Examination of Witnesses(Questions 64-79)
LORD CAIRNS,
MR PAUL
FLETCHER, MR
RICHARD LAING
AND MS
GILLIAN ARTHUR
TUESDAY 17 DECEMBER 2002
Chairman
64. Thank you very much for coming to see us
again. We all felt it might be helpful to clear the air in the
sense that what we had originally intended to do was to take evidence
from you in the summer, write to the Secretary of State with some
questions and publish that letter and her replies. During the
course of the summer the Secretary of State, when the House was
not sitting, made quite a number of announcements about CDC, so
we felt it would be quite helpful to enable everyone to clarify
some issues. The first question really is to try to get some feeling
from you as to the sort of institution you see CDC as being. Is
it an elephant, a rhinoceros or a gnu? The Clerk, in his briefing
for this meeting, has put down certain suggestions as to what
it might be. I should be interested to hear what you think you
are. Are you a demonstrator institution providing risk equity
in a way which mimics or marginally improves current commercial
practice, but with a geographic focus on poor countries, a model
which aims to maximise the quantity of investment reaching poor
countries by showing to commercial lenders that it can be done?
In other words, is CDC about trying to persuade others to follow
your lead in going into developing countries? Or are you an investor
institution which tries to do what the commercial providers cannot
do, for example accept that commercial estimation of risk is often
exaggerated and thus be willing to invest in higher risk ventures
such as SMEs or companies with long-term horizons? Are you an
institution which is going for the parts other bits do not go
to? Or are you a mixture of those and are you an experimenter
leaning towards the demonstrator model but continually experimenting
to push the envelope upwards? Or are you simply a venture capital
fund like any other venture capital fund? It would be helpful
for us to have some understanding of how you see CDC. What makes
CDC different from, say, CBC, which is a commercial venture capital
fund investing in different parts of the world?
(Lord Cairns) Thank you very much. I
perhaps should first of all introduce Paul Fletcher, who has taken
over as the Chief Executive from Alan and whom you will not have
met before. My other colleagues were here on the last occasion.
To answer your question, very simply, one objective is to maximise
the amount of third party monies which we can bring alongside
government. The second objective is to help create and build sustainable
businesses in our chosen markets which we call, in shorthand,
the CDC universe. Those are our two objectives. They are very
simple, they result in us doing rather different things from a
lot of other people by virtue of the fact that our shareholder,
DFID, have pointed us very specifically into these markets. We
are operating to a standard in those markets which very few other
people are able to do, as typified by the number of people we
have on the ground in parts of the world where other conventional
players might have a fly-in/fly-out role. We hope that through
that we can achieve both those objectives in terms of better understanding
the businesses which are in those markets and also are able to
convince third-party investors that we have something special
to offer them and that if they wish to invest in those markets,
they would be pretty stupid not to come along and talk to CDC
about it. Whether that goes through the alternatives you have
offered or not, it would be my way of trying to say what we aspire
to and I hope as far as possible can achieve.
65. Just out of interest, is it possible to
give an indication of the sort of scale of third-party investment
you are managing to attract?
(Lord Cairns) To date we are responsible for some
$400 million of third-party capital. Colleagues will know what
our aspirations are, which is really rather more important.
(Mr Fletcher) May I endorse that statistic? Over the
last 10 years CDC has raised third party funds. I looked at the
numbers recently and in aggregate it is about $400 million and
just a little over 90 separate investors who have come into these
funds across the globe. We do have some experience here. One of
the key objectives of CDC is the mobalisation of private sector
capital alongside the public sector capital which we have today.
In aspiration terms I should like to tell you that we are in the
process of putting a plan together which will have some landmarks
five years out as to the sort of dilution effect we should like
to see. I think it is a reasonable aspiration for us to have 30
or 40% of our portfolio in third-party capital in five years'
time. I do not want to put hostages to fortune out there because
we are right in the midst of our business planning for the next
five years, but that seems to me the sort of scale we might realistically
anticipate in the difficult markets in which we operate.
