Written evidence submitted by Tom Cairnes
My experience of CDC is as the manager of the Sierra
Investment Fund, a private equity fund that focuses on investing
in Sierra Leone. CDC is an investor in the fund.
1. The main points I would like to make are as
follows:
(a) CDC should be considered the jewel in the
crown of the UK's development activity.
(b) However, it has become a victim of its own
success, and what seemed bold a few years ago, no longer seems
so.
(c) This is no excuse for stagnation. Rather
CDC should continue to innovate at the forefront of the development
field and reform is justified.
(d) My view is that any reform should be guided
by the following principles:
(i) Focus on the lowest income countries:
CDC's raison detre should be to invest where others will not.
In doing so, Government, as the owner of CDC, should recognise
the increased risk of investment loss this entails. An allocation
of the portfolio to middle income countries is therefore justified.
(ii) Do not sacrifice investment principles
for development goals: Bad investment is good for no-one.
I believe there is no trade off between investment returns and
development returns (within some common sense rules of what businesses
you should and should not invest in). However, pressure may come
to invest quickly to demonstrate "we are doing something
to help". This risk should be managed carefully.
(iii) Focus on countries where the UK has
the greatest political influence: Development does not happen
in a political vacuum. Combining British influence with investment
capital will have a positive effect on both.
(iv) The pace of change should be driven by
people, not by policy: Investing in the poorest countries
in the world is unpopular because it is both difficult and very
risky. As such, CDC should look to build a world class team (benchmarked
against the private sector) to deliver any new business it undertakes.
The existing team has been built to run a fund of funds business
- a job they are very good at. Changing this focus will require
adding new people. Taking time to find the right people will
repay itself significantly in the long run. It would be a mistake
to rush this.
(v) Private equity should remain a significant
part of CDC's business: CDC have a great team that has done
a great service. Keep the best people you have and make the most
of them.
(vi) Making direct investments (as either
debt or equity) will require building out the organisational infrastructure
that CDC lost when Actis and Aureos were formed: You can't
make direct investments if you are based in London. Being on
the ground, and hiring strong local teams, is essential. I envisage
this to be the greatest challenge in implementing the reforms
proposed by Andrew Mitchell. I think there are two ways to do
this, and perhaps both should be implemented in parallel:
1. Firstly, CDC should consider buying out some
funds in which it has a significant stake. This would (i) give
it presence on the ground, (ii) give it control over capital it
has tied up over a long term, (iii) most importantly give it access
to talented managers. The challenge here is of course the price
CDC would need to pay.
2. Secondly, CDC could look to directly recruit
talented managers in areas where it wanted to build capacity.
To ensure on the ground presence they will need to open offices
in locations where they want to operate.
(e) It is acceptable to do well by doing good:
People should get angry about poverty and not wealth. It is
good that those who make a significant positive contribution get
financially rewarded - I have no problem with paying the head
of CDC a large bonus if they do well. Having said that, performance
must be measured over the long term - I am not an expert on structuring
compensation, but believe that this can be done simply. I believe
the public is accepting of high salaries if they understand why
they are being paid. There is limited public anger at footballer's
wages, whereas bankers (about whom people have very little information
and are involved in an activity people do not understand) receive
public scorn.
2. To conclude, the British government should
be proud of the work done to date by CDC. However, all organisations
must change as their environment changes. Finding ways to make
CDC even more effective at reducing poverty in emerging markets
will require some experimentation (and as a result, some failures),
but if done sensibly will keep the organisation at the forefront
of international development.
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