The future of CDC

Evidence from Bowen Wells, Founder Chair, International Development Select Committee and Alistair Boyd, Formerly CDC Deputy CEO

The Future of CDC

To readers of this submission, 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 2-3 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 1961-1974. 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.