House of Commons International Development Committee
The Future of CDC
Fifth Report of Session 2010–11
Volume I Volume I: Report, together with formal minutes, oral and written evidence
Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/indcom
Ordered by the House of Commons to be printed Tuesday 15 February 2011
HC 607 Published on 3 March 2011 by authority of the House of Commons London: The Stationery Office Limited £17.50
The International Development Committee
Rt Hon. Malcolm Bruce MP, (Liberal Democrat, Gordon) (Chairman) Hugh Bayley MP, (Labour, City of York) Richard Burden MP, (Labour, Birmingham, Northfield) Sam Gyimah MP (Conservative, East Surrey) Richard Harrington MP, (Conservative, Watford) Pauline Latham MP, (Conservative, Mid Derbyshire) Jeremy Lefroy (Conservative, Stafford) Mr Michael McCann MP, (Labour, East Kilbride, Strathaven and Lesmahagow) Alison McGovern MP, (Labour, Wirral South) Anas Sarwar MP, (Labour, Glasgow Central) Chris White MP, (Conservative, Warwick and Leamington)
The following members were also members of the committee during the parliament: Mr Russell Brown MP, (Labour, Dumfries, Galloway) Mr James Clappison MP, (Conservative, Hertsmere) Ann McKechin MP, (Labour, Glasgow North)
Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/indcom
Committee staff The staff of the Committee are David Harrison (Clerk), Mick Hillyard (Second Clerk), Anna Dickson (Committee Specialist), Chlöe Challender (Committee Specialist), Tony Catinella (Senior Committee Assistant), Susan Monaghan (Senior Committee Assistant), Vanessa Hallinan (Committee Assistant), Emily Harrisson (Inquiry Manager) and Nicholas Davies (Media Officer)
Contacts All correspondence should be addressed to the Clerk of the International Development Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 1223; the Committee’s email address is [email protected]
The Future of CDC 1
Contents
Report Page
Summary 3
1 Introduction 5
2 The development rationale for CDC 6 The importance of private sector development 6 Development finance institutions 7 CDC 7 History of CDC 7 ‘Fund of funds’ model 8 Comparative position of CDC 9 DFID’s oversight of CDC 9
3 Development impact of CDC 10 CDC’s development impact 10 Investment model 10 CDC’s ability to leverage additional finance 12 Is CDC’s funding additional to private capital? 13 The composition of CDC’s portfolio 14 Geography 14 Sector 15
4 Remaining challenges 19 Implementation of CDC’s Investment Code 19 Measuring development impact 20 Transparency 22 Use of tax havens 23 Remuneration 24 Actis 25
5 Reforming CDC 26 New investment model for CDC 26 Investment methods 28 Sectoral mandate 30 Geographical mandate 31 Improving CDC’s development focus 32 DFID oversight of CDC 32 The new CDC 33 Conclusion 33
Conclusions and recommendations 39
2 The Future of CDC
Annex 1 34
Annex 2 36
Annex 3 37
Formal Minutes 44
Witnesses 45
List of printed written evidence 45
List of additional written evidence 46
List of Reports from the Committee during the current Parliament 47
The Future of CDC 3
Summary
CDC was created in 1948 as the Commonwealth Development Corporation. Its current mandate is to boost economic growth by investing in businesses in developing countries. Since restructuring in 2004, CDC almost exclusively relies on the ‘fund of funds’ investment model, thereby making almost all of its investments indirectly via fund managers.
There has been mounting criticism that CDC does not have sufficient development impact. In October 2010, the Secretary of State for International Development announced that reforms to CDC were required and we decided to undertake an inquiry.
We found that although CDC has increased its net assets by £1.5 billion since 2004 and has contributed to employment and the tax base of developing countries, its development impact has been insufficient for a Government-owned company whose net investments count as Official Development Assistance. We are concerned that some of the investments CDC has made are ones the private sector would have made anyway. Over half of its investments are concentrated in four middle-income countries. Too few of its investments have been in sectors which most benefit the poor such as agriculture, infrastructure and small and medium enterprises.
In order radically to increase CDC’s development impact we recommend that CDC be split into two parts. The first part would primarily use the ‘fund of funds’ method and co- investment (through equity), and other financial instruments as appropriate, to make investments in developing countries. The new second part would have a mandate to make innovative investments in ‘pro-poor’ sectors. The profit from the first part of the business would fund or subsidise the second.
CDC should be more transparent to facilitate greater accountability and public oversight. We believe the remuneration of CDC’s executives is excessive and that high quality staff could be secured for lower salaries.
CDC has an important role to play. However, CDC’s mandate should be changed from economic growth to incorporate a specific focus on poverty alleviation. DFID should become a more active shareholder of CDC and undertake closer oversight of CDC in future. CDC should retain its expert status and should remain complementary to the other DFIs, whilst sharpening its development impact and poverty alleviation focus.
The Future of CDC 5
1 Introduction
1. CDC Group plc (formerly the Commonwealth Development Corporation) is a public limited company wholly owned by the UK Government. It is the UK’s Development Finance Institution (DFI) and aims to help fill a shortage of finance for investment that is a major constraint to economic growth and poverty reduction. CDC is a major element of the support provided by the Department for International Development (DFID) for the private sector in developing countries. CDC’s objective is to invest in the creation and growth of viable private businesses in poorer developing countries to contribute to economic growth for the benefit of the poor; and to mobilise private investment in these markets both directly and by demonstrating profitable investments as part of the mission of the DFID to fight world poverty.1
2. CDC has been self-financing since 1995 and has had some significant successes. Since 2004, CDC has generated substantial growth in its assets from £1.2 billion to £2.7 billion.2 However, concerns have been growing regarding CDC’s development impact, its ‘fund of funds’ model3 and operational practices. These mounting concerns led the Secretary of State for International Development, the Rt. Hon Andrew Mitchell MP, to announce a review of CDC on 12 October 2010, “in order radically to increase its development impact.” He stated that he wanted CDC to be “more pro-poor focused than any other DFI, doing the hardest things in the hardest places.”4
3. Following the Secretary of State’s announcement of a review of CDC, we decided to carry out an inquiry into the future of CDC. We aimed to consider CDC’s development impact and how this could be maximised in the future. We also wanted to evaluate the implications of potential reforms. In parallel to our inquiry, DFID has held a consultation regarding the future of CDC, prior to the publication of CDC’s new business plan. This inquiry follows on from our predecessor Committee’s report on Private Sector Development and the Public Accounts Committee’s report on DFID’s oversight of CDC.5
4. We received 27 written submissions of evidence from a variety of sources ranging from non-governmental organisations to CDC’s fund managers. We have also received a briefing from the National Audit Office (NAO). We held three evidence sessions, during December 2010 and January 2011, with: the Secretary of State for International Development, CDC executives, academics, fund managers, non-governmental organisations and journalists. We are grateful to all those who provided oral and written evidence for their valuable contributions. We would like to thank our specialist adviser Dr Dirk Willem te Velde of the Overseas Development Institute.
1 CDC, Department for Business, Innovation and Skills Online, www.bis.gov.uk 2 Ev 65 3 For description see Chapter 2 4 HC Deb, 12 October 2010, col14-15WS 5 International Development Committee, Fourth Report of Session 2005-06, Private Sector Development, HC 921-I and Public Accounts Committee, Eighteenth Report of Session 2008-09, Investing for Development: the Department for International Development's oversight of CDC Group plc, HC 94
6 The Future of CDC
2 The development rationale for CDC
The importance of private sector development
5. The private sector is increasingly recognised as a vital component of sustainable development and ‘pro-poor’ growth.6 In his speech on 12 October 2010, the Secretary of State said that it was the private sector which “promotes new jobs, new opportunities, new markets and new prosperity.”7 The private sector has the capacity to create employment, increase trade, provide goods and services and generate substantial tax revenues. These tax revenues can be used to provide basic public services such as healthcare and education.
6. The NAO found that research demonstrated that growth was “an essential, although not always sufficient, precondition for poverty reduction.”8 It is also clear that strong growth is contingent on high rates of investment.9 However, there is still a considerable lack of capital available for some sectors and regions in developing countries.10 Foreign direct investment (FDI) flows to Sub-Saharan Africa remain persistently low; it receives only 5% of global FDI.11 Almost 50% of African companies identify a lack of finance as a major constraint to doing business.12 The lack of capital is further illustrated by the fact that nearly three-quarters of the funds in which CDC invested during 2009 and 2010 received funding from other DFIs and 36% of these funds failed to reach their target size.13
7. DFID and many others consider shortages of investment finance in developing countries an important constraint to “private sector development, economic growth and poverty reduction.”14 The shortage of capital is a particular problem because developing countries often have challenging investment conditions. International commercial investors are also still reluctant to invest in poor countries due to the perceived risk, difficulty and unpredictability of the operating environments.15 A combination of market failures and low appetite for risk results in a lack of access to finance for credible businesses.16 The types of investments that are most needed for poverty reduction, in particular, are often too risky for mainstream private sector operators.17 In addition, some countries experience other constraints to investment such as: a lack of appropriate laws; a weak regulatory
6 For discussions of pro-poor growth, see, for instance, ‘World Development Report 2006: Equity and Development’ (Washington: World Bank, 2005) or DFID Pro-Poor Growth Briefing Note 1, ‘What is pro-poor growth and why do we need to know?’ (DFID Policy Division internal paper, February 2004). 7 Mitchell, A. 12 October 2010. Wealth Creation Speech. http://www.dfid.gov.uk/Media-Room/Speeches-and- articles/2010 NAO para 1.6 7 Ev w33 8 Ev w33 9 Ev w33 10 Ev w26 11 Ev 62 12 Ev 62 13 Q 92 14 Ev w33 15 Ev 60 16 Market failures occur when the private sector does not allocate sufficient resources to viable enterprises. 17 Ev w56
The Future of CDC 7
institutional framework; and political instability and conflict.18 A lack of appropriate infrastructure is also a major disincentive for investment and inhibits economic development. We will comment further upon this subject in the infrastructure inquiry we are currently conducting.
Development finance institutions
8. CDC is one of approximately 20 multilateral, regional and bilateral DFIs which seek to address the shortage of investment in developing countries. Their role is to invest in viable companies that contribute to economic growth. They have an important role in demonstrating that profitable investments can be made in difficult business environments. Bilateral DFIs19 provide approximately 25% of total development finance, equivalent to around 20% of total aid.20
9. The aims of DFIs differ. Half of European DFIs (not including CDC) require investments to be tied to national interests.21 DFIs use a variety of investment methods, including loans, equity and guarantees. Some, but not all, provide technical assistance. Some DFIs also aim to leverage additional capital from private investors. CDC is unusual in being overwhelmingly focussed on equity.
CDC
History of CDC
10. CDC was established in 1948 as the Colonial Development Corporation to develop the resources of Britain's colonies. It was renamed the Commonwealth Development Corporation in 1963, and was given authority to invest outside the Commonwealth in 1969. In 1997 CDC became a public private partnership and two years later was transformed from a statutory corporation to a public limited company. CDC was substantially restructured in 2004 into a ‘fund of funds’ investment company. As part of the restructuring, two separate management companies were created out of CDC: Actis and Aureos. Actis is CDC’s largest fund manager. DFID holds 40% of the shares of Actis; the remainder are held by Actis management.
18 Public Accounts Committee, Eighteenth Report of Session 2008-09, Investing for Development: the Department for International Development's oversight of CDC Group plc, HC 94, para 13 19 Bilateral DFIs are nationally owned DFIs e.g. Proparco is the French DFI. 20 Overseas Development Institute. The strengths and weaknesses of bilateral development finance institutions (2008), pg 1 21 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p43
8 The Future of CDC
‘Fund of funds’ model
Figure 1: CDC’s investment model
International private equity Other private investors, investors and other development e.g. local banks finance institutions
Actis funds Investments in individual companies (multiple companies per fund)
Actis 40% shareholding
DFID C DC 100% Other funds Investments in shareholding Advice individual companies (multiple companies per fund) S hareholder E xecutive 50+ Other Fund Managers
Advice DFID shareholding C DC investment Third party investment Management contract
Source: Evidence from NAO, Figure 1
11. Since 1997, CDC has specialised in providing private equity finance. Following the 2004 restructuring, CDC now operates through an intermediated investment model as shown in Figure One. It makes no direct investments but instead invests with fund managers, which in turn invest in businesses through their funds. CDC claims that this intermediated approach has three key benefits: mobilising third party capital; using local fund manager’s knowledge and expertise; and enabling CDC to have a broader investment footprint. At the end of 2009, CDC invested with 65 fund managers, in 134 funds, in 794 underlying portfolio companies.22 CDC aims to have a catalytic impact and stimulate private sector investment by illustrating that good commercial returns can be made in developing economies. CDC’s resources are less than 1% of international private equity that goes to developing countries, so for CDC to have a meaningful impact it must be able to influence the behaviour of commercial investors and mobilise additional capital.23
12. The intermediated investment model means that CDC does not make any individual investment decisions; all investment decisions are made by their fund managers. Before investing, CDC agrees the strategy of the fund, the environmental, social and governance issues and how the fund should operate.24 The fund managers monitor their investments and provide them with business expertise when appropriate. When the fund manager sells the investment they then return the capital and the proceeds from the sale to CDC and
22 Ev 80 23 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p40 24 Q 89
The Future of CDC 9
other investors. The NAO found that in 2008 fund managers were “receiving an annual management fee of around one to two per cent of the value of investments, and a proportion of profits (usually 10 to 20 per cent) when investments were sold, typically after 5 to 10 years”.25 There will be a more detailed analysis of the ‘fund of funds’ investment model in Chapter Three.
Comparative position of CDC 13. As shown in Annex Two, CDC is the fourth largest bilateral DFI, but is smaller than larger multilateral and regional DFIs. DFIs use different investment methods, shown in Annex One. CDC currently “leads the field globally” in equity funds amongst DFIs.26 CDC specialises almost entirely in equity, which is unique amongst the bigger DFIs. The majority of the portfolio of other DFIs (e.g. BIO, DEG, Finnfund, FMO, Proparco, SOFID)27 is through loans.28 Most DFIs do very little in guarantees. CDC has less than 50 staff, which is significantly fewer than other DFIs. Academics from the Overseas Development Institute found that CDC’s portfolio is much more orientated towards poorer countries than other DFIs.29 Annex Three shows that CDC’s comparative advantage lies in selecting appropriate fund managers and using the ‘fund of funds’ approach. Academic analysis has concluded that there is not a best practice model for DFIs and instead there is value in DFIs exploiting their comparative advantage and specialisation.30
DFID’s oversight of CDC
14. DFID has no direct involvement in CDC’s operational decisions. The absence of direct DFID involvement is a deliberate feature of the Department’s oversight of CDC. It is argued that it is important to demonstrate CDC’s commercial discipline, free of political interference, to other investors. The NAO informed us that this type of arms-length relationship is “standard practice in departmental oversight of government-owned companies.”31
15. DFID does, however, exercise influence over CDC through the Investment Policy, Investment Code, business plan and remuneration policy. CDC’s Investment Policy is the principal instrument through which DFID ensures that the Company invests so as to grow viable businesses in developing countries. CDC’s Investment Policy and Remuneration Framework were last updated in 2008.32
25 Ev w34 26 Kingombe, C. et al., CDC’s position in the wider DFI architecture, 2011 27 DFIs listed above are from the following countries:BIO (Belgium), DEG (Germany), Finnfund (Finland), FMO (Netherlands), Proparco (France), SOFID (Portgual). 28 Kingombe, C. et al., CDC’s position in the wider DFI architecture, 2011 29 Kingombe, C. et al., CDC’s position in the wider DFI architecture, 2011 30 Kingombe, C. et al., CDC’s position in the wider DFI architecture, 2011 31 Ev w34 32 Ev 88
10 The Future of CDC
3 Development impact of CDC
16. This chapter assesses the claims that CDC has not had a sufficient development impact and is not adequately pro-poor. It will examine this claim with respect to CDC’s investment model, its geographical spread and the sectors in which it invests. Our conclusions about how to improve development impact in the future are set out in Chapter Five. CDC’s development impact 17. CDC has, undoubtedly, contributed to economic development in the countries in which it invests. In 2009 CDC’s investee companies employed over one million people and paid local business taxes of nearly three billion US dollars.33
18. CDC’s remit does not include a duty to alleviate poverty, only a duty to invest in “viable private businesses in poorer developing countries to contribute to economic growth for the benefit of the poor.”34 However, because CDC’s net equity investments, £222 million in 2009,35 count towards the UK’s Official Development Assistance, the UK Aid Network (UKAN) argues that CDC has a “responsibility to invest its resources in ways that deliver maximum poverty reduction impacts.”36
19. Although CDC has met its mandate of creating economic growth, there has been significant criticism that CDC’s operations are not having a sufficient development impact and are not adequately pro-poor. In 2009, the Public Accounts Committee concluded that “although CDC invests more of its resources in poor countries than any other DFI, there is limited evidence of CDC’s effects on poverty reduction.”37 The main criticisms of CDC’s current operations are its use of the ‘fund of funds’ model, its tendency to invest where the private sector would anyway, and its failure to invest in the countries and sectors with the greatest need.
Investment model
20. The ‘fund of funds’ model has received much criticism, in particular for limiting CDC’s ability to target investments for the benefit of the poor. The NAO found that fund managers themselves questioned the ability of a ‘fund of funds’ business to secure the breadth of development benefits that DFID aspires to from CDC. The fund managers also doubted whether higher risk and lower return investments were compatible with a commercial business model.38 Table One compares the advantages and disadvantages of the ‘fund of funds’ model with an alternative option, direct investment.
33 Ev 65 34 Ev 88 35 DFID, Statistics on International Development , 2010 36 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w59 37 Public Accounts Committee, Eighteenth Report of the Session 2008-09, Investing for Development: the Department for International Development's oversight of CDC Group plc, HC 94, pg 6 38 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p22
The Future of CDC 11
Table 1: Alternative investment models
Financial Advantages Disadvantages model
Fund of Enables a wider investment footprint – CDC CDC is one step removed from the investee funds currently has investments in 794 businesses in 73 businesses. Investment decisions are taken by countries. fund managers not CDC so CDC has reduced control to target investments. Utilises expertise of local fund managers – 89% of CDC’s total portfolio is invested with local Tends to support the countries and sectors with fund managers. the most ‘investment-ready’ opportunities, not those in greatest need of support. CDC has a respected reputation as an equity expert. Reduces transparency and impairs the public’s ability to scrutinise CDC. Effective for mobilising third party capital. Reduces the ability of CDC to conduct due Less management-intensive, fewer human diligence, manage risk and development impact resources needed. and influence investee companies.
Local fund managers can make an ongoing Requires long-term capital commitments (10-15 valuable contribution to investee companies. years) so is a far less flexible model.
Individual funds can make smaller investments The model relies on leverage and influence, but than CDC could. the positive effect of increasing private investment flows is largely unproven. Local fund managers are best equipped to find sound viable investment options. Cost of others managing the fund.
Builds capacity in the investment profession in Tend to invest through offshore financial developing countries. centres.
Direct Increased ability to target investments. More costly. equity investment More flexible model. More management-intensive so would require more staff. Increased influence and control. Reduced scale of investments. Will enable CDC to exercise active control over its investment portfolio and therefore its Direct investments tend to favour larger adherence to responsible business practices. investments.
Should allow CDC to be more accountable and CDC would be in direct competition with the transparent. funds it invests in and other DFIs.
Strengthens institutional framework in country of CDC does not currently have the appropriate investment. This will have a multiplier effect for expertise to make direct investments. It would the whole country. be challenging to replicate the expertise of their local fund managers.
CDC would need to have a presence on the ground.
This method does not rely on influencing other investors so less capital would be available for investment.
This method does not build or enhance local fund management capacity.
Source: Drawn from volume of oral and written evidence. We will draw our conclusions regarding Table One in Chapter Five.
12 The Future of CDC
CDC’s ability to leverage additional finance
21. CDC seeks to make investments which draw in further investments from the private sector. Since 2004 CDC has invested over US$5 billion, alongside which over $23 billion of third party capital has been invested.39 For the period from September 2008-September 2010 third party capital mobilised was 346% of invested CDC capital,40 according to CDC methodology.41 It has been estimated that every dollar of CDC investment draws in $5 of other investment. This is more than the International Finance Corporation, which leverages approximately $3 for every dollar invested, or for the European Bank of Reconstruction and Development, which leverages approximately $1 for every dollar invested.42 CDC claims to give an early commitment of finance to funds in order to attract others to the investment.43 CDC’s analysis of its portfolio led it to the conclusion that of the 19 funds to which it made commitments in 2009-10 it “played a leading catalytic role in 15.”44
22. On the other hand, it is difficult to calculate the extent to which CDC mobilised this capital as it cannot be proven whether other investments would have taken place without CDC’s investment.45 Professor Keith Palmer argued that if CDC’s capital was to be truly catalytic and mobilise additional private sector investment, CDC must be prepared to accept greater risks and lower returns.46 Although it is not always easy to prove, the key benefit of the ‘fund of funds’ model is its ability to leverage additional finance. This finance is invaluable considering the comparatively small amount of capital at CDC’s disposal. By using this capital to demonstrate that investments in developing countries and frontier markets can be successful, CDC can pull in extra investment and have a significantly more substantial impact than if it uses its capital in isolation. Diaspora communities often have an interest in poverty alleviation in their countries of origin but have difficulties in finding out how to make investments. CDC should seek to attract funds from such diaspora communities and, in addition, develop partnerships with UK businesses, provided they have a pro-poor focus in developing countries and are not tied to UK national interests.
39 Ev 63 40 Ev 63 41 The new methodology recognises that CDC can only influence investors investing at the same time or after CDC. It is also recognised that CDC’s capital is likely to have had most impact in mobilising capital for first time funds as opposed to later funds with the same manager.A tapering factor is applied according to whether it is a first, second or subsequent fund as follows: first time funds have no tapering, Fund 2s are tapered by 25%, Fund 3s are tapered by 50% and Fund 4s onwards are tapered by 75% so that only 25% of investment by others counts as mobilisation. 42 Kingombe, C. et al., CDC’s position in the wider DFI architecture, 2011 43 Q 102 44 Ev 67.This assessment was made on the basis of several criteria—the volume of their financial commitment, their input into the strategy of the funds and the guidance they provided on environmental, social and governance (ESG) and other matters. 45 Ev 50 46 Ev w59
The Future of CDC 13
Is CDC’s funding additional to private capital?
23. As stated by CDC, CDC’s capital should always aim to be ‘additional’ to private capital; CDC should only make investments which the private sector would not.47 There has been much criticism that CDC’s investments are very similar to those of the private sector and are often “larger, more commercial investments.”48
24. Witnesses were critical of a number of CDC’s fund managers’ investments, arguing that they would have been made without CDC’s involvement. Actis’ $20 million investment in Ghana’s first premier shopping mall in Accra49 was a source of particular concern. CDC claims that the Accra mall has created over 1,000 jobs and generated sales taxes of US$4.3 million in 2009.50 However, there has been no analysis of the impacts of the shopping mall on trade in downtown Accra, the nature of the jobs created (e.g. whether those employed were previously in employment, whether the jobs are permanent) or whether the five-year tax holiday granted to the project was justified.51 An academic who assessed the project concluded that it “remains a luxury niche, serving the needs of a minor section of the city’s population.”52 Similar criticisms have been made of CDC’s $40 million investment in The Palms shopping mall in Lagos53 and of CDC’s investment, operating as part of a consortium, of $35 million in Moser Baer to “enable the company to broaden its business to include the production of photo-voltaics for use in solar panels.” This investment was provided despite the fact that Moser Baer was already highly profitable and the world’s second largest manufacturer of optical storage devices.54
25. By contrast, some of CDC’s funding is clearly ‘additional’ and of substantial value, investing in projects, which would not have gone ahead without its involvement, such as the GEF Africa Sustainable Forestry Fund. CDC identified the need for a sustainable forestry fund, selected the most appropriate fund manager to run it and provided $50 million of initial investment. $50 million has been committed by other investors to date.55 CDC has also committed to Rabo Equity Advisors’ India Agribusiness fund, the first private equity fund in India focused solely on this sector.56 It is imperative that all of CDC’s funding backs investments that the private sector would not otherwise support. CDC should make assessments before investing, including an appraisal of whether their contribution would be additional. Additionality should be demonstrable for all
47 Ev 62 48 Q 4 [Dr Timmerman] 49 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w24 50 Ev 65 51 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w24 52 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w24 53 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w40
54 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w40 55 Ev 68 56 Kingombe, C. et al., CDC’s position in the wider DFI architecture, 2011
14 The Future of CDC
investment decisions. CDC should be careful only to invest in funds that are committed to this principle.
The composition of CDC’s portfolio
Geography
26. There is widespread belief that CDC is not investing the right amounts in the right countries. In 2009, CDC had 45% of its portfolio in Sub-Saharan Africa, 43% in Asia, 7% in North Africa and 5% in Latin America.57 CDC’s Investment Code does not restrict concentration of investment in any one particular country. In 2009, 52% of CDC’s portfolio was in four countries—India, China, South Africa and Nigeria.58 While these four countries do contain many of the world’s poor,59 they have large economies and attract substantial foreign investment. China and India also have considerable domestic private capital available for investment.60 39.5% of CDC’s sub-Sahara African investment was in South Africa and Nigeria.
27. However, CDC has a better record than other DFIs. CDC has “more capital invested in sub-Saharan Africa and in Asia than any other major European DFI.”61 At the end of 2007, CDC had 66% of its investments in poor countries, whereas the average for other DFIs was 24%.62
28. The Investment Policy has become more pro-poor. A more stringent Investment Policy for 2009-2013, set by DFID, requires CDC to make more than 75% of new investments in low income countries (per capita income below $905) and more than 50% of new investments in Sub-Saharan Africa. It allows $125m investment in small and medium-sized enterprise (SME) funds. Investments in middle-income countries are limited to 25% of new investments.
29. Some believe that CDC should only invest in the poorest countries and not in middle- income countries such as India and China. The ONE Foundation has suggested that there should be a stronger CDC commitment to investing in poor countries, monitored by setting a target for investments in Least Developed Countries.63
30. Others argued that there is a case for CDC to continue investment in middle-income countries. Approximately 75% of the world’s poorest people now live in middle-income countries64 and poverty in middle-income countries is often very regionalised. We were
57 CDC Group plc, Development Review 2009, p6. CDC has now discontinued investment in Latin America. 58 CDC Group plc, Development Review 2009, p8 59 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p19 60 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w21 61 Ev 61 62 Ev w33 63 Ev w56 64 Sumner, A. Global Poverty and the New Bottom Billion: What if three-quarters of the world’s poor live in middle income countries? 2010
The Future of CDC 15
warned against restricting investment in middle-income countries further, because of the benefits of the current Investment Policy in: maintaining a stable risk management strategy; giving fund managers broad geographic exposure; and facilitating knowledge and skills transfer.65 For instance, fund managers Helios and Aureos both invest to build successful “platform companies”66 which may involve investing in middle-income countries, with the explicit objective of expanding the business into low income countries.67 Investment in regional hubs can facilitate investment into neighbouring economies. It can also cross-subsidise riskier investments. CDC is concerned that a higher focus on poor countries may reduce investment returns, resulting in fewer capital or financial losses which would harm CDC’s reputation with partner investors.68 Moreover, it is argued that equity is more appropriate for middle-income countries than aid, which may be better suited to low-income countries.
31. Dr Timmerman of Equity for Africa pointed out that
there are substantial opportunities for poverty alleviation in middle-income countries, and there are equally substantial commercial opportunities in low-income countries. The investment policy should be driven by outcomes, both financial and developmental.69
We will make more recommendations about CDC’s geographical mandate in Chapter Five.
Sector
32. Currently CDC’s portfolio value by sector is: financials 20%, consumer 14%, industrials 13%, energy and utilities 10%, ICT 10%, healthcare 8%, infrastructure 8%, mining 6% and agribusiness 5%.70 Many of the submissions we received during the inquiry argued that CDC should increase its development impact by focusing on certain sectors which suffer from a lack of private sector capital and are directly linked to poverty alleviation. Potentially, sectoral targets could help CDC to target investments to support pro-poor growth more effectively. Investment in smallholder agriculture, finance for agriculture- related SMEs and rural infrastructure can be “particularly beneficial from a poverty reduction perspective,” according to Oxfam.71 It has also been suggested that investment in labour-intensive industries, for example agriculture, as opposed to capital-intensive industries, is more pro-poor as it creates more jobs.72 We will now explore the sectors that are thought of as directly more pro-poor.
65 Ev w25, Ev w30 66 An investment approach using platform companies utilises the more developed infrastructure and skills base in middle income countries to extend business into low income countries. 67 Ev w30, Ev w4 68 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p19 69 Q 31 70 CDC Group plc, Development Review 2009, p8.Sometimes CDC’s portfolio in infrastructure is calculated as 18% (the energy and utilities category is added to the infrastructure category). 71 Q 60 72 Ev w57
16 The Future of CDC
Agriculture
33. CDC used to specialise in agriculture investments. In the early 1980s CDC investments in agribusiness totalled almost 50% of its portfolio, albeit including a number of loss- making ventures. By 2009, agribusiness only represented 5% of CDC’s portfolio.73 It has been suggested that CDC should ‘re-grow’ its investment portfolio in agriculture and agribusiness, especially smallholder agriculture.74 The World Bank argues that growth in agriculture is twice as effective at reducing poverty as growth in other sectors.75 Agriculture has more direct development impacts than the other sectors in which CDC currently invests. Three out of four of the poorest people in low income countries live in rural areas and depend on agriculture, livestock, fisheries and forestry for their livelihoods.76 In Sub-Saharan Africa almost two-thirds of the population are employed in agriculture.77 With the increasing risks posed by food price volatility, climate change and environmental degradation the agricultural sector is becoming increasingly important. A successful agricultural sector provides livelihoods, contributes to food security and supports wider economic growth. However, despite significant positive impacts, the agricultural sector suffers from a lack of capital. There is an urgent need for investment in viable, sustainable rural and agro-industrial enterprise.78
34. Currently agriculture-supporting infrastructure is deficient in Africa, especially irrigation.79 It has been suggested that CDC could make particularly valuable investments in: production inputs (e.g. seeds, fertilisers, machinery) needed by small farmers, processing facilities and crop storage; and packaging and marketing companies which maximise addition of value to local produce.80 The ONE Foundation advised that CDC should be careful to attain a balance within its investments between those which will support export crops and those that will support staple food crops.81 Increased investments in agriculture would enable CDC to contribute to poverty alleviation and food security.82
Infrastructure
35. Lack of infrastructure has profound implications. It inhibits access to basic services and employment and is a significant barrier to private sector development. It is a serious constraint to growth. Reliable infrastructure, especially that relating to the transport, agriculture and energy sectors, is vital for poverty alleviation and benefits both individuals and businesses. A study of economic growth in Uganda showed that a lack of adequate
73 Ev w57 74 Ev 59, Ev w22, Ev w57 75 DFID, Agriculture, 2010 http://www.dfid.gov.uk/Global-Issues/Emerging-policy/Wealth-creation-private- sector/agriculture/ 76 ibid 77 DFID, Agriculture, 2010 http://www.dfid.gov.uk/Global-Issues/Emerging-policy/Wealth-creation-private- sector/agriculture/ 78 Ev w24 79 International Development Committee, Fourth Report of Session 2005-06, Private Sector Development, HC 921-I, pg 22 80 Ev w24 81 Ev w58 82 Ev w25
The Future of CDC 17
road, railway and electricity infrastructure was the most binding constraint on growth and therefore poverty reduction.83 Access to infrastructure reduces transportation costs and enables businesses to be more productive and to expand their businesses to reach other markets.84 Vietnam, which halved its poverty rate between 1993 and 2002, targeted infrastructure investments at regions with high poverty levels and prioritised large infrastructure investments in an effort to maximise growth.85 According to the World Bank, Africa requires US$93 billion per year to address its infrastructure needs.86 Renewed investment in infrastructure by CDC would not only be highly valuable to many facets of development, but would also have significant benefits for economic growth and would fill a gap that donors have historically been reluctant to fill.
Energy and climate change initiatives
36. According to estimates by the World Bank, almost 75% of the population in Sub- Saharan Africa lack access to electricity and 700 million people in South Asia do not have power to their homes and businesses.87 The availability of safe and reliable energy is crucial for development. Lack of supply negatively impacts both individuals and businesses. Lack of access to electricity often results in environmental damage as people have to rely on biomass fuels, including wood.88 The time taken to collect the fuels also reduces earning potential for women and results in children not having time to attend school. The increasing threat of climate change is creating a demand for new products and services such as clean energy. CDC could adopt an important catalytic role by focusing investments on green sources of energy. The provision of clean technologies to poor countries would help facilitate sustainable development. In a speech on climate change on 18 November 2010, the Secretary of State said that he envisaged a role for CDC in climate- related initiatives.89
Small and medium-sized enterprises
37. Small and medium-sized enterprises (SMEs) are “widely acknowledged engines of growth”90 and also make a valuable contribution to developing countries through the provision of jobs and contributions to tax revenue. SMEs have traditionally offered lower financial returns but have the potential for high development benefits.91 SMEs are also a
83 World Bank.Uganda Moving Beyond Recovery:Investment and Behaviour Change, For Growth.Country Economic Memorandum.Volume II:Overview. 2007. 84 Nathan EME Executive Summary of Literature Review, Constraints to Investment in Business in Developing Countries, 2011 85 International Development Committee, Fourth Report of Session 2005-06, Private Sector Development, HC 921-I, pg 22 86 Foster, V. and Briceno-Garmendia, C. eds. Africa’s Infrastructure.A time for transformation. 2010. Pg 1 87 Meisen, P and Akin, A. The case for meeting the Millenium Development Goals through access to clean electricity. 2008. Pg 7 88 CDC Group plc, Energy and Utilities Online, 2010 89 Mitchell, A. 18 November 2010. Climate Change Speech. http://www.dfid.gov.uk/Media-Room/Speeches-and- articles/2010/Climate-change/ 90 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w19 91 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p13
18 The Future of CDC
high-risk investment which makes it very difficult for them to attract sufficient capital. They tend to require more external input, for instance more business advice and support. Dr Timmerman informed us of the lack of capital available to the ‘missing middle,’ (investments between $5,000 and $100,000).92 The size of SMEs makes them vulnerable to economic shocks and failures but can also make them more flexible and innovative. Smaller amounts of capital could have a significant impact in this sector.
38. In 2009, the average CDC-supported firm had 1,188 employees.93 Only 7% of CDC funding has gone into SMEs and only 17% of CDC’s investee businesses are SMEs.94 Nevertheless, CDC has made some worthwhile investments in this sector. For example, CDC has supported Manocap, a fund manager which invests in SMEs in West Africa. Over the last three years Manocap has invested approximately $8 million in four businesses, created around 800 additional jobs and contributed $750,000 of increased tax revenue for the local government.95
39. In Chapter Five, we will put forward our recommendations for the remit DFID should give CDC to ensure it can do more to help the poorest people. We will consider in particular the future investment model that CDC should use. In Chapter Four, we will assess a further set of criticisms made against CDC.
92 Q 24 93 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w59 94 Ev 88 95 Q 1
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4 Remaining challenges
40. While the previous chapter examined claims that CDC has had an inadequate impact on development, this chapter assesses other concerns and criticisms made of CDC’s current operations, covering a broad range of issues ranging from their use of tax havens to the levels of CDC’s staff remuneration.
Implementation of CDC’s Investment Code
41. As part of its commitment to Corporate Social Responsibility, CDC’s Investment Code was developed in collaboration with DFID and is designed to promote responsible business practices in respect of environment, social and governance (ESG) matters. CDC requires fund managers to operate in line with the Investment Code. The fund managers are responsible for ensuring that portfolio companies adhere to responsible business practices.96
42. Concerns have been raised about the quality of CDC’s Investment Code, its implementation and enforcement. Oxfam stated that the Investment Code “leaves considerable room for interpretation”97 and that it needs to be strengthened to make it more rigorous.98 CDC’s business model, under which it funds others to invest rather than investing itself, limits CDC’s ability to ensure portfolio companies are compliant. Although fund managers are responsible for enforcing compliance, CDC acknowledges that these managers “may not always be in a position to exercise control or influence over their portfolio companies.”99 Oxfam believes that CDC should require all portfolio companies to comply with the Investment Code, if necessary by “ensuring more than 20% ownership over all portfolio companies.”100
43. However, others had a better opinion of the Code. Tom Cairnes, the fund manager of Manocap, told us that CDC had made a very valuable contribution before it had invested in the fund to improving Manocap’s internal processes “particularly around ESG and governance and reporting.”101
44. In practice, DFID and CDC recognise that “not all companies in the difficult markets in which CDC invests are likely to meet the business principles in full from the outset.”102 Instead of applying them as a barrier to investing, CDC asks fund managers to ensure that companies have effective action plans in place to achieve the necessary improvements in
96 CDC Group plc, Development Review 2009, p64 97 Ev 58 98 Ev 58 99 CDC Group plc, Development Review 2009, p64 100 Ev 57 N.B. 20% ownership would tend to ensure that they had sufficient influence. 101 Q 20 102 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p24
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reasonable time.103 The minimum standards required for a CDC-backed investment to be made are unclear.
45. Witnesses claimed that there had been serious failings in the implementation of the Code. We were told that Emerging Capital Partners Africa Fund II and Ethos Fund, both CDC-backed funds,104 both invested in Intercontinental and Oceanic Banks, which were cited by Nigeria’s Economic and Financial Crimes Commission for their alleged involvement in money laundering.105 Emerging Capital Partners also invested in Anvil Mining Ltd which has been accused of involvement in serious human rights abuses in the Democratic Republic of Congo.106 Anvil’s role in the Kilwa massacre107 was under investigation by the Australian Federal Police when CDC made their investment.108
46. There have been some changes to the way that CDC monitors compliance with the Investment Code. CDC used to rely wholly on assurance from fund managers that portfolio companies adhere to the investment principles.109 This predominantly remains the case, but now some ‘mid-point fund evaluations’ are conducted independently.110 Witnesses believed that CDC should adopt more rigorous monitoring and due diligence procedures to improve CDC’s oversight of its investments.111
47. We acknowledge the difficulty some companies have in complying with CDC’s Investment Code during initial stages and support the notion of encouraging improvement in Environmental, Social and Governance standards. However, CDC’s Investment Code must set a clear baseline standard of compliance for investments. We are concerned by the claims that some of the funds in which CDC has invested have not met these standards. We recommend that CDC ensure that thorough due diligence and monitoring is conducted on all CDC-backed investments.
Measuring development impact
48. As we saw in the last chapter, CDC has been criticised on the grounds that its impact on development is inadequate. However, there is a consensus that “gaining a worthwhile assessment of the impact of investment on economic development and poverty reduction
103 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p24 104 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w27 105 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w27 106 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w27 107 In October 2004, Anvil Mining Limited was linked to a counter-offensive by the Congolese military to crush insurgents in the town of Kilwa in Katanga Province, DRC, which resulted in more than 70 civilian deaths. Anvil denies that it had knowledge of, or provided assistance to, the Congolese army in the committing of any human rights violations. Legal cases are ongoing but to date no prosecutions have been made. 108 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w41 109 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p24 110 CDC Group plc, Development Review 2009, p65 111 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w29, w39
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is inherently difficult.”112 No standard group of indicators can comprehensively measure the development impact of a diverse range of investments accurately.113 Factors that should be considered include job creation, capacity to stimulate other private sector investment and tax revenues. In isolation, however, these measurements are crude and overly simplistic. It is especially difficult to categorise the indirect impacts of investment, for instance the impacts of increased trade from financing a road and the multiplier effects on an entire economy, and to assess both the short-term and long-term impacts. DFIs often report overall taxes paid by their portfolio companies rather than incremental changes that are attributable to their investment. This is also true of the way that some report on employment.114
49. CDC began quantifying its development impact in 2008 with its first annual Impact Report which set out, on the basis of a model adapted from the International Finance Corporation’s Development Outcome Tracking System, its emerging evidence on the impact of its post-2004 investment activities. Funds are evaluated at the midpoint and at the end of the fund’s life. In 2009, 17 of the 20 fund evaluations undertaken by CDC scored 'satisfactory' or 'successful' on development outcomes. Three were scored ‘below expectations’.
50. CDC only analyses its development impact at fund level, but not beyond this i.e. the impact of individual investee companies. CDC assesses fund investments on four indicators—financial; economic; Environmental, Social and Governance (ESG) performance; and private sector development.115 The fund investment is graded on the basis of these four indicators. The aggregate grading is problematic as it could mask extremely poor aspects of ESG performance if a fund performed well financially.116 In 2009, seven of the 20 development impact evaluations were conducted by an independent assessor, Steward Redqueen (formerly Triple Value), a specialist in investment evaluation. In 2010, 50% of fund evaluations were conducted independently.117 This should ensure that CDC’s evaluation process is robust. It will also provide an external benchmark for comparison against CDC’s internal evaluations.
51. According to Dr Sarah Bracking of Manchester University other DFIs including Norfund, DEG and FMO have superior development impact criteria to CDC.118 According to Helios, CDC could improve its measurement of “key tangible development indicators.”119 Witnesses called for the establishment of more detailed indicators relating
112 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p6 113 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p7 114 Nathan EME Literature Review Executive Summary, Development Returns to DFI Investments, 2011 115 CDC Group plc, Development Review 2009, p14 116 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w27 117 Ev 66 118 Q 5 119 Ev w29
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to development impact and poverty alleviation.120 They argued that CDC should report its achievements against these indicators and report on its development impact.121
52. We welcome the increased independent evaluation of CDC’s development impact. CDC should establish more comprehensive indicators relating to development impact, poverty reduction and employment generation (including whether the jobs are permanent, the wages paid, whether any jobs were lost due to restructuring before an investment was made etc.) CDC should monitor these indicators and report on them.
Transparency
53. Many have called for CDC to be more transparent in order to enhance its accountability and facilitate public oversight.122 Richard Brooks of Private Eye told us that currently there is a “vacuum of accountability.”123 Save the Children UK claim that it is not possible for a member of the UK public or a citizen of the country of investment to see a list of companies which have had CDC-backed investment.124 Christian Aid stated that it was imperative that CDC’s structure and investment model facilitated transparency, especially with regard to its tax payments and those of investee companies, and if they did not they should be changed.125 The Public Accounts Committee recommended that CDC should use its influence over fund managers to increase transparency around reporting on fund plans and performance.126
54. We were informed that, currently, CDC gave too much weight to commercial interests and too little to public disclosure.127 According to The One Foundation, in order for CDC to successfully achieve its development mandate it “must [...] become a global champion of transparency.”128 Transparency is essential to enabling the public to hold CDC, a Government-owned company, to account. We acknowledge that commercial sensitivities exist but recommend that much more rigorous requirements are placed upon CDC to ensure that its investment decisions, development impact and the tax payments of their fund managers are as transparent as possible. In its response to this report, DFID should indicate how it plans to do this.
120 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w26, w55 121 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w28 122 Ev 57 123 Q 65 124 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w48 125 Ev w12 126 Public Accounts Committee, Eighteenth Report of Session 2008-09, Investing for Development: the Department for International Development's oversight of CDC Group plc, HC 94, pg 6
127 Q 76 128 Ev w56
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Use of tax havens
55. CDC invests in funds which pay a variety of taxes in the countries in which they operate. In some cases their profits are recognised in countries widely regarded as tax havens. The Organisation for Economic Co-operation and Development (OECD) recognises these countries and has divided them into three categories, a ‘white list’, for those that had substantially implemented internationally agreed-upon tax standards, a ‘grey list’ for those that had committed to the tax standards but had not yet implemented them and a ‘black list’ for those that had not yet committed to the standards.129
56. CDC’s use of tax havens has been heavily criticised, especially by NGOs, for depriving developing countries of much-needed tax revenues, avoiding capital gains tax, exacerbating governance problems, facilitating corruption and reducing transparency.130 Richard Brooks from Private Eye informed us of the case of Mineral Deposits Ltd in Senegal, in which Actis is the largest shareholder. The company only paid £20,000 in tax in 2008 and 2009 and rid itself of £6 million in tax charges by recording its profit in Mauritius.131
57. Using the IMF list of tax havens for 2007, Dr Bracking and colleagues classified the domicile of CDC’s funds (excluding subsidiaries) in 2010. The totals revealed that 144 were domiciled in ‘secrecy jurisdictions’132—80% of all CDC’s investments by number.133 The academics conducted research into the tax losses for developing countries due to domicile of companies in secrecy jurisdictions. They estimated that for 29 companies in which Norfund invested, the “tax losses for developing countries because of domicile in secrecy jurisdictions has been calculated for 2008 at over (gross) $14.6 million.”134 The tax loss to developing countries from the use of tax havens for the entire European DFI portfolio was estimated, by the same academics, to be over EUR430 million a year on average over the last five years.135
58. Nonetheless, CDC claim that investing in funds domiciled in offshore financial centres “is the most efficient way of pooling capital for investment in businesses in the developing world”136 and is necessary in order to co-invest alongside the private sector. CDC states that it only invests through OECD’s ‘white list’ offshore financial centres, with the exception of one fund from the mid-1990s for the Pacific Region which is domiciled in Vanuatu, currently on the OECD’s ‘grey list.’137 Whilst most DFIs do not have restrictions on the use of tax havens by the funds and companies they support, since 2009 three DFIs— Norfund (the Norwegian DFI), Swedfund (the Swedish DFI) and Proparco (the French DFI)—have been operating under stricter restrictions on their use of secrecy
129 Kozak, T. The OECD, TIEAs, and the White List Explained.2010. 130 Ev w16, Ev w12 131 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w41 132 Secrecy jurisdictions are also known as ‘tax havens’ or ‘offshore financial service centres’. 133 Bracking et al.Future Directions for Norweigan Development Finance. 2010 134 Bracking et al.Future Directions for Norweigan Development Finance. 2010 135 Bracking et al.Future Directions for Norweigan Development Finance. 2010 136 Ev 88 137 Ev 88
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jurisdictions.138 The Secretary of State observed that Norfund’s more stringent rules had “restricted its ability to attract third-party funding, and also in some circumstances restricted its ability to invest in Africa.”139
59. Changes are, however, being considered. The 2009 DFID White Paper affirms that, “we all suffer from weak financial regulation, the financial impact of imbalances in trade, and the action of tax havens.”140 The Secretary of State said that the Treasury was carefully examining this issue.
60. The domicile of companies and funds in tax havens is a complex area which demands further investigation and we stress the importance of HM Treasury addressing this issue. Once established, CDC should follow standards of best practice. By doing so, CDC could raise standards across all DFIs. The tax payments made by CDC’s fund managers and investee companies should be transparent. They should be published annually on a country-by-country basis.
Remuneration
61. The remuneration paid to CDC’s executive directors has attracted much criticism. The remuneration framework is agreed with DFID and is benchmarked against the lowest quartile of the ‘fund of funds’ industry. The Chief Executive’s base salary was £225,000 for 2010.141 Like all CDC employees, the CEO is eligible for his basic salary, an annual bonus and the returns from the long-term incentive plan (LTIP). Firm-wide the average bonus paid for 2009 performance was 47.5% of salary.142 CDC claim to pay the necessary rate to recruit experts in this field.143 About 40% of the annual bonus is contingent on development impact.144 The NAO underlined the advantages of linking remuneration to performance measures which had the potential to align staff behaviour with DFID’s objectives.145
62. However, many believe that CDC salaries are unnecessarily high and too closely aligned with the financial performance of funds. Jubilee Debt Campaign referred to the high pay levels as “scandalous.”146 The Committee received evidence that there would be individuals with appropriate expertise who would be willing to work for a unique organisation like CDC for far less money,147 and this opinion was shared by the Secretary of State.148 On the other hand, CDC claimed that this would not prove possible in
138 Ev w16 139 Q258 140 DFID Building our common future 2009 141 Q 115 142 Ev 86 143 Q 103 144 Q 119 145 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p29 146 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w42 147 Q 39 148 Q 236
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practice.149 Remuneration should be linked to performance but we are concerned that current pay rates within CDC are above what is necessary to recruit and retain the appropriate staff. The remuneration framework needs to be redesigned to provide more incentives to CDC’s staff to increase CDC’s development impact, instead of focusing too heavily on financial returns. CDC should, as the Secretary of State proposed, examine the possibility of recruiting experienced staff that might be willing to work in a development organisation at lower pay rates.
Actis
63. Actis Capital LLP was split out of CDC in 2004, as a commercially-orientated fund manager. It took over CDC's overseas offices and the majority of CDC's staff, including all those in overseas locations. Actis is a limited liability partnership (LLP), owned 60% by its partners and an employee share trust, and 40% by the Secretary of State for International Development. The 60% shareholding in Actis was sold for just £373,000; by May 2010 Actis had $4.8 billion of funds under management.150
64. The Secretary of State told us that the taxpayer was also entitled to 80% of the profits but had not received any money from Actis, despite its significant financial success and the fact that 44% of its capital came from CDC.151 The Secretary of State explained that no profits have been declared because Actis has set up its own charitable division.152 He said that he was “amazed and surprised at the way the management of Actis have so enthusiastically exploited the taxpayer’s position.”153 Alistair Boyd, Former CDC Deputy CEO, and Bowen Wells, Chair of the International Development Select Committee 1997- 2001, believed that it was logical to sell DFID’s shareholding in Actis and for the proceeds to be made available to the new CDC.154 The Secretary of State agreed that there is no strategic reason to retain the shareholding.155 We were astonished to discover that following the sale of Actis for just £373,000 the taxpayer had not received any return despite being entitled to 80% of the company’s profits. We recommend that DFID’s shareholding in Actis should be sold, but care must be taken to achieve the maximum value. The capital received from the sale could be reinvested into CDC.
149 Q 123 150 Q 242 151 Q 242 152 Q 247 153 Q 242 154 Ev w68 155 Q 242
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5 Reforming CDC
65. This chapter outlines our views on the form that CDC should adopt in the future, building on the points that we have discussed so far. It sets out the investment tools we believe CDC should use and the criteria on which CDC should base its investments.
New investment model for CDC
66. As we have said, it is clear that the ‘fund of funds’ model has had considerable successes and is an efficient way of utilising limited capital. The private equity model allows CDC to target different funds with different objectives and enables a wider scale of investment and impact. The ability of the ‘fund of funds’ model to leverage additional finance is invaluable considering the comparatively small amount of capital at CDC’s disposal. By using this capital to demonstrate that investments in developing countries and frontier markets156 can be successful, CDC can pull in extra investment and have a significantly more substantial impact than if it uses its capital in isolation. We recommend that the ‘fund of funds’ model continue to be the predominant part of CDC’s operations. We believe that the continued use of this model should be contingent on improvements in transparency, accountability and targeting. CDC is renowned for its expertise in being a ‘fund of funds’ and should remain pre-eminent in this area. The UK’s DFI should remain distinct from and complementary to the range of other bilateral and multilateral DFIs.
67. Between 2004-2008, CDC’s average annual returns on investment were 18% per annum.157 Currently CDC invests in a range of different funds and most of its portfolio has been chosen to achieve returns which would attract more commercial investors to developing countries. As the new mandate for CDC is being designed, its future risk and return strategy must be considered. Lord Cairns, the former chair of CDC then Actis, argued that CDC should maintain its “real value capital.”158 If CDC takes on too much risk it might lose money which will reduce the capital available for investment in future, be harmful to CDC’s catalytic effect and harm CDC’s reputation with investors. Unsustainable investment also has negative consequences for those directly involved, for example jobs will be lost and children will have to stop going to school.159
68. Richard Laing, CDC’s CEO, said that one of the advantages of being state-owned is that CDC can be less risk-averse than private companies160 and accept lower returns. Alistair Boyd, Former CDC Deputy CEO, and Bowen Wells, Chair of the International Development Select Committee between 1997-2001, argued that CDC should establish sector-specific funds with different funding bases.161 Helios told us
156 Markets at an early stage of economic and financial market development. 157 CDC Group plc, Financial Performance, 2010 158 Ev w11 159 Q 41 160 Q 82 161 Ev w67
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We propose that CDC set up a number of ‘not for loss’ development type funds with lower return criteria, these could focus on specific sectors such as an agribusiness fund or lower income country-specific funds.162
A possible way forward would be to divide CDC into two parts with separate objectives and different rates of return. One part could maintain the use of the ‘fund of funds’ model and the other could target its investments specifically to have an increased development impact.
69. All of CDC’s investments must aim to be profitable in the long term. Nonetheless, CDC can allow for lower returns on parts of its portfolio. Therefore, we propose that CDC be divided into two parts. Alongside the existing ‘fund of funds’ model, which henceforth will be called CDC Funds, we recommend that CDC reinvest a significant proportion of the profits resulting from equity investments into a separate body which will be referred to from now on as CDC Frontier.
CDC Funds should:
• use the ‘fund of funds’ model and co-investment as its primary investment methods • focus on ensuring that its investments are additional • make a higher proportion of investments in SMEs. CDC Frontier should:
• have an explicit mandate to reduce poverty • accept lower rates of return on its portfolio • fund sectors most in need of support • use a mix of financial instruments, including grants and loans. 70. We do not specify the precise means by which CDC Frontier is created or how it achieves its goals. Our priority is that the fund meets its objective of achieving pro-poor development.
71. By making targeted investments CDC Frontier would improve its development impact. Although CDC should allow for lower rates of return from CDC Frontier it should not sacrifice the quality of investment. By default the types of investment that CDC Frontier will be mandated to make will have a higher inherent risk, but the separation of CDC Funds and CDC Frontier will enable this risk to be managed effectively.
72. The ‘fund of funds’ part of the business in CDC Funds should be ring-fenced so as not to damage CDC’s reputation with private investors and to ensure it does not lose money. The anticipated profits from the ‘fund of funds’ part of the business could fund or subsidise CDC Frontier.
162 Ev w30
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Investment methods
73. The Secretary of State is keen to give CDC access to a wider range of instruments to achieve a greater development impact. As he put it, at the moment CDC is only using one golf club; it should be able to use all the clubs in the golf bag.163 The Secretary of State wants CDC to “regain its power to make investments directly in target markets.”164 Making direct investments would give CDC more flexibility to target investments that will maximise development impact. However, as seen in Table One, direct investment is costly, resource-intensive and would be likely to reduce CDC’s investment footprint. Local expertise is also essential for direct investment so CDC would require a presence on the ground. Direct investment would also take a long time to implement responsibly if chosen as an appropriate investment method.
74. The Secretary of State envisages that initially CDC could co-invest with private equity investors, local investors, the International Finance Corporation or other development agencies. Co-investment would involve viable investments being identified by other investors and CDC providing extra capital. DFID believes that co-investment “will allow CDC to use others’ on-the-ground knowledge and expertise to deploy capital in challenging places, having an impact on poverty whilst building its own capacity to invest directly over a period of time.”165 Fund managers often identify viable transactions that they do not want to invest in alone for a variety of reasons.166 CDC’s current fund managers are potential co-investors, alongside whom co-investment could begin relatively quickly.
75. Currently DFID provides grants and repayable grants for funds such as the Africa Enterprise Challenge Fund.167 If CDC Frontier were to be involved, it could, where appropriate, take a stake in businesses in return for grants, especially those with a clear link to poverty alleviation, and potentially provide a better return to the taxpayer to be invested in other pro-poor projects.
76. We recommend that, in order to increase CDC’s development impact, CDC should start to use co-investment alongside the ‘fund of funds’ model. The ‘fund of funds’ approach and co-investment should remain the primary investment methods for CDC Funds. Co-investment would enable CDC to target its investments without incurring the high costs that direct investment would involve.
