Examination of Witnesses (Questions 60-79)
DEPARTMENT FOR
INTERNATIONAL DEVELOPMENT
AND CDC GROUP
15 DECEMBER 2008
Q60 Angela Browning: I always find
this one of the most important parts of any NAO Report and that
is when you look at page eight and you see the range of recommendations
made by the NAO, can we take it then that you, having already
read this report and studied it for some time now, are satisfied
that you can accept and meet these recommendations so that if
you were to come back before us this time next year you would
be able to say you had put all of that into your practice?
Ms Shafik: Broadly speaking we
agree with all the recommendations.
Q61 Angela Browning: I am asking
if you are going to do it.
Ms Shafik: Yes, in fact we have
already, as I have said, moved on many of these things in terms
of the new investment policy, the new remuneration framework,
putting in place this new procedure for business principles. So
yes, we are almost there in terms of responding to these recommendations
and we will do that within months.
Q62 Mr Touhig: Ms Shafik, your department
is responsible for Britain's international aid programme with
the ultimate objective of poverty reduction. The CDC Group is
supposed to support that.
Ms Shafik: That is correct.
Q63 Mr Touhig: How does it do that?
What are the specific targets and objectives that you set it?
Ms Shafik: CDC is one very important
instrument in our arsenal for fighting poverty. DFID does many
other things.
Q64 Mr Touhig: Yes, but what specifically
have you asked them to do?
Ms Shafik: We have asked them
to demonstrate and to bring others with them to show that you
can make money and create sustainable jobs in the poorest countries
in the world, and do that in a way that creates sustainable jobs,
pays taxes and has good social and environmental policies.
Q65 Mr Touhig: That is a broad mission
statement; what specifically have you asked them to do?
Ms Shafik: We have asked them
to do that in the context of the investment policy, to invest
the majority of their assets in the poorest countries in the world.
It is important to note that we have not put any public money
into CDC since 1995 so it is a self-sustaining vehicle. We are
continuing to push the frontier to create sustainable private
sector development in the poorest countries.
Q66 Mr Touhig: A little while ago
Mr Laing said that you put a billion pounds into the poorest countries
in the world. That is not true though, is it? You put that money
into China, India, South Africa and Nigeria where you might have
the largest number of poor people but not necessarily the poorest
countries. They are quite different things, are they not?
Ms Shafik: Yes but CDC can invest
in those economies where we no longer give a lot of aid, to be
honest. We are investing in the more public sector side of development
in those countries because there is not as much of an opportunity
for business.
Q67 Mr Touhig: Investing in the poorest
countries is not the same as investing in the key areas like India,
China, South Africa and Nigeria which might have the largest number
of poor people taken across the world but are not necessarily
the poorest countries.
Ms Shafik: They have the largest
number of poor people but CDC is not giving aid to them; CDC is
investing and getting a return.
Q68 Mr Touhig: How often do you and
your ministers meet with the chairman and the chief executive
to review their objectives?
Ms Shafik: We have a quarterly
meeting with CDC to review performance and additional meetings
as needed. In the recent period we have met quite a lot.
Q69 Mr Touhig: The Comptroller and
Auditor General's Report does point out that you have substantially
exceed growth expectations. The annual rate of growth in assets
has averaged 24% and the Report also tells us that over-performance
reflects the strong market upturn in the economies you have invested
in. Should you be surprised at this? You are investing in India
and China, two economies that will overtake Europe and the United
States and be world leaders economically.
Ms Shafik: Again context is important.
In 2004 CDC was restructured. The internet bubble had burst; the
East Asian crisis had occurred; the Russian crisis had occurred;
Argentina had defaulted. Investors were fleeing from emerging
markets so when we restructured CDC and gave it this investment
policy and mission it was not obvious that investors would go
heavily into emerging markets. That context is important. Having
said that, CDC has outperformed its benchmark so they have not
just been going with the trend with emerging markets, they have
done better than the trend. I should note that the index that
we have available to us—which is the Morgan Stanley Emerging
Markets Index—is actually heavily weighted with middle income
countries which are much easier markets to make money in than
the ones CDC is in.
Sir Malcolm Williamson: I would
emphasise that we do benchmark ourselves against an index; it
is not just looking at what we do in absolute terms. Therefore
we have, over the last few years, exceeded the benchmark. What
we would hope over the next few years if we are going to see difficult
times is that we still out perform the benchmark, but it is not
going to be easy. We know this next year or two could be very
rough. I suppose my big fear is that some of the countries that
have become richer will become poorer to the point where they
are back in the bracket we would have looked at back in 2004.
Q70 Mr Touhig: Ms Shafik just said
that you do not just invest in markets that are going to produce
a strong return, it has to be a solid investment and poverty reduction,
but we are not suggesting, are we, that China and India, even
with the global crisis we have now, are really going to start
to retreat in terms of economic growth. These are two powerful
economies.
Sir Malcolm Williamson: If you
look at the Stock Market indices for these emerging markets they
have all fallen by about 60% in the last few months.
Q71 Mr Touhig: Yes but their growth
is still far in excess of most of Europe.
Sir Malcolm Williamson: It will
be, yes.
Q72 Mr Touhig: So these are going
to be pretty strong economies even with the world downturn.
Sir Malcolm Williamson: I do not
want to give an economic forecast here, it is not my job, but
I think the important thing to say is what Mark Lowcock has said
which is that we have a new investment policy which is designed
to make us focus on the poorest countries in the world, that some
countries that were in our nets before, like China, will no longer
be in the future. I would stress in answer to the question from
Angela Browning earlier that when we have been in China we have
not actually always been exclusively in those areas which are
getting help, we have made investments in Shandong Province and
other quite poor provinces actually in an attempt to do something
for the local economy. I think the answer to your question is
that we have a very clear development mission; nobody can tell
us what it is and we are doing our best to execute it in the most
sensible way.
Q73 Mr Touhig: How often do you review
your investment portfolios in the developing countries other than
China and India?
Sir Malcolm Williamson: The board
of CDC acts as an investment committee so we do not make any investments
that do not go to the full board and the full board reviews progress
on all those investments on a very regular basis. That is part
of the management information that flows to us.
Q74 Mr Touhig: So you have a board
that actually takes its responsibility pretty seriously.
Sir Malcolm Williamson: It takes
them very seriously, I can assure you.
Q75 Mr Touhig: You have a history
of banking, of course, Sir Malcolm.
Sir Malcolm Williamson: Yes. We
are not very popular people these days, are we?
Q76 Mr Touhig: Do you believe in
risk as a banker?
Sir Malcolm Williamson: I take
risk very seriously, absolutely.
Q77 Mr Touhig: Most of your colleagues
seem to think they can sell us products that they do not understand
and they have managed to take away something called risk. When
I crossed the road today from the Abbey to the St Stephen's entrance
of the Commons I took a risk.
Sir Malcolm Williamson: I cannot
speak for other banks but I can speak for the one that I chair
and I chair the risk committee there and they regard me in good
times as a pretty miserable old git and in the bad times people
thank me for being a miserable old git.
Q78 Mr Touhig: So you are a pretty
old fashioned banker.
Sir Malcolm Williamson: Absolutely.
Q79 Mr Touhig: You recognise that
in any investment there is risk.
Sir Malcolm Williamson: Yes.
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