The Future of CDC - International Development Committee Contents

Examination of Witnesses (79-193)

Richard Laing, Richard Gillingwater and Rod Evison

14 December 2010

Q79   Chair: Good morning, gentlemen, and welcome to this session of the International Development Committee. Although we know who you are, would you introduce yourselves for the record?

Richard Gillingwater: Yes. Good morning. I'm Richard Gillingwater. I'm the Chairman of CDC.

Richard Laing: My name is Richard Laing and I'm the Chief Executive of CDC.

Rod Evison: My name is Roderick Evison and I'm the Managing Director for Africa.

Q80   Chair: Okay, well thank you very much. Obviously, you are only too aware that CDC's role is being reviewed and that the Government wants to promote more private sector development and wants to consider whether or not CDC can modify or change or operate in different ways in the future, but if we can perhaps look at what it is and then perhaps further on we can look at what it could become. Obviously, CDC is not unique in that there are other funds of this kind operated under the development auspices of other countries, but I wondered if you could say what you think CDC brings to development and obviously particularly private sector development that the IFC and the World Bank or other comparable organisations run by other countries do not. Most of them operate as a mixed basis, whereas CDC is purely a fund of funds, so in its present format, what do you think that CDC delivers that other comparable organisations do not?

Richard Laing: Chairman, it might be worth going back and explaining a little bit of the history of CDC, which would explain why we do what we do today.

Q81   Chair: Yes, as long as you don't take too long. Obviously, we have got some background.

Richard Laing: No, we won't take too long, and in fact I'll only go back to 1997. That was when the then Prime Minister said that he would like CDC, which at that stage was mainly providing debt for projects in the poorest countries of the world, to be a PPP—public private partnership. That led to some substantial reorganisation in CDC to prepare it for privatisation.

It became apparent in around 2002 that it would not be possible to privatise CDC, but, in order to achieve a PPP, it was decided that what would happen would be that most of the investment staff of CDC would be spun out to create a fund management company. So people who would take capital, including CDC's capital, and continue to invest that in the poorest countries of the world. In fact that had already been done with a company called Aureos, which focused on small and medium enterprises. CDC would then provide capital to both Aureos and the main spin-out, which was called Actis and still exists today, and then go on to provide capital to others.

The idea behind this was that fund managers based on the ground in the countries in which CDC operates are best equipped to find good, sustainable businesses, which is where our capital eventually ends up; secondly, those fund managers could manage not just our own capital but other people's capital, including other Development Finance Institutions. So CDC then became what is in the industry often called a fund of funds; that is we are an entity with currently £2.7 billion of net worth, and we are putting that capital to work in private equity infrastructure, debt and other funds. We are not doing our investing directly, but we are using, as I said earlier, fund managers on the ground in the countries where we invest.

Richard Gillingwater: If I can just add specifically to your point, I think the way in which CDC is distinctive perhaps against some of the DFIs is it has a very definite focus on equity or has to date, and certainly relative to a lot of the other DFIs, it is doing a lot more in sub­Saharan Africa and South Asia than most of the other DFIs.

Richard Laing: In section 2.12 of our submission to the Committee, there is a chart that shows that of the other major European Development Finance Institutions, CDC has 57% of its new commitments in 2009 in sub­Saharan Africa, which is far ahead of the other Development Finance Institutions, and a combination of 90% in sub­Saharan Africa and Asia, which again is far ahead. So CDC of the European DFIs, Development Finance Institutions, and indeed if you compare it also against the private sector arm of the World Bank, the IFC, is much more focused on the poorest counties of the world than any other Development Finance Institution, and that was because DFID, our shareholder, the Department for International Development, wanted to make sure that we were focusing on the very poorest countries.

Q82   Chair: I think that is understood, and you've just answered the obvious question that that was actually a requirement from Government that you would do that, but questions have been raised as to whether you were, first of all, delivering for the poorest people in the poorest countries and to what extent what you were doing was alleviating poverty, given that that was not a specific requirement. So can you give an example or examples of how you believe that CDC's activities have directly reduced poverty—not just delivered investment results in the poorest countries, but reduced poverty in those countries?

Richard Laing: Yes, and let me talk about West Africa. I was in West Africa earlier this year, and one of the things we have done in the last few years is to put quite significant sums of money into small and medium enterprises and microfinance. I was sitting with a group of Ghanaian woman who were using CDC capital in microfinance. They borrow approximately $200 and pay it off over a year. One of them, for example, had a jeans garment manufacturing operation; another one had a little stall selling commodities.

Microfinance is an area that before, in the lead up to privatisation, we probably wouldn't have done. One of the advantages of being owned by the state is that we can take very high risks and do things such as microfinance. Microfinance and SME investing in the funds that we've invested in 2009-10 represent over 30% by number of the funds that we've done in the last couple of years. These small and medium enterprises, microfinance, really do have an effect on the poor.

I think it's also worth saying that our overall mandate is to create economic growth. No country has reduced poverty in the absence of economic growth. You need to have economic growth. The economic growth comes certainly from small and medium enterprises and microfinance, but it also comes from larger activities such as big infrastructure projects and medium and big companies, as well as small companies. So I think it is not accurate to say that it is just small enterprises that have an effect on the poor. Also big companies do because, after all, they do employ people.

Q83   Chair: I didn't suggest that was the case.

Richard Laing: No, but some do.

Chair: We recognise that, just exactly what you said, if countries are going to come out of poverty, it will be through economic development and economic growth. We accept that and the Government accepts that. The question is to what extent CDC's activity does actually help people out of poverty. You've given us examples on the microfinance point. Of course a large company investment could do it, but we'll come on to questions like that because the point is to what extent CDC makes a difference.

Q84   Chris White: A very brief question: going back to that lady that you lent $200, it may be a bit unfair, but do you know what has happened to that person now? What was the outcome of that story—building the business?

Richard Laing: She was about halfway through paying off her loan. When talking to her and her colleagues, I did say, "Well, what about the future?" The refrain back from everybody was, "We want more of this. We want to have a bit more capital so we can expand our businesses, whatever they might be." I haven't followed her individually, but they were definitely looking forward to expanding their businesses.

Q85   Chair: Just on a practical point, the Committee has seen in the past where DFID in its bilateral country programmes has done direct microfinance itself. So how do you sit alongside when DFID is doing that? Do you communicate with each other, or are you just doing your own thing?

Richard Laing: We certainly communicate with each other. The models that we are seeking to do are sustainable models in the sense of using private sector capital. We want to see not just the relatively small sums of money that Development Finance Institutions can provide but that attract alongside us the billions and even trillions of dollars that are required in these countries, and I think probably the difference is that our models are very much about making it financially sustainable and attracting private capital into it.

Q86   Chair: In other words, making it a commercial success.

Richard Laing: Indeed.

Q87   Pauline Latham: On the point of this lady or people that you met, did you make the decision to lend $200 to that woman, you being CDC, or was that through Actis?

Richard Laing: No, it wasn't Actis. This particular one was a fund manager called Lok, which is based in India, run by Indians. Actis is just one of our 65 fund managers. They don't do microfinance, so this is another of our 65 fund managers.[1] They have invested in microfinance institutions that then do the operational side of the activity. They are of course on the ground, so they understand the needs and requirements of the market.

Q88   Pauline Latham: When you did your preamble you talked about how it was important to have people on the ground, so your employees are in-country; they are not in this country.

Richard Laing: No, our employees are in this country. What we are doing is providing capital to fund managers, and those fund managers are in-country, on the whole. Most of them are in-country, so they have people on the ground and those are the people who are investing the capital.

Q89   Pauline Latham: Right, so you don't actually do any investment as an organisation.

Richard Laing: What we do is we agree with the fund manager the strategy of the fund, the terms and conditions, the environmental, social and governance issues surrounding it, the best practices surrounding it, and agree with them upfront how the fund should operate, but we do not make investments directly out of London. We feel it is better to have local people doing it and building up the capacity locally.

Q90   Pauline Latham: Just for clarification on what you said, how many million did you say you had?

Richard Laing: Our net worth at the moment is £2.7 billion.

Pauline Latham: Billion?

Richard Laing: Yes.

Q91   Richard Harrington: I am familiar with the concept of a fund of funds, at least in the more conventional UK investment terms, so I understand that you do not get involved in direct investment. However, reading quite a lot of your material, a lot of the money you invest is with other investors in different ways investing in the same funds. Using a sort of standard investment analogy in the City that is perfectly understandable. Obviously, we are here as the International Development Committee from that side of it, rather than the investment side. I am trying to understand from reading your material to what extent CDC is a catalyst that provides the main role and you're the lead investor to bring in lots of other investors because of your reputation or perhaps the size of investment, or to what extent you are a kind of fellow traveller. I don't mean that in an insulting way, but people are putting a fund together and like in the City, "I'll have a piece of that; you have a piece of that," because in economic growth and development terms, it is very different. In pure investment terms, it's perfectly acceptable to say, "Who else is in? Yes, we'll have a piece of that because it sounds very good." I can't find actual examples from the information I've read where you are the main people going into a new market, burning out new ground, and saying to others, "Follow our example." So if I could probe you a bit on that—perhaps give us some real examples of the sort of creative side of it: new investments, new markets, breaking new ground.

Richard Laing: Let me give you two data points and then my colleague Rod Evison might come in. First of all, if you look at the funds that we have invested in 2009-10, which is up until the date we put our submission into the Committee,[2] there were 19 funds. Fifteen of those funds were materially affected by CDC's involvement, either because there were our initiatives or because we had a very large proportion of the fund or because we changed it in some way in order to attract other people into the fund and get more capital into it.

