International Financial Assistance Regulations: SOR/2019-249
Canada Gazette, Part II, Volume 153, Number 14
SOR/2019-249 June 25, 2019
INTERNATIONAL FINANCIAL ASSISTANCE ACT
P.C. 2019-914 June 22, 2019
Her Excellency the Governor General in Council, on the recommendation of the Minister of Foreign Affairs and the Minister for International Development and with the concurrence of the Minister of Finance, pursuant to section 8 of the International Financial Assistance Act footnote a, makes the annexed International Financial Assistance Regulations.
International Financial Assistance Regulations
1 The following definitions apply in these Regulations.
- Act means the International Financial Assistance Act. (Loi)
- OECD DAC List means the Organisation for Economic Co-operation and Development’s Development Assistance Committee List of Official Development Assistance Recipients, as amended from time to time. (liste établie par le CAD de l’OCDE)
Conditions to make a loan
2 The competent minister must not make a loan under paragraph 3(1)(a) of the Act unless
- (a) the competent minister is of the opinion that the recipient or guarantor of the loan is creditworthy, taking into consideration World Bank and International Monetary Fund debt sustainability assessments; and
- (b) the recipient or guarantor of the loan is the government of
- (i) a country or territory that is included in the OECD DAC List, and
- (ii) a borrowing member of the International Bank for Reconstruction and Development of the World Bank Group.
Foreign state limit
3 The sum of all outstanding loans made by the competent minister under paragraph 3(1)(a) of the Act to the government of a single foreign state and all outstanding loans made by the competent minister under that paragraph that are guaranteed under subsection 3(2) of the Act by the government of that foreign state must not exceed $120 million or the value of 20% of all outstanding loans made by the competent minister under paragraph 3(1)(a) of the Act, whichever is greater.
Maximum loan term
4 The maximum term of a loan made under paragraph 3(1)(a) of the Act is 10 years.
5 The interest rate applicable to a loan made under paragraph 3(1)(a) of the Act is a fixed rate that equals the Government of Canada’s cost of borrowing as determined by reference to the zero-coupon yield curve for Government of Canada bonds published by the Bank of Canada.
6 The initiation fee for a loan made under paragraph 3(1)(a) of the Act is the lesser of 0.15% of the amount of the loan and $100,000.
7 In the case of a loan made under paragraph 3(1)(a) of the Act that is to be disbursed in a single disbursement, the per annum commitment fee is 0.25% of the amount of the loan for the period beginning on the day that is 60 days after the effective date of the loan and ending on the day on which the recipient draws the loan, payable on a semi-annual basis.
Terms and conditions of repayment
8 (1) Subject to subsection (2), principal and interest payments related to a loan made under paragraph 3(1)(a) of the Act are payable by the recipient on at least an annual basis.
(2) The competent minister may grant the recipient a grace period during which the recipient is not required to make principal or interest payments, or both, on a loan made under paragraph 3(1)(a) of the Act if there is an imbalance between the recipient’s cash inflows and outflows.
9 Sections 2, 4 and 8 of these Regulations do not apply to a loan made under paragraph 3(1)(a) of the Act as part of debt restructuring.
10 A loan made under paragraph 3(1)(a) of the Act may only be made in the currency of Canada, the United States, the European Monetary Union, the United Kingdom, Japan or another currency identified by the International Monetary Fund as an official foreign exchange reserve currency.
Approval — Minister of Finance
11 The competent minister must not carry out any of the following transactions without the approval of the Minister of Finance:
- (a) making a loan under paragraph 3(1)(a) of the Act;
- (b) amending a financial term of a loan made under paragraph 3(1)(a) of the Act.
Consultation — Minister of Finance
12 The competent minister must consult with the Minister of Finance before a debt or obligation relating to a loan made under paragraph 3(1)(a) of the Act is written off or forgiven.
Persons or entities
13 Under paragraph 4(a) of the Act, the competent minister must not guarantee an obligation undertaken by a person or entity unless
- (a) the guarantee supports international assistance in a country or territory included in the OECD DAC List; and
- (b) the competent minister obtains from the recipient of the guarantee an undertaking to make reasonable efforts to recover losses related to the obligation.
Maximum guarantee exposure
14 (1) The maximum amount of outstanding guarantees provided under paragraph 4(a) of the Act must not exceed $500 million.
(2) The maximum amount of outstanding guarantees provided under paragraph 4(a) of the Act to a particular recipient must not exceed $100 million.
15 If the competent minister provides a partial guarantee under paragraph 4(a) of the Act, the competent minister must not guarantee more than 50% of the obligation undertaken by a person or entity.
