House of Commons - International Development

Select Committee on International Development Minutes of Evidence

APPENDIX 2

1. BACKGROUND

Traidcraft Exchange is a charity whose mission is to contribute to poverty eradication by promoting fair and ethical trading with disadvantaged communities in developing countries. Our activities embrace capacity-building with ethically orientated small enterprise development organisations in developing countries; promotion of market access for small producers; public information and awareness-raising in the UK about fair and ethical trade and ethical business; and policy work to inform and influence debate amongst decision-makers in government, business and the voluntary sector. Traidcraft Exchange is linked with Traidcraft plc, a trading company which for 20 years has been importing and selling products from disadvantaged producers in developing countries, and providing development support to those producers. Traidcraft plc's sales are now worth some £7 million per year.

We warmly welcome this opportunity to submit evidence to the International Development Committee's Enquiry on the future of the Commonwealth Development Corporation (CDC).

As CDC and the Department for International Development (DFID) point out in their Memoranda to the Committee, CDC is the Government's main instrument for directly mobilising investment in developing countries. The fundamental purpose of the conversion CDC into a Public-Private Partnership is to allow CDC to increase the volume of this investment. It is essential that these funds should make the maximum possible contribution to the elimination of poverty—in keeping with the November 1997 White Paper. Furthermore, we believe it is vital that every aspect of CDC's operations should follow, and should be seen to follow, the highest possible ethical standards. This submission is based on these two principles.

2. TARGETING POVERTY

The new legislation

We warmly welcome the commitment by CDC and DFID to ensure that in future CDC continues to target investment to the poorest countries. We are concerned, however, that tensions may arise between this commitment and the requirements of CDC's new private investors for high returns on their investment. Enshrining the commitment to poverty elimination in the legislation establishing the new Partnership would give clear direction to the new body and provide a firm reference point for all future investment decision-making.

Recommendation: The legislation establishing the new Public-Private Partnership should state explicitly that the Partnership's objective is to contribute to the elimination of poverty.

Co-ordination with DFID and consultation with civil society

DFID's activities in-country are guided by Country Strategy Papers (CSPs) that match DFID's overarching policy objectives to local priorities. All CSPs are to be reviewed within the next two years. DFID has announced there is to be greater involvement of civil society organisations, both in the UK and in-country, in the preparation of CSPs than hitherto. DFID is also committed to supporting the implementation of National Sustainable Development Strategies.[16] Increased private investment flows should be fully consistent with this framework.

Recommendation: CDC activities should be planned within the framework of DFID Country Strategies. Comprehensive consultation with civil society organisations should be conducted, and all documents should be publicly available.

Specific provision for Small and Medium Enterprises

Small and medium-sized businesses can be particularly important in creating employment and livelihood opportunities for the poor. We note that DFID states in its submission to the Committee that CDC will continue to offer finance for smaller businesses and may manage programmes for micro-enterprises on behalf of the Department.[17] These activities might not necessarily be attractive to the CDC's new private investors and there may be pressure on CDC to give less attention to this area—to the detriment of the organisation's development objectives.

Recommendation: The new CDC should make specific provision for support to small and medium-sized businesses—for example a target for a percentage of all new investment each year.

3. ACHIEVING THE HIGHEST POSSIBLE SOCIAL AND ETHICAL STANDARDS

We warmly welcome CDC's "commitment to be a leading ethical and socially responsible investor".[18] As a significant source of private investment in developing countries, CDC can play an important role in demonstrating ethical practice to the international business community, contributing to increased social responsibility throughout the private sector. It will also be essential for CDC to be able to demonstrate the highest ethical standards if it is to attract the discriminating ethical investors it intends to target.

Formal commitment to international standards

Conventions agreed under the International labour Organisation (ILO) constitute internationally agreed standards in areas such as the elimination of child labour, basic wages, health and safety at work, freedom of association, etc. The government is committed to these standards,[19] which form the basis, for example, of the work of the DFID-supported Ethical Trading Initiative. CDC is already beginning to implement guidelines for working and living standards in CDC-managed business that in many instances exceed the basic ILO standards. Nonetheless, it would be helpful to secure explicit commitment to these international agreed core labour standards—as a floor, not a ceiling—through the new CDC legislation.

