This past Wednesday, the Aga Khan Foundation convened in Ottawa a compelling meeting to look at adding a commercial lending arm to the Canadian government's support for international poverty reduction.
The gathering came after months of speculation that 2015 might see the announcement of a new Canadian public fund to catalyze private investment in emerging and frontier markets.
In May, Federal International Development Minister Christian Paradis was named chair of the steering committee for the joint World Economic Forum – Organisation for Economic Cooperation and Development (WEF-OECD) "Redesigning Development Finance" initiative. This project is charged with identifying new ways to expand the pool of capital available for economic development in poor countries.
While Minister Paradis is signaling ambitions that far exceed those of his recent ministerial predecessors, Canada is late to the development finance party. Our official aid budget was frozen from 2010 to 2015 at $5 billion annually, equivalent to 0.3 per cent of our GDP. At the same time, Canada's peers have raced ahead: in 2013, the United Kingdom became the first G7 country to hit Lester B. Pearson's internationally agreed goal of lifting aid to 0.7 per cent of GDP.
Canada is the only G7 country that doesn't have a publicly-owned, profit-driven development finance institution (DFI) that can help private business invest in jobs, growth and markets in low-income countries. We're not just missing an opportunity to raise people out of poverty: we're also missing a chance to build Canadian business while earning returns for Canada's stretched taxpayers.
DFIs have a decades-long history of making money by doing good: all of the G7 DFIs are profitable. The American Overseas Private Investment Corporation (OPIC) returns $8 to the US government's purse for every $1 it invests. In a time of prime interest rates around 3 per cent, an 800 per cent yield should be a no-brainer for our government too.
Other countries are moving on this opportunity: the BRICS countries set up their own $100 billion development bank in July this year. In recent weeks, China unveiled plans for a $50 billion Asian Infrastructure Investment Bank and a $40 billion Silk Road Infrastructure Fund focused on the "Stans" of central Asia.
These DFIs do what private capital often can't: lend into risky environments over long horizons in sectors where returns take years to accrue.
Canada already has a bit of skin in this game through its stake in the world's DFI, the International Finance Corporation (IFC). We could simply increase the capital we provide to the IFC. But Wednesday's meeting showed we can do much better than the IFC's increasingly risk averse and sometimes sclerotic practices.
Participants in Wednesday's meeting emphasized that, as a late mover, Canada has a chance to build on the lessons learned by other DFIs -- and leverage some particularly Canadian strengths.
A Canadian DFI could use Canada's AAA credit rating to raise capital on the cheapest possible terms while investing in risks that other DFIs can't bear. It could also collaborate with our unparalleled immigrant communities to identify opportunities in emerging countries and sectors where other industrialized-country investors fear to tread. In tandem, a Canadian development lender could finance immigrant Canadian entrepreneurs whose brief credit records in Canada normally exclude them from private finance.
Toronto's financial sector has the skills and reputation following the 2008 financial crisis to give a Canadian DFI a running start. It also has particular acumen in making investments cleaner, greener and more humane that could make a Canadian DFI an exceptional generator of both profits and positive social impact.
About half of the world's growth now comes from emerging and developing countries, but Canada barely participates in it: our stock of private direct investment in Africa and Asia is by far the lowest among G7 countries even after adjustments for our relatively small population and GDP. Canada's expertise in finance, extractive industries, and large-scale infrastructure is in high demand in these regions, but our major companies are barely present. A Canadian DFI could help change this.
The notion of a Canadian DFI has been bandied about in Ottawa since the Trudeau era. The idea has usually been stymied by fears on the right that a Canadian DFI would unnecessarily expand our government and by concerns on the left that a DFI would undermine our commitment to grant aid.
To garner cross-party support, the federal government should make it clear that a Canadian DFI would not compete with private finance, but instead take risks that mobilize far larger pools of investor capital. The federal government should also commit to unfreezing Canadian development grant aid and increasing it annually.
Canada's development toolbox needs both aid and a commercially-oriented DFI: the developing world's needs are too great for either financing channel to be sufficient alone. They fund different things. Aid should be used to provide public goods--vaccinations, anti-malarial bed nets, school bathrooms for girls--and a DFI should help private business take outsize risks that can yield both big financial returns and big improvements in human well-being.
Aid should also be centered on countries that lack access to international capital markets. There are too many middle-income countries among the 25 "countries of focus" to which the Canadian government provides development aid. A Canadian DFI could lend to businesses operating in these countries on commercial terms and allow scarce grant aid dollars to be reallocated to poorer countries where they're needed most.
The coming year should see Canada finally get serious about the business of development by creating a distinctly Canadian DFI.