[Relevant documents: Fifth Report of the International Development Committee, HC 607, and the Government response, HC 1045.]
Motion made, and Question proposed, That the sitting be now adjourned.—(Mr Newmark.)
I am glad to have the opportunity to open this debate on the future of CDC, and I appreciate the fact that the Secretary of State for International Development has undertaken to respond to it.
CDC is a remarkably important part of our development armoury and it is likely to undergo substantial changes in the coming years, as our Committee recommended in its report. I need not detain hon. Members long by saying that CDC—originally the Colonial Development Corporation, subsequently the Commonwealth Development Corporation, and now just the CDC—is the Government’s development finance institution and the fourth largest in the world. On its own terms, it has been a success, in the sense that it has grown its assets from £1.2 billion to £2.7 billion since 2004. In 2009, which is the last year for which I have figures, it contributed £222 million towards the UK’s official overseas development assistance.
From a personal point of view, I would say that CDC has done well in terms of what it was asked to do, but it needs to do more and differently, and that is certainly the recommendation of the Committee’s report. The Government have reviewed CDC. The Secretary of State said to me that as a fund of funds it is fine, but it needs to be something more—I agree. Indeed, it has been my view for a number of years that CDC is too distant from the Department for International Development and that its full potential for helping to achieve private sector growth and development in our priority areas has not been realised. I welcome the Secretary of State’s statement that he wants CDC to be
“more pro-poor focused than any other development finance institution, doing the hardest things in the hardest places.”
If I may say so, that quote is characteristic of him.
I have often said that the International Development Committee is not the overseas aid Committee. If we are to provide sustainable development that will lift poor people out of poverty and keep them out, we must strengthen the private sector’s ability to support them. As a fund of funds, CDC has levered additional finance, and there is clearly a role for that to continue—indeed, that will probably be its predominant role—but we have suggested that CDC should consider whether it can, for example, attract more capital from diaspora funds. Diaspora finance far outweighs our overseas development assistance to many developing countries, but it is fair to acknowledge that, understandably, much of that money goes back to the families and communities from which the diaspora has come. However, the Committee took the view that there must be scope for a significant part of that finance to be channelled into wealth-focused, pro-poor development funds. We certainly believe that a well-targeted, well-managed fund could unlock a lot more for pro-poor development.
As a fellow member of the Committee, I praise the Chair and his draft, which we accepted without any amendments. He rightly says that diaspora communities want to invest in their mother countries. One example is the Pakistani community, which invests heavily in Pakistan. However, one regular problem is that the investments are risky and do not give the returns sought. If CDC reformed itself to appeal to diaspora communities, that could lead to much more effective aid and development in their countries.
I thank the hon. Gentleman for that intervention. CDC opens up the opportunity to do a lot of things differently in the future that could unlock funding from a variety of different sources. That will be a mark of its success.
We also recommend that CDC should try to invest funds where private capital otherwise might not go—or not on a scale or on terms that would meet the needs of the poor. There is plenty of evidence throughout the world that some market opportunities do not always attract adequate investment because they are regarded as unfashionable or remote, or because their benefits are counter-intuitive. One example from the not-too-distant past, and from quite close to home for me, is the Highlands and Islands Development Board. An interesting thing about the board is that it invested in its heyday in stimulating new companies and initiatives across the highlands and islands region.
I remember the chairman of the board giving evidence to a Select Committee. When he was asked what return the board made on its investment, how many losses and bad debts it had and how that compared with the private sector, he answered, in summary, “Actually, our rate of return and bad debt is almost exactly the same as in the private sector.” That prompted the question, “Well, why do we need you, then?” and he answered, “Because the private sector wouldn’t go where we went.” That is classically the case with CDC. It will and can go to places where investment might not otherwise be made, but where genuinely positive economic returns can be secured. [Interruption.] I am glad that my hon. Friend the Member for East Surrey (Mr Gyimah) has found his right place in the Chamber. I hope that he might catch your eye in due course, Mr Walker.
It is right that a development finance initiative such as CDC should have, in addition to such priorities, an investment code that meets the Department’s environmental, social and governance standards. That code should be used not as a barrier to attracting funds, but as a means of effectively certifying the quality of investment and attracting money from investors who want to meet certain high standards. There are examples of ethical investment funds in the UK. People with such investments want to invest their money in ways that have particularly beneficial social outcomes. I am certain that people will want to invest in ways that deliver benefits to the poor, but they will also want to know that it is being done in a businesslike and commercial way—not through a charity, but through an organisation designed to create sustainable economic development.
One problem with and criticism of a fund of funds is that, by definition, it creates long lines of communication and limited direct control. Many transactions are happening at a long remove. Given that it is a development finance institution, it is therefore necessary, first of all, to ensure that the impact is properly assessed and measured. We have called on the Government to ensure that that is done more effectively than in the past. A proper assessment should be made of what jobs were created, whether they were quality, permanent jobs, and whether those jobs were adequately paid. That is the essence of sustainability as well as of the pro-poor benefit of the investment. The same applies to transparency. People need to know where the money is being invested and whether it is being invested in appropriate things with which people feel comfortable. They need the assurance that the primary outcome is benefiting poor people.
That point raised a debate in the Committee about what people should be paid. It is somewhat embarrassing that the CDC has suffered criticism for that in the past. Given that its primary purpose is to help the poorest people in the world, high rates of remuneration and bonuses for its executives create an uncomfortable anomaly that needs to be addressed.
Does the right hon. Gentleman agree that it is not just about the absolute level of salaries and bonuses, but about the time horizon within which they are paid? If we are to do serious development work or to make investments with a development impact, people should be thinking about the long term, rather than about short-term gains.
I absolutely agree. My view is that that is a good criterion for every form of investment, but especially in this context.
The Committee received interesting evidence on remuneration, which we debated. The standard response on CDC has been, “It has been set up as a market-based model competing for funds in the marketplace, so we have to pay people market-based salaries.” I am not saying that there is no connection between those things, but we received significant evidence that there were people who would be prepared to work for considerably less than the market rate, although not necessarily for peanuts, given that, in the peak year, the chief executive’s package totalled £1 million, which included a salary of several hundred thousand pounds. However, there are people who will work not for £20 a week, but perhaps for £50,000, £100,000 or £150,000 a year, on the grounds that they have an opportunity to give something back from their own career by contributing their experience at a time when they do not need the money. We asked the Government to look at that. I appreciate that that can create tensions, but as long as the process is done openly, the model would draw some of the sting out of the criticism that has been levelled in the past.
Similarly, the Committee had an interesting discussion about the use and role of tax havens. We recognised that things were not as simple as we had thought when we started to look into the situation. The argument for their use is that they create financial efficiency that attracts more money than would otherwise be the case, and that that does not, in fact, mean that taxes are not being paid. Unattached—orphan—money that was not directly related to a particular geographical area or activity could be reinvested in the fund and, in effect, the tax not paid on the tax haven funds represented money available for reinvestment. The Norwegian development finance institution recently took a policy decision to pull out of tax havens, and doing so dramatically reduced the attraction of additional finance. Our view is that we should look at the situation clearly. There should be transparency and institutions should always pay taxes appropriately and properly, but we have asked the Government to consider whether they should provide a rule about the correct role of tax havens. To be frank, the Committee did not feel that there was enough authoritative evidence to make a definitive recommendation.
Absolutely, and I obviously hope the Secretary of State can give us that assurance.
In a sense, the organisation needs to be a trailblazer for what an investment model in developing countries ought to be, and a role model not only for other DFIs, but for the well-intentioned private sector. We have concluded that there is scope for clarification at the very least and for the maximum transparency.
