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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 921-v House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE INTERNATIONAL DEVELOPMENT COMMITTEE
Tuesday 9 May 2006 MR BOB FITCH and MS ANN GRANT MR WALTER GIBSON and MS SUE CLARK Evidence heard in Public Questions 277 - 343
USE OF THE TRANSCRIPT
Oral Evidence Taken before the International Development Committee on Tuesday 9 May 2006 Members present Malcolm Bruce, in the Chair John Barrett John Battle John Bercow Richard Burden Ann McKechin Joan Ruddock ________________ Witnesses: Mr Bob Fitch, Project Director, Financial Deepening Challenge Fund, Enterplan, and Ms Ann Grant, Vice-Chairman, Standard Chartered Capital Markets Ltd, gave evidence. Q277 Chairman: Good morning to you both and thank you very much for coming in to give us evidence. As you will know, the Committee is really interested in how we can grow the private sector in poor countries as a means of improving economic support for the Government and, obviously, economic conditions for people. I think what we are really interested in is what works. I have to say, with the brief, it got lots of indications of great initiatives that people are working on and attracting funds to, but we are rather short on examples of what really is working and in particular of the interaction between the private sector and the development agencies, the extent to which they can work together or the extent to which they have discrete responsibilities, so if you can bear that in mind that would be helpful. Also, by way of introduction we would really value your views on what you think our own Department of International Development can do in encouraging private sector development; whether you think they are good at it and what their strengths and weaknesses are, and, to the extent they have strengths, and we know as a department they have but in this context, what you think they could most reasonably focus on in ways that would be positively helpful for enabling the private sector to do the business and encourage growth, jobs, and improvement in poor countries. Ladies first? Ms Grant: Thank you very much, and thank you for the opportunity to give evidence today. I assume I am here on the basis not only of my actually rather new job with Standard Chartered but also because I have been involved on the interface between business and development most recently - and inspiringly from my personal point of view - in South Africa where the relationship between business, government and the civil society is very special for historical reasons, but also where I think all three groupings see themselves as playing a part in the national project, in the nation building, and have communication systems and mechanisms coming from the history which do mean they talk about economic development and national development all the time, though it is obviously a very tense relationship, as in many countries, some of the time. Before that, I was the Africa Director in the Foreign Office in London when DFID and the Foreign Office separated, and that was also very interesting and important experience for me in the past, and then before that I was in New York in our delegation to the UN, where I was also on the board of UNDP and UNICEF, so I had some experience of the multilateral organisations. I also worked briefly for Oxfam in the '80s and '90s. As you say, a lot of people have given a lot of evidence and I was here for the DFID presentation and DFID memorandum which I think set out very fairly the key areas to work on, which themselves have been set out by the World Bank's report I think on doing business in 2005. I think the fact that growth and jobs are key to development and that the private sector is key to both is now accepted wisdom but the actual mechanisms and ways of working and, indeed, training and background of people involved in development is still quite new, and I think one of the reasons you have not got the examples of what works and the track record, if you like, on the private sector working well and smoothly with development organisations across the board is because that is still for both cultures. There is a cultural problem of how you see the world, which I think is now pretty much sorted, but for people who were brought up, as I was, on the sort of Nyerere school of development studies, where you were talking about basically socialist models of redistribution in Africa, especially, although those models have not worked and have not been found to be productive, there are an awful lot of people for whom that is the basic training which it is difficult to accommodate to the new models of the private sector being a force for good and part of the solution for poor people rather than an exploitative and negative force, especially again in Africa. I think the intellectual work has now been done and we are a long way down that road but you are talking about people in long-term business, whether it is NGOs, governments, multilaterals, for whom working naturally and easily with the private sector is still quite new. Q278 Chairman: Even allowing for the fact that the majority of people in poor countries are in the private sector, they are at a very low level and it is the only form of economy, so although they know it is the private sector it is not active enough and does not deliver enough for them. Ms Grant: Exactly, and again a lot of the problems are of terminology. When a lot of people in development, academics and others, think of the private sector in the past they meant basically multinationals working on a global scale, and that has been the private sector going into Africa. As you say, the fact that 90 per cent of people in Africa are in the private sector and not in public sector employment is again something I think you need to keep repeating because it helps to break down all the stereotypical ways of looking at the relationship between business and the state and poor people, so I think it is a new area. We very much welcome, certainly in Standard Chartered bank where we work in difficult and emerging markets, Asia, Africa and the Middle East, the new emphasis by the Secretary of State in his speech on the private sector, which mentioned the private sector very much in the terms you have just done, Mr Chairman, and where it is obviously high on the agenda of DFID to develop new alliances, new ways of working, and a much more intensive dialogue with the private sector. We certainly as a bank have got that dialogue, we have been meeting various officials, especially the Financial Inclusion Team, over a period of months; we have got some meetings coming up now, very much focusing on the White Paper agenda on this agenda; we contributed to the Business Action for Africa, and I very much commend and we just sign up for everything that the Business Action for Africa submission to this Committee said, which are the key areas to work on, where we are at the moment and how far we need to go. Certainly for us in Standard Chartered, and in my personal role as an adviser in that bank, we are very open to new ways of working, to new ideas, to new risk sharing whether it is funding, looking together at things like credit rating for countries, where we have expertise and experience which perhaps NGOs and government officials have not, and where we would like to rely on our skills and experience for the agenda which are being developed and we would like to have, and I think we do have, the opportunity to contribute as DFID decides what it can best do in individual countries, especially Africa, but more broadly we want to be part of that, and we think we have the dialogue with William Kingsmill and others that we need in order to make that input. Finally, on the ways of working, I did not realise until I joined the bank there is actually a global shortage of financial professionals; there are not enough people in the banking sector to go around. They are constantly being poached from one bank to another, there are huge new demands because of growth from China and India for that kind of international expertise, and it is very difficult, even for a bank like mine that is very keen to participate in all this, and we do not have people to spare to come to two-day meetings or to develop policy documents. We need to get sharper and smarter and briefer. For example, I am going to suggest with DFID, if we are going to look at new Africa Challenge Enterprise Fund, that we have somebody to come to the bank to do half an hour's quick presentation where I might possibly get some of my senior colleagues, especially if it is before work really gets going in the morning, rather than the opportunity to submit papers and to come in. I think that is a Civil Service way of working that does not match up very easily to the way the private sector works and I think we have not got that much tolerance for another lot of summits, another lot of discussions - discussions on policy in particular. We would like a quick run-through of what is possible, and then a follow-up with the business as to who is going to take it forward and a small team to actually work on it, so that we learn by doing rather than by talking about it, and we are very up for that. For looking at pilot schemes and at different ways of sharing risks on new kinds of funding we are already involved in a lot of Business Action for Africa's discussions and we have a very strong government relations team doing that. When it comes to doing business and promoting business, our focus is on small and medium businesses in Africa and elsewhere in the developing world and that is where we would like to look at working together with DFID, and as we found in the UK there is a limit to how much government servants can get involved and promote and develop business on the ground themselves. The important things are the ones we know about - the investment climate, the regulatory frameworks, the enabling environment. Q279 Chairman: We have other questions on that but, Mr Fitch, it is the interaction between the private sector and DFID that is of interest to us and you have the experience of the Challenge Fund, but briefly, what do you think DFID's expertise in this area is and how do you think you can best interact to stimulate the private sector? I take Ann Grant's point entirely that private sector is private sector and governments facilitate or get in the way but cannot actually do it. Mr Fitch: Yes. I think DFID's strength over the last seven or eight years in this area has been its innovativeness and willingness to challenge perceived wisdom, and part of that has been very much looking at this private sector engagement issue. I think they have had one or two fundamental realisations along the way that has helped that. One of the things they have realised is that the private sector needs to get on with doing business which is making a profit. Whereas profit-making was perceived to be perhaps non-desirable in the development world eight or ten years ago, DFID has led a process of embracing that where it is seen to be ethical and coincidental with its own ambition, which is to help reduce poverty, and I think one of the more enlightened parts of our approach recently has been to engage on a business-to-business type of agenda rather than looking at more of a kind of corporate social responsibility type agenda. The corporate social responsibility may be part of the motivation of the private sector for getting involved, but I think what DFID has realised is that that type of involvement is not likely to be sustainable. The most sustainable private sector participation is where it is driven by profit, so what DFID has very much gone about is looking for that coincidence of developmental and commercial interest, and that has been extremely important. Along the way the other realisation they have had - and I say this at the risk of you saying: "Well, you are a private consultant; you are bound to say that" - is that they realise to do this business, DFID themselves are not the best body to do the business type of interaction. The private sector has some difficulty in having constructive conversation with civil servants, however good and enlightened they are, and I think their willingness to look at ways of outsourcing that type of intermediary role has been very important as well in pushing this agenda forwards. Q280 Ann McKechin: The current fashion for donor strategy at the moment in private sector development seems to centre on investment climate work, and I am trying to get some indication of what the relative importance is of the financial sector development as part of that, and how you would attach the same significance to financial sector development as you would to corporate governance or infrastructure development, because all of this is very key to current thinking in DFID. Mr Fitch: I would not even like to tackle the issue of which is more important. We all have to accept they are extremely important elements of the same approach and integration is often the key, I think, to making these things work and perhaps one of the weaknesses, the integration between those different aspects of an economic development programme is lacking. The financial services and the development of it is essential but I think we have to be clear, or at least my own view is that financial services are not the driver of