We certainly don't feel like a traveller along the way, but let me give you an example. Earlier this year, we decided that sustainable forestry in sub­Saharan Africa was not getting the investment it required. A lot of these forests were being looted by illegal foresters and they needed to be run more sustainably and legally. So we decided that we should put out a tender, an invitation for people to come and run a fund focused on sustainable forestry in sub­Saharan Africa. We said we would put $50 million into that fund. We had a number of responses to that and we selected a fund manager. That fund manager has now, with us, gone to a number of other investors, mainly I have to say other Development Finance Institutions but also some private sector—we would like to see more private sector—and that fund has now got over $100 million of capital. That fund would not have existed without that initiative by us to get it going, and perhaps the biggest example of all is Actis itself, which of course spun out from us and was seeded with capital by CDC and now runs $4 billion of capital.

Rod Evison: I would just add, from the Africa perspective, that I have been in CDC 20 years so I've seen part of the old and the new. When we started with this new business model in 2004, the state of maturity of unlisted investment in Africa was very weak. There were just a handful of fund managers who were trying to do the business. Few of those had raised a successor fund. When we now look at the state of the industry, we have got around 25 fund managers that we've backed in Africa. We've got over 40 funds in Africa. I think the mobilisation impact of private capital has shown to all sorts of investors that Africa is a successful destination for capital.

There are two examples that I would add to try to illustrate this. One is in a SME fund that we backed called GroFin. We initially backed that in 2005 in order to provide SME finance into East Africa, and then in 2008 we backed the second fund, which is a much larger fund, to spread out into seven African countries. That is one example of what we've been doing. Infrastructure would be another example and right at this time, we are just in the process of closing a fund that involves specialist investors in infrastructure, which is one of the key constraints in African development, but all of the selection of funds that we do is with a development objective. That is what we are trying to achieve.

Q92   Richard Harrington: Can't there be a real conflict between the two aims because I'm sure, perhaps referring to Mr Gillingwater, the Chairman, or the chairman of an investment committee, on the one hand you have got the fear that anyone in investment has: that the pioneers get shot by the Indians. They are the ones that always lose the money, although it might have perfectly excellent credibility in terms of its proposal for economic growth and the development side of it, compared with your presumably other hat. I'm trying not to put words in your mouth, but I'm trying to compare it with a standard investment committee where the fact is, if someone else is in it and it is a well trodden path, it is a much better way to go because after all everyone, the press, is very happy to blame you if things go badly. So to what extent are there these conflicts in investment decisions?

Richard Gillingwater: Just let me address that one. I think you've touched on, in a sense, what our raison d'être is. I think our raison d'être, putting it very simply, is to demonstrate that you can invest successfully in sub­Saharan Africa. You can create economic growth through that and by doing that, earn returns, and those returns are attractive returns if you reward the investment. That acts to create a demonstration effect and to bring in the very private sector investors that we are talking about. I think our whole sort of modus is very much around trying to demonstrate that Africa or South Asia is not as risky as investors think it is. I don't think there is a conflict there at all. I think that is at the heart of our mission.

Can I just add a comment to your earlier point—just some evidence that you'd had from in this case EMPEA[3], just talking about the catalytic effect of CDC and they say right towards the end in paragraph nine of their submission, "CDC-backed fund managers account for approximately 77% of all capital raised for private equity investment in sub­Saharan Africa over the last decade." So whether that percentage is right or not, I think it shows the scale to which CDC has been mobilising outside capital.

Richard Laing: Could I add one more comment Chairman, if I may? I think there is a myth out there that there's a whole load of capital, particularly for Africa, and that Development Finance Institutions, in particular CDC, are just sort of following the private sector. In many ways, I wish that were the case because we'd allow the private sector to get on with it, but unfortunately it's not. Some 74%, so almost three-quarters of the funds that we've invested in 2009 and 2010, have other Development Finance Institutions in them; 36% of the funds failed to reach their target size; and almost all of the funds failed to reach the maximum size that they're aiming for. If you speak to fund managers, and you met with Tom Cairnes who runs one of the funds last week, they are desperate for more capital and the private sector at the moment is not delivering it, and that of course is where the Development Finance Institutions have come in.

Q93   Chair: I take your point. You've given us a number of examples in your submission. What you haven't said, and I am just curious, is what your input was. If you take one, you've got Brookside Dairies in Kenya and you talk about what the business is—150,000 farmers. What is the CDC contribution to that and would it have happened without CDC? That's the sort of information I think we need, because it's a very nice sort of case study but it doesn't say what difference CDC made—how much of it was you, and how much of it was other partners?

Richard Laing: Well, let's take that one as an example. That is a transaction that is managed by a fund manager called Aureos. CDC is the largest capital provider to Aureos. It's based in Kenya and the Kenyan team of Aureos run that investment. Now, when you say what input does CDC have, you were right, we do not have a day-to-day direct input in that dairy—a dairy that, incidentally, supports 150,000 people. Our capital of course is the capital that has gone into that dairy to grow it, but we have asked the fund manager to invest our capital on our behalf. Now we will monitor it. I happened to be at Brookside dairy last month, so we'll be watching what's going on and checking that the fund manager is acting responsibly, but that is his job, the person on the ground, to manage that investment.

Rod Evison: I would just add that the strength of the model is the multiplier impact: instead of one distribution channel that the old CDC had, we've now got multiple distribution channels through—whatever it is—70 fund managers, each of which has got a separate strategy and each of which gets us into different areas in different ways, but you're absolutely right that what we don't have is the decision over ultimately each individual investment that is made.

Q94   Chair: But the bottom line would be, if Aureos hadn't had CDC funding and hadn't taken it, would that business be there or would it be operating as effectively?

Richard Laing: The answer is no. The £2.7 billion of capital that we have got and that we're putting to work is going into businesses like that and, perhaps even more importantly, the capital that is coming alongside it is also going into those businesses.

Q95   Mr McCann: CDC, gentlemen, uses the equity financial tool, the Dragons' Den tool, for determining investment, but could you tell me which financial instruments are most in demand within low­income country markets?

Richard Laing: Private equity is indeed the major part of what we do and the reason we did that goes back a number of years to when we identified that what was really required in Africa, and poor countries generally, was equity capital; the high-risk capital, the capital that is long term and patient. There was debt; there is still a shortage of debt; but it was equity that is really required. Just last weekend, I was talking to somebody who is involved with a wind farm in north-east Kenya, and I said, "How's it going?" and he said, "Well, we think we've got the debt; we think that's in place; but we cannot get that final tranche of equity." That is a story we hear time and time again. That project will not get off the ground until it can find that equity. So equity is the instrument of choice at moment, though I would add that we also do do some debt as well. We have a number of funds that are involved in debt, at the moment over 10% of new funds are involved in debt, and so I am not saying there is not a need for debt, but we did identify equity and DFID did identify equity as the main instrument when we set out to do what we do today.

Q96   Mr McCann: But is that the instrument that those low-income countries are looking for?

Richard Laing: Absolutely. Take that Kenyan example: that project won't happen without that instrument, without the equity.

Q97   Mr McCann: In terms of how other DFIs undertake a range of different functions, are there any that CDC would like to take on, looking at other DFIs and how they operate?

Richard Laing: This comes on to what CDC might do in the future, and we've been talking about the fund of funds operation. We do have a programme also of doing focused direct investment alongside our fund managers, so we have a small portfolio of that, and I think that is certainly one thing that we could do more of. As I said, debt is something that we could look at, and the third one would be guarantees. We've just started working with the IFC actually on a new commitment. We're putting in $20 million for a guarantee product to work with the private sector arm of the World Bank. So, yes, there is still a need for these other instruments as well.

Richard Gillingwater: Can I make a broader point about equity? Not to say that these other instruments aren't important, but one of the aspects that CDC has worked on very intensely over the last six years has been building up its environmental, social and governance capability and through the investment code working with the funds and with the companies. I think it's fair to say that you get the closest and strongest alignment between accepting investment codes and ESG practices through equity, and we have got debt experience. One of the interesting things about debt is that, because it is shorter term in nature, it is much harder to have an effect on ESG through debt instruments than it is through equity. So I think not only is there an absolute profound need for equity but it really helps you embed ESG, which has been another part of our core mission.

Q98   Richard Burden: I think we're going to come back to the investment code in a little while. I would just like to press you if I may a little bit more on how your relationship with the other DFIs works. Mr Laing, you were talking about the example of when strategically CDC decided that sustainable forestry was an area that needed attention, and so through your fund managers, you then were able to bring others into that overall project. So your involvement was strategically up there but the actual relationship, if I understood it correctly, with the other DFIs was through the fund, not with you directly. Is that right?

Richard Laing: It was a mixture; it was joint. We went to a German DFI, and said, "Look, this is a very interesting proposition." We effected the introduction to the fund manager and then continued that discussion. We have regular dialogue with the other European DFIs, the African Development Bank, the Asian Development Bank and the IFC about particular initiatives and projects that we might be originating or they might be originating.

Q99   Richard Burden: It was that latter point that I was getting at. Are there any examples that illustrate where something that was not an area that you were involved in, was outside your general way of doing things, but an initiative that came from another DFI, and you said, "Well that's something we're going to do," and what you did and how much got devolved down to the fund manager?