Recommendation: The new CDC legislation should provide explicitly that CDC will as a minimum implement ILO Conventions, and will pursue the highest possible social and labour standards, throughout its operations.

Timetable for achieving standards

As noted above, CDC is pursuing a programme to implement high working and living standards in its managed businesses. These account for only 14 per cent of its total investment portfolio.[20] It will therefore also be important to ensure that the highest possible standards are achieved in businesses in which it holds an equity stake but which it does not directly manage, and those to which investment flows through intermediary funds supported by CDC.

Recommendation: DFID should set timetables for CDC to develop and implement procedures for securing the highest possible social and ethical standards in its managed businesses, non-managed businesses in which it holds equity, and businesses supported through intermediaries.

It is now widely accepted in business circles that corporate social responsibility requires a commitment to the social and economic well-being of the local communities in which a company is operating—and that such a commitment enhances a company's reputation with the public and amongst shareholders, ultimately contributing to profitability. Many opportunities will arise for the new CDC not only to reap these benefits, but also to enhance its contribution to development and poverty elimination through appropriate community initiatives. Partnerships could be developed with local or international NGOs to promote local development. These could extend beyond the "conventional" approach of simply donating funds—for example by providing management expertise to local small business support programmes.

Recommendation: All CDC managed businesses should establish a community development fund, in which they should invest 1 per cent of their annual profits. These funds should be used for local economic and social development initiatives and should be overseen by local community representatives. Other businesses receiving investment directly and indirectly from CDC should be encouraged to do the same. A similar fund should be established by CDC centrally, under the control of the CDC Stakeholder's Council (see below).

4. SECURING TRANSPARENCY AND ACCOUNTABILITY

We warmly welcome the CDC's intention to "have and report on a code of ethical policy and practice which meets international best practice".[21] As noted above, it is important that CDC should be seen to be achieving the highest standards in this area. Some aspects of the standards that are appropriate are discussed above. While CDC will be financially responsible to its investors, its development objective means that it will need to demonstrate accountability to a wider group of stakeholders—including local communities in developing countries, non-governmental organisations, UK and developing country governments, Parliament, and the public.

Social Accounting as a tool for transparency and accountability

Social Accounting, or Social Auditing, is a technique gaining increasing acceptance in business for analysing and documenting the variety of a business' relationships with its diverse stakeholders, and for assessing its performance in relation to the interests of these different groups. Shell International and the Co-operative Bank are among the leading UK companies that have recently published social accounts. Other companies are currently in the midst of such exercises. A key feature of the social accounting methodology is that it requires external verification—certification by an organisation external to the company that appropriate procedures have been followed in seeking the views of all stakeholder groups. Social accounting would be an ideal tool for demonstrating to all interested parties—including CDC investors, staff, local communities in developing countries, UK and developing country governments, Parliament, non-governmental organisations and the public—whether the new CDC is achieving its development objectives as well as generating return on investors' capital. This technique should be adopted in relation to the CDC's activities as a whole, not merely for reporting on the ethical policy.

Recommendation: The legislation establishing the new CDC should require the views of all the organisation's stakeholders to be reflected in the Annual Report, through a technique such as social accounting.

By the same token, social accounting would also be valuable in documenting the social impact of all the businesses receiving CDC investment.

Recommendation: CDC's ethical policy should require the production of annual Social Accounts by all businesses receiving investment from CDC.

A CDC Stakeholders' Council

Accountability to CDC's stakeholders would be strengthened by the establishment of a formal mechanism as part of the new structure to be established by legislation. A CDC Stakeholders' Council, consisting of representatives of development NGOs, UK government, Parliament, investors, local communities, developing country governments, and CDC staff and management, could provide formal review of CDC's activities and work with CDC to ensure that ethical best practice is being followed. Such a Council should have formal powers to issue advice to and seek information from CDC. It would act as one means of communication with stakeholders, facilitating the social accounting process referred to above.

Recommendation: A CDC Stakeholders' Council should be established, composed of representatives of all stakeholder groups, to provide a formal mechanism for securing accountability and transparency.

Traidcraft Exchange

26 June 1998

16 Cf the OECD Development Assistance Committee target that all countries should be implementing National Sustainable Development Strategies by 2005. Back



© Parliamentary copyright 1998	Prepared 7 July 1998