development; they are an enabler. The fact that people can get money is going to enable their development but it should not necessarily be seen as the driving feature of their development. Other things should be driving development and financial services should be empowered to respond to whatever kind of commercial opportunity arises. Q281 Ann McKechin: So it is a secondary line of development? Mr Fitch: Yes. I think this whole issue of sequencing is extremely important. When we look at the private sector engagement in development, there are some sectors you could identify where there is potential for systemic change in developing countries, and financial services is one of them because it reaches out to every other service. Information and Communication Technology (ICT) may be another because it has the ability to improve information transfer in a way we could not dream of even ten years ago, lack of information being one of the critical impediments to development, so I think we need to look at sectors having different potential roles, and infrastructure has been given quite a high degree of focus by this Committee. Clearly, also, so many studies into the impediments of private sector growth keep coming back to the fact that financing is often seen to be the critical one but infrastructure is often the one that gets pinpointed most, particularly amongst small businesses, as the real impediment to their development. Ms Grant: I would agree with all of that. I think it is not an either/or; it is a commonplace thing to say. When you look at who is going to do something about it, for us as a banking financial services sector the regulatory framework is very important. It can have a multiplier effect and be system-wide, but it is a means to an end and, if it is not implemented correctly and if you do not have the commitment or, indeed, the people to apply the regulatory standards then that is a genuine problem. There are very few countries where there are enough people to tackle regulatory requirements, even once they have them in place. Those are the kind of things which are very important. For us certainly one of the things we do around the world is help regulators in countries where we ourselves are regulated to make those systems work, and that is an area of expertise where we can really help and where we are already getting involved. The question is whether I suppose we do that on a systematic or structured basis, but I think that is one example. Another example where I think the financial sector could be really important is working on the credit ratings of countries. Again, a lot of multilaterals are doing work on that and public sector NGOs and governments, but in the banks people do credit rating for a living and some of that expertise could be quite usefully borrowed and have a multiplier effect. It is a bit like microfinance; it is not an end in itself but something which would enable people to join the formal economy and to prosper, but they are not going to do it because they have microfinance. That is one of the things that is a necessary but not sufficient condition for taking off. Q282 Ann McKechin: Donors are sometimes criticised for being better engaged with large-scale enterprises and multinationals rather than Small and Medium-sized Enterprises (SME), and certainly in developing countries there seems to be quite a gulf between the two sectors. There is in our own country but I think it is more marked when you go into the developing area. Do you believe that is true of DFID in particular and, if so, how would you believe they should address the needs of the SME sector as well as the large-scale international companies they are already engaging with? Ms Grant: I think it is a spectrum. Especially for things like the regulatory environment you do have to deal with the big players globally but DFID's tradition is to work at grass roots and with quite small people. What is happening now maybe is a rethinking, as Bob and the DFID people who gave evidence to you said themselves, looking at the whole spectrum of DFID's activities with a view to looking at the relevance of the private sector. So I do think there is a focus obviously on microfinance, microcredit, on small and medium enterprises. The difficulty again, which is something that all governments find, is of getting involved at the right level with people who are extremely numerous and perhaps not easily dealt with in a collective. Q283 Ann McKechin: Do you think we should be spending more time trying to build up connections between the SME sector on the one hand, and the larger multinational corporations on the other in terms of supply chains, distribution chains? These seem to work in some areas but they are very weak, and there seems to be no connection in other parts at all. Ms Grant: I think most multinationals have a very strong network of small and medium businesses. It is difficult to generalise, and it depends what business you are in. You can fly in, do it yourself and fly out but that is perhaps not the norm, and certainly for a bank we have a renewed and a strong focus on small and medium enterprises everywhere we work, and we do spend a lot of time with our suppliers and customers. So I would not say there is no attention paid to it but I think it is difficult to get it right, and it is difficult to generalise across countries as to what works. But it is also a job for the countries themselves to look at their own relationships with business and their own communication not just with the top business people who maybe advise the President on a regular basis, as was the case in South Africa, but also to make sure there is the right kind of support and communication with people lower down the economy. Mr Fitch: The important words in your original question were "engaging directly". By definition donors cannot engage directly with SMEs, there are too many of them, and in terms of making impact on development you have to have an impact on a large number of SMEs, and in the past - and still, in fact - there is a huge amount of money spent by donors on trying to promote development of the SME sector but it is done in a very different way. It is being done increasingly through looking at the enabling environment, and in the past it was done looking at things like business support services. The real challenge in SME development and micro enterprise development is how you foster their development without really disrupting the market. Q284 Ann McKechin: Global market forces? Mr Fitch: This is where, you are absolutely right, bringing bigger businesses into the supply chain mechanisms is something which worked very successfully in some of the east Asian targets, where they attracted inward investment and made sure it was well connected then to the indigenous economy and the benefits moved downwards, and DFID again have tried to look at this with the business linkage to challenge fund and they have worked on trying to promote that kind of connection. I think much more could be done and much more strategic effort could be done and this is where the real opportunity is with the investment climate facility and the Africa Enterprise Challenge Fund working in parallel. What was lacking perhaps in earlier challenge fund work, where it was kind of a bottom-up initiative to try and encourage business to do things, was that top-down initiative also to address enabling environment issues, and I think that is one of the things we have all learned from the earlier challenge fund initiatives and is one of the things that DFID should be applauded for, for seeing that potential connection. Ann McKechin: Should it spend more money in terms of training, to be specific? You have pointed out lack of capacity in financial advisers even within your own organisation, and it seems to me that training and technical skills -- Q285 Chairman: Think of the role of the banks in this country which is taking somebody who has an idea and saying: "You need to understand the basics of keeping a cashflow and how to do a business plan before you go and talk to a bank or anything else". Is there a role in poor countries for organisations like DFID to help people at that stage? Mr Fitch: There is and there has been plenty that has been done. The big difficulty with that approach is, again, sustainability because services are often set up on a free service basis, often with a lot of expatriate overhead built into the delivery, so as soon as you take away the external substantive that process stops, and this has been one of the challenges. How do we prevent things coming to a juddering halt as soon as that external assistance comes to an end? What is the smooth exit plan? That is the real challenge. There is no doubt that training is an essential part of it, and capacity building, but it is training and capacity building at government level as well to change the mindsets, so that when you are developing the regulations and the legal frameworks it is not just a theoretical construct but something that they believe in and want to pursue. Ms Grant: Even on the training it is a question of who does it, and I agree very much with Bob. We had an interesting conference last year in Standard Chartered called * Banking Missing Middle for people who are not quite subsistence but also not regular bank customers, and we launched our own small and medium enterprise-sized business in Africa last year also, helping people to get to the point, and then there is a point of investing in future customers. If you can get banking people to help with business plans and with financial literacy and get them to first base that is probably more efficient than setting up some kind of DFID-led super structure which then hands them over to a bank. So it is providing and getting banks to look at the financial incentives for them to invest in future customers looking further down the line, rather than for DFID to set up its own training programme, for example. Q286 John Bercow: I am puzzled, Chairman, because I just picked up on what Mr Fitch said a moment ago about the difficulty of the exit strategy and the great problem of the sustainability of such business advisory services, how to construct a business plan and so on, and I understand in part but not altogether, if you will forgive me saying so. It does not seem to me that intellectually it is anything like on a par with Einstein's Theory of Relativity. There is no great complex issue to resolve here and, with reference to what Ann said, at the risk of being provocative I do not think there is a huge debate to resolve as to whether it is a DFID superstructure or a business-led and then business-continued initiative. The question is, if it is accepted that this is supremely of benefit in establishing and building a business class and therefore promoting development, surely it is not beyond the wit of people of good will in public and private sector alike to thrash out an agreed programme which, if it is going to yield significant benefits, need not and should not be short-term and from which, therefore, one should not frankly at this stage be speculating overly about the exit strategy. The question is not the exit strategy - when, how, is it finessed - but when will it get started, for what period will it operate, and with what likely results will it function? Forgive me for being slightly impatient but it seems that sometimes in these situations one can make them more complicated than they are, and it is not that complicated. Mr Fitch: No, and I have quite a lot of sympathy with your view. What I would have to say is what you would need to do to pursue that approach is create a business plan to work out how much money you needed to pursue things to the level you want to, to achieve the scale of impact, given the number of poor people in the world, work out what the cost of delivering that is through whatever financial means you can, then work out where that money is going to come from, and then say what proportion is going to be public sector, and work out how you fill in the difference. That is the challenge; that is why it is difficult. If you throw money at it I agree you can do it, but have we got that amount of money to throw at one single part of the development conundrum? Q287 John Bercow: I understand that there are always competing clients in the public resources and political -- Mr Fitch: And there is an issue of scale, as well. John Bercow: Okay, but if it is accepted that this is a crucial prerequisite for achieving growth and reducing poverty, and given that both of you have a very good lead into DFID at the very highest level, forgive me asking this obvious question but why has this politically challenging but intellectually fairly simple matter not been addressed? We do not want to exaggerate our own importance but you knew perfectly well, Mr Fitch, that you were coming to talk to us; I know you do not make the world change yourselves overnight but these are really the essences of the matter, and Ann made the very important point I thought with a degree of frustration which I understood, that she was not all that interested in sitting around talking about matters; a brief analysis, look at the options and then get on with it. If we were having a review in a year's time where in this crucial matter would we be? Would we be talking about further discussions to be had? Meanwhile people are dying.