Mr Battle
66. May I say in response to the remarks you
have made, that I find it in a way quite encouraging, looked at
from a different perspective? You are doing things differently
from other conventional players. I should like to ask whether
it is possible that you could be thinking, not just about the
scale of the mobilisation of capital, but moving away from what
I describe as a very old-fashioned, out-of-date view of simply
investing this capital and it generating a return, to looking
at the link between that risk capital and its impact on poverty.
Some have said to me that they would not ask that in the first
world. My response to that is that the radical and best are now
doing that, they are asking what the impact of investment is in
inner city neighbourhoods like mine on the social and economic
structure of the neighbourhood. Is it possible to link capital
investment to tackling challenges which seem to be not resolved
by just looking to a blind trickle-down theory? I should like
to ask in particular, if you have that vision that the investment
of capital can contribute in terms of social development, economic
development, tackling poverty, how CDC would move along that line
if there were no systematic assessment of the investment returns'
impact on poverty reduction, for example, on poverty reduction
targets, millennium development goals? Would you consider linking
the objectives of capital investment to those objectives and measuring
them?
(Lord Cairns) Gillian, you have probably done more
on this than the rest of us. Gillian, among other things, heads
the section which deals with the social business principles side
of the operation. This is a difficult area.
(Ms Arthur) It is a difficult area. What I would say
is that we do look at social impact today; we certainly look at
social impact when we invest on an investment by investment basis
and go through a whole series of questions and then look to work
through those issues. I should say that there are different sectors
and clearly the characteristics of those sectors are different
and we need to begin to understand that better, to your point
about working it through to a poverty reduction connection. We
are clearly in industries which have high impact on growth in
the country and that is what DFID have asked us to do. For example,
if you take financial institutions, which is probably 17 to 20%
of our portfolio, they have a high impact on the economic growth
of the country, there is great alignment with what DFID is trying
to do in terms of creating corporate governance, but the link
to poor people is not as obvious. Having said that, there are
clearly policies and practices which banks and financial institutions
can put in place which we can follow through on in terms of micro-lending,
where you can begin to make a far closer connection between the
investment and poor people.
67. What I am groping towards is asking whether
it is possible to be dynamic and anticipate the impact rather
than just measuring it afterwards. To give a crude example from
the north world, a supermarket arrives, there is a big discussion
on the impact of the neighbourhood and we try to work out its
impact on local corner shopping in our inner city neighbourhood
well in advance. We build in the impact on the local economy and
some work has been done on that now; not post hoc, not after the
investment has gone in, but anticipating and analysing before
it goes in. Are you building that capacity into CDC?
(Ms Arthur) I think that some of that capacity is
in CDC today. I can think of investments where people have gone
through a thought process of considering how this investment will
impact on local traders, how this investment will impact on local
infrastructure and have begun to think through those things pre-investment.
I do not think it is just ad hoc as we go through it. Clearly
the first port of call is to make the business sustainable and
profitable so that these things have a lasting impact.
68. The reason I suggest that is I do think
you are in a position to get ahead of the game and lead in some
of these ways rather than follow the trend and when the whole
economic debate is shifting in that direction of linking the micro
to the macro. Would you not be much more proactive in leading
that rather than following behind?
(Ms Arthur) I would say that today, in terms of where
the pack is, we would certainly think that in a number of our
investments we have gone through these issues where perhaps others
would not. It is very much part of our thinking and I see no reason
why it should not become more so.
(Lord Cairns) We see creating sustainable businesses
and hoping to create growth as our primary objective. It is not
without merit that very recently the Corporation of London, in
seeking a social responsibility, social impact assessment looked
at CDC as a case study to prove the point.
69. Where I would perhaps worry about the language
is that sometimes we think there are economics and then social
impact is social work added on extra. I do think it is going to
become good economics to build the poor in.
(Mr Fletcher) We would agree.
(Lord Cairns) We are with you.
(Ms Arthur) I agree with that. I just go back to the
financial institutions, I do think they see that there is a market
there, so it becomes very much part of the operating policies
and thought processes of a company. That is built in today in
the way in which we look at those investments.
Alistair Burt
70. We talk about promoting and protecting the
environment, and your business principles do that, but there is
nothing similar on social development; social issues refer to
employment standards rather than development. The business principles
you have are in fact pretty standard safeguarding measures designed
to mitigate adverse consequences rather than maximise positive
development outcomes. Our concern is whether mitigation in itself
is enough and whether there should be some more positive steps
taken towards enhancing your social development contribution.
