Written evidence submitted by the Jubilee
Debt Campaign
INTRODUCTION AND
SUMMARY
1. Jubilee Debt Campaign (JDC) welcomes the International
Development Committee's inquiry, most notably its coverage of
the operations of the CDC Group. We would like to focus our evidence
on this aspect. We have only recently started investigating the
CDC Group's activities, but we aim to build our expertise and
public information work on the group in coming months.
2. We have been aware of the CDC Group primarily
through its outstanding developing country debt portfolio. We
are aware that CDC Group is not currently a debt creating entity.
However, our interest in the CDC Group was sparked earlier in
2010 when we met a Nigerian activist, Dotun Oloko, who presented
us with information about CDC's investments in Nigerian companies.
These investments were connected with individuals allegedly involved
in widespread corruption and with serious financial mismanagement,
ultimately leading to a Nigerian government bail-out of several
Nigerian banks.
3. We are also aware, through research undertaken
by investigative journalist Richard Brooks of Private Eye, War
on Want and others, of serious problems with CDC's projects including:
- a focus on profitability to the detriment
of development;
- depriving developing counties of much needed
tax revenuel
- lack of analysis of development impactsl
and
- an ongoing failure of oversight and standards,
transparency and accountability.
These persistent problems with CDC's operations point
to a systemic failure in CDC's "development" model requiring
a fundamental re-think.
4. JDC hopes to form stronger analysis and recommendations
on CDC in coming months. However, we suggest that there is more
than enough information in the public domain to call on the Department
for International Development (DfID) to fundamentally re-assess
its relationship with the CDC Group and the operating model of
the Group. In particular this should include the following elements:
- - A comprehensive review of the private equity
model employed by CDC, the sectors which it supports, the funds
it channels investments through and the countries it focuses on.
We strongly suggest alternative models are considered which allow
better accountability and control. Better oversight by DfiD is
essential;
- - Much stronger development standards, with
clear poverty targets - for instance all investments must meet
stated human development needs and analysis must be expanded to
include context sensitive assessment;
- - Better methods of consulting civil society
in the UK and the developing world, and establishment of a complaints
mechanism for those impacted;
- - A framework for monitoring and evaluating
CDC's operations and impacts including an annual, public evaluation
of projects;
- - A review of the pay structure and incentives
offered to staff by CDC;
- - A tax standard in CDC's investment code
and mandating of all funds receiving CDC support to publicly publish
their accounts on a country-by-country basis.
ABOUT JUBILEE
DEBT CAMPAIGN
5. Jubilee Debt Campaign is part of a global movement
working for full cancellation of unpayable and unjust developing
country debts, by fair and transparent means. As such it is also
interested in advocating for financial reforms which would make
for a more responsible and pro-development lending system. It
is a company limited by guarantee (number 3201959) and a charity
registered in England and Wales (number 1055675). See www.jubileedebtcampaign.org.uk
for more details.
A FOCUS ON
PROFITABILITY TO
THE DETRIMENT
OF DEVELOPMENT
6. Our central concern relates to the model used
by the CDC Group, especially since its partial privatisation in
2004. The theory behind CDC's "development" approach
is that many developing countries are failing to attract capital
flows sufficient for economic development. CDC provides such capital,
thus directly leveraging additional private capital and indirectly
proving that such investments can be profitable and safe, thus
encouraging further capital into like projects. We agree that
lack of sufficient capital is a real problem for many developing
countries, though it is equally important to ensure that capital
remains in the country concerned, something CDC mitigates against
for instance through its approach to tax (see below). Hence the
quality of the investment is the real key, something to which
we do not believe CDC pays sufficient attention.
7. In fact, we believe that CDC misunderstands its
own model, and actually invests in developing country projects
which have no difficulty in raising capital, but which are simply
highly profitable for CDC. The CDC confuses profitability with
development. This is perhaps not surprising, given that the incentive
structure of CDC is based around profitability rather than development
impact.
8. One proof of this is demonstrated by the spread
of CDC investments by sector. Agriculture - the sector which CDC
traditionally supported - has now fallen to only 5% of CDC's portfolio.
This is extraordinary at a time of global food crisis, when lack
of investment in small scale agriculture has caused enormous suffering
across the world. The World Bank and several UN agencies have
lamented the lack of agricultural investment in recently years.
CDC could have played a key role in changing this picture. Similarly,
investment in infrastructure has fallen to below 8%.
9. Our contention is that investments in such sectors
has been abandoned on the basis they are not profitable enough.
They have been replaced by investments in more profitable areas
such as "consumer" and "financial" sectors.
