Commonwealth Development Corporation Bill (First sitting)

Richard Graham Excerpts

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

[James Duddridge]

That makes an awful lot of sense.

[Richard Graham (Gloucester) (Con)]

Q Over the years since the inception of the Commonwealth Development Corporation in 1948, the Government’s approach to it has fluctuated considerably. In the 1980s it was doing, on a smaller scale, broadly what Graham and Diana are now doing—direct investment—but then there was pressure to separate out and effectively privatise the private equity or venture capital element of it. With 0.7% of GNI going to DFID, you can take a longer, more strategic approach to the CDC, but the effective tensions, potential tensions, between ODA objectives, taxpayer return on equity and pursuing aid goals but not investing in things that might be done by the private sector otherwise, remain and arguably will be more in the public eye as the CDC expands. How will you balance those, and what is the longer-term strategy, in your view, for the future of the CDC?

Rory Stewart: It is a very good question. You are absolutely right: since 1948, the CDC has been through changes. I think that is because it was a very bold and imaginative move by the Attlee Government. It was a very unusual thing at the time; indeed, it was the first DFI. And from the moment that they were invented, DFIs have had to tread a thin line between two quite different things: a private sector modality—a desire to generate a commercial return—and a public developmental objective. A lot of the shifts you mention are about the pendulum swinging back and forth between these two types of objective.

Looking at the history of CDC, there have been times, in the 1980s for example, when CDC made a lot of very bold, risky investments in high development impact and lost money. It did not succeed in making money. There have been other times, under other leaderships—and this was true in the period criticised by the NAO, in the 2000s—when they went to the other extreme. We had a situation in which, during that period, CDC managed to generate £1.5 billion of profit—profit for the UK taxpayer, profit that is put back into the CDC and reinvested, but they were very high rates of return, largely achieved through the fund of funds strategy.

Now, we are using this piece of primary legislation, this discussion of the Committee and also the UK aid strategy and the CDC strategy being undertaken at the end of this year, to provide a much tighter definition of the key characteristics that take us forward. That is, philosophically, that the DFIs work when you get that balance right. The balance is right where the private sector element gives you the commercial discipline to make sure the investments you are making are genuinely sustainable, that they are going to keep those jobs and deliver revenue to the Government and value for money for the taxpayer. However, that has to be balanced with the public objective, which is the ability to make very patient long-term investment, to take a certain degree of risk and to pursue developmental impact. That is why we have put out this grid where, on the X axis and Y axis, we measure with every single investment how much capital is available, how hard the business environment is, how low the GDP capture is on both axes and whether the sector is likely to create jobs. That is also why we brought in Harvard University last year to review this and why we are now going through a 15-year longitudinal study to try and establish this.

I think we are getting better at this, but your warning, Mr Graham, is a good one and everything we are doing in our strategy, our metrics and our measurement is to ensure that we are not back in a world where this pendulum is swinging back and forwards all the while.

[The Chair]

Just before Mr Graham comes in again, five other colleagues have caught my eye and we must finish this session at 10.30 am, so we are going to have to speed up a little bit.

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[Richard Graham]

Q May I follow up very briefly on three specific points? First, if having private sector expertise in CDC helps it focus on the commercial return element, sustainable investments and so on, which I totally accept, would a partial flotation at some stage not both achieve Richard Fuller’s earlier point—I think it was Richard Fuller who mentioned it—on bringing private money into the CDC, that is, the Government acting as a catalyst to bring money with it, on the one hand, while on the other, assure those people in the private sector that it was not the Government competing against them?

The Centre for Global Development called for the CDC to

“do as much as possible to demonstrate that it’s investing in projects that create jobs and growth which would not otherwise happen.”

Is that an impossible ask?

The last point is on the geographic eligibility. At the moment, you can invest in 63 countries, which is considerably more than the Commonwealth. What about Palestine or the middle east?

Rory Stewart: Okay, here we go.

[The Chair]

As briefly as you can, please.

Rory Stewart: Those were three very complicated questions, but I will try to deal with them very quickly. No. 1, the reason why a partial flotation would be difficult is that the returns we generate are deliberately low. We are only at about 3% return because we want to have a developmental impact. It would also have a significant impact on our governance arrangements, as we are currently a 100% shareholder.

The second question—is it an impossible ask? No, we do not feel it is an impossible ask. It is tough, but if you look at our investments in solar power around Burundi and CAR, that is a really good example of something that is extremely unlikely to have been done by a normal commercial investor. These are high-risk investments, generating a relatively low return. We are only able to do it because we are a DFI with that patient long-term investment policy.

