The future of CDC - International Development Committee Contents

3  Development impact of CDC

16.  This chapter assesses the claims that CDC has not had a sufficient development impact and is not adequately pro-poor. It will examine this claim with respect to CDC's investment model, its geographical spread and the sectors in which it invests. Our conclusions about how to improve development impact in the future are set out in Chapter Five.

CDC's development impact

17.  CDC has, undoubtedly, contributed to economic development in the countries in which it invests. In 2009 CDC's investee companies employed over one million people and paid local business taxes of nearly three billion US dollars.[33]

18.  CDC's remit does not include a duty to alleviate poverty, only a duty to invest in "viable private businesses in poorer developing countries to contribute to economic growth for the benefit of the poor."[34] However, because CDC's net equity investments, £222 million in 2009,[35] count towards the UK's Official Development Assistance, the UK Aid Network (UKAN) argues that CDC has a "responsibility to invest its resources in ways that deliver maximum poverty reduction impacts."[36]

19.  Although CDC has met its mandate of creating economic growth, there has been significant criticism that CDC's operations are not having a sufficient development impact and are not adequately pro-poor. In 2009, the Public Accounts Committee concluded that "although CDC invests more of its resources in poor countries than any other DFI, there is limited evidence of CDC's effects on poverty reduction."[37] The main criticisms of CDC's current operations are its use of the 'fund of funds' model, its tendency to invest where the private sector would anyway, and its failure to invest in the countries and sectors with the greatest need.

Investment model

20.  The 'fund of funds' model has received much criticism, in particular for limiting CDC's ability to target investments for the benefit of the poor. The NAO found that fund managers themselves questioned the ability of a 'fund of funds' business to secure the breadth of development benefits that DFID aspires to from CDC. The fund managers also doubted whether higher risk and lower return investments were compatible with a commercial business model.[38] Table One compares the advantages and disadvantages of the 'fund of funds' model with an alternative option, direct investment.

Table 1: Alternative investment models
Financial model AdvantagesDisadvantages
Fund of fundsEnables a wider investment footprint - CDC currently has investments in 794 businesses in 73 countries.

Utilises expertise of local fund managers - 89% of CDC's total portfolio is invested with local fund managers.

CDC has a respected reputation as an equity expert.

Effective for mobilising third party capital.

Less management-intensive, fewer human resources needed.

Local fund managers can make an ongoing valuable contribution to investee companies.

Individual funds can make smaller investments than CDC could.

Local fund managers are best equipped to find sound viable investment options.

Builds capacity in the investment profession in developing countries.

CDC is one step removed from the investee businesses. Investment decisions are taken by fund managers not CDC so CDC has reduced control to target investments.

Tends to support the countries and sectors with the most 'investment-ready' opportunities, not those in greatest need of support.

Reduces transparency and impairs the public's ability to scrutinise CDC.

Reduces the ability of CDC to conduct due diligence, manage risk and development impact and influence investee companies.

Requires long-term capital commitments (10-15 years) so is a far less flexible model.

The model relies on leverage and influence, but the positive effect of increasing private investment flows is largely unproven.

Cost of others managing the fund.

Tend to invest through offshore financial centres.

Direct equity investment Increased ability to target investments.

More flexible model.

Increased influence and control.

Will enable CDC to exercise active control over its investment portfolio and therefore its adherence to responsible business practices.

Should allow CDC to be more accountable and transparent.

Strengthens institutional framework in country of investment. This will have a multiplier effect for the whole country.

More costly.

More management-intensive so would require more staff.

Reduced scale of investments.

Direct investments tend to favour larger investments.

CDC would be in direct competition with the funds it invests in and other DFIs.

CDC does not currently have the appropriate expertise to make direct investments. It would be challenging to replicate the expertise of their local fund managers.

CDC would need to have a presence on the ground.

This method does not rely on influencing other investors so less capital would be available for investment.

This method does not build or enhance local fund management capacity.

Source: Drawn from volume of oral and written evidence.

We will draw our conclusions regarding Table One in Chapter Five.


