Foreign Affairs Committee on June 15th, 2017

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

Thank you.

Ms. Rhodes, I have another question for you. In your opening remarks, you suggested that we follow the Dutch model. However, you didn't describe the model in great detail. I was wondering whether you could elaborate on what we should implement from the Dutch model.

[Francesca Rhodes]

This is the independent mechanism for accountability, which the Dutch FMO set up in very close consultation with civil society organizations, including the Dutch affiliates in Oxfam. It's set up as an independent mechanism where communities affected by investments made by the FMO can take any concerns or complaints and be able to experience that accountability. Yes, Oxfam was quite closely involved, and I'm happy to speak to our Dutch colleagues to find out exactly how it was designed, how it is operating, and the lessons learned, and bring those back as well.

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

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Aubin.

I think that's it.

I will go to Mr. Levitt, please.

[Michael Levitt, Liberal, York Centre, ON]

Good morning, everyone.

I want to come to you for a second, Ms. Rhodes, or both of you. I want to go to a little higher level for a macro look.

We've heard from other witnesses earlier in this study the concern about placing too many constraints or expectations that will constrain the private sector investment and turn it from being a DFI into something that starts looking more ODA.

Ms. Rhodes, you raised a lot of suggestions around how this can tie into our international development priorities, which were very clearly articulated by Minister Bibeau just under a week ago. Is there a percentage level that you think can be set aside to deal particularly with projects focusing on women and girls? Do you think this should apply across the board to the full budget or annual allotment that's in the DFI? How do we still keep this as a thriving, functioning tool to bring in projects that might not have happened otherwise and also stay true to our development objectives?

[Francesca Rhodes]

All of the learning from working to try to achieve gender equality through development indicates that you need to have stand-alone projects that target women and girls, but you also need to make sure to mainstream gender equality throughout the programs.

You need to have a gender analysis of any program, which you're implementing to ensure that women and girls will be able to benefit equally from that program. I wouldn't say the focus on women and girls is going to be a discrete part of the DFI's mandate, but it needs to be able to learn from the experiences of Global Affairs and the development community globally. That is core to be able to achieve its goals.

I would say that the idea to focus on women entrepreneurs, for example, is a good idea, and there are definitely examples and ways that this can be done. Women experience the economy in a broad range of ways, and not all women are entrepreneurs. Women are in the labour market. Women are not in the labour market for various reasons as well. It's thinking about how we can use this opportunity and this type of financing to address some of those issues.

In terms of the experiences of other countries as well with their development finance initiatives, the evaluations show that when they are working very much towards the same strategies and the same goals in a focused way...so it does mean making choices. Canada has chosen to focus on a feminist approach and to focus on targeting women and girls, so it would make sense for the DFI to also focus on that approach.

When the DFI and the donor agency are working together towards the same goals, then that's much more strategic than to be working on separate strategies or issues, sometimes in the same country, with things that aren't linked together. That is much less effective.

[Lauren Ravon]

I'll jump in on that. We're thrilled that Canada has decided to take on a women's rights and feminist approach in its international programming. This is great.

The private sector has been at this for a long time. They know there are good rates of return from investing in women . It's good for GDP. It's good for the economy. The private sector usually makes the business case and we make the human rights case, but we're still going in the same direction. I don't think that encouraging private investments in women is going to be the hardest one in the sense that there is a profit to be made there, certainly, and the potential for growth is huge.

I was wondering if Francesca wanted to speak to a specific example with Goldman Sachs, because it shows that companies are willing to invest and there are good rates of return on these sorts of investments. There is a DFI-related program with Goldman Sachs on women's entrepreneurship.

[Francesca Rhodes]

This is a partnership between the World Bank, IFC, and Goldman Sachs. It's called “10,000 Women” and it's a program that aims to reach 10,000 women and small and medium-sized enterprises with financial products but then also with training and mentorship.

It's been running for a number of years and I think all the evaluations have shown much stronger businesses have been invested in, and job creation, and also that the women who have had the training and mentorship have reported very strong results. It's just one example of how you can direct this type of finance towards women and girls.

[Michael Levitt, Liberal, York Centre, ON]

Thank you.

