The future of CDC - International Development Committee Contents

2  The development rationale for CDC

The importance of private sector development

5.  The private sector is increasingly recognised as a vital component of sustainable development and 'pro-poor' growth.[6] In his speech on 12 October 2010, the Secretary of State said that it was the private sector which "promotes new jobs, new opportunities, new markets and new prosperity."[7] The private sector has the capacity to create employment, increase trade, provide goods and services and generate substantial tax revenues. These tax revenues can be used to provide basic public services such as healthcare and education.

6.  The NAO found that research demonstrated that growth was "an essential, although not always sufficient, precondition for poverty reduction."[8] It is also clear that strong growth is contingent on high rates of investment.[9] However, there is still a considerable lack of capital available for some sectors and regions in developing countries.[10] Foreign direct investment (FDI) flows to Sub-Saharan Africa remain persistently low; it receives only 5% of global FDI.[11] Almost 50% of African companies identify a lack of finance as a major constraint to doing business.[12] The lack of capital is further illustrated by the fact that nearly three-quarters of the funds in which CDC invested during 2009 and 2010 received funding from other DFIs and 36% of these funds failed to reach their target size.[13]

7.  DFID and many others consider shortages of investment finance in developing countries an important constraint to "private sector development, economic growth and poverty reduction."[14] The shortage of capital is a particular problem because developing countries often have challenging investment conditions. International commercial investors are also still reluctant to invest in poor countries due to the perceived risk, difficulty and unpredictability of the operating environments.[15] A combination of market failures and low appetite for risk results in a lack of access to finance for credible businesses.[16] The types of investments that are most needed for poverty reduction, in particular, are often too risky for mainstream private sector operators.[17] In addition, some countries experience other constraints to investment such as: a lack of appropriate laws; a weak regulatory institutional framework; and political instability and conflict.[18] A lack of appropriate infrastructure is also a major disincentive for investment and inhibits economic development. We will comment further upon this subject in the infrastructure inquiry we are currently conducting.

Development finance institutions

8.  CDC is one of approximately 20 multilateral, regional and bilateral DFIs which seek to address the shortage of investment in developing countries. Their role is to invest in viable companies that contribute to economic growth. They have an important role in demonstrating that profitable investments can be made in difficult business environments. Bilateral DFIs[19] provide approximately 25% of total development finance, equivalent to around 20% of total aid.[20]

9.  The aims of DFIs differ. Half of European DFIs (not including CDC) require investments to be tied to national interests.[21] DFIs use a variety of investment methods, including loans, equity and guarantees. Some, but not all, provide technical assistance. Some DFIs also aim to leverage additional capital from private investors. CDC is unusual in being overwhelmingly focussed on equity.



10.  CDC was established in 1948 as the Colonial Development Corporation to develop the resources of Britain's colonies. It was renamed the Commonwealth Development Corporation in 1963, and was given authority to invest outside the Commonwealth in 1969. In 1997 CDC became a public private partnership and two years later was transformed from a statutory corporation to a public limited company. CDC was substantially restructured in 2004 into a 'fund of funds' investment company. As part of the restructuring, two separate management companies were created out of CDC: Actis and Aureos. Actis is CDC's largest fund manager. DFID holds 40% of the shares of Actis; the remainder are held by Actis management.

'Fund of funds' model

Figure 1: CDC's investment model

Source: Evidence from NAO, Figure 1

11.  Since 1997, CDC has specialised in providing private equity finance. Following the 2004 restructuring, CDC now operates through an intermediated investment model as shown in Figure One. It makes no direct investments but instead invests with fund managers, which in turn invest in businesses through their funds. CDC claims that this intermediated approach has three key benefits: mobilising third party capital; using local fund manager's knowledge and expertise; and enabling CDC to have a broader investment footprint. At the end of 2009, CDC invested with 65 fund managers, in 134 funds, in 794 underlying portfolio companies.[22] CDC aims to have a catalytic impact and stimulate private sector investment by illustrating that good commercial returns can be made in developing economies. CDC's resources are less than 1% of international private equity that goes to developing countries, so for CDC to have a meaningful impact it must be able to influence the behaviour of commercial investors and mobilise additional capital.[23]

12.  The intermediated investment model means that CDC does not make any individual investment decisions; all investment decisions are made by their fund managers. Before investing, CDC agrees the strategy of the fund, the environmental, social and governance issues and how the fund should operate.[24] The fund managers monitor their investments and provide them with business expertise when appropriate. When the fund manager sells the investment they then return the capital and the proceeds from the sale to CDC and other investors. The NAO found that in 2008 fund managers were "receiving an annual management fee of around one to two per cent of the value of investments, and a proportion of profits (usually 10 to 20 per cent) when investments were sold, typically after 5 to 10 years".[25] There will be a more detailed analysis of the 'fund of funds' investment model in Chapter Three.


