What factors should Canada consider as we build a DFI? MEDA weighs in
MEDA joined the discussion on Canada's plans for a development finance institution recently.
Senior VP programs Jerry Quigley spoke to the Standing Committee on Foreign Affairs and International Development June 15 by video link.
Here are his prepared remarks. And you can watch the recording (go to 10:00:00 mark) at http://ow.ly/nihP30cIwdq
I will start with three assumptions /context comments and then make two recommendations.
MEDA generally supports the creation of a Canadian DFI and congratulates the current government for seeing this important initiative through.
At the initial $300 million per five years, it is too small to act like other DFIs. OPIC invests US $1.6 billion annually; CDC has net assets of US $4.3 billion. To have meaningful impact, it must be bold.
I read somewhere 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? What can we do that is new?
We think there is no better place to start than with a 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." This comment can be found in the recent CIDP publication, How Can Canada Deliver? Responding to the Changing Global Development Context.
First to the issue of additionality
Other countries acknowledge that Canada is an innovative global leader in blended finance. The DFI offers an excellent opportunity to grow that work and reputation.
The world does not need a baby DFI that competes with other DFI’s and private capital for low-risk, high impact investments in low income countries. Doing so would make it a light-weight, pale duplicate of what all the other DFIs are doing.
The world does need a DFI that acts as a catalyst to private capital. Think CMHC. It is not a perfect example in the development space, but it does make the point. CMHC does not offer mortgages in competition to private lenders…but it does take 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 catalyse private capital, the result can be innovative, transformative and catalytic. We will know it is successful by how much private capital it crowds-in. Other DFIs are criticized for competing with private capital.
That is why we feel it must be linked to GACs office of innovative finance. The combined result should be bold, different and disruptive, doing things that no other DFI is doing – it may not have the lofty returns of its contemporaries, but it will make a bigger difference.
Second is the issue of development impact
Given its size, the DFI might consider sectoral (or geographic) focus. It would be innovative to de-risk private capital for investments in environmental infrastructure – or women-led businesses, or health. However, there are always trade-offs in development.
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 field of investment being one factor in “risk”).
For instance, investments in the health sector in East Africa is a small pool, but the DFI has few resources with which to fish, so maybe it should be selective. That said, the DFI is new and therefore it has a window of opportunity to shape itself to achieve greater impact in a smaller space.
The DFI should consider working with GAC to offer side-car 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 GAC-funded blended-finance project with $15 million de-risking investment from the Canadian government, paired with $5 million in technical assistance.
We have found that most INFRONT 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 GAC to the investee companies.
It is good to see that Canada’s new ODA policy supports such approaches:
“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.”
“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 to do so in collaboration with the new DFI.
Thank you for this opportunity to share our views on the DFI.