Examination of witnesses

Commonwealth Development Corporation Bill – in a Public Bill Committee at 9:25 am on 6th December 2016.

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Diana Noble, Graham Wrigley, Rory Stewart and David Kennedy gave evidence.

Do any members of the Committee wish to make declarations of interest? No? Good. We will now hear oral evidence from the Minister and from the chair and chief executive of the CDC. Before calling the first member to ask a question, I would like to remind all members that questions should be limited to matters within the scope of the Bill, and we must stick to the timings in the programme motion agreed by the Committee. We have until 10.30 am for this session. Could the witnesses introduce themselves for the record?

Diana Noble:

I am Diana Noble and I am the Chief Executive of CDC.

Graham Wrigley:

I am Graham Wrigley and I am the chairman of CDC.

Rory Stewart:

I am Rory Stewart and I am the Minister of State, Department for International Development.

David Kennedy:

I am David Kennedy and I am the director general for economic development at DFID.

Photo of Kate Osamor Kate Osamor Shadow Secretary of State for International Development

Good morning. CDC’s operational policy published in March 2014 on the payment of taxes and the use of offshore financial centres dictates that CDC would invest through a jurisdiction that is not successfully participating in the Global Forum only in exceptional cases. What would be the exceptional cases in which it would use these jurisdictions?

Diana Noble:

Let me first say that CDC’s use of OFCs has nothing to do with secrecy or reducing tax. We take pride in the payment of corporation tax by our portfolio companies in the countries where we invest— it is one of our development indicators. We use OFCs for two important reasons. One is for legal certainty; the other is to pool capital in neutral places. Let me explain both of those. CDC’s mission is to invest and grow businesses in some of the poorest companies in the world. Unfortunately, many of those places do not have legal systems that allow us to invest with certainty that, if there is a dispute, we will be able to get our money back. Of course, one of our big areas of responsibility is to look after UK taxpayers’ money: that is part of our mandate. So unfortunately, for some places where we invest we have to go through an offshore structure.

The second point is that we have a very important mission to pool capital from other investors to come in alongside us into difficult countries. This is an enormously important role. If we look at CDC’s investments from 2004 until now, we have supported fund of funds that total $30 billion in Africa and south Asia, of which CDC has only provided $5 billion—so that is $25 billion from other investors. Those investors come from lots of different jurisdictions themselves, so the capital does have to be pooled somewhere. Those investors, who are already cautious about the countries in which the investments are being made, have a lower risk tolerance than CDC does, for legal certainty; so they insist on a safe jurisdiction. We, however, do play our role, because we insist that that pooling is done in the best, or the most compliant, of the offshore centres in the OECD register.

Do we think that the situation is ideal? We don’t. We look forward to the day when every country where we invest has a safe legal regulatory system, where we can invest directly in every single country; but that is not the case today. What we have done, though, is encourage an important project that we have been working with DFID on, to examine the possibility of an onshore centre in Africa. That work has led to the Governments of Kenya and Rwanda taking this very seriously. It would be a very long-term project, but we are very keen that it gets progressed over time.

Photo of Kate Osamor Kate Osamor Shadow Secretary of State for International Development

Q How many offshore jurisdictions do you currently use?

Diana Noble:

It is a short list. We can provide absolute clarity about exactly how many, subsequent to this Committee. On the list are certainly Mauritius, which is well accepted as a place for pooling capital, particularly for Africa and south Asia; Guernsey; and Cayman Islands.

Rory Stewart:

I have the list: at the moment, it is Cayman Islands, Guernsey, Jersey, Luxembourg and Mauritius.

Kate Osamor—are you happy?

Photo of Richard Fuller Richard Fuller Conservative, Bedford

I apologise, Mr Streeter, for being slightly lateQ . Graham, can I ask you a little about the potential for the CDC to attract investment from other investors? Diana was just talking about the fund of funds drawing funds in, but at the top level of the CDC are there opportunities to get sovereign wealth or other enlightened investors, perhaps high net worth individuals, to put their money alongside the increasing capital of the CDC?

Graham Wrigley:

That is an interesting question. The other day someone asked us whether it would be possible to turn the CDC into an ISA or a PEP. Looking at how other DFIs are funded, the IFC has created a vehicle whereby people have invested alongside the IFC; the FMO is owned partly by some banks as well as—

Q Do you want to explain some of those acronyms for the record?