Before I move to Mr. Medhora, I have one quick follow-up question, because I know it's an area of focus and strength for civil society organizations like Oxfam. It's on the importance of local actors to achieving positive outcomes, to being able to get information back in terms of whether we're meeting the needs and hitting the mark on some of these projects.

What do you hear on the ground from case studies of successful DFI initiatives and successful projects that have really stood out for you? What is the importance of local actors?

[Francesca Rhodes]

The first thing to note is that, overall, there is a real lack of evidence and documentation, and that's globally on DFI activities. A lack of transparency is something that civil society has been raising time and time again. That's why at this moment we are calling as well for this DFI to make sure that it's open and transparent and can set the goals of what it's trying to achieve and then be able to report on them as well—involving local actors, as you said.

We particularly advocate to involve women's organizations to make sure that you're bringing forward their expertise in designing the investments, of course. It's essential to be able to design them in line with the priorities of that context, as well.

If you want to be able to support women entrepreneurs in Kenya, then the best people to go speak to will be the membership bodies of women entrepreneurs in Kenya, and ask them what the context is and what is needed and how those investments should be designed. Time and time again, consultation with a co-active is the best way to design any intervention.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Levitt.

We'll have to go to Mr. McKay, please. Go ahead, John.

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

You have to go to me...?

[The Chair, Liberal, Bob Nault]

Yes, I also want to. I don't have to but we'll talk about that later.

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

Thank you for your charitable intentions.

Thank you to all our witnesses.

As the sponsor and author of the better aid bill, which is Canada's only legislated mandate for ODA, I have a parental and protective interest in seeing that the principles of the bill are incorporated into this entity, and hence I do like your idea of poverty reduction being the focus of this financial institution.

The reason for the bill in the first place is that governments wander, ministers wander. We put aid money into all kinds of projects having absolutely nothing to do with poverty reduction, but we try to dress it up as poverty reduction. I think the conversation as to what is poverty is an interesting conversation, but if you don't start at first principles—that the point of this entire exercise is poverty reduction—then you will be subject to the whims of any government or any minister, so I buy your core point.

The second issue, and I want to pursue this discussion, is that feminism has rightly been, if you will, woven into the government's approach. It's a good idea. The issue is that, if in fact you start to pursue smaller projects, you will up your overhead considerably. If you're doing mentorship, if you're doing expertise provision, and if you are upping your overhead per dollar loaned, you are going to have fewer dollars loaned, or you are going to possibly have to go to market rates, which are highly inflationary, or you're going to have to recapitalize on a regular basis.

I'd be interested in comments from both of you as to the possible unintended or unanticipated consequences of focusing on small and medium-sized loans, which will inevitably cut you out of the highly profitable other loans.

[Lauren Ravon]

Maybe I can start and Francesca can follow.

One thing is that we have to look at these investments. If they were highly profitable, the private sector would be investing in them on its own. These need a boost. They need some encouragement, so we're not looking at the same kinds of investments that the private sector would be making in any case.

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

Maybe I misstated by saying “highly profitable”.

[Lauren Ravon]

Of course, but the issue of overhead is an important one.

I might be going out on a limb. I don't know if this has been done in other DFIs—and Francesca and our other colleague can speak to this—but there is something to be said for aligning the goals of our aid portfolio and the DFI.

For example, last week there was an announcement that Canada will be investing $150 million in local women's rights organizations. You can see a strategy where, for example, in any given country, you have investments in women's rights organizations through our aid programs strengthening women's entrepreneurship associations, women's co-operatives, and all the rest, and then have an investment in the same communities where you already have a strengthened base of groups to work with.

This is not to say there would be no overhead in the DFI investment, but a lot of the coaching, the capacity building, and the long-term support that you need to build up that base is happening at the aid level and the investment is capitalizing on what's already been invested in from the aid side. We can see those kinds of models.

I take our colleague's point on the issue of the burden of requirements of reporting and proof that is placed on the aid sector, and that understanding that it perhaps should be less for the DFI, but less overall. I think there's something that we're all facing in the development community, that we are really crushed by the administrative frameworks around aid. I know there's a statement in the new assistance policy to say this needs to be addressed, because in our efforts to be more accountable, we're actually less effective.