We were as shocked as the Secretary of State that despite the sale of Actis, the fund manager, for £373,000 and the fact that the Government were apparently entitled to 80% of the proceeds, not a penny had been paid by the time the Committee took evidence. I know that he was anxious to vent his spleen about that when he gave evidence to us. I do not know whether he will be able to give any indication today of whether the Government can sell their share and, if they do so, whether we will get a fair rate of return—after all, that will be reinvested for the benefit of poor people.
Perhaps the Committee’s most significant recommendation was that the investment model for CDC should be changed. I know that the Government have not entirely accepted our recommendations, but I think that they acknowledge the strength of their principle and the spirit. We recognise that the fund of funds model could unlock a substantial amount and that it does attract investment. Particularly if the report’s recommendations are taken on board, that could be focused in a way that gives real, sustainable, long-term benefits to poor people in poor countries.
We felt that some of the money needed to go into more direct, riskier and more pro-poor investment. That means not that it should be thrown away or invested irresponsibly, but that lower rates of return should be acceptable or that a mix of grants and loans should be applied. We suggested the name “CDC Frontier” to indicate that the body would be operating slightly more experimentally.
One point about our recommendation of having two separate businesses was that because the fund of funds has been very successful at attracting and unlocking substantial extra funding—it has provided very good leverage—we were concerned that a more risk-associated set of investments in the same fund might frighten off some investors who have contributed. I hope that the Secretary of State will reassure us and that his response shows that he has taken our concern on board. As long as the Department and the way in which CDC is established are able to reassure those people, the Committee will be content if our specific model is not adopted. I hope that the Secretary of State understands that the proposal was not a gimmick, but a genuine attempt to ensure that we had the balance of the changing nature of the business right and that we did not have a higher-risk aspect undermining the area with a proven track record.
The Committee felt that there should be some agreement on the sort of sectors within which CDC should operate, but the Government did not entirely accept that recommendation. I appreciate the reason behind the absence of the hon. Member for Stafford (Jeremy Lefroy). He is a valued member of our Committee and has real expertise in agricultural development in east Africa. He was rightly exercised by the view that most countries in which we have the greatest commitment to pro-poor development are rural, and agricultural productivity is a major cause of poverty. The Committee accepts that the world is changing. We have produced a report on urban poverty and increasing urbanisation, so we do not see development as something that happens just in remote parts of rural Africa, which is sometimes the public image. However, it is true that in both the sub-continent and Africa, a high proportion of the poorest people depend on agriculture for their livelihoods, yet the productivity of agriculture is frankly abysmal in many cases.
When the Committee recently visited east Africa, some of us spent a night in a village in the heart of rural Burundi—
I will not take any interventions on that point. There is an internal issue in the Committee.
In Burundi, we witnessed for ourselves some of the poorest of the planet’s poor people struggling. I was going to say that they were on the edge, but they were beyond the edge—they were not operating at survival levels. If it were not for the intervention of non-governmental organisations, I do not think that they would have survived. It was estimated that their per-capita income was 20p a day. Apart from very basic and poor living conditions—no electricity, one tap for 4,000 people and pit latrines, although not for everybody—we saw exhausted soil, diseased plants and minimal yields that were inadequate even for self-sufficient farming, never mind cash-cropping.
The hon. Member for Stafford, as someone who knew a little more about agriculture than other Committee members, said that it should be possible to perform a soil analysis, to work out nutritional benefits and to advise on disease-resistant plants, and possibly to increase the yield of the agricultural holdings by up to eight to 10 times. That would be a massive return, so we felt that CDC should be part of the process of tackling that problem. We would like to think that it would consider investing in improving agricultural outputs in such poor countries.
Is it not true that CDC could help not only with productivity and increasing yield, but by working with farmers with very small plots of land to enable them to join together as a co-operative, because that would give them a greater income overall? When the Committee went to India, we saw a diversity of products compared with the sorts of crops grown in Burundi, Rwanda and, indeed, the Democratic Republic of the Congo. It would be better if people could diversify and have larger plots so that they can make more money, which would come back to CDC and benefit all those incredibly poor people we saw when we stayed in Burundi.
I certainly agree that we want a partnership that looks at the best way of optimising and maximising production from which the community can benefit. I know that the Government have said that they are unwilling to direct CDC into particular sectors, but I hope that the Secretary of State will indicate that he will also not be telling it not to go into particular sectors. I hope that the Government will listen to the Committee’s view that CDC should try to explore such an area because that approach would give it an expertise that would be beneficial and could be replicated elsewhere.
Although today might not be the appropriate time for the Secretary of State to comment on this, he will be aware of the engagement that we have all had in our development programme in India. He has set a target of 50% for the level of Indian overseas development assistance going into private sector development by the end of 2014-15. For absolute clarity, I should say that the Committee did not dissent from that as a principle, but we were concerned about whether the mechanisms existed, or would exist, to achieve that figure. It will be interesting to see the role of CDC and equivalent partners in relation to that, particularly because the Government of India have made it clear that they are not keen on the UK Government’s aid programme being used to subsidise private sector investment.
To return to the example I cited with regard to the Highlands and Islands Development Board, there were projects in the states that we went to—Bihar and Andhra Pradesh—that probably would yield a return, but are unable to attract investment because they are off the sexy horizon of where people want to invest in India. It is possible for the Secretary of State’s objectives to be achieved, but the revamped CDC and the equivalent model may have to be worked up to a point where that can deliver. That is not possible at present and, to be fair, the Secretary of State has not said that it should happen as of today. However, a lot needs to be done in the next three or four years if that is to be delivered.
I can summarise things with a slightly personal view. I have been Chair of the Committee for six years, including throughout the previous Parliament. As I have said before, the creation of DFID was a considerable achievement of which the previous Labour Government had every justification to be proud. I have no hesitation in saying that. However, after that length of time and with a new Government in office, it is also right and proper to review, reprioritise and reassess.
Until recently, DFID was not comfortable with the role of interacting with the private sector. What people in DFID do in development terms is brilliant and world class. Indeed, I am not criticising the people involved because they did what they were asked to do. However, whenever there was a discussion about private sector co-operation and partnership, there was a tendency to say, “Well, that’s what CDC does. We’ll park that and get on with our development job.” In future, there needs to be more of a mingling of the two. When one role is more risky, complicated and difficult, there is always a worry that it could compromise the other. I understand those concerns, but the relationship between the Department and CDC as it changes needs to be slightly more hands on. There needs to be more parallel working between CDC in country and DFID programmes in country, and a greater understanding about them between the two.
My final example about that comes from a briefing the Committee enjoyed—my hon. Friend the Member for Mid Derbyshire (Pauline Latham) was there in Aberdeen—from the Wood Family Trust, which I hope will give evidence to us in the autumn on a different inquiry. The trust was engaged in a project in east Africa on making markets work for the poor. It is a private family foundation, and it started off by saying, “We’re going to give the money we’ve made”—predominately out of the oil and gas industry—“and put it into development in Africa, because that’s about putting something back. We’re business people and we’ll do the business thing.” Indeed, that was precisely what it was doing. However, it rapidly realised that it could not do what it wanted without being in partnership with the public sector. It is interesting to note that the public sector needs to partner the private sector and the reverse is also true. It is the working together that delivers the best results.
I commend to the Secretary of State the fact that, when the Committee is visiting any bilateral partner in the future, we are likely to get a briefing about what is happening between the development programme and CDC in that country. We have not had that in the past—CDC has almost been a different organisation.
