Commonwealth Development Corporation Bill (Second sitting)

Jeremy Lefroy Excerpts

Committee Debate: 2nd sitting: House of Commons
Tuesday 6th December 2016 Public Bill Committees

[Stephen Doughty]

The Minister suggests we should not be sceptical of the Government and their intents. It is the role of this House to be sceptical of the Government and their intents. To suggest that Ministers are going to take powers but might not use them is a slightly curious argument: I have not seen many cases of that in the past. The timing of this is very odd, given some of the other circumstances, which I will come on to.

[Jeremy Lefroy (Stafford) (Con)]

Will the hon. Gentleman give way?

[Stephen Doughty]

I will give way in a moment, but I just want to make one point. We have seen a very important change in the definition of the ODA, which occurred only last year. Previously, as I said on Second Reading, it was the issue of the CDC net disbursements that contributed to our ODA figures. Normally we looked at the money that the CDC was investing, returns from that investment, the function of the two and ended up, usually, with a positive number. Over the past five years it had been a £100 million or £200 million positive contribution to our aid effort. In fact, last year it would actually have been a negative contribution of minus £9 million. However, the Government changed the rules. They decided to count the capital inflow into the CDC—all of it, in its entirety—as ODA, as aid, rather than the function of what is actually, potentially, being achieved.

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What is to prevent the Government in the future from putting pressure on the CDC, regardless of whether it wants the money, to spend, use or request, through the process that the Minister has described, large sums to bump up the figures to show that the Government are, for example, meeting the 0.7% aid target? Before the Minister jumps to his feet to say, “Oh no, that would never happen,” let me say that he knows full well that it has been the habit of all Governments, of all colours, to look at how figures are presented, move things around and reclassify things in an attempt to meet wider targets and wider agendas. Obviously, a certain amount of that goes on all the time, but it does look very odd that we are seeing this huge rise, this huge potential new power being given, at the same time as the definition of how that is counted is changed. That is where my scepticism and that of many others comes from.

[Jeremy Lefroy]

It is a pleasure to serve under your chairmanship, Ms Ryan. The hon. Gentleman raises a very important point about the capacity of DFID and, indeed, the capacity of the two continents—Africa and part of the continent of Asia, south Asia—to absorb this kind of money, but does he not agree that one major challenge facing the world at the moment is the need to create in the next 15 years 1 billion jobs, most of which will be in those countries, and that the amount of money that we are talking about is tiny in comparison with the amount that would be required to create those jobs and thereby to alleviate poverty?

[Stephen Doughty]

I agree that the challenge of creating jobs is huge and one in which we and others should be playing a role, but it is not solely our role. Again, I hope that one question that we will get on to discussing is whether we should be providing what is in effect private capital in some of these locations or whether the capital should be coming from other sources: other Governments, institutions or DFIs. Indeed, should that be the responsibility of the Governments themselves? We will undoubtedly come on to that in discussion of some of the new clauses, but one of my fundamental questions is about the focus of this money: where is it going currently, and is it doing all that it could do? Professor Collier himself said this morning, in relation to the current bias of funding towards south Asia and India in particular, that he thought that there should be more focus on Africa. I agree.

[Jeremy Lefroy]

I agree, too, on that point. Will the hon. Gentleman also accept this point about the other DFIs? The Dutch DFI has invested far more money than we have, and the Netherlands has a population one quarter the size of the UK’s. The French Proparco is in a similar position to the UK, but the Germans have invested three times as much. We are laggards in this respect.

[Stephen Doughty]

We are not here to discuss the Dutch DFI, but I do know a reasonable amount about it. It provides only marginally more than us. It does do interesting work; it does not do exactly the same work as us. I do not know its history of recapitalisations and how much additional ODA money it has received recently. It would be interesting to look at that. However, the question here is this. What is the best use of our money? Are we not investing or have we reduced investment in other sectors where we could be using our aid in order to do this, and is that the right choice? That is the question before us, and when we look at, for example, DFID’s closures of bilateral programmes in places such as Burundi, we do not have clarity from the bilateral aid review on whether there will be further closures or changes.

We have heard worrying things about cuts in bilateral funding for HIV/AIDS programmes, despite the good money that is going into the global fund. We have seen a shift away from certain sectors and from budget support. We have seen a shift away from investing in free healthcare and education, and in teacher salaries, and with removing user fees for healthcare, for example. When the CDC invests in private healthcare and private school systems, we might have a debate about the role that voluntary and private play in healthcare and schools, but again it is an opportunity cost—it is a choice about where we invest these things.

