10/02/2017 Select Committees


10/02/2017

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Thank you very much. Ladies and gentlemen, welcome to the

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Public Accounts Committee this Wednesday 8th February, 2017. We are

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here today to look at the CDC, the Commonwealth development corporation

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which is a body set up originally in 1948 to channel money into

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investment in developing countries to help promote economic growth and

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job creation and it is going through an interesting change right now,

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going through the House is a bill that's going to change the structure

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but particularly focus on increasing investment in line with an economic

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strategy so there is an investment limit going up from 1. 5 billion

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currently to 6 billion and potentially enables the House

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through secondary legislation to increase that to ?12 billion. So it

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is an interesting time of change. The report goes through some of that

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with interesting graphs about the expansion of staff teams and the

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cost of staff going up as a result, partly as a result of that. This is

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a quadruple willing of taxpayers' money to be invested for overseas

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development aid but a vehicle that's a sort of hybrid vehicle because it

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gets direct taxpayers' money but operates in private sector terms

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which is a sort of brief summary of how it works. I want to welcome our

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witnesses and I wanted to ask some questions about St Helena airport

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before the main session. This is from my left to right. Rachel

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Turner, interim director general for economic development. Welcome I

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think it's your first time in the committee. Yes. Welcome. We are a

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friendly bunch, most of the time. If you answer our questions! Sir mark,

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permanent Secretary at the Department for International

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Development. Diane Nobel, the chief executive, but not for much longer s

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that right? A few more months. Do you know who your successor is? We

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will talk about that later. OK. And Graham Ridley the chair of the CDC.

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Our hashtag for anyone following on social media is hashtag CDC. Before

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we start on that, Sir Mark, I wanted to ask about St Helena, I understand

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there was a key date yesterday for tenders coming in to provide

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aircraft to the airport. What can you do, can you update us on

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progress on whether flights will be able to land at the airport? Yes,

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chair. There was a closing date submission of tenders. I can tell

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you we have had a substantial number of responses. My commercial advisers

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tell me I shouldn't tell you the precise number because it is a

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commercial process ongoing. It remains the Government's plan to

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move through the tender process and to start an air service to St Helena

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in the way we discussed last time I was here later in the year. OK. Any

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of these aircraft large or all smaller aircraft that were managing

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to land successfully? There are some aircraft that are in the category

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that I ran through when I was here with Richard Montgomerie last time.

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We won't revisit that in this session. Thank you for the update. A

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couple of questions. I met some people from St Helena yesterday,

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they may have met you, as well, I don't know. But I am concerned

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because we have seen all of this money go in and haven't yet got the

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right solution in terms of the airport, I hope that will happen.

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But these are really questions for CDC and I don't expect to you sign

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your name in blood to anything right now but your mission is to secure

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future sustainability and prosperity for some of the poorest countries in

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sub Sahara Africa and Asia. St Helena is underdeveloped and is in a

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sort of aspect where it can't really change without the airport and

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without the investment. It hardly has any hotel beds, the bank is

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capitalised at ?5 million. It is precisely the sort of thing one

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might think where a multilateral financial institution like the EBRD

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or CDC might come in over a long period of time perhaps with partners

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to develop a corporation, particularly if the air solution

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comes up, that would create the right conditions for a much more

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sustainable long-term tourist industry with perhaps 1520,000

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visitors, there is obviously a huge interest and a niche market for

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that. Is this the sort of thing that CDC would seriously look at? You

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described precisely what CDC does but the geographies that we invest

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in are decided by our shareholder and we invest at the moment only in

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Africa and south Asia wris where 80% of the world's poor live. So a

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question of the shareholder changing its mind. You Getty point. I get

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your point and indeed you will be aware that the Caribbean development

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bank, for example, with help is interesting in overseas territories

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now I need to check which of the development banks have a mandate for

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exactly where St Helena is but I will take that away and have a look

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at it and in respect of CDC as you will know the Secretary of State is

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planning to agree with the board shortly the new strategy for CDC and

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that does touch on the issue what of right geographical areas are. It

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would be extraordinary if the British overseas territories, some

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are which very poor, some have had governance problems, when I was

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first elected to as an MP I was invited to the solicitor owemans and

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it was cancelled a because it was too dangerous. If they were excluded

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when other places were, even if they were roughly in the right

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geographical area, would that not be strange? It's a matter for the

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investment policy and they're reviewing the policy at the moment.

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So I will take away the point and consult the Secretary of State.

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There is an open invitation for you to lobby the Secretary of State. OK.

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We are moving into our main session on CDC, particularly in light of the

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bill going through parliament. I will pass over.

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Thank you very much for being here. There are a number of questions I

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want to ask relating to your strategy.

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First, to Sir Mark, do you think there has been a big benefit moving

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from a fund to fund strategy to more direct investments? Well, I think

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probably the company will want to comment on that, as well. The then

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Secretary of State in 2012 was very keen to do that in order to get CDC

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back in the business of being able to invest directly in companies

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where the company thought there was a good prospect for creating jobs

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and adding to the tax base and making development impact and the

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experience so far, it is early days in terms of the proven results, but

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the experience so far has been very positive. Yes, we think it's a good

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idea for CDC to have both the fund to funds vehicle and the direct

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investments, equity and debt. Yes, we are happy with our mandate. We

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think it gives us the full range of tools we need to achieve our mission

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to create jobs especially in the poorest places. There are some great

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things that funds, investing through funds can achieve. You are creating

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a layer of investing infrastructure effectively that will last for

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decades to come. And also you are - direct investing can be much more

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precise in targeting investments that alleviate poverty. The

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principle worry about this is you are moving from one set of

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investment, your investment professional, I read, so you

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understand that it is a very different thing to be a fund to

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funds manager than to be a direct investor. So you need a different

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skills set. How are you doing in expanding that particular skills

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set? If I can refer colleagues to page... Yes, the report covered it

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very well actually, that we have done a lot of work over the last

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five years to establish effective will you new teams, there is a

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figure that shows all the boxes of the teams in the colours. And so we

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have put in place product teams so a direct equity team and sector teams

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because you really need to understand the sectors that you are

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investing. Now we are beginning to expand our geographic reach as well

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to supplement this so that we can be really close to our portfolio

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companies but you are right it's a different skill. Do you think it is

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- I was looking at the compound growth rate, which I asked for

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specifically. I notice that it is sort of fallen off. Take the last

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four or five years, it is about 7. 7.5%. Whereas over 15 year period

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it's 10%. Is that related to the fact that you are shifting your

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focus? Do you mean the financial return is coming down? Yes, it is.

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It is not so much because we are investing direct, it's because we

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deliberately responded to the recommendations from this committee

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and also the development committee and international development

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committee in 2010 to push ourselves to make harders investments. You

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will have seen the development impact grid in the NAO report and

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that is that targets our tapes and pushes our teams to make investments

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in the harder countries. You will have seen our portfolio is more

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weighted to the harder bits so we think we are pushing our mission and

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that we think over time will continue to bring the financial

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return. If as you accept that the financial return is slightly

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decreasing, and that's what the numbers suggest, the issue that I

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would have is that how do you measure the development impact

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because it seems looking at the report and looking at other things

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that that's a difficult thing for you to get a handle on and you have

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used different criteria. So we think we have extraordinary impact and we

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think and we are demonstrating it, as well. So we want to try and

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maximise the number of jobs that are created. We can now show the last

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two years our portfolio companies created over a million jobs in each

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of those two years. A million jobs in each of those two years. We want

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to increase taxes paid. We can show that our portfolio companies paid

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over $7 billion over the last three years into local Exchequers, we want

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to power Africa. We can show that our power companies generated 56,000

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gigawatt hours, which is enough to support 28 million people. And we

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want to bring the private sector and other investors in alongside us and

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we can show that last year 700 million extra capital came in

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alongside our 3 punz million that we committed to funds. Forgive me,

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these are fluent answers but if you look at figure 15 of the report on

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page 34, it's not - the picture that you lucidly describe is not captured

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in that figure because there are a number of criteria that you

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discontinued for what reason, I am not sure why you would have done

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that. It looks to me like you have been moving the goal posts slightly

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in the sense that some of the criteria are no longer used or have

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I got the wrong impression? It's a different picture. Again the NAO

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report very clearly shows how much we have done and how much has

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changed since 2011. So, where we invest, how we invest, what we

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invest in and a lot of our processes and policies have changed, as well.

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Every time we enhance what we do we add something new to the way that we

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report. So the picture I want to paint is one of constant

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improvement, not one of wanting to change goal posts. You will

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understand if you alter the measure it is very difficult for committees

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like us to track progress. You understand that problem? Of course.

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But the main metrics that I described upfront, jobs created, tax

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paid, capital crowded in, power generated, these are not measures

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that are changing. We will report consistently on them year on year.

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Can I ask about jobs created. You talk about a million from the

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portfolio companies. Direct jobs is about 25,000, isn't it? Yes Seems a

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big jump from 25,000 to a million. Can you talk through how you make

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that, what measure you set in place and make sure you are not double

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counting? Of course. So it follows accepted economic advice which is

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when you look at the job effect of investing it falls into three

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categories. Obviously the direct jobs, we all understand that. Then

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there are indirect jobs generated through supply chains. Then there

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are induced jobs which result of bringing more power or finance to a

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country or a region that doesn't have enough of it.

