Examination of Witness (Question Numbers
Rt Hon Andrew Mitchell MP
18 January 2011
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 envisagenot 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
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
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 povertyand to enable
them to lift themselves out of povertyis economic growth.
It is jobs; it is private sector development; it is wealth creationthat
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 vehicleit is a
vehiclefor 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
usit seems to methat 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 clubthe 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.
Sorry to interrupt you. You say, "CDC has hobbled".
Was it CDC, or was it the Government?
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.
The World Bank?
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
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 detailboth 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 CDCits roots and traditions over many yearshas
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 capitalcapital that does not require
the same returns as the markets often dois, in my view,
the unique niche that CDC should be bringing to the development
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?
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
Q198 Anas Sarwar:
As part of that process, is there a consultation taking place
with the IFCdirect 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?
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 spokesmanmore than
a year agobecause 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
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 betterand CDC is betterat 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
Richard Harrington: We've
seen that. Thank you.
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?
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 CDCsometimes 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?
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
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.
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?
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?
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.
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?
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
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"
placesto get the easy returnswhich 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
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 conclusionagain it's something
that we're consulting widely aboutis 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 financeI fully understand how all those
points connectthat 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?
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
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.
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.
One of the things that CDC said to us was that its strength was
mobilising capital from other organisationsprivate 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?
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
Which means you'll have to separate
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?
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 Programmethis 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?
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?
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
likethe 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."
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?
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.
Would that include helping developing countries that have a desperate
need for electricity power to develop lowcarbon, rather
than fossil fuelbased
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?
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?
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
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.
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?
A balance has to be struck on that. For CDC to pay no regard
whatsoever to the poverty reduction strategy of a Governmentoften
one that has been agreed between the international community as
well, in signing up for donor supportwould 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
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,
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 investmentdirect
foreign investmentis 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 itnot a great dealwill
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
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
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?
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?
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?
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 DFIDat 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
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 modelbeing a fund of fundsthat
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.
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
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
Q232 Richard Burden: But
there wouldn't be any objection in principle to it doing that,
if it met those criteria?
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 waynot for profit, but also not for
lossdevelopment funds that could focus on specific areas?
Is that the model of patient investment that you're talking about,
or could it be?
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 funda 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?
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
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 peoplelooking 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 standardthe 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 CDCor, in fact, all active investment staffshould
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.
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 whoI confess to having
spent some time in the City myselfhave 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 inspirationalI really
dobut it's very different from what we were told by the
incumbents in the position now.
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.
To be fair, Secretary of State, we had evidence from other quarters
that such people did exist.
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?
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
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?
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
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.
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?
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 forfrom
memoryaround £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,
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 startedsome
44% of its capital came from CDCits 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.
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?
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.
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.
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?
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
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.
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
As a shareholder.
Jeremy Lefroy: As a shareholder.
Could you perhaps elaborate?
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 usthe taxpayersas 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
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
Q249 Jeremy Lefroy:
Was that on the basis of an agreement at the time between the
shareholder, the Government and
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.
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
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 armsomething
that is actually doing charitable and philanthropic things? If
so, what sort of things?
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?
I'm not able to answer that question, but I'm sure I can find
out for you, if that would be helpful.
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 pointthis is Jeremy Lefroy's questionwhat
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.
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
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?
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?
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 leadI
should be clear about thatand the discussions are ongoing.
In terms of an intermediate jurisdiction, it is perfectly sensiblethis
is the heart of the private equity modelthat 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?
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?
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?
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?
The countrybycountry reporting?
Anas Sarwar: Yes, until
you have clarified a position about whether we want that to be
a public disclosure?
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.
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
thatpartly because it is so complexwe 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.
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
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?
Mr McCann makes the point about transparency in this area and
people being clear, because it is so very complexI'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.
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 localin 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 staffif they're going to do
more direct investment, it would seem to be necessaryand
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
radicallyas radically as the mix changes.
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.
In its previous incarnation, if one goes back 30 or 40 yearsat
that time, of course, they were civil servants; now they would
not bethere were significant numbers of staff distributed
around the world working directly for CDC's predecessor. That
is correct, is it not?
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.
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.
The Committee will be very eager to engage with the Department
on that quite exciting change. It would be fair to put on recordI
think you have, by implicationthat 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 anxiouswe've had some quite useful exchanges
of evidence, and we'll probably have quite lively discussions
as a Committeeto 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.
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
Chair: Okay. Thank you
very much indeed.
1 Being a share of the residual profits made by the
Actis LLP after other allocations to partners have been made. Back