Memorandum submitted by the Department
for International Development
INQUIRY INTO DFID'S DEPARTMENTAL REPORT 2008
ANSWERS TO THE INTERNATIONAL DEVELOPMENT
COMMITTEE'S WRITTEN QUESTIONS
June 2008
AID EFFECTIVENESS
1. The Annual Report includes the statement
that DFID helps "to lift at least 3 million people permanently
out of poverty every year (Foreword and para 5). The source is
footnoted as the "Collier-Dollar Model of Impact of Aid".
The Committee would be grateful to receive the Department's detailed
calculations for the figure of 3 million people. How has DFID
used the Collier-Dollar model in its assessment, and how has it
adapted it for this current "3 million people" assessment
exercise?
Answer—The detailed calculations
relate to the Collier and Dollar poverty model which essentially
yields total numbers pulled out of poverty based on estimates
by country of the total, average and marginal numbers of people
pulled out of poverty. These estimates are derived from evidence
about the impact of aid on growth, and the relationship between
growth and poverty. Combined these two relationships allow us
to estimate for each country the number of poor people that are
pulled out of poverty for a given aid allocation which summed
over DFID's entire bilateral and multilateral contributions yields
DFID's annual 3 million people pulled out of poverty figure. For
the current exercise, whilst we did not adapt the model we used
the original methodology to derive more up to date marginal and
average estimates.
2. The Committee notes that a 2003 paper,
"Poverty Efficient Aid Allocations—Collier-Dollar Revisited",
updating and reviewing the earlier Collier-Dollar work, was undertaken
by the DFID-established Economics & Statistics Analysis Unit
(http://www.odi.org.uk/spiru/publications/working_papers/esau_wp2.pdf).
Has the Department carried out, or taken into account, any subsequent
research on the Collier-Dollar work? What is DFID's latest assessment
of the number of people each £1 million (or $million) of
UK ODA lifts out of poverty?
Answer—DFID continues to use the
original methodology to estimate average and marginal efficiency
estimates of the numbers pulled out of poverty per million dollars
by country. For the CSR 2008-11 bid, we looked at alternative
ways of expressing the aid growth relationship in Collier Dollar
models to yield different average and marginal efficiency estimates
but as the original estimates are more conservative, they continue
to be used. It would be appropriate for future exercises to produce
new estimates using more recent global aid data, and updated poverty
and GNI per capita data based on new purchasing power parities.
In addition to this work, the Chief Economist is currently preparing
a review of research on alternatives to the Collier Dollar allocations
work.
The number of people pulled out of poverty for
each £ million of UK ODA differs for different expenditure
levels, different allocation patterns, and whether we are talking
about average or marginal £ million and bilateral or multilateral
programme. The average figure can vary between 650 to 1,000 people
pulled out poverty for each £ million of UK ODA and at the
margin can vary between 450 to 750 people.
PSA TARGETS
3. The 2007 Annual Report included an annex
which discussed progress on PSA targets which were "off-track".
Although some targets have not been given a "final"
performance assessment and remain outstanding, such an annex has
been dropped from the 2008 Report. Why is this?
Answer—It was agreed with HM Treasury
that there was no formal requirement to include an "off-track"
annex. Given that many of the targets were assessed as final (because
we had come to the end of the SR04 PSA period) we decided not
to include this. The targets that remain outstanding are mainly
due to the time-lag in obtaining reliable data to measure final
outturn. We will still be required to report on those outstanding
targets from SR04 PSA and what we are doing to address these targets
in our Autumn Performance Report.
4. For PSA 3(3) indicator (i)—Poverty
Reduction Strategies (PRSs)—the Annual Report gives figures
from the latest World Bank Aid Effectiveness Review showing 80%
of the countries covered had PRSs that were assessed as either
largely developed (13%) or with actions that had been taken (67%).
The 80% exceeds the 75% target for the indicator. However, the
Autumn Performance Report (APR) noted equivalent figures of 17%
and 62%, giving a comparable total of 79%. Why was the indicator
assessed as amber in the APR but green in the Annual Report when
in both cases the 75% target had been met and the percentage of
PRSs which were "largely developed" had actually fallen?
