Examination of Witnesses(Questions 80-99)
TUESDAY 17 DECEMBER 2002
LORD CAIRNS,
MR PAUL
FLETCHER, MR
RICHARD LAING
AND MS
GILLIAN ARTHUR
80. Which business is this?
(Mr Fletcher) The business we sold was a business
called Sulmac.
81. Was that a horticultural business?
(Mr Fletcher) That is a horticultural business.
82. In?
(Mr Fletcher) In Kenya.
83. Surely that process of building a business
and then finding a sharp entrepreneur who can sharpen it up, make
it into a profitable business, has taught you all manner of things,
expertise which you could spread.
(Mr Fletcher) Which we have fully absorbed and going
forward we shall continue to seek to expand our portfolio into
business of that sort. I fully expect to continue to be able to
tell you about our broad agricultural portfolio which we will
have. What I suspect we will not have is investments in primary
agriculture without the attendant linkages those businesses have
to market. The lesson we have learned is that they are very difficult
to make money in.
84. After the last session we had you gave us
a list of employment outcomes for the sale of five African agro-businesses,
Nanga, Eutco, Kawalazi, Sable and Rwenzori Highlands Tea and three
businesses which I think were on the market then, Shiselweni,
Sulmac and York farms. In which countries were those businesses
and what sort of things did they produce? What lessons can you
learn from your experience of running them? In order for them
to be profitable, they need to produce good tea and have a deal
with Tetley's or Brooke Bond's or someone, do they not? That is
a lesson.
(Mr Fletcher) Yes.
85. What can CDC, having learned those lessons,
do to enable other African businesses to get hold over that hurdle,
get beyond producing a good marketable product to actually marketing
it in a developed country?
(Mr Fletcher) Maybe I could take a specific example
. One of the businesses which we have broken up during the course
of the year is a business called Tanwat in Tanzania. One part
of that business was indeed a tea plantation. We sold that tea
plantation to a company in Tanzania called Tanzanian Tea Packers
and subsequently injected further money into this. Why? The reason
is that this provided another source of production to this company
which I believe was established five years ago, with an exceptional
entrepreneur who had seen the opportunity not only to source tea
within Tanzania but to package tea, brand tea and market it within
the local marketplace. We now see a huge opportunity to travel
with this entrepreneur, not only in the Tanzanian marketplace,
but exporting into international marketplaces. I would totally
agree with you. Our ability to replicate that will be governed
by our ability to spot the entrepreneurs, the management teams
which we can back. They are not thick on the ground.
86. Do you expect to increase the value of your
investments in agricultural businesses and agriculture related
businesses in Africa?
(Mr Fletcher) As our portfolio increases in absolute
size, I should expect the agricultural component to remain about
constant, if we look at a pure statistical basis of today's existing
assets.
Tony Worthington
87. I am seeing this in structural terms rather
than project terms. We used to see CDC as a means by which the
British Government, CDC, linked the African world, using Africa
as shorthand, to our markets. Then the government changed your
remit and you could not find ways of making money in African agriculture.
If we gave you the wrong remit, then you should not be blamed
for following that remit. My perception of the situation is the
same as Hugh's. Without agriculture being run better within Africa,
forget it. What you have is a policy-free zone, ministries which
do not work, no contact with the commercial market, the Food and
Agriculture Organisation just a mess, just not there and a country
which is dependent on agriculture. What you are not saying and
I wish you would say, because you are perceived as our expertise
there, although you are now denying it, is that there is a crisis
in African agriculture because there is hardly anywhere where
they get up to being anywhere near a market situation. Is that
true?
