Written evidence submitted by Oxfam
1. OXFAM
2. Oxfam welcomes the opportunity to make a submission
to the International Development Select Committee's inquiry into
the future of CDC. Oxfam works with partners around the world
to find lasting solutions to poverty and injustice. Currently,
we work in more than 70 countries - including the UK - and respond
to an average of 30 emergency situations each year. Oxfam believes
that people are entitled to five fundamental rights: a sustainable
livelihood; basic social services; life and security; to be heard;
and equity. We work to support people in realising these rights
and fight poverty and suffering through campaigning, long-term
development work, and emergency response. Oxfam GB is a member
of Oxfam International, a confederation of 14 Oxfam affiliates
around the world.
3. The effectiveness of the CDC, compared
with other similar institutions
4. CDC has been effective in: a) being financially
self-sustaining; b) catalysing some private capital into developing
countries; c) developing ESG risk management tools. However, it
is less clear to what extent CDC has invested, and catalysed private
capital, into regions, sectors and activities that are particularly
important for poverty reduction and development but which are
perceived as too risky or unprofitable by mainstream investors,
and thus have received little or no attention from private investors.
CDC seems to operate almost as a "mainstream" fund of
funds investor with a good policy on ESG risk management (eg similar
to many signatories to the UN Principles for Responsible Investment)
and a geographical mandate, but CDC's track record in terms of
delivering development, as well as financial, returns is more
difficult to assess.
5. There are different models amongst Development
Finance Institutions (DFIs). Some are more commercially-oriented,
such as IFC and CDC, which tend to invest in large funds with
diversified investment portfolios that include companies in high-growth
sectors such as telecommunications, financial services, and information
technology, which provide the best opportunity to raise additional
equity from private investors. Other DFIs, such as Norfund and
Swefund, have helped to establish local financial institutions
in countries with severely underdeveloped private sectors, such
as Angola. These latter fund investments entail significant investment
risk and could not be realised without some concessional financing
and long investment horizons. In turn, the potential to raise
additional private capital in these types of investment in the
short- to medium-term is severely restricted. Although it is necessary
for those DFIs that are self-funded to strike a balance between
financial and development returns, in Oxfam's view, as development
agents, they should at minimum:
- Prioritise investments in regions and sectors
where private investors would not invest on their own, catalysing
long-term responsible investment in under-capitalised geographies,
sectors and ventures eg agri-SMEs or least developed countries;
and
- ensure environmental, social and governance (ESG)
standards are met in all their investments, direct and indirect.
6. CDC appears to be investing in some funds,
and companies, where private capital would potentially go anyway.
Finding the right balance between development and financial returns
to make a clear positive development impact, whilst remaining
self-financing seems to be the biggest challenge for CDC. With
the exception of its geographical mandate (and some sector exclusions),
CDC operates almost as a "mainstream" investor fund
of funds with a policy on ESG risk management similar to many
UN PRI signatories.
7. 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; the extent to which the proposed
reforms will be sufficient to refocus CDC's efforts, especially
with respect to poverty reduction
8. We agree with the Secretary of State that
the CDC should become more pro-poor in its approach and activities,
and that CDC investments need to be targeted in (potentially more
risky) regions and ventures that will generate higher development
returns. This includes being prepared to invest for longer than
the average investor to achieve development - alongside environmental,
social and governance - outcomes, and to be ready to accept lower
returns than the average private investment actor would typically
accept.
9. We encourage the Secretary of State explicitly
to incorporate a pro-poor development strategy in CDC's mandate,
including clear objectives and targets, that is, laying out development
and poverty reduction aims eg targeting women entrepreneurs, promoting
small and medium-sized agri-businesses.