Answer—Since the World Bank and
IMF no longer approve PRS or PRS progress reports, we scored this
indicator by using the best assessments available at the time
of the Autumn Performance Report and the Annual Report to assess
whether the strategies were sufficiently developed to have met
the WB and IMF's threshold.
In the Autumn Performance Report, an assessment
was made using the 2006 Survey on Monitoring the Paris Declaration.
This survey used the World Bank's Comprehensive Development Framework
(CDF) approach to assess the operational value of national development
strategies. This is the source of the assessment that 17% of countries
had national development strategies which were largely developed
towards achieving good practice, with 62% reflecting action taken
towards achieving good practice. In scoring the indicator as amber,
only those countries with already developed strategies were classed
as having reached the required level.
The assessment used in the Annual Report draws
on the 2008 Survey on Monitoring the Paris Declaration. This uses
an updated World Bank assessment of national development strategies
using a different and more rigorous set of criteria. Using the
new criteria, the proportion of countries assessed to have largely
developed operational development strategies has increased from
8% in 2005 to 13% in 2007, while the proportion of countries assessed
to have made progress increased from 58% in 2005 to 67% in 2007.
The amber light given in the Autumn Performance
Report was changed to a green light following discussion with
the World Bank and HMT. Under the new more rigorous methodology,
we agreed that all countries assessed by the World Bank to either
have largely developed strategies, or to have made progress towards
this aim, would be considered to have reached the threshold which
would be required for PRSP endorsement. As 80% of countries had
reached this threshold, we scored the target as met.
5. On PSA target 4—reduction in world
trade barriers—the Government Response to the Committee's
report last year stated that the technical note included measures,
not sub-targets, and that the Department reported a qualitative
assessment due to a lack of data (HC 64-II Ev 35 (Q19)). Has the
data now become available to give a quantitative assessment on
the measures? How has your assessment of the four measures changed
since the Autumn Performance Report to alter the PSA outcome from
Red to Amber?
Answer—No. We have still not reached
a point where we have data which we can apply our quantitative
measures. This is primarily because of lack of progress on the
Doha Development Agenda (DDA). There is, though, one measure that
does not rely on this but the time lag between policies being
agreed and their having an effect means that assessing change
in tariff and changes in the level of EU imports from LDCs would
not, at this stage, provide a useful guide to performance.
However, our performance assessment has moved
from red to amber because, despite lack of progress on the DDA,
wider progress across Trade Policy has been made in reducing EU
and world trade barriers. A good deal of this progress has been
made fairly recently. 35 interim Economic Partnership Agreements
(EPA) have now been signed, the Common Agricultural Policy (CAP)
Health-check and EU budget review offer real potential to reduce
CAP trade-distorting support and delivery on our 2005 G8 commitments
on Aid for Trade and the launch of the Enhanced Integrated Framework
(EIF) in 2008 to support LDCs with trade related assistance are
now taking effect. The UK Government continues to vigorously push
for a Doha Deal.
6. The Annual Report gives an Amber assessment
for PSA target 4. This target focuses on progress with the Doha
round of WTO negotiations. Why is target 4 reported as a "final
assessment when those negotiations are still unresolved?
Answer—A final assessment was made
because the target period ended on March 2008. As outlined above,
there are other non-Doha processes which contributed to partly
meeting the target.
7. Reduction in world trade barriers is now a
DBERR-led PSA under the new CSR regime. Have there been any further
changes in the level of DFID's staffing and budgets allocated
to this work since the Parliamentary Under-Secretary of State
(Gareth Thomas) gave evidence to the Committee on changes in ministerial
responsibilities in October 2007 (HC 68 (2007-08), Ev 17-30)?
Answer—No. The Joint Trade Policy
Unit (BERR/DFID) responsible for delivering the trade related
targets under the new CSR period remains staffed and funded as
outlined in PUSS evidence in October 2007.
DEPARTMENTAL STRATEGIC
OBJECTIVES
8. The Annual report notes that there are
32 indicators for the DSOs. The Department shared a draft set
of DSOs and their indicators with the Committee last July, which
we published. Subsequently, with the publication of the CSR, the
DSOs were slightly revised. The Committee would like to receive
details of the final list of DSO indicators, along with details
of any baselines for measuring progress on those indicators over
the life of the CSR.