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

I'm limited in my time. I want to get Mr. Medhora's comments on the inevitable increased costs of smaller loans, effectively.

[Rohinton Medhora]

Yes, indeed, and it also ties into the previous exchange on local know-how. If you want to be effective in the development sphere, you need on-the-ground expertise. If you have an operation of $50 million or $60 million a year, then how are you going to get the local nuance? Is it going to be by being in Montreal, or is it going to be by having a network of informants and professional staff around the world? It's likely the latter. The more you do of the latter, the higher the overhead. I think a small size is fine to begin, but this is not a long-term sustainable model. In the long term, there is going to have to be a difference in ratio, and the way to change that ratio is not by having fewer staff but by having larger lending activities.

Now, on the question of how one identifies these elements and whether it is easier to tack them onto existing priorities, I could make a case for you either way. I think the case that my colleague from Oxfam made—empowering women's rights organizations results in greater knowledge of women's entrepreneurship activities—is a good one. This, however, will require coordination between the aid officials who reside in GAC and the development finance officials who reside in EDC.

Frankly, it's not readily apparent to me that empowering women's rights organizations will lead to better market information about women's entrepreneurship. I could be just as comfortable saying to let the banking folks identify opportunities, whether in infrastructure or in technology start-ups, through other channels. If everything is homogenous, where do the new ideas come from?

That was the relationship between the former CIDA and IDRC. IDRC did not do absolutely everything CIDA did, and there was a reason for that. It was there that the experimentation happened. That's where the risks were taken. If something works, you then scaled it up and it became CIDA.

I'd make the same case with respect to the DFI. The DFI selects sectors that might not be in Canada's mainstream, and then lets them grow. It may be that over time an area, like using blockchain technology for democratic development, which is not in our current ODA priorities, might become an ODA priority because of something small and interesting and successful that the DFI did 10 years previously.

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

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. McKay.

Colleagues, that will wrap it up for this hour.

I want to thank Mr. Medhora and the Centre for International Governance Innovation, as well as Ms. Rhodes and Madam Ravon from Oxfam. This was a very good discussion, and very helpful. There's a lot of interest in where this goes, the new DFI. At some point we're going to have to talk a little bit more about the effectiveness of a DFI that has a very small budget, what that means, and whether this is the first tranche of a government strategy. It would be limited to some extent when we compare it with other DFIs, if we were able to do that and compare apples with apples.

On behalf of the committee, I want to thank you very much for your presentations. If there's any other information you think this committee should have a look at, feel free to send it on to us.

Colleagues, we're going to suspend for five minutes and set up for our next witnesses, and we'll go from there.

Thank you.

[The Chair, Liberal, Bob Nault]

We'll have to get back in session. As you know, we have a very tight schedule, as is normal.

Before us today we have the Mennonite Economic Development Associates, with Jerome Quigley, senior vice-president. We also have Jessie Greene, who is with the Développement international Desjardins. Thank you for coming this morning.

We'll start with Ms. Greene, and then we'll go to Mr. Quigley. In accordance with normal practice, we'll go to questions after their short presentations.

Ms. Greene, the floor is yours.

[Jessie Greene, Director, Investment, Développement international Desjardins]

Thank you, Mr. Chair.

Hello.

Committee members, I'm very pleased to be here today to support the committee in its study of the development finance initiative.

Développement international Desjardins is part of the Desjardins financial group. It was established in 1970. It's a not-for-profit organization, and its goal is to share Desjardins' experience working in the financial sector and in the co-operative financial sector with institutions in developing countries.

Nowadays DID works with a broad range of financial actors in developing countries, and our goal is to improve access to quality financial services. Since 2009 we've been working especially with entrepreneurs launching these financial institutions or SME finance institutions in five different countries in Africa and Latin America, which we funded with support from GAC, Global Affairs Canada, as well as DFIs and private investors. In fact, we have been working with seven DFls over the last eight years, just to give you a perspective on our experience with DFIs. They've provided about $21 million in support, a combination of grants. About 30% of that is technical assistance grants and then we have some debt and some equity.