Richard Laing: There is a very good example of one we did last year as a response to the economic crisis across the world. There was a shortage of trade finance and trade was almost literally stopping at one point because suppliers and purchasers couldn't get the trade finance to do the deals, the transactions, and get the products moving again. In this case, the IFC, the private sector arm of the World Bank, said, "Look, we need to do something about this." They talked to us and they talked to some other people and we put a facility together called the Global Trade Liquidity Programme, which is run by the IFC, and we worked with them on that.

Last week, I signed a facility—it is actually a debt facility, interestingly—where a group of European Development Finance Institutions are putting approximately €300 million to work with the European Investment Bank to provide debt for the Africa, Caribbean and Pacific regions. We're putting €25 million in; the total facility is about €300 million; and again that is an example of a club of us working together, identifying that there is a shortage of in this case debt capital in fact, and it enables the project to get done that would otherwise not get done.

Rod Evison: I think that debt's a good example of what you wanted to hear about because, when the new CDC came into being, one of the very early things that was done was indeed to work with the European DFIs on a debt club. For us that was quite attractive because they were then the specialists in debt—we were the specialist in equity, but we could leverage off their skills and expertise in that and commit capital to that. We're now on to the third or fourth one of those arrangements.

Q100   Alison McGovern: Thank you for your answers so far, which have been helpful. We've talked a bit about on the one hand the value of your investment where you're a small part of the total fund amongst others and also whether or not there is crowding out going on. You mentioned the real absence of equity and therefore the importance of CDC's role. Just developing that point, in the case of Moser Baer, the Chief Executive explicitly stated that the investment would have in fact gone ahead without CDC. We are talking about a large-scale manufacturer. How does that fit with your role you've described as leading the market or shifting the market? How does that particular example fit with that?

Richard Laing: First of all, I've never heard a Chief Executive in fundraising mode volunteer anything other than it is going to be a success. So I think that we don't know, because you can't prove the counterfactual, whether Moser Baer would have or would not have succeeded in raising that round of capital. That particular investment is one of our direct investments. It's aimed at climate change and green investing. It produces solar panels. Would it have raised capital without us? I don't know the answer to that. It might have done, but it might not have done and one has to take a view.

Q101   Alison McGovern: Okay, but let's look at the question from another perspective. Of course no one would ask you to prove the counterfactual, but surely you need an internal mechanism to prove additionality?

Richard Laing: I entirely agree with you, and many of the funds that we are in, by the way, we are not a tiny sliver. I have mentioned that sustainable forestry fund where we are at the moment roughly 50%. There are some funds where we are 100%. For our largest fund, which is an infrastructure fund, we are about 85% of the capital. There are some funds, particularly some of the older funds we are in, where we may only be 5% or 10% of the capital, but, generally speaking, we take a very active and significant role in that.

Q102   Alison McGovern: But how do you prove that you are additional? How do you prove the extra value of CDC?

Rod Evison: I was just going to add that one of the reasons why I think this is quite a challenging subject to prove is that finance is so much about momentum and what is really valuable is an early commitment of finance. That's what then starts to get an entrepreneur to realise his dream.

Alison McGovern: Or her dream.

Rod Evison: Yes, or indeed her dream, absolutely. That is what we certainly try to do with both commitments to funds that we undertake but also direct investments and care investments as well, because it is the early commitment that allows something to get off the ground, and although Moser Baer is outside of my direct area, I know it was really quite a challenging investment strategy that entrepreneur had, and quite an early stage one.

Q103   Pauline Latham: Changing the subject a little bit, can you tell me if you consider the remuneration levels that you pay at CDC necessary to recruit and retain people with expertise in this sector, bearing in mind that you don't actually do the investing; other people do?

Richard Gillingwater: Let me take that. I think the straightforward answer to that is we do. We had a very carefully agreed remuneration framework, which we agreed with DFID and the Treasury, back at the time of the creation of CDC.

Q104   Pauline Latham: How many years ago was that?

Richard Gillingwater: That was in 2004, and it was refreshed in 2008. Once we had strategically established the type of entity we were going to be, we were effectively almost a start-up at that point in time. The vast bulk of professionals went to Actis and a small core of 15 were left in CDC, essentially two individuals with investment expertise. It was necessary to build up from scratch a team that could both invest and obviously understand development. We devised with DFID, and they then gave the board this remuneration framework, and effectively, at its heart, it is about enabling us to recruit from the private sector. It is also about enabling us to retain people for long periods of time. It's very important at CDC and indeed any fund of funds that you have people that are ready and prepared to commit to at least a 10-year phase, because they are making decisions that have very, very long periods of time.

The other aspect of the remuneration that was very important at the time was the notion that this should be linked to success, that essentially we wanted something that would reward, as DFID put it, on one hand, robust financial performance and on the other hand development outcomes. So that was the nature of the remuneration framework. I think it was necessary in order for us to bring in the team, and that team have gone on and I think created a lot of success.

Q105   Pauline Latham: As a wholly owned state organisation, don't you think that the financial incentivisation of remuneration is in conflict with the overarching development aims of CDC, and do you really think it is appropriate that the Chief Executive earns three and a half times the amount of the Prime Minister of the country?

Richard Gillingwater: In my past life, I set up and created something called The Shareholder Executive, and the purpose of that was for Government to try to be a better shareholder and owner of Government-owned businesses. At the heart of that was a very clear understanding that it's very important to be able to attract good people from the private sector to come in and make a difference frequently and, as is the case at CDC, at a substantial discount to what they would receive in the private sector but still in touch with the private sector. I think that the first thing to say is that the approach to remuneration at CDC has generally mirrored what is the case in other Government-owned businesses. So it's not dissimilar in terms of its structure. I would say it is absolutely necessary, in order to assemble a good team, to be able to pay something that isn't totally at private sector but is capable of persuading people to come over and do important tasks.

Q106   Pauline Latham: Probably much safer than private sector because it is a Government organisation—it's not private—and so normally people take less remuneration because they've got more security of tenure than they have in the private markets.

Richard Gillingwater: That is a very interesting point. Again from my Shareholder Executive experience, I would say the average tenure of a CEO of a Government owned company is probably no greater than it would be in the private sector. The security for the leadership is not particularly high, because these are effectively often very commercial organisations that are operating.

Q107   Pauline Latham: But you have just said that you need people to be there long term.

Richard Gillingwater: Yes.

Q108   Pauline Latham: So that's what you're just saying now and it's contradictory.

Richard Gillingwater: Obviously, you want them to be but sometimes the pressure of operating in a Government-owned sector is such that people don't always achieve their objective. I think in CDC's case, the extraordinary thing is that it has managed to generate over £1.5 billion of further investment return, which is then available for development. If the companies that were effectively in my Shareholder Executive had collectively produced that sort of result then that would have been an astonishing thing. Most of them were not nearly in that category.

Q109   Anas Sarwar: Just on the same point, how many members of staff does CDC employ and what is the total level of remuneration for the staff of CDC, including bonus payments and incentive payments?

Richard Gillingwater: It employees 46 people.

Richard Laing: I don't have the total wage bill to hand, but we can supply it.[4]

Q110   Anas Sarwar: Even a guesstimate?

Richard Laing: I think it would be better if I gave it to the Committee.

Q111   Chair: Can you give us the wage bill and the total bonus?

Richard Laing: We can provide that data.[5]

Q112   Alison McGovern: Two very brief questions, if I may: your memorandum to us[6] stated that bonuses paid in March 2010 for 2009 performance were on average nearly 50% of salary, so 47.5% of salary. Given the position of the economy in 2009-10, is that something that you as Chair are happy with?[7]

Richard Gillingwater: The answer is we went to quite extraordinary lengths to make sure that, first of all, given the remuneration framework that we have agreed with DFID and the Treasury, we were operating within the letter and the spirit of that remuneration framework. We operate a balance scorecard system for every individual at CDC. In order to earn any short-term bonus, every individual has to meet certain key objectives. The answer to the question is that in that year CDC more than achieved on the objectives that it had been set.

Q113   Alison McGovern: Okay, but I've known a broad range of organisations operating performance and performance relative to remuneration, and that to me seems an extraordinary percentage, and I want to know if you're comfortable not just with the process that you went through but the outcome that you ended up with. My second question, just to get it out briefly, is: have you ever undertaken a gender pay audit and if so what was the result?

Richard Gillingwater: The answer to your first question is that we were comfortable with that because, to go back to what I said, CDC had a very robust recovery from the economic crisis and one of the things it was able to do, almost alone—certainly of a lot of the private sector organisations—was to carry on investing and to carry on committing during the worst ever financial crisis that we had. That was down to a lot of skill on the part of the team in terms of, first of all, the creation of the platform, but secondly, the actual management of cash at the time, which was an extraordinarily difficult situation to manage, and I think the team essentially more than succeeded on those short-term objectives.

Richard Laing: On the gender point, CDC has approximately 50 people, and about half are women and that is spread across the organisation. Of my four direct reports, two are women. We pay our people, it doesn't matter whether they are male or female, according to the remuneration structures that we have in place. We're looking for skills and experience.

Q114   Alison McGovern: I asked whether you've carried out a gender pay audit.

Richard Laing: No, we haven't because we treat our employees equally.

Alison McGovern: I should hope you do.

Q115   Chris White: I'm personally quite surprised. You do understand the structures and everything else about remuneration, but in most organisations one of the biggest parts of spend is the wage bill. First of all, I am quite surprised that you don't actually know that when I would have thought, coming to this meeting, you might have guessed that that would be one of the subjects we would be talking about. I think for the record, it might be useful for us to know what the Chief Executive's remuneration was. I think that would be a useful thing to put down. First of all, would you be able to answer that question?

