RT HON
CLARE SHORT,
MP, MR
BARRIE IRETON and MS ROSEMARY
STEVENSON
Ms King
40. Can I just confirm that there is no
situation you can envisage in which the Government would not have
voting rights on the new board of directors.
(Clare Short) That would only come about if a
future administration decided to get rid of its Golden Share or
sell off. We are back to that question that obviously you cannot
bind a future Government.
(Mr Ireton) I think we should be clear that while
we will have a minority shareholding, whatever the figure is,
40 or 35, the Government would make it clear in its prospectus
that it would not expect to exercise that voting right in the
board in normal circumstances.
41. If it did not exercise that right how
would it be able to ensure it did stick?
(Clare Short) This is the answer I gave to Dennis
Canavan's question earlier. We want to entrench the public interest
development objectives but not through a fickle route if governments
behave in unpredictable ways. If the only way of securing that
interest is through ministerial intervention (which by its nature
would be unpredictable) it makes difficulties for the market and
private sector to judge what the results of those interventions
would be. That is why we are trying to entrench all of those interests
from the very beginning in the prospectus in the nature of the
company so that anyone buying in knows exactly what they are coming
into so the political power is there as a way of entrenching and
not as a way of intervening in a fickle and unpredictable way.
That is the model that we are advised is most likely to succeed
and I am persuaded by that advice.
42. At the moment the CDC owes the Government
£775 million on concessional loans. Once the public-private
partnership is in place what status will these loans have? Will
they remain concessional, be converted into government equity
or be repaid at market rates?
(Clare Short) We have not decided that yet but
I imagine it will be a mixture of these things, some of it converted
into equity, and some loans held on the balance sheet and a judgement
of the right balance will be made nearer the time.
43. A recent article in Sunday Business[11]
suggested that the CDC was demanding to be allowed to bank offshore
and that the transformation to a public private partnership could
result in a "fat cat" scandal. Firstly, are there any
plans to allow CDC to bank offshore to reduce its tax bill and,
secondly, do you think there is any potential at all for a fat
cat scandal?
(Clare Short) That article was very destructive
and not well-informed. It is not true that there is that kind
of conflict between the Department or between myself and the CDC.
We share these objectives I have been describing to you. The CDC
does not want to be privatised and wants to secure the same objectives
as I have been describing to you today. That article is ill-informed,
but there is a serious question around this offshore thing which,
again, I would be very grateful if this Committee would take on
board very seriously. It is to do with the taxation regime. I
am told that most investment companies tend to move offshore because
they get a much lower rate of taxation and therefore in the original
advice it was flagged up that it would be desirable to move CDC
offshore so that the tax treatment would be such that it was attractive
and it could compete with other private sector investment organisations.
But my own judgment is that that is an intolerable suggestion.
44. That is an——?
(Clare Short) An intolerable suggestion, that
a British development investment organisation should be offshore
from Britain, just retain an office in London but be based offshore.
On the other hand, if we do not solve the problem the tax treatment
would be so high that it would not be viable as a means of attracting
private sector funds so what we are discussing with the Treasury
and others is the creation of new type of organisation, a development
investment corporation that would be treated for tax purposes
as well as our pension funds. There is another type of investment
organisation that pays much lower levels of tax but has to turn
round its business very quickly. So I think the answer is the
creation of this new type of institution and I am optimistic that
we will secure that. Again, I would be very grateful if the Committee
would take an interest in it because this is a very important
question.
Chairman
45. These sorts of arrangements are common
in the developing world of course and it is by no means unique.
If you are making one in this country it would be the first time
but they are very common overseas. Mr Ireton wanted to add something.
(Mr Ireton) I just wanted to pick up on the point
the Secretary of State made that successive governments have recognised
that there are certain sorts of investment trust organisations
which benefit from having an offshore location which makes them
tax efficient.
(Clare Short) It means they pay a lower rate of
tax.
(Mr Ireton) It means the vehicle pays a lower
rate of tax but it does not mean people who invest in it who are
liable to United Kingdom tax pay less tax on their incomes. So
the vehicle itself is tax efficient and in order to have that
tax efficiency they have to be offshore.
(Clare Short) What is the other fund?
(Mr Ireton) An investment fund.
(Clare Short) They can be onshore and have a lower
rate of tax but their turnaround around is very rapid. If we achieve
the creation of this new category it would not be treated any
more beneficially than other forms of investment are treated.
No-one would be making a quick buck out of it. It would mean that
this kind of instrument could remain onshore in Britain which
I think is a highly desirable outcome.