The third question? I am so sorry, Mr Graham.

[Richard Graham]

Q Sixty-three countries at the moment. What about Palestine, for example?

Rory Stewart: This very interesting discussion has gone back and forth. As you are aware, the International Development Committee asked CDC to look strongly at investment to deal with the crisis around Syria and at what we can do to help bring stability to the middle east, for example. At the same time, other members of the IDC tabled amendments to the Bill that would not only take us out of middle-income countries in the middle east but would restrict investment to the countries with which DFID has bilateral programmes. My gut instinct is that that is an issue not for primary legislation but for Departments to address through their strategy in response to a changing world.

[Stephen Doughty (Cardiff South and Penarth) (Lab/Co-op)]

Q I apologise for my late arrival. I was hosting a general from the British Army. Minister, I want to ask a very specific question about where these figures come from. I want to probe you further on them. You answered a written question from me yesterday—for Hansard, it is 55702—and said that the only capital requests that you received from CDC were for the £735 million. You said that you have not had any others. Can you be clear about whether CDC has requested capital increases to you beyond the £735 million?

Rory Stewart: The process is threefold. We will seek permission from Parliament to be able to recapitalise CDC. We want to know whether you are prepared to allow us to give any more money to CDC—£1, £10, £1 billion or £6 billion. We are looking for the option to give it more money. Then we will produce the five-year forward strategy for CDC, which will come together at the end of the year. Then we will produce a business case in the summer to lay out what we believe, in consultation with CDC, its likely requirements are in order to prepare our promissory notes. The final stage is that CDC will make a request on the basis of the projects it has. That is exactly what we have done with the £735 million.

We have discussed the ceiling that we are proposing to you in detail with Graham and Diana. At this early stage, they believe it is a reasonable maximum limit for the amount that they could conceivably need between 2016 and 2021.

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[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.

[Richard Graham]

Q Thank you. Saranel, it is clear that you would not want to see any money going from the taxpayer to CDC that would mean either selling it or closing it down, or possibly both. How would that help DFID achieve its goals of supporting businesses and jobs in the developing world?

Saranel Benjamin: I think we differ in how we see development. However, the fact that CDC is operating without a strategy begs the question of what it is prioritising. Why would one prioritise private education or schools, or private healthcare, in countries where the majority of people are not getting access to that? How does that justify the better use of UK taxpayers’ money? I think the question was raised earlier about whether we are choosing poverty reduction or profit-making.

[Richard Graham]

Q Okay. So you are against specific investments that have been, or might be, made. Are you against investment in businesses full stop?

Saranel Benjamin: I am against using business to conduct development in the global south.

[Richard Graham]

Q So you do not believe that creating jobs through business is a constructive way of meeting development aims?

Saranel Benjamin: I don’t think that that is the only thing that should be done in terms of development, but from CDC’s point of view, that seems to be not just about job creation, but about supporting projects that have absolutely nothing to do with poverty reduction. I cannot see how supporting top-level real estate in Kenya, for example, is about poverty reduction.

[Patrick Grady]

Q I just want to ask any panel member who might want to reflect on the levels of transparency in CDC and the opportunities for parliamentary scrutiny. I particularly want to ask the reps from War on Want and Oxfam how their transparency in reporting requirements from DFID have changed in recent years and whether they have any views on how they should apply to CDC.

Gideon Rabinowitz: Oxfam is a signatory to the international aid transparency initiative, which is the comprehensive aid transparency framework that is applied across the development community. The initiative was started and promoted by the UK Government, who have obviously played an important leveraging role in promoting transparency across the world.

We are ambitious implementers of IRT and in our dialogue with DFID right now, we are being encouraged to look at how we can apply those standards and the standards introduced by the initiative further down our supply chain with our local partners. It will be a challenge, but one that we shall pursue head on. Throughout the chain of delivery partners we work with, we will look at ways we can address those standards.

One of the questions we think it would be really useful for the Committee to think about is, how—whatever is agreed through the legislation—can we help to ratchet up the level of transparency of CDC? It has made progress, but the last time it was assessed against IRT standards, it scored “poor”. We have not seen a fundamental change in the level of information that is currently reporting, so it has some catching up to do. We hope this legislation can help.

Saranel Benjamin: That is a really good question, because while listening to everybody talking, I was thinking that when we have to apply to DFID for funding, there is absolutely no way we would get funding if we just went and said, “Can I have £500,000 and I will give you the strategy later?” That would never happen for the development sector.