The future of CDC

Memorandum from CDC

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


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).’


· 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:

o Investments in 900 businesses in 73 developing countries;

o Nearly US$3bn in local business taxes paid in 2009;

o Over US$23bn in third party capital invested alongside CDC in funds;

o 3 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.


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’.


· 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.


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.’


· 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$23bn 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


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’.


· 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


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.’


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


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’.


As at 30 June 2010, 7% or US$183m of CDC’s portfolio (at value) was in SME’s.

Issue: Environmental, Social, Governance (ESG) Standards


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’.


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.