Additional written evidence submitted
by CDC Group plc
Further to my letter of 10 January 2011, where I
sought to draw the Committee's attention to errors of fact arising
from the oral evidence given by witnesses, I have as promised,
done the same with the written submissions the Committee received.
I thought it would be helpful for you to have this
information, whilst the Committee is drafting its report.
I attach a note with this letter which details some
of the witnesses' comments and, in turn, CDC's comment. As with
my earlier note, I have deliberately focused more on the significant
errors of fact and those statements that are particularly misleading
than on minor errors and value judgements expressed by the witnesses.
I hope you find it useful. Please feel free to contact
me should you require any clarification or if you have further
questions.
CDC NOTE TO CHAIR OF INTERNATIONAL DEVELOPMENT
SELECT COMMITTEE ADDRESSING MAJOR ERRORS OF FACT ARISING FROM
SUBMISSIONS TO THE COMMITTEE
ISSUE: MEASURING
DEVELOPMENT IMPACT
Claim
CornerHouse, pg2: "the
exclusive reliance of CDC on funds of funds renders it less able
to respond to the varied capital-raising needs of the private
sector in developing countries. In fact, as noted in our previous
submissions, the fund of funds model is largely inappropriate
to the development mandate of CDC—private equity funds are
wholly unsuited to delivering positive development outcomes (particularly
poverty alleviation)."
Response
- The most serious economic impediment to economic
development in poor countries is that international investors
are reluctant to invest there. The capital requirements are enormous—believed
to be trillions of dollars in investment.
- Allowing CDC to use more financial instruments
gives CDC the flexibility to invest and support businesses in
different ways and this is certainly to be welcomed. It is worth
noting however, that the fund of funds approach is a demand led
form of investment; responding to the call for capital which promising
businesses require and lack access to.
- Moreover, the current model enables CDC to invest
and crucially harness investment of third party investment for
businesses; encouraging and furthering investment in poor countries'
businesses, bringing about more development impact.
- It is therefore incorrect to say that "private
equity funds are wholly unsuited to delivering positive development
outcomes", indeed since its implementation in 2004, the fund
of funds model has achieved outcomes including:
- Investments in 900 businesses in 73 developing
countries;
- Nearly US$3 billion in local business taxes paid
in 2009;
- Over US$23 billion in third party capital invested
alongside CDC in funds;
- Three million lives supported.
- Development impact assessments carried out by
third parties on CDC's funds have shown that there is significant
development impact created by the investments into sustainable
businesses.
Claim
One, pg1: "recent
reports show the relationship between poverty reduction and economic
growth varies depending upon existing characteristics and inequalities
in the type of growth in the individual country (Kalwij &
Verchoor, 2007; OECD, 2010). Indeed, in some cases poverty levels
have remained the same while inequalities have actually increased
with GDP growth (Kalwij & Verchoor, 2007; Ravallion, 2001).
Without policies to directly address inequality simply supporting
economic growth generation will not achieve the desired results".
Response
- There is broad consensus that an overall rise
in economic growth correlates with poverty reduction. However,
it can certainly be agreed that if the growth only enriches those
who aren't in poverty, and does not benefit poor people, over
any time frame, it cannot be said to reducing poverty.
- CDC's investments tackle poverty. Poor countries
require investment in a range of sectors and CDC's approach has
been to invest across all of them, from infrastructure to agriculture,
consumer goods to microfinance; they have created employment,
tax, infrastructure, goods, services and will have improved a
range of peoples' lives immeasurably.
Claim
Bracking, pg 1: "Positive
effect of augmenting private investment flows is largely unproven".
Bracking, pg 2: "No
convincing evidence that total capital flows to Africa are expanded
as a consequence of this investment model".
Oxfam, pg 2: "CDC
appears to be investing in some funds, and companies, where private
capital would potentially go anyway."
Response
- These assertions are inaccurate and not backed
up by supporting analysis.
- CDC's current investment model has mobilised
capital to the world's poorest countries. CDC has done this by
demonstrating to private sector investors that good returns in
the poorest countries are possible.
- Since 2004, CDC has committed more than US$5bn
to over 70 fund managers. Other investors have committed approximately
US$23 billion to these fund managers.
- Recent analysis of CDC's portfolio shows than
in the 19 funds where CDC made commitments in 2009 and 2010, CDC
played a leading catalytic role in 15. These funds would not exist
or would be materially different without CDC's investment. It
is also worth noting, that 36% of CDC's funds fail to reach their
target size with less than 3% exceeding their target size, indicating
that there is a severe shortage of capital from the private sector
and puts paid to the myth that CDC is operating in areas where
there is sufficient private capital.
