The Future of CDC - International Development Committee Contents

Examination of Witness (Question Numbers 194-267)

Rt Hon Andrew Mitchell MP

18 January 2011

Q194   Chair: Secretary of State, thank you very much for coming to answer our questions on the final evidence session we're holding on our short report on The future of CDC. You've obviously made a written statement to the House, and other statements and speeches about the changes you envisage—not moving away from the fund of funds model, but perhaps diversifying away from it. Perhaps you could just start by saying what you think are the current limitations or disadvantages of the way the business model for the CDC currently operates. Obviously, we'll ask you specific questions about where it might go, but you arrive in your office as the new Secretary of State, and you've got this organisation, and you look at it and say, "I want to change it." What was wrong with it?

Andrew Mitchell: Thank you, Chair, very much indeed. I'm obviously extremely grateful to the Committee for making a short report on CDC a priority. This was a high priority for us when we came into government last May, and I'm particularly grateful for the timing, because it means that we will be able to consider carefully the views of the Committee in an exercise in which we are consulting extremely widely. That is very helpful to us. I am conscious that around this table sit people with very considerable knowledge in this area.

If I may be permitted a very short preamble to answering your question very directly, it is this. We are spending an enormous amount of time at the moment trying to make sure that we use our aid budget well. We buy results and we deliver for British taxpayers, as well as for those we're seeking to help, 100 pence for every £1 we spend on development. I'm sure it's common cause for all of us here today, however, that really has the power and ability to lift the poorest of the world out of poverty—and to enable them to lift themselves out of poverty—is economic growth. It is jobs; it is private sector development; it is wealth creation—that is the key to poverty alleviation. Most of the jobs around the world are not created by Governments; they're created by the private sector. Aid is a means to an end. It is not an end in itself.

Looking carefully at wealth creation and at economic growth brings you quite quickly to looking at CDC. CDC is the Government's and the British taxpayer's vehicle—it is a vehicle—for private sector investment. In our view, it should be the jewel in the crown, and a very important piece of the international development architecture indeed. It seems to us—it seems to me—that CDC has lost its way in that respect. It was, of course, perceived by the incoming Government in 1997 as a failing DFI that was not performing particularly well economically. The then Government sought to privatise it, found they couldn't privatise it, and turned it into a fund of funds, where it has effectively privatised the management but not the activities of CDC. We believe that it has lost quite a lot of its development DNA. Perhaps it had insufficient financial DNA before. It's now got insufficient development DNA, and we need to put it back in the middle, where it has both financial credibility and financial DNA, and also development DNA. That is the first point.

The second point about how it has lost its way is that it is far too narrowly focused, as a fund of funds. If I may use a golfing analogy, it is as if this organisation has gone out on to a varied and interesting golf course armed only with one club—the fund of funds. I'm not a golfer, but if you go around a golf course, you require woods and irons, and no doubt other clubs as well. CDC has, in my view, hobbled its abilities and its potential, because it is far too narrowly defined, and that is what we want to change.

Q195   Chair: Sorry to interrupt you. You say, "CDC has hobbled". Was it CDC, or was it the Government?

Andrew Mitchell: CDC is 100% owned by the Government, and it is the Government who have placed CDC in this position. I make the point that I think before it was genuinely failing in what it was doing. I think it's now gone too far the other way, and we want to put it back in the middle. It is a task for Government to determine what CDC should do, and it is for the board, then, to implement the business plan to carry out the instructions of the Government, its 100% shareholder.

  Chair: Okay. Thank you for that.

Q196   Anas Sarwar: Secretary of State, thanks for coming to the Committee. Late last year, the Committee visited New York and Washington, and visited the World Bank. I think that we were all struck by the work of the International Financial Corporation, and saw it as a potential model that we could use here for our very own CDC.

Andrew Mitchell: The World Bank?

Chair: Yes.

Anas Sarwar: Yes, yes indeed. I just wondered, with that in mind, how you see that the CDC in its new format can complement and add to what other financial institutions and other international financial corporations are doing.

Andrew Mitchell: That is absolutely the subject of the consultations that we are undertaking, and, of course, one of the key things as part of that consultation is to look at what other DFIs are doing. We will be doing that in detail—both Ministers and officials. If you look around the European architecture, you will find, for example, that in Germany there is the DEG, which has a specialist niche in manufacturing. In France, it's PROPARCO, which has a specialism in infrastructure development. In Holland, the FMO is particularly skilled in the financial sector and microfinance. We are seeking to ensure that CDC becomes the best DFI in the world and that everyone comes to us to see what we are doing. We are obviously looking to make sure that we don't replicate niches that others are involved in. At the end of the day, CDC needs to be, above all, a provider of patient capital. If CDC is only doing things that the private sector does anyway, there is little point in not putting it in the private sector. The point about CDC—its roots and traditions over many years—has been doing something that the private sector can't do. That is particularly the development DNA that we should add. In the end, the provision of patient capital—capital that does not require the same returns as the markets often do—is, in my view, the unique niche that CDC should be bringing to the development architecture.

Q197   Anas Sarwar: Just on that point, you said how, obviously, the CDC should be different from other development finance institutions, and it should be unique. How do we actually make that happen and make the CDC unique?

Andrew Mitchell: We do it by assessing what that niche is, and then by tasking the board of CDC to draw up a management plan, under the Department's business plan. We expect that to be with us by May this year. There are a number of reviews taking place. There is a big meeting of experts later this week to discuss the future direction of CDC. What the Government are trying to do is to say, "We want this to be the best DFI in the world. It's a tremendous opportunity for CDC. What would it take to ensure that it does become the best DFI?" If we can see and demonstrate that the work that CDC is doing is really contributing to the development outcomes that we all want, the Government would be prepared to produce additional capital in pursuit of that. We are doing our best to ensure that CDC becomes a real credit to the international development architecture, and a real credit to Britain's development effort.

Q198   Anas Sarwar: As part of that process, is there a consultation taking place with the IFC—direct communication links, discussions, and a real consultation about how it operates and how CDC can learn from the good things that it does, and also learn from the things that it can do better? Is that process taking place actively?

Andrew Mitchell: Yes, of course. We are very closely engaged with the IFC. My officials have day­to­day contact with the IFC, and of course the IFC has been part of the Multilateral Aid Review as well, where we've been looking at the IFC and trying to assess its strengths and its weaknesses. I first had discussions with the IFC about CDC when I was Opposition spokesman—more than a year ago—because we were anxious to tap into the IFC's expertise, which is clear and undoubted. It's not just the IFC; it's the other DFIs as well, and learning wherever we can what it will take to achieve the pre-eminent position for CDC that I have set out.

Q199   Richard Harrington: I'd just like to press you on what you've said about the possibility of changing this organisation from just being the fund of funds to having direct investment as well. We're told there's a City analogy about the fund of funds, and one of the problems with it is the same problem as with a commercial one, in regular investment: there's effectively two lots of management and two lots of fees. Would this be one reason why you would decide to go into direct investment for CDC? Secondly, do you feel that there is a conflict of interest between a fund of funds operation and a direct investment operation, because you might be funding competitors to CDC's own direct operation?

Andrew Mitchell: You might, but on the last point that you make, you would be selecting the appropriate club from your golf bag, if I may return to my earlier analogy. Of course you will be pursuing the results that we seek for all our development activity. We want to make sure that we are better—and CDC is better—at articulating the results that our development work is achieving. That, as I mentioned when I was here before, is indispensable to carrying public support for what we are doing. There is a whole range of additional ways in which CDC can act. I set some of them out in the speech I made to the LSE, which I think the Committee has seen.

