The Future of CDC

Evidence submitted by Save the Children UK



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 [1] 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 (2007-2009) 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



Total portfolio 2009

Avg net profit after tax 2007-2009

Ratio net profit/total portfolio

(Fund total return after tax)

















































































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. [2] 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:

7. Looking at the industry sectors in which CDC invests.

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.

8. Looking at the size of the companies in which CDC invests

It is not clear how CDC is going to better meet the needs of small and medium-sized businesses i.e. 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." [3]

10. According to a recent European Development Finance Institutions (EDFI) report, [4] 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

11. Basing its investment strategy on a real understanding of poverty – who is poor and why, where they live and where they work.

Seventy five percent of the poor in developing countries live in rural areas with incomes directly or indirectly linked to agriculture. [5] 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. [6]

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 1.3bn poor people now live in middle-income countries. [7]

13. Measuring the impact of its investment on poverty in ways that go beyond just the contribution to GDP growth

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) [8] . 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. [9] 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.

[1] “The Growing Role of Development Finance Institutions in International Development Policy:

[2] ODI event, Development finance and the global financial crisis, 3 December 2008

[3] Shell Foundation, Enterprise Solutions to Scale: Lessons learned in catalysing sustainable solutions to global development challenges, 2010

[4] European Development Finance Institutions, The Growing Role of Development Finance Institutions in International Development Policy , 2010

[5] World Bank, World Development Report 2008: Agriculture for Development, 2008

[6] Food and Agriculture Organisation of the UN (FAO), Issues Briefs: How to Feed the World in 2050, 2009

[7] 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

[8] More information about the recommendations of the UN Special Representative on Business and Human Rights can be found at the following portal:

[9] Mathonet, P.Y. and Meyer, T. J-Curve Exposure: Managing a Portfolio of Venture Capital and Private Equity Funds, John Wiley & Sons, UK , 2007