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Your right to say that the methodology we put in place a couple

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of years ago, it is clear that the indirect jobs are much great and the

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direct jobs are much smaller as the proportion of the whole. But I think

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this is intuitive. As an example, we made an investment bringing

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hydropower to eastern Congo, this is off grid, the first of this region

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has had it, that we think will generate 250 direct jobs but it is

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part of planned to bring 40,000 new jobs to the indirect effect...

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Perhaps we can follow up on this but how do you measure your not double

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counting? You're creating the energy which could potentially create

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40,000 but other things which could contribute to this which you might

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also be investing in. The design of the methodology was not ours. We

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went out and find the best adviser to put it together and we are peer

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reviewing that methodology at the moment. Like you, we want to be as

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precise and accurate and honest about the impact we have. About this

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development, we had slightly more problems on this than I think you're

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answers may suggest. In 2008 there was an issue, was there not? This is

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to Sir Mark. There were a number of things in two dozen eight. This was

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a question that Mr Kaepernick Lakra bacon asked in 2008. Why was the tax

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paid by the date the company? Asking about the development company. There

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are none of damage and need element impact. Are these businesses are

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generating business and paying tax going back into the Exchequer? A big

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change in the element impact has been the eight fold increase in

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businesses paying tax. It is absolutely the case today that in

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2008 we were not tracking jobs created. It is also the case as the

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report pointed out that we were not in 2008 identified at the moment is

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the company was going to make an investment or not, will be predicted

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development impact would be. Those three things are enhancements. The

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report recommends we do more to enhance knowledge of the element

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impact, more evaluation work and so, and we agree with that I want to do

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that. There has been a lot progress since 2008. Can I ask you a specific

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question about this? By understanding is you had ?5 million

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of the 735 that you got in 2015, ?5 million allocated specifically to

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hire a senior evaluation Officer, or someone who would be looking at this

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very issue impact, development impact. Where have you got to

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intensify ring this person? The 5 million was not to hire the

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individual, to be clear. We were in the -- we were intended to hire an

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individual who had expertise in this and would be able to manage a 15

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year long study, checking in periodically to provide the

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aggregate picture of the element impact. I'm sorry to have to report

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to you, at the report says that we have not been able to find the

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person with the right skills to do that. What we have done is tender

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contract to provide the analysis in the study over that 15 year period.

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That is not the only thing we have done, we have also, the company

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should be to much bigger programme of work they have commissioned of an

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evaluative sword so we can tell a stronger story as we go along. Are

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you still looking for someone or had you abandon that? We will have

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another look at what I didn't want to do is delay the whole evaluative

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process because we were delaying finding the senior person for that

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we can let the contract and we have competent people. How long did you

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spend trying to define this person? Are you so. -- a year or so. The

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other thing I wanted to ask about is the quality of jobs because clearly

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that is a big issue you pride yourself on in terms of job

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creation. How do you measure the quality of the jobs you create? The

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NAO report recognises that we made a lot of progress in this area. And we

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agreed that it is not enough just to care about the number of jobs

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created, we should also care about the quality of those jobs, or decent

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work if you like. The things we have done, we have a code of responsible

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investing and that had standards in it that followed the International

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Labour organisation. It is very clear that we have standards set to

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avoid forced child labour or discrimination, we ensure safe and

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healthy working environments, and we ensure that our companies pay the

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minimum wage. It is fine to say these are standard but the important

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thing is are they actually did too? We have a great team that goes in

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and does due diligence before we invest and assess the compliance and

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if they are not complained they will put in place and action plan and

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they oversee real change. We don't stop there, we also assess how the

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companies are doing against the action plan and we will step in and

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help them if they are falling short. We had a traffic light system that

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go to the risk committee. If I may, it's a very compelling story, but

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I'm interested in your relation to the private sector. This is quite

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hybrid beast and I'm sure you would have been happy to receive capital

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underwritten by the taxpayer, I've looked at York account and there no

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cost of capital that I can see and yet you're competing on favourable

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terms on financing with the private sector -- your accounts. Is that

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something you are happy doing? Do you feel that you're competing not

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competing but operating in a fair environment with other people you

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are trying to do it on a commercial basis? CDC is a unique and

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extraordinary organisation. What you describe is actually its strength.

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It has permission to go to the very hard places that it uses and this is

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a strength of the team we have hired, it uses commercial skills to

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apply judgment to navigate the difficult places. The judgment about

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which team we should work with which management team we should not work

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with, what standards should we have in job quality and is this a company

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that is going to grow and be sustainable for the long term? These

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are important judgment that the team makes and these are commercial

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skills. But you see there may be an issue in terms of private investors

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operating in your space who feel they cannot compete and are being

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crowded out. This is an important topic. We use the phrase

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additionality. The meaning of that is that we always want to be clear

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that CDC is bringing something that CDC is bringing something

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unique to the investment we make and that can be capital. For example,

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during the Ebola crisis we provided much-needed liquidity to companies

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that were running out of working capital to the essential businesses

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going. No other investor was investing in cereal own at the time.

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That occur in Sierra Leone. Also we can bring things that the private

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sector would not bring -- in Sierra Leone. We have dramatically improved

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working conditions in a rail freight business intimately poorest state of

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India, which is an industry which is notorious for poor working practice.

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Or we may change the strategy of the investment that we work with. The

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report talks about global leg, our busiest investment, which is the

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biggest independent power producer in Africa. We make that investment

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but commercial capital would have invested in it. It is an attractive

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company. But what we have done is completely change the strategy from

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essentially a commercial strategy where the shareholders are taking

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out dividends each year and saying that we want those dividends and all

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the focus to go on developing the next generation of power plants

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across Africa which is not a fully commercial strategy. We have changed

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the board and the management team and the strategy. For my

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clarification, do you essentially go in as yourself or do you go in as

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joint ventures? Do you have a style or approach with respect to joint

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ventures and partners? We are very flexible. We can be very active, as

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I described with Globalec, we were a majority shareholder. One of the

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important things we do is to try to work with the best people. The magic

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of CDC is when you combine capital with people who share your values

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and what to do the right thing. One of the most important things we do

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is to try to choose those people and back them. You don't see any

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tension, any tension at all between those twin goals? You think this is

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a model that is completely without any wrinkles? Of course it's

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challenging. To the mandate we have, and the whole team that we've hired

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over the last five years, completely accept this, is to really push the

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impact part of our mission, to do the hard things that the committee

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wants us to do. But to do it in a responsible way that generates

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returns, crowds in the private sector as well, and also had a

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demonstration effect so future investors will follow us. It is a

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hard mission and it does have challenges and trade-offs, should we

:25:08.:25:10.

make this investment, will it achieve both those aims? Mr Wrigley?

:25:11.:25:28.

You summarised the balancing of the impact and the return. It is

:25:29.:25:32.

perpetual paranoia, are we getting the right balance? You can think

:25:33.:25:36.

about it on an investment level and a strategic level. Every investment

:25:37.:25:42.

comes to the investment committee, the teams and the committee has to

:25:43.:25:47.

make a judgment, a triangulation between the redevelopment impact,

:25:48.:25:50.

how can we make the world better, financial return, how we're to

:25:51.:25:55.

achieve our financial mandate from the UK taxpayer, are we going to be

:25:56.:26:02.

additional? Your question, we never want to crowd out and we don't crowd

:26:03.:26:06.

out and we have clear rules and guidelines. And are we managing UK

:26:07.:26:13.

money with full business integrity? That is every investment. Last year

:26:14.:26:18.

we made over 40 investments. At a strategic level, and we are very

:26:19.:26:24.

long-term business, we have to judge development impact and financial

:26:25.:26:30.

return, the tone of the National Audit Office inquiry eight years ago

:26:31.:26:34.

was a different set of questions. That is what we try to do. Those are

:26:35.:26:39.

the debate we are having at the moment with each shareholder for the

:26:40.:26:45.

next five years. I looked at the 2008 report and clearly there were

:26:46.:26:49.

big problems and it's a different picture. They were running it like

:26:50.:26:54.

hedge funds with 30% returns one year on taxpayer money and were

:26:55.:26:57.

being very well paid for it. You have moved on from that. I think, as

:26:58.:27:06.

the NAO report said, the returns that we've made and the taxpayer has

:27:07.:27:12.

made in the last five years, 84% of them came from that strategy and a

:27:13.:27:16.

lot of great mobilisation was done in that period. And the Joslin

:27:17.:27:21.

report from Harvard business School talked about 345,000 jobs created.

:27:22.:27:30.

