DfID Economic Development Strategy

Baroness Jenkin of Kennington Excerpts

Monday 27th November 2017 Lords Chamber

[Baroness Jenkin of Kennington (Con)]

My Lords, I welcome both the noble Baroness’s introduction to her excellent debate and the discussion about DfID’s economic development strategy. I admit to having had something of an essay crisis this morning when preparing for this debate but I am grateful for the words and works of Professor Paul Collier, the CDC, the noble Lord, Lord Griffiths, and his co-author Dr Kim Tan for making the case for social venture capital through their pamphlet, Fighting Poverty Through Enterprise, as inspiration and background reading for this debate.

What is clear is that the economic development strategy is good but that certain elements need expanding—namely, the opportunity for DfID to catalyse private sector skills and organisations and mobilise the best of Britain and British to assist, through advice, in supporting the sustainable building of poorer economies. I know, for example, British businesspeople who have helped to develop Nigeria’s venture capital system to the benefit of both the UK and Nigeria. Using experienced people on a voluntary basis costs the UK nothing. They ask for no return or benefit for themselves, just the satisfaction of seeing the UK and Nigeria prosper. These are programmes on which to build. As a founder of the Conservative Friends of International Development, I meet successful businesspeople on a regular basis who are keen to share their expertise and experience by helping the UK and DfID develop programmes of this kind. May I ask my noble friend what is being done to harness the energy and enthusiasm of experienced entrepreneurs of this kind? Are there programmes within DfID to which they could be signposted?

The decision by DfID to allow more of the UK’s aid budget to flow via the CDC to support private investment met with predictable criticisms from some quarters. There are still some who want aid to be uncontaminated by business and, on the other side of the coin, there are those who believe that aid allows Governments to avoid facing reality while crowding out private finance. When such different arguments agree, we should be careful. Shifting aid to support for business will be essential for the small low-income countries that are the core of the development challenge. What is more, other advanced countries are also building up public agencies like the CDC. The ascent out of poverty depends on transforming the productivity of the vast workforce engaged in private economic activity. This transformation is not mysterious. It is achieved by reaping the gains from scale and specialisation. Modern countries perform this miracle of productivity as a matter of course but in poor countries proper companies have not yet developed. Informal microenterprises, while important, are not a substitute. Any of us who have travelled to poor countries will have seen intense activity by one-man bands working their socks off to make a living but unable to scale their businesses to soak up the workforce in any meaningful way.

In Africa in particular, few companies have scaled up, so their workers are condemned to poverty. The reason is that the economies of many African countries are tiny, environments are risky and the markets are undeveloped. Groups making investments will often be pioneers. Being a pioneer is even more important in poor countries than in rich ones. While in advanced economies, most investment simply deepens existing forms of capital, in the poorest countries this is not the case, so a much higher proportion of investment is likely to be pioneering, not technologically but because it is market-creating. A mechanism that supports the public benefit is therefore especially important. Aid is needed to pay for the substantial public benefit of bringing reputable companies into difficult countries. Without such groups the poorest countries will struggle to develop, and without public support there will be too few of them. This view should not be contentious, and, happily, development agencies are belatedly recognising its merits.

To channel aid to companies, aid agencies need specialist vehicles with private sector expertise. The African Development Bank has created the Africa50 Infrastructure Fund for this purpose. In December last year, donors signed off the £65 billion, 18th three-year replenishment of the International Development Association—the World Bank’s aid programme. For the first time, this includes a private sector window, whereby about $2.5 billion can be channelled to the International Finance Corporation—the bank’s specialist vehicle for the private sector. The CDC is the British equivalent of the IFC. For a period it lost its way, and policy mistakes made a decade or more ago have left a scar. In 2011, a policy rethink brought in excellent new management and a new mandate. I pay particular credit to the recently departed chief executive, Diana Noble, who did so much to turn things around. I wish her successor, Nick O’Donohoe, continuing success as he builds on her legacy and continues to scale the work of the CDC to help build businesses and create jobs in Africa and south Asia. It is a crucial tool in the part that business and enterprise can play in reducing poverty.

