Examination of Witnesses (Questions 40-59)
LORD CAIRNS, DR ALAN GILLESPIE, MR RICHARD LAING, MS GILLIAN ARTHUR
TUESDAY 2 JULY 2002
40. What you are saying is very important. As I translate it, you are saying that, although you have this conspicuous inefficiency, you have people frequently living at below subsistence level, and although there is a big job to be done in agriculture it is not worth doing it until the common agricultural policy is changed. Is that what you are saying?
(Lord Cairns) I might qualify it a little bit but in principle I am saying that, but please bear in mind we still do have and wish to have, wherever we can make the case for it
41. But you see this is very important. You are saying, as far as the great bulk of African agricultural activity is concerned, there is no economic development role for the donor nations at the moment?
(Lord Cairns) I think there is a role for grant aid, and so long as the mandate is to put money in as grants it may be possible. Take Mpongwe, which produces 20 per cent of the wheat of Zambia and 5 per cent of the soya in Zambia and 1 per cent of the maize in Zambia, we currently value that at significantly less than we put into it. We did, however, take over an irrigation system that other people had put huge amounts of money into. I do not know what the total cost was if you add it up, but maybe $70/80 million has been put into that project which may now be worth $10, $15, $20 million.
42. We all have our individual examplesthe Chairman's is about tomatoes in Ghana, mine is pineapples in Ugandawhere you have superb projects that should be on the shelves in Sainsbury's, and I say to myself what is the key thing that the west or the north should be doing? It is building that link between the pineapples and the tomatoes and the shelves, and you have pulled out of that and no-one is doing it.
(Dr Gillespie) I showed you a list earlier of a significant number of modern horticultural businesses which we are doing. You referred to our mandate, and what the Government asked us to do starting four or five years ago was to invest in sustainable businesses that are profitable. Unfortunately many of the enterprises that you are referring to are not profitable and that is why we have not invested in them.
43. Yes, but they are not profitable when you say you have to get 17 to 19 per cent return on them. You are imposing a very strict test of profitability and when you have got the situation of the camera, I agree with you totally about the CAP, when you have all those negatives there, it is very important what you are saying: you are basically saying that, under present structures, there is no role and no hope for improving the great bulk of agriculture in Africa?
(Dr Gillespie) I am not addressing the burden of the donor nations overall but what the CDC has to do and I would say to you, and we have pointed this out to the Secretary of State, that as a consequence of the mandate we are being asked to implement we are doing less new agriculture than we might have in the past. We pointed that out to the Department and said, "There is a gap here that needs to be filled and that may need to be filled with capital that does not need any return at all"a gift from the west, donor capital. But that is not the basis on which we operate.
44. It would be very helpful if you could give us a note on the gap that has been left because I think sometimes you are criticised very unfairly because you are doing what Parliament has asked you to do but it would be very helpful for our policies if you could say, "Look, there is a job as far as agriculture is concerned that is not being done at the present by CDC but which needs to be done"?
(Dr Gillespie) We will do that, and I would say that we have had significant interaction with the Secretary of State in this matter. She said to me recently, "Alan, what you should do is help build the road through the rural areas to enable individual farmers to get their produce to market", and that is the sort of thing we are trying to do. We are not, and CDC never has been, down to the level of making capital available to the individual farmer. That has to be done by someone else.
45. One of the problems now, although there is a huge job to be done in African agriculture and agriculture everywhere, is you have lost your expertise basically, have you not? It is from that area that your staff losses have most come.
(Dr Gillespie) Richard sits on the board of our oil palm business in South East Asia which, again, is a very poor area that we operate in, and he sees the level of expertise now in the company itself.
(Mr Laing) It is not true to say that we have lost our expertise; what we have done is relocated it where we think it would be most effective. For example, in the palm oil businesses in Indonesia and Papua New Guinea we have agriculturalists, agronomists and engineers employed by those businesses and who provide the expertise locally. That is a difference from the past where we may have had people based in the UK who spent a lot of time on aeroplane going from one site to another, but we feel it is much more effective to have that expertise locally and also to replace expensive expatriates with well-trained locals who can bring that expertise to the sites.
