Commonwealth Development Corporation Bill (First sitting)

Alison McGovern Excerpts

Committee Debate: 1st sitting: House of Commons
Tuesday 6th December 2016 Public Bill Committees

[The Chair]

Thank you. We will move on. Alison McGovern.

[Alison McGovern (Wirral South) (Lab)]

Q I have two questions. The first is for the CDC—I do not mind if you answer, Diana, or if Graham does—and the second is for the Minister.

The first question is on crowding in versus crowding out. What is your measure for additionality? Can you tell me numerically what the test is? How do you know for sure that you are not doing what the private sector would do anyway, and how numerically do you know that projects and funds are meeting that test?

Secondly, the Bill proposes an incredible level of freedom on investing in the CDC. Why is the cap so high? Why are we expressing such a high level of confidence in CDC, as opposed to any other aid mechanism?

Diana Noble: I am happy to take the first question. It is a very important question that has been extremely high on the agenda of the board and the management team over the past five years.

We felt back in 2012 that this had not been taken seriously enough by the CDC pre-2012. We engaged an extremely experienced person—ex IFC—to look at the whole area of additionality for us. He wrote a long report and went to talk to all the other DFIs as well. Our guidance to him was, “We want CDC to have the highest standards of additionality across all the DFIs.” This is a difficult area. He has written a long report and I would be very happy to share it with Committee members.

The report led to some broad principles that say that CDC completely understands that we must play a unique role in every investment that we make. This is not generic across a portfolio; this is a standard that the investment committee applies for each investment that we make. We must be satisfied that our unique role is either that we are bringing capital that another investor will not bring or that we are bringing some unique expertise that is important and will lead to a material improvement that another investor will not bring. We take that incredibly seriously.

The team of CDC has no interest in doing what the private sector will already do. We take real pride in being distinctive and bringing something special to our investing companies.

[Alison McGovern]

Q May I briefly follow up on that? You say that either there is not another investor, which is clear, or that we need to bring some unique experience. What does that really mean? That seems to me like a catch-all.

Rory Stewart: The primary measure that has been set by the Department is the development impact grid, which defines what the most difficult countries are in which to invest. It looks at three criteria—GDP per capita, the amount of capital available and the difficulty of doing business. The last two help us from a strategic level to answer your question. I will hand back to Diana.

Diana Noble: You are right. It is at the point of investment that we say we are bringing expertise to a company. That is a forward look. It would typically be environmental and social issues. For example, we worked with an online retailer in India to transform how they thought about their supply chain and to sign them up to the ethical trading initiative, which was the first time that any online retailer in India had done that.

Of course, we are saying that at the point of the investment. We do not know whether it is going to happen. What we have done—again, we are the first DFI to do this—is implement an external objective review of every case, in which we only justify it on this additional expertise, not on capital. We had our first report back that said that in all of those cases—they are a minority—we did in fact actually deliver and in a lot of cases we delivered more than we expected at the time of the investment committee. I agree with you that none of us should be justifying an investment on an expectation that does not happen.

Rory Stewart: The answer to the second question is that over a five-year period we are looking at a ceiling option on the basis of a business case of CDC being able to draw down up to £4.5 billion. That is a very large sum of taxpayers’ money and we need to be very responsible about it. It is also worth putting that in context. The overall annual expenditure is estimated at £12 billion. To put that £1 billion in context, in a single year we would typically put something in the region of £5 billion into multilateral institutions. To illustrate that what we are putting into CDC is not out of proportion to other comparable investments, the type of funding we produced for the World Bank over the last three-year period was £3.3 billion. We are about to do another replenishment, but it is of that order.

Why are we putting it into CDC? Well, there are a couple of reasons. One is that we believe CDC is a very effective vehicle for delivering jobs and economic development in some of the hardest places in the world. The second thing, contextually, is that there is a difficult issue, to which we can return, of comparing a stock with a flow—in other words, comparing what will be a capital fund for CDC with the annual expenditure of the Department—but even at 8% we are likely to be significantly lower than the amount of money that Germany or France, for example, put into their equivalents.

[The Chair]

A quick follow-up.

[Alison McGovern]

Q Minister, you mentioned the index that is designed to drive investment to the poorest parts of the world, yet we have heard about investment in online retail in India. My understanding was that the Government’s policy is to move investment away from middle income countries, or countries towards the middle income range, such as India. How can the two approaches fit together? It makes no sense.

Rory Stewart: In the grid, we break India down by state and target the poorest states. There is a transition in India. You are absolutely right that the Government have decided to move away from traditional development grants and into technical assistance and the kind of financing that CDC would produce. We do two things in an Indian context: we target the poorest states and, specifically on the question of the online retailer, we are able to do things in India that we might not be able to do in some of the more testing, difficult markets. With that particular online retailer we are also able to focus on driving up labour standards and making sure that skills and worker safety are protected. It is worth bearing it in mind that India, despite all its very strong economic performance, still has some of the very poorest areas in the world. Enormous numbers of people are on less than $2 a day, and many are on less than $1 a day.

[Patrick Grady (Glasgow North) (SNP)]

Q I would like to probe a little more on the specifics of the hard figures in the Bill—the £6 billion and the ultimate cap of £12 billion. Where do those numbers come from? What was the needs assessment that these are about the amounts of money that the Department feels CDC needs? Was there dialogue between the Department and CDC to reach those amounts? Why go for such hard figures, rather than some kind of proportional formula? Is there any indication of a timescale in which these amounts might eventually be reached?