21.  CDC seeks to make investments which draw in further investments from the private sector. Since 2004 CDC has invested over US$5 billion, alongside which over $23 billion of third party capital has been invested.[39] For the period from September 2008-September 2010 third party capital mobilised was 346% of invested CDC capital,[40] according to CDC methodology.[41] It has been estimated that every dollar of CDC investment draws in $5 of other investment. This is more than the International Finance Corporation, which leverages approximately $3 for every dollar invested, or for the European Bank of Reconstruction and Development, which leverages approximately $1 for every dollar invested.[42] CDC claims to give an early commitment of finance to funds in order to attract others to the investment.[43] CDC's analysis of its portfolio led it to the conclusion that of the 19 funds to which it made commitments in 2009-10 it "played a leading catalytic role in 15."[44]

22.  On the other hand, it is difficult to calculate the extent to which CDC mobilised this capital as it cannot be proven whether other investments would have taken place without CDC's investment.[45] Professor Keith Palmer argued that if CDC's capital was to be truly catalytic and mobilise additional private sector investment, CDC must be prepared to accept greater risks and lower returns.[46] Although it is not always easy to prove, the key benefit of the 'fund of funds' model is its ability to leverage additional finance. This finance is invaluable considering the comparatively small amount of capital at CDC's disposal. By using this capital to demonstrate that investments in developing countries and frontier markets can be successful, CDC can pull in extra investment and have a significantly more substantial impact than if it uses its capital in isolation. Diaspora communities often have an interest in poverty alleviation in their countries of origin but have difficulties in finding out how to make investments. CDC should seek to attract funds from such diaspora communities and, in addition, develop partnerships with UK businesses, provided they have a pro-poor focus in developing countries and are not tied to UK national interests.


23.  As stated by CDC, CDC's capital should always aim to be 'additional' to private capital; CDC should only make investments which the private sector would not.[47] There has been much criticism that CDC's investments are very similar to those of the private sector and are often "larger, more commercial investments."[48]

24.  Witnesses were critical of a number of CDC's fund managers' investments, arguing that they would have been made without CDC's involvement. Actis' $20 million investment in Ghana's first premier shopping mall in Accra[49] was a source of particular concern. CDC claims that the Accra mall has created over 1,000 jobs and generated sales taxes of US$4.3 million in 2009.[50] However, there has been no analysis of the impacts of the shopping mall on trade in downtown Accra, the nature of the jobs created (e.g. whether those employed were previously in employment, whether the jobs are permanent) or whether the five-year tax holiday granted to the project was justified.[51] An academic who assessed the project concluded that it "remains a luxury niche, serving the needs of a minor section of the city's population."[52] Similar criticisms have been made of CDC's $40 million investment in The Palms shopping mall in Lagos[53] and of CDC's investment, operating as part of a consortium, of $35 million in Moser Baer to "enable the company to broaden its business to include the production of photo-voltaics for use in solar panels." This investment was provided despite the fact that Moser Baer was already highly profitable and the world's second largest manufacturer of optical storage devices.[54]

25.  By contrast, some of CDC's funding is clearly 'additional' and of substantial value, investing in projects, which would not have gone ahead without its involvement, such as the GEF Africa Sustainable Forestry Fund. CDC identified the need for a sustainable forestry fund, selected the most appropriate fund manager to run it and provided $50 million of initial investment. $50 million has been committed by other investors to date.[55] CDC has also committed to Rabo Equity Advisors' India Agribusiness fund, the first private equity fund in India focused solely on this sector.[56] It is imperative that all of CDC's funding backs investments that the private sector would not otherwise support. CDC should make assessments before investing, including an appraisal of whether their contribution would be additional. Additionality should be demonstrable for all investment decisions. CDC should be careful only to invest in funds that are committed to this principle.

The composition of CDC's portfolio


26.  There is widespread belief that CDC is not investing the right amounts in the right countries. In 2009, CDC had 45% of its portfolio in Sub-Saharan Africa, 43% in Asia, 7% in North Africa and 5% in Latin America.[57] CDC's Investment Code does not restrict concentration of investment in any one particular country. In 2009, 52% of CDC's portfolio was in four countries—India, China, South Africa and Nigeria.[58] While these four countries do contain many of the world's poor,[59] they have large economies and attract substantial foreign investment. China and India also have considerable domestic private capital available for investment.[60] 39.5% of CDC's sub-Sahara African investment was in South Africa and Nigeria.

