Written evidence submitted by Save the
Children
INTRODUCTION
1. Save the Children is the world's leading
independent children's rights organisation. We're outraged that
millions of children are still denied proper healthcare, food,
education and protection and we're determined to change that.
2. In this submission we address the questions
raised regarding the effectiveness of and proposed reforms to
the CDC, and suggest ways in which it might be as effective as
possible in stimulating pro-poor growth in the countries in which
it invests. The submission is structured so as to answer the questions
asked in the call for evidence in turn.
The effectiveness of CDC compared with other similar
institutions
3. This submission will not focus in depth on
a comparison of CDC with other similar institutions. However,
we would like to raise one particular issue. A recent European
Development Finance Institutions report[82]
featured a table that compared key data points across a number
of European Development Finance Institutions (DFIs). The figures
for CDC's average net profit after tax (2007-09) particularly
stood out. When compared to its portfolio size, CDC's profits
seem to be disproportionately large; the average ratio of average
net profits after tax to portfolio size across the European DFIs
was 2%, whereas CDC's ratio was 9% (see Table 1 below for calculations).
This raises concerns about whether CDC is pursuing a different
and more commercially driven strategy compared to other DFIs.
Table 1
KEY DATA FOR EUROPEAN DFIS
| DFI | Country
| Total portfolio 2009 | Avg net profit after tax 2007-2009
| Ratio net profit/total portfolio (Fund total return after tax)
|
| BIO | Belgium | 261
| 2.2 | 1% |
| CDC | UK | 3,349
| 314 | 9% |
| COFIDES | Spain | 482
| 2.2 | 0% |
| DEG | Germany | 4,701
| 28.5 | 1% |
| FinnFund | Finland | 403
| 8.6 | 2% |
| FMO | Netherlands | 4,598
| 71 | 2% |
| IFU | Denmark | 528
| 35 | 7% |
| Norfund | Norway | 635
| 27.8 | 4% |
| OeEB | Austria | 149
| 0.5 | 0% |
| Proparco | France | 2,184
| 22.7 | 1% |
| BMI-SBI | Belgium | 18
| 0.4 | 2% |
| SIFEM | Switzerland | 284
| N/A | N/A |
| SIMEST | Italian | 701
| 5.9 | 1% |
| SOFID | Portugal | 3
| N/A | N/A |
| Swedfund | Sweden | 232
| 3 | 1% |
| Average |
| |
| 2% |
Source: Save the Children UK analysis based on data published
by European Development Finance Institutions (EDFI) in "The
Growing Role of Development Finance Institutions in International
Development Policy", July 2010
The reforms proposed by the Secretary of State for International
Development on 12 October 2010 and the feasibility of achieving
desired results given the CDC's current resources, including staffing
4. In our previous submission to the IDC about CDC, we raised
concerns about the private equity "fund of funds" model
under which CDC currently operates as it does not allow CDC to
direct investment towards projects that have particular development
benefits. We are therefore glad to see that the Secretary of State
for International Development has proposed that CDC should
regain its power to make investments directly in target countries.
We do, however, have a number of outstanding questions about the
extent to which the proposed reforms will ensure that CDC and
its investments reduce poverty to the greatest extent possible.
5. The Secretary of State for International Development states
that "[CDC] must strive towards both development and financial
gains." But there must be some recognition of the trade off
between these two objectives. It is not yet clear from the proposed
reforms how this trade off is to be resolved. At an event in December
2008 at the ODI, Richard Laing, CEO of CDC Group, talked about
the dangers of a strategy that involved CDC accepting less than
commercially attractive returns on the basis that it might deter
the private sector from investing in developing countries.[83]
However, if the vision is for CDC to be "…doing the
hardest things in the hardest places" then the possibility
of less than commercially attractive returns on CDC investments
must be considered. Much clearer guidance needs to come from
the Secretary of State for International Development about how
the proposed reforms will address these tensions.
