The Future of CDC

Evidence from Christian Aid

1. Introduction

1.1 Christian Aid is a Christian organisation that insists the world can and must be swiftly changed to one where everyone can live a full life, free from poverty. We work globally in over 40 countries for profound change that eradicates the causes of poverty, striving to achieve equality, dignity and freedom for all, regardless of faith or nationality. We are part of a wider movement for social justice. We provide urgent, practical and effective assistance where need is great, tackling the effects of poverty as well as its root causes.

1.2 We welcome the opportunity to provide written evidence to the International Development Committee on the future of CDC, and warmly welcome the committee’s interest in this area. This submission is an addition to the evidence on CDC that we have already provided to the Committee as part of its inquiry into the work of DFID in 2009-10.

1.3 We have focussed our remarks on the Committee’s request for evidence on: 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; and the extent to which the proposed reforms will be sufficient to refocus CDC’s efforts, especially with respect to poverty reduction.

1.4 Our earlier evidence on CDC is copied at the end of this document, for the Committee’s convenience.

1.5 We are happy to provide further evidence on any of the subjects covered in this submission via Melanie Ward, Senior UK Political Advisor on or 020 7523 2467.

2. The future of CDC

Christian Aid makes the following, additional points:

2.1 Christian Aid welcomes the focus of DFID on – amongst other things - whether CDC could do more to help developing countries with work to adapt to climate change while mitigating their contribution to the problem.

2.2 While Christian Aid acknowledges that the use of public funds, including those invested by CDC, to leverage private investments will be crucial in the global fight against climate change, we believe that further evidence is needed to assess the extent to which these leveraging mechanisms can actually result in pro-poor outcomes, especially in terms of adaptation and access to energy for the poorest.

2.3 In this context, if CDC is to explore ways in which public funds can leverage private finance for climate adaptation and mitigation, it will be crucial that these mechanisms are made consistent with poverty reduction objectives. We believe that the development and application of rigorous social and environmental safeguards will be fundamental to ensure the pro-poor outcomes of investments.

2.4 When public money is used to leverage private sector investment for climate change, it is Christian Aid’s view that in the context of the UK’s responsibilities under the UN Framework Convention on Climate Change, only the public element of the CDC investment should count towards meeting the UK’s international financial obligations.

2.5 It is, however, vital that all of CDC’s investments – not just those with a ‘climate change’ badge on them – are both environmentally sustainable and pro-poor.

2.6 It is impossible to say whether the reforms proposed on 12 October will achieve sufficient focus of CDC’s work because the proposals are currently so general.

2.7 Christian Aid welcomes Andrew Mitchell’s suggestion that CDC should reduce the proportion of its investments made via third party fund managers. This would help the company to exercise more active control over, and to have more information about, the way in which investee companies use UK public funds. That, in turn, should allow CDC to be more transparent and accountable for the way in which it is investing public money – a shift which is highly desirable and in line with government thinking about the vital importance of transparency.

2.8 A key test of any proposed reform of CDC is the extent to which it will create genuine transparency around the ways in which public money is being invested and how those investments are contributing to poverty reduction and sustainable development, not least through tax payments.

2.9 In particular, if CDC’s structure and investment model do not permit transparency around the tax payments which it and its investee companies make in the countries where they operate around the world, then the structure and investment model should be changed.

2.10 Christian Aid is surprised that DFID feels the need to even ask, in its consultation on CDC, whether it is appropriate for the company ‘to operate or invest in jurisdictions that do not meet international standards of transparency and exchange of information’. Given the way that such secrecy jurisdictions facilitate corruption, tax evasion and other highly damaging forms of crime against developing countries, CDC should have an unambiguous, well-publicised policy of avoiding them. This would set a welcome example for other multinational investors.

2.11 Finally, it is worth noting that since Christian Aid last submitted evidence to the Committee (see below), in which we argued that CDC’s investee companies should be encouraged to report their accounts on a country-by-country basis, the European Commission has launched a public consultation on the introduction of such reporting for multinational companies within Europe, the detail of which can be found here:  

3. Christian Aid’s evidence on CDC from the IDC’s inquiry into the work of DFID in 2009-10

3.1 CDC is part of the UK’s international development programme and its activities should thus be consistent with the International Development Act 2002, which requires development spending to be likely to relieve poverty and contribute to human welfare and sustainability.

3.2 However, it is currently extremely difficult to tell how the company’s activities affect people living in poverty. Even CDC itself has – as the Public Accounts Committee has noted [1] – only limited evidence of its effects on people and the environment. This, in turn, is connected to CDC’s investment model. It channels some 134 funds through 65 different fund managers and so its ability to monitor and influence the roughly 800 companies in which it invests is limited, as CDC admits. [2]

3.3 This lack of transparency around the way that CDC uses public money, supposedly for the benefit of some of the world’s poorest people, is at odds with the government’s stated concern for accountability and transparency.