16 Subject to section 18 of these Regulations, the initiation fee for a guarantee provided under paragraph 4(a) of the Act is the lesser of 0.15% of the amount of the guarantee and $100,000.
17 Subject to section 18 of these Regulations, the fee to obtain a guarantee provided under paragraph 4(a) of the Act is an amount equal to the net present value of the expected financial loss to the Government of Canada of the guarantee.
Fees — guarantees with co-guarantor
18 If the competent minister provides a guarantee under paragraph 4(a) of the Act with a co-guarantor, the initiation fee and the fee to obtain the guarantee are the amounts charged for similar fees by the co-guarantor on a prorated basis.
Circumstances of dealing with shares
19 (1) The competent minister must not under paragraph 4(f) of the Act acquire, hold, assign, exchange, sell or otherwise dispose of shares except in respect of an investment that supports international assistance in a country or territory included in the OECD DAC List.
Manner of dealing with shares
(2) The competent minister must not seek to acquire or hold a controlling or majority interest in a corporation when making the investment referred to in subsection (1).
Approval — Minister of Finance
20 The competent minister must not carry out any of the following transactions without the approval of the Minister of Finance:
- (a) providing a guarantee under paragraph 4(a) of the Act;
- (b) executing a transaction under any of paragraphs 4(b) to (f) of the Act, except if the transaction is executed under paragraph 4(f) of the Act through a transfer payment;
- (c) amending a financial term of a transaction that was executed under any of paragraphs 4(a) to (f) of the Act, except if the transaction is executed under paragraph 4(f) of the Act through a transfer payment.
Program for Climate Change
21 The competent minister must not, under section 5 of the Act, seek to acquire or hold a controlling or majority interest in a corporation.
Coming into Force
S.C. 2018, c. 27, s. 659
22 These Regulations come into force on the day on which section 659 of the Budget Implementation Act, 2018, No. 2 comes into force, but if they are registered after that day, they come into force on the day on which they are registered.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
According to the United Nations, there is an annual US$2.5 trillion financing gap to deliver on the Sustainable Development Goals (SDGs) in developing countries. In 2015, Canada and the global community agreed to meet an ambitious set of SDGs, to eradicate poverty and build peace around the world by 2030. To tackle this immense challenge, the International Monetary Fund (IMF) has highlighted the need for concerted efforts that includes individual countries, international organizations, official donors, philanthropists, the private sector and civil society. This requires donors, including Canada, to be more innovative in their approaches and partnerships to catalyze the additional financing.
In 2017, the Feminist International Assistance Policy was launched, and it recognized that Canada’s official development assistance must be used more innovatively and strategically to mobilize additional resources to support sustainable development.
On December 13, 2018, Budget Implementation Act No. 2, inclusive of the International Financial Assistance Act (the Act), received royal assent. The Act provides the necessary authorities to support the delivery of the new Sovereign Loans Program and the International Assistance Innovation Program in order to take more innovative approaches to international assistance as part of the Feminist International Assistance Policy.
The Act authorizes the Minister for International Development and the Minister of Foreign Affairs (the ministers) to provide interest-bearing loans to developing countries at the national level. The ministers could also make loans to organizations at the sub-national levels and to other entities, but only when the loans are being guaranteed in Canada’s favour by the developing country at the national level.
The Act also authorizes the ministers to guarantee repayment of any financial debt or obligation to encourage an entity, typically financial institutions, to enter into financial transactions that they otherwise would not enter into to achieve particular SDGs. In addition, the Act authorizes the ministers to charge fees, to acquire/dispose of shares of a corporation and to take a security or security interest footnote 1 against defaults on obligations owed to or guaranteed by Canada.
The Act also supports the delivery of Global Affairs Canada’s climate change programming by providing the necessary flexibility to preserve the value of the Government’s related assets when using repayable contributions. This means that it allows loans made by recipients with such contributions to be converted into equity when the conversion could result in minimizing potential losses or maximizing the amount recoverable as per the terms of the agreement/arrangement.
The potential recipients of the loans and guarantees include all levels of governments of developing countries, multilateral organizations, international financial institutions and the private sector including local financial institutions in developing countries.
To operationalize the Act, regulations are needed to establish the parameters for innovative financing within the context of the above-mentioned programs that will address development challenges in developing countries, and support international assistance.
- Support the deployment of the International Assistance Innovation Program and the Sovereign Loans Program, as well as the Government’s climate repayable contribution programming;
- Establish the parameters for innovative financing within the context of the above-mentioned programs that will address development challenges in developing countries, and support international assistance; and
- Safeguard the Consolidated Revenue Fund.