The extent to which the proposed reforms will be sufficient
to refocus CDC's efforts, especially with respect to poverty reduction
Pro-poor focus
6. The Secretary of State for International Development wants
"…CDC to be more pro-poor focused than any other
development finance institution, doing the hardest things
in the hardest places." This sounds like an important aim,
but we need to better understand what this means and how this
will be measured. At the moment it appears that the extent
to which CDC is "pro-poor" is measured primarily by
the % of its investments that are made in low-income countries
and in Sub-Saharan African countries in particular. This is a
start, but we would suggest that CDC will need to do more in order
to be able to say that it is a pro-poor development finance institution.
This includes:
Looking at the industry sectors in which CDC invests.
7. As we mentioned in our previous submission to the IDC about
CDC, some projects have greater development benefits than others.
Examples of this are those that have a direct, positive impact
on human wellbeing such as water and sanitation infrastructure;
and those that support labour-intensive industries such as agriculture
or construction over investment in capital and knowledge-intensive
businesses such as natural resource extraction or financial services.
Looking at the size of the companies in which CDC invests
8. It is not clear how CDC is going to better meet the needs
of small and medium-sized businesses ie the "missing middle"
that is not addressed through microfinance or traditional commercial
sources of financing.
9. Many experts in this area have recognised the fact that
financing is not always the key constraint for small and medium
sized businesses. The Shell Foundation recently noted that "building
sustainable enterprises…requires additional input over and
above grant finance in the form of business advice, market access
and appropriate governance support. This means that large amounts
of up-front subsidy as well as dedicated staff resources must
be committed before verifiable developmental benefits start to
materialise in the longer-term."[84]
10. According to a recent European Development Finance Institutions
(EDFI) report,[85] other
EDFIs offer technical assistance alongside financing. It is unclear
whether the CDC plans to adapt its model to better meet the needs
of small to medium sized businesses in this way
Basing its investment strategy on a real understanding of poverty
- who is poor and why, where they live and where they work.
11. Seventy five percent of the poor in developing countries
live in rural areas with incomes directly or indirectly linked
to agriculture.[86] GDP
growth originating in agriculture, in particular among smallholders
(who, in turn, often employ informal labourers), is on average
at least twice as effective in benefiting the poorest half of
a country's population as growth generated in non-agricultural
sectors.[87]
12. Recent research estimates that most poor people now live
in middle-income countries. The global poverty problem has changed
fundamentally in recent years. In 1990, 93 per cent of the world's
poor people lived in low income countries. In contrast, in 2007/8
three-quarters of the world's approximately 1.3 billion poor people
now live in middle-income countries.[88]
Measuring the impact of its investment on poverty in ways that
go beyond just the contribution to GDP growth
13. In 2004 DFID itself held a workshop on "Measuring
the Impact of Business on Poverty", where it concluded that
business can contribute to poverty reduction in three ways: by
contributing to growth, by contributing to making growth pro-poor,
and by making direct contributions to poverty reduction. CDC needs
to measure its impact using a more holistic framework, building
on this type of thinking.
STANDARDS OF
RESPONSIBLE BUSINESS
14. We are glad to hear that the Secretary of State has referred
to the role that CDC can play in improving the standards of responsible
business in the companies in which it invests. However,
we are concerned that the proposed reforms do not make specific
reference to:
- A clear statement of policy that CDC will not support activities
that are likely to cause or contribute to abuses of human rights
(including social and economic rights), making clear its own procedures
and systems for practising human rights due diligence, and the
due diligence it expects from its investee companies.
- The specific guidelines, human rights toolkits and mechanisms
that will be put in place to ensure that the companies in which
CDC invests do not contribute to human rights abuses. These
types of systems will require investment of resources (time, money
and expertise).
15. At the moment it appears that CDC measures its development
impact through four metrics:
- Financial performance (portfolio returns compared with market
indices),
- Economic performance (taxes paid and number of jobs)
- Environmental and social governance (ESG) performance (measured
only by whether fund managers had management systems to manage
ESG risks), and
- Private Sector Development (whether fund managers strengthen
local capital markets)
Nowhere in this assessment process is there an analysis of
the human rights impact of CDC's investee companies.