3.4 Christian Aid is especially interested in the company’s impact on developing countries’ tax revenues, because tax is a crucial resource for those countries to lift themselves out of poverty. It has been shown to strengthen countries’ governance and policy stability, as well as providing revenue for investment in public services. [3] Christian Aid believes that CDC should know about the tax payments and practices of those companies in which it invests, and that it should be open with the British public about how much tax those companies are paying – and where.

3.5 As an example of the current lack of such transparency, CDC’s latest Development Review reports that it received details of the taxes paid in developing countries by 179 companies – only one quarter of those in which CDC invests. [4] Similarly, the company has in the past made claims about its tax contribution to developing countries which it then struggled to substantiate. [5]

3.6 CDC should publicly declare the identities of the companies in which it invests on a country-by-country basis. It should also use its influence as an investor to encourage its investee companies to declare financial details of their operations for each country in which they operate. Support for such country-by-country reporting is enshrined in DFID policy through the 2009 White Paper [6] as well as in the European Commission Communication on Good Governance in Tax Matters. [7]

3.7 Such publication would allow the public and the company’s owner, DFID, to properly scrutinise its record. It would also have the benefit of setting an example for other companies trading internationally to follow.

3.8 Furthermore, such publication would help to answer the many disturbing allegations that CDC routinely invests in companies which exploit artificial structures in order to avoid tax in the developing countries in which it invests. The 2009 DFID White Paper affirms that, "we all suffer from weak financial regulation, the financial impact of imbalances in trade, and the action of tax havens". It also made a commitment that, "CDC, which has sought to avoid unco-operative jurisdictions in the past, will in future only commit capital to new funds and direct investments in jurisdictions substantially implementing the international tax standard. CDC will review all existing investments in jurisdictions committed to, but not yet implementing, the international tax standard, following the next G20 Summit in September 2009." [8]

3.9 Christian Aid is concerned by reports that almost half of CDC’s subsidiaries are in tax havens, which - quite apart from the likely impacts on the tax revenues received by poor countries – makes it impossible for the public to scrutinise their finances.

3.10 That CDC generally invests through fund managers (rather than directly) does not justify less transparent reporting of the company’s tax record. If CDC’s current investment model does not permit such transparency then it is the investment model which should change.

3.11 DFID must ensure that CDC is fully transparent about its tax impact on developing countries, and that of its investee companies, as a matter of urgency.

[1] Investing for Development: the Department for International Development’s oversight of CDC Group plc, House of Commons Public Accounts Committee, session 2008-09. Criticism by the National Audit Office and Public Accounts Committee has prompted reforms intended to improve CDC’s attention to its effect on poor people and the environment but Christian Aid’s impression is that more fundamental changes may be needed before CDC will truly prioritise its effects on people and their environments. For instance, even the company’s latest Development Review shows that the company has evaluated the social and environmental impact of only 20 of the 134 funds. Of these, only seven were done by people who did not work for CDC. Furthermore, the Review itself implies that the evaluators did not have the information they needed in to assess non-financial criteria such as social and environmental ones. ‘…The understanding which CDC seeks from its evaluations includes the extent to which CDC’s capital contributed to poverty alleviation and macro-economic growth. An understanding of this sort requires clearer focus on the nature of the fund that is possible from the data provided by typical annual monitoring reports.’ (CDC Development Review 2009, page 58.)

[2] p64, CDC Development Review 2009 : ‘…Through the intermediated investment model, CDC is one step removed from portfolio companies and has limited ability to control what happens on an ongoing basis. CDC accordingly is not in a position to check compliance with all standards at portfolio companies but relies on its fund managers to do so: and CDC’s fund managers in turn may not always be in a position to exercise control or significant influence over their portfolio companies.’

[3] D. Brautigam, 'Introduction: taxation and state-building in developing countries' in Taxation and State-Building in Developing Countries Capacity and Consent, Edited by D. Brautigam, O. Fjeldstad and M. Moore, Cambridge: Cambridge University Press, 2008. A stable, transparent, even-handed tax system is perceived by investors as a sign of established ‘rule of law’ R. Bird, J. Martinez-Vasquez, and B. Torgler, “Societal institutions and tax effort in developing countries”, In The Challenge of Tax Reform in the Global Economy , edited by J Alm and J Martinez-Vazquez Germany: Springer-Verlag, 2006

[4] CDC Development Review 2009, page 3. Confusingly, the company reports on page 17 that it received tax data from 463 companies.

[5] When the company gave evidence to the Public Accounts Committee on 15 December 2008, it repeated its claim that its investee companies pay around £250m a year in tax and other charges to local governments. Two committee members asked the company to explain how it had arrived at the figure but in a letter from to the committee dated 9 January 2009, DFID said that CDC needed more time to gather information to substantiate its tax claim. Christian Aid does not know whether the company eventually provided the information.

[6] DFID (2009) “Eliminating World Poverty: Building our Common Future”, London: DFID

[7] European Commission (2010) Tax and Development: Cooperating with Developing Countries on Promoting Good Governance in Tax Matters, SEC(2010)426

[8] IBID.