What was the fall in 2008? You have been saying how wonderful it was but

:27:31.:27:35.

it was down 36% in one year? It was a volatile market. I'm talking about

:27:36.:27:42.

over the period. I remember this, I was on the committee at the time and

:27:43.:27:47.

one of your predecessors paid himself ?970,000 and was targeting a

:27:48.:27:52.

bunch of middle income countries, not the most difficult to help so

:27:53.:27:55.

they were mimicking what was being done by a private equity providers

:27:56.:27:59.

and hedge funds and very nice for them, thank you very much, but not

:28:00.:28:05.

clear that Mr and Mrs taxpayer need to be involved. And Sir Mark is

:28:06.:28:09.

nodding. The reason you sort the drop wasn't because it was volatile,

:28:10.:28:14.

although of course it was, but because there was a strategic choice

:28:15.:28:20.

made, a good one. I'm not speaking out of turn, I hope, that an

:28:21.:28:25.

accurate description? I think the change has been profound. The new

:28:26.:28:30.

strategy that started in 2012 is a fundamental change and we have now

:28:31.:28:36.

targeted, as it says on figure for on page 20, sub Saharan Africa and

:28:37.:28:41.

South Asia, the poorest states, so we have 90% of our new investment...

:28:42.:28:46.

Do you know how close signalling is to sub-Saharan Africa? As Mark said

:28:47.:28:54.

earlier... -- how close St Helena. As the NAO report said, we have

:28:55.:29:00.

fundamentally addressed the concerns of Parliament about that period.

:29:01.:29:05.

Figure seven on page 24 of the report demonstrates the rate of

:29:06.:29:16.

return and the 36% drop in 2008. In a sense there is another

:29:17.:29:21.

objective, which is rather bizarre at first which is actually Sir

:29:22.:29:24.

Mark's, if you like, objective, which is to spend a minimum of,

:29:25.:29:28.

which is the most bizarre, if you like, way of looking at this, as

:29:29.:29:34.

against clearly the more commercial objectives of trying to develop

:29:35.:29:38.

projects which will give you development improvement in some of

:29:39.:29:42.

these countries as well as a return on the investment made. So,

:29:43.:29:47.

presumably each of these projects has a different development value so

:29:48.:29:53.

to speak. So, Sir Mark, how do you make sure in your quest to make sure

:29:54.:29:57.

you spend all that money we aren't actually spending on projects which

:29:58.:30:01.

in the real world if we didn't have that target we wouldn't because it

:30:02.:30:05.

is not good value or a good rate of return for the taxpayers of the

:30:06.:30:08.

country because I am assuming there are some things which have a big

:30:09.:30:11.

impact fairly quickly, you have picked infrastructure targets, I

:30:12.:30:14.

suspect, because they're much better at doing that and the long-term

:30:15.:30:18.

sustainable advantages is clearly demonstrated, but are you going to

:30:19.:30:21.

be pushing now into territories which don't give you that sort of

:30:22.:30:26.

return and how are you dealing with that? So, obviously I think you are

:30:27.:30:30.

which is what the Government's which is what the Government's

:30:31.:30:34.

decided and parliament sort of put on statute book for the tax payer to

:30:35.:30:40.

spend every year on official development assistance. From that

:30:41.:30:44.

budget the Government has a choice about how much to capitalise CDC and

:30:45.:30:48.

the legislation which the chair referred to at the beginning which I

:30:49.:30:56.

think is going through the House of Lords process tomorrow, gives the

:30:57.:31:00.

Government the authority to invest with a statutory instrument on the

:31:01.:31:06.

way up to another ?10. 5 billion into CDC. Now the previous

:31:07.:31:11.

legislation which I think was passed in 99 or 2,000 capped what the

:31:12.:31:15.

Government could put in. The capitalisation of CDC over the last

:31:16.:31:19.

70 years has been here and there from the taxpayer, grown over time,

:31:20.:31:23.

sometimes coming down a bit as MrBacon observed in a bad year, but

:31:24.:31:32.

grown over time. The choice we face now is given that we had exhausted

:31:33.:31:37.

the ability to capitalise previously permitted by legislation, assuming

:31:38.:31:40.

the bill goes on the statue book, the choice that will be available to

:31:41.:31:47.

ministers will be whether to put more capital into CDC and ministers

:31:48.:31:50.

are absolutely clear during the House of Commons passage of the bill

:31:51.:31:56.

that they would only do that on the basis of a clear business case where

:31:57.:31:59.

it was absolutely transparent what the development impact would be,

:32:00.:32:02.

what the trade-offs would be, whether there was a need for capital

:32:03.:32:10.

or not. Now currently over the last two years what's happened in 2015

:32:11.:32:15.

the company made commitments of ?735 million and in 2016 of ?1. 2

:32:16.:32:21.

billion. Even in those African south Asian markets which have been

:32:22.:32:25.

traditionally harder, and obviously the Government wouldn't have tabled

:32:26.:32:28.

the bill if it didn't think there was a good case at some point in the

:32:29.:32:34.

future for more investment, but that decision on more investment hasn't

:32:35.:32:38.

been made yet. It will be subject to a business case. The quality of the

:32:39.:32:42.

business case will need to be as good as the last one by the NAO

:32:43.:32:47.

commented on, they say in the report it was a convincing business case

:32:48.:32:52.

last time and then if there is a convincing business case ministers

:32:53.:32:57.

will decide whether they do want to invest more. How do you measure the

:32:58.:33:03.

value? The reason I ask that and you will no doubt say it is about the

:33:04.:33:06.

number of jobs created and something other things you talked about, but

:33:07.:33:10.

in a sense that's easier with an infrastructure project than it would

:33:11.:33:15.

be than some of the things you are likely to be going into if they do

:33:16.:33:21.

grant you the money, so are you considering reviewing your whole

:33:22.:33:25.

measurement system so it is fit for purpose, that it is comparable

:33:26.:33:28.

against different types of investment you make because it seems

:33:29.:33:33.

that's quite important because the British taxpayer wants to see that

:33:34.:33:41.

it is a philantropic approach has delivered and you can see which

:33:42.:33:47.

investments have delivered more across the different measures? You

:33:48.:33:51.

describe almost perfectly what you will see in our next five-year

:33:52.:33:55.

strategy. So we want to be relentless about showing more, as I

:33:56.:34:00.

said upfront we show a lot of impact but there is always more you can do.

:34:01.:34:05.

So you will see in the strategy that we will be much clearer about the

:34:06.:34:10.

individual impact that we want to achieve on each case, on each

:34:11.:34:15.

investment that we make and you're right, it's different for each

:34:16.:34:18.

investment. Obviously jobs and taxes are a unifying force and that's

:34:19.:34:21.

where we started because we wanted to be able to show the impact of our

:34:22.:34:27.

whole portfolio. Now we need to drill in a bit more and look at the

:34:28.:34:30.

individual very much that is we make, what our expectations are,

:34:31.:34:34.

what we want that investment to do over time and we need to track it

:34:35.:34:39.

over time to see how we are doing. And will you look at that in the

:34:40.:34:47.

context of the poverty gap or poverty need the country that you

:34:48.:34:51.

decided to invest in, because you have picked projects presumably

:34:52.:34:54.

according to some crit year because you think you can make the most

:34:55.:34:58.

impact so to speak, but then do you go back to this country rather than

:34:59.:35:03.

just this project, how do you actually improve the overall quality

:35:04.:35:08.

of life there? What you see in the grid that we use and that really

:35:09.:35:13.

does it in a way in that it grades higher the poorer and the harder

:35:14.:35:18.

places to do business and the places that have the greatest need of our

:35:19.:35:24.

capital. But always when we assess an individual investment we do try

:35:25.:35:29.

and step back and say is this good for the country, is this good for

:35:30.:35:33.

poverty, is this good also, does it ling us to the sustainable

:35:34.:35:37.

development goals which obviously we are all unified in trying to

:35:38.:35:39.

achieve. Measurement.

:35:40.:35:44.

You are acutely aware from the answers that you have given of the

:35:45.:35:50.

need to measure and I know we don't yet have the individual in place, if

:35:51.:35:55.

we ever do, to look at this in the longer term, but pending that

:35:56.:35:58.

individual being in place it seems to me there is a need to ensure that

:35:59.:36:03.

you do take some action to make sure that what you think is happening is

:36:04.:36:07.

happening and is delivering what you need, so it would be helpful to have

:36:08.:36:13.

some spotlight on that as to how you go about it, and September this if

:36:14.:36:17.

you like, fix, that we hope you find and one specific issue I would like

:36:18.:36:23.

to address is one of corruption. Clearly you say that you look at the

:36:24.:36:27.

quality of the directors so they are not corrupt, which is clearly the

:36:28.:36:30.

right thing to do, but in many of these countries it is not just about

:36:31.:36:34.

whether the director is or is not corrupt, but there are business

:36:35.:36:38.

processes and business models which are simply not free of corruption so

:36:39.:36:43.

how do you deal with that because clearly one of the things that we

:36:44.:36:50.

face as politicians is a cry from the taxpayers say why are we

:36:51.:36:53.

spending money on this and that the country is wealthy or, you know,

:36:54.:36:57.

this is a project which could have been funded via the private sector?

:36:58.:37:03.