My comments today are very much from the co-investor perspective working together with DFls as well as the client perspective because we have received funding from DFIs. There are many advantages to working with DFIs. They're patient investors. They tend to take more risk than private investors. We can often get larger amounts from DFIs than from private investors. They tend to be the ones who stay when things go less well. In an economic downturn, private funding tends to disappear whereas DFI funding will often stay. They provide investments in local currency, which we find essential in developing countries. In fact, when DID makes investments in exotic currencies, we use an agency called TCX, which is a hedging agent for exotic currencies. That didn't exist before. It was set up by a group of DFIs.

There are many advantages to working with DFls, but there are also some disadvantages or challenges, I should say. They tend to be a little inflexible and bureaucratic. Our experience is that it's very difficult to obtain smaller investments from DFIs. When we started launching institutions in sub-Saharan Africa, we just needed small investments. We were looking for less than a few million dollars, and the DFIs told us that was just way below their minimum ticket size. Most of them start at $7 million or higher. That makes it almost impossible for start-ups and for innovative new initiatives to find funding from DFIs. We think it would be helpful for the DFI to reserve a part of its budget for smaller transactions or for investing in start-ups.

Working with DFls sometimes involves long delays and complicated legal negotiations. Just to give you an example, it took us three years to negotiate a relatively small equity investment with a DFI quite recently—three years. We think it would be very innovative for the DFI to have a bit of a lighter touch, especially when it comes to smaller investments. Thinking a little bit outside of the box, when Desjardins' private equity investment team wanted to make their services more appealing to SMEs or to entrepreneurs, they replaced their standard 40-page shareholder agreement, which always involved years of negotiations, with a four-page shareholder agreement. This was completely revolutionary. If a DFI did something like this, it would be a small revolution.

We would hope to see a flexible DFI that has the possibility to be at least flexible with a part of its budget. We believe this would allow for innovation. On the question of how the DFI should measure outcomes, I very much agree with Mr. Medhora, who spoke before, that we shouldn't seek to measure outcomes. Outcomes can only be measured in a controlled environment where we know all the variables, and for an investor, that's impossible.

We believe that the DFI should be requested or required to report on its outputs and activities. We want to ensure that the conditions are in place to create the desired outcomes, but from our point of view, it wouldn't be realistic to ask an investor to measure outcomes.

We're very pleased with the establishment of the DFI, but we are concerned that this could lead to the perception that the government shouldn't engage in any other kind of investment for development. We see the DFI as part of a continuum, so on the one side we have pure aid, at the other end we have pure investment, and in between there can be a mix of the two in this kind of continuum.

Although Global Affairs Canada is not currently enabled to invest in initiatives that are for profit, we would love to see that in the future. We think that would allow for investments that are riskier and in countries where perhaps the DFI wouldn't be able to invest. We hope the government will continue to develop a wide range of complementary development tools, where riskier investments could be done by GAC, for example, and perhaps the DFI could combine some of its investments with donations for capacity development. We think that would be very helpful in riskier sectors such as agricultural finance.

We certainly respect and agree with the need for the DFI to be autonomous, but we do believe that if the DFI is to distinguish itself internationally, it is essential for it to work in complementarity in some way with the other Canadian development actors. IDRC, GAC, and civil society would be the ideal way for the DFI to really show its complementarity to Canada's development strategies. We believe this could be done with at least a part of its portfolio.

There has been a lot of discussion about blended finance, whereby public funding is leveraged to attract private funding. Obviously the simplest and most common way of doing that, which DFIs do often, is to subordinate their investment to the investments of private investors, but we don't think that's the only way. We've seen many different kinds of structures that we believe could be called blended finance and that could be considered blended finance as well. In fact, why not think of a structure where Canadian investors or Canadian citizens could invest in the DFI or buy shares in the DFI? To me, that would be a truly innovative case of blended finance.

[The Chair, Liberal, Bob Nault]

Thank you, Ms. Greene.

We'll go to Mr. Quigley, please.

[Jerome Quigley, Senior Vice-President, Programs, Mennonite Economic Development Associates of Canada]

Good morning.

First of all, thanks to the committee for the opportunity to submit today. Greetings from Waterloo, Ontario. We appreciate your facilitating this by Internet.

Good morning, Jessie, who we know well. We respect Desjardins quite a bit.