Graham Wrigley:

Yes. I am sorry. The IFC, which is the International Finance Corporation and is part of the World Bank, has created a programme called the AMC, which has mobilised other capital. The FMO is the Dutch equivalent of the CDC and it is partly owned by some banks. The CDC’s business model, though, is one whereby we are 100% owned by the UK Government, and that is how we see ourselves. We see ourselves as we are, as the world’s oldest development finance institution.

We have mobilised other capital mostly through the fund structures, and we are now looking at permanent capital vehicles whereby we will get investors who are interested at the project level. It has not been on our agenda for the past five years to look at raising capital at the CDC level because, as I said, we see ourselves as 100% owned—

Photo of Richard Fuller Richard Fuller Conservative, Bedford

Q Are you open to putting that on your agenda? If the British taxpayer is being asked to put more money in—Diana was talking about how well we are leveraging in at the project level—surely we should have a strategy. Loads of people, not only in the UK but around the world, may be willing to put their money alongside the expertise of the CDC, so will you look at that?

Rory Stewart:

May I come in on that? Technically that would be a call for the Department for International Development rather than for the CDC, and it would be set out in the five-year forward business strategy produced at the end of this year. It is certainly something we can consider. Among the things that we would have to consider is the fact that we are driving the CDC very hard to make high-risk investments in some of the most difficult countries in the world. We have dropped our expectation of the level of financial return because our primary objective is development, so the type of investor who would co-invest with the CDC would have to be a specialised one, engaged, essentially, in some form of philanthropic investing. But we can certainly look at that.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

Q I am intrigued by Mr Wrigley’s suggestion about an ISA or a PEP, which are much more about individual investors. Every day on the television we see requests for people to put money—£2 a week, £3 a week—into those sorts of things. There is a tremendous interest in this country in development work, and pride in the public support for it. Would you be interested, Minister, in taking up the indication from Mr Wrigley about an ISA/PEP model to galvanise individuals in this country to put some of their money alongside the CDC?

Graham Wrigley:

May I be clear that that was not my suggestion? The CDC, as the Minister said, provides incredibly high-risk, development-driven, impact investment in the hardest countries in the world, and it is the last place I would recommend anyone put their pension—

Photo of Richard Fuller Richard Fuller Conservative, Bedford

Thank you for the clarification, Graham. I did not mean to misinterpret you. It was something you said. But, on the principle, Minister?

Rory Stewart:

Perhaps, Mr Fuller, we can sit down and explore your idea in more detail. It is an interesting idea.

Thank you. We will move on. Alison McGovern.

Photo of Alison McGovern Alison McGovern Chair, Speaker's Advisory Committee on Works of Art

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.Q

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.

Photo of Alison McGovern Alison McGovern Chair, Speaker's Advisory Committee on Works of Art

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.

A quick follow-up.

Photo of Alison McGovern Alison McGovern Chair, Speaker's Advisory Committee on Works of Art

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.

Photo of Patrick Grady Patrick Grady Shadow SNP Spokesperson (International Development)

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 Q 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.

Photo of Imran Hussain Imran Hussain Shadow Minister (International Development)

Just to build on the point made by Mr Grady in his question to the Minister, I listened to the answer, but in the absence of a business case strategy or investment policy I am finding it difficult to understand how we can arrive at those specific figures because there is nothing to suggest how that money will be spent.Q

Secondly, does CDC have the capacity, given the totality of its lifetime spend of £1.5 billion? Such a massive increase would be an issue. Another question, probably to the Minister, is around the point made earlier by Ms McGovern and the areas where we have availability of private sector financing. Is there any idea of where the new strategy or investment policy will go with that? I take on board the example used—India. I accept that India has pockets of poverty, but in comparison private sector financing is more readily available perhaps than other target areas.

Rory Stewart:

Those are three very good questions around the business case, capacity and private sector financing. I will take them one by one.

The idea of this proposal—the primary legislation—is to provide an indicative ceiling around which a business case can be organised. Within the Department, we would expect to produce a business case and to have some sense of what money would be available. Currently, there would be no money available so it would not be possible at the moment for anyone to write, as the Department would hope, the forward strategy for future investment or produce a business case, which we hope to do in the summer of next year because Parliament would not have given us permission to give any more money to CDC.

