Written evidence submitted by Bowen Wells,
Founder Chair, International Development Select Committee and
Alistair Boyd, Formerly CDC Deputy CEO
THE FUTURE
OF CDC
A very short biographical background note might be
useful. I cannot add it to the paper as Alistair Boyd is now in
Uganda to work with AMREF and will not return for two to three
weeks.
Alistair Boyd CMG spent all his working life with
the Commonwealth Development Corporation retiring as the Deputy
Chief Executive. He was Chairman, after his retirement amongst
very many commitments concerned with Development as the Chairman
(UK) of AMREF and on the main Board in Nairobi. He now holds the
position of Deputy Chairman of the Royal African Society.
Bowen Wells FMP worked with the Commonwealth Development
Corporation from 1961-74. He was elected to Parliament in 1979
and served on the Foreign and Commonwealth Select Committee. He
became the founder Chairman of the Department of International
Development Select Committee from 1997-2001, when he retired from
Parliament. He has sat on the Boards of Care (UK) Amred UK, ODI,
and the Institute of Development Studies located on the campus
of the University of Sussex.
In the last decade CDC, with the encouragement of
DFID, has placed emphasis on the creation of private sector equity
funds with the objective of stimulating economic growth in less
developed economies. In that endeavour there can be little doubt
that it has succeeded in its objective of attracting risk capital
to emerging economies.
It has done this by channelling funds through third
parties, which themselves were more driven by the concept of maximising
financial returns that concerned about the social and economic
consequences of their investments. As a consequence of this strategy,
CDC itself inevitably became once, if not twice, removed from
the end beneficiary, and hence from the socially important developmental
aspects formerly associated with CDC.
It could be argued that the new mission CDC/DFID
set itself a decade ago has been accomplished and that it has
succeeded in encouraging private sector flows to destinations
hitherto not on the risk-development radar. If CDC has in more
recent times successfully managed to blaze the equity trail, then
that is good news. It now begs the question "Whither CDC
tomorrow?" in formulating the answer to that question it
would seem appropriate for CDC to work alongside the recently
announced private sector initiative within DFID.
Clearly, a new and very distinctive role for CDC
needs to be identified, perhaps targeting the more vulnerable
parts of society. However, even in the past, it was never easy
to strike the right balance between social investment development
needs and financial returns. To ignore the latter brought into
focus the challenge of sustainability. Over 50 years ago Lord
Reith, the then Chair of CDC, came up with the maxim that CDC
was all about "doing good without losing money". Over
the years CDC has managed to improve on that ideal and, taking
one year with another, it managed to make a modest return.
Today, the debate is around where we should be focussing
the organisation.
There are frontier sectors which could be addressed
by an organisation which embraces development, as a high priority,
in its vocabulary:-
- Climate change and environment;
- Water supply, afforestation, sewerage
- Food production, food v/s fuel, GM crops;
- Infrastructure (roads, rail, power, communications);
and
- Transfer technology;
- Linkages in agricultural research;
- Affordable private health-care schemes, insurance
retirement schemes;
- Business development, business mentoring and
micro-finance; and
- Growing the beneficiaries of micro-finance and
stand-alone enterprises.
The activity list for possible CDC participation
is long. It will be important to decide on priorities. To grapple
with any of the above sectors will require the establishment of
sector specific funds, with different funding bases in recognition
that some sectors have a high social content and require access
to softer funds whilst others could be expected to generate more
immediate financial returns and hence funded appropriately. Catering
for social needs inevitably requires greater management overheads.
Depending on the perceived risk, each of the funds
will need to offer a mix of financial instruments (equity, mezzanine
finance, debt conversions, term loans and guarantee arrangements).
For instance, start-up funds requiring up-front capital coupled
with the provision of management support for the underlying investment,
are likely to need some element of soft financing to achieve viability
and hence sustainability in the long term.
The complexity and specialist knowledge required
to make an effective contribution within any of the sectors suggested
in para 6 above will require an innovative approach to developing
partnerships. It seems inevitable that CDC should explore an association
of partnerships with the private sector (management and finance)
and develop linkages with NGOs and local Government organisations
maximising the use of their local networks on the ground, supplemented
by CDC's own regional/country offices.
CDC itself should probably not be tempted to revert
to micro-management using its own staff. It should aim to develop
linkages with the new breed of specialist managers working with
local/indigenous organisations already on the ground. Instead
of managing a "funds of Funds" or individual projects,
CDC will, however, need to attract specialist expertise in those
sectors it intends to target.
CDC has accumulated capital through a combination
of shrewd financial management, coupled with the fact that HMG
capitalised all CDC's debt into "equity", did not seek
any dividends, and was exempt from tax in the UK. Although most
of CDC's present cash balances are linked to future, already partially
disbursed, investments contracts, there must surely be opportunities
to sell both existing investments and the related future commitments,
thereby providing a revamped CDC with immediate access to capital.
There will, of course, over time, be a stream of inward cash arising
from the maturity of funds in which CDC with cash/capital to make
future investments.
Whether CDC itself should be permitted to borrow
funds (loans) must surely depend on the source and quality of
those funds (commercial or subsidised) and the financial on-lending
arrangements which would need to be structured to ensure that
repayment terms are closely matched with CDC's own obligations
to its creditors.
Consideration needs to be given on whether the name
CDC should be preserved or whether it would be more appropriate
to rebirth the organisation as, say, the British Development Corporation.
On balance, unless HMG requires CDC to be a specific instrument
of UK Government policy, there are strong reasons in favour of
keeping the organisation, and hence its name, relatively neutral.
There still lingers in many developing countries affectionate
feelings for what CDC has done in the past and which a re-vamped
CDC should endeavour to build upon.
Before deciding on the future of Actis it would seem
appropriate to examine the development contribution the organisation
has generated. However, it seems likely that if CDC is now endeavouring
to move away from the culture of the last ten years it would seem
entirely logical for DFID's shareholding to be sold and the proceeds
made available to the new CDC as working/investment capital.
Throughout CDC's history, "governance "
issues have been complicated by the dilemma as to whether the
organisation should operate independently, with the prime objective
of developing the emerging economies of the world, or was it a
more direct instrument of HMG policy. It succeeded in managing
this balancing act with considerable acumen. Today, the question
of to whom CDC should report will depend on who are to be the
future stakeholders. If it is decided that Government/DFID should
retain ownership it could be argued that the organisation should
report to Parliament and that the Board should include senior
Government representation.
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