Richard Gillingwater: Yes, I can answer that and it was £225,000.

Chair: That was the salary though.

Richard Gillingwater: That's the base salary. The Chief Executive waived a bonus in 2009 and didn't receive a bonus in 2008, and there was a long-term incentive payment that comes out of a long-term plan that is aligned to the success of CDC over the long run and that was £264,000.

Q116   Chris White: There were two other questions. One which was to refer back to something Pauline Latham asked, which I don't think that you answered directly: do you think your role is worth twice as much as the Prime Minister? I would be interested in a more direct answer to that. You also mentioned the fact that the remuneration was so strong because of the long-term commitment that you had to give, but then your subsequent answer seemed to indicate that it wouldn't always be a long-term commitment, so that argument was quite weak. Would you like to comment on those points?

Richard Gillingwater: In terms of the Prime Minister's salary, I find the question very difficult because it is a much bigger structural issue. This would not go just for CDC, but the difficulty more broadly is the Government-owned corporate sector needs to recruit from the private sector and one of the big issues is whether it could ever recruit at the level of the Prime Minister's salary, and the answer to that is it simply could not. The question then becomes: is it in any way important to be able to do that? This covers a whole array of different areas. For instance, the FSA at the moment are trying to recruit for a major regulatory job and they are trying to recruit at a level of over £500,000 for this role, and they absolutely know that they won't attract anyone who could do the job at anything less than that amount. This is a much, much wider issue than CDC.

Q117   Pauline Latham: You talked about 2004, when you had the reorganisation of CDC. Can you tell me if there were any arrangements enabling you to share in profits at that time from the sale of investments following the reorganisation?

Richard Gillingwater: There were no such arrangements at all.

Q118   Pauline Latham: Nothing at all. So you couldn't invest when the share prices were low.

Richard Gillingwater: Nothing whatsoever, no.

Q119   Pauline Latham: Can you tell me what proportion of remuneration is currently contingent on non­financial measures of development impact?

Richard Gillingwater: Yes, it is about 40%; just under 40%. Sorry, let me clarify that: 40% of short-term bonus is contingent on development. The whole of the long-term incentive plan is contingent on development outcomes.

Q120   Richard Harrington: A very quick question. Gentleman, maybe unlike some other people around this table, I'm not against the high salaries and this kind of thing. I realise that you're competing in the private sector to recruit people, but like other people I find it extraordinary, with due respect Mr Laing and Mr Gillingwater, that for 46 employees, a tiny outfit, you couldn't answer that question on the total salaries etc. But putting that to one side, if you are competing in the private sector with private sector conditions, are you then telling me that people will lose their jobs for incompetence exactly as they do in the private sector and not have the kind of arrangements in the public sector?

Richard Gillingwater: Yes.

Q121   Richard Harrington: So how many people have lost their jobs in the last two years for lack of performance, if you wouldn't mind saying?

Richard Laing: I can think of one very senior person with whom that's exactly what happened. On my senior team at the moment, I have four people reporting to me. There have been other instances at a lower level where there has been mutual agreement that it wasn't working out and they left.

Q122   Richard Harrington: Because I think what people object to, what the public object to, are people who want to be in the private sector when it comes to salaries—Chief Executives of local councils are a good example—"Oh, we've got to compete for the best," but then have a public sector type of life with pensions and perks and lack of accountability, so that is the reason for the point.

Richard Laing: I would entirely agree with you and I recognise that this is a contentious area, but we take performance very seriously and if people are not performing it is not like the civil service; we are acting like a private sector business and people who join CDC understand that and take the consequences of that.

Rod Evison: It may be helpful to remind the Committee that when CDC moved from the split of debt and equity model in the late '90s to a risk capital one, about one quarter of the staff were made redundant.

Q123   Chair: The witnesses last week did indicate there were people who were prepared to work for less than market salaries because of their, if you like, altruistic motivation to development—not necessarily for a lifetime career, but for a period.

Richard Laing: Could I make two points to that? First of all, I have heard it said very often. We advertise frequently or we have advertised for people and people are free to apply. I have to say we have not had this sort of rush of these people who exist apparently, so our evidence is I am not sure where they are. Second, is the point that the Chairman made about commitment. I think it is true that we could probably find people for a three-month secondment or something of that nature, but we need people who are going to make this a real life commitment. We don't want people to come in for three months and feel that they're doing a bit of good and then disappear. We need to have people who are professional and do the work well.

Q124   Anas Sarwar: Just one last question, Chairman, on this point and then I promise we will move on. I just want to echo what Chris and Richard have said. I just find it bizarre that we have the CEO, the Chairman and a Managing Director sitting in front of us of a company that has 46 employees and they don't know what their total salary is. I just find that completely bizarre and I think I look forward to your reply when you send it into the Committee. We have got three members of that 46 staff in front of us. It would be interesting to know what the remuneration salary and bonus is for each of the three of you.

Richard Gillingwater: I can straightforwardly tell you what mine is, which is I get a £40,000 fee and that's it.

Q125   Pauline Latham: For how many days work is that?

Richard Gillingwater: I think the contract is for about four days a month. In practice, it has been very, very substantially more than that.

Q126   Anas Sarwar: I can imagine. I'm now moving on to the development impact. I just want to ask some specific questions about where the investments take place. Does CDC deliberately make some low-risk, high-return investments to generate more profits in order to reinvest it elsewhere?

Richard Laing: We will not set out deliberately to make low-risk investments because, by definition, where we invest and where DFID have asked us to invest are the poorest countries of the world—the data we gave you—and they are almost by definition pretty high risk, but you are right that there is an issue here about the balance of risk and return. We need to take risk. We need to be right at the frontier of that. At the same time, we are the stewards of taxpayers' money. We have £2.7 billion of taxpayers' money, and we need to make sure that we exercise good stewardship over that. What we have done is within that geographical mandate we have a risk approach. We will spread our investments. For example, we have quite significantly high exposure, approximately 30%, to infrastructure investments. These investments have high development impact but they also, because they're asset backed, tend to be slightly lower risk. So we take a balanced view on that, recognising that we have multiple objectives, primarily development impact but also we are stewards of the taxpayers' money.

Q127   Anas Sarwar: Thank you. One of the more controversial investments that you made was in shopping mall in Accra and I just wonder if you think that is, as you have quoted in one of your documents, doing "the hardest things in the hardest places", because it could be argued that an investment of that sort could easily find private investment from other places.

Richard Laing: Well, that one is interesting. It does get a lot of publicity.

Q128   Chair: It's quite a nice shopping mall.

Richard Laing: It's a very nice shopping mall. It's the first shopping mall in Accra. If you ask local people what they think about it, they think it's fantastic. They say, "Well, why shouldn't we have shopping malls? You've got shopping malls in London and the West. Why can't we have shopping malls?" It provides a lot of employment; it provides supply chains. I've been there and I have walked around that mall, and I remember talking to the manager who ran the meat counter and I said, "Where does your meat come from? Is it all imported?" He looked very shocked and he said, "Of course it's not imported. This is Ghanaian meat and we have a supply chain now providing meat to a very high standard." So CDC has done shopping malls and they clearly do have a role to play amongst a whole portfolio of economic growth and development impact.

Q129   Anas Sarwar: How much was the CDC investment in the actual shopping mall? What's the return been to date, both in terms of employees and in terms of creating wealth and product?

Rod Evison: Yes, I can answer that question. The investment in the mall has been around $20 million from CDC, and we have received no return from that development so far. It was an early stage, meaning that this was a start-up. I think that's an important point—this was helping create something that wasn't there before and, as Richard was saying, to attract businesses of quality. You may like them; you may hate them, but supermarkets are still quite rare in low-income countries and absolutely a supermarket is a core tenant of that mall, and the impact that a good professionally run supermarket has around supply chain management is dramatic. Again, like them or hate them, but it's part of development.

Q130   Anas Sarwar: How much was the total project? Do you feel as if the $20 million coming from CDC helped pull in other funds to try and finish off the creation of the mall. I take it was more than a £20 million project. Obviously, the reputation of the CDC and other partners helped bring in the people that are going to put the individual stores in the malls, and that in itself attracts more people and attracts further employment. Is that how you would see the CDC relationship with the shopping mall project?

Rod Evison: Yes, absolutely. You are quite right. There had to be long-term debt in order to get the mall completed and that was provided by one of the local international banks—I think it was Standard Bank—and they provided a construction facility and a long-term facility thereafter. So I think it was around 50/50 finance between equity and debt in that particular case. This was not in the heart of the financial crisis, but it was at a time when it was quite a challenge to raise debt.

Q131   Alison McGovern: Very briefly, in talking about economic development, economic development will only produce poverty reduction if attention is paid to the worst-off in society and those at the bottom of the income distribution. What attention, specifically in that development, was paid to the impact on those at the bottom end of the income distribution?

Rod Evison: One of the ways to respond to that is around the local stallholders, where space was provided for local stallholders to set up outside of the mall. That was very much to ensure that the magnet that the mall provided in attracting traffic could also be a benefit to those lower down the pyramid.

Q132   Jeremy Lefroy: Just before I ask the main question, I just wanted to come back on one thing if I may, Chairman, which is you talked about the number of employees being about 47 or 48, but the report says that the average monthly number of group employees was 2,154. It's here on notes to the accounts, number four.

