Conclusions and recommendations
1.CDC’s existing targets for financial and development performance, established in 2012, do not adequately reflect the changing size and nature of CDC’s investment portfolio. CDC has exceeded its targets for both the financial return and the expected development performance of its investments in each of the four years since 2012 when they were agreed with the Department. CDC told us that achieving these targets will become more difficult as it looks to invest in the hardest places. These targets relate to CDC’s overall portfolio (which includes different types of investment in funds, and equity and loans) and therefore fail to capture variations in performance across CDC’s increasingly varied types of investment.
Recommendation: When agreeing the next 5-year investment policy (due in 2017), the Department should review the nature and values of the targets it sets for CDC, to make sure they reflect the diversity of CDC’s investment portfolio and economic trends in the countries in which it is investing.
2.It is difficult to determine what wider economic development impact CDC has achieved. CDC’s assessment of its development impact assesses expected rather than actual development performance. The Department and CDC supplements the two existing performance targets covering the financial return from investments and development performance with other indicators seeking to capture broader aspects of CDC’s performance, such as the number of jobs created and improvements in environmental, social and governance standards. However, these indicators lack a target against which progress can be assessed, and there is variability across the indicators as to what is required to be reported and on what basis. The Department approved an evaluation of the development impact of CDC’s investments almost two years ago but has not managed to recruit a person with the right skills to supervise this work and has yet to let the contract for the evaluation, undermining its ability to understand CDC’s performance.
Recommendation: The Department and CDC should design and publish an evaluation plan for CDC to sit alongside the new investment policy being prepared. The Department should also, as soon as possible, and in advance of any further increases in CDC’s funding, let the evaluation contract agreed as part of the business case to recapitalise CDC.
3.The relationship between the Department and CDC is confused. As the sole shareholder in CDC, the Department has the power to appoint its own member to the CDC board. But the Department has not done so, apparently on the grounds that it does not have a member of staff with the requisite knowledge of investment decisions. Neither the Department nor CDC could say whether the Department has a power of veto over investments decisions, dismissing the issue as hypothetical. Given the Department’s current and expected investment in CDC, and CDC’s importance to the successful delivery of the Department’s economic development strategy, such confusion needs to be resolved.
Recommendation: The Department should write to the Committee by the end of July 2017 setting out a detailed rationale for the current arrangements. The Department should also look again at governance arrangements, including:
- having a representative from the Department, as sole shareholder, on CDC’s board;
- clarifying whether the Department can veto or influence investment decisions.
4.The Department approved the business case for the £735 million recapitalisation of CDC in 2015 without seeking investment advice from external experts. The Department considers that it does not have the relevant expertise inhouse to involve itself in individual investment decisions made by CDC. However, it maintains that it did have sufficient expertise to approve the business case for the £735 million recapitalisation of CDC without obtaining external assurance from investment experts. This echoes our findings on the St Helena airport fiasco where we found that the Department had not commissioned an independent adviser with the necessary technical expertise to corroborate or challenge advice received. The Department told us that it would need to look ‘very hard’ at whether it had the right skills to build a business case to justify its next investment in CDC. We are concerned that the Department may come under pressure from Ministers to provide further funding to CDC without sufficient evidence of a strong investment pipeline needed to determine whether the funding would provide value for money.
Recommendation: To make sure it is acting as an intelligent customer, the Department should employ external investment experts to quality assure, and provide independent challenge to, future business cases recommending further investment in CDC.
5.CDC faces serious recruitment and retention challenges which may undermine its ability to meet the Department’s ambitions for future investment through CDC. CDC’s change of focus since this Committee last reported (away from a funder of funds model to direct investments and securing a development impact) led to its reorganisation and an increase in the number of people it employs. At the same time, CDC reduced its average pay. The Department’s future plans for CDC will require a further expansion in staff numbers. Both the Department and CDC acknowledge that recruitment and retention is a key risk for CDC’s operations. Remuneration policy, a key factor in recruitment and retention, is decided by the Department as sole shareholder. CDC’s remuneration framework, revised every three years, is currently under consideration by the Department.
Recommendation: The Department and CDC should agree CDC’s approach to recruitment and retention alongside agreeing the next five-year investment strategy and three-year remuneration framework. As part of the business case for further investment in CDC, the Department should ask CDC to set out how and when it will secure the right number and mix of resources to oversee the proposed expansion it its business.
24 April 2017