The Future of CDC

Evidence submitted by TUC

Introduction

1. The TUC welcomes the opportunity to submit its views to the International Development Committee’s (IDC) inquiry into the future of CDC. As DFID’s wholly owned Development Finance Institution (DFI), CDC has the mandate, resources, and potential to drive significant pro-poor private sector growth in the developing world, yet as this submission outlines it is falling well short of this potential. It has a set of development standards that are weak and arguably not in compliance with international conventions. It fails to systematically target and reach the poor through its investments. And unlike leading private sector development initiatives, it lacks the systems or programmes to support companies, workers and other stakeholders to drive sustainable improvements in development. Finally, CDC could greatly improve its civil society engagement, transparency and accountability.

2. The TUC therefore concurs with, and welcomes the view of Andrew Mitchell, DFID Secretary of State that CDC needs a "major overhaul", particularly to "rebalance" the organisation "…towards both development and financial gains".

About the TUC

3. The TUC is the voice of Britain at work, representing 58 affiliated unions with a total of 6.3 million members. The TUC is also part of the larger global trade union family that will have members working in the companies that CDC funds are invested in. It works in partnership with many developing country trade unions to alleviate poverty and secure decent work.

4. The TUC has extensive experience in developing private sector standards to improve conditions at work, particularly in the context of international development. This includes:

• developing international standards of corporate behaviour through the International Labour Organisation, the International Standards Organisation, and the OECD;

• working with multinational enterprises to improve labour rights in supply chains, particularly through the UK-based Ethical Trading Initiative;

• working with government over developing best practice systems on ethical procurement (e.g. the London Organising Committee for the Olympic Games, the NHS); and

• assisting worker representatives on pension funds.

5. This submission is adapted from an earlier TUC submission to the IDC’s inquiry into DFID’s annual report 2008-09. It focuses on the TUC’s core area of expertise: decent work and development. However the TUC also shares the concerns of others regarding CDC’s practices on expenses and remuneration, use of tax havens, and other development goals such as environmental sustainability and combating corruption, as well as DFID’s oversight of CDC.

The CDC Investment Code and labour standards

1. CDC’s Investment Code (the "Code") should be the basis upon which all of its developmental efforts are directly towards. It is therefore essential that the Code as good as it can be. The best code among DFI’s is widely recognised to be the World Bank’s International Finance Corporation’s "Performance Standard" (IFC PS). This has been widely adopted by other DFIs, and CDC claims that its Code is "compatible" with the IFC PS, but it falls short in three important regards.

2. Firstly, unlike IFC’s labour rights provisions set out in its "Performance Standard 2" (PS 2), the Code does not include key provisions around fair retrenchment processes, grievance mechanisms, supply chains, human resources policies, requirements to provide written terms and conditions of employment and the requirement that the code covers all workers engaged by the company, not just "employees". This last point is critically important because company operations can involve many "non-employees" – from contract or agency workers to workers in an outsourced part of the company’s operation. These are typically the most vulnerable and poorest workers in sectors that CDC invests in including construction, manufacturing and agriculture. This leads to worrying outcomes: for example, under the current Code, a company would be free to discriminate against e.g. migrant agency workers, or home workers engaged on a piece rate system, where the domestic legal system does not address the issue.

3. Secondly, the Code’s language on labour rights is much weaker and on several occasions distorts the meaning of the core conventions of the International Labour Organisation (ILO), or the Universal Declaration of Human Rights, which it is claiming to reference. For example the Code states that businesses in which CDC capital is invested will: "allow consultative work-place structures and associations which provide employees with an opportunity to present their views to management". This language is a watered down definition of freedom of association typically used in company codes of conduct for operations in countries where independent trade unions are banned such as China. As such, it is inconsistent with the definition of freedom of association and the right to collective bargaining in ILO Convention 87, which the Code references earlier

4. Thirdly, while PS2 and other DFI codes requires companies to adhere to core labour standards, the Code only aims to, "encourage the businesses in which CDC’s capital is invested to work over time towards full compliance with the International Labour Organisation (ILO) Fundamental Conventions". While the TUC recognises the importance of encouraging continuous improvement in performance over time, it is important for the Code to set clear baseline of compliance rather than vague aspirations. This concern is compounded by CDC’s lack of transparency over the management systems, and targets that companies are adopting to drive such continuous improvement (see also paragraph 29).

