the case of the proposed DFI. Last Tuesday at a committee meeting, we discussed that DFIs have not been immune to controversy, like the investment in a shopping centre in Nigeria. That project doesn't really appear to be a sincere poverty reduction initiative.

How can accountability measures be enforced with the private sector to ensure that projects serve a development purpose at a fundamental level?

First, I'll go to you, Ms. Greene.

[Jessie Greene]

I agree that no institution will be immune to controversy. They should allow for some degree of failure. In fact, they should share their failures. To me, the most interesting kind of accountability would be to share failures, besides reporting on outcomes and activities, which it should do, of course. This is something we rarely see in development or from DFIs either.

I would be so pleased to see a DFI share its failures. This is something that's taboo in development but very common in investment. Private equity actors know that if they invest in 10 companies.... The theory is that two will fail, six will be kind of middling, and two will outperform and make for a good return in a fund. In development, we never say that we're going to have 10 projects, that two will fail, six will be average, and two will be great. This is a discussion that I would strongly encourage the DFI to have.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

Go ahead, Mr. Quigley.

[Jerome Quigley]

That's a very good question. How do we make sure our investments are responsible? We just completed a 60-page due diligence report on a bank in Ukraine.

I would argue that, although the countries, the societies, and the legal framework in the countries we're working in are less advanced and less mature in their legal and regulatory frameworks than in North America, the investments made through DFIs and organizations like MEDA and Desjardins are subject to an intense amount of scrutiny and analysis, even more so, I would argue, than some of the investments in North America. I suggest this is designed to offset the lesser regulatory environment in these countries.

Be assured that when you're working in this area with DFIs—and presumably with the new Canadian DFI—and with private sector investments, they are subject to intense analysis to make sure they are environmentally sound, are reaching the right places, and to the extent possible, are not putting people at undue risk.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

Can you give an example of where a DFI project has been instigated, and what the project should look like?

[Jerome Quigley]

I'll jump in and then let Jessie take over from there. For example, we currently have an investment of $2 million in a company called Business Partners International as part of a project we manage in Kenya. This is a company that takes that money and makes it available to small companies. We're talking companies in the range of $50,000 to $150,000 or $200,000 in equity or net worth.

All the DFIs you could check off on your fingers are involved in that investment: FMO, World Bank, IFC, and EBRD. This is a practical example of where Canadian government money is merging with that of existing DFIs, making it available to small companies in Kenya to great effect.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

Okay.

Ms. Greene.

[Jessie Greene]

I have lots of examples in mind, but one of the DFIs I think is doing very good work right now in Central Asia is EBRD. There's been a very difficult economic situation in recent years in Azerbaijan, Tajikistan, and several other countries. Whereas private capital flows have disappeared and many DFIs have stopped investing, EBRD continues to invest in local currency, even though the currencies are very risky at the moment, while providing technical assistance grants to help institutions manage risk. They're focusing on risk management to help institutions overcome the economic difficulties, while also providing capital when capital has dried up. That's definitely additionality for a DFI.

[The Chair, Liberal, Bob Nault]

Thank you very much, Mr. Sidhu.

Mr. Fragiskatos, please.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you very much, Mr. Chair.

I wonder if you could go back, Ms. Greene, and talk about some of the decisions Desjardins makes when it comes to prioritizing investment and some of the factors that weigh on your decision-making. Why particular countries over others? Certainly we're seeing good corporate citizenship here on the part of Desjardins.

Is poverty reduction at the top of the list, and how do you measure poverty reduction? I brought that up earlier, but I think it's central to the discussion here.

[Jessie Greene]

Thank you. It's a good question.

On the way we choose our countries, basically we're looking for countries where access to finance is low. We're a small investor on the global scale in microfinance. There are some very large funds investing these days. We're looking for countries where access to finance is low. There's an excellent database, created by the World Bank, called Findex. They surveyed one thousand in every country and made this database where you can see the percentage of access to credit and to formal accounts. It's very detailed. It goes according to women, men, regions, and all kinds of financial products.

We use this database first of all to target specific countries where the need is higher, although maybe not the highest. For example, I mentioned Tajikistan, where 5% of people have access to a formal savings account. We believe the need is high. This is a social impact opportunity but also a business opportunity. If 95% of people don't have access to finance, surely some of them would need some access. In Canada, access to a formal savings account, just to give a comparison, is 97%. That gives you an idea of what percentage of people would like to have access.

On the question of poverty reduction, of course when microfinance started out, especially in the 1990s or early 2000s, there was a lot of focus on microfinancing for reducing poverty. This leads to very strong demand, then, to prove it, but everyone needs financial services. We all use financial services. We need loans to finance our homes. We need loans to go to school. It's very difficult to prove that the fact that I have access here to financial services helps me get out of poverty. It's been equally difficult to prove this as the determining factor that helps people get out of poverty. Countries may be developing. Some people are more entrepreneurial than others.

The truth is that financial services can also be harmful, because if you get into too much debt, if you get different loans from different institutions, that could lead to over-indebtedness. We even heard about suicides in India. Then people can turn around and say, “How could you say that this led to poverty reduction? It led to suicides.” I think it's quite risky to say that financial services lead to poverty reduction. They lead to economic development. That we know for sure. We shouldn't have to prove, time and again, that financial services are useful to people.

That's just one example. I don't think the focus should be on proving, every time you did an action, that it led to poverty reduction, because there are too many factors involved in poverty. As you mentioned before, poverty is very complex. It's not just GDP. It's not just access to education or health. We believe we have to put in place the factors to ensure that poverty reduction will occur, but we shouldn't have to prove it every time.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you very much.

[The Chair, Liberal, Bob Nault]

Can you make it a short question, please?

[Peter Fragiskatos, Liberal, London North Centre, ON]

Okay.

I'll go to you, Mr. Quigley, for your thoughts on this whole debate. I think it's so crucial to the discussion that I'll continue to focus on it. Can you give me your thoughts on how we ought to define poverty here?

To be very frank, I think poverty is more than not having money in one's pocket. There are all sorts of other measures that we need to look at if we're going to be serious about addressing poverty, through a DFI or through development policy in general terms. What is your position on this?

[Jerome Quigley]

On the definition of poverty...?

[Peter Fragiskatos, Liberal, London North Centre, ON]

Yes. How should we define poverty and how should we measure it? If this is going to be included in the mandate of a Canadian DFI, then I think it really speaks to basic principles here.

[Jerome Quigley]

On poverty reduction, there are many forums and many calculations. Definitions of poverty don't mean only less purchasing power and less than $150 U.S. per day of income. There are many different measurements, and I would obviously agree with you that they're not all equal and they're not all very indicative of the meaningful change in people's lives that we are all trying to achieve.

Let me just explain. I think the crux of your question is how we measure poverty reduction relative to investment. Measuring that is perhaps more difficult than measuring direct intervention, so I'm agreeing with you on that. The measurement of poverty relative to investment is much more difficult. You can measure at the level of the investment. You can measure whether they are creating jobs. You can measure whether they have policies in place that empower women in business. You can measure whether they have environmental policies and procedures in place. Those are all the kinds of things that are very important to the abolishment of poverty, but they don't answer whether it changes the lives of people in the communities that they serve.

MEDA is working with the University of Waterloo to try...and that's a question for not only MEDA or Desjardins or the Canadian government in the establishment of the DFI. The question that everybody is asking in this development impact investing space is how we measure impact, if you're calling it impact investing. MEDA—