Canada finally gets into the development finance game — will it work?
While Global Affairs Canada continues to flesh out its larger development finance strategy, FinDev Canada moves forward with its own initiatives.
On December 4, the government’s finance development arm, FinDev Canada, announced its second-ever deal: a US$20 million investment in renewable energy initiative Climate Investor One. It was Canada’s first investment in blended finance, a type of financing intended to attract private investors to what would otherwise be high-risk investments in developing countries.
FinDev Canada, Canada’s development finance institution (DFI), was launched earlier this year, and has pledged to invest $300 million over five years. Canada is the last G7 country to create a DFI.
While Global Affairs Canada wrestles with how to best structure a separate $1.5 billion promised for innovative financing programs, which will include a and the , FinDev Canada, a branch of Export Development Canada (EDC), is already taking steps into this important new financing arena that many hope will fill the enormous gap in funding needed to achieve the Sustainable Development Goals (SDGs), or 2030 Agenda.
Development finance can be broadly defined as the use of public sector resources to facilitate private sector investment in low and middle-income countries where the commercial or political risks are too high to attract purely private capital, and where the investment is expected to have a positive developmental impact on the host country. Development finance institutions use direct loans, loan guarantees, equity investments and a variety of other products to support and enable these investments — and to mitigate political and commercial risk.
DFI is an umbrella term for a wide array of quasi-government organizations that make investments, operate on market principles and, in theory, invest in markets that would otherwise be unable to attract capital. Generally, DFIs seek to maximize profit and development impact in high-risk, underserved and cash-starved emerging markets.
DFIs are not new, and some have that Canada is late to the game and, with this initial $300 million, offering too little. However, while Canada continues its search for the right tools to promote investing for impact in developing countries, this arms-length government agency is the country’s first concrete commitment to innovative financing mechanisms to support the 2030 SDGs.
With the realization that massive economic growth and the resulting job creation was a key contributor to halving extreme poverty under the Millennium Development Goals, attracting new sources of capital to complement traditional grant aid is embedded in the SDGs.
Using public funds to engage the private sector is a difficult shift for Canada’s aid professionals schooled in years of grant-making. Nevertheless, some investors interviewed for this story are optimistic the small bet on FinDev Canada will accelerate greater contributions from Canada to innovations in financing development and, along the way, lead to a seat on the UN Security Council.
“The poorest person in the poorest village in the poorest country in the world would rather have a paycheque than a hand out,” said Stephen Nairne, CEO of Vancouver-based AHL Venture Partners. “Unless we can invigorate the private sector in Africa and create jobs, create wealth…I cannot ever foresee a situation where these countries will find health, infrastructure, education, independently. Recognizing that, and the fact that all Official Development Assistance, (ODA), represents a fraction of what is needed to meet the SDGs, anything Canada does to stimulate private sector development is very positive.”
The $300 million pledge from EDC, which will focus on Latin American, the Caribbean and sub-Saharan Africa, is in addition to Canada’s ODA. In what is considered a smart move by several in the industry, EDC reached outside of its own staff to recruit Paul Lamontagne, a seasoned impact investor with deep entrepreneurial networks across Africa, as FinDev Canada’s CEO. Aligned with Canada’s Feminist International Assistance Policy, one of Lamontagne’s early moves was to recruit Anne-Marie Levesque as a gender advisor, a position he says was not originally scoped by EDC. Reflecting the significance of FinDev Canada’s gender lens, Levesque has a vote on the investment committee — a first for any DFI, according to Lamontagne.
With only two deals on the books since his arrival in January 2018, Canada’s small community of impact investors is giving Lamontagne the benefit of the doubt, and taking a cautiously optimistic, wait-and-see approach before passing judgement.
Given the lack of financing for development expertise in Ottawa, Nairne had low expectations for Canada’s DFI until learning Lamontagne would take over. He said Lamontagne “has a hard head and a smart heart. And he brings a track record.”
The challenge for FinDev Canada is to balance risk and return, delivering added value in deals that attract risk-averse private sector investors to new markets. The announcement of its first deal, a $10 million equity investment in Kenya-based M-Kopa, was unfortunately timed with the company acknowledging the recent layoffs of 450 local staff. Founded in 2011 by Canadian Jesse Moore and two partners, M-Kopa has also been one of the best-funded start-ups in Africa, having raised US$80 million in 2017 alone from a number of investors including the UK’s DFI, CDC, and Stanbic Bank.
With a remit to “fill the gap between development assistance and commercial financial support,” according to Minister of International Development Marie-Claude Bibeau’s most recent on Canada’s ODA, the challenge is to deliver impact and tax dollar value. In stimulating net new flows of capital to entrepreneurs in developing countries, the danger for DFIs is to use public funds to invest in deals that already have private investors. M-Kopa could be seen as such a dangerous DFI deal.
FinDev Canada’s second deal is more promising. The US$20 million commitment to Dutch and South African-owned Climate Investor One’s Construction Equity Fund — a blended finance initiative — is more in line with what impact investors believe is needed from the government to attract more capital to important development-oriented projects in low and middle-income countries.
Ultimately, FinDev Canada is still finalizing a sound strategy to balance impact and financial return. Lamontagne points out that the mandate for FinDev Canada is to be sustainable, which means that while impact will be a driver in decision-making, it will not offer concessional financing to reduce risks.
While its final operating strategy is still a work in progress, its impact objectives are clear: creating economic opportunities for women; climate change mitigation; and growing local markets.
Lamontagne is hoping to reduce FinDev Canada’s current $5 million minimum deal size to $1 million, which would give his team more flexibility to identify early-stage investment opportunities in small and growing businesses. To do that, he says, his team is exploring how to leverage technology and lower the cost-per-transaction.
Canada’s commitment of $300 million pales in comparison to more established DFIs such as the United States’s OPIC (US$3.8 billion invested in 2017), the UK’s CDC (US1.4 billion in 2017), and France’s Proparco (1.4 billion euros in 2017). However, undeterred by the smaller funds available, Lamontagne believes FinDev Canada will build out its portfolio through partnerships with other investors. Along with CDC, its partner in the M-Kopa deal, agreements have been signed with the Dutch and Finnish DFIs. We can expect to see more letters of intent signed with other partners in the new year.
With two deals now confirmed, Lamontagne and his team are encouraged by the over 200 prospective opportunities they are looking at for 2019.
Canada’s timing is promising. Three years after the 2015 Addis Ababa Action Agenda on Financing for Development, in its , the OECD is sounding the alarm on declining investments available to achieve the SDGs and calling on developed countries to accelerate public and private investments in fragile markets.
There is still no news on how the government plans to spend the $1.5 billion in funding for innovative finance for development announced in the 2017-2018 budget. Global Affairs Canada continues researching strategies for development finance, market-based solutions and what that means to Canada’s international development policy. In the meantime, impact investment in development partners around the world are watching EDC’s FinDev Canada, waiting to see what deals it will do in 2019.