Now May Not be the Time for a Development Finance Institution

02/27/2015 01:07 EST | Updated 04/29/2015 05:59 EDT

In the last few months there has been much discussion about the Canadian government establishing a Development Finance Institution (DFI). Organizations like Engineers Without Borders should be commended for sparking an important conversation about the future of Canadian development assistance with regard to the creation of the DFI. And it appears the Canadian government is eager to move forward on this idea. Speaking at an Engineers Without Borders conference in January, International Development Minister Christian Paradis said, "I strongly believe that establishing (a development finance institution) would fill an important gap in our development toolkit."

DFIs definitely have some potential to work for development. But would it really fill an important gap in Canada's development toolkit? And is this the right time and the right government for this move? I am not yet convinced.

Proponents of the idea suggest a Development Finance Institution (DFI) can play a critical role in servicing the 'middle range' of development aid. In theory, DFIs provide government-backed loans to private companies and entrepreneurs in developing countries who would otherwise have no access to investment capital. This should enable the development of a strong private sector that provides new jobs and an enlarged tax base. Supporting these high-risk markets can in turn encourage additional investment from the private sector, further catalyzing economic growth in developing countries. DFIs are designed to be self-sustaining, as they reinvest the return from loans in future development projects.

There is, however, reason to be wary. According to several studies by Eurodad (the European Network on Debt and Development), DFI models currently employed by other countries have exposed major shortcomings. A large portion of DFI investments -- roughly 50 per cent in 2010 -- went to the financial sector, which have limited local knowledge of development issues, in comparison to local organizations. Using the financial sector as an intermediary for DFI funding makes it nearly impossible to ensure transparent and effective distribution of this money to the people who need it. Rather than catalyzing investment in dollar-starved markets, DFI funding is funnelled to industries that promise lower risk and more secure returns. This prioritization on profitability over development precisely misses the point of development financing. There is also evidence that a substantial proportion of the companies that receive DFI dollars are domiciled in tax havens, meaning that the intended boon to tax revenue for the developing state is lost.

These are all pitfalls that can be easily avoided if our DFI is rigorously planned and responsibly executed. Unfortunately, New Democrats have serious concerns about the Conservative government's ability to do either. These concerns must be addressed before we can support the allocation of increasingly scarce development dollars towards a new institution/mechanism.

We must ensure that a Canadian DFI adheres to the core principles of the Official Development Assistance Accountability Act (ODAAA). These principles of poverty reduction, the perspectives of the poor, and respect for human rights have been consistently ignored by the Conservative government in the past (as acknowledged by the 2013 Report from the Auditor General with regard to Canada's ODA to multilateral organizations). A Canadian DFI must focus on poverty alleviation rather than act as Trojan Horse for business interests.

The government also needs to be clear about the source of the seed money. Will it be new money or will this money come from the ODA budget, which has already been cut both officially and through the back door? For too long, Liberal and Conservative governments have promised to increase Canada's international development funding without following through. In fact, under Jean Chretien's Liberal government, Canada's ODA dropped from 0.49 per cent in 1991/92 to .25 per cent in 2000/01. Under the Conservatives, Canada's ODA/GNI ratio will fall under 0.24 per cent by 2015 - meaning Canada will soon rank among the world's worst performing aid donors. Given this context, it is critical that our (increasingly scarce) development dollars are spent wisely and with maximum impact. Is a DFI appropriate at a time when massive cuts are being made to Canada's ODA?

Further, how will they measure development impact? Who will be making decisions about where and how investments are made? And how can we be sure DFI funding will be aligned to developing countries' investment priorities?

If Canada creates a DFI, how do we ensure that our money will go to the companies and sectors that have the least access to private capital markets? There must be strong safeguards. Given the Conservatives' scandalous track record with CIDA INC, we have serious concerns about their capacity to ensure this level of transparency.

Canada's role in international development has been seriously reduced under this current government. In theory, a DFI could be useful in filling out our development capabilities and stretching the impact of ODA dollars. In practice, however, and under the Conservatives, there are no guarantees this will be done well. Now may not be the time.