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Clare Short: As the hon. Gentleman will know, the Department has a holding in the European Bank for Reconstruction and Development. The bank's chief economist, Nick Stern, thinks that the move from loans to equity and, therefore, the greater commitment to improving the quality of the management of the business, rather than securing a return on the loan, will possibly have great creative impact. The reason for that move is not merely to obtain a higher rate of return that will make it attractive to commercial investment; it will improve the long-term management capacity of the company into which the equity is placed. That potential benefit of the change could have great importance.
Mr. Wells: I very much agree with that point. I want the CDC to be encouraged by the directors in actually pursuing that. However, the change will not be easy to achieve. The right people must be found; they must be properly trained and supervised. However, doing so will provide security and that vital interest in the day-to-day management and in taught management. That would make it impossible for Governments in the states in which the CDC was operating to make political appointments to the management--a problem that has faced the CDC in the past. Such political appointees were not able to manage properly; they had neither the training nor the background and were forced into the management of the company. Thereby hangs a serious tale, which, in the case of the Guyana Electricity Corporation, ended with the collapse of the company, so that, for some months, there was no light in Guyana's capital city. Management is most important and I hope that it will be developed systematically, using modern management techniques.
I come now to the question of borrowing. The CDC will be able to expand if it reaches the point at which it can borrow on the international markets. Until now, its great restriction has been that it was subject to the constraints of the public sector borrowing requirement and the amount that could be borrowed in the private sector. Once money from the aid budget was not being invested in the CDC, its ability to expand was dependent on borrowing from the Treasury. It will be released from that constraint by the Bill, once the shares are sold to the private sector. I understand that the Treasury rules provide that the Government should sell 60 per cent. of the shares to private sector investors and the CDC would then be able to borrow on the private markets. That goal must be reached as soon as is practical, because it is from that borrowing that the CDC will be able to expand.
My next point relates to timing. If we were to turn the CDC into a company under the Companies Act 1985, but wholly owned by the Government--as it would be
possible and practical to do by the end of this year--the CDC would be unable to borrow from the private sector because its shares would be wholly owned by the Government. In those circumstances, I worry as to whether the CDC could maintain its investment programme--roughly running at about £250 million a year--because its only source of money would be self-generated funds, unless the Department is considering allowing the CDC to borrow from the Treasury during that interim period. I suppose that that would be possible, but perhaps the Under-Secretary of State could let us know about that when he sums up. Will he also confirm whether some of the aid budget will be allocated to the CDC to enable it to expand its lending and investment programmes during the interim period before the shares are sold off and it can borrow in the private sector?
That period is crucial because the CDC will be attempting to build a track record during those years. If its ability to borrow and expand is constrained too much, there will a bad effect on the track record that it presents to private investors.
My own view is that the sooner we sell the shares and launch the CDC in its private-public sector role, the better, which brings me to the balance sheet. Waiting too long for a track record would be a mistake; the CDC should go quickly into the private sector, so that it can begin to borrow, to adjust to the disciplines of the private sector and to make the equity investments necessary to enable it to accomplish what the Secretary of State wants. Certain interim steps could be taken--for example, dressing up the balance sheet by issuing preference shares. Such shares would have a coupon of, say, 8 per cent. They would attract ethical investors and commercial investors from the insurance world who are interested in an emerging market portfolio. They would also have transfer rights, so that they could be transferred into proper, full equity share at a later date to be decided by the investor. In that way, we could attract private sector investment into the CDC sooner.
Whether the preference shareholding would qualify the CDC to borrow from the private sector is a detail that we need to explore, but that sort of imaginative thinking has to go into the balance sheet and how to dress that up in the interim period. There is no doubt that it would be perfectly possible to produce a balance sheet for the CDC that would be attractive to the private sector almost immediately, because the CDC has accumulated profits and surpluses within the budget totalling almost £550 million. In addition, there are Government loans that are not currently being repaid, or on which interest is not being paid, which could be converted into equity.
Those are major hurdles which the CDC must overcome as it transfers to its new role of investing in vibrant sectors of society. In its developmental role, it will help countries to escape dependency and enable them to achieve self-confident development. As those countries generate their own resources, they will be able to invest revenues derived from the taxation of those resources in housing, education and health, which are vital to proper development.
I shall conclude with a statement made by Sir Michael McWilliam to the Select Committee. I asked:
Mr. Phil Hope (Corby):
I shall be brief and stay within the time allowed to me.
I strongly support the Bill because it gives us an opportunity to pursue the White Paper's goals and objectives of eliminating world poverty. The hon. Member for South-West Devon (Mr. Streeter) said, revealingly, that the Conservatives did not privatise the CDC because it would hurt the poorest of the poor. What does that tell us about the Conservatives' motives in all their other privatisations?
I am convinced that the Bill is about long-term partnership, as the CDC attracts new private capital for investment in the public good in developing countries. The CDC will target and expand its work in the poorest countries and will ensure that its investment is ethical, with social, environmental and health and safety issues taken into account. I remind the House that, in October 1997, when launching the White Paper, my right hon. Friend the Prime Minister said of the sale of the CDC:
Mr. Edward Leigh (Gainsborough):
One of the key reasons why I take an interest in this subject is that, when we were at the Department of Trade and Industry, Sir Tim Sainsbury and I were involved in the successful privatisation of the Export Credits Guarantee Department. That company is not entirely dissimilar from the CDC, even though, because we were dealing with potentially far more prosperous markets, we faced far fewer problems when the ECGD was privatised than the Government are facing today. The then Labour Opposition opposed that privatisation, but we rejoice when sinners repent of their former mistakes.
I have a few questions to ask the Government--after all, the CDC was founded in 1948 and it has been successful, so we have to be certain that the motives and factors prompting change are powerful. The CDC borrows long, at 25 years, and lends short, at an average of seven years; that adds to its surpluses. How will being in the private sector facilitate its ability to continue to do so? If the CDC's current borrowing power is insufficient, and if it will have more freedoms in the private sector, will it be able to borrow as cheaply in the private sector as it borrows now? Since 1995, the corporation has borrowed from the Exchequer at a zero rate of interest. Can that continue when the CDC is in the private sector?
Can the Treasury concede a special tax structure to a private company, to enable that new private company to compete with offshore companies? Will not that set a precedent, which the Treasury normally resists vigorously? The CDC is an extremely small burden on the UK taxpayer, so why are we changing its status now? If we are doing so because of its insufficient borrowing powers, could not those powers be extended in some other way--for example, by allowing the CDC to borrow overseas, which would free it from the shackles of the public sector borrowing requirement?
"Can the CDC achieve its aims of development more effectively if this Bill goes through? What do the panel think, yes or no?"
24 May 1999 : Column 70
Sir Michael's conclusion was:
"I think the end result as one comes out of this transition period will be more focused development, a clearer idea of where they really are making a contribution and the ability to attract partner funds will also be enhanced and that again will reinforce their development purpose. I think this whole process, uncomfortable as it may be and muddly as it may be in some respects, has a very worthwhile objective at the end of the road."
It is a worthwhile objective to find a way of enhancing, encompassing and bringing together private sector investment in the extremely poor and not-so-poor countries of the third world, so as to bring about economic development that complements social and other development.
6.34 pm
"I can also promise that all the money Government raises from the sale will be ploughed back into our development programme".
That is an important point.
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