Answer—The final set of indicators
were published on DFID's website in December http://www.dfid.gov.uk/news/files/psa-1712.asp.
The reference period for the baselines will be 2007-08 drawing
on the latest available information for each indicator. Much of
the relevant information is drawn from the international system
and some of the data are not yet available. We willpublish full
details of the baselines together with more detail of the indicator
methodology in our Autumn Performance Report.
| Departmental Strategic Objectives
| DSO Indicators |
| DSO 1: Promote good governance, economic growth, trade and access to basic services
| 1. Governance (improved state capability, accountability and responsiveness)
2. Improved support for economic growth
3. Increased participation in global trade by developing countries
4. Delivery of the White Paper commitments on public services (improved outcomes for education, health, HIV and AIDS, water and sanitation and social protection)
5. Increased access by women and girls to economic opportunities, public services and decision-making
|
| DSO 2: Promote climate change mitigation and adaptation measures and ensure environmental sustainability
| 6. Policies and programmatic approaches developed for effective climate change mitigation and adaptation measures in developing countries, along with coherent international support for both
7. Environmental sustainability integrated into programmes
|
| DSO 3: Respond effectively to conflict and humanitarian crises and support peace in order to reduce poverty
| 8. Improved capacity of the international system to prevent conflict, respond early to crises and build peace
9. Effective implementation of DFID Security and Development Policy in priority countries
10. Effective DFID response to prioritised humanitarian crises
11. Improved international system for humanitarian assistance
|
| DSO 4: Develop a global partnership for development (beyond aid)
| 12. Enhanced HMG coherence of assessment, planning and implementation of conflict prevention and stabilisation
13. High quality research and evidence based policies for achieving MDGs
14. Cross Whitehall agreement and support for coherent,
pro-development forums and programmes
15. Greater positive participation by Brazil, Russia, India, China and South Africa (BRICS) in multilateral and other development forums and programmes
|
| DSO 5: Make all bilateral and multilateral donors more effective
| 16. Improved global performance against Paris Declaration commitments
17. 2005 Gleneagles commitments delivered (Including increased aid volumes)
18. Improved effectiveness of the European Commission
19. Improved effectiveness of the International Finance Institutions
20. Improved effectiveness of the UN system
21. Improved effectiveness of the Global Funds
|
| DSO 6: Deliver high quality and effective bilateral development assistance
| 22. Paris Declaration commitments implemented and targets met corporately and in country offices
23. DFID programmes in fragile states are consistent with the DAC principles
24. Portfolio quality is improved
|
| DSO 7: Improve the efficiency and effectiveness of the organisation
| 25. Achievement of CSR spending and efficiency targets
26. Financial management, compliance and controls
27. Improved leadership and management of people
28. A healthy, safe and secure workplace
29. Developing and changing the workforce
30. Investing in IT and business change
31. Greater public support for and understanding of development
32. Strengthening effectiveness through learning and better use of evidence
|
GENDER
9. In response to the Committee's report on the DAR 2007,
DFID said that "A report on the first year's implementation
of the [Gender Action] Plan will be published in April 2008. A
copy will be forwarded to the Committee". [HC 329 (2007-08)
page 6, response to recommendation in Paragraph 49]. We understand
that this report has not yet been produced. What are the reasons
for the delay in publication?
Answer—We acknowledge that publication of this
report has been delayed from our original target date but this
does not indicate a lack of commitment by DFID to the Gender Equality
Action Plan (GEAP) or to reporting on progress. Rather, the delays
were for practical reasons.
Our aim is to provide a comprehensive report which accurately
reflects progress over the first year of the GEAP, and sets out
our plans for year 2. Whilst the report will outline progress
against the individual Key Indicative Activities for year 1 set
out in Annex A of the GEAP itself, it is clear that the Plan has
successfully acted as a catalyst for a wider range of new or strengthened
work on gender equality and women's rights across DFID. We therefore
wanted the report to reflect the breadth of work being undertaken
as well as provide an overview of progress against GEAP objectives.
It has, however, proved a challenge to capture a representative
range of work in a report of manageable length which has meant
that preparation of the report has taken longer than planned.
We envisage that the progress report on implementation of
the Gender Equality Action Plan will be published in July. We
will forward a copy to the Committee as soon as it is finalised.