27.  However, CDC has a better record than other DFIs. CDC has "more capital invested in sub-Saharan Africa and in Asia than any other major European DFI."[61] At the end of 2007, CDC had 66% of its investments in poor countries, whereas the average for other DFIs was 24%.[62]

28.  The Investment Policy has become more pro-poor. A more stringent Investment Policy for 2009-2013, set by DFID, requires CDC to make more than 75% of new investments in low income countries (per capita income below $905) and more than 50% of new investments in Sub-Saharan Africa. It allows $125m investment in small and medium-sized enterprise (SME) funds. Investments in middle-income countries are limited to 25% of new investments.

29.  Some believe that CDC should only invest in the poorest countries and not in middle-income countries such as India and China. The ONE Foundation has suggested that there should be a stronger CDC commitment to investing in poor countries, monitored by setting a target for investments in Least Developed Countries.[63]

30.  Others argued that there is a case for CDC to continue investment in middle-income countries. Approximately 75% of the world's poorest people now live in middle-income countries[64] and poverty in middle-income countries is often very regionalised. We were warned against restricting investment in middle-income countries further, because of the benefits of the current Investment Policy in: maintaining a stable risk management strategy; giving fund managers broad geographic exposure; and facilitating knowledge and skills transfer.[65] For instance, fund managers Helios and Aureos both invest to build successful "platform companies"[66] which may involve investing in middle-income countries, with the explicit objective of expanding the business into low income countries.[67] Investment in regional hubs can facilitate investment into neighbouring economies. It can also cross-subsidise riskier investments. CDC is concerned that a higher focus on poor countries may reduce investment returns, resulting in fewer capital or financial losses which would harm CDC's reputation with partner investors.[68] Moreover, it is argued that equity is more appropriate for middle-income countries than aid, which may be better suited to low-income countries.

31.  Dr Timmerman of Equity for Africa pointed out that

there are substantial opportunities for poverty alleviation in middle-income countries, and there are equally substantial commercial opportunities in low-income countries. The investment policy should be driven by outcomes, both financial and developmental.[69]

We will make more recommendations about CDC's geographical mandate in Chapter Five.


32.  Currently CDC's portfolio value by sector is: financials 20%, consumer 14%, industrials 13%, energy and utilities 10%, ICT 10%, healthcare 8%, infrastructure 8%, mining 6% and agribusiness 5%.[70] Many of the submissions we received during the inquiry argued that CDC should increase its development impact by focusing on certain sectors which suffer from a lack of private sector capital and are directly linked to poverty alleviation. Potentially, sectoral targets could help CDC to target investments to support pro-poor growth more effectively. Investment in smallholder agriculture, finance for agriculture-related SMEs and rural infrastructure can be "particularly beneficial from a poverty reduction perspective," according to Oxfam.[71] It has also been suggested that investment in labour-intensive industries, for example agriculture, as opposed to capital-intensive industries, is more pro-poor as it creates more jobs.[72] We will now explore the sectors that are thought of as directly more pro-poor.


33.  CDC used to specialise in agriculture investments. In the early 1980s CDC investments in agribusiness totalled almost 50% of its portfolio, albeit including a number of loss-making ventures. By 2009, agribusiness only represented 5% of CDC's portfolio.[73] It has been suggested that CDC should 're-grow' its investment portfolio in agriculture and agribusiness, especially smallholder agriculture.[74] The World Bank argues that growth in agriculture is twice as effective at reducing poverty as growth in other sectors.[75] Agriculture has more direct development impacts than the other sectors in which CDC currently invests. Three out of four of the poorest people in low income countries live in rural areas and depend on agriculture, livestock, fisheries and forestry for their livelihoods.[76] In Sub-Saharan Africa almost two-thirds of the population are employed in agriculture.[77] With the increasing risks posed by food price volatility, climate change and environmental degradation the agricultural sector is becoming increasingly important. A successful agricultural sector provides livelihoods, contributes to food security and supports wider economic growth. However, despite significant positive impacts, the agricultural sector suffers from a lack of capital. There is an urgent need for investment in viable, sustainable rural and agro-industrial enterprise.[78]

