Examination of Witnesses (Question Numbers
100-108)
MS NEMAT
(MINOUCHE) SHAFIK,
MR MARK
LOWCOCK, MR
ANDREW STEER
AND MR
RICHARD CALVERT
24 NOVEMBER 2009
Q100 Andrew Stunell: Perhaps if I
move to the CDC. Can you describe to us how DFID keeps a grip
on what CDC does and whether you believe you have got that grip?
Ms Shafik: As you know, the recent
NAO report on CDC recommended a tighter regime of oversight of
CDC, and I will let Mark say something about how we are putting
that into practice because he leads for us on CDC.
Mr Lowcock: We set the policies
for CDC. We tell them the places they can invest and the standards
to which they have to invest. We appoint the chairman. A year
ago today roughly the new chairman took office. We also have a
significant voice in the appointment of other non-executive directors
and there is a process to identify two new non-executive directors
at the moment in which we are strongly involved. Minouche and
I have a quarterly meeting with the whole board. We also have
a quarterly meeting with the non-executives which gives us a chance
to have off-line discussions, if you like, about how the non-executives
view the performance of the executive. Then our teams have continuous
dialogue with CDC on how they are getting on on delivering their
business plan. One of the things that the NAO and PAC said to
us was that we need to systemise all of those sorts of engagement.
In the first part of this year I signed with the chairman of CDC
a memorandum which sets in place all those arrangements, what
we will do when, and how therefore we will capture the overall
relationship.
Q101 Andrew Stunell: Okay so they
produce an annual report, which is probably more of a hagiography
than a report. How do you think the assessment of the development
aspects is really captured? Apparently they did not do anything
wrong at all.
Mr Lowcock: I think that is a
little bit unfair, if I may say so, on the report. One of the
other things we have asked them to do is to put in place a much
more structured approach to environmental, social and governance
safeguards, and in the development impact report I think they
have been quite open on some of the problems. Just to give one
example they invest in a company which supplies security services
to businesses in Nigeria. Basically it drives cash around between
banks and business. The CDC have acknowledged that there were
two people who worked for that company who were killed in the
course of their duties last year and CDC have had a series of
follow-ups to check whether that business is doing all it can
to look after its employees. To give another example, one of CDC's
fund managers invested in a business in India which in the first
week they found were paying some of their staff below the minimum
wage, and CDC caused that problem to be solved within the first
week.
Ms Shafik: They have also invested
in things where they have not made money, although thankfully
they have invested in more things where they have made money so
their financial position is quite good. However, they have made
some bad investments and you would expect that in the sort of
highly risky business they are in.
Q102 Andrew Stunell: Do you think
you have a good assessment of whether the investments they are
making are producing development impacts? There is a difference
between investing in a developing country and producing development
impacts?
Ms Shafik: Absolutely, and that
is why for the first time we have pressed them to produce this
development impact report. To be honest, we were quite pleased
with it. For starters, it is important to say that the work of
the International Finance Corporation at the World Bank, which
is a kind of CDC equivalent, has looked at thousands of projects
around the world and found that there is an 85% correlation between
profitability and good development impact. As someone once said
to me, no company that has gone bust has ever had good development
impact. It is a bit of an obvious point but actually the expert
evidence is supportive of that. I believe that the development
impact report shows that the CDC has created a million jobs and
tax payments by CDC companies is over $250 million.
Mr Lowcock: It was $2 billion
last year that CDC-invested-in-companies paid in tax to the authorities
in the countries in which they work. I think there was clearly
a gap before the requirement was in place to have the annual development
impact report. They have done one and, as Minouche says, we were
quite pleased with it. We did not think it was perfect. It is
a goal for CDC to be a leader on environmental, social and governance
issues and certainly, as the shareholders, making sure that is
the case is a big priority for us.
Q103 Mr Lancaster: Given your acceptance
that CDC have had some problems in some of their investments—and
I am sorry to return to this because I have been impressed—is
it right the chief executive or the chairman was paid nearly a
million pounds last year? What say do you have on that salary?