77. Making direct equity investments would be a radical change to CDC’s current operations and should only be undertaken if CDC can identify investments responsibly. The potential development benefits should be balanced carefully against the cost of conducting thorough assessments of investments which would involve CDC having locally based staff. Moreover, direct investment could not take place
163 Q 194 164 Mitchell, A. 12 October 2010. Wealth Creation Speech. http://www.dfid.gov.uk/Media-Room/Speeches-and- articles/2010/Wealth-creation-speech/ 165 Ev 90 166 Q 178 167 Repayable grants are essentially interest free loans (information from DFID).
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immediately but would have to wait until CDC had the appropriate staff or partners in place. DFID offices should be targeted to work with CDC Frontier.
Table 2: Investment tools
Investment Method Explanation
Equity Provision of equity directly or indirectly in companies or financial institutions.
Debt / Loan A variety of loan instruments can be provided directly or indirectly through an intermediated model.
Guarantees Guarantees indemnify companies against any commercial, non- commercial and economics risks.
Mezzanine Financing A blend of traditional debt financing and equity financing. Mezzanine financing is essentially debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full.
Technical Assistance Technical assistance can improve the performance of the fund/investee company or help to meet costs such as advisory, restructuring, training, due diligence and compliance.
78. The Secretary of State wants CDC to utilise a wider range of financial instruments, including debt instruments and guarantees, as he believes that “greater flexibility will enable it to build a more diversified portfolio in terms of risk, maturity and liquidity.”168 The ability to use different investment tools, such as those described in Table Two, will be beneficial as the optimal investment method will vary according to country and sector. Helios, one of CDC’s fund managers, welcomed the proposal for CDC to invest in debt instruments and provide guarantees.169 CDC has started to use debt recently as a new investment method.170
79. However, we received warnings about the problems that could arise from using certain investment methods or too many investment methods. Stephen Dawson, who has worked in venture capital and private equity for thirty years, advised that CDC should not try to compete with other DFIs in their areas of specialisation.171 EMPEA informed us that CDC has an “excellent reputation as a thorough, thoughtful and sophisticated provider of capital,” but this reputation could be damaged if CDC takes on too many financial instruments.172 The Corner House and Jubilee Debt Campaign “strongly recommend against the generalised use of intermediated loans173 and against the use of sovereign guarantees by a reformed CDC.”174 Helios told us that CDC’s business principles are
168 Mitchell, A. 12 October 2010. Wealth Creation Speech. http://www.dfid.gov.uk/Media-Room/Speeches-and- articles/2010/Wealth-creation-speech/ 169 Ev w30 170 Q 99 171 Ev w22 172 Ev w26 173 Intermediated loans are loans that are issued indirectly. 174 Ev w14
30 The Future of CDC
safeguarded for longer with equity instruments than with debt. This is because once debt has been repaid the obligation to adhere to business principles will cease whereas with equity they are a condition of the shareholders’ agreement.175
80. We welcome the opportunity for CDC to be allowed the flexibility to use a wider range of investment instruments when the correct opportunities arise. However we remain cautious about how many new investment tools CDC should take on. We note that CDC is regarded as an expert in private equity and although we are keen for CDC to best serve the needs of the poorest people it must protect its reputation. There is a danger that CDC could lose its expert status if it tries to take on too many new roles too quickly.
81. We therefore recommend that CDC diversify the investment tools it uses slowly and only when it has access to sufficient expertise. Other financial instruments are available through other DFIs; CDC should not aim to do everything and should concentrate on what it is best at and what is needed. It should work alongside the other DFIs to provide the range of tools needed by developing countries.
Sectoral mandate
Table 3: European development finance institutions portfolio investments by sector 2009 Portfolio end 2009, final beneficiary 6.000
5.000
4.000
3.000
Portfolio in million € 2.000
1.000
0 Financial sector Infrastructure Agribusiness Industry/Manufacturing Other
Source: 2009 Comparative analysis of EDFI members, EDFI
82. Certain sectors of the economy provide more assistance to the poor, for example through providing employment. These prospective sectors and the advantages of increasing investment in them were outlined in Chapter Three. Table Three shows that some sectors receive less support than others by the European DFIs, in particular agribusiness. Infrastructure receives more support, but probably is underrepresented given
175 Ev w30
The Future of CDC 31
the scale of need. The ONE Foundation argued that CDC should align its investments with the national development priorities of developing countries.176 Sectors could be identified for each country which are most appropriate to meet their development needs. Witnesses argued for increased investment in agriculture, infrastructure and SMEs.177 CDC should target its investments at key sectors, such as agriculture, infrastructure and SMEs, in order to improve its development impact. If the Government accept our recommendation to split CDC into two parts, we recommend that CDC Frontier prioritise these key sectors, which are underfunded. We envisage that CDC Frontier should aim to have approximately 25% of its investments in agriculture, and another 25% in infrastructure. Large-scale infrastructure is particularly lacking and will require a mix of financing. Investment in agriculture and infrastructure would directly alleviate poverty, have multiple benefits and contribute to wider development goals such as food security which is increasingly important with the growing threat of climate change. We acknowledge that CDC Frontier should decide in which sectors the other 50% of investments should be made, since it will require the flexibility to remain innovative and the most appropriate sectors for investment will vary from country to country.
83. CDC would benefit from closer collaboration with DFID in ascertaining in which sectors and in which countries they should invest to have the most demonstrable development impact. DFID could help identify suitable investment opportunities for CDC Frontier. In addition, CDC should consider making investments consistent with developing countries’ national development strategies.
Geographical mandate
84. CDC’s new investment policy for 2009-2013 requires it to make more than 75% of new investments in low-income countries and more than 50% of investments in Sub-Saharan Africa. On the balance of the evidence received, the Committee are content with CDC’s new geographic mandate for 2009-2013. It should apply to both CDC Funds and CDC Frontier. We appreciate that investments made in middle-income countries can be valuable, especially given that recent research shows that 75% of the world’s poor live in middle-income countries. However, in future CDC should aim for a more evenly- distributed portfolio between countries and avoid overconcentration of investment in any middle-income country. CDC should also target the poorest regions or areas of middle-income countries.
85. As DFID’s new Business Plan makes clear, the Department is now committed to focusing on the poorest people in the poorest countries and dedicating 30% of ODA to support fragile and conflict-affected states. DFID has 22 priority countries.178 One option is for CDC to focus its investments in those 22 countries. This would have the benefits of increasing the development impact in those countries and of improving the synergy between CDC and DFID. However, we do not believe that CDC should be restricted to
176 Ev w57 177 Q 60 178 NAO, The work of the Department for International Development in 2009-10 and its priorities for reform, 2010, pg 11
32 The Future of CDC
operating only in the countries that DFID does, as DFID is increasingly focused only on the poorest countries. We believe that CDC could make a wider contribution to poverty reduction if its investment policy allows for investment in middle-income countries.
Improving CDC’s development focus
86. Currently CDC’s mission statement is to “foster growth in sustainable businesses, helping to raise living standards in developing countries.”179 As we have said, it does not mention poverty alleviation explicitly and the model largely relies on the benefits of economic growth reaching the poor. Oxfam would like the Secretary of State to install a “pro-poor development strategy in CDC’s mandate, including clear objectives and targets,” e.g. supporting female entrepreneurs, promoting small and medium sized agribusiness.180 The Corner House and Jubilee Debt suggested that CDC should collaborate more closely with local communities and back “a more diverse range of companies (cooperatives, for example, or community-based companies) that are Southern-based and link directly to communities.”181 The mission statements of both CDC Funds and CDC Frontier should incorporate an explicit reference to their role in poverty alleviation. Investments made by CDC Frontier should include a thorough analysis of their potential for poverty alleviation before CDC commit to making an investment. The commercial viability of investments will remain of central importance, but CDC Frontier’s investment decisions should also be based on the potential for alleviating poverty. Once CDC has adopted a more directly pro-poor remit we hope it would provide an example to other DFIs to focus more on poverty alleviation.
DFID oversight of CDC
87. DFID’s arms-length oversight of CDC has been deliberate, so that CDC is seen to be independent from the Government and can more readily mobilise private sector capital. DFID only sets the broad framework for CDC’s operations and CDC has an independent Board. The NAO found that DFID only allocated 1.5 people to the oversight of CDC, a lower level of resources than dedicated by Government departments to oversee other Government-owned businesses.182 The Secretary of State considers that DFID has “sometimes in the past...been too remote a shareholder,”183 which is an opinion many others share. Save the Children UK voiced concerns over DFID considering putting a new infusion of money into CDC for the first time since 1995 at the same time as it is, according to Save the Children UK, considering cutting some of its projects, including commitments to double support to global education and spend £6 billion on health services and systems.184 We recommend that there be a closer relationship and collaboration between DFID, especially the new Private Sector Department, and CDC
179 CDC Group plc, Development Review 2009 180 Ev 57 181 Ev w17 182 NAO, Investing for development: the Department for International Development’s oversight of CDC Group plc, 2008, p27 183 Q 200 184 International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w48
The Future of CDC 33
than there is at present. In particular, DFID should have closer involvement with CDC Frontier. But as DFID and CDC become closer it is important that the division of accountability between CDC and DFID is made clear. The revised business plan for CDC is likely to be more complex than previously and necessitate higher risks, and will therefore require closer oversight by DFID, its sole shareholder. DFID and CDC should review the business plan on an annual basis to ensure that it remains consistent with the shareholder’s aims.
The new CDC
88. When CDC’s new mandate and objectives have been decided, CDC will need to recruit new staff with the appropriate skills to ensure that it has the capacity and expertise to operate responsibly and effectively. Depending on the revised mandate CDC may need to recruit staff with development experience and expertise in the appropriate sectors.185 The Board and staff of CDC should both reflect the mix of development and financial expertise required in the new CDC. The transition to the new model should be dictated by the time that it takes to recruit the most appropriate people.
Conclusion
89. This inquiry has carefully examined the claims that although CDC has made impressive financial returns it has not had sufficient development impact. We have come to the conclusion that the ‘fund of funds’ model can be effective if targeted correctly, which has not always been the case. Our recommendation for CDC to be divided into two separate parts with different objectives would enable CDC to maximise its development impact whilst maintaining a sustainable finance base.
185 Ev w17
34 The Future of CDC
0% 36% 93% 57% 63% 53% 64% 63% 87% 35% 89% 72% 70% 74% Rest 2009)
o riskier riskier o Asia
al Report). (**) 0
5% 8% 8% 6% 6% 8% N/A 28% 12% 14% 11% 21% 12% 11% ramme is included. portfolio,
South Geography of
(share 2% 7% 5% ACP 36% 14% 35% 25% 33% 25% 29% 44% 20% 18% 15% 100% Information and Communication Trade Finance Prog (i)
4% 2% 7% 2% 5% 0% 5% 3% 8% 6% N/A N/A N/A N/A N/A N/A N/A Other 19% N/A 78% 12% 18% 25% 30% 44% 30% 11% 47% 64% 18% 47% 63% 79% 27% 23% 100% Industry als; Sub-National Finance; which will give businesses added comfort as they move int move as comfort they added businesses give will which i-equity products) had increased to 23% (IFC 2010 Annu
Mining 6%; Others 6%. (*) The Global ), a deal deal ), a 8% 4% 6% 2% 5% 1% 3% 5% 1% 8% 5% 2009) N/A N/A N/A 18% 15% 13% 10%
-type, quas y),geography and Agribusiness portfolio, Sectors
of
Education; Oil, Gas, Mining & Chemic arantee Agency (MIGA arantee 8% 3% (share N/A N/A 36% 13% 34% 25% 20% 28% 24% 10% 55% 22% 19% 37% 45% 65% ltimate beneficiar equity (including equity g. includes: Health Care 8%; Care g. includes: Health Infrastructure sector
2% 5% 8% 1% 2% N/A 45% 21% 23% 48% 45% 19% 42% 23% 18% 35% 36% 100% Financial
tfolio ‘other’ sector category e. and Pacific.
obal Manufacturing & Services; Health & whereas loans had fallen to 45% and products of the Multilateral Investment products Gu Multilateral of the itutions, by instrument, sectoritutions, (u by instrument,
0% 2% 0% 0% 0% 2% 3% 3% 0% 0% 0% 2% 0% 0% 11% 17% 27%* 2009)
guarantees
portfolio, al Financial Markets; Gl
0% 4% 6% 42% 84% 43% 62% 53% 51% 44% 15% 12% 36% 55% 57% 83% 85% loans s had increased to 31%, s had of Instruments
(share 0% 96% 47% 14% 57% 38% 45% 45% 53% 85% 88% 64% 18% 94% 42% 15% 100% equity
Other sectors include: Glob T
:
(**)
(**) (**)
Moreover, a new agreement will allow IFC to market IFC to market the new allow a will Moreover, agreement markets. In 2010, the percentage Annex 1 Inst Table 4 Comparing Development Finance BIO CDC COFIDES DEG Finnfund FMO IFU/IØ/IFV Norfund OeEB Proparco SBI SIFEM SIMES SOFID SwedFund EBRD EIB IFC Notes Technology (ICT); (i) In the case (ICT); Technology etc. of CDC, the underlying por For sectors we used commitments.ACP = Africa, Caribbean The Future of CDC 35 11. Sub-Saharan Africa 20.8% 15.6% 0.0% DFID and presented at CDC Roundtable on 20 DFID 20 January CDC Roundtable and presented at South Asia South Asia 5.5% 16.8% 0.0% Report for UK rature Review”, 7.5% Middle East and North Africa 42.6% 0.0% and own calculations 27.1% Latin America and Latin America Caribbean 23.7% 0.0% port, annual DFI reports (US) (US)
Comparing Development Finance Institutions, Lite 22.2% Europe and Central Asia 0.0% 99.7%
10.9% East Asia and East Asia Pacific 7.4% 0.3% Swedfund International AB (Sweden) Danish International Investment Funds Spanish Development Funding Company Investment and Promotion Company for Economic Finnish Development Finance Company Norwegian Investment Fund for Developing Italian Development Finance Institution European Bank for Reconstruction and Development Swiss Investment Fund for Emerging Markets Portuguese Development Finance Institution African Development Bank Overseas Private Investment Corporation Austrian Development Bank Asian Development Bank Inter-American Development Bank Netherlands Development Finance Company German Investment Corporation Corporation Investment German CDC Group plc (UK) Belgian Investment Company for Developing Countries European Investment Bank International Finance Corporation Kingombe et al (2011) based on the EDFI annual re : DFI annual reports reports : DFI annual Belgian Corporation for International Investment : ADB ADB AfDB BIO CDC COFIDES DEG EBRD EIB Finnfund FMO IADB IFC IFU/IØ/IFV Norfund Countries OeEB OPIC Proparco Cooperation (France) SBI SIFEM SIMEST SOFID SwedFund EBRD EIB (external) IFC Source of 2009 distributionTable 5 Geographical portfolio Source Kingombe, C., I. Massa and D.W. te Velde (2011), “ 36 The Future of CDC
Annex 2
Figure 2: DFI investments, 2009 ($ millions)
IFC EBRD EIB AfDB Proparco DEG FMO IADB CDC ADB SIMEST COFIDES Finnfund Norfund BIO IFU/IØ/IFV OeEB SwedFund SIFEM SOFID SBI
0 5,000 10,000 15,000
Notes: To private sector only and EBRD and EIB investment to public sector excluded, IFC: year to March 2010, excludes syndications. Portfolio data may be more appropriate for some: e.g. annual commitments to funds are less meaningful. Non-European bilateral DFIs such as OPIC excluded. Coverted into dollars using Euro – dollar exchange rate for average in the year. Source: Kingombe et al (2011) based on the EDFI annual report, annual DFI reports and own calculations Kingombe, C., I. Massa and D.W. te Velde (2011), “Comparing Development Finance Institutions, Literature Review”, Report for UK DFID and presented at CDC Roundtable on 20 January 2011.
The Future of CDC 37
Annex 3
Table 6 The perceived strengths of Development Finance Institutions
The mandate of AWS involves supporting Austrian business in Austria and abroad. Its biggest advantage is its direct link with the Austrian business community. AWS serves as “point of entry” to Austrian companies to the large multilateral DFIs, especially AWS MIGA.
CDC biggest advantage is its knowledge and understanding of the private equity market in frontier markets. As a fund-of-funds their expertise is in identifying good fund CDC managers, especially in sub Saharan Africa and South Asia.
The advantage of COFIDES relies mostly on its proximity to the Spanish investor and its understanding of the Spanish corporate culture. Cofides' client base has traditionally been the SME segment; COFIDES knowledge of emerging markets (especially Latin America) make them the preferred advisor for SMEs which cannot afford large pre- investments expenses. COFIDES already has this knowledge in-house and available. COFIDES-financed projects are mainly based in Latin America--which, owing to cultural links, is the traditional destination of Spanish companies expanding abroad--and COFIDES increasingly in China and Central and Eastern Europe.
The strength of DEG lies in being part of a development group and being part of the KfW Bankengruppe, so that it has strength in innovation and can move first in products. DEG has flexibility and regional experience. It has local offices. DEG is good at syndication, and taking equity stakes (because it can use expertise at the KfW). DEG is also good at agriculture projects. Thanks to a reasonable scale, country risk ratings can be done on a bigger scale because its parent, KfW, already does this. Finally, DEG is DEG close to German companies due to historical reasons.
EBRD has a significant presence in one region, built up significant expertise, good DFI- client relations thanks to its local offices and offers a large range of products. It tends to be in the lead in bigger projects in the region (except perhaps in equity). It uses stricter environmental and social guidelines than other DFIs. Its specific mandate is to promote EBRD transition, and in this area EBRD has a comparative advantage.
EIB known as a lean operation (few staff) but with good project appraisal: due to its breadth and depth of knowledge. EIB works across the world, but with different mandates in different regions. It has specific sectoral knowledge areas such as in engineering. EIB-IF is not tied, has a broader focus in terms of countries. It is faster than other multilaterals. EIB is in big ticket projects in infrastructure such as power and water. Scale is an issue here. Other DFIs more focused on specific countries, but EIB EIB cannot ignore less popular countries.
Better suited to deal with small to mid-size projects. Ability to adjust better to the limited resources small clients have, and are more flexible to adapt to the client’s capacity.Assist clients to “grow into the DFI system”, in this way, they have served as a sort of training experience for clients before approaching the big multilaterals. Due to FINNFUND’s link to Finnish business community, they have developed special knowledge in those industries where Finnish companies are at the forefront of FINNFUND technology, especially, forestry, energy efficiency (bio-power), and telecommunications
FMO is good in infrastructure and financial services, less so in production, services and equity funds. It excels in using networks and so-called knowledge streets (networks). The network of financial institutions in Africa is very important and second to none (including IFC). FMO is flexible, investing a lot in Africa, and introduces new products. FMO FMO has good relations with co-financiers, such as DEG or the private sector: it uses
38 The Future of CDC
ABN AMRO in Indonesia, needs the expertise of Rabobank in agribusiness deals and relies on country knowledge of the City Bank.
IFC see themselves as the main innovator among DFIs in three areas: (i) risk mitigation, (ii) advisory services, (iii) standards setting. IFC is also good at innovation on municipal finance (bonds), and energy financing in retail estate (low income) market. IFC is moving from predominantly a ‘finance’ institution into a ‘development’ institution, with a far stronger ‘knowledge’ base as its comparative advantage. It already has 50% of its IFC staff in field offices (up from 30% a few years ago).
IFU can play a role and make a difference in financing small projects and its ability to accommodate the client. Their procedures are flexible and client-friendly. Due to the fact that IFU’s funds are tied and in 99% of the cases this is understood as the need to have a Danish co-investor in the project, IFU has specialized in mobilising IFU/IØ/IFV Danish capital into developing countries, especially LDCs.
NORFUND’s strategy of channeling one third of their funds to Least Developed Countries gives them a large exposure and understanding of high risk projects. Special knowledge developed by their priority investment in hydropower through the SN Power initiative. Funds management has also developed as a special knowledge through NORFUND their involvement in Aureos Capital Fund.
PROPARCO Knowledge in French speaking developing countries. Industry.
SIFEM has focused its strategy in channeling its funds either directly in financial institutions or in private equity funds with an emphasis in infrastructure and SME development. SIFEM positions itself as a flexible and agile organisation. A small team that can handle small projects without being anti-economic. Special knowledge has been SIFEM developed in certain countries: Ghana, South Africa, Peru, India and the Balkans.
SWEDFUND advantage is its ability to take part in small projects. Its closeness to the Swedish business community allows them to remain flexible and up to date with the daily thinking of the private sector companies, its needs and concerns. As a result, their capacity to adapt to a need for change is more agile than for large DFIs. Small companies also need world-class shareholders when investing into developing countries, a small bilateral DFI like SWEDFUND can provide that support. Special knowledge developed during the re-structuring of the banking sector in the Baltic states. In some countries, SWEDFUND has a long standing experience by being shareholders in companies which later became the largest tax payers in the country, such as in Namibia SWEDFUND and Tanzania.
Source: analysis based on interviews as reported in D.W. te Velde, M. Warner, and G.Dellacha (2008), “The strengths and weaknesses of bilateral development finance institutions”, Report for EDFI.
The Future of CDC 39
Conclusions and recommendations
CDC’s ability to leverage additional finance
1. Although it is not always easy to prove, the key benefit of the ‘fund of funds’ model is its ability to leverage additional finance. This finance is invaluable considering the comparatively small amount of capital at CDC’s disposal. By using this capital to demonstrate that investments in developing countries and frontier markets can be successful, CDC can pull in extra investment and have a significantly more substantial impact than if it uses its capital in isolation. Diaspora communities often have an interest in poverty alleviation in their countries of origin but have difficulties in finding out how to make investments. CDC should seek to attract funds from such diaspora communities and, in addition, develop partnerships with UK businesses, provided they have a pro-poor focus in developing countries and are not tied to UK national interests. (Paragraph 22)
Is CDC’s funding additional to private capital?
2. It is imperative that all of CDC’s funding backs investments that the private sector would not otherwise support. CDC should make assessments before investing, including an appraisal of whether their contribution would be additional. Additionality should be demonstrable for all investment decisions. CDC should be careful only to invest in funds that are committed to this principle. (Paragraph 25)
Implementation of CDC’s Investment Code
3. We acknowledge the difficulty some companies have in complying with CDC’s Investment Code during initial stages and support the notion of encouraging improvement in Environmental, Social and Governance standards. However, CDC’s Investment Code must set a clear baseline standard of compliance for investments. We are concerned by the claims that some of the funds in which CDC has invested have not met these standards. We recommend that CDC ensure that thorough due diligence and monitoring is conducted on all CDC-backed investments. (Paragraph 47)
Measuring development impact
4. We welcome the increased independent evaluation of CDC’s development impact. CDC should establish more comprehensive indicators relating to development impact, poverty reduction and employment generation (including whether the jobs are permanent, the wages paid, whether any jobs were lost due to restructuring before an investment was made etc.) CDC should monitor these indicators and report on them. (Paragraph 52)
40 The Future of CDC
Transparency
5. Transparency is essential to enabling the public to hold CDC, a Government-owned company, to account. We acknowledge that commercial sensitivities exist but recommend that much more rigorous requirements are placed upon CDC to ensure that its investment decisions, development impact and the tax payments of their fund managers are as transparent as possible. In its response to this report, DFID should indicate how it plans to do this. (Paragraph 54)
Use of tax havens
6. The domicile of companies and funds in tax havens is a complex area which demands further investigation and we stress the importance of HM Treasury addressing this issue. Once established, CDC should follow standards of best practice. By doing so, CDC could raise standards across all DFIs. The tax payments made by CDC’s fund managers and investee companies should be transparent. They should be published annually on a country-by-country basis. (Paragraph 60)
Remuneration
7. Remuneration should be linked to performance but we are concerned that current pay rates within CDC are above what is necessary to recruit and retain the appropriate staff. The remuneration framework needs to be redesigned to provide more incentives to CDC’s staff to increase CDC’s development impact, instead of focusing too heavily on financial returns. CDC should, as the Secretary of State proposed, examine the possibility of recruiting experienced staff that might be willing to work in a development organisation at lower pay rates. (Paragraph 62)
Actis
8. We were astonished to discover that following the sale of Actis for just £373,000 the taxpayer had not received any return despite being entitled to 80% of the company’s profits. We recommend that DFID’s shareholding in Actis should be sold, but care must be taken to achieve the maximum value. The capital received from the sale could be reinvested into CDC. (Paragraph 64)
New investment model for CDC
9. We recommend that the ‘fund of funds’ model continue to be the predominant part of CDC’s operations. We believe that the continued use of this model should be contingent on improvements in transparency, accountability and targeting. CDC is renowned for its expertise in being a ‘fund of funds’ and should remain pre-eminent in this area. The UK’s DFI should remain distinct from and complementary to the range of other bilateral and multilateral DFIs. (Paragraph 66)
10. All of CDC’s investments must aim to be profitable in the long term. Nonetheless, CDC can allow for lower returns on parts of its portfolio. Therefore, we propose that CDC be divided into two parts. Alongside the existing ‘fund of funds’ model, which henceforth will be called CDC Funds, we recommend that CDC reinvest a significant
The Future of CDC 41
proportion of the profits resulting from equity investments into a separate body which will be referred to from now on as CDC Frontier.
CDC Funds should:
• use the ‘fund of funds’ model and co-investment as its primary investment methods
• focus on ensuring that its investments are additional
• make a higher proportion of investments in SMEs.
11. CDC Frontier should:
• have an explicit mandate to reduce poverty
• accept lower rates of return on its portfolio
• fund sectors most in need of support
• use a mix of financial instruments, including grants and loans. (Paragraph 69 )
12. By making targeted investments CDC Frontier would improve its development impact. Although CDC should allow for lower rates of return from CDC Frontier it should not sacrifice the quality of investment. By default the types of investment that CDC Frontier will be mandated to make will have a higher inherent risk, but the separation of CDC Funds and CDC Frontier will enable this risk to be managed effectively. (Paragraph 71)
13. The ‘fund of funds’ part of the business in CDC Funds should be ring-fenced so as not to damage CDC’s reputation with private investors and to ensure it does not lose money. The anticipated profits from the ‘fund of funds’ part of the business could fund or subsidise CDC Frontier. (Paragraph 72)
Investment methods
14. We recommend that, in order to increase CDC’s development impact, CDC should start to use co-investment alongside the ‘fund of funds’ model. The ‘fund of funds’ approach and co-investment should remain the primary investment methods for CDC Funds. Co-investment would enable CDC to target its investments without incurring the high costs that direct investment would involve. (Paragraph 76)
15. Making direct equity investments would be a radical change to CDC’s current operations and should only be undertaken if CDC can identify investments responsibly. The potential development benefits should be balanced carefully against the cost of conducting thorough assessments of investments which would involve CDC having locally based staff. Moreover, direct investment could not take place immediately but would have to wait until CDC had the appropriate staff or partners in place. DFID offices should be targeted to work with CDC Frontier. (Paragraph 77)
42 The Future of CDC
Investment tools
16. We welcome the opportunity for CDC to be allowed the flexibility to use a wider range of investment instruments when the correct opportunities arise. However we remain cautious about how many new investment tools CDC should take on. We note that CDC is regarded as an expert in private equity and although we are keen for CDC to best serve the needs of the poorest people it must protect its reputation. There is a danger that CDC could lose its expert status if it tries to take on too many new roles too quickly. (Paragraph 80)
17. We therefore recommend that CDC diversify the investment tools it uses slowly and only when it has access to sufficient expertise. Other financial instruments are available through other DFIs; CDC should not aim to do everything and should concentrate on what it is best at and what is needed. It should work alongside the other DFIs to provide the range of tools needed by developing countries. (Paragraph 81)
Sectoral mandate
18. CDC should target its investments at key sectors, such as agriculture, infrastructure and SMEs, in order to improve its development impact. If the Government accept our recommendation to split CDC into two parts, we recommend that CDC Frontier prioritise these key sectors, which are underfunded. We envisage that CDC Frontier should aim to have approximately 25% of its investments in agriculture, and another 25% in infrastructure. Large-scale infrastructure is particularly lacking and will require a mix of financing. Investment in agriculture and infrastructure would directly alleviate poverty, have multiple benefits and contribute to wider development goals such as food security which is increasingly important with the growing threat of climate change. We acknowledge that CDC Frontier should decide in which sectors the other 50% of investments should be made, since it will require the flexibility to remain innovative and the most appropriate sectors for investment will vary from country to country. (Paragraph 82)
19. CDC would benefit from closer collaboration with DFID in ascertaining in which sectors and in which countries they should invest to have the most demonstrable development impact. DFID could help identify suitable investment opportunities for CDC Frontier. In addition, CDC should consider making investments consistent with developing countries’ national development strategies. (Paragraph 83)
Geographical mandate
20. On the balance of the evidence received, the Committee are content with CDC’s new geographic mandate for 2009-2013. It should apply to both CDC Funds and CDC Frontier. We appreciate that investments made in middle-income countries can be valuable, especially given that recent research shows that 75% of the world’s poor live in middle-income countries. However, in future CDC should aim for a more evenly- distributed portfolio between countries and avoid overconcentration of investment in any middle-income country. CDC should also target the poorest regions or areas of middle-income countries. (Paragraph 84)
The Future of CDC 43
21. However, we do not believe that CDC should be restricted to operating only in the countries that DFID does, as DFID is increasingly focused only on the poorest countries. We believe that CDC could make a wider contribution to poverty reduction if its investment policy allows for investment in middle-income countries. (Paragraph 85)
Improving CDC’s development focus
22. The mission statements of both CDC Funds and CDC Frontier should incorporate an explicit reference to their role in poverty alleviation. Investments made by CDC Frontier should include a thorough analysis of their potential for poverty alleviation before CDC commit to making an investment. The commercial viability of investments will remain of central importance, but CDC Frontier’s investment decisions should also be based on the potential for alleviating poverty. Once CDC has adopted a more directly pro-poor remit we hope it would provide an example to other DFIs to focus more on poverty alleviation. (Paragraph 86)
DFID oversight of CDC
23. We recommend that there be a closer relationship and collaboration between DFID, especially the new Private Sector Department, and CDC than there is at present. In particular, DFID should have closer involvement with CDC Frontier. But as DFID and CDC become closer it is important that the division of accountability between CDC and DFID is made clear. The revised business plan for CDC is likely to be more complex than previously and necessitate higher risks, and will therefore require closer oversight by DFID, its sole shareholder. DFID and CDC should review the business plan on an annual basis to ensure that it remains consistent with the shareholder’s aims. (Paragraph 87)
The new CDC
24. The Board and staff of CDC should both reflect the mix of development and financial expertise required in the new CDC. The transition to the new model should be dictated by the time that it takes to recruit the most appropriate people. (Paragraph 88)
44 The Future of CDC
Formal Minutes
Tuesday 15 February 2011
Members present:
Mr Malcolm Bruce (Chair)
Hugh Bayley Jeremy Lefroy Richard Burden Chris White Sam Gyimah Anas Sarwar Michael McCann
Draft Report (The future of CDC), proposed by the Chair, brought up and read.
Ordered, That the draft Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 89 read and agreed to.
Annex and Summary agreed to.
Two papers were appended to the Report as Annex 1 and Annex 2.
Resolved, That the Report be the Fifth Report of the Committee to the House.
Ordered, That the Chair make the Report to the House.
Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.
Written evidence was ordered to be reported to the House for printing with the Report in addition to that ordered to be reported for publishing on 30 November 2010.
[Adjourned till Thursday 17 February at 09.30 am
The Future of CDC 45
Witnesses
Tuesday 7 December 2010 Page
Tom Cairnes, Manager, ManoCap, Dr Sarah Bracking, Senior Lecturer in Politics and Development, University of Manchester, and Dr Michiel Timmerman, Co- Founder, Equity for Africa Ev 1
Penny Fowler, Head of Private Sector Advocacy Team, Oxfam, and Richard Brooks, Private Eye Ev 12
Monday 14 December 2010
Richard Laing, Chief Executive Officer, Richard Gillingwater, Chairman, and Rod Evison, Managing Director for Africa, CDC Group plc Ev 18
Tuesday 18 January 2011
Rt Hon Andrew Mitchell MP, Secretary of State, Department for International Development Ev 36
List of printed written evidence
1 Dr Sarah Bracking, University of Manchester Ev 50 2 Richard Brooks, Private Eye Ev 55 3 CDC Group plc Ev 60; Ev 85; Ev 91 4 Tom Cairnes Ev 55 5 Department for International Development Ev 88; Ev 94 6 Oxfam Ev 56 7 Michiel Timmerman Ev 59
46 The Future of CDC
List of additional written evidence
(published in Volume II on the Committee’s website www.parliament.uk/indcom)
8 Actis Ev w01 9 Aureos Capital Ev w02 10 Lord Cairns Ev w10 11 Christian Aid Ev w12 12 The Corner House and Jubilee Debt Campaign Ev w14 13 Martin Curwen Ev w21 14 Stephen Dawson Ev w22 15 Anthony Ellman Ev w22 16 Emerging Markets Private Equity Association Ev w25 17 GroFin Ev w27 18 Helios Investment Partners LLPs Ev w29 19 Josh Lerner Ev w31 20 National Audit Office Ev w33 21 Dotun Oloko Ev w42 22 ONE International Ev w56 23 Keith Palmer, Chairman of AgDevCo and InfraCo Ev w58 24 Save the Children Ev w60 25 TUC Ev w63 26 Bowen Wells, Founder Chair, International Development Select Committee and Alistair Boyd, Formerly CDC Deputy CEO Ev w67
The Future of CDC 47
List of Reports from the Committee during the current Parliament
The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.
Session 2010–11 First Report Appointment of the Chief Commissioner of the HC 551 Independent Commission for Aid Impact Second Report The 2010 Millennium Development Goals Review HC 534 Summit Third Report Department For International Development Annual HC 605 Report & Resource Accounts 2009–10 Fourth Report The World Bank HC 606
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International Development Committee: Evidence Ev 1
Oral evidence
Taken before the International Development Committee on Tuesday 7 December 2010
Members present: Mr Malcolm Bruce (Chair)
Richard Burden Jeremy Lefroy Mr James Clappison Mr Michael McCann Richard Harrington Anas Sarwar Pauline Latham Chris White ______
Examination of Witnesses
Witnesses: Tom Cairnes, Manager, ManoCap, Dr Sarah Bracking, Senior Lecturer in Politics and Development, University of Manchester, and Dr Michiel Timmerman, Co-Founder, Equity for Africa, gave evidence.
Chair: Good morning and welcome. You’re all here Chair: From the sharp end. in your own individual right, but, for the record, will Tom Cairnes: We’ve had support from CDC to invest you just introduce yourselves and say who you in Sierra Leone. I don’t really have the expertise to represent, things like that? talk about CDC outside Sierra Leone. I can only talk Dr Timmerman: My name is Michiel Timmerman. specifically about the work that they’ve done with us. I’m the Chairman of Equity for Africa, which is a I definitely think that the model of investing in small charity that invests on a commercial basis in small and medium-sized enterprises, through funds like businesses, focused in Tanzania. I have some other ManoCap, is pro-poor. There’s obviously a range of background that may be relevant to this, which is that different ways that an organisation like DFID can for the last 12 years I have been running a fund of engage, and there are lots of different potential funds for RBS Coutts, and, most recently, Aberdeen ingredients to deliver pro-poor growth. My personal Asset Management, investing in private equity and view is that there has definitely been a lack of focus hedge funds. in the development community at large on investment Dr Bracking: My name is Dr Bracking. I’m a Senior and private sector development. Therefore, investing Lecturer at the University of Manchester. I research in a fund like ManoCap, and the work that we do in development finance and international development. Sierra Leone, is, in my view, the kind of thing that an Tom Cairnes: My name is Tom Cairnes. I’ve spent organisation like CDC should be doing. In terms of the last six years living in Sierra Leone, where I do a the impact that we’ve had over the last three years, couple of things. I helped to set up an investment we’ve invested about $8 million in four businesses. I business called ManoCap, which is part-funded by think the jury’s still out on whether that’s been a CDC. We also run the Business Development success or not. We have definitely not declared Initiative, which is a technical assistance facility that victory. It’s very hard to make investments work in was founded by support from DFID. I also run a the space in which we’ve invested. In that short space charity that provides direct support to the Children’s of time, however, we’ve created around 800 additional Hospital in Freetown. jobs. There has been about $750,000 of increased tax revenue for the local government, and there is a real Q1 Chair: Thank you. We have two sessions, with opportunity for this model to deliver results in very three witnesses in this panel and two in the other. I challenging environments. don’t want you to feel that you can’t say what you want to say, but at the same time, not everybody has Q2 Chair: What kind of businesses or projects are to answer every question. If we have short questions they? and short answers, we’ll get through a lot more Tom Cairnes: We’ve invested in an industrial fishing information. business, an ice manufacturing company, and a mobile If I can kick off, you will be aware that the Secretary payments business, a bit like M-PESA, which I’m of State is reviewing the whole of the CDC operation, sure you’ve heard of. We’ve also invested in a and certainly wants it to undertake more direct transportation and distribution business focused on the investment. Perhaps we can take CDC as it is at the agricultural sector, linking small-scale farmers in rural moment, and say how you would assess its recent areas with the main market hub in Freetown. performance against the objectives, specifically in contributing to economic growth and pro-poor Q3 Chair: I’m asking about CDC’s performance, but growth. One of the criticisms is that it has tended to since a shift is going to take place, can you perhaps take the easier options. Do you believe that that’s a say where you think it might usefully go in terms of fair comment, or do you think it has been effective in direct investment, unlocking other private investment delivering pro-poor growth in poor countries? and pro-poor delivery? The argument is that pro-poor Tom Cairnes: Maybe I can start. is difficult. Tom Cairnes has just said it’s difficult. The cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
Ev 2 International Development Committee: Evidence
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman other argument is that CDC doesn’t always go where a return on the investment, but not doing anything nobody else goes. Should the test be that it goes there significantly different from what the private sector because private sector funding is otherwise not could or is doing? available, or is there a temptation simply to do what Dr Bracking: Yes. the private sector might do anyway? Dr Timmerman: I’d say, broadly speaking, that’s my Dr Bracking: Obviously there will be examples of understanding. However, there are some exceptions, where CDC is doing its job well, but if we go back to such as the ManoCap investment, or the investment in the total portfolio for a moment, the financial Grofin, which is another SME fund. I’d say in general indicators used by CDC on internal rates of return the focus tends to be on the larger, more commercial have been as high as 18%. Compared with other investments, but CDC may be hamstrung in the sense European-like organisations, this is quite high. of having been imposed, or setting itself, high IRR Relatively speaking, if you had a table, the rates of targets. return on financial investments in other European Chair: This obviously is the moment to review all institutions tend to be quite a lot lower, in single of that. figures at least. If you look at the economic criteria for how well CDC is doing, it normally uses employment Q5 Richard Burden: I have to go to a debate in creation and tax paid at a local level. Those two Westminster Hall for 11, so if you’re in the middle of measures are actually quite thin, and the methodology an answer and I walk out, it’s nothing you’ve said. that’s used to calculate them is not particularly Well, it might be, but I don’t think it will be. Do you sophisticated. EDFI, which compiles those figures, get the sense that there is a kind of model of DFIs tends not to use pro rata data. It attributes to the DFIs that CDC would do well to emulate? You’ve talked the whole employed workforce, or the whole tax paid. about rates of return being lower with other DFIs. You What the DFIs are not generally doing is paying a have some criticisms of the way that CDC operates, lot of capital gains tax and income-based tax for the but are there areas of best practice, and investor, because of their domicile pattern. In terms methodologies, they positively should be following? of other development criteria, such as being pro-poor, Dr Bracking: I’ve just been working for Norad on a obviously SMEs are generally used as an example of study of Norfund. The first thing to say is that across that. However, to get to a SME they’re using a Europe these questions tend to be on the table, so this financial chain, a fund of funds, where a lot of money isn’t happening in a vacuum. The Swedish and is being leaked into management fees, licensing fees, Norwegian Governments already have better offshore, before you get to those communities. I restrictions on the use of tax havens or secrecy would propose a much more direct model, rather than jurisdictions than we do. This was the specific area of the intermediated model, if you want to get value for my research. CDC has a widespread use of secrecy money in the developmental sense for these types of jurisdictions that requires regulation. Its development investments. impact criteria, or the way that it monitors Dr Timmerman: My experience of dealing directly developmental impact, are also not very sophisticated with CDC is limited. We’ve had some past compared with some of the others. I would say conversations with them about possible investments Norfund are better, DEG are better, FMO are better, in Equity for Africa funds. My understanding, from maybe not the EIB. CDC has been following a model reading around CDC, is that there is much more of a of synergy with the way the private sector behaves too focus on larger investments, and there is, as Sarah much, so its developmental impact has been assumed said, quite a heavy focus on financial returns. If I by the commensurability of any type of growth with compare that to other development finance any type of development. They think, “We could institutions, such as Cordaid, who are an investor with basically invest anywhere and it will induce growth, Equity for Africa, they are interested in commercial and then growth means development for us.” They return. However, they are looking for 10–12% returns haven’t looked specifically at different types of in local currency terms, rather than 17 to 18% returns. economic growth and different types of ways that My view is that it is a myth that there is a scarcity of economies are growing. This, in Africa, is a problem, capital and interest in investing in Africa. I’ve been to because if you use funds and financial intermediation, the last two FT private equity conferences on Africa, you tend to invest only at the top of chains. You are and they have been completely oversubscribed. In getting to the elites, not the commercial banking addition, in my fund of funds job, talking to funds in sector, not the domestic manufacturing and industrial which we invest, a number of them have significant sectors, and certainly not the missing middle of interest and some have significant exposure to Africa, investors who are desperate for capital. We’re in areas such as infrastructure and resources, including supporting the big end of the economy, not further telecommunications. Consequently, I think there is a down where more pro-poor growth could be expected dearth of capital going into certain sectors of Africa, to occur. but it is very much at the smaller end of the spectrum. Dr Timmerman: In terms of CDC’s investment However, if you hamstring yourself by having high model, certainly there is targeting at the top end. I return IRR targets for your investments, you’re not would question the sense of CDC making direct going to be able to access those smaller investments. investments, in the sense that it is an entirely different business model. You need a much larger number of Q4 Chair: That implies that CDC, in its present people to monitor your investments. If you look at form, is not adding a heck of a lot of value in that leading private equity companies, they will raise, say, context. It’s adding value in the sense that it is making $2 billion to $3 billion for a fund, they will make 15 cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
International Development Committee: Evidence Ev 3
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman to 20 investments with that fund over five years, and compatible with targeting in terms of sectors or they will have several hundred staff to do so. geography? Although you pay away fees on the fund of funds Dr Timmerman: I think the challenge at the moment business, at the same time it is a much leaner way of for investing in funds or companies specifically operating, and your spread is much wider than it targeting social benefits as well as financial returns is would be if you were making direct investments. that there’s a limited supply of funds that specifically There is a compromise, which is doing target poverty and small businesses. Consequently, co-investments, where effectively the funds you are you would struggle to put £1.9 billion,1 i.e. CDC’s working with do a lot of the donkey work in terms of entire portfolio, to work in that particular sector today. research and monitoring of the businesses in which However, there is a conundrum, which is that because you invest. there is a limited amount of capital investing in firms such as Growfin and ManoCap, there is limited Q6 Richard Burden: Are there any examples of supply, because people are struggling to raise money good practice on that that you’d like to draw our to launch the funds. Again, if you were to invest part attention to? of your portfolio in funds such as ManoCap or Dr Timmerman: Before answering that, I’d just like Growfin, you would be promoting the development of to talk about the two development institutions we the funds industry, which would be of huge benefit. work with, which are Cordaid and Norfund, who I’d The chances of an organisation like CDC investing $2 say have a very different business model from CDC. million to $3 million in a dairy business in Sierra I’d characterise them as a bit more of a venture capital Leone, or an engineering business in Tanzania, is model, in the sense that they look for good quality pretty limited, because you need a lot of people on the people. They look for people who have clear ground to do so.2 commercial objectives and experience, and have a good idea, and hopefully somewhat of a track record Q9 Chris White: Seeing as you’re about to speak, I of having put the idea into practice. They will then was going to ask you a question, just to get the feel give a smallish amount of money to those firms, and of the scale and scope of some of the work you’re that gets you access to new and innovative ways of doing. You mentioned, for example, an ice-making accessing particularly the missing middle and the business. How many people would be employed in slightly smaller investments. You are not, as Sarah one of the three examples that you’ve put up? was saying, taking just a conventional commercial Tom Cairnes: Our investments have ranged from the private equity model, which I believe CDC is very smallest at $1 million to the largest at $6 million. Our much following. smallest company, which is the ice manufacturing business, employs about 50 people. We supply ice to Q7 Chris White: What are the benefits and around 400 artisanal fishermen, which doubles the limitations of the fund of funds model? amount of time they can go fishing, allows them to Dr Timmerman: Clearly, a limitation is that you have store fish for much longer, and provides them with the to pay people money, fees, to manage a fund for you. possibility to access export markets. To be able to get That introduces an extra layer of fees. The other fish from an artisanal fisherman through the value disadvantage is that you have a more limited control chain to the port or the airport requires them to be over the investments that that fund makes than if you able to demonstrate that they’ve kept that product cool are making your own investments yourself. The over the lifetime of the cycle. Our largest business, advantages are, as I was saying earlier, that the impact the fishing company, employs 150 people directly and of your organisation can be far greater if you’re then we have probably 250 casual workers in addition investing in funds, because you have effectively a to that. The business we have that employs the most much larger number of people who are working for people is our mobile payments business, and we have you. If you weren’t investing in funds, you would about 800 salesforce people who go out to sell that have to hire quite a few of those people yourself, and product directly to people in the marketplace. consequently you would be paying out the money for May I just make one more comment on the fund of salaries for those individuals. Equally, if you’re a very funds model? I think there’s a challenge in that there’s large investor such as CDC, you have very substantial no “one size fits all” solution to this. In certain negotiating power. Particularly in an area where there markets it makes a lot of sense to make direct may be new or smaller funds seeking to be investments, particularly where there is a lot of established, you can negotiate some pretty expertise in place. In markets that are difficult to advantageous terms with the individual funds, both in access, like Sierra Leone, there is a benefit to having terms of the fees that they charge, and the amount funds like us, or people like us, based on the ground of influence you have over the investments that the in the country, being able to manage the portfolio. underlying fund makes. I would say overall, if you When I think about aid in general, DFID doesn’t have were looking to invest globally across a wide range of a direct aid model. It gives money through NGOs, it sectors, and build up a diversified portfolio, the fund gives money directly through Governments, and of funds model is an attractive one. I would just like probably at much greater costs than it would do giving to say I don’t have an axe to grind here: Equity for Africa makes direct investments. 1 Note by Witness: The figure should, in fact, be £1.4 billion, not £1.9 billion. 2 Note by Witness: Investing in smaller funds, focused on Q8 Chris White: Just to continue on the making smaller investments is likely to reach companies development benefits, do you think this model is which CDC may otherwise not reach. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
Ev 4 International Development Committee: Evidence
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman through funds of funds. Therefore personally I don’t Q12 Jeremy Lefroy: Following up on that, it seems have a problem with not doing direct aid work, or to me, from what you’re all saying, that the fund of providing money directly to beneficiaries. The funds model isn’t necessarily in itself a problem. The challenge is to choose the right vessels through which rate of return is a problem because, by its very nature, that money should flow. Per se I don’t think there is a it restricts the areas in which investment can be made. problem with the fund of funds model. It can have a There is no real objection, for instance, to CDC huge advantage where you have the right people on promoting the setting up of funds that target more the ground to be able to go and see those investments developmental outcomes at a lower rate of return, and add value to the businesses that the money is where they wouldn’t necessarily have to have large going into on a day-to-day basis. At the same time, at numbers of people on the ground. They could perhaps the larger scale, I can see that it would be easier for help set up—as indeed Actis was originally part of an organisation like CDC to make direct investments. CDC—such a fund manager in which they could That was my thought on the fund of funds model invest. Would that be a possibility? itself. Tom Cairnes: In terms of the way that our business Chris White: That’s very helpful. developed, we started as a technical assistance facility, directly funded by DFID, providing business planning and business advice and support to small businesses Q10 Chair: Do you accept that there is some validity in Sierra Leone. From that we realised that there was in the argument that the fund of funds model has a lack of capital to invest in medium-sized businesses encouraged CDC to go after the easy targets? Whilst that wasn’t at interest rates of 25 to 30%, which the you’re all saying the difficult targets are going to be entrepreneurs that we were working with really much more expensive—I’m looking at Sarah weren’t interested in taking. If you sit down and work Bracking here—the implication is that some of the with business people in Sierra Leone, anyone who’s other comparable institutions have clearly taken more had their business destroyed in the war, had it rebuilt, risks and got a poorer return, but delivered better on had it destroyed again, had it rebuilt and makes development and poverty reduction. Is that fair? reasonable profits is a good person to back. There are Dr Bracking: Yes. The point about the fund of funds not a lot of people looking to find those opportunities. model is that CDC doesn’t actually have the power Translating between good entrepreneurs, who are very to target anything. It’s putting its equity with a fund rough around the edges, and private commercial manager, who then makes those decisions. This capital that needs transparency and the ability to be problematises risk management and due diligence, able to monitor those investments, there is a gap there because it’s a sub-contracting arrangement. The fund for funds of funds in our space. There are some manager promises to meet the investment stipulations lessons to be learned from our experience. CDC, as DFID has handed them to CDC, and then they hand along with DFID, have the opportunity to push the them on again. The act of faith here is the idea that forefront of investing in places like Sierra Leone. you put a small amount of equity in a much larger However, I would say it’s incredibly risky. I don’t fund, and that buys you influence and impact. There’s think investing in Sierra Leone is purely commercial. not actually much empirical data to prove that Considering the risk-adjusted returns on our fund, I assertion, because CDC is only in control of 1% of would not tell my grandmother to put her pension in all the foreign direct investment that goes to the least our fund. That is a bad investment decision. I do think, developed countries. There’s an argument that, in the long term, there are real benefits to be had from because they are sitting on the Board, they can providing capital to entrepreneurs and businesses who influence the way the funds behave, but they only ask deserve that opportunity. At the same time, that that the fund produces a best practice document for, doesn’t mean you should reduce the investment say, environmental impact or social impact. They rigour. Sometimes, mixed in with this, “We need to can’t mandate them to do anything, not even keep reduce IRR targets”, is the idea that you need to reduce the quality of the investment decision-making, international standards on such things. and the principles of investment decision-making that you apply. It’s inevitable that the golden rule of Q11 Chair: I just want to clarify this point. The investing, which is to go where the IRR is highest, slight implication of what you’re saying is that if you needs to be relaxed in this space, but all other targeted more specific funds, or put more specific investment rules should hold. You should invest in objectives on those funds, even the fund of funds good businesses, in good people, where there is model could deliver a much better result on transparency, where taxes are paid properly. If you development and poverty reduction. relax every other investment principle along with the Dr Bracking: I’m not opposed to private equity per IRR, you have a problem. That is one of the risks. se. It’s just that at the moment, about 86% of the There is too much of a broad conversation about private equity funds in which CDC invests are also IRRs. There’s no trade-off between investment domiciled in secrecy jurisdictions. There’s no principles and development returns, if what you’re country-by-country accounting. There’s no way of saying is you have to apply high-quality investment verifying that the geographic targets are being met, decision-making. You shouldn’t feel sorry for people and there’s no way of checking who the underlying in poor countries, you should treat them as hard as investee companies are. you would do in this country; however, in doing that, Chair: We’ll come back to that specific point in a you respect them and provide them with an minute. opportunity to deliver jobs. cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
International Development Committee: Evidence Ev 5
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman
Chair: Thank you. That’s very helpful. Tom Cairnes: It’s incredibly helpful to be able to provide businesses with technical assistance Q13 Mr McCann: I have a question on financial pre-investment. It definitely gets into a grey area of instruments, and perhaps I can direct it in the first subsidising returns. One of the debates that people instance to Dr Timmerman. The Secretary of State have had with us about the use of what’s called the suggested that in the future, CDC should use a wider Business Development Initiative is that essentially range of financial instruments to support a more what we are doing is preparing businesses to get diversified portfolio. In your experience, what investment. In some cases we manage the investment financial instruments are most needed by recipients in as well. In all of this debate, there is this grey zone poor countries? between private returns and development returns. It Dr Timmerman: The equity model is very difficult to requires judgment calls as you go on. I don’t think implement in smaller companies in developing there is necessarily a right answer. Technical countries, because the legal structure doesn’t really assistance is incredibly helpful. When we look at exist. The concept of equity doesn’t exist particularly businesses, there are lots of reasons why they aren’t well either. Consequently, you need to look at other ready for investment. Why is bank capital so ways of sharing risk as well as having a stake in the expensive? In part because it’s almost impossible to business. Models such as providing debt but with get good information out of businesses in somewhere revenue sharing arrangements, where you may like Sierra Leone, mostly because they are, quite participate in a percentage of the revenues from the rightly, trying to hide how much tax they should be business, would be an equity-like option, but you are paying. The tax discussion is basically a negotiation sharing some of the risk of the business. I’d say, with the tax collector, who walks in and says, “Well, broadly speaking, that there shouldn’t be a constraint if you give me this much, you’ll pay that much tax.” on the instruments that CDC or other investors are That’s the system within which they work. When we willing to consider, in that it’s really all about invest, we say that there will have to be proper understanding what risk and return objective you accounting systems, which means that the amount of have, and therefore which instruments allow you to tax paid will go up by 20 to 30%. So there needs to access that risk and return. Consequently, if you don’t be a real benefit to the companies themselves. The want to take a large amount of risk, and you want technical assistance helps them see the benefit of good fairly steady returns, you should be looking at accounting practice in advance of capital being put in debt-like investments. If you want to participate in place. For an investor, it allows you to look the guy more of the upside, you should be looking at in the eye, before you do any work with him. On equity-like investments. There is not a lot of sense in structures, I like equity, not necessarily because of the being dogmatic: “We only invest in equity,” or “We increased returns, but because it allows you to sit only invest in debt,” or “We only invest in something down with someone and say, “I am your partner. We in between.” What you should be looking at is what are going to live this. I make money when you make the financial outcome is that you are looking for. money. We will be here through the trenches of the What’s the risk return profile? How much risk are you disasters that will inevitably happen in the next six prepared to take, compared with how much risk the years.” Doing technical assistance in advance helps business is taking? What type of investment does the you build that relationship. If you spend six months business need in order also to have the non-financial working with someone, you sit down and talk to them outcomes, i.e. the employment creation or whatever it about how they’re going to handle their employment is you’re trying to achieve by investing in the decisions or manage customers, how difficult it is business? working with junior minister x in the Ministry of Fisheries, you build a relationship that is essential to Q14 Mr McCann: I think you’ve just answered this make investments work. If you don’t have that trust, question, but I’ll put it to you anyway. Would if you have to go to court, it’s over. You’ve lost. All increasing the number of different instruments have the money is gone. You’re proving a point because an impact on overall cost? you need to demonstrate that you can go to court, but Dr Timmerman: Cost to CDC? that’s not where you want to get to. Technical assistance is helpful because it allows you to get Q15 Mr McCann: Yes. Investment costs. transparency into the business and help businesses Dr Timmerman: I wouldn’t expect so. It may require understand what it means to get outside investment. some additional financial expertise to be hired by It’s a nice pilot and it builds a strong relationship. CDC. However, most of the investments you’ll be Then I like equity combined with other types of making in developing countries are going to be pretty product that help to mitigate risk, because of that basic compared with today’s financial engineering primary gut response you have with the guy that standards in developed markets. None of these you’re working with: “I am your partner through all instruments are going to be very complicated. There of the crap that’s going to happen in the next four or may be some extra legal costs to get the right five years, until we get money out of this.” When you documentation in place. talk to people, they know that it’s going to be hard to make money. I think that’s the reality of the work that Q16 Mr McCann: Mr Cairnes mentioned, in answer we do. to an earlier question, technical assistance. Do you think that technical assistance should be an integral Q17 Jeremy Lefroy: I’d just like to declare my part of DFIs? interest, in that I’m a director, with Michiel, of Equity cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
Ev 6 International Development Committee: Evidence