10. Currently CDC's mandate focuses on geographical
areas and the exclusion of a few sectors (goods that are deemed
illegal under applicable local or national laws or banned by global
conventions or agreements, arms production or trade, businesses
significantly involved in tobacco, pornography, gambling). While
welcoming that the current mandate is biased towards Sub-Saharan
countries, Oxfam believes that CDC's mandate should also include
a clearer development strategy identifying which sectors, and
why, will be favoured based on the development needs of the recipient
countries, for example, infrastructure for rural areas (eg improved
energy, water and transport infrastructure that provides basic
services to farmers at lower cost, making them more competitive),
agriculture, financial services eg developing local financial
institutions versus consumer-oriented investments.
11. CDC should work over time towards the development
of concrete quantitative and/or qualitative indicators relating
to development and poverty reduction alongside its existing ESG
criteria, which would allow its performance to be assessed against
its stated development objectives. CDC's approach should change
from focusing on ESG risk management to focusing on development
(including ESG) outcomes.
12. We agree that CDC should significantly increase
its directly managed portfolio, and take a more active approach
to portfolio management. In so doing, if it is to remain self-financing,
CDC will need to find a balance between undertaking direct and
indirect investments, and between delivering financial and development
returns. This could potentially be done by establishing
a percentage of direct investments (say, at least 50%), for example,
balancing financing given directly to small-scale farmers in rural
areas where poverty rates are high and the short-term "social"
impact is the greatest with indirect investments in agri-businesses
such as food processing, packaging, and distribution companies.
13. According to the current CDC Investment Code,
CDC's Fund Managers are required "to procure that such portfolio
companies sign an undertaking confirming that they will operate
in line with sections 1-3 of this investment code" (covering
CDC's principles, objectives and policies, and exclusions). Understanding
the complexities involved in fund managers enforcing explicit
commitments to the code when they lack effective control or significant
influence over portfolio companies (that is, typically, where
they own less than 20% of the company), CDC should require ALL
portfolio companies to commit to delivering certain development
goals and to comply with the code; even if it means ensuring more
than 20% ownership over all portfolio companies, and thus reducing
the overall number of CDC investments.
14. In order to properly manage an increased
number of direct investments, DFID will need to consider: a) increasing
human resources, particularly managerial staff with development
expertise; b) exploring innovative models of collaboration with
other parties, private, public or civil society to help monitor
CDC's investments; and c) increasing CDC's advocacy and influencing
role in the fund management and private equity industry to promote
higher standards, greater transparency and reporting within the
industry in general and, for CDC indirect investments in particular.
15. We agree with the Secretary of State's proposal
to demand from CDC more effective treatment of environmental issues,
greater transparency and a rigorous approach to tackling corruption.
16. The current CDC Investment Code leaves considerable
room for interpretation, and thus for free riding, eg many of
the policies are applicable "as/when appropriate", as
are requirements for verification of results or setting improvement
targets. The Investment Code should be reviewed and strengthened
to remove loopholes and ambiguity, particularly in relation to
the management of CDC's fund managers eg by changing the current
wording "encourage the managers of portfolio companies to
adopt and implement policies relating to ESG matters, particularly
where businesses entail significant risks" to a more concrete
requirement that "managers adopt and implement effective
ESG policies over time and that investments comply with ESG goals
by the time CDC exits the investment.".
17. For its indirect investments, when operating
as a fund of funds, CDC should establish clear criteria and procedures
for selecting, and assessing financial intermediaries, including
that intermediaries:
- have policies and a strong track record of performance
on ESG matters, including reporting, as a key criterion for selection;
- are explicitly required to demonstrate results
in terms of their ESG performance, as well as meeting specific
development targets, in their contractual agreements, and due
diligence;
- maintain oversight of, and engage with, the funds
they invest in regarding their ESG and development performance
and progress. This includes requiring them to report on ESG (and
development) performance and progress.
18. In addition, CDC should:
- engage with other DFIs to harmonise standards
and increase their capacity to influence private investors in
developing countries, by raising awareness of the importance of
managing ESG issues, sharing expertise and tools, and improving
standards across the private equity industry (including standarising
private equity reporting frameworks); and
- establish a process to manage non-compliance
by fund managers and private equity firms they invest in, and
to improve monitoring and reporting of their investments.