OFFICIAL DEVELOPMENT
ASSISTANCE
10. Paragraph 1.26 of the Annual Report gives a figure
of £1.5 billion for debt relief in 2006-07, and page 202
gives a figure of £2 billion. How do these two figures reconcile?
Answer—We apologise that the figure appearing
in Paragraph 1.26 was printed in error and we did not pick this
up in proof reading. The correct figure for the financial year
2006/07 is reported in the Annex and is consistent with data reported
in Statistics on International Development 2002-03 to 2006-07
published in September 2007. We will ensure that the correct figure
is reported on the website. The relevant comparator should also
have been the relevant calendar year figure for 2006 (£1.9
billion) which is slightly lower than the financial year figure.
The correct calendar year figures were provided to the DAC and
released in April.
11. The Committee requests a breakdown of planned ODA
for each of the CSR07 years, as well as for 2007-08, which differentiates
DFID and non-DFID expenditure. It would be helpful if the statistics
showed: total ODA expenditure and % of GNI; total DFID ODA and
total non-DFID ODA; and the contributions from different sources
(eg Environmental Transformation Fund, Stabilisation fund, debt
relief, CDC net investments, etc). Non-DFID ODA data should also
be broken down by the government department providing the aid.
Answer—Annual plans for DFID Departmental Expenditure
Limits (DEL) and total UK ODA were set out by the Treasury at
the time of the CSR.
http://www.hm-treasury.gov.uk/media/6/B/pbr_csr07_annexd10_148.pdf.
Almost all of DFID DEL is ODA eligible. As such it is possible
to estimate the non-DFID contribution to UK ODA over the CSR period
as shown in the table below.
PUBLISHED CSR FIGURES FOR DFID DEL AND TOTAL UK ODA (£
MILLION)
| 2007-08 | 2008-09
| 2009-10 | 2010-11
|
| DFID DEL | 5,354 | 5,790
| 6,843 | 7,917 |
| Total UK ODA | 5,291 | 6,392
| 7,477 | 9,140 |
| Implied (minimum) non-DFID contribution |
-63 | 602 | 634 |
1,223 |
| of which: | |
| | |
| DEFRA ETF | |
50 | 100 | 250 |
| FCO | | 57
| 92 | 107 |
| Stabilisation Fund | |
58 | 58 | 108 |
| Other government DEL |
| 39 | 39 | 39 |
| Other ODA not in DEL
(includes CDC investments and debt relief)
| | 398 | 345 |
719 |
Note that the implicit negative contribution of non-DFID
ODA in 2007-08 is the result of net CDC disinvestment. Indeed
this effect was larger than forecast at CSR time and total UK
ODA for 2007-08 is likely to be slightly lower than shown in the
above table.
Provisional 2007 calendar year ODA figures were published
by the DAC in April. UK ODA was estimated to be £4,957 million.
Of this £5,167 million was DFID expenditure with non-DFID
contribution estimated to be negative £210 million.
2008-09 MAIN ESTIMATE
12. DFID's 2008-09 Main Estimate Memorandum notes the
Capital-DEL budget increasing by £160 million in 2008-09,
which includes £50 million for the Environmental Transformation
Fund. How much of the Capital-DEL budget increase is for increased
debt relief and how much for increased funding for the IDA and
African Development Bank?
Answer—The budget for debt relief will
increase from £90 million in 2007-08 to £192 million
in 2008-09. The budget for IDA will reduce from £493
million in 2007-08 to £453 million in 2008-09, with significant
increases thereafter to £701 million in 2009-10 and £721
million in 2010-11.
The budget for the African Development Bank (through
the African Development Fund) will increase from £73 million
in 2007-08 to £82 million in 2008-09. The remainder of the
increase is mostly accounted for by the Asian Development Bank
(through the Asian Development Fund), which will increase from
£28 million in 2007-08 to £48 million in 2008-09.
ENVIRONMENTAL TRANSFORMATION
FUND
13. DFID's 2008-09 Main Estimate memorandum notes a £50
million commitment for the Environmental Transformation Fund (ETF).