Bluntly, if the Committee decided not to pass this legislation, CDC would have to start reducing staff and we would have to scale down significantly the future programme of investments because there would simply be no money legally available to CDC and there would be no purpose in producing a business case in the summer for future investment because that money has already been allocated. So we believe it is important to get your permission in principle for a seemly amount that we could give CDC should a business case be produced to meet it. That brings me to the second question.

I will hand over to Graham and Diane in a second, but I am absolutely certain that the board of CDC and its chief executive will not request the money from us if they do not feel they have the capacity to spend it and if market demand does not exist for that expenditure. They are under a strong obligation to their board to make sure they take this money responsibility, so even in a case in which DFID does its business through consultation with CDC and we decided, for the sake of argument, that a reasonable sum of money going forward over a five-year period was, let us say, £3 billion—I chose £3 billion because the £4.5 billion is a ceiling and we are not saying we will take that. That is what this business case is about. So let’s say it was £3 billion. They would then effectively be able to draw down on a promissory note, effectively. The Department would be saying, “You can draw down that money over a five-year period.” CDC would then have to come up with individual proposals—“Here is a solar programme in Burundi that we think is worth investing in”—and draw down the money from us. I do not want to speak for CDC, but it would certainly not be drawing down money if it did not feel that it had the resources to spend it responsibly.

That brings me to the third question of private sector financing and to Ms McGovern’s question. We are absolutely clear that we do not want to be in the business of crowding out private sector finance. One of the really good criticisms made of CDC in the National Audit Office report, the Public Accounts Committee report and the ICDC report was that it was doing exactly that, for example by making investments in coastal China. We stopped those things from 2012 onwards. The investments that we are now talking about in India are in places such as Bihar or the poorest bits of Uttar Pradesh, where the business environment is very difficult and very little capital is going in. We are also making sure that the grid is followed absolutely with every investment, so that we are not falling into that trap.

Graham Wrigley:

This very important question is about how CDC and the shareholder respond to what we think is the very clear need for long-term, patient, impact-driven and additional capital in low-income countries, and about how we do that in a responsible and thoughtful way. We fully understand that this will be a very significant step in CDC’s history, but from our perspective, having worked on this for the last five years, this is evolution, rather than revolution as it might look from the outside.

Let me explain why. If we go back to 2012, when an entirely new mandate was created, a new team was empowered to go off and explore and see what would happen. At that time, the projections showed that if things went well, more capital would be required. That is precisely what happened, and it led to the recapitalisation in 2015. As the Minister has just said, we structured that recapitalisation such that the money could be drawn down if and when there was the market demand. Indeed, it was only this week that the first promissory note for that recapitalisation was called.

Going into the next five years, the team has now been established. It was 40 people back in 2012; we are now at 220. The commitment rates have gone up. We believe that the market need in our markets is growing, and for the last year we have also been working with the Department on a series of potential new programmes focused on high risk and on unlocking new forms of development impact.

The quantum and timing of any capital given to CDC will depend on two things: first, the shareholder making its decision about how CDC stacks up against other opportunities—the opportunity cost was debated in Parliament last week; and secondly, the view from CDC. As chair of CDC, I feel deeply responsible for making sure that any capital that we call is allocated for the purpose of development impact, and that our teams can execute that responsibly. That is the context for where we are now and for the Bill. We see this as a long-term discussion about the shareholding of CDC. CDC has to perform it for the purpose of development impact, which I promise you is what drives everybody who works in CDC.

Rory Stewart:

Just to confirm, Graham, am I right that you are formally saying to the Committee that you would not draw down this money if you did not feel that you could spend it responsibly and have the resources to do that?

Graham Wrigley:

No, we would not do that.

That well known Labour Member, James Duddridge.

Photo of James Duddridge James Duddridge Conservative, Rochford and Southend East

Thank you, Mr Streeter. I should have taken the opportunity to draw the Committee’s attention to my entry in the Register of Members’ Financial Interests; my apologies that I did not do so earlier.Q

I have two questions, Minister. First, going back to the cap, I wonder whether the Bill is future-proof. I think that we will pass the Bill—it will become an Act—there will be successful drawdown up to 2020 and 2025, and quite possibly at that point you will have to come back to the House to ask for more money. Can you go into a little more detail as to why the Clerks did not advise that? Recently, we have had the multilateral and bilateral review, and that does not get anywhere near the same scrutiny as this relatively, proportionately, smaller amount of money.