Rory Stewart: It is a question of setting a ceiling. We welcome this, but it is quite unusual in the Department’s spending to have to go through primary legislation in order to make a financial allocation. I mentioned to Ms McGovern that, in a three-year period, we would allocate, say, £3.3 billion to the World Bank. We do not do that through primary legislation. This Bill attempts to give the Department the ability to do what we do with the rest of our budget, which is to make decisions on the basis of ministerial decisions, accountability to Parliament and strategic decision making. Specifically in relation to CDC, we would like the ability, should a business case emerge, to give it more money without having to come back to Parliament with primary legislation every time we wished to do so.

Where was the figure arrived at? Well, the figure was arrived at after a discussion with CDC about the maximum possible amount it could realistically require over the period, which takes into account its staff resources, the demand in the developing world and its past spend. If you look at CDC’s last round, it put about £1.2 billion through in a year, of which £735 million was a recapitalisation from the Government.

Looking forward over the next five years—2016 to 2021—this would allow them to draw down something of the order of £1 billion a year. In effect, it is only £4.5 billion because of that £6 billion they already have £1.5 billion. On the next bit of what they take in the future, if I’m honest with the Committee, my preference would have been to say, for the reasons and principles I laid out in relation to our other spend—our investment to the World Bank—that Ministers could come back through secondary legislation. A statutory instrument is how I just did a £350 million addition to the World Bank. I think you were on that Committee, Mr Grady. That would be the process we would hope to do with CDC.

My preference would have been to just give Ministers the power to go to a Statutory Instrument Committee to ask for that money, but the Clerks of the House advised us that it would be better to set a financial limit to that power, so we chose for the period 2021 to 2026 the same amount we chose for 2016 to 2021. That is how that figure is arrived at.

--- Later in debate ---

[Alison McGovern]

Q In this session, Minister, you said that you do not yet have CDC’s strategy, which we knew. We have discussed the fact that there was not much clarity about investments in India and whether or not they were going to the poorest states. You have explained that you are expecting CDC to increase the risk of the investments it makes at the same time as you are radically increasing the amount of capital available to it. So just for clarity, which do you believe to be CDC’s greatest priority? Is it the reduction of poverty; or is it return on investment, so that the CDC has continuity of capital?

Rory Stewart: The priority of CDC has to be to do good without losing money. The point is not to lose money while doing good, so we are focused on jobs and economic development without losing money. That is the guiding principle that CDC follows in everything it does.

[Stephen Doughty]

It’s not poverty—

--- Later in debate ---

[James Duddridge]

Q Should not we be encouraging it to give more than £1 billion a year?

Sir Paul Collier: Yes, of course. The future of aid is to get decent firms to go to places where they will not make much money until there are lots more of them.

[Alison McGovern]

Q Very briefly, obviously there is a massive need for capital in Africa, and the question is how we should spend UK taxpayers’ money. I would like to come back to you, Tom. As we heard in the previous session, we are asking CDC to take increased risks with quite a lot of increased capital, but we do not yet have its strategy. Do you think that that approach is probably the wrong way round?

Tom McDonald: There is a cart-and-horse problem here, is there not? One of the things that we saw in the 2015 recapitalisation business case was that the Department did go through a thorough process of assessing, in collaboration with CDC, the art of the possible. There are good foundations on which the Department can build.

One of our worries, which we set out in the report, is that CDC has to be comfortable that it can absorb this money in two ways. One is internally: does it have the capacity to grow, still be agile and make decisions in the way it has done in the past? That is its internal operating model, if you like. The other is whether it has access to all the opportunities for investment. Now that it is again in the business of direct investment, that requires a lot more effort from the teams that are putting together these deals. There needs to be a discussion between the two bodies over the remainder of the spending review period, or the Parliament, about whether DFID is clear about what it wants from CDC, where it wants CDC to operate, and the principles on which it wants it to work. From CDC’s perspective, can it cope with the volume of money and can it, in good faith, invest all that in a portfolio of deals that will still allow it to meet its targets?

Gideon Rabinowitz: I have a very quick point to follow up on that. As well as our mission to tackle the injustice of poverty around the world, we are very keen in our work and our engagement with the development community to push for adequate public scrutiny and trust in the work that the British Government and institutions such as CDC do. We think that needs to be central to this debate, so these are really good issues that we are discussing. The absence of this investment strategy is making it a little difficult to get a fuller perspective. There is clearly a dynamic situation around CDC. I have looked at the business case for the last capitalisation last year, which said,

“CDC has previously determined that given investment needs, it could productively deploy up to £1bn of additional capital.”

We heard from this morning’s witnesses that that situation seems to have changed. An additional point was made in the business case that, of the £735 million that DFID allocated to CDC last year, it would need to go beyond that only in 2019. It is a very fluid situation, and the lack of clarity over that investment strategy and how the situation on the ground with CDC is changing poses challenges. It is important to get that clarity.

[Richard Graham]

Q A very quick question for you, Tom—probably a one-word answer. If I got you right earlier, you were calling for a more effective measurement of the quality of jobs generated by CDC. Do we have such a measurement in the UK?

Tom McDonald: A one-word answer would be no.