Chairman: We have more detailed questions on this from colleagues so you will not be let off the hook! Mr Fitch: I said earlier that I thought one of the strengths of DFID was its innovativeness but in many organisations a strength can also become a weakness, and I think sometimes there is too much of looking for new answers rather than seeing what merit there is in existing approaches, and there is a tendency - and this is not just DFID but the development community as a whole - to look short term rather than long. As consultants, as we are, we try to attract three-year cycles in development thinking and development practice and that is what we expect to see. And the cycles repeat, although sometimes there are new words or slightly changed approaches. But I think you have a valid point in asking why we can not have a more stable approach. It may not be perfect, but we can deal with those imperfections through implementations. Q288 John Barrett: Very much following on, with the use of challenge funds there has been that innovation in DFID and there has been the success in that the Financial Deepening Challenge Fund was able to stimulate twice as much private sector investment as the amount of DFID grant funding but, as you say, along with innovation there are risks. Can you say from your experience with the FDCF exactly how DFID should be developing to deliver its development objectives? To follow up John Bercow's point, if the private sector is involved, if you are setting up a successful business and part of that is not to have an exit strategy for getting out of the business, it becomes self-sustaining and that is the answer to one problem. Mr Fitch: Again, at the risk of being overly critical of one of my clients, one of the frustrations we did have with Financial Deepening Challenge Fund is that one of our roles as management was to go out and tell the rest of the development community, and anybody interested, of the successes and the strengths of the instrument and we got many positive responses from other development agencies, whose question would generally at the end be: "That is really interesting, that is great, what are DFID going to do next?" To which my answer was: "I do not know, what would you like them to do next?" Sometimes it is that lack of, I suppose, a strategic plan as far as we can see. I think the FDCF was very successful. If you look at some of the projects and work now being done by Vodaphone and Deutschebank, as well as some of the organisations in the developing world, there are some clear examples of how the private sector can get embedded in very appropriate processes. We have learned lessons about weaknesses as well; it is a risk-taking initiative. Some of the projects that have been funded perhaps would not have been, given what we now understand about how markets develop. I think we have learned about some of the processes. We have learned that maybe it was wrong to have a lower limit on a grant of £50,000 at an average grant size of around half a million because the reality is you can only then fund fairly well-developed project ideas and it stifles some of the innovation at the entry level. So we have learned many things. My frustration is that here we are now; we designed the Africa Enterprise Challenge Fund in 2006, I was involved in the design work of the Financial Deepening Challenge Fund in 1998, and the funding for the Financial Deepening Challenge Fund actually came to a halt in 2004, so we are staring at a three to four year funding gap for the market place and the danger there is that we are losing the momentum we built up if we believe in the success of challenge funds. So I think this comes back to your point, that this is a problem in development programming. Q289 John Barrett: So is the new African Enterprise Challenge Fund going to draw on that experience? Mr Fitch: Yes, and DFID are working hard to make sure that is the case, and there is clear evidence that that is happening. Ms Grant: Could I respond to your challenge which is that if we are here in a year's time we will just be talking in the same circle? I think with the dialogue over the White Paper and your inquiry and so on we can do it. As you say, it is not rocket science. If it is accepted that our major contribution to development in Africa, for example, is to be a successful business and that what we want to do, what we have a vested interest in, is to see a lot more people, small, medium and large, also being successful, the countries themselves being successful and having the right kind of regulatory environment, if that is our starting point and I think it is, we just have to find cost-effective, realistic ways of maintaining that dialogue and getting some joint working going and I think we have that framework in the discussions we will be having, not only as a bank but also as Business Action for Africa, and I very much commend DFID for setting that up. It really does the business for business; it is very well run; it hits the spot in terms of the information that we need, and it gives us a readymade platform for dialogue and for a quick meeting if we want one on a particular subject. So I think our financial sector colleagues in Business Action for Africa and others do see this process and the White Paper process as getting us to that point where we stop talking and start doing things together. Q290 John Battle: There is one element, as we are on this subject of inventing new instruments, that seems to me to be missing which is credit unions. Our Committee did a report a year or so ago on remittances; migrant workers who collect a lot of money from work and send it back home. Much more than the aid budget goes back, but what happens is the traditional banks and commercial institutions taxed the transaction so that not all the money gets back. So in California the fastest growing banks are now credit unions of El Salvadorian migrant workers; a quarter of the people in El Salvadorian credit unions are getting the money from the migrant workers in and investing it in projects. In India it is the same; credit unions are proliferating because that is where there is a source of credit, insurance and investment capital. We are not seeing that in Africa and I just wonder whether you are fostering credit unions to make a connection between the remittances from migrants but also on the ground level? There are commercial banks now in Africa but what you cannot get is insurance because the rates are too high, but credit unions have cut through that. Would you be supporting the development of credit unions in Africa? In Latin America they are going, and in India they are going well, and there is an alternative, but is it being fostered in Africa? Ms Grant: Firstly, we are basically a trading bank so we are focusing a lot both on micro finance - although I would not go so far as to say micro enterprises - but also on remittances, and I would say in the banking elsewhere there is nothing micro about remittances. They are mega, really big, and the way in which they have been managed, as you say, means there must be a huge role for a more competitive and better run business of transferring remittances. We are as a bank on the UK Remittances Task Force looking into all of this but I have to say we are looking at it as a business and systematically, again, it is quite new for us. We were involved in all report backs for the UN Year of Micro Credit and there was a very exciting, very well run and very businesslike UN Summit which I went to last November - and I do not very often get the opportunity to say that! - where we were looking at remittances, micro finances, the kind of flows that go between our two businesses, for example, in the two markets we know well in the Gulf and in India, Pakistan and Bangladesh, with absolutely huge transfers all the time. The question is how we as an international bank can partner and link up with credit unions, with micro finance institutions, which themselves are turning into banks, as you say especially in Latin America, but it is very exciting. I have been presenting it as a commercial opportunity to the bank, not as some kind of corporate social responsibility, though hopefully it would have enormous benefits all round. Q291 John Battle: Two final points. Is one of the reasons why there has not been that progress as far as access to remittances through local banking is concerned that banking cost is moving ahead but what is not moving ahead at the same speed is the legal framework in these countries at the same time, so that if you are running a business and if the debt is not paid you can pursue that through local courts or whatever, and, secondly, DFID outsources the management of challenge funds, but is that the right thing to do? Mr Fitch: To the first I would just say "Yes". On the management of the challenge funds, and given that I have a vested interest because I work for a private company that earns money for managing challenge funds on DFID's behalf, the answer is also "Yes, it is the right thing to do" because I think we can do it on a far more cost-effective basis than they could do it in-house; cost effective because they push us very hard to deliver to a fixed price, and we have managed to do what the private sector needed us to do which was to manage things to fixed timescales. We never missed a deadline of managing challenge funds, which the private sector was not used to with donor level programmes, not just the DFID. Ann will perhaps be able to comment more on this but from my point of view I think we are better able to talk and interface with the private sector about business issues because we are a private sector business as well. So I do think there is a strong rationale for it. Ms Grant: I would agree with that. We were not involved in the previous challenge funds but we are very much looking forward to discussing in a lot more depth the Africa one which is coming up, and we have meetings set up to do just that. On what else needs to be done in order for remittances and other things to work well and to work the same, what we are all talking about is how we bring poor people, or people not previously participating in the formal economy into that field, and I think credit bureaux is a very interesting and important way of making sure that the financial sector can flourish. We have been lobbying all over our footprint in Africa, and Asia in particular, for countries that have not, to establish credit bureaux, it is a basic step for getting to all the other more elaborate and fancy things we have been talking about, and I think that is somewhere where perhaps we can talk more systematically with DFID to make sure that is part of their lobbying and, indeed, part of the British government's lobbying generally. They are one small example of where what looks like a fairly technical boring issue that is not worth bringing up might make all the difference between an economy being able to take off or not. Q292 John Battle: The traditional role of a bank, Standard Chartered being one and the commercial banks, has been as a vehicle for handling money and investment well, really, and I am an aficionado of credit unions in my own neighbourhood but I know we have to use another clearing house bank to get there so I am very interested on that clearing house bank being absolutely clean, managing the money well and not being a rip-off profit operation. I can get loyal credit through the credit union and drive out the loan sharks but I cannot do that through a commercial bank who have withdrawn all their offices or units from my neighbourhood. Let me ask about banks that have operations in developing countries because quite often the criticism is that they end up being the body that launders money that is involved in the money that is collected corruptly, so how do you help sort that out? I am not suggesting that you are in collusion with those robbing the state and the public sector and taking the aid money and shoving it in the bank, but you have it so how can you help clean up the act so that money is managed well? What anti corruption measures can the bank take to contribute to clean money so it works for development, and can you name and shame people involved in corruption? Would you go that far? Would you refuse deposits from people when there are trials taking place and they have been accused of mismanaging? How far would you go in helping to clean up the money act so there is real transparency? In a sense money is for development, not just for private gain at the expense of everybody else. Ms Grant: I very much hear what