46. On another aspect of the agribusiness point: you have sold a lot of your agribusiness activities and you said, "These are not yielding the kinds of returns we want now". Is not the problem that you sold them at the bottom of the market?
(Lord Cairns) We do not know whether we have. We have sold them to people who we think will take those businesses on and have a good chance of making as much
47. In terms of your balance sheet it makes it look pretty ropey, does it not?
(Lord Cairns) We have sold them at losses. Frankly, we have valued down our businesses to the current value whether we have sold them or not, so it does not make a great deal of difference whether we have sold them or maintained them in terms of how we present them on our balance sheet.
48. Finally, when we were in Ghana, the people we were talking to there were emphasising just how much they needed a Ghanaian middle class, an entrepreneurial middle class. We were told that CDC loans were only available for amounts over £5 million. Is that correct? I know you were saying you do not give at the level of the individual farmer, but are you in contact at this SME level any more, or is it a £5 million threshold?
(Dr Gillespie) No. The fund we have in Ghana, and the investments are listed here, are typically investments of $200/$300/$400,000 each equivalent and that is why we have this separate entity doing SME business, and those are mostly agriculture.
49. I have come latefor which I apologiseinto a rather interesting discussion. What I am hearing is about your strategy in selling on agricultural businesses and so on but the question really I have is whether your investment strategies have been working, because we hear the CDC have suffered a loss in value from approximately £1.6 billion to about half that.
(Dr Gillespie) Can I respond to that by pointing you to pages 19 and 20 of the submission? One of the changes that occurred with the new instructions from Government is that we are now accounted for as an investment fund and at the end of the each year we value our balance sheet and therefore the value of our balance sheet goes up and down according to markets. Last year our result, if you look at page 20, was an overall negative return of minus 10 per cent. That return we are not happy aboutany portfolio that goes down you are not happy aboutbut if you look at the comparative returns on that page you will see the South African market went down 21 per cent, the Indian market 26 per cent, and in this country the FTSE went down 18 per cent and 3i went down 19 per cent, so we believe that our financial record last year is quite a respectable one relative to these other markets and these other benchmarks. Again, this is an unrealised balance sheet movement and we hope that, as markets may improve, a rising tide will raise all boats and we will see this value being re-established. This is an annual market-to-market valuation on the portfolio as would be customary for any other investment company. Within our portfolio we have certain companies that are doing very well and showing the sort of returns we target, and equally in our portfolio we have companies that are disappointing in terms of not creating a profit and not showing good returns. We will only know in some fullness of time over an investment cycle, which is typically in our countries 7 to 8 years, what the investment return will be on each investment from the cash invested at the beginning to the cash received when the investment is disposed of.
50. The answer on the stock markets is a fair one, although I trust that your high-priced investment analysts are better used to beating the market, but the more general point is whether this figure is correct of approximately £1.6 billion down to about 50 per cent of that?
(Dr Gillespie) No, it is not correct, and if you look at page 19 Richard will take you through the figures.
(Mr Laing) On page 19 we have the financial performance set out and the largest item there in 2001 is the capital account return before tax, the second line, of £197 million. As the chief executive said, that is primarily driven by the valuation of our investments and links in with the markets in which we have been operating shown on page 20, where we have seen reductions of 20 per cent odd. Our reduction was about 10 per cent, so it was in comparative terms better. But it is driven by the environment in which we operate and, as we all know, the 2001 environment was very tricky.
(Dr Gillespie) We also took out of our balance sheet a large block of HIPC designated debt which was transferred to the Department.
(Mr Laing) That was £165 million in the previous year of 2000 so that is neither a gain nor a loss but is a transfer of value to the shareholder.
51. It appears that you wrote comments on the policy of privatisation in your memo and the CDC decided to move from the public sector to the private sector and, as it is doing so, it talks of selling investments after an appropriate holding period during which value is added. Does CDC care what happens to the investments which it sells on, and can witnesses give examples of the value which CDC has added to some of the recent sell-ons?
