Canada, US introduce new world of development financing

Published on Thursday, 01 November 2018

Published by Bart Édes on Thursday, 01 November 2018

Construction of the University of Central Asia campus in Khorog, Tajikistan. Photo by OPIC.
Construction of the University of Central Asia campus in Khorog, Tajikistan. Photo by OPIC.

Exciting things are happening in global development finance as leading players are introducing new mechanisms and approaches to mobilize financing. Here in North America, the governments of Canada and the United States have launched their own development finance institutions to promote international engagement while fighting poverty, promoting inclusion, and creating jobs in developing countries.

FinDev, Canada’s new development finance institution, aims to combat poverty in developing countries. It will invest in business markets that promote green growth and agribusiness, and support small and medium-sized enterprises through local financial institutions.

Headquartered in Montréal, FinDev opened its doors for business in January, armed with initial capital of C$300 million ($230 million). The new agency, housed within Export Development Canada, will focus on Latin America and the Caribbean, and sub-Saharan Africa.

Meanwhile, on the southern side of the 49th parallel, US President Donald Trump signed an act in early October creating the International Development Finance Corporation (IDFC). While it has substantially more resources at its disposal than its Canadian counterpart—about $60 billion —IDFC's targets overlap with FinDev’s in areas such as support to small business and women’s economic empowerment. The new US government-backed body is expected to improve the competitiveness of American firms in frontier markets. It is perhaps the biggest change in US development policy in 15 years.

IDFC will be able to make loans or loan guarantees, acquire equity or financial interests in entities, provide insurance or reinsurance to private sector entities and qualifying sovereign entities, administer special projects, provide technical assistance, and establish enterprise funds. Importantly, IDFC will also be able to take equity stakes in overseas investments worldwide, including Asia. The new entity subsumes the Overseas Private Investment Corporation and USAID’s Development Credit Authority, which uses risk-sharing agreements to mobilize local private capital to address the unmet need of small businesses for loans.

  The creation of FinDev and IFDC could not come at a better time

The creation of FinDev and IDFC raises the New World profile within the global family of mostly European bilateral development finance institutions, such as the Netherlands Development Finance Company, France’s Proparco, and the German Investment and Development Company.

For multilateral development banks such as ADB, FinDev and IDFC are likely to become reliable partners in the expanding effort to catalyze private sector funds for investing in energy, transport, water, communications, and the social sectors of developing countries. Although FinDev’s geographic focus does not include Asia, that is not the case for the IDFC. For ADB, which intends to increase the share of private sector operations to one third of all operations in number within the next 6 years, the emergence of another significant source of public funding for quality infrastructure is welcome news.

The creation of FinDev and IDFC could not come at a better time.

In the last few months, several analyses have warned that less than three years into the Sustainable Development Goals (SDGs) era, the world could be veering off track in meeting all of the 17 goals by 2030. The United Nations Conference on Trade and Development estimates an annual SDGs financing gap in developing countries of $2.5 trillion. The new North American institutions will contribute to addressing this investment shortfall with their own resources, while attracting substantial private financing into areas of need. And they aim to do this while operating according to high environmental, governance, social, and transparency standards that set an example for others.

While FinDev is only a few months into its operations, and IDFC may be a year or more away from using its new tools and mandate, the launch of these institutions provides a positive stimulus to global development finance, and will encourage investors to think about new projects in countries where they may have been hesitant to enter. Indeed, FinDev and IDFC represent an important step forward in efforts to scale up the mobilization of private funds for development.