you are saying and endorse it all, and I know it is one of my Chairman and CEO's strongest messages that, as we said, our major contribution wherever we are is to be a successful business but also to operate to the highest standard. I think something that has changed even more recently than you talking about DFID's thinking having evolved is the regulatory framework around banks now, and I had no idea about that before I joined a bank and I am no expert on the constraints now and the extraordinary combination of anti money laundering, anticorruption legislation, now antiterrorism legislation, designed to track the movement of money. The fact that as a bank we are subject to a regulatory environment in the US, the UK and Hong Kong to say three of the tightest, it is just not possible, even if you really were trying hard, to buck the system. It is very difficult now, I think, to have the same kind of freedom to transfer corrupt monies that was possible in the past. There is a legal constraint; there is a huge effort and commitment in our bank to legal and compliance issues. A very large part of our resources and time goes into making sure that we do not get it wrong and that all our staff are trained. Operating like that, for example, as we do in Nigeria to the highest global standards is also one of the reasons why we are managing to recruit and retain good staff. There is competition for talent but also there is competition between banks on reputation - otherwise we are pretty much the same - but the reputation of a bank like ours which works, say, in Asia, Africa and the Middle East, if we were to do a corrupt deal or mess around in the Philippines or in Ghana, that would affect our share price in London and elsewhere immediately, so I think there is a huge incentive for us to get it right. Showing by example and working with banking councils and chambers of commerce in all the countries where we work we would make the business case for doing the right thing, and I think that is the most effective way of making sure that the regulatory stuff is real and, of course, there is no question of us, as you say, getting involved. Q293 John Battle: What about working with governments and DFID, to give two examples? Sometimes the governments themselves may well be corrupt and it may be the bank being very outspoken, and courageously outspoken, to challenge corruption in governments. When Hilary Benn was asked recently whether he could sum up his White Paper in one word, he said "governance". How can you work with DFID and governments in Africa to be more proactive on behalf of transparency - well, especially clean money? Ms Grant: As I say, the one big thing we do is lead by example. On your more proactive point, just because things are not done publicly it would be unusual to say the least, in my very limited experience in the bank, to have a bank Chairman or CEO criticise in the way that a minister might or a senior official in government or even somebody in a multilateral organisation, but that does not mean those conversations do not take place. I do think it would be unusual for them to be public, but the fact that we vote in Nigeria, and our commitment to the money we put into Nigeria last year as a bank was very considerable, had the effect of reassuring other investors. It means we are one of the largest taxpayers in that sector, and I think that is a real commitment, a long-haul commitment to a country which does enable us to speak frankly at the top level. I am not sure there is a market for an outspoken banking voice but it does not mean that it could not be part of the mix, and we do of course keep in very close touch with governments, with the World Bank and the fund, all of whom we also bank in many of these countries. Q294 Richard Burden: You have been very clear on that issue, both in terms of your own business interests in rooting-out corruption and how perhaps on a quiet basis people can have an impact in some of the countries you operate in. You also earlier on put some emphasis on networks internationally and regulations for that network. Ms Grant: Absolutely. Q295 Richard Burden: You put that forward as something that actually helps in that regard. I am just interested to know whether you think that some of those international networks and regulations you are building up can sometimes cut across each other as well, and if so is there anything that needs to be done in that area? You mentioned the States, you mentioned the UK, very multilateral bodies; if they are all meshing together to help root out corruption that is brilliant, but you could find that they end up creating holes that you can fall down the middle of. Ms Grant: It is difficult for me to comment because I am not an expert banker, indeed I am not sure I ever will be, but also because there is competition between regulatory authorities as to who can be the stiffest - certainly the US, the UK and Hong Kong are probably the tightest. If you are subject to one of those then you do not fall between two stools because you accept those standards wherever you operate. The challenge now is to bring the huge economies of India and China and the banks and financial institutions that operate in those countries into the same game, but with people needing to raise finance globally and being global players, there is a very strong push for anyone who wants to raise capital anywhere to be playing by pretty much the same rules. I have heard people moaning about regulation because, while it is very welcome in principle, it is often obviously extremely tedious for some people in practice. We are very clear that the balance and advantage is in the kind of regulation that we are subject to. What we want is a playing field where everyone observes that level of regulation and where we are able to compete fairly. The trend is all one way and I do think it will be for better and more comprehensive regulation for the reasons we have set out. Q296 Joan Ruddock: I am puzzled, having heard everything you have said, which suggests that everything is moving in the direction of more transparency, good governance and everything else, how do you explain the fact that over the last five years your bank has made very significant loans to the Government of Angola which has a very bad record of corruption, mismanagement of its oil revenues and is obviously desperately poor. How do those loans sit with everything you have just said? Ms Grant: The loans have actually been to Sonangol, to the oil corporation, not to the Angolan government, and on the basis that we dealt with them as one of a consortium we have been satisfied with those loans and the way in which they have been spent and repaid. On transparency we are pushing for more transparency so that other people can share the information that is currently commercially confidential, but we work to the highest standards in that loan context, although obviously we have had a much longer relationship with the Angolan government than this new regulatory framework, maybe for ten or twenty years. Q297 Joan Ruddock: There is a contradiction there, is there not, because you may say you are operating to the highest standards in a financial context, but the impact or lack of impact on that country's development is something that is not being taken account of. The World Bank has suggested that these particular kinds of resource-backed loans are, in the case of Angola, the core obstacle to the country's development. Ms Grant: All I can say is that it is not true that we do not take those factors into account. There is a very strong and very robust process inside the bank for looking at the implications of that kind of deal. It is now, with our reputation and risk management inside the bank, much stronger than it has ever been and these issues are very fully discussed. A judgment is made as to whether they should go ahead or not and all I can say is that it may not come out always with the answer that you would wish, but it is not true that it is not very fully and very seriously considered when any such deal comes on the table, and deals are walked away from on the basis of, if you like, the non-financial factors. Q298 Joan Ruddock: The level of indebtedness of Angola is equivalent to half their GDP; it is not getting better. The involvement of your bank in the basic resource industry, which could and should be delivering to the people of that country and moving them out of poverty, is not happening. Do you see any need for change? Is there something that needs to be done that is not being done at the present time, and are you the only people who we might make this criticism of or, for example, do you see China doing things that even you are rejecting? Ms Grant: On all the financing that I am aware of into Angola there has been a very large consortium of international banks because of the scale of the funding that is involved. Sonangol is not in debt to us, the repayment record was one of the very significant factors in going ahead in the past. If what you are saying is that we should not be lending to Angola, that is a conclusion which the bank has not come to yet and all I can give you an assurance of is that the factors you have raised and the factors that have been raised by the World Bank and others are now fully considered every time there is a proposal for such a deal with the bank, not just with Angola, and it would be very carefully thrashed out inside the bank. Q299 Joan Ruddock: You do not think there is any need for any new mechanism that will actually ensure that these sorts of resource-rich countries do not get loans that will substantially undermine the path out of poverty and actually contribute to continuing corruption and negative outcomes. You do not think there is any mechanism that should be put there by the international community or anybody else, this is just a fact of life? Ms Grant: No, I do not think it is a fact of life, I think it is a matter of judgment whether or not you are engaged in the economy of a country which has serious flaws in its government and in the distribution of its resources. To set up such a mechanism would be very difficult, and I would myself say that the trends and the thrust of what is happening is such that a commercial decision now is broadly based and takes account of all the factors that you and others have raised. My own view would be to rest on that commercial judgment, and if you are taking a wider view and a longer term view of your bank's involvement and your bank's reputation and so on, I would rather rest on that judgment rather than on some kind of sanction system which would prevent the private sector working with governments that were generally not held in high regard by the OECD. You would then really risk polarisation and your chances of bringing in India, China and others would actually be less. I would rather rest on the pressure and the reality of all the factors I have spoken about being actually quite powerful drivers and becoming more so. Q300 Joan Ruddock: The condemnation of the IMF and the World Bank about these forms of loans is not sufficient. Ms Grant: Those past loans? Q301 Joan Ruddock: Do you expect some change? Ms Grant: All I am saying is that I would rather rely as a motor for change on the kind of commercial pressures, public awareness and so on than on what you were suggesting, that something must be done in a mechanism or regulatory way. Q302 Joan Ruddock: Are you familiar with the Wolfsberg Principles? Ms Grant: No. Joan Ruddock: Then I will not ask you about them. Q303 Chairman: The point there is that a number of NGOs and Transparency International have said they are concerned about what Joan is talking about and that they do not sit comfortably with international standards, and they tried to set up some sort of objective criteria. According to our brief, 12 leading banks and Transparency International established these in 2000 and the real question that we are driving at is, is it not really important, and probably slightly at odds with what you are saying - we are not questioning the view that the bank says we have a commercial judgment and we are applying those standards - that there is a lack of external accountability or transparency and, as Joan has suggested, indications that in some cases the Chinese are prepared to come in and provide finance which does not bear the same comparison. That completely undermines what the IMF or the international community are trying to do in terms of improving governance and getting rid of corruption, so at the very least you stand somewhat tainted by association