Written statement to Parliament

Andrew Mitchell on the reform of CDC Group plc

Secretary of State for International Development, Andrew Mitchell on the reform of CDC Group plc.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Rt Hon Andrew Mitchell MP

In October 2010 I informed the House of the Government’s decision to reconfigure CDC in order radically to increase its development impact.

In my previous statement I set out the objectives of this reform and announced a public consultation, as well as the commissioning of a number of independent studies.  The results of that consultation and the four studies have been published on the DFID website. The International Development Committee of this House has since conducted an inquiry into the future of CDC.  Its report was published on 3 March 2011, and the Government’s response was given on 4 May.

I can now inform the House that the Government and the CDC Board have agreed a new High Level Business Plan, published during the Whitsun recess on 31 May, which sets out how CDC will carry through the reforms I proposed last October.

CDC will be more focused on the poor than any other Development Finance Institution, building further on its strong concentration on the poorer countries in South Asia and Sub-Saharan Africa.  In future, all CDC’s new investment commitments will be for the benefit of these two regions, where over 70% of the world’s poorest people live.  In India, CDC will move to a concentration on the 8 poorest Indian States. 

CDC will not invest in regions or sectors which are already well-served by private investors, such as large-scale mining in many countries. Otherwise, it will be responsible for selecting, on the basis of the strongest anticipated development outcomes, investments from across a wide range of sectors. 

CDC will aim to reduce the proportion of its portfolio held in other countries outside the new focus regions over time to 15-20 % by 2015.  It will not invest in the better-off developing countries, unless for the benefit of poorer countries in the relevant region. 

There will be a new performance framework for CDC, focused on development impact rather than CDC’s own profitability.  It will be a development-maximising, not a profit-maximising, enterprise.  CDC will measure the impact of its investments on generation of incomes and tax revenues, broader private sector development, mobilising private capital, and improving socially and environmentally responsible management in beneficiary companies.  Stretching targets will be set for these indicators for CDC to meet and they will be reviewed annually. 

CDC will become bolder and more pioneering in its approach to innovation and risk: being more creative and accepting higher financial risks where these are justified by greater development benefits.  It will reach the parts that other emerging market investors too often don’t.  But it will still ensure that it remains sufficiently profitable to offset the cost of the taxpayers’ money invested in it, as defined by Her Majesty’s Treasury.  Whilst development impact will be the driver, CDC will also look to build the companies in which it invests into commercially sustainable enterprises. 

CDC will no longer exclusively operate indirectly, through private equity funds managed by others, but will work through a wider range of intermediaries - and importantly build up its own direct investments.   It will do this gradually and initially only through co-financing with other lead investors, as it redevelops its capacity to seek out and manage direct investments.  Likewise, it will offer lending as well as equity financing, with the aim of increasing the share of loan instruments in its portfolio. 

CDC will continue to make new commitments to private equity fund managers, and to support and develop suitable local investment management firms, but with the aim of reducing the fund of funds share of its assets to some 60% by 2015.  In running down this part of its portfolio, the realisation of full value for money for the taxpayer will remain the primary consideration. 

The Remuneration Framework agreed for CDC by the previous government, which aimed to align CDC remuneration with Private Equity Fund of Funds firms in the City of London, has led to inflated remuneration.  A study by independent consultants has indicated that in comparison with other publicly owned development finance institutions, and with private foundations doing similar work, CDC remuneration has risen far above the median levels elsewhere. 

We must bring pay and bonuses down to a level that is fair and appropriate, but not excessive, for a publicly owned body whose very purpose is to reduce poverty. The CDC Board will take immediate action to cut bonus levels by 50% for this year.  Once a new CDC Chief Executive is in place, the government will agree with CDC’s Board how to restructure pay to attract, motivate and retain people with the attitude and skills necessary to take part in this exciting new phase of CDC’s existence.   The new remuneration framework will prioritise development results rather than profitability and any performance-related pay will be largely deferred and based on long-term performance. 

In response to the public consultation on CDC, CDC will publish a new disclosure policy aimed at making its work as transparent as possible.  While observing the constraints of commercial confidentiality and the Data Protection Act, CDC will publish more information on the businesses using its capital, the funds investing it, and the economic impact of investments; and on CDC’s remuneration and operating costs.  More of CDC’s evaluations will be conducted independently, going beyond the current 50%; and as much evaluation material as possible will be published that does not jeopardise commercial confidentiality.  CDC’s Investment Policy, agreed with DFID, will also be published. 

CDC will update its Investment Code to reflect the latest international standards and best practice and will continue to ensure, by means of independent external audit, that its compliance and implementation is properly monitored.

CDC has strengthened its policy on taxation: where it is within CDC’s discretion as originating or sole investor, CDC will not make new investments in or through harmful tax regimes, or regimes which do not comply with international tax transparency and exchange of information standards (as defined by the OECD and Global Forum on Transparency and Exchange of Information for Tax Purposes).  Where CDC does not have such discretion, CDC will make a judgment on the merits of the proposed new investment against the nature of the tax regime - and be transparent about that judgment.  CDC will also be transparent in its dealings from a tax perspective. Information will be published on taxes paid within CDC’s portfolio and, if specific information cannot be published, CDC will explain why. 

DFID will work more closely with CDC, both at country level and at the centre. CDC’s business plan will be reviewed annually and CDC will report annually to the Secretary of State on achievement against its targets, which we will publish. 

The Board of CDC has responded willingly and constructively to the recent scrutiny of its work and to the changes that the Government has proposed.  There is now the opportunity to strengthen CDC’s role as a leading instrument in the UK’s policy for accelerating poverty reduction in the poorer countries through enterprise and economic growth.

Published 7 June 2011