Select Committee on International Development Minutes of Evidence


Examination of Witnesses (Questions 92 - 99)

TUESDAY 21 MARCH 2006

MR RICHARD LAING

  Q92  Chairman: Mr Laing, thank you very much for agreeing to give evidence to us. You obviously heard the previous evidence session. The Committee has met with you in the past. It is interesting that in the article that you had in The Guardian on 22 February[10], which interestingly enough for us related to Mozambique, you make the point that investing in the Maputo Corridor toll road—we were looking at roads and railways there—has reduced costs to the local community, but it does raise the question of how you identify projects that reduce poverty and the extent to which you are doing things that would not otherwise happen because would not other people have invested in the Maputo Corridor if CDC had not done so? I wonder if you could identify the extent to which your strategy is targeted at reducing poverty, whether it is by going for low income countries, or identifying poverty in other countries, and also how you relate to other investors in terms of stimulating the private sector. As you are a public corporation accountable to DFID what we really need to know is what do you do that the private sector or the aid community cannot do?

  Mr Laing: Chairman, it may be worth explaining how we do what we do to get to the answer to your question. To remind the Committee, we are fully owned by government. We now have about £1.5 billion worth of assets. Earlier the split of CDC into two entities was mentioned; that is CDC remaining with the assets owned 100% by government and the creation of a fund management company called Actis, which takes our capital and other people's capital and they then manage that money and they do the individual investments. We are now putting our money with them and with other fund managers as well. We now have a total of about 17 fund managers; that is people where we allocate capital to them and they will then go and do the individual investments. The question therefore, to answer your question, is how do we allocate that capital and how do we make sure that that capital is going to places in the world where there is a shortage of capital? The answer is that we will select funds and fund managers to manage our money on our behalf in areas where we feel there is a need. The first target we have been given by our shareholder—we are 100% owned by DFID—is that 70% of our investments have to go in the very poor countries of the world.

  Q93  Chairman: That is your own target?

  Mr Laing: I would say it is a non-negotiable target in that we will ensure that that does happen. Our definition of poor countries is those with a GNI per head of less than US$1,750. There is a second test which is that 50% of our investments, again over a five year rolling period, must go into sub-Saharan Africa and South Asia. That way we allocate our capital to those parts of the world where it is most needed. Secondly, this new structure we have is that we are now able to choose sectors where we feel there is a particular need for capital. For example, in the last 12 months we have allocated capital to companies who manage our capital on our behalf involved in microfinance; into agribusiness—last month we finalised terms of a US$75 million sub-Saharan Africa agribusiness investments—black empowerment in South Africa—we have closed in the last year two funds involved in black empowerment—and also small and medium enterprises (SMEs) where we have a specific target to get capital to work in SMEs.


  Q94  Chairman: You have explained the anti-poverty strategy but, for example, taking the Maputo Corridor, what do you do that other people will not do when you are operating? We have identified that you put into those countries the majority of the money, but what do you do?

  Mr Laing: What we do is provide the capital and in a sense that is all we do. We will provide capital to teams of people on the ground. We will identify those areas which I have just outlined where we feel there is a need for capital. It will then be up to the individual manager of that capital to decide which individual projects to go into. Clearly if we said that we want this to be an agribusiness fund, then all those projects, by definition, will be in agribusiness, but we, based in London, do not get involved in the individual projects other than monitoring them.

  Q95  John Battle: I have a sense of the structure now post-restructuring, but the CDC has been going a long time as well and it is not too far removed from what the original intention was back in the 1960s and that notion of trying a thin string and then a thicker string of investors will follow in. Could you give me any specific examples of countries? You mentioned the new ideas of black empowerment and agribusiness, but examples where CDC has pioneered the investment, got the structure up and running on your terms, but then other investors have followed after and you have been able to move away. Have you any examples?

  Mr Laing: I will use the small and medium enterprise as one of the top examples. The entity that manages our capital is a company called Aureos, which we will have a 50% shareholding in. That has a series of teams of people around the world running SME funds in Africa and in Latin America. We have recently committed US$20 million to a fund in India and South East Asia, the Pacific Islands and so forth. Since 1 January 2003—for the last three years—they have raised a total of US$145 million in addition to our capital of a similar amount. By starting with them seeding a fund that gives a kick-start, they can then go out to other providers of capital and say CDC is here—and let us use South Asia as an example, the India fund—they have committed US$20 million, this fund will work. We are now able to build the team up, we have recruited the team, why do you not come and join us? The seeding of that fund enables other people to say yes, this is real, and they will commit capital. Alongside our capital others will follow.

  Q96  John Battle: Will follow or have followed? Has it happened yet in India?

  Mr Laing: Yes. The chief executive of the Norwegian Development Finance Institution came to see me yesterday and confirmed that his institution would be committing initially US$10 million and then a further US$10 million in the future. I know there are discussions going on with local financial institutions, some of which are ready to sign up.

  Q97  Joan Ruddock: I am a little confused because what you are saying is that things are going very well and that you are doing lots of things, but we have been given information saying that the number of people employed by firms managed by CDC has fallen from 34,000 in 1999 to around 17,000 today. Is that because money is going to other bodies who are then doing the management and so you have actually taken yourself out of management?

  Mr Laing: That is right. CDC today consists of 28 people. CDC three years ago consisted of about 300 people and they would manage the individual projects and there would be direct investments that we would make into those projects run by those 300 people. The new model is exactly as we say; we have now created two fund managers who will manage our capital and we are investing with others and the investments are now run by those fund managers and those investments, that is where the people being employed are. The people are still being employed; it is just not directly by us and not subsidiaries of ours any more because they are investments of those separate pools of capital, the funds that we have invested in.

  Q98  Joan Ruddock: Are you confident that with that new arms-length you can still deliver to the poorest people and you can still create the employment, which has to be the major aim of this exercise, does it not?

  Mr Laing: I agree, it does, and in a sense I am more confident. The original model back in 1997, when the Prime Minister announced that CDC would become a PPP[11], was that shares in CDC would be sold and that CDC as a whole would remain and we would sell shares in that. The implication of that was that we were going to have to provide very high returns for those new shareholders. The advantage of the current structure where we are still owned by government is that we are less return-sensitive and we can direct capital to those areas where maybe we will not maximise our return, but we will see the capital go to areas where we think it is necessary. The examples I have given, such as microfinance, agribusiness, SMEs, we are now doing more of that than we would have done under the old privatisation-type structure.


  Q99  Joan Ruddock: We have also been told that your involvement in agriculture has fallen from 18% of portfolio five years ago to 10% now. Is there a similar explanation as to why that is the case?

  Mr Laing: It is true that our exposure to agriculture fell. One of the reasons was that returns on agribusiness were quite low. I also said that we have just this year committed US$75 million to agribusiness because we recognise that that is a very important area to be in. We are now able to reverse that pure emphasis on returns to emphasis on certainly returns are vital—we must make profits, we must do this sustainably—but also put capital to work in places where there is a lack of capital.


10   "The rich get richer, but so do the poor", The Guardian, 22 February 2006. Back

11   Public-Private Partnership. Back


 
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