if you do not have any independent accountability. Ms Grant: We signed up for the Equator Principles, the Global Compact and everything else. I am sorry, but this particular group is a new one to me and I am not aware of our participating in it. Maybe I could get back to you on the Wolfsberg Principles. Q304 Chairman: What we would like to know is whether there should be some kind of external comparator, which would get you off the hook to some extent as well as make the international community feel that there was a standard that everybody was applying, because there is a danger that you are competing for finance and you are up against perhaps Chinese financial institutions that do not follow the same criteria. Albeit you have a reputation, these are big sums of money - 3.5 billion dollars secured by oil revenues I guess is quite an attractive investment but may undermine other objectives. Ms Grant: It is a very important discussion and a very important dialogue and it is worth thinking about how best to involve China in a regulatory framework instead of assuming it is going to drive everything to the bottom. My own view is that there is a big challenge, for NGOs as well as for business and for governments, to actually engage with China on the basis on which it might provide the kind of finance and kind of investment that we are talking about. Again, we need to make sure that they are part of a discussion and not spoken about rather than spoken to. Q305 Chairman: It would be helpful if you are willing to reflect on that and perhaps give us a considered note, because it is unfair to pursue it in the present context but we are anxious to see if we can make some constructive suggestions. Ms Grant: That is that external validation. Q306 Chairman: Could I just round this off by asking you both the same question. We have a lot of initiatives and you have said, yes, we think we can deliver. The question first of all is do you think that private sector driven growth is beginning to deliver, do you have some firm evidence of that, and would you be willing to say in five years time, given that you are fairly upbeat about some of these initiatives, the extent to which sustainable growth in the private sector will have delivered - I cannot ask you to measure the results - significant results? Bob, would you like to start? Mr Fitch: I do not have hard evidence to back up a claim that the growth is happening now. I guess my instinct, and I would not claim it is much more than that, to be honest, is that we have an opportunity at the moment in the marketplace where a lot of the private sector in the developed world is constrained, it is fighting within saturated markets and it needs to look for its future opportunities. Of course, there may be more immediate opportunities in many parts of Asia, but there is evidence albeit it circumstantial that many businesses are now looking at how they can participate in the private sector in Africa as well as in Asia, so my expectation in the five year period you have talked about is, yes, there will be clear signs of that happening, but I would not expect it to translate into a massive economic transformation in a five year period, but there is evidence that it is beginning to happen. In the interaction I have with businesses in the UK and elsewhere in the developed countries there is more sign of people talking about new commercial activity, not something driven from a social development angle, and I think that is a big difference. Ms Grant: I would cite what is happening in South Africa and Botswana where there is real evidence of the growth of a middle class, and I have some very interesting figures I saw yesterday from the bank on the size of our small business and individual growth of the middle class there, so maybe I could send you a note on that too. There is no area of the world which is so easy to generalise about than Africa, and if we were to say that the 54 countries of Africa were all going to rise up over the next five years I think not, but there will be really significant evidence and examples of what works. One of the really big challenges for Africa is just the size of the market, and South Africa found that by doing everything right, ticking most of the boxes, doing all the stuff they were asked to do, the fact is they are still quite a small market in global terms. The question is whether some of the lessons on private sector development in India and China can possibly be applied to some of these very small markets and, if not, which I guess is the answer when we are talking about scale, what more can be done to reduce the barriers of individual countries, what more could be done about breaking down the barriers between countries so that you have regions that make sense, customs unions and so on. One of the problems that Africa has is the competition, obviously, from other parts of the world where it is easier and quicker to make money on a bigger scale, without the need to make all the investments that we are talking about, so it is the relative difficulty of making money in small markets or people entering new markets. What is happening, we are finding as a bank, is obviously huge interest from the Middle East, from India and from China in Africa, and we are accompanying that business on both sides; that is if you like a bright spot, but in terms of the traditional growth that we are talking about it is going to be very patchy across the board and some parts of Africa would do very well if they get it right, but if they do not the price of being left behind is going up all the time. Chairman: Thank you very much indeed, both of you. We can perhaps now talk to companies that are active in the field and see what they think. Thank you very much for coming in and giving us your views.
Examination of Witnesses
Witnesses: Ms Sue Clark, SABMiller, Chair of Business Action for Africa and Mr Walter Gibson, Head of Global Health through Hygiene Programme, Unilever, gave evidence. Q307 Chairman: Thank you both very much. You have heard what we have been talking about but you are actually practitioners in the field, as it were, and can perhaps give us some practical examples. One of the things, just taking up Ann's final shot, is that in many of the poor countries by definition your customers are poor people with limited incomes, yet the key is how to find enough of a market there and to grow it. I suppose the question that then arises is how can a multinational company that is operating in big markets and big figures operate at a level that actually develops a market from the kind of people who are living at the bottom end of the economic scale. The experience you have had of doing that may well help us find other ways of growing those markets to the point where they become less poor people and, by definition, more attractive markets. Perhaps Sue Clark might start. Ms Clark: Thank you very much and thank you for inviting me along today. I am here in my capacity of corporate affairs director for SABMiller and in that capacity I sit on our business boards in India and Africa. I am also wearing the hat of the current chair of Business Action for Africa who have submitted evidence to the inquiry. Just a word about SABMiller, we are one of the largest global brewers of beer and bottlers of Coca-Cola. We operate in about 60 countries and about 80 per cent of our earnings comes from developing economies. We were founded in South Africa in the late 1800s and we now operate in 29 countries across Africa; in fact, Africa provides about 40 per cent of our overall group earnings. We employ about 14,000 people and I guess with the multiplier effect that is about 150,000 people through the indirect supply chains that we operate. One of the things to stress is that our business is about brewing beer and bottling soft drinks for local consumption, so it goes right to the heart of what we were saying about how do we develop those markets with essentially poor people. There are essentially three things to say at the outset. One is that we very much believe, as has been discussed this morning, that successful, profitable businesses are the real engine for growth and the real key to lifting people out of poverty. As we have heard this morning and we would concur, and I would like to share some examples with you, utilising and leveraging our value chains, both downstream at the supply end and upstream at the distribution end, are clearly very important and, as we have found, partnerships are really the most effective way of delivering the most effective outcomes. Perhaps I could just give you a couple of examples of where we are actually building markets on the ground. One of the key experiences we have had is in Zambia where effectively the issue was providing an affordable product for people in Zambia where some 70 per cent of people are living on under a dollar a day. The problem was that to provide a commercially-produced beer using imported barley was just too expensive, so the issue was how could we substitute an imported product with a local production. We looked at using a form of sorghum to produce a clear beer so we worked with the local agricultural institute to select a strain of sorghum that we could use in the clear beer process. We then partnered with the government who basically agreed that if we could develop a local agricultural base around sorghum they would give us an excise broker on the tariffs. Having got the right strain of sorghum, having got that agreement with government, we then linked up with a local NGO, Africare, and we went out to the farmers and we offered them the opportunity to grow sorghum, giving them a guaranteed income at the end of it and giving them the seeds to do it and, through the NGO, helping them to produce the product and giving them assistance in that. At the same time we then invested in developing our brewery to enable us to use that sorghum product. The first year was quite difficult: 350 farmers came on board and as you have heard in evidence from your previous witnesses it is quite hard to get farmers to come to something that is unfamiliar to them, they have had bad experiences in the past with middlemen who have not paid them, they are slightly reluctant about putting all of their eggs in one basket. In the first year we had 350 farmers on board and I am pleased to say that in the year that has just completed we are now up to 8,500 farmers involved in the project now. They themselves are earning some four to five times what an average Ugandan is earning which enables them to obviously buy education, food and health. That product has now got a 20 per cent share of the market and we are spending some million pounds on buying sorghum and, consequently, the effects that that has for distribution, for transport and processing et cetera up the value chain is significant. From our point of view as a brewer one of the key things that we are looking at is where can we source locally agricultural products that displace imports? That is the Ugandan example and we have a similar example now, we have rolled that out in Zambia. We have a very similar example which I am delighted to share in Ghana where we use maize to displace imported barley. Q308 Chairman: In a minute Joan Ruddock might want to follow some of those points up, she has one or two specific questions, but you are giving us examples. I am not cutting you off, we will come back to that, it is a very interesting issue and we would like to hear more about that and also how it might translate in other areas. The same applies, I guess, in that Unilever is a long-established company with a lot of low value, everyday products, but nevertheless it would be interesting to see how you do that and also how you interact with the development community, in other words how the two things can come together. Mr Gibson: The first thing to say is that as a business opportunity we see this as really important and we are committed to ---- Q309 Chairman: Your starting point is that it is a business opportunity. Mr Gibson: It is a very large market, we are in a lot of the countries where that market exists and, as you have said, we have a long history of working in those markets and trying to reach people on low incomes and trying different things. Another advantage we have is that the kind of products we deal in are the products of everyday life, the products of basic health, hygiene and nutrition and we have a lot to offer as well in terms of promoting the health and welfare of people, which is actually motivating for people who know the diverse business, but it