Currently CDC invests 20% in "financial" and 14% in
"consumer" sectors.[157]
10. The marginalisation of low return investments
is exemplified by the Mpongwe project in Zambia's copper belt.
The project, which was originally financed by the Commonwealth
Development Corporation, and turned thousands of acres of dry
bush into productive arable land for a return of 8%-10%. In spite
of this, in 2008 CDC sold off its remaining holdings in the Mpongwe
Development Company resulting in the company's liquidation. This
has had a negative impact on co-operative land development.[158]
11. The sale of the Mpongwe Development Company is
noted by the BBC as being part of a new approach by CDC: "Former
officials detect a new commercial ethos, with talk of projects
now being considered old hat - today the talk is of deals. Investment
in estates like Mpongwe belong to yesteryear."[159]
12. Financing is instead being redirected to projects
that are likely to provide faster maturing, higher returns. Examples
of this include investment in the established Indian company Moser
Baer and underwriting of The Palms shopping mall in Nigeria.
13. In 2007, CDC operating as part of a consortium,
invested $35 million in Moser Baer to enable the company to broaden
its business to include the production of photo-voltaics for use
in solar panels.[160]
This investment from CDC was provided even though Moser Baer was
already highly profitable given its position as the world's second
largest manufacturer of optical storage devices and with subsidiaries
in India, Japan, Europe and the US, resulting in the employment
of some 6,000 people.[161]
Ergo, it is questionable whether CDC investment is offering significant
developmental benefit to the project.
14. With regard to The Palms shopping mall, CDC provided
investment of $40 million.[162]
While the project has resulted in employment and the production
of tax revenues, critics believe that the project does little
to reduce poverty. John Hilary of development charity War on Want
stated at the time: "The Palms shopping centre is designed
to cater for the wealthiest, most affluent Nigerians who can go
and shop there - It's not actually going to be providing very
much for the poor at all. If CDC's money is meant to be going
towards development and poverty reduction it's unclear really
how that is going to be achieved through a shopping centre in
Lagos."[163]
The Palms shopping mall demonstrates the failure of the trickle
down theory which appears to lie at the centre of CDC's approach.
The Mall was a success for the developers and sparked a series
of similar ventures in Nigeria. This may be good for those rich
enough to get into property development - and would not necessarily
have required development finance. We understand, however, that
those working in the mall recently had to undertake strike action
over their poor wages and working conditions.
15. The same story is told by the geographical spread
of CDC investments. CDC is very proud of the fact that it now
invests a greater proportion of funds in poorer countries than
any other Development Finance Institution (DFI). But a closer
looks raises serious questions about how much this commitment
means.
16. CDC directs a growing proportion of its investment,
nearly two thirds (up from around a quarter), to the rapidly emerging
economies of Nigeria, South Africa, India and China.[164]
While these countries certainly contain a significant percentage
of the worlds poor, they also independently attract considerable
foreign investment.
17. Today, the importance to CDC of returns over
other considerations is highlighted in a National Audit Office
(NAO) report: "CDC has argued that an increasingly higher
focus on poor countries might destroy value in CDC by delivering
lower investment returns, resulting in less capital available
for investment in later years, or financial losses that would
harm CDC's reputation with partner investors. CDC believes that
there is limited capacity in these countries to accept further
equity investment."[165]
18. Fund managers interviewed by the NAO questioned
the "breadth of development benefits that DfID hopes CDC
can deliver." This is because "they doubted whether
higher risk and lower return investments were compatible with
a commercial business model."[166]
CDC and DfID are concerned that low income countries do not have
the capacity to absorb substantial further private sector investment.
This assertion was rejected by the NAO, which notes that alternative
indicators suggest that Sub-Saharan Africa is not near investment
saturation with enterprises complaining more about lack of finance
than in other regions.[167]
19. Serious concerns have been raised about the direction
in which "profit maximisation" leads CDC. One example
is Globaleq, a company which facilitates privatisation of energy
services in developing world countries. In 2006, War on Want documented
how Globeleq's operations had had detrimental impact on poor people,
including vastly increased prices in Uganda which sparked protests
and a court case, and the development of environmentally damaging
forms of energy.[168]
In 2007, Globeleq sold its North African, Asian and Latin American
companies, at large profit, according to Richard Brooks. In 2009
the legal ownership was transferred to the Actis Infrastructure
Fund, but "CDC continues to be a key stakeholder in Globeleq's
business as a material investor in Actis Infrastructure Fund".[169]
Again we are concerned this further reduces accountability.
20. An additional example worthy of note is the support
provided by CDC, through the Emerging Capital Partners (ECP),
to Anvil Mining, a Canadian-Australian company accused of involvement
in serious human rights abuses in the Democratic Republic of Congo.