Richard Laing: Let me explain that. It is rather technical. Within the portfolio, where we have a significant holding of a fund, and indeed in some of the older funds we have very significant holding, we were required to consolidate some of the underlying businesses into our statutory accounts. So that would include some of the portfolio, by no means all, and in fact it's quite a small proportion of it. It's a rather technical accounting point that the accountants require us to consolidate, and therefore we had to report those companies' employees. That number in itself just represents a small proportion of the portfolio.

Q133   Jeremy Lefroy: But presumably we, as CDC, own more than 50% and therefore have responsibility?

Richard Laing: Well, the fund manager has the responsibility, but for accounting purposes, we were required to consolidate it.

Q134   Jeremy Lefroy: I think it would be useful, since we do talk about 2,154, to get the terms and conditions of those in addition to the 47 in the UK, since they are here in the report.

Richard Laing: They will be in a number of individual businesses around the world.

Q135   Jeremy Lefroy: If we could have those as well I think that would help, not just the 47 that was referred to earlier, because presumably they themselves produce accounts.[8]

Richard Laing: We don't own 100%.

Q136   Jeremy Lefroy: We own more than 50%. I notice there's one in which we have 77%—something agricultural.

Q137   Chair: Are you in a position to provide that information?

Richard Laing: We could. In general terms, we can find out the terms and conditions of those companies.

Q138   Jeremy Lefroy: Particularly in relation to the gender audit that Miss McGovern referred to earlier, possibly?

Mr Richard Laing: We will see what we can provide.[9]

Q139   Jeremy Lefroy: Coming onto agriculture, the portfolio on agriculture has declined from 49%-5% and infrastructure from 35%-8%, and I would just be interested to know why there is a decrease in emphasis on agriculture and infrastructure. I was encouraged to hear you talk about a new infrastructure fund, and maybe that's a sign that things are turning round in those percentages.

Richard Laing: You're right: it is turning round. Agribusiness is one of the sectors that we focus on. If you look at the recent funds that we've been investing in—I've already mentioned the sustainable sub­Saharan African forestry fund—we also invested in the first Indian agribusiness fund. We're a major investor in that fund, and we're looking to do more. In fact, in 2009-10, 12% of our new commitments are in agribusiness, so we will see that number increase over the next few years in terms of our new commitments. The number you were quoting I think was our portfolio, so we will see the portfolio increase over time.

Q140   Jeremy Lefroy: I welcome the fact that it is 12%, but do you see the possibility for that being greater, given that there seems to be a general recognition that investment in agriculture has very good returns, particularly at the bottom end of the income scale?

Richard Laing: This is a really interesting point about which sectors are the most developmental and different people will come up with different ideas. People who are pro­agribusiness will express the merits of that, people who are pro­infrastructure—for example, the need to have good roads, rail, ports—will say that's highly developmental. Part of the discussion we are having with DFID on the consultation period that they're running is to have a greater dialogue and more dialogue about and get more input from people about which are the sectors that have the biggest bang for the buck in development purposes. It is an area that a lot of academics have done work on. We will continue to look at it and reach a view about how our portfolio should be spread.

Q141   Mr Clappison: Can you give us some idea of a target or a figure that you would like to see your investment in agriculture go up to?

Richard Laing: As I say, we haven't today got a target, but I think we will address this area as part of the consultation with DFID. I think it will be bigger than the current 6%, but we do not yet have a formal target.

Q142   Mr Clappison: We have been told that it's gone down from 49%, which was a figure in the past, and we were also told that, in sub­Saharan Africa, where we have a particular focus, 70%-80% of employment is in agriculture and one imagines that you are reaching the very poorest people there in many cases. How do you explain the figure going down from 49% and the way in which it has gone down so dramatically to 6%?

Richard Laing: The 49% goes back a long way. That goes back to the days before, back into the 1990s, and that was at a time when that was one of CDC's specialist areas. That explains why it was high at that stage. I have to say 49% is extraordinarily high. Those investments were not always a great success.

Rod Evison: Could I come in on this point? We had a very interesting review done on the portfolio, and indeed the numbers you were talking about around 49% were absolutely driven by a quantitative target that the old CDC had to achieve. That review, which was performed in 2001, looked at the history of our agri-investments and its conclusion was that CDC had demonstrated what could be achieved in African agri, which is what I recall, but with a large enough subsidy. Indeed, it quantified the amount of subsidy that CDC had put into African agri at £100 million. Now there is a debate: is that the right subsidy for African agri or is it not? I think it's quite useful just to at least clarify some of what lay behind the previous portfolio. Hopefully, now I am going to answer another Member's question: the prospects for agri in sub­Saharan Africa are more positive, and we are absolutely interested to find good intermediaries who can get our money to work in good ways.

Q143   Mr McCann: Just a brief point: I don't want to flog it to death, because obviously you've answered the question in several different ways, but we heard from the World Food Programme a couple of weeks ago. Obviously, we were asking questions about the peaks in prices over the past few years, and two of the ways in which WFP explained to us that could be tackled were: first, that the poorest countries in the world are guaranteed food supplies; and secondly, investment in agricultural businesses. It just strikes me that if we are to have a connection between all the different parts of the development work that we do, then investment in those areas is utterly crucial, because then it will help the poorest countries and those most in need.

Richard Laing: I would agree. I think one of the reasons that we are increasing our percentage in agribusiness is precisely that, but would it get to the levels of 49%? I don't think it will ever get to that level. Take another sector. I'm sure you do talk to infrastructure specialists. A recent study showed Sub­Saharan Africa needs £93 billion of capital per annum for infrastructure. Currently, it has got around £45 billion, so there is a £48 billion gap per annum for infrastructure investment in sub­Saharan Africa. The infrastructure specialists will say, "Come on CDC, you should be doing more on infrastructure." This is where we have to weigh up the different merits of the different sectors. I don't think there is a right answer. It's something we need to work with; we work very closely with our shareholder. But I absolutely take the point on agribusiness. There are merits for agribusiness.

Q144   Mr McCann: Can I ask you on that point, is it effectively you're saying that if you don't put the infrastructure in to get the food around the country in the first place, then obviously there is no point, so therefore it's a chicken and egg situation?

Richard Laing: Yes.

Richard Gillingwater: Can I make another point about agri, which we're all so very interested in? There is an absolute huge need for proper warehousing. We were on a board trip recently to Kenya and what was being said to us on the ground, partly when we visited this dairy, was that one of the biggest needs is not investment into agriculture itself but into proper warehousing where you can store the produce, most of which or a lot of which is currently wasted. That's an area where we are taking a very strong interest.

Q145   Jeremy Lefroy: Is one of the problems with investing in agriculture that it fails to meet your expected levels of return?

Richard Laing: No, because otherwise we wouldn't be investing in it. It's got to be sustainable. It's got to have appropriate return to attract private capital, and we believe there are definitely ways of agriculture reaching those levels of return.

Q146   Jeremy Lefroy: So the expected levels of return, from other information we've had, of around about the sort of 18% mark is what you look for? Is that right?

Richard Laing: For equity?

Jeremy Lefroy: Yes.

Richard Laing: That might be the sort of level that people would aim for. That strikes me as quite a high number.

Q147   Jeremy Lefroy: That's a number we've heard. What would it be? What would you be looking for?

Rod Evison: We did a strategy for agri in Africa, and I hope that we tried to get the balance right between setting a target that would attract in external capital, which again is one of the key objectives that we have, but that also recognised the particularities of the industry. So at that time, we said if we are going to commit to specialist agri funds, which we are doing, that we should not expect returns overall in excess of 12% to 15% in agri.

Q148   Jeremy Lefroy: That compares with, in the old CDC days, around 6%, as I understand.

Richard Laing: Yes, but most of that was debt, while these returns we're talking about is that high-risk capital.

Jeremy Lefroy: Right, so 12% to 15% for agri. Thank you.

Q149   Chris White: Can you confirm that only 7% of CDC funding is being invested into SMEs?

Richard Laing: No, that number is increasing. I think you are quoting a number in the portfolio where that number is right, but we would expect that to increase. As I said earlier, over 30% by number of funds are going into SMEs and microfinance in the last couple of years.

Q150   Chris White: Is there any reason why it was so low?

Richard Laing: Well, it comes back to the discussion we were having about agribusiness and about infrastructure and about SMEs. We haven't talked about other sectors, but it is about getting this balance between the developmental impact and a portfolio that is, for risk purposes, well balanced. People will speak strongly for agribusiness, and I quite understand that, and they will speak strongly for SMEs, and I quite understand that. We're the largest provider of capital for SME funds in Africa.

Q151   Chris White: I was heartened with the example you used at the beginning of this inquiry, talking about $200, and you clearly appreciated the difference it was making to that person's environment. If you are increasing that amount, so too the good. How do you measure your development impact?

Richard Laing: We have a methodology and it's set out in the development impact report, and we've now produced those for two years, where we look at a number of attributes to the investments we make, ranging from the economic effect we're having, so numbers of people employed, for example, the taxes paid, to the growth of the businesses. We look at the financial performance of the investment. Thirdly, we will look at that environmental, social and governance performance of the investment, and then we look at what we call the private sector development, so what impact has that investment had on the general private sector around where it's operating. We then score across those four attributes, and that will result in a grading of that particular fund investment that we've made. The details of that, as I say, are in the Development Impact Report that is in the House of Commons Library and obviously available to you.

