I wish to inform the House of the Government’s decision to reconfigure CDC in order radically to increase its development impact.
CDC has the potential to be the jewel in the crown of the UK’s support to the private sector in developing countries. In the past, when its expertise was more developmentally than financially focused, its record of achieving investment returns was at best uneven. Subsequently, the balance has tipped too far the other way. CDC now needs to reinvigorate its development DNA and marry this together with business know-how and financial discipline. It must strive towards both development and financial gains.
As a fund of funds, CDC has in some ways been a remarkable success. In terms of financial performance, we applaud the achievement of turning £1 billion into £2.5 billion since 2004. But CDC has become less directly engaged in serving the needs of development. Using public capital CDC pursued the narrowly defined private sector goals for which it was incentivised and this meant the greatest return for the least risk. This was not consistent with concentrating its efforts in the regions of greatest development need.
We will create a revitalised CDC with a great deal more clarity and ambition over what it does and where it works.
Specifically, I shall propose that CDC reduce new commitments to future third-party funds and consider the benefits of liquidating some of its existing investments where this can be done on attractive terms. We will not end commitments to new third-party funds since they can be the most appropriate way to mobilise funding in some countries and for some investment purposes. But the fund of funds model should make up no more than part of a new, broader and more actively managed portfolio.
CDC should regain its power to make investments directly in target countries. This could be done through co-investment with other sources of capital where, by doing so, CDC would make possible desirable investments which could not otherwise be made.
In addition to regaining greater investment control, CDC should be committed to participating through a wider range of vehicles, including investment in debt instruments and the provision of guarantees. Greater flexibility will enable it to build a more diversified portfolio in terms of risk, maturity and liquidity.
I should like CDC also to develop a more active approach to portfolio management. Its purpose is to invest in the poorest countries or sectors where capital is otherwise not available—to provide patient capital to finance and kick-start private investment in the most difficult regions.
CDC also needs more financial firepower. It needs to try to find liquidity for its investments so that capital can be recycled more quickly to new targets. We are also exploring how CDC could regain its power to borrow. This would give CDC the ability to move more quickly and more effectively.
CDC must continue to show that it is improving the way in which firms in the poorest countries operate, and that it monitors and demands improvements in the conditions under which people work. CDC must also continue to demand more effective treatment of environmental issues, more transparency and a rigorous approach to corruption.
These reforms will enable CDC to become a distinctive, innovative and differentiated development finance institution, with clearly measurable development impact and additionality, and new commitments targeted throughout sub-Saharan Africa and the poorer parts of Asia. I want CDC to be more pro-poor focused than any other development finance institution, doing the hardest things in the hardest places.
Identifying the sectors on which CDC should focus in future is a complex area. The correlation between investment and poverty reduction is not straight forward.
The Government want to listen to a wide range of views before taking any decisions. CDC and DFID will commission independent studies which will be made public on the DFID website and my Department is also launching a consultation, outline details of which will be available on Wednesday 13 October.
Regaining greater power over the investment of capital needs to be staged carefully, will take time, and will need resources of human capital additional to the dedicated people working for CDC at the moment. CDC must attract people of the highest calibre, who are passionate about pro-poor investment and whose expertise is rewarded by remuneration that is fair and appropriate, but not excessive. As part of the consultation, I will consider what that remuneration structure should be.
I shall make a further announcement early next year and CDC will reflect the necessary changes in the business plan which they will publish in the spring.