I commend our report to hon. Members. I am very grateful to the Secretary of State for attending the debate and, indeed, for his constructive response to the report. I look forward to him updating us because I am aware that since our report was published, things have moved on a bit with regard to initiatives to revamp and reinvigorate CDC. The Committee is very much looking forward to hearing about that.
I endorse and congratulate the right hon. Member for Gordon (Malcolm Bruce), the Chair of the Committee, on the way in which he has introduced the report. As I am a Committee member, it would be rather surprising if I said that I disagreed with the report, so I will say that I agree with it, having participated in its compilation. In addition, my life on the Committee would not be worth living if I said anything else.
I would like to ask the Secretary of State a couple of questions. In a sense, this picks up where the right hon. Gentleman finished. He talked about the join between the Department’s private sector activities and those of CDC. I am still a bit uncertain about where that join is and how the Secretary of State sees it. When we visited India, that issue came home to me when we came across a target of 50% for how much of the Department’s budget should be spent in the private sector. I had not heard of that before. It is obviously very well known that the Government felt that more of the Department’s activities should be channelled through the private sector—I do not necessarily demur from that—but it was the first time I had heard that there was actually a target of 50%. A number of my colleagues and I found that a bit surprising because, if DFID is about doing what is right to combat poverty, the private sector should be utilised where it is appropriate, and what in some places might be called the third sector and the public sector should be utilised where that is appropriate. The objective should determine the percentage. That is not what seems to be happening here, where the percentage is in danger of determining the objective.
As we asked more questions about that, I got more confused about exactly what the policy was. When the Secretary of State winds up, will he clarify where the 50% figure comes from, rather than 40%, 30%, 60% or 80%? Why 50%? If such a target is appropriate for India, is there a 50% target for other areas where the Department is operating? If so, what is that based on? Is it based on the same criteria as for India or is it based on different criteria? If the figure is not 50% for other areas, how did he arrive at the different percentages? I am genuinely confused about how that works.
I would also like to know what the join is between that figure and the role of CDC. Certainly there was an uneasiness among some of our interlocutors in India about DFID saying that it wished to devote 50% of its activities to the private sector. That was not because the people we spoke to considered private sector investment to be unimportant. Indeed, a number of the most creative projects that we saw there could go under the heading of private sector projects, and they were often very small scale and very pro-poor. As the right hon. Member for Gordon mentioned, the people concerned were questioning whether, if this is going to be done on an industrial scale and on the basis of a particular percentage, it should be a private sector-led activity—the private sector investing—rather than something done by DFID directly.
Does my hon. Friend recall the conversation that the Committee had with representatives of the Indian Government, who said that they would not see direct private investments by the Department for International Development as aid assistance? They recommended that DFID create a private sector wing, or arm, of its organisation to make those investments. In this case, it could be argued that that wing is CDC. If that 50% of funding does not go through CDC, does that not highlight the failures of CDC?
My hon. Friend makes a good point. In a sense, that is what I am getting at. I well remember that discussion. There was unease about the percentage. There was certainly a view that there was a need for vehicles specifically attuned to that, rather than simply a percentage of the aid assistance programme. Does the Secretary of State see CDC as the vehicle for delivering that percentage, or do CDC’s activities somehow sit on top of that? If he does see it as the vehicle, has he communicated that down to his officials in the field, so that they are not necessarily structuring their budgets in a way that might not be what he wants to achieve? If he does not see it as the role of CDC to take that role—back to my original question—where is the join between what the Department itself does directly and what CDC does, particularly in regard to its direct investments, rather than its role as a fund of funds?
I am grateful for the opportunity to speak in the debate, particularly because I am not a member of the International Development Committee, although I follow its work closely. I welcome the Committee’s report on CDC, which has operated in the shadows for too long and which is increasingly a subject of public concern.
I am pleased to note that the issue of compliance by CDC fund managers with the Department for International Development-sponsored CDC investment code has been raised in the report, because it is an important issue. I have followed the issue at first hand after one of my constituents, Mr Dotun Oloko, came to see me about the investments of two CDC-backed funds in Nigeria, Ethos and Emerging Capital Partners. Mr Oloko’s concerns have been set out in written evidence received by the Committee, so I will not detail them here. Suffice to say that Nigeria’s Economic and Financial Crimes Commission reports that four of the companies in which CDC-backed funds have been invested are fronts for laundering money. That money is said to have been corruptly obtained by James Ibori, the ex-Governor of Nigeria’s Delta state. Mr Ibori, who has previously been convicted twice in the UK, is on trial here again, this time for alleged money-laundering offences involving CDC investee companies.
CDC’s investment in such companies raises many concerns. As hon. Members will recall, CDC’s investment code requires that all businesses in which CDC’s capital is invested must
“comply with all applicable laws and international standards intended to prevent bribery and financial crime.”
Under these rules, companies with links to a politically exposed person, such as Mr Ibori, his relatives and close associates, should have been subject to an enhanced due diligence process. Why did the funds fail to pick up on these links, even after they had been brought before a Nigerian court and were widely publicised in print and in the electronic media? A simple internet search would have revealed the details of corruption associated with these CDC investee companies.
I also want to know whether procedures were in place, both within the funds and within CDC, to ensure compliance with money laundering laws in the UK, the US, Jersey, South Africa and Mauritius—all countries where the funds and CDC are variously registered. For example, here in the UK, the Money Laundering Regulations 2003 require CDC to implement procedures to forestall and prevent money laundering. If, as the evidence from this case suggests, CDC has failed in that respect, will there now be a broader review of CDC’s portfolio with regard to money laundering risks?
My constituent Mr Oloko’s own investigations revealed another stunning fact: a discrepancy of several million pounds between the amount one of CDC-backed funds claims was paid for its investment in a Nigerian fertiliser company, and what was actually received for the shares in Nigeria. The fertiliser company is reported—alleged—to be a front for Mr Ibori. Yet this appears to have gone unnoticed by CDC and, once it was informed, unreported too. In future, will CDC be required to report such information, if there are reasonable grounds to suspect that a crime has been committed?
There are other causes for concern. CDC continues to be an investor in a bank whose director has been jailed and in other indicted investee companies. Those companies include one where a former chief executive officer is facing criminal charges in Nigeria as well as civil action in the UK, and another which Private Eye magazine has accused of tax evasion and corruption. DFID’s response has been equally worrying. When concerns were raised, did it seek further information from Mr Oloko? No, it did not. Did it bring in independent investigators? No, it did not. All it has done is to ask the funds and CDC—the very institutions whose actions need investigation—to give assurances that no wrongdoing occurred. That is not sufficient to reassure the public.
A key question, still to be answered, is whether CDC passed on the information that it received from Mr Oloko to the police, as required under the Proceeds of Crime Act 2002. We do not know, because CDC refuses to say. When I met the director of the Serious Fraud Office earlier this year, he told me that he learned about the concerns directly from my constituent, Mr Oloko.
CDC’s Nigerian investments are not the only causes for concern. CDC also invested in funds that have backed companies accused of human rights abuses, such as Anvil Mining, and of profiting at the expense of the poor. For example, in Uganda the CDC-backed power distributor Umeme has hiked electricity prices to the point where many poorer Ugandans have been forced to steal electricity from the grid; Umeme’s manager is reported to have called for their execution.
DFID officials have argued that the measure of CDC’s contribution to relieving poverty is the profitability of the companies backed by its funds, which is not a serious argument. While investment is certainly needed to relieve poverty, it is both simplistic and irrational to assume that any investment, even if conditioned by environmental and social safeguards, automatically translates into positive impacts on poverty reduction simply because that investment generates growth.