I accept the hon. Gentleman’s wider point about the importance of jobs, investing and crowding in capital into some of these sectors, but we have to question what we should be doing with our money and whether that is right versus other potential sources. I contend that the Government simply have not come forward with a case that justifies this level of cap. Some increase in the CDC’s budget might be justified, but certainly not at this level.

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[Patrick Grady]

I thank my hon. Friend for that point. The point of equity and proportionality is what I am trying to test. As I have said, under my formula, the figures would come out not that much lower than the caps proposed in the Bill. Let us accept, in good faith, that we will hear some rationale for those caps. My formula would take us not a million miles away from those numbers. The point is that under my formula, the caps would vary over time, depending on what the total ODA spend was likely to be.

Even if the Minister objects to the particular formula, I will be keen to hear why some kind of proportionate formula is not preferable to the hard numbers in the Bill. We have heard about other amendments that probe those numbers. A formula that linked the caps to the total ODA spend over a period of time surely would help to clarify the link with the overall amount of ODA and the balance of the Government’s development priorities, which we will discuss when we debate the new clauses.

[Jeremy Lefroy]

I will make four brief points. First, there are several reasons for bringing forward the Bill, but one of the major reasons is that reducing the expected rate of return of the CDC’s investments, which I absolutely agree with, creates a need for more capital.

Under the last Labour Government, the CDC grew substantially, was well managed, invested in funds and made a lot of money out of significant investments, such as that in Celtel. All of that was good and I welcomed it, but it perhaps was not in accordance with the CDC’s original mission, although I would argue that it helped to reduce poverty. Capital was generated internally to quite a considerable extent. The required rate of return was relatively high, those returns came in and that money was reinvested.

Now that CDC is quite rightly supposed to focus on harder investments with lower rates of return and higher risk, there inevitably will not be as much free cash flow or free capital available for investment, so the shareholder —the UK Government, DFID and the taxpayer—needs to be prepared to put in more capital if we are to meet those objectives.

The second point is about middle-income countries. I fully accept the Minister’s point about the importance of targeting lower-income countries wherever possible, but let us not forget that the range for middle-income countries is, frankly, ridiculous. It goes from just over £1,000 to £13,000 per year. At the lower end are countries that are basically low-income countries and at the higher end are relatively wealthy countries. If we categorise all middle-income countries as somehow moderately wealthy, that is simply not the case. There was a point—not now, sadly, because of what is happening there—when South Sudan was briefly a middle-income country; look at where it is now. We have to be very careful when we talk about middle-income countries as though they are a homogenous group; they are not.

[Stephen Doughty]

The hon. Gentleman is making an important point and I have no doubt we will discuss this further. Is he not concerned, though, when he looks at the amount that is going into India, for example, and at individual states within India, where the majority of even the CDC’s new disbursements are still going to the richest states rather than the poorest? The top disbursement was to Maharashtra, where Mumbai is.

[Jeremy Lefroy]

Absolutely, we should look at that. However, there are more of the poorest people in India than in the whole of sub-Saharan Africa. If you take the view that a company in India in which you invest is likely to have national ambitions and wants to work across India, you would hope that it would therefore target the poorest as well as those who are perhaps better off. I agree, though, that the CDC needs to look at this and ensure that it does not stray back into the realms of investing only in fairly soft, nice, high rate of return investments.

My third point is about employment. I have already mentioned the figure of 1 billion jobs. The World Bank says that 600 million jobs are required across the world in the next decade; others have put it as high as 1 billion. There will be more of those 1 billion jobs in the middle-income countries than in the low-income countries, so we need to invest across the two if we are to tackle this enormous threat.

I was in Tunisia last week at the launch of the Parliamentary Network’s middle east and north Africa chapter—I chair the global network. The problems that a country such as Tunisia faces, with a population of 10 million and unemployment among graduates of 60%, are enormous. We know the social consequences of that. Tunisia has a very high rate of young people who have gone to Syria and Iraq to fight for Daesh. That is one consequence of the very high rates of unemployment and the lack of hope in those countries.

Finally, this is about investment. We talk about money being spent, but it is actually investment. Once it goes in, provided it is well-managed, it is recycled. As I have said, the money that made about £500 million of profit from Celtel under the last Labour Government was recycled into investment and is still there. Some of it may have been invested twice since then. This is not a one-off hit where we make a grant to an organisation and it does excellent work, but is then gone. It is money that goes round and round, that is recycled and that creates jobs.

