CDC Group: a Case Study in Blinkered Development

CDC has made a long journey from supporting rural development in British colonial territories to pursuing high returns, often channelled through tax havens. The author argues that CDC has lost sight of wider development goals and needs to reset its ethical and investment standards.
Nic Benton
19 August 2010

Development Finance Institutions

Development Finance Institutions (DFIs) operate as specialised development banks, providing long-term financing for private sector enterprises in developing countries. In effect they link commercial investments with development aid.

In the UK, development financing is the responsibility of CDC Group (formerly the Commonwealth Development Corporation), a private limited company owned by the Department for International Development (DfID). The mission of CDC is to contribute to poverty reduction in under-supplied markets through the provision of financing to commercially viable private businesses. This is achieved by investing risk capital with local private equity fund managers based in developing economies (as of June 2009 CDC was in possession of a portfolio worth £1,100 million).

For a DFI, this model is unique. By favouring this approach, DfID intends CDC to have a catalytic effect on developing economies by demonstrating that good returns can be made in poor countries. Fund managers invest in a range of businesses including agribusiness, consumer goods and services, financial services, healthcare, manufacturing and industry, mining and engineering, property and retail, as well as telecommunications and information technology. It is estimated that the businesses supported by CDC employ approximately one million people and pay an estimated £250 million in local taxes each year. (Public Accounts Committee, Investing for Development)

However, it can be contested that since CDC’s partial privatisation in 2004, its ability to fulfil its role has become diluted. This is because humanitarian projects that produce a low level of return are being marginalised; an outcome that has led critics to voice the concern that CDC is now merely using public money to pursue profits.

If CDC is to fully achieve its mandate a significant reform of its aims and objectives is required, in particular a higher premium needs to be placed on development outcomes beyond the purely financial. Moreover, CDC must fully maximise revenues in developing countries by pursuing transparent policies that ensure that taxable revenues remain in the country within which the investment is located.

CDC investment policy

The original responsibility of the CDC, as the Colonial Development Corporation in 1948, was to raise the living standards of the rural population of colonial territories through the promotion of increased agricultural production. An outcome that was largely achieved through the promotion of public sector partnerships. By the mid 1980s this emphasis was considered high-risk and low return; resulting in a move towards private sector investment.

Accordingly, profitable investments which maximise returns appear to be preferred to higher risk ventures that may have greater non-commercial benefits for local communities. This is illustrated by the focus of CDC investments, with only 5% being directed towards agribusiness - compared with 20% for financials, 14% for consumer and 13% for industrials. Fund managers interviewed by the National Audit Office questioned the ‘breadth of development benefits that DfID hopes CDC can deliver’. This is because ‘they doubted whether higher risk and lower return investments were compatible with a commercial business model.’ (National Audit Office, Investing for Development)

The marginalisation of low return investments is exemplified by the Mpongwe project in Zambia’s copper belt. BBC Radio 4 has reported that the project, which was originally financed by the Commonwealth Development Corporation, turned thousands of acres of dry bush into productive arable land for a modest return of 8% - 10% on capital employed. In spite of this, in 2008 CDC sold off its remaining holdings in the Mpongwe Development Company resulting in its liquidation. This has had a negative impact on the co-operative of organisations working the land as they have been starved of support.

The sale of the Mpongwe Development Company is considered to be part of a ‘new commercial ethos’ at CDC.

Financing is instead being redirected to projects that provide faster maturing, higher returns. Examples of this include investment in the established Indian company Moser Baer and underwriting of The Palms shopping mall in Nigeria.

In 2007, CDC operating as part of a consortium invested $35 million in Moser Baer to enable the company to broaden its business to include the production of photo-voltaics for use in solar panels. This investment from CDC was provided even though Moser Baer was already highly profitable given its position as the world’s second largest manufacturer of optical storage. It is therefore questionable whether CDC investment is being best served by this project.

With regard to The Palms shopping mall, CDC provided investment of $40 million. While the project has resulted in some employment and the production of tax revenues, critics believe that the project does little to reduce poverty. The Public Accounts Committee, for instance considers that ‘although CDC invests more of its resources in poor countries than any other Development Finance Institution, there is limited evidence of CDC’s effects on poverty reduction’.

CDC remains defiant that its investments are creating valuable poverty alleviation through the job creation and payment of local taxes. This focus on financial performance however, provides an abstraction of human development. It fails to fully acknowledge the context and ramifications of investment in low and middle income countries, for example, the extent to which women and vulnerable minorities are benefiting from economic development. Financial performance also ignores other relevant poverty reduction measures such as access to health care and education, food security, political stability and good governance to name a few, all of which need to be addressed if poverty is to be reduced.

Context Sensitivity

This marginalisation of development indicators has resulted in CDC risking providing support to projects that greatly weaken development and devalue human, social and political security. Through its Investment Code, CDC limits oversight of project impacts to compliance with applicable local and national laws and the identifying of potential risks through an environmental impact assessment. These standard procedures are fairly limited and there is no significant oversight mechanism in place to ensure compliance.

