Examination of Witnesses (Questions 20-39)
LORD CAIRNS, DR ALAN GILLESPIE, MR RICHARD LAING, MS GILLIAN ARTHUR
TUESDAY 2 JULY 2002
20. The question I am asking is whether there is any assessment. To be provocative about it, I am not quite sure how the investment strategies are assessed, for example, in executive housing estates for UN workers in aid agencies. How does that deliver to poor people in developing countries? Is that not a question of fact? In other words, you have a choice about where the investments are made and when there are stakes in companies what do you do to question where the company makes its investment to see if they have a policy alleviation agenda, or are you really just leaving it to a trickle down theory and hoping that it will work out in the long run, that there will be a bit of economic development and that might help?
(Lord Cairns) I think it is more specific than that in terms of the business principles, the areas in which we invest and the standards that we expect to be maintained in the companies in which we invest, both those that we manage and those in which we have investments. Gillian Arthur may like to expand on that as that is her particular area.
(Ms Arthur) In terms of looking at individual investments, we certainly go through a due diligence stage and a great deal of investigation into what this company's attitude is to the whole area of health and safety and environmental type issues. Our take away from that is not so much that it has to be great for us to invest in but: is there a reasonable chance of us being able to do something to improve the company? I think the starting point is that investment might be good for these countries but investment per se is not enough and we will look at the economic and social benefits. Clearly, we are trying to build sustainable businesses. What will job creation over time be; will it be durable; what has been their attitude to environmental issues; are there things that we can do to improve that? Really, once these companies get to a certain level of their own robustness, then you begin to see them engage in activities of their own. I think you have got some examples in the submission of things like Favorita Fruit, which have taken on a great range of environmental and social issues and tried to work through those. That is where we see the process going, so that it is not necessary that we have some big, up-front kind of economic return of capital calculation, because I think that we have found in the past those have not necessarily been predictors of the way in which a company might develop.
21. I would want to go even further, and I am pushing development agencies, whether they be departments or not, to ask: how is partnership working out with people locally? How do the poor themselves have a say in assessing whether what is done on their behalf actually has an impact? Do you facilitate, for example, any of your companies to have independent local assessment of the impact of the investment?
(Ms Arthur) Indeed we do. There are some examples. There is an example in the submission of Songas, which is the gas pipeline in Tanzania which goes up to Dar es Salaam. There are lots of examples in the way that has been managed of engaging with local people to talk about how this would affect them. There are village electrification projects that come out of that in which the company has engaged. I think we have got work to do but there is definitely amongst, if you like, our better companiesand we do grade them on their ability to deal with thingsa necessity that they do have to engage in local communities. I think Engro Chemicals in Pakistan is a fabulous example of people who have community programmes and very much a volunteer type of attitude within their staff. The issue for us is to try and replicate some of those kinds of good examples through the CDC units.
22. There has been quite a lot of adverse publicity from employees of CDC Capital Partners. Are you aware of the story which has had wide circulation that the new management have told the staff that if they want to work for a development organisation, then they should go and work for Oxfam? My question is: is that true and does CDC still see itself as a development organisation?
(Lord Cairns) I have asked my colleagues if they have any reason to believe that is true to say so, but it is totally out of character with what CDC is about. CDC is about developing business in the third world. We are committed to development. We are not an aid agency. There is a difference. We are about one part of the whole panoply and we think a responsible and careful and caring one. That does not mean to say that we do the same things as Oxfam and aid agencies, and I have been involved in a number of those myself. They do different things. They are part of the total contribution. We have a role to play. We have actually a very difficult role to play. I have to say that the people who work for CDC have a very hard time. They are tested and tried every day of the week. It is a tough place to work. People try their socks off but the professionalism and discipline is, I think, quite magnificent in CDC and it has gone on improving throughout that time. It may be that a number of people have not liked that. I have heard those things; I have not seen them in print. I have seen what seem to be some scurrilous and inaccurate comments in some newspapers and I hope those news papers will now correct that.