I turn to microfinance and social impact investing, most particularly used in Africa as another tool. Micro- credit has been a crucial first step in directly helping the poor escape poverty. The development of microfinance institutions providing small uncollateralised loans to poor entrepreneurs to start up micro-businesses has been successful. The loan repayment rate amongst these MFIs is exceptionally high, especially if the loans are made to women rather than men. Social venture capital has the potential to be a successful asset class and an important second step to support the growth of small and medium-sized enterprises in developing countries and thereby create crucial jobs. So what is social venture capital? These are for-profit social venture funds investing in SMEs in developing countries. They take an enterprise approach to poverty alleviation by building commercially sustainable companies that create jobs and empower the poor to improve their livelihoods. They adopt the principles, discipline and accountability of venture capital investing, but with a sub-venture capital rate of financial returns. Henry Ford once said, “A business that only makes money is a poor kind of business”. This is an attitude and business model which increasingly resonates amongst a new generation of social entrepreneurs. The old business model of existing solely to make a profit for their shareholders looks increasingly dated.

Social enterprise businesses look beyond just financial returns to social and environmental returns as well. Of course, they do not lose money—to be sustainable, a business has to be profitable—but a social VC does not require the same high rate of financial return, and this is a sector that is growing rapidly. Furthermore, some 10 years ago there were very few players in this market —for example, the Shell Foundation and Google.org— but it is growing rapidly and mainstream investment funds are allocating capital to this area. I would like to hear from the Minister what the Government are doing to encourage growth in this sector.

I would like to share with noble Lords an example of a successful social enterprise in a developing country. The Agape call centre operates in the largest men’s prison in Singapore. It employs convicts to try to rehabilitate them. It has helped inmates with remaining sentences of 12 to 24 months to rebuild their self-esteem and confidence. It helps offenders on their release to integrate back into society and the marketplace, and often reduces reoffending. The prison is now releasing inmates six months earlier on parole if they demonstrate good behaviour and if they work in the Agape call centre. It also leads to other things.

Anil calls himself an “unbankable” person—someone who is not reliable to bankroll or invest money in because he served time in that prison. He worked in that same call centre and worked his way up to the centre’s manager position. As he puts it, “To be in a call centre for a prisoner is the most effective work there is. In the prison environment, there are no distractions. They are completely focused and hungry for more. And we tell them that if you make 100 calls, you get 80% to 90% reject calls, but you know that you have actually learned perseverance. At times when customers call them and berate them, you know that they will not react because they value their jobs and they have developed the skill of patience”.

When he completed his jail term, armed with his industrial know-how, Anil decided that he wanted to give back and start a call centre business for inmates and fellow ex-convicts. However, because of his ex- convict status, he could not get a bank loan to start the business, so two methods were devised to impose corporate governance systems to ensure that Anil managed the provided capital effectively and wisely. His investor and mentor said, “Here’s a guy who has transformed himself, having been through what he’s been through, and now he has a vision to go and build a business that can help others along the same journey and give them a second, third or fourth chance. So for us as investors, at the end of the day, we are wholeheartedly behind the vision. The key question for us was: is this the right person? Anil is willing to learn, teachable and transparent about his background, and he is treasuring his existing chance ... So we see that as something we are willing to take a bet on”.

And Anil has delivered. In all, he has given employment to 85 prison inmates, including six senior citizens, three people with disabilities, three single mothers and one stroke patient, and his call centre manager is a fellow ex-convict. He has won the social entrepreneur of the year award at the Singapore Venture Capital and Private Equity Association.

DfID should support this agenda where possible. Here is the opportunity but here too is the challenge. Looking back to 1960, per capita income in Africa and east Asia was roughly the same. By 2004, GDP per capita in east Asian countries was five times higher than in Africa. My noble friend Lord Eccles used more up-to-date figures to illustrate the same point. Such a divergence in income between poor and wealthier countries has been a contributory factor to greater illegal migration out of Africa, but if we in the UK could play our part in developing and investing in businesses such as these, just imagine what the future of Africa and other tragically poor countries across the developing world might look like.