Yes, so we take all possible steps to try and ensure that we and our

:37:04.:37:08.

companies that we invest in avoid fraud and corruption and this

:37:09.:37:13.

requires a number of different work streams effectively. So, we inor

:37:14.:37:20.

dinnate efforts to make sure we work with the right people, that's really

:37:21.:37:26.

at the heart of of it. We try to avoid sectors that have particular

:37:27.:37:31.

propensity for corruption, ones with high levels of Government tendering

:37:32.:37:36.

and things like that. We have a very strong business integrity team which

:37:37.:37:40.

you will have seen from the report we built from scratch since 2011.

:37:41.:37:46.

That team is as large as the IFC's, which is the private sector on the

:37:47.:37:52.

World Bank, it has a portfolio of 15 times our size and our team is the

:37:53.:37:56.

real size and these are real professionals. And obviously we have

:37:57.:38:02.

lots of policies here. But again this isn't just about writing things

:38:03.:38:06.

on pieces of paper. As the report points out, 19% of our pipeline was

:38:07.:38:12.

turned down because we didn't meet the standards of integrity, either

:38:13.:38:14.

the people working with or the standards we found in the companies,

:38:15.:38:20.

or because of environmental and social issues. So, we are really

:38:21.:38:23.

careful about where we invest. Thank you.

:38:24.:38:27.

One of the things that is a bit of a riddle to me is the nature of the

:38:28.:38:34.

relationship you have with DIDOD. These are obviously huge amounts of

:38:35.:38:36.

money, the bill going through parliament is potentially giving

:38:37.:38:43.

more. I want to know more about the relationship between DIFOD

:38:44.:38:47.

ultimately responsible for the taxpayers money and the capable

:38:48.:38:51.

investment professionals. Well, as the report says, there has been some

:38:52.:38:55.

sort of revamping of the Government's arrangements and the

:38:56.:38:59.

report says we have a thorough set of arrangements. The basic construct

:39:00.:39:09.

is that the shareholder appoints the chair and sets the strategy and

:39:10.:39:14.

investment policy and then it is a matter for the chair to assemble a

:39:15.:39:20.

board on which she consults as new vacancies arise and to hire and

:39:21.:39:24.

supervise the executive, to execute the policy. So the construct is that

:39:25.:39:32.

there is a separation. As you will know, some of the low points in

:39:33.:39:37.

CDC's history over 70 years have been ones where civil servants,

:39:38.:39:41.

often well-meaning, came up with bright ideas on things that maybe

:39:42.:39:47.

the company could do and poor decisions all too often were made as

:39:48.:39:50.

a result. There is a deliberate separation. The report flags the

:39:51.:39:57.

point that it is important everybody across Government understands that

:39:58.:39:59.

separation and we have just sent guidance out to the whole of the HMG

:40:00.:40:06.

network overseas to explain it is up to CDC, who are accountable through

:40:07.:40:09.

the board to the shareholder and the Secretary of State, to decide what

:40:10.:40:16.

investments to make. It is not up to, you know, the - not the civil

:40:17.:40:19.

servants in my department or other departments. Clearly we don't want

:40:20.:40:27.

to go down to the schemes and that kind of stuff. Are there formal

:40:28.:40:35.

structures where DIFD communicate with CDC? Informal thing? There is a

:40:36.:40:44.

set in the report. As Mark said, I have a team of six who help Mark

:40:45.:40:48.

steward our relationship with the company. We have a formal process,

:40:49.:40:55.

four times a year to sit down with CDC, to go through a series of

:40:56.:41:02.

indicators about the portfolio, about the processes that Diane was

:41:03.:41:08.

talking about in terms of due diligence and the environmental and

:41:09.:41:16.

social plans and status of the underlying investments, it's a

:41:17.:41:19.

detailed set of information that we sit down, drill through it. So we

:41:20.:41:25.

feel that we are a very active and engaged and well-informed and we are

:41:26.:41:32.

able to debate, we are able to ask questions and that's at the core of

:41:33.:41:38.

our relationship, our ongoing relationship. And do you have a

:41:39.:41:44.

power of veto in terms of schemes that you feel are perhaps unethical

:41:45.:41:48.

or perhaps you feel that you don't wish taxpayers' money to be bound up

:41:49.:41:53.

in this way? What we have is a policy and the deal is the company

:41:54.:41:59.

are accountable for living within the policy. So in extremely rare

:42:00.:42:03.

circumstances there's been one case mentioned in the report the company

:42:04.:42:06.

brought an investment to us and asked us if we had a point of view,

:42:07.:42:10.

but that was not to get a decision from us. What was your point of view

:42:11.:42:15.

in that case was favourable? Had your point of view been, we are not

:42:16.:42:23.

happy, then what would happen? I don't know, maybe the chair could

:42:24.:42:31.

say what he would do. Graham Wrigley, what would have happened if

:42:32.:42:34.

they had said we are not sure or just no? The way the board and I

:42:35.:42:42.

feel accountable for is to deliver value for our shareholder and that

:42:43.:42:47.

means development impact, a steady increase in the balance sheet CDC so

:42:48.:42:52.

it's an evergreen facility that the UK Government can reuse and managing

:42:53.:42:59.

reputation. And all the issues that are laid out clearly in the code of

:43:00.:43:02.

responsible investment and the investment policy. And we explicitly

:43:03.:43:10.

through formal structures supplemented through informal

:43:11.:43:12.

conversations make sure we try and don't put our selves in that

:43:13.:43:16.

position and we haven't done. Had you been in that position what would

:43:17.:43:20.

you have done as a board? This is an informal relationship but it's

:43:21.:43:25.

important because in the end the money comes from DIFD. Taxpayers

:43:26.:43:31.

must be clear. So we would not do something that we felt that was not

:43:32.:43:37.

going to achieve those goals. But in terms of the investment

:43:38.:43:42.

decision-making itself... I need to publish you, it could be something

:43:43.:43:46.

would achieve those goals but would be something that DIFD didn't like.

:43:47.:43:52.

If it was, we are talking hypothetical, if it was something

:43:53.:43:56.

that was so obviously wrong it wouldn't get through our processes.

:43:57.:44:02.

If it was, coming up with an investment decision as I said

:44:03.:44:07.

earlier, is a triangulation of those different things. It's a judgment

:44:08.:44:10.

call you have to make at the end of the day.

:44:11.:44:15.

I have to questions. When things go well and things have been success.

:44:16.:44:20.

That's fine, but if things go horribly wrong, and there is a big

:44:21.:44:26.

investment like in 2008, resume and you are ultimately responsible for

:44:27.:44:29.

that? Me and the board are responsible, yes. You would take a

:44:30.:44:33.

full response ability, it has nothing to do with DfID. The

:44:34.:44:40.

strategy and objectives are set by the shareholder and our job as a

:44:41.:44:47.

board is to execute and deliver the strategy. But an ordinary

:44:48.:44:50.

shareholders would be able to get rid of you at some point? And they

:44:51.:44:56.

can. I went through a review for my reappointment last year, there was a

:44:57.:45:01.

thorough review. I get reviewed by the senior independent director

:45:02.:45:04.

every year, the shareholder comments on my performance. As Mark and

:45:05.:45:10.

Rachel said, we feel accountable to our shareholder. My last question,

:45:11.:45:16.

and Diana answered but I want to what Sir Mark and Graham had to say

:45:17.:45:22.

about it. Let's say a member of the public would say, I don't get this,

:45:23.:45:27.

why not bring it all in-house and we have no problem with the

:45:28.:45:31.

accountability? Or spin it off? But I can't understand, hypothetically.

:45:32.:45:39.

It is an absolutely key question, why not bring it in-house? Because

:45:40.:45:43.

civil servants in my department do not have the skills to run the

:45:44.:45:47.

investments. We are an excellent department in the grant giving thing

:45:48.:45:51.

we do. You're good at signing cheques. The supervision and

:45:52.:45:57.

implementation and the result and all that but it does not involve the

:45:58.:46:00.

management of the balance sheet. That is why not bring it in-house.

:46:01.:46:06.

And I think the report does a good job of justifying that. Why not sell

:46:07.:46:09.

it off? Another good question and the answer is because the public

:46:10.:46:14.

policy rationale for the taxpayer owning this operation is because it

:46:15.:46:21.

is a very good way of promoting development in Africa and South Asia

:46:22.:46:26.

which find it hard at the moment contract -- attract investment. It

:46:27.:46:30.

is about a million jobs a year, two and a half, $3 billion in tax,

:46:31.:46:34.

demonstrating a new development path and the goal obviously if at some

:46:35.:46:40.

point, just as in East Asia and Latin America, the markets we are in

:46:41.:46:47.

now are open and attractive to pure private investment and there is no

:46:48.:46:50.

longer a need for CDC. That is the goal. Let's put this on record. CDC

:46:51.:46:58.

isn't actually a big part of your overall spend at a department. It

:46:59.:47:02.

has a 4 billion balance sheet whereas you are spending 12, 13

:47:03.:47:09.

billion a year. 10 billion. Of course, for 25 years up till the

:47:10.:47:15.

year before last there was no investment in CDC from the

:47:16.:47:18.

department's budget. Over the last two years, we have put in ?730

:47:19.:47:22.

million and we are considering putting in more. That is because we

:47:23.:47:29.

think the CDC, as the secretary district set out in the economic

:47:30.:47:35.

element strategy, if the key vehicle in the British do much to promote

:47:36.:47:38.

private investment in the poorest and most fragile countries, which we

:47:39.:47:42.

think is the best way of creating good quality jobs and contributing

:47:43.:47:45.

to the taxpayers. That is the rationale. Thank you, Mr Kwarteng. I

:47:46.:47:55.

want to welcome some members of the Uganda bureau of statistics who are

:47:56.:47:59.

attending the session today and you are very welcome. You're helping to

:48:00.:48:06.

aid the bureau in their work. Mr Boswell. Following on from Mr

:48:07.:48:13.