Richard Harrington: We've seen that. Thank you.

Andrew Mitchell: It's not just direct investment; it's also returning, as we have, the ability to borrow. It's being more involved in debt instruments. It's co­investment, because actually CDC will not have these skills overnight, so you might start to build them up with co­investment. I want it to have far more of an understanding of the work that the PIDG is doing, which is extremely important work that the Department is strongly supporting.

  

Q200   Mr Clappison: Just a quick question. The matters you have raised with us so far have presumably also been raised with the present leadership of CDC. What sort of response have you had?

Andrew Mitchell: I've had a number of meetings with the Chairman of CDC, and some with the Chief Executive. I think that the Chairman is extremely open to change. I think that he will welcome a much closer relationship between the Government and CDC—sometimes in the past we've been too remote a shareholder. We will, of course, be able to judge the extent to which I'm right by the business plan that comes out of all this consultation, but I'm very confident that the Chairman of CDC is in the right place on this.

Q201   Mr Clappison: They're aware of the interest that there is in this, not least from this Committee?

Andrew Mitchell: I believe they are, yes.

  Chair: They've been in front of us.

Q202   Pauline Latham: Good afternoon, Secretary of State. Do you think there's a trade­off between increasing development impact and mobilising as much capital as possible? How do you think the CDC can get the balance right with regards to this tension? What level of financial return should CDC target for its investments, and why, and to what extent should CDC be an agent for improving environmental, social and governance standards?

Andrew Mitchell: It certainly should be doing the latter. It's no part of our mission to do anything other than drive up work standards. I've already had discussions with the TUC about this. It's a very important part of investment, on the last part of your question.

On the other parts of your question, if I've understood them correctly, we want to make sure that the development impact of what CDC is doing is very clearly recognised, and we will consider how to change its geographical approach and the investment returns that it achieves. Those are two key parts of the consultation that we are undertaking. As far as the development returns are concerned, I want them much better expressed, just as we do for the work that we do in the bilateral and multilateral aid programmes. As for financial investment, I want them better expressed, just as we do for the work that we do in the bilateral and multilateral aid programmes. As far as the financial returns are concerned, I go back to my point about patient capital. I want to be able to use this capital to ensure that we achieve the best possible development returns. Clearly we will need to discuss this across Government, with the Treasury, and with the board of CDC, and we will need to reflect what comes out of the consultation. It does not seem to me that you need to designate, for the work of CDC, very high economic returns. We could have a discussion about whether they should cover the cost of inflation in the returns that they seek. That's a perfectly reasonable proposition. I'm not wishing to pursue what the fund of funds model, partly because of the remuneration mechanism, makes so clear, which is the highest possible economic returns at the expense of development returns.

Q203   Pauline Latham: Rather than just going for easy successes.

Andrew Mitchell: Yes. Mrs Latham makes a very good point. CDC should be in the hardest possible places where we are seeking to help the poorest in the world. There is, of course, a clear demonstration effect of what CDC does, in leading the way in showing the private sector what can be done in some very difficult places.

Q204   Pauline Latham: Yes. I wanted to come on to poverty alleviation. At the moment, it does a lot of economic development, which is typical of the purpose for DFIs, but would you be seeking to expand CDC's mandate to incorporate poverty alleviation? Could you see any potential disadvantages to changing CDC's remit in that way?

Andrew Mitchell: All of CDC's work should be about pro­poor private sector investment. I would certainly try to persuade the Committee that all that is about poverty alleviation. Particularly if you take my point about patient capital, the demonstration effect, and working in the most difficult places, I hope that you would feel that we were directly addressing that point about poverty alleviation in our pro­poor investment and development strategies.

Q205   Pauline Latham: When they came in front of us, I didn't get the feeling that they felt that poverty alleviation was the biggest thing that they should be doing, but that they were really there to be making as much money as possible, which did seem to conflict with that. Do you think there is a tension between what it is doing now and what you want it to do? Do you see that you'll be able to move it on and change its conditions?

Andrew Mitchell: CDC responds to the instruction it's given by its shareholder. The Government are the 100% shareholder in CDC, and we are certainly quite clear that we will agree with the board of CDC how it is to proceed in this area. I have every confidence that it will do exactly that.

Q206   Chair: Secretary of State, the change, in a way, is a risky strategy for you as a Minister and for the Government. You said that it was a rather distant relationship before, but it was an easy one for the Government to take. I'm not making a judgment, but it is saying, "We give you parameters and you grow the fund, and as long as you keep doing that, making a return and not costing the taxpayer any money, there's not a lot of risk," it's easy to park it. If you start not to micromanage it, but to direct it more, and lower its risk thresholds and get it more into development, and you also want to demonstrate value for money and a good return for the taxpayer, you're putting CDC in a situation where it's much more likely to have some bad news stories and difficulties. Is that something that you're comfortable with?

Andrew Mitchell: CDC will respond directly to the mandate it's given by its shareholder, so in terms of the return that it must make, it will have to operate within that structure. In terms of the geographic footprint, it will have to operate within that as well. When I say that I think CDC was too distant from the Government, the example I would give of that is that it took 18 months to agree, two years or so ago, the percentage of CDC's investment that should take place in sub­Saharan Africa, in the poorest parts of the world, and in SMEs. If it took 18 months to agree these changes, that does not suggest that there's a very close relationship between the shareholder and the management. Let me be absolutely clear: the one thing you mustn't have is civil servants and Ministers making operational decisions. They must not pick winners; that is a much­discredited approach. We will set the framework within which CDC will operate. We will make sure, particularly with the setting up of the new private sector department within DFID, which was launched on 1 January this year, that, in terms of driving forward our private sector-focused work, for all the reasons that I outlined at the beginning, there is the closest possible relationship, in pursuit of that common aim, between CDC and the Department.

Chair: We have a couple of supplementaries.

Q207   Anas Sarwar: Just a brief point on what you said, Secretary of State, following up from the idea that CDC should be working in the hardest places. I totally agree with that. Do you think that there also could be a role for it to have some investment in so­called "easy" places—to get the easy returns—which in return gives you extra capital and extra money to spend in the hardest areas, or do you think that all money has to be focused just in the most difficult areas?

Andrew Mitchell: Yes, that is a very good point. What I would say about that is that it certainly that gives you the spread, as you rightly say. Secondly, of course, we are approaching a position where 75% of the poorest people in the world live in middle­income countries. My own preliminary conclusion—again it's something that we're consulting widely about—is that geographical borders and being very specific about countries is important, but not the most important aspect of this. Clearly we are considering the role of CDC in places such as India, and in other graduation countries too, such as Vietnam, and Zambia, that are moving quite fast out of poverty towards middle­income status, if they have not already achieved it. The role of private sector investment there is incredibly important in intensifying that graduation. That is certainly something that completely fits our view of how CDC should approach this.

Q208   Mr McCann: My question, I think, neatly follows on from that. If there's a greater emphasis on poverty reduction, and less on return, and more on patient finance—I fully understand how all those points connect—that has the potential to lead to fewer returns for CDC. Will DFID bankroll CDC if it has to abide by the new rules on poverty reduction and more patient finance?