The International Financial Assistance Regulations (the Regulations) have been made as follows:
Sovereign Loans Program
For the purpose of supporting the delivery of the Sovereign Loans Program (SLP), the Regulations prescribe the eligibility criteria for international assistance, as well as the key parameters for the loans. The eligibility criteria include that recipients of loans be a national government of a developing country that is included in the Development Assistance Committee List of Official Development Assistance Recipients or any other person or entity provided that the loan is guaranteed in favour of Canada by the government of such a developing country benefiting from the loan. Therefore, the developing country is either the loan recipient or the loan guarantor.
In addition, the developing country must be a borrowing member of the International Bank for Reconstruction and Development, a member institution of the World Bank Group, and be credit worthy, taking into consideration the World Bank and IMF debt sustainability assessments.
The loans are to be provided in hard currencies, namely the currency of Canada, the United States, European Monetary Union, United Kingdom, Japan or another currency identified by the IMF as an official foreign exchange reserve currency. The sum of all outstanding loans made to or guaranteed by a single country may not exceed $120 million or 20% of all outstanding loans made under this program, whichever is greater.
The ministers will determine the repayment schedules of each loan on a case-by-case basis with a maximum loan term of 10 years, and may include a grace period. Loan payments by the recipient will be at least on an annual basis.
The rate of interest will be determined based on the loan term, and will be a fixed rate that equals the Government of Canada’s applicable borrowing cost of comparable bond terms as published by the Bank of Canada. In addition to the interest on the loan, the ministers will also charge the borrower a one-time initiation fee that will equal the lesser of 0.15% of the amount of the loan and $100,000. For single disbursement loans, the ministers will also charge an annual commitment fee of 0.25% of the amount of the loan starting 60 days after the loan is signed until the recipient draws the loan. This is an amount that the borrower pays to compensate for the lender’s commitment to lend funds in the future at a specific interest rate.
In the event the borrowing country is unable to repay the loan as per the loan terms and conditions, including after assuming the obligation of the loan it has guaranteed, the ministers could restructure the loan, which would no longer be subject to the eligibility criteria, the maximum loan term and the minimum repayment frequency of once a year.
International Assistance Innovation Program and climate financing
For the purpose of supporting the delivery of the International Assistance Innovation Program (IAIP) through guarantees, the Regulations prescribe the eligibility criteria (e.g. any private or public person or entity that supports financially private sector investments in developing countries that are part of the Development Assistance Committee List of Official Development Assistance Recipients), and state that the ministers are to obtain from the recipient of the guarantee an agreement to make reasonable efforts to recover losses related to the obligation guaranteed.
The Regulations also state that the ministers can only provide a guarantee that is not more than 50% of an obligation undertaken by a person or entity (e.g. losses resulting from a loan portfolio). The Regulations also cap outstanding guarantees at any one time under the IAIP to $500 million for the portfolio and $100 million for a particular recipient.
Each guarantee will be subject to a one-time initiation fee that corresponds to the lesser of 0.15% of the amount of the guarantee and $100,000. In addition, the fee to obtain a guarantee is an amount equal to the net present value of the expected loss to the Government of Canada resulting from the guarantee.
In context where a guarantee is provided with a co-guarantor, which could be another donor government or the private sector, the initiation fee and the fee to obtain the guarantee are the amounts charged for similar fees by the co-guarantor on a prorated basis. This means that if Canada and a co-guarantor each guarantee 25% of an obligation, they will charge the same fee amounts, but if Canada guarantees 25% and a co-guarantor 50%, then Canada’s fees will be half of the co-guarantor’s fees.
For the purpose of supporting the delivery of the IAIP through equity investments (e.g. providing long-term capital to developing countries’ enterprises in support of job creation to advance women’s economic empowerment to the extent possible) for the benefit of developing countries that are part of the Development Assistance Committee List of Official Development Assistance Recipients, the Regulations allow the ministers to acquire or dispose of shares of a corporation while stating that the intent is not to seek to acquire or hold a controlling or majority interest in a corporation. It is rather to provide patient capital to enable private sector entities to invest in growth, employment and ultimately poverty alleviation, as well as support subsequent fund raising.
Funding provided under climate finance repayable contributions
The acquisition and disposition of shares are also applicable to funding provided under climate finance repayable contributions to allow Global Affairs Canada to safeguard the value of the Government of Canada’s assets by allowing debt-to-equity conversions under certain circumstances. This means that the ministers can authorize recipients of climate change repayable contributions to convert loans they made with such contributions into shares when the conversion could result in minimizing potential losses or maximizing the amount recoverable as per the terms of the agreement/arrangement.
