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Mr. Streeter: I said "could be".
Clare Short: No, the hon. Gentleman said "should". In effect, he said, "Stop dithering--put it offshore."
It seems to me that a body with a major golden share in a Government holding, which is an instrument of our development policy, should be based in Britain. I asked my advisers where it could be based offshore because I thought that it might be bearable to place it in Africa, but they replied, "The Cayman Islands--or Ireland." It would be nice if it were in Ireland, but this is a British--a United Kingdom--development institution.
Clare Short:
They did not suggest Jersey, and I do not think that Jersey would do the trick for the purpose of competing with other offshore funds. That was the origin of the tax problem: other funds go offshore and benefit from very low tax, but an instrument of British development should be based in Britain or, I should say, in the United Kingdom. That was the circle that we had to square.
With the Treasury and the Inland Revenue, we considered all possible options, and I can today announce our conclusion that we should provide tailored tax treatment for the CDC public-private partnership. We discussed whether there should be a class of development institutions, which would have been another way of approaching the problem, but we settled on a tailored tax treatment that will enable the CDC to compete for funds with companies that are based offshore. That treatment will endure so long as the Government hold their golden share in the CDC. The main element will be exemption for the CDC from corporation tax arising on income and chargeable gains from its investment activities. Instructions have been sent to parliamentary counsel and I intend to table the necessary amendments in Committee. The solution is a good one which will enable the CDC to compete fairly and be a major instrument of British development policy.
The International Development Committee has also expressed interest in the CDC's capital structure, and it is right to say that restructuring is needed. Currently, the CDC's balance sheet consists of about £750 million of interest-free debt to Government and reserves of some £515 million; obviously, as a public corporation, it does not have any share capital. We intend to restructure the CDC's capital to create a balance sheet which potential investors will recognise as commercially viable and which will be a strong balance sheet, suited to the CDC's
business needs. We do not propose to leave interest-free loans on the balance sheet once the partnership is established; that would, in effect, be a subsidy to shareholders, which is clearly wrong. We shall restructure the loans into equity, or commercial loans, or a mixture of the two. We shall keep the International Development Committee fully informed as those decisions are made, and lay any proposals before the House.
As the House will know, there is always a potential state aids angle in any Government sale. After informal soundings with the European Commission, we do not consider that tax or balance sheet proposals will either distort intra-Community trade, or be likely to create any difficulty. However, to provide investors with certainty, we plan to notify the Commission at the same time as we inform it of the capital restructuring--a process required to ensure that there is no hidden subsidy in capital restructuring. We expect speedy clearance from the Commission on both questions.
As I have made clear, we want to encourage wide participation in the CDC, and that will ultimately lead to our seeking a listing. The CDC's business principles will ensure that it is very much an ethical investment, so it is likely to appeal to the growing sector of ethical investors. However, we do not intend to target ethical investors alone: interest could also be expected from, for example, those who are already targeting emerging markets and who are interested in moving into poorer frontier markets.
The timing of a listing will depend on several factors, including market perceptions of pre-emerging markets and of the CDC's track record and forecast performance. The key will be to ensure that new capital is introduced at the right time for the success of the CDC's business. However, we recognise that listing might not be possible at the time when other conditions are right for creation of the partnership; in that case, we would look at alternatives for a transitional period. For example, the CDC might have a good track record, but if there is turbulence in emerging markets, the time might not be right for a listing. We must move at the right times and to the right stages during the process of transformation.
The CDC's financial track record is obviously a key issue. Clearly, 1998 was a very difficult year for emerging markets. The International Finance Corporation, which is part of the World Bank group, produces an index that measures, for example, what is happening in emerging markets; it fell by 22 per cent. in 1998. Against that background, the CDC's performance was creditable: although for the first time in many years it made a loss in 1998, that was largely due to provisions against investments in Indonesia and Pakistan; although the underlying investments were good, the provisions were necessary because foreign exchange problems meant it was not possible to get money out of those countries.
Overall revenue in 1998 was £147.2 million with an operating surplus of £110.4 million. Although both figures are lower than in 1997, they have held up well in difficult market conditions. In previous years, the CDC has generally achieved profitability targets, with returns comparable to or above those of other development finance institutions. However, it is obvious that returns at historical CDC levels will not be enough to attract private investors.
Mrs. Cheryl Gillan (Chesham and Amersham):
The Secretary of State obviously examines the CDC's figures.
Clare Short:
I have not made such a projection, and I do not think it would be useful for me to do so. The CDC runs its own business. Although I exercise some supervisory powers, I do not consider myself to be an expert when it comes to the economic performance of emerging markets. I read about such matters with a great deal of interest, but I do not think my predictions would be very valuable in guiding the CDC in its investment operations.
We are confident that the CDC will be able to increase its profitability and make the returns needed to attract private investors. Much of the improvement will come from the CDC's capturing for itself more of the profitability of the investments it makes. Historically, the CDC has largely invested in secured debt, which is obviously relatively low risk and therefore offers low returns. In preparation for the partnership and to increase its capacity to attract private sector funds, the CDC has started the process of shifting to risk capital--meaning equity and quasi-equity. It will, therefore, capture a higher return on its investments.
In 1998, more than 60 per cent. of new investments were risk capital, compared with around 30 per cent. in 1997. That is important not just in order to attract private sector funds but from a development point of view. Equity investment leads to a stronger commitment to the development of a business with long-term growth prospects. Risk capital is in short supply in the poorer countries. A larger CDC creating more equity investment will bring much greater benefits to developing countries.
Mr. Andrew Rowe (Faversham and Mid-Kent):
Some of us are concerned that the easiest way for the CDC to make serious savings on its overheads in difficult market conditions is by closing some of its offices in countries where its investment is coming to an end. Yet, when the CDC gave evidence before the Committee, it pointed out that one of its best selling points was its unrivalled network of offices in countries in which few of its competitors were active. Has the Secretary of State discussed with the CDC the fact that, in order to make itself more attractive to the capital market, it is in danger of eliminating the very asset that makes it an attractive development instrument?
Clare Short:
The hon. Gentleman is absolutely right. That is what would have happened if we had simply privatised the CDC and it had cut costs by closing offices in difficult markets and moving to easier markets. That is why we must have a partnership and why we have had to entrench the rulings about the countries in which the CDC invests. We have said that at least 50 per cent. of the CDC's investment in developing countries must go to the poorer countries, which will prevent the search for greater returns leading to the kind of action that the hon. Gentleman described. This measure is designed deliberately and carefully to prevent that outcome.
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