16. CDC's policies on human rights, and the need for human
rights due diligence should be brought into line with the recommendations
of Professor John Ruggie, the UN Special Representative on Business
and Human Rights (his final recommendations will be released in
June 2011 and will provide guiding principles for how his recommendations
can be implemented)[89].
The CDC is also a signatory to the Principles on Responsible Investing
and should ensure that it is upholding best practice in this area.
TRANSPARENCY AND
ACCOUNTABILITY
17. One of the key concerns in our previous submission to
the IDC about CDC was the lack of transparency about CDC
and its investments. Aside from the suggestion that "CDC
should regain its power to make investments directly in target
countries", there is no mention in the proposed reforms of
what tangible improvements will be made in transparency, so that
members of the general public can easily access information, including
financial accounts, about the companies in which the CDC invests.
There is also no further detail about what accountability mechanisms
will be put in place to ensure that CDC is meeting its obligations
to reduce poverty in developing countries.
18. Related to issues of transparency and accountability,
we are concerned about the fact that since the CDC Act of 1999,
CDC has been exempt from paying UK Corporation Tax. The justification
for this is to maximise the portfolio receipts that can be recycled
back into new investments in developing countries. In isolation
this makes sense, however when considered alongside the scale
of the pay rises for CDC executives over a similar period, the
goal of maximising the profits that are returned to the fund seems
more questionable. Between 2003 and 2007 the Chief Executive of
CDC Group saw his income rise from £383,000 to £970,000;
a 250% increase. This, combined with the concerns we raised in
our previous submission to the IDC about CDC about CDC investments
being channelled through tax havens make it unclear as to whether
the proposed reforms will address the inconsistencies between
the attempts to refocus CDC's efforts on poverty reduction and
its tax planning strategies.
19. The reforms proposed by the Secretary of State for International
Development suggest that "CDC…needs more financial firepower."
We are unclear about what this will entail, beyond the specific
suggestion that CDC should regain its power to borrow money. The
suggestion that CDC needs more access to capital needs to be
better explained, especially as, according to the 2009 Financial
Review, CDC currently has a 60% over-commitment ratio. According
to literature on the theory of fund management, an over-commitment
ratio of less than 100% suggests an inefficient use of resources.[90]
At a minimum, it appears that CDC deems there to be a shortage
of investment opportunities. On this basis, it is unclear why
CDC needs "more financial firepower". It also begs the
question whether CDC is sitting on cash that could usefully be
invested in projects with poverty reduction potential because
of its sole focus on generating commercially attractive returns.
82
"The Growing Role of Development Finance Institutions in
International Development Policy: http://www.edfi.be/component/downloads/downloads/32.html
Back
83
ODI event, Development finance and the global financial crisis,
3 December 2008 Back
84
Shell Foundation, Enterprise Solutions to Scale: Lessons learned
in catalysing sustainable solutions to global development challenges,
2010 Back
85
European Development Finance Institutions, The Growing Role of
Development Finance Institutions in International Development
Policy, 2010 Back
86
World Bank, World Development Report 2008: Agriculture for Development,
2008 Back
87
Food and Agriculture Organisation of the UN (FAO), Issues Briefs:
How to Feed the World in 2050, 2009 Back
88
Sumner, A., Global poverty and the new bottom billion: Three-quarters
of the World's poor live in middle-income countries, IDS Working
Paper, Sep 2010 Back
89
More information about the recommendations of the UN Special Representative
on Business and Human Rights can be found at the following portal:
http://www.business-humanrights.org/SpecialRepPortal/Home Back
90
Mathonet, P.Y. and Meyer, T. J-Curve Exposure: Managing a
Portfolio of Venture Capital and Private Equity Funds, John
Wiley & Sons, UK, 2007 Back
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