Rory Stewart:

I think the argument from the Clerks is that Parliament does not like the idea of granting blank cheques, and I can completely understand why you would want to bring us back. Again, this was simply an attempt to get an in-principle agreement that in changing the way in which the CDC was funded, we would move to secondary legislation, but I can completely understand why you would want to put a cap on that, and we have accepted that; we are happy to take that.

Photo of James Duddridge James Duddridge Conservative, Rochford and Southend East

Q This is my second question. As I said, I think that the Bill will be passed, but if it is not and we accept as a Committee the need to put more money into economic development and jobs, what capacity would DFID have to spend the same volume of money? Is there an alternative? During Second Reading, there was a lot of talk about the opportunity cost of giving this money to the CDC. What else could DFID do with the money?

Rory Stewart:

The key thing is that this is within our economic development portfolio, which is less than 20% of our spend, so it is about moving money from, essentially, David Kennedy’s part of the Department—within different programmes in his part of the Department. The intention is not to move large sums of money from our humanitarian activity, health activity or education activity. It is a different modality for economic development.

What alternatives might we have were you as a Committee to decide not to approve this legislation? We could, for example, give more money, through the World Bank, to the IFC. We could use a different form of DFI, which was not the CDC, and the World Bank could theoretically spend that money. That would not require primary legislation; it would require my going to you with a statutory instrument in the normal way we give money. Alternatively, we could spend the money, as we have done in the past, on technical assistance. That is a normal part of economic development activity. There are also various forms of livelihood programming that we have done in parts of the world. However, we believe that the CDC is a really good institution; we think that it is in many ways better than the other development finance institutions that we could look at as alternatives if you did not wish to go with the CDC. That is why we strongly suggest that we put the money into the CDC.

Photo of Richard Graham Richard Graham Conservative, Gloucester

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 Q 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, where 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—where 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.

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 speak up a little bit.

Photo of Richard Graham Richard Graham Conservative, Gloucester

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.

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.

Photo of Richard Graham Richard Graham Conservative, Gloucester

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.

Photo of Stephen Doughty Stephen Doughty Labour/Co-operative, Cardiff South and Penarth

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 Q 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.

Photo of Stephen Doughty Stephen Doughty Labour/Co-operative, Cardiff South and Penarth

Q Who came up with the figure? Was it Ministers or CDC?

Rory Stewart:

We did. Our Department came up with the figure.

Photo of Stephen Doughty Stephen Doughty Labour/Co-operative, Cardiff South and Penarth

Q Okay. May I ask you a separate question? A minute ago, you said that CDC’s support to India is targeted at the poorest states, but you told me yesterday in a written parliamentary answer—55689—that the majority of new disbursements are still going to the richer states in India. In fact, the top disbursement is to Maharashtra, which is where Mumbai is located. You told me that 42%—that is only this year; it has been going up steadily—goes to the poorest, but the majority goes to the richest. Can you explain why that is, and do you want to clarify what you said earlier?

Rory Stewart:

My understanding of what is happening there is that every business case in India needs to be scored against our development impact grid. To achieve the score that we are looking for—I believe it is a 2.3 score, and we are generally crossing 3.0—we have to reconcile on the X and Y axes the number of jobs that would be created through the investment. In other words, we focus on the sector, then on GDP per capita, which is broken down by state, then on the difficulty of investment, and then on the amount of available capital. Any investments, even in the wealthier states in India, will have gone through that grid.

Photo of Stephen Doughty Stephen Doughty Labour/Co-operative, Cardiff South and Penarth

Q But the majority is not going to the poorest states. Is that correct?

Rory Stewart:

Let me hand over to Diana on this.

Diana Noble:

Can I explain our strategy? In a lot of cases, when you want to help poor countries, it is better to back businesses that exist elsewhere and encourage them to expand into those countries. Therefore, a lot of our investment is about the vision that we can create through these investments.

Let me illustrate that with a quick example. Last year, we invested in a mid-size Indian bank—RBL. The vision was to help it expand its business into rural areas, to the rural poor and into poorer states. That is, as I am sure you know, a big priority for the Modi Government. CDC did not just provide capital to RBL; we also helped it with expanding financial literacy training to 25,000 really poor women in Madhya Pradesh to explain to them how they can benefit from savings accounts and bank accounts. There are already results from that. RBL now has 1.9 million new customers in the rural and poorer areas. We are evaluating that by doing a random sample of loans to understand how that translates into new jobs as well. That is a really good example of our having a partnership with a high-quality operator, going to poorer places, helping them and sharing the results.