Kwarteng's light of questioning, a different

:48:14.:48:19.

the -- it is not received intimation and above the CDC's decisions to

:48:20.:48:26.

invest however the Department government arrangements encourage

:48:27.:48:30.

CDC to share information in certain circumstances. Under what

:48:31.:48:36.

circumstances does DfID encourage the CDC to share information about

:48:37.:48:39.

investment decisions? It is really in the example that is covered in

:48:40.:48:47.

the report. It was a very big investment for CDC to take its stake

:48:48.:48:55.

in Kwarteng which is the biggest green feed that McCoy greenfield

:48:56.:49:01.

power generation in Africa, burgers and on low carbon technologies, gas

:49:02.:49:05.

and renewables. Because it was a big investment, the chair at the right

:49:06.:49:08.

thing to do was to check if the department had a point of view about

:49:09.:49:12.

it and it is the only case I'm aware of since 2012 where the chair want

:49:13.:49:18.

to do that. We're not going to set criteria which tells the chair when

:49:19.:49:24.

to make what judgment. We have appointed him because we trust him

:49:25.:49:28.

to note the cases when he wants to prefer things to us. And from the

:49:29.:49:36.

CDC side, dreich does not receive information on all of this integrity

:49:37.:49:42.

issues that CDC encounters in its investments. So why does CDC in a

:49:43.:49:48.

put in some business integrity issues encounters to DfID? We do

:49:49.:49:59.

share all the serious ones. You deem them to be serious and then...?

:50:00.:50:06.

That's right. There are sometimes details of those that we have to

:50:07.:50:11.

keep confidential customer for example, the whistle-blower policy

:50:12.:50:13.

protect the identity of the whistle-blower. And how does the CDC

:50:14.:50:20.

determine which is this integrity issues are reported to DfID, which

:50:21.:50:25.

really is what you just said, you deem it serious so what is the

:50:26.:50:29.

criteria you use? Is there a process? It about yourselves? We

:50:30.:50:34.

have ahead of business integrity who is a very experienced crime

:50:35.:50:39.

prevention officer and also experienced in the private sector as

:50:40.:50:44.

well. And he applied his judgment but according to some reasonably

:50:45.:50:50.

clear principles. The areas we really need to share with DfID are

:50:51.:50:58.

ones where either CDC ourselves or the companies we have invested in or

:50:59.:51:02.

the fund managers we have supported have perpetrated some level of

:51:03.:51:08.

crime, or where a crime has been alleged, I should say, against CDC.

:51:09.:51:20.

That is where we focus. We will move on to indications of increased

:51:21.:51:28.

funding I think. Mr Bacon? Can I stop the ?735 million? Can you

:51:29.:51:35.

reiterate or summarise the rationale with it being that amount -- can I

:51:36.:51:43.

start? It was only in July 2015 am not that long ago. Of course that

:51:44.:51:48.

was the limit because that was the limit of the statutory provision of

:51:49.:51:54.

that time. Why was it as much as that? It was basically because the

:51:55.:51:58.

business case demonstrated convincingly as the report says that

:51:59.:52:03.

there were lots of uses for more capital than the CDC had. That has

:52:04.:52:07.

been corroborated because in the last two years, there was 730

:52:08.:52:16.

million of new investments in 2015 and 1.2 billion in 2016 so what has

:52:17.:52:21.

happened, even the toughest market in Africa and South Asia, the

:52:22.:52:25.

business climate has got a bit better so there are more investable

:52:26.:52:31.

propositions. CDC is by far the most concentrated of any organisation

:52:32.:52:35.

that sort in Africa. There is 40% of its business in Africa compared to

:52:36.:52:39.

10% for the International Finance Corporation but it is still smaller

:52:40.:52:44.

than I see in Africa so there is a lot of need for capital to help

:52:45.:52:53.

generate that number -- smaller than IFC. Years ago I used to act for a

:52:54.:53:02.

big private equity investor so I was always putting out statements to the

:53:03.:53:06.

press about when they bought or sold investment and it became apparent

:53:07.:53:10.

that there came a point when there was plenty of money out there, I

:53:11.:53:16.

guess this was the late 90s and I know it goes in cycles, and not

:53:17.:53:18.

enough good investment propositions enough good investment propositions

:53:19.:53:22.

so you would have more money chasing those good propositions. That is a

:53:23.:53:26.

universal, a phenomenon of investment, not particular to or

:53:27.:53:32.

Africa or a category. But I attended a dinner recently where some Kenyan

:53:33.:53:35.

investment professionals were talking about the growing tendency

:53:36.:53:43.

to create successfully Africa to Africa fund, funds generated in

:53:44.:53:46.

Africa for Africa. That being the case have you noticed you are

:53:47.:53:50.

increasingly competing for those good investments? And if so, given

:53:51.:53:58.

your remit, how do you calibrate, no, that is too good? How do you

:53:59.:54:03.

balance that? I go back to the additionality guidelines I talked

:54:04.:54:06.

about earlier. Every investment we make we have to be clear we are

:54:07.:54:11.

bringing something you need that wouldn't happen without CDC. And it

:54:12.:54:18.

may be capital but it may be no or expertise that it may be know-how.

:54:19.:54:22.

It is that say there is more capital coming into Africa and South Asia

:54:23.:54:28.

and this is what we want but CDC's mission is to try to do the hard

:54:29.:54:33.

things and the need is there. If we look at the private sector

:54:34.:54:36.

environment in some of those countries in the UK we have 64

:54:37.:54:41.

million people and 15,000 companies with revenue is more than $50

:54:42.:54:51.

million. In Ethiopia there are 17. The existing investable

:54:52.:54:53.

opportunities that a lot of people are competing over may be small but

:54:54.:54:59.

it needs the hard work by teams like CDC to grow smaller businesses. And

:55:00.:55:03.

the other thing we do a lot of invest in good quality operators and

:55:04.:55:08.

partner with them and take them to those hard places. I suppose this is

:55:09.:55:18.

a double act, following on closely, for 20 years, from 95 until 2015,

:55:19.:55:22.

there was not a penny extra provided by the taxpayer. I look at your

:55:23.:55:27.

balance sheet and you have something like 2.7 billion of retained

:55:28.:55:32.

earnings. In lots of retained earnings that you've put back into

:55:33.:55:36.

the business also it should be noted that the taxpayer doesn't get a

:55:37.:55:44.

penny back. So why now aren't you ramping up the potential amount of

:55:45.:55:48.

capital? I know you are saying there is this investment but why was not a

:55:49.:55:53.

penny but in for 20 years and all of a sudden you talking about a 6

:55:54.:55:59.

billion cap. That seems to be a huge step up. To start with that, the

:56:00.:56:09.

main focus of the economic development strategy which the

:56:10.:56:11.

Secretary of State published last week is to try to make links to

:56:12.:56:17.

global markets to harness more trade opportunities and hence reduce

:56:18.:56:21.

poverty for Africa and South Asia which is where our focus is. It is

:56:22.:56:28.

to focus on job-creating sectors, so construction, power, health and

:56:29.:56:32.

education, financial sector. And we seem CDC as the principal mechanism

:56:33.:56:37.

of doing that. Why now, to your question, it's a very fair question

:56:38.:56:48.

and it adds up to the choice made by ministers of the day over the last

:56:49.:56:52.

period. You understand that why now is a critical question went for 20

:56:53.:56:59.

years, a long time, not a penny was put question you are getting good

:57:00.:57:04.

returns, your growth rate was good. I think the thing that has changed,

:57:05.:57:10.

a lot of the returns in the 90s up until I suppose halfway through the

:57:11.:57:19.

last decade were in East Asia where the markets were booming. Most of

:57:20.:57:22.

Africa in that period wasn't really investable. And because the British

:57:23.:57:30.

development programme has always had a focus on Africa and South Asia, I

:57:31.:57:34.

give it would've been curious to invest in CDC so it could invest

:57:35.:57:38.

more in China when the markets were booming there. I think now that

:57:39.:57:41.

these markets are more viable than they were previously, there is more

:57:42.:57:48.

investable propositions and it also absolutely the case that the

:57:49.:57:52.