Andrew Mitchell: First, we will determine the rules governing returns. At the moment, the figure is quite high. The Treasury will have a view on this. I don't think there's anything to be said for allowing CDC to lose money. A business that is failing is not good for the shareholders, or for the people it's seeking to serve. The point I was making was that we have to think this through very thoroughly. One of the models would be to say that CDC should make a return sufficient to cover the cost of inflation. That's the first point I would make. The second point I would make, which I think I alluded to earlier, is that if CDC is successfully achieving what the shareholder wants it to do, if it is delivering the development results as well as the financial results, if it is powering ahead on this pro­poor private sector investment, and if it is being a success, I certainly would not rule out providing additional capital from the development budget in support of its work

Q209   Alison McGovern: Very briefly, coming back to Pauline's question, if we are debating economic growth versus poverty reduction, and you've indicated you want them to be demonstrating that it's possible to invest in the toughest possible areas, how are you going to measure success? I'm sure we'll get into this in further detail later, but I'd be interested in a brief response on whether you will measure the results by economic growth measures, or whether it will be MDG­style social measures of poverty reduction.

Andrew Mitchell: I probably wouldn't draw exactly the distinction that you have, perfectly fairly, drawn. Success, in financial terms, means meeting the targets that we have set for CDC overall. If you look at CDC's annual report last year, it is better at talking about the results in MDG terms, and other terms, that it is achieving. Clearly, the number of businesses that have been set up, the number of people who are employed, and, for example, the fact that CDC investments paid local taxes of I think $3 billion last year are all development outcomes. The successful paying of tax into the Exchequers of poor countries is something that the development budget seeks to facilitate through technical support and structures in a number of countries at the moment. All that is just as important as providing goods and services to very poor people, and also supplying jobs to poor people in very poor parts of the world. In terms of the development outcome, it's quite a wide spectrum, and the financial outcome, and the results and targets that we set, will be quite easy to evaluate.

Q210   Chair: One of the things that CDC said to us was that its strength was mobilising capital from other organisations—private and public. If you lower the risk threshold and you focus more on poverty, how will that affect its ability to attract capital from other quarters? If it does, is that a point of concern?

Andrew Mitchell: We don't wish it to cease altogether the fund of funds model. We want it to keep that particular golf club. We do, however, want to move away from that being the only way that it is doing development finance.

Q211   Chair: Which means you'll have to separate—

Andrew Mitchell: It will be for it to decide operationally how it organises that. We are not saying that that model has no place. What we are saying is that it is much too narrow a definition of the tradition and heritage and potential that CDC has.

Q212   Jeremy Lefroy: Secretary of State, you've talked about pro­poor investment, which is something that we'd all very much agree with. According to the World Bank, growth in agriculture seems, some people say, to be twice as effective at reducing poverty as other sectors. CDC traditionally had an emphasis on some large­scale agriculture projects, some of which are still going, even under other management. Would you see investment in the agriculture sector as one way in which CDC could go, given that it has only 5% of its investments there at the moment?

Andrew Mitchell: Yes, Mr Lefroy makes an extremely good point. Agriculture is an enormously important part of development. There's some extremely good work on food security going on in northern Uganda at the moment. Embedding food security, supporting the work of the World Food Programme—this is enormously important. Clearly, however, private sector investment in agriculture, which has declined overall in recent years, is incredibly important, and I would expect us to build that up. Which sectors CDC should be in going forward is a matter for consultation. Agriculture is clearly one. Energy, and particularly the clean energy sector, is another very obvious one. Infrastructure work, which CDC is already very involved in, is clearly highly relevant as well. We have to take quite a well-thought-through approach to this. I remember feeling that CDC investing in shopping malls in Accra sounded a rather strange investment for it to make. However, if that investment was part of a chain of activities that was encouraging people to come and shop for produce that was grown locally, or not so far away, it might well be that investing in shopping malls was a very good contribution to a wider approach on agricultural and food security. You have to take quite a wide view of this, but I absolutely agree with Mr Lefroy that investing in agriculture is something we should look at extremely closely.

Q213   Jeremy Lefroy: Just one quick follow­up on that. There seems to be a lot of large­scale investment in agriculture in sub­Saharan Africa at the moment, which consists of funds coming in and buying up tens of thousands of hectares almost speculatively. Given that situation, do you see a role for CDC to do this kind of thing, but in a very different way, and to set a different model from what some of us fear is a bit of a land grab at the moment?

Andrew Mitchell: Yes. Mr Lefroy identifies an activity that, if it is not transparent, can be very undermining. Clearly setting standards of transparency in investment, and trying to make sure that the chain and way in which the investment is made is done properly and in an open way, is extremely important work for CDC.

Q214   Richard Burden: In November, you suggested that CDC could have more of a role relating to climate initiatives. Can you say a little bit more about what you were getting at there, and, to use your analogy, which of the golf clubs you're going to use to achieve it?

Andrew Mitchell: One could imagine, across a whole range of activities, pro­poor, private sector investment that was encouraging the clean production of energy. That is something that CDC should be looking at. I think it was Bill Gates who pointed out that providing energy for very poor people, at every level, is one of the single greatest development interventions you can make. I would expect, from these consultations, to come a priority for energy production and investment in energy. Clearly, where we can, we should certainly be trying to ensure that that is a boost for clean technology in energy production.

Q215   Richard Burden: Have you got any sense, at this stage, of what that might look like—the kind of things in the development of, say, green technology or whatever, you would like CDC to get involved with? To some extent, that could be anything from looking at some of the grassroots issues, in terms of using waste products in villages and so on, which we've seen on some of our visits, right the way through to much bigger stuff. Do you have any sense of the kind of levers that CDC would be using in that investment, or will you be saying, "That's a priority area for CDC; now, CDC board, you go away and work out how you achieve it."

Andrew Mitchell: Mr Burden is inviting me to pick some winners in the sector, and I think I will resist his kind invitation on that. It is for CDC, with us, to determine which sectors it should be in, and then, having sent a signal that those are the sectors that it is interested in, to wait and see what propositions come to them, and evaluate them accordingly. Of course they should be more proactive than that in terms of co­investment and, later on, in direct investment, subject to the skills and capacity to do such deals, and also to respond to the instructions it is given by the shareholder.

Q216   Anas Sarwar: Going back to the IFC briefly, it has "addressing climate change" as one of its strategic priorities. Do you think the new CDC, or the new format of CDC, should have something similar, or should it just purely be about the economic impact?

Andrew Mitchell: I've no doubt at all that addressing climate change issues is a hugely important aspect of all the coalition Government's activities. We have made clear that we are putting nearly £3 billion into climate funds, not exceeding a total of 7.5% of the development budget. I have no doubt whatsoever that, as part of a revivified and revamped CDC, approaching the sort of investment that Mr Burden was addressing will be a key part of its activities.

Q217   Chair: Would that include helping developing countries that have a desperate need for electricity power to develop low­carbon, rather than fossil fuel­based—

  Andrew Mitchell: Absolutely.

Q218   Chair: Would that be part of the conversation between the Department and CDC, which I think is a little bit of what Richard Burden was asking? You say it's up to them to decide, but would you have an exchange of views? When it was giving evidence to us, the CDC team was saying, "Sometimes building a coal­fired power station delivers the power they need, and it's the cheapest, most effective way to do it." The counter for that is that it doesn't help the climate change agenda. Would you have a situation where the Department might actually have a conversation to try and get the right balance there?

Andrew Mitchell: We are considering that point. It arose, actually, during the purdah period at the general election, when we were asked whether or not we thought that a big coal­fired power station in South Africa should proceed. From memory, it was a World Bank project. At that stage, we decided that our advice was probably that Britain should abstain, and we made it very clear in opposition that we did not think, for example, that ECGD should be involved in promoting fossil fuel power generation. There is clearly a priority of trying to move away from that. It is inconsistent with our climate change aims and commitments. In the case of the South African power station, things had gone so far that I think abstention rather than opposition was the right position. As your question rightly implies, addressing these issues early on, having a presupposition in favour of clean fuel generation, seems to me to chime in absolutely with the Government's priorities.