[Stephen Doughty]

The hon. Gentleman makes an interesting point and I agree that it is investment and it is recycled—the CDC has shown that. However, does he not agree that that applies to our whole aid budget? If we invest in the education of a girl through a bilateral programme, with the opportunities that provides in her life and the opportunity it gives her to contribute to the economy, that is, similarly, an investment.

[Jeremy Lefroy]

Yes; I do not disagree with that.

[James Duddridge]

The hon. Member for Cardiff South and Penarth is wrong. It is not an investment in the same way, in that it is not so easily controlled. An investment in a girl’s education is, indeed, an investment, but we are discussing an investment that has an actual return, which we can reinvest and have some degree of control over, as the aid budget is targeted in different ways. It is a different type of investment. As I said on Second Reading, it is a gift that keeps giving.

[Jeremy Lefroy]

I will conclude by saying that I feel a little like I am in the middle of a great argument, but I probably agree in some way with both Members.

[Kate Osamor (Edmonton) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Ms Ryan. This is the first time for me, but I am sure there will be many more.

I want to speak about investment. That word has been used many times and in the absence of an investment strategy from the CDC, we feel very sceptical about why we should use taxpayers’ money in this way. It is only fair to ask the Minister to present that to us, so that we can have a debate in which we feel we have all the information. That is my brief contribution on this group of amendments.

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Those are my main points. Is the capacity there and does the Minister see indirect investment as having a significant role in the future? Does he share the view that identifying first-time funds in developing countries is an important part of our agenda and will he recommit himself to the issue of equivalence of respect through this amendment?

[Jeremy Lefroy]

I accept that the potential increase from £6 billion to £12 billion is very substantial. I note that subsection (3) talks about regulations. Does the Minister envisage gradual increases, perhaps of a billion at a time, through regulations under secondary legislation? I believe that secondary legislation is a very adequate way in which to do this and that hon. Members need to take it very seriously, as the hon. Member for Cardiff South and Penarth has mentioned. However, it might reassure Members if somewhere in the Bill or in an amendment it was stated that the increases would be no more than, say, £2 billion at a time. After all, we are now considering raising the amount by £4.5 billion in the Bill, yet, as I understand it, we are looking to put it up by £6 billion through secondary legislation. It might therefore be proportionate to indicate that we would expect the Government to come back to the House on more than one occasion if the sum were to go from £6 billion to £12 billion.

[Imran Hussain]

For the sake of avoiding repetition, I will cite the case I previously outlined, because I think the arguments are exactly the same. The only additional point is that I agree with my hon. Friend the Member for Cardiff South and Penarth, who makes the point that using a statutory instrument to double the increase, if not more, is something that MPs will be uncomfortable with, for obvious reasons.

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[Jeremy Lefroy]

I have to say that I agree with a considerable number of the hon. Gentleman’s points, although I see some problems with the way in which the new clauses address them. For instance, if we restricted new capital to a certain list of countries, where would that leave the self-generated capital, both from existing investments and from these investments once they are sold? That does not seem to be clear, so in effect we would have to segregate capital raised through the profits or the free cash flow of the sale of existing investments, and capital raised through the sale of new investments that had been restricted to certain countries.

[Stephen Doughty]

The hon. Gentleman will correct me if I am wrong, but has that not already happened with regard to legacy investments in Latin America, for example, as a result of the changes in the strategy for CDC in 2012?

[Jeremy Lefroy]

Yes, it has, absolutely, but what I am saying is that the new clauses are not specific enough to achieve what the hon. Gentleman wants.

I must also repeat my earlier point that middle-income countries are a very broad church. I think I mentioned that they cover gross national incomes between £1,000 and £13,000; forgive me, but I meant between just over $1,000 and just over $13,000—dollars, not pounds, although that is less of a difference than it was a year ago. I believe firmly that a country with a gross national income of $2,000 or $3,000 per head per year is absolutely the kind of country that we should be investing in to create the jobs I referred to earlier, but it would be counted as a middle income country.

My final point is that when we invest in multilateral institutions such as the World Bank through IDA, we are investing in low income countries; but when we invest through the International Bank for Reconstruction and Development, which is the major part of the World Bank, we are investing indirectly in middle income countries, including India, China, Brazil and all the other countries that the hon. Gentleman mentioned. I would not like us to treat the CDC differently from our investments in the World Bank or in other multilateral institutions such as the Global Fund.

[Imran Hussain]

Again, I associate myself with the comments made by my hon. Friend the Member for Cardiff South and Penarth. I have two additional general points. We have to look at the 2011 review. There were clear purposes behind it, one of which was that the CDC had lost its focus. As a result of the review, we saw the new universe of countries and, as I said earlier, have ended up in a better place today than we were in four or five years ago.

