Mar 03 2011

Britain’s CDC is failing, should be split – report

Posted by: Nick Shaxson in: Thoughts

For those who don’t know, the Commonwealth Development Corporation (CDC) is an offshore-diving British development quango which has been pursued doggedly by Richard Brooks of Private Eye, in the face of fierce CDC protests. It’s a private equity model for international development: a model that contains great flaws. As Brooks said in testimony to parliament in December:

“One of the great frustrations I’ve had over the last couple of years is that you just can’t follow the money, you can’t really find out what’s happening. This is a serious flaw in private equity. You approach CDC not necessarily on specifics, but on the way in which their investee company is operating, aspects that are fundamental to the way they operate, like avoiding tax as a fundamental part of the structure of the business, and CDC says it’s none of its business; it’s down to the fund manager in the company. You go to the fund manager and they say, “No, sorry, we’re private equity. Don’t you understand private?” You can’t ask anybody, so there’s a complete vacuum of accountability. It strikes me that without that, without being able to see what’s happening to public money, the model is fatally flawed from the off.

Tax havens, of course, and a tax-avoiding tax haven mentality, are right at the heart of all this.

The UK parliament has now produced a report entirely vindicating his work. It speaks for itself:

The Government development fund – CDC – is not doing enough to alleviate poverty, does not focus on the sectors most in need and is paying its bosses too much, according to a new report by MPs on the International Development Committee.

Background
CDC, created in 1948 formerly known as the Commonwealth Development Corporation, has operated since 2004 as a ‘fund of funds’ manager that invests in developing countries with the aim of promoting growth. It is owned by the UK’s Department for International Development (DFID), and as such its investments are assessed as UK Official Development Assistance.

The Chair of the Committee, Malcolm Bruce MP said:

“There has been a lot of fuss about the high salaries at the Government’s development finance body, but CDC must do more to reduce poverty especially in the world’s poorest countries.”

Over half of CDC’s portfolio is in four ‘middle-income’ countries – India, China, South Africa and Nigeria.

It should be working in poorer countries and with poor people such as farmers and small business owners and accept lower returns.”

Poverty alleviation

MPs also believe that CDC makes some investments that the private sector would have done anyway.  The report suggests a radical solution by splitting CDC into two parts. Malcolm Bruce MP said:

“The ‘fund of funds’ model is profit-making and leverages much extra finance. Therefore we suggest it is retained in the arm we suggest calling ‘CDC Funds’.
Some of the profits from this could fund a second arm called ‘CDC Frontier’ which would have a specific mandate to reduce poverty, and invest in pro-poor sectors including agriculture and infrastructure.”

The Committee is pushing for greater oversight of CDC by DFID, so that there is greater alignment of poverty alleviation aims. It also said that current salaries are excessive at CDC, and that quality staff could be attracted for far lower salaries.

The Committee wants HM Treasury to look into the use of tax havens, and for CDC to adopt best practice on tax. Chair of the Committee, Malcolm Bruce MP, added:

“DFID should be a more active shareholder in future. It should call CDC to account for excessive remuneration, and its lack of transparency.”

You can read the whole report here. Written in ultra-polite parliamentary language, this is a useful case study in financialisation, and how such vehicles are singularly ill-suited to poverty reduction. Hardly surprising, since — as the Tax Justice Network puts it – Tax Havens Cause Poverty.

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