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman for Africa. I’d just like to concentrate a bit more on does enable CDC, perhaps indirectly through us, but the question of direct investment. We’ve spoken a also working with DFID and the British High little bit about whether it would be worth CDC Commission, to have conversations with Government. making direct investments in the same way as, for It’s incumbent on people who accept funds from the instance, IFC do, or other funds do. I would like to British Government, through institutions like CDC, to hear your views on that. engage with the other British Government arms on the Tom Cairnes: Again, there’s nothing wrong with CDC ground in a country like Sierra Leone. I don’t think doing direct investments. The most important thing is that that is very hard to do. not to have cookie-cutter solutions for making investments in different spaces. The solution to doing Q19 Jeremy Lefroy: Was CDC supportive when you agricultural investment in Kenya might be to do a raised the question of the tax problems? direct investment. The solution to doing it in Liberia Tom Cairnes: It was. One of the helpful things they might be to do it through a fund. I don’t think you can did was to put us in contact with one of their other make generalisations about the best impact that could funds, to have a conversation about how they dealt be had apart from making a judgment of the people with it. That was the most helpful network effect that who will be involved in that investment. I think CDC we got from the fund of funds space. DFID has people should consider doing direct investments, where it can on the ground in Sierra Leone whom we have spent a demonstrate that it has the capacity to do so. Working lot of time talking to. Just as some of the NGOs, and with funds allows it to potentially co-invest as well. some of the other partners that DFID has, provide One of the ways that CDC could get greater advantage information to the British Government’s effort in out of its portfolio of investments in funds would be Sierra Leone, we feel very much part of that. I think to co-invest alongside those funds and take greater that’s important. Yes, CDC could be wiping its hands control in those investments. In principle, I don’t think of the tax problem, but that doesn’t necessarily need there’s anything wrong with direct investments. to be the case. At least the people we deal with are Dr Bracking: There has been a pattern in the past of quite sophisticated on the matter. using private equity to try to avoid institutional problems in under-developed markets. If you move Q20 Anas Sarwar: I’ve got a few questions, again, the unit of analysis from just the firm and the success to you, Tom, with regard to the relationship of of the firm in which you’re invested to the whole soft ManoCap with CDC. It would be helpful to explore infrastructure of the country, then the benefit of direct just what the relationship is like, so we can get a better investments can be more fully seen. Institutions don’t understanding of how CDC operates. How much improve unless you use them. When a DFI makes a oversight and influence does CDC insist upon from direct investment, you have a sense of their frustration you when it comes to, for example, investment about the transactional costs, and the bureaucracy, and decisions and operations? the arbitrary nature of such laws. However, that’s part Tom Cairnes: I would split our relationship with CDC of their developmental remit, in my opinion, and they into two parts: the pre-investment part, before they should be doing that, however frustrating, because the made a commitment to us, and the post-investment multipliers for other businesses are very large. You’re part, once they’d made that commitment. changing the whole market environment for a much Pre-investment, they spent a huge amount of time wider group of people than just the firm that you’re helping us improve our own internal processes, investing in. particularly around ESG and governance and reporting. It took us, I would say, just over 18 months Q18 Jeremy Lefroy: Thank you. That’s a very from the beginning of our conversation with CDC to important point. If I might just put that back to Mr closing the investment decision. During that period, Cairnes. Given that you’ve just mentioned, which I they visited us four times in-country. We made fully understand, the problem with dealing with local probably the same amount of trips here to talk to tax authorities, do you think the fact that CDC is one them. We found that incredibly helpful in improving step removed from that means that they can say, our own standards, and our own private investors felt “That’s your responsibility. We’re not going to get that as well. Pre-investment, CDC were incredibly involved with the problems of local tax authorities?” helpful, and we had significant amounts of I have to say I have had similar experiences. engagement. Post-investment, the relationship with Tom Cairnes: Again, I can only speak of our CDC changes. The way the investment model works experiences. I don’t think CDC wipes its hands of that is that we, as limited partners, provide you with the responsibility by investing through us. We have a lot authority to make investment decisions. Those of conversation with DFID, with the British High investment decisions need to meet our ESG standards, Commission, and with CDC about the challenges of and you need to report to us on a quarterly basis. Since dealing with corruption, and ensuring that our the investment that they’ve made in us has been businesses pay tax. We had a problem with one of our provided, we probably talk to them monthly. There’s companies, where when we went in we discovered someone within the Africa team who sits above us there was tax avoidance, and we had to have a and monitors our investment—their investment in us. conversation with the Anti-Corruption Commission, We talk on a monthly basis. They don’t engage with DFID, and with CDC about how to deal with directly in investment decisions. The investment that. From that, DFID itself started having a decisions are made by ManoCap’s investment conversation with the Government about the way the committee, which is made up of three of our investors NRA, which is the tax collection unit, works. That and the two partners in ManoCap. They do sit on our cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
International Development Committee: Evidence Ev 7
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman advisory board, who meet on a six-monthly basis and predominantly agricultural-based, and agricultural make broad decisions about where the fund should be incomes are pretty much below the poverty line. investing and the performance of the businesses. Providing people with salaried and paid employment That’s how we relate to them now. so that they can access bank accounts, pay for school fees and health care, has a huge collateral benefit to Q21 Anas Sarwar: How rigorously do they monitor those individuals. It also has a secondary benefit to their own investment code with, for example, their children and their families. I’d say at that ManoCap and other companies? Is there a rigorous missing middle, there is— monitoring process that CDC does to ensure that Pauline Latham: A real gap. Yes. ManoCap, or any other business, is going along with Dr Timmerman:—a real dearth of capital. The impact CDC’s investment code? of every dollar you put into that missing middle is Tom Cairnes: We provide them with quarterly reports substantially greater, in terms of poverty alleviation, on the performance of the businesses. Normally, after than if you’re investing a dollar in, say, a telco in a sending a quarterly report, we have a phone country like Tanzania. On average we create about conversation to discuss current results. That’s the level one job for every $1,500 we invest. of engagement we have with them now. Q25 Pauline Latham: And they’re permanent jobs? Q22 Anas Sarwar: Thirdly, how much investment Dr Timmerman: Yes. Provided we’re making good does CDC have with ManoCap? Do CDC reward fund investment decisions, they’re permanent jobs, because managers for being more development-friendly? the businesses will continue once they’ve paid us back Tom Cairnes: They have $5 million invested with us, our capital, yes. and they reward us on financial return. Our compensation is a percentage of the returns of the Q26 Pauline Latham: Andrew Mitchell says that he fund, and a management fee on the total capital that envisages climate change initiatives should be we have managed. There are no direct development featuring in CDC’s portfolio. Do you see that there’s aspects to my compensation. a future role for CDC in the development of green energy and technology—particularly affordable green Q23 Anas Sarwar: In terms of private sector energy and technology—for developing countries? investment in ManoCap, have you mobilised further Dr Bracking: Yes. If you look at the underlying third-party capital on the back of CDC’s involvement? investments from the fund investments in the total Has the CDC involvement helped you attract other portfolio, CDC have got a lot of investments in power third-party investment into the company? and ICT, but they tend to be traditional power Tom Cairnes: Absolutely. The evolution of our fund infrastructure rather than renewables. Norfund have is that we started only with private sector investors, made a big effort with renewables. CDC also invest which was a small group of high net worth very little in water and sanitation infrastructure. To go individuals, who seeded us. We then had a second back to your original question about developmental round of investment where CDC came in, and I think that the stamp of approval that CDC provided allowed impact, if it’s not measured by the units of us to scale up the amount of capital that we had. We employment or tax paid, which are quite thin, but went from $6 million to $22.5 million. We definitely developed more widely on the multiplier effects on started off with a small group of private investors, and the economy as a whole, CDC could afford to move CDC came in, which allowed us to scale up. We more into those basic infrastructures. Clean water is brought in another semi-development institution, as one of the most important poverty-reducing effects for well, the Soros Economic Development Fund, who are the poorest in the population at large. Otherwise, I also one of our investors. endorse what’s just been said about the missing middle. Q24 Pauline Latham: Can you tell us what sectors are most in need of CDC support, in order for CDC Q27 Pauline Latham: Do you see any evidence to to have significant development impact? Where do prove that if CDC invested heavily in agriculture, you see the gap in funding? Where is it most severe? infrastructure and/or green energy this would Dr Timmerman: The biggest gap in funding is the stimulate further private sector involvement in the gap in which we operate, which is called the “missing whole scene? middle”, between $5,000 to $100,000 investments. Dr Bracking: Yes. The legacy portfolio that was sold Equity for Africa operates right at the bottom of that. when CDC was reorganised had a quite low value that Specifically, in Tanzania, the small businesses in year, but it bounced quite quickly afterwards. which we invest have no other source of capital. We Agricultural pricing, in Africa in particular, tends to screen for businesses that are unable to get bank have quite a high variance. Overall, what CDC did financing. Certainly, in our area, there’s a real dearth best, in its older incarnation in the 1970s and 1980s, of capital. Such capital is important for two reasons. even though half of those investments didn’t end up One is that small businesses that are above being that profitable, was a very good job in microfinance level are important to create a vibrant agriculture. It invested in crops with a very long economy, and it is a benefit to the entrepreneurs, but temporality, like woodland and forests and plantation even more importantly it creates employment among crops and outgrower schemes. There hasn’t been the population. In a country like Tanzania, but also much concentration on that in the last decade across other sub-Saharan countries, employment is the EDFI portfolio, and it would be of great benefit cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
Ev 8 International Development Committee: Evidence
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman and developmental impact if they could return to that over-focus. There is an opportunity to make as part of their core mandate. investment in post-conflict countries, where people don’t necessarily allocate capital, and CDC has real Q28 Pauline Latham: Particularly if they were expertise in looking at scale investments as well as looking at something like crops that can survive in those types of missing middle investments. I wouldn’t drought conditions. Obviously the climate is do it in Nigeria. I wouldn’t make large investments in changing, and it’s important that the investment is in South Africa, or perhaps in Kenya, the more something that’s going to work in the long term, not developed economies. However, I can definitely see a what used to work, because it’s changing. case for larger-scale investments in economies like Dr Bracking: Food crops? Sierra Leone and Liberia, potentially even in places Pauline Latham: Yes, in terms of food crops. like Afghanistan, where there are strong political as Obviously the other things are still very useful. well as developmental links. I think there’s a post-conflict sectoral focus that would be important. I Q29 Chair: The point you made about sanitation and would urge that there is a breadth of approach, so not water is of some interest, because when we did a just small-scale investments, but a sensible approach report on that, we had a slightly diversionary to deciding which large-scale investments to make. discussion about the role of privatisation of water. Pauline Latham: It sounds as if they’ve lost their What we did find was that an awful lot of the projects way a bit. we did look at were commercially financed. Certainly Tom Cairnes: I can only speak of what CDC do for on maintenance and operating costs, people were us, and I think the kind of investment they’ve made prepared to pay for water, and paying for running in us is the kind of investment that an organisation water is cheaper than paying for water being delivered like CDC should be doing. We’ve had a very positive in cartons or tankers and so on. Are you suggesting experience of them. the reason CDC doesn’t do it is to do with rates of Dr Timmerman: Can I make one comment on return, or the complexity of making those types of agriculture? As I’m sure you are aware, there’s a huge investments? amount of commercial interest in investing in Dr Bracking: At the moment the public sector in large-scale agriculture, which started off in Latin Africa pays about half of the cost of infrastructure America and is now making its way to Africa. There investments in water and sanitation, and private are issues around large-scale commercial investment capital has the minor part, mostly through these PPIs in agriculture, particularly in Africa, where there’s or risk-sharing arrangements. About half of those have very little attention paid to the historical ownership of had some procedural problem, and ended in court. the land and the development opportunities through That was the first generation, however, and there’s agriculture. There is certainly an opportunity for CDC been a lot of learning by doing those types of projects. to go back to some of those roots in agriculture, and The overall point is that CDC hasn’t tended to engage invest in responsible agricultural practices in Africa, much with the public sector at all. It prefers a fund rather than leaving the field open to large-scale hedge model, which is a bit more ephemeral. If CDC were to fund investments in agriculture that will simply seek re-engage more with the wholesale and retail banking to replicate the Latin American model of almost zero sector within the country, the national structures and employment and large-scale investment in machinery. the Government, through parastatals or through Chair: That’s a very important point for us to take budget support, and link back together with the public up. Thank you. and private sectors institutionally, that would really Pauline Latham: It is. assist the development of water and sanitation infrastructure. Q31 Anas Sarwar: I’d like to get your thoughts on which parts of the world you think CDC should be Q30 Chair: But that would require a bit more focusing its work on. Do you think the geographic management supervision? focus of the CDC should change going forward from Dr Bracking: Yes. The idea that CDC would have to what it is now? What do you think the priorities have more core staff in London would be accepted, should be? Or do you think that being prescriptive on because they would have to have more oversight. I what sectors we invest in, or the geography of where don’t see a problem with expanding the CDC’s staff. the CDC invests, could have a harmful effect? Do you Chair: We need to know whether the Government think it could have a positive effect in focusing the have any political problem with that, given the mind on where the investments should be going? I’d admin charges. just like to get your thoughts on the geography of it. Tom Cairnes: I would echo the comments that Dr Timmerman: I’d say that geography is a very Michiel made, but would add one extra thing. I think, crude measure. The focus, under the current concerning the sectors where you might want CDC to guidelines, sounds about right. However, there are invest, there is a very compelling argument to be made substantial opportunities for poverty alleviation in about scale, but in sectors and types of economies middle-income countries, and there are equally where capital isn’t around. In Sierra Leone, for substantial commercial opportunities in low-income example, there’s a gap at $10,000, a gap at $100,000, countries. The investment policy should be driven by and a gap at $1 million. If you are looking at, let’s outcomes, both financial and developmental, rather say, large-scale agricultural investments, which might than being very focused on exactly which country one be $20 million, there is definitely a gap there. Scale should be investing in. Every country presents a range to the missing middle shouldn’t necessarily be an of opportunities. cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
International Development Committee: Evidence Ev 9
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman
Q32 Anas Sarwar: Would you both agree with that? attracts a 10% withholding tax. Depending on how Tom Cairnes: I would add one thing, which is that it that gets treated out, that depends how our investors makes sense for CDC to look to invest where the themselves pay tax, which is standard practice in the British Government itself has the greatest political investment community. There is a broader debate influence. Investment in development does not happen about tax havens and how they should be used in in a political vacuum. One of the criticisms I would investment, and that’s something that I’m probably make of development in general is that there is an not the right person to speak about. I don’t think that assumption that it does so. A lot of problems that are it impacts the amount of tax we pay in Sierra Leone. faced by various actors within the development field We engage very heavily with the tax community. For come from the fact that the political interaction example, if we domiciled ourselves in the UK or in between the local government and local business Ireland, we would be paying the same amount of tax community is not considered. Our experience with the in Sierra Leone. British High Commission and DFID in Sierra Leone Dr Timmerman: It depends: there are two answers. has been incredibly beneficial. CDC could look to One answer is, is the implication of your question that have a greater impact by trying to focus on areas people who are resident in offshore centres are where the UK has influence and interest. However, the dishonest or bad people? geographic measure is very crude. There should be a Mr McCann: No: it’s more to do with the fact that focus on development impact and returns. they wouldn’t be paying their proper dues. Dr Timmerman: I’d say that CDC need to always Q33 Chair: Just on the point you made before, I engage with people of integrity, who pay the right don’t think we have time now, but do you think you amount of tax. As you were saying, if you pay the might be able to give us a note?3 You talked about right amount of tax, I don’t see why you should not responsible agricultural investment, avoiding the invest with people in an offshore jurisdiction. mistakes of Latin America. If you had a slightly more Presumably in the case of ManoCap, none of you detailed thought of how that might be, and the others work in the UK and consequently it doesn’t matter could certainly contribute to that, it might be helpful, where your jurisdiction is. because I think we need to explore that in a bit more Dr Bracking: Could I just point out that investee detail. companies who pay tax because they’re domiciled in Sierra Leone is a different point from a fund paying Q34 Anas Sarwar: A follow-on question: are there tax. What’s happening here is that capital gains tax is any circumstances where you think CDC should being avoided. I find it a slight conflation of logic that invest in high-income countries? a fund can say, or the DFIs generally say, “We pay Dr Bracking: I think the geographical focus is about tax,” and then quote figures on it. That’s the tax paid right. But, at the moment, you can’t prove the money by a domestic company in which they are an is going to those geographies. We’ve been using it as investor—they have a part investment. That’s not tax a proxy that the investments are going to the poorest they’re paying, because they’re a fund. They should people, but that isn’t well proved. You can say most be paying capital gains tax, but because of the double of it goes to Africa; they need to prove that most of it taxation agreement they’re avoiding it, which is part stays in Africa, or goes there in the first place, and of the attraction to the international investor. The then that it is reaching the poorest people. international investor, in this model, is then privileged over the domestic investor, who’s still paying tax. I Q35 Anas Sarwar: What about the point on the don’t think that’s a due process in paying tax, myself, high-income countries? Any thoughts on that? because some stakeholders are benefiting and others Tom Cairnes: Where would you put a country like not. India? There are obviously opportunities for Mr McCann: Right. That’s helpful. Thank you very investment in agriculture and infrastructure and water much. in a country like India in which the private sector is not investing. The country measure, because of its Q38 Pauline Latham: CDC claim to pay what is crudeness as an average across a billion people, makes needed to get the best people. Do you believe this that very difficult. I would say in somewhere like level of remuneration that they offer is the right level India, there probably are opportunities for CDC to that they should be recruiting at? invest. I wouldn’t go to the United States though. Tom Cairnes: I don’t know how much they get paid. I don’t know their people. Q36 Mr McCann: A short question for each of you: is it acceptable for CDC to invest in fund managers Q39 Chair: The Chief Executive has earned nearly who are domiciled in offshore financial centres? £1 million, and is currently earning about half that. Dr Bracking: No. Dr Timmerman: Our experience, at Equity for Africa, is that we are getting a steady supply of investment Q37 Mr McCann: Is that a collective no? bankers and professionals at leading management Tom Cairnes: We’re domiciled in Mauritius, which consultancies, who want to come and work for us at makes us tax transparent in the UK. All our 30% of what they used to be paid. I’d say there is a investment companies pay tax within Sierra Leone, so significant minority of people out there who are we pay a 30% corporate tax. Any capital that gets considering their career options, who have a very high remitted outside from those investments to Mauritius degree of skill, and who want to become, or want to 3 Ev 59 be engaged in, social entrepreneurship. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
Ev 10 International Development Committee: Evidence
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman
Chair: Put something back. in whatever form it takes after this kind of review. Dr Timmerman: Put something back, exactly. They What I’m trying to say is there’s no direct relationship may have been working for three, four, or five years between risk and development returns, and the idea for these companies. Consequently we’re not finding that if you’re taking more risks you’re doing better for a problem recruiting highly skilled people who, in the poor people is not true. If you lose money, that’s bad commercial market, you’d have to pay £200,000 to for everybody. You give people a job and then they’re over £300,000 for, if you include their bonuses. It may fine, but two years later they’ll be bad, because what be difficult to find 100 people like that, but certainly will have happened when they get a job is that their finding tens of people like that I wouldn’t expect there dependants will have doubled. The children will be to be a problem. going to school but will stop instantaneously. If these Tom Cairnes: Again, I would echo that sentiment. In businesses shut down, you’re doing more harm than our own experience, our most recent hire was a you would have done. I think that’s a really important Ghanaian from Barclays Capital, just out of Harvard principle to apply. Business School, who probably took a 70% cut on his Dr Timmerman: As we were saying earlier, I think last salary job. I don’t know how long we will be able there is a big case to be made for sacrificing some to retain someone of that calibre, and I don’t know return, but as Tom was saying absolutely no case to how many people there are who are willing to make be made for sacrificing quality of investment. I’d say, that commitment. Because of our own size, we can’t going with the sacrificing of returns, there is a case to match London or New York in terms of paying be made for taking on a bit more risk. However, the people, but there are people out there who will do investments need to be made with the view of making that. I personally don’t have a problem with paying money—maybe not 18% but a bit less than that. That people for doing good in this space. I think you can needs to go hand-in-hand with very clear development get people, but I don’t have a principled problem with objectives and very clear monitoring of the paying people well. development outcomes of the investments that have been made, to a greater degree than is probably the Q40 Pauline Latham: One option for reform is for case currently. It needs to be part of the contract with CDC to continue its operations but reinvest the profits the fund manager that they will report on livelihood in a more development-friendly fund, which would improvements, employment creation, whatever your undertake riskier investments, accept lower rates of measures are going to be. return, and fund sectors most in need of support. What are your opinions on this suggested model? Do you Q42 Pauline Latham: So it’s not taking the risks, it’s think they could do that, and that countries would be looking at lower rates of return that’s more important? better for it? Dr Timmerman: Yes. But having said that, Dr Bracking: I think that that has to happen, but there investments such as Equity for Africa or ManoCap or also has to be a change in the way that CDC is Growfin, as Tom said earlier, are probably riskier than managed. You have people who own part of it who investing in a telecoms company in Zambia, for are also making managerial decisions, who are also example. calculating risk. Q43 Pauline Latham: And do you think that has any Q41 Pauline Latham: Sorry, did you say “who own implications for the type of staff at CDC, or the part of it”? numbers that they’d need to employ? Dr Bracking: If you see the companies that were spun Dr Timmerman: I think they would probably need to out, the Actis fund is part-owned by its managers. add people with non-financial measurement expertise Pauline Latham: Right. Yes. in order to monitor that in a more rigorous way than Chair: At 60%. they do today. But other than that, they would Dr Bracking: Yes. I work in the public sector, so my probably need to add to their sector specialism in benchmark coordinates are much different, but it those particular slightly lower return, higher risk areas seems to me that there’s a problem of conflict of of investment, although from what Tom was saying interest there. There should at least be a better form there’s already good expertise at CDC in that area. of regulation. As in the financial crisis, if the people Tom Cairnes: What exists right now is a group of who are calculating risk are in the pay of the people people who know how to run a fund of funds. If the selling the product, that seems to me to be a decision is to change that mandate you would dysfunctional relationship. inevitably have to change the team. Once you make Tom Cairnes: Specifically on the question of should the policy decision to change CDC’s mandate the pace CDC take more risk, and should there be a greater of that change should be dictated by the pace with percentage of their portfolio allocated to riskier which you can bring in good people. It is better to investments, I think the inevitable result of that is that wait to find somebody good, which may take a year or CDC will lose money. I’m not necessarily sure that a year and a half, than just to hire the worst common that’s a policy decision that should be made as to denominator to be able to execute, because whether CDC should be trying to maintain its capital development isn’t a two-year project. My personal or grow its capital over time. I think that there are commitment is that I’ve been in Sierra Leone for six ways to make riskier investments in countries like years; I’ll probably be there for another 10. At that Sierra Leone, where you are taking IRR sacrifice, but point I may have made some small difference, and I not necessarily losing investment principles. There is think that the speed with which these changes need to a delicate balance to be made by the managers of CDC be delivered should be considered within that cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
International Development Committee: Evidence Ev 11
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman timeframe. This is a generational change that is couldn’t do a systematic review of that because of required to happen in very poor countries in the world, time, but this Committee or the PAC need to do a and so the requirements here should be driven by systematic review of the cost structure of equity funds. talent once that policy decision is made. That will be Tom Cairnes: Can I just make a brief comment? a very delicate balance for CDC to get right, because you will lose a lot of money if you hire rubbish Q47 Chair: Sorry, do you have any more published people. information on your work on Norfund? Dr Bracking: Can I make the point that in the Dr Bracking: The Committee already has the report, research we’ve just been doing, we actually saw the but the actual data, no, because I can’t give it to you. company accounts from funds in the Norfund and Swedfund portfolios, and I was actually quite shocked Q48 Chair: Are they worth talking to, for us? at some of the management fees and the technical fees Dr Bracking: Yes. that were being paid, as a proportion of the overall Tom Cairnes: Again, I can’t speak for anywhere else. fund to be invested. There needs to be a systematic Our management fee is 3% of capital under review of the subsumed costs in the fund of funds management. The benchmark for fees should be model that should be reported to the Public Accounts something along those lines, and I think it should be Committee, because if we ask “do you think these compared with other development spending. So when people are too well paid or not too well paid”, I have I look at management fees, for example, for NGOs no benchmarks personally to answer the question. But that take funds from DFID, I think we compare there should be appropriate institutional benchmarks incredibly favourably. In fact, that is one of the and at the moment it is entirely non-transparent. Given reasons why I personally do what I do. The that it is public money that’s voted through and management fee on the capital that we use in the counted as money we’re spending on development, development space should be compared with that of we might not be. We might be spending up to 30%, UNDP, who historically charge an 8% management 40% on management fees. If that cost is brought back fee on an annual basis, and if you look at some of the in house and we used not just an output measure like NGOs that DFID support, that rate could be between IRRs but looked at the cost and output measure as a 12% and 12.5% on an annual basis. I think that’s the whole we might find that bringing more staff in-house right benchmark for this capital. in CDC would be cheaper than using funds. Q49 Mr Clappison: Sorry to just come back, but Q44 Mr Clappison: I am sorry that I arrived slightly you’re telling us there’s a much higher amount than late. Can I just come in on that because it’s something that aren’t you? I’m interested in? Are you saying that the money that Dr Bracking: There are different types of fees. The is being spent on the management fees, which you’ve management fee is generally 3 to 5%. just described as being of a high proportion, is counted as overseas aid? Q50 Mr Clappison: There usually are different types Dr Bracking: Yes, because the money is voted to the of fees in these things aren’t there? fund. The management fees are deducted by the fund Dr Bracking: Yes, but then some fund managers have managers before the fund closes. The fund closure other lines of money as well. For instance, they also generates the IRR that the CDC publish. But the fees charge a technical assistance fee or a leasing fee. and costs have already been taken out. But when they These are the ones that tend to go out to the secrecy say that they have spent, say, £400 million in jurisdiction. So they’re not paying any capital gains sub-Saharan Africa, they’re adding up everything they on the fees either. So the amount of income that can vote to and invest in the funds. be earned by having fairly fungible or multiple fee structures— Q45 Mr Clappison: So when you talk about Mr Clappison: Sounds like nice work if you can get management fees, can you give us some ideas of the it. scale of the fees, and the nature of them? Chair: We’re running way over time. Dr Bracking: The actual numbers are subject to a non-disclosure agreement for 10 years that my Q51 Pauline Latham: Just very quickly, the university signed with Norfund and Swedfund, so I Secretary of State is very keen that CDC changes and am not allowed to use any company names, but I will we’re looking at a new business plan next March. Is give you a general idea. there anything that you feel should be in it that you haven’t mentioned so far? Q46 Mr Clappison: Who asked for the Dr Bracking: There should be an official regulator. non-disclosure clause? The forms of transparency and accountability of CDC Dr Bracking: Norfund and Swedfund. CDC wouldn’t aren’t appropriate for a modern democracy. give us data at all, and CDC’s data isn’t in the public Chair: I think you’ve made that clear. domain, so Swedfund and Norfund are going a step Dr Bracking: Yes. Sorry. further. But we saw management fees and start-up fees Pauline Latham: No, no, that’s fine. Maybe our new and establishment fees of up to 40% of the investable DFID watchdog might have a look at it. fund. But Norfund and Swedfund responded that the Chair: I think we may have to look at it first. Thanks funds we were looking at were in their first year and all three of you very much. It’s been a useful and an establishment year is always costly, and it informative session. It’s very opportune that the approximates over five years and they go down. We Government are reviewing CDC. Obviously the cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
Ev 12 International Development Committee: Evidence
7 December 2010 Tom Cairnes, Dr Sarah Bracking and Dr Michiel Timmerman
Committee was anxious to have some contribution to us a short follow-up note that would we much that review before it was settled. Your evidence, both appreciated, and it certainly will help us produce what what you’ve put in writing and what you’ve given to I hope will be a useful report. I know that the us this morning, has been very helpful. It has set up a Secretary of State is quite interested in what we may number of lines of thought. On the one or two issues have to conclude. Thank you very much indeed for that we’ve asked for follow-ups, if you’re able to give your contribution.
Examination of Witnesses
Witnesses: Penny Fowler, Head of Private Sector Advocacy Team, Oxfam, and Richard Brooks, Private Eye, gave evidence.
Chair: Good morning and thank you very much for pro-poor, and so on, to the extent that they are, you coming in. I am sorry we’re slightly late, although I have to bear in mind whether they are doing it in a know you had some difficulty getting here, so that way that others wouldn’t. I think that’s where the partly explains it. Our objective is to try and finish at answer is “not enough”. half past, although we may run slightly beyond that. I don’t want to inhibit you, but you do not both need to Q54 Chair: We’ll have some more detailed answer every question. If you can be crisp in your follow-ups from that. answers we’ll try and be crisp with the few questions Penny Fowler: A similar response from me really in that we have. Of course you are here as two short, in that Oxfam would agree that private completely independent witness who just happen to investment is essential for economic development and be sharing the same session. I know you’ve just poverty reduction in developing countries. However, introduced yourselves to each other but nevertheless, the quality of that growth and how it’s targeted— for the record, will you just introduce yourselves? whether it’s targeted in sectors that are directly Penny Fowler: Yes, I’m Penny Fowler, I head up beneficial for people living in poverty—will Oxfam’s Private Sector Advocacy Team in our determine the extent to which it’s delivering a direct Campaigns and Policy Division. or great contribution to poverty reduction. We Richard Brooks: I’m Richard Brooks, and I’ve 4 welcome the fact that DFID is reviewing CDC and reported on CDC for Private Eye magazine. exploring whether it could be more proactive and pro-poor in its approach, and assessing its Q52 Chair: Thank you for your written evidence, performance on clearer, more explicit development and thank you for your report, which I think most of indicators. us have read or read at the time. I know you’ve been Chair: And that’s obviously what we’re trying to running for quite a long time on CDC issues. I will explore. just open it up and bring colleagues in with a number of more detailed questions. If you heard some of the previous evidence, you’ll obviously see where we’re Q55 Pauline Latham: 52% of CDC’s investment is coming from. The obvious question is: to what extent in four middle-income countries: India, China, South does CDC add value? What does it do that the private Africa and Nigeria. In your view is this focus sector doesn’t do? In what it does, does it really make justifiable, and if not how could the current review a development difference? That’s the essence that seek to widen CDC’s exposure to poorer counties? we’re trying to get at: what difference does it make India we know has its own space programme, we have and what’s its contribution to development? billionaires coming over and buying companies in this Obviously the constructive part of this—the country. Clearly there are a lot of poor still there. Is it Government’s reviewing it in any case—is how could right that they should do it? China, for instance, is it do things differently and better? That’s the general investing heavily in Africa. Why are CDC spending point, so just a short take on that. money in China, particularly? Richard Brooks: Clearly, CDC does do some good. I Penny Fowler: The fact is that there are still many know I’ve been a vociferous critic of the organisation, poor people, as you say, in many middle-income but it does do some good. The problem is that it does countries. Some recent research by the Institute of not do enough. The problem is it’s moved away from Development Studies suggested that around 75% of the areas where it has done a great deal of good into the poorest people live in middle-income rather than areas where, even if it’s doing good, it’s not doing any low-income countries. Therefore, arguably there is good that others couldn’t do. still a case to be made for the UK to be investing in those places, but the point would be to ensure that Q53 Chair: By “others” you mean private sector? the resources we’re deploying there are particularly Richard Brooks: Private sector, private investment, focused on those poorest groups or sectors that would yes. That’s the fundamental flaw in the way it operates particularly benefit them. at the moment. Whenever you ask questions, such as whether its activities provide development or are Q56 Chair: If they’re investing in China and India, are they doing so in a way that Chinese and Indian 4 Richard Brooks, 3rd September 2010. That’s Rich! How Britain’s poverty relief fund abandoned the poor … while its investors couldn’t do just as well? I suppose that bosses cleaned up. Private Eye. would be the key question. cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
International Development Committee: Evidence Ev 13
7 December 2010 Penny Fowler and Richard Brooks
Pauline Latham: Because China is investing hugely don’t know to what extent you can change that, but in Africa. that’s a serious weakness in the model here. Chair: Does it have anything different to bring to play that might make a difference in China? Q59 Pauline Latham: So if you start at the top Penny Fowler: I think it’s difficult to assess. In you’re going to get better targets? CDC’s own literature they acknowledge the difficulty Richard Brooks: Certainly. of determining the extent to which they’re catalysing, through their investments, additional private capital Q60 Chair: The question is, do either of you have going into those markets, so it’s quite difficult to make any thoughts about how you could focus in that assessment overall. To the extent that CDC is not middle-income countries on ways where CDC would reporting clearly on its development outcomes as have something extra to give? Are there any criteria ideally we would like to see it doing makes it less you could help us with that might focus that? clear as well. So if it were to move to a situation Penny Fowler: From a geographical perspective, one where it’s reporting beyond financial and economic idea is looking at the poorer states or regions. performance and on specific management of However, in addition to that, I know it’s considered to environmental, social and governance issues, and be slightly controversial, but based on Oxfam’s more explicitly being measured on its development experience and the evidence from various institutions, performance against some more detailed indicators including the FAO and the Bank, certain sectors that there, then I think there would be a stronger case for are particularly labour-intensive or where a lot of very it to continue investing in those places. poor people are engaged—for example, in agriculture, Richard Brooks: The figures you quote show why it’s smallholder agriculture in particular—should be important not to concentrate too much on geography. considered as factors that are used to determine where It does depend on the type of investments. The degree CDC is potentially required to direct a proportion of of investment in India and China that built up was its investments. The idea of looking at certain sectors under what looked like quite a progressive investment or regions—the obvious ones from our experience code, which was exploited, if you like, in order to would be smallholder agriculture, finance for increase investments in India and China in particular, agricultural related small and medium-sized and also in Nigeria and South Africa, in such a way enterprises, rural infrastructure—might be shown to that private business was doing anyway. This is one be particularly beneficial from a poverty reduction of the problems with having an inflexible code: that it perspective. gets exploited to its limits. You need to go back from that code to the incentives, because what caused that Q61 Anas Sarwar: Short question: do you think it problem were the incentives; everybody, the CDC would be beneficial to directly incorporate poverty management, the fund managers, were incentivised to alleviation into the mission statement of CDC? make as much profit as possible. So within the terms Penny Fowler: Yes. of the code they were able to do exactly what you Richard Brooks: Yes. described. Q62 Anas Sarwar: It’s an easy question. Q57 Pauline Latham: If there were more detailed Richard Brooks: The point is interesting, because targets with regard to investments in the what you’re getting at is: what does CDC see itself middle-income countries, specifying that a certain for and how do you codify that? One of the problems percentage should go to poor states, do you think that is that the codification that has happened has allowed would make life better? it to lose direction, to move away from poverty Richard Brooks: The code has already changed in alleviation, so you need to get that right at the top. that respect, quite significantly. However, I still think that without changing the incentives that’s of limited Q63 Anas Sarwar: So in terms of your own use. The new code will be taken to its limits. What thinking, Richard, obviously from the article you you need to do is get back to what incentives the wrote, you are very critical of what CDC has become, people who are running CDC itself, and who are but I think that you are strongly in favour of it running the investments as fund managers, have for basically getting back to where it was. Am I right in their performance, because even in the poorest thinking that or is it more complicated than that? countries under the current arrangements the incentive Richard Brooks: It is a bit more complicated, in that is to look for the maximum return. That can lead you things have changed since 1948. In terms of its into some very dubious places. purpose, yes, it needs to see its purpose as poverty alleviation and not to equate that with making profit. Q58 Pauline Latham: So, if the incentives in terms The fundamental flaw is that through various steps, of performance-related pay, rather than saying, “The particularly in the last 20 years or so, it has equated more money you make, the more money you get,” making profit with relieving poverty, and that’s just were changed, they would then focus in different a mistake. areas? Richard Brooks: Yes, I think that’s the first step. That Q64 Anas Sarwar: And have you compared it to any has to happen at CDC itself, but there’s a fundamental other models of any other organisations that are flaw in the private equity model, in that the private similar to it around the world that it can perhaps better equity fund managers are incentivised in that way. I model itself on? cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
Ev 14 International Development Committee: Evidence
7 December 2010 Penny Fowler and Richard Brooks
Richard Brooks: Other development and finance Q66 Jeremy Lefroy: That really leads us on to the institutions do appear to have a better range of next question. In its investment code, CDC promotes investment methods open to them. They appear not to responsible business practices in respect of the target profit so heavily, and CDC has a lot to learn environment, social matters and governance. How far from that. do you think that investment code is, in fact, implemented, and in respect of the aggregate fund Q65 Chair: Your report, if I may say so, slightly manager level, is that reporting sufficient? suggested that there was a golden age of CDC where Penny Fowler: The investment code has some good in reality there were some good things and some elements in it, clearly. There appear to be quite a few mixed things. But you clearly believe there should be areas that are open to interpretation: quite a lot of more direct investment activity. I don’t know whether “where appropriates”, and that kind of wording. There you heard much of the previous evidence, but there could be an argument to try to tighten the investment were mixed comments about that. Of course, it code to some extent. CDC in its own documents requires more management, there’s more risk involved acknowledges that the monitoring reports it typically and there isn’t anything fundamentally wrong with a receives from its fund managers are insufficient to, in fund of funds if it’s more focused and targeted. But some cases, assess the impact of all of their do you have a view that there really ought to be a investments from a development point of view and mix, that just having it as a pure fund of funds, even the level of detail that you could interpret from the if they’re more targeted, would not be enough, and investment code. There’s quite a lot of flexibility in you need to offer a range of different options? the investment code as to whether or not that’s really Because if you do, that’s a perfectly legitimate point required of those fund managers. So I think that there that we have to consider as a Committee, but it does is a case to be made to tighten that up and to require lead to a much more radical restructuring of CDC from where it is at the moment. clearer reporting on that basis. Otherwise you’re left Penny Fowler: Oxfam’s view is that that should be with a situation where those funds are operating in a seriously considered. To go back to the earlier points, very similar way to any private fund that’s managing CDC is effectively an arm of DFID, whose mandate its ESG risks and is signatory to the UN Principles for is poverty reduction. I think that DFID as the Responsible Investment. shareholder should be a smarter owner of CDC and Richard Brooks: When you read the code, you think, be clearer about the balance it expects CDC to deliver “Well, that all looks fine.” But as Penny says, there’s between clear development benefits and financial a lot of room left for things like tax avoidance and returns. The current fund of funds model is inadequate due diligence. There’s very little way of problematic to some extent, because while CDC has checking how far the code has been followed. The done quite a lot about requiring and raising awareness main mechanism, as I understand it, is that the fund among its fund managers, around managing managers have to report on development impact to environmental, social and governance risks, it requires CDC. I’ve spent quite a long time trying to get these a different approach to be more proactive about reports, unsuccessfully, through the Freedom of actively looking for how it can maximise the Information Act. CDC wouldn’t provide them and the development impacts of its investments. That requires Information Commissioner agreed with CDC that they some different kinds of expertise, probably, and closer shouldn’t be provided. CDC said, “In a market that management by CDC about directing those is both highly competitive and extremely sensitive to investments and monitoring their impacts. adverse publicity, disclosure of these negative Richard Brooks: I agree. I think that there’s certainly evaluations would or would be likely to prejudice the a need for a wider range of ways of investing, so not fund manager’s ability to attract new investors.” So just through private equity but equity direct even where we have adverse findings on development investment, lending money where that’s the we can’t know about it because the commercial appropriate method. For all of those, the overarching imperative overrides disclosure. So whatever you have demand is for greater accountability so that we can written in the code, you can’t find out whether it’s see what’s happening to the money. One of the great being lived up to, and as Penny says it leaves room for frustrations I’ve had over the last couple of years is certain kinds of behaviour you wouldn’t want as well. that you just can’t follow the money, you can’t really find out what’s happening. This is a serious flaw in Q67 Jeremy Lefroy: So just following on from that, private equity. You approach CDC not necessarily on CDC doesn’t appear to use its clout as being a major specifics, but on the way in which their investee investor in these funds to extract greater transparency? company is operating, aspects that are fundamental to the way they operate, like avoiding tax as a Richard Brooks: Quite the reverse. It demands fundamental part of the structure of the business, and complete secrecy. CDC says it’s none of its business; it’s down to the fund manager in the company. You go to the fund Q68 Chair: That brings us on to the role of the manager and they say, “No, sorry, we’re private offshore centres. 45% of CD funds are invested equity. Don’t you understand private?” You can’t ask through Mauritius, which is not without its anybody, so there’s a complete vacuum of controversy, and CDC says it’s “not an apologist for accountability. It strikes me that without that, without offshore financial centres” but it’s a heavy user of being able to see what’s happening to public money, them. the model is fatally flawed from the off. Pauline Latham: You might recognise that quote. cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
International Development Committee: Evidence Ev 15
7 December 2010 Penny Fowler and Richard Brooks
Chair: It is appropriate to use these jurisdictions at which are prepared to show what happens to their all, which clearly they defend, in terms of tax paid, money, may be of greater development and even but does it also have an implication for transparency? economic value than secretive ones. Richard Brooks: The use of tax havens to invest in Penny Fowler: I’d only add to that that I think DFID the investee companies, as a place to locate the fund and CDC to its fund managers should be sending a managers and the collective vehicles—the holding clearer signal about the balance that it’s expecting and companies in which investors come together—is a potentially accepting lower financial returns if that default position, because it presents no problems, it delivers clearer development benefits, which may will work in just about every situation. I think that’s include this transparency issue as well. lazy, really. Each investment could be looked at a lot Chair: I think that probably leads to a number of more closely to see whether it could be done without questions that Jeremy Lefroy has. using tax havens, therefore giving transparency and enabling people to see what happens to the money. Q70 Jeremy Lefroy: I’m getting the strong I’ve looked at many of them and wondered why they impression that, given that this is all taxpayers’ couldn’t have used a UK company. They could have money, we should demand a higher degree of avoided the double taxation that is cited as the reason transparency in where it goes. Obviously, to some for using tax-haven companies, because UK tax law extent there may be limits on commercial allows for relief for double taxation. So it is possible, transparency, but certainly when it comes to ethical and I don’t think CDC or its fund managers try hard matters we need much more transparency. That’s a enough. I don’t think they try at all to find a way of question. making investments without tax havens. There might Richard Brooks: The question is how you achieve be the odd occasion where it really would be difficult that. An essential feature of the private equity model to do it any other way, but we can’t really know. We really is the privacy. It’s something for the Committee can’t know enough details about the deals they’ve to consider, but the extent to which you can open up done to assess that. private equity to make it a sufficiently transparent use Against that, there’s the cost of using the tax havens of public money is a difficult one I think. as you allude to, which is complete opacity. You just do not know what’s happened to the money in some Q71 Jeremy Lefroy: Just moving on from that, what that I’ve looked at, in very dubious situations. We areas do you think CDC should be investing in in know that CDC has invested through the fund order to have a bigger developmental impact than it manager ECP in Nigeria with seriously corrupt people does at the moment? and their business associates. Now, they’ve invested Penny Fowler: I mentioned some earlier. The fact that collectively through Mauritius. How do we know CDC is the development finance arm of DFID and what’s happened to the money that’s gone to is aiming to demonstrate that private investment can Mauritius and then to the British Virgin Islands deliver a financial return and development returns at company controlled by these corrupt people? We the same time suggests that there should be a clearer can’t. We should be able to follow that, but the trail steer and focus on the delivery of those development runs cold. CDC itself doesn’t even have the accounts returns, even if that involves a lower financial return. of that holding company. Whilst there may be I guess that while there is a case to be made for marginal justifiable benefit from the occasional use of maintaining a degree of separation between DFID and tax havens, the cost is very serious. CDC, at the same time there’s a case to be made for incorporating stronger development expertise into Q69 Chair: Presumably the implication is then that CDC, and/or for there to be smarter management and if the Government decided that CDC should not collaboration potentially. For example, within operate in this way, it should be open and particular countries where DFID will have an transparent—it’s not to be compared with a private expertise and analysis of where the sectors are that sector equity fund because it is the public sector would be particularly important from a development development fund—it would presumably have and a poverty reduction perspective, I don’t know the implications for the rates of return, because their extent to which CDC would currently be using that argument is that by doing it this way we can get a information to inform its own investment strategy in a better rate of return. They will probably go on to particular country, but that’s one example. Obviously justify it by saying that therefore they have more where the biggest development impact might be will money to invest in poor countries. I think what you’re vary from context to context and country to country, saying is the price of lack of transparency, or opacity, but there are some—including those I mentioned as you put it, is too high a price to pay. Is it a moral already where there’s evidence of the poverty benefits judgment on the kind of fund it is rather than on the of investing in smallholder agricultural or finance for whole business of equity investment? agricultural SMEs—where there’s currently a Richard Brooks: I think it goes beyond CDC, yes. It’s constraint. particularly acute because CDC is using public money. The alternative is that CDC says, “Look, if Q72 Jeremy Lefroy: Going back to that, and I fully you want our investment, everything’s going to have understand why you’re saying that, do you think that to be out in the open.” That wouldn’t be the end of both those sectors are sectors in which CDC could the world, and it may in fact mean that investments invest profitably, even accepting perhaps that there’d get directed to much more worthwhile businesses. It be a lower rate of return? Are there examples of other may be controversial to say it, but open businesses, development finance institutions investing in those cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
Ev 16 International Development Committee: Evidence
7 December 2010 Penny Fowler and Richard Brooks areas successfully, albeit maybe for lower returns, but Q74 Jeremy Lefroy: One of our previous witnesses actually doing what you’re wanting CDC to do? referred to the large-scale, one might call “land Penny Fowler: I think this is an area that DFID’s grabs”, that are going on in parts of the world at the commissioned some research into and we’re trying to moment, where sometimes even sovereign wealth look more closely at the extent to which that would funds are coming in and buying up large amounts of be possible. I think it is an important area to be agricultural land. Is this an area where you would explored within the context of the current review of actually see that a slightly reformed CDC would be CDC. I think that there’s no getting away from the fact able to provide a better governance model for such there are often challenges in investing in smallholder activities than is going on at the moment? agriculture, for example. Oxfam is engaging in some Richard Brooks: It’s not something that I’ve looked collaborative work with some private sector at in detail, but it is the sort of thing that CDC should companies in this area ourselves. You are often be looking at. It should be thinking about what role it required to take a longer term view and tolerate a can play in developing these alternative models. I’m lower financial return, at least in the short to medium familiar with the issue you’re talking about. I haven’t term. But I think it needs looking into in more detail really thought about what it could do, but it certainly and considering seriously for CDC in the future. should be at the leading edge of that thinking about Richard Brooks: I agree completely. I think that the what could be done. priority is to look at, in each country, what is the need Penny Fowler: That’s a more general point really. I in that country? Where would investment make the think DFID’s often considered to be one of the leading greatest contribution to development, bearing in mind development agencies, and CDC as its development what others are prepared to invest in anyway? You’ve finance arm should be aiming to position itself as, got to be careful, I think, not to override that careful similarly, the leading development finance institution, consideration that’s needed with too many rules or too demonstrating best practice in these areas and many targets that would just distort investment demonstrating business models and ways of doing decisions. investments that genuinely deliver poverty reduction and development whilst also delivering a financial Q73 Jeremy Lefroy: Moving on from that, one return, even if that’s over a slightly longer timeframe. option that’s been put forward as a possibility is that CDC perhaps should continue as it is at the moment, Q75 Chair: Clearly, if CDC changed its model and perhaps with some modifications, but that it should started losing money, I guess that would give you a gradually, through the profits on its current whole new seam of criticism. I think taking the Oxfam investments, set up a separate fund. It could be within model, where I think you suggested 50% maybe the same organisation, but would have clearly separate should go into direct investment and 50% in funds. objectives, which would be to make investments in You can debate what the proportion is, but both of the kind of things that you’ve been suggesting. Would you seem to be implying that a transitional role where that be a model that you would think is valid or do you get more transparency, you still have a you think a greater overhaul is necessary, given that commercial return, but you invest some of that in a it’s very difficult to liquidate a fund such as CDC very lower rate of return longer term, more quickly? In fact, it would be counterproductive to do development-orientated, not necessarily more risky, so. What we are effectively saying is CDC as it is because I think the other evidence would suggest we now would not grow, but the growth would be through shouldn’t be taking more risk. Do you think that putting the profits into a second type of fund. would give us the kind of cover that would avoid the Penny Fowler: I think that’s a possible way to make risk of CDC getting into financial difficulties, which a change over time, to having a stronger focus on would clearly be an embarrassment to the delivering a development return. As Richard has Government, but also move away from a situation suggested, the issue is having a clearer steer about the where, frankly, it’s just driven almost by a profit need to deliver these development benefits, and then motive, which doesn’t make it very different from a allowing CDC more space to learn over time and private sector fund? refine its approach, to experiment and see what works Penny Fowler: Given that we outlined something like and where the right balance is between how it can that in our written submission5, yes, that would identify potentially viable industries that are stymied sound like a sensible way to proceed, also bearing in through lack of private investment currently but have mind that the whole point of CDC and similar really got a genuine potential to become viable and development finance institutions is to demonstrate that potentially deliver a financial return over a longer time investments in these countries and pro-poor period. So it’s not saying that’s an easy thing to do, investment can deliver a financial return. It needs to necessarily, but the approach you suggest would be showing that over time and exploring, opening up provide one way of it developing some expertise and new frontiers for private investment and some learning, and moving to that different model demonstrating what’s possible. over time. Richard Brooks: I would agree. I’m not sure about Q76 Chair: And I think you’re saying that less the mechanics of changing direction. That sounds like requirement for resistance to Freedom of Information a viable method, but you have to be careful that you’re and more positive, proactive transparency is not over-hasty in counter-productively liquidating something that you believe the CDC needs? investments just because they weren’t the right ones in the first place. 5 Ev 56 cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:07] Job: 008635 Unit: PG01 Source: /MILES/PKU/INPUT/008635/008635_o001_kathy_IDC 07 12 10 corrected master file.xml
International Development Committee: Evidence Ev 17
7 December 2010 Penny Fowler and Richard Brooks
Richard Brooks: Yes, that’s one thing that’s essential. counts a lot for people, even bankers. The reason Given that I mentioned how the Information given for such high pay at CDC was that the Commissioner has viewed Freedom of Information comparator was private equity, and it was appropriate requests on things like development impact, to look at private equity, which I think was always something needs to be built into a reformed CDC that nonsense. Public sector job security was completely means that an Information Commissioner would judge ignored, as evidenced by the fact that the 100% owner the public interest to be in disclosure, so the of CDC, the Secretary of State for International commercial interests wouldn’t have such primacy. Development, has just said that it’s lost its way. He’s Secondly, I think that the audit arrangements need to made some extremely critical comments about the be overhauled. CDC needs to be within the scope of organisation and the Chief Executive is still there. public audit, which it isn’t. There are still some huge How many Chief Executives in a private equity fund unresolved question about the way Actis was created, would still be there once their 100% shareholder said and the valuations that were put on investments at the that he’d lost his way? The pay arrangements are a time. At the time an investment in a mobile phone nonsense. company, Celtel , was valued at $15 million dollars. Penny Fowler: The other important point that the The next year it was sold for $250 million. But we other witnesses made, which came up in our session can’t question the process of that evaluation. It’s just earlier, was about the importance of ensuring that the not within the National Audit Office’s scope. When reward, the performance-related pay, is based on the Public Accounts Committee looked at CDC they delivering development returns, as well as financial had to look at DFID’s management of CDC, not CDC. returns, which is a really critical point. So a number of fairly scandalous aspects of CDC were Chair: These issues have been raised before, but you just brushed over. So I think that needs to be changed, can see they attract huge, obvious controversy. This is along with greater transparency. about a pro-poor agency, and the people running it are millionaires. You made the point in your own articles; Q77 Chair: I don’t know what the legal situation is, it’s very difficult to reconcile the two, unless you can but do either of you have a view of the future of Actis demonstrate that you wouldn’t be able to deliver those should be? results otherwise. We’ve had mixed evidence, but I Penny Fowler: I haven’t really, no. think it points in one direction overall. I appreciate Richard Brooks: Well, Actis is sort of floating free your coming in. For us, this is an interesting inquiry, now. It’s the one that got away. I know it was quite because CDC is a major body owned wholly by a while ago, but I still think there should be a full DFID. The Committee did not investigate it in the investigation into how it was created. People have told last Parliament, to some extent because there wasn’t a me things that happened, which I haven’t been able to background of change. There is now a background of print, about how investments were valued, how change, against which I think we could usefully flesh everybody knew it was undervalued, how they were out a lot of different ideas and help perhaps to shape more or less laughing at the process. People have a different way of doing things, and I think both of walked away extremely rich from that, albeit six and you and our previous witnesses have been very a half years ago. helpful in giving us some pointers. I must say to you, Chair: Thank you. We have the opportunity to Mr Brooks, you’ve obviously been persistent over a question both the Chief Executive of CDC and the long period of time. I’ve read quite a number of your Secretary of State, and we will want to probe a little reports and you’ve clearly gone into a lot of detail. bit more, not only into what went wrong—I think It’s created some degree of paranoia perhaps within we’re more interested in the future—but I do take CDC. Perhaps they’d be better off inviting you into your point, which is how you can go forward in a way their parties rather than shutting you out. which makes it more open, more transparent, more Richard Brooks: It was nice to get an invitation today, development friendly whilst hopefully still being able for a change. to be self-financing, because the one virtue of it is that Chair: At least you got some protection in the end. it is able to reinvest money in development and Similarly for Oxfam, I think you’ve come up with doesn’t become a liability, but there’s a long way some useful parameters for us to explore. I’d like to between where it is now and that, one would think. think all of our inquiries are useful and add value, but this is one where, even though it’s a short one, quite Q78 Jeremy Lefroy: I just wanted to put one a lot of ideas have already come out this morning, question that we put to the previous witness. I know which can be helpful to the Department, as well as to there’s been a lot of interest in the remuneration of ourselves, in producing something helpful for the people employed at CDC. Do you think that it is future. necessary, which is the argument that is put, to pay Pauline Latham: Is it next week we’re supposed to those kinds of remuneration to attract the kind of be seeing CDC? highly-skilled individuals who are needed to work in Chair: We’re seeing CDC next week, and the this particular area? Secretary of State we’re seeing after Christmas. Richard Brooks: No, I don’t. We heard earlier that Pauline Latham: I’m sure you might be in the people want to work in this kind of area because it is audience then. a very interesting, very useful area to work in. That Chair: Thank you both very much. cobber Pack: U PL: COE1 [SE] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
Ev 18 International Development Committee: Evidence
Tuesday 14 December 2010
Members present: Malcolm Bruce (Chair)
Mr Richard Burden Mr Michael McCann Richard Harrington Alison McGovern Pauline Latham Anas Sarwar Jeremy Lefroy Chris White ______
Examination of Witnesses
Witnesses: Richard Laing, Chief Executive Officer, Richard Gillingwater, Chairman, and Rod Evison, Managing Director for Africa, CDC Group plc, gave evidence.