Role of the Minister of Finance
The Regulations prescribe that the Minister of Finance must approve transactions including loans, guarantees, amendments of a financial term, debt restructuring and share and security transactions. In addition, the Minister of Finance must also be consulted prior to initiating debt write-offs and/or debt forgiveness.
To assist in developing the legislation and regulations, Global Affairs Canada consulted with other donors that have extensive experience in managing a guarantee program such as Swedish International Development Cooperation Agency and United States Agency for International Development as well as with Agriculture Canada that delivers guarantee programs under the Canadian Agricultural Loans Act and the Agricultural Marketing Programs Act.
The overall IAIP design features also take into account, either through these Regulations or policy direction:
- OECD Development Assistance Committee (DAC) Blended Finance Principles (BF principles) which promote development impact, mobilization of commercial finance, assistance to be tailored to local context, effective partnering and monitoring for transparency and results.
- Recommendations from authoritative reports on the state and priorities for blended finance in support of sustainable development in developing countries (e.g. OECD DAC, Convergence). For instance, the OECD report entitled Making Blended Finance Work for the Sustainable Development Goals finds that blended finance has the potential to bridge the SDGs funding gap, but to do so, the way donor governments are blending needs to improve
- to attract commercial finance rather than combine different sources of public development finance;
- to blend across a range of contexts, sectors and SDGs as opposed to targeting only a few sectors;
- to adopt a common framework and understanding of blending supporting cohesive action (e.g. BF principles); and
- to provide consistent estimates of blended finance market and assessment of effectiveness.
- Consultations held with private sector stakeholders in the context of Canada’s Feminist International Assistance Policy, which emphasized the need for Global Affairs Canada to deliver international assistance in a new way by adopting an expanded set of innovative programming tools and mechanisms to support innovation and achieve desired outcomes and by positioning Canada as a pioneer in testing and scaling new approaches to international assistance. Consultations also promoted the creation of new programming tools relevant to specific partner-country contexts, such as concessional loans, equity and cost-recovery mechanisms particularly for middle-income countries. These recommendations are reflected in the types of instruments allowed under the Regulations as well as in the eligibility criteria.
In this context, prepublication did not take place, as the Regulations are not regulating Canadian businesses, but establishing financial parameters for Global Affairs Canada to provide international assistance in order to safeguard the Consolidated Revenue Fund. These parameters include for instance the requirement not to guarantee more than 50% when providing partial guarantees; to set a ceiling for outstanding guarantees; to ensure that fees charged will cover expected losses; to diversify risk by limiting the proportion of Global Affairs’ loan or guarantee portfolio going to a single country or obligor respectively; to safeguard the Government of Canada’s assets through security or security interest including shares; and to take measures that limit credit and market risks by providing medium-term loans in hard currencies to credit worthy borrowers, reflecting their capacity to repay the loan as opposed to contributing to their debt distress.
Modern treaty obligations and Indigenous engagement and consultation
Modern treaty implications have been considered and none have been identified. The Regulations serve to operationalize the IAIP and SLP — two new programs that are targeting non-Canadians as ultimate recipients, as is the case with the climate finance repayable contribution programming that the Regulations also support.
The Act provides for the Governor in Council to make regulations on the recommendation of the Minister of Foreign Affairs and Minister for International Development and with the Minister of Finance concurrence, for the purposes of supporting the SLP; the IAIP; and a federal international assistance program that promotes the mitigation of or adaptation to climate change through repayable contributions.
Therefore, the Regulations are essential for the implementation of the new programs. Without the Regulations in place, the programs cannot be operationalized as intended, given that the legislated instruments (loans, guarantees and equity) cannot be deployed without Regulations setting the parameters for their use; Global Affairs Canada will not be able to deploy its Sovereign Loans Program; and the toolkit under the International Assistance Innovation Program will be restricted to transfer payments.
Similar loan guarantee programs, such as those managed by Agriculture and Agri-Food Canada, are also governed by a legislative and regulatory framework.
Given a main purpose of the Regulations is to make explicit key Government of Canada “risk appetite” parameters that define how Global Affairs Canada can use the funds allocated through Budget 2018, the principles of outcome- or performance-based regulation could not be applied in this context.
Costs and benefits
The main benefit of the Regulations is to enable the full implementation of the International Financial Assistance Act.
The above measures combined with the Minister of Finance oversight through consultation or approval of certain transactions help safeguard the Consolidated Revenue Fund. It does so by creating a framework for prudent risk-taking that protects the Government’s funds while delivering on Canada’s international assistance and foreign policy priorities, including addressing development challenges in developing countries through innovative financing.