A report by Rights & Accountability in Development finds it
"unacceptable that at the time CDC's investment was made,
Anvil's role in the Kilwa massacre was under investigation by
the Australian Federal Police".[170]
ECP is the same manager responsible for some of the problematic
Nigerian investments (below).
DEPRIVING DEVELOPING
COUNTIES OF
MUCH NEEDED
TAX REVENUE
21. Tax avoidance is a legal activity that devalues
administrative governance and accountability and reduces the efficiency
of resource allocation in developing countries. As of December
2008, CDC investments were being channelled through 72 subsidiaries,
40 of which were situated in tax havens.[171]
Tax havens are countries or territories that support laws that
allow companies and individuals to operate opaquely and avoid
paying tax. The UK government has repeatedly said that tax avoidance
plays a detrimental role in development, for instance Stephen
Timms as Treasury Minister said tax avoidance "costs developing
countries billions each year in lost revenue - a major drain on
often fragile economies and a genuine barrier to economic growth.
These are vital resources for schools, hospitals and infrastructure."[172]
22. Nonetheless, DFID has defended the use of tax
havens by CDC - which it refers to as "offshore financial
centres" (OFCs) - on the grounds that if they were not used
then CDC investments would be taxed twice: in the first instance,
when companies that CDC has invested in are taxed, and again when
the investment funds are taxed. Moreover, investing through offshore
centres is considered a positive way of attracting third-party
money into developing countries. In a memo to the Committee of
Public Accounts in December 2008, DFID argued: "The use of
offshore financial centres is a legitimate and widely-used practice
undertaken by other Development Finance Institutions, which, like
CDC, are committed to supporting economic growth in developing
countries in the most effective and efficient way. Using OFCs
actually means CDC delivers more money to the economies of poor
countries by mobilising extra investment."[173]
23. CDC's use of tax havens have been well documented.
For instance, CDC has provided investments, totalling £10
million to the Australian mining company Mineral Deposits Ltd,
making it the company's largest single shareholder and giving
it a place on the board.[174]
This company operates in Senegal extracting gold from the Sabodala
region, and ilmenite and zircon from the Grand Cote. While Mineral
Deposits is actively mining the resources of Senegal, it paid
just £20,000 in tax in 2009 and 2010 - ridding itself of
£6million in tax charges according to Richard Brooks.[175]
Instead profits are largely recorded in Mauritius where the tax
level is nearer to zero, even though the company has no one working
there.
24. This huge distortion of profits by a CDC-financed
company is not isolated. Oando plc in Nigeria preserves profits
through the payment of tax-free "technical" and "management"
fees to CDC and co-investors.[176]
In 2009 Oando recorded half of its total profits ($48.4 billion)
through a company registered in Bermuda, even though it doesn't
have any staff there. This deprived Nigeria of $15 million in
taxes according to Richard Brooks.[177]
The same source has also reported that CDC promotes and makes
use of "tax holidays" which leads to "tax competition"
that is ultimately detrimental to all developing countries.
25. The prevalence of tax avoidance among CDC's investments
may be unsurprising given the private equity model actively pursued
by CDC. Private equity funds often utilise tax havens as a means
of maintaining profits, irrespective of the damage caused to local
economic empowerment and development. But it is concerning, given
that CDC is recorded as saying: "The norm of our business
is that once [companies] generate profits they ought to pay tax.
Indeed, part of the development thesis here is that by employing
people, by generating profits on which taxes are then paid, which
is then income for Government, that is creating the wealth that
will defeat poverty."[178]
26. The use of tax havens clouds CDC's operations
in secrecy. The fact that offshore tax havens double as secrecy
jurisdictions where corrupt government officials are able to hide
their illegal acquisition of their poor country's assets is significantly
damaging to the growth and development of the looted nations,
and as such warrants CDC ending their use of tax havens. We contend
that the benefits of foreign investment facilitated by tax havens
is far outweighed by the capital outflows which these havens also
facilitate.
27. As the private equity model gains prominence
among DFIs, it is essential that a new set of rules be developed
that constrict the legitimacy of tax havens. It is troubling that
investment in the most impoverished countries should be dependent
on tax avoidance mechanisms - especially as CDC claims to raise
standards on investment in developing countries. DFIs should be
seeking to develop legislation and expertise that will allow developing
countries to catalyse funds within their domain rather than remove
taxable funds. This should be an achievable outcome for CDC as
they already support a number of funds located outside of tax
havens.