(Dr Gillespie) I would like to respond with an example of the cement business in Africa which is an example which has gone from the beginning to the end of that investment cycle. In the mid-1990s CDC acquired three cement companies being sold by governments in Africa in Zambia, in Malawi and in Tanzania. Over our ownership of those businesses, which, let's say, is on average 5 to 6 years, we brought a number of people who had come out of Blue Circle here in the UK and sent them to Africa to work and improve those businesses to improve their productive capacity and to improve their labour relations: we helped those businesses get insurance which they had not had before, and get ISO accreditation in terms of standards. We realised about a year ago that CDC was not the natural owner of those cement activities over the fullness of time and we invited offers from the market and we had Blue Circle and Lafarge each bidding to buy those businesses. During the process of that transaction, Blue Circle and Lafarge came together and we sold those businesses to Lafarge. In summary I would say it was a good financial investment for CDC because the return we had between the mid-1990s and 2001 was, overall, on average, a 15 to 16 per cent return, so financially it was a good return, and we got that because we had added some value to them between when they were bought from African governments and when we sold them on. The point I would really like to make, though, is that CDC was the appropriate owner of those businesses for a period of time when no one else stepped up to buy them, and yet today Lafarge is the better owner, and you have a major cement company now based in southern central Africa. That is also mobilisation of money because when we moved out they put their money in, and the gain we took on the sale of the cement we now seek to recycle back into Africa. I wish I could give you many more examples but right now we cannot because we are still at a very early stage in this business of equity investment, but that is one example of, from beginning to end, a good financial return and value added, and I think if you visited those cement businesses today local employees and management would attest to them being better places to work than in the mid-90s when we acquired them.
52. Could we just go to page 53, because I notice we are joined by some Parliamentary colleagues from Guatemala, and page 53 includes an investment of £15 million in the power sector of Guatemala, and I would like to get a better feel of how you decide where to put your investments? One almost gets the impression this morning that this is just people like the China Fund and others coming to you and saying, "Would you like to put money in or invest in this particular market", and so forth. Who initiates the suggestions of where you invest? How does that happen? Is it governments coming to you or is it funds? Just help us. This is clearly a substantial investment in Guatemala, hopefully for the considerable benefit of power users in Guatemala, but how did that come about and how would other countries, like for example Guyana, which is the next one down, perhaps encourage you to increase your investment in Guyana?
(Dr Gillespie) For many years CDC has had an emphasis in the poor countries of central America and an office in San Jose and Costa Rica, and these investments have come about by the CDC employees of those offices marketing themselves, saying "We have capital to invest", and looking for eligible and interesting projects. Given the strong theme we have in electricity and I believe in the developmental impact of electricity, the Orzunil project came to our attention I think in about 1999, and was put on the books just as I was joining CDC in the year 2000. That was as a consequence of going out and looking for interesting investment, and that is how most of our investments are sourced. From time to time people will walk into our office asking for money, but most often we are going out looking for situations.
53. You must have a different office to mine because my carpet used to get worn bare by people from India coming in and telling me about the latest power project they had in India, and if I just had a few million in my back pocket it would be a fantastic rate of return. What you are suggesting is you are having to actively go out and find projects to invest in?
(Dr Gillespie) It is a mix. For example, if you take our Delhi or Bombay offices, people do contact them. We also put out marketing material saying "Please contact us", so it is a combination of both.
54. Critics have commented that CDC Capital Partners has been naive about countries in which it has invested, for example, Egypt. What understanding does CDC Capital Partners have of the standards of financial probity in some of the markets in which it invests? In particular, in some countries where CDC is a minority shareholder, is it not the case that there is very little respect given to minority shareholders' rights, and if there is no liquidity in the market then the owner of the business has minority shareholders in a stranglehold?