Before I was elected to this House, I worked for Oxfam for more than 10 years. I have seen some of these development questions at first hand. Many of the funds in which CDC invests make extensive use of tax havens. I listened with interest to the right hon. Member for Gordon (Malcolm Bruce) on the complications and issues around tax havens, which is a matter of concern. Those funds are using tax havens, and although the right hon. Gentleman explained that that is not always to avoid paying taxes, it still raises concerns.
I want to reassure the hon. Lady that we share those concerns. We did not dispel them; we just felt that the matter was more complicated than we had appreciated. In a wider inquiry, we did not have time to come to a definitive conclusion. The concerns exist and we need assurances, but she should accept the danger that investment may be driven away if the matter is handled wrongly.
I hope that the issue can be looked at in greater detail. I appreciate that it is complex, but none the less there are real causes for concern.
The Government have acknowledged many of the concerns about CDC. I am encouraged that that has strengthened CDC’s environmental, social and governance procedures. CDC is also committed to introducing new development impact indicators and to developing new investment instruments, so that it no longer operates exclusively as a fund-of-funds investor. By 2015, 20% of its investments will be loans and 20% of them will be direct equity investments. However, that still leaves 60% of its investments being delivered through private equity funds. I question whether such turbo-charged profit seekers are always the appropriate development finance vehicles. Indeed, fund managers themselves are sceptical about the compatibility of the fund-of-funds approach with DFID’s development objectives, particularly in addressing poverty.
There are some important lessons to be learned, most notably about the need for proper scrutiny of development projects and for CDC’s investments to be properly monitored on a regular basis. My constituent has looked at a relatively small proportion of CDC-backed funds, but what he has already discovered makes me extremely concerned that there deep-seated problems that needed to be addressed as a matter of urgency.
Profiting from development at the expense of the poor is easy; history is, unfortunately, replete with examples of that. The more difficult challenge is to assist poorer people in designing and developing programmes for their own benefit, rather than that of their financial backers. I very much hope that CDC can rise to that challenge in the future.
Finally, I sincerely apologise for the fact that I cannot be present for the whole debate, although I will be here for some time. I understand that it goes on until 5.30 pm.
It is a pleasure to serve under your chairmanship once again, Mr Walker. Most of us here agree about the vital role that an organisation such as CDC can play, if it gets its model right, in driving growth and prosperity and in alleviating poverty in the process.
I was not a member of the Committee when it conducted its inquiry, and I was quite worried, before I looked at its excellent report, about changing CDC’s business model. I was concerned about whether CDC would be able to make the same returns. I thought we might be asking too much of an investment fund that operates in some of the most difficult parts of the world if we told it to focus only on those places that need its help the most, on those sectors where it can make the most difference and in environments where levels of corruption could be quite high—as we know from organisations such as Transparency International, governance regimes are simply not there in some of these countries, and especially in those that face conflict. Ultimately, the UK taxpayer could suffer as a result. There was therefore the difficulty of returns, the political risk and the issue of operating in conflict areas. That was the attitude with which I approached the Committee’s report.
Having looked at the report and been on our visit to Rwanda, the Democratic Republic of the Congo and Burundi, I realise that private sector companies simply will not take on certain types of investment, because the returns are not there, and they will not allocate capital to such projects. With that in mind, it makes a lot of sense to see whether much of CDC’s effort could be refocused, and the horizon is absolutely important. When CDC changed its business model, a lot of bankers and private equity players ended up working there, and from my experience in banking, I know that their outlook is slightly different and the returns they look for are very different. If an organisation is staffed by such people, it might not always be consistent with looking at agriculture or infrastructure projects, which take quite a long time to deliver the development output that we would expect.
Having seen the Secretary of State’s response to the Committee’s report, I have a couple of questions for him. The first relates to sector focus, which was touched on by the Chair, who also mentioned the experience and expertise of my hon. Friend the Member for Stafford (Jeremy Lefroy) in agriculture. In the whole of Africa, we are seeing some of the consequences and difficulties that come about if we do not have some of the best practice in agriculture. As we know, people in CDC had that experience before it changed its business model, so is there a case for saying that we should look at some sort of sector focus to make a development impact? That is particularly relevant given what DFID came up with after the bilateral and multilateral aid reviews. They did not say much about agriculture, so could CDC be the vehicle for looking at the issue?
My next question for the Secretary of State relates to the skills and the knowledge base. If CDC is to change its business plan, I want to know a little more about how it will get the skills to deliver what will be a very different investment model. If it is going to focus on sub-Saharan Africa and Asia, it will need a lot of country knowledge and to be able to identify the best transactions. It will also need people who are committed to the sector they are dealing with, which is very different from a fund-of-funds model, where people’s skills base probably relates to choosing the right fund to put money into, rather than identifying the right investment and the right management team, which will then be given ongoing support to ensure that the investment yields a return. What work has been done on that? How will CDC be almost re-engineered to deliver the new business plan?
The final point I want the Secretary of State to clarify is how the accountability link to the UK taxpayer will work. Obviously, it will be through the Department, but I would like a greater sense of how that will work. The Secretary of State has rightly focused on results as regards our development and aid budget, and the Committee’s report focused a lot on how we can assess development impact, but I want to know how we work out whether the UK taxpayer is getting value from what is done.
As the hon. Gentleman has rightly said, he was not a member of the Committee during our inquiry. Having immersed himself in our work since he joined the Committee, however, he will agree that it was bizarre that when CDC’s managing director, chief executive and chair came before us to give evidence, they could not, between the three of them, answer basic questions such as how many staff they employed, what the total wage bill was and what the total bonuses paid to their 46 members of staff were. Is that not an indication that we need improved transparency, so that we can show those things to the British people and get their trust in the process?
I thank the hon. Gentleman for his point. I totally agree that the British public need transparency about how the organisation is run. However, the success or failure of the fund’s operations also depends on such details.
I want the Secretary of State to clarify the points that I have raised. Let me say once again what a pleasure it is to serve under your chairmanship, Mr Walker.
I am grateful to you, Mr Walker. I was not sure whether I would be allowed to speak, not having notified you. I was in a Bill Committee and I was not sure whether I could leave it.
I would like to follow my right hon. and hon. Friends and other hon. Members on the Committee by raising a few points, and I apologise if I repeat some of what they have said. I want to stress two or three issues that have come out of the report. I very much welcome the Government’s positive response and the way in which they have set about dealing with CDC—a body that has, let us not forget, been extremely successful. Its investments have gone up by something like £1.5 billion over six or seven years, and any organisation would be proud of that performance. CDC has received no taxpayer’s money since 1995, and it is something of which the British people and the British Government—the previous Conservative and Labour Governments and the current coalition Government—can be proud. We need to set all our remarks in that context.
As I said, I welcome the Secretary of State’s engagement with CDC right from the start, as well as his support for the Committee’s work and the Government’s reaction to our recommendations. He did not necessarily accept that CDC should be split into two separate legal entities, and perhaps there could be two separate parts to the same legal entity. I understand his position, and we do not want to create more complexity than is absolutely necessary, but we must aim to achieve what we want to achieve.
