RT HON
CLARE SHORT,
MP, MR
BARRIE IRETON and MS ROSEMARY
STEVENSON
20. It is from the Government
memorandum.[7]
(Clare Short) As I have trawled through
this, basically the private sector and the markets are very leery
of political intervention that is unpredictable so that if you
retain the political power to intervene and suddenly change the
way in which an organisation behaves markets do not like that
because it is unpredictable and they cannot make their judgements.
Therefore, we are seeking as much as possible to secure the public
sector interests, the predominant activity in the poorest countries
and the ethical codes entrenched in the organisation rather than
being dependent on the intervention of a politician in order to
get an organisation so that anyone who is thinking of investing
in it can make a sensible judgement about its stability and its
likely behaviour. I think that is the meaning of that kind of
phrase.
Chairman
21. How would you actually physically mechanically
do that? Presumably through the Memorandum and Articles of Association?
(Mr Ireton) We envisage, as we said in the memorandum,
that for example, the investment policy which would be established
in terms of essentially where the future CDC public-private partnership
would be operating would be entrenched and we think that would
be entrenched in the constitution and that could then only be
changed by the agreement of the Golden Share.
(Clare Short) But the Golden Share is an instrument
of entrenchment.
22. By constitution you mean Articles of
Association?
(Mr Ireton) Yes, we have stated that there must
be an investment policy and we would set out the investment policy
of course in the prospectus. The point that the Secretary of State
is making is if we invite the private sector in they must have
certainty as to the overall framework in which they are invited
to come. They would not wish to come in on one expectation to
find in some way the Government can then alter the rules of the
game. We would propose creating that certainty of framework.
(Clare Short) Equally, I do not want an instrument
that can then steer itself away from the least developed countries.
We want those requirements entrenched from the beginning so that
anyone who invests in it and everybody who works for it is in
agreement that 70 per cent of its activities will remain in the
least developed countries and that the ethical code will be entrenched
and never be departed from and so on.
Mr Robathan
23. Secretary of State, the advice that
you took from BZW was obviously pretty critical in this. Do you
think, with the situation in world markets, particularly dare
one say the collapse of some emerging markets and the effect this
has had on the markets of the developing world, that the situation
has changed? Do you think people are more likely to invest in
the CDC or less likely as a result of the upheavals in Asia and
elsewhere? Really the question is why would anyone want to invest
in the CDC?
(Clare Short) It is an interesting and good question.
I think it is the judgement of many people that lots of the investment
in Asia was irresponsible, short term, not properly secured, and
I think as Asia recovers, as I am sure it will (this is my own
judgement) there will be a continuing desire to invest in developing
emerging markets but more anxiety to make sure that the investment
is responsible and I think CDC will benefit there from its track
record, from its public accountability and also I think there
is a growth in people seeking ethical investment and ticking ethical
on their pension fund box or companies that are moving to ethical
codes and then wanting their pension funds to be ethical. The
CDC will also benefit from that. That is a two-part answer to
your question but on the first part only time will tell. As you
know, everyone is talking about the moral hazard of the IMF and
the World Bank taking action to stabilise countries. The moral
hazard is irresponsible private sector investment being bailed
out by public institutions which is, after all, what the World
Bank and IMF are. I assume that a private sector that wants to
invest in emerging markets will be somewhat scalded by its experience
and will be looking for more responsible investment in emerging
markets. I think the CDC could reasonably say, "We have got
a track record and we are more likely to be responsible."
Chairman
24. I think it is important that we get
the terminology right. I think we heard you say you want them
to invest 70 per cent in the least developed countries.
(Clare Short) That is not quite right, I am speaking
from memory.
(Mr Ireton) We have two aspects of the policy
in mind. Firstly, that around a figure of say 70 per cent would
be invested in countries with, broadly speaking, a per capita
income on the 1995 published figures of about $1,670.
(Clare Short) Or less.
(Mr Ireton) Or less. That is broadly speaking
what the agreement is at the moment through the strategic quinquennial
review process between the DFID and CDC and we envisage that continuing
broadly.
(Clare Short) But there is another factor.
(Mr Ireton) Secondly, we are also envisaging that
around 50 per cent would be invested in sub-Saharan Africa and
South Asia, South Asia essentially being the Indian sub-continent.
25. But amongst those there are middle income
countries.
(Mr Ireton) There are within sub-Saharan Africa
certain countries, not very many, South Africa is the obvious
one, which have a per capita income above $1670 US dollars. So
the 50 per cent is not entirely a subset of the 70 per cent.
26. I was going to say 50 and 70 add up
to more than 100.
(Clare Short) Yes, but they overlap.
(Mr Ireton) The precise percentages are still
to be finalised, but that would be essentially the main elements
of the investment policy.