If CDC is to contribute to poverty alleviation, a more holistic approach to development is necessary. This requires that all investments be accompanied by a context-sensitive analysis. An effective analysis should identify emergent political, economic, ecological and social issues that will ensure projects best reflect the interests of communities as a whole and not just a minority of people. For example, a context-sensitive assessment will enable CDC to evaluate the extent to which economic developments create insecurity through conflict (e.g. tensions relating to access to employment and resources arising from economic migration), crime and corruption; as well as ensure that investments do not favour one community over another.

The negative impacts of failing to implement appropriate due diligence is exemplified by CDC support for the international power generating company, Globeleq. Initially, Globeleq formed the power sector arm of CDC Group, but in 2004 was established as a stand-alone organisation; CDC however, remains the sole shareholder.

Electricity coverage around the world is insufficient for some 1.6 billion people, or roughly a quarter of the world’s population. The privatisation of electricity has often resulted in electricity becoming unobtainable for large sections of the world’s population; this is because it can result in sharp increases to tariff charges. In the state of Andhra Pradesh in India for example, privatisation resulted in electricity prices rising in 2000 by approximately 60-80% for agriculture users and 30-50% for domestic users. This increase was mirrored in Uganda, where Globeleq operating as an electricity distributor increased charges by some 24% for domestic energy in April 2005; this was followed by further increases of 37% for domestic users and 58% for industrial users in June 2006. (War on Want, Globeleq: The Alternative Report).

World Bank and OECD investigations have found that the ‘profit-maximising behaviour’ of private companies has resulted in negative developments as rural communities and the urban poor become increasingly marginalised in terms of access to electricity. It is worrying that DfID and CDC promote Globeleq as an intrinsic part of their overseas aid effort, despite the potential human insecurity (i.e. freedom from want) from privatised utilities. A context-sensitive analysis would greatly enhance the capacity of CDC to understand the negative impacts of investments, a process necessary for ensuring positive development.

Tax avoidance

CDC also causes developing countries to lose substantial resources through the use of tax avoidance structures. Tax avoidance is a legal activity that devalues administrative governance and accountability and reduces the efficiency of resource allocation in developing countries. As of December 2008, CDC investments were being channelled through 72 subsidiaries, 40 of which were situated in tax havens. Tax havens are countries or territories that support laws that allow companies and individuals to operate opaquely and avoid paying tax.

DfID defends the use of tax havens – which it refers to as ‘offshore financial centres’ (OFCs) – on the grounds that if they were not used then CDC investments would be taxed twice: in the first instance, when companies that CDC have invested in are taxed, and again when the investment funds are taxed. Moreover, investing through offshore centres is considered a positive way of attracting co-investment from international funds.

These justifications are expanded by the Norwegian DFI Norfund, which notes that tax havens offer: ‘secure and cost-effective handling of transactions between the home countries of the investors and the companies in which the funds invest; a good and stable legal framework specifically tailored to the requirements of the financial sector; arrangements which avoid unnecessary taxation in third countries; and political stability.’ (EURODAD, Investments for Development)

Irrespective of this, tax havens produce negative outcomes because they starve developing countries of their most sustainable source of finance. Tax revenues allow governments to independently generate funds, invest in infrastructure and services, promote good governance and redistribute wealth; therefore, the reduction of tax payments, made possible by tax havens, greatly devalues the breadth of development provided by these economic investments.

Private Eye has reported extensively on CDC use of tax havens. In Senegal for example, CDC invested £10 million in the Australian mining company Mineral Deposits Ltd. While Mineral Deposits Ltd is actively mining the resources of Senegal it does not declare any of its profits in that low-income country; a situation that allows it to avoid paying the 30% tax that would otherwise be applicable. Instead, profits are declared in Mauritius where the tax rate is much lower.

This outcome is achieved by the simple expedient of arranging for the immediate ownership of the two Senegal-based operating companies to be with companies registered in Mauritius. In 2009 a total of A$67 million were transferred up the chain by way of tax-deductible interest, leasing, and management charges. The structure resulted the Mineral Deposits Ltd group paying tax of just A$45,000 for 2008 and 2009 in Senegal, having taken advantage of tax exemptions of A$14.6 million.

This is not an isolated case and other examples could be cited.

This practice is not surprising given the private equity model actively pursued by CDC. Private equity funds often utilise tax havens as a means of manipulating results, irrespective of the damage caused to local economic empowerment and development.

As the private equity model gains prominence among DFIs, it is essential that a new set of rules be developed that constrict the legitimacy of tax havens. It is troubling that investment in the most impoverished countries should be dependent on tax avoidance mechanisms. DFIs should be seeking to develop legislation and expertise that will allow developing countries to catalyse funds within their domain rather than have taxable funds removed. This should be an achievable outcome for CDC as they already support a number of funds located outside of tax havens.

Overall, CDC as a government-owned institution with a development mandate has a social responsibility to contribute fully to the tax revenues of developing countries. It is particularly important that CDC’s policy and practices reflect this if the organisation is to contribute effectively to a holistic poverty reduction agenda.


ourEconomy: putting people, planet and power at the centre of the debate Get the weekly ourEconomy newsletter Join the conversation: get our weekly email


We encourage anyone to comment, please consult the oD commenting guidelines if you have any questions.
Audio available Bookmark Check Language Close Comments Download Facebook Link Email Newsletter Newsletter Play Print Share Twitter Youtube Search Instagram WhatsApp yourData