What do we want to achieve? There are two or three things that we need to do with this new-model CDC. The first point to note, as my right hon. Friend the Member for Gordon (Malcolm Bruce) and my hon. Friend the Member for East Surrey (Mr Gyimah) stressed, is the importance of agriculture. It is vital that private investment goes into agriculture. There has been news in the past two or three years of major investments in agriculture in sub-Saharan Africa. Those consist quite often of sovereign funds taking large chunks of land on a lease or perhaps a freehold basis to promote their own domestic food security. I see some dangers in that. First, the food security that we need to be most concerned about is in the countries in which the investments are made. We do not want food to be exported from countries that are already suffering deficits to other parts of the world. We need to encourage local production for local markets. Of course we need to encourage trade and exports. However, I have had personal experience of how there can be a surplus in one part of a country, which is traded overseas, while there is a deficit—indeed, semi-famine—in other parts of the country. The problem is the logistics and infrastructure. We need to be a little wary about such investments.
I see CDC as having a tremendous role to play in encouraging a sustainable investment in agriculture, of two kinds. That might, first, be in direct investments in socially responsible agribusinesses, and in businesses that perhaps work with smallholders at one remove. The future of increased productivity in agriculture in sub-Saharan Africa, and other parts of the world, is often in the hands of smallholders, who know their land best and are able to get fantastic results. Sometimes it is said that smallholder production is not up to the standard of that of large estates, but I dispute that. Where smallholders have access to training, inputs, fertiliser, up-to-date seeds, research and modern plants, they can produce at the same level as estates, and perhaps surpass it. The cocoa crop is an example; it is produced almost entirely by smallholders, not estates, for the simple reason that the smallholders generally do a much better job than estates have, where they have existed. It is clear that CDC in its new guise, either through CDC Frontier or the existing CDC, could improve or increase its investments, and go from what I believe is currently 6% in agriculture to a much higher level.
Secondly, I believe that CDC has an important role to play in the support and development of small and medium-sized enterprises. Our report showed that the average size of a company in which CDC had made an investment was quite substantial. If I remember rightly, it would have an average of more than 1,000 employees. Clearly, within that there were successful smaller companies. However, I believe that CDC could be one of the major sources of funding in the spheres where it operates—perhaps not directly for SMEs, because it might be too much to ask that it would invest in them directly, but certainly in funds such as GroFin, in which I believe it already invests, and ManoCap in Sierra Leone—funds that invest in SMEs. CDC already has expertise in that area, and I would like it to expand that.
Finally, I believe that CDC needs to consider infrastructure. It already invests quite a lot in that. I have referred to the importance of infrastructure in agriculture and getting crops around the country. I think that DFID has a tremendous role through the Private Infrastructure Development Group in supporting infrastructure in sub-Saharan Africa and elsewhere. However, CDC could look at more local and smaller scale investments in infrastructure, which would help not only the SMEs I have spoken about but the agricultural sector.
I welcome the Government’s response to the report. I believe that CDC is poised to set off in new areas without losing its expertise and performance in existing areas. It is extremely important that the Government should continue to support CDC. The report pointed out that DFID should perhaps take greater interest than it has in the past, when CDC has almost been left to get on alone. It has done a good job, but if the Secretary of State continues to show the kind of engagement and involvement with CDC that he has done, both in his public pronouncements and the response to the report, it will have an excellent future.
It is a pleasure to speak today from the Labour Front Bench about CDC. I thank the Chair of the International Development Committee, the right hon. Member for Gordon (Malcolm Bruce), and the rest of the Committee for their work. It is vital that CDC should play its part in promoting investment in developing countries to promote economic development and poverty alleviation.
In 2009 development finance institutions contributed about $33 billion of new private sector investment in developing countries. The contribution made by institutions such as CDC to developing countries has the potential to make an even more significant impact on economic development and poverty alleviation, as part of the UK’s continuing work in international development. As the right hon. Member for Gordon pointed out, it is vital to build on its work and to focus on areas where improvements can be made. With a mandate to boost economic growth by investing in private sector development and more than £2 billion of planned investment in the next five years, there is, as I have said, a great opportunity.
I want to focus on some of the issues raised by right hon. and hon. Members in the debate. The right hon. Member for Gordon highlighted the importance of CDC’s acting as a fund of funds, and of the need to focus on pro-poor development and the connection between investment and development. Economic growth in its own right will not bring about development if we do not use our investments appropriately, as many hon. Members have pointed out.
The hon. Lady has made an important point. A World Bank report on sub-Saharan Africa will often give an annual figure showing rates of growth that most of Europe would envy, but it does not show that the distribution of that wealth is not helping to alleviate poverty. Wealth by itself is no use, if it does not get to the people who need it.
I welcome that comment. As we have seen recently, in many middle-income countries, economic inequality coupled with injustice are a devastating combination and can lead to conflict. Economic development is vital. Growth is vital, but it must go hand in hand with tackling global inequality. We must be mindful of that responsibility in our investments through CDC and in our other investments.
The right hon. Member for Gordon also discussed the linked matter of ethical investment and the need for social outcomes and sustainable economic growth, and other hon. Members have reinforced those points. Historically, while CDC’s role has been important and has often been positive, it has had a mixed history. This is a great opportunity for us to look ahead at how it can play a bigger and more significant role.
My hon. Friend the Member for Birmingham, Northfield (Richard Burden) raised the important question of about 50% of the international development budget to India being channelled through private sector investments. He sought clarification from the Secretary of State whether that figure is accurate and whether that investment will be channelled through CDC or some other route. I will appreciate that being clarified in the Secretary of State’s response.
The hon. Member for Brighton, Pavilion (Caroline Lucas) raised some important issues about compliance with the spirit and letter of international law and about tax, transparency and money laundering laws, among others. She reiterated the role of ethical investment and the need to be mindful of human rights, in particular when investing in mining companies and others. Many organisations have expressed concern about the impact that particular kinds of investment can have and the need for greater care to ensure that such investments are ethical and that human rights violations do not take place.
CDC has an important opportunity to lead by example, and we must require it to set that example and to implement the focus on human rights, given the interest in human rights in those countries. I very much accept the hon. Gentleman’s point.
I also want to mention what the hon. Member for Brighton, Pavilion said about CDC acting as a fund of funds as well as a poverty alleviator. It is important to consider compatibility. There are many examples of incompatibility and, as she rightly stated, some bring into sharp focus the tensions between the two objectives. The two are welcome, but greater monitoring is needed to ensure that the objectives do not contradict each other.
The hon. Member for East Surrey (Mr Gyimah) discussed returns on investment. His insights included recognising the importance of creating the appropriate investment horizons and environments. He raised two key issues on skills: first, on skills and the knowledge base, he pointed out the importance of ensuring that that capacity and technical expertise is available as the investment takes place in developing countries; and, secondly, he indicated the importance of sector focus, in particular in agriculture. Several hon. Members mentioned accountability and transparency.
I will wrap up, because I am conscious that I do not have a huge amount of time.
I have lots of time, which is good.
In 2010, CDC’s capital was invested in about 143 funds, supporting 930 individual companies worldwide. Companies benefiting from CDC investment employ almost 1 million people in 70 different countries. As the International Development Committee report acknowledges, CDC has contributed to employment and the tax base in developing countries, which are critical to development and economic growth. That is, however, only part of CDC’s contribution, and other notable examples of success can be found in developing infrastructure and technology and in linking those countries to the international economy. So CDC has a vital role to play in the future in infrastructure development and in poverty alleviation, although a number of issues were raised by the Select Committee report as well as by those who submitted evidence and who have campaigned for continued reform of CDC.
I want to ask the Secretary of State about ensuring the appropriate monitoring of impact, of what happens to the investment and of how development objectives are met. I also want to reiterate the points made in the debate about investments being ethical, fulfilling human rights objectives and not contradicting our overall national aims to ensure that our investments are appropriately geared towards economic development as well as poverty alleviation.