is quite a challenge getting your products to people who only have a dollar a day to spend. One challenge is distribution, for example, and if we take India as an example you are dealing with villages a long way from any shops and the sheer distribution and penetration of the market is quite difficult. Affordability is another challenge, making products that are of sufficient quality for our standards, that people can afford and want to use and offer them value for money. The other thing that we are learning more and more is that you have really got to understand those consumers in the same way that we understand the consumers in developed markets, you have to offer them products that work for them in their settings, you cannot just scale down and take the cost out of a product that works in another market. That is something we need to do more of. As an example of what we have done I would take Hindustan Lever in India which wanted to grow its market in the rural villages of India. The first thing they realised was that they needed to find new mechanisms of distribution to get the products out there, they realised that they needed to help income generation in those communities to generate the flow of cash that enabled the trading in our goods to take place and they started quite a innovative scheme called Shakti which, if anybody is interested, is written up in Prahalad's book, The Fortune at the Bottom of the Pyramid, you can find out more information about it there. The basic idea was that all over India there were self-help groups springing up, mainly women who were borrowing small amounts of money from the Grameen bank and using that money to trade, so we decided to try and set up a scheme where we would work with those self-help groups and see if they would be interested in trading directly with us in our products. That has been highly successful as a sustainable mechanism for breaking through some of the chains that previously existed and cut out quite a few middlemen so that we are now dealing directly with these ladies who have become almost like a sales force in their local areas. One of the huge benefits of this, apart from increasing our share of the market in the rural areas, has been that it has given a whole new self-esteem to the women who participate in the scheme. Q310 Chairman: I am sure that that is true, but is there a role for government in that? You are a multinational company, you are operating a market opportunity and it has benefits, no dispute. Is that just something you do and government should just let you get on with it, or is there a role to interact with government and help? Mr Gibson: I was reflecting during the earlier conversation and some of the questions you were asking earlier about how DFID could help, and I just wonder whether there is scope for organisations like DFID to get behind or aligned with some of these schemes at quite a practical level, because I am sure that in the case of Shakti there were other things that could have been done around that scheme in driving the commercial side of it: the supply of the goods, the trading of the ladies and all that kind of thing, but there are other things around that that could benefit those communities, for example in health provision, insurance, savings schemes, the type of thing that a DFID might want to get involved with and that they could do on quite a small scale to see what worked, and then perhaps with the private sector develop models which can be scaled up elsewhere. Q311 Chairman: For example, they could work in partnership with you to help that and on the back of that they might identify whether there were other companies that could be encouraged to go down the same road. Mr Gibson: Exactly, there might be multiple alliances that could be developed that could have quite a big impact. Chairman: Joan, do you want to come back on the beer story? Q312 Joan Ruddock: Yes, the beer story, it is absolutely fascinating. You spoke about Zambia but I understand you have a similar operation in Uganda, I believe. Ms Clark: I am sorry, if I did not make it clear but Uganda was very much the story I was talking about and we are now rolling it out into Zambia. Q313 Joan Ruddock: I wondered where the balance of benefits lies between what you have gained as a company and what local people have gained. For example, were people required to change their farming practices in certain ways, has there been any change in the gender balance of who is doing the farming and who you are contracting, how you look at the environment and the pressures of establishing major plants for drinks - we know there is a lot of water required et cetera et cetera. How did you consult with local communities or did you consult with local communities? How have they been brought along and therefore how sustainable is this operation which sounds to be one of considerable size if you have 8,000 farmers involved? Ms Clark: There are some interesting questions there. Broadly speaking there have clearly been benefits to the farmers in terms of the income. One of the issues that we saw at the outset was that agriculture is not our core business, and that was really the key thing about working with an NGO, really to work with us and to work with the farmers to do that consultation and to help them to basically understand crop rotation and what they could do to make sure that they do not become solely dependent on SABMiller and our business. When it comes to the gender issue, clearly when you go out into the market you see the women working very much in the field and it is quite interesting that the people we deal with are a very mixed gender balance, but I am sure you have seen yourself how much work the ladies in the field actually do. On the environment, clearly the water issue is very important for us and we understand that as a brewer we use a lot of water in our businesses. All of our breweries meet the UN standard, so about 78 per cent of them are below the five hectolitres of water to one hectolitre of water which is the industrial norm. What we are really trying to do now is to focus on how we can get greater efficiency of water use, how we can recycle water use, how we can use water in the local community that we have used in our breweries, and in many cases we are using it as effluent and it is then being used to benefit the local communities by putting it onto agricultural land and things. Q314 Joan Ruddock: May I just ask in that context whether you are monitoring the water table? Ms Clark: We are monitoring the water tables in all of our breweries and one of the things we are now doing more and more of is watershed management and how can we actually study our watersheds, how can we actually work with our suppliers to understand how much they are using in the production of the agricultural side of things. I have to say that it is an area that we can see increasingly is going to require a lot of partnerships with the local communities as we go forward. Q315 Joan Ruddock: That is very interesting. What lessons do you believe this case has for our understanding really of the role of business in development? Ms Clark: It is the development of markets, producing affordable products, which is key; we think there is very much a virtuous circle here in investment which leads to jobs, leads to creation of products, demand, increased excise, profit at the end and so the circle goes on. It kind of reinforces the role that business has in communities and the lessons increasingly for companies working in Africa are how can you be more innovative about your supply chains? One of the interesting things worth mentioning is the agricultural subsidies have come off sugar in the last year and the sugar price has doubled, so we are now sourcing sugar locally in Mozambique and Tanzania, so from a development angle the whole issue of subsidies is crucial to how it actually affects behaviour on the ground. The partnership point of view is very important; this was a government/NGO/business partnership and all three actors in that played a very significant role. Q316 Joan Ruddock: Will all those actors remain, is this entirely sustainable on this basis or would there be a change to a more traditional commercial model? Ms Clark: Certainly from our perspective it is a model that works, from the NGO's perspective it is a model that works and I guess over time how government perceives it and how they manage their tax revenue from it will be something we have to follow. Q317 Joan Ruddock: Do you think there is a real consensus now within the business community on the contribution that business can make specifically to international development as opposed to being a business for its own sake and just getting a commercial return? Ms Clark: There increasingly is. Something like the Business Action for Africa network that has been established goes to the heart of that and there is a change and certainly an understanding increasingly amongst business that the profit motive is clearly important but you cannot do that without taking all your stakeholders with you, and when it comes to emerging markets that does mean actually looking at the market in a little bit of a different way and being much more innovative, as I have described. Q318 Joan Ruddock: You have spoken about the supply chain in terms of the farmers and then there will be truckers and all sorts of people involved. Do you see it as part of your role to ensure some kind of ethical basis for the operations of those in the supply chain and seeing that they develop well in the general sense? Ms Clark: Yes, it is a matter of degree how far our responsibility goes, but we have a series of principles that we share with our suppliers in the supply chain. One of our sustainable development principles is that in places like South Africa, Tanzania etc where we are actually very much involved at the distribution end and where, as my colleague from Unilever described, we have established local businesses to run depots and distribute our beer in the local community we actually provide them with training, and as part of that business training there is training about HIV/Aids awareness and a whole series of other aspects. Q319 Joan Ruddock: I was just going to ask you that. Alcohol and sex often go together so I am going to ask about whether you have some involvement in the health of your workers in that sense. Ms Clark: Yes, alcohol is clearly used responsibly as part of a normal, healthy lifestyle and there is no evidence that links increased Aids with people who drink. There is some evidence to suggest that people who drink irresponsibly participate in risky sex, as they do in a whole bunch of other risky things, and we have programmes to tackle that. When it comes to our own workforce we basically provide voluntary counselling and testing and HIV Aids programmes, we provide free anti-retrovirals for our employee and up to four of their immediate dependents. Joan Ruddock: Excellent, thank you. Q320 John Battle: You do the bottling for Coca-Cola? Ms Clark: In some countries. Q321 John Battle: What is your relationship with them if you are part of the Coca-Cola supply chain because sometimes they have been criticised for not carrying out a proper ethical audit or being socially responsible and environmentally responsible. Do you have a dialogue with Coca-Cola that fits your environmental and ethical policies, or do theirs tell you what to do? Ms Clark: It is quite interesting. We do obviously have a dialogue with Coca-Cola but Coca-Cola has a range of bottlers and we are actually one of the big bottlers. Very often they deal with very small local family-owned bottlers and in these instances maybe there are issues on the ground. The fact that we are a big multinational with our own principles, when it comes to operating on the ground it is our values and our principles that really hold sway. Q322 Chairman: Just finishing off on that, you have said Uganda and Zambia, are you spreading elsewhere and what are your competitors doing? I understand that you had about 99 per cent of the market in South Africa so you had to go elsewhere to expand your market, but what is the potential for following this practice in other countries? Why not Mozambique or Malawi or Nigeria or whatever? Ms Clark: The issue is that every market has a different solution and one of the key things to our success is actually looking at things on a very local market basis. There is not a one size fits all so we are looking at the development of cassava as a substitute for sugar which will have application in some of our markets, the