(Clare Short) And what we are trying to do is
entrench the past pattern but obviously give the CDC enough room
for manoeuvre. It does need to balance its investments in some
slightly stronger middle income countries to have a balanced and
reliable portfolio but we want to keep its purpose as being fundamentally
developmental. If the Committee wanted to look at the way in which
we sought to do it, I would be very interested in your views in
that we are genuinely seeking to secure in a reasonable way an
entrenched description of the current pattern of investment activity.
If you have got any suggestions that might secure that in a better
way we would be very interested.
27. We may do. It is just that these terms
are used technically particularly in Europe and the international
world with the World Bank and IDA. There are 48 least developed
countries in which CDC invested in 16 and then there are developing
countries which is a broader category including middle income
countries but I think your definition, as Mr Ireton has given
it to us, is different from those international criteria.
(Mr Ireton) That is correct. Normally in this
context we are not talking about "least developed" as
defined by the UN in its list of least developed countries which
involves a series of criteria. We are really talking about the
"poorer" countries although they happen to be classified
as least developed. For example Ghana declined to be classified
as a least developed country.
(Clare Short) Even though it is $600[8]
and something a head. Some of the countries not in the category
are very very poor. Sorry, I did use the language inaccurately.
Barbara Follett
28. Secretary of State, given that the Government
plans to maintain a substantial minority interest in CDC, what
is the purpose of the Golden Share which the Government also proposes
to retain?
(Clare Short) The Golden Share is a way of entrenching
the developmental purpose and the ethical code. It could be swept
away by market developments otherwise.
29. Talking about sweeping things away,
in the memorandum[9]
that your Department sent to the Committee it said Government
would expect to retain this interest for the foreseeable future.
How are you going to ensure that interest is retained?
(Clare Short) There is a very important question
here and again I would be grateful for the Committee's views and
assistance with this. My own view is obviously no Government can
seek to bind a future Government, that is the nature of our constitution,
but the CDC exists under a statute that Parliament gave its permission
for and has worked up to now under that statute. We are now going
to be asking Parliament for permission for it to operate in another
way and to explain as we are explaining to you today the purpose
of the exercise and the intentions that we are seeking to entrench.
I therefore believe that if any future administration wished to
change the instrument again it ought to seek the permission of
Parliament. Beyond that I cannot seek to bind a future administration
but we are having a really serious technical problem with finding
a way of making this change that means a future Government being
willing to get rid of the Golden Share or to use it in another
way would not be able to do so without seeking Parliament's permission.
I am very anxious to secure that and it is not easy and I might
not be able to secure it. If you could help to find a way to secure
it I would be delighted.
30. Would it be possible for you to elaborate
on the technical problem or for us to have a memorandum on it?
(Ms Stevenson) The issue is largely about the
classification of CDC to the private sector. If controls were
put on the CDC which were different to what other completely private
sector companies have then there is an issue about whether it
can be classified as private sector and therefore released from
the public sector borrowing constraints or not. It is possible
to have some constraints, but time limited, and the advice that
we have been given is that we could have some kind of additional
constraint on the selling of government shares for a time-limited
period of five years but not indefinitely.
(Clare Short) It does not secure the objective
at all, so I do not think there is any point in that. I think
it might help if we sent you a memorandum on this.[10]
It is a fascinating constitutional question and if you can come
up with an answer—I have one idea actually—I would
be delighted. If we get the permission of Parliament to make this
change, any future administration which wanted to change again
ought to seek the permission of Parliament, and under the model
we have at the moment that would not be necessary.
Chairman
31. Since you cannot change the memorandum
and articles of association of a company unless you get 75 per
cent of the shareholders to agree to it, you are proposing to
take a 40 per cent share, as I understand it, so it seems to me
that you are doubly ensuring yourselves by taking the golden share
and 40 per cent of the equity.
(Clare Short) That is right, but the question
is what happens if a future Government wishes to change the nature
of CDC, to in effect privatise it, to drop the requirements about
the countries it should invest in, and to drop the ethical code.
Obviously any future administration has the right to do that,
much as I would regret it, but under the model we have now a future
administration would be able to do that without the permission
of Parliament. I think the right thing to try to secure would
be that if any future administration sought to do that, it would
need the permission of Parliament, and I am having a technical
problem securing that.
Barbara Follett
32. Because it goes away from the original
intent of the original golden share holder?
(Clare Short) That is right.
33. Will the golden share be time-limited
or indefinite?
(Clare Short) The answer is indefinite.
Chairman
34. If you secure what you want through
the golden share, why do you want as high a minority interest
as 40 per cent?