On smaller investments and support to SMEs, as hon. Members have mentioned, we must be vigilant in ensuring that CDC does not merely replicate what other investors do but provides added value. It should give support and investment to smaller investors or those from diaspora communities. As was acknowledged, such communities provide more investment in developing countries—their countries of origin—than all development aid put together. CDC has a great opportunity to tap into that resource and channel the aid and investment going into those countries to help fulfil economic development and poverty alleviation objectives.
I will cite one recent example from my constituency. A small group of UK Bangladeshi entrepreneurs developed a cargo business with their own investment—only a small amount of money—because they could not get access to resources elsewhere, and it is now a multi-million pound business. That is a small but significant example, because those entrepreneurs did not have access to investment from organisations such as CDC and because it illustrates the profound interest among diaspora communities in investing in their countries of origin to develop the economies of the cities that they come from. Many of their ideas are incredibly innovative, as in my example, and have the capacity to promote investment and connections between the two countries.
I certainly agree with the hon. Lady’s comments about focusing on small and medium-sized enterprises. Given the high failure rate, however, especially among small enterprises, does she agree that if we have greater focus by CDC on SMEs, we must accept that it might not have the returns that it has previously achieved?
I accept that point. If CDC wants to be a trailblazer and to encourage investment by others, there must be some way of framing its activities to enable some appropriate risks to be taken. That might involve a special innovation fund to identify potential investments, which could recognise that failure rates are greater with particular kinds of investments such as smaller businesses.
Although innovation journeys in business, technology and elsewhere may attract a large amount of investment, there are often only a small but significant number of successes, but they may generate new sectors. There must be discussion about the level of risk that CDC can take, and it would be helpful if the Secretary of State were to reflect on some of those points and tell us whether particular efforts can be made to recognise that, for example, diaspora and smaller communities have a big role to play in those countries, but that there must be a way of enabling them to invest. The pool of investors is often smaller. Is there a way of pooling investments or collaborating to ensure that more targeted investment from those groups goes to developing countries? Those matters should be explored.
Is it not true that diaspora communities invest in and send money back to the communities that they came from, because they know those communities? Trying to get another organisation to co-ordinate how they spend their money might seem to them to be telling them how to spend that money. Would it not be better to leave them to form their own associations to help their own communities, because they often know many people in the area? They are better left to get on with funding in areas that they know and whose needs they know, instead of giving it to someone else to invest. If we are not careful, we might stop them investing at all.
Diaspora communities may be interested in developing businesses that connect between, for example, the UK and Pakistan. They may need advice, support and technical assistance, and they sometimes need access to investment funds to start up a business. There may be areas where they can do that themselves, but my essential point is that opportunities are being missed. We do not want to duplicate or squeeze out direct investments to help families, but second and third-generation British citizens with links to their countries of origin are increasingly interested in investment in and support for business rather than direct support to family members. It is important that CDC looks at opportunities for such investment, which is different from the traditional support to families and friends because it involves putting money into businesses in their home country or city, or the area where they come from.
CDC’s business plan, which follows the various reports, including that of the International Development Committee and the Government response, is welcome, as is the general thrust of its focus on economic development, including its fund-to-fund focus, and on poverty alleviation, but we must look closely at where CDC goes next and how it implements the overall vision that it has set for itself, recognising the many issues that have been raised. Those issues include internal practices and how CDC is perceived by the public. Hon. Members have acknowledged that there are still concerns and reputational issues about how CDC is perceived to be using resources, remuneration packages, pay and so on, and how its money is spent. The public deserve the best value for money, as well as transparency and accountability, so that our investments create a genuine space for others to follow. In areas where CDC invests, it creates new opportunities for others to follow, and it acts as a trailblazer and a catalyst. That is the ethos that we all want CDC to achieve. We all want it to succeed.
I again commend the work of the International Development Committee and look forward to seeing CDC thrive and succeed in increasing investment in developing countries, in helping to reduce inequality through economic growth and in making its contribution to reducing poverty.
It is a pleasure to appear under your benign chairmanship, Mr Walker, for the first time. I congratulate my right hon. Friend the Member for Gordon (Malcolm Bruce), who launched this debate today, and his Committee on its work not only on CDC, which has been enormously helpful to my Department, but on a range of other matters to which it brought extraordinary expertise and experience as well as energy, when considering difficult and intractable development problems. Secretaries of State do not always agree with Committees on every issue, and that is true of the International Development Committee and this Secretary of State. However, for the record, it is a pleasure to work with such an expert Committee. The Department and its Ministers draw huge strength from the way in which the Committee goes about its business, and I am extremely grateful to all its members for that.
This has been an excellent debate on many of the key issues that the Government are trying to address in connection with CDC. Let me start by emphasising the point that several hon. Members made—that CDC, given the terms of reference under which it has operated in recent years, has done an extremely good job. It has provided an excellent return to taxpayers, and it has increased substantially the funds under management, but my submission is that in development terms it is a greatly under-utilised asset, and needs to be changed.
It is fair to say that some years ago, CDC perhaps had too much development DNA in its work, and not enough financial rigour. Indeed—I hope that this does not cause Labour Members to blush—the then Prime Minister, Tony Blair, was minded to privatise CDC, but that did not proceed. The pendulum has now swung to the other extent, and it is a very strong, financially driven organisation that is not much different from many other organisations that operate in emerging markets. It seems to have lost some of its development DNA, and we need to put that back in the centre so that it has both rigorous financial control DNA, as well as strong development DNA. That is our intention, and I am pleased that it was strongly endorsed by the Committee in its response to our proposals.
It is worth emphasising the point that was made by the Committee’s Chair, my right hon. Friend the Member for Gordon, that aid is a means to an end, not an end in itself. The coalition Government have been determined to refocus the development programme so that the aid programme is fuelled by the engine of development—the private sector. Here, I turn to some of the comments made by the hon. Member for Birmingham, Northfield (Richard Burden), who is my hon. Friend in Birmingham, where our constituencies are close together. He asked about the 50% figure for the amount that will be spent through private sector development in India, and for which other countries we were minded to adopt that policy. He also asked me to explain why I saw the private sector as a key means of development, and we had some exchanges on that when I appeared before the Select Committee.
I suspect that, although the hon. Gentleman sees intellectually that the private sector is the engine of development, he may have residual reservations, and sometimes under the bedclothes late at night he may think that it is perhaps the enemy of development rather than its engine. The truth is that if one believes that the private sector is the engine of development, one wants to bring to bear all the available skills in the private sector to try to drive development forward. Some 90% of the world’s jobs are created not by Governments but by the private sector. Wealth creation and economic growth empower societies and enable them to lift their citizens out of poverty.
I do not know what the bedclothes are like in the north of Birmingham, but the Secretary of State is searching under the wrong bedclothes in the south of Birmingham because that was not the question I asked. I wanted him to explain the figure of 50%, as opposed to 40%, 60% or 80%. If there is a logic to that figure, what is it based on? Does it apply elsewhere, and if so, on what is that based?
As I made clear to the Committee, the figure of 50% feels right in the context of India. I suspect that in many bilateral programmes over the years, there will be an increasing role for the work of the private sector as countries move down the path of lifting themselves out of poverty. In Vietnam, for example, we can see how that engine has driven the alleviation of poverty. There is no science to the figure of 50%, but it feels right in the case of India. As I said when I gave evidence to the Committee, it is not an arbitrary target but an aim.