Q152   Chris White: That sounds all very thorough, but, like any other operation, are there any other ways you're looking at to make that more thorough?

Richard Gillingwater: Well, one of the things we are doing and have done is we have brought in an external party to work with us, and independently look at a number of the funds. This year, roughly 50% of the funds will be looked at independently and 50% under the Best Practice Committee. One of the things we have done is compared some of their approach and some of their learning and some of their insights. They're a very noted consultancy in this particular field, and we've taken that on board and are taking that on board.

Q153   Chris White: Have you got any headlines or bullet points out of that comparison?

Richard Gillingwater: I think the main headline is that they have, and again you can see their opinion in the Development Impact Review, underscored the rigour of the evaluation work that we've been doing. They have different ways of looking at economic performance and they are undoubtedly helping our thinking in terms of trying to understand the broader economic effect of what we're trying to do.

Q154   Anas Sarwar: Over half of CDC's portfolio is in four middle-income countries: India, China, South Africa and Nigeria. How do you justify these investments?

Richard Gillingwater: If I can just explain, first of all, that our geographic mandate is focused on sub­Saharan Africa and South Asia. That's a mandate that's set to us by our shareholder, which of course is the Department for International Development. India has more people living on less than $2 a day that the whole of sub­Saharan Africa, so, whilst it has been recently classified as a middle-income country, there are still a lot of poor people there. Again, I think there's a very interesting and valuable debate to be had about the role of not just CDC but Development Finance Institutions generally. What is their role in middle-income countries? That is a debate that we have with DFID and with other institutions. There is no straightforward answer. There is a role, but we need to define what that role is.

Q155   Anas Sarwar: Have you made an assessment of what levels of poverty reduction you are doing in these four countries with the investments that you do have?

Richard Laing: Certainly, on the development impact in the broadest sense that the Chairman just talked about, the funds in, say, India will go through exactly that same process.

Q156   Anas Sarwar: The other point relevant to India and also to China is they are very regionalised. There will be some very affluent parts, but there will be some very poor parts. Is there a breakdown of where the investments are taking place in-country?

Richard Laing: Part of the work that we're now doing with DFID under the consultation period is to look at how we could get capital to work in some of those poorer states in India, such as Orissa and others. That work is ongoing as we speak. The CDC Managing Director for South Asia, Anubha Shrivastava, has already started having meetings with DFID officials in India, and she is working with them as to how we might be able to get more capital to work in those very poor states.

Q157   Anas Sarwar: Does CDC have sufficient incentives to relinquish investments in successful countries and sectors?

Richard Laing: I am not quite sure what you mean by incentives. If it was appropriate to dispose of those, we could. We would always have in mind value for the taxpayer. We do not want to relinquish or sell investments that would result in a loss to the taxpayer. I think that would be imprudent and I suspect this Committee would have words to say if we were to do that, but we have got to get the right balance to the portfolio, so it is a subject certainly that we'd look at.

Q158   Anas Sarwar: Another issue that's been raised recently is 80% of CDC's investments are domiciled in tax havens. Again, I find that situation quite bizarre both for us in the UK and also in several developing countries in terms of tax receipts. How do you justify this use of offshore financial centres for CDC's investments?

Richard Laing: Clearly, this is a subject that gets a lot of airing and let me just start off by saying that the reason that we use offshore centres is for developmental reasons. One of our missions, one of our objectives is to attract alongside us private sector capital. The capital has to be collected; our capital and other people investing in the funds. It might be a Californian Pension Fund; it might be another European Development Finance Institution; it might be the African Development Bank. All this capital coming from different places needs to collect somewhere. The providers of that capital want a stable environment. They want to make sure that they can have contracts that are going to be enforceable with the fund manager in an appropriate regime. Let me just confirm again that the taxes paid by the companies in-country, the underlying investee companies, are not reduced by the use of offshore centres. They will pay their local taxes. We estimate that over $3 billion per annum is being paid by CDC's underlying investee companies.

Q159   Anas Sarwar: What about capital gains tax? Is that being paid effectively in-country?

Richard Laing: The capital taxes will depend. Most of these offshore regimes are referred to as see-through regimes, so the individual investor will have to pay the taxes that are required by wherever they come from, and we don't have access to the taxes that they will be paying.

Q160   Anas Sarwar: Does it also make it more difficult for domestic in-country investors in terms of competing with international investors who have the advantage of financial offshore centres where they can base their investments. Does that not go against what CDC is all about in terms of encouraging investment in-country?

Richard Laing: It is a very valid point and there are structures to make sure that doesn't happen. So if you take India, typically what will happen is that the fund is put together and structured as two funds. One will be an international fund that will use an offshore centre, and one will be a domestic fund where the Indian capital is put in that vehicle, and then they invest together and they are run effectively as one. So there are ways round to make sure that the domestic investor can come in. By the way, I think that's a really important point: we need to attract not just international capital but domestic capital—African capital investing in Africa, as well as international capital.

Q161   Alison McGovern: Very briefly on that point, you make a good point about what has happened in India. That has been a policy that has been led by India federally for some years. What do we do about other countries to make sure that that combination of domestic and global funds are available?

Rod Evison: Could I just add an example about Nigeria? You may be aware that the previous administration in Nigeria reformed the pension industry to require employers to arrange pensions for their employees. There is now $10 billion of pension money in Nigeria. This has built up in quite a short period of time. It's really only been in the last six or seven years I think. Where is that money invested? 25% is invested in the local stockmarket. The remaining 75% is invested in money market instruments and Government bonds. None of it is invested in unlisted securities at this moment—private equity. Why? Because probably, quite rightly, to begin with the regulator did not want that money invested in unquoted investments, but they are recognising now that some of the choices originally made to get a prudential basis for the scheme can also have some unintended consequences.

We've had meetings and in fact we took the board to the National Pension Commission during a board visit two years ago to West Africa, and they are now exploring ways to get that money invested in infrastructure and targeted private equity funds. I think the role of the DFI in some of those will be one of ways to give comfort to the regulator that this is a sensible route for money to be invested. It is not yet there, but I think some progress in being made.

Q162   Richard Burden: Could we move back to your investment code? I can understand the objective of that is to promote responsible business practices, environmental social matters and governance. What I am not clear about is whether there is a baseline standard that you set that is a minimum requirement before CDC will invest?

Richard Laing: In our investment code, there is a set of standards that are laid out and indeed that has been provided to the Committee. What we do not insist upon is that everything should be in place right at the very start. A lot of what CDC is here for is about a journey. We want to see improvements. For example, I visited Nigeria once and I went to a mattress manufacturer and I walked around that with the Chief Executive—she's Nigerian, by the way—and she pointed out to me, "Look at that safety rail. We just put that in, and we put that in because we know that you value your environmental, social and governance issues and health and safety is part of that." The safety rail wasn't there when we started, but it is there now, and a lot of it is about the journey.

Q163   Richard Burden: Are there any minimum standards at all?

Richard Laing: Well, there are things like illegal activity is a minimum standard and must be removed immediately.

Q164   Richard Burden: Illegal in what sense?

Richard Laing: Well, for example, paying below the minimum wage.

Q165   Richard Burden: You mean illegal in the context of the country in which you're operating?

Richard Laing: Yes, but then of course the standards then go to international best practice, and we would expect to see a journey towards meeting those standards.

Richard Gillingwater: So that case that we talked about, which I have also visited, uses very dangerous processes and is very, very dangerous for the employees. It's now certified to the highest level, I think it's ISO 9001 or 901,[10] and on that journey it has got itself a full international safety and environmental rating.

Q166   Richard Burden: So your code sort of sits there at CDC level as an objective and encouragement for the journey, but the investment decisions within the overall strategy are made by fund managers?

Richard Laing: Yes.

Q167   Richard Burden: So are the fund managers the ones that look at your investment code and say, "When we decide to make this investment over here, we will look at what is happening at the outset and how far there is the potential for improvement there," or do you do that?

Richard Laing: What will happen is the fund manager is responsible for the individual investment but what we provide for the fund managers is a toolkit on environmental, social and governance issues. We provide training for that toolkit. Just last week, two of my colleagues, Shonaid Jemmett­Page and Nicolas During, who are experts in this area, were in India. They came back last weekend. They were training the fund managers in the toolkit—in the environmental, social and governance toolkit—and how it can be applied. There were over 10 fund managers there. This is a direct involvement of CDC in making sure that they understand what is required to be done, but when it comes to the individual company, although we may visit some and on a sample basis will be monitoring what's going on, the fund manager is responsible for the ESG issues.

Q168   Richard Burden: I suppose it was that last point I was then going to come on to. What kind of monitoring do you do of the decisions that your fund managers are making and whether those ESG factors are in practice being taken into account and improved? Is it done systemically?

Richard Laing: Yes. Each fund manager is required to produce reports on this, either quarterly or semi­annually—usually quarterly—and where issues arise, they need to tell us what they are and what action they are taking. If we see high-risk investments and we feel it is appropriate to intervene in some way, then we will go and visit those.

Q169   Richard Burden: This is high risk in terms of investment return?

Richard Laing: No, on ESG; environmental, social and governance high risk.

Rod Evison: All of our portfolio is graded by ESG risk and the high-risk ones are the ones that we really focus on.

Q170   Richard Burden: What kind of percentage would they be? How many visits do you make?