Secretary of State and her predecessors who believe strongly

:57:53.:57:57.

that the private sector is the engine development. Most jobs will

:57:58.:58:00.

have to come from the private sector, they will have to provide

:58:01.:58:04.

the tax base. It is that combination of things I would say. I think it's

:58:05.:58:12.

a great question and I can understand from all the conversation

:58:13.:58:15.

we have had with stakeholders in the last two months about the act of

:58:16.:58:20.

Parliament, why now and why this amount of money. The reality is that

:58:21.:58:26.

this plan to recapitalise CDC has been under development and

:58:27.:58:29.

discussion between the company and the shareholder since 2012 when the

:58:30.:58:35.

reforming strategy came in to say, is there a way in which CDC and the

:58:36.:58:42.

UK taxpayer could respond to the need for long-term, patient capital,

:58:43.:58:45.

doing exactly the sort of things Diana was talking about? In the

:58:46.:58:49.

prediction made in 2012 there was a variety of scenarios will sub the

:58:50.:58:54.

upside and the best in the base case one showed a need for more capital

:58:55.:58:57.

required and that led to conversations in 2014 with the

:58:58.:59:02.

shareholder for the recapitalisation that Mark is talked about. When we

:59:03.:59:08.

structured that investment, the recapitalisation, aware of exactly

:59:09.:59:14.

the danger Mr Bacon said that having force of pressure on capital, we

:59:15.:59:18.

structured that investment so it could be drawn down in the form of

:59:19.:59:21.

promissory notes over the next four years which is what we did but when

:59:22.:59:25.

we did the projections in 2015 week showed that if things carry on going

:59:26.:59:26.

we would need more capital. Last year we committed under 1. 2

:59:27.:59:36.

billion. So a large amount of the potential need, subject to a

:59:37.:59:39.

business case and the shareholder agreeing, is to allow CDC to

:59:40.:59:44.

increase its investment rate from what was about ?200 million a year,

:59:45.:59:50.

to what it is, 700 average for the last three years, 1. 2 billion last

:59:51.:59:59.

year. And that would permit CDC to be an evergreen, revolving, slowly

:00:00.:00:03.

growing balance sheet owned by the UK taxpayer but to commit money in

:00:04.:00:06.

the markets we are focussing on for the next five years. My

:00:07.:00:10.

understanding of the 735 is that you haven't even invested all of that.

:00:11.:00:17.

There is a 450 million promisory note you have got. Before you have

:00:18.:00:22.

invested that you are asking for... Well, so, it's a bit, a technical

:00:23.:00:30.

point. What we have done is deposit notes, that means the company knows

:00:31.:00:33.

they have the backing for their investments. What we didn't want to

:00:34.:00:38.

do is hand over the bank notes. Because that would have been handing

:00:39.:00:41.

over the cash before the company was going to be using it. So, the

:00:42.:00:44.

taxpayer doesn't have to hand over the bank notes until the cash needs

:00:45.:00:47.

to be drawn down. That's basically what's going on. You will appreciate

:00:48.:00:53.

capital is a scare commodity. The idea you have 735 million there

:00:54.:01:01.

which only 260 has been invested? The 735... You see the drift of what

:01:02.:01:07.

I say. I totally see the drift. This was a specific recommendation by the

:01:08.:01:14.

NAO in 2008 to make sure we manage our cash balances appropriately. At

:01:15.:01:17.

the same time as also for the company being able to honour its

:01:18.:01:21.

commitments that it has made into businesses. At the moment we have ?2

:01:22.:01:25.

billion of ongoing commitments, so the NAO report shows how we came up

:01:26.:01:29.

with the liquidity policy working with a Shear share and Treasury to

:01:30.:01:33.

do this. -- shareholder. At the moment we have at the end of last

:01:34.:01:38.

year, 223 million of cash which is 5% of our portfolio. The goal of the

:01:39.:01:48.

promisere note is to come up with a an efficient use of taxpayers' money

:01:49.:01:52.

as allowing us to make the scale of commitments we are doing. While you

:01:53.:01:55.

are expanding the balance sheet, as well. Yes. This brings me to my next

:01:56.:02:03.

point, the fear I have is that the risk of SATs rating CDC with cash,

:02:04.:02:08.

we have seen that in many places, the Reg gram noet fund, how are you

:02:09.:02:13.

going to manage that risk so it doesn't manifest itself in some of

:02:14.:02:16.

the ugly and unfortunate ways we have seen? That is the key question.

:02:17.:02:20.

That's the key question for the business case. The company are going

:02:21.:02:26.

to need to explain to us why the 1. 2 billion is going to continue into

:02:27.:02:34.

the future but why these are high quality investments which the

:02:35.:02:39.

taxpayer can be confident will sustain a decent return record. I go

:02:40.:02:46.

every few months or so have a sort of strategic discussion with the

:02:47.:02:51.

board. I thought you were going to say poke around... It's not anything

:02:52.:02:56.

the board wouldn't mind me saying. This is the point, you are going to

:02:57.:02:59.

need to persuade us that the quality of the investment pipeline is such

:03:00.:03:06.

as to justify any new capitalisation, never mind, you

:03:07.:03:10.

know, what the volume is. They have to make a case, never mind the

:03:11.:03:18.

next... Does the impact fund team have enough skill now to do this at

:03:19.:03:22.

the scale you are talking about? Let me describe the picture from the

:03:23.:03:26.

operating, from this chief executive's seat, I guess, so it is

:03:27.:03:31.

fair that back in 2012 when we were given the mandate of invest only in

:03:32.:03:36.

Africa and south Asia, but invest directly alongside funds, we didn't

:03:37.:03:41.

have a team and we didn't know what the demand was going to be. What we

:03:42.:03:45.

have learned over the last five years is if you put a highly

:03:46.:03:49.

committed and talented team behind the strategy, you give it very clear

:03:50.:03:55.

mandate of where you can invest additionality standards, development

:03:56.:03:58.

impact, etc, and you hire the people with the right motivation, it is

:03:59.:04:03.

amazing how much demand and need there is for the CDC team. Let me

:04:04.:04:08.

say clearly no one at CDC is motivated by scale. We are motivated

:04:09.:04:11.

by the quality of outcomes that we can general rate with capital. Do

:04:12.:04:17.

you see then, you didn't even know was there, but turns out to be

:04:18.:04:22.

latent demand, when somebody sees something done well and thinks

:04:23.:04:25.

perhaps we can do that and put together a sensible case, does that

:04:26.:04:29.

manifest itself? Very much so. Can you explore with us this question of

:04:30.:04:33.

additionality more. Are you saying your very presence, for example, in

:04:34.:04:37.

a territory that's rather marginal, would you would hope you are being

:04:38.:04:41.

additional, where perhaps the economy is not sufficiently

:04:42.:04:43.

diversified, where it is fragile, there isn't enough good

:04:44.:04:46.

infrastructure, where there are poor transport links, a lack of

:04:47.:04:50.

confidence, that your very presence is the thing that can make the

:04:51.:04:52.

difference potentially to other investors over a period of time?

:04:53.:04:56.

There is an element of that. But we haven't really even fully explored

:04:57.:05:01.

that yet. You will have seen in the report that our local country

:05:02.:05:03.

presence is still at a latent stage presence is still at a latent stage

:05:04.:05:09.

and we want to increase that. Actually I think the demand has been

:05:10.:05:13.

generated because the teams have gone out in a very focussed way, for

:05:14.:05:17.

example, the direct team from scratch, and said these are our

:05:18.:05:21.

seven priority sectors, what's the need in those sectors and

:05:22.:05:24.

particularly if you look at Africa and the poorest cases of India,

:05:25.:05:30.

there is enormous need, and what's the best way to get companies going,

:05:31.:05:35.

get companies growing and what can we invest in? They've gone out and

:05:36.:05:40.

knocked on doors and found really high quality aligned partners to

:05:41.:05:45.

invest in. So in many ways, certainly on the direct side where

:05:46.:05:48.

we had to start from scratch we generated our own pipeline. In funds

:05:49.:05:52.

where we have been doing it since 2,000 or before 2,000, we were a

:05:53.:05:57.

pioneer of this industry across Africa and south Asia, we now have

:05:58.:06:01.

such a reputation in funds in that any high quality fund manager will

:06:02.:06:05.

want to come to CDC first and get the seal of approval. It would help

:06:06.:06:08.

a project to have your name alongside it, good, yeah. One more

:06:09.:06:12.

question. You have had recruitment and retention difficulties, what are

:06:13.:06:16.

you going to do about that? We will be working very hard to make CDC a

:06:17.:06:22.

place that high quality people want to come to and to stay in,

:06:23.:06:26.

long-term, and that's about selecting the right people, but it

:06:27.:06:31.

is also about creating an environment of, say inspiration,

:06:32.:06:37.

that people really enjoy and we all know that the next millennium group

:06:38.:06:40.

of great graduates are coming in out of business school, this is the kind

:06:41.:06:44.

of thing, this is the kind of work that inspires them. They don't just

:06:45.:06:47.

want a financial bottom line, they do want to make the world a better

:06:48.:06:51.

place and CDC can offer that to them. Thank you.

:06:52.:07:05.