13.  As shown in Annex Two, CDC is the fourth largest bilateral DFI, but is smaller than larger multilateral and regional DFIs. DFIs use different investment methods, shown in Annex One. CDC currently "leads the field globally" in equity funds amongst DFIs.[26] CDC specialises almost entirely in equity, which is unique amongst the bigger DFIs. The majority of the portfolio of other DFIs (e.g. BIO, DEG, Finnfund, FMO, Proparco, SOFID)[27] is through loans.[28] Most DFIs do very little in guarantees. CDC has less than 50 staff, which is significantly fewer than other DFIs. Academics from the Overseas Development Institute found that CDC's portfolio is much more orientated towards poorer countries than other DFIs.[29] Annex Three shows that CDC's comparative advantage lies in selecting appropriate fund managers and using the 'fund of funds' approach. Academic analysis has concluded that there is not a best practice model for DFIs and instead there is value in DFIs exploiting their comparative advantage and specialisation.[30]


14.  DFID has no direct involvement in CDC's operational decisions. The absence of direct DFID involvement is a deliberate feature of the Department's oversight of CDC. It is argued that it is important to demonstrate CDC's commercial discipline, free of political interference, to other investors. The NAO informed us that this type of arms-length relationship is "standard practice in departmental oversight of government-owned companies."[31]

15.  DFID does, however, exercise influence over CDC through the Investment Policy, Investment Code, business plan and remuneration policy. CDC's Investment Policy is the principal instrument through which DFID ensures that the Company invests so as to grow viable businesses in developing countries. CDC's Investment Policy and Remuneration Framework were last updated in 2008.[32]

6   For discussions of pro-poor growth, see, for instance, 'World Development Report 2006: Equity and Development' (Washington: World Bank, 2005) or DFID Pro-Poor Growth Briefing Note 1, 'What is pro-poor growth and why do we need to know?' (DFID Policy Division internal paper, February 2004). Back

7   Mitchell, A. 12 October 2010. Wealth Creation Speech. NAO para 1.6

Ev w33 Back

8   Ev w33 Back

9   Ev w33 Back

10   Ev w26 Back

11   Ev 62 Back

12   Ev 62 Back

13   Q 92  Back

14   Ev w33 Back

15   Ev 60 Back

16   Market failures occur when the private sector does not allocate sufficient resources to viable enterprises. Back

17   Ev w56 Back

18   Public Accounts Committee, Eighteenth Report of Session 2008-09, Investing for Development: the Department for International Development's oversight of CDC Group plc, HC 94, para 13 Back

19   Bilateral DFIs are nationally owned DFIs e.g. Proparco is the French DFI. Back

20   Overseas Development Institute. The strengths and weaknesses of bilateral development finance institutions (2008), pg 1 Back

21   NAO, Investing for development: the Department for International Development's oversight of CDC Group plc, 2008, p43 Back

22   Ev 80 Back

23   NAO, Investing for development: the Department for International Development's oversight of CDC Group plc, 2008, p40 Back

24   Q 89  Back

25   Ev w34 Back

26   Kingombe, C. et al., CDC's position in the wider DFI architecture, 2011 Back

27   DFIs listed above are from the following countries:BIO (Belgium), DEG (Germany), Finnfund (Finland), FMO (Netherlands), Proparco (France), SOFID (Portgual). Back

28   Kingombe, C. et al., CDC's position in the wider DFI architecture, 2011  Back

29   Kingombe, C. et al., CDC's position in the wider DFI architecture, 2011  Back

30   Kingombe, C. et al., CDC's position in the wider DFI architecture, 2011 Back

31   Ev w34 Back

32   Ev 88 Back

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