46. I did notice that the CDC paid £14.3
million in tax last year. It has always seemed to me to be a most
peculiar position for a development company owned by the Government
to pay tax to the UK Government. In terms of working with impoverished
overseas countries it seems to me—I do not want to use too
strong a term— that we are taking money from poor countries
and paying it into the UK Treasury which cannot be right when
we have got a developmental objective in mind particularly in
view of the fact that the Department and the Treasury are putting
no further investment into the CDC. So we are draining money in
terms of UK tax out of the developing countries as well.
(Clare Short) Personally, I have not looked at
the current tax regime. We could do so if you wish but we are
proposing to change it. I am extremely interested in getting the
future tax regime right in order to secure the policy objectives
that we are about. However, we do continue to give money to CDC
year on year and we also receive some returns from CDC investments
into the Department year on year. Your second question was fat
cats. There is no prospect of fat cats benefiting like they did
from other privatisations in the way that so revolted the public.
This will remain a development institution. It will not seek to
imitate the kinds of salaries and perks that the City engages
in and people who want those things will go and work in the City
and not seek to work in the CDC. I have had this discussion with
the current management. There might be some skill areas that the
CDC currently lacks that it needs to attract. It might even be
when it moves to equities and so on one would have to increase
salaries to attract certain skills but that would have been required
if it had stayed in the public sector. There is nothing in the
structure we are proposing that would generate windfall bonuses
or fat cat type conditions. It is not possible within the model.
Mr Rowe
47. I gather that quite a lot of small islands
around the world which would otherwise find it very difficult
to make ends meet profit from being offshore and perhaps the Commonwealth
Development Corporation could claim fostering development in some
of the smaller islands if it went offshore.
(Clare Short) I hear what you say and I think
yes, though that needs properly regulating or it leads to other
difficulties for those countries of the kind we have just seen
in Asia. This is a question I would be grateful for the Committee's
advice on and your opinion on, how to secure a reasonable tax
treatment which secures the development objectives. I have to
say that I have a deep preference for the CDC not having to go
offshore, I would be very disappointed indeed if the conclusion
was that that was what it had to do.
Chairman
48. This vehicle which you have suggested,
which would be taxed lower in the UK, would this be unique to
CDC or would this be an Act or part of the Finance Bill which
would enable other companies to benefit in the same way?
(Clare Short) It could not of course be unique
to the CDC without giving us a Hybrid Bill, which would give us
all lots of fun but would be rather difficult. The proposal we
are examining, and again which I think would be the best outcome,
is a new category of development investment institution. It will
be defined by those objectives and then others could set up under
that legislation as similarly intentioned development investment
institutions.
49. So we are talking about two pieces of
legislation in that case, one CDC's reorganisation as a public-private
partnership and also this new category of development finance
institution?
(Clare Short) That is right, which could be incorporated
in a Finance Bill.
Mr Rowe
50. The CDC currently operates within a
policy supervision framework which includes quinquennial reviews,
the CDC's annual corporate plan looking three years ahead on a
rolling basis, a twice-yearly submission by CDC called a "Planning
Framework" submission which sets out its financial projections
for broadly the same period as the corporate plan, a requirement
for CDC to seek political clearance from the FCO post for all
individual investments over £2 million, and Government approval
of countries, other than dependent territories, in which the CDC
may operate. What I would like to know is, what effect will the
public-private partnership have on the content of the policy supervision
framework within which the CDC currently operates? Who will decide
on this framework in the future and how will it be enforced?
(Clare Short) I will give you my understanding
of the answer and then bring in my officials. The discussion we
have had earlier about seeking to entrench early on the ethical
code, the rules about where to invest and then leave it to the
new organisation to manage itself and to only use the power of
the Government holding to ensure those entrenched conditions are
not modified, is so we get rid of the day-to-day supervisory interventions
by creating an institution which entrenches those intentions but
then leaves it free for the new institution to manage itself according
to its own judgments within those entrenched conditions. That
is right, is it not?
(Mr Ireton) Yes.
(Clare Short) That is back to the question Dennis
Canavan asked at the beginning about how to get an organisation
which the market would be able to see as predictable in its behaviour
and therefore worth investing in.
(Mr Ireton) I would emphasise that really the
existing supervisory framework, which exists while CDC is a statutory
corporation in the public sector, will go and a new framework
for the partnership will be established along the lines the Secretary
of State has already described.
51. Will that framework include certain
expectations of publications? After all, some of it will be public
money so, for instance, whether it is the Public Accounts Committee
or this Committee, we would be interested in seeing how they are
getting on as it were rather more closely than an entirely private
company. The Committee would be interested to know what the Department's
ideas are, though it may be a better question for our next set
of witnesses, as to how Parliament can keep abreast of what the
CDC is doing under the new regime?