Q219   Hugh Bayley: Overall DFID's strategy is to reduce the number of countries that you operate in so that you have more impact where you do have a presence. Should CDC be doing the same?

Andrew Mitchell: It would be sensible for CDC to focus on the areas that Britain and the British development programme are focusing on. I do not mean by that that they should be absolutely contiguous, and we will consult on this, but I start that consultation with the general view that CDC should be part of the British Government's development armoury for all the reasons I set out in my first answer. It should complement that work, and that, inevitably, means that it should be focused on the same areas that we are focused on.

Q220   Hugh Bayley: You've mentioned geography a couple of times, but I'm still not clear in which direction you think CDC should go. Should it be doing less in middle­income countries and more in the poorest countries?

Andrew Mitchell: We want to consult on that point, and we have not yet made a decision about that. We'll be very interested to hear the views of the Committee. We want to try and make sure that CDC is used, to the greatest possible extent, to help eradicate poverty and to assist poor people to lift themselves out of poverty. I don't think you can ignore the fact that 75% of the poor are, or will shortly be, living in middle­income countries. Therefore one of the options, for example, would be to try and ensure that, in a country such as India, CDC was working in the poorest areas. Then you have to make a judgment, in support of that, on how you would define that.

Q221   Hugh Bayley: You said a moment ago, Secretary of State, that CDC, rather than the Government, should determine which sectors it works in.

Andrew Mitchell: What I said was that we were consulting on that, and that the shareholder would decide what the parameters were. Within those parameters, CDC would obviously make the operational decisions.

Q222   Hugh Bayley: The question in my mind is this: development needs to be led by the developing country. Should CDC seek to align its investments with the priorities of the country in question? For instance, in Malawi, should it concentrate on infrastructure, if that's the Government's development priority, rather than other priorities that may appeal to the CDC board? How aligned should CDC's work be with the priorities of countries' Governments?

Andrew Mitchell: A balance has to be struck on that. For CDC to pay no regard whatsoever to the poverty reduction strategy of a Government—often one that has been agreed between the international community as well, in signing up for donor support—would be very surprising. It's a case really of making sure that a harmonious relationship exists to the best possible effect of both CDC and those we are trying to help. In general, I want to ensure that CDC has much closer relationships and closer contact with DFID's offices overseas, and it seems to me that that's entirely sensible. Bear in mind that aid is a means to an end, not an end in itself. As countries, hopefully, begin to graduate out of poverty. Inevitably there should be a much closer relationship between the development authorities and CDC in the pursuit of the common interest of promoting pro­poor investment.

Q223   Hugh Bayley: One last point. You say that CDC should be in the most difficult places relieving poverty, and you talk about broad alignment with DFID's priority countries. Given the emphasis that you place on working in conflict and post­conflict states, and the difficulty of investing commercially in such places, what kind of role would you see for CDC in the DRC, southern Sudan or Afghanistan, for example?

Andrew Mitchell: We will see the extent to which CDC is able, following all our consultations, to do just that. These are places where, as Mr Bayley mentions, private sector overseas investment—direct foreign investment—is largely absent. It may therefore be that with the approach of supplying patient capital, there is a clear demonstration effect of CDC's involvement with such countries, which would be hard and difficult, but greatly to the benefit of these more difficult countries that you mentioned. It is for us to work out, given the parameters within which CDC will be investing, the extent to which it is able to have an impact in some of the very difficult places that you and I have mentioned.

Q224   Mr McCann: Secretary of State, you started off with a golf bag analogy. Those of us who know a little bit about it—not a great deal—will remember that Lee Trevino, the great golfer, went round a very difficult golf course in Scotland with a nine iron and did better than most of us could with three sets of clubs. To continue that analogy, therefore, you've indicated that you would like CDC to use a range of different financial instruments. Two questions on that: could using too many financial instruments jeopardise CDC's niche status, or indeed jeopardise its reputation for expertise; and, secondly, what proportion of CDC investment should comprise equity finance?

Andrew Mitchell: On your last point, that is for discussion. We will see what comes out of the expert advice that we get and the other advice in the consultations. I suspect a larger proportion, but let us reflect on that and see what comes out of the consultation.

The aim of CDC should be to perform as well with all the clubs at its disposal, to go back to your analogy of the golf course, as it possibly can. It should show leadership, and example and demonstration, to others who are seeking to do the same thing. You've clearly got to have the expertise within CDC, and it is equally clear that CDC is going to need to take on additional expertise and additional specialists to enable it to accomplish the mission that we are evolving for it. Clearly the board may need to reflect those changes as well, and we're completely open to having a larger board. There are two new board members in the process of being appointed. The decision as to what businesses CDC is in will come from the new business plan. It will be up for the CDC management to make sure that they are able to staff that, and that there are the requisite expertise and skills within CDC to carry that out.

Q225   Mr McCann: I think you've already confirmed it from a question earlier, but if new functions are required for CDC as well as new expertise, in the right circumstance, would DFID consider financing those changes?

Andrew Mitchell: We will certainly consider that, yes.

  

Q226   Jeremy Lefroy: You've expressed a desire to see CDC regain its power to make investments directly in target markets. There are a number of questions that arise out of that. If it does have this power, it will inevitably need greater in­house expertise, or be able to access expertise, in order to make those investments. Secondly, would it then come into conflict or competition with the fund managers through which it invests other funds?

Andrew Mitchell: The point I was making to Mr McCann is that once the board and the shareholder have agreed the tasks that they're going to undertake and carry out, it will be for the board to make sure that there are the requisite skills. I've no doubt at all that it will need to hire additional skills in order to carry out the mandate. I'm quite clear about that. In respect of your second question, I don't really see them coming into conflict here. It is a case of making sure that you use the right approach. These are financial and development skills. You use the right approach to make a successful investment in the sector that you've identified.

Q227   Jeremy Lefroy: Why do you think it is important to have the ability to make direct investments, other than it being simply another golf club?

Andrew Mitchell: Because I think that, in pursuing the mission of making pro­poor private sector investment, when you're looking at achieving a set of development aims, in whichever sector it is, there might well be a role for direct investment. I fully accept that for now, given the skill base at CDC, it is likely to be co­investment. I hope that the private sector department in DFID, along with other bodies, can help CDC to recognise the opportunities that exist for co­investment, and encourage it to take them.

Q228   Jeremy Lefroy: And would you see, for instance, the ability to co­invest alongside perhaps non­traditional investment partners, such as co-operatives, as one of those advantages that might be not available to investment funds?

Andrew Mitchell: Subject to that being consistent with the agreed criteria on which CDC is investing, yes.

Q229   Jeremy Lefroy: I just want to raise one other issue. As you're probably aware, DFID is one of the main funders of a programme called the Africa Enterprise Challenge Fund. I have to declare an interest here, having been involved in one or two of the projects. It is, in my view, a very good fund. What happens, though, is that it enables private sector companies to start up in areas and businesses when they otherwise wouldn't have been able to do that. It seems to me that we are rather missing a trick here, and that perhaps the taxpayer could take some kind of equity stake in those funds, which are sponsored by DFID—at the moment they're just given away as grants. They could then be brought under the umbrella of CDC to be managed. I wondered what your view of that might be, as a possible way of doing some of this patient capital investing that is actually going under the umbrella of DFID at the moment, in the form of grants, but bringing it as an equity stake under CDC.

Andrew Mitchell: It sounds a most interesting and sensible idea, and I will ensure that the new private sector department considers it very quickly. It sounds a very good idea.

