Select Committee on International Development Minutes of Evidence


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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