Q79 Chair: Good morning, gentlemen, and welcome capital, and continue to invest that in the poorest to this session of the International Development countries of the world. In fact that had already been Committee. Although we know who you are, would done with a company called Aureos, which focused you introduce yourselves for the record? on small and medium enterprises. CDC would then Richard Gillingwater: Yes. Good morning. I’m provide capital to both Aureos and the main spin-out, Richard Gillingwater. I’m the Chairman of CDC. which was called Actis and still exists today, and then Richard Laing: My name is Richard Laing and I’m go on to provide capital to others. the Chief Executive of CDC. The idea behind this was that fund managers based on Rod Evison: My name is Roderick Evison and I’m the ground in the countries in which CDC operates the Managing Director for Africa. are best equipped to find good, sustainable businesses, which is where our capital eventually ends up; Q80 Chair: Okay, well thank you very much. secondly, those fund managers could manage not just Obviously, you are only too aware that CDC’s role our own capital but other people’s capital, including is being reviewed and that the Government wants to other Development Finance Institutions. So CDC then promote more private sector development and wants became what is in the industry often called a fund of to consider whether or not CDC can modify or change funds; that is we are an entity with currently or operate in different ways in the future, but if we £2.7 billion of net worth, and we are putting that can perhaps look at what it is and then perhaps further capital to work in private equity infrastructure, debt on we can look at what it could become. Obviously, and other funds. We are not doing our investing CDC is not unique in that there are other funds of this directly, but we are using, as I said earlier, fund kind operated under the development auspices of other managers on the ground in the countries where we countries, but I wondered if you could say what you invest. think CDC brings to development and obviously Richard Gillingwater: If I can just add specifically to particularly private sector development that the IFC your point, I think the way in which CDC is and the World Bank or other comparable organisations distinctive perhaps against some of the DFIs is it has run by other countries do not. Most of them operate a very definite focus on equity or has to date, and as a mixed basis, whereas CDC is purely a fund of certainly relative to a lot of the other DFIs, it is doing funds, so in its present format, what do you think that a lot more in sub-Saharan Africa and South Asia than CDC delivers that other comparable organisations do most of the other DFIs. not? Richard Laing: In section 2.12 of our submission to Richard Laing: Chairman, it might be worth going the Committee, there is a chart that shows that of the back and explaining a little bit of the history of CDC, other major European Development Finance which would explain why we do what we do today. Institutions, CDC has 57% of its new commitments in 2009 in sub-Saharan Africa, which is far ahead of the Q81 Chair: Yes, as long as you don’t take too long. other Development Finance Institutions, and a Obviously, we have got some background. combination of 90% in sub-Saharan Africa and Asia, Richard Laing: No, we won’t take too long, and in which again is far ahead. So CDC of the European fact I’ll only go back to 1997. That was when the then DFIs, Development Finance Institutions, and indeed if Prime Minister said that he would like CDC, which at you compare it also against the private sector arm of that stage was mainly providing debt for projects in the World Bank, the IFC, is much more focused on the poorest countries of the world, to be a PPP— the poorest counties of the world than any other public private partnership. That led to some Development Finance Institution, and that was substantial reorganisation in CDC to prepare it for because DFID, our shareholder, the Department for privatisation. International Development, wanted to make sure that It became apparent in around 2002 that it would not we were focusing on the very poorest countries. be possible to privatise CDC, but, in order to achieve a PPP, it was decided that what would happen would Q82 Chair: I think that is understood, and you’ve be that most of the investment staff of CDC would be just answered the obvious question that that was spun out to create a fund management company. So actually a requirement from Government that you people who would take capital, including CDC’s would do that, but questions have been raised as to cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
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14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison whether you were, first of all, delivering for the can expand our businesses, whatever they might be.” poorest people in the poorest countries and to what I haven’t followed her individually, but they were extent what you were doing was alleviating poverty, definitely looking forward to expanding their given that that was not a specific requirement. So can businesses. you give an example or examples of how you believe that CDC’s activities have directly reduced poverty— Q85 Chair: Just on a practical point, the Committee not just delivered investment results in the poorest has seen in the past where DFID in its bilateral countries, but reduced poverty in those countries? country programmes has done direct microfinance Richard Laing: Yes, and let me talk about West itself. So how do you sit alongside when DFID is Africa. I was in West Africa earlier this year, and one doing that? Do you communicate with each other, or of the things we have done in the last few years is to are you just doing your own thing? put quite significant sums of money into small and Richard Laing: We certainly communicate with each medium enterprises and microfinance. I was sitting other. The models that we are seeking to do are with a group of Ghanaian woman who were using sustainable models in the sense of using private sector CDC capital in microfinance. They borrow capital. We want to see not just the relatively small approximately $200 and pay it off over a year. One of sums of money that Development Finance Institutions them, for example, had a jeans garment manufacturing can provide but that attract alongside us the billions operation; another one had a little stall selling and even trillions of dollars that are required in these commodities. countries, and I think probably the difference is that Microfinance is an area that before, in the lead up to our models are very much about making it financially privatisation, we probably wouldn’t have done. One sustainable and attracting private capital into it. of the advantages of being owned by the state is that we can take very high risks and do things such as microfinance. Microfinance and SME investing in the Q86 Chair: In other words, making it a commercial funds that we’ve invested in 2009–10 represent over success. 30% by number of the funds that we’ve done in the Richard Laing: Indeed. last couple of years. These small and medium enterprises, microfinance, really do have an effect on Q87 Pauline Latham: On the point of this lady or the poor. people that you met, did you make the decision to I think it’s also worth saying that our overall mandate lend $200 to that woman, you being CDC, or was that is to create economic growth. No country has reduced through Actis? poverty in the absence of economic growth. You need Richard Laing: No, it wasn’t Actis. This particular to have economic growth. The economic growth one was a fund manager called Lok, which is based comes certainly from small and medium enterprises in India, run by Indians. Actis is just one of our 65 and microfinance, but it also comes from larger fund managers. They don’t do microfinance, so this is activities such as big infrastructure projects and another of our 65 fund managers.1 They have medium and big companies, as well as small invested in microfinance institutions that then do the companies. So I think it is not accurate to say that it operational side of the activity. They are of course on is just small enterprises that have an effect on the the ground, so they understand the needs and poor. Also big companies do because, after all, they requirements of the market. do employ people. Q88 Pauline Latham: When you did your preamble Q83 Chair: I didn’t suggest that was the case. you talked about how it was important to have people Richard Laing: No, but some do. on the ground, so your employees are in-country; they Chair: We recognise that, just exactly what you said, are not in this country. if countries are going to come out of poverty, it will be Richard Laing: No, our employees are in this country. through economic development and economic growth. What we are doing is providing capital to fund We accept that and the Government accepts that. The managers, and those fund managers are in-country, on question is to what extent CDC’s activity does the whole. Most of them are in-country, so they have actually help people out of poverty. You’ve given us people on the ground and those are the people who examples on the microfinance point. Of course a large are investing the capital. company investment could do it, but we’ll come on to questions like that because the point is to what extent Q89 Pauline Latham: Right, so you don’t actually CDC makes a difference. do any investment as an organisation. Richard Laing: What we do is we agree with the fund Q84 Chris White: A very brief question: going back manager the strategy of the fund, the terms and to that lady that you lent $200, it may be a bit unfair, conditions, the environmental, social and governance but do you know what has happened to that person issues surrounding it, the best practices surrounding now? What was the outcome of that story—building it, and agree with them upfront how the fund should the business? operate, but we do not make investments directly out Richard Laing: She was about halfway through paying off her loan. When talking to her and her 1 Note by Witness: Catalyst, is the name of the fund manager, not Lok. It invests in Ghana and Nigeria, and is not based in colleagues, I did say, “Well, what about the future?” India and run by Indians. Actis is just one of 70 fund The refrain back from everybody was, “We want more managers (not 65). They do not do microfinance, so that is of this. We want to have a bit more capital so we another of our 70 fund managers, not 65. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
Ev 20 International Development Committee: Evidence
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison of London. We feel it is better to have local people gone to a number of other investors, mainly I have to doing it and building up the capacity locally. say other Development Finance Institutions but also some private sector—we would like to see more Q90 Pauline Latham: Just for clarification on what private sector—and that fund has now got over you said, how many million did you say you had? $100 million of capital. That fund would not have Richard Laing: Our net worth at the moment is existed without that initiative by us to get it going, £2.7 billion. and perhaps the biggest example of all is Actis itself, Pauline Latham: Billion? which of course spun out from us and was seeded with Richard Laing: Yes. capital by CDC and now runs $4 billion of capital. Rod Evison: I would just add, from the Africa Q91 Richard Harrington: I am familiar with the perspective, that I have been in CDC 20 years so I’ve concept of a fund of funds, at least in the more seen part of the old and the new. When we started conventional UK investment terms, so I understand with this new business model in 2004, the state of that you do not get involved in direct investment. maturity of unlisted investment in Africa was very However, reading quite a lot of your material, a lot of weak. There were just a handful of fund managers the money you invest is with other investors in who were trying to do the business. Few of those had different ways investing in the same funds. Using a raised a successor fund. When we now look at the sort of standard investment analogy in the City that is state of the industry, we have got around 25 fund perfectly understandable. Obviously, we are here as managers that we’ve backed in Africa. We’ve got over the International Development Committee from that 40 funds in Africa. I think the mobilisation impact of side of it, rather than the investment side. I am trying private capital has shown to all sorts of investors that to understand from reading your material to what Africa is a successful destination for capital. extent CDC is a catalyst that provides the main role There are two examples that I would add to try to and you’re the lead investor to bring in lots of other illustrate this. One is in a SME fund that we backed investors because of your reputation or perhaps the called GroFin. We initially backed that in 2005 in size of investment, or to what extent you are a kind order to provide SME finance into East Africa, and of fellow traveller. I don’t mean that in an insulting then in 2008 we backed the second fund, which is a way, but people are putting a fund together and like much larger fund, to spread out into seven African in the City, “I’ll have a piece of that; you have a piece countries. That is one example of what we’ve been of that,” because in economic growth and doing. Infrastructure would be another example and development terms, it is very different. In pure right at this time, we are just in the process of closing investment terms, it’s perfectly acceptable to say, a fund that involves specialist investors in “Who else is in? Yes, we’ll have a piece of that infrastructure, which is one of the key constraints in because it sounds very good.” I can’t find actual African development, but all of the selection of funds examples from the information I’ve read where you that we do is with a development objective. That is are the main people going into a new market, burning what we are trying to achieve. out new ground, and saying to others, “Follow our example.” So if I could probe you a bit on that— Q92 Richard Harrington: Can’t there be a real perhaps give us some real examples of the sort of conflict between the two aims because I’m sure, creative side of it: new investments, new markets, perhaps referring to Mr Gillingwater, the Chairman, breaking new ground. or the chairman of an investment committee, on the Richard Laing: Let me give you two data points and one hand you have got the fear that anyone in then my colleague Rod Evison might come in. First investment has: that the pioneers get shot by the of all, if you look at the funds that we have invested Indians. They are the ones that always lose the money, in 2009–10, which is up until the date we put our 2 although it might have perfectly excellent credibility submission into the Committee, there were 19 in terms of its proposal for economic growth and the funds. Fifteen of those funds were materially affected development side of it, compared with your by CDC’s involvement, either because there were our presumably other hat. I’m trying not to put words in initiatives or because we had a very large proportion your mouth, but I’m trying to compare it with a of the fund or because we changed it in some way in standard investment committee where the fact is, if order to attract other people into the fund and get more someone else is in it and it is a well trodden path, it capital into it. is a much better way to go because after all everyone, We certainly don’t feel like a traveller along the way, the press, is very happy to blame you if things go but let me give you an example. Earlier this year, we badly. So to what extent are there these conflicts in decided that sustainable forestry in sub-Saharan investment decisions? Africa was not getting the investment it required. A Richard Gillingwater: Just let me address that one. I lot of these forests were being looted by illegal think you’ve touched on, in a sense, what our raison foresters and they needed to be run more sustainably d’être is. I think our raison d’être, putting it very and legally. So we decided that we should put out a simply, is to demonstrate that you can invest tender, an invitation for people to come and run a fund successfully in sub-Saharan Africa. You can create focused on sustainable forestry in sub-Saharan Africa. economic growth through that and by doing that, earn We said we would put $50 million into that fund. We returns, and those returns are attractive returns if you had a number of responses to that and we selected a reward the investment. That acts to create a fund manager. That fund manager has now, with us, demonstration effect and to bring in the very private 2 Ev 60 sector investors that we are talking about. I think our cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
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14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison whole sort of modus is very much around trying to Rod Evison: I would just add that the strength of the demonstrate that Africa or South Asia is not as risky model is the multiplier impact: instead of one as investors think it is. I don’t think there is a conflict distribution channel that the old CDC had, we’ve now there at all. I think that is at the heart of our mission. got multiple distribution channels through—whatever Can I just add a comment to your earlier point—just it is—70 fund managers, each of which has got a some evidence that you’d had from in this case separate strategy and each of which gets us into EMPEA3, just talking about the catalytic effect of different areas in different ways, but you’re absolutely CDC and they say right towards the end in paragraph right that what we don’t have is the decision over nine of their submission, “CDC-backed fund ultimately each individual investment that is made. managers account for approximately 77% of all capital raised for private equity investment in Q94 Chair: But the bottom line would be, if Aureos sub-Saharan Africa over the last decade.” So whether hadn’t had CDC funding and hadn’t taken it, would that percentage is right or not, I think it shows the that business be there or would it be operating as scale to which CDC has been mobilising outside effectively? capital. Richard Laing: The answer is no. The £2.7 billion of Richard Laing: Could I add one more comment capital that we have got and that we’re putting to work Chairman, if I may? I think there is a myth out there is going into businesses like that and, perhaps even that there’s a whole load of capital, particularly for more importantly, the capital that is coming alongside Africa, and that Development Finance Institutions, in it is also going into those businesses. particular CDC, are just sort of following the private sector. In many ways, I wish that were the case Q95 Mr McCann: CDC, gentlemen, uses the equity because we’d allow the private sector to get on with financial tool, the Dragons’ Den tool, for determining it, but unfortunately it’s not. Some 74%, so almost investment, but could you tell me which financial three-quarters of the funds that we’ve invested in 2009 instruments are most in demand within low-income and 2010, have other Development Finance country markets? Institutions in them; 36% of the funds failed to reach Richard Laing: Private equity is indeed the major part their target size; and almost all of the funds failed to of what we do and the reason we did that goes back reach the maximum size that they’re aiming for. If a number of years to when we identified that what you speak to fund managers, and you met with Tom was really required in Africa, and poor countries Cairnes who runs one of the funds last week, they are generally, was equity capital; the high-risk capital, the desperate for more capital and the private sector at the capital that is long term and patient. There was debt; moment is not delivering it, and that of course is there is still a shortage of debt; but it was equity that where the Development Finance Institutions have is really required. Just last weekend, I was talking to come in. somebody who is involved with a wind farm in north- east Kenya, and I said, “How’s it going?” and he said, “Well, we think we’ve got the debt; we think that’s in Q93 Chair: I take your point. You’ve given us a place; but we cannot get that final tranche of equity.” number of examples in your submission. What you That is a story we hear time and time again. That haven’t said, and I am just curious, is what your input project will not get off the ground until it can find that was. If you take one, you’ve got Brookside Dairies in equity. So equity is the instrument of choice at Kenya and you talk about what the business is— moment, though I would add that we also do do some 150,000 farmers. What is the CDC contribution to that debt as well. We have a number of funds that are and would it have happened without CDC? That’s the involved in debt, at the moment over 10% of new sort of information I think we need, because it’s a very funds are involved in debt, and so I am not saying nice sort of case study but it doesn’t say what there is not a need for debt, but we did identify equity difference CDC made—how much of it was you, and and DFID did identify equity as the main instrument how much of it was other partners? when we set out to do what we do today. Richard Laing: Well, let’s take that one as an example. That is a transaction that is managed by a Q96 Mr McCann: But is that the instrument that fund manager called Aureos. CDC is the largest those low-income countries are looking for? capital provider to Aureos. It’s based in Kenya and Richard Laing: Absolutely. Take that Kenyan the Kenyan team of Aureos run that investment. Now, example: that project won’t happen without that when you say what input does CDC have, you were instrument, without the equity. right, we do not have a day-to-day direct input in that dairy—a dairy that, incidentally, supports 150,000 Q97 Mr McCann: In terms of how other DFIs people. Our capital of course is the capital that has undertake a range of different functions, are there any gone into that dairy to grow it, but we have asked the that CDC would like to take on, looking at other DFIs fund manager to invest our capital on our behalf. Now and how they operate? we will monitor it. I happened to be at Brookside Richard Laing: This comes on to what CDC might dairy last month, so we’ll be watching what’s going do in the future, and we’ve been talking about the on and checking that the fund manager is acting fund of funds operation. We do have a programme responsibly, but that is his job, the person on the also of doing focused direct investment alongside our ground, to manage that investment. fund managers, so we have a small portfolio of that, 3 See http://www.publications.parliament.uk/pa/cm201011/ and I think that is certainly one thing that we could cmselect/cmintdev/writev/607/m06.htm do more of. As I said, debt is something that we could cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
Ev 22 International Development Committee: Evidence
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison look at, and the third one would be guarantees. We’ve Programme, which is run by the IFC, and we worked just started working with the IFC actually on a new with them on that. commitment. We’re putting in $20 million for a Last week, I signed a facility—it is actually a debt guarantee product to work with the private sector arm facility, interestingly—where a group of European of the World Bank. So, yes, there is still a need for Development Finance Institutions are putting these other instruments as well. approximately €300 million to work with the Richard Gillingwater: Can I make a broader point European Investment Bank to provide debt for the about equity? Not to say that these other instruments Africa, Caribbean and Pacific regions. We’re putting aren’t important, but one of the aspects that CDC has €25 million in; the total facility is about €300 million; worked on very intensely over the last six years has and again that is an example of a club of us working been building up its environmental, social and together, identifying that there is a shortage of in this governance capability and through the investment case debt capital in fact, and it enables the project to code working with the funds and with the companies. get done that would otherwise not get done. I think it’s fair to say that you get the closest and Rod Evison: I think that debt’s a good example of strongest alignment between accepting investment what you wanted to hear about because, when the new codes and ESG practices through equity, and we have CDC came into being, one of the very early things got debt experience. One of the interesting things that was done was indeed to work with the European about debt is that, because it is shorter term in nature, DFIs on a debt club. For us that was quite attractive it is much harder to have an effect on ESG through because they were then the specialists in debt—we debt instruments than it is through equity. So I think were the specialist in equity, but we could leverage not only is there an absolute profound need for equity off their skills and expertise in that and commit capital but it really helps you embed ESG, which has been to that. We’re now on to the third or fourth one of another part of our core mission. those arrangements.
Q98 Richard Burden: I think we’re going to come Q100 Alison McGovern: Thank you for your back to the investment code in a little while. I would answers so far, which have been helpful. We’ve talked just like to press you if I may a little bit more on how a bit about on the one hand the value of your your relationship with the other DFIs works. Mr investment where you’re a small part of the total fund Laing, you were talking about the example of when amongst others and also whether or not there is strategically CDC decided that sustainable forestry crowding out going on. You mentioned the real was an area that needed attention, and so through your absence of equity and therefore the importance of fund managers, you then were able to bring others CDC’s role. Just developing that point, in the case of into that overall project. So your involvement was Moser Baer, the Chief Executive explicitly stated that strategically up there but the actual relationship, if I the investment would have in fact gone ahead without understood it correctly, with the other DFIs was CDC. We are talking about a large-scale manufacturer. through the fund, not with you directly. Is that right? How does that fit with your role you’ve described as Richard Laing: It was a mixture; it was joint. We leading the market or shifting the market? How does went to a German DFI, and said, “Look, this is a very that particular example fit with that? interesting proposition.” We effected the introduction Richard Laing: First of all, I’ve never heard a Chief to the fund manager and then continued that discussion. We have regular dialogue with the other Executive in fundraising mode volunteer anything European DFIs, the African Development Bank, the other than it is going to be a success. So I think that Asian Development Bank and the IFC about particular we don’t know, because you can’t prove the initiatives and projects that we might be originating counterfactual, whether Moser Baer would have or or they might be originating. would not have succeeded in raising that round of capital. That particular investment is one of our direct Q99 Richard Burden: It was that latter point that I investments. It’s aimed at climate change and green was getting at. Are there any examples that illustrate investing. It produces solar panels. Would it have where something that was not an area that you were raised capital without us? I don’t know the answer to involved in, was outside your general way of doing that. It might have done, but it might not have done things, but an initiative that came from another DFI, and one has to take a view. and you said, “Well that’s something we’re going to do,” and what you did and how much got devolved Q101 Alison McGovern: Okay, but let’s look at the down to the fund manager? question from another perspective. Of course no one Richard Laing: There is a very good example of one would ask you to prove the counterfactual, but surely we did last year as a response to the economic crisis you need an internal mechanism to prove across the world. There was a shortage of trade additionality? finance and trade was almost literally stopping at one Richard Laing: I entirely agree with you, and many point because suppliers and purchasers couldn’t get of the funds that we are in, by the way, we are not a the trade finance to do the deals, the transactions, and tiny sliver. I have mentioned that sustainable forestry get the products moving again. In this case, the IFC, fund where we are at the moment roughly 50%. There the private sector arm of the World Bank, said, “Look, are some funds where we are 100%. For our largest we need to do something about this.” They talked to fund, which is an infrastructure fund, we are about us and they talked to some other people and we put 85% of the capital. There are some funds, particularly a facility together called the Global Trade Liquidity some of the older funds we are in, where we may only cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
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14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison be 5% or 10% of the capital, but, generally speaking, Q105 Pauline Latham: As a wholly owned state we take a very active and significant role in that. organisation, don’t you think that the financial incentivisation of remuneration is in conflict with the Q102 Alison McGovern: But how do you prove that overarching development aims of CDC, and do you you are additional? How do you prove the extra value really think it is appropriate that the Chief Executive of CDC? earns three and a half times the amount of the Prime Rod Evison: I was just going to add that one of the Minister of the country? reasons why I think this is quite a challenging subject Richard Gillingwater: In my past life, I set up and to prove is that finance is so much about momentum created something called The Shareholder Executive, and what is really valuable is an early commitment of and the purpose of that was for Government to try finance. That’s what then starts to get an entrepreneur to be a better shareholder and owner of Government- to realise his dream. owned businesses. At the heart of that was a very clear Alison McGovern: Or her dream. understanding that it’s very important to be able to Rod Evison: Yes, or indeed her dream, absolutely. attract good people from the private sector to come in That is what we certainly try to do with both and make a difference frequently and, as is the case commitments to funds that we undertake but also at CDC, at a substantial discount to what they would direct investments and care investments as well, receive in the private sector but still in touch with the private sector. I think that the first thing to say is that because it is the early commitment that allows the approach to remuneration at CDC has generally something to get off the ground, and although Moser mirrored what is the case in other Government-owned Baer is outside of my direct area, I know it was really businesses. So it’s not dissimilar in terms of its quite a challenging investment strategy that structure. I would say it is absolutely necessary, in entrepreneur had, and quite an early stage one. order to assemble a good team, to be able to pay something that isn’t totally at private sector but is Q103 Pauline Latham: Changing the subject a little capable of persuading people to come over and do bit, can you tell me if you consider the remuneration important tasks. levels that you pay at CDC necessary to recruit and retain people with expertise in this sector, bearing in Q106 Pauline Latham: Probably much safer than mind that you don’t actually do the investing; other private sector because it is a Government people do? organisation—it’s not private—and so normally Richard Gillingwater: Let me take that. I think the people take less remuneration because they’ve got straightforward answer to that is we do. We had a very more security of tenure than they have in the private carefully agreed remuneration framework, which we markets. agreed with DFID and the Treasury, back at the time Richard Gillingwater: That is a very interesting point. of the creation of CDC. Again from my Shareholder Executive experience, I would say the average tenure of a CEO of a Q104 Pauline Latham: How many years ago was Government owned company is probably no greater that? than it would be in the private sector. The security for Richard Gillingwater: That was in 2004, and it was the leadership is not particularly high, because these refreshed in 2008. Once we had strategically are effectively often very commercial organisations established the type of entity we were going to be, we that are operating. were effectively almost a start-up at that point in time. The vast bulk of professionals went to Actis and a Q107 Pauline Latham: But you have just said that small core of 15 were left in CDC, essentially two you need people to be there long term. individuals with investment expertise. It was Richard Gillingwater: Yes. necessary to build up from scratch a team that could both invest and obviously understand development. Q108 Pauline Latham: So that’s what you’re just We devised with DFID, and they then gave the board saying now and it’s contradictory. this remuneration framework, and effectively, at its Richard Gillingwater: Obviously, you want them to heart, it is about enabling us to recruit from the private be but sometimes the pressure of operating in a sector. It is also about enabling us to retain people for Government-owned sector is such that people don’t long periods of time. It’s very important at CDC and always achieve their objective. I think in CDC’s case, indeed any fund of funds that you have people that the extraordinary thing is that it has managed to are ready and prepared to commit to at least a 10-year generate over £1.5 billion of further investment return, phase, because they are making decisions that have which is then available for development. If the very, very long periods of time. companies that were effectively in my Shareholder The other aspect of the remuneration that was very Executive had collectively produced that sort of result important at the time was the notion that this should then that would have been an astonishing thing. Most be linked to success, that essentially we wanted of them were not nearly in that category. something that would reward, as DFID put it, on one hand, robust financial performance and on the other Q109 Anas Sarwar: Just on the same point, how hand development outcomes. So that was the nature many members of staff does CDC employ and what of the remuneration framework. I think it was is the total level of remuneration for the staff of CDC, necessary in order for us to bring in the team, and that including bonus payments and incentive payments? team have gone on and I think created a lot of success. Richard Gillingwater: It employees 46 people. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
Ev 24 International Development Committee: Evidence
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison
Richard Laing: I don’t have the total wage bill to Q114 Alison McGovern: I asked whether you’ve hand, but we can supply it.4 carried out a gender pay audit. Richard Laing: No, we haven’t because we treat our Q110 Anas Sarwar: Even a guesstimate? employees equally. Richard Laing: I think it would be better if I gave it Alison McGovern: I should hope you do. to the Committee. Q115 Chris White: I’m personally quite surprised. Q111 Chair: Can you give us the wage bill and the You do understand the structures and everything else total bonus? about remuneration, but in most organisations one of the biggest parts of spend is the wage bill. First of all, Richard Laing: We can provide that data.5 I am quite surprised that you don’t actually know that when I would have thought, coming to this meeting, Q112 Alison McGovern: Two very brief questions, you might have guessed that that would be one of the 6 if I may: your memorandum to us stated that subjects we would be talking about. I think for the bonuses paid in March 2010 for 2009 performance record, it might be useful for us to know what the were on average nearly 50% of salary, so 47.5% of Chief Executive’s remuneration was. I think that salary. Given the position of the economy in 2009–10, would be a useful thing to put down. First of all, is that something that you as Chair are happy with?7 would you be able to answer that question? Richard Gillingwater: The answer is we went to quite Richard Gillingwater: Yes, I can answer that and it extraordinary lengths to make sure that, first of all, was £225,000. given the remuneration framework that we have Chair: That was the salary though. agreed with DFID and the Treasury, we were Richard Gillingwater: That’s the base salary. The operating within the letter and the spirit of that Chief Executive waived a bonus in 2009 and didn’t remuneration framework. We operate a balance receive a bonus in 2008, and there was a long-term scorecard system for every individual at CDC. In incentive payment that comes out of a long-term plan order to earn any short-term bonus, every individual that is aligned to the success of CDC over the long has to meet certain key objectives. The answer to the run and that was £264,000. question is that in that year CDC more than achieved on the objectives that it had been set. Q116 Chris White: There were two other questions. One which was to refer back to something Pauline Q113 Alison McGovern: Okay, but I’ve known a Latham asked, which I don’t think that you answered broad range of organisations operating performance directly: do you think your role is worth twice as and performance relative to remuneration, and that to much as the Prime Minister? I would be interested in me seems an extraordinary percentage, and I want to a more direct answer to that. You also mentioned the know if you’re comfortable not just with the process fact that the remuneration was so strong because of that you went through but the outcome that you ended the long-term commitment that you had to give, but up with. My second question, just to get it out briefly, then your subsequent answer seemed to indicate that it is: have you ever undertaken a gender pay audit and wouldn’t always be a long-term commitment, so that if so what was the result? argument was quite weak. Would you like to comment on those points? Richard Gillingwater: The answer to your first Richard Gillingwater: question is that we were comfortable with that In terms of the Prime Minister’s salary, I find the question very difficult because, to go back to what I said, CDC had a very because it is a much bigger structural issue. This robust recovery from the economic crisis and one of would not go just for CDC, but the difficulty more the things it was able to do, almost alone—certainly broadly is the Government-owned corporate sector of a lot of the private sector organisations—was to needs to recruit from the private sector and one of the carry on investing and to carry on committing during big issues is whether it could ever recruit at the level the worst ever financial crisis that we had. That was of the Prime Minister’s salary, and the answer to that down to a lot of skill on the part of the team in terms is it simply could not. The question then becomes: is of, first of all, the creation of the platform, but it in any way important to be able to do that? This secondly, the actual management of cash at the time, covers a whole array of different areas. For instance, which was an extraordinarily difficult situation to the FSA at the moment are trying to recruit for a manage, and I think the team essentially more than major regulatory job and they are trying to recruit at succeeded on those short-term objectives. a level of over £500,000 for this role, and they Richard Laing: On the gender point, CDC has absolutely know that they won’t attract anyone who approximately 50 people, and about half are women could do the job at anything less than that amount. and that is spread across the organisation. Of my four This is a much, much wider issue than CDC. direct reports, two are women. We pay our people, it doesn’t matter whether they are male or female, Q117 Pauline Latham: You talked about 2004, when according to the remuneration structures that we have you had the reorganisation of CDC. Can you tell me in place. We’re looking for skills and experience. if there were any arrangements enabling you to share 4 Ev 85 in profits at that time from the sale of investments 5 Ev 85 following the reorganisation? 6 Ev 60 Richard Gillingwater: There were no such 7 Ev 85 arrangements at all. cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
International Development Committee: Evidence Ev 25
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison
Q118 Pauline Latham: Nothing at all. So you Richard Laing: Could I make two points to that? First couldn’t invest when the share prices were low. of all, I have heard it said very often. We advertise Richard Gillingwater: Nothing whatsoever, no. frequently or we have advertised for people and people are free to apply. I have to say we have not Q119 Pauline Latham: Can you tell me what had this sort of rush of these people who exist proportion of remuneration is currently contingent on apparently, so our evidence is I am not sure where non-financial measures of development impact? they are. Second, is the point that the Chairman made Richard Gillingwater: Yes, it is about 40%; just under about commitment. I think it is true that we could 40%. Sorry, let me clarify that: 40% of short-term probably find people for a three-month secondment or bonus is contingent on development. The whole of the something of that nature, but we need people who are long-term incentive plan is contingent on going to make this a real life commitment. We don’t development outcomes. want people to come in for three months and feel that they’re doing a bit of good and then disappear. We Q120 Richard Harrington: A very quick question. need to have people who are professional and do the Gentleman, maybe unlike some other people around work well. this table, I’m not against the high salaries and this kind of thing. I realise that you’re competing in the Q124 Anas Sarwar: Just one last question, private sector to recruit people, but like other people Chairman, on this point and then I promise we will I find it extraordinary, with due respect Mr Laing and move on. I just want to echo what Chris and Richard Mr Gillingwater, that for 46 employees, a tiny outfit, have said. I just find it bizarre that we have the CEO, you couldn’t answer that question on the total salaries the Chairman and a Managing Director sitting in front etc. But putting that to one side, if you are competing of us of a company that has 46 employees and they in the private sector with private sector conditions, are don’t know what their total salary is. I just find that you then telling me that people will lose their jobs for completely bizarre and I think I look forward to your incompetence exactly as they do in the private sector reply when you send it into the Committee. We have and not have the kind of arrangements in the public got three members of that 46 staff in front of us. It sector? would be interesting to know what the remuneration Richard Gillingwater: Yes. salary and bonus is for each of the three of you. Richard Gillingwater: I can straightforwardly tell you Q121 Richard Harrington: So how many people what mine is, which is I get a £40,000 fee and that’s it. have lost their jobs in the last two years for lack of performance, if you wouldn’t mind saying? Q125 Pauline Latham: For how many days work is Richard Laing: I can think of one very senior person that? with whom that’s exactly what happened. On my Richard Gillingwater: I think the contract is for about senior team at the moment, I have four people four days a month. In practice, it has been very, very reporting to me. There have been other instances at a substantially more than that. lower level where there has been mutual agreement that it wasn’t working out and they left. Q126 Anas Sarwar: I can imagine. I’m now moving on to the development impact. I just want to ask some Q122 Richard Harrington: Because I think what specific questions about where the investments take people object to, what the public object to, are people place. Does CDC deliberately make some low-risk, who want to be in the private sector when it comes to high-return investments to generate more profits in salaries—Chief Executives of local councils are a order to reinvest it elsewhere? good example—“Oh, we’ve got to compete for the Richard Laing: We will not set out deliberately to best,” but then have a public sector type of life with make low-risk investments because, by definition, pensions and perks and lack of accountability, so that where we invest and where DFID have asked us to is the reason for the point. invest are the poorest countries of the world—the data Richard Laing: I would entirely agree with you and I we gave you—and they are almost by definition pretty recognise that this is a contentious area, but we take high risk, but you are right that there is an issue here performance very seriously and if people are not about the balance of risk and return. We need to take performing it is not like the civil service; we are acting risk. We need to be right at the frontier of that. At the like a private sector business and people who join same time, we are the stewards of taxpayers’ money. CDC understand that and take the consequences of We have £2.7 billion of taxpayers’ money, and we that. need to make sure that we exercise good stewardship Rod Evison: It may be helpful to remind the over that. What we have done is within that Committee that when CDC moved from the split of geographical mandate we have a risk approach. We debt and equity model in the late ’90s to a risk capital will spread our investments. For example, we have one, about one quarter of the staff were made quite significantly high exposure, approximately 30%, redundant. to infrastructure investments. These investments have high development impact but they also, because Q123 Chair: The witnesses last week did indicate they’re asset backed, tend to be slightly lower risk. So there were people who were prepared to work for less we take a balanced view on that, recognising that we than market salaries because of their, if you like, have multiple objectives, primarily development altruistic motivation to development—not necessarily impact but also we are stewards of the taxpayers’ for a lifetime career, but for a period. money. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
Ev 26 International Development Committee: Evidence
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison
Q127 Anas Sarwar: Thank you. One of the more finance between equity and debt in that particular controversial investments that you made was in case. This was not in the heart of the financial crisis, shopping mall in Accra and I just wonder if you think but it was at a time when it was quite a challenge to that is, as you have quoted in one of your documents, raise debt. doing “the hardest things in the hardest places”, because it could be argued that an investment of that Q131 Alison McGovern: Very briefly, in talking sort could easily find private investment from other about economic development, economic development places. will only produce poverty reduction if attention is paid Richard Laing: Well, that one is interesting. It does to the worst-off in society and those at the bottom of get a lot of publicity. the income distribution. What attention, specifically in that development, was paid to the impact on those at Q128 Chair: It’s quite a nice shopping mall. the bottom end of the income distribution? Richard Laing: It’s a very nice shopping mall. It’s the Rod Evison: One of the ways to respond to that is first shopping mall in Accra. If you ask local people around the local stallholders, where space was what they think about it, they think it’s fantastic. They provided for local stallholders to set up outside of the say, “Well, why shouldn’t we have shopping malls? mall. That was very much to ensure that the magnet You’ve got shopping malls in London and the West. that the mall provided in attracting traffic could also Why can’t we have shopping malls?” It provides a lot be a benefit to those lower down the pyramid. of employment; it provides supply chains. I’ve been there and I have walked around that mall, and I Q132 Jeremy Lefroy: Just before I ask the main remember talking to the manager who ran the meat question, I just wanted to come back on one thing if I counter and I said, “Where does your meat come may, Chairman, which is you talked about the number from? Is it all imported?” He looked very shocked and of employees being about 47 or 48, but the report says he said, “Of course it’s not imported. This is Ghanaian that the average monthly number of group employees meat and we have a supply chain now providing meat was 2,154. It’s here on notes to the accounts, number to a very high standard.” So CDC has done shopping four. malls and they clearly do have a role to play amongst Richard Laing: Let me explain that. It is rather a whole portfolio of economic growth and technical. Within the portfolio, where we have a development impact. significant holding of a fund, and indeed in some of the older funds we have very significant holding, we Q129 Anas Sarwar: How much was the CDC were required to consolidate some of the underlying investment in the actual shopping mall? What’s the businesses into our statutory accounts. So that would return been to date, both in terms of employees and include some of the portfolio, by no means all, and in in terms of creating wealth and product? fact it’s quite a small proportion of it. It’s a rather Rod Evison: Yes, I can answer that question. The technical accounting point that the accountants require investment in the mall has been around $20 million us to consolidate, and therefore we had to report those from CDC, and we have received no return from that companies’ employees. That number in itself just development so far. It was an early stage, meaning represents a small proportion of the portfolio. that this was a start-up. I think that’s an important point—this was helping create something that wasn’t Q133 Jeremy Lefroy: But presumably we, as CDC, there before and, as Richard was saying, to attract own more than 50% and therefore have responsibility? businesses of quality. You may like them; you may Richard Laing: Well, the fund manager has the hate them, but supermarkets are still quite rare in low- responsibility, but for accounting purposes, we were income countries and absolutely a supermarket is a required to consolidate it. core tenant of that mall, and the impact that a good professionally run supermarket has around supply Q134 Jeremy Lefroy: I think it would be useful, chain management is dramatic. Again, like them or since we do talk about 2,154, to get the terms and hate them, but it’s part of development. conditions of those in addition to the 47 in the UK, since they are here in the report. Q130 Anas Sarwar: How much was the total Richard Laing: They will be in a number of project? Do you feel as if the $20 million coming from individual businesses around the world. CDC helped pull in other funds to try and finish off the creation of the mall. I take it was more than a Q135 Jeremy Lefroy: If we could have those as well £20 million project. Obviously, the reputation of the I think that would help, not just the 47 that was referred to earlier, because presumably they CDC and other partners helped bring in the people 8 that are going to put the individual stores in the malls, themselves produce accounts. Richard Laing: We don’t own 100%. and that in itself attracts more people and attracts further employment. Is that how you would see the CDC relationship with the shopping mall project? Q136 Jeremy Lefroy: We own more than 50%. I notice there’s one in which we have 77%— Rod Evison: Yes, absolutely. You are quite right. something agricultural. There had to be long-term debt in order to get the mall completed and that was provided by one of the local Q137 Chair: Are you in a position to provide that international banks—I think it was Standard Bank— information? and they provided a construction facility and a long- term facility thereafter. So I think it was around 50/50 8 Ev 86 cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
International Development Committee: Evidence Ev 27
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison
Richard Laing: We could. In general terms, we can Q142 Mr Clappison: We have been told that it’s find out the terms and conditions of those companies. gone down from 49%, which was a figure in the past, and we were also told that, in sub-Saharan Africa, Q138 Jeremy Lefroy: Particularly in relation to the where we have a particular focus, 70%-80% of gender audit that Miss McGovern referred to earlier, employment is in agriculture and one imagines that possibly? you are reaching the very poorest people there in Mr Richard Laing: We will see what we can many cases. How do you explain the figure going provide.9 down from 49% and the way in which it has gone down so dramatically to 6%? Q139 Jeremy Lefroy: Coming onto agriculture, the Richard Laing: The 49% goes back a long way. That portfolio on agriculture has declined from 49%-5% goes back to the days before, back into the 1990s, and and infrastructure from 35%-8%, and I would just be that was at a time when that was one of CDC’s interested to know why there is a decrease in emphasis specialist areas. That explains why it was high at that on agriculture and infrastructure. I was encouraged to stage. I have to say 49% is extraordinarily high. Those hear you talk about a new infrastructure fund, and investments were not always a great success. maybe that’s a sign that things are turning round in Rod Evison: Could I come in on this point? We had those percentages. a very interesting review done on the portfolio, and indeed the numbers you were talking about around Richard Laing: You’re right: it is turning round. 49% were absolutely driven by a quantitative target Agribusiness is one of the sectors that we focus on. If that the old CDC had to achieve. That review, which you look at the recent funds that we’ve been investing was performed in 2001, looked at the history of our in—I’ve already mentioned the sustainable agri-investments and its conclusion was that CDC had sub-Saharan African forestry fund—we also invested demonstrated what could be achieved in African agri, in the first Indian agribusiness fund. We’re a major which is what I recall, but with a large enough investor in that fund, and we’re looking to do more. subsidy. Indeed, it quantified the amount of subsidy In fact, in 2009–10, 12% of our new commitments are that CDC had put into African agri at £100 million. in agribusiness, so we will see that number increase Now there is a debate: is that the right subsidy for over the next few years in terms of our new African agri or is it not? I think it’s quite useful just commitments. The number you were quoting I think to at least clarify some of what lay behind the previous was our portfolio, so we will see the portfolio increase portfolio. Hopefully, now I am going to answer over time. another Member’s question: the prospects for agri in sub-Saharan Africa are more positive, and we are Q140 Jeremy Lefroy: I welcome the fact that it is absolutely interested to find good intermediaries who 12%, but do you see the possibility for that being can get our money to work in good ways. greater, given that there seems to be a general recognition that investment in agriculture has very Q143 Mr McCann: Just a brief point: I don’t want good returns, particularly at the bottom end of the to flog it to death, because obviously you’ve answered income scale? the question in several different ways, but we heard Richard Laing: This is a really interesting point about from the World Food Programme a couple of weeks which sectors are the most developmental and ago. Obviously, we were asking questions about the different people will come up with different ideas. peaks in prices over the past few years, and two of People who are pro-agribusiness will express the the ways in which WFP explained to us that could be merits of that, people who are pro-infrastructure—for tackled were: first, that the poorest countries in the example, the need to have good roads, rail, ports— world are guaranteed food supplies; and secondly, will say that’s highly developmental. Part of the investment in agricultural businesses. It just strikes me discussion we are having with DFID on the that if we are to have a connection between all the consultation period that they’re running is to have a different parts of the development work that we do, greater dialogue and more dialogue about and get then investment in those areas is utterly crucial, more input from people about which are the sectors because then it will help the poorest countries and that have the biggest bang for the buck in those most in need. development purposes. It is an area that a lot of Richard Laing: I would agree. I think one of the academics have done work on. We will continue to reasons that we are increasing our percentage in look at it and reach a view about how our portfolio agribusiness is precisely that, but would it get to the should be spread. levels of 49%? I don’t think it will ever get to that level. Take another sector. I’m sure you do talk to Q141 Mr Clappison: Can you give us some idea of infrastructure specialists. A recent study showed a target or a figure that you would like to see your Sub-Saharan Africa needs £93 billion of capital per investment in agriculture go up to? annum for infrastructure. Currently, it has got around Richard Laing: As I say, we haven’t today got a £45 billion, so there is a £48 billion gap per annum target, but I think we will address this area as part of for infrastructure investment in sub-Saharan Africa. The infrastructure specialists will say, “Come on the consultation with DFID. I think it will be bigger CDC, you should be doing more on infrastructure.” than the current 6%, but we do not yet have a formal This is where we have to weigh up the different merits target. of the different sectors. I don’t think there is a right 9 Ev 86 answer. It’s something we need to work with; we work cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
Ev 28 International Development Committee: Evidence
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison very closely with our shareholder. But I absolutely number is right, but we would expect that to increase. take the point on agribusiness. There are merits for As I said earlier, over 30% by number of funds are agribusiness. going into SMEs and microfinance in the last couple of years. Q144 Mr McCann: Can I ask you on that point, is it effectively you’re saying that if you don’t put the Q150 Chris White: Is there any reason why it was infrastructure in to get the food around the country in so low? the first place, then obviously there is no point, so Richard Laing: Well, it comes back to the discussion therefore it’s a chicken and egg situation? we were having about agribusiness and about Richard Laing: Yes. infrastructure and about SMEs. We haven’t talked Richard Gillingwater: Can I make another point about other sectors, but it is about getting this balance about agri, which we’re all so very interested in? between the developmental impact and a portfolio that There is an absolute huge need for proper is, for risk purposes, well balanced. People will speak warehousing. We were on a board trip recently to strongly for agribusiness, and I quite understand that, Kenya and what was being said to us on the ground, and they will speak strongly for SMEs, and I quite partly when we visited this dairy, was that one of the understand that. We’re the largest provider of capital biggest needs is not investment into agriculture itself for SME funds in Africa. but into proper warehousing where you can store the produce, most of which or a lot of which is currently Q151 Chris White: I was heartened with the wasted. That’s an area where we are taking a very example you used at the beginning of this inquiry, strong interest. talking about $200, and you clearly appreciated the difference it was making to that person’s environment. Q145 Jeremy Lefroy: Is one of the problems with If you are increasing that amount, so too the good. investing in agriculture that it fails to meet your How do you measure your development impact? expected levels of return? Richard Laing: We have a methodology and it’s set Richard Laing: No, because otherwise we wouldn’t out in the development impact report, and we’ve now be investing in it. It’s got to be sustainable. It’s got to produced those for two years, where we look at a have appropriate return to attract private capital, and number of attributes to the investments we make, we believe there are definitely ways of agriculture ranging from the economic effect we’re having, so reaching those levels of return. numbers of people employed, for example, the taxes paid, to the growth of the businesses. We look at the Q146 Jeremy Lefroy: So the expected levels of financial performance of the investment. Thirdly, we return, from other information we’ve had, of around will look at that environmental, social and governance about the sort of 18% mark is what you look for? Is performance of the investment, and then we look at that right? what we call the private sector development, so what Richard Laing: For equity? impact has that investment had on the general private Jeremy Lefroy: Yes. sector around where it’s operating. We then score Richard Laing: That might be the sort of level that across those four attributes, and that will result in a people would aim for. That strikes me as quite a grading of that particular fund investment that we’ve high number. made. The details of that, as I say, are in the Development Impact Report that is in the House of Q147 Jeremy Lefroy: That’s a number we’ve heard. Commons Library and obviously available to you. What would it be? What would you be looking for? Rod Evison: We did a strategy for agri in Africa, and Q152 Chris White: That sounds all very thorough, I hope that we tried to get the balance right between but, like any other operation, are there any other ways setting a target that would attract in external capital, you’re looking at to make that more thorough? which again is one of the key objectives that we have, Richard Gillingwater: Well, one of the things we are but that also recognised the particularities of the doing and have done is we have brought in an external industry. So at that time, we said if we are going to party to work with us, and independently look at a commit to specialist agri funds, which we are doing, number of the funds. This year, roughly 50% of the that we should not expect returns overall in excess of funds will be looked at independently and 50% under 12% to 15% in agri. the Best Practice Committee. One of the things we have done is compared some of their approach and Q148 Jeremy Lefroy: That compares with, in the old some of their learning and some of their insights. CDC days, around 6%, as I understand. They’re a very noted consultancy in this particular Richard Laing: Yes, but most of that was debt, while field, and we’ve taken that on board and are taking these returns we’re talking about is that high-risk that on board. capital. Jeremy Lefroy: Right, so 12% to 15% for agri. Q153 Chris White: Have you got any headlines or Thank you. bullet points out of that comparison? Richard Gillingwater: I think the main headline is Q149 Chris White: Can you confirm that only 7% that they have, and again you can see their opinion of CDC funding is being invested into SMEs? in the Development Impact Review, underscored the Richard Laing: No, that number is increasing. I think rigour of the evaluation work that we’ve been doing. you are quoting a number in the portfolio where that They have different ways of looking at economic cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
International Development Committee: Evidence Ev 29