By outlining the financial risk parameters to support prudent risk-taking and appropriate pricing, the Regulations also deliver greater efficiency and integrity to the programming of investments under the SLP and IAIP while supporting developing countries. It does this by supporting expedited decision-making, resulting from standardized assessment processes with nonnegotiable pricing and pre-established parameters, including risk-sharing. As for the authority to approve debt to equity conversions in context of non-performing loans, this provides the ministers the necessary authority to minimize potential losses or realize the maximum amount recoverable.
In addition, the Regulations help mitigate reputation risk to the Government of Canada by ensuring funding decisions take into account key factors mitigate risk, such as developing countries’ ability to take on debt as well as requiring the Government of Canada to share risks as opposed to fully absorbing them.
Where appropriate, flexibility has also been incorporated into the Regulations to allow for the harmonization of practices with those of other donors and investors, increasing the opportunity for collaboration. This includes, for example, alignment of fee structures when providing co-guarantees.
As a result of sound financial management, good governance and openness to collaboration, Global Affairs Canada, and the Government of Canada by extension, can over time be seen as a preferred investment partner in the international development space, cementing Canada’s reputation on the international stage.
By design, the Regulations are internally focused. As such, the burden on external stakeholders is expected to be minimal, if any. The Regulations are complemented by detailed internal operational, due diligence and administrative guidelines, policies and procedures. For example, due diligence will have to be conducted irrespective of a formal establishment of a risk threshold under the Regulations. As a result, the incremental costs directly related to the Regulations are projected to be minimal and are designed to be absorbed by the Government of Canada.
The Regulations establish broad risk-limiting parameters to support program delivery consistent with the approved funding profiles of each program. In the absence of the Regulations, Global Affairs Canada would nevertheless deliver the programs consistent with the funding profiles, as it currently does with the climate finance envelope that requires the use of unconditionally repayable contributions (that are recorded as assets in the Public Accounts of Canada). However, the Regulations do circumscribe Global Affairs Canada’s degrees of freedom by prescribing specific limits related to the use of the legislative authorities. Accordingly, the costs are essentially program delivery costs, inclusive of the existing due diligence costs exercised in support of the tailored Chief Financial Officer Branch’s role and responsibilities to support such programming.
The same logic applies in terms of attributing a financial value to the benefits. Given, the due diligence processes serve to protect the integrity of the Government of Canada’s fiscal framework, these benefits (e.g. limitation of losses) would occur under both the baseline and regulatory scenarios.
Small business lens
The small business lens does not apply to the Regulations, as there is no impact on small businesses in Canada. The sovereign loans are intended for foreign states and guarantees and equity are meant to provide risk-absorbing capital to enable private sector entities in developing countries to invest in growth, employment and ultimately poverty alleviation.
The “One-for-One” Rule does not apply because there is no administrative burden on Canadian businesses given the Regulations guide the Government of Canada’s financing to foreign states or entities in developing countries.
Regulatory cooperation and alignment
The proposal does not have any linkage to international agreements or obligations. It is also not part of an existing formal regulatory cooperation initiative.
Strategic environmental assessment
In accordance with The Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.
Gender-based analysis plus
No direct gender-based analysis plus (GBA+) impacts have been identified for the Regulations, which establish the parameters defining how Global Affairs Canada can use the funds allocated through Budget 2018 for providing international assistance while supporting prudent financial risk taking. However, the Regulations support financing arrangements and partnerships that mobilize additional resources in support of the Feminist International Assistance Policy, and the Sustainable Development Goals more broadly. A targeted gender-responsive approach to investments is proposed for the IAIP, where possible, to support private and public sector investments that could help increase access to capital for women entrepreneurs and businesses that have women in leadership positions; promote gender equality in the workplace and supply chain; increase the number of products and services that benefit women and girls; and optimize impact on gender equality and empowerment.
Implementation, compliance and enforcement, and service standards
The Regulations came into force upon registration. Global Affairs Canada will publish on its website relevant information on the availability of the two new programs and on how to support an application for funding using these new mechanisms consistent with the Department’s investment strategy. It may also identify potential initiatives that could be co-financed with other donors or intermediaries that have extensive experience with guarantees and/or equity as the Department builds its capacity.
To mitigate potential risks, including related to gender dimensions, investment proposals will be thoroughly evaluated based on published assessment criteria that complement the Regulations eligibility criteria. Global Affairs Canada officials will closely monitor and track the performance of all recipients for compliance with the terms and conditions, and will require periodic status updates and reporting as defined in the terms of the agreements/arrangements.
In addition, the programs will be subject to a five-year review prior to determining whether they are to become ongoing programs.
Grants and Contributions Management Bureau
Global Affairs Canada