(Lord Cairns) I think this comes to the whole issue of corporate governance and clearly, in any investment we make, we wish to see the corporate governance standards are as high as possible. You ask about the probity of the entrepreneurs that we work with: we spend hours worrying about that, getting reports on people, digging as far as we can. We know that in some cases our ability to have recourse to the courts will be less efficient, to put it at its kindest, than would be the case in some other countries; therefore the need to understand the standards of the people that we are investing with is something we agonise over and, quite frankly, when we look at investments which we have abandoned, more times than not it is because we have problems that we cannot sort out with other peoplemaybe it is the entrepreneur, maybe it is the majority owner. But we are alive to those issues and that, frankly, is one of the very considerable risks that we are running in most of the countries and, frankly, why the private sector demands higher potential returns to take account of those risks. I cannot say that we get it right all the time but we agonise about the points that you have raised, and we have quite a lot of experienceperhaps more than mostin how you can minimise those risks. They do not go away.
55. How often do shareholders get the chance to discuss any investment they have?
(Lord Cairns) It will depend on which companies we are talking about but on a number of the companies we will either be on the boards or we will have agreements that we can see the figures on a regular basis. It may vary from business to business but one of the real changes that has happened within CDC over the past five years, as we have become an equity investor rather than a loan investor, is that a loan investor is interested in whether he is going to get his money back. We are interested in making those companies really work. We have a far closer relationship with each and every company in which we are involved than we had as a loan provider. We are part of the team that is trying to make things work and, as such, the relationships down to a personal relationship with the people that run the companies, is hugely important. Quite frankly, if we do not feel that we can work with them then we will not make the investments.
56. You have talked and we have talked of expertise and your experience in various sectors, particularly in agriculture and other primary industries and certainly, if you go back ten years, it says in your submission, half your investments were in agriculture. That expertise was built up over many years and I think you still have a considerable amount of that in-housepeople who not only speak the language of the countries that you have been involved in but also, if you like, the language of the businesses and the sectors. But you now are shifting that focus. You have talked about Chinafive people chasing round the largest country on earth looking for investmentsand forgive me if I say you did not know where one of those businesses was located. There has been criticism that you are now moving out of the areas that you know best into areas which you know little about. Do you not feel that the criticism may be justified, and that you are not going to produce the best return in the long run by moving away from the sectors that you do know best?
(Dr Gillespie) Mr Walter, I do not agree with what you are saying, and I think the best way to deal with your question and other questions is that you come and visit our people and some of our offices overseas. You indicated country expertise. I believe in India today CDC has one of the finest teams of investment professionals on the ground and, frankly, we are very fortunate we have kept them: that they have not been stolen by the private sector. They are in Delhi, Bombay and Bangalore and they are excellent, and they are all but two Indian nationals. I referred earlier to our position in Kenya. We have a large office in Nairobi with one expatriate in that office. We could go right across Africa in these small funds we have been talking about which are all populated by local employees who have a far closer knowledge of what is going on in Mozambique or Ghana than the fifty years of expatriates going from London could understand. So I want to make a positive point here that on the ground in our offices we are more in touch locally than the organisation had been when it was much more an adjunct of the Foreign Office in the past. In the sectors, we have talked about power which CDC has focused on for many years. We have just recruited another small group of executives from the power industry, and we are very fortunate that they have joined us because they are not wanting to stay in the first worldthey are prepared to spend their lives helping to make investments in the poor countries, and we have again a team that stands out there in the international energy industry. Some of our other teams are smaller. If we talked about China, as I said, China is one small office away from the core of what we are doing. The core under DFID's direction is Sub-Sahara Africa and South Asia, and that is what we are measured against and the statistic we produce each year is for the percentage of our investment in South Asia and Sub-Sahara Africa. That is the core of our activities and where we are expert, and I can tell you right now we have been doing some work with McKinsey who have helped us tighten the focus even further, so we are trying to hit the sweet spot of where DFID want us to operate.