(Lord Cairns) I hope to some extent we have answered
the question in that we do see it in other businesses in which
we invest as being good economic policy, good commercial policy
to develop, as far as we can, in playing our part, and the part
of the companies in which we invest, in all forms of social development,
without saying that we can take over the whole work of reforming
society in the various countries in which we operate, which we
are not equipped to do, but we can play a part.
71. To what extent do you think you can drive
and in some cases push further than would be natural in the circumstances?
Where do you feel you can take the lead and be more positive rather
than in a sense just playing safe?
(Lord Cairns) Paul, you have been running Africa for
a long time. You must have thought about this.
(Mr Fletcher) I do not think we play safe. You are
right that we process every single one of our investments, you
are right, through the hurdles of our business principles as enunciated.
Every single investment we take to the next step and where there
are deficiencies we look at what we can do in terms of influencing
the outcome. You may know that we sold an investment this year
in East Africa. There we found ourselves looking at very complex
inter-relationships around the continued employment of the employees.
We took enormous proactive steps to ensure the right outcome,
the right outcome for housing, the right outcome for benefits,
the right outcome for the social infrastructure for those employees,
even though we were selling the business. I do not recognise the
rather defensive position you describe for us because we really
are very proactive. I would say to you that we could always do
better and we shall certainly continue to pay serious attention,
as you correctly point out, to taking a leadership role here.
72. As an example, the International Finance
Corporation is moving towards having sustainability as a concept
in evaluating its investments. Its investment officers in their
job appraisals have to show whether or not the business in which
they have invested will add anything developmentally. Is this
a practice you could copy?
(Mr Fletcher) Absolutely. All of our investment executives
in our Aureos fund are already qualified under the IFC diploma
standard. I have asked Gillian to see how we can take a position
and effectively replicate that within CDC. The IFC as we speak
are doing a multi-country rollout of the standards you describe
and indeed have asked CDC not to be a participator but in fact
to be a teacher and a case study presenter in that rollout. I
would endorse what you say.
73. To what extent do you measure trickle-down
in terms of poverty reduction, such as hiring local people for
construction work? Do you do any analysis of this and is this
part of your returns process?
(Lord Cairns) I do not believe we do any trickle-down
process in any formal sense. Richard, you have had experience
in the palm oil plantations in Indonesia and Sumatra. What have
you found there?
(Mr Laing) Yes, when you mentioned this proactive
nature on the social side I was thinking of an example both in
Papua, New Guinea and in Indonesia in a palm oil business. In
Papua, New Guinea we took very active steps to improve the schools
where our employees were going which we were not happy with. I
should say that is going beyond the pure commercial approach.
It was important to us in our social approach to the business
and we took action there. The second place was in Indonesia, again
in the palm oil business, where we were not happy with the housing.
This is interesting because our partner in that business said
that in his view it was all right. We felt it was not and in this
case we put in our own money. It meant bulldozing down some old
housing and putting up better housing, against our partners' wishes
but we believed it was the right proactive social approach.
74. In examining something as basic as how much
local labour is hired as part of a project in order to ensure
that there has been a poverty reduction element in the project,
even to that basic extent, to what extent is that measured in
your returns on the projects?
(Mr Laing) It is not actually formally measured as
such, though the data could be captured if we needed to capture
it. We do use local contractors. In the example I just gave, we
would use local contractors for that sort of activity.
75. Do you not think it needs to be measured
rather more than you do at the moment?
(Mr Laing) It goes to the heart of what we have been
asked to do. It is something we feel strongly about, but at the
end of the day our main objective, set for us by our shareholder,
is to invest in sustainable private sector businesses, doing it
in a principled way, following our business principles. We do
measure some metrics, but there are some where we feel at this
stage that we do not need to, but we can continue to add to that
and we shall continue to add to some of those measures.