ISSUE: TRANSPARENCY
& TAX
Claims
CornerHouse, pg 4: "the
majority of the DFIs we have looked into currently operate with
no binding restrictions on the use of tax havens by those funds
and companies which they support, a practice that has drawn widespread
criticism, both because of the role played by tax havens in facilitating
corruption and because of the adverse development impacts of denying
developing countries much-needed tax revenues. The only undertaking
is a voluntary agreement by DFIs that are members of the Association
of European Development Finance Institutions (EDFI) to "self
regulate" by using "acceptable" secrecy jurisdictions
as defined by the OECD."
CornerHouse, pg 4: However,
three DFIs—Norfund (Norway), Swedfund (Sweden) and Proparco
(France)—have been operating under stricter, mandatory restrictions
on their use of secrecy jurisdictions since 2009.
For Norfund, this means that it cannot
invest in funds that are domiciled in tax havens that appear on
OECD's "grey list" and which do not have tax agreements
with Norway. A
recent study undertaken for Norad, Norway's bilateral aid agency,
confirms that the policy has resulted in Norfund declining to
participate in one project in Tanzania and "a re-routing
of one fund to Luxembourg from Mauritius".
Proparco has similarly confirmed a greater
use of Luxembourg by funds it supports
Christian Aid pg 3: "CDC's
latest Development Review reports that it received details of
the taxes paid in developing countries by 179 companies".
Response
- Businesses with potential are often held back
in poor countries because they can't get the finance they need
to grow.
- One of CDC's primary objectives is to mobilise
other investors to invest alongside CDC. This is facilitated by
the use of offshore financial centres enabling international commercial
investors to pool their money in a place where they can have confidence
that they can enforce contracts and have certainty on financial,
governance and legal matters, without creating another layer of
taxation.
- Under DFID direction, CDC follows the OECD rules
and guidelines and only uses OECD white list locations (two historical
fund investments are in a pacific island which is on the grey
list but which is expected shortly to be on the white list).
- CDC is working with the other European DFIs to
explore the use of offshore centres and with DFID through the
consultation.
- The 179 figure is inaccurate. CDC did not receive
details of taxes paid from 179 companies, in fact the figure at
the end of 2009 was 463.
ISSUE: OVERSIGHT
& DUE DILIGENCE
Claim
Bracking, pg 5: "CDC
does not carry out due diligence on all their co-investors. The
argument that they check all major shareholders but the very small
ones is an argument incorporating much hazard: a 'small' investor
in a large equity fund is often a very 'big fish' once he or she
is back in their domestic context, capable of wielding much power
and control over local markets, communities and workers. Thus
the moral hazard is that such people are empowered in relation
to others, with no apparent checks on their business practice
or legal record. The due diligence of small investors is left
to contracted Fund Managers."
Response
With the fund of funds model, investors sign-up to
the investment strategy put forward by fund managers. This would
include for example, sector and geography focus. Investors, including
large investors such as CDC, provide guidance and support to fund
managers. Crucially, however, investors do not dictate how the
fund operates e.g. what businesses are invested in: this is the
role carefully chosen fund managers perform, whom CDC and other
investors do due diligence on and who are empowered to take responsibility
at a local level having agreed the overall strategy and objectives
of the fund with the investors. It is unclear therefore where
and how investors wield power over local communities and workers
and there is no evidence in this submission to support the assertion.
ISSUE: SECTORS
Claim
CornerHouse, pg 3: "This,
however, is significantly greater than CDC's support for SMEs,
which amounted in 2008 to just four per cent of its investment
portfolio".
Response
As at 30 June 2010, 7% or US$183 million of CDC's
portfolio (at value) was in SME's.
ISSUE: ENVIRONMENTAL,
SOCIAL, GOVERNANCE
(ESG) STANDARDS
Claim
CornerHouse, pg5: "In
terms of environmental and social standards, all the DFIs that
are members of the EDFI have committed to "benchmarking"
their support against the "UN Declaration of Human Rights,
the ILO Core Conventions and the International Finance Corporation's
Performance Standards on Economic and Social Sustainability and
associated Environmental and Health and Safety Guidelines".
Such benchmarking does not require compliance with the referenced
standards, simply that the project is assessed against them. By
contrast, for OPIC, compliance with the Performance Standards
is mandatory".
Response
CornerHouse seems to have confused the principle
that underlies CDC's Investment Code by suggesting that CDC merely
requires businesses be assessed against best international practice
with no requirement that they actually comply. Instead the opposite
is true. Whilst CDC may not require an investee business to be
fully compliant with best international practice at the time of
a new investment by the fund manager, the fundamental principle
of the Investment Code is that fund managers' work over time to
apply relevant international best practice with appropriate timetables
and targets for achieving best practice. Moreover, fund managers
who receive CDC's capital must also commit to minimising adverse
ESG impacts in the investee businesses and committing to a process
of continuous improvement in these areas. Fund managers with significant
influence over their portfolio companies, for example with a seat
on the board, are also required to obtain an undertaking committing
the portfolio company to operating in line with CDC's Investment
Code. CDC's Investment Code not refers to the conventions mentioned
above CornerHouse, but other international best practice standards
on ESG matters as well.
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