5. The Code’s claim to be "compatible" with the IFC PS therefore seems to be more a mistaken assertion of fact rather than having the effect of incorporating the terms of the performance standard into Code.

6. Accordingly, CDC should revise its Investment Code by:

• consulting publicly with trade unions, and other civil society organisations, and relevant international institutions; and

• ensuring that it is fully consistent with internationally recognised labour, social and environmental standards; and genuinely builds on best practice instruments including the IFC PS, the OECD Guidelines for Multinational Enterprises, and the ILO Tripartite Declaration on Multinational Enterprise.

• Monitoring and demonstrating "development impact"

7. After reviewing CDC’s published material, the TUC shares the conclusion of the Public Accounts Committee of the House of Commons: "there is limited evidence of CDC’s effects on poverty reduction." This is for the simple reason that CDC does not target or measure poverty in its projects.

8. In its 2009 Development Review it reports that companies it invests in employ some 733,000 people. Have these jobs been created because of CDC’s investment? Has this employment helped these people leave poverty? Or were they already well off? The TUC is concerned that many of the sectors that CDC invests in may not be reaching the poor or creating jobs. Further, if CDC investments are reaching the poor, there is no data showing that workers are earning wages good enough to lift them and their families out of poverty.

9. While DFID has given CDC investment targets for countries and regions, it does not have targets for reaching the poor and reducing poverty. As a first step, CDC could adopt indicators and targets on actual jobs created and wage levels. In selecting investments, regard should also be had to environmental and governance concerns, as well as the potential of the investment to lift people out of poverty. Applying such criteria should help define what sectors CDC focuses on in the future.

10. CDC investments should also be having a measurable impact in other areas of development covered in the Code. CDC’s recently published 2009 Development Review attempts to respond to this criticism, but the data it presents is inadequate. A series of evaluations of the CDC funds were carried out, concluding that some funds "had social issues" and some had "reported social improvements". It also gives each fund a global grade on its ESG (Environmental Social Governance) performance on a scale of "excellent", down to "unsatisfactory".

11. Is child labour an issue? Are workers actually being paid their wages? In what sectors are investments lifting the most people out of poverty? Unfortunately CDC’s reporting says very little about the developmental impact of its work. Other private sector initiatives with a development or "social" component would grade performance on an issue-by-issue basis establishing baselines to measure each issue, setting benchmarks to strive towards, and then supporting the company to come up with a plan of action to drive continuous improvement. The data produced by this can then be used to analyse trends, and evaluate how interventions can be better tailored to tackle difficult issues. This is basic good practice on aid effectiveness, and practice that DFID is a world leader on. In the absence of such a system, the impacts of CDC investments are unlikely to be any different from ordinary private sector activity in developing countries.

12. CDC should:

• amend its mission statement to contain an explicit reference to its role in alleviating poverty and providing decent work;

• work with DFID, the ILO (and other relevant UN agencies) and other key stakeholders to develop clear development indicators and poverty reduction benchmarks and targets for its investments. In the employment context this should include "Decent Work" indicators measuring employment creation, social protection, labour standards and social dialogue.

Setting up systems to drive Decent Work and development

13. Along with developing development indicators and targets, CDC needs to follow the lead of other DFIs and organisations in running programmes with companies to make real strides in reducing poverty and providing decent work. For example, a company member of the Ethical Trading Initiative (ETI) has recently been able to show that over the past three years it has turned around 60 "non-complying" factories in Morocco to ensure that they now all pay at least the minimum wage, and adhere to national health and safety standards. It achieved this with far fewer resources, and greater supply chain challenges than CDC. Furthermore, it has done this as a for-profit outfit, not as an organisation using public funds with the purported aim of alleviating poverty.

14. Other DFIs are making promising progress in this area. The IFC-ILO Better Work Programme is working with multinational enterprises, local suppliers, trade unions and national governments to improve the livelihoods of workers in manufacturing supply chains. In Cambodia, for example, the programme has given decent work and wages to female workers, who have been able to save and send funds back to their rural communities enabling them to cope with rice shortages. This is a cost effective programme, well targeted and measured.

15. Both of these examples represent emerging best practice in private sector development and labour standards management. They are moving away from a "compliance" approach –a flawed "tick box" exercise that has little sustainable developmental impact - to putting a strong emphasis on developing systems to enable and ensure sustainable improvements in labour standards and productivity. This includes working with companies to develop professional systems of human resource management, and working with local unions to build functioning systems of industrial relations – to enable workers to monitor and improve their own conditions and production processes through mature dialogue with management.