What other ETF projects are being developed, and how much of the
£400 million DFID share of the ETF will be taken up by these
projects? What representations has DFID received from other potential
donors, potential recipient countries and NGOs about the likely
attractiveness and take-up of ETF loans?
Answer—The £800 million international Environmental
Transformation Fund (ETF) was announced in the 2007 budget for
the period 2008-11. The ETF is jointly owned by DFID and Defra,
with a £400 million share allocated to each department. The
£50 million noted in the Main Estimate memorandum is DFID's
indicative allocation from the ETF for financial year 2008-09.
We do not plan to use the ETF to develop bilateral projects,
but instead want to ensure it is part of a bigger multilateral
effort to help address climate change in developing countries.
An initial capital grant allocation from the ETF of £50 million
over three years was earmarked for the Congo Basin Fund. We plan
to channel this and some of the rest of the £800 million
ETF-IW through the proposed multilateral Climate Investment Funds
(CIFs). The CIFs aim to ensure a coherent, global response to
climate change to pilot ways to assist developing countries in
moving to low carbon and climate resilient development.
We are not yet in a position to confirm the exact ETF contribution
to the CIFs, but it will be in the form of an equity subscription
in a manner analogous to the International Development Association
(IDA). Like IDA most of the funds will be provided to recipient
countries in the form of loans and some in the form of grants.
We have openly communicated this to other donors, potential recipients,
and NGOs during the CIF consultation period (January to May 2008).
NGOs have been critical of the loan component. We have explained
that as the ETF was allocated to DFID/Defra under our capital
budgets, we are required to allocate the bulk of this funding
as concessional loans. The loans will be highly concessional with
negligible (near zero) interest rates. The repayment period will
be 40 years, with a 10 year grace period. This means that the
loans which recipients receive through the CIF will be about two
thirds cheaper than if borrowed at average global interest rates.
Other donors are likely to increase the grant envelope within
the CIF (particularly for the climate resilience element) so countries
will have a blend of financing options available to them. Any
loans from the funds will not be made to countries who cannot
afford to repay them. It will be entirely up to recipient countries
whether they choose to take highly concessional loans in addition
to the grant finance available. This is not a new "indebting"
of developing nations—it is entirely consistent with standard
development finance and is in line with the Bali Action Plan call
for finance—"to provide new and additional resources
including official and concessional funding for developing countries".
14. Will ETF loans score as UK ODA, and if so what proportion
of the planned 0.56% of GNI by 2010-11, envisaged in the CSR,
will be made up of ETF loans? Will ETF loan repayments count as
negative-ODA?
Answer—We are working with other donors to ensure
that UK ETF funding will meet Official Development Assistance
(ODA) conditions, and as such would be eligible to contribute
to the planned 0.56% of GNI target by 2010-11. Our current understanding
is that there would be negative ODA if money were returned to
the UK. But loans and repayments between CIFs and borrowers would
not affect ODA.
Current plans are for £500 million of ETF-IW funding
(£250 million each from DFID and Defra) to be allocated in
2010-11 which constitutes just over 5% of planned ODA in that
year. The precise ODA treatment of the funds including the potential
treatment of repayments as negative flows will be determined by
the DAC and is unlikely to be formally agreed until the first
relevant flow information is submitted in 2009.
EFFICIENCY PROGRAMME
15. The Department's evidence to the Committee on the
2007 Annual Report referred to an Internal Audit department review
of the efficiency programme, which had not been finalised at that
time (HC 64-II, Ev 36, (Q22)). What were the outcomes of that
review?
Answer—The internal audit review concluded that
DFID has made effective use of SR04 efficiency guidance from the
Office of Government Commerce (OGC) and the Treasury notes on
value for money proposals for CSR07 bids. It stated that the reporting
processes in place to HM Treasury via DFID senior management appear
to be effective and efficient. 8 recommendations were made to
strengthen the governance of the programme all of which were accepted.
They included recommendations to strengthen assurance on data
quality and systems, and to include delivery of efficiency savings
within Divisional Performance Framework targets. 5 have been implemented
and 3 are in progress and will be implemented for the CSR07 VFM
programme.
16. What arrangements is the Department making to have
its final efficiency programme savings for 2007-08 validated/audited?
Will the National Audit Office be involved?