use of maize has applications in Ghana. It is difficult to give a one size fits all solution, but as I have shown we are very much looking at each individual market and saying what can we do here? I do not know if that answers your question. Chairman: That is helpful. John Barrett. Q323 John Barrett: If I could turn to Mr Gibson and ask some questions about the Global Partnership for Handwashing with Soap, it never fails to strike me that when we visit a number of developing countries and we go to visit hospitals and ask what are the big killers, you might think it is going to be HIV, malaria, TB, but people say it is diarrhoea that is killing the kids and access to clean drinking water and basic hygiene could make a massive difference. Unilever are part of that Global Partnership for Handwashing with Soap and reading the papers it says people do hand wash in some areas but on five to fifteen per cent of occasions when it should be practised. Do you know what the percentage is in this country? Mr Gibson: It will be higher than that but it will not be 100 per cent, it is probably a lot lower than you might think. In fact, my colleague, Dr Val Curtis of the London School of Hygiene and Tropical Medicine has done some tests on this amongst students and it comes out around 40 to 50 per cent, even among people who are studying hygiene. Q324 John Barrett: It is a very interesting partnership and I wondered if you could say a bit about how the partnership actually works. Mr Gibson: It is a wonderful thing because there is actually a shared vision at the heart of it, a shared objective, which brings the public sector and the private sector together, and that is about reducing diarrhoea through promoting handwashing with soap because, as you rightly pointed out, diarrhoea is a major killer and there is lots of good scientific evidence to say that the simple act of washing your hands with soap at the right time, which is mainly after defecation or before preparing food, would lower that incidence by about 50 per cent, so the task we have to do is to find the right way of promoting that use of soap, scaling it up and reaching all the vulnerable people; that is mainly small children and mothers who look after children. The private sector interest is the increased use of soap will expand the market; the public sector interest is promoting health, reducing the burden of disease and thereby having an impact on poverty because the diarrhoea in itself may lead to lower attendance at school, particularly among girls, it leads to poor education, it leads to lost time at work so there are lots of indirect consequences apart from the health consequences, and so as a public health agenda in terms of poverty it is really significant. There is a coincidence of the public and private sector interest which is around promoting the change in behaviour that is crucial and that we are both interested in. It is finding the right interventions, getting the evidence for them and driving that to scale. There is recognition that neither the public nor the private sector can do that on its own. We have our own initiatives as a business to promote handwashing tied to some of our brands like Lifebuoy, and we have been quite successful, we have reached 70 million people in India with that campaign, but that is a drop in the ocean compared to the size of the problem so we need the public sector to assess, reach and have the impact of scale that we are looking for. What we bring is the kind of skills that we have as a business and one of the things that we have learned through the Public Private Partnership (PPP) is that it is quite surprising in a way learning about partnerships and what each partner brings. There may be some surprises in terms of what your initial expectations were, so one of the things that the private sector has found that it can contribute really successfully to a partnership like this is an understanding of marketing because behaviour change is in our DNA and we understand how you go about an efficient marketing campaign to get your message across, to design the campaign, to understand consumer needs and the triggers of behaviour that you are trying to press, how best to communicate those in an effective way, how to run a mass media campaign. Q325 John Barrett: Has the public sector taken this on board or have they watched you doing it? Mr Gibson: They have definitely taken it on board. In fact, the PPP in handwashing has developed a model of which this is a critical component, so every time you go into a country there will be some kind of consumer or co-operative research to try and understand the need and make sure that the campaign is tailored to meet that need. Q326 John Barrett: Have there been any examples of where there has been a conflict? It seems like the kind of example where everybody would be pulling in the same direction, but have there been differences that have had to be compromised and differences reconciled? Mr Gibson: Between the public and the private sector?
John Barrett: Yes. Mr Gibson: There have been some quite vigorous debates. I have actually just been to a meeting in Washington of the steering committee for the PPP in handwashing and the level of discussion now is really, really good and the level of understanding of what each partner can bring to the party as it were is now very good. We are at the point now where we understand each other well enough to be able to do something really quite big and significant. Q327 Joan Ruddock: Do you actually produce and make soap in the countries rather than import the soap into the countries? Mr Gibson: I would hesitate to answer that for every country but we do produce locally in many countries, that is true, I do not know if it is true in every country. Q328 Chairman: Is that true of the packaging materials as well? Mr Gibson: In many cases, yes, the packaging would be produced locally, but it depends on the type of packaging. I can give you a more detailed answer if you would like. Q329 Joan Ruddock: It appears to me to be a very important principle; it was when you mentioned Lifebuoy I could just see huge boxes of Lifebuoy soap being imported into countries, whereas clearly it would help the business climate enormously if you actually set up a means of making soap and distributing it and everything else. Mr Gibson: In a lot of our major countries like India and Indonesia we would manufacture at probably more than one site in the country, simply because of the distribution costs. Q330 John Bercow: I suppose as far as children are concerned, Mr Gibson, there are two avenues for encouraging good practice; one is through the home and the other is at school for those children fortunate enough to attend. Mr Gibson: Yes. Q331 John Bercow: Is there a simple plan in mind to try to disseminate good practice and the means of delivering it amongst schoolchildren? You have a mass audience there and a teacher who is presumably regarded as a role model. It should not - to go back to my line of enquiry with the previous witnesses - be something that requires the most enormous sagacity to address, should it? Mr Gibson: There are several elements to arriving at the simple plan. I do not think we have the simple plan but I would love to have the simple plan. There are several elements: first of all you need an intervention that works and is going to work in most places, so you need to have some kind of universal message that children will relate to and react to first of all, and that is something that we are working on with academic colleagues who are leading that field, there is that chunk of it. Then there is the question of how you communicate that, how do you actually get your message to the children? Is it best done through teachers or is it best done directly, and we have not quite got the best model there. The other factor that we need to bear in mind is that to do this in all the countries where it is necessary you are going to have to work through a lot of ministries of education, so it is not something that a private sector company can do on its own, and that is another benefit of these public private sector partnerships, opening doors to these channels to get an agreed package of communication to where it is needed. There are lots of good experiments going on, I would say, but no firm consensus on how best to do it or a plan of how to get to every school in the world. There are lots of good things going on in many countries. Q332 John Bercow: Can I very briefly follow up because agreement on a model would help. Mr Gibson: Yes. Q333 John Bercow: But it is quite important to concede the point that just because one cannot do everything does not mean they should do nothing, and it may take a long time to spread the practice as widely as it needs to be spread, but at least making a start (a) achieves something and (b) offers the prospect, does it not, of imitation - if people see that something good is being done they might try to imitate it elsewhere. This is in no sense a personal criticism of either of our witnesses, it is just a frustration that has been burning inside me for some time which I would like to put to you. Joan has gone out of the room but I know that when we were on one of our recent visits we both felt that something quite simple that could have been done for a child was not, and when we raised it with genuinely caring - presumably - representatives of an NGO they looked at us rather blankly and said "Well, we haven't been asked". The example I have in mind admittedly does not relate to handwashing, but it is an example of a health point. There was a queue of kids waiting at a feeding centre and there was a young man, probably no more than 14, severely scarred around the mouth with very, very badly chapped and bloodied lips, who was an albino. That young man - Joan alerted me to him - was standing in a queue and, okay, it was not normal practice there to be wearing sunhats, but that kid was suffering, not just because he was bloody hungry but because his head was going to be damaged further, his health was going to suffer. We said to the NGO it is scorching hot sun, the boy is an albino, does he not need a hat and there was a prosaic, utterly unmoved response, "Well, I suppose he might" - almost like what time of day is it, it is 12:20. If I had had a spare one I would have given it to him, but I asked was there not a policy when you see such small-scale problems to address them, to which the reply was "Oh well, we've never been asked". If ever there was an example, if you will forgive me saying so, of someone working in a large organisation who no doubt had all sorts of big plans and policies and resources at her disposal, who had failed in a very human sense on a human scale to do something about a small problem that was immediate, that was it. I was completely shocked by it; can you offer me any sort of comfort that this was an isolated case, or is it very commonplace, because I do not regard it as a laughing matter? Mr Gibson: Let us stick with handwashing, shall we? What is Unilever doing? We are running a campaign which we call Swasthya Chetna, which is currently mainly in India but we are moving that into Africa, which is a way of quite cost-effectively getting the message of handwashing primarily to schoolchildren, so it started in India, it has gone into many thousands of villages in India and it uses the children to propagate the message. As far as we can tell it has been quite successful and we have reached, we think, 70 million people using that approach. That is the limit of what we can do with our resources. We have learned quite a lot about how to talk to children in that process, what works and what does not work, and we want to get to every child in the world who needs this message in the same way that I think you do. My submission is that to get to your simple plan there are some stages you have to go through. We will keep doing Swasthya Chetna, we will keep doing what we can, we will keep working with the public private partnership and they will talk to the children as well because part of that involves schoolwork, but to get to the bigger plan of how you reach every child with a really compelling message that you think will change behaviour, you need to bring together all the actors, you need to have real evidence that the behaviour change mechanism that we are going to use is effective and is scaleable and that is the kind of thing we are trying to achieve. That is the way I would like to get to the simple plan, it is to get all the actors but it is not something that we can do on our own.