Hugh Bayley
76. In the Doha trade round a commitment was
given by the rich world to making it a development round. As far
as sub-Saharan Africa is concerned, probably as far as most developing
countries are concerned, if we do not do something to improve
market access for agricultural produce to the developed world,
we shall fail to make it a development round. I should have thought
that by common consent that is the single most important area
where change is needed in the trade round, yet we heard in our
last evidence session that CDC is moving away from agriculture
in a strategic way. Do you not think that is a mistake, given
your expertise in developing small-, medium- and large-sized agricultural
businesses and connecting those businesses with purchasers of
their products in developing countries? Is there not an awful
lot you could do in this field?
(Lord Cairns) I think I rather got carried away last
time by ranting on a bit because it is one of my pet hobby horses.
It is perfectly possible under the structure we are looking at,
creating CDC going forward, that DFID could say to us or one part
could say to the other part of the organisation, "Thou shalt
create an agricultural fund which has very low return hurdles".
That might be very good social development. I am not sure it would
under the current circumstances be a very good way of using scarce
capital, just because the circumstances which have been created
by the advanced world have made it somewhere between difficult
and impossible for that business to become truly sustainable.
I regret that as much as you regret that, but for us to develop
businesses which do not offer the prospects of attractive returns
is to condemn more and more people to live at the margins of society.
We may be able to find other ways in which we can help, in terms
of developing infrastructure, developing telephone systems which
enable more people to operate better in that field. I regret where
we are, but those are the facts and we have to operate within
the market as we see it. There are certain agricultural investments
which we do undertake. You have heard about the massive palm oil
business in which we are operating in some of the poorest parts
of Indonesia, Kalimantan, Sumatra and Papua, New Guinea. We have
a very large business in Zambia, producing a large proportion
of the total output there. We are operating in those fields where
we feel there is an opportunity to make reasonable returns. I
regret there are not more, but under the rules of engagement under
which we operate, unless we are given instructions to do something
different from what we are doing now, it is very difficult for
us to do much for the agricultural sector, although we will always
look.
77. May I lead the conversation directly to
Africa? I believe you have a goal to ensure that either half of
your business or half of your new business is in sub-Saharan Africa.
Is that the case?
(Lord Cairns) Half in sub-Saharan Africa and South
Asia; between the two.
78. It is difficult for me to see any sector
of the economy in sub-Saharan Africa which offers greater potential
for exports, for earning hard currency, than agriculture. Indeed
it so dwarves all the other sectors as far as the poorest countries
are concerned that it must be an area in which development policy
focuses. Surely a good entrepreneur is not somebody who just does
what other people are doing, but someone who spots a niche market,
spots something, some field in which they have expertise and can
make a contribution which others have not spotted. I am putting
it to you that with the expertise which CDC has built up over
the years, surely you are in a uniquely good position to build
links between producers of agricultural products and markets in
the developed world. You have experience of this. Maybe you do
not do it through your existing businesses, but surely there is
a really important role there to which CDC could make a contribution
and I am rather concerned that you are saying this is too difficult
an area for you and you back off. I do not see how sub-Saharan
Africa can be developed unless we provide access to our markets
for their agricultural produce.
(Lord Cairns) There are areas where we are doing this
and where we are trying to do this. I suspect we have to stay
out of all those commodities which are over-produced by the developed
world and where the access is made so difficult. There are some
quota places where we can operate at the margin. Paul, you could
talk about tea and flowers and vegetables and all sorts of things
where we are active.
(Mr Fletcher) You assert that CDC has expertise. I
should just like to qualify that expertise. I believe that we
have a significant amount of expertise which is deployed in making
the judgements as to where best to deploy our capital, which management
teams, which entrepreneurs we should back to best effect. I would
doubt whether we have or indeed ever had within CDC the underlying
expertise to make an appropriate return on investments in the
agricultural sector. By way of example, we are actually on the
cusp of re-investing in the business I referred to a few minutes
ago which we sold this year, which is now run by a truly professional
entrepreneur. Where CDC had lost money month after month in that
business, in one month he has made money. The reason he has made
money is that this is a fully integrated producer-to-market business,
able to maximise the advantages of understanding both the freight
and the marketing which comes with his position as a producer
of horticulture within the African country and a route-to-market
in Western Europe. We shall invest in that business and we shall
invest significantly in that business. We shall repetitively seek
to make investments backing individuals like that within Africa.
79. Remind me. Is this the York Farm?
(Mr Fletcher) No, it is not.
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