34.  Currently agriculture-supporting infrastructure is deficient in Africa, especially irrigation.[79] It has been suggested that CDC could make particularly valuable investments in: production inputs (e.g. seeds, fertilisers, machinery) needed by small farmers, processing facilities and crop storage; and packaging and marketing companies which maximise addition of value to local produce.[80] The ONE Foundation advised that CDC should be careful to attain a balance within its investments between those which will support export crops and those that will support staple food crops.[81] Increased investments in agriculture would enable CDC to contribute to poverty alleviation and food security.[82]


35.  Lack of infrastructure has profound implications. It inhibits access to basic services and employment and is a significant barrier to private sector development. It is a serious constraint to growth. Reliable infrastructure, especially that relating to the transport, agriculture and energy sectors, is vital for poverty alleviation and benefits both individuals and businesses. A study of economic growth in Uganda showed that a lack of adequate road, railway and electricity infrastructure was the most binding constraint on growth and therefore poverty reduction.[83] Access to infrastructure reduces transportation costs and enables businesses to be more productive and to expand their businesses to reach other markets.[84] Vietnam, which halved its poverty rate between 1993 and 2002, targeted infrastructure investments at regions with high poverty levels and prioritised large infrastructure investments in an effort to maximise growth.[85] According to the World Bank, Africa requires US$93 billion per year to address its infrastructure needs.[86] Renewed investment in infrastructure by CDC would not only be highly valuable to many facets of development, but would also have significant benefits for economic growth and would fill a gap that donors have historically been reluctant to fill.

Energy and climate change initiatives

36.  According to estimates by the World Bank, almost 75% of the population in Sub-Saharan Africa lack access to electricity and 700 million people in South Asia do not have power to their homes and businesses.[87] The availability of safe and reliable energy is crucial for development. Lack of supply negatively impacts both individuals and businesses. Lack of access to electricity often results in environmental damage as people have to rely on biomass fuels, including wood.[88] The time taken to collect the fuels also reduces earning potential for women and results in children not having time to attend school. The increasing threat of climate change is creating a demand for new products and services such as clean energy. CDC could adopt an important catalytic role by focusing investments on green sources of energy. The provision of clean technologies to poor countries would help facilitate sustainable development. In a speech on climate change on 18 November 2010, the Secretary of State said that he envisaged a role for CDC in climate-related initiatives.[89]

Small and medium-sized enterprises

37.  Small and medium-sized enterprises (SMEs) are "widely acknowledged engines of growth"[90] and also make a valuable contribution to developing countries through the provision of jobs and contributions to tax revenue. SMEs have traditionally offered lower financial returns but have the potential for high development benefits.[91] SMEs are also a high-risk investment which makes it very difficult for them to attract sufficient capital. They tend to require more external input, for instance more business advice and support. Dr Timmerman informed us of the lack of capital available to the 'missing middle,' (investments between $5,000 and $100,000).[92] The size of SMEs makes them vulnerable to economic shocks and failures but can also make them more flexible and innovative. Smaller amounts of capital could have a significant impact in this sector.

38.  In 2009, the average CDC-supported firm had 1,188 employees.[93] Only 7% of CDC funding has gone into SMEs and only 17% of CDC's investee businesses are SMEs.[94] Nevertheless, CDC has made some worthwhile investments in this sector. For example, CDC has supported Manocap, a fund manager which invests in SMEs in West Africa. Over the last three years Manocap has invested approximately $8 million in four businesses, created around 800 additional jobs and contributed $750,000 of increased tax revenue for the local government.[95]

39.  In Chapter Five, we will put forward our recommendations for the remit DFID should give CDC to ensure it can do more to help the poorest people. We will consider in particular the future investment model that CDC should use. In Chapter Four, we will assess a further set of criticisms made against CDC.

