Examination of Witnesses (79-193)|
Richard Laing, Richard Gillingwater and Rod Evison
14 December 2010
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?
Yes. Good morning. I'm Richard Gillingwater. I'm the Chairman
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.
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
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.
Yes, as long as you don't take too long. Obviously, we have got
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 PPPpublic
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
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
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 povertynot just delivered
investment results in the poorest countries, but reduced poverty
in those countries?
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
I didn't suggest that was the case.
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 storybuilding
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.
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?
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.
In other words, making it a commercial success.
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?
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.
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.
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.
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
Q90 Pauline Latham:
Just for clarification on what you said, how many million did
you say you had?
Our net worth at the moment is £2.7 billion.
Pauline Latham: Billion?
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 thatperhaps give us some real examples of
the sort of creative side of it: new investments, new markets,
breaking new ground.
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,
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 sectorwe would
like to see more private sectorand 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
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
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 pointjust
some evidence that you'd had from in this case EMPEA,
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
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
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 is150,000
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 madehow much of it was you, and
how much of it was other partners?
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 dairya 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
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 throughwhatever
it is70 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.
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?
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
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
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?
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.
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?
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?
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
Last week, I signed a facilityit is actually
a debt facility, interestinglywhere 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 debtwe 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?
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?
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
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?
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?
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?
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
organisationit's not privateand so normally people
take less remuneration because they've got more security of tenure
than they have in the private markets.
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.
Q108 Pauline Latham:
So that's what you're just saying now and it's contradictory.
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?
It employees 46 people.
I don't have the total wage bill to hand, but we can supply it.
Q110 Anas Sarwar:
Even a guesstimate?
I think it would be better if I gave it to the Committee.
Can you give us the wage bill and the total bonus?
We can provide that data.
Q112 Alison McGovern:
Two very brief questions, if I may: your memorandum to us
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?
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?
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 alonecertainly of a lot of the private
sector organisationswas 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.
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.
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?
Yes, I can answer that and it was £225,000.
Chair: That was the salary
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?
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
There were no such arrangements at all.
Q118 Pauline Latham:
Nothing at all. So you couldn't invest when the share prices
Nothing whatsoever, no.
Q119 Pauline Latham:
Can you tell me what proportion of remuneration is currently contingent
on nonfinancial measures of development impact?
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?
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 salariesChief 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.
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.
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 developmentnot necessarily
for a lifetime career, but for a period.
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.
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?
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?
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 worldthe
data we gave youand 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'
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.
Well, that one is interesting. It does get a lot of publicity.
It's quite a nice shopping mall.
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 pointthis
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 banksI think it was Standard
Bankand 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
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.
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
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.
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
We don't own 100%.
Q136 Jeremy Lefroy:
We own more than 50%. I notice there's one in which we have 77%something
Are you in a position to provide that information?
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.
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.
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 inI've already mentioned the sustainable
subSaharan African forestry fundwe 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?
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 proinfrastructurefor
example, the need to have good roads, rail, portswill 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?
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
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
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
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?
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?
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?
Jeremy Lefroy: Yes.
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.
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
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?
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?
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
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?
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?
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
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?
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?
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
Q157 Anas Sarwar:
Does CDC have sufficient incentives to relinquish investments
in successful countries and sectors?
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
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?
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
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
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?
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 capitalAfrican 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
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 momentprivate
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
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?
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 Executiveshe's Nigerian, by the wayand
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
Q163 Richard Burden:
Are there any minimum standards at all?
Well, there are things like illegal activity is a minimum standard
and must be removed immediately.
Q164 Richard Burden:
Illegal in what sense?
Well, for example, paying below the minimum wage.
Q165 Richard Burden:
You mean illegal in the context of the country in which you're
Yes, but then of course the standards then go to international
best practice, and we would expect to see a journey towards meeting
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,
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?
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?
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 toolkitin the environmental,
social and governance toolkitand 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?
Yes. Each fund manager is required to produce reports on this,
either quarterly or semiannuallyusually quarterlyand
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?
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
Rod Evison: It
would be about 10% of our portfolio would fall into the high-risk
category and that could go from mining to infrastructurea
number of the large infrastructure projects are high-risk assetsto
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.
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 aboutthe ESG standards, the governance
standardsreceive 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
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?
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 breacheither
an environmental breach or a fatality or a serious injury or an
instance of a failure of governance or corruptionit 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.
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.
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?
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 countriesand we talked earlier about poor
regions, for example, in Indiathere 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.
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?
It certainly does. We would need to gear up for whatever the
new investment strategy is.
At this stage, you wouldn't be able to identify what sort of numbers
you would be talking about?
No, not yet because we have not yet finished that consultation
period with DFID as to exactly what the investment strategy would
What about providing technical assistance, becausewe shouldn't
shout this too loudDFID 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?
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.
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?
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
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
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 DFIDas we discussed with our
witnesses last week, not necessarily lower risk but lower rate
of return projects?
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 andclearly,
we are owned by DFIDnot 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 CDCthis is to your
point about attracting other investorsthat CDC is able
to manage its affairs on a day-to-day basis.
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"?
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."
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."
What we would hope, coming out of the consultation, is that if
that's the route we goand we would certainly be very open-minded
about that routethat 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?
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 facilityagain that is the club of European
DFIs, of which CDC will be one of the major contributorswhich
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?
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?
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?
We are not; it is DFID.
Q187 Jeremy Lefroy:
DFID; I'm sorry, yes.
There is a very clear separation of roles.
Q188 Jeremy Lefroy:
And you have no input into that whatsoever?
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?
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.
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
I think that if we were to switch into or continue investing in
the sort of areas we are alreadyso infrastructure, SMEs,
manufacturing and growth businesses generallythen 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
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?
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
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
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
Ev 60 Back
See http://www.publications.parliament.uk/pa/cm201011/cmselect/cmintdev/writev/607/m06.htm Back
Ev 85 Back
Ev 85 Back
Ev 60 Back
Ev 85 Back
Ev 86 Back
Ev 86 Back
Note by Witness: It is certified to the highest level by
ISO 9001, not 901. Back