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison performance and they are undoubtedly helping our in tax havens. Again, I find that situation quite bizarre thinking in terms of trying to understand the broader both for us in the UK and also in several developing economic effect of what we’re trying to do. countries in terms of tax receipts. How do you justify this use of offshore financial centres for CDC’s Q154 Anas Sarwar: Over half of CDC’s portfolio is investments? in four middle-income countries: India, China, South Richard Laing: Clearly, this is a subject that gets a Africa and Nigeria. How do you justify these lot of airing and let me just start off by saying that the investments? reason that we use offshore centres is for Richard Gillingwater: If I can just explain, first of all, developmental reasons. One of our missions, one of that our geographic mandate is focused on our objectives is to attract alongside us private sector sub-Saharan Africa and South Asia. That’s a mandate capital. The capital has to be collected; our capital that’s set to us by our shareholder, which of course is and other people investing in the funds. It might be a the Department for International Development. India Californian Pension Fund; it might be another has more people living on less than $2 a day that the European Development Finance Institution; it might whole of sub-Saharan Africa, so, whilst it has been be the African Development Bank. All this capital recently classified as a middle-income country, there coming from different places needs to collect are still a lot of poor people there. Again, I think somewhere. The providers of that capital want a stable there’s a very interesting and valuable debate to be environment. They want to make sure that they can had about the role of not just CDC but Development have contracts that are going to be enforceable with Finance Institutions generally. What is their role in the fund manager in an appropriate regime. Let me middle-income countries? That is a debate that we just confirm again that the taxes paid by the have with DFID and with other institutions. There is companies in-country, the underlying investee no straightforward answer. There is a role, but we companies, are not reduced by the use of offshore need to define what that role is. centres. They will pay their local taxes. We estimate that over $3 billion per annum is being paid by CDC’s Q155 Anas Sarwar: Have you made an assessment underlying investee companies. of what levels of poverty reduction you are doing in these four countries with the investments that you do Q159 Anas Sarwar: What about capital gains tax? Is have? that being paid effectively in-country? Richard Laing: Certainly, on the development impact Richard Laing: The capital taxes will depend. Most in the broadest sense that the Chairman just talked of these offshore regimes are referred to as see- about, the funds in, say, India will go through exactly through regimes, so the individual investor will have that same process. to pay the taxes that are required by wherever they come from, and we don’t have access to the taxes that Q156 Anas Sarwar: The other point relevant to India they will be paying. and also to China is they are very regionalised. There will be some very affluent parts, but there will be Q160 Anas Sarwar: some very poor parts. Is there a breakdown of where Does it also make it more the investments are taking place in-country? difficult for domestic in-country investors in terms of Richard Laing: Part of the work that we’re now doing competing with international investors who have the with DFID under the consultation period is to look at advantage of financial offshore centres where they can how we could get capital to work in some of those base their investments. Does that not go against what poorer states in India, such as Orissa and others. That CDC is all about in terms of encouraging investment work is ongoing as we speak. The CDC Managing in-country? Director for South Asia, Anubha Shrivastava, has Richard Laing: It is a very valid point and there are already started having meetings with DFID officials structures to make sure that doesn’t happen. So if you in India, and she is working with them as to how we take India, typically what will happen is that the fund might be able to get more capital to work in those is put together and structured as two funds. One will very poor states. be an international fund that will use an offshore centre, and one will be a domestic fund where the Q157 Anas Sarwar: Does CDC have sufficient Indian capital is put in that vehicle, and then they incentives to relinquish investments in successful invest together and they are run effectively as one. So countries and sectors? there are ways round to make sure that the domestic Richard Laing: I am not quite sure what you mean investor can come in. By the way, I think that’s a by incentives. If it was appropriate to dispose of those, really important point: we need to attract not just we could. We would always have in mind value for international capital but domestic capital—African the taxpayer. We do not want to relinquish or sell capital investing in Africa, as well as international investments that would result in a loss to the taxpayer. capital. I think that would be imprudent and I suspect this Committee would have words to say if we were to do Q161 Alison McGovern: Very briefly on that point, that, but we have got to get the right balance to the you make a good point about what has happened in portfolio, so it is a subject certainly that we’d look at. India. That has been a policy that has been led by India federally for some years. What do we do about Q158 Anas Sarwar: Another issue that’s been raised other countries to make sure that that combination of recently is 80% of CDC’s investments are domiciled domestic and global funds are available? cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
Ev 30 International Development Committee: Evidence
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison
Rod Evison: Could I just add an example about expect to see a journey towards meeting those Nigeria? You may be aware that the previous standards. administration in Nigeria reformed the pension Richard Gillingwater: So that case that we talked industry to require employers to arrange pensions for about, which I have also visited, uses very dangerous their employees. There is now $10 billion of pension processes and is very, very dangerous for the money in Nigeria. This has built up in quite a short employees. It’s now certified to the highest level, I period of time. It’s really only been in the last six or think it’s ISO 9001 or 901,10 and on that journey it seven years I think. Where is that money invested? has got itself a full international safety and 25% is invested in the local stockmarket. The environmental rating. remaining 75% is invested in money market instruments and Government bonds. None of it is Q166 Richard Burden: So your code sort of sits invested in unlisted securities at this moment—private there at CDC level as an objective and encouragement equity. Why? Because probably, quite rightly, to begin for the journey, but the investment decisions within with the regulator did not want that money invested the overall strategy are made by fund managers? in unquoted investments, but they are recognising now Richard Laing: Yes. that some of the choices originally made to get a prudential basis for the scheme can also have some unintended consequences. Q167 Richard Burden: So are the fund managers We’ve had meetings and in fact we took the board to the ones that look at your investment code and say, the National Pension Commission during a board visit “When we decide to make this investment over here, two years ago to West Africa, and they are now we will look at what is happening at the outset and exploring ways to get that money invested in how far there is the potential for improvement there,” infrastructure and targeted private equity funds. I think or do you do that? the role of the DFI in some of those will be one of Richard Laing: What will happen is the fund manager ways to give comfort to the regulator that this is a is responsible for the individual investment but what sensible route for money to be invested. It is not yet we provide for the fund managers is a toolkit on there, but I think some progress in being made. environmental, social and governance issues. We provide training for that toolkit. Just last week, two Q162 Richard Burden: Could we move back to your of my colleagues, Shonaid Jemmett-Page and Nicolas investment code? I can understand the objective of During, who are experts in this area, were in India. that is to promote responsible business practices, They came back last weekend. They were training the environmental social matters and governance. What I fund managers in the toolkit—in the environmental, am not clear about is whether there is a baseline social and governance toolkit—and how it can be standard that you set that is a minimum requirement applied. There were over 10 fund managers there. before CDC will invest? This is a direct involvement of CDC in making sure Richard Laing: In our investment code, there is a set that they understand what is required to be done, but of standards that are laid out and indeed that has been when it comes to the individual company, although provided to the Committee. What we do not insist we may visit some and on a sample basis will be upon is that everything should be in place right at the monitoring what’s going on, the fund manager is very start. A lot of what CDC is here for is about a responsible for the ESG issues. journey. We want to see improvements. For example, I visited Nigeria once and I went to a mattress Q168 Richard Burden: I suppose it was that last manufacturer and I walked around that with the Chief point I was then going to come on to. What kind of Executive—she’s Nigerian, by the way—and she monitoring do you do of the decisions that your fund pointed out to me, “Look at that safety rail. We just managers are making and whether those ESG factors put that in, and we put that in because we know that are in practice being taken into account and you value your environmental, social and governance improved? Is it done systemically? issues and health and safety is part of that.” The safety Richard Laing: Yes. Each fund manager is required rail wasn’t there when we started, but it is there now, and a lot of it is about the journey. to produce reports on this, either quarterly or semi-annually—usually quarterly—and where issues arise, they need to tell us what they are and what Q163 Richard Burden: Are there any minimum action they are taking. If we see high-risk investments standards at all? and we feel it is appropriate to intervene in some way, Richard Laing: Well, there are things like illegal then we will go and visit those. activity is a minimum standard and must be removed immediately. Q169 Richard Burden: This is high risk in terms of Q164 Richard Burden: Illegal in what sense? investment return? Richard Laing: Well, for example, paying below the Richard Laing: No, on ESG; environmental, social minimum wage. and governance high risk. Rod Evison: All of our portfolio is graded by ESG Q165 Richard Burden: You mean illegal in the risk and the high-risk ones are the ones that we really context of the country in which you’re operating? focus on. Richard Laing: Yes, but then of course the standards 10 Note by Witness: It is certified to the highest level by ISO then go to international best practice, and we would 9001, not 901. cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
International Development Committee: Evidence Ev 31
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison
Q170 Richard Burden: What kind of percentage Q173 Mr McCann: I think some of Richard’s would they be? How many visits do you make? questions have touched on the one I’m going to ask, Rod Evison: It would be about 10% of our portfolio which is how would CDC respond to accusations that would fall into the high-risk category and that could you don’t take your social environmental go from mining to infrastructure—a number of the responsibility seriously? But perhaps, if I could just large infrastructure projects are high-risk assets—to move on from there and you could bear that question some manufacturing processes as well. So, yes, when in mind, have you ever withdrawn an investment we do go overseas, we try to make sure that if we’re because people have not taken seriously those visiting a fund manager we say, “Look we’d like to responsibilities? In terms of ensuring that people think go see one of the high-risk assets in order to assess about the environment, can you tell me how that whether they are indeed having a difference.” So in works in practice in terms of making sure that projects Uganda, we went to Umeme. are sustainable and low carbon? Richard Gillingwater: Just to comment on that, Richard Gillingwater: Before Richard comes in on Umeme is the electricity distribution company in the detail, can I just say something about the Uganda. It has had a lot of investment, partly through seriousness? You’ve heard about our monitoring CDC. It is basically going through two processes: one, processes; we monitor quarterly. If we have a situation a re-equipping; and secondly, a rural electrification of serious breach—either an environmental breach or project. So recently it has added something like a fatality or a serious injury or an instance of a failure 100,000 homes. One of the big issues there is the of governance or corruption—it is reported, first of illegal taking of electricity. This is something much all, obviously from the company to the fund, and up on our minds. There are, sadly, a lot of deaths from to CDC very rapidly indeed. There is a very clear this. We have spent a huge amount of time visiting understanding that we want to know when these this company. The board went and spent effectively a things occur. I can then tell you that we spend a lot of day with the company, seeing the entire operation each board going through precisely these situations. from soup to nuts; but, more importantly, we have had We will sit down and we will talk about these issues, CDC Executives actually going out and visiting that and indeed, if you were to see it, you would see the company very systematically, because it is probably Chief Executive’s Report would contain, and does one of our most high-risk investments. They are contain, regrettably, a section where we see incidents, taking safety extremely seriously. We sat down with breaches coming up to the board for discussion. They the board, and they are taking safety and the dangers get seriously discussed and debated and often our of stealing electricity really seriously at board level, teams then go back to work with the fund managers including at Government level. to understand precisely what has been the cause of the particular issue and that it doesn’t, within our capacity, occur again. These things are escalated to board level Q171 Richard Burden: So that is an example of a and are taken very seriously by the board. potential success in terms of your monitoring policy. Richard Laing: You asked for an example, but ideally Presumably, there would also be penalties for we’d never get into this situation obviously. There non-compliance. Can you tell me what they are and have certainly been cases where we have looked at a whether they have ever been invoked and, if so, fund manager who has come to a proposition with us where? and we felt that they were not going to take these Rod Evison: I was going to respond along these lines, issues seriously and we decided not to invest. We have which is that in the discussions that we have with our definitely come across that. Another example is a fund fund managers around ESG, the key assessment for in Asia where we knew that the fund manager wasn’t us is whether the fund manager is hearing what we’re taking governance seriously. What we did then is we saying, understanding what we are saying and trying didn’t withdraw our money but what we asked was to move to best practice. When we look at the for that individual to be removed from the fund development of private equity in the emerging management company. It was particularly difficult markets, I think the role of the DFIs, and CDC plays because he was the head of the fund management a part, but it’s a broader initiative than that, is in company, but we managed to lead a group of investors ensuring that the areas that you are talking about— in that fund and indeed that did happen and the fund the ESG standards, the governance standards—receive continues, which is a better solution than withdrawing high profile within the selection of investee companies our money. by fund managers. Emerging market fund managers The ultimate sanction is that we could stop investing are at the forefront of that, and indeed we are seeing if we felt they weren’t taking it seriously. As I say, we that Western fund managers are now having to catch hope we never ever get to that situation, and indeed I up in view of some of the pressures that their activities have to say that fund managers really see the value of have given rise to. So I think that there is a good story this. I talked about the training session in Mumbai last here. We have not had a situation to date, touch wood, week. They volunteered to come. We obviously where a fund manager has not responded to invited them. They really get value out of this and exhortation from us to do a better job. If we find a want more. Generally speaking, we find this is fund manager that does that, then we would not be something that the fund managers want to take continuing a relationship with him. seriously. The reason being, of course, is that if they are selling a business on or putting it on the stock Q172 Richard Burden: It’s not happened so far? exchange, the new owners of the business today, Rod Evison: Not happened so far. particularly if it is an international buyer or if it’s a cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
Ev 32 International Development Committee: Evidence
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison local stock exchange float, will demand good set up to do: invest in the private sector in the most standards, so it is in their interest as well. difficult markets in the world. That’s what we do and we do it very well. Going into technical assistance is Q174 Chair: In terms of the future, the Secretary of an entirely different business activity and I think that State says he wants CDC to regain its power to make would need very considerable thought with our investments directly in target markets and, as you say, shareholder if that was required, and, to your point other DFIs have more of a mix. You say you do have earlier about resource, it would need different skills some debt, but you’re mostly equity. What do you and different resource. think would be the advantages or disadvantages of diversifying from that model? I think you’ve said in Q178 Chair: The Secretary of State says he looks your earlier answers that you’re doing it the way at you doing co-investing; finding other partners and you’re doing it because that’s what you were asked to working with them. I suppose the implication is it’s a do. So you’re likely to be asked to do something step back. You don’t suddenly want to change your different, but what would you say would be, I working models and presumably go into a whole suppose, the disadvantages of diversifying and indeed different area of risk with which you are not fully the implications of perhaps investing in a variety of conversant. So have you thought through how you different ways, rather than concentrating on mostly might start to move in that direction and whether you equity and a small amount of debt? would do it by developing your own capacity in-house Richard Laing: One of the disadvantages of the or whether a better method or complementary method private equity model is that it is long term, but, by the is doing it with partners who are a bit ahead of the way, it’s also an advantage to provide that long-term, game and with whom you can team up? patient capital. If you go into a fund, you know you’re Richard Laing: I think the first stage would be exactly making a 10-year, perhaps 12, even 15-year that, to work with partners, and the first group of commitment to that fund and, as time progresses, you partners that is logical to work is our fund managers. may feel that there are other focuses that should have There are many times when a fund manager may greater focus. It is a machine that takes a long time to come across a transaction that, for a variety of move the portfolio in a different direction. The reasons, they don’t want to do all of. It may be advantages of direct investment are that you can do because they may have high exposure to that that much more quickly. So, for example, if we particular country and they want to have a balanced identify either geographies or particular countries— portfolio. It may be that it is too big. It may be that and we talked earlier about poor regions, for example, they want additional expertise. They will invite in India—there might be particular geographies where co-investors to come alongside them. We’ve already we could put more capital to work in more quickly. done some of that with them, and we could start again There may also be certain sectors where we can doing some direct investments along with those prioritise by doing direct investing; that may enable selected partners, again in selected geographies or us to get more capital to work in that particular sector sectors, and we could do that quite quickly. The next in a quicker time period. stage would then be to identify other partners. It might be other investors working in countries that we know Q175 Chair: But you have a staff of 47 people and particularly well and that are of high priority and you are operating through funds at the moment, so if working with them. That is also something that we you are doing more in the way of direct investment, will begin to look at. So I think there are ways does that have implications for your staffing definitely of getting a direct programme up and requirements? running, particularly involving our existing fund Richard Laing: It certainly does. We would need to managers. gear up for whatever the new investment strategy is. Q179 Chair: Could you envisage CDC working up Q176 Chair: At this stage, you wouldn’t be able to projects? If we take agriculture, for example, and you identify what sort of numbers you would be talking have the example of your dairy project in Kenya, but about? let’s say a co-operative to add value to process, Richard Laing: No, not yet because we have not yet perhaps to deliver fair trade quality, for example, to finished that consultation period with DFID as to assist. Is that something where CDC could take a exactly what the investment strategy would look like. direct lead and say, “There’s a role in this country. There are a group of farmers who want to produce Q177 Chair: What about providing technical better coffee or process or roast it to add value and to assistance, because—we shouldn’t shout this too meet fair trade standards.”? I am giving this as an loud—DFID is under staffing constraints. What is not example, but is that something where CDC might clear is, first, the extent to which CDC would come come in and say, “Well, we could help set that up and under those staffing constraints and, secondly, if on invest in it,” or is that taking you more back to where the other hand you were able to provide some direct you were and would that require a substantially investment, loans, technical assistance, you would be different organisational structure? able to do some of the things that DFID might have Rod Evison: One example, which I think Richard difficult doing in-house because of their constraints. mentioned earlier, of where we’ve sought to have an Do you see that as being a possible partnership? impact along the lines that you’re talking about is Richard Laing: What I would say, as of today, the indeed in forestry in sub-Saharan Africa. There we skills of CDC are investing. That’s what we’ve been felt absolutely that there is an opportunity that is more cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
International Development Committee: Evidence Ev 33
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison attractive now than it has been for, in our view, a then we settle on infrastructure, on small and medium number of years. So how did we approach it? We enterprise, on microfinance, particular geographies. wanted to find people that were experts in sustainable Then we are left to get on and make the targeted direct forestry investment in other parts of the world and that investments that deliver in that broad policy. I think had a track record, and we wanted to encourage them what would be very difficult, it would be if essentially to come to Africa. So we found them; we found a we were being told to go and do particular projects, Washington-based group that is now establishing because that then fundamentally takes away from our offices in sub-Saharan Africa, and they have raised decision-making capability, but I think we’re also over £100 million in funds and are hoping to get responsible for the overall judgment on development £200 million altogether. So that is one example of a outcome and on the financial performance at the end reasonably targeted niche where we could point to of the day, and you start to get very blurred what you were talking about. There may well be other accountabilities in that type of situation. opportunities as well. Q183 Pauline Latham: The Secretary of State Q180 Chair: You said at the beginning, Mr Laing, envisages that climate-related activities and initiatives that there had originally been a plan to privatise CDC could feature in your portfolio. Are you doing that didn’t prove possible; the market wasn’t anything about climate change and could you have a interested. If DFID is having a more direct influence role in investing in green energy and technology? over what you are doing, is there a danger that that Richard Laing: This is a very interesting sector and could undermine the relationship you have with your one that we would definitely like to do more in. We other investors, because they feel that there is perhaps have got some already. A member of the Committee too much direct input? Or do you think it is possible has already mentioned Moser Baer, which is actually to find a partnership or a way of doing that that will an example of a direct investment, where we invested retain the confidence of other investors, whilst alongside an investor that is making solar panels. One delivering a rather different need for DFID—as we of the reasons we liked it was precisely was because discussed with our witnesses last week, not it was to do with energy and environmental issues. necessarily lower risk but lower rate of return There are some focused environmental funds we’ve projects? gone into, about three or four, and I mentioned a debt Richard Laing: I think you have identified a really facility that I signed last week with other European important point, which is the need for CDC to be seen DFIs. We are also looking at another facility—again to be an expert in this area and—clearly, we are that is the club of European DFIs, of which CDC will owned by DFID—not to have day-to-day management be one of the major contributors—which is an of CDC by DFID. Otherwise, we might as well just international climate change facility, again for the be a department of DFID and indeed other investors very poorest countries in the world, with a focus on value that independence. They recognise that when Africa. So it is definitely an area we’d look at and, they are talking to CDC—this is to your point about as part of the consultation with DFID, I’m sure it’s attracting other investors—that CDC is able to something that will come up. manage its affairs on a day-to-day basis. Q184 Pauline Latham: DFID’s strategy involves Q181 Chair: So you don’t have an indication of reducing the number of countries that it is going to be Ministers coming along and saying, “We’ve actually operating in because it has to cut down, but to have a identified something we want you to do in Tanzania more substantial development impact. Do you think or Malawi or whatever”? CDC should follow a similar approach and could you Richard Gillingwater: Let me come in here. I think specialise in operating in the countries that DFID is that what has been one of the successes so far of CDC moving out of? is that it’s adapted to a lot of change even since the Richard Laing: That is again a subject of the 1990s. Moving into the fund of funds model, we consultation, and we have started having those obviously had a very intense dialogue with the discussions. It is clear that, in many countries, the first shareholder, but then I think the shareholder wisely stage of development is aid-based, and then the said to the board and the management team, second stage is that the private sector comes in and “Actually, we’ve set the parameters here, but we starts to generate that economic growth that we’ve would like you now to get on and deliver and operate, been talking about, and it is those countries where I and what we don’t want to do is to be drawn into this think CDC has a really powerful role to play. The or that particular investment situation.” discussions with DFID are not yet finished as to which countries we should be focusing on and, ultimately, of Q182 Chair: Presumably, it would be possible to course, it will be the shareholder decision as to where subdivide CDC and say, “Well that’s its more or less they would like us to focus, but I think part of the traditional fund of funds approach there; this is a discussion will be exactly what you were talking different, more politically directed operation.” about. Richard Gillingwater: What we would hope, coming out of the consultation, is that if that’s the route we Q185 Jeremy Lefroy: A couple of questions: I just go—and we would certainly be very open-minded wondered about the shareholding in Actis, the 40%. about that route—that we have a discussion about Do you see any value in that? Is that something that sectors and geographies, and we are very up for, really provides a bit of a conflict of interest and obviously, first of all a rigorous debate about that, but perhaps should be sold? cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
Ev 34 International Development Committee: Evidence
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison
Richard Gillingwater: I was going to say that I think these issues, and we have to wait until that process the Committee knows that DFID is a shareholder in has ended to see where DFID would like us to put Actis, and in terms of its ownership, that’s very much our capital. DFID’s matter. We obviously are symbiotically connected to Actis, so the key point for us is that Q191 Jeremy Lefroy: But what impact do you think whatever happens sustains Actis as a successful that would have on the future of CDC? investing organisation and it certainly has been a very Richard Laing: I think that if we were to switch into important part of CDC’s success. or continue investing in the sort of areas we are already—so infrastructure, SMEs, manufacturing and Q186 Jeremy Lefroy: Do you, as a 40% shareholder, growth businesses generally—then we can do that take an active role on the board? with the instruments we have to hand, such as private Richard Gillingwater: We are not; it is DFID. equity funds and debt funds. We have talked about an enhanced direct programme, which is something that Q187 Jeremy Lefroy: DFID; I’m sorry, yes. again I think we can start pretty quickly, though as the Richard Gillingwater: There is a very clear separation Chairman said, there is an issue of making sure we of roles. have got the right capability going forward. Debt is another area where we can increase the amount we do, Q188 Jeremy Lefroy: And you have no input into whether it be through intermediated structures such as that whatsoever? funds or we do it direct. Guarantees is another Richard Laing: DFID hold the shareholding, and I instrument that we’re looking at, as to whether we think that question is better addressed to DFID as to should be doing more. We have the appetite, clearly, how they manage that shareholding. to look at all of these to make sure that CDC’s configured in an appropriate way. Q189 Jeremy Lefroy: So you don’t have a view on One thing that’s important is CDC must keep its what DFID should do with that shareholding? distinctiveness. The British Development Finance Richard Gillingwater: I think we obviously have a Institution, CDC, is renowned in the world as being a view that, whatever happens, Actis remains a real expert in what we do and the British should be successful fund manager and that fund management very proud of that. We want to be careful that we capability is not compromised. That is crucial to us, so don’t just become a lookalike of a number of the we would obviously favour anything that supports it. others. The strength of the bilateral Development Finance Institutions is most of them have particular Q190 Jeremy Lefroy: Right. Now, clearly the value areas of expertise: the Dutch, for example, in financial of CDC’s investment has increased substantially from services; the Norwegians in renewable energy; the an estimated £1 billion in 1997 to £2.7 billion now, Germans do debt very efficiently. We are known for which is obviously a great record and has enabled our private equity investing. So provided we retain CDC to invest in lots of funds since 2004. Given what our distinctiveness, there is, I am sure, appetite and we’ve discussed, do you see that there is an ability to go and do further types of instrument. opportunity here to perhaps send some of those new investments from, hopefully, future profitable Q192 Jeremy Lefroy: Sorry, just one final question, activities in other directions, along the lines of what Chairman. If we are looking at perhaps moving the we are talking about; possibly a greater emphasis on emphasis away from what has been the case in agriculture, infrastructure, small and medium previous years, the classic example is something like business. I think this is clearly what Government and Celtel, which was obviously a great investment but certainly this Committee seems to be thinking will perhaps these days would attract a lot of private have a greater developmental impact in future, and capital should a similar investment come along. There how quickly could that happen given that clearly you are two ways forward really that I see: one is that can’t just liquidate funds overnight? You’d take a big either CDC can have a sort of CDC mark one, which impairment in value. is what you do at the moment, and then do something Richard Laing: I think there is further debate to be slightly different under a different name or a different had about the developmental merits of different part of the same organisation, or you have a more sectors. I agree with you that SMEs and infrastructure organic switch because you’re investing through funds are developmental, but a manufacturing business anyway, which says, “We’ll continue doing what employs lots of people and creates supplies around we’re doing and do these new areas within the same it; it is also developmental. We haven’t talked about set-up.” Are those two conflicting models? financial institutions, but banks are a very efficient Richard Laing: I think those are exactly the way of getting capital to work amongst communities. discussions we are having with DFID now as to how I think the debate has to be, as part of the consultation we should be configured going forward, but the period, which of these sectors and which of the consultation period doesn’t end until January and firm instruments we use are the ones that the shareholder decisions haven’t yet been made, but these are exactly ultimately would want us to focus on. We are the the sort of discussions we’re having. largest investor in SMEs in private equity in sub-Saharan Africa, and I would see that still being a Q193 Chair: Thank you very much. We are taking very big focus of what we do. SMEs in South Asia; evidence from the Secretary of State on 18 January again we have a major part of our portfolio in that. and hoping to produce a Report before the end of The consultation period no doubt will address exactly February. I think you will have got a favour of some cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:08] Job: 008635 Unit: PG02 Source: /MILES/PKU/INPUT/008635/008635_o002_kathy_IDC 14-12-10.xml
International Development Committee: Evidence Ev 35
14 December 2010 Richard Laing, Richard Gillingwater and Rod Evison of the things the Committee is interested in, and I Richard Laing: Indeed. think what you and the previous witnesses have given Chair: We obviously have to deliberate on what we us is some ideas as to the kind of things that could be have seen and heard, but I thank all three for you for done. I think you stress quite strongly you feel the evidence that you have given us in answering our defensive in the sense of saying you feel the fund of questions and informing the Committee to write a funds model has produced quite a lot of success and Report that we hope will make a constructive you would hate to lose all of that, but you do feel contribution to how CDC can go forward. Thank you there’s scope for you to diversify into other areas, very much. provided that distinctive identity is retained. cobber Pack: U PL: COE1 [SE] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
Ev 36 International Development Committee: Evidence
Tuesday 18 January 2011
Members present: Mr Malcolm Bruce (Chair)
Hugh Bayley Jeremy Lefroy Richard Burden Mr Michael McCann Mr James Clappison Alison McGovern Richard Harrington Anas Sarwar Pauline Latham ______
Examination of Witness
Witness: Rt Hon Andrew Mitchell MP, Secretary of State, Department for International Development, gave evidence.
Q194 Chair: Secretary of State, thank you very development architecture indeed. It seems to us—it much for coming to answer our questions on the final seems to me—that CDC has lost its way in that evidence session we’re holding on our short report on respect. It was, of course, perceived by the incoming The future of CDC. You’ve obviously made a written Government in 1997 as a failing DFI that was not statement to the House, and other statements and performing particularly well economically. The then speeches about the changes you envisage—not Government sought to privatise it, found they couldn’t moving away from the fund of funds model, but privatise it, and turned it into a fund of funds, where perhaps diversifying away from it. Perhaps you could it has effectively privatised the management but not just start by saying what you think are the current the activities of CDC. We believe that it has lost quite limitations or disadvantages of the way the business a lot of its development DNA. Perhaps it had model for the CDC currently operates. Obviously, insufficient financial DNA before. It’s now got we’ll ask you specific questions about where it might insufficient development DNA, and we need to put it go, but you arrive in your office as the new Secretary back in the middle, where it has both financial of State, and you’ve got this organisation, and you credibility and financial DNA, and also development look at it and say, “I want to change it.” What was DNA. That is the first point. wrong with it? The second point about how it has lost its way is that Andrew Mitchell: Thank you, Chair, very much it is far too narrowly focused, as a fund of funds. If I indeed. I’m obviously extremely grateful to the may use a golfing analogy, it is as if this organisation Committee for making a short report on CDC a has gone out on to a varied and interesting golf course priority. This was a high priority for us when we came armed only with one club—the fund of funds. I’m not into government last May, and I’m particularly a golfer, but if you go around a golf course, you grateful for the timing, because it means that we will require woods and irons, and no doubt other clubs as be able to consider carefully the views of the well. CDC has, in my view, hobbled its abilities and Committee in an exercise in which we are consulting its potential, because it is far too narrowly defined, extremely widely. That is very helpful to us. I am and that is what we want to change. conscious that around this table sit people with very considerable knowledge in this area. Q195 Chair: Sorry to interrupt you. You say, “CDC If I may be permitted a very short preamble to has hobbled”. Was it CDC, or was it the Government? answering your question very directly, it is this. We Andrew Mitchell: CDC is 100% owned by the are spending an enormous amount of time at the Government, and it is the Government who have moment trying to make sure that we use our aid placed CDC in this position. I make the point that I budget well. We buy results and we deliver for British think before it was genuinely failing in what it was taxpayers, as well as for those we’re seeking to help, doing. I think it’s now gone too far the other way, and 100 pence for every £1 we spend on development. I’m we want to put it back in the middle. It is a task for sure it’s common cause for all of us here today, Government to determine what CDC should do, and however, that really has the power and ability to lift it is for the board, then, to implement the business the poorest of the world out of poverty—and to enable plan to carry out the instructions of the Government, them to lift themselves out of poverty—is economic its 100% shareholder. growth. It is jobs; it is private sector development; it is Chair: Okay. Thank you for that. wealth creation—that is the key to poverty alleviation. Most of the jobs around the world are not created by Q196 Anas Sarwar: Secretary of State, thanks for Governments; they’re created by the private sector. coming to the Committee. Late last year, the Aid is a means to an end. It is not an end in itself. Committee visited New York and Washington, and Looking carefully at wealth creation and at economic visited the World Bank. I think that we were all struck growth brings you quite quickly to looking at CDC. by the work of the International Financial CDC is the Government’s and the British taxpayer’s Corporation, and saw it as a potential model that we vehicle—it is a vehicle—for private sector could use here for our very own CDC. investment. In our view, it should be the jewel in the Andrew Mitchell: The World Bank? crown, and a very important piece of the international Chair: Yes. cobber Pack: U PL: COE1 [O] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
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18 January 2011 Rt Hon Andrew Mitchell MP
Anas Sarwar: Yes, yes indeed. I just wondered, with Andrew Mitchell: Yes, of course. We are very closely that in mind, how you see that the CDC in its new engaged with the IFC. My officials have day-to-day format can complement and add to what other contact with the IFC, and of course the IFC has been financial institutions and other international financial part of the Multilateral Aid Review as well, where corporations are doing. we’ve been looking at the IFC and trying to assess its Andrew Mitchell: That is absolutely the subject of the strengths and its weaknesses. I first had discussions consultations that we are undertaking, and, of course, with the IFC about CDC when I was Opposition one of the key things as part of that consultation is to spokesman—more than a year ago—because we were look at what other DFIs are doing. We will be doing anxious to tap into the IFC’s expertise, which is clear that in detail—both Ministers and officials. If you look and undoubted. It’s not just the IFC; it’s the other around the European architecture, you will find, for DFIs as well, and learning wherever we can what it example, that in Germany there is the DEG, which will take to achieve the pre-eminent position for CDC has a specialist niche in manufacturing. In France, it’s that I have set out. PROPARCO, which has a specialism in infrastructure development. In Holland, the FMO is particularly Q199 Richard Harrington: I’d just like to press you skilled in the financial sector and microfinance. We on what you’ve said about the possibility of changing are seeking to ensure that CDC becomes the best DFI this organisation from just being the fund of funds to in the world and that everyone comes to us to see having direct investment as well. We’re told there’s a what we are doing. We are obviously looking to make City analogy about the fund of funds, and one of the sure that we don’t replicate niches that others are problems with it is the same problem as with a involved in. At the end of the day, CDC needs to be, commercial one, in regular investment: there’s above all, a provider of patient capital. If CDC is only effectively two lots of management and two lots of doing things that the private sector does anyway, there fees. Would this be one reason why you would decide is little point in not putting it in the private sector. The to go into direct investment for CDC? Secondly, do point about CDC—its roots and traditions over many you feel that there is a conflict of interest between a years—has been doing something that the private fund of funds operation and a direct investment sector can’t do. That is particularly the development operation, because you might be funding competitors DNA that we should add. In the end, the provision of to CDC’s own direct operation? patient capital—capital that does not require the same Andrew Mitchell: You might, but on the last point returns as the markets often do—is, in my view, the that you make, you would be selecting the appropriate unique niche that CDC should be bringing to the club from your golf bag, if I may return to my earlier development architecture. analogy. Of course you will be pursuing the results that we seek for all our development activity. We want to make sure that we are better—and CDC is better— Q197 Anas Sarwar: Just on that point, you said how, at articulating the results that our development work obviously, the CDC should be different from other is achieving. That, as I mentioned when I was here development finance institutions, and it should be before, is indispensable to carrying public support for unique. How do we actually make that happen and what we are doing. There is a whole range of make the CDC unique? additional ways in which CDC can act. I set some of Andrew Mitchell: We do it by assessing what that them out in the speech I made to the LSE, which I niche is, and then by tasking the board of CDC to think the Committee has seen. draw up a management plan, under the Department’s Richard Harrington: We’ve seen that. Thank you. business plan. We expect that to be with us by May Andrew Mitchell: It’s not just direct investment; it’s this year. There are a number of reviews taking place. also returning, as we have, the ability to borrow. It’s There is a big meeting of experts later this week to being more involved in debt instruments. It’s discuss the future direction of CDC. What the co-investment, because actually CDC will not have Government are trying to do is to say, “We want this these skills overnight, so you might start to build them to be the best DFI in the world. It’s a tremendous up with co-investment. I want it to have far more of opportunity for CDC. What would it take to ensure an understanding of the work that the PIDG is doing, that it does become the best DFI?” If we can see and which is extremely important work that the demonstrate that the work that CDC is doing is really Department is strongly supporting. contributing to the development outcomes that we all want, the Government would be prepared to produce Q200 Mr Clappison: Just a quick question. The additional capital in pursuit of that. We are doing our matters you have raised with us so far have best to ensure that CDC becomes a real credit to the presumably also been raised with the present international development architecture, and a real leadership of CDC. What sort of response have you credit to Britain’s development effort. had? Andrew Mitchell: I’ve had a number of meetings with Q198 Anas Sarwar: As part of that process, is there the Chairman of CDC, and some with the Chief a consultation taking place with the IFC—direct Executive. I think that the Chairman is extremely open communication links, discussions, and a real to change. I think that he will welcome a much closer consultation about how it operates and how CDC can relationship between the Government and CDC— learn from the good things that it does, and also learn sometimes in the past we’ve been too remote a from the things that it can do better? Is that process shareholder. We will, of course, be able to judge the taking place actively? extent to which I’m right by the business plan that cobber Pack: U PL: COE1 [E] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
Ev 38 International Development Committee: Evidence
18 January 2011 Rt Hon Andrew Mitchell MP comes out of all this consultation, but I’m very Q204 Pauline Latham: Yes. I wanted to come on to confident that the Chairman of CDC is in the right poverty alleviation. At the moment, it does a lot of place on this. economic development, which is typical of the purpose for DFIs, but would you be seeking to expand Q201 Mr Clappison: They’re aware of the interest CDC’s mandate to incorporate poverty alleviation? that there is in this, not least from this Committee? Could you see any potential disadvantages to Andrew Mitchell: I believe they are, yes. changing CDC’s remit in that way? Chair: They’ve been in front of us. Andrew Mitchell: All of CDC’s work should be about pro-poor private sector investment. I would certainly try to persuade the Committee that all that is about Q202 Pauline Latham: Good afternoon, Secretary of poverty alleviation. Particularly if you take my point State. Do you think there’s a trade-off between about patient capital, the demonstration effect, and increasing development impact and mobilising as working in the most difficult places, I hope that you much capital as possible? How do you think the CDC would feel that we were directly addressing that point can get the balance right with regards to this tension? about poverty alleviation in our pro-poor investment What level of financial return should CDC target for and development strategies. its investments, and why, and to what extent should CDC be an agent for improving environmental, social Q205 Pauline Latham: When they came in front of and governance standards? us, I didn’t get the feeling that they felt that poverty Andrew Mitchell: It certainly should be doing the alleviation was the biggest thing that they should be latter. It’s no part of our mission to do anything other doing, but that they were really there to be making as than drive up work standards. I’ve already had much money as possible, which did seem to conflict discussions with the TUC about this. It’s a very with that. Do you think there is a tension between important part of investment, on the last part of your what it is doing now and what you want it to do? Do question. you see that you’ll be able to move it on and change On the other parts of your question, if I’ve understood its conditions? them correctly, we want to make sure that the Andrew Mitchell: CDC responds to the instruction it’s development impact of what CDC is doing is very given by its shareholder. The Government are the clearly recognised, and we will consider how to 100% shareholder in CDC, and we are certainly quite change its geographical approach and the investment clear that we will agree with the board of CDC how returns that it achieves. Those are two key parts of the it is to proceed in this area. I have every confidence consultation that we are undertaking. As far as the that it will do exactly that. development returns are concerned, I want them much better expressed, just as we do for the work that we Q206 Chair: Secretary of State, the change, in a way, do in the bilateral and multilateral aid programmes. is a risky strategy for you as a Minister and for the As for financial investment, I want them better Government. You said that it was a rather distant expressed, just as we do for the work that we do in relationship before, but it was an easy one for the the bilateral and multilateral aid programmes. As far Government to take. I’m not making a judgment, but as the financial returns are concerned, I go back to my it is saying, “We give you parameters and you grow point about patient capital. I want to be able to use the fund, and as long as you keep doing that, making this capital to ensure that we achieve the best possible a return and not costing the taxpayer any money, development returns. Clearly we will need to discuss there’s not a lot of risk,” it’s easy to park it. If you this across Government, with the Treasury, and with start not to micromanage it, but to direct it more, and the board of CDC, and we will need to reflect what lower its risk thresholds and get it more into comes out of the consultation. It does not seem to me development, and you also want to demonstrate value that you need to designate, for the work of CDC, very for money and a good return for the taxpayer, you’re high economic returns. We could have a discussion putting CDC in a situation where it’s much more about whether they should cover the cost of inflation likely to have some bad news stories and difficulties. in the returns that they seek. That’s a perfectly Is that something that you’re comfortable with? reasonable proposition. I’m not wishing to pursue Andrew Mitchell: CDC will respond directly to the what the fund of funds model, partly because of the mandate it’s given by its shareholder, so in terms of the return that it must make, it will have to operate remuneration mechanism, makes so clear, which is the within that structure. In terms of the geographic highest possible economic returns at the expense of footprint, it will have to operate within that as well. development returns. When I say that I think CDC was too distant from the Government, the example I would give of that is that Q203 Pauline Latham: Rather than just going for it took 18 months to agree, two years or so ago, the easy successes. percentage of CDC’s investment that should take Andrew Mitchell: Yes. Mrs Latham makes a very place in sub-Saharan Africa, in the poorest parts of good point. CDC should be in the hardest possible the world, and in SMEs. If it took 18 months to agree places where we are seeking to help the poorest in the these changes, that does not suggest that there’s a very world. There is, of course, a clear demonstration effect close relationship between the shareholder and the of what CDC does, in leading the way in showing the management. Let me be absolutely clear: the one thing private sector what can be done in some very you mustn’t have is civil servants and Ministers difficult places. making operational decisions. They must not pick cobber Pack: U PL: COE1 [O] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
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18 January 2011 Rt Hon Andrew Mitchell MP winners; that is a much-discredited approach. We will providing additional capital from the development set the framework within which CDC will operate. We budget in support of its work will make sure, particularly with the setting up of the new private sector department within DFID, which Q209 Alison McGovern: Very briefly, coming back was launched on 1 January this year, that, in terms of to Pauline’s question, if we are debating economic driving forward our private sector-focused work, for growth versus poverty reduction, and you’ve indicated all the reasons that I outlined at the beginning, there you want them to be demonstrating that it’s possible is the closest possible relationship, in pursuit of that to invest in the toughest possible areas, how are you common aim, between CDC and the Department. going to measure success? I’m sure we’ll get into this Chair: We have a couple of supplementaries. in further detail later, but I’d be interested in a brief response on whether you will measure the results by Q207 Anas Sarwar: Just a brief point on what you economic growth measures, or whether it will be said, Secretary of State, following up from the idea MDG-style social measures of poverty reduction. that CDC should be working in the hardest places. I Andrew Mitchell: I probably wouldn't draw exactly totally agree with that. Do you think that there also the distinction that you have, perfectly fairly, drawn. could be a role for it to have some investment in Success, in financial terms, means meeting the targets so-called “easy” places—to get the easy returns— that we have set for CDC overall. If you look at which in return gives you extra capital and extra CDC’s annual report last year, it is better at talking money to spend in the hardest areas, or do you think about the results in MDG terms, and other terms, that that all money has to be focused just in the most it is achieving. Clearly, the number of businesses that difficult areas? have been set up, the number of people who are Andrew Mitchell: Yes, that is a very good point. What employed, and, for example, the fact that CDC I would say about that is that it certainly that gives investments paid local taxes of I think $3 billion last you the spread, as you rightly say. Secondly, of year are all development outcomes. The successful course, we are approaching a position where 75% of paying of tax into the Exchequers of poor countries is the poorest people in the world live in middle-income something that the development budget seeks to countries. My own preliminary conclusion—again it’s facilitate through technical support and structures in a something that we’re consulting widely about—is that number of countries at the moment. All that is just as geographical borders and being very specific about important as providing goods and services to very countries is important, but not the most important poor people, and also supplying jobs to poor people aspect of this. Clearly we are considering the role of in very poor parts of the world. In terms of the CDC in places such as India, and in other graduation development outcome, it’s quite a wide spectrum, and countries too, such as Vietnam, and Zambia, that are the financial outcome, and the results and targets that moving quite fast out of poverty towards we set, will be quite easy to evaluate. middle-income status, if they have not already achieved it. The role of private sector investment there Q210 Chair: One of the things that CDC said to us is incredibly important in intensifying that graduation. was that its strength was mobilising capital from other That is certainly something that completely fits our organisations—private and public. If you lower the view of how CDC should approach this. risk threshold and you focus more on poverty, how will that affect its ability to attract capital from other Q208 Mr McCann: My question, I think, neatly quarters? If it does, is that a point of concern? follows on from that. If there’s a greater emphasis on Andrew Mitchell: We don’t wish it to cease altogether poverty reduction, and less on return, and more on the fund of funds model. We want it to keep that patient finance—I fully understand how all those particular golf club. We do, however, want to move points connect—that has the potential to lead to fewer away from that being the only way that it is doing returns for CDC. Will DFID bankroll CDC if it has to development finance. abide by the new rules on poverty reduction and more patient finance? Q211 Chair: Which means you’ll have to separate— Andrew Mitchell: First, we will determine the rules Andrew Mitchell: It will be for it to decide governing returns. At the moment, the figure is quite operationally how it organises that. We are not saying high. The Treasury will have a view on this. I don’t that that model has no place. What we are saying is think there’s anything to be said for allowing CDC to that it is much too narrow a definition of the tradition lose money. A business that is failing is not good for and heritage and potential that CDC has. the shareholders, or for the people it’s seeking to serve. The point I was making was that we have to Q212 Jeremy Lefroy: Secretary of State, you’ve think this through very thoroughly. One of the models talked about pro-poor investment, which is something would be to say that CDC should make a return that we’d all very much agree with. According to the sufficient to cover the cost of inflation. That’s the first World Bank, growth in agriculture seems, some point I would make. The second point I would make, people say, to be twice as effective at reducing poverty which I think I alluded to earlier, is that if CDC is as other sectors. CDC traditionally had an emphasis successfully achieving what the shareholder wants it on some large-scale agriculture projects, some of to do, if it is delivering the development results as which are still going, even under other management. well as the financial results, if it is powering ahead on Would you see investment in the agriculture sector as this pro-poor private sector investment, and if it is one way in which CDC could go, given that it has being a success, I certainly would not rule out only 5% of its investments there at the moment? cobber Pack: U PL: COE1 [E] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
Ev 40 International Development Committee: Evidence
18 January 2011 Rt Hon Andrew Mitchell MP
Andrew Mitchell: Yes, Mr Lefroy makes an extremely Q215 Richard Burden: Have you got any sense, at good point. Agriculture is an enormously important this stage, of what that might look like—the kind of part of development. There’s some extremely good things in the development of, say, green technology or work on food security going on in northern Uganda at whatever, you would like CDC to get involved with? the moment. Embedding food security, supporting the To some extent, that could be anything from looking work of the World Food Programme—this is at some of the grassroots issues, in terms of using enormously important. Clearly, however, private waste products in villages and so on, which we’ve sector investment in agriculture, which has declined seen on some of our visits, right the way through to overall in recent years, is incredibly important, and I much bigger stuff. Do you have any sense of the kind would expect us to build that up. Which sectors CDC of levers that CDC would be using in that investment, should be in going forward is a matter for or will you be saying, “That’s a priority area for CDC; consultation. Agriculture is clearly one. Energy, and now, CDC board, you go away and work out how you particularly the clean energy sector, is another very achieve it.” obvious one. Infrastructure work, which CDC is Andrew Mitchell: Mr Burden is inviting me to pick already very involved in, is clearly highly relevant as some winners in the sector, and I think I will resist well. We have to take quite a well-thought-through his kind invitation on that. It is for CDC, with us, to approach to this. I remember feeling that CDC determine which sectors it should be in, and then, investing in shopping malls in Accra sounded a rather having sent a signal that those are the sectors that it strange investment for it to make. However, if that is interested in, to wait and see what propositions investment was part of a chain of activities that was come to them, and evaluate them accordingly. Of encouraging people to come and shop for produce that course they should be more proactive than that in was grown locally, or not so far away, it might well terms of co-investment and, later on, in direct be that investing in shopping malls was a very good investment, subject to the skills and capacity to do contribution to a wider approach on agricultural and such deals, and also to respond to the instructions it food security. You have to take quite a wide view of is given by the shareholder. this, but I absolutely agree with Mr Lefroy that investing in agriculture is something we should look Q216 Anas Sarwar: Going back to the IFC briefly, it at extremely closely. has “addressing climate change” as one of its strategic priorities. Do you think the new CDC, or the new format of CDC, should have something similar, or Q213 Jeremy Lefroy: Just one quick follow-up on should it just purely be about the economic impact? that. There seems to be a lot of large-scale investment Andrew Mitchell: I’ve no doubt at all that addressing in agriculture in sub-Saharan Africa at the moment, climate change issues is a hugely important aspect of which consists of funds coming in and buying up tens all the coalition Government’s activities. We have of thousands of hectares almost speculatively. Given made clear that we are putting nearly £3 billion into that situation, do you see a role for CDC to do this climate funds, not exceeding a total of 7.5% of the kind of thing, but in a very different way, and to set a development budget. I have no doubt whatsoever that, different model from what some of us fear is a bit of as part of a revivified and revamped CDC, a land grab at the moment? approaching the sort of investment that Mr Burden Andrew Mitchell: Yes. Mr Lefroy identifies an was addressing will be a key part of its activities. activity that, if it is not transparent, can be very undermining. Clearly setting standards of Q217 Chair: Would that include helping developing transparency in investment, and trying to make sure countries that have a desperate need for electricity that the chain and way in which the investment is power to develop low-carbon, rather than fossil made is done properly and in an open way, is fuel-based— extremely important work for CDC. Andrew Mitchell: Absolutely.