33   Ev 65 Back

34   Ev 88 Back

35   DFID, Statistics on International Development , 2010  Back

36   International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w59 Back

37   Public Accounts Committee, Eighteenth Report of the Session 2008-09, Investing for Development: the Department for International Development's oversight of CDC Group plc, HC 94, pg 6 Back

38   NAO, Investing for development: the Department for International Development's oversight of CDC Group plc, 2008, p22 Back

39   Ev 63 Back

40   Ev 63 Back

41   The new methodology recognises that CDC can only influence investors investing at the same time or after CDC. It is also recognised that CDC's capital is likely to have had most impact in mobilising capital for first time funds as opposed to later funds with the same manager.A tapering factor is applied according to whether it is a first, second or subsequent fund as follows: first time funds have no tapering, Fund 2s are tapered by 25%, Fund 3s are tapered by 50% and Fund 4s onwards are tapered by 75% so that only 25% of investment by others counts as mobilisation. Back

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

43   Q 102  Back

44   Ev 67.This assessment was made on the basis of several criteria-the volume of their financial commitment, their input into the strategy of the funds and the guidance they provided on environmental, social and governance (ESG) and other matters. Back

45   Ev 50 Back

46   Ev w59 Back

47   Ev 62 Back

48   Q 4 [Dr Timmerman] Back

49   International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w24 Back

50   Ev 65 Back

51   International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w24 Back

52   International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w24 Back

53   International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w40 Back

54   International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w40 Back

55   Ev 68 Back

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

57   CDC Group plc, Development Review 2009, p6. CDC has now discontinued investment in Latin America. Back

58   CDC Group plc, Development Review 2009, p8 Back

59   NAO, Investing for development: the Department for International Development's oversight of CDC Group plc, 2008, p19 Back

60   International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w21 Back

61   Ev 61 Back

62   Ev w33  Back

63   Ev w56 Back

64   Sumner, A. Global Poverty and the New Bottom Billion: What if three-quarters of the world's poor live in middle income countries? 2010 Back

65   Ev w25, Ev w30 Back

66   An investment approach using platform companies utilises the more developed infrastructure and skills base in middle income countries to extend business into low income countries. Back

67   Ev w30, Ev w4 Back

68   NAO, Investing for development: the Department for International Development's oversight of CDC Group plc, 2008, p19 Back

69   Q 31  Back

70   CDC Group plc, Development Review 2009, p8.Sometimes CDC's portfolio in infrastructure is calculated as 18% (the energy and utilities category is added to the infrastructure category). Back

71   Q 60  Back

72   Ev w57 Back

73   Ev w57 Back

74   Ev 59, Ev w22, Ev w57 Back

75   DFID, Agriculture, 2010 Back

76   ibid Back

77   DFID, Agriculture, 2010 Back

78   Ev w24 Back

79   International Development Committee, Fourth Report of Session 2005-06, Private Sector Development, HC 921-I, pg 22 Back

80   Ev w24 Back

81   Ev w58 Back

82   Ev w25 Back

83   World Bank.Uganda Moving Beyond Recovery:Investment and Behaviour Change, For Growth.Country Economic Memorandum.Volume II:Overview. 2007. Back

84   Nathan EME Executive Summary of Literature Review, Constraints to Investment in Business in Developing Countries, 2011 Back

85   International Development Committee, Fourth Report of Session 2005-06, Private Sector Development, HC 921-I, pg 22 Back

86   Foster, V. and Briceno-Garmendia, C. eds. Africa's Infrastructure.A time for transformation. 2010. Pg 1 Back

87   Meisen, P and Akin, A. The case for meeting the Millenium Development Goals through access to clean electricity. 2008. Pg 7 Back

88   CDC Group plc, Energy and Utilities Online, 2010  Back

89   Mitchell, A. 18 November 2010. Climate Change Speech. Back

90   International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w19 Back

91   NAO, Investing for development: the Department for International Development's oversight of CDC Group plc, 2008, p13 Back

92   Q 24  Back

93   International Development Committee, Third Report of Session 2010-11, Departmental Annual Report and Resource Accounts, HC 605, Ev w59 Back

94   Ev 88 Back

95   Q 1  Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2011
Prepared 3 March 2011