16. CDC should be learning and applying this best practice, but will face challenges in doing so because its funder of funds model makes it too detached from the actual companies using its funds to be able to influence them.

17. CDC could explore two complementary approaches to overcome this problem. Firstly, the TUC supports the Secretary of State’s views that the CDC portfolio should limit its indirect investments and begin to make direct investments again, to ensure it has real influence over companies. Secondly, to roll out the support and programmes described above, CDC should consider engaging local specialist staff in priority investing countries to work with companies to develop and carrying out time-bound, target-driven improvement plans. Such efforts could be carried out in conjunction with DFID country offices, with other DFIs and development actors. Such support could apply to companies using CDC funds both directly and indirectly.

18. CDC’s current staffing structures would not be able to deliver this. At present CDC only has two staff covering its "ESG" (or Environmental, Social and Governance) work across an incredibly large and broad portfolio. Instead it mainly relies on its fund managers to drive development, supported "through a comprehensive training programme backed up by the new Toolkit". However, such fund managers are unlikely to have the right skills to perform the necessary tasks (e.g. could a fund manager design a programme to identify and address caste discrimination?), nor may they necessarily want to. Instead, CDC needs put in place qualified in-country specialists and the resources to help deliver such a programme. It could begin by piloting this approach in a range of priority investing countries.

19. Bringing CDC within DFID’s proposed Private Sector Department could be a great opportunity to enable it to learn from best practice with other DFID-supported initiatives such as the Ethical Trading Initiative.

20. CDC should:

• Draw on best practice in private sector development initiatives by running programmes in priority investing countries with companies to drive sustainable improvements in labour standards and productivity; and

• Establish a balanced portfolio by limiting its funder of funds-style investments and increasing its direct investment.

Civil society engagement

21. Contrary to good practice among other DFIs, the CDC has no formal consultative processes or governance positions for trade unions or other representative civil society organisations. For example, the IFC and the European Bank for Reconstruction and Development (EBRD) have been able to achieve best practice in developing and applying labour standards to their investments through drawing on the expertise and experience of the Global Union Federations and the International Trade Union Confederation (ITUC) through formal consultative structures. Further, DFIs such as the Netherland’s FMO and Germany’s DEG include trade union representation on their boards.

22. Other UK bodies dealing with the private sector and international development (among other things), such as the UK National Contact Point (NCP) to the OECD Guidelines have benefitted from having social partners (TUC, CBI and NGO representatives) sit on its oversight body. These external members have greatly aided in improving accountability and oversight of performance, building consensus on strategic direction and bringing in a wide range of expertise. Among the 42 NCPs globally, the UK is now recognised as a world leader.

23. CDC needs to conduct public consultations. Aside from ensuring that CDC is accountable and consultative, consultation is simply common sense: CDC’s Investment Code would have greatly benefitted from external feedback and advice.

24. CDC claims in its Freedom of Information statement that it "discloses aggregate summary results of its evaluation work and produces development impact reports annually". Yet as discussed earlier, this information says very little about actual development impact. Instead CDC should disclose all information relevant to assessing development impact including, but not limited to, all information generated under section 4 of the Code concerning management systems for CDC fund managers, especially initial impact assessments, remedial action plans, targets for continual improvement, corrective actions, and any evaluations.

25. Surprisingly, unlike other DFIs such as the IFC or the Asian Development Bank, CDC has no complaints mechanism for workers or communities potentially affected by CDC investments to seek redress. Such mechanisms can help identify and resolve problems at an early stage, rather than cause them to escalate and cause huge reputational damage.

26. Trade unions most probably represent workers engaged by the companies that CDC invests in. However, it is not at all clear that these unions have been consulted, as part of any impact assessment or in any ongoing monitoring and evaluation work.

27. Accordingly CDC should:

• include trade unions and other civil society partners on its Board. As a first step CDC should develop formal consultative structures with trade unions and representative civil society organisations;

• hold public consultations as part of developing policy and strategy;

• Disclose all information relevant to assessing development impact;

• Establish a complaints mechanism allowing parties to file complaints to address potential breaches of the standards and secure appropriate remedies; and

• For all proposed investments, conduct impact assessments that consult with potentially affected parties and civil society organisations, and include binding recommendations for avoiding or mitigating negative impacts.