57. I am willing to be convinced on some of this maybe at some future stage but I want to go on and look at a point you make in your memorandum on page 4 that states that CDC "contributes towards development by investing in sustainable and profitable businesses, which in turn should cause economic and social improvement . . .". What determines whether they do bring about such improvements, and what does CDC do to bring those improvements about?
(Lord Cairns) I had hoped we had to some extent covered this ground in that what we, in development terms, think is important in the poorer countries in the world is to create businesses which really can help in those countries; which can create further capital; can contribute to taxes; can increase the levels in employment and increase the rates at which people can be employed in those countries. At the same time we are trying to do so in as correct a way as we can in terms of looking after all the standardswhether it is the health standards, whether it is the safety standards, whether it is the environmental standards, whether it is in terms of creating examples of transparency or examples of best practice in all attitudes of corporate life, which will be seen to be successful, and at the same time encouraging organisations in their turn to play their role in terms of corporate social responsibility within the communities in which they operate. I think right across that field we have an immense contribution to make. It is not going to resolve all the problems of poverty and all the problems of development: we are one small part of a total package. We are a very specialist part. I think we do it quite well: I think we are learning all the time and will do it even better, but that focus and intensity and the level of skills we can apply are hugely important, and I would not be involved in the exercise unless I thought that this was, as part of the development effort, hugely important, and that I had a really remarkable team of people working for me.
58. Can I press you a little bit on that in terms of how you measure it, because obviously in pure P&L terms or in terms of the balance sheet and how that evolves you can measure that in conventional ways. One of my colleagues talked earlier on about employment in terms of your businesses, and I was just flicking through the back of your submission and one of your businesses I did visit about nine months ago which was Del Oro in Belize, which I think you show as employing 400 people in your submission, but the business is much bigger than that because it is the sole processor of the citrus industry in Belize so it is all the growers, all the pickers and all the rest of the people, so we are talking about thousands of people who are dependent on this business. So in terms of that outcome and that sustainability, are you measuring that as well?
(Dr Gillespie) We are not required by our shareholder to calculate each year a whole series of developmental measures that a development economist might present. What our shareholders ask us to do is to identify companies, invest in them, and help those companies grow and prosper, and it is in a sense axiomatic that, if a company grows and prospers, it will employ more people, source more goods in its community, pay more taxes, hopefully make some exports and generate foreign exchange. If the business does not do that, it declines and fails, so in a way we come back to talking about sustainability which means that businesses are going to be profitable and survive. That is what we look for and that is why we sit on the boards of companies to try and help them grow. I think the measure of employment is a very key proxy for developmental impact. I had the privilege over a number of years to work first for the prior government and then this government in a development agency in Northern Ireland, and the one measure we looked at for economic benefit and growth was jobs. Therefore putting forward here for Africa 61,000 people employed in businesses that are thriving and prospering I think is a very interesting proxy for a development impact. You made a very helpful observationthat it is often a multiplier through the growers' associations as well.
59. In conclusion, can I ask you about your relationship with DFID on policy issues? Does the Secretary of State approve your annual corporate plan? Do you go and have a once-a-year meeting with the Secretary of State to go through your objectives so that she and her officials can raise any concerns they have? What is the process of engagement with DFID that you have?
(Lord Cairns) I think it is a rather good relationship. We have a board and two members of that board have a specific remit back to the Secretary of State directly if they have any concerns basically whether we are or are not adhering to the basic business principles under which we operate, and she can ask them if she has any concerns in that area. Beyond that, on an individual investment basis, the board will decide to the extent it may delegate its powers to the management in respect of smaller businesses, and our relationship with DFID is, at the same time as being apart in terms of those business decisions, quite an intense relationship on a whole range of issues, both in presenting our annual plan and in presenting our annual report, but also on a whole range of issues where we can be helpful with each other. We may also, if we feel something is at the margin, say, "How does this look? It stacks up on most grounds but we just wonder whether it might not look quite right from your point of view"we will talk to them about it. But at the end of the day, on issues of running the company or the group, we operate in a pretty private sector-like way. All three of my colleagues are in touch with DFID on a pretty regular basis.