LACK OF
ANALYSIS OF
DEVELOPMENT IMPACTS
28. Much of the detail of this submission has been
publicly known for some time. As such we are surprised and disappointed
that CDC has not developed more effective methods of measuring
its development impact as a means of answering our concerns. However,
in 2009, the Parliamentary Public Accounts Committee reported
that "Although CDC invests more of its resources in poor
countries than any other Development Finance Institution, there
is limited evidence of CDC's effects on poverty reduction."[179]
29. CDC seems to have limited understanding of development,
and often simply equates profit-making with development through
the jobs and tax revenues CDC's investment creates. We have seen
some of the problems related to CDC's investments producing taxes.
As far as employment is concerned, it is difficult to test CDC's
claims. First CDC does not appear to monitor the quality of its
employment - the impact of jobs on poverty depends on who is being
employed and on what wages. Second, CDC uses figures from the
funds it invests in regardless of how small a share the CDC's
investment represents. A small CDC share in an already profitable
business which would have easily found other investors elsewhere,
means the CDC has had no real impact on anyone's life, and the
sole purpose of the investment has been making money for CDC and
its fund managers.
30. The funds in which CDC chooses to invest often
prove to be controversial. JDC first started working on CDC because
of a case brought to our attention in Nigeria. CDC invests in
Nigeria partly through Emerging Capital Partners (ECP). Through
this fund, CDC invested in several recently privatised Nigerian
companies associated with James Ibori, former Governor of Niger
Delta state, who is currently accused of corruption. Several of
the ECP-invested funds have been connected to Ibori including
Notore, a fertiliser company. Notore is the same company which
was the single largest debtor to Oceanic bank, another recipient
of CDC money, which had to be bailed out by the Nigerian government
for its large share of potentially toxic assets. These claims
are currently being investigated by DfID, but Nigerian activists
believe warning bells should have sounded much earlier. DfID was
in fact notified seven months before the banks were revealed to
have been collapsing but did little or nothing with the information
provided.[180]
31. Another CDC fund is Actis, previously a part
of CDC before its privatisation in 2004. That privatisation process
alone should give grounds to question the private equity fund
model. The privatisation of Actis in 2004 was a national scandal
in which the company was sold off at well below market value to
the very people who at that time controlled CDC and had, very
unusually, underperformed by 30% the year before the sale. In
2005, what had been projected to be a "break-even" year,
ended with a profit of $14 million for Actis. Actis partners not
only shared personally in these profits, but some also received
a one-off payment for concluding the deal. Although this case
is now five years old, and well reported, the pay incentive structure
in CDC - not to mention the funds CDC uses - are still excessively
driven by financial returns.[181]
We fail to understand how a development agency can expect to fulfil
its duty of investing where others will not if those in charge
of making decisions are personally incentivised, largely or wholly,
by profitability.
32. The process by which CDC evaluates individual
funds is opaque, and we are unclear as to how the CDC measures
the fund's development credentials. We only know that different
funds are attributed an environmental social governance "grade"
by CDC. Contracting out the work of CDC to separate investment
funds is bound to mean that quality control becomes more difficult.
Given that these funds are not renowned for their positive development
impact, we believe this model is inherently problematic and strongly
suggest it be set aside. If the CDC is to continue contracting
out its work, the manner in which the CDC chooses to invest in
funds must be urgently improved and made transparent.
33. The focus on financial performance provides an
abstraction of human development. It fails to fully acknowledge
the context and ramifications of investment in low and middle
income countries; for example, the extent to which women and vulnerable
minorities are benefiting from economic development. Financial
performance also ignores other relevant poverty reduction measures
such as access to health care and education, food security, political
stability and good governance to name a few, all of which need
to be addressed if poverty is to be reduced. CDC must ensure that
all projects conduct a thorough context analysis to ensure that
investment is centred on projects that will benefit communities
through comprehensive poverty alleviation, and not create harm
to vulnerable and marginalised groups in the process.
AN ONGOING
FAILURE OF
OVERSIGHT AND
STANDARDS, TRANSPARENCY
AND ACCOUNTABILITY
34. DfID must take responsibility for a failure to
adequately oversee and evaluate CDC, in the face of significant
concerns being expressed publicly over a number of years. Despite
the fact that DfID was not informed about important decisions
in CDC's operations, such as the basis for the head of the CDC
Richard Laing's scandalous £1 million pay package in 2007,
DfID seems to have made no changes in the oversight model.
35. DfID must institute a comprehensive set of development
standards by which the CDC must operate and evaluate its projects.