My name is Jerry Quigley. I'm senior vice-president for Mennonite Economic Development Associates, also called MEDA. I would like to start very simply with three contextual comments on the DFI, and then go to two recommendations that MEDA would make.

The first contextual comment is that MEDA generally supports the creation of a Canadian DFI. We congratulate the current government for seeing this important initiative through.

The second contextual comment is that, at the initial $300 million over five years, we believe this DFI is too small to act like other DFIs. OPIC is investing about $1.6 billion annually. CDC has net assets of somewhere in the neighbourhood of $5 billion. To be meaningful, the Canadian DFI at that level must be bold.

The third contextual comment is that this is the first DFI to be created in the last 20 years. Twenty years is a lot of time to learn, so what have we learned and what can we do that is new?

I'll move on to the recommendations. MEDA believes that there is really no better place to start than a recent quote from the Canadian International Development Platform group.

Development impact and additionality should be at the top of the mandate. The DFI must work complementarily with Canada's wider development strategy.

That is a comment that can be found in the recent CIDP publication called “How Can Canada Deliver? Responding to the Changing Global Development Context”.

First, to their comment about additionality, other countries agree and acknowledge that Canada is an innovative global leader in the area of blended finance. We hear that all the time in the U.S. and the U.K. The DFI offers an excellent opportunity for Canada to grow that reputation and work. The world does not need another baby DFI that competes with other DFIs and private capital for low-risk, high-impact investments in low-income countries. Doing so, or trying to do so, would make it a lightweight, pale duplicate of what all the other DFIs are doing. The world needs a DFI that acts as a catalyst to private capital.

Think CMHC. It is not a perfect example in the development space, but it makes a point. CMHC does not offer mortgages in competition with private lenders, but it takes on risk that allows private capital to flow where it otherwise would not. This should be a focus of the DFI.

If the DFI can truly catalyze private capital, the result can be innovative, transformative, and catalytic. We will know the Canadian DFI is successful by how much private capital it crowds in. Other DFIs are criticized for competing with private capital. That is why we think the DFI must be linked to Global Affairs Canada's new office for innovative finance. The combined result should be bold, different, and disruptive, doing things that no other DFI is doing. That means it probably won't have the lofty returns of its contemporaries in other countries, but it will make a bigger difference.

Second is the issue of development impact. Given its size, the DFI might consider a sectoral or geographical focus.

For instance, it would be innovative to de-risk private capital for investments in environmental infrastructure or women-led businesses or health. However, in development there are always trade-offs. We know that. More narrow focus may undermine greater additionality, keeping in mind that there is an inverse relationship between the willingness of private capital to participate and the narrowness of the opportunity. Narrow fields of investment is one factor in risk. For instance, investments in the health sector in east Africa is a very small pool, but the DFI also has few resources with which to fish, so maybe it needs to be selective. That said, the DFI is new and therefore has a window of opportunity to shape itself to achieve greater impact in a smaller space.

My next comment is aligned with that of Desjardins that the DFI should consider working with Global Affairs Canada to offer sidecar technical assistance to augment and enhance its investments. MEDA's INFRONT project confirmed that many businesses want to do the right thing. INFRONT is a pioneering Global Affairs Canada-funded blended finance project with $15 million of de-risking capital from the Canadian government paired with $5 million in technical assistance to the businesses that are investee companies. We have found that most INFRONT private business owners are genuinely concerned about issues such as poverty, the environment, and women's participation. The DFI will quickly learn that the impact of its investments can be greatly enhanced with targeted additional support from Global Affairs Canada to the investee companies.

Finally, it is good to see that Canada's feminist international assistance policy supports such approaches. I quote two things from the new policy. First, it says:

New instruments such as repayable contributions will be introduced that will better enable Canada to mobilize new streams of financing for underserved private sector partners in developing countries, including woman-led businesses.

Second, the recently released policy says:

Canada's contributions will also be leveraged by expanding and enhancing the options to contribute to initiatives through funding relationships that present a mix of repayable and non-repayable support.

It just needs to find a meaningful way and in collaboration with the new DFI.

Thank you for the opportunity this morning to share our views on the DFI. I turn it back to the chair.