McLeod Group Blog, May 11, 2015
In the 2015 Federal Budget, the Conservative Government announced the creation of a Canadian development finance ‘initiative’. Details remain scanty. In the name of ‘coherence and effectiveness’, the budget states that the government has established the new initiative to enhance private sector development, achieve meaningful development outcomes, and raise people out of poverty.
Despite claims about advancing ‘new’, ‘innovative’, and ‘blended’ financing by involving the private sector, neither promoting the role of the private sector nor the realization that it has an important role to play is new. For 30 years, CIDA’s Industrial Cooperation Program (known as CIDA-INC) mimicked elements of a Development Finance Institution (DFI) in that it sought to support Canadian businesses with operations in the developing world. While CIDA-INC was designed to use foreign aid to support private sector development, its purpose was ultimately to ‘encourage Canadian private sector to establish long-term business relations’. A 2007 internal evaluation found that of the 8,138 projects that were approved between 1978 and 2005, fewer than 1,000 were implemented, and under 9% were in line with Canada’s development priority countries or sectors. The bulk of the money and projects went to middle-income countries—with China accounting for almost a third of the total. The evaluation also found that after spending more than one billion dollars, just 15.5% of the projects were successful.
Canada’s poor track record in this field provides several lessons. One is that a DFI should not tap into aid money. Investment is no substitute for development assistance. Nor should aid be a substitute for private sector investments. Given that Canada’s aid budget is reaching new lows, it is more important than ever to safeguard it.
Many DFIs have no development mandate, but they can have a massive counter-development impact. A recent international report on the subject found that 80% of developing country debt to other governments is created by export credit guarantees. Export credit agencies also receive significant transfers from aid budgets every year as a result of export credit debts cancelled by donor countries and paid off with official development assistance (ODA). This must be avoided in any new Canadian initiative.
If the new Canadian DFI goes ahead, it should seek to expand business opportunities in regions and sectors that have hitherto been ignored or neglected. For example, global foreign direct investment has hovered around $1.3 trillion over the past few years, yet less than 3% went to Sub-Saharan Africa—the majority concentrated in a few natural resource-rich countries.
Canadian private sector activity in Africa is negligible and restricted to a few sectors. Of Canada’s $285 billion in exports, just 1.3% is destined for Africa, and of Canada’s $350 billion in imports, just 3% is sourced from Africa, primarily Algeria, Nigeria and South Africa—consisting overwhelmingly of trade in natural resources (gold, petroleum, diamonds and copper).
A new Canadian DFI should seek to catalyze Canadian investment in new sectors (outside of extractive industries) and in countries and regions that have up to now been ignored. And the new institution should continuously assess its contributions to local business and job growth, poverty reduction, human rights, the environment, gender equality and community sustainability.
It should complement ODA and local investments, not displace them, taking into consideration Canada’s overall international development priorities. Private sector investment may be needed to address important investment gaps in the developing world, but it is no silver bullet, nor is it a replacement for ODA. Doing it right (and doing no harm) will entail careful planning, ensuring that vulnerable aid budgets are not further diminished.