Q230   Richard Burden: May I pursue this same line of questioning about the new model of CDC and what its impact on the ground can be? One of the things about its current model—being a fund of funds—that it has emphasised to us is that it means that the vast majority of its fund managers are local. The point is sometimes made that even if there are good reasons for moving towards a direct investment model, the danger, or one of the downsides, of that is that you could lose a great deal of that local expertise. Therefore you would lose the sensitivity to the very things that you're trying to be more sensitive to. How do you think, in practical terms, as the shareholder, you could direct CDC under the new model to make sure that it does have sufficient local knowledge on the ground? Some of that is covered by your answer to Jeremy Lefroy, but I wondered if you had any further thoughts on it.

Andrew Mitchell: There are a number of ways. First of all, it's one of the reasons why I want to see a much closer relationship between CDC on the ground and the expertise that exists in DFID's offices. When I was in India recently, I was able to make sure that some of these private sector initiatives and discussions started to take place. The officials involved in this have responded extremely well to that. There needs to be more cross­fertilisation, bearing in mind always that CDC has a total strength of something like 50 at the moment, so it does not have much spread around the world. In terms of activities in­country, where there is the possibility of what you described happening, good relations and a good understanding of what we are trying to achieve should do a great deal to blunt that. I emphasise that the additional freedoms that we want to give to take forward our drive to get more pro­poor private sector investment is CDC­plus, not CDC­minus. I see it as an opportunity, and not a trap, in the way that you suggest it possibly could be.

Q231   Richard Burden: Could you see it maybe directly buying out some of the funds that it is a fund of at the moment to give itself more reach on the ground?

Andrew Mitchell: It would need to have a good, sound commercial reason for doing so that met our requirements in terms of looking after the interests of the British taxpayer, and looking after the interests of pro­poor development.

Q232   Richard Burden: But there wouldn't be any objection in principle to it doing that, if it met those criteria?

Andrew Mitchell: I'm not sure if you're making a wider point, Mr Burden, about whether or not some of the funds should be churned, as it were, to greater advantage by spending that money in a different way. That would be a commercial decision that the managers of CDC would need to satisfy themselves fulfilled my earlier two criteria.

Q233   Richard Burden: Okay. Again, I suppose this will mirror some of the questions that Jeremy Lefroy put to you. At the moment, CDC is generating pretty substantial profits and has been doing for some time. It is self­financing. Do you see that CDC itself, and would you encourage it, could set up a number of not­for­loss, if I can put it that way—not for profit, but also not for loss—development funds that could focus on specific areas? Is that the model of patient investment that you're talking about, or could it be?

Andrew Mitchell: I certainly wouldn't wish to rule it out.

Q234   Hugh Bayley: My question has, in truth, only the most tenuous relationship with this inquiry, but the Chair agreed to indulge me. The last CHOGM recognised that the Commonwealth has really lost focus and direction, and it set up the Eminent Persons Group to reassess what, uniquely, the Commonwealth could bring to its members. The CPA UK branch put in evidence, with a number of proposals in the field of human rights, the rule of law and governance. It also made a proposal that the Commonwealth should establish a development fund—a stand­aside development fund, rather like a smaller version of the UNDP. The idea was that you might then, through British leadership in making contributions, be able to generate greater contributions from Australia, New Zealand and Canada. You might be able to develop a relationship with emerging donors, such as India and South Africa, and share expertise and experience, and you could also demonstrate to the poorer Commonwealth countries one of the benefits of being a member of the club. If such a body was set up, I think it should be separately managed from the Commonwealth Secretariat, because it doesn't really have a track record in this field. I'm not suggesting that it should be managed by CDC, but here is an example of a body that was initially established as a Commonwealth fund and separately managed. Does DFID have any interest in trying to strengthen a Commonwealth front on development? Are there any lessons that could be learned from CDC's experience that might be applied to creating such a Commonwealth development fund? Perhaps you've not thought much about it, but if so, would you be willing to think through the idea of it?

Andrew Mitchell: I've no doubt that Mr Bayley will ensure that it's included in the report from the Select Committee, not least because his emphasis on the Commonwealth, of course, fits with the first letter "C" of CDC's name. The Foreign Secretary and I have both made it clear that we'd like to see the British Government doing more with the Commonwealth and building up our links. This is a remarkable north­south family that has huge potential, which we think should be embraced and built on. Certainly that underlines a development angle to that. Of course, we've been looking at the Commonwealth Secretariat as part of the Multilateral Aid Review. It is one of the 43 agencies we've been looking at. We will be coming to some conclusions shortly about what we should do in respect of that funding, whether it's delivering what we want, and whether it could be changed to deliver more effectively. It is well worth considering Mr Bayley's comments in that connection. The only rider that I would make, on the other side of the balance sheet, is that anyone who looks at the development architecture realises that there are a huge number of different organisations doing quite similar things. Therefore, one would need to be clear that this would have a unique benefit in terms of the results it would secure for poor people, and wouldn't just be duplicating and not delivering any real benefit for its arrival as a new fund on the development scene.

Q235   Alison McGovern: We've been talking around the issue of the arm's length nature of CDC and the Government being its shareholder. Perhaps you might say explicitly how independent you think CDC should remain in the future, and how much oversight you're going to have of CDC in the future. Is there a possible world where you have a seat on the board? Connected with that, you've mentioned several times DFID's new private sector development department. What will the relationship be between CDC and that team within your Department?

Andrew Mitchell: First of all, the relationship between the private sector development department and CDC will be much closer than it has been in the past. I want to see the cross­fertilisation of ideas and, indeed, quite possibly people—looking forward some way. I want to ensure that, as the shareholder, we exercise the right and proper role of a shareholder, but we don't get involved in operational decisions. As I think I said earlier on, it is not for Ministers and civil servants to make operational decisions and pick winners. That is for CDC to do, and it has a board to manage all its operations and activities. It has the direction set by the shareholder, and then it gets on and implements that direction and strategy. We should be very clear about that. I do not want a seat on the board. I am involved in the appointment of board members, and I intend to ensure that the board accurately reflects the development DNA we wish to see in the CDC, and the financial skills DNA. That would be the extent of my involvement as a shareholder, however. It is then for the board to come up with a strategy, which the shareholder will approve, and then to go ahead and implement it.

Q236   Richard Harrington: Secretary of State, on the thorny subject of remuneration levels, which I'm sure you'd rather not talk about because it's been overdone and it's dull, just a short question. As you might be aware, we had in front of this Committee the Chairman and Chief Executive, and there were some questions. Everyone's read Private Eye and all this sort of thing, but trying to keep away from that, can I ask about the real basis on which you think staff should be remunerated in an organisation like CDC? They told us that it was benchmarked against a City standard—the fund of funds industry. I'm not sure I can quite go with the comparables in terms of accountability and everything, but do you feel that's the right benchmark, or do you think there should be another way that CDC—or, in fact, all active investment staff—should be remunerated? Also, could you comment on how that could be adjusted? Obviously some of the remuneration surely should be for other things, such as development impact and part of DFID's general cause, rather than specific investment criteria.