(Lord Cairns) I would divide the agricultural business
we can look at and we can help with as being those businesses
such as tea, such as flowers, horticulture, where those countries
have a natural advantage. Last time I was with you I gave the
example of sugar, how the cost of sugar production in Africa is
50% more than the world price. I do not see how businesses can
work there. We are looking at a number of things which we can
do. We are talking very hard at the moment to the Ugandan Government
about their electrical distribution company. There is a country
which probably has more advantage than most, a comparative advantage
in agricultural terms. The hope is that we can start to help distribute
more of that power which needs to be distributed more widely than
in many other countries, to get to the agricultural sector to
create the added value to the agricultural products which they
produce up country, but which, for lack of power, go to waste
or are sold in second class forms. I hope that we can help in
a number of ways.
88. I am not communicating obviously. I am not
suggesting you should do it. What I am saying is that there is
a huge amount which is not being done to get African agriculture
up to the situation where you can help.
(Lord Cairns) That is largely true in a number of
areas. Although there is the example of flower farms, world class,
across quite a wide range of agriculture that is the case.
89. What needs to be done?
(Lord Cairns) First and foremost we have to have some
sense in the world pricing of so many of those commodities.
90. We cannot do anything about that in Africa.
What can be done in Africa? We have to tackle world pricing elsewhere.
What can be done in Africa?
(Mr Fletcher) As far as CDC is concerned, we are as
energetically focused as we ever have been in looking for appropriate
investments in this sector. What can we do to change the underlying
issue you raise? I suspect very little.
91. But you have an expertise as someone who
is involved and knows those markets which would be valuable if
you would say what the inadequacies are in the present structures
in various countries in order to reach market situations. You
do not seem willing to say that.
(Mr Fletcher) We have a widespread network of individuals
across Africa in multiple countries. Many of these individuals
are locals, they are very senior people within their own markets
and members of the Committee have met some of them. They are constantly
exercising influence in the corridors of power, be it government,
be it regulatory, in their own markets in order to effect positive
change, to create a conducive environment for an investment culture
which supports agriculture to flourish. Anyone who has been to
Zambia and seen our level of influence in that marketplace, or
indeed Tanzania, or indeed Kenya would be testimony to that.
Mr Colman
92. I would say from my visit to CDC and non-CDC
farms in Kenya and Zambia this August on the way to the World
Summit for Sustainable Development in South Africa, the expertise
in the non-CDC farms was higher than in the CDC farms. My reading
was that the Sulmac sale to a local Kenyan farming enterprise
was the right way forward and the standards were not lowered and
the productivity was significantly better. Would you be able,
unless it is commercial in confidence, to explore further what
you hinted at, which was the re-investment of those monies from
the sale of Sulmac back into a vertical operator, farming both
in Kenya and Zambia and elsewhere and having contracts with the
major supermarket chains in the UK and elsewhere, as a way of
using your real expertise, which is to provide capital where it
is quite difficult for capital to go, to get the access into developed
countries which African countries need for their agriculture?
(Lord Cairns) You are absolutely right that that is
what we are trying to do.
93. Would you like to give us more information
on that?
(Lord Cairns) At the moment we should just say that
we are in discussions, but exactly down the line you are talking
about. At the moment we are in a confidential period, but in due
course I shall certainly let you know.
94. Could you let the Committee know how that
money is re-invested because it is very important?
(Lord Cairns) I will let the Committee know[1]
Chairman
95. There is a general concern, shared by members
of this Committee and by members of the House more broadly and
it is this. You have been given a remit whereby you have to make
certain rates of return on your investment. That is understandable.
You effectively said that on those rates of return there is no
possibility of investing in primary agriculture in Africa and
only investing where you can find exceptional entrepreneurs. The
consequence of that seems to be that to fulfil your remit CDC
is now largely having to invest in power projects. You mentioned
Uganda. You very kindly sent me a press release which you are
putting out today relating to other power projects in Africa.
The four funds which have been set up are Asia, Africa, power
and SMEs. How much of your portfolio is going to be power related
within five years?
(Lord Cairns) It might be as much as one third; something
like that. We would hope that is an area where we can particularly
bring in third party funds to work alongside us, both at an individual
country level, on a continent by continent level and at a level
of the whole power sector. The proportion of the government's
money which is in there in three or four years' time is going
to be difficult to foretell, but it will still be quite a major
part of our portfolio.