As the hon. Gentleman will be aware, in defending our decision to continue with an aid and development programme in India, it is important to respond to public concern. We must explain that, yes, India is roaring out of poverty, but there are more poor people in India than in the whole of sub-Saharan Africa. Seven and a half times the total population of the United Kingdom live on less than 80p a day, and it is right to walk the last mile with India on development. The aid and development programme is important, and makes up part of the rich tapestry of Britain’s relations with India that were so singularly reinvigorated by the Prime Minister’s visit last year. Those relations are important and we all—not only people in India but those in Britain as well—have a huge amount to gain from Indian prosperity. For that reason, we decided to freeze the programme, focus on work in the poorest states and redirect a significant part of the budget—up to approximately 50% by the end of the next four years—to pro-poor private sector development. That will create the jobs and prosperity that are essential for India.
I wholeheartedly agree with the case that the Secretary of State makes for aid to India, and there was strong cross-party support for the report on India by the International Development Committee. I want to follow on from the question asked by my hon. Friend the Member for Birmingham, Northfield (Richard Burden). The issue is not about whether the private sector has a role to play in development—that is a given; the private sector is crucial if we are to develop underdeveloped nations. However, if the Department for International Development aims for 50% of its money to be spent in the private sector—as in India, for example—what percentage of that money will go through CDC? If the Department is making direct investment and not using a third-party organisation such as CDC, will that risk the integrity of DFID, which makes untied, direct grants and investments in a bilateral sense, rather than direct investments from which it looks for a return?
I will come directly to that point. CDC investments in India will be in addition to the 50% of the programme funding that we expect to be spent on pro-poor private sector development over the next four years. If the hon. Gentleman will allow me, I will come in a moment to some of the other points that he has raised.
I am sorry to delay the Secretary of State on this issue, but I want to return to the point raised by the hon. Member for Birmingham, Northfield (Richard Burden). The Secretary of State said that the figure of 50% was not arbitrary, but he then said that the criteria were that that figure “feels right”, which does sound arbitrary. Will the Secretary of State be clearer about the criteria that led to the discussion and agreement on a figure of 50% for India, and what criteria were used elsewhere?
At the moment, the target exists only in India. I can only repeat what I said to the hon. Lady: the figure feels right; it is not a science and I am not setting an arbitrary target in that sense. It is an aim and as long as we move down that course over the next four years—which I am sure we will—we will see the benefits in terms of what is happening in India and of the effectiveness of our programme.
I know that the hon. Lady has an urgent constituency matter to attend to and may leave before the end of my speech, so I will address the point she raised. She made a number of detailed comments about the nature of the operation of CDC’s investment in Nigerian companies against which corruption allegations have been made. I hope that she will forgive me if I draw her attention to the fact that some of those matters are before the courts and I must therefore be careful about what I say in my response. I can tell her, however, that the Department and CDC take allegations of corruption extremely seriously. We have looked at the allegations in exhaustive detail, and I have written in great detail on the matter to the chief executive—I think—of the Jubilee Debt Campaign. I would be happy to share the contents of that correspondence with the hon. Lady, and if she would like me to do that, she has only to say.
The hon. Lady is nodding assent, and I will write to her on that basis.
The point I seek to make is that by helping the world’s poorest people to create wealth and build up their own assets, we will help them to pull themselves out of poverty, and become less reliant on aid and more resilient in the face of natural disasters. During her excellent speech, the hon. Member for Bethnal Green and Bow (Rushanara Ali) underlined the point that development finance institutions such as CDC should do more to reduce poverty. I completely agree with her. We need to see the new CDC leading the way and demonstrating how other international financial institutions, including the International Finance Corporation, can set a good example. We are pressing the IFC to do more in lower-income countries and particularly fragile states, and to be more demonstrably pro-poor in middle-income countries. There is no difference of opinion between the Front-Bench spokespeople on that point.
At the heart of the approach that we are discussing is a reformed and revitalised CDC that will be a catalyst for change in the most challenging environments where the transforming power of successful financial investment is most needed. In that context, the previous six months have seen an enormous amount of activity, and if I may, I will remind the Committee of what the Government have been doing. In October 2010, I informed the House of the Government’s decision to reconfigure CDC to boost its development impact, and a public consultation was set up as part of that process. In March this year, the Committee published its report on CDC. The Government responded on 4 May, welcoming that report and agreeing with the vast majority of its recommendations. On 7 June, I reported to the House that the Government and CDC had agreed on and published a new high-level business plan.
In his opening remarks, the Chairman of the International Development Committee stated how important it was that the Department should not be too distant from CDC. He expressed the view that the Department had previously seemed distant, although the two buildings are only about 300 yards apart. I completely agree with the right hon. Gentleman, and we are intent on rectifying that within the important confines that Ministers and civil servants should not pick winners or make decisions on individual investments. They are, however, entitled as the 100% shareholder in CDC to express a clear understanding of the direction in which CDC should be moving. That is what we are doing.
I take the Secretary of State’s point about Ministers, but what about departmental staff and CDC staff who work together, particularly in bilateral areas? Our experience in the past is that CDC is never mentioned during programmes of visits to other countries. I hope that that will not be the case in the future.
The right hon. Gentleman is absolutely right. We will, I hope, see secondments between the Department and CDC in the future, and we are intent on promoting much closer involvement, including at country level. When I first visited India, I, too, was struck by the distance between the Department and CDC, although it is fair to say that, such is the quality of the staff that we are fortunate enough to have in India, that is rapidly being rectified. The Chairman of the Select Committee will agree that that is a most important matter.
In the early part of his remarks, the Chairman mentioned the importance that the Committee attached to the role of the diaspora and, in particular, to remittancing and related matters. On page 2 of the Government response to the Committee’s report, we are clear that making intelligent and innovative use of that should be something that we progress, and we have every intention of doing that.
I do not want to waste the valuable opportunity presented by today’s debate by repeating the details that I have already given the House. Instead, I want to remind hon. Members of the broad thrust of the changes that we have made to CDC—changes that reflect the responses to the consultation and many of the comments made in the Committee.
Under its new business plan, CDC will become a pioneering investor—the most pro-poor investor in the world. As members of the Committee made clear, there have been too many examples of CDC behaving like any other emerging market private equity fund. I noticed that on one occasion CDC was the seventh investor in a fund, which does not suggest a great deal of pioneering. What CDC has that the market does not have is the ability to deploy patient capital, which does not require the same returns as are returned by the market. It can take a much longer view. That is one of CDC’s unique selling points, and it is extremely important that it is deployed.
CDC’s focus will be on development impact rather than corporate profitability. It will channel all its new investments into the poorer countries in sub-Saharan Africa and Asia, where more than 70% of the world’s poorest people live. It will become bolder in its approach to innovation and risk, accepting higher financial risks where those are justified by greater development benefits. In other words, as I said, it will be a patient investor.
I agree wholeheartedly with the suggested reforms for CDC. The Secretary of State rightly mentions the fact that CDC will have to make more risky investments. If CDC made more risky investments and did not get the returns that it hoped to get, would the Department be willing to put further funds into CDC to protect it?
The hon. Gentleman asks an important question. We have taken nothing off the table in that respect. I will come on to why the time to deal with that point is when the new chief executive has been appointed and the business plan for CDC under his or her direction has been set out.
A number of members of the Select Committee raised the overuse of private equity funds by CDC in the past. However, ManoCap, for example, which is a brilliant organisation and fund in Sierra Leone, run by Tom Cairnes and his colleagues, is highly developmental. Under its new approach, CDC will support pioneering equity investment and will increasingly also deploy other tools, including lending, guarantees and co-investment, but they will be introduced carefully and over time.
