5. PUBLIC/PRIVATE
PARTNERSHIP
5.1 We therefore concluded that CDC could contribute more
effectively to the sustainable development of poorer countries
if we established a long-term public/private partnership that
would benefit both from its association with Government and from
the participation of the private sector. The introduction of private
capital would enable CDC to make a lager contribution to development.
5.2 Prior to the announcement by the Prime Minister in October
1997 and the publication of the White Paper in November 1997,
DFID had commissioned and received advice externally that, provided
the partnership was designed satisfactorily, there would be private
sector interest in participating.
5.3 One important element of the Partnership is that it should
be classified as outside the public sector so that it can attract
private capital without it counting against the PSBR. Government
proposes to retain a substantial minority interest together with
the Golden Share and invite private investors to take the majority
interest. Government would expect to retain this interest for
the foreseeable future.
5.4 The emphasis will be on CDC continuing to do what it
does best and building on its experience and network of overseas
offices with a continued focus on the poorer countries of South
Asia and sub-Saharan Africa; regions that have not so far benefited
from private capital flows.
5.5 The purpose of the Partnership may be summarised as "to
maximise CDC's success in creating and growing long-term viable
businesses in developing economies, especially the poorer economies,
achieving attractive returns for shareholders and implementing
ethical best practice".
5.6 Detailed work on the design of the Partnership is continuing.
The key issues are designing the framework to secure the development
goals for the company and creating the right legal structure and
the financial structure of the new company. The initial focus
of work has been on the design of the partnership framework. Work
on the detailed legal and financial structure will follow in the
light of this.
5.7 The approach taken is to ensure that the development
goals are transparent and clearly entrenched from the start of
the Partnership (for example, through golden share type provisions).
This is important in order to provide clarity for both the public
and private sector investors.
Investment Policy
5.8 The CDC Partnership will be required to make investments
consistent with an investment policy which has particular focus
on the poorer developing countries. A specific target will be
set for the percentage of new investments which are made for the
benefit of poorer economies and there will also be a requirement
to continue to focus on sub-Saharan Africa and South Asia, reflecting
CDC's present strategic direction. The investment policy could
only be changed with the agreement of the partners.
Ethical Policy
5.9 The CDC Partnership will also be required to implement
and report on a code of ethical policy and practice which meets
international best practice. The code will cover various issues
including social and environmental appraisal, response to human
rights abuses, activities which CDC will not invest in, and standards,
for the managed businesses, for a range of issues including health,
housing and employment.
5.10 Since August 1997 CDC has made substantial progress
in developing a new code of practice. The code will take some
time to develop and CDC is currently consulting extensively with
all staff.
Other Aspects of the Relationship
5.11 DFID would continue to work closely with the new CDC
Partnership in developing joint projects and programmes on the
ground and will consider asking CDC to manage specific new initiatives
or ring-fenced funds.
The Legal Structure
5.12 There is a range of options for the final legal structure
of the new Partnership and these are currently being examined.
The choice will be influenced by the need to create a committed
pool of funds for investment, the desire to allow for a wide marketing
of shares at the right time and, importantly, the need for tax
efficiency comparable with other vehicles for investing funds
overseas.
Timing
5.13 The Government intends to put legislative proposals
to Parliament as early as possible with a view to seeking private
investor participation within the lifetime of the present Parliament.
The precise timing would depend upon such factors as the continued
development of CDC business market conditions and consideration
of value.
6. DEVELOPMENT
IMPACT
6.1 The new CDC Partnership will be able to grow and so mobilise
additional finance for development and sustainable livelihoods.
By focusing on the poorest countries and investing successfully
in them, it should also have strong demonstration effects and
lead to some reduction in the perceived risk of operating in those
markets.
6.2 The nature of business activities may change to some
degree as a result of the new Partnership. Investors would be
buying into CDC because of its strengths and existing competitive
advantage and it is unlikely that they would seek a material change
in the nature of the business. The focus on agri-business, infrastructure,
manufacturing and financial services is expected to continue.
CDC would continue to operate equity funds which offer finance
for smaller business. There would also be opportunities for CDC
to manage programmes for DFID, for example to target micro enterprise.
6.3 Private investors can be expected to seek a higher return
on capital than that currently achieved by CDC. This higher return
will come as CDC moves more and more into equity rather than loan
business. This trend is already underway and DFID have been requiring
CDC to meet targets for new equity business for some time. Equity
is a scarce resource in many developing countries and usually
makes a stronger development contribution than loans because it
ensures that risk is shared with the developing country business
and because equity positions allow CDC to offer governance and
management skills. The requirement to turn-over the equity positions,
normally through local capital markets, will also develop the
local financial sector. Greater profitability will also flow from
CDC's ability to finance itself partly through debt and, therefore,
to leverage its returns.
6.4 The focus on a higher rate of return is consistent with
the development goals of the new organisation. Investing in profitable
businesses, without recourse to subsidy, is more likely to ensure
the sustainability of the livelihoods created. The focus on the
poorest countries (which are not targeted to such an extent by
other international financial institutions) means that CDC is
unlikely to crowd out other sources of finance. The equity product
offered by CDC is complementary to those products offered by organisations
such as IFC and EIB.
6.5 It has been agreed that any proceeds raised by substituting
private for public capital will be available to DFID to use for
development activities. It is too early to forecast the amount
and timing of these proceeds.
Department for International Development
21 April 1998