Q214 Richard Burden: In November, you suggested Q218 Chair: Would that be part of the conversation that CDC could have more of a role relating to climate between the Department and CDC, which I think is a initiatives. Can you say a little bit more about what little bit of what Richard Burden was asking? You say you were getting at there, and, to use your analogy, it’s up to them to decide, but would you have an which of the golf clubs you’re going to use to exchange of views? When it was giving evidence to achieve it? us, the CDC team was saying, “Sometimes building a Andrew Mitchell: One could imagine, across a whole coal-fired power station delivers the power they need, range of activities, pro-poor, private sector investment and it’s the cheapest, most effective way to do it.” The that was encouraging the clean production of energy. counter for that is that it doesn’t help the climate That is something that CDC should be looking at. I change agenda. Would you have a situation where the think it was Bill Gates who pointed out that providing Department might actually have a conversation to try energy for very poor people, at every level, is one of and get the right balance there? the single greatest development interventions you can Andrew Mitchell: We are considering that point. It make. I would expect, from these consultations, to arose, actually, during the purdah period at the general come a priority for energy production and investment election, when we were asked whether or not we in energy. Clearly, where we can, we should certainly thought that a big coal-fired power station in South be trying to ensure that that is a boost for clean Africa should proceed. From memory, it was a World technology in energy production. Bank project. At that stage, we decided that our advice cobber Pack: U PL: COE1 [O] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
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18 January 2011 Rt Hon Andrew Mitchell MP was probably that Britain should abstain, and we made priority, rather than other priorities that may appeal to it very clear in opposition that we did not think, for the CDC board? How aligned should CDC’s work be example, that ECGD should be involved in promoting with the priorities of countries’ Governments? fossil fuel power generation. There is clearly a priority Andrew Mitchell: A balance has to be struck on that. of trying to move away from that. It is inconsistent For CDC to pay no regard whatsoever to the poverty with our climate change aims and commitments. In reduction strategy of a Government—often one that the case of the South African power station, things has been agreed between the international community had gone so far that I think abstention rather than as well, in signing up for donor support—would be opposition was the right position. As your question very surprising. It’s a case really of making sure that rightly implies, addressing these issues early on, a harmonious relationship exists to the best possible having a presupposition in favour of clean fuel effect of both CDC and those we are trying to help. generation, seems to me to chime in absolutely with In general, I want to ensure that CDC has much closer the Government’s priorities. relationships and closer contact with DFID’s offices overseas, and it seems to me that that’s entirely Q219 Hugh Bayley: Overall DFID’s strategy is to sensible. Bear in mind that aid is a means to an end, reduce the number of countries that you operate in so not an end in itself. As countries, hopefully, begin to that you have more impact where you do have a graduate out of poverty. Inevitably there should be a presence. Should CDC be doing the same? much closer relationship between the development Andrew Mitchell: It would be sensible for CDC to authorities and CDC in the pursuit of the common focus on the areas that Britain and the British interest of promoting pro-poor investment. development programme are focusing on. I do not mean by that that they should be absolutely Q223 Hugh Bayley: One last point. You say that contiguous, and we will consult on this, but I start that CDC should be in the most difficult places relieving consultation with the general view that CDC should poverty, and you talk about broad alignment with be part of the British Government’s development DFID’s priority countries. Given the emphasis that armoury for all the reasons I set out in my first answer. you place on working in conflict and post-conflict It should complement that work, and that, inevitably, states, and the difficulty of investing commercially in means that it should be focused on the same areas that such places, what kind of role would you see for CDC we are focused on. in the DRC, southern Sudan or Afghanistan, for example? Q220 Hugh Bayley: You’ve mentioned geography a Andrew Mitchell: We will see the extent to which couple of times, but I’m still not clear in which CDC is able, following all our consultations, to do just direction you think CDC should go. Should it be doing less in middle-income countries and more in the that. These are places where, as Mr Bayley mentions, poorest countries? private sector overseas investment—direct foreign Andrew Mitchell: We want to consult on that point, investment—is largely absent. It may therefore be that and we have not yet made a decision about that. We’ll with the approach of supplying patient capital, there be very interested to hear the views of the Committee. is a clear demonstration effect of CDC’s involvement We want to try and make sure that CDC is used, to with such countries, which would be hard and the greatest possible extent, to help eradicate poverty difficult, but greatly to the benefit of these more and to assist poor people to lift themselves out of difficult countries that you mentioned. It is for us to poverty. I don’t think you can ignore the fact that 75% work out, given the parameters within which CDC of the poor are, or will shortly be, living in will be investing, the extent to which it is able to have middle-income countries. Therefore one of the an impact in some of the very difficult places that you options, for example, would be to try and ensure that, and I have mentioned. in a country such as India, CDC was working in the poorest areas. Then you have to make a judgment, in Q224 Mr McCann: Secretary of State, you started support of that, on how you would define that. off with a golf bag analogy. Those of us who know a little bit about it—not a great deal—will remember Q221 Hugh Bayley: You said a moment ago, that Lee Trevino, the great golfer, went round a very Secretary of State, that CDC, rather than the difficult golf course in Scotland with a nine iron and Government, should determine which sectors it did better than most of us could with three sets of works in. clubs. To continue that analogy, therefore, you’ve Andrew Mitchell: What I said was that we were indicated that you would like CDC to use a range of consulting on that, and that the shareholder would different financial instruments. Two questions on that: decide what the parameters were. Within those could using too many financial instruments jeopardise parameters, CDC would obviously make the CDC’s niche status, or indeed jeopardise its reputation operational decisions. for expertise; and, secondly, what proportion of CDC investment should comprise equity finance? Q222 Hugh Bayley: The question in my mind is this: Andrew Mitchell: On your last point, that is for development needs to be led by the developing discussion. We will see what comes out of the expert country. Should CDC seek to align its investments advice that we get and the other advice in the with the priorities of the country in question? For consultations. I suspect a larger proportion, but let us instance, in Malawi, should it concentrate on reflect on that and see what comes out of the infrastructure, if that’s the Government’s development consultation. cobber Pack: U PL: COE1 [E] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
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18 January 2011 Rt Hon Andrew Mitchell MP
The aim of CDC should be to perform as well with Q228 Jeremy Lefroy: And would you see, for all the clubs at its disposal, to go back to your analogy instance, the ability to co-invest alongside perhaps of the golf course, as it possibly can. It should show non-traditional investment partners, such as co- leadership, and example and demonstration, to others operatives, as one of those advantages that might be who are seeking to do the same thing. You’ve clearly not available to investment funds? got to have the expertise within CDC, and it is equally Andrew Mitchell: Subject to that being consistent clear that CDC is going to need to take on additional with the agreed criteria on which CDC is investing, expertise and additional specialists to enable it to yes. accomplish the mission that we are evolving for it. Clearly the board may need to reflect those changes Q229 Jeremy Lefroy: I just want to raise one other as well, and we’re completely open to having a larger issue. As you’re probably aware, DFID is one of the board. There are two new board members in the main funders of a programme called the Africa process of being appointed. The decision as to what Enterprise Challenge Fund. I have to declare an businesses CDC is in will come from the new business interest here, having been involved in one or two of plan. It will be up for the CDC management to make the projects. It is, in my view, a very good fund. What sure that they are able to staff that, and that there are happens, though, is that it enables private sector the requisite expertise and skills within CDC to carry companies to start up in areas and businesses when that out. they otherwise wouldn’t have been able to do that. It seems to me that we are rather missing a trick here, and that perhaps the taxpayer could take some kind of Q225 Mr McCann: I think you’ve already confirmed equity stake in those funds, which are sponsored by it from a question earlier, but if new functions are DFID—at the moment they’re just given away as required for CDC as well as new expertise, in the right grants. They could then be brought under the umbrella circumstance, would DFID consider financing those of CDC to be managed. I wondered what your view changes? of that might be, as a possible way of doing some of Andrew Mitchell: We will certainly consider that, yes. this patient capital investing that is actually going under the umbrella of DFID at the moment, in the Q226 Jeremy Lefroy: You’ve expressed a desire to form of grants, but bringing it as an equity stake see CDC regain its power to make investments under CDC. directly in target markets. There are a number of Andrew Mitchell: It sounds a most interesting and questions that arise out of that. If it does have this sensible idea, and I will ensure that the new private power, it will inevitably need greater in-house sector department considers it very quickly. It sounds expertise, or be able to access expertise, in order to a very good idea. make those investments. Secondly, would it then come into conflict or competition with the fund managers Q230 Richard Burden: May I pursue this same line through which it invests other funds? of questioning about the new model of CDC and what Andrew Mitchell: The point I was making to Mr its impact on the ground can be? One of the things McCann is that once the board and the shareholder about its current model—being a fund of funds—that have agreed the tasks that they’re going to undertake it has emphasised to us is that it means that the vast and carry out, it will be for the board to make sure majority of its fund managers are local. The point is that there are the requisite skills. I’ve no doubt at all sometimes made that even if there are good reasons that it will need to hire additional skills in order to for moving towards a direct investment model, the carry out the mandate. I’m quite clear about that. In danger, or one of the downsides, of that is that you respect of your second question, I don’t really see could lose a great deal of that local expertise. them coming into conflict here. It is a case of making Therefore you would lose the sensitivity to the very sure that you use the right approach. These are things that you’re trying to be more sensitive to. How financial and development skills. You use the right do you think, in practical terms, as the shareholder, approach to make a successful investment in the you could direct CDC under the new model to make sector that you’ve identified. sure that it does have sufficient local knowledge on the ground? Some of that is covered by your answer to Jeremy Lefroy, but I wondered if you had any further Q227 Jeremy Lefroy: Why do you think it is thoughts on it. important to have the ability to make direct Andrew Mitchell: There are a number of ways. First investments, other than it being simply another golf of all, it’s one of the reasons why I want to see a much club? closer relationship between CDC on the ground and Andrew Mitchell: Because I think that, in pursuing the expertise that exists in DFID’s offices. When I was the mission of making pro-poor private sector in India recently, I was able to make sure that some investment, when you’re looking at achieving a set of of these private sector initiatives and discussions development aims, in whichever sector it is, there started to take place. The officials involved in this might well be a role for direct investment. I fully have responded extremely well to that. There needs to accept that for now, given the skill base at CDC, it is be more cross-fertilisation, bearing in mind always likely to be co-investment. I hope that the private that CDC has a total strength of something like 50 at sector department in DFID, along with other bodies, the moment, so it does not have much spread around can help CDC to recognise the opportunities that exist the world. In terms of activities in-country, where for co-investment, and encourage it to take them. there is the possibility of what you described cobber Pack: U PL: COE1 [O] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
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18 January 2011 Rt Hon Andrew Mitchell MP happening, good relations and a good understanding Commonwealth Secretariat, because it doesn’t really of what we are trying to achieve should do a great have a track record in this field. I’m not suggesting deal to blunt that. I emphasise that the additional that it should be managed by CDC, but here is an freedoms that we want to give to take forward our example of a body that was initially established as a drive to get more pro-poor private sector investment Commonwealth fund and separately managed. Does is CDC-plus, not CDC-minus. I see it as an DFID have any interest in trying to strengthen a opportunity, and not a trap, in the way that you Commonwealth front on development? Are there any suggest it possibly could be. lessons that could be learned from CDC’s experience that might be applied to creating such a Q231 Richard Burden: Could you see it maybe Commonwealth development fund? Perhaps you’ve directly buying out some of the funds that it is a fund not thought much about it, but if so, would you be of at the moment to give itself more reach on the willing to think through the idea of it? ground? Andrew Mitchell: I’ve no doubt that Mr Bayley will Andrew Mitchell: It would need to have a good, ensure that it’s included in the report from the Select sound commercial reason for doing so that met our Committee, not least because his emphasis on the requirements in terms of looking after the interests of Commonwealth, of course, fits with the first letter “C” the British taxpayer, and looking after the interests of of CDC’s name. The Foreign Secretary and I have pro-poor development. both made it clear that we’d like to see the British Government doing more with the Commonwealth and Q232 Richard Burden: But there wouldn’t be any building up our links. This is a remarkable north-south objection in principle to it doing that, if it met those family that has huge potential, which we think should criteria? be embraced and built on. Certainly that underlines a Andrew Mitchell: I’m not sure if you’re making a development angle to that. Of course, we’ve been wider point, Mr Burden, about whether or not some looking at the Commonwealth Secretariat as part of of the funds should be churned, as it were, to greater the Multilateral Aid Review. It is one of the 43 advantage by spending that money in a different way. agencies we’ve been looking at. We will be coming That would be a commercial decision that the to some conclusions shortly about what we should do managers of CDC would need to satisfy themselves in respect of that funding, whether it’s delivering what fulfilled my earlier two criteria. we want, and whether it could be changed to deliver more effectively. It is well worth considering Mr Q233 Richard Burden: Okay. Again, I suppose this Bayley’s comments in that connection. The only rider will mirror some of the questions that Jeremy Lefroy that I would make, on the other side of the balance put to you. At the moment, CDC is generating pretty sheet, is that anyone who looks at the development substantial profits and has been doing for some time. architecture realises that there are a huge number of It is self-financing. Do you see that CDC itself, and different organisations doing quite similar things. would you encourage it, could set up a number of Therefore, one would need to be clear that this would not-for-loss, if I can put it that way—not for profit, have a unique benefit in terms of the results it would but also not for loss—development funds that could secure for poor people, and wouldn't just be focus on specific areas? Is that the model of patient duplicating and not delivering any real benefit for its investment that you’re talking about, or could it be? arrival as a new fund on the development scene. Andrew Mitchell: I certainly wouldn't wish to rule it out. Q235 Alison McGovern: We’ve been talking around the issue of the arm’s length nature of CDC and the Q234 Hugh Bayley: My question has, in truth, only Government being its shareholder. Perhaps you might the most tenuous relationship with this inquiry, but say explicitly how independent you think CDC should the Chair agreed to indulge me. The last CHOGM remain in the future, and how much oversight you’re recognised that the Commonwealth has really lost going to have of CDC in the future. Is there a possible focus and direction, and it set up the Eminent Persons world where you have a seat on the board? Connected Group to reassess what, uniquely, the Commonwealth with that, you’ve mentioned several times DFID’s could bring to its members. The CPA UK branch put new private sector development department. What in evidence, with a number of proposals in the field will the relationship be between CDC and that team of human rights, the rule of law and governance. It within your Department? also made a proposal that the Commonwealth should Andrew Mitchell: First of all, the relationship establish a development fund—a stand-aside between the private sector development department development fund, rather like a smaller version of the and CDC will be much closer than it has been in the UNDP. The idea was that you might then, through past. I want to see the cross-fertilisation of ideas and, British leadership in making contributions, be able to indeed, quite possibly people—looking forward some generate greater contributions from Australia, New way. I want to ensure that, as the shareholder, we Zealand and Canada. You might be able to develop a exercise the right and proper role of a shareholder, but relationship with emerging donors, such as India and we don’t get involved in operational decisions. As I South Africa, and share expertise and experience, and think I said earlier on, it is not for Ministers and civil you could also demonstrate to the poorer servants to make operational decisions and pick Commonwealth countries one of the benefits of being winners. That is for CDC to do, and it has a board a member of the club. If such a body was set up, I to manage all its operations and activities. It has the think it should be separately managed from the direction set by the shareholder, and then it gets on cobber Pack: U PL: COE1 [E] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
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18 January 2011 Rt Hon Andrew Mitchell MP and implements that direction and strategy. We should not motivated by the desire to do the next deal and to be very clear about that. I do not want a seat on the get on the production line. They want to leave their board. I am involved in the appointment of board own footprint in the sand and to make a real mark by members, and I intend to ensure that the board getting involved in something as important, rewarding accurately reflects the development DNA we wish to and fulfilling as the development aims of CDC. With see in the CDC, and the financial skills DNA. That the right leadership, we can harness the skills of those would be the extent of my involvement as a two groups, and attract them without having to pay shareholder, however. It is then for the board to come these extraordinarily large salaries. up with a strategy, which the shareholder will May I just add two riders to that? The first is that we approve, and then to go ahead and implement it. are looking carefully at the remuneration structures of the other DFIs. For example, the head of the French Q236 Richard Harrington: Secretary of State, on version of CDC is, I think, paid €200,000 per year, the thorny subject of remuneration levels, which I’m which is about £160,000. The average across the DFIs sure you’d rather not talk about because it’s been in Europe is no more than €300,000. The overdone and it’s dull, just a short question. As you remuneration should be proper to recruit, retain and might be aware, we had in front of this Committee the motivate, as I say, but legitimate questions have been Chairman and Chief Executive, and there were some raised about some of the remuneration at CDC, and questions. Everyone’s read Private Eye and all this those questions need to be addressed. sort of thing, but trying to keep away from that, can I ask about the real basis on which you think staff Q237 Richard Harrington: I must say I find your should be remunerated in an organisation like CDC? answer truly inspirational—I really do—but it’s very They told us that it was benchmarked against a City different from what we were told by the incumbents standard—the fund of funds industry. I’m not sure I in the position now. can quite go with the comparables in terms of Andrew Mitchell: We are moving to a new system. accountability and everything, but do you feel that’s People have contracts, and those contracts must, of the right benchmark, or do you think there should be course, be honoured, but I am trying to set out a another way that CDC—or, in fact, all active different vision for CDC that I think has the ability to investment staff—should be remunerated? Also, could catch people’s imagination. you comment on how that could be adjusted? Richard Harrington: A public service vision, Obviously some of the remuneration surely should be absolutely. for other things, such as development impact and part of DFID’s general cause, rather than specific Q238 Chair: To be fair, Secretary of State, we had investment criteria. evidence from other quarters that such people did Andrew Mitchell: It’s a very important area, and exist. we’ve given some thought to this. One of the four Andrew Mitchell: Did you not have, Chair, Tom studies that we have commissioned is on the issue of Cairnes in front of this Committee? I’ve met Tom remuneration. Let me be clear: we need to be able to Cairnes in Sierra Leone, and I’ve seen what he is recruit, motivate and retain very high-quality people seeking to do. I’ve seen the results of what he’s doing: to administer and run CDC. We should be in no doubt employing 800 people and contributing, I think, about that. However, I feel that we are missing out by $750,000 of tax revenue in Sierra Leone in the last not tapping into two very specific groups of people who could make a massive contribution to CDC. The year. He is an inspiration to other youngsters, who can first is that there are people who—I confess to having see what he has done, and see the mark that he has spent some time in the City myself—have made a left in the sand. I think there are many others out great deal of money in the City and are very there, who, given the opportunity, would respond to experienced, but perhaps a little bit older. They have that challenge? reached a stage in their life when they would like to put something back. They might wish to get off the Q239 Alison McGovern: Like Richard said, I think production line deal flow in the City, put something you talk a good talk, but we just had a discussion in back, and do something really inspiring and useful. I which I asked you about how DFID would have a believe that what CDC should be doing is inspiring relationship with CDC. You said you were quite clear and incredibly important. It is to be the jewel in the that operational decisions would not be a matter for crown of Britain’s pro-poor private sector investment you. Are we going to come back to this issue in a effort. It is a fantastic opportunity going forward for couple of years’ time, once bankers’ bonuses are a CDC, for all the reasons we’ve been discussing this little bit less on the agenda and the economy has afternoon: what it can achieve; and what, for the first moved on, perhaps, and find that we’ve still got time, our generation can achieve, which has not been excessively high levels of pay? Will you then say to possible for any before. I believe that such people will us, “It’s for the board of CDC to decide that”? How be motivated by the mission and will have enthusiasm active a shareholder do you intend to be on the issue for making a real contribution, and they will not of remuneration? To be clear, there were lots of require enormous telephone-number salaries. You then questions asked in our evidence session with the Chair couple that with the other group, on which members and Chief Executive, and I think there was a level of of the Committee may share my view from what they dissatisfaction with the answers that we got. They see in their own constituencies. There are groups of didn’t seem to be able to make clear information young people who perhaps go into the City and are available to us, and I’d just like to know, as a cobber Pack: U PL: COE1 [O] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
International Development Committee: Evidence Ev 45
18 January 2011 Rt Hon Andrew Mitchell MP shareholder, how active do you think you can be over company estimates that it will double that $5 billion, the issue of remuneration? and a 20% carry means that $1 billion dollars of Andrew Mitchell: We have commissioned an revenue will accrue to the company and the partners. independent report on remuneration to help to inform That is a very substantial amount of revenue, which us, and we will then agree those parameters with the would in turn yield a very substantial amount of profit. board, and the board will get on and implement them. It seems to me that the taxpayer is entitled to some As for the future, I would not relish returning in two of this. years’ time and giving such an answer under forensic Actis was created on a private sector model. It is examination from the honourable Lady. extremely successful. It has invested its capital very Chair: I think you can see where the Committee’s well. Its existing management, many of whom came coming from, Secretary of State. out of CDC, are doing phenomenally well and, in my view, they out-negotiated the then Government. We Q240 Mr McCann: I have a question on ODA. CDC have a situation where the taxpayer, as a shareholder, net equity investments are eligible to be counted as is entitled to 80% of the profits,1 but the business is ODA which, as we know, should have a demonstrable being run in such a way as to ensure that taxpayers development impact. How do you intend to ensure and the Government receive nothing whatsoever from that the new remodelled, reshaped CDC can have that that. This deal is particularly shameful, Chair, given demonstrable impact? the level of taxpayer contribution, the legacy of capital Andrew Mitchell: Everything I’ve said about the new to get it started—some 44% of its capital came from directions of CDC is absolutely consistent with the CDC—its legacy in terms of people, and also the OECD-DAC rules governing ODA. There is no history of Government involvement. intention of straying outside those in CDC’s remit. In answering your question about what we should do about this 40% holding, the question is: what are the Q241 Mr McCann: Regarding your governance of board members of Actis prepared to pay the taxpayer that and the whole transparency agenda, which you’ve for 40% of a very successful business? I have to say been very keen on, would you intend to put different that I am amazed and surprised at the way the mechanisms in place in terms of your share total management of Actis have so enthusiastically position? I realise that you’ve said on several exploited the taxpayer’s position using aid and occasions that you don’t want to micromanage CDC, funding directed by the British taxpayer to help the but would you intend to put other mechanisms in poorest in the world. It remains to be seen whether place to ensure that what you were asking for was they will recognise and rectify this shameful position being delivered upon? in any future discussions. Andrew Mitchell: There is no intention of allowing CDC to stray outside the ODA rules that govern its Q243 Chair: That’s a very forthright exposition, but current investments. I can’t see any circumstances in presumably what you’re really saying is that that 40% which that would change. is open to negotiation, and you’re setting out the terms? Q242 Chair: In your opening answer, Secretary of Andrew Mitchell: I’m saying that I see no strategic State, you talked about the history of CDC: how the advantage in maintaining that shareholding, but I’m Government tried to privatise it and then effectively obviously intent on making sure that the taxpayer gets privatised the fund manager while retaining CDC a proper deal in any sale. itself in public ownership, with the Government as its only shareholder. However, you still retain a 40% Q244 Chair: After all, if you’re changing the shareholding in Actis. Is there a future for that? Is structure of CDC, there’s no particular reason for any there any advantage in that? Is it under review? fund manager or fund holders to be publicly owned. Should you retain it? They’re partners. They’re out there. Andrew Mitchell: This is an interesting and sorry Andrew Mitchell: Indeed. saga. There is no strategic reason for us to retain that Chair: That would normally be the case. shareholding. Clearly, if we can realise proper value for it, in the interests of the taxpayer, we should do Q245 Anas Sarwar: Let me just pick up on that so. I very much fear that when Ministers made the point. I thank the Secretary of State for that answer, decision to spin Actis out of CDC, they did not appear which was almost like a written statement to the to have fully understood the new arrangements that Committee. Are there any other shareholdings that the they agreed. You will recall, Chair, that some 60% of Secretary of State may have concerns about, other Actis was sold for—from memory—around £373,000. than Actis? While the taxpayer owns 40% of this business, the Andrew Mitchell: We don’t own any shares in taxpayer also owns 80% of the profits. Aureos, which is the other principal vehicle spun out It may be helpful to the Committee if I underline what of CDC. Actis is in a unique position. Aureos deals the revenue arrangements are for Actis. This is a with much smaller investment, and Actis, of course, management company that has approximately $5 is the vehicle through which a large amount of capital billion under management, which attracts a 2% from CDC has been invested in private equity. We management fee, which is $100 million per annum. should be clear that, in terms of the performance of As it has made clear in its documents, there is a 20% the company, it has done very well, in terms of the uplift from the carry for the investments that they 1 Being a share of the residual profits made by the Actis LLP make. That means that, for the period of the fund, the after other allocations to partners have been made. cobber Pack: U PL: COE1 [E] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
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18 January 2011 Rt Hon Andrew Mitchell MP assets under management. My comments are focused Andrew Mitchell: I was not a Minister at the time. It on the value of the management company, not the seems to me that the advice that was given, with underlying investments, where the taxpayer is a 40% hindsight, was clearly sub-optimal. shareholder, entitled to 80% of the profit, but the taxpayer has not received one farthing from that Q250 Jeremy Lefroy: But there is nothing that can investment. be done at this moment to rectify it by yourself as the shareholder. Q246 Chair: Just related to that, it also takes us back Andrew Mitchell: We have appointed advisors. We to the remuneration point. You’ve answered it quite are in discussions about this, and we will see what clearly in relation to CDC. However, clearly, to the transpires from those discussions. extent it remains a fund of funds, one could get into Chair: Maybe at some point we should talk to Actis. a situation where the management of CDC are exactly the people who we all hope will be recruited into it, Q251 Mr McCann: The Secretary of State suggested but they are then contracting with funds for which that the advice that was received at the time that was they might be significantly the biggest player. They sub-optimal. I’m sure there are plenty of examples in won’t necessarily have the same control over the history when we can point to that taking place, but remuneration of those fundholders, so it still could have you carried out an investigation about what create ripples of embarrassment, could it not? It could advice was given at the time before the decision was even create an odd situation where the guys who are made to make the original investment? driving it are earning modest salaries, but the people Andrew Mitchell: I can ask officials for details. This they’re working with are earning substantially more. involves details, advice, and advisors appointed under Andrew Mitchell: We must make clear that CDC is at a previous Administration, and there are strict rules one remove of Actis. My comments are directed at the governing that. I have laid the facts before the arrangements with Actis, and the board and Committee this afternoon, and explained how we have management of Actis. Actis is a unique arrangement got into this position and what I am doing, in answer for CDC, so were we to sell our shareholding in Actis, to the Chair’s question, to try and address the issue of that specific problem would be removed. this 40% shareholding. Mr McCann: Chair, can I ask your advice here? The Q247 Jeremy Lefroy: Secretary of State, could I just Secretary of State has given us information, but I pick you up on one thing? You said that Actis seemed don’t know all the facts behind it. I was just to find ways of ensuring that the taxpayer got nothing, wondering how we would be able to get into that detail if we chose, or, indeed, thought it was wise to or pretty much nothing— do so. Andrew Mitchell: As a shareholder. Chair: We can ask the Department, presumably, for Jeremy Lefroy: As a shareholder. Could you previous advice. I think we should consult among perhaps elaborate? ourselves. First of all I would say that we should Andrew Mitchell: Yes, because the business is run in appreciate that the Secretary of State has been very such a way that no profit is declared. The shareholder forthright and very clear, and it’s very helpful to the would be entitled, through dividends, to a share in the Committee. profit, and there have been no profits declared in this business at all, because that is the way the business is Q252 Richard Burden: I imagine this is something run. Indeed, I believe I’m right in saying that, a short that we’ll look into further. However, so that I can while ago, Actis set up its own philanthropy and completely understand what you’re saying, obviously charitable division so that any profits that were placed you raise very major questions about the kind of in there would, again, not come to us—the discussions and arrangements that were put in place taxpayers—as a shareholder. I think that that is an at the time of the spinning off. You’ve also talked inappropriate, and as I said in my remarks a moment about the setting up of this charitable and ago, a shameful deal that needs to be rectified. philanthropic arm, if I understood you correctly, almost as a ruse not to declare a profit. When was that Q248 Jeremy Lefroy: Which I entirely endorse, but set up? Was it at the same time, or subsequently, and we are 40% shareholders, and even though it’s a is it, in your view, simply a ruse, or is it a charitable minority, a 40% shareholding is often one that one can and philanthropic arm—something that is actually use to make a lot of noise. Given that, what noise has doing charitable and philanthropic things? If so, what been made by yourself and your predecessors to try sort of things? and rectify this shameful position? Andrew Mitchell: The Committee will have to draw Andrew Mitchell: That is true, and I should be quite its own conclusions. I merely make the point that clear that Actis has not done anything illegal. This is nothing has been paid to the 40% shareholder: the a deal made when Actis was spun out of CDC under taxpayer from this business. The Committee will draw which the new management have done incredibly its own conclusions about what I have said about that. well, and the taxpayer has done incredibly badly, as subsequent events have shown. Q253 Richard Burden: When was the charitable arm set up? Q249 Jeremy Lefroy: Was that on the basis of an Andrew Mitchell: I’m not able to answer that agreement at the time between the shareholder, the question, but I’m sure I can find out for you, if that Government and— would be helpful. cobber Pack: U PL: COE1 [O] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
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18 January 2011 Rt Hon Andrew Mitchell MP
Q254 Chair: I think we should move on. We’ve had think there’s an issue or a problem in that sort of a useful interchange. It was very instructive and this “aircraft carrier” approach to intermediate is a matter of concern, so I think the Committee will jurisdictions. The point that we have made in the past want to discuss it further, but it’s a very clear point. is the importance of transparency. That is what It’s not original, in the sense that we know that governs the White List that is being produced on concerns have been expressed in the past about what jurisdictions. As far as preferential jurisdictions are happened, but it’s important that we understand the concerned, we are consulting. This is a highly current situation. More to the point—this is Jeremy complex area. We want to make it clear that we think Lefroy’s question—what could be done about it? transparency is incredibly important. The Treasury is Frankly, from the Committee’s point of view, there’s in the lead, and the Government are considering what much more value in trying to ensure that the matter is their position should be on that. resolved in a fair and satisfactory way. If we can do nothing about it, recriminations don’t take us Q257 Anas Sarwar: UK taxpayers are increasing the anywhere. What does take us somewhere is the ability aid budget, and DFID is rightly focusing on value for to move forward. money while at the same time allowing CDC Andrew Mitchell: That is exactly the right approach, potentially to shift millions of pounds in tax revenues but to make sure that a fair settlement is achieved, it’s to tax havens. Do you accept that that is a false important to recognise what the scale of the success economy? of this business, in which the taxpayer is a 40% Andrew Mitchell: We’re looking very carefully at the shareholder, has been, and to see that reflected in any rules governing what CDC does. This is a very potential sale. complex area. CDC, of course, pays an enormous Chair: You’ve made very clear your take on that, and amount of tax, and CDC will adopt the best practice I appreciate it. on this, when we’ve come to a conclusion, in what is a very difficult area, on what that best practice is. Q255 Richard Harrington: When you took office, one of the significant public announcements you made Q258 Anas Sarwar: Just a final point: does CDC in was that you hoped to increase significantly its current format do country-by-country reporting of transparency in our aid efforts, which you stated, to what it does, what it spends, and what tax it pays in us and elsewhere, was absolutely very important. each country it operates in? Obviously we support this. Given the fact that there Andrew Mitchell: I don’t think it does at the moment, are, in this case with CDC, a lot of commercial deals but this specific point is under active consideration by negotiated with commercial confidentiality, to what the OECD, and we will wait for the conclusions that extent can we hope for more transparency in CDC’s it comes to before considering what further steps we activities? can take on that. Norfund has been very clear and has Andrew Mitchell: Mr Harrington is right to underline been in the lead in this area. I should just mention that the importance that we place on transparency. We it has found that tightening the rules as much as it has published the transparency guarantee, in the very early has restricted its ability to attract third-party funding, days of the coalition Government, for the Department. and also in some circumstances restricted its ability Indeed, on the website ConservativeHome, it was, I to invest in Africa. I merely want to underline the think, the second most popular policy of the coalition complexity of this area, but the Government are for a period of time. There’s a balance to be struck determined, through a Treasury lead, to try and get between normal commercial confidentiality and it right. transparency. We will make it very clear that we want to see as much transparency as possible introduced, Q259 Anas Sarwar: Even if this country-by-country but equally we must respect the fact that, in certain reporting wasn’t published to the public, do you think circumstances, commercial confidentiality will be it’s something that it perhaps should do to DFID in important, and we must make sure we get that the short term? balance right. Andrew Mitchell: Do I think— Anas Sarwar: Do you think it should at least make Q256 Anas Sarwar: By number, 80% of all CDC’s that information available to yourself as the Secretary investments are domiciled in tax havens. Is it of State in the short term? appropriate for CDC to invest in jurisdictions that Andrew Mitchell: The country-by-country reporting? operate preferential tax regimes for non-resident Anas Sarwar: Yes, until you have clarified a position companies? about whether we want that to be a public disclosure? Andrew Mitchell: The whole issue of intermediate Andrew Mitchell: I’m not sure whether we would, in jurisdictions, but in particular of preferential tax any event, be in a position to do that, but if it would regimes, is currently under discussion in the be helpful, I will write to the Committee on that point. Government. It is, though, of course, a Treasury Chair: That would be helpful. lead—I should be clear about that—and the discussions are ongoing. In terms of an intermediate Q260 Hugh Bayley: There are many very poor jurisdiction, it is perfectly sensible—this is the heart countries that lose more through capital flight than of the private equity model—that there should be a they gain through aid. Isn’t there something tax-neutral location in which funds from different contradictory when a wholly owned British countries can locate. Of course they pay tax in their Government aid agency is using the same techniques own countries when the funds are realised. I don’t to minimise tax burden that are so attractive to owners cobber Pack: U PL: COE1 [E] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
Ev 48 International Development Committee: Evidence
18 January 2011 Rt Hon Andrew Mitchell MP of capital in developing countries? Although it is right understand entirely what he is saying, but I must rest that the Treasury should take the lead in developing today on the fact that the Government are looking the UK’s fiscal and business attitude to offshore tax very seriously at all these issues, and so, after all, is havens, it doesn’t necessarily make sense for DFID to the OECD. The OECD and the EU have made it clear follow that lead. that they’re trying to make sure that there is much Andrew Mitchell: We are one Government and greater commonality between people in the approach collective responsibility is obviously a cornerstone of on these matters. I hope that we’re going to see that. I’m not sure I would accept the opening premise progress before too long in that respect. of your question, except to say that of course you are quite right that the flows of investment, and indeed Q264 Chair: I’m certain that when we write our remittancing, dwarfs the flows of aid across the report, because we’ve heard not only your evidence, international exchanges. On all these matters, we are but evidence from other sources and also the board of engaged in consultation, and I hope that—partly CDC’s response, that we will want both to report that because it is so complex—we will be able to make and, no doubt, to make a Committee comment on it. progress and publish our views before too long. I think that that will be part of the conclusions. As CDC moves into a different mix, I think we were Q261 Hugh Bayley: I accept that government is told the staff of CDC is currently 47, and that 61 out joined up and needs to be joined up. However, of its 70 fundholders are local—in other words, they wouldn't it make sense for your Department to have are outside the UK. I think that’s over 2,000 people the same policy on commercial returns, even for an who are effectively attributable to CDC. That’s a organisation like CDC, as the Department for resource; it is also a liability. As it changes, will there Business might have when looking at international be capacity to rebalance CDC? The two issues are to business deals with which the Government become expand the staff—if they’re going to do more direct involved? If one could persuade rich people in poor investment, it would seem to be necessary—and also countries to retain more of their capital in their own to ensure that we have the same kind of local country, instead of tucking it safely away in a fund expertise. Just for clarification, I take it that the abroad, there would be less need for foreign donors to staffing levels or constraints on the Department provide capital for enterprises in those countries. would, by definition, not apply to CDC, as it’s a Surely your Department should be advocating a “lead corporation, effectively, outside Government. It would by example” from agencies that it owns. seem to me that its staffing would need to change Andrew Mitchell: Mr Bayley makes an interesting quite radically—as radically as the mix changes. point, and it is certainly true that the cause of Andrew Mitchell: That is exactly right. First of all, transparency is championed by my Department we will complete the consultations and consider what vigorously. Sunlight is the best disinfectant, and the new enhanced role for CDC going forward is. transparency relates very directly to the issues that we Then we will agree a strategy, which I hope will take are discussing. I invite the Committee to await the place as early as May this year, with the board. It will Government’s considered view of what, as I say, is a then be for the board to implement that strategy and very complex area of current discussion. to make the judgments about the skill sets it is Chair: Our report will reflect some of this anyway, required to hire. How it goes about that will then be because we have had evidence. an operational matter for it.
Q262 Jeremy Lefroy: Just very briefly on that, is it Q265 Chair: In its previous incarnation, if one goes in fact one of the reasons why having just that single back 30 or 40 years—at that time, of course, they were golf club of fund of funds is problematic? Fund of civil servants; now they would not be—there were funds tends to invest through, as you say, level playing significant numbers of staff distributed around the field tax jurisdictions, which are often offshore world working directly for CDC’s predecessor. That centres. If CDC were to be able to invest directly, or is correct, is it not? to offer loans and guarantees, that would not require Andrew Mitchell: Yes. this to be the case, as I understand it. It wouldn't have to do that through— Q266 Chair: While I’m not suggesting anybody Andrew Mitchell: That is absolutely true. It goes with would want to go back to that model, we are likely to the model, as I say, of private equity investment. see CDC having directly employed staff in country. This rather brings into sharp focus the need for close Q263 Mr McCann: Just a final point, from our working with the country offices of DFID, because perspective, on the investment side and tax havens. clearly they would be visibly British aid activists on You use a lot of hyperbole, Secretary of State, about the ground, albeit doing something different. Actis. Would you understand and accept that a lot of Andrew Mitchell: Yes. The model will demonstrate people would also regard it as shameful that CDC what is required from the management of CDC, but investments and moneys were held in tax havens, and we are moving to a new position. The position I people in this country, rightly, want to see those issues described at the beginning, where in 1997 CDC was remedied as well? a failing DFI, has moved right the way over now to Andrew Mitchell: Mr McCann makes the point about where it is financially extremely successful, but has transparency in this area and people being clear, lost a lot of its developmental capacity. Now if we because it is so very complex—I’ve used the example are to put it back in the middle, where it has both of Norfund to show that this isn’t an easy issue. I developmental DNA and financially strong DNA to cobber Pack: U PL: COE1 [O] Processed: [18-02-2011 11:44] Job: 008635 Unit: PG03 Source: /MILES/PKU/INPUT/008635/008635_o003_kathy_18 January.xml
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18 January 2011 Rt Hon Andrew Mitchell MP deliver on its mission, I think that we can do that. probably have quite lively discussions as a The consultations are going well. There are plenty of Committee—to come up with a report that, I hope, grounds for believing that, at the end of this process, can make some interesting and constructive we will have a very clear plan for CDC, and I think recommendations that might help the process. That that it has every confidence that it will be able to would certainly be our intention. I’m not suggesting expand its skill base and its work to deliver on that. that you will agree with everything we say, or vice versa, but I would imagine it will be constructive and Q267 Chair: The Committee will be very eager to lively. We’ve had some quite useful inputs, and it’s engage with the Department on that quite exciting made us think a bit, too, about where it might go. change. It would be fair to put on record—I think you Thank you very much indeed for coming along again have, by implication—that the previous Government and giving us your views on this. succeeded in taking a failing organisation and making Andrew Mitchell: Thank you and your Committee, it a very successful fund of funds. That’s not in Chair. We are very anxious to have the benefit of the dispute. Clearly what is in dispute is some of the report on CDC from the Committee. I’ve seen most arrangements that were entered into to determine it, of the evidence that you have received, and certainly and whether or not that is a good enough model for as part of our plans going forward for CDC, we intend the future. Clearly your judgment is that it’s not, and to attach great weight to the expertise assembled here you want to build on it, diversify it and change it. The and the report that you produce. Committee will be very anxious—we’ve had some Chair: Okay. Thank you very much indeed. quite useful exchanges of evidence, and we’ll Andrew Mitchell: Thank you. cobber Pack: U PL: CWE1 [SE] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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Written evidence
Written evidence submitted by Dr Sarah Bracking, University of Manchester I am writing to submit a short Memorandum in respect of the future of the CDC, within the published terms of the current IDC enquiry. I am a Senior Lecturer in Politics and Development at the University of Manchester and specialise in the political economy of African development with particular reference to the role of public development finance institutions (DFIs) of which CDC is the UK national example. I have written a book on the subject called Money and Power: Great Predators in the Political Economy of Development (Pluto Press, 2009). More specifically I have recently completed a project, in which I was the principle investigator, commissioned by the Norwegian equivalent to DfID, Norad, about the future of Norfund, the Norwegian equivalent to CDC. The study was a comparative one, and also featured other European DFIs, including detailed material on Norfund, Swedfund and CDC. The focus was particularly about the consequences of the domicile arrangements for private equity funds contributed by DFIs in the context of the government restrictions in place in Norway and Sweden on the use of secrecy jurisdictions/tax havens by public DFIs. This document was used by Norad to inform a report to the Ministry of Foreign Affairs in Norway. These can be obtained by contacting: [email protected] The documents make clear, there are a number of serious research gaps which pertain to an assessment of the developmental impact of private sector development interventions. It is in two separate documents: — Future Directions for Norwegian Development Finance”, dated 14 October 2010, ref. No.: 0902364–55”. (ps. 48). — Supplementary documentation to the report “Future Directions for Norwegian Development Finance”, dated 14 October 2010, ref. No.: 0902364–54. (ps. 168). These documents are the property of Norad according to the contract between Norad and the University of Manchester. Given the complexity of the issues around the developmental impact of different types of delivery mechanism of capital to the private sector (private equity funds, direct investments, guarantees and so forth); their differential developmental impact by sector (infrastructure, microfinance, industry and so forth); by choice of partner; and by choice of domicile; I would expect the Committees work to be challenging. My comments below, in relation to this inquiry, concern: — the effectiveness of CDC compared with other similar institutions; — the reforms proposed by the Secretary of State for International Development on 12 October 2010 and the feasibility of achieving desired results given the CDC’s current resources, including staffing; and — the extent to which the proposed reforms will be sufficient to refocus CDC’s efforts, especially with respect to poverty reduction. I also raise issues around tax justice and domicile (the place where CDC investments are legally registered). In general I believe that there are critical problems in the current means of evaluation, management and direction given to CDC in terms of delivering a development benefit. The argument below is that the development effectiveness of CDC as currently operating is limited, although it cannot be accurately measured given the paucity of public data and research. The reforms proposed are to be welcomed, but geographic targets should be replaced by more specific criteria on poverty reducing investments, while the issue of domicile of companies and funds should also be addressed. The proposals are too general at present to be significantly addressed, but increased use of alternatives to the current exclusive use of equity funds is to be welcomed. These could include direct investments, loans, the provision of risk instruments, investment guarantees, mezzanine financing and commercial and mutuals investments. Increased use of these instruments would mean an increased coordination with ECGD would be required. Issues of tax justice must be considered alongside these changes, and restrictions to secrecy jurisdiction use put in place.
Executive Summary 1. The use of the fund of funds model critically impairs CDC’s management of developmental impact, political risk, reputational damage, consolidated and counterparty risk in the underlying investee companies, due diligence monitoring and the oversight of investment partners. The model relies on leverage and influence, but the positive effect of augmenting private investment flows is largely unproven and must be offset against the model’s disadvantages in terms of reducing the fiscal base in developing countries, increasing business opacity and for privileging the interest of investors unduly in relation to other stakeholders. 2. The overwhelming use of secrecy jurisdictions for fund of funds investments (secrecy jurisdictions are also termed “tax havens” or “offshore financial service centres”) exacerbates most if not all of these investment governance problems. 3. The overwhelming use of secrecy jurisdiction domicile for CDC investments reduces the rightful and morally just fiscal resources available for developing country governments, which would otherwise be available cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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to them had the funds and companies in which CDC invests been domiciled in their countries of actual operation. This impairs the development of education, health and public services upon which development critically depends. 4. It is hard to accurately calculate a developmental impact which includes tax losses and offsets these against figures for employment created and tax paid, which are the indicators most often used by DFIs in order to promote the benefit of their work (see EDFI, 2009). Public announcements by DFIs of developmental benefit generally rely on a thin evidence base and weak methodology. They are not subject to systematic publically available evaluation. 5. The current impact methodology in use by DFIs and the European Development Finance Institutions (EDFI), their representative body are inadequate. Most centrally there has been an erroneous, but widespread use of aggregated figures for employment created and tax paid in companies in which DFIs have contributed investment capital, rather than a pro rata calculation relating to their actual proportional ownership within the enterprises. 6. There is a dearth of relevant research within the DFIs or within the wider research community which can accurately assess the developmental impact of different forms, types and scales of private sector development intervention. This is due to the uncritical assumptions that have been held by DFI managements that any investment must be good for growth, and that growth is roughly commensurate with development, and also, in turn, with poverty reduction. Each link in this associational chain is problematic in practice. 7. The current instructions issued to CDC by DfID concerning the deployment of funds are only roughly related to actual outcomes, partly because of these flaws in logical association, and partly because of the globalised and multi-layered complexity of sovereign domicile in corporate structures and in the funds and companies in which DFIs invest. For example, the requirement to put certain percentages of invested funds into geographic areas such as sub-Saharan Africa, or “the poorest countries” are impossible to accurately measure, even by CDC itself, since it places the vast majority of its funds in key secrecy jurisdictions under investment contracts. It is the Fund Managers who agree to meet these DfID criteria by proxy. However, they again are not required to disclose the degree of on-lending of DFI-originated funds to underlying portfolio companies which are similarly routed to secrecy jurisdiction based holding companies, parent companies and trust companies. The level of reporting of Funds to DFIs is not exhaustive in this regard since they do not routinely practice country by country accounting. It is not always clear where the final destination of funds invested actually is from these reports. In short, it would be a challenge for the participating parties—the Fund Managers and their DFI contributors—to know themselves what actual scale of funds are truly delivered into the national geographies to which they are mandated. 8. There is a perverse effect of mandating investment to the poorest countries in anticipation of an enhanced poverty reduction effect, in that the local capacity to absorb such funds tends to be highly concentrated in enclaved, extractive and export-oriented sectors owned by a small proportion of the population. The political economy effect of this is to increase inequality and frustrate efforts to make political and economic elites accountable, particularly since many of these transactions occur “offshore”. Much more empirical evidence should be generated on the types of investment that DFIs support, the sectors in which they invest and the ability of these to catalyse broad based and poor-poor growth. The mandating of funds to the “poorest countries” does not at present, and as currently operationalised, have a provable beneficial developmental effect, and could quite easily be contributing to these adverse social and political consequences which may in fact hinder growth. 9. DFIs align themselves to the investment models and prerogatives of private sector actors in order to augment the total amount of capital available for investment, by pooling their resources with these partners in Funds, normally domiciled in a secrecy jurisdiction. However, there is currently no convincing evidence that total capital flows to Africa are expanded as a consequence of this investment model. But there is evidence of this structure being harmful in many other respects, including in a reduced fiscal base, in reduced corporate accountability, in patterns of “round-tripping” investment, and in the privileging of the “international investor” and Fund Manager in comparison to other local stakeholders which include nationally domiciled shareholders, workers and affected communities. The issue of tax justice should preclude any further use of this “offshore” intermediated model. 10. Given the above, and the problems with risk assessment given in more detail below, the use of public funds in this manner by CDC must be of critical concern to the public interest and UK tax payer. The governance of CDC must be reformed in order to increase its public accountability, the quality of its accounting and transparency of reporting of its accounts, and its monitoring and assessment of risk and development impact. The influence that it believes it has as a contributing investor to private funds must be proven in terms of its ability to actually induce reforms and best practice in those firms as a condition of its participation, and not as something aspired to and promised by a third party Fund Manager. An increased use of direct investments is to be preferred.
The Submitter 11. I have been researching and writing on development finance for close to 20 years, and have cognate interests in the political economy of development, political corruption, democratisation and poverty reduction. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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I am currently employed as a Senior Lecturer for the International Development programme at the University of Manchester, UK.
Factual Information 12. The CDC provided a list of its domiciles by number of funds invested in each place, but not by value to a recent University of Manchester research team (see Bracking et al, 2010a, Bracking, 2010b). The majority are domiciled in secrecy jurisdictions. The CDC currently invests solely using a “fund of fund” model, investing in private equity funds in an intermediated model. From the data presented by CDC in 2010, it is clear that the intermediated model relies heavily on OFCs, with 71.67% of all its funds and subsidiaries—by number not value—domiciled in either London, Mauritius or Cayman, which deductively act as three central business hubs. Using the IMF list of tax havens for 2007, it is possible to classify the domicile of its funds (excluding subsidiaries) in 2010, which adds up to 144 in tax havens, or 80% of all the CDC’s investments by number (Bracking et al, 2010, para 1.7, page 10). 13. The CDC has a “fund of funds” structure and about half its portfolio by value is routed using domiciles out of London. Actis, which includes the legacy investments, is managed from London and probably accounts for the majority of, if not all, London-based domiciles. CDC has 59 fund managers overall, one each for Actis and Aureos, and a further 57 with whom it sub-contracts. Actis employs 49% of CDC’s overall capital—USD 3,361 million. It attracts to its funds a further USD 80 million from other DFIs, and USD 2,789 million from commercial investors. Aureos, a joint venture with Norfund aimed at SMEs, invests a further six per cent of CDC capital. CDC’s 57 other managers direct 45% of its capital (Bracking et al, 2010, para 1.8, page 10). 14. There is an intimate connection between one particular type of investment model—the intermediated private equity investment fund—and domicile in a secrecy jurisdiction. The lesser association of direct investments with this type of domicile is clear from the domicile patterns of Norfund and Swedfund, but is still prevalent for larger direct investments (see Bracking et al, 2010a, 2010b). 15. There is some evidence from CDC that using sub-contracted in this way does augment private investors’ participation. Data from the CDC Development Report 2008, suggests that the leverage rate of different types of fund is indeed better for funds that are sub-contracted, rather than in funds and subsidiaries in the “legacy” portfolio. Thus, Actis has USD 3,361 million invested, with USD 80 million from other DFIs (making USD 3,441 million), which manages to attract USD 2,789 million from the commercial sector. Expressed as a ratio, this is approximately 1: 0.81. Conversely, the 57 new fund managers between 2004 and 2008 had USD 7,137 million invested by CDC, with an additional USD 1,433 million from other DFIs (making USD 8,570 million), which together attracted a further USD 19,718 million from commercial investors, giving an equivalent ratio of approximately 1: 2.3 between the “public” and private sectors, or nearly three times as much per unit of invested DFI capital. 16. CDC is unique among DFIs to employ all its capital through private sector Fund Managers, albeit that the fund with nearly 50% of its capital is managed from London, in the new private fund company Actis, jointly invested by DfID and private owners (who used to be CDC public employees). Ergon explains that the objective of this arrangement was to achieve a “step change in CDC’s economic impact and catalytic role” (quote assigned to DfID, 2010: 14), in that CDC resources are less than one per cent of total international private equity to developing countries, so to have a bigger impact it was thought that they should invest though private equity Fund Managers to influence commercial investors in the same companies available to them (see Ergon, 2010: 14). This model thus relies on leverage, influence and perhaps more critically, following the pack, rather than directly investing in stand-alone projects. However, it is hard to attribute to CDC alone the responsibility for the behaviour of these investors, since the counterfactual case—that they would have done it in any case—is unclear. It is certainly possible that this investment model attracts investors who would otherwise have invested “onshore” in any case, displacing local savings and investment. It is not clear that this is additional capital in terms of the investment market as a whole. 17. There is little evidence that using sub-contracted funds in this way produces any developmental impact that couldn’t be attributed to a like volume of private investment per se. The additionality is not proven such that the deployment of CDC funds in other structures must be seen as desirable given the adverse tax effects. 18. DFIs and investors view secrecy jurisdictions as protecting them from expropriation of their investments, and as guaranteeing them an effective disputes mechanism for conflicts between co-investors. Leaving secrecy jurisdictions is generally associated with an increase in investment risk, in particular in the categories of political risk, expropriation risk and exchange rate risk. However, the risk “protection” offered by funds could concentrate rather than spread risk, in a similar fashion to the manner in which off-balance sheet items from financial institutions, opaque structured investment vehicles and structured investment products, such as offshore SPVs and CDOs concentrated risk, triggering the current global financial crisis (see Government Commission Report (NOU, 2009)). 19. Also cross investments and repeated ownerships in the underlying portfolio can also concentrate risk, such that the “consolidated risk”—which aggregates that of the underlying companies could be extremely toxic. European DFIS are only beginning to account for this, although to the author’s knowledge CDC may not. Relatedly, the Government Commission in Norway correctly concluded that tax havens enhance counterparty risk (NOU, 2009). 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of DFI owner countries. Thus, it would be prudent to remove certain business types and organisational forms from the risk-bearing chain—such as secrecy domiciled Funds and international business companies (IBCs)— since these contribute only opacity, and work only in the interests of capital holders at the expense of capital receivers. International companies which are not obliged to keep proper accounts are unsuitable as business counterparties, since the transaction risks are too great. Thus, the depiction of secrecy jurisdictions as a means of managing some types of risk to the investor—expropriation, payments—must be offset against their contribution to the inflation of other types of risk—counterparty risk, consolidated risk and reputational risk. Withdrawing from secrecy jurisdictions will have the likely result of enabling a more systematic means of risk accounting, as well as a reduced exposure to non-transparent risks (see Bracking et al 2010a, para 2.2.2, page 19). 20. The issue of management of risk. In Bracking et al (2010, 19–20) it states that: “It is clear from the financial crisis of 2007–09 that when the risk management agencies were under the employ of the organisations releasing the financial products, they were bound to have a conflict of interest, which would lead to error. The system here has a similar flaw, wherein those defining and benefiting from the fund product, are also calculating the investment risk, or assigning it to third parties. That the DFIs are significantly cross-invested adds to the image of safety, but actually—particularly with the type of investments that DFIs do best in, which by their nature tend to be high risk—this herd effect gives another false veneer of safety. DFIs could be subject to significant reputational damage, should this risk concentration fail them. The current arms-length due diligence and risk management of intermediated funds is thin. It is efficient and cuts down administrative costs in order to plough more money back into “development”, but that will prove a short-sighted strategy if a political or reputational scandal emerges. DFIs should calculate counterparty, consolidated, reputational, social and political risk, as well as financial and investment risk themselves, or assign this role to an impartial third party, such as an office within the home Public Accounts Department. A European development finance regulator should be able to conduct ad hoc tests of procedures in member states.” This holds equally true as a recommendation for this review. 21. Due diligence. CDC does not carry out due diligence on all their co-investors. The argument that they check all major shareholders but the very small ones is an argument incorporating much hazard: a “small” investor in a large equity fund is often a very “big fish” once he or she is back in their domestic context, capable of wielding much power and control over local markets, communities and workers. Thus the moral hazard is that such people are empowered in relation to others, with no apparent checks on their business practice or legal record. The due diligence of small investors is left to contracted Fund Managers. 22. DFIs sometimes point to the reductions in administrative costs attribute to the use of funds. However, fees for fund managers are born by the fund as a whole, deducted before the fund is closed. These fees are taken from the pool of investable capital, and are contributed in part by tax avoidance in the country of effective residence of the underlying portfolio company. In other words the cost structures of different types of investments are not commensurate as some costs which would be accounted for in a public organisation are subsumed into the fee structure of a fund. Further research is required on relative cost structures. Suffice to say that an increased use of direct investments by CDC would require more in-house investment managers, the cost of which could be born in part from the reduced indirect cost of fees and expenses in sub-contracted funds. 23. DFIs also assert that the use of secrecy jurisdictions reduces the transactional costs of administering investments, and thus allows for a better flow of funds to the end user. However, Bracking et al (2010a, 21–22) argue that: “Increased transactional costs due to withdrawal from secrecy jurisdictions in terms of red tape, bureaucracy, and in altering the culture of facilitation payments can be expected in the short and medium term. Overcoming such high transactional costs could be part of the core developmental remit of a DFI by supporting domestic finance markets, enhancing institutional quality, which would eventually lead to better developmental outcomes. Operating guidelines could be changed to reflect the increased role DFIs would have in the reform of soft and hard market infrastructures and operating cultures. In order to ameliorate the increased costs associated with the active search for investment opportunities (a role previously assigned to the Fund Manager), DFIs could consider advertising available funds through a calls to tender type system, directed at the private sector in target countries, with clear investment criteria that potential firms and funds must demonstrate that they can meet.” Because investments in developing countries are considered hard to implement in a direct fashion is not a good enough reason to stop trying, since the market environment improvements that a DFI presence can catalyse have multiplier effects for other investors. This is part of the developmental benefit that can be expected from PSD intervention. 24. Active ownership by DFIs in more embedded national structures can make a real difference to institutional strengthening, regulatory improvements, and measures of market and risk perception, in order to catalyse capital market growth. Institutional strengthening and enhanced institutional quality is positively correlated to further growth in investment flows, savings and investment in a virtuous cycle. Research from Kaufmann et al (2005) and others around the “governance and institutions matter” theme, suggests that local investment and savings growth is just as, if not more important, to sustainable economic growth and cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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development in the long-term than short-term injections from “outside” (also see Addison, 2010; Chang, 2002; Di John, 2010). Recent development success stories generally start with a strong, developmentally oriented state, not a private sector which is designed to bypass it (See Chang, 2002). 25. Richard Murphy has recently estimated the tax loss to developing countries from the DFI use of tax havens for the EDFI portfolio as a whole, using data produced by the DFIs, at in excess of EUR 430 million, a year on average over the last five years. Actual corporate taxes paid on the EDFI portfolio might be as low as EUR 270 million per annum in direct conflict with the EDFI claim that their investments generate approximately EUR two billion3 of tax revenues per annum for developing countries (Murphy, 2010). 26. In Bracking et al (2010a) we estimated for 29 companies in which Norfund invested, the tax loss (or gain) for developing countries for 2008, as compared to what the same companies would have been liable to pay had they been domiciled in the country of actual operations. For these, the amount of tax underpaid, or tax losses for developing countries because of domicile in secrecy jurisdictions has been calculated for 2008 at over (gross) USD 14.6 million. This is tax that would have been paid, at the rates prevailing in the countries of their actual operations, for these 29 companies if they had been domiciled in the same jurisdictions as their operations, rather than in a secrecy jurisdiction. [An explanation for how these figures are derived is found in the accompanying report Supplementary Documentation for the report “Future Directions for Norwegian Development Finance”, Bracking (2010b)].
Recommendations for Action 27. DfID should make provisions in law, policy and practice to ensure that: — CDC does not invest in private equity funds in secrecy jurisdictions as determined by the existence of 1) differential tax treatment for non-nationals and 2) company law which allows beneficial owners to remain secret and company accounts to remain private. CDC invests in funds in which at least 10% of the onlending to the underlying portfolio companies occurs in the legal jurisdiction of the domicile of the fund. This is in order to enhance the developmental impact and accountability of Funds to developing countries’ regulatory authorities and the transparency of corporate structures. — CDC should not make direct investments to companies where the parent is in a secrecy jurisdiction and the funds are routed through it. There is no positive developmental function that can be attributed to a firm having an offshore parent, but many negative consequences thereof. — DfID should redesign the directions given to CDC for the deployment of funds so that they can be realistically and accurately measured in terms of territorial domicile, rather than the deceptive data which is currently published by CDC about the geographical spread of its investments. — DfID should redesign investment management criteria to ensure that CDC activities maximise developmental impact and poverty reduction. This will require use of a new development impact matrix which should include criteria concerning direct poverty reduction effects, downstream and upstream business generated, employment, environmental impact, governance effects, economic displacement effects and modelling of the type of growth effects to be expected by sector and type of enterprise. In other words, a systematic means of monitoring developmental impact should be employed by CDC. — If CDC maintains the use of private equity funds its participation should be conditional on their adherence to international accounting, environmental and human rights standards and to fair remuneration. — HM Government should support moves to establish a European regulator of European DFIs to carry out independent checks of DFI operational procedures.
Summary 28. The development effectiveness of CDC as currently operating is limited, although it cannot be accurately measured given the paucity of public data and research. The reforms proposed are to be welcomed, but geographic targets should be replaced by more specific criteria on poverty reducing investments, while the issue of domicile of companies and funds should also be addressed. The proposals are too general at present to be significantly addressed, but increased use of alternatives to the current exclusive use of equity funds is to be welcomed. These could include direct investments, loans, the provision of risk instruments, investment guarantees, mezzanine financing and commercial and mutual investments. Increased use of these instruments would mean an increased coordination with ECGD would be required. Issues of tax justice must be addressed alongside these changes and restrictions to secrecy jurisdiction use put in place. 17 November 2010
References Addison, T (2010), “Revenue mobilization for poverty reduction: What we know, what we need to know”, in Lawson D, Hulme D, Matin I and Moore K (eds.) What Works for the Poorest? Poverty reduction programmes for the world’s extreme poor, Practical Action Publishing Ltd, Bourton on Dunsmore, ps. 253–262. cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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Bracking S, Hulme D, Lawson D, Sen K and Wickramasinghe, D (2010a) “Future Directions for Norwegian Development Finance”, dated 14 October 2010, ref. No.: 0902364–55”. (ps.48) Bracking S (ed.) “Supplementary documentation to the report “Future Directions for Norwegian Development Finance”, dated 14 October 2010, ref. No.: 0902364–54. (ps. 168). Chang, H-J (2002), Kicking Away the Ladder: Development Strategy in Historical Perspective: Policies and Institutions for Economic Development in Historical Perspective (Anthem Studies in Development and Globalization), Anthem Press. Di John J (2010), “The political economy of taxation and resource mobilization in sub-Saharan Africa”, in Padayachee V (ed.) The Political Economy of Africa, Routledge, London. EDFI Secretariat (2009) 2008 Comparative Analysis of EDFI members, EDFI ASBL, Brussels. Ergon Associates Ltd (2010), Decent work and development finance: Background paper for Decent Work and Labour Standards Forum, March 2010, sponsored by DfID, mimeo. Kaufmann, D, Kraay A, and Mastruzzi M (2005), “Governance Matters IV: Governance Indicators for 1996–2004” World Bank, May. Murphy R (2010), Investments for Development: Derailed to Tax Havens. A report on the use of tax havens by Development Finance Institutions. Prepared for IBIS, mimeo. Norwegian Official Report (NOU), Government Commission, Norway, (2009) Tax Havens and development: Status, analyses and measures, Official Norwegian Reports, No. 19, Government of Norway, Oslo.
Written evidence submitted by Richard Brooks, Private Eye I enclose a copy of a report I wrote recently in Private Eye.1 The central issues, in my view, are the manner in which CDC invests through private equity funds and the businesses in which it invests. These fail to make best use of CDC’s unique position as a publicly-owned investor and result in public money being invested where the private sector is happy to go anyway. Behind these questions lie concerns about the historic development of CDC, in particular its 2004 reorganisation into a fund of funds and a private equity fund manager, Actis. The investment methods and incentives introduced have, in my opinion, driven CDC away from its core development purpose. The structure also leads to a loss of transparency in the use of public funds, which ought to be paramount for a state-owned development fund. I have been researching CDC in some depth for three years.
Written evidence submitted by Tom Cairnes My experience of CDC is as the manager of the Sierra Investment Fund, a private equity fund that focuses on investing in Sierra Leone. CDC is an investor in the fund. 1. The main points I would like to make are as follows: (a) CDC should be considered the jewel in the crown of the UK’s development activity. (b) However, it has become a victim of its own success, and what seemed bold a few years ago, no longer seems so. (c) This is no excuse for stagnation. Rather CDC should continue to innovate at the forefront of the development field and reform is justified. (d) My view is that any reform should be guided by the following principles: (i) Focus on the lowest income countries: CDC’s raison detre should be to invest where others will not. In doing so, Government, as the owner of CDC, should recognise the increased risk of investment loss this entails. An allocation of the portfolio to middle income countries is therefore justified. (ii) Do not sacrifice investment principles for development goals: Bad investment is good for no- one. I believe there is no trade off between investment returns and development returns (within some common sense rules of what businesses you should and should not invest in). However, pressure may come to invest quickly to demonstrate “we are doing something to help”. This risk should be managed carefully. (iii) Focus on countries where the UK has the greatest political influence: Development does not happen in a political vacuum. Combining British influence with investment capital will have a positive effect on both. 1 (Not printed) See Richard Brooks, 3 September 2010. That’s Rich! How Britain’s poverty relief fund abandoned the poor … while its bosses cleaned up. Private Eye. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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(iv) The pace of change should be driven by people, not by policy: Investing in the poorest countries in the world is unpopular because it is both difficult and very risky. As such, CDC should look to build a world class team (benchmarked against the private sector) to deliver any new business it undertakes. The existing team has been built to run a fund of funds business—a job they are very good at. Changing this focus will require adding new people. Taking time to find the right people will repay itself significantly in the long run. It would be a mistake to rush this. (v) Private equity should remain a significant part of CDC’s business: CDC have a great team that has done a great service. Keep the best people you have and make the most of them. (vi) Making direct investments (as either debt or equity) will require building out the organisational infrastructure that CDC lost when Actis and Aureos were formed: You can’t make direct investments if you are based in London. Being on the ground, and hiring strong local teams, is essential. I envisage this to be the greatest challenge in implementing the reforms proposed by Andrew Mitchell. I think there are two ways to do this, and perhaps both should be implemented in parallel: 1. Firstly, CDC should consider buying out some funds in which it has a significant stake. This would (i) give it presence on the ground, (ii) give it control over capital it has tied up over a long term, (iii) most importantly give it access to talented managers. The challenge here is of course the price CDC would need to pay. 2. Secondly, CDC could look to directly recruit talented managers in areas where it wanted to build capacity. To ensure on the ground presence they will need to open offices in locations where they want to operate. (e) It is acceptable to do well by doing good: People should get angry about poverty and not wealth. It is good that those who make a significant positive contribution get financially rewarded—I have no problem with paying the head of CDC a large bonus if they do well. Having said that, performance must be measured over the long term—I am not an expert on structuring compensation, but believe that this can be done simply. I believe the public is accepting of high salaries if they understand why they are being paid. There is limited public anger at footballer’s wages, whereas bankers (about whom people have very little information and are involved in an activity people do not understand) receive public scorn. 2. To conclude, the British government should be proud of the work done to date by CDC. However, all organisations must change as their environment changes. Finding ways to make CDC even more effective at reducing poverty in emerging markets will require some experimentation (and as a result, some failures), but if done sensibly will keep the organisation at the forefront of international development.
Written evidence submitted by Oxfam 1. Oxfam 2. Oxfam welcomes the opportunity to make a submission to the International Development Select Committee’s inquiry into the future of CDC. Oxfam works with partners around the world to find lasting solutions to poverty and injustice. Currently, we work in more than 70 countries—including the UK—and respond to an average of 30 emergency situations each year. Oxfam believes that people are entitled to five fundamental rights: a sustainable livelihood; basic social services; life and security; to be heard; and equity. We work to support people in realising these rights and fight poverty and suffering through campaigning, long- term development work, and emergency response. Oxfam GB is a member of Oxfam International, a confederation of 14 Oxfam affiliates around the world.
3. The effectiveness of the CDC, compared with other similar institutions 4. CDC has been effective in: a) being financially self-sustaining; b) catalysing some private capital into developing countries; c) developing ESG risk management tools. However, it is less clear to what extent CDC has invested, and catalysed private capital, into regions, sectors and activities that are particularly important for poverty reduction and development but which are perceived as too risky or unprofitable by mainstream investors, and thus have received little or no attention from private investors. CDC seems to operate almost as a “mainstream” fund of funds investor with a good policy on ESG risk management (eg similar to many signatories to the UN Principles for Responsible Investment) and a geographical mandate, but CDC’s track record in terms of delivering development, as well as financial, returns is more difficult to assess. 5. There are different models amongst Development Finance Institutions (DFIs). Some are more commercially-oriented, such as IFC and CDC, which tend to invest in large funds with diversified investment portfolios that include companies in high-growth sectors such as telecommunications, financial services, and information technology, which provide the best opportunity to raise additional equity from private investors. Other DFIs, such as Norfund and Swefund, have helped to establish local financial institutions in countries with severely underdeveloped private sectors, such as Angola. These latter fund investments entail significant investment risk and could not be realised without some concessional financing and long investment horizons. cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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In turn, the potential to raise additional private capital in these types of investment in the short- to medium- term is severely restricted. Although it is necessary for those DFIs that are self-funded to strike a balance between financial and development returns, in Oxfam’s view, as development agents, they should at minimum: — Prioritise investments in regions and sectors where private investors would not invest on their own, catalysing long-term responsible investment in under-capitalised geographies, sectors and ventures eg agri-SMEs or least developed countries; and — ensure environmental, social and governance (ESG) standards are met in all their investments, direct and indirect. 6. CDC appears to be investing in some funds, and companies, where private capital would potentially go anyway. Finding the right balance between development and financial returns to make a clear positive development impact, whilst remaining self-financing seems to be the biggest challenge for CDC. With the exception of its geographical mandate (and some sector exclusions), CDC operates almost as a “mainstream” investor fund of funds with a policy on ESG risk management similar to many UN PRI signatories.
