By Aniket Bhushan
Prime Minister Justin Trudeau and his coterie of eloquent ministers went to considerable lengths last week at the World Economic Forum in Davos to rebrand Canada and double down on the “Canada is back” message. While it was good to see that innovation in development financing was one of the many areas the government targeted, its focus on one relatively small initiative is problematic.
In a joint release, Chrystia Freeland, Canada’s Minister of International Trade, and Marie-Claude Bibeau, Minister of International Development, welcomed the launch of a “new Canadian initiative [that] will support investment in emerging markets.” The initiative is a platform called Convergence and it will be run out of Toronto’s MaRS Discovery District. Canada is investing $23.5 million to get Convergence started, and the expectation is that this relatively small investment will lead to projects worth $10 billion over the next five years.
This is great and very welcome. Except it is not new.
I discussed Convergence when it was announced back in July 2015 at the Financing for Development conference in Addis Ababa, Ethiopia. Do these kinds of repeat announcements happen every time there is a change in government? The jaded view might say this is taking credit for something the previous government started and pushed hard on. The optimist might argue the new government looks beyond politics and recognizes a good idea when it sees one.
Regardless, the initiative is a good story that is in keeping with the times. It is cheap (small enough that the fiscally minded will barely notice) and all about blending public and private money.
As far as innovation in development finance goes, the obvious starting point is leverage – how much bang for every public buck? While the initiative is unspecific, the fine print does allude to leveraging public and philanthropic money to “unlock billions of private sector dollars… which can lead to as much as a 10x increase in overall investment.”
There is no real reference to gauge whether that is ambitious, consequential or not. Even in a space known for fuzzy results and impact attribution issues, verifying how much of that deal-flow would happen anyway, and what share of that “unlocked private capital” is thanks to Convergence, may be speculative (if at all possible).
Convergence neither brings meaningful capital nor aims to raise capital from investors to invest in development. So it is, in its own words, a marketplace for deals and investors. At best, it lowers informational asymmetry and frictional costs (such as they are) in a niche corner of development finance.
There is nothing wrong with that. But some humility is in order, especially when we hear claims it will play an “important role in closing the $2.5 trillion financing gap that comes with the UN Sustainable Development Goals.”
Future innovation: more finance, less development
In my view, based on recent research, Canada is more of a leader in development innovation (including innovative finance) than its representatives realize or effectively communicate. We are among the top seven donors in both the Global Fund and vaccine alliance GAVI, where we could (and should) step up further at upcoming replenishments. And, by our count, we lead in at least four other innovative finance and results-based initiatives, totalling financial commitments over $400 million.
This all sounds too good, is there a problem? Yes. The problem is that the future of development finance is more about finance and less about development – and it is a future Canadian stakeholders (especially civil society) seem unprepared and ill-equipped to handle.
Development is primarily thought of in terms of individual projects and/or humanitarian interventions viewed largely through a moralistic (if not moralizing), charitable lens. This view is outdated. Developing country governments and local partners have more capacity and know-how to both define their own agendas and deliver results. What they often lack is the ability to fund start-up and running costs. This is why real innovation is needed in finding new money and bringing new investors to the table.
What we see when we compare Canada with peers is the mismatch in terms of both scale and strategy.
The myriad recent forays — e.g. AgResults, the Global SME Finance Innovation Trust Fund, Grand Challenges Canada or the Global Financing Facility for women and children — while at different stages, represent a great lab from which to draw lessons. The new government should be focused on compiling these lessons and sharing them with stakeholders for discussion (e.g. through a green paper). This would be very much in line with the Minister of International Development’s mandate letter.
While Convergence is great, slightly higher up the proverbial tree of low hanging fruit is the development finance initiative (DFI) that was allocated $300 million (over five years) in the last government’s budget. Even by relatively conservative estimates that figure is too small. The UK recently injected new capital into its DFI, the CDC Group, allocating $1 billion over three years. The new Canadian government should (more than) double down on this initiative.
France is going much further. More ambitious than the announcement that France will provide an additional four billion Euros per year in development assistance by 2020 — compared to French development agency AfD’s current budget of eight billion euros — are the steps being taken to get there. AfD is being integrated into the 400-billion-Euro-plus government-owned financial institution Groupe Caisse des Dépôts et Consignations, which, among other things, manages French public pension funds. In this new formation AfD could use Caisse’s assets to leverage additional borrowing on capital markets for development projects, making it a potential game-changer in development finance.
This is where development finance is going and Canada needs to catch up. Unlike leaders in results-based and innovative finance (like the UK), we lack an overarching strategy, the absence of which is sure to be filled by small, one-off innovative-sounding announce-ables that no one can be sure add up to what.
Releasing a discussion document to gather stakeholder inputs towards a Canadian strategy on innovative financing for development and doubling-down on the proposed Canadian DFI would send a signal that Canada is serious about “becoming a leader in innovative approaches to financing for development,” as our ministers claimed at Davos.