23. To take John's point a little further, your Chief Executive referred earlier to the fact that you invested in 270 companies and he talked of their positive impact in their communities. Your Operations Director has just talked about the fact that local communities are in dialogue with companies in order that the development is actually what people want. Do you see a role for CDC in ensuring that the companies you are investing in, those 270 companies so far, are maximising their development impact?
(Lord Cairns) Development has so may faces. We start off by saying: what is the mandate that DFID has given us? We try and follow that very precisely. Those three things that we talked about at the very beginning come at the top of the list. Clearly we do that out of a sense that this will be not the only but one of the really important contributions to development. I must have had dialogue with about eight of Africa's presidents and prime ministers in the course of this year so far. Every single one of them has said to me, "We have got to get the private sector to do more. We have got to get a better private sector". I have been in discussions with them in various roles, including CDC but not exclusively, on how the private sector responds to NEPAD and how it is going to work because there is nothing in NEPAD unless the private sector takes up the challenge and really develops it, and this at a time when the risk appetite of many investors around the world is going down. It is a hugely difficult issue. I see that as being the primary development role that we are playing.
24. CDC obviously has attracted a lot of adverse comment for pulling back from agriculture and agribusiness because of the relatively low yields. I appreciate that these businesses have been sold on rather than wound up, but who is going to create businesses like this in the future? What is CDC's policy for filling the gap that you have left in capitalising these types of agricultural businesses?
(Lord Cairns) I think we make the point in our submission that 28 per cent by cost of all our investment is in the agricultural sector.
25. Is that for new investments?
(Lord Cairns) No, of our existing portfolio, 28 per cent by cost is in the agri-sector. It is only now worth 11 per cent of the total on an up-to-date valuation.
26. What about the future - that is the question I am asking - if this is not going to be a priority for future investment, and indeed it seems to be the reverse, and you continue to sell these businesses?
(Lord Cairns) We have sold a number. We still maintain a large number of different businesses in that sector. We are looking at one or two new ones but, as we lay out in our submission, it is a difficult area in which to meet the criteria for developing a private sector business. That does not mean to say that other people may wish to support that business on an aid or grant basis, but it is very difficult to do it on a profitable, sustainable business. Amartya Sen suggests at the back of our document that it may not even be a very sensible use of capital to try and do it. I personally would agree with him but I understand that there is a huge amount of rural poverty which, on the basis on which we run the world at the moment, for substances and so forth, makes it somewhere near an impossible area, except in specific areas, for the private sector to do the job in these countries. That is a crying shame. That is one of the greatest evils of the world.
27. What have been the employment implications for the businesses in Africaagricultural businessesthat you have sold? How many jobs have been lost?
(Dr Gillespie) Let me address that question first of all by saying that we made a statement in our annual report a year and a half ago that we were seeking to divest of certain agricultural activities. To put that statement in context, because it has been taken dramatically out of context, we have sold five businesses. We are in the process of selling another three, and we would be happy to document those. In the back of our submissionand if you have it, I would like to take you to some evidence around this matter, to try and illustrate to this Select Committee that we are deeply in agriculture and it is a fallacy to say that we are notcould I point you to pages 44 to 47? I start with page 44 and may I take a moment on this to illustrate what I am saying? If you look at Swaziland, there are three investments essentially in the sugar industry where we are employing 5,000 people. We are probably one of the largest agricultural investors in that small country. Over the page, you will see that in Tanzania the first two investments listed are in teak, where we are employing 1,000, and in wattle we are employing 700 people. At the bottom of the page where it says "SME Funds", that is our current fund dedicated to small