The Development Business: A History of the Commonwealth Development Corporation

The Development Business A History of the Commonwealth Development Corporation

Michael McWilliam

The Development Business

This page intentionally left blank

The Development Business A History of the Commonwealth Development Corporation Michael McWilliam

© Michael McWilliam 2001 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2001 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin’s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). ISBN 0–333–80057–5 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data McWilliam, Michael, 1933– The development business: a history of the Commonwealth Development Corporation/Michael McWilliam. p. cm. Includes bibliographical references and index. ISBN 0–333–80057–5 1. Commonwealth Development Corporation – History. 2. Economic assistance, British – Commonwealth countries – History. 3. Great Britain – Colonies – History. I. Commonwealth Development Corporation. II. Title. HC259 M37 2001 353.1‘3273‘0941–dc21 2001036554 11 10 9 8 7 6 5 4 3 2 1 11 10 09 08 07 06 05 04 03 02 01 Printed in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

Contents List of Tables

vii

List of Abbreviations

viii

Prologue Part I 1 2 3 4 5 6

3 11 26 36 54 63

An Agency for Development 1963–79

Easing the Funding Constraint Aid and Development Jubilee Stocktaking Targeting the Poor

Part III 11 12 13 14 15 16 17 18 19

A Will to Succeed 1948–62

Planning for a Better World Tropical Allsorts: A False Start Stemming the Losses Adjusting the Mandate Financial Reorganisation The Score Card

Part II 7 8 9 10

x

68 75 86 113

Making a Business of Development 1980–93

Commercial Borrowing Mirage A Salvage Proposal Nothing But a Bank The Fan Club A Major Review A New Era Monopolies and Mergers Commission A Crisis of Identity A Business of Sorts

Part IV

119 129 133 137 143 155 165 178 203

Reinventing CDC 1994–99

20 Strategy Review 21 A Battle of Wills 22 Escaping the Funding Impasse

215 220 226 v

vi Contents

23 Understanding Public–Private Partnership 24 Reconciling God and Mammon 25 Facing the Future

232 242 247

Epilogue

256

Appendix 1: Principal Reports

261

Appendix 2: CDC Leaders

263

Appendix 3: Ministers Responsible for CDC 1948–98

264

Appendix 4: CDC Profile 1951–97

265

Appendix 5: CDC Financial Highlights 1951–97

266

Notes

267

Bibliography

289

Index

291

List of Tables 2.1 3.1 4.1 7.1 8.1 9.1 9.2 9.3 9.4 15.1 16.1 16.2 16.3 18.1

Distribution of projects Operating profits 1950–55 Allocation of loans and investments Commercial borrowings by CDC Funding bids and allocations 1971–75 CDC mortgage finance companies CDC housing development companies CDC smallholder projects A family of Devcos Alternative funding Realisations 1987–91 Source of cash flow 1987–91 Board approvals 1987–90 Two perceptions of CDC

vii

15 35 43 70 83 96 97 106 111 151 156 157 157 186

List of Abbreviations CDC BAL BP CDFC CEDC CPII DEG DFID DTI EIB EMB FAWG FCO FLDA FMO HMG IBRD IDA IDC IFC KTDA MMC MOD NAO NGO ODM OFC ORDA PAC PSBR SIFIDA

Colonial Development Corporation, subsequently Commonwealth Development Corporation Borneo Abaca Limited Board Paper Commonwealth Development and Finance Corporation Colonial Economic Development Committee Commonwealth Private Investment Initiative Deutsche Gesellschaft für Wirtschaftliche Zusammenarbeit Department of International Development Department for Trade and Industry European Investment Bank Executive Management Board Financial Accounts Working Group Foreign and Commonwealth Office Federal Land Development Agency Nedelandse Overzeese Financierings Maatschappi Her Majesty’s Government International Bank for Reconstruction and Development International Development Association International Development Committee of the House of Commons International Finance Corporation Kenya Tea Development Authority Monopolies and Mergers Commission Ministry of Overseas Development National Audit Office Non Government Organisation Overseas Development Administrations Overseas Food Corporation Overseas Resources Development Act Public Accounts Committee Public Sector Borrowing Requirement Société International Financière pour Investissement et Dévelopement en Afrique viii

List of Abbreviations ix

SIS SOAS UDC USAID IYSIS

Swaziland Irrigation Scheme School of Oriental and African Studies Uganda Development Corporation US Agency for International Development Inyoni Yami Swaziland Irrigation Scheme

Prologue Development has been one of the great themes of the past fifty years. Notwithstanding all the complications of economic, social and political development, the concept has continued to attract the commitment of idealists and of practitioners. Distorted by the politics of the Cold War, confused by conflicting theorists, disappointed by unexpected results, development has nevertheless been driven by a widespread humanitarian imperative to tackle the issues of world poverty on a sustainable basis. This has implied that external agents should have a major role in the development process, most clearly in order to supplement domestic savings in order to finance faster growth, but increasingly through broader based interventions to bring about social and institutional changes favourable to development. From the outset, motives have been subject to suspicion, often with good cause, as investors and donors have sought collateral benefits for themselves. From the extremes of exploitation seen in the Belgian Congo or Portuguese Angola through to influence peddling and alliance building in the Cold War, there has been plenty of occasion to muddy the waters. The post-war multilateral institutions have been perceived by many to have their own theology as to what constituted proper development and have not themselves escaped from responsibility for the pathology of aid dependency. The virtuous route of self-help through international trade that was demonstrated in East Asia has also encountered protectionist frustration by the major developed countries in the European Union, North America and Japan. More recently, we have witnesssed a widespread attitude of revulsion to the implications of closer integration of the world economy through trade and the operations of multinational corporations. Into this confusing scene the Commonwealth Development Corporation (originally Colonial) or CDC, as it is commonly referred to, has sought over the past fifty years to make its contribution as a bilateral agency funded by the British taxpayer to invest in developing countries. Its colonial origins and purposes have required progressive reinterpretation as the development debate has evolved. A sequence that encompasses CDC as an instrument for cultivating the colonial estate, an agency for aid disbursement, a means of invigorating the private sector in developing countries, to an apotheosis as a proposed partnership between the x