7. The reforms proposed by the Secretary of State for International Development on 12 October 2010 and the feasibility of achieving desired results given the CDC’s current resources, including staffing; the extent to which the proposed reforms will be sufficient to refocus CDC’s efforts, especially with respect to poverty reduction 8. We agree with the Secretary of State that the CDC should become more pro-poor in its approach and activities, and that CDC investments need to be targeted in (potentially more risky) regions and ventures that will generate higher development returns. This includes being prepared to invest for longer than the average investor to achieve development—alongside environmental, social and governance—outcomes, and to be ready to accept lower returns than the average private investment actor would typically accept. 9. We encourage the Secretary of State explicitly to incorporate a pro-poor development strategy in CDC’s mandate, including clear objectives and targets, that is, laying out development and poverty reduction aims eg targeting women entrepreneurs, promoting small and medium-sized agri-businesses. 10. Currently CDC’s mandate focuses on geographical areas and the exclusion of a few sectors (goods that are deemed illegal under applicable local or national laws or banned by global conventions or agreements, arms production or trade, businesses significantly involved in tobacco, pornography, gambling). While welcoming that the current mandate is biased towards Sub-Saharan countries, Oxfam believes that CDC’s mandate should also include a clearer development strategy identifying which sectors, and why, will be favoured based on the development needs of the recipient countries, for example, infrastructure for rural areas (eg improved energy, water and transport infrastructure that provides basic services to farmers at lower cost, making them more competitive), agriculture, financial services eg developing local financial institutions versus consumer-oriented investments. 11. CDC should work over time towards the development of concrete quantitative and/or qualitative indicators relating to development and poverty reduction alongside its existing ESG criteria, which would allow its performance to be assessed against its stated development objectives. CDC’s approach should change from focusing on ESG risk management to focusing on development (including ESG) outcomes. 12. We agree that CDC should significantly increase its directly managed portfolio, and take a more active approach to portfolio management. In so doing, if it is to remain self-financing, CDC will need to find a balance between undertaking direct and indirect investments, and between delivering financial and development returns. This could potentially be done by establishing a percentage of direct investments (say, at least 50%), for example, balancing financing given directly to small-scale farmers in rural areas where poverty rates are high and the short-term “social” impact is the greatest with indirect investments in agri-businesses such as food processing, packaging, and distribution companies. 13. According to the current CDC Investment Code, CDC’s Fund Managers are required “to procure that such portfolio companies sign an undertaking confirming that they will operate in line with sections 1–3 of this investment code” (covering CDC’s principles, objectives and policies, and exclusions). Understanding the complexities involved in fund managers enforcing explicit commitments to the code when they lack effective control or significant influence over portfolio companies (that is, typically, where they own less than 20% of the company), CDC should require ALL portfolio companies to commit to delivering certain development goals and to comply with the code; even if it means ensuring more than 20% ownership over all portfolio companies, and thus reducing the overall number of CDC investments. 14. In order to properly manage an increased number of direct investments, DFID will need to consider: a) increasing human resources, particularly managerial staff with development expertise; b) exploring innovative models of collaboration with other parties, private, public or civil society to help monitor CDC’s investments; and c) increasing CDC’s advocacy and influencing role in the fund management and private equity industry to promote higher standards, greater transparency and reporting within the industry in general and, for CDC indirect investments in particular. 15. We agree with the Secretary of State’s proposal to demand from CDC more effective treatment of environmental issues, greater transparency and a rigorous approach to tackling corruption. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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16. The current CDC Investment Code leaves considerable room for interpretation, and thus for free riding, eg many of the policies are applicable “as/when appropriate”, as are requirements for verification of results or setting improvement targets. The Investment Code should be reviewed and strengthened to remove loopholes and ambiguity, particularly in relation to the management of CDC’s fund managers eg by changing the current wording “encourage the managers of portfolio companies to adopt and implement policies relating to ESG matters, particularly where businesses entail significant risks” to a more concrete requirement that “managers adopt and implement effective ESG policies over time and that investments comply with ESG goals by the time CDC exits the investment.”. 17. For its indirect investments, when operating as a fund of funds, CDC should establish clear criteria and procedures for selecting, and assessing financial intermediaries, including that intermediaries: — have policies and a strong track record of performance on ESG matters, including reporting, as a key criterion for selection; — are explicitly required to demonstrate results in terms of their ESG performance, as well as meeting specific development targets, in their contractual agreements, and due diligence; — maintain oversight of, and engage with, the funds they invest in regarding their ESG and development performance and progress. This includes requiring them to report on ESG (and development) performance and progress. 18. In addition, CDC should: — engage with other DFIs to harmonise standards and increase their capacity to influence private investors in developing countries, by raising awareness of the importance of managing ESG issues, sharing expertise and tools, and improving standards across the private equity industry (including standarising private equity reporting frameworks); and — establish a process to manage non-compliance by fund managers and private equity firms they invest in, and to improve monitoring and reporting of their investments. 19. Oxfam acknowledges the efforts and progress made by CDC in developing a comprehensive tool kit and ESG management system for fund managers. However, the delegation of investment decisions in the fund of fund model requires the development of stronger management systems for fund managers, to compensate for the absence of direct DFI control and civil society oversight of the investments, including specific criteria and procedures for selecting and appraising fund managers, as well as a system and procedure for dealing with “non-compliance” with CDC’s Investment Code by fund managers. 20. The application of CDC’s policy and geographical mandate to its indirect investments is unclear as CDC’s Board has discretion over decisions to invest in any particular investment vehicles for fiscal, regulatory or any other reasons. This potentially leaves the door open for CDC to invest in funds which lack transparency, and which are hard to track/monitor and influence, and which might be domiciled in offshore financial centres, which could potentially damage the reputation of CDC. 21. Internal and external verification: There is a case to be made for involving third parties as monitors of and reporters on investee companies, as the relationships between DFIs, fund managers, and investee companies involve potential conflicts of interest. Some DFIs (e.g Norfund) have employed consultants to report on the development impacts of a sub-set of their investment portfolios. DFIs could broaden and systematize this practice by collectively creating an independent ombudsman mandated to conduct field missions to monitor and report on both fund managers and investee companies, and to publicly report on the development impacts of their activities. 22. Corporate Governance and accountability: CDC currently has an independent Board, with no representation from DFID. We propose that DFID should consider having a permanent representative (non- executive director) on the Board who would hold overall responsibility for the establishment of, compliance with and reporting on CDC’s development strategy. 23. Transparency: CDC should regularly report on its performance against its development strategy, in terms of the extent to which it has meant its development objectives, how its activities have contributed towards this, and on the development, as well as the financial, performance of its investments; a full development report should be made publicly available on an annual basis.
24. Should alternative options, including the abolition of the CDC, be adopted? 25. We understand that there needs to be a balance between CDC’s ability to catalyse private capital (that otherwise will not invest in certain regions or companies) and CDC’s ability to manage and ensure social and environmental returns. 26. Intermediary financing (such as the fund-of-fund model) involves significant delegation of investment decisions to private parties (eg fund managers, loan officers), which undermines the ability of DFIs to directly select and appraise investments and report on their development results. Moreover, intermediary financing reduces the public availability of information to the point where civil society is unable to fulfill its traditional role as a “watchdog” that could provide a useful informal accountability mechanism and a strong incentive for DFIs to improve their performance in terms of development results. cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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27. In our view, an alternative model worth considering would be a combination of fund of funds with direct investments, when and if, the indirect investments follow the above proposed policies and practices. Direct funds require more human resources, and thus, are more costly (management intensive) yet, they have greater potential to focus on higher risk and potentially lower (financial) return investments, and/or investments that might require much longer holding until they become sustainable, that could deliver greater returns from a poverty reduction perspective. Increasing the proportion of investments in higher risk/lower financial return regions and sectors could be compensated by CDC’s indirect investments, which are likely to continue to be more profitable. Notwithstanding, a shift from financial to development returns will inevitably imply smaller overall profits, not least because focusing more on direct investments will require either providing CDC with more resources (human particularly) or focusing on an overall smaller number of investments.
28. DFID’s shareholding in Actis, CDC’s largest Fund Manager
29. DFID’s shareholding in Actis should be reviewed in line with the new CDC model and investment strategy that emerges from DFID’s review of CDC.
30. Conclusion
31. Oxfam intends to undertake further research and analysis of the role that private finance can play in development, including the role of DFIs in harnessing the potential of private investment for poverty reduction, which we will feed into DFID’s current public consultation on reforming CDC Group plc.
Written evidence submitted by Michiel Timmerman
Potential for Agricultural Investment by CDC
There has been very substantial commercial investment in agriculture in lower-income countries over the last five years, driven by a number of factors. These include (1) a desire to improve food security by emerging market countries as economic growth results in increased wealth and demand for protein and general consumption of foodstuffs; (2) a consequent desire to improve food security by net food-importing countries; (3) attractive yields and portfolio diversification from farmland for financial investors in a low interest rate environment; (4) sharp rises in food prices in the 2007–08 boom and again in 2010 and into 2011. These trends continue to drive demand for agricultural land today and have resulted in sovereign wealth and investment funds buy up large tracts of land, particularly in Latin America (Brazil’s cerrado region) and in Eastern Europe. These regions are targeted because of the availability of large blocs of farmland at relatively low prices, compared to western farmland, the ability to maximise yields through large scale, mechanised cultivation, sometimes weak land governance and in some cases (eg Brazil) government support and infrastructure development.
Investors have more recently turned to Africa, where there are large areas of suitable farmland available. According to press reports, investors expressed an interest in 42 million pa globally after the 2008 commodity boom, of which 75% was in sub-Saharan Africa. Put in context, this is nearly 10% of the total 446 million ha estimated of uncultivated land available globally (Rising Global Interest in Farmland, World Bank 7 September 2010).
Unlike Eastern Europe, where large farms are available from private or former state entities, and Brazil where the cerrado region was sparsely populated, many areas of African farmland are farmed, with poor quality title, by smallholders or otherwise used by the local population. Many African countries display weak state capacity, poorly defined property rights and weak enforcement of any property laws which do exist. This creates a substantial risk that the foreign investors’ appetite for farmland can result in the displacement of the local population and the use of large scale, mechanised agricultural practices, as in Brazil and Eastern Europe. Yet with appropriate training, provision of infrastructure and processing equipment and other investment such as seed research, smallholder-based or small-holder inclusive models of agriculture can be very successful (Awakening Africa’s Sleeping Giant, World Bank 2009). Such an approach can have a substantial impact on rural poverty by improving rural incomes, which are currently at extremely low levels. It is also likely to enhance local food security as in many cases large scale agricultural production is focused on export crops.
CDC should be examining the potential for making a positive financial return while at the same time alleviating poverty by investing in smallholder-centric agricultural schemes. There are many examples of success in such schemes, for example smallholder rice production in Thailand (op cit, World Bank 2009) and small-holder based models for coffee and cocoa production, processing and export in Tanzania.
Such an approach will have the added benefit of providing competition to the financial and foreign sovereign purchasers of agricultural land and providing an alternative, pro-poor model for agricultural development. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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Written evidence submitted by CDC Group plc We welcome the opportunity to brief the Committee on CDC’s work as part of the Inquiry process. Our submission focuses on the first area of the Inquiry, namely CDC’s effectiveness. We have not attempted to address additional areas of the Inquiry, namely the reforms proposed by the Secretary of State on 12 October 2010. We believe it would be premature to comment until the DFID–led consultation is completed and detail on the reforms is provided. Section 1 is an executive summary. Section 2 is an introduction to CDC. Section 3 looks at our effectiveness. Section 4 is a brief conclusion. The submission also includes case studies which we hope the Committee may find useful. A set of appendices is attached providing additional information: Appendix A CDC’s Investment Code. Appendix B CDC’s indicators for monitoring and evaluation. Appendix C CDC’s performance history. Appendix D CDC mobilising third party capital. Appendix E List of first-time fund managers. Appendix F Triple Value’s external perspective on CDC’s development impact measurement. Appendix G KPMG’s independent assessment report to CDC Group plc Appendix H CDC’s monitoring and evaluation framework and summary of the evaluation results CDC Group plc www.cdcgroup.com
Section 1 Executive Summary 1.1 CDC’s role is tackling poverty in the developing world by investing vitally needed capital in promising private sector businesses. No country has reduced poverty in the absence of economic growth and it is the private sector that drives economic growth. Businesses create jobs, train people and invest in research and development of new products and services. The private sector provides the taxes for governments to invest in public services, health and education. 1.2 Although successive governments have asked CDC to achieve this using different methods and strategies, CDC’s mission has not changed in its 62 years of existence. The company’s purpose has always been to contribute to sustainable economic development in poor countries by stimulating and investing in the private sector. 1.3 Along with our shareholder, DFID, CDC believes that growing the private sector is the single most important contributor to the economic growth upon which the developing world’s prosperity depends. Without a thriving, responsible and profitable private sector the poor countries of the world will continue to struggle with poverty. 1.4 The most serious impediment to economic development is that international commercial investors are still reluctant to invest in poor countries. They see these places as risky, difficult and unpredictable. They continue to shy away from backing businesses with great potential but limited access to finance. Without substantially higher levels of investment, enterprises in poor countries are struggling to expand. This is a major issue for development. 1.5 This is why CDC’s capital, like that of other development finance institutions (DFIs), is so important. We play a vital role in putting essential capital to work in businesses located in countries that have extremely challenging investment environments. So CDC’s role is to do the hardest things in the hardest places. 1.6 But our capital on its own is a drop in the ocean. The amount of investment needed across the poor countries of Africa alone can be reckoned in the trillions of dollars. The key to attracting this capital is persuading and encouraging private and commercial investors to make commitments of capital in poor countries. In order to attract this capital it is essential to demonstrate that good risk adjusted returns can be made. Without those returns, investors will shy away from these markets. 1.7 CDC’s task therefore is twofold: first to back businesses with potential and second to do so in a way that encourages others to invest. cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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1.8 Our capital is “patient capital”: we are not looking for quick “in and out” returns and we are always prepared to take the long term view. 1.9 The current fund-of-funds model was introduced by the last administration in 2004. The model means that we place our capital with fund managers who in turn raise capital from other investors and invest that larger pool of capital in businesses on the ground. 1.10 This model has been implemented by CDC with many significant achievements: — currently invested in nearly 900 businesses in 73 developing countries; — 3 million lives supported; — nearly US$ 3 billion of local business taxes paid by businesses in 2009; — over US$ 23 billion in third party capital invested alongside CDC in funds; — more capital invested in sub-Saharan Africa and in Asia than any other European DFI; and — local financial capacity-building in at least 37 countries. 1.11 All of this has happened with no fresh capital from the UK Government for over 15 years. 1.12 Although it has the important advantage of helping to attract vital capital from other investors, the model has drawbacks. CDC is, in legal and practical terms, one step removed from the businesses. This limits the level of information we have access to, the control we can exercise and the degree of influence we are able to exert over the investee companies. The fund-of-funds model, therefore, brings complex contractual and practical challenges. 1.13 CDC has worked energetically to mitigate these challenges. Our Investment Code, which our fund managers are required to follow, covers environmental, social and governance (ESG) issues (see Appendix A), together with our monitoring and evaluation systems, are seen by many other DFIs as leading-edge and innovative. Nonetheless, with 70 fund managers and nearly 900 investee businesses in some of the world’s most difficult investment environments, problems will inevitably arise. CDC is not complacent about this and we accept that difficulties have been encountered. 1.14 That said, much has been achieved under the fund-of-funds model. The progress we have been able to make to stimulate the private sector and develop capital markets in poor countries is set out later in this submission. 1.15 CDC is discussing with our shareholder how we can expand the range of investment tools we use to achieve greater developmental impact through supporting the private sector. This will include, for example, direct investments which are a highly effective way of targeting specific sectors, countries and businesses. It will also include the provision of debt and guarantees because not all businesses in the developing world need equity investment, and some require other forms of finance. These are all important ways of ensuring that CDC’s capital continues to be at the forefront of developmental thinking and is as developmentally effective as possible. 1.16 But whatever our precise investment model, our focus will continue to be on ensuring long-term profitability in the portfolio companies because it is financial performance that is widely recognised as the vital bedrock for sustainable economic development. 1.17 Lasting development impact is the goal of all who work at CDC. The organisation cannot stand still and as knowledge and understanding about sustainable economic development grows and adapts, we must do the same. CDC recognises this and is open and receptive to change. 1.18 A key objective of any DFI should be the ability to mobilise capital from responsible commercial investors. This is because developing economies’ growth depends on the availability of a much larger pool of capital than DFIs alone can provide. 1.19 The public consultation taking place will be an important element in framing CDC’s future activities. We are enthusiastically committed to achieving the highest possible impact and welcome new and creative ways of ensuring that the potential of the developing world’s entrepreneurs is unlocked to bring about a thriving private sector to benefit all.
Section 2 CDC’s Current Way of Working 2.1 CDC exists to improve people’s lives in developing countries by helping businesses to grow. Set up over 60 years ago, the Colonial Development Corporation was established to “investigate, formulate and carry out projects for developing Colonial Resources”. CDC has changed its name and adapted its investment model over the years to suit changing economic and investment climates and modes of development thinking, but its central mission has remained constant: to foster growth in sustainable businesses and, in doing so, help to raise living standards in developing countries. We remain committed to adapting to the demands and challenges that our mission places upon us. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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2.2 Originally focusing its efforts on agricultural production, CDC’s investments were by the mid-1990s mostly debt-based and were sourced and monitored by CDC staff from offices in the United Kingdom, Africa, Asia, Central and South America. In the late 1990s, driven by a well-documented shortage of equity capital in many developing countries, a decision was taken to focus on equity investment. 2.3 In 1997 the then Prime Minister announced that CDC should become a Public Private Partnership. Plans were therefore put in place to privatise CDC. This proved not to be possible as there was insufficient interest from private sector investors. 2.4 In the early 2000s, in an effort to encourage additional equity capital for investment in private sector companies in developing countries, the decision was taken by Government to spin out CDC’s direct investment teams into what became Actis and Aureos, two leading emerging market private equity fund managers. CDC began operating through an intermediated business model focused on the world’s poorer countries with DFID remaining CDC’s sole shareholder. Our new role as a fund-of-funds investor meant that we were no longer a direct investor in companies in emerging markets. Instead we now deploy our capital through private equity funds, such as those managed by Actis and Aureos, which in turn invest in companies in developing countries. These private equity funds thereby provide CDC with an indirect share in the businesses in which the fund manager invests. Through these investments the fund managers provide companies with access to the capital and advice that allows them to expand and improve their businesses. Other investors, both public and private, invest alongside CDC in the funds. This further expands the access to capital for fund managers to invest in businesses in emerging markets.The spin-out of Actis and Aureos enabled the amount of capital invested in developing countries to multiply considerably, while avoiding a situation where CDC would be in direct competition with its fund managers. As Professor Ajay Shah of the Indian National Institute of Public Finance and Policy in Delhi and former Indian Government economics adviser has said: “Private equity in India is actually very different to what is known in the mainstream western discourse as private equity. Private equity is much more like venture capital, in that it’s about putting large amounts of capital and professional management inputs into relatively smallish projects, bringing them up to scale, and then putting them out into the public markets … So you start with a team that has some very good ideas but just does not have the capital to pull it off. And for whatever reasons the domestic financial system is malfunctioning, and the standard banks and the other sources of capital don’t take the risks and don’t put their money into some of these extremely nice projects…so there could not be anything more developmental in India than private equity investment.” 2.5 CDC is not designed to solve all development challenges. It is one part of the UK Government’s armoury to combat poverty. We are asked by Government to contribute to poverty reduction in two ways, by: — investing responsibly in the creation and growth of viable private businesses in poorer developing countries to contribute to the economic growth that is central to reducing poverty; and — mobilising private investment in these markets both directly and by demonstrating a profitable and responsible track record. CDC does this because many commercial investors still shy away from poor countries, particularly in sub-Saharan Africa, which are seen as risky, unknown and problematic.
What is CDC seeking to redress? 2.6 Through investment in private businesses, CDC contributes to economic development and poverty reduction. Its investment increases jobs, income, productivity, goods, services and tax revenues. CDC aims to invest its capital in countries, regions, businesses and sectors in which private investors are currently reluctant to invest. This means that CDC investment aims to be financially additional, i.e. it should avoid crowding-out private investors. 2.7 In addition, CDC acts as a catalyst, attracting (crowding-in) private investors by demonstrating that profitable and responsible investments can be made in difficult business environments in developing countries. 2.8 In poor countries, DFIs are performing a vital role in providing the capital businesses need to expand. Although all DFIs share the same goal of supporting the private sector in poor countries, they carry this out in varying ways. Some focus on debt. Others undertake direct investment in businesses. Some DFIs invest only the capital of their own government and others manage and invest commercial capital as well. The range of approaches means it is difficult to compare DFIs on a like-for-like basis. CDC and SIFEM, the Swiss DFI, for example, are the only DFIs to operate fully as fund-of-funds private equity investors. Nonetheless, all DFIs work to back promising businesses in poor countries and to do so in a way that encourages more capital into the developing world. 2.9 This shortage of capital remains a significant and primary impediment to economic growth in poor countries. Other challenges to economic growth exist but the shortage of capital remains a central barrier to long-term poverty reduction. For example, almost 50% of African companies identify lack of access to finance as a major constraint to doing business1. The cost of finance, including investment finance, is higher in Africa than any other part of the world and the access for small and medium enterprises (SMEs) is particularly limited. Estimates vary, but a UN policy brief in October 2010 suggests that Africa as a whole receives only 5% of cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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foreign direct investment, while its population accounts for more than 15% of the world’s total. Similar challenges exist in South Asia too. On 18 November 2010, Duvvuri Subbarao, the Governor of the Reserve Bank of India, a country that has more people living on less than US$2 a day than the whole of Africa, said: “India needs to raise its investment by a quantum step if it is to realise its aspiration of double digit growth. We certainly need to augment our domestic resources with foreign savings. For obvious reasons, we have a preference for long-term funds over short-term funds, for equity over debt and for FDI over portfolio flows.” 2.10 The focus of CDC’s investments is on the low-income countries of sub-Saharan Africa and Asia. Our investment policy for 2009–13 means that of all our new commitments: — 75% must be based in low-income countries; — 50% must be in sub-Saharan Africa; and — up to £25 million per annum can be invested in SMEs funds in other developing countries. 2.11 CDC has, as the table below indicates, more capital invested in sub-Saharan Africa and in Asia than any other major2 European DFI. CDC’s portfolio also has the highest percentage focus on Asia and the highest on sub-Saharan Africa.
CDC’s Current Way of Working Source: Dalberg Development Advisers. Size of portfolio Share of portfolio on 1 January 2009 (US$m) on 1 January 2009 New 2009 commitments
CDC 1340 1574 2914 40% 47% 87% 57% 33% 90% IFU 111 148 259 21% 28% 49% 32% 41% 73% FINNIFUND 141 105 246 35% 26% 61% 36% 29% 65% DEG 846 1410 2256 18% 30% 48% 25% 38% 63% FMO 1333 1150 2483 29% 25% 54% 34% 28% 63% PROPARCO 874 437 1311 40% 20% 60% 45% 17% 62% SIMEST 21 210 231 3% 30% 33% 2% 25% 27%
2.12 Currently, CDC catalyses private investment at three levels: — fund level: CDC can help persuade other investors to commit capital alongside it into the funds that it backs. From 2005 to 2010, over US$ 23 billion of third party capital has been invested alongside CDC. Some of this capital would not be there were it not for the “stamp of approval” signified by CDC’s investment. CDC has developed a methodology which gives an approximate indicator as to how much third party capital is mobilised by CDC’s presence. On a three year rolling basis, third party capital mobilised currently stands at 346% of invested CDC capital, with the trends since 2005 shown below: % Third party capital mobilised 400
350 346 300 250 278 200
150 193
% third party capital 100 142
50
0 2005-2007 2006-2008 2007-2009 2008-Sept 2010 Three year rolling
— co-investment: when these funds invest in companies, this may persuade other investors to invest additional capital in these companies; — wider country level: if CDC achieves commercially attractive returns by investing in companies in the poorer developing countries, this can persuade other, unrelated investors, that these countries are worth investing in. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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Why isn’t enough investment going into the world’s poorer countries? 2.13 Despite some limited increased interest in the developing world from commercial investors, businesses in poor countries still struggle to secure the finance they need to grow. The table below shows that many of the countries where CDC invests are some of the lowest ranking in the world when it comes to corruption. This is a serious barrier for other investors. Investors need reassurance about returns. Issues around corruption, transparency and ease of doing business mean that many investors are reluctant to enter emerging markets. 2.14 The current, relatively small level of DFI capital going to businesses in emerging economies will have to be dwarfed by significantly larger levels of private, commercial capital if the developing world is to win the fight against poverty. The influx of private capital into China in the last decade is testament to this effect. CDC considers its role as a catalyst for increased private capital as central to its purpose and its effectiveness. In poor countries DFIs are performing a vital role in providing the capital businesses need to expand but it is a drop in the ocean compared to what is needed for long-term sustainable growth. Ranking’s of CDC’s largest investment destinations in sub-Saharan Africa in Transparency International’s Corruption Perceptions Index for 2009 (rank out of 180 countries): Rank Country
162 Democratic Republic of Congo 154 Côte d’Ivoire 146 Kenya 130 Nigeria 126 Tanzania 69 Ghana 55 South Africa
The CDC Business Model 2.15 Given the challenges outlined above, CDC’s model was devised by DFID and CDC to make a distinct and tangible development impact. Through its intermediated investment model, CDC no longer invests directly. Instead it invests in locally-based fund managers’ funds, which in turn invest risk capital in businesses. The intermediated approach enables CDC to be developmental in several ways: A wider investment footprint: The intermediated model means CDC benefits from a much broader investment footprint, with our fund managers channeling CDC capital and good business practices into nearly 900 businesses in 73 countries, many more than would be possible than under other investment models. The model also offers a good spread of risk across sectors, countries and fund managers. Supporting local entrepreneurs and investors: The intermediated business model enables decisions to be made locally by fund managers with experience on the ground which is essential when dealing with portfolio companies on a regular basis. CDC supports and creates capacity building through both the emergence of new and typically locally-based fund managers (thereby deepening local capital markets) and more established international managers with local offices. Enabling local management of companies leads to better performance—both financially and against other development indicators
Brookside Dairies Many Kenyans live in remote areas of the country with few basic services. One problem for farmers is that they have limited ability to sell their produce to national suppliers. Over the past 12 years, CDC’s investment in Brookside Dairies has helped tackle this problem. CDC’s capital has helped Brookside to expand its production capacity and develop a highly effective collection and distribution system across the Eastern Province to the Central Province and the Rift Valley. This means that all milk collected is quality-tested and reaches the dairy within three hours. Over 150,000 Kenyan small dairy farmers, distributors and retailers now work with Brookside Dairies to bring high quality fresh milk to market. The milk is available in traditional outlets such as shops and supermarkets, but also in small kiosks in remote areas. Brookside Dairies is a successful and growing company. It has diversified its product range to include yoghurt and butter and is helping dairy farmers to access credit facilities so they in turn can buy new equipment and livestock. Building sustainable business practices: CDC ensures its capital is invested in a sustainable manner, embedding international standards for ESG issues within fund managers’ practices and processes. Emerging market private equity remains a relatively new industry and CDC, along with other DFIs, has been instrumental in shaping the ESG policies under which many emerging markets funds now operate. As a consequence, emerging market private equity fund managers often operate with more stringent ESG policies than managers operating in Europe and North America. Mobilising third party capital: CDC’s model mobilises capital for the world’s poorest countries and CDC’s catalytic effect has been dramatic. Since 2004, CDC has committed more than US$ 5 billion to over 70 fund cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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managers. Alongside or subsequent to CDC’s commitments, other investors have committed approximately US$ 23 billion to these fund managers. Private equity direct investment into portfolio companies also creates a multiplier effect as new capital attracts additional investment and financing in those companies. CDC has demonstrated to private sector investors that it is possible to earn market returns in the poorest countries while promoting the sustainable growth of businesses in emerging markets. 2.16 In the six years since 2004, CDC has created £1.5 billion of value, bringing it from a value of £1.2 billion to £2.7 billion today. It has received no funding from HM Government since 1995. 2.17 The investee companies employ over a million people and pay taxes in excess of US$ 3 billion to their own governments.
Umeme: Safe and reliable power for Uganda Millions of Africans do not have access to safe and reliable power. This means enormous hardship for families, communities, schools, hospitals and businesses throughout the continent. Over the last five years CDC’s investment in Umeme, an electricity distribution company in Uganda, has helped bring safe and reliable electricity to 88,000 new customers. The distribution network has been extensively overhauled, 30 rural electrification schemes have been connected to the Umeme grid and an efficient customer service system has been introduced. The US$ 60 million investment programme has created 1,000 jobs and Umeme paid local taxes of US$ 4 million in 2009 alone. US$ 100 million will be invested in the network over the next four years and a public safety awareness campaign set up in 2005 will continue throughout the country. Umeme is helping Uganda develop a modern electricity network supplying safe and reliable power to people in remote rural areas as well as towns and cities. This is making significant improvements to the quality of people’s lives. Expanding access to power also helps run essential services and supports businesses.
Accra Mail The retail sector in Africa is becoming more important to economic development, particularly as African countries continue to urbanise and disposable incomes begin to rise. Retail outlets such as shops, supermarkets and malls have a significant contribution to make to development because they create employment, build supply chains, create markets for local producers and suppliers and stimulate economic activity. Access for local people to a wider and cheaper range of goods is also improved. CDC’s capital has helped develop Ghana’s first and only A-grade shopping mall. With 19,000 square meters of retail space on an eleven acre site, Accra Mall has brought consumer products and services to the local people which were previously unavailable or prohibitively expensive. Contracts for cleaning, maintenance and security have also been awarded to local people. The mall is hugely popular with the local population. Extensive supply chains for local products, often displacing imports, have been introduced. Accra Mall has created over 1,000 jobs. Sales taxes of US$ 4.3 million were generated in 2009 and plans are now being developed to expand the mall, introducing new companies to Ghana’s expanding retail sector. 2.18 While the intermediated business model offers many tangible benefits, the model also presents challenges and brings with it inherent limitations. Some of the criticism we have faced from our detractors has focused on what they see as the drawbacks of the intermediated nature of our business, in particular the perceived lack of oversight and direct influence on the activities of some of investee companies. 2.19 CDC’s intermediated model means that it is the fund managers who are responsible for specific investment decisions and for the day-to-day oversight of the businesses in which CDC’s money is invested. CDC relies on carefully selected fund managers to demonstrate evidence of improvement in standards across their portfolio of investments. While this process does take time and an immediate turnaround of standards cannot always be guaranteed, the systems that CDC has put in place are designed to ensure that there are medium and long-term improvements and that over time the relevant international standards are reached, as set out in our Investment Code (Appendix A). 2.20 CDC’s investments are in some of the world’s most difficult business environments, so our strategy focuses on implementing robust measures including strict requirements for fund managers and portfolio companies, as well as effective monitoring. This monitoring takes the form of quarterly financial reports, company visits, annual ESG reporting and a development impact evaluation at the midpoint and end of a fund’s life. This approach is a highly effective way to prevent taxpayer’s money being involved in businesses that are unable to manage the ESG risks they face. More importantly, our systems ensure that CDC’s own commitment to high standards is shared and spread to funds and portfolio companies in the countries where CDC is focused. When problems do surface with its fund managers or their portfolio companies, CDC works directly with those fund managers to resolve the issues. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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Section 3 CDC’s effectiveness and how it compares with others CDC is proud of the achievements it has made since 2004: — currently invested in nearly 900 businesses in 73 developing countries; — over 3 million lives supported; — Nearly US$ 3 billion local business taxes paid by investee companies in 2009; — over US$ 23 billion in third party capital invested alongside CDC in funds; — more invested in sub-Saharan Africa and Asia than any other European DFI; — currently has investments in 139 funds with 70 fund managers; — invested over £400 million in infrastructure and power since 2004; and — major impact on locally-based investment capability in 37 countries (number of countries where our fund managers have offices).
Understanding development effectiveness 3.1 Measuring development is complex and many institutions, including DFIs, have approached the matter in a range of ways. CDC’s framework for monitoring and evaluating the developmental effects of its investments was created after extensive benchmarking with other DFIs. This benchmarking included comparison with other European DFI’s systems and the IFC’s DOTS (Development Impact Tracking System). Following careful deliberation, CDC chose indicators closely modelled on IFC’s DOTS system, but also adapted to be more relevant to CDC’s intermediated model. See Appendix B for a full list of indicators and when these are collected. 3.2 In June 2010, CDC updated its monitoring and evaluation ratings to take into account lessons learnt from the 43 fund evaluations to date. CDC also recognises the importance of independent evaluations and a third party consultant was employed to this end in 2009. So far, 12 fund evaluations have been completed by an independent third party. Out of the seven funds evaluated, six were considered to have a satisfactory or better development outcome. CDC’s effectiveness was rated at least satisfactory for all seven funds. At least 50% of the fund evaluations in 2010 onwards will be carried out by independent consultants to provide an external benchmark against which to compare CDC’s own fund evaluation ratings, to ensure the robustness and adequacy of the evaluation framework and to benefit from the additional insights and observations of an external party. 3.3 When discussion around development effectiveness takes place, the creation of jobs is often cited as an important indicator. However, even this can be a misleading and coarse metric. For example, an investment in an infrastructure project such as a bridge will create fewer direct jobs than an investment in a factory. Yet the construction and operation of the bridge will certainly allow the increased trade, mobility and transport links that are vital to local economic growth and employment. 3.4 Similarly, many commentators favour investment in small businesses over larger enterprises believing this kind of investment to be particularly developmental. SMEs are an important part of the mix and CDC is one of the largest investors in SMEs of any bilateral DFI. However, sustainable economic growth requires larger businesses too, particularly where international trade prospects and investment in research and development are part of their contribution to the economy. 3.5 The question of which sectors are especially developmental is another area of discussion. Some believe, for example, that agriculture has a particularly important role to play, while others see infrastructure as a priority. All have their merits. But the reality is that sustained economic growth of the kind developing countries need to prosper has to be founded on a mixed economy playing to the comparative advantages of that economy: businesses of all sizes and in all sectors, providing employment and training, with improving standards in ESG matters and generating tax revenues for local governments to fund public services. 3.6 There is no “one size fits all” investment—there is always a hard choice between different development impact outcomes. Goals such as job creation, good ESG performance and reaching rural poor areas can and do conflict with each other. Mining creates a lot of jobs in rural areas but represents a high risk from a health, safety and environmental perspective. Agribusinesses reach rural areas and are lower risk, but do not always generate as many jobs as other sectors. Financial services companies can generate a lot of jobs and are relatively safe but are usually not based in rural areas. Regardless of your choice, you can never tick all the boxes and reach all the development impact goals. But what is clear is that the critical element missing in emerging economies is sufficient capital investment for businesses to grow. Tackling this issue is fundamental to all economic development.
CDC’s effectiveness 3.7 As previously emphasised in this submission, one of CDC’s most important functions is to mobilise additional investment in poor countries. Capital flows to the developing world, particularly sub-Saharan Africa, need to increase significantly. For example, it is estimated that there is a US$ 60 billion shortfall in investment cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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for infrastructure in Lagos State alone for the next ten years (Nigerian Public and Private Partnership Agency 2010). 3.8 In 2006, India’s then Finance Minister Palaniappan Chidambaram identified India’s infrastructure deficit as its greatest challenge announcing that US$ 500 billion in investment would be needed, a third of which would need to come from the private sector. Encouraging large scale commercial capital investment, therefore, is crucial. If the private sector is to grow, commercial investors must put much higher levels of their capital to work in poor countries. DFIs have a limited pool of capital. This capital must be used effectively and imaginatively in a way that acts as a magnet for what is really needed -international capital on a massive scale. 3.9 CDC has met this challenge in three ways: — by achieving successful and profitable investments in the hardest placed; — by demonstrating this track record to other investors thereby encouraging them to invest in turn in poor countries; and — ensuring that fund managers improve their understanding of how to control and manage ESG risks and opportunities that result from their investment strategies. 3.10 The key to CDC’s investment is to demonstrate to commercial investors that it is possible to make good returns by investing responsibly in businesses in poor countries. Profit is essential. Investors need to see a return on their capital. Without the prospect of profits, commercial investors will shy away from any market, developed or developing. 3.11 Over the past six years CDC has performed well and has delivered good returns. In 2004 CDC’s net worth was £1.2 billion. That figure now stands at £2.7 billion despite the turmoil of the global downturn. A detailed breakdown of CDC’s returns and key performance data over the past six years is included in Appendix C. This has acted as an endorsement to other investors. CDC’s reputation for commercial rigour and our commitment to responsible investment has demonstrated to commercial investors that doing business in poor countries can be profitable, ethical and worthwhile. 3.12 Over the past six years more than US$ 23 billion in additional capital has been invested alongside CDC in funds. More detailed information about CDC’s performance in mobilising additional capital is included in Appendix D. Throughout CDC’s portfolio of investments there are many examples of funds where CDC has played a crucial role in mobilising third party capital. Recent analysis of our portfolio shows that in the 19 funds where we made commitments in 2009 and 2010 to date, CDC played a leading catalytic role in 15. This involved issues such as significant financial commitments, input into the strategy of the funds, the way in which they were structured and guidance on ESG and other matters. These funds attracted US$ 3 billion of third party capital. Many of these funds would not have existed without CDC or would have appeared in a materially different form. 3.13 Many fund managers will testify to CDC’s catalytic effect in attracting other investors to a fund. As an example, Mr Okey Enelemah, Chief Executive of African Capital Alliance has said: “CDC’s commitment to African Capital Alliance’s (ACA) first fund in the late 1990s, a time when private equity in Nigeria was still virtually nonexistent, acted as a ‘stamp of approval’ for ACA, reassuring and attracting investors to the manager and to the asset class as a whole. ACA is currently raising its third private equity fund, targeted at US$ 350 million. ACA’s success can be partly attributed to the pioneering investment of CDC in the early years of the manager’s life.” 3.14 The investment profession in poor countries, particularly in sub-Saharan Africa, is significantly under- developed. One important piece of the jigsaw in developing capital markets is to harness the skills that currently exist and to Nurture firms and individuals so that local investment professionals are empowered to drive the sustainable business growth on which economic development depends. Building local capacity and financial infrastructure is a key objective for sustainable development. 3.15 One of CDC’s most important contributions to sustainable development has been our work with local investment professionals and in particular with African and Asian professionals raising funds for the first time. Traditionally, commercial investors make investment decisions based on the all-important previous track record of a fund manager. Without this track record, the task of attracting investors can be a great challenge. It is even more of a challenge in developing countries where commercial investors are still reluctant.
Athi River Steel Since 1998 CDC’s capital has been supporting Athi River Steel, a steel smelting company in Kenya. The country’s steel industry was still in its infancy at the time of CDC’s initial investment. 50% of the country’s steel was imported at high cost and the little scrap metal collected was exported at low prices. Athi River Steel’s business model has proved successful. It produces hot rolled steel products such as fasteners and building materials using scrap metal. The plant is based in the Mavoko township 30 km from Nairobi. It provides jobs and training for 900 people in this poor area where there are few employment opportunities outside agriculture. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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The plant has stimulated economic activity in the region more broadly. Increased demand for transport and other services has had a positive impact on the local economy and some small enterprises have grown to serve the workforce. For example, a group of women has set up a small catering business supplying traditional food to the company’s employees. Safety standards have been improved across the business. The company has also helped create a flourishing scrap metal industry. By 2004 over 1,000 collection businesses had been registered and Athi River Steel estimates that 150,000 Kenyans now receive income from scrap metal sales. 3.16 Almost all CDC’s fund managers are locally based. From Accra to Lagos, Nairobi to Johannesburg, Colombo to Karachi and across India, CDC’s fund managers have local offices that understand and serve the immediate and wider regions. 3.17 60% of CDC’s fund managers are managing capital on behalf of investors for the first time. Most of these fund managers would not have got off the ground without CDC’s support. One of many examples of CDC’s pivotal role is the GEF Africa Sustainable Forestry Fund. In this case CDC identified the sustainable forestry sector as an area of opportunity for Africa. We invited potential fund managers to put their proposals to us and as a result of that process we selected a fund manager and committed US$ 50 million to the fund. Subsequently other investors have committed over US$ 50 million to this new fund alongside CDC. We are proud of this achievement which represents a tangible contribution to development. Frequently CDC will work with new managers over a long period of time to help them establish themselves. We provide support and advice on setting up the fund, attracting additional investors, monitoring the portfolio, reporting to investors and structuring the fund itself to deliver greatest possible value. This fund and all the subsequent jobs, investment and growth that will come out of it would not exist without CDC. 3.18 A list of CDC’s first-time fund managers is included in Appendix E. 3.19 CDC’s success depends on selecting good fund managers who support CDC’s developmental objectives and who know and understand their local business environment. Fund managers must also abide by our Investment Code which sets out our approach to ESG matters at the funds and portfolio company level. The Investment Code is included in Appendix A. 3.20 When DFID asked CDC to operate as a fund-of-funds in 2004, emerging markets were even less developed than they are currently. Private equity was virtually unknown in sub-Saharan Africa and investment levels in India were much lower than is presently the case. In 2004 CDC had investments with just three fund managers. That figure is currently 70. CDC is the largest provider of capital for private equity in India and sub- Saharan Africa, and is seen as the pioneer in these arenas, something of which the UK can be justifiably proud.
CDC and Value for Money 3.21 CDC has always been mindful of the need to deliver value for money to DFID and the UK taxpayer. 3.22 CDC’s achievements in terms of capital deployed, additional investments mobilised, jobs and livelihoods supported and tax revenues generated, have not required any new funding from DFID for over 15 years. 3.23 The UK government does not require CDC to pay tax and so the profits the company has made are re- invested each year in promising businesses in the developing world where a severe shortage of capital is holding those businesses back. 3.24 CDC’s success has enabled the company to continue investing in poor countries throughout the global economic downturn at a time when commercial investors were withdrawing their already low exposure to emerging markets. 3.25 All this has been achieved with a total staff of fewer than 50. The company’s operating costs in 2009 were 0.5% of net asset value. This compares favourably with the fund-of-funds industry benchmarks up of to 1%.
Measuring Impact and the Evaluation Process 3.26 CDC’s evaluation framework, benchmarked against those of other DFIs, is similar to and based on the system developed and used by the IFC for investments through financial intermediaries. The system, which was also developed with the support of DFID, is intended to be practical, simple and focused on investigating key information to assess development impact. 3.27 Funds are evaluated at the midpoint and at the end of the fund’s life. In 2009 seven of the 20 development impact evaluations were conducted by an independent assessor, Steward Redqueen (formerly Triple Value), a renowned emerging markets consultancy specialising in assessing and evaluating investment effectiveness. In line with industry best practice, CDC has increased the number of independent evaluations of funds to 50% in 2010. 3.28 Steward Redqueen’s (formerly Triple Value) findings and perspective on CDC’s development impact are included in Appendix F. cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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3.29 In 2009, CDC’s systems and processes to implement its Investment Code were also independently assured by KPMG. KPMG’s report is included in Appendix G.
Financial Performance Profitability of businesses and the consequent returns made by funds are vital indicators of success. There can be no sustainable development without financial success. Financial success is also a key consideration for commercial investors. By demonstrating profitability, CDC is better able to attract crucial third party capital to poor countries. CDC’s own financial returns ensure that we are able to continue investing much needed capital in developing economies without seeking additional funding from the UK Government.
Spandana Sphoorty Finanicial Services Around one third of the world’s poor live in India with millions of the poorest having little access to financial services to help improve their lives. Microfinance, with its emphasis on very small scale entrepreneurship, plays a vital role in development. In 2007 CDC’s capital was invested in Spandana Sphoorty, an Indian microfinance institution helping 2.4 million poor people borrow small amounts of money to start their own small scale enterprises. The company has over 1,300 branches spanning 12 provinces across India. Over half of the borrowers live in remote rural areas and nearly all—94%—are women. The average micro-loan made by the company is US$237. Loans range from a few dollars for daily wage labourers and traders to larger sums for micro-businesses often in agriculture. New products are also being pioneered and the company recently launched a maternity hospital for low-income women. Spandana Sphoorty has 900 employees and paid US$14 million in local taxes to the Indian government in 2009. It is a profitable institution, which means the company is sustainable and can therefore continue to help poor people at the very bottom ‘of the pyramid’ find a way out of poverty in the longer term.
Economic Performance This dimension of our impact assessment looks at how investments have generated benefits for the local economies in terms of commercially successful and growing businesses that provide jobs and generate taxes.
ESG This dimension examines the adherence of fund managers and their portfolio companies to CDC’s Investment Code. It also covers the improvements portfolio companies are making, with the assistance of fund managers, to their practices and standards on ESG matters.
Private Sector Development CDC wants to play a role in developing the private sector in poorer economies by investing in funds which in turn invest capital in promising businesses. Understanding the extent to which we are achieving this aim is an important element of assessing our impact. We look for broader private sector development effects including: — increased investment of commercial capital alongside CDC; — more efficient capital markets; and — improvements to the regulatory environment as a result of contributions from fund managers. 3.30 Finally we evaluate CDC’s specific impact against two further considerations. The first is CDC’s added value to fund managers such as in helping to shape their investment thesis, upgrading their professional skills and helping them to improve their ESG management. The second is CDC’s impact in terms of attracting third party capital into funds.
Development Impact Evaluation Results for 2009 3.31 The results of 2009’s evaluation process, along with a summary of CDC’s monitoring and evaluation framework and indicators, are included in Appendix H. Out of the seven funds evaluated, six were considered to have a satisfactory or better development outcome. CDC’s effectiveness was rated at least satisfactory for all seven funds.
Sierra Investment Fund, Sierra Leone Sierra Leone has made real economic and political progress since the end of the civil war in 2002 and its democratic government is keen to attract foreign investment. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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The country has been heavily reliant on donor funding and until recently has been ignored by investors because of its perceived problems. But Sierra Leone has experienced strong economic growth, averaging about 7% annually since 2005. In 2009, CDC became the first DFI to make a private equity investment focused solely on Sierra Leone since the end of the civil war. CDC’s US$ 5 million investment in the locally run Sierra Investment Fund is the first of its kind in the country. Sierra Investment Fund provides financial backing to entrepreneurs and has already made investments in local businesses including Ice Ice Baby, a local ice producer, and Sierra Fishing Company which is the largest fishing business in the country. The investment will provide new jobs and services for the country’s people. CDC anticipates that its commitment to the fund will reap profits that can be re-invested in other businesses in the years ahead.
Conclusion 4.1 CDC is a highly successful DFI, with more investments in the poorest countries of the world than any other bilateral DFI. Its development impact is high and at the same time it is financially successful—thereby creating even more resources for investing in those poor countries. 4.2 The task of assessing development impact is complex and challenging. Nonetheless, it is essential. CDC is investing public money and the organisation must account for the difference it is making in supporting the private sector in the developing world. 4.3 Since 2004 and the introduction of the fund-of-funds model, much has been achieved. Although the scale of investment needed in poor countries is still immense, progress is being made and CDC has played a part in that. 4.4 However, we recognise the limitations of the model. We acknowledge the need for change and are open to new and creative ideas. The consultation process recently announced by DFID will help to inform how CDC should adapt its model. Initial ideas include: — providing debt and guarantees, where there is still a need for capital; — investing directly with carefully selected partners, enabling a more focused approach on sectors and geographies that are of priority; and — exploring new innovative ways of investing, providing these have the long term potential to attract third party capital. 4.5 CDC is a developmentally ambitious organisation. We welcome the opportunity to explore effective and imaginative ways of putting UK government capital to work in promising businesses in the poor countries of the world to help them grow, create jobs and contribute to lasting prosperity for all.
APPENDIX A CDC’s Investment Code CDC’s mission is to generate wealth in emerging markets, particularly in poorer countries, by providing capital for investment in sustainable and responsibly managed private sector businesses. CDC invests in the creation and growth of commercially viable private businesses in poor countries. Commercially sustainable businesses, supported by CDC, play a vital part in economic development: they employ and train people, pay taxes, invest in research and development, and build and operate infrastructure and services. This contributes to economic growth, which benefits poor people. CDC also mobilises private investment in these markets both directly and by demonstrating profitable investments. Sustainable private sector development requires responsible business management of environmental, social and governance (“ESG”) matters. This Investment Code defines CDC’s principles, objectives, policies and management systems for sustainable and responsible investment with respect to ESG.2 It also includes an Exclusion List, which specifies businesses and activities in which CDC will not invest.3
1. Principles CDC, and the businesses in which its capital is invested, will: — comply with all applicable laws; 2 CDC’s Investment Code is compatible with the 2006 International Finance Corporation (“IFC”) Policy and Performance Standards on Social and Environmental Sustainability (“IFC Performance Standards”). See www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards. A Fund Manager that follows the IFC Performance Standards fulfils the requirements on the Environment and Social Matters set out in this Investment Code. The Investment Code is also compatible with the 2007 agreement for common environmental and social standards among the European Development Finance Institutions (“EDFI Rome Consensus”). 3 CDC’s Exclusion List is compatible with those of the IFC and the EDFI Rome Consensus. cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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— as appropriate, minimise adverse impacts and enhance positive effects on the environment, workers, and all stakeholders; — commit to continuous improvements with respect to management of the environment, social matters and governance; — work over time to apply relevant international best practice standards,4 with appropriate targets and timetables for achieving them; and — employ management systems which effectively address ESG risks and realise ESG opportunities as a fundamental part of a company’s value.
2. Objectives and Policies 2(a) The environment Objectives — To minimise adverse impacts and enhance positive effects on the environment, as relevant and appropriate, from the businesses in which CDC’s capital is invested. — To encourage the businesses in which CDC’s capital is invested to make efficient use of natural resources and to protect the environment wherever possible. — To support the reduction of greenhouse gas emissions which contribute to climate change from the businesses in which CDC’s capital is invested.5
Policy Businesses in which CDC’s capital is invested will: — operate in compliance with applicable local and national laws (as a minimum); — assess the environmental impact of their operations as follows: — identify potential risks and appropriate mitigating measures through an environmental impact assessment where business operations could involve loss of biodiversity or habitat, emission of significant quantities of greenhouse gases, severe degradation of water or air quality, substantial solid waste or other significant negative environmental impacts;6 and — consider the potential for positive environmental impacts from business activities; and — take appropriate actions to mitigate environmental risks, ameliorate environmental damage, and enhance positive effects as follows: — where an activity is assessed to present significant environmental risks, work over time to apply the relevant IFC policies and guidelines,7 if these are more stringent than local legislation, with appropriate targets and timetable for improvements; and — as appropriate, work over time towards international environmental best practice standards.8
2(b) Social matters 2(b)(i) Labour and working conditions Objectives — To require the businesses in which CDC’s capital is invested to treat all their employees and contractor fairly and to respect their dignity, well-being and diversity. — To encourage the businesses in which CDC’s capital is invested to work over time towards full compliance with the International Labour Organization (“ILO”) Fundamental Conventions9 and with the United Nations (“UN”) Universal Declaration of Human Rights.10 4 As referenced in this Investment Code and as may develop over time. 5 In line with the 1994 United Nation Framework Convention on Climate Change and the associated 2005 Kyoto Protocol (“UN Framework Convention”), see www.unfccc.int/2860.php as may be amended from time to time. 6 Activities with potential significant adverse environmental impacts that are diverse, irreversible or unprecedented; mindful of potential cumulative, secondary or synergistic impacts that may occur as a consequence. 7 The IFC Performance Standards and the 2007 IFC Environmental, Health and Safety Guidelines (“IFC EHS Guidelines”), as may be amended from time to time and adopted by CDC. IFC EHS Guidelines include general guidelines and industry sector guidelines for forestry, agribusiness/food production (including fisheries), general manufacturing, oil and gas, infrastructure, chemicals (including pharmaceuticals), mining and power. See www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards and www.ifc.org/ifcext/policyreview.nsf/Content/EHSGuidelinesUpdate. 8 Including the range of internationally certifiable environmental standards issued by the International Organization for Standardization (“ISO”), the ISO 14000 series, notably including standards for environmental management systems (ISO 14001) and greenhouse gas emissions (ISO 14064–65), as may be amended from time to time. See www.iso.org 9 The ILO Fundamental Conventions are the Conventions on Freedom of Association and Collective Bargaining; Forced Labour; Child Labour; and Non-Discrimination, as may be amended from time to time. See www.ilo.org/ilolex/english/docs/ declworld.htm for the texts of these Conventions and a list of the countries that have ratified each of them. 10 See www.un.org/Overview/rights.html cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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Policy Businesses in which CDC’s capital is invested will: — comply with applicable local and national laws (as a minimum); — not employ or make use of forced labour of any kind; — not employ or make use of harmful child labour;11 — pay wages which meet or exceed industry or legal national minima; — treat their employees fairly in terms of recruitment, progression, terms and conditions of work and representation, irrespective of gender, race, colour, disability, political opinion, sexual orientation, age, religion, social or ethnic origin, or HIV status; — allow consultative work-place structures and associations which provide employees with an opportunity to present their views to management; and — for remote operations involving the relocation of employees for extended periods of time, ensure that such employees have access to adequate housing and basic services.
2(b)(ii) Health and safety Objectives — To attain safe and healthy working conditions for employees and contractors of the businesses in which CDC’s capital is invested. — To safeguard the health and safety of all those affected by the businesses in which CDC’s capital is invested.
Policy Businesses in which CDC’s capital is invested will: — comply with applicable local and national laws (as a minimum); — assess the health and safety risks arising from work activities; and — take appropriate actions to eliminate or reduce risks to health and safety as follows: — where an activity is assessed to present significant health and safety risks,12 work over time to apply the relevant IFC policies and guidelines,13 if these are more stringent than local legislation, with appropriate targets and timetable for improvements; and — as appropriate, work over time towards international best practice standards for health and safety.14
2(b)(iii) Other social matters Objectives — To be objective, consistent and fair with all stakeholders of the businesses in which CDC’s capital is invested. — To recognise and, as appropriate, promote the social development impact from the businesses in which CDC’s capital is invested.
Policies Businesses in which CDC’s capital is invested will: — take account of their impact on employees, contractors, the local community and all others affected by their operations as follows: — identify potential adverse effects and appropriate mitigating measures through a social impact assessment in cases involving resettlement, critical cultural heritage, indigenous peoples, non- local labour or other issues where the negative impact could be significant;15 and — consider social development contributions; and 11 As defined by the ILO C138 Minimum Age Convention from 1973 and the ILO C182 Worst Forms of Child Labour Convention from 1999. See www.ilo.org/ilolex/english/docs/declworld.htm 12 Activities that could have a severe health or safety impact for workers or affected communities. 13 The IFC Performance Standards and the IFC EHS Guidelines, as may be amended from time to time and adopted by CDC. See www.ifc.org/ifcext/enviro.nsf/Content/ PerformanceStandards and www.ifc.org/ifcext/policyreview.nsf/Content/ EHSGuidelinesUpdate 14 Including OHSAS 18001, the international occupational health and safety management system specification, and industry specific international good practice standards related to the safety of product use, eg the international Good Manufacturing Practice (“GMP”) standards for food and pharmaceutical products promoted by the World Health Organization (“WHO”), see www.who.org 15 Activities with potential significant adverse social impacts that are diverse, irreversible or unprecedented. cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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— take appropriate actions to mitigate risks, ameliorate negative impacts, and enhance positive effects.16
2(c) Governance: Business integrity and good corporate governance Objectives — To ensure that CDC, and the businesses in which CDC’s capital is invested, exhibit honesty, integrity, fairness, diligence and respect in all business dealings. — To enhance the good reputation of CDC. — To promote international best practice in relation to corporate governance in the businesses in which CDC’s capital is invested.17
Policy CDC, and the businesses in which CDC’s capital is invested, will: — comply with all applicable laws and promote international best practice,18 including those laws and international best practice standards intended to prevent extortion, bribery and financial crime; — uphold high standards of business integrity and honesty; — deal with regulators in an open and co-operative manner; — prohibit all employees from making or receiving gifts of substance in the course of business; — prohibit the making of payments as improper inducement to confer preferential treatment; — prohibit contributions to political parties or political candidates, where these could constitute conflicts of interest; — properly record, report and review financial and tax information;19 — promote transparency and accountability grounded in sound business ethics; — use information received from its partners only in the best interests of the business relationship and not for personal financial gain by any employee; — clearly define responsibilities, procedures and controls with appropriate checks and balances in company management structures; and — use effective systems of internal control and risk management covering all significant issues, including environmental, social and ethical issues.
