This op-ed originally appeared in the Globe and Mail’s Report on Business on 21 May, 2015.

In its 2015 Economic Action Plan, the federal government announced its intention to create a $300-million, five-year ”œdevelopment finance initiative” to partner with private capital to create growth and jobs in low-income countries. The budget document anticipates that this initiative – to be located within an expanded Export Development Canada (EDC) – will provide a mix of financing, technical assistance and business advisory services to enterprises operating in line with the government’s international assistance priorities.

Now it’s time to turn these good intentions into action. Development organizations have weighed in, cautioning that this initiative shouldn’t be a substitute for Canada’s grant aid. They’re right to be concerned: Canadian official development assistance fell to a recent low of 0.24 per cent of gross domestic product in 2014 as a result of an ongoing freeze on new budget allocations.

Aid and private, profit-driven investment need to work together to build integrated development solutions to extreme poverty. To function well, private business needs public investments in health, education and infrastructure – good things that don’t produce a return that’s easy for a company to capture. And the public sector needs the private sector to provide a dynamic engine of growth: As the World Bank points out, about 90 per cent of jobs in developing countries are already created by private capital. Canada should increase its public and private international development financing in tandem.

Doing so requires the business community to engage with the Department of Foreign Affairs, Trade and Development and EDC in the effective design and implementation of the government’s new initiative.

Done well, this initiative could leverage Canada’s strengths in finance, natural resources, infrastructure construction and engineering to catalyze private investment that will accelerate the global push toward the United Nations’ Sustainable Development Goals (SDGs). The initiative could also build on the skills and experience of Canada’s large immigrant communities to strengthen trade and investment links with emerging and frontier markets – countries that are now responsible for the lion’s share of global growth, but where Canada’s business presence is tiny.

Done poorly, this initiative could become a slush fund for unproductive, politically driven subsidies. Even worse, it could become a competitor to private financiers, equity investors and insurers. Despite this initiative’s great potential, success is not assured, which is why private investors need to work with the federal government to ensure this initiative realizes its full promise.

Every other Group of Seven country and most Organization for Economic Co-operation and Development industrialized countries have operated similar ”œblended” public-private initiatives for decades. All of the G7’s development finance institutions (DFIs) are profitable. Some roll these profits back into their national treasuries; others use their returns to finance expanded public-private collaborations and growth in their public grant aid. As outlined in a submission to Parliament last summer by the Centre for International Governance Innovation and Engineers Without Borders, the experiences of Canada’s G7 counterparts offer some important lessons for Ottawa’s initiative.

An effective initiative should address market failures; that is, it should fill gaps in the financial system that prevent good projects, sound businesses and effective entrepreneurs from obtaining the financing they need on reasonable terms. A classic example would be the situation of new immigrant entrepreneurs: They know their former countries well, they are ideally placed to build links between Canada and their birthplaces, but their lack of Canadian credit history makes it difficult for them to gain access to affordable borrowing to grow their businesses.

Ottawa’s new initiative will need to be empowered with a full range of financial tools – a variety of lending instruments, a mandate to take equity positions, the ability to write guarantees, the option to underwrite insurance products – that it can tune flexibly to take projects from their early days to full bankability. It needs to be risk-loving and clear-eyed about the fact that some projects will fail, and maintain a long horizon on investments that typically take many years to pay out returns and development impact.

This new development finance initiative should also embrace open competition. The most successful DFIs work with the most effective firms on the most innovative projects. They’re not limited to working with their own nationals. Both Canada and developing countries will benefit most if this initiative is made accessible to the best people, ideas and execution.

Finally, Canada’s new development finance initiative needs to take poverty reduction just as seriously as profit generation. Most other DFIs do this imperfectly, at best; some don’t even monitor the impact of their projects on development. This makes no sense. Development is good for business and business can be good for development. Five years from now, development gains will be just as important as profits in making the case for renewed funding of this initiative.

All these lessons need be adapted to both the needs of Canadian business and Canada’s specific development objectives. The Canadian Chamber of Commerce and Canadian Council of Chief Executives have both been important supporters of this project. Now it’s time for the businesses that stand to benefit directly from this initiative to get involved ensuring its success.

Brett House is a Senior Fellow at the Jeanne Sauvé Foundation in Montréal, a Visiting Scholar at Massey College at the University of Toronto, and an Advisor to Tau Investment Management, an impact fund based in New York. He recently completed projects as a Senior Fellow at the Centre for International Governance Innovation (CIGI) and as a Chazen Visiting Scholar at Columbia Business School. A macroeconomist, Brett's current work focuses on improving our approaches to sovereign debt restructuring and crisis management, new tools for mobilizing development finance, reforming international trade policy, and enhancing long-run economic growth. He tweets on @BrettEHouse.

You are welcome to republish this Policy Options article online or in print periodicals, under a Creative Commons/No Derivatives licence.

Creative Commons License