businesses in Tanzania. The second one, Tanzania Flowers, is a rose farm; the third one, Interchick, is a poultry business. Over the page, La Fleur d'Afrique is a rose farm; Tanga Fresh is a dairy business; TATEPA is a tea business. At the bottom of page 46, in Zambia, Chisamba Grain is a grain milling business, and then a poultry business. Mpongwe is our arable farm employing 1,200 people. At the top of page 47 we have a milling business. In Zimbabwe, on page 47, we have a horticulture business and the Dairibord, employing 1,000 people. These are investments that we have made out of our small funds over the last four to five years. We are doing all we can to try and build the profitability of these businesses by being a good owner. I would like it to go on the record because The Times article on this was absolutely wrong in taking out of context the statement that we are disposing of certain investments. Right now, I think we have 24 agricultural investments in Africa. Many of them are not profitable and they are decreasing the value of our portfolio, which we are not happy about, but we are in them; we sit on the boards of these companies. Many people who in the pastand there was a comment about people leaving CDCmight have worked in CDC are now working in the companies at a local level. Many of them are Africans working at the local level in these companies. We have a job to do in maintaining these businesses and looking forward. That is where your question started. Right now, I can think of three investments in the agricultural sector that we are scrutinising. What I have not talked about is Latin America or South-East Asia. On the head count, agribusiness accounts for 50,000 of the 190,000 people across our businesses and is very substantial. As the Chairman said, it may have cost us 28 per cent by value and it is now sadly only worth 11 per cent by valuation, but we are there and we are in it. We are trying to make it work and make it better.
28. Could I ask you to let us have a note in relation to the five businesses you have sold and the three which are on the market as to the employment implications. Please add whatever commentary you want about the need for restructuring, but we would like to know what are the employment consequences of the sales programme.
(Dr Gillespie) Yes. Just to comment briefly on that now, if I may, in a several of those five businessesand I do not recall the detailthere was significant overmanning on those farms, particularly of casual labour. We dealt with that before the sale in order to have some of those workers receive the right level of compensation, because the buyer was wanting to buy it as a more commercial entity, rather than having the buyer take action around the work force. So we have adjusted the workforce in some of the businesses for sale. We have done it within the principles of fair employment in which we believe. We will give you a note on that.
29. May I follow on from your question? You could tell us now presumably how many people have lost their jobs in those industries.
(Ms Arthur) Just going back to the sale, I do not think anybody lost their job in Manda. We have a commitment from Global that they will maintain employment levels and that they will maintain or improve employment conditions. Within our own businesses, my memory is that in terms of permanent jobs over a period of
30. No, permanent jobs is not the issue, since these investments are intended to provide employment opportunities. I do not know about employment law but I suspect in a lot of these countries an awful lot of employment is on a casual basis.
(Ms Arthur) I understand. I was going to say that in terms of permanent employees, the number is down probably to 25 per cent would be my guess, but I could give you a note on it. Included in that, though, are jobs where we restructure businesses. For example, if you look at forestry businesses, they have, like most forestry businesses, outsourced and created local businesses around some of the functions. Then there are seasonal workers, which I think is important in terms of the wholeness of this. I have to say that that is very varied. I could give you a lot more detail.
31. On the information that we have been given, 10,000 local employees have been made redundant. Is that a figure you would dispute?
(Ms Arthur) The figure I have in my mind in terms of permanent jobs would be much closer to 5,000.
32. Could I move on to your operations in China? I understand that you have recently opened an office in China and yet China is an emerging market that does not apparently face problems in attracting capital. So why has CDC made China a priority? Can you tell me a bit about the portfolio? What percentage of the investments is in remote rural areas and what percentage is on the coast where a lot of capital is going anyway?