In addition, my hon. Friend the Member for Stafford (Jeremy Lefroy) and the hon. Member for Bethnal Green and Bow mentioned the position of CDC in relation to SMEs. It is worth making it clear that CDC is already one of the major backers of SME funds, such as ManoCap and GroFin, and it will do more. Last November, it committed €8 million to a new SME fund based in west Africa. I hope that the hon. Lady will feel that the direction of travel in that respect is also a good one.
Following the changes, CDC will no longer work exclusively through private equity funds managed by others and, as I have said, it will offer loans as well as equity financing. It will become more transparent in its dealings, so that taxpayers and the people whom we are trying to help can see where and how the money is being spent. It is already publishing more corporate and investment data on its website, and more of its evaluations will be carried out independently.
As I mentioned, DFID will work more closely with CDC, not only at country level but at the centre. CDC’s business plan will be kept under regular review, and it will report annually to my Department against published targets. DFID will not interfere in CDC’s investment decisions, for the reasons that I explained, but it can offer valuable information and expertise from a development perspective.
The issue of remuneration was raised. Pay and bonuses will be brought down to a level that is fair and appropriate but not excessive. I am pleased to be able to tell members of the Select Committee that the CDC board has already cut bonus levels by 50% this year.
I thank the Secretary of State for giving way again; I am sorry to be a nuisance. He rightly mentions that CDC will report every year to the Department. Will that process include transparency about what profits are made, and what taxes are paid, in each country?
The hon. Gentleman, despite his comment, is never a nuisance. If he bides his time, I will come directly to the point that he has raised.
Once the new chief executive is in place, the Government will decide how to restructure pay. We will ensure that the new remuneration framework links performance to development results rather than simply profit. I was asked a number of questions about how CDC would deliver that new agenda. I expect CDC to start to make rapid progress in a huge number of different directions once the new chief executive is appointed. The head-hunters charged with finding the person for what I have described—accurately, I hope—as one of the most interesting and exciting jobs anywhere in the financial world have advised me that they have been overwhelmed by an incredible response from highly talented people. We all look forward to seeing the result of that process.
In addition, we have already reinforced and strengthened the board of CDC, which has managed in the past to attract a very high calibre of expertise. Once the new chief executive is appointed, he or she will be able to take the wider remit that we have agreed with the board for the work that CDC will carry out in the future and ground it with much more detail. He or she will also be able to start to recruit the team who will carry out that important activity.
We want CDC to become the most successful and the best development finance institution in the world and to blaze a trail and set an example that others will follow. As the Chair of the Select Committee said, the organisation is extraordinarily attractive both to those who are coming to the latter stages of their business life, who perhaps have been successful and made a great deal of money and want to put something back—they can bring huge expertise to the work of CDC—and to younger people who perhaps do not want to work on a production line in the City of London but want to leave a footprint in the sand and to make their contribution at this time when so much can be done to alleviate poverty—to make their contribution to the workings of CDC and to the exciting propositions that will undoubtedly come forward for them through the work that CDC is doing. Getting together that team, developing the resources required by CDC and motivating and leading the team is one of the key jobs that I hope the new chief executive will take forward.
The CDC board has responded willingly and constructively to the changes. The reforms answer directly the criticisms that have been made of CDC and the concerns voiced by the Government and the Select Committee. They make CDC a far more effective tool in the Government’s development armoury. I need to make it clear that quite a significant chunk of CDC’s capital is locked up in binding legal contracts for a number of years to come, so reform in that respect will take place over time, but I and the board are committed to making it happen.
I now pick up on a couple of other points made during the debate. The Committee Chair and my hon. Friends the Members for East Surrey (Mr Gyimah) and for Stafford made important points about CDC’s role in developing agriculture. I completely agree with what they said. Agriculture is crucial to our efforts. DFID is highly active in supporting agriculture through research and development and value-change development, and in many other ways. I think particularly of the work that we are doing with the World Food Programme in Karamoja in northern Uganda, a food-stressed part of the world where people have regularly needed support and food aid; we hope that it will become self-sustaining so that they will not need such aid in future.
When investing in agricultural enterprises is the best way to generate sustainable jobs and income for poor people, CDC will certainly consider doing so more than it has in the past. In many parts of the world, one of the best ways of helping people in rural areas is to generate employment in non-agricultural sectors. Although CDC will consider investing in agriculture, it will also be helping to create off-farm enterprises and businesses in other sectors.
I turn to the important question on transparency asked by the hon. Member for Glasgow Central (Anas Sarwar). He wanted to know whether the Government would ask CDC to publish data on all countries in which it works. CDC will shortly be publishing a new disclosure policy. It will be substantially more transparent, publishing significantly more data on the businesses in which it invests, on its fund managers, on the impact of investment country by country and on taxes paid. If, for some reason, it cannot disclose the information that it is asked for—perhaps for reasons of commercial confidentiality—it will be incumbent on CDC to explain why.
I thank the Secretary of State for giving way again. Paragraph 60 of the report recommends that
“CDC should follow standards of best practice. By doing so, CDC could raise standards across all DFIs. The tax payments made by CDC’s fund managers and investee companies should be transparent. They should be published annually on a country-by-country basis.”
Does the Secretary of State broadly agree with that statement? Will the code that he mentioned include other investee companies?
We should wait for the code to be published, but when the hon. Gentleman sees it he will realise that we are at precisely the same place. I hope that it will win his approval.
The hon. Member for Bethnal Green and Bow asked me about the monitoring of CDC’s development impact. As I indicated earlier, it is important that CDC’s work should be judged by both its development impact and its financial returns. No one is in the business of wanting it to support unprofitable enterprises. Monitoring CDC’s achievements will show why it is of such great importance that it makes a profit, but I hope that the hon. Lady will agree that we are becoming better at demonstrating both aspects. We are pressing hard for CDC to come up with proposals on this, and it is being supported with strong advice from development experts in my Department. CDC is committed to more than 50% of evaluations of its investments being done by independent evaluators.
I have answered my hon. Friend the Member for East Surrey on getting the right skills in CDC, but I would like to add that we have appointed someone to head CDC Innovation, a new CDC team, to consider frontier pioneering opportunities. However, as I have indicated, the real momentum on that front will come after the appointment of the new CEO.
I hope that I have covered most of the points raised in this debate. I again acknowledge the important role played by the Committee in the development of CDC. Its thinking has helped shape CDC’s new business plan, and I greatly value the expertise that the Committee has deployed in helping us all to take these developments forward to the best possible effect.
I thank the Secretary of State for his full response to the debate and also all hon. Members who have participated. I thank my Committee for its work in producing the report.
I do not wish to detain the Chamber, other than to wish the Secretary of State well in reforming CDC. On behalf of the Committee, we look forward to an early meeting with the new chief executive officer, albeit not necessarily formally. The Committee will be anxious to have an exchange of views with the new CEO and the executive staff so that we can interact in a mutually beneficial way. I hope that the Secretary of State regards that as a perfectly reasonable wish for the Committee. CDC has the potential, together with DFID, to become one of the most innovative pro-poor investment opportunities in developing countries. We very much look forward to seeing that development.
I thank the Secretary of State personally for the energy with which he is driving things forward, for his vision for maintaining the successes and advantages that are built into CDC, and for enabling it to be innovative and flexible in ways that I hope will be of great benefit to poor people throughout the world.
Question put and agreed to.