(Mr Ireton) There is nothing sacrosanct about
the 40 per cent as opposed to some other notion of substantial
minority shareholding. We have so far taken the view that simply
having a golden share in the background does not capture the full
nature of the partnership and full commitment of HMG to the partnership,
rather that commitment as perceived by outsiders, including the
countries in which we are investing and including the private
capital we are hoping to introduce. That partnership is most appropriately
reflected in the Government maintaining a substantial minority
shareholding of some order of magnitude as opposed to simply selling
100 per cent of the shareholding. There is a further issue in
that the Government having, if you like, financed and helped create
the CDC that we have today, the Government may wish to continue
to have a minority but substantial stake in the future success
of the partnership, and therefore benefit from its future success
rather than simply selling out 100 per cent of the equity tomorrow.
(Clare Short) We would expect a reasonable rate
of return continuing to come from its activities which we assume
will expand and produce an increased rate of return. Then there
is the fact if you have more than 30 per cent of the shares, you
are a controlling shareholder and you have much more influence
over the future direction of the company than if you go lower
than that. That is company law.
35. You are seeking 40 per cent then. The
other thing which is interesting is that should the CDC have a
rights issue in the future, you as a 40 per cent shareholder,
or the Department as a 40 per cent shareholder, is going to have
to contribute to that rights issue?
(Clare Short) Indeed, that is an interesting question.
36. Is that part of the partnership idea?
(Clare Short) That remains for the future. We
have talked about that.
(Mr Ireton) That is a decision the Government
would have to take at the time as to whether it wishes to participate
in that or allow a dilution of its shareholding.
Barbara Follett
37. I have found this fascinating because
this is the first time we are looking at something before the
legislation and I think the fact people do not have all the answers
is quite a good thing because we are still exploring things; I
have found it one of the most rewarding sessions we have had.
To go on to the CDC's investment portfolio, which we have had
some discussion of, perhaps you would like to say what other changes
you anticipate in this investment portfolio, other than the ones
you have already mentioned about the 50 and 70 per cent shares?
What guarantees will you have that there is not a shift in geographical
focus and that you make sure that it is transparent and accountable
and that the money goes to small and medium sized enterprises
rather than large ones?
(Clare Short) As I said earlier, a shift has been
taking place from loans to equity and we plan that will increase.
There tends to be a higher rate of return on equity because there
is a higher risk, but I think that has other desirable characteristics
in that it takes a commitment to management with it and enhancing
potentially the management capacity of companies in very poor
countries, and that is a capacity that they need. The intention
is that CDC should operate from the niche it is in—it knows
these countries in a way others do not, it is particularly strong
in agri-businesses and it intends to continue to work around where
it has expertise and knowledge. It has offices around the world
and people who know those sectors and those countries. That is
its comparative advantage and it plans to continue that. Within
its code it has some commitment to medium sized companies already
in the practice of CDC—is that not right?
(Ms Stevenson) It is not formal.
(Clare Short) It is not a formal target but it
is part of its practice record. It intends, obviously, to continue
to build on its strengths and continue operating within its niche.
We have decided in terms of the entrenched proportional rules,
that it should not be penalised by helping countries to succeed;
that if, over time, some of the poorer countries become more developed,
it would not have to exit. You might have a view on that, I think
that is right but that is a judgment.
38. So when things are becoming more profitable,
it could stay there?
(Clare Short) If it had helped to bring that about
and was getting a rate of return which in turn it could continue
to invest in poorer countries, I think that is probably right,
but that is a matter of judgment.
(Mr Ireton) I was going to clarify that by way
of example. It means if a country, which is currently under, say,
1670 dollars per capita income, successfully moves above it, any
investments in that country will continue to count towards the
70 per cent target.
(Clare Short) That is the point. We could change
that but there is an incentive question there and a balancing
of the returns from investment question which again you might
want to look at.
Chairman
39. But is not the logic that if you ask
them to make more money basically through equity investments,
the CDC will move, unless you take measures to stop them, inevitably
towards more middle income than lower income countries, because
the risk is less and the equity return therefore more?
(Clare Short) That is the very reason for having
the 70 per cent and 50 per cent rule to prevent that. Let me say
on equities, before we were dealing with the CDC I had a conversation
with Nick Stern, who is the Chief Economist of the European Bank
for Reconstruction and Development which operates very much in
the transition countries about the way in which they operate because,
again, you are talking about countries with no tradition of business
activity or judgements of markets and you need to create a new
culture and expertise within those countries and he was very strongly
of the view that equity investment helps to do that because you
are taking a stake in countries you have a continuing interest
in and therefore sharing your knowledge of good management practice
and you are building investment in those countries and I think
that applies here too. So the move to equity makes what we are
trying to achieve with CDC realisable because the rate of return
is higher and therefore it is a route which is viable for the
private sector but I think it has this other benefit which is
very important.
7 See Evidence, pp. 1-4. Back
8
Note by witness: Ghana's GNP is around $400 per capita. Back
9
See Evidence, pp. 1-4. Back
10
See Evidence, p. 15. Back
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