(Dr Gillespie) First of all, China sits within the approved list of countries, the list that DFID has given to us. It sits on that list of poor countries because there are 200 million people living on less than a dollar a day and there is a per capita GDP of $1000. So by every measure it is a poor country. We were approached by a leading UK assurance company, CGNU, as it is now known, who said they are interested in making investments in China and would we work with them. It was on our list of poor countries. We were approached by probably the most prestigious investor of all we work with offering us $50 million. That predated my arrival at CDC and about four years ago it was decided by the board that we would put $50 million up alongside their $50 million. So we have a dedicated fund of $100 million. We have a small team in Beijing, and from memory it is five people, of which three are locals. Therefore we are very small in the China market and it is very early. We have made a small number of investments, one of which is discussed in our submission, which is a manufacturing company called North Pole, which makes camping chairs and outdoor equipment for export. That company has benefited in a number of ways from capital from our fund, but I would say the most profound impact that pleases us is that we have helped that company put better labour practices in place through its chain of subcontractors, and indeed some of its subcontractors are in Sri Lanka and Bangladesh. We have not just provided capital; we have provided capital with advice, capital with discipline and I hope, through that example, we are in a very modest way helping to reform some work practices in China in simple things like ensuring that there are lavatories for workers, which there were not in some of these factories. We are a drop in the bucket when it comes to China with our $100 million but it is a poor country and we seek to make investments that will make a difference.
33. In relation to the CGNU investment, do you believe the investment would not have gone ahead, that CGNU would not have been able to find some other venture capitalist to put in money, had CDC not done so? Do you routinely ask that question of yourselves, given that you have the benefit of capital coming from the public purse? Do you always make yourself the investor of last resort or do you look for good investments, even though others might too make such investments?
(Dr Gillespie) On the CGNU, I suspect, if you pressed them, they might have found someone else to work with, but they did not. They came to us and said, "We have observed that CDC over the years has gone into countries in a sort of missionary way for the first time and has invested in a responsible way". They liked the fact that we are owned by the UK Government with a code of business principles. We were going to act in a way that they would be proud of, and that is why they approached us. If they had not found us, might they have put the money in some other way? Possibly, but we were very pleased. To go back to the earlier point of mobilisation, through CDC being willing to work with them, and the fund is entirely staffed by our people, that is an extra $50 million going into a poor country.
(Lord Cairns) On the question of additionality, which is really the basis of your question, CDC used to operate with an additionality test until the announcement in 1997. That was really inconsistent with our goal of attracting private capital. The thought that you can attract private capital when you only invest when nobody else will invest seemed to us to be a contradiction in terms and that actually we could not fulfil our full mandate if we had that constraint. So, yes, we do compete for business. There is competition not only for us but for the other people in the process. We do compete. We are not the investor of last resort although, if you took the portfolio that we have as a whole, there is nobody else that does the job we do in Africa; there are one or two people who come and go on the Indian scene; there are very few people who are dealing with the SME sector.
34. Maybe that is more of an argument for not dealing in China and devoting more resources to Africa.
(Lord Cairns) It is a small part of our exercise but, if we can be successful in China with CGNU, we think we can do some useful things in China; we can establish our reputation far more broadly than that and maybe that helps with what we can do with private sector investors elsewhere.
35. To follow up the Chairman's question, you have opened an office in China, you have opened offices in Mexico and in Miami to deal with the Caribbean basin, and yet you have closed offices in Côte d'Ivoire, in Ghana, in Mozambique, in Malawi. The Prime Minister is very committed to NEPAD. How on earth are we delivering on the trade agenda and on the private sector development agenda for Africa, which the G8 leaders are so committed to, when you are putting your skills and experience and resources into China and Mexico and pulling it out of some countries in Africa?