Answer—Efficiency programme savings were validated
in accordance with HMT published measured guidance including an
internal audit review during the SR04 period. We are aware that
the NAO does not plan to conduct further studies of the SR04 programme
during 2008-09 but may do so in future years.
17. What proportions of the £588 million efficiency
savings figure for 2007-08 are assessed as "preliminary",
"interim" or "final" (using the OGC classifications)?
Answer—£476 million of the 2007-08 efficiency
savings was assessed as preliminary (mainly because the financial
expenditure outturns were not finalised at that time) and £112
million assessed as final. We will continue to update this assessment
during the first two quarters of this financial year.
DFID'S VALUE
FOR MONEY
DELIVERY AGREEMENT
18. The Value for Money Delivery Agreement includes two
efficiency streams (streams (a) and (b)) which use a similar rationale
to the previous efficiency target, by seeking to capture allocative
efficiency gains from aid being directed to low income countries.
The previous efficiency target was classed as "non-cashable"
because efficiencies are realised through greater outputs for
the same inputs. Given the similarity in the new and old efficiency
measures, why is the target in the Delivery Agreement viewed as
a "cash-releasing" target?
Answer—The terminology and definitions DFID
uses in its Value for Money (VfM) Delivery Agreement are consistent
with Treasury guidance. HMT specifically advised that it was appropriate
to use the term "net cash-releasing savings" to describe
all our savings. This includes the savings forecast from allocative
bilateral and multilateral choices against a counterfactual baseline.
HMT guidance for VfM Delivery Plans asks departments to break
down their "cash-releasing" VfM initiatives into categories.
One of the standardised categories is "allocative efficiency".
The guidance then goes on to define this category as "releasing
resources by transferring activity from less effective to more
effective policy interventions".
19. For efficiency stream (c) of the Value for Money Delivery
Agreement which seeks to capture the increase in the value of
DFID's projects/programmes that are scored as successful, why
has the approach for calculating efficiencies been altered to
recognise all improvements in the rating of projects, rather than
only those achieving the top two grades? As this target under
the previous PSA regime was regarded as "non-cashable"
why is the revised target now treated as "cashable"?
Answer—The table below sets out DFID's project/programme
scoring system on which the value for money measure is based.
| Score | DFID Description
|
| 1 | Likely to be completely achieved
|
| 2 | Likely to be largely achieved
|
| 3 | Likely to be partly achieved
|
| 4 | Only likely to be achieved to a very limited extent
|
| 5 | Unlikely to be achieved
|
The way DFID calculates a value for money index for its bilateral
projects/programmes has changed for CSR period 2008-11; from including
only the commitment values of projects scoring 1 and 2, to including
those with scores 1 to 5 on a sliding percentage basis. Under
the previous approach, it was recognised that projects with the
highest score 1 were given as much weight in the calculation as
those with score 2, despite the fact that there is a difference
between the two success ratings. Furthermore, projects scoring
3 and 4 were given no weight, despite the fact that these projects
are achieving some success. The new approach is fairer and recognises
the relative success of projects by the giving the most successful
projects more weight than the least.
The terminology and definitions DFID uses in its Value for
Money Agreement are consistent with Treasury guidance. In the
context of efficiency stream (c), the Treasury advise that it
is appropriate to use the term "net cash-releasing savings"
and this term includes "releasing resources by transferring
activity from less effective to more effective policy interventions".
CDC GROUP PLC
20. What influence does DFID have over CDC's investments,
or its mix of cash and investment asset holdings? Over 50% of
CDC's net assets are held as cash or short term deposits. Would
DFID prefer to see a higher or lower proportion of CDC's assets
invested in development projects?
Answer—DFID sets CDC's investment policy and
provides overall targets for proportions of new CDC investments
in poorer markets. CDC is also precluded from investing in certain
sectors such as arms, illegal drugs, gambling, tobacco and prostitution.
In 2004, DFID set an Investment Policy for CDC that at least 70%
of its investments had to be in the poorer developing countries
(with a per capita income below $1,750) and at least 50% in Sub
Saharan Africa and South Asia. The Investment Policy constitutes
part of an MOU between CDC and DFID that sets out the responsibilities
and obligations of CDC. DFID also agreed CDC's Business Plans
in which CDC had set out various business targets for the following
period. Within these parameters, CDC has autonomy in making responsible
investments in private sector businesses.