Mr Walter
96. May I explore the new structure of CDC a
little more and look particularly at something which your former
chief executive, Alan Gillespie said when he gave evidence? He
gave great emphasis to the SME sector in terms of your operations.
Was it a mistake for CDC to give up on the management of Aureos
in which you are a 50% partner? Was this simply window dressing
to reduce headcount or was there a genuine reason for doing this?
(Lord Cairns) There was a genuine reason for doing
that. We felt that we had already invested significant sums of
money in the SME sector and had built up a track record. We had
not always got them right, but we have learned a lot through the
previous four or five years. We found that by involving Norfund
as a co-owner of the management company, they would commit to
invest very significant sums alongside us in the future development
of that fund and the expertise they had, together with making
it more of an international affair than purely a British affair,
also encouraged a number of other people who might not have invested
in a purely CDC fund, for nationalistic and other reasons, were
happy to do so on the basis that it was a more broadly owned operation.
The development of the SME sector under the co-ownership of ourselves
and Norfund has expanded its horizons and the sort of funds which
they are now raising are a testimony to that. Three funds are
being raised at the moment. I do not know how far that has got.
(Mr Fletcher) The three funds are East, Southern and
West Africa in an aggregate target amount of $150 million. Yesterday
I reviewed the status of that fund raising and with CDC and Norfund
as co-anchor investors, you will find a mix here which is proving,
certainly in initial soundings, reasonably attractive to other
investors. SMEs are a difficult sector, Africa is a difficult
continent, but the early investor indications are that one if
not two of those funds will be successfully launched on time in
the first quarter of next year and we are very encouraged by that.
97. May I just look at your investment company
and ask about your relatively high required net rates of return?
I am just looking at the evidence you submitted to us earlier
in the year showing that compared with most emerging markets'
stock exchanges, you did rather well last year with only a minus
10% return. You did have a requirement of 20 to 25% net rate of
return. Will these same parameters apply to the CDC management
company as it tries to raise funds through the investment fund?
Are you looking across the board for this kind of rate of return?
(Lord Cairns) Those rates you talk about are gross
rates rather than net rates. They can vary. One of the great advantages
of the structure we are moving towards is that we can vary the
rates of return to what we think is realistically achievable and
which can vary from market to market and sector to sector. It
may have an effect one way or the other on our ability to raise
third party funds for that particular type, offset against which
may be the desirable development effects of a particular type.
We shall be looking in future and in the new structure we shall
be discussing between the investment company and the management
company as to the yin and yang of the ability to raise more money
against other objectives which the investment company may seek
to impose upon us. Clearly in the case of the SME sector the expense
base is very high in relation to the size of each investment,
which makes the net returns quite hard to achieve. The SME sector
is likely to be more attractive to the DFI sector, as opposed
to the genuinely private sector.
Chairman
98. One of the advantages of a select committee
is that we sit for the whole of a parliament. This may be an area
which we can re-visit in a couple of years' time and see how you
are progressing in relation to where you say you ought to be at
that time. A rather clearer picture will emerge of CDC post these
new funds at that stage. Thank you very much for coming and helping
us this morning. I think you will have gathered from the questions
which have been asked that there is still a certain level of concern,
but only time is going to show to what extent those concerns are
justified or unjustified.
(Lord Cairns) Thank you very much, Chairman. If you
or members of your Committee want to come and spend a longer period
with us to discuss some of these issues, we are very excited about
discussing what we are doing because we think it is important
and worthwhile. We should love to have any of you come and join
us for a session and we shall tell you anything you wish to know.
99. The Committee tends to visit countries as
part of our inquiries, so earlier this year we were in Ghana and
Nigeria and maybe one of the tests is that when we go to particular
countries we might look and see what CDC is doing on the ground
in those countries.
(Lord Cairns) Please do.
Chairman: Thank you very much.
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