"CDC Group, whose role is to help reduce poverty by investing in private businesses in poor countries, has shown that it is very good at turning a profit. And the Group built up its uninvested cash deposits to £1.4 billion by mid-2008, a far higher level than expected. We need to know, however, how effective it is at reducing poverty and so far there is limited evidence.Mr Leigh was speaking as the Committee published its 18th Report of this Session which examined how effectively DFID has exercised its oversight of CDC to maximise its development impact.
"CDC is government-owned but its obligations to report to the Department for International Development have been weak. Oversight by the department of how
CDC operated agreed remuneration arrangements was ineffective. These arrangements led to extraordinary levels of pay in a small, publicly owned organization aimed at fighting poverty. The Chief Executive earned £970,000 in 2007. The pay arrangements place too much emphasis on financial performance and too little on success in reducing poverty. "DFID needs to steer CDC to invest more in those poor countries with less well-known and less developed capital markets, rather than in countries such as China and India which are already successful in attracting foreign investors."
CDC Group Plc, formerly the Commonwealth Development Corporation, is the United Kingdom's Development Finance Institution. It is wholly owned by the Department for International Development (DFID), which views it as a means to help reduce poverty by supporting private sector development. CDC is self-financing, having received no Government funding since 1995. It does not donate aid. Rather, it invests equity in private enterprises in developing countries in order to demonstrate to other investors that it is possible to make money in such countries, while at the same time creating sustainable jobs, paying taxes and following good social and environmental policies. It now faces the new challenge of investing effectively during a global recession.
DFID restructured CDC in 2004 in order to invest indirectly, through private fund managers. CDC invests largely in sub-Saharan Africa and South Asian enterprises in sectors as diverse as retail, financial, agricultural and manufacturing. Since 2004, CDC has grown rapidly, more than doubling the value of its assets to £2.7 billion by mid-2008. DFID's oversight of certain elements of business efficiency needs to be improved. High profits have led to CDC accumulating some £1.4 billion of uninvested cash, far higher than expected. And management of rising levels of executive pay has been weakened by misunderstandings, particularly as to when CDC should have consulted DFID.
DFID does not interfere in individual investment decisions but sets the overall framework for CDC's investment policy, which targets poor countries.
As a result, CDC invests over 70% of its resources in poor countries, a far higher proportion than for similar institutions in other donor nations. CDC has limited influence, however, where its fund managers invest within these broad criteria. Only 4% of its resources are invested in small and medium enterprises, which suffer a shortage of finance. And it has only recently reduced new investments in China, which has been relatively well served by other investors.
For DFID, financial performance is the principal indicator of CDC's development impact, but this information is not sufficient to assess CDC's effect on poverty reduction. In 2004, DFID and CDC set out plans to evaluate wider development results and to monitor compliance with ethical investment principles. But it is not doing enough to measure and report these aspects of performance, and work to remedy this situation is only now getting underway.
The level and nature of CDC executive remuneration are also relevant to business efficiency and management incentives. The Chief Executive's remuneration increased from £383,000 in 2003 to £970,000 in 2007, reflecting in part CDC's exceptional financial performance. Advisers concluded that CDC executives were paid below the median for this group. However, CDC does not compete for cash to invest, offers high job satisfaction, and has, since 2004, successfully recruited and retained talented staff.