Rory Stewart:

I did not answer your question directly. The answer at the moment is that, from our portfolio, 42% of the investment in India goes into the poorer states. The rest—the remaining 58%—does not go into the poorer states, but into states where we believe the business will benefit the people in India who are in need. Many of those investments are intended to be regional investments, so we may invest in a bank, for example, that is not located in one of the poorer states, in order to benefit ultimately the people in the poorer states.

The best way to evaluate such decisions is by looking at the individual investment and giving us an opportunity to discuss with you the individual company in which we have invested, so that we can discuss our theory of change. It is difficult to decide whether to make a regional investment to help the poorer states or whether to go straight to the poorer states. I think we should be accountable and talk to you about those individual investments so that we can explain why we have a theory of change and investment in a particular company.

We need to move on.

Photo of Fiona Bruce Fiona Bruce Chair, International Development Sub-Committee on the Work of the Independent Commission for Aid Impact

I would like to ask Diana about job creation. You say that one of CDC’s key strategic aims is to achieve development impact focused on job creation. How do you measure jobs that are created directly and indirectly? Last week, the National Audit Office said in its report that progress on measuring job quality has been slow. How are you working on that? How are you measuring productivity, quality of jobs and income levelsQ ?

Diana Noble:

As you rightly point out, we focus on jobs because we believe a job is the first and the best step out of poverty. I think everyone on the Committee understands the difference that a job makes to someone in a poor country: to them and to their family. When we talk to workers it is clear that they also use the income particularly to educate their children, so it has a benefit for future generations. How do we measure job creation? This is something that we take very seriously. Two years ago, in partnership with some academics, we put in place a way to measure job creation across the whole of the Africa and south Asia portfolio.

We are the first DFI to collect data from all our portfolio companies. We do not just collect headcount data; we also collect revenues, supply chain, purchases, work and wages as well. The academic uses that to calculate not just the direct job creation but the indirect job creation. As you can imagine, some of our priority sectors, such as financial inclusion and particularly infrastructure and power, have a far greater job impact beyond the direct jobs. So we have now published the methodology on our website. We are going to go through a peer review process because we want it to become one of the industry standards. We have shown the data from that for two years now. We can start to compare and contrast it. It shows that the portfolio has created over 1 million jobs in the past two years. That is a number we take immense pride in.

You also rightly talked about job quality, because it is not just about volume. Quality has lots of different elements to it. What all of us sitting in this room might consider a good job is not necessarily so with the lens that you should use in the countries where we invest.

On job quality, before we make an investment, our fantastic environmental and social team go and sit down with the company and do due diligence on them. They say, “Are you up to standard, particularly in the areas of health and safety?” If they are not at the right standard, an action plan is agreed with management and put in place.

The second thing we do is collect data across the portfolio on fatalities and serious accidents. We have been doing that since 2008. We have very rich data now and have been able to combine that and give training back to portfolio companies and fund managers about the areas that lead to fatalities and serious accidents. We think that gives huge added value to our portfolio.

We are going further than that. We are collecting information on lost time injury frequency, particularly for manufacturing and construction—places where workers are potentially put at harm. We are looking at staff retention for some of our larger investments, because we are advised that it has a big correlation with job quality. We are doing an evaluation in Bangladesh at the moment—everyone on the Committee will be aware of the issues in garment factories there—to try to understand what workers really want out of their jobs, so that we can build that in. There is a big element of learning. We are on a journey, and there is still a long way to go.

Photo of Jeremy Lefroy Jeremy Lefroy Conservative, Stafford

The question I wanted to ask has been asked, Mr Streeter.

So we move on to Patrick Grady.

Photo of Patrick Grady Patrick Grady Shadow SNP Spokesperson (International Development)

Q I want to press you a little bit more on some of the policy and decision making and the opportunities we have with the Bill. ODA has a clear definition, and the various international development Acts put in place a duty to achieve poverty reduction, but is that sufficient for CDC, as was? We have heard about these business cases and impact grids. All these are policy-level decisions. The 1999 Act does not mention poverty, impact or international development. So, why not take the opportunity with this legislation to do what some of the amendments are attempting to do, which is to make it clear that CDC would have a statutory duty to meet those objectives or, at the very least, to put some of these processes into the legislation? Would that not help to reduce the risk of backsliding, returning to the days of excesses and concerns—which, I accept, are in the past?