Andrew Mitchell: It's a very important area, and we've given some thought to this. One of the four studies that we have commissioned is on the issue of remuneration. Let me be clear: we need to be able to recruit, motivate and retain very high­quality people to administer and run CDC. We should be in no doubt about that. However, I feel that we are missing out by not tapping into two very specific groups of people who could make a massive contribution to CDC. The first is that there are people who—I confess to having spent some time in the City myself—have made a great deal of money in the City and are very experienced, but perhaps a little bit older. They have reached a stage in their life when they would like to put something back. They might wish to get off the production line deal flow in the City, put something back, and do something really inspiring and useful. I believe that what CDC should be doing is inspiring and incredibly important. It is to be the jewel in the crown of Britain's pro­poor private sector investment effort. It is a fantastic opportunity going forward for CDC, for all the reasons we've been discussing this afternoon: what it can achieve; and what, for the first time, our generation can achieve, which has not been possible for any before. I believe that such people will be motivated by the mission and will have enthusiasm for making a real contribution, and they will not require enormous telephone­number salaries. You then couple that with the other group, on which members of the Committee may share my view from what they see in their own constituencies. There are groups of young people who perhaps go into the City and are not motivated by the desire to do the next deal and to get on the production line. They want to leave their own footprint in the sand and to make a real mark by getting involved in something as important, rewarding and fulfilling as the development aims of CDC. With the right leadership, we can harness the skills of those two groups, and attract them without having to pay these extraordinarily large salaries.

May I just add two riders to that? The first is that we are looking carefully at the remuneration structures of the other DFIs. For example, the head of the French version of CDC is, I think, paid €200,000 per year, which is about £160,000. The average across the DFIs in Europe is no more than €300,000. The remuneration should be proper to recruit, retain and motivate, as I say, but legitimate questions have been raised about some of the remuneration at CDC, and those questions need to be addressed.

Q237   Richard Harrington: I must say I find your answer truly inspirational—I really do—but it's very different from what we were told by the incumbents in the position now.

Andrew Mitchell: We are moving to a new system. People have contracts, and those contracts must, of course, be honoured, but I am trying to set out a different vision for CDC that I think has the ability to catch people's imagination.

Richard Harrington: A public service vision, absolutely.

Q238   Chair: To be fair, Secretary of State, we had evidence from other quarters that such people did exist.

Andrew Mitchell: Did you not have, Chair, Tom Cairnes in front of this Committee? I've met Tom Cairnes in Sierra Leone, and I've seen what he is seeking to do. I've seen the results of what he's doing: employing 800 people and contributing, I think, $750,000 of tax revenue in Sierra Leone in the last year. He is an inspiration to other youngsters, who can see what he has done, and see the mark that he has left in the sand. I think there are many others out there, who, given the opportunity, would respond to that challenge?

Q239   Alison McGovern: Like Richard said, I think you talk a good talk, but we just had a discussion in which I asked you about how DFID would have a relationship with CDC. You said you were quite clear that operational decisions would not be a matter for you. Are we going to come back to this issue in a couple of years' time, once bankers' bonuses are a little bit less on the agenda and the economy has moved on, perhaps, and find that we've still got excessively high levels of pay? Will you then say to us, "It's for the board of CDC to decide that"? How active a shareholder do you intend to be on the issue of remuneration? To be clear, there were lots of questions asked in our evidence session with the Chair and Chief Executive, and I think there was a level of dissatisfaction with the answers that we got. They didn't seem to be able to make clear information available to us, and I'd just like to know, as a shareholder, how active do you think you can be over the issue of remuneration?

Andrew Mitchell: We have commissioned an independent report on remuneration to help to inform us, and we will then agree those parameters with the board, and the board will get on and implement them. As for the future, I would not relish returning in two years' time and giving such an answer under forensic examination from the honourable Lady.

Chair: I think you can see where the Committee's coming from, Secretary of State.

Q240   Mr McCann: I have a question on ODA. CDC net equity investments are eligible to be counted as ODA which, as we know, should have a demonstrable development impact. How do you intend to ensure that the new remodelled, reshaped CDC can have that demonstrable impact?

Andrew Mitchell: Everything I've said about the new directions of CDC is absolutely consistent with the OECD-DAC rules governing ODA. There is no intention of straying outside those in CDC's remit.

Q241   Mr McCann: Regarding your governance of that and the whole transparency agenda, which you've been very keen on, would you intend to put different mechanisms in place in terms of your share total position? I realise that you've said on several occasions that you don't want to micromanage CDC, but would you intend to put other mechanisms in place to ensure that what you were asking for was being delivered upon?

Andrew Mitchell: There is no intention of allowing CDC to stray outside the ODA rules that govern its current investments. I can't see any circumstances in which that would change.

Q242   Chair: In your opening answer, Secretary of State, you talked about the history of CDC: how the Government tried to privatise it and then effectively privatised the fund manager while retaining CDC itself in public ownership, with the Government as its only shareholder. However, you still retain a 40% shareholding in Actis. Is there a future for that? Is there any advantage in that? Is it under review? Should you retain it?

Andrew Mitchell: This is an interesting and sorry saga. There is no strategic reason for us to retain that shareholding. Clearly, if we can realise proper value for it, in the interests of the taxpayer, we should do so. I very much fear that when Ministers made the decision to spin Actis out of CDC, they did not appear to have fully understood the new arrangements that they agreed. You will recall, Chair, that some 60% of Actis was sold for—from memory—around £373,000. While the taxpayer owns 40% of this business, the taxpayer also owns 80% of the profits.

It may be helpful to the Committee if I underline what the revenue arrangements are for Actis. This is a management company that has approximately $5 billion under management, which attracts a 2% management fee, which is $100 million per annum. As it has made clear in its documents, there is a 20% uplift from the carry for the investments that they make. That means that, for the period of the fund, the company estimates that it will double that $5 billion, and a 20% carry means that $1 billion dollars of revenue will accrue to the company and the partners. That is a very substantial amount of revenue, which would in turn yield a very substantial amount of profit. It seems to me that the taxpayer is entitled to some of this.

Actis was created on a private sector model. It is extremely successful. It has invested its capital very well. Its existing management, many of whom came out of CDC, are doing phenomenally well and, in my view, they out­negotiated the then Government. We have a situation where the taxpayer, as a shareholder, is entitled to 80% of the profits,[1] but the business is being run in such a way as to ensure that taxpayers and the Government receive nothing whatsoever from that. This deal is particularly shameful, Chair, given the level of taxpayer contribution, the legacy of capital to get it started—some 44% of its capital came from CDC—its legacy in terms of people, and also the history of Government involvement.

In answering your question about what we should do about this 40% holding, the question is: what are the board members of Actis prepared to pay the taxpayer for 40% of a very successful business? I have to say that I am amazed and surprised at the way the management of Actis have so enthusiastically exploited the taxpayer's position using aid and funding directed by the British taxpayer to help the poorest in the world. It remains to be seen whether they will recognise and rectify this shameful position in any future discussions.

Q243   Chair: That's a very forthright exposition, but presumably what you're really saying is that that 40% is open to negotiation, and you're setting out the terms?

Andrew Mitchell: I'm saying that I see no strategic advantage in maintaining that shareholding, but I'm obviously intent on making sure that the taxpayer gets a proper deal in any sale.

Q244   Chair: After all, if you're changing the structure of CDC, there's no particular reason for any fund manager or fund holders to be publicly owned. They're partners. They're out there.

Andrew Mitchell: Indeed.

Chair: That would normally be the case.

Q245   Anas Sarwar: Let me just pick up on that point. I thank the Secretary of State for that answer, which was almost like a written statement to the Committee. Are there any other shareholdings that the Secretary of State may have concerns about, other than Actis?

Andrew Mitchell: We don't own any shares in Aureos, which is the other principal vehicle spun out of CDC. Actis is in a unique position. Aureos deals with much smaller investment, and Actis, of course, is the vehicle through which a large amount of capital from CDC has been invested in private equity. We should be clear that, in terms of the performance of the company, it has done very well, in terms of the assets under management. My comments are focused on the value of the management company, not the underlying investments, where the taxpayer is a 40% shareholder, entitled to 80% of the profit, but the taxpayer has not received one farthing from that investment.