Rod Evison: It would be about 10% of our portfolio would fall into the high-risk category and that could go from mining to infrastructure—a number of the large infrastructure projects are high-risk assets—to some manufacturing processes as well. So, yes, when we do go overseas, we try to make sure that if we're visiting a fund manager we say, "Look we'd like to go see one of the high-risk assets in order to assess whether they are indeed having a difference." So in Uganda, we went to Umeme.

Richard Gillingwater: Just to comment on that, Umeme is the electricity distribution company in Uganda. It has had a lot of investment, partly through CDC. It is basically going through two processes: one, a re-equipping; and secondly, a rural electrification project. So recently it has added something like 100,000 homes. One of the big issues there is the illegal taking of electricity. This is something much on our minds. There are, sadly, a lot of deaths from this. We have spent a huge amount of time visiting this company. The board went and spent effectively a day with the company, seeing the entire operation from soup to nuts; but, more importantly, we have had CDC Executives actually going out and visiting that company very systematically, because it is probably one of our most high-risk investments. They are taking safety extremely seriously. We sat down with the board, and they are taking safety and the dangers of stealing electricity really seriously at board level, including at Government level.

Q171   Richard Burden: So that is an example of a potential success in terms of your monitoring policy. Presumably, there would also be penalties for non­compliance. Can you tell me what they are and whether they have ever been invoked and, if so, where?

Rod Evison: I was going to respond along these lines, which is that in the discussions that we have with our fund managers around ESG, the key assessment for us is whether the fund manager is hearing what we're saying, understanding what we are saying and trying to move to best practice. When we look at the development of private equity in the emerging markets, I think the role of the DFIs, and CDC plays a part, but it's a broader initiative than that, is in ensuring that the areas that you are talking about—the ESG standards, the governance standards—receive high profile within the selection of investee companies by fund managers. Emerging market fund managers are at the forefront of that, and indeed we are seeing that Western fund managers are now having to catch up in view of some of the pressures that their activities have given rise to. So I think that there is a good story here. We have not had a situation to date, touch wood, where a fund manager has not responded to exhortation from us to do a better job. If we find a fund manager that does that, then we would not be continuing a relationship with him.

Q172   Richard Burden: It's not happened so far?

Rod Evison: Not happened so far.

Q173   Mr McCann: I think some of Richard's questions have touched on the one I'm going to ask, which is how would CDC respond to accusations that you don't take your social environmental responsibility seriously? But perhaps, if I could just move on from there and you could bear that question in mind, have you ever withdrawn an investment because people have not taken seriously those responsibilities? In terms of ensuring that people think about the environment, can you tell me how that works in practice in terms of making sure that projects are sustainable and low carbon?

Richard Gillingwater: Before Richard comes in on the detail, can I just say something about the seriousness? You've heard about our monitoring processes; we monitor quarterly. If we have a situation of serious breach—either an environmental breach or a fatality or a serious injury or an instance of a failure of governance or corruption—it is reported, first of all, obviously from the company to the fund, and up to CDC very rapidly indeed. There is a very clear understanding that we want to know when these things occur. I can then tell you that we spend a lot of each board going through precisely these situations. We will sit down and we will talk about these issues, and indeed, if you were to see it, you would see the Chief Executive's Report would contain, and does contain, regrettably, a section where we see incidents, breaches coming up to the board for discussion. They get seriously discussed and debated and often our teams then go back to work with the fund managers to understand precisely what has been the cause of the particular issue and that it doesn't, within our capacity, occur again. These things are escalated to board level and are taken very seriously by the board.

Richard Laing: You asked for an example, but ideally we'd never get into this situation obviously. There have certainly been cases where we have looked at a fund manager who has come to a proposition with us and we felt that they were not going to take these issues seriously and we decided not to invest. We have definitely come across that. Another example is a fund in Asia where we knew that the fund manager wasn't taking governance seriously. What we did then is we didn't withdraw our money but what we asked was for that individual to be removed from the fund management company. It was particularly difficult because he was the head of the fund management company, but we managed to lead a group of investors in that fund and indeed that did happen and the fund continues, which is a better solution than withdrawing our money.

The ultimate sanction is that we could stop investing if we felt they weren't taking it seriously. As I say, we hope we never ever get to that situation, and indeed I have to say that fund managers really see the value of this. I talked about the training session in Mumbai last week. They volunteered to come. We obviously invited them. They really get value out of this and want more. Generally speaking, we find this is something that the fund managers want to take seriously. The reason being, of course, is that if they are selling a business on or putting it on the stock exchange, the new owners of the business today, particularly if it is an international buyer or if it's a local stock exchange float, will demand good standards, so it is in their interest as well.

Q174   Chair: In terms of the future, the Secretary of State says he wants CDC to regain its power to make investments directly in target markets and, as you say, other DFIs have more of a mix. You say you do have some debt, but you're mostly equity. What do you think would be the advantages or disadvantages of diversifying from that model? I think you've said in your earlier answers that you're doing it the way you're doing it because that's what you were asked to do. So you're likely to be asked to do something different, but what would you say would be, I suppose, the disadvantages of diversifying and indeed the implications of perhaps investing in a variety of different ways, rather than concentrating on mostly equity and a small amount of debt?

Richard Laing: One of the disadvantages of the private equity model is that it is long term, but, by the way, it's also an advantage to provide that long-term, patient capital. If you go into a fund, you know you're making a 10-year, perhaps 12, even 15-year commitment to that fund and, as time progresses, you may feel that there are other focuses that should have greater focus. It is a machine that takes a long time to move the portfolio in a different direction. The advantages of direct investment are that you can do that much more quickly. So, for example, if we identify either geographies or particular countries—and we talked earlier about poor regions, for example, in India—there might be particular geographies where we could put more capital to work in more quickly. There may also be certain sectors where we can prioritise by doing direct investing; that may enable us to get more capital to work in that particular sector in a quicker time period.

Q175   Chair: But you have a staff of 47 people and you are operating through funds at the moment, so if you are doing more in the way of direct investment, does that have implications for your staffing requirements?

Richard Laing: It certainly does. We would need to gear up for whatever the new investment strategy is.

Q176   Chair: At this stage, you wouldn't be able to identify what sort of numbers you would be talking about?

Richard Laing: No, not yet because we have not yet finished that consultation period with DFID as to exactly what the investment strategy would look like.

Q177   Chair: What about providing technical assistance, because—we shouldn't shout this too loud—DFID is under staffing constraints. What is not clear is, first, the extent to which CDC would come under those staffing constraints and, secondly, if on the other hand you were able to provide some direct investment, loans, technical assistance, you would be able to do some of the things that DFID might have difficult doing in­house because of their constraints. Do you see that as being a possible partnership?

Richard Laing: What I would say, as of today, the skills of CDC are investing. That's what we've been set up to do: invest in the private sector in the most difficult markets in the world. That's what we do and we do it very well. Going into technical assistance is an entirely different business activity and I think that would need very considerable thought with our shareholder if that was required, and, to your point earlier about resource, it would need different skills and different resource.

Q178   Chair: The Secretary of State says he looks at you doing co­investing; finding other partners and working with them. I suppose the implication is it's a step back. You don't suddenly want to change your working models and presumably go into a whole different area of risk with which you are not fully conversant. So have you thought through how you might start to move in that direction and whether you would do it by developing your own capacity in­house or whether a better method or complementary method is doing it with partners who are a bit ahead of the game and with whom you can team up?

Richard Laing: I think the first stage would be exactly that, to work with partners, and the first group of partners that is logical to work is our fund managers. There are many times when a fund manager may come across a transaction that, for a variety of reasons, they don't want to do all of. It may be because they may have high exposure to that particular country and they want to have a balanced portfolio. It may be that it is too big. It may be that they want additional expertise. They will invite co­investors to come alongside them. We've already done some of that with them, and we could start again doing some direct investments along with those selected partners, again in selected geographies or sectors, and we could do that quite quickly. The next stage would then be to identify other partners. It might be other investors working in countries that we know particularly well and that are of high priority and working with them. That is also something that we will begin to look at. So I think there are ways definitely of getting a direct programme up and running, particularly involving our existing fund managers.

Q179   Chair: Could you envisage CDC working up projects? If we take agriculture, for example, and you have the example of your dairy project in Kenya, but let's say a co-operative to add value to process, perhaps to deliver fair trade quality, for example, to assist. Is that something where CDC could take a direct lead and say, "There's a role in this country. There are a group of farmers who want to produce better coffee or process or roast it to add value and to meet fair trade standards."? I am giving this as an example, but is that something where CDC might come in and say, "Well, we could help set that up and invest in it," or is that taking you more back to where you were and would that require a substantially different organisational structure?

Rod Evison: One example, which I think Richard mentioned earlier, of where we've sought to have an impact along the lines that you're talking about is indeed in forestry in sub­Saharan Africa. There we felt absolutely that there is an opportunity that is more attractive now than it has been for, in our view, a number of years. So how did we approach it? We wanted to find people that were experts in sustainable forestry investment in other parts of the world and that had a track record, and we wanted to encourage them to come to Africa. So we found them; we found a Washington-based group that is now establishing offices in sub­Saharan Africa, and they have raised over £100 million in funds and are hoping to get £200 million altogether. So that is one example of a reasonably targeted niche where we could point to what you were talking about. There may well be other opportunities as well.

Q180   Chair: You said at the beginning, Mr Laing, that there had originally been a plan to privatise CDC that didn't prove possible; the market wasn't interested. If DFID is having a more direct influence over what you are doing, is there a danger that that could undermine the relationship you have with your other investors, because they feel that there is perhaps too much direct input? Or do you think it is possible to find a partnership or a way of doing that that will retain the confidence of other investors, whilst delivering a rather different need for DFID—as we discussed with our witnesses last week, not necessarily lower risk but lower rate of return projects?