Recapitalisation decisions, particularly the CDC DfID

:07:06.:07:11.

relationship. In 2015 the decision to recapitalise by 735 million was

:07:12.:07:15.

made by DfID. According to the National Audit Office the DfID

:07:16.:07:20.

report arguing the case was quality assured internally. It is

:07:21.:07:25.

potentially a dangerous statement. So, was the DfID recapitalisation of

:07:26.:07:33.

the CDC by 735 million in 2015 first suggested by DfID indly or was the

:07:34.:07:38.

matter looked into upon question by CDC? As the chairman said, since

:07:39.:07:45.

2012 we have been, certainly I personally have been making the case

:07:46.:07:49.

and when Andrew Mitchell, when he was the Secretary of State, was

:07:50.:07:51.

encouraging us to think this through. We weren't ready to do it

:07:52.:07:56.

at that stage. So, I don't think it is the case that the shareholder was

:07:57.:08:01.

pushed by the company to do this. I think the shareholder wanted to

:08:02.:08:04.

encourage the company to have a bigger ambition, to make a bigger

:08:05.:08:10.

distribution because we do think the CDC is a very unusual, got an

:08:11.:08:15.

unusual capability. London obviously can be the capital market for

:08:16.:08:25.

Africa. Other countries have DfIDs bigger. There was an opportunity not

:08:26.:08:28.

being taken. We basically challenged the company to build a capability,

:08:29.:08:33.

to absorb more resources and to use them well, that was basically the

:08:34.:08:39.

direction of the conversation. So the recapitalisation, DfID produced

:08:40.:08:44.

a report find ago strong case for recapitalisation. Because this was

:08:45.:08:48.

quality assured internally, why did the department deem an external

:08:49.:08:52.

analysis and audit on the report unnecessary? Why was it internal?

:08:53.:08:56.

Well, there was quite a lot, Rachel may want to speak. There was a lot

:08:57.:09:02.

of external dialogue. We had experts like Paul Collier, for example,

:09:03.:09:06.

advised us on the future direction for CDC. The reference to the

:09:07.:09:10.

quality assurance is part of a general system we have in the

:09:11.:09:14.

department, so that the case put to ministers for spending large sums of

:09:15.:09:17.

money doesn't come just from the team who would be spending the

:09:18.:09:21.

money, there is an independent assurance from a group which is run

:09:22.:09:27.

by the chief economist who has to - who is dispassionate, doesn't mind

:09:28.:09:30.

which team gets the money, if you like, but provides a different point

:09:31.:09:34.

of view inside the department to justify the case. But there was a

:09:35.:09:39.

lot of external collaboration and dialogue, as well. You can see

:09:40.:09:44.

because of the relationship between DfID and CDC there is a certain

:09:45.:09:50.

discomfort when the watchdog is watching itself effectively. If DfID

:09:51.:09:55.

felt it was ail to analyse the merits of the recapitalisation

:09:56.:09:58.

itself but does not appoint a board member as it considers it not with

:09:59.:10:02.

the depth of commercial investment and experience, can you explain why

:10:03.:10:08.

DfID felt it was ail to analyse the recapitalisation case itself if it

:10:09.:10:12.

does not feel it is capable of appointing a board member? Well, two

:10:13.:10:17.

different things happening here. The job of the board and the board

:10:18.:10:22.

members is to review proposals put forward by the executive team, Diane

:10:23.:10:25.

and her colleagues, on each particular investment. Is it a good

:10:26.:10:31.

idea to invest in this company? That is not a skills set that we are

:10:32.:10:35.

hiring people to have inside the department. What we are hiring

:10:36.:10:39.

people to be able to do inside the department is understand and make a

:10:40.:10:43.

broader case for whether investing more in CDC versus other things we

:10:44.:10:48.

could spend the money on is going to be conducive to achieving the

:10:49.:10:52.

strategic goals that ministers have set. So, the report does explain -

:10:53.:10:57.

explains and we talked this afternoon about the sort of pros and

:10:58.:11:01.

cons of us appointing a civil servant to be on the board and our

:11:02.:11:06.

view is that we appoint the chairman as the chairman has said, you know,

:11:07.:11:11.

we can unapoint a chairman, but while they're accountable to us, we

:11:12.:11:15.

don't think in addition to that we need to appoint civil servants on to

:11:16.:11:20.

the board. The contradiction if you like in

:11:21.:11:23.

what you are trying to do, on the one hand you said it was basically a

:11:24.:11:28.

political decision massively to expand the balance sheet of CDC. Yet

:11:29.:11:33.

on the other hand, you are saying that you don't want any oversight in

:11:34.:11:40.

terms of how the new entity with expanded balance sheet potentially

:11:41.:11:46.

will run. Well, I am trying to say something else. What I am trying to

:11:47.:11:52.

say is there could be a strategic case for investing in the business

:11:53.:11:55.

which is what the business case for the 735, which the NAO were

:11:56.:12:02.

convinced by was, that's completely different to once you have a capital

:12:03.:12:06.

base, how do you pick the businesses in which to invest? What I am saying

:12:07.:12:09.

is the Government doesn't think it is a very good idea for civil

:12:10.:12:12.

servants to be taking those decisions. You said that the demand

:12:13.:12:15.

for more capital was something that was coming from the department, it

:12:16.:12:18.

was coming from ministers. You mentioned Ministers, it wasn't the

:12:19.:12:22.

CDC asking for more capital. It was the policy decision. Was it not?

:12:23.:12:26.

Yeah, that's exactly right. We saw a bigger opportunity in these markets

:12:27.:12:30.

for the reasons I have tried to run through. And those were politicians

:12:31.:12:34.

and civil servants. Yet, at the same time, you are saying that you don't

:12:35.:12:40.

wnt to get involved in that. Having identified the opportunities and

:12:41.:12:43.

being... I am not doing very well... What I am trying to do is draw the

:12:44.:12:50.

distinction between the strategic and the individual investment. Thank

:12:51.:12:55.

you. You said earlier the previous Secretary of States supported this

:12:56.:12:59.

idea. Isn't it true that the previous Secretary of State to that,

:13:00.:13:02.

Mr Benn, who was the Labour Secretary of State, said, I remember

:13:03.:13:06.

hearing him saying it on the radio, said explicitly that trade and

:13:07.:13:09.

business and the private sector ought to do more to lift people out

:13:10.:13:16.

of poverty than anything else, you mentioned Paul Collier, his book was

:13:17.:13:21.

given that title because two billion people above that had been lifted

:13:22.:13:25.

out of poverty by the private sector but until they've been lifted

:13:26.:13:29.

they're still in that grey zone that you were talking about, is that

:13:30.:13:33.

fair? I think that is fair. I don't normally help witnesses by the way!

:13:34.:13:42.

Thank you very much. From the company side we think we

:13:43.:13:48.

have an engaged active shareholder. We have quarterly shareholder

:13:49.:13:52.

meetings, we have AGMs, committees within the board who interface with

:13:53.:13:56.

relevant counterparties across DfID. We have a series of relationships

:13:57.:14:01.

with DfID as a partner level, trying to create investments and work in

:14:02.:14:04.

harmony together. I think CDC is a fundamentally

:14:05.:14:15.

long-term business. We are the oldest DFI in the world, and I will

:14:16.:14:19.

give it a couple of examples which goes to this incredibly important

:14:20.:14:23.

point about the governance of CDC and how it must work over the decade

:14:24.:14:29.

and a cross-party consensus. Kenya team was set up in 1964 by CDC. 20

:14:30.:14:39.

years later in 1983 there was 145,000 smallholder farmers giving

:14:40.:14:45.

product for 39 factories which made one in four cups of tea in the UK.

:14:46.:14:52.

20 years for that investment. 20 years later, sell Pell, the first

:14:53.:14:57.

big mobile phone company in Africa, was sold, and it has transformed the

:14:58.:15:06.

economy in Africa and that was a CDC investment -- Celltel. And over a

:15:07.:15:11.

long period, this is six years, if you look at Sierra Leone today,

:15:12.:15:15.

which you asked earlier, it is a poor country, last year I was in

:15:16.:15:25.

Freetown with the president and he thanked me, I did not do any of the

:15:26.:15:29.

work but I was happy to hear the praise, about the work the teams at

:15:30.:15:36.

CDC had done with the Ebola facility with Standard Chartered. There was

:15:37.:15:40.

an amazing amount of work done by NGOs and DfID that we can't

:15:41.:15:46.

contribute to but we did our bit to create the straight facility and

:15:47.:15:50.

keep businesses going. He said, the thing we need now is power. Last

:15:51.:15:58.

month CDC announced it is part providing the debt and the majority

:15:59.:16:04.

amount of equity in a $150 million investment in plant which will give

:16:05.:16:11.