Q246   Chair: Just related to that, it also takes us back to the remuneration point. You've answered it quite clearly in relation to CDC. However, clearly, to the extent it remains a fund of funds, one could get into a situation where the management of CDC are exactly the people who we all hope will be recruited into it, but they are then contracting with funds for which they might be significantly the biggest player. They won't necessarily have the same control over the remuneration of those fundholders, so it still could create ripples of embarrassment, could it not? It could even create an odd situation where the guys who are driving it are earning modest salaries, but the people they're working with are earning substantially more.

Andrew Mitchell: We must make clear that CDC is at one remove of Actis. My comments are directed at the arrangements with Actis, and the board and management of Actis. Actis is a unique arrangement for CDC, so were we to sell our shareholding in Actis, that specific problem would be removed.

Q247   Jeremy Lefroy: Secretary of State, could I just pick you up on one thing? You said that Actis seemed to find ways of ensuring that the taxpayer got nothing, or pretty much nothing—

Andrew Mitchell: As a shareholder.

Jeremy Lefroy: As a shareholder. Could you perhaps elaborate?

Andrew Mitchell: Yes, because the business is run in such a way that no profit is declared. The shareholder would be entitled, through dividends, to a share in the profit, and there have been no profits declared in this business at all, because that is the way the business is run. Indeed, I believe I'm right in saying that, a short while ago, Actis set up its own philanthropy and charitable division so that any profits that were placed in there would, again, not come to us—the taxpayers—as a shareholder. I think that that is an inappropriate, and as I said in my remarks a moment ago, a shameful deal that needs to be rectified.

Q248   Jeremy Lefroy: Which I entirely endorse, but we are 40% shareholders, and even though it's a minority, a 40% shareholding is often one that one can use to make a lot of noise. Given that, what noise has been made by yourself and your predecessors to try and rectify this shameful position?

Andrew Mitchell: That is true, and I should be quite clear that Actis has not done anything illegal. This is a deal made when Actis was spun out of CDC under which the new management have done incredibly well, and the taxpayer has done incredibly badly, as subsequent events have shown.

Q249   Jeremy Lefroy: Was that on the basis of an agreement at the time between the shareholder, the Government and—

Andrew Mitchell: I was not a Minister at the time. It seems to me that the advice that was given, with hindsight, was clearly sub­optimal.

Q250   Jeremy Lefroy: But there is nothing that can be done at this moment to rectify it by yourself as the shareholder.

Andrew Mitchell: We have appointed advisors. We are in discussions about this, and we will see what transpires from those discussions.

Chair: Maybe at some point we should talk to Actis.

Q251   Mr McCann: The Secretary of State suggested that the advice that was received at the time that was sub­optimal. I'm sure there are plenty of examples in history when we can point to that taking place, but have you carried out an investigation about what advice was given at the time before the decision was made to make the original investment?

Andrew Mitchell: I can ask officials for details. This involves details, advice, and advisors appointed under a previous Administration, and there are strict rules governing that. I have laid the facts before the Committee this afternoon, and explained how we have got into this position and what I am doing, in answer to the Chair's question, to try and address the issue of this 40% shareholding.

Mr McCann: Chair, can I ask your advice here? The Secretary of State has given us information, but I don't know all the facts behind it. I was just wondering how we would be able to get into that detail if we chose, or, indeed, thought it was wise to do so.

Chair: We can ask the Department, presumably, for previous advice. I think we should consult among ourselves. First of all I would say that we should appreciate that the Secretary of State has been very forthright and very clear, and it's very helpful to the Committee.

Q252   Richard Burden: I imagine this is something that we'll look into further. However, so that I can completely understand what you're saying, obviously you raise very major questions about the kind of discussions and arrangements that were put in place at the time of the spinning off. You've also talked about the setting up of this charitable and philanthropic arm, if I understood you correctly, almost as a ruse not to declare a profit. When was that set up? Was it at the same time, or subsequently, and is it, in your view, simply a ruse, or is it a charitable and philanthropic arm—something that is actually doing charitable and philanthropic things? If so, what sort of things?

Andrew Mitchell: The Committee will have to draw its own conclusions. I merely make the point that nothing has been paid to the 40% shareholder: the taxpayer from this business. The Committee will draw its own conclusions about what I have said about that.

Q253   Richard Burden: When was the charitable arm set up?

Andrew Mitchell: I'm not able to answer that question, but I'm sure I can find out for you, if that would be helpful.

Q254   Chair: I think we should move on. We've had a useful interchange. It was very instructive and this is a matter of concern, so I think the Committee will want to discuss it further, but it's a very clear point. It's not original, in the sense that we know that concerns have been expressed in the past about what happened, but it's important that we understand the current situation. More to the point—this is Jeremy Lefroy's question—what could be done about it? Frankly, from the Committee's point of view, there's much more value in trying to ensure that the matter is resolved in a fair and satisfactory way. If we can do nothing about it, recriminations don't take us anywhere. What does take us somewhere is the ability to move forward.

Andrew Mitchell: That is exactly the right approach, but to make sure that a fair settlement is achieved, it's important to recognise what the scale of the success of this business, in which the taxpayer is a 40% shareholder, has been, and to see that reflected in any potential sale.

Chair: You've made very clear your take on that, and I appreciate it.

Q255   Richard Harrington: When you took office, one of the significant public announcements you made was that you hoped to increase significantly transparency in our aid efforts, which you stated, to us and elsewhere, was absolutely very important. Obviously we support this. Given the fact that there are, in this case with CDC, a lot of commercial deals negotiated with commercial confidentiality, to what extent can we hope for more transparency in CDC's activities?

Andrew Mitchell: Mr Harrington is right to underline the importance that we place on transparency. We published the transparency guarantee, in the very early days of the coalition Government, for the Department. Indeed, on the website ConservativeHome, it was, I think, the second most popular policy of the coalition for a period of time. There's a balance to be struck between normal commercial confidentiality and transparency. We will make it very clear that we want to see as much transparency as possible introduced, but equally we must respect the fact that, in certain circumstances, commercial confidentiality will be important, and we must make sure we get that balance right.

Q256   Anas Sarwar: By number, 80% of all CDC's investments are domiciled in tax havens. Is it appropriate for CDC to invest in jurisdictions that operate preferential tax regimes for non­resident companies?

Andrew Mitchell: The whole issue of intermediate jurisdictions, but in particular of preferential tax regimes, is currently under discussion in the Government. It is, though, of course, a Treasury lead—I should be clear about that—and the discussions are ongoing. In terms of an intermediate jurisdiction, it is perfectly sensible—this is the heart of the private equity model—that there should be a tax­neutral location in which funds from different countries can locate. Of course they pay tax in their own countries when the funds are realised. I don't think there's an issue or a problem in that sort of "aircraft carrier" approach to intermediate jurisdictions. The point that we have made in the past is the importance of transparency. That is what governs the White List that is being produced on jurisdictions. As far as preferential jurisdictions are concerned, we are consulting. This is a highly complex area. We want to make it clear that we think transparency is incredibly important. The Treasury is in the lead, and the Government are considering what their position should be on that.

Q257   Anas Sarwar: UK taxpayers are increasing the aid budget, and DFID is rightly focusing on value for money while at the same time allowing CDC potentially to shift millions of pounds in tax revenues to tax havens. Do you accept that that is a false economy?

Andrew Mitchell: We're looking very carefully at the rules governing what CDC does. This is a very complex area. CDC, of course, pays an enormous amount of tax, and CDC will adopt the best practice on this, when we've come to a conclusion, in what is a very difficult area, on what that best practice is.