CDC has out-performed substantially all of the targets we
agreed at the time of its reorganisation in 2004. Since the end
of 2003 CDC has:
— Grown in value from £1.0 billion to £2.7
billion.
— Exceeded its Investment Policy targets, achieving
74% in the poorer developing countries and 67% in Sub-Saharan
Africa and South Asia as in 2007 five-year rolling average.
— Made a cumulative return of £1.7 billion
(vs £0.26 billion target set in the reorganisation).
— Mobilised $1.5 billion of third party capital
(vs $0.95 billion target).
— Realised £2.1 billion of investments (vs
£0.8 billion target).
— Accumulated £1.4 billion cash (vs £0.1
billion target).
— Committed capital to 52 fund managers and 112
Funds.
The CDC Board holds responsibility for the mix of cash and
investments. The company regularly runs an over-commitment (14%
as at end 2007) to funds. This means that the cash held is more
than fully committed to funds. But actual cash levels are dependent
both on the timing of fund draw downs and on the volumes of investment
realisations. The cash balance at end 2007 (£1.4 billion)
was particularly high because of the partial Globeleq power subsidiary
sale of $1.2 billion. The majority of this amount has already
been committed to a new infrastructure fund. DFID monitors CDC's
mix of cash and investments on a quarterly basis. We would like
to see the maximum amount possible invested in development projects
but acknowledge CDC's expertise in recognising opportunities for
investing in difficult markets. We would not want CDC to rush
into investments that turn out to be poor ones. We consider it
important that the company makes the decisions about fund selection
and works with its fund managers on the timing of actual disbursement
of the capital.
21. What is the reason for the exemption for CDC from
UK corporation tax? For each year since it was given that exemption:
what amount of UK corporation tax would have been paid if the
exemption had not applied; what amount of UK corporation tax credits
(negative corporation tax liability) were applied to allow CDC
to reduce its corporation tax liabilities in other countries'
jurisdictions; and what amount of corporation tax was paid to
other countries?
Answer—CDC was exempted from UK Corporation
Tax in 2003. Most investment funds are domiciled in tax efficient
countries and it is important that CDC has a level playing field
with other funds in order that it can show competitive returns.
Not paying Corporation Tax also means that it is able to invest
all of its reflows for the benefit of poor people in developing
countries. If CDC had not been exempted from UK Corporation Tax,
it would have structured its business differently, so it is not
possible to say how much tax CDC would have paid without exemption.
CDC's UK corporation tax status does not change the amount
of tax paid in non-UK countries. For the avoidance of doubt, no
UK corporation tax credits (negative corporation tax liability)
were applied to allow CDC to reduce its corporation tax liabilities
in other countries' jurisdictions. CDC invests in managed funds.
The funds then invest in companies in developing countries. These
companies pay taxes under the laws of the countries in which they
operate. In accordance with normal industry practice, when the
funds report to CDC there is no detailed record of the tax paid
by each underlying company in their country of operation.
22. Why is the exemption of CDC from UK corporation tax
in 2007 (£245 million) greater than the pre-exemption charge
(£190 million)? Why was there no exemption in 2006?
Answer—As noted above, if CDC did not have UK
corporation tax exemption it would have structured its business
differently so certain reconciling numbers in the tax notes are
in reality theoretical. The line in Note 5 of CDC's Annual Report
and Accounts for 2007, showing "Effect of UK tax exemption"
at £245 million in 2007 is greater than the "Tax charge
on the accounting profit at the UK tax rate of 30%" charge
of £190 million is because the former is calculated by applying
30% to the CDC parent company's profit, whereas the latter is
calculated on the group profits. The group profits are lower than
the parent company profits because the parent company contains
valuation gains on subsidiaries, which are taken out of the group
consolidated accounts and replaced by the operating profits of
those subsidiaries. Prior to 2007, the basis on which the note
5 reconciliation was prepared was different, so a detailed comparison
of 2007 against 2006 on this line of Note 5 is misleading. On
a comparable basis the 2006 number is £137 million.
23. What is the UK Government's view on the appropriateness
of publicly owned companies investing in businesses using offshore
tax havens? What representations has DFID made to CDC about its
investments in funds based in tax havens?