(Clare Short) I think that is a good question
because my understanding, and I will bring Rosemary Stevenson
in, is that we are seeking to set up an institution which will
entrench the public sector and developmental interests and then
allow that institution to run itself without intervention unless
it seeks to depart from those interests. Therefore, there will
be accountability to Parliament for that working and Parliament
might be giving us advice like, "It is departing from them,
you should be using your golden share here". But I think
the incentive is that that it is the only way in which we would
have any capacity to intervene. Is that right?
(Ms Stevenson) That is right. The CDC will be
accountable to its shareholders in the normal way, including the
Government as a substantial minority shareholder. So it will be
reporting to all on the implementation of policies.
(Clare Short) But Parliament would, quite rightly,
ask the Government to be accountable for the fact that it was
choosing not to use its golden share to intervene because it was
content. That accountability to Parliament would remain and Parliament
might say, "No, Government, you are wrong, it is departing
from the permission Parliament gave to establish this institution,
you should be using your golden share to intervene."
52. You could see a trend developing. If
they were moving away from certain countries, for example, Parliament
might feel that was rather risky.
(Clare Short) And it would be right then for Parliament
to make a fuss and say, "This is a departure from the basis
on which Parliament gave its permission for this reorganisation,
therefore the Government should consider using its shareholding
power to pull it back."
53. Will the CDC's investment activities
remain subject to targets? If so, who will set the targets and
who will be responsible for monitoring CDC's performance against
them?
(Mr Ireton) The quantifiable targets are those
which we have already discussed. CDC will have a universe of countries
in which they are allowed to invest in total, there will be the
70 per cent target in relation to per capita income and the target
in relation to Sub-Saharan Africa and South Asia. There will not
be other targets.
(Clare Short) There will be the ethical code as
well.
(Mr Ireton) Yes.
Chairman
54. I wondered under financing whether you
have considered the possibility of launching the new private-public
partnership with 100 per cent of the shares owned by the Government
and then issuing preference shares which would have a coupon of,
shall we say, 8 per cent which would attract probably institutional
investors and issue that number of preference shares, thus diluting
your interest in them, and possibly giving them, to give them
an extra attraction, a capacity to convert into ordinary share
capital later on? In that way of course you would retain all the
control you need but you would bring in the private capital through
preference shares and therefore provide the additional money that
you are looking for in that way.
(Clare Short) Yes, we have touched on this question
before. We will start off with 100 per cent of the shares owned
by the Government, and then we intend eventually to get to a market
float, but the route to that could include the sort of steps you
are indicating. I do not know about preference shares, I do not
know enough about it, but we will not necessarily go straight
to a float, we need to judge the market and take it in the best
possible way to keep the organisation stable and get a decent
rate of return.
(Ms Stevenson) If there was retained Government
control, then the CDC would not be classified to the private sector
which would affect the ability to borrow.
(Clare Short) Because then we would then be outside
Treasury rules.
55. Yes, you have to issue enough preference
shares to do that to get within the rules. Yes, I understand that.
Just one more question, when you receive money for your equity
sales which department of government is going to receive the resulting
money? Is it the Treasury or is it the Department?
(Clare Short) As you know, when the Prime Minister
announced at the Commonwealth Heads of Government that we were
going to re-organise CDC in this way he said that any proceeds
from the sale would come back to the Department. So that commitment
has been given but of course when one is talking to the Treasury
about commitment to funding of the Department, if one brings into
play the commitment around GNP spend which the Committee desires
and so do we, it becomes notional. The commitment is there that
it goes through the Treasury, that is right. So we have got a
commitment in principle but let me put it more bluntly: we want
more than that. Then it becomes a bit of a book-keeping exercise.
56. What I am worried about is the Treasury
saying, "You have received X from the sale of shares in CDC,
therefore we are reducing the amount we would otherwise have given
you by that figure X."
(Clare Short) I am focused on X. When you talk
to the Treasury you have to focus. Who would know what they would
have done if the CDC sales were not there but as long as X comes
out right, it is okay.
57. As long as what they are giving you
is not less than X you will be content?
(Clare Short) Yes, that is my position. If it
was only CDC sales it would be less than X.
Mr Robathan
58. Briefly, this could be yes or no, you
are confident that X will be added to your funds after sale?
(Clare Short) Yes, the commitment has been made
by the Prime Minister that the proceeds of sale will come back
to my budget.
59. So your budget will increase by X?
(Clare Short) I am confident my budget will increase
at least by that.
Chairman: X plus Y.
11 Sunday Business, 31 May 1998: Labour in
`fat cat' flap. Back
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