49 megawatts of electricity which, in the low season, will double the

:16:12.:16:15.

amount of electricity given to the whole country. And that is a

:16:16.:16:26.

country, we have one 200th of the electricity they use. If we work on

:16:27.:16:31.

it for two years and it is a long time, so it is incredibly important

:16:32.:16:38.

that we have an institutional relationship which goes over the

:16:39.:16:43.

years. I get all of that. I think you have described it very

:16:44.:16:47.

persuasively and in a way I'm trying to use that to say, quite suddenly

:16:48.:16:53.

ramp up the balance sheet? In theory we are custodians of taxpayers

:16:54.:16:57.

money. I look at your balance sheet and it is very conservatively run,

:16:58.:17:02.

you have 10% of your assets in cash. I think you are slightly

:17:03.:17:07.

underinvested in terms of the extra 735 million. You have this

:17:08.:17:10.

incredible track record of success and all of a sudden we are saying

:17:11.:17:15.

we're going to transform this thing and completely expand the balance

:17:16.:17:18.

sheet and you can see why we would be concerned about it. You're asking

:17:19.:17:24.

the question I'm asking of the team in the Department and the company

:17:25.:17:30.

about why can explain to me the business case for another

:17:31.:17:32.

capitalisation. We will not be recommending another capitalisation

:17:33.:17:37.

even if Parliament gives us the authority to, unless we are

:17:38.:17:44.

persuaded that there is a case. Can I probe on that? This has puzzled

:17:45.:17:52.

us. As Mr Kwarteng said, it seems like a policy decision to have more

:17:53.:17:56.

available capital but it could go up to 12 billion. You go to CDC and

:17:57.:18:00.

asked them to put a business case to see if they can spend it question of

:18:01.:18:03.

CDC comes to you with a business case but would you ever say no. I'm

:18:04.:18:09.

not sure who starts the process. If you have an opportunity in a

:18:10.:18:16.

country, do you say to DfID, we think we can invest 2 billion in

:18:17.:18:19.

something could you let us have the money and then put the business case

:18:20.:18:27.

to DfID? No, that's not how it works, this is a long-term business

:18:28.:18:32.

and the teams go out and generate pipelines of opportunities that are

:18:33.:18:35.

sometimes a year, two years in the cooking. I would recommend the

:18:36.:18:43.

committee looked at the rate of investment we have already achieved,

:18:44.:18:48.

that is highlighted in the report, the ?1.2 billion a invested in these

:18:49.:18:55.

markets in 2016. Even if we only stayed at that level and didn't grow

:18:56.:18:59.

at all, we would need some money, and quite a large amount, to fund

:19:00.:19:04.

that step up. Because we are such a long-term investor, it'll only be

:19:05.:19:09.

when those seven, ten year investment start returning money

:19:10.:19:14.

that we become... You've got a lot of cash, this promissory note, you

:19:15.:19:21.

can actually expand your investments without additional capital. Do I

:19:22.:19:30.

make a point, a broader point -- can I make a point? In relation to the

:19:31.:19:35.

investment needs of Africa and South Asia over the next generation or

:19:36.:19:44.

two, which are calculated in the trillions, what CDC is able to do at

:19:45.:19:50.

the moment is very small. As we said earlier, CDC, although it has four

:19:51.:19:54.

times as much of its business in Africa than the IFC does, it is

:19:55.:20:01.

still small in aggregate terms. The investable opportunity and the

:20:02.:20:07.

taking of it is what will get Africa beyond its a dependency and give

:20:08.:20:11.

people their jobs and livelihoods and better futures. The investable

:20:12.:20:14.

opportunity is going to be dramatically bigger than what CDC

:20:15.:20:19.

can do. The question for us is, not how many good investment are there

:20:20.:20:26.

out there, the question is, what is the rate at which CDC can sensibly

:20:27.:20:30.

absorb more capital and spend and use it in a way that does not repeat

:20:31.:20:34.

some of the mistakes of the pass? That is what we're focused on. That

:20:35.:20:40.

is very reassuring. The fact you are focused on that is reassuring but

:20:41.:20:42.

can I ask Mr Wrigley another question? You emphasised the

:20:43.:20:48.

long-term nature of what you do so would you say the role for CDC

:20:49.:20:52.

potentially in and invest the country where the conditions were

:20:53.:20:56.

right to be assisting in the creation of a development

:20:57.:20:59.

Corporation locally with you investing with other partners over a

:21:00.:21:04.

long period of time? We have a whole series of ideas about how you can

:21:05.:21:10.

take an idea to a country and creating development banks like in

:21:11.:21:17.

the UK, the old three I invested in history, we have been thing about

:21:18.:21:20.

that as one of the platforms we might do. So the only criterion

:21:21.:21:27.

would be a political one, which is, if it within your remit? Are we

:21:28.:21:34.

going back to St Helena here? I'm very glad you said it first, but

:21:35.:21:39.

yes! If the remit were OK, that is the sort of thing, in a territory,

:21:40.:21:43.

let's call it that, that would be among the many things you would

:21:44.:21:46.

discuss question mark potentially, but can I add an important point?

:21:47.:21:51.

You were nodding, can you put that on the transcript? And can I add one

:21:52.:22:01.

incredibly important thing to this point about the absorptive capacity

:22:02.:22:07.

of CDC and its ability to invest? I got asked a question in the select

:22:08.:22:12.

committee about if the board of CDC will take capital from its

:22:13.:22:14.

shareholder evicted nothing it could invest it in high development

:22:15.:22:19.

impact. Meeting our return requirements and doing that well and

:22:20.:22:23.

thoughtfully and I said absolutely clearly, no. The point I've been

:22:24.:22:28.

trying to make is that we have been developing this business

:22:29.:22:30.

operationally, all of the things they talked about with the teams

:22:31.:22:34.

from the last five years and the conversations with the shareholder

:22:35.:22:37.

about how can fund it, hopefully over the last five years, it is a

:22:38.:22:42.

mutual decision. The shareholder has to want to provide the cash and the

:22:43.:22:48.

company is to believe it can execute it well. I think we are reassured by

:22:49.:22:55.

that, but turning to figure 18 on page 39, which gives the operating

:22:56.:22:58.

costs as a percentage of portfolio value and no doubt those costs are

:22:59.:23:04.

also have costs which figure 19 and others cover. And actually figure 20

:23:05.:23:11.

is also useful. You have a projection, operating costs as a

:23:12.:23:18.

percentage of portfolio value. You can read behind that there is a

:23:19.:23:21.

portfolio value prediction you are making so you have a plan, but when

:23:22.:23:31.

do you go to DfID and say, we are sure it is on track so we need to

:23:32.:23:35.

draw down some money and he is our business case, will you do it? And

:23:36.:23:39.

when do you think, we are not going to manage that? What assurances do

:23:40.:23:43.

you put in place? You have this extra staff that is ready to do this

:23:44.:23:47.

which is a cost and unless you are doing the business but they are a

:23:48.:23:52.

dead weight cost. The process for that is that we in the middle of

:23:53.:23:57.

concluding the strategy for the next five years and after that has been

:23:58.:24:01.

approved and with the Secretary of State, we would work to create a

:24:02.:24:06.

business case to provide any funding going forward. The reason that

:24:07.:24:10.

metric is in there, by the way, something that we have developed

:24:11.:24:13.

ourselves over the last three years, and it is thinking of the purpose of

:24:14.:24:19.

this committee, value for money. And one of the things we will be doing

:24:20.:24:24.

with the business case and the strategy discussions is saying to

:24:25.:24:28.

the shareholder, here are a range of options of what we can do. Different

:24:29.:24:32.

activities have different costs. Investing in high impact, people on

:24:33.:24:37.

the ground, not through intermediary vehicles is much more expensive than

:24:38.:24:41.

working in providing debt from London. Those numbers with the

:24:42.:24:49.

illustrative forecast to show the NAO how we are strategically

:24:50.:24:53.

thinking about costs. And on the staffing issue, we touched on this

:24:54.:24:56.

earlier, but there will be a pressure on salaries because of

:24:57.:25:01.

competition out there. You made a cogent case for how people want to

:25:02.:25:04.

do this because they are not just after the bottom line, but figure

:25:05.:25:13.

A19 highlights some of the issues around celery and we are worried

:25:14.:25:20.

that there is a pressure on salaries. How are you managing that

:25:21.:25:25.

risk to the business? When you need the people to do the job, but you

:25:26.:25:28.

also don't want to go back to the bad old days when salaries went

:25:29.:25:32.

exponentially to ridiculously high levels. I think the report paints a

:25:33.:25:39.

clear picture of the changes being made as a result of the

:25:40.:25:42.

recommendations, it was one of the first things I did as a new CEO. Now

:25:43.:25:49.

we have to look at the sustainability of the organisation,

:25:50.:25:52.

we have hired a lot of people quickly and it is a fantastic team

:25:53.:25:55.

with a lot of different skills in it but matched to us being a long-term

:25:56.:26:02.

business is we need long-term staff. We don't want to be a revolving door

:26:03.:26:04.

and this is something that takes... I beg leave to ask the question

:26:05.:30:34.

standing in my name on the order paper. We already have domestic law

:30:35.:30:39.

that safeguards the environment. The great repeal bill also to be

:30:40.:30:43.

introduced in the next parliamentary session will incorporate EU law

:30:44.:30:51.

relating to environment and biodiversity into UK law. The UK

:30:52.:30:52.

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