Richard Laing: I think you have identified a really important point, which is the need for CDC to be seen to be an expert in this area and—clearly, we are owned by DFID—not to have day-to-day management of CDC by DFID. Otherwise, we might as well just be a department of DFID and indeed other investors value that independence. They recognise that when they are talking to CDC—this is to your point about attracting other investors—that CDC is able to manage its affairs on a day-to-day basis.

Q181   Chair: So you don't have an indication of Ministers coming along and saying, "We've actually identified something we want you to do in Tanzania or Malawi or whatever"?

Richard Gillingwater: Let me come in here. I think that what has been one of the successes so far of CDC is that it's adapted to a lot of change even since the 1990s. Moving into the fund of funds model, we obviously had a very intense dialogue with the shareholder, but then I think the shareholder wisely said to the board and the management team, "Actually, we've set the parameters here, but we would like you now to get on and deliver and operate, and what we don't want to do is to be drawn into this or that particular investment situation."

Q182   Chair: Presumably, it would be possible to subdivide CDC and say, "Well that's its more or less traditional fund of funds approach there; this is a different, more politically directed operation."

Richard Gillingwater: What we would hope, coming out of the consultation, is that if that's the route we go—and we would certainly be very open-minded about that route—that we have a discussion about sectors and geographies, and we are very up for, obviously, first of all a rigorous debate about that, but then we settle on infrastructure, on small and medium enterprise, on microfinance, particular geographies. Then we are left to get on and make the targeted direct investments that deliver in that broad policy. I think what would be very difficult, it would be if essentially we were being told to go and do particular projects, because that then fundamentally takes away from our decision-making capability, but I think we're also responsible for the overall judgment on development outcome and on the financial performance at the end of the day, and you start to get very blurred accountabilities in that type of situation.

Q183   Pauline Latham: The Secretary of State envisages that climate-related activities and initiatives could feature in your portfolio. Are you doing anything about climate change and could you have a role in investing in green energy and technology?

Richard Laing: This is a very interesting sector and one that we would definitely like to do more in. We have got some already. A member of the Committee has already mentioned Moser Baer, which is actually an example of a direct investment, where we invested alongside an investor that is making solar panels. One of the reasons we liked it was precisely was because it was to do with energy and environmental issues. There are some focused environmental funds we've gone into, about three or four, and I mentioned a debt facility that I signed last week with other European DFIs. We are also looking at another facility—again that is the club of European DFIs, of which CDC will be one of the major contributors—which is an international climate change facility, again for the very poorest countries in the world, with a focus on Africa. So it is definitely an area we'd look at and, as part of the consultation with DFID, I'm sure it's something that will come up.

Q184   Pauline Latham: DFID's strategy involves reducing the number of countries that it is going to be operating in because it has to cut down, but to have a more substantial development impact. Do you think CDC should follow a similar approach and could you specialise in operating in the countries that DFID is moving out of?

Richard Laing: That is again a subject of the consultation, and we have started having those discussions. It is clear that, in many countries, the first stage of development is aid-based, and then the second stage is that the private sector comes in and starts to generate that economic growth that we've been talking about, and it is those countries where I think CDC has a really powerful role to play. The discussions with DFID are not yet finished as to which countries we should be focusing on and, ultimately, of course, it will be the shareholder decision as to where they would like us to focus, but I think part of the discussion will be exactly what you were talking about.

Q185   Jeremy Lefroy: A couple of questions: I just wondered about the shareholding in Actis, the 40%. Do you see any value in that? Is that something that really provides a bit of a conflict of interest and perhaps should be sold?

Richard Gillingwater: I was going to say that I think the Committee knows that DFID is a shareholder in Actis, and in terms of its ownership, that's very much DFID's matter. We obviously are symbiotically connected to Actis, so the key point for us is that whatever happens sustains Actis as a successful investing organisation and it certainly has been a very important part of CDC's success.

Q186   Jeremy Lefroy: Do you, as a 40% shareholder, take an active role on the board?

Richard Gillingwater: We are not; it is DFID.

Q187   Jeremy Lefroy: DFID; I'm sorry, yes.

Richard Gillingwater: There is a very clear separation of roles.

Q188   Jeremy Lefroy: And you have no input into that whatsoever?

Richard Laing: DFID hold the shareholding, and I think that question is better addressed to DFID as to how they manage that shareholding.

Q189   Jeremy Lefroy: So you don't have a view on what DFID should do with that shareholding?

Richard Gillingwater: I think we obviously have a view that, whatever happens, Actis remains a successful fund manager and that fund management capability is not compromised. That is crucial to us, so we would obviously favour anything that supports it.

Q190   Jeremy Lefroy: Right. Now, clearly the value of CDC's investment has increased substantially from an estimated £1 billion in 1997 to £2.7 billion now, which is obviously a great record and has enabled CDC to invest in lots of funds since 2004. Given what we've discussed, do you see that there is an opportunity here to perhaps send some of those new investments from, hopefully, future profitable activities in other directions, along the lines of what we are talking about; possibly a greater emphasis on agriculture, infrastructure, small and medium business. I think this is clearly what Government and certainly this Committee seems to be thinking will have a greater developmental impact in future, and how quickly could that happen given that clearly you can't just liquidate funds overnight? You'd take a big impairment in value.

Richard Laing: I think there is further debate to be had about the developmental merits of different sectors. I agree with you that SMEs and infrastructure are developmental, but a manufacturing business employs lots of people and creates supplies around it; it is also developmental. We haven't talked about financial institutions, but banks are a very efficient way of getting capital to work amongst communities. I think the debate has to be, as part of the consultation period, which of these sectors and which of the instruments we use are the ones that the shareholder ultimately would want us to focus on. We are the largest investor in SMEs in private equity in sub­Saharan Africa, and I would see that still being a very big focus of what we do. SMEs in South Asia; again we have a major part of our portfolio in that. The consultation period no doubt will address exactly these issues, and we have to wait until that process has ended to see where DFID would like us to put our capital.

Q191   Jeremy Lefroy: But what impact do you think that would have on the future of CDC?

Richard Laing: I think that if we were to switch into or continue investing in the sort of areas we are already—so infrastructure, SMEs, manufacturing and growth businesses generally—then we can do that with the instruments we have to hand, such as private equity funds and debt funds. We have talked about an enhanced direct programme, which is something that again I think we can start pretty quickly, though as the Chairman said, there is an issue of making sure we have got the right capability going forward. Debt is another area where we can increase the amount we do, whether it be through intermediated structures such as funds or we do it direct. Guarantees is another instrument that we're looking at, as to whether we should be doing more. We have the appetite, clearly, to look at all of these to make sure that CDC's configured in an appropriate way.

One thing that's important is CDC must keep its distinctiveness. The British Development Finance Institution, CDC, is renowned in the world as being a real expert in what we do and the British should be very proud of that. We want to be careful that we don't just become a lookalike of a number of the others. The strength of the bilateral Development Finance Institutions is most of them have particular areas of expertise: the Dutch, for example, in financial services; the Norwegians in renewable energy; the Germans do debt very efficiently. We are known for our private equity investing. So provided we retain our distinctiveness, there is, I am sure, appetite and ability to go and do further types of instrument.

Q192   Jeremy Lefroy: Sorry, just one final question, Chairman. If we are looking at perhaps moving the emphasis away from what has been the case in previous years, the classic example is something like Celtel, which was obviously a great investment but perhaps these days would attract a lot of private capital should a similar investment come along. There are two ways forward really that I see: one is that either CDC can have a sort of CDC mark one, which is what you do at the moment, and then do something slightly different under a different name or a different part of the same organisation, or you have a more organic switch because you're investing through funds anyway, which says, "We'll continue doing what we're doing and do these new areas within the same set-up." Are those two conflicting models?

Richard Laing: I think those are exactly the discussions we are having with DFID now as to how we should be configured going forward, but the consultation period doesn't end until January and firm decisions haven't yet been made, but these are exactly the sort of discussions we're having.

Q193   Chair: Thank you very much. We are taking evidence from the Secretary of State on 18 January and hoping to produce a Report before the end of February. I think you will have got a favour of some of the things the Committee is interested in, and I think what you and the previous witnesses have given us is some ideas as to the kind of things that could be done. I think you stress quite strongly you feel defensive in the sense of saying you feel the fund of funds model has produced quite a lot of success and you would hate to lose all of that, but you do feel there's scope for you to diversify into other areas, provided that distinctive identity is retained.

Richard Laing: Indeed.

Chair: We obviously have to deliberate on what we have seen and heard, but I thank all three for you for the evidence that you have given us in answering our questions and informing the Committee to write a Report that we hope will make a constructive contribution to how CDC can go forward. Thank you very much.

1   Note by Witness: Catalyst, is the name of the fund manager, not Lok. It invests in Ghana and Nigeria, and is not based in India and run by Indians. Actis is just one of 70 fund managers (not 65). They do not do microfinance, so that is another of our 70 fund managers, not 65. Back

2   Ev 60 Back

3   See Back

4   Ev 85 Back

5   Ev 85 Back

6   Ev 60 Back

7   Ev 85 Back

8   Ev 86 Back

9   Ev 86 Back

10   Note by Witness: It is certified to the highest level by ISO 9001, not 901. Back

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