These should be based on DfID's own standards and include impact
assessments for all projects. They should also include an effective
context sensitive assessment, comprising a study of economic and
pro-poor development indicators, and identify emergent political,
economic, ecological and social issues. Understanding the dynamics
of a context will better enable CDC to gain a more holistic understanding
of investment impacts, thus ensuring projects are in the best
interests of communities as a whole and not just a minority of
people. For example, a context-sensitive assessment will enable
CDC to evaluate the extent to which economic developments create
insecurity through conflict (eg tensions relating to access to
employment and resources arising from economic migration), crime
and corruption.
36. We hope the proposals for improving CDC's monitoring
and evaluation will make an enormous difference to the production
of transparent information on the CDC's operations. But we also
believe DfiD should require CDC to undertake a thorough review
of its transparency and bring forward a set of proposals to transform
its public accountability. This should include disclosure of impact
assessments.
37. Finally, we are deeply concerned that CDC fails
to engage with civil society organisations North or South who,
in many cases, have decades of experience which would enable CDC
to improve its development impact. In future we believe all projects
must include consultation with Northern and Southern civil society
organisations before approval, as well as a complaints mechanism
for those potentially affected by projects.
RECOMMENDATIONS
38. On the basis of this submission, we believe DfID
needs to institute the following reforms at CDC:
- - A comprehensive review of the private equity
model employed by CDC, the sectors which it supports, the funds
it channels investment through and the countries it focuses on.
We strongly suggest alternative models are considered which allow
better accountability and control. Better oversight by DfiD is
essential;
- - Much stronger development standards, with
clear poverty targets - for instance all investments must meet
stated human development needs and the current analysis must be
expanded to include context sensitive assessment;
- - Better methods of formally consulting civil
society in the UK and in countries in which CDC invests, and establishment
of a complaints mechanism for those impacted;
- - A framework for monitoring and evaluating
CDC's operations and impacts including an annual, public evaluation
of projects;
- - A review of the pay structure and incentives
offered to staff by CDC; and
- - A tax standard in CDC's investment code
and mandating of all funds receiving CDC support to publicly publish
their accounts on a country-by-country basis.
157 CDC Group, Overview, last accessed September 2010
www.cdcgroup.com/overview.aspx Back
158
BBC Radio 4, CDC, 15 July 2008, http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/15_07_08_fo4_cdc.pdf Back
159
Ibid Back
160
Ibid Back
161
"About Moser Baer India Ltd", Overview, www.moserbaer.in Back
162
CDC Group, The Palms, Nigeria: Creating modern shopping for Nigeria
with new goods and services, http://www.cdcgroup.com/The%20Palms.aspx Back
163
BBC Radio 4, Op cit Back
164
Public Accounts Committee, "Eighteenth Report: Investing
for Development: the Department for International Development's
oversight of CDC Group plc" (2009)
www.publications.parliament.uk/pa/cm200809/cmselect/cmpubacc/94/9402.htm Back
165
National Audit Office, "Investing for development: the Department
for International Development's oversight of CDC Group plc"
(2008), www.nao.org.uk/publications/0809/investing_for_development.aspx Back
166
Ibid Back
167
Ibid Back
168
War on Want, "Globeleq: the Alternative Report" (2006),
www.waronwant.org/attachments/Globeleq%20-%20The%20Alternative%20Report.pdf
Back
169
Globaleq, "History", last accessed September 2010: www.globeleq.com/about_us/history Back
170
Rights & Accountability in Development, "Memorandum of
Evidence to the Joint Committee on Human Rights", (2009),
http://raiduk.org/docs/Press_Releases/Memo%20final.pdf Back
171
Public Accounts Committee (2009), Op cit Back
172
Treasury Minister Stephen Timms quoted in "CDC: Haven help
us", Private Eye, Issue 1259, 2 April 2010 Back
173
Public Accounts Committee (2009), Op cit Back
174
Richard Brooks, "Poverty Relief: Looting in Senegal",
Private Eye, Issue 1260, 16 April 2010 Back
175
Richard Brooks, "That's Rich", Private Eye, Issue 1270,
3 September 2010 Back
176
Richard Brooks, "Haven help us", Private Eye, Issue
1259, 2 April 2010 Back
177
Richard Brooks, "That's Rich", Private Eye, Issue 1270,
3 September 2010 Back
178
quoted in BBC Radio 4, Op cit Back
179
Public Accounts Committee (2009), Op cit Back
180
Jubilee Debt Campaign, et al, "Memorandum to Secretary of
State for International Development: Concerns over alleged corruption
in CDC-backed companies in Nigeria"(June 2010)
Back
181
Richard Brooks, "That's Rich", Private Eye, Issue 1270,
3 September 2010 Back
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