My hon. Friend is absolutely right that we must not lose our focus on development impact and where it can be greatest, and nor must CDC. We must continue to focus on the poorest countries, where the impact will be felt the most and where it is most needed. The CDC’s ultimate goal must be to alleviate poverty, and that goal is not best achieved in some of the countries that have been used as examples.

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[Kate Osamor]

I have not spoken a lot today. That is not because I have not been in support of my hon. Friend the Member for Cardiff South and Penarth, which I believe is the right way of saying it—I have heard many versions today. I want to speak on this clause, because my issue relates to tax havens and the way the CDC is using them. In the evidence session earlier today, Diana Noble of the CDC admitted that at times it has to use tax havens, but I feel that DFID should be looking at transparency. We should be working more closely with CDC because we are setting up a system that could be exploited, and I am concerned that we could be sitting back and not using the power that I believe DFID could be using.

This is the time to look at how the relationship was initially set up and at how we might reform that relationship, not because we should be micromanaging but because we should be taking some responsibility for taxpayers’ money. I say that because, while there is cross-party support for DFID in this House, there is a lot of tension outside among people who do not agree with the way we are spending money. If this was highlighted and got into the wrong hands—the Daily Mail—it could turn into a situation in which the Government would have to fight back. I ask that we look at that relationship, make it a lot more transparent and also look at what will happen when Diana Noble moves on, because a new CEO may not able to turn things around the way she has. She has made great changes, but she is moving on, so we need to look at how that new relationship with DFID will be, and this is the time to change that situation.

I support the clause and I hope that the Minister can reassure us that we will not be in a situation going forward whereby the CDC, or similar organisations, have to use tax havens because the country they are functioning in does not have systems to take the tax.

[Jeremy Lefroy]

I have a lot of sympathy with the points made. I cannot support this new clause because I do not think that the international situation lends itself to being practical for the CDC at the moment. Regrettably, there is not the range of options for CDC to make its investments at the moment alongside other partners. When it is direct investments, which I am very glad to see the CDC has started to do again since the new arrangements in 2011-12, there is absolutely no reason why the investment cannot be made directly into the share capital of the company in which the investment is being made. However, when you are trying to leverage other investments, as the CDC often does, alongside other DFIs or other private sector entities, you have to arrive at a mutual agreement as to what jurisdiction is most suitable, both from the point of view of the ability of the legal system to uphold agreements and in terms of when dividends are paid, and whether double tax arrangements and so on are in place.

These are all practical matters, but I very much agree with the hon. Member for Edmonton and the hon. Member for Cardiff South and Penarth that there is an opportunity here for the CDC to set the pace—for instance, here in the United Kingdom, where we have such a fine legal system, as is being displayed right at this very moment across the road.

[Hon. Members]

Hear, hear.

[Jeremy Lefroy]

That is true from whatever point of view we approach the matter. Why can we not set up the kind of structure, based in the UK, that would be perfectly reasonable for funds to see as an acceptable basis for making their investment alongside the CDC?

[Rory Stewart]

I shall try, for the sake of right hon. and hon. Members who are under time pressure, to be quite short in answering. Of course, I agree strongly with points made about the absolute importance of this. The CDC never invests in any of these locations in order to save tax or to avoid scrutiny. There are only two reasons why we would do it, and those are the reasons that were raised by the hon. Member for Cardiff South and Penarth; which is to say either because the regulatory environment in the country in which we are investing is not sufficiently robust for us to be able to trust UK taxpayers’ money to that location, or because we are attempting to accumulate a larger fund where we are trying to get co-investors. We are very proud of that. We have brought in, at times, £1 billion of investment and have managed to bring in £30 billion behind it, so that is a multiplier effect of 30 which might not have been possible had we not been able to ensure that we were able to go through certain offshore centres.

However, we are very focused on this issue. The Labour Government made great progress in focusing on the white list. The hon. Gentleman mentioned Anguilla and the British Virgin Islands. To be absolutely clear, as I think he is aware, we do not, nor would ever, invest in those locations, nor would we invest in Panama. We only invest in the places that have been put through the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes as compliant locations.

Nevertheless, I agree that in the long run we need to develop financial sectors within Africa to ensure we can make secure investments through African locations, rather than having to go through offshore centres. DFID is now running a big programme on that, which is something the CDC can learn from. To respond to my hon. Friend the Member for Stafford, we absolutely should be taking the lead on this. On that basis, I ask that the motion be withdrawn.