3. Exclusions CDC’s capital will not be invested in the following businesses or activities: — production of or trade in any product or activity deemed illegal under applicable local or national laws or regulations, or banned by global conventions and agreements, such as certain: — hazardous chemicals, pesticides and wastes;20 — ozone depleting substances;21 and — endangered or protected wildlife or wildlife products;22 — production of or trade in arms, ie, weapons, munitions or nuclear products, primarily designed or primarily designated for military purposes; or — production of, use of or trade in unbonded asbestos fibres.23 CDC’s capital will not be invested in businesses for which the following activities or products are, or are intended to be, a significant source of revenue: 16 As relevant, by applying IFC Performance Standards on Land Acquisition and Involuntary Resettlement; Indigenous Peoples; and Cultural Heritage; as may be amended from time to time and adopted by CDC. See www.ifc.org/ifcext/enviro.nsf/Content/ PerformanceStandards. 17 Including the 2004 Organisation for Economic Cooperation and Development (“OECD”) Principles of Corporate Governance, as may be amended from time to time. See www.oecd.org 18 Including the 2005 UN Anti-Corruption Convention, see www.unodc.org/unodc/en/treaties/CAC/index.html; the 1997 OECD Anti-Bribery Convention, see www.oecd.org; and, as relevant, the 2005 Extractive Industries Transparency Initiative (“EITI”), see www.eitransparency.org; as may be amended from time to time. 19 CDC promotes the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), see www.iasb.org; and the International Private Equity and Venture Capital Valuation Guidelines (“IPEVC”), see www.privateequityvaluation.com 20 Including those specified in the 2004 Stockholm Convention on Persistent Organic Pollutants (“POPs”), see www.pops.int; the 2004 Rotterdam Convention on the Prior Informed Consent Procedure for Certain Hazardous Chemicals and Pesticides in International Trade, see www.pic.int; and the 1992 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, see www.basel.int; as may be amended from time to time. 21 As covered in the 1999 Montreal Protocol on Substances that Deplete the Ozone Layer, see www.ozone.unep.org, as may be amended from time to time. 22 As covered in the 1975 Convention on International Trade in Endangered Species or Wild Flora and Fauna (“CITES”), see www.cites.org, as may be amended from time to time. 23 This does not apply to purchase and use of bonded asbestos cement sheeting where the asbestos content is less than 20%. cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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— gambling; — pornography; or — tobacco or tobacco related products.24
4. Management Systems for CDC’s Fund Managers25 In order to implement CDC’s Investment Code effectively, CDC requires its Fund Managers to enter into a formal agreement pursuant to which each Fund Manager commits to an investment undertaking similar in substance to sections 1–4 of this Investment Code.26 Where Fund Managers have effective control or significant influence over portfolio companies,27 CDC requires its Fund Managers to procure that such portfolio companies sign an undertaking confirming that they will operate in line with sections 1–3 of this Investment Code. CDC also requires its Fund Managers to establish and maintain ESG management systems 28 which: — assess the impact of all new investments on ESG matters as an integral part of the investment appraisal process; — give new investments a risk rating on ESG issues to determine the appropriate level of management and monitoring; — if an investment is made despite identified shortcomings in relation to ESG issues, or if any issues would arise during the investment period, assist the portfolio company concerned to develop an action plan to address such issues, with appropriate targets and timetable for improvements; — encourage the managers of portfolio companies to work towards continuous improvements in these areas, with targets for improvements as appropriate; — encourage the managers of portfolio companies to adopt and implement policies relating to ESG matters, particularly where businesses entail significant risks; — monitor portfolio companies’ performance on ESG matters and their progress towards relevant action plans and targets for improvements; — monitor and record incidents involving portfolio companies that result in loss of life, material effect on the environment, or material breach of law, and promote appropriate corrective actions; and — consider sections 1–3 of this Investment Code in all investment and divestment activities. To demonstrate the implementation of this Investment Code, CDC requires its Fund Managers to: — report annually on the implementation of their ESG management systems and on the performance of portfolio companies against sections 1–3 of this Investment Code in a format acceptable to CDC;29 — set targets for improvements where appropriate; and — as soon as possible inform CDC about incidents involving portfolio companies that result in loss of life, material effect on the environment, or material breach of law, and any corrective actions taken.
5. Management Systems for CDC CDC will: — assist its Fund Managers as appropriate to establish and maintain ESG management systems; — monitor the implementation of the Investment Code through its Fund Managers’ annual reports, with verifications as appropriate; — evaluate its Fund Managers’ implementation of the Investment Code periodically, using internal and external sources as appropriate, usually: — at the end of a fund’s investment period or the half-way point of the duration of a fund, which would typically be five years after a standard fund has commenced; and 24 Except, in the case of tobacco production only, with an appropriate timeframe for phase-out. 25 For the purposes of the Investment Code, “Fund Manager” means (i) investment fund managers managing capital on behalf of CDC; (ii) financial institutions managing and/or investing capital on behalf of CDC; and (iii) other intermediated institutions managing and/or investing capital on behalf of CDC 26 By side letter or equivalent agreement. 27 A Fund Manager will be deemed to have significant influence over a portfolio company where its fund has (i) an ownership interest in the portfolio company in excess of 20%, which is presumed to be a level that allows for participation in the financial and operating policies of a portfolio company (if the percentage is lower but gives rise to the same participation, this will also meet the definition of significant influence); or (ii) board representation to a level that allows for participation in determining the financial and operating policies of the portfolio company; or (iii) rights to influence the financial and operating policy decisions of the portfolio company pursuant to a shareholders’ or similar agreement. 28 Further guidance on ESG management systems and assessments is provided in CDC’s Toolkit for Fund Managers, see www.cdcgroup.com. Guidance on environmental and social management systems and assessments is provided in IFC Performance Standard 1, see www.ifc.org/ifcext/enviro.nsf/Content/ PerformanceStandards. ISO 14001 is a certifiable international standard to help organisations minimise how their operations negatively affect the environment, see www.iso.org 29 A suggested format for ESG reporting is available on CDC’s website, while other reporting formats could be acceptable. See www.cdcgroup.com cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
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— at the end of the duration of a fund, which would typically be 10 years after a standard fund has commenced; — in instances where CDC invests directly and independently, establish and maintain ESG management systems substantially similar to those described above for its Fund Managers; — consider the cumulative effects of CDC’s investments with respect to the Investment Code and: — minimise adverse effects; — maximise development impact; and — promote synergies; — identify major risks and opportunities associated with climate change in investments and potential investments made by its Fund Managers and proactively promote through those Fund Managers the application of international best practice standards in the reduction of emissions of greenhouse gases;30 — incorporate lessons learned into CDC’s future investment strategy; — keep up-to-date on new developments with respect to relevant international agreements and best practice standards; and — review this Investment Code periodically to ensure its continuing suitability and effectiveness.
30 In line with the UN Framework Convention, as may be amended from time to time, and including IFC Performance Standards, IFC EHS Guidelines, and ISO 14064–65, as may be amended from time to time and adopted by CDC. See www.unfccc.int/ 2860.php, www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards, www.ifc.org/ifcext/policyreview.nsf/Content/EHSGuidelinesUpdate and www.iso.org cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
Ev 76 International Development Committee: Evidence Evaluations As relevant/appropriate When to record APPENDIX B % of portfolio companiesemployment with increase in % of portfolio companiestaxes with paid increase in % total portfolio increase:% EBITDA total portfolio increase:% Turnover total portfolio increase:% Employment total portfolio increase:% Taxes of paid portfolio companiesclassification with at SME time ofrelevant) acquisition (if % of portfolio companieslow-income which Target? markets serve / populationsrelevant) (if Target? IRR for each realizedTotal exit investment (%) ($) Total commitment ($) Investment period (yrs) Target businesses that generate employmentand pay % taxes of portfolio companies with increase in turnover markets > financial return to investors CDC Indicators for Monitoring and Evaluation (M&E) Always Development Outcome Economic performanceInvestee company level*** > Contributions commercially to viable economic and growth growing increases % of portfolio companies with EBITDA 1. Financial performanceFund level Fund managers’ ability to attract Net IRR of fund * commercial capital to poor country Target Performance area Concept Indicators At investment Annual monitoring Mid Final CDC’s Indicators for Monitoring and Evaluation cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
International Development Committee: Evidence Ev 77 Evaluations As relevant/appropriate When to record status) Raising of successor fund? Non-DFI financing in successor%) fund ($; Debt or other externalinvestee financing companies raised ($) by Average holding period forcompanies investee (yrs) Multi-country investments/operations(LICs, SSA; % capital) Type of investment Target? (growth,expansion; privatization; VC; etc.) Target? Type of realised exitsMBO, (IPO, sale trade to sale, investor(s)) companies’ governance structure, track record of governance issues management system ESG serious incidents performance record effects:> more efficient capital> markets regulatory improvements managers services and infrastructure Local capacity building Local fund manager? (Y/N; change in DFIs being invested other funds/fund Local? environment, social matters andgovernance (ESG)> fund managers’ ESGsystems management and related the risks ESG and healthof performance opportunities and portfolio safety companies performance record and other social matters Social: Labour and working conditions, Governance: Quality of portfolio Risks and targets Risks and targets CDC Indicators for Monitoring and Evaluation (M&E) Always For fund managerPrivate sector development Broader privateDirectly sector related development to theinvestment Third party capital from DFIs and/or non- > benefits to customers from increased availability Frontier of fund goods, manager? (Y/N; change in Rating status) Quality of and improvements to GPs ESG Quality ESG performanceInvestee company level*** practices with respect to the Responsible investment and business Environment: Portfolio companies addressing environmental and climate Risks and targets Performance area Concept Indicators At investment Annual monitoring Mid Final cobber Pack: U PL: CWE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
Ev 78 International Development Committee: Evidence Evaluations As relevant/appropriate When to record CDC Frontier fund manager whoseestablishment can be attributedevidence with to CDC? (Y/N;status) change in Local fund manager whosecan establishment be attributed with(Y/N; Local? evidence Rating change to in CDC? status) Raising of successor fund,of with attribution evidence to CDC Other factors, eg increaseliquidity in for market distressed assetsExamples funds of CDC helpingraising GPs (qualitative; with $) fund Target? % increase in PEGDP investment as share of (regulations, etc.) Enhancements to sectors wherecompanies portfolio operate (if available)**** Target? other investors> focus on commercial capital managers, with evidence of attribution to DFIs being invested other funds/fund CDC Indicators for Monitoring and Evaluation (M&E) Always CDC Effectiveness Investment contextContextual or directly related2. Catalytic effects CDC’s direct role in bringing in Third party capital from Enhancements DFIs Change to and/or in investment non- no. environment of PE Target? firms in the market Updated annually in CDC’s knowledge management system Performance area Concept Indicators At investment Annual monitoring Mid Final cobber Pack: U PL: CWE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04
International Development Committee: Evidence Ev 79 Evaluations ver time will be valued uation covers available sectors / geographies where As relevant/appropriate lecom penetration); new technologies When to record improve the way fundinvest managers CDC’s capital, for> example: to shape athesis fund’s or investment to alignment, terms GP improving> (eg strategy, to shaping enhancing improve terms, fund fostering management managers’ systems ESG> carry to structure recruit or performance orexpertise other (eg contract for matters) ESG key responsible management technical and successful investment or management other matters) systems, corporate governance CDC structure support to improve fund ESG CDC Indicators for Monitoring and Evaluation (M&E) Always : ESG management systems and performance will be assessed relative to CDC’s Investment Code and the risk level of portfolio companies. Improvements o Added value CDC’s direct contributions to Examples of CDC qualitative assistance Target? Performance area Concept Indicators At investment Annual monitoring Mid Final in the evaluation.they The operate. investment portfolio of* each For fund that manager asset will class,** type be Including of risk labour fund rated and manager, working based and*** conditions, / on ESG health or its and geography. issues portfolioinformation safety, and and companies at other that and improvements social time. the should matters. **** inherent be If risk any reviewed levels andor for of as other the all per inventions. available portfolio information, companies eg, in infrastructure development high-risk (eg, sectors power, roads, and water); for availability others of products as or appropriate. services The (eg, te mid-point eval Note cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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APPENDIX C CDC’s Performance History 2004 2005 2006 2007 2008 2009 £m £m £m £m £m £m
Total return after tax 179 426 375 672 (359) 207
New investments 200 156 257 412 436 359 Proportion in Africa 70% 57% 29% 53% 44% 61%
Portfolio cash generated 287 508 407 986 268 162
Value of investment portfolio 937 938 1,125 1,184 928 1,411 Proportion in Africa 42% 49% 49% 60% 56% 52% Proportion in Infrastructure and 44% 51% 46% 26% 24% 18% power
Outstanding commitments 378 833 914 1,601 1,972 1,561
Underlying portfolio companies 250 344 325 409 682 794
Number of funds 37 47 69 100 127 134
Number of fund managers 3 13 26 42 59 65 New fund managers in the year 1 10 13 16 17 6
APPENDIX D CDC Mobilising Third Party Capital 2004 2005 2006 2007 2008 2009 $m $m $m $m $m $m
CDC new commitments 853 188 852 1,865 876 335 Other investors’ commitments 498 1,580 3,595 5,025 8,653 3,599 alongside CDC
Third party mobilised on three year rolling basis* 2008–2010 (to date) 346% 2007–2009 278% 2006–2008 193% 2005–2007 142% * new basis since 1 January 2009 based on target markets and including tapering for later series of funds.
APPENDIX E List of First-Time Fund Managers Access Holdings Actis Capital Adlevo Capital Advanced Finance and Investment Group African Capital Alliance African Lion Altra Investments Ambit Pragma Ventures Amundi Aureos Capital Avigo Capital Partners cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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Berkeley Partners BTS Investment Advisors Business Partners Capital Today CITIC Capital Citigroup Venture Capital International CMIMC Development Partners International Equator Capital Partners Fountainvest Partners (Asia) Frontier GP Pte Ltd GroFin Helios Investment Partners Horus Development Finance JS Private Equity Kendall Court Keytone Capital Partners Kotak Mahindra Group Lok Capital ManoCap Minlam Asset Management Multiples Investment Advisers New Silk Route Advisors Rabo Equity Advisors Saratoga Capital Sphere Holdings Travant Capital Tripod Capital International Vantage Capital Ventureast Zana Capital
APPENDIX F Triple Value’s External Perspective on CDC’s Development Impact Measurement An external party, Triple Value has evaluated the performance of seven funds and also added a new component: an assessment of the socio-economic impact of a fund.
Triple Value: Our Insights into CDC’s Evaluation Process Triple Value’s work for CDC In 2009, Triple Value evaluated the performance of seven funds on behalf of CDC. Four evaluations concerned midterm evaluations of African funds while three evaluations were final evaluations of Asian funds. As described earlier in this report, our evaluation approach consisted of a combination of CDC’s evaluation methodology and Triple Value’s Socio- Economic Impact Assessment (SEIA) model. Each fund evaluation was based on an analysis of relevant information and documents and a judgement of a fund’s performance. Subsequently, interviews were conducted with people involved in the fund (including CDC staff, fund managers and representatives of portfolio companies). In addition, site visits to local fund management offices and portfolio companies were organised. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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In total, Triple Value visited eight fund management offices and 14 portfolio companies in six African countries.
As almost all Asian investments had been exited a long time ago, no visits were made in Asia. These evaluations were completed based on desk research and in-depth interviews with fund management and CDC staff.
The value add of an external view
The purpose of an external evaluation exercise is threefold.
Firstly, it provides an external judgement of a fund’s performance and thus enhances the independence of the evaluation. Secondly, it tests the effectiveness and robustness of CDC’s evaluation methodology. And thirdly, external evaluations enable CDC to compare the results with those of internally performed evaluations and judges whether these suffer from internal bias.
Main Findings
Out of the seven funds evaluated by Triple Value, six were considered to have a satisfactory or better development outcome. And CDC’s effectiveness was rated at least satisfactory for all seven funds.
As the ratings of the 13 internal evaluations show very similar ratios (85% of funds have a satisfactory or better development outcome and 100% rate CDC’s effectiveness as more than satisfactory), this suggests that CDC’s evaluation methodology serves as a framework to assess a fund’s performance in an objective way.
While working with CDC’s methodology, we found that it is a thorough approach to perform an evaluation. Naturally, we also came across some aspects where we think that the methodology needs to be modified or sharpened and CDC is currently working on this.
Conclusion
We think that external evaluations contribute to a transparent and accountable fund evaluation process. By producing external evaluations side by side with those produced internally, a strong combination is built based on in-depth knowledge of the fund’s details and an outside perspective on fund performance and CDC investment decisions. The assessment of the wider socio-economic impact of a fund provides information on the development impact of supply chains that was not previously available, although it does not include all aspects of development.
Compared to CDC staff who live with the funds every day, for external evaluators it can be a challenge to acquire sufficient knowledge of a fund’s details in order to form a robust opinion on its performance. However, by working closely with CDC staff and fund managers this issue is substantially alleviated. Moreover, starting with a completely fresh mind has the advantage that new insights can be identified. Evaluating CDC’s own effectiveness is naturally more objectively done by an outsider.
Given the different character and dynamics of internal and external evaluations and the strong combination they make towards an overall evaluation approach, we agree with CDC that outsourcing approximately half of its fund evaluations contributes to a strong approach. Comparison of evaluation ratings: CDC compared to Triple Value (development outcome - % distribution) 80 62% 57% 60
29% 40
23% 15% 20
0 Excellent Successful Satisfactory Below Unsatisfactory Poor expectation
Triple Value (7 evaluations) CDC (13 evaluations) cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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APPENDIX G KPMG’s Independent Assurance Report to CDC Group plc Scope KPMG LLP was engaged by CDC Group plc (‘CDC’) to provide limited assurance over CDC’s description of its processes to implement its Investment Code in pages 64 to 67 of the CDC Development Review 2009 (‘the Development Review’).
Responsibilities The preparation, maintenance and integrity of CDC’s Development Review, including the pages over which we provide this opinion, are the sole responsibility of the directors of CDC. Our responsibility is to express our conclusions in relation to the above scope and in accordance with the terms of our engagement letter dated 26 January 2010. This report is made solely to CDC in accordance with the terms of our engagement. Our work has been undertaken so that we might state to CDC those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than CDC for our work, for this report, or for the conclusions we have reached.
Which assurance standards and criteria did we use? We conducted our work in accordance with International Standard on Assurance Engagements 3000 (ISAE 3000): Assurance engagements other than Audits or reviews of Historical information, issued by the International Auditing and Accounting Standards Board. We conducted our engagement in compliance with the requirements of the IFAC Code of Ethics for Professional Accountants, which requires, among other requirements, that the members of the assurance team (practitioners) as well as the assurance firm (assurance provider) be independent of the assurance client. The IFAC Code also includes detailed requirements for practitioners regarding integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. KPMG LLP has systems and processes in place to monitor compliance with the IFAC Code and to prevent conflicts regarding independence Section five of CDC’s Investment Code, as set out in Appendix 1 (pages 80 to 84) of the Development Review, describes CDC’s responsibilities and management system for implementing the Investment Code, and we have used that description as the basis of our evaluation.
What did we do to reach our conclusions? We planned and performed our work to obtain all the evidence, information and explanations that we considered necessary to understand and review CDC’s processes to implement its Investment Code. Our work included the following procedures and evidence-gathering activities: — Interviews with the CEO, Board members, senior management, and relevant staff at CDC to assess the approach to handling material issues, controls in place, incentives and penalties, and escalation procedures; — interviews with 12 out of 16 investment professionals to discuss their roles in implementing the Investment Code and the activities they carried out as part of screening, due diligence, monitoring and evaluation procedures of selected funds and portfolio companies; — Interviews with the ESG team to discuss work plans, training, internal controls and guidance documents; — Examination of the documentation produced at different points in the investment lifecycle, for a risk-based selection of funds (21 funds out of 134 funds); — Examination of internal and external documentation including correspondence, minutes of meetings, reports and presentations relating to the implementation of the Investment Code; — Examination of training and guidance documentation, including the Toolkit for fund managers, and attended an internal training session for CDC staff; and — Examination of other relevant sections of the Development Review to evaluate whether any disclosures are inconsistent with our findings.
Inherent limitations As outlined on page 8 and 9 of the Development Review, CDC operates as a fund of funds in the Private Equity industry, in which relationships are generally trust-based and therefore the nature and number of checks between parties may vary significantly. As CDC is one step removed from the companies which ultimately receive its funds, CDC is inherently limited in its ability to perform compliance checks of these companies’ performance against minimum requirements of the Investment Code. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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Emphasis of matter
Our work covered the design of the processes for implementation of the Investment Code and the extent to which those processes have been implemented in relation to a selection of funds. Our work did not include an assessment or test of adherence of individual funds and portfolio companies to all the principles of the Investment Code.
In the course of our work we noted that CDC’s processes have been evolving over time. Therefore whilst CDC has made efforts to apply additional reporting requirements to older funds this has not always been possible or appropriate, for example, in the case of legacy assets as described on page 67.
All of our work was carried out at CDC, not at fund managers or portfolio companies, and included examination of evaluation reports carried out by CDC and Triple Value. We also draw your attention to the process improvements planned by CDC in their description of the implementation of the Investment Code.
Our Conclusion
Based on the scope of our engagement and the work described above, nothing has come to our attention to suggest that CDC’s description on pages 64 to 67 of the processes to implement the Investment Code is not fairly stated. Vincent Neate Partner For and on behalf of KPMG LLP 23 April 2010
APPENDIX H
CDC’s Monitoring and Evaluation Framework and Summary of the Evaluation Results
CDC’S MONITORING AND EVALUATION FRAMEWORK AND INDICATORS Development outcome Concept Typical performance indicators
Financial performance * Fund Managers’ ability * Net IRR of funds versus investment to attract commercial targets capital to poor country * IRR for each exit markets > financial return to investors Economic performance * Contributions to * Employment economic growth * Taxes paid > commercially viable and * EBITDA and turnover (increase over growing businesses that time) generate employment and * SMEs and low income reach (if pay taxes relevant) ESG performance * Responsible investment * ESG issues and improvements over and business practices time with respect to the * Development outlays (if available) environment, social * Environmental products/services (if matters and governance relevant) (ESG) > fund managers’ ESG management systems and the ESG performance of portfolio companies Private sector development * Broader private sector * Third party capital development effects: * Local capacity building > more efficient capital * Enhancements to sectors and benefits markets for > regulatory consumers eg, increase in telecom improvements penetration, new infrastructure, > benefits to customers increased access to power and financial from increased availability services of goods, services and infrastructure cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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CDC effectiveness Concept
Catalytic effects * CDC’s direct role in bringing in other investors > focus on commercial capital Added value * CDC’s direct contributions to improve the way fund managers invest CDC’s capital, for example: > to shape a fund’s investment thesis or terms > to improve fund managers’ ESG management systems > to recruit or contract key technical expertise for responsible and successful investment management
2009 Evaluations in Summary — 20 funds. — 11 fund managers. — 313 companies. — 15 mid-point evaluations, 5 final evaluations. — CDC’s evaluation work in 2009 covered funds investing in companies of all sizes and in all sectors. — 10 funds investing in Africa, 8 funds investing in Asia. — 13 evaluations conducted by CDC. — 7 conducted by external consultants.
Further written evidence submitted by CDC Group plc Breakdown of the costs of the salary and bonus payments for CDC in 2009. Salary: £3.2 million. Short-term bonus payments: £1.5 million. Long-Term Incentive Payments: £1.3 million. Total: £6 million. This total represents around 45% of the organisation’s costs which is not unusual in a company that has no assets other than its employees. Three additional questions on remuneration were asked, as follows:
5.1 What percentage of an employee’s salary can be awarded in an annual bonus? 5.2 In terms of the LTIP, is it right that the highest possible pay-out is 240% of basic salary? 5.3 What percentage of pay is contingent on performance? CDC Response to the IDSC’s Supplementary Questions on Remuneration CDC’s remuneration framework was agreed with DFID and is benchmarked against the lower quartile of the fund-of-funds industry. The principle of relating pay to performance is central to the framework. CDC’s performance is assessed in terms of financial sustainability and development impact and all bonus awards are made within the context of successful performance.
5.1 and 5.3 What percentage of an employee’s salary can be awarded in an annual bonus? What percentage of pay is contingent on performance? The percentage of salary that can be awarded as an annual bonus varies and is dependent on a number of factors. All these factors are based on performance at the individual and company levels. The contribution the person’s role within CDC makes to the overall performance of the company is one factor. For example, a member of the investment team has a higher direct impact in this respect than a member of the Human Resources or Finance Teams. In addition, the degree of responsibility and seniority of the individual within the company is a factor. Individual performance is assessed and monitored through an annual performance appraisal system and is reviewed by the company’s Human Resources Committee. At the beginning of each year, objectives are agreed between line managers and employees. Individuals’ objectives are aligned to the company’s objectives. Therefore, any annual bonus awarded takes into account both company and individual performance. Any bonus payment is contingent on the company achieving or exceeding the targets set by the Remuneration Committee in line with the overall framework set by DFID. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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Performance against objectives is monitored and reviewed regularly and an annual appraisal is conducted at the end of the year. Each line manager is asked to score employee performance against a range of considerations. Performance and the attainment of high standards, therefore, are fundamental to the appraisal system and to the awarding of any bonus. For bonuses paid in March 2010 for 2009 performance, the average percentage was 47.5% of salary.
5.2 In terms of the LTIP, is it right that the highest possible pay-out is 240% of basic salary? The Long Term Incentive Plan (“LTIP”) is based on the company’s financial and developmental performance over the longer term. The assessment is made over a three year rolling basis. Any bonuses paid under the plan are therefore entirely dependent on CDC achieving the targets set by DFID under the remuneration framework. This means that if the company does not meet these targets, no bonuses are paid under the plan. For example, no LTIP payments will be made for the three year period ending in 2010 because the financial performance threshold has not been met. DFID revised the LTIP and an updated plan has been in place since 2008. Under the new plan, if CDC meets all the targets set by DFID and achieves an average portfolio annual return of 10% pa, the maximum pay-out for the CEO would be 0.83 times base salary.
1. What proportion of the investment decisions taken by CDC’s fund managers does CDC review? CDC’s intermediated model means that it is the fund managers who are responsible for day to day investment decisions and for the day to day oversight of the businesses in which CDC is invested. Before committing capital to a fund, CDC undertakes a lengthy process to ensure that each fund has a sound investment strategy, including specific parameters governing the sectors and geography in which the fund is permitted to make investments. Furthermore, fund managers must commit to an investment code that sets out the environmental, social and governance (ESG) standards to which investments must adhere, programmes to improve these where necessary, and an “exclusion list” of investments that are prohibited such as those in armaments. CDC receives quarterly reports from fund managers and reviews the progress of all funds on a bi-annual basis. Specific annual reporting on ESG matters is also required, including inherent ESG risk ratings and a quality assessment of ESG management systems at each portfolio company in the Fund as well as any ESG issues, realised improvements or future targets. Investments which are regarded as having a high ESG risk rating are visited on an as needed basis. Twice in the life of a fund a detailed evaluation to assess development impact is carried out. These evaluations, at least half of which are carried out by an independent consultant, consider the development outcome of a fund from the perspective of financial performance, economic performance, ESG performance and private sector development. CDC also reviews its own effectiveness in relation to raising the fund and assisting the fund manager.
2. What happens if CDC disagrees with an investment decision taken by a fund manager? What power can CDC exercise in that situation? As an intermediated investor, CDC conducts lengthy and thorough due diligence on its fund managers prior to committing capital to their funds. CDC’s investment decision is the decision whether or not to commit capital to a particular fund. The fund manager then has the responsibility to source transactions and to make the investment decisions following the fund strategy which will have been agreed with CDC. If CDC has concerns about a fund manager’s investment decisions or performance, it will typically raise those concerns through the seat it has on its investee funds’ advisory boards/committees. In the event that CDC and other investors conclude that a fund manager has acted negligently or fraudulently in relation to an investment decision (and that negligence or fraud is proven), the relationship may be terminated. Furthermore, if CDC is dissatisfied with a fund manager’s performance then a “without cause” termination right can typically be exercised, although in this scenario compensatory payments would usually be made to the outgoing fund manager.
3. How often is CDC in contact with its fund managers once CDC has made its investment? The frequency of contact varies between fund managers. As mentioned above, the minimum formal requirement is quarterly reports from fund managers, bi-annual reviews with CDC, and a specific annual report on ESG matters is also required. Any serious incident (for example, a fatality or material breach of law) is obliged to be reported immediately. In addition, CDC often sits on the fund managers’ advisory committees, as well spending time with fund managers on scheduled investor days. Visits are also made to investee companies, especially those that have been given a high ESG risk rating. On an informal basis, however, CDC will usually be in contact more frequently than this either by phone or by visiting the fund manager in their country of operation. cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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4. Information regarding the 2300 employees listed in the accounts A very small number of investee companies held directly by CDC Group plc are consolidated in the group accounts in 2009 under technical accounting rules. These investee companies are direct investments originating from CDC Group plc activity prior to 2004. These investments are managed for CDC Group plc by an external investment manager (Actis), and it should be appreciated that CDC Group plc does not set the terms or conditions of employment in the investee companies. The following data table (below) relates only to the remuneration of the employees of those investee companies consolidated in the group financial statements, and this data does not include CDC Group plc. Information regarding remuneration of direct employees of CDC Group plc has been provided separately by email sent to Emily Harrisson (Tuesday 14 December at 13.51). The figures are estimated totals for 2010, based on the information most recently reported to CDC Group plc for group accounting at 30 June 2010. Note that the total number of employees for these consolidated companies is now 1,110, down from 2,154 at year end 2009. This is principally due to the sale of the Globeleq companies, whose employees and wages are therefore no longer included in the CDC Group plc accounts. Average employee Estimated annualised Company numbers salaries 2010 2010 £000
Continuing operations African Forests Group Ltd & Kilombero Valley Teak Co Ltd 244 463 Tatepa Tea 200 122 DFCU 401 4061 Total—continuing operations 845 4646
Operations discontinued during 2010 Equatoria Teak Company Limited 258 373 Equatoria Teak (Services) Limited 7 39 Total—operations discontinued during 2010 265 413
Total—continuing and discontinued operations 1,110 5058
How we choose fund managers The investment profession is under-developed in many poorer countries and capacity building the industry is an important part of CDC’s development impact. We want to work with local fund managers and we do not generally support the “fly-in-fly-out” model used by some based in the West. The vast majority of our managers are local teams. We are looking for fund managers who know the local business environment, understand CDC’s development impact objectives and the importance of financial sustainability. We also only appoint managers who will abide by CDC’s Investment Code. We are looking for managers willing to come on the same journey as CDC and who are the best fit for us. We start the search for managers with a detailed market mapping of the particular region or country where we wish to invest to see what managers there are on the ground. If there are no suitable managers, we take the initiative and establish a fund. A good example of this is the GEF Africa Sustainable Forestry Fund. We recognised Africa’s potential in forestry, put out a tender for fund managers to make proposals, appointed a fund manager and invested US$50 million. We expect a further US$100 million to US$150 million to be committed alongside us. Often we help build a team on the ground. We work with individuals to bring a team together, provide practical help and support, give guidance on the prospective fund’s structure, advise on managing environmental, social and governance (“ESG”) matters and help identify possible investors. This is an important developmental contribution for CDC. 60% of our managers are managing private equity funds for the first time. CDC is also well-known in emerging markets and fund managers with good investment strategies and experience, frequently seek us out. Once we are ready to take things to the next stage, we conduct extensive due diligence on the fund, the prospective manager and all members of the team. This involves: agreeing with the fund manager the objectives of the fund; understanding fully how the fund will operate such as its geographic and sectoral spheres of operation; agreeing the types of transaction and financial instrument to be used; investigating the markets in which the fund will invest; checking and agreeing the governance arrangements; checking track records of the fund manager and the team; conducting thorough “know your client” and anti-money laundering checks; full referencing of the team; and so on. Detailed fund terms will also need to be agreed. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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All funds are regularly reviewed and constantly monitored. We look at what investments have been made and how the fund is performing against the strategy agreed. Funds are also reviewed for development impact at the midpoint and at the end of the fund, often using independent consultants. If an investment within a fund has ESG issues, then that investment is thoroughly monitored and appropriate action is agreed with the fund manager.
SMEs 17% of investee businesses are SMEs (149 out of 882). 15% of all our funds are SME funds (21 out of 139 funds). 7% of our funding has gone into SMEs. CDC’s Investment Policy set by DFID allows us to invest up to £25 million a year in SME funds in middle income countries.
Policy on offshore financial centres We do invest in funds domiciled in offshore financial centres because this is the most efficient way of pooling capital for investment in businesses in the developing world. We only invest through OECD’s “white list” offshore financial centres, with the exception of one fund from the mid-1990s for the Pacific Region which is domiciled in Vanuatu, currently on the OECD’s “grey list”, which means that it has committed to making reforms such that it could progress to the “white list”.
Local fund managers Helping to build capacity in the investment profession in poorer countries is an important part of CDC’s development impact. 61 of our 70 fund managers are based in the countries where CDC invests. That represents 87% of our fund managers. 96% of new investments made in 2010 (to the end of November) were made to local fund managers and 89% of CDC’s total portfolio of investments is with local fund managers.
How we measure additionality The system CDC uses to measure financial additionality has been agreed by DFID. We look firstly at how much was invested alongside us by other investors in the funds where our capital is at work. If the fund is with a first-time fund manager, CDC is deemed to have had a particularly catalytic effect. This is because first- time fund managers often find it hard to attract capital from private investors since they do not have the track record that other investors usually require. CDC’s presence in such funds acts as a “stamp of approval” for other investors. Secondly, we look at how much capital is from private investors and how much is from other DFIs. The long-term aim is to “crowd in” private investors. A high proportion of private investors investing alongside CDC in a fund also signifies CDC’s additionality. Thirdly, we look at how many of our funds reached their target fund levels. Since CDC began operating as a fund-of-funds, nearly 40% of funds to which we have committed capital have failed to reach their initial target size. This is an important indication of the extent to which poor countries struggle to attract investment. Finally, we review other additionality effects such as the value added by CDC in getting the fund up and running, contributions to environmental, social and governance standards, advice to the fund manager, and discussions with other investors.
Written evidence submitted by The Department for International Development Introduction CDC is a bilateral development finance institution (DFI) 100% owned by the UK Government through the Department for International Development (DFID). CDC’s website is at http://www.cdcgroup.com CDC’s objectives are: to invest in the creation and growth of viable private businesses in poorer developing countries to contribute to economic growth for the benefit of the poor; and to mobilise private investment in these markets both directly and by demonstrating profitable investments. CDC is classified by HM Treasury as a self-financing public corporation. It is a public limited company (plc) with its own board and is regulated by the FSA. DFID sets CDC’s Investment Policy (within which sits its Investment Code around environmental, social and governance standards) and its Remuneration Framework. Both Investment Policy and Remuneration Framework were last set in 2008. DFID does not get involved in CDC’s operational decisions: this responsibility lies with CDC’s Board and Management. cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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Since its restructuring in 2004, CDC has operated primarily as a private equity fund of fund. Under this business model, CDC commits capital to fund raised and managed by independent fund managers, the majority of whom are based in developing countries. The fund manager invests CDC’s money together with money committed by other investors, both public and private, in promising private companies in developing countries. Such investments are generally held for about five to eight years. During this time, CDC’s fund managers play a hands-on role in nurturing the companies in their portfolios and add value through the provision of business expertise and the promotion of responsible business practices. When the fund manager sells the investment, it returns the capital and any net profit to CDC and other investors. CDC re-cycles the proceeds from these investments into new commitments to fund. In this way CDC is self-financing. CDC has received no public money since 1995. The Secretary of State set out a range of intended reforms to CDC in his speech on Wealth Creation on 12 October, in which he noted that a public consultation will inform further these proposals. The consultation runs from the beginning of November 2010 to the end of January 2011.
Effectiveness of CDC Compared to Other Similar Institutions CDC’s effectiveness can currently be assessed through how it matches up to its 2008 Investment Policy targets and the development impact of its fund investments. There is less comparable evidence available around CDC’s effectiveness vis a vis other, similar bilateral and multilateral DFIs. This is in part due to the different models, objectives and areas of geographic focus employed by those institutions. (For example, CDC’s almost 100% fund of Funds private equity model is unique in the DFI sector. Other organisations have different instruments at their disposal and several have different ownership models, including private sector shareholders). CDC’s November 2008-revised Investment Policy focused CDC tightly on the poorer countries. Its Policy targets required that, for investment funds that CDC backs from January 2009 to 31 December 2013, more than 75% of total investment by CDC over the period must be in Low Income Countries (those with an annual GNI per capita of less than US$905) and more than 50% must be in sub-Saharan Africa. In 2009, 100% (£52 million) was invested in Low Income Countries, of which 96% was in Sub Saharan Africa. (Since its reorganisation in 2004, under a previous Investment Policy, CDC has also made 75% of new investments in the poorer developing countries and 64% in sub-Saharan Africa or South Asia, exceeding the targets set for it at the time). CDC has a greater proportion of its portfolio in poorer countries than other DFIs. In its 2009 report 31 the House of Commons Public Accounts Committee found that “CDC’s portfolio is much more focussed on poor countries than are the investment portfolios of other Development Finance Institutions. For example, CDC is investing more in poor countries than the combination of the German, Dutch and French Development Finance Institutions”. In 2008, CDC had some 56% of its portfolio in Africa, compared to 11% for the International Finance Corporation, 13% for DEG (Germany), 45% for Proparco (France), and 28% FMO (Holland).32 At the end of financial year 2010, the International Finance Corporation had 8.3% of its overall portfolio in Low Income Countries. To illustrate the contribution of CDC’s investments in its target countries, in 2009 CDC had capital invested in some 800 businesses in developing countries, employing some 733,000 people and paying annual taxes in excess of $2.8 billion to their governments. And in the last six years, CDC has committed £2.9 billion in the poorer countries of Africa, Asia and Latin America, which has played a role in attracting £24 billion of capital that private investors and other DFIs have also committed to those funds. Over the same period, CDC has also grown in value from £1 billion to £2.5 billion at the end of 2009. CDC began properly quantifying its development impact in 2008 with its first annual impact report which set out, on the basis of a model adapted from the International Finance Corporation’s Development Outcome Tracking System, its emerging evidence on impact of its post-2004 investment activities. In 2009, for example, of the 20 CDC-invested fund evaluations undertaken by CDC, 17 scored “satisfactory” or “successful” on development outcomes. Three were scored “below expectations”. Independent verification of its impact is also being increasingly used by CDC to ensure its veracity. CDC’s approach to development impact measurement has been since taken up by other bilateral DFIs including Swedfund. (CDC’s 2008 and 2009 reports can be found on CDC’s website, at the address shown above). The reforms proposed by the Secretary of State for International Development on 12 October 2010 and the feasibility of achieving desired results given the CDC’s current resources, including staffing The aim of the ambitious reforms proposed by the Secretary of State is to make CDC an essential ingredient to wealth creation in the poorest countries. The reforms will bring about a revitalised CDC driven by both 31 Investing for Development: the Department for International Development’s oversight of CDC Group plc. Eighteenth Report of Session 2008–09. 32 EDFI 2008 Comparative Analysis of EDFI Members, quoted in CDC’s Development Report 2008. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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development, as well as financial, returns and an organisation which has more clarity and ambition over what it does and where it works. The first reform proposed is that the fund of Funds model, which can lock up CDC’s capital for up to 10 years, should make up no more than a part of a broader and more actively managed portfolio. CDC should further have the ability to make investments directly in target markets, beginning with co-investment with other capital providers. CDC should then also engage a wider range of instruments including debt and guarantees to create a more diversified portfolio in terms of risk, maturity and liquidity. The reforms also include the need for CDC to demand more effective treatment of environmental issues, more transparency, and a rigorous approach to corruption, and monitoring of the improvements in conditions under which people work. The proposed reforms provide CDC with significant opportunities. But to meet these challenges, the Secretary of State recognises that CDC, which has a current complement of 46 staff, will require new skills and capacity in order to deliver on its upgraded objectives. For example, given its lack of current direct investment expertise, CDC may initiate co-investments before embarking on its own investment origination but, over time, will need to build in-house skills. A growing debt portfolio will also require adequate resourcing, recruiting the people with the right expertise to do the job. And to achieve the results required, CDC must attract and retain high calibre people committed to international development—and who want to be remunerated fairly, but not excessively. DFID will also therefore take on board advice from the public consultation on what the most appropriate remuneration structure (as well as instruments and sectors for investment) should be. Finally, CDC must also have the financial capacity to support its investment operations. It will therefore regain the power to borrow through access to a substantial borrowing facility.
The extent to which the proposed reforms will be sufficient to refocus CDC’s efforts, especially with respect to poverty reduction The Secretary of State is clear that CDC must be more focused on the poorest countries than any other development finance institution—doing the hardest things in the hardest places. The package of reforms proposed is a strong addition to CDC’s armoury to help achieve this. It will allow CDC more scope to provide capital to businesses which could not otherwise access it in some of the poorest countries in the world. Reducing CDC’s new commitments to future third party funds—which can tie up capital long term in places where it may no longer be needed—and possible liquidation of some of its existing investments (where this is achievable on suitable terms) and developing a set of new instruments will allow CDC a more active approach to portfolio management, more suited to building the range of poverty-focused investments it needs to be able to make. It will permit more active management of its flows of capital, using for example loans of different tenors and investments of varying risk levels to build a portfolio which will have the greatest impact on poverty. New instruments will also provide CDC with greater flexibility to invest creatively in the poorest countries in which private equity markets are not yet developed and where investing in businesses therefore needs a different vehicle. CDC will be able also to extract itself more quickly when it is no longer adding real value. And investing alongside others will allow CDC to use others’ on-the-ground knowledge and expertise to deploy capital in challenging places, having an impact on poverty whilst building its own capacity to invest directly over a period of time. All this will be backed by the additional financial firepower provided by a borrowing facility which will maximise CDC’s ability to respond quickly to the investment opportunities it develops. So the reforms will bring about a substantial refocusing of CDC’s work in reducing poverty through more control over what it does, the use of more instruments, and extra flexibility to be where it is needed most and not where it is not. The public consultation will provide further important advice and evidence from which CDC can learn about what works best in investing to fight poverty, particularly in Sub Saharan Africa and the poorer parts of Asia, and on CDC’s modus operandi more broadly. And these changes to CDC’s mission and business model will be managed to ensure that co-investors and the financial markets recognise the new opportunities on hand for CDC. Final decisions on CDC’s reconfiguration will be made following the consultation and will be reflected in CDC’s new Business Plan which will be approved by the CDC Board and published in May 2011.
Whether alternative options, including the abolition of the CDC, should be adopted The status of CDC and whether it should be sold off or brought into DFID as an executive agency was considered as part of the summer 2010 Cabinet Office review of non-departmental public bodies. CDC is not being sold off for two reasons. First, DFID would lose an important tool for supporting private sector development in developing countries. Private investors fail to invest enough in the poorer countries to drive the development and economic growth that will reduce poverty. CDC plays an important role in demonstrating that profitable investments in these countries can be made. Since 2004, when it was restructured cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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into a fund of fund, CDC has realised investments that have returned some £2.6 billion to CDC for reinvestment in new businesses—from an initial value of £1 billion. Second, any sale of CDC investments in the secondary market would likely be at a discount, probably crystallising a loss to the taxpayer and representing poor value for money. If the status of CDC were to change from the relative independence of a plc to become an Executive Agency within DFID, many of the benefits that accrue from that independence are likely to be lost. In particular, any actual or perceived increase in Government control or influence over CDC is likely to compromise CDC’s ability to attract other private sector investors to invest in fund alongside CDC and in other forms of parallel investment.
DFID’s shareholding in Actis Actis was created in 2004 as a spin-out from CDC, the UK’s development finance institution, following a reorganisation in which CDC moved from being a direct investor to being an intermediated investor. A new independent company, Actis Capital LLP, was de-merged from CDC to handle the fund management side of the business. Actis took over CDC’s overseas offices and most of CDC’s staff, including all those in overseas locations. Actis is now a limited liability partnership (LLP), owned 60% by its partners and an employee share trust, and 40% by the Secretary of State for International Development. Actis is regulated by the FSA. DFID has an 80% economic interest in Actis until 2013 and 40% thereafter. It is a commercially-oriented fund manager, promoting and managing private equity fund in a range of emerging markets and developing countries. Its principle activity is fund management on behalf of third party investors. Actis had $4.8 billion of fund under management as at May 2010. CDC remains an important investor in Actis managed fund, and currently represents approximately 46% of total commitments to Actis managed fund worth £1.3 billion. Further information on Actis is available on its website: www.act.is DFID does not take part in the day-to-day operations of Actis and has no Board representation. This was set up at Actis’ inception to ensure that the business could credibly present itself to private investors as a commercially driven and independent organisation, thereby assisting its fund raising activities. DFID is reviewing its stake in Actis to ensure that the UK’s development interests remain best served by maintaining its share in the business.
Additional written evidence submitted by CDC Group plc Further to my letter of 10 January 2011, where I sought to draw the Committee’s attention to errors of fact arising from the oral evidence given by witnesses, I have as promised, done the same with the written submissions the Committee received. I thought it would be helpful for you to have this information, whilst the Committee is drafting its report. I attach a note with this letter which details some of the witnesses’ comments and, in turn, CDC’s comment. As with my earlier note, I have deliberately focused more on the significant errors of fact and those statements that are particularly misleading than on minor errors and value judgements expressed by the witnesses. I hope you find it useful. Please feel free to contact me should you require any clarification or if you have further questions.
CDC NOTE TO CHAIR OF INTERNATIONAL DEVELOPMENT SELECT COMMITTEE ADDRESSING MAJOR ERRORS OF FACT ARISING FROM SUBMISSIONS TO THE COMMITTEE Issue: Measuring Development Impact Claim CornerHouse, pg2: “the exclusive reliance of CDC on funds of funds renders it less able to respond to the varied capital-raising needs of the private sector in developing countries. In fact, as noted in our previous submissions, the fund of funds model is largely inappropriate to the development mandate of CDC—private equity funds are wholly unsuited to delivering positive development outcomes (particularly poverty alleviation).”
Response — The most serious economic impediment to economic development in poor countries is that international investors are reluctant to invest there. The capital requirements are enormous— believed to be trillions of dollars in investment. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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— Allowing CDC to use more financial instruments gives CDC the flexibility to invest and support businesses in different ways and this is certainly to be welcomed. It is worth noting however, that the fund of funds approach is a demand led form of investment; responding to the call for capital which promising businesses require and lack access to. — Moreover, the current model enables CDC to invest and crucially harness investment of third party investment for businesses; encouraging and furthering investment in poor countries’ businesses, bringing about more development impact. — It is therefore incorrect to say that “private equity funds are wholly unsuited to delivering positive development outcomes”, indeed since its implementation in 2004, the fund of funds model has achieved outcomes including: — Investments in 900 businesses in 73 developing countries; — Nearly US$3 billion in local business taxes paid in 2009; — Over US$23 billion in third party capital invested alongside CDC in funds; — Three million lives supported. — Development impact assessments carried out by third parties on CDC’s funds have shown that there is significant development impact created by the investments into sustainable businesses.
Claim One, pg1: “recent reports show the relationship between poverty reduction and economic growth varies depending upon existing characteristics and inequalities in the type of growth in the individual country (Kalwij & Verchoor, 2007; OECD, 2010). Indeed, in some cases poverty levels have remained the same while inequalities have actually increased with GDP growth (Kalwij & Verchoor, 2007; Ravallion, 2001). Without policies to directly address inequality simply supporting economic growth generation will not achieve the desired results”.
Response — There is broad consensus that an overall rise in economic growth correlates with poverty reduction. However, it can certainly be agreed that if the growth only enriches those who aren’t in poverty, and does not benefit poor people, over any time frame, it cannot be said to reducing poverty. — CDC’s investments tackle poverty. Poor countries require investment in a range of sectors and CDC’s approach has been to invest across all of them, from infrastructure to agriculture, consumer goods to microfinance; they have created employment, tax, infrastructure, goods, services and will have improved a range of peoples’ lives immeasurably.
Claim Bracking, pg 1: “Positive effect of augmenting private investment flows is largely unproven”. Bracking, pg 2: “No convincing evidence that total capital flows to Africa are expanded as a consequence of this investment model”. Oxfam, pg 2: “CDC appears to be investing in some funds, and companies, where private capital would potentially go anyway.”
Response — These assertions are inaccurate and not backed up by supporting analysis. — CDC’s current investment model has mobilised capital to the world’s poorest countries. CDC has done this by demonstrating to private sector investors that good returns in the poorest countries are possible. — Since 2004, CDC has committed more than US$5bn to over 70 fund managers. Other investors have committed approximately US$23 billion to these fund managers. — Recent analysis of CDC’s portfolio shows than in the 19 funds where CDC made commitments in 2009 and 2010, CDC played a leading catalytic role in 15. These funds would not exist or would be materially different without CDC’s investment. It is also worth noting, that 36% of CDC’s funds fail to reach their target size with less than 3% exceeding their target size, indicating that there is a severe shortage of capital from the private sector and puts paid to the myth that CDC is operating in areas where there is sufficient private capital.
Issue: Transparency & Tax Claims CornerHouse, pg 4: “the majority of the DFIs we have looked into currently operate with no binding restrictions on the use of tax havens by those funds and companies which they support, a practice that has drawn widespread criticism, both because of the role played by tax havens in facilitating corruption and because cobber Pack: U PL: COE1 [O] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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of the adverse development impacts of denying developing countries much-needed tax revenues. The only undertaking is a voluntary agreement by DFIs that are members of the Association of European Development Finance Institutions (EDFI) to “self regulate” by using “acceptable” secrecy jurisdictions as defined by the OECD.”
CornerHouse, pg 4: However, three DFIs—Norfund (Norway), Swedfund (Sweden) and Proparco (France)— have been operating under stricter, mandatory restrictions on their use of secrecy jurisdictions since 2009. For Norfund, this means that it cannot invest in funds that are domiciled in tax havens that appear on OECD’s “grey list” and which do not have tax agreements with Norway. A recent study undertaken for Norad, Norway’s bilateral aid agency, confirms that the policy has resulted in Norfund declining to participate in one project in Tanzania and “a re-routing of one fund to Luxembourg from Mauritius”. Proparco has similarly confirmed a greater use of Luxembourg by funds it supports
Christian Aid pg 3: “CDC’s latest Development Review reports that it received details of the taxes paid in developing countries by 179 companies”.
Response — Businesses with potential are often held back in poor countries because they can’t get the finance they need to grow. — One of CDC’s primary objectives is to mobilise other investors to invest alongside CDC. This is facilitated by the use of offshore financial centres enabling international commercial investors to pool their money in a place where they can have confidence that they can enforce contracts and have certainty on financial, governance and legal matters, without creating another layer of taxation. — Under DFID direction, CDC follows the OECD rules and guidelines and only uses OECD white list locations (two historical fund investments are in a pacific island which is on the grey list but which is expected shortly to be on the white list). — CDC is working with the other European DFIs to explore the use of offshore centres and with DFID through the consultation. — The 179 figure is inaccurate. CDC did not receive details of taxes paid from 179 companies, in fact the figure at the end of 2009 was 463.
Issue: Oversight & Due Diligence
Claim
Bracking, pg 5: “CDC does not carry out due diligence on all their co-investors. The argument that they check all major shareholders but the very small ones is an argument incorporating much hazard: a ‘small’ investor in a large equity fund is often a very ‘big fish’ once he or she is back in their domestic context, capable of wielding much power and control over local markets, communities and workers. Thus the moral hazard is that such people are empowered in relation to others, with no apparent checks on their business practice or legal record. The due diligence of small investors is left to contracted Fund Managers.”
Response
With the fund of funds model, investors sign-up to the investment strategy put forward by fund managers. This would include for example, sector and geography focus. Investors, including large investors such as CDC, provide guidance and support to fund managers. Crucially, however, investors do not dictate how the fund operates e.g. what businesses are invested in: this is the role carefully chosen fund managers perform, whom CDC and other investors do due diligence on and who are empowered to take responsibility at a local level having agreed the overall strategy and objectives of the fund with the investors. It is unclear therefore where and how investors wield power over local communities and workers and there is no evidence in this submission to support the assertion.
Issue: Sectors
Claim
CornerHouse, pg 3: “This, however, is significantly greater than CDC’s support for SMEs, which amounted in 2008 to just four per cent of its investment portfolio”. cobber Pack: U PL: COE1 [E] Processed: [24-02-2011 13:19] Job: 008635 Unit: PG04 Source: /MILES/PKU/INPUT/008635/008635_w010_michelle_Additional evidence from Rt Hon Andrew Mitchell MP.xml
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Response As at 30 June 2010, 7% or US$183 million of CDC’s portfolio (at value) was in SME’s.
Issue: Environmental, Social, Governance (ESG) Standards Claim CornerHouse, pg5: “In terms of environmental and social standards, all the DFIs that are members of the EDFI have committed to “benchmarking” their support against the “UN Declaration of Human Rights, the ILO Core Conventions and the International Finance Corporation’s Performance Standards on Economic and Social Sustainability and associated Environmental and Health and Safety Guidelines”. Such benchmarking does not require compliance with the referenced standards, simply that the project is assessed against them. By contrast, for OPIC, compliance with the Performance Standards is mandatory”.
Response CornerHouse seems to have confused the principle that underlies CDC’s Investment Code by suggesting that CDC merely requires businesses be assessed against best international practice with no requirement that they actually comply. Instead the opposite is true. Whilst CDC may not require an investee business to be fully compliant with best international practice at the time of a new investment by the fund manager, the fundamental principle of the Investment Code is that fund managers’ work over time to apply relevant international best practice with appropriate timetables and targets for achieving best practice. Moreover, fund managers who receive CDC’s capital must also commit to minimising adverse ESG impacts in the investee businesses and committing to a process of continuous improvement in these areas. Fund managers with significant influence over their portfolio companies, for example with a seat on the board, are also required to obtain an undertaking committing the portfolio company to operating in line with CDC’s Investment Code. CDC’s Investment Code not refers to the conventions mentioned above CornerHouse, but other international best practice standards on ESG matters as well.
Supplementary written evidence submitted by Rt Hon Andrew Mitchell MP, Secretary of State, Department for International Development At my evidence session on 18 January, there were two points on which I said I would write to the Committee:
Questions 253 Acis has informed DFID that it set up its charitable arm in late 2009.
Question 259 On a country by country basis, CDC reports details of new investments and realisation proceeds to DFID for DAC reporting p purposes. CDC also provides information on activities and expenditure in its annual report and accounts. Starting with its 2010 Annual Report and Accounts CDC will report country-by-country data on new investments, realisations and portfolio at valuation. Furthermore, CDC’s annual Development Review publishes aggregate data on taxes paid by investee companies that report tax data. I trust that this information will be helpful to the Committtee.
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