(Dr Gillespie) I think we need to look at the materiality test. We have allocated $50 million to China which will be invested over the next 3-4 years. That is, out of the totality of CDC, a very small part. In Mexico we do not have a fund and we are going to operate there on the basis of raising funds using other people's capital, so these are small and early stage operations. What I would want to say secondly, though, is that when we talk about Africa, we have opened an office in Lagos. Nigeria is the single largest economy of potential in Africa and, given our British preoccupation with sub-Saharan Africa, it is essential that we are there. We have put one of the finest Nigerian professionals we can find in to head that office and are in the process of making our first investments, so there is a very affirmative commitment to Africa. You have referenced some other countries where we have closed offices. We have done that in common with a number of organisations who work out of regional hubs, and we now have a very large office in Nairobi in Kenya out of which a group of executives operate in Kenya, Uganda, Malawi and a satellite office in Tanzania. We have organised our African business around a series of hubs which is not dissimilar from what the British Council are doing right now. That is not to say we have diminished our commitment to Uganda; indeed, right now, one of the more significant investments we are looking at is in the power sector in Uganda, and we had people on the ground there two weeks ago. We have the small funds that we talked about earlier; a small fund of offices from memory in Ghana, in Kenya, in Tanzania, in Zambia, in Zimbabwe, Mauritius, Mozambique, and Maputo and we are an anchor investor in the Mozal aluminium smelter in Mozambique. The Chairman said earlier that there is nobody else doing this across Africa the way CDC is. I really believe that in terms of the spread of offices. What I find intriguing in learning the history of this organisation is that it has opened and closed offices over its history, and we believe right now we are quite well positioned to fulfil the UK's commitment to Africa as expressed through NEPAD.
36. Having recently had an all-too-brief visit to China and as the proud owner of a Northpole travel band, the company the Chief Executive has told us that CDC are investing in, I would like to push you on a question that Hugh asked that I do not think you clarified. Where exactly in China is the Northpole, because there is absolutely no doubt in my mind that Beijing and Shanghaiwell, move over New York. They do not need your investmentit is like two companiesbut the south and the south west of China do need your investment, so I would like to know where exactly are you investing in China?
(Dr Gillespie) Our team, because it is such a large country and there are only five of them, have said they will invest within a two-hour flying distance of Beijing. That is the circle they have drawn in this first year of their activity. I will follow up with the answer as to where exactly the Northpole company is, but I think the perspective we would bring is that it is not just the location within China but the fact that we have invested in a company that is offering a huge amount of employment, is getting its products into the market, and as I said earlier we have tried to enhance the labour conditions in that business. The Chinese government would like us to go to the far west.
37. I am sure they would.
(Dr Gillespie) We cannot do that with five people.
38. I am still trying to get to grips with your investment strategy. What it seems to me you are sayingand you have not put it in these termsis "Parliament changed our remit and we are honouring that and doing that and you are now criticising us for it, for doing a different job which was what the changed remit of CDC amounted to". Would that be a fair summary?
(Lord Cairns) I think what I am saying is that the development world moves on. The sort of approach that we were prompted to take, the slight changes in the emphasis and so on, is something which just about every other DFIand Alan can probably talk to this even better because he has been Chairman of the group of European DFIsis moving in the direction of, though they are on the whole three or four years behind us in terms of I think focusing the mandate rather more precisely than used to be the case, focusing on the importance of creating units that can really add value in the countries in which we are operating.
39. When I go to Africa, and I think this goes for some of my colleagues as well, what I see are countries that in terms of Ministry of Agriculture produce virtually nothing in terms of a macro agriculture strategy about where that country is going. You have got a United Nations' organisation, the Food and Agricultural Organisation, which is a non-starter as far as I can see in terms of its impact: you travel through the country: you see mile after mile of fertile soil and you see it being used in what seems to be an incredibly inefficient way. You see products that cannot find a market. It seems to me that is the priority. You have 70 to 80 per cent of the people living on the land in poverty and when you look at it you say to yourself, "What is the economic priority of this country?". It is to get its agriculture working better, and you are saying, "That is not our job at that level". Is that right?
(Lord Cairns) I think I am saying two things: I am saying that in the current world of subsidies, I have a very small farm. My cattle are paid £5 a week by Europe£5 a weekmore than a large number of people in Africa are being paidand to expect the agricultural sector, even in an area which has as a basis a comparative advantage, by the time I have been paid that ridiculous £5 a week it is very difficult for them to compete, and as such the market forces are saying, as Armartya Sen says in his piece at the back of this document, until you can change the appalling regime that the developed world has created and the United States has aggravated in recent weeks, it is very difficult to say that scarce resources in development terms should be used in agriculture. I can see a very strong case for doing so on compassionate terms, but it is different.