Answer—We have advised CDC that they are allowed
to use offshore tax regimes, but only to the extent that they
are legal and transparent and are entirely necessary for the objectives
we have set CDC. As noted above, offshore tax regimes may be used
to ensure that CDC can demonstrate competitive returns against
other fund operators. We have advised them that they should seek
to avoid those jurisdictions listed as uncooperative tax havens
by the OECD, or tax regimes listed as harmful under the EU Code
of Conduct for business taxation.
The advice that we received from our independent financial
advisers at the time was that an onshore structure for CDC's energy
subsidiary Globeleq, for example, would not have attracted other
investors. Bermuda was chosen because its corporate law is similar
to the UK's, and a Bermuda location would facilitate subsequent
listing on a US stock exchange, should that be the strategy adopted.
24. Of the 78 subsidiaries listed in the PQ of 3 April
2008 [HC Deb 3 April 2008 c1225w], 30 are incorporated in countries
viewed as tax havens (Mauritius, Barbados, Bermuda, British Virgin
Islands, Cayman Islands and Jersey). What are the activities of
these companies; how much of each of the companies does CDC own;
and why are they incorporated in those countries? What would be
the effect on the taxation paid by (i) the CDC group and (ii)
the companies it invests in, if the 30 subsidiaries were instead
registered in the UK?
Answer—These companies are investment holding
companies; ordinarily, CDC holds 100% of the share capital of
these companies. CDC avoids using investment holding companies
in jurisdictions listed as uncooperative tax havens by the OECD
or tax regimes listed as harmful under the EU Code of Conduct
for Business Taxation.
These investment companies were either:
(a) acquired as part of a larger deal in purchasing operating
subsidiaries; or
(b) set up to facilitate the most beneficial disposal of investments
at a later date; or
(c) set up for tax effectiveness.
Only one company (CDC Group plc) has exemption from UK corporation
tax. The rest of the CDC group of subsidiaries has no special
tax exemption. Therefore, any subsidiary of CDC in the UK would
pay normal UK corporation tax.
There would be no effect on the underlying corporation tax
paid by the companies in which the holding company invests (ie
the underlying investee companies) because these companies pay
tax in their own local jurisdictions—this would be the same
whether the holding company was in the UK or overseas.
25. Has DFID or CDC made any assessment of the amount
of corporation tax paid (i) to the UK and (ii) to overseas tax
authorities by the funds that CDC has invested in?
Answer—Neither CDC nor DFID has made any assessment
of the amount of corporation tax paid by the funds that CDC has
invested in. The funds that CDC invests in are either resident
outside the UK or, if resident in the UK, are tax transparent
partnerships (ie are looked through and ignored for tax purposes).
In either case they do not pay UK corporation tax. It is normal
industry practice to structure managed investment funds so that
they are tax transparent and/or pay minimal tax. The underlying
companies in which the funds invest pay tax in their country of
operation and the investors in the fund pay tax in their country
of residence.
26. How does CDC reconcile its role as a "fund of
funds" with the acquisition and ownership of companies such
as Umeme (a power generation company in Uganda)? To what extent
is the rationale for altering CDC's structure in 2004, to separate
out direct investments from CDC itself, undermined by such direct
CDC investments?
Answer—Although CDC entered into the demerger
from Actis in 2004, commencing operations as a fund of funds,
it had a legacy portfolio of direct investments and still does
some investment through other intermediated structures. When the
reorganisation of CDC took place in 2004, it was agreed that the
portfolio at that time would be managed by Actis with a management
fee from CDC. The investment in Umeme was via Globeleq, a legacy
portfolio power company that was on the CDC balance sheet but
managed by Actis as part of the legacy power portfolio. Umeme
has transformed the electricity distribution to over 270,000 customers
in Uganda. It has increased access to electricity for 20,000 properties
per annum, upgraded dilapidated infrastructure, increased efficiency,
reduced losses and implemented a formal safety policy, which is
now meeting international benchmarks. As the legacy portfolio
investments that are directly held are managed by Actis under
an umbrella agreement for a management fee, (ie an arrangement
similar in management terms to a fund) they are consistent with
the rationale for altering CDC's structure in 2004.
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