John Barrett: I understand. Mr Gibson: The PPP handwash is a great start because it brings together a number of different actors - the World Bank, Unicef, soap companies and USAid amongst others, and then at a country level the governments who control access to schools, for example. It is quite a big challenge getting to a simple plan, but I do agree that it is actually what we are all striving for. Ms Clark: Could I offer a slightly different take on that question? When it comes to big businesses, what you were talking about, the very local responses, it is all about culture to be honest and as a big global business what we can do is really try and develop that culture and those values in local people, because you cannot mandate from the centre that somebody has got to provide a hat or help an orphanage, what you have got to try and do is develop that culture and visibly reward that culture on the ground. An interesting example that comes to mind based on your example is in Zambia where a local team of finance people had got together, started to sponsor a HIV Aids orphanage, found a little boy who was very badly burned from head to toe, liaised with the team in South Africa, they managed to get a specialist doctor to take the boy on, they raised the money to get him there, it is very much a cultural issue about what happens on the ground and the role of big business is really to try and instil that culture and reward that culture. Q334 Ann McKechin: Mr Gibson, you have obviously carried out some very interesting research with Oxfam which was reported on last year, and in the conclusions you stated that the company could improve its interactions with people living in poverty. I just wonder if you could perhaps give us some indication of what you thought those changes could be or key findings were for the company, and whether or not you have carried it forward in your current business models. Mr Gibson: To take the latter part of your question first, we have a major kind of initiative within the company at the moment to really understand how best we can meet the needs of the bottom of the pyramid, so that is being handled at the highest level in the company. The executive committee is going to ask to bring together a group of very senior people to work out a real strategy for doing that. I think one of the things that we recognise and can share with you now is that as I said earlier we need to get a much better handle on the needs of people on really low incomes and not make assumptions based on understanding from other situations in richer markets, because it is not just about affordability, it is about the appropriateness of your product, can you get it to the person, can it be kept stable, do they have to travel a long way to get it, all those sorts of things need to be taken into account. We are looking very hard at that and we will probably do what we have always done, I think, which is to try things. We will probably try some practical experiments, we will probably choose some areas where we think there is a particular need and we will try things, just like we tried smaller unit doses to help people buy aspirational products; we will try things in markets and see what works. That is probably how we will get into it. We are quite keen to follow up the research that we did with Oxfam, really to understand more about the people at the extreme ends of the value chain and what would make a difference to them. That is one of the things that struck me on reading that report, that there were a number of ways that you could improve. Q335 Ann McKechin: One of the ways that was suggested was the issue about contract workers who had very different terms and conditions. Your own employees were obviously enjoying excellent terms and conditions, but one of the contract workers said "If I become pregnant or ill I lose my job." That is surely one of the issues, the relationship between one area of the chain to the next. Mr Gibson: We try to keep a very close eye on that and try and raise standards when we can. The government clearly has a role to play there --- Q336 Ann McKechin: In terms of the labour laws, yes. Mr Gibson: In terms of the legal framework for employees, and they have tried very hard to impose better standards on contract companies. It is more a question of compliance than actually changing the law. Q337 Chairman: In the report on this survey in Indonesia it says that "For supply and distribution chains to benefit poor people even more, there need to be other social institutions and resources in place such as credit and saving schemes, marketing associations, and insurance schemes as well as diversification of income streams ..." Is that something again that development agencies and the like can assist with? Is that the kind of crossover point where the partnership can work? Mr Gibson: Yes, that was the kind of thing I was alluding to earlier when I said that maybe there is an opportunity for development agencies to get alongside some of the enterprises that the private sector are starting, so they clearly are trying to encourage enterprise on a small scale but big companies also take initiatives - for example, the Kecap Bango initiative that is mentioned in the report is another form of enterprise and a different way of trading that benefits the farmer. There might be opportunities for development agencies to get alongside those and really, in a way, amplify the benefit to those people through offering them other things that the private sector cannot offer. There is perhaps more that can be done through dialogue. Q338 Chairman: Another one where you have an interesting summary of Unilever's contribution is Development Africa. Obviously it is your own take, but you talked about trading between Nigeria and Ghana and the difficulty of getting transport routes; you have said that it has taken time to get transport routes established and it can still be a struggle. Is this to do with roadblocks and physical things like that, or is it the quality of the roads? Mr Gibson: I am not a real expert here, I have to confess, but I think it is about just a shortage of good roads quite honestly, just very poor physical infrastructure that makes transport very difficult. Q339 Richard Burden: Could I ask you two questions about the Investment Climate Facility which you are one of the founding sponsors of. First of all from Unilever's point of view what do you think the business case is for getting involved in initiatives of that sort, but also specifically on the Investment Climate Facility what added value do you think that specifically brings over and above other initiatives of the World Bank and so on? Mr Gibson: The business case is quite straightforward in the sense that we want to grow our business in Africa. There are a number of obstacles to that that are not entirely within our control and we can see the benefits of being in a partnership like that where the objective is to encourage investment in Africa and remove some of those barriers. It seems like quite a powerful vehicle to help address some of the concerns, so it will help us to hopefully be more successful in terms of perhaps overcoming some of the barriers - the physical barriers, the regulatory barriers, the trading barriers - which as an organisation we cannot deal with on our own, but it is again coming back to the benefits of partnerships where you have people who have an influence in other sectors. I think that would help us so, yes, it is an investment to help us grow our business in Africa. How does it add value over other initiatives? It complements some of the other initiatives because it is not directly seeking to stimulate the enterprise itself, it is more just trying to create a favourable climate in which enterprise can flourish and, as far as I know, there are not too many other organisations that are doing that. Q340 Richard Burden: If you talk about the World Bank's investment climate assessment and things like that, does it reach something that initiatives like that do not reach? Mr Gibson: I am not too familiar with that one, to be honest, so I am perhaps not the best person to ask on that, but again if you would like an answer on that I am sure we could supply you with that. Q341 Chairman: In conclusion, you are both describing business successes, things that you have done to grow your own businesses, which is after all what you exist to do. What is your feeling about the business climate for your kind of companies in the poorer countries? Do you feel that it is going forward on all fronts, or do you feel that there are either certain countries or certain areas where you are either static or going backwards? Is there anything that the donor countries can do, positively or negatively? I am asking you both the same question. Mr Gibson: I am greatly encouraged by what I see in the business at the moment. Some countries are more advanced than others and have more confidence than others. India is currently strong and is taking the lead in many areas, but the learning that that is generating is being picked up in other places and models that have been developed there have been picked up, so one of the things that we can do is transfer knowledge and best practice and see a new will in Africa to really try and make that a success. China is a huge opportunity; we are in there for the long term but it is starting to show positive signs. Ms Clark: From our point of view, yes, we are very encouraged by what we see. If you look at our plans we see good growth coming from Africa, but we always have to remember the exogenous factors, climate particularly. In Tanzania when we look ahead to the next year, with the drought there we are not as confident as we were. Clearly, economic stability is important: Botswana was always the great growth model but over the last year has suffered two significant devaluations, which has an impact. What more can donors do? From our perspective it clearly is about continuing to focus on the investment climate, but maybe for big businesses it is how we can work in partnership to deliver infrastructure. Some of the agricultural initiatives that I talked about would be more successful if there were more small-scale irrigation schemes; getting our product out into rural areas still needs roads, infrastructure, bridges and things, so there is more work needed to be done there. Q342 Chairman: Do you make specific representations to donors on those fronts? Ms Clark: We are starting to, yes. We are in discussions in different countries, we are in discussions in Zambia, we are in discussions in Mozambique. Q343 Joan Ruddock: Just a small point, you mentioned drought. What advice do you get or seek on climate change and what is the need to mitigate the known now or predictable effects of climate change, particularly in Africa? Ms Clark: To be honest, it is something that we are just now starting to turn our attention to. The latest figures I have seen would have Africa reducing its rainfall by 30 per cent and India increasing it by 30 per cent, which would have significant impacts on our business, so it is something we are starting to turn our attention to. We really can see practical effects of it in South Africa where barley is really suffering now because of what appears to be climatic change. Mr Gibson: I was passed a note by a colleague to say that we manufacture in 18 African countries and there is soap manufactured in almost all of those. Joan Ruddock: Hopefully you can get into the ones you have not yet got into. Chairman: You are not shipping it out of Port Sunlight then. Thank you very much. |