Q258   Anas Sarwar: Just a final point: does CDC in its current format do country­by­country reporting of what it does, what it spends, and what tax it pays in each country it operates in?

Andrew Mitchell: I don't think it does at the moment, but this specific point is under active consideration by the OECD, and we will wait for the conclusions that it comes to before considering what further steps we can take on that. Norfund has been very clear and has been in the lead in this area. I should just mention that it has found that tightening the rules as much as it has has restricted its ability to attract third­party funding, and also in some circumstances restricted its ability to invest in Africa. I merely want to underline the complexity of this area, but the Government are determined, through a Treasury lead, to try and get it right.

Q259   Anas Sarwar: Even if this country­by­country reporting wasn't published to the public, do you think it's something that it perhaps should do to DFID in the short term?

Andrew Mitchell: Do I think—

Anas Sarwar: Do you think it should at least make that information available to yourself as the Secretary of State in the short term?

Andrew Mitchell: The country­by­country reporting?

Anas Sarwar: Yes, until you have clarified a position about whether we want that to be a public disclosure?

Andrew Mitchell: I'm not sure whether we would, in any event, be in a position to do that, but if it would be helpful, I will write to the Committee on that point.

Chair: That would be helpful.

Q260   Hugh Bayley: There are many very poor countries that lose more through capital flight than they gain through aid. Isn't there something contradictory when a wholly owned British Government aid agency is using the same techniques to minimise tax burden that are so attractive to owners of capital in developing countries? Although it is right that the Treasury should take the lead in developing the UK's fiscal and business attitude to offshore tax havens, it doesn't necessarily make sense for DFID to follow that lead.

Andrew Mitchell: We are one Government and collective responsibility is obviously a cornerstone of that. I'm not sure I would accept the opening premise of your question, except to say that of course you are quite right that the flows of investment, and indeed remittancing, dwarfs the flows of aid across the international exchanges. On all these matters, we are engaged in consultation, and I hope that—partly because it is so complex—we will be able to make progress and publish our views before too long.

Q261   Hugh Bayley: I accept that government is joined up and needs to be joined up. However, wouldn't it make sense for your Department to have the same policy on commercial returns, even for an organisation like CDC, as the Department for Business might have when looking at international business deals with which the Government become involved? If one could persuade rich people in poor countries to retain more of their capital in their own country, instead of tucking it safely away in a fund abroad, there would be less need for foreign donors to provide capital for enterprises in those countries. Surely your Department should be advocating a "lead by example" from agencies that it owns.

Andrew Mitchell: Mr Bayley makes an interesting point, and it is certainly true that the cause of transparency is championed by my Department vigorously. Sunlight is the best disinfectant, and transparency relates very directly to the issues that we are discussing. I invite the Committee to await the Government's considered view of what, as I say, is a very complex area of current discussion.

Chair: Our report will reflect some of this anyway, because we have had evidence.

Q262   Jeremy Lefroy: Just very briefly on that, is it in fact one of the reasons why having just that single golf club of fund of funds is problematic? Fund of funds tends to invest through, as you say, level playing field tax jurisdictions, which are often offshore centres. If CDC were to be able to invest directly, or to offer loans and guarantees, that would not require this to be the case, as I understand it. It wouldn't have to do that through—

Andrew Mitchell: That is absolutely true. It goes with the model, as I say, of private equity investment.

Q263   Mr McCann: Just a final point, from our perspective, on the investment side and tax havens. You use a lot of hyperbole, Secretary of State, about Actis. Would you understand and accept that a lot of people would also regard it as shameful that CDC investments and moneys were held in tax havens, and people in this country, rightly, want to see those issues remedied as well?

Andrew Mitchell: Mr McCann makes the point about transparency in this area and people being clear, because it is so very complex—I've used the example of Norfund to show that this isn't an easy issue. I understand entirely what he is saying, but I must rest today on the fact that the Government are looking very seriously at all these issues, and so, after all, is the OECD. The OECD and the EU have made it clear that they're trying to make sure that there is much greater commonality between people in the approach on these matters. I hope that we're going to see progress before too long in that respect.

Q264   Chair: I'm certain that when we write our report, because we've heard not only your evidence, but evidence from other sources and also the board of CDC's response, that we will want both to report that and, no doubt, to make a Committee comment on it. I think that that will be part of the conclusions.

As CDC moves into a different mix, I think we were told the staff of CDC is currently 47, and that 61 out of its 70 fundholders are local—in other words, they are outside the UK. I think that's over 2,000 people who are effectively attributable to CDC. That's a resource; it is also a liability. As it changes, will there be capacity to rebalance CDC? The two issues are to expand the staff—if they're going to do more direct investment, it would seem to be necessary—and also to ensure that we have the same kind of local expertise. Just for clarification, I take it that the staffing levels or constraints on the Department would, by definition, not apply to CDC, as it's a corporation, effectively, outside Government. It would seem to me that its staffing would need to change quite radically—as radically as the mix changes.

Andrew Mitchell: That is exactly right. First of all, we will complete the consultations and consider what the new enhanced role for CDC going forward is. Then we will agree a strategy, which I hope will take place as early as May this year, with the board. It will then be for the board to implement that strategy and to make the judgments about the skill sets it is required to hire. How it goes about that will then be an operational matter for it.

Q265   Chair: In its previous incarnation, if one goes back 30 or 40 years—at that time, of course, they were civil servants; now they would not be—there were significant numbers of staff distributed around the world working directly for CDC's predecessor. That is correct, is it not?

Andrew Mitchell: Yes.

Q266   Chair: While I'm not suggesting anybody would want to go back to that model, we are likely to see CDC having directly employed staff in country. This rather brings into sharp focus the need for close working with the country offices of DFID, because clearly they would be visibly British aid activists on the ground, albeit doing something different.

Andrew Mitchell: Yes. The model will demonstrate what is required from the management of CDC, but we are moving to a new position. The position I described at the beginning, where in 1997 CDC was a failing DFI, has moved right the way over now to where it is financially extremely successful, but has lost a lot of its developmental capacity. Now if we are to put it back in the middle, where it has both developmental DNA and financially strong DNA to deliver on its mission, I think that we can do that. The consultations are going well. There are plenty of grounds for believing that, at the end of this process, we will have a very clear plan for CDC, and I think that it has every confidence that it will be able to expand its skill base and its work to deliver on that.

Q267   Chair: The Committee will be very eager to engage with the Department on that quite exciting change. It would be fair to put on record—I think you have, by implication—that the previous Government succeeded in taking a failing organisation and making it a very successful fund of funds. That's not in dispute. Clearly what is in dispute is some of the arrangements that were entered into to determine it, and whether or not that is a good enough model for the future. Clearly your judgment is that it's not, and you want to build on it, diversify it and change it. The Committee will be very anxious—we've had some quite useful exchanges of evidence, and we'll probably have quite lively discussions as a Committee—to come up with a report that, I hope, can make some interesting and constructive recommendations that might help the process. That would certainly be our intention. I'm not suggesting that you will agree with everything we say, or vice versa, but I would imagine it will be constructive and lively. We've had some quite useful inputs, and it's made us think a bit, too, about where it might go. Thank you very much indeed for coming along again and giving us your views on this.

Andrew Mitchell: Thank you and your Committee, Chair. We are very anxious to have the benefit of the report on CDC from the Committee. I've seen most of the evidence that you have received, and certainly as part of our plans going forward for CDC, we intend to attach great weight to the expertise assembled here and the report that you produce.

Chair: Okay. Thank you very much indeed.

Andrew Mitchell: Thank you.

---

1   Being a share of the residual profits made by the Actis LLP after other allocations to partners have been made. Back

---

Prepared 3 March 2011