It does seem pretty enormous.
Ms Shafik: Three-quarters of that
is performance-based and based on the long-term performance of
the portfolio.
Q104 Mr Lancaster: You said some
of the problem is that they have not always made consistent investments,
so if you have got a problem with investments and it is performance-based,
and he is still paid a million pounds, what would it have been?
How do we get here?
Mr Lowcock: It is not the case
that in 2008 he was paid a million pounds. In the previous year,
when the company made £600 million in profit, the total remuneration
of the chief executive was £970,000.
Q105 Mr Lancaster: Sorry, I was £30,000
out.
Mr Lowcock: That was a year in
which they had made £600 million in profit which had been
returned to the taxpayers. One thing we did when we restructured
CDC in 2003, which was after a period in which the company had
lost hundreds and hundreds of millions of pounds by making bad
investments and there was no incentive for the executive to generate
a financial return, the Government deliberately put in place a
performance-related pay scheme. The truth is the company turning
its assets from £1.2 billion in 2003 to £2.7 billion
at the end of 2007 was beyond the wildest expectations that we
had when we restructured them, but that was why the chief executive's
remuneration was as it was. Last year they did much less well
and his remuneration was correspondingly substantially lower.
We do think that the performance element has been an important
reason for the much better performance of the company over the
last several years and obviously our Secretary of State, together
with Treasury ministers, set the remuneration policy. One thing
that they have decided to retain is that performance element.
Q106 Mr Lancaster: How much was he
paid last year?
Mr Lowcock: I would need to check.
It was about £550,000.
Q107 Chairman: Andrew Stunell described
the CDC's annual report as a hagiography; I would not like to
say the Department's report is, but it is very upbeat and very
positive. The final question is what do you see as the role of
the report? In all seriousness, do you not think you should put
into it some of your failures or reassessments which actually
say, "Look, this is what we set out to do. Of course these
are all our successes but actually this did not work and we had
to change it ... " or whatever? Whilst this is still a useful
document, a good reference, and we will certainly go back to it,
as I say it could perhaps be a little more balanced. What is your
evaluation of it?
Ms Shafik: I think we welcome
feedback from the Committee because you are obviously our primary
audience for this. This is a new format this year, we have merged
the resource accounts with the Annual Report to try and streamline
our reporting to the Committee but also split it into two volumes
where this is, sort of, intended to be a more accessible version,
focused on what the Department delivered, and the results and
the more detailed accounts are in the second volume. We would
be interested in hearing whether you found that a useful format.
We would be happy to look at including more of our failures and
some of the lessons we have learned in future reports, if you
think that would be helpful.
Q108 Chairman: We are constantly
monitoring and evaluating the Department, and it is no secret
the Committee thinks it is a first-class Department and does a
very good job. Nevertheless, our job is to keep you under pressure,
under scrutiny and hopefully help you to do an even better job.
Sometimes actually an acknowledgement, not for us but a general
interaction, which says, "This is difficult, this is challenging",
yet the report does not really reflect that, it only reflects
the positives. It is understandable, that is what company reports
tend to do but they cannot disguise the facts if they have made
a loss or did not deliver. That is the kind of thing we are looking
for, more evaluation of the connection between the spend and the
outcomes and an acknowledgement in the process that sometimes
you have to change tack for a variety of reasons.
Ms Shafik: We would be happy to
do that. What we are aspiring to do, and this report is a first
step, is turn this much more into a report around results and
increasingly, I hope, about value for money. So being able to
tell the Committee, "We have delivered these results and
it cost us that much" and having it be a more helpful accountability
document for you. I think that is really the next stage of our
own work on value for money and evaluation.
Chairman: Thank you very much indeed.
It has been, as always, an interesting and mutually constructive
exchange. We know at least the ammunition we can throw at your
Secretary of State tomorrow! Thank you very much indeed.
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