Rory Stewart:

Mr Grady, broadly speaking we are in sympathy. We are very clear that we expect all investments made by this Department to aim at poverty alleviation and, to relate to one of your amendments, to reinforce the sustainable development goals. The particular space that CDC operates is within our economic development space. We believe that the correct way to respond effectively to a changing world, to allow Ministers and elected Governments to put their policies through, is through the process we have of setting strategy and governance. One thing I was pleased with in the NAO report was the praise it brought forward for our governance. Any money we give to CDC has to follow that test. That is the fundamental test applied, whether we are giving money to CDC, IFC or a UN agency, or whether it is any of the £5 billion a year of multilateral spending. The way in which we control it is through not primary legislation but Government strategy documents.

Graham Wrigley:

May I add, from the CDC perspective, that we have developed some organisational principles and pillars that we have shared with the shareholder? They cover the following things. The first is that our purpose is development. That is why everybody at CDC is there—Diana, me and everybody else. Secondly, we are the world’s oldest DFI, set up by Clement Attlee, supported by both major parties over the decades and 100% owned by the UK shareholder. We are very proud of that fact.

We have to balance—a question was asked earlier about this—development impact and financial return. That creates perpetual paranoia about whether we get the right balance. We see our goal as meeting the needs, and Diane will give you an example of that in a sec—

She might not. We will draw things to a close now with two more quick questions.

Photo of Stephen Doughty Stephen Doughty Labour/Co-operative, Cardiff South and Penarth

Q Some new research by the House of Commons Library suggests that CDC’s new investments, as a proportion, to Africa are actually falling over the past few years, with a majority going to south Asia, largely to India. Are you satisfied with that, given the poverty focus that is supposed to exist?

Rory Stewart:

These are all really good questions. Fundamentally, things will change year on year. We would expect that with an investment strategy, because these guys have to make very difficult decisions. The NAO has been very clear that it does not want DFID Ministers micromanaging or interfering in the individual business decisions of CDC. I hope you would agree with that: if we were in the business of signing off on every single investment CDC makes, it would become a political arm of the Government, where we could be directing it to how it invests.

We set the overall strategy and framework; we have taken CDC out of places like China and given it the freedom to invest in south Asia and Africa. We have agreed a development grid; we are conducting a lot of research on how that happens, but I think it is perfectly reasonable that over a period more investment one year might go into south Asia than Africa. I think the way that we deal with that is through the next strategy that we produce, continuing this process of tightening accountability, but I do not think it is appropriate for me to start vetoing individual investment decisions by the board.

Photo of Alison McGovern Alison McGovern Chair, Speaker's Advisory Committee on Works of Art

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.

Final question.

Rory Stewart:

I am sorry; there was a strange comment coming from Mr Doughty who, when he is not texting, throws things from the chair. We believe very strongly that economic development and job creation are absolutely core activities in the elimination of poverty. The distinction that Mr Doughty is trying to draw between economic development, job creation and poverty alleviation is extremely unorthodox and it is not one that the chief economist of our Department, or indeed any of the officials of our Department, would accept.

Photo of Imran Hussain Imran Hussain Shadow Minister (International Development)

Q I have a final question for the Minister. While the CDC has made some progress since 2011, as I have said in the Chamber, does he at least accept that there is room for improvement around a greater focus on poverty alleviation, around greater overview and scrutiny and avoiding tax havens and so on?

Rory Stewart:

Yes, we need to continually improve. One reason why this debate is useful, and why the primary legislation is useful, is shining a light on all this stuff. None of us is at all complacent. These things are very difficult. The DFI is the leader in the world, we believe, in terms of trying to measure things that are very difficult to measure—how to treat job creation and economic development in some of the toughest environments in the world. We can keep improving and you are absolutely right that those things you have mentioned are exactly the kinds of things that our new strategy will attempt to improve, including, for example, caps on the amount of investment that goes to India.

Thank you for getting that all done within time. We thank our expert witnesses and the Minister.