19. Oxfam acknowledges the efforts and progress
made by CDC in developing a comprehensive tool kit and ESG management
system for fund managers. However, the delegation of investment
decisions in the fund of fund model requires the development of
stronger management systems for fund managers, to compensate for
the absence of direct DFI control and civil society oversight
of the investments, including specific criteria and procedures
for selecting and appraising fund managers, as well as a system
and procedure for dealing with "non-compliance" with
CDC's Investment Code by fund managers.
20. The application of CDC's policy and geographical
mandate to its indirect investments is unclear as CDC's Board
has discretion over decisions to invest in any particular investment
vehicles for fiscal, regulatory or any other reasons. This potentially
leaves the door open for CDC to invest in funds which lack transparency,
and which are hard to track/monitor and influence, and which might
be domiciled in offshore financial centres, which could potentially
damage the reputation of CDC.
21. Internal and external verification: There
is a case to be made for involving third parties as monitors of
and reporters on investee companies, as the relationships between
DFIs, fund managers, and investee companies involve potential
conflicts of interest. Some DFIs (e.g Norfund) have employed consultants
to report on the development impacts of a sub-set of their investment
portfolios. DFIs could broaden and systematize this practice by
collectively creating an independent ombudsman mandated to conduct
field missions to monitor and report on both fund managers and
investee companies, and to publicly report on the development
impacts of their activities.
22. Corporate Governance and accountability:
CDC currently has an independent Board, with no representation
from DFID. We propose that DFID should consider having a permanent
representative (non-executive director) on the Board who would
hold overall responsibility for the establishment of, compliance
with and reporting on CDC's development strategy.
23. Transparency: CDC should regularly report
on its performance against its development strategy, in terms
of the extent to which it has meant its development objectives,
how its activities have contributed towards this, and on the development,
as well as the financial, performance of its investments; a full
development report should be made publicly available on an annual
basis.
24. Should alternative options, including
the abolition of the CDC, be adopted?
25. We understand that there needs to be a balance
between CDC's ability to catalyse private capital (that otherwise
will not invest in certain regions or companies) and CDC's ability
to manage and ensure social and environmental returns.
26. Intermediary financing (such as the fund-of-fund
model) involves significant delegation of investment decisions
to private parties (eg fund managers, loan officers), which undermines
the ability of DFIs to directly select and appraise investments
and report on their development results. Moreover, intermediary
financing reduces the public availability of information to the
point where civil society is unable to fulfill its traditional
role as a "watchdog" that could provide a useful informal
accountability mechanism and a strong incentive for DFIs to improve
their performance in terms of development results.
27. In our view, an alternative model worth considering
would be a combination of fund of funds with direct investments,
when and if, the indirect investments follow the above proposed
policies and practices. Direct funds require more human resources,
and thus, are more costly (management intensive) yet, they have
greater potential to focus on higher risk and potentially lower
(financial) return investments, and/or investments that might
require much longer holding until they become sustainable, that
could deliver greater returns from a poverty reduction perspective.
Increasing the proportion of investments in higher risk/lower
financial return regions and sectors could be compensated by CDC's
indirect investments, which are likely to continue to be more
profitable. Notwithstanding, a shift from financial to development
returns will inevitably imply smaller overall profits, not least
because focusing more on direct investments will require either
providing CDC with more resources (human particularly) or focusing
on an overall smaller number of investments.
28. DFID's shareholding in Actis, CDC's largest
Fund Manager
29. DFID's shareholding in Actis should be reviewed
in line with the new CDC model and investment strategy that emerges
from DFID's review of CDC.
30. CONCLUSION
31. Oxfam intends to undertake further research
and analysis of the role that private finance can play in development,
including the role of DFIs in harnessing the potential
of private investment for poverty reduction, which we will feed
into DFID's current public consultation on reforming CDC Group
plc.
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