Prologue xi

British public and private sectors as a demonstration of ethical international investment, has left a trail of multiple identities. A principal aim of this study is to trace these transformations of CDC, within the context of Britain’s evolving aid policies. The Colonial Development Act of 1929, with its provision for annual public finance transfers to meet expenditure on economic and social infrastructure in the colonies, marks the conventional starting point of what became the aid business. The history of the development programmes under this and subsequent Colonial Development and Welfare Acts has been well narrated in D. J. Morgan’s 1980 Official History of Colonial Development. The initiative to establish CDC in 1948 was not however inspired by the same Lugardian ideals of the colonial mandate, but stemmed rather from the goal of augmenting the productive capacity of the colonies to provide food and raw materials to meet the pressing needs of post-war Britain. This crude self-interest had quickly to be reinterpreted as also bringing benefits to the colonies, so that CDC’s investments might win the support of colonial governors and emerging nationalists alike. In the pre-independence period, there was a complementarity between welfare-motivated expenditure funded from grants under the CD&W Acts and development-motivated investment by CDC. This distinction was not always easy to maintain in the minds of colonial governments, who tended only to see two alternative sources of British government funding, or that of CDC, which perceived a need to balance portfolio risk with infrastructure investments. Initial over-confidence by the Board and inexperience resulted in failures and near disaster. Although the contemporaneous, ill-fated East Africa Groundnuts Scheme is often attributed – wrongly – to CDC, it did have its own major folly in the Gambia Eggs Scheme. Although CDC recovered from its misadventures, the reputational and financial damage lasted for years. However a record of competence was gradually established and CDC was an available instrument when Britain realised that there would be continuing post-colonial responsibilities through the provision of development aid programmes. From the 1960s there ensued a lengthy phase in which CDC’s role as a development agency evolved, combining both the methodologies of investment selection and economic appraisal for developmental aims. The prevailing fashion saw governments as the prime instigators of economic growth and CDC was oriented towards investing in public sector projects. A growing international concern at the ineffectiveness of much aid disbursement matured in the ‘grand assize’ of the 1969 Pearson Report. It was reflected in increasing concern over the pattern

xii Prologue

of development and especially the issues of poverty alleviation which led in Britain to the seminal 1975 White Paper entitled More Help for the Poorest. The focus on rural development played to CDC’s strengths in agriculture and smallholder schemes, and to its capacity to manage such projects with its own experienced staff which was unique amongst development agencies. It led also to a shift in emphasis from creating major new productive resources to a more nuanced appreciation of the development impact of CDC’s operations. Investment in renewable natural resources, especially when incorporating small farmers, became a major priority for CDC, and was associated with more broadly based assessments of the impact of investment, involving the calculation of economic rates of return. The exclusive focus on the Commonwealth was widened after 1969 to embrace a wider definition of poor countries. More difficult to accommodate was the prolonged influence of a school of thought (especially under Conservative governments) that CDC should be promoting British exports as a byproduct of its activities. Considerable efforts were made to demonstrate that CDC’s investment activities were indeed beneficial to British commercial interests, but this was accomplished without it ever being required formally to tie procurement to British goods, or to work only with British co-investors. Another constraint was the notion that, as a public sector institution, CDC should not compete with British interests for new business. Until recently this has had a debilitating effect on its pursuit of new investment opportunities. The economic repercussion was perverse in that it had a dampening effect on CDC’s demonstration role as an investor in emerging markets, which has come to be seen as one of its most important development contributions. A general perception that CDC was on the way to becoming a kind of development bank was arrested in the 1980s and a new emphasis emerged, whereby CDC’s developmental role was redefined in terms of encouraging the private sector in emerging economies. The implication of moving from public sector risk to private sector risk was not translated into a firm preference for making equity investments in the place of secured loans, since CDC was under little pressure to demonstrate enhanced financial performance. The legacy of its founding legislation, where CDC was enjoined to operate on commercial lines by ensuring only that its costs were covered by revenues, taking one year with another, was hard to shake off. This simple revenue test was quite unequal to dealing with the early capital losses, given that CDC was endowed with no equity capital. After carrying a large deferred liability

Prologue xiii

item in its balance sheet for over twenty years, the government finally wrote off the outstanding balance in 1977. Thereafter CDC began to build up reserves – much helped by the introduction of concessional loan terms, but the absence of a conventional corporate balance sheet militated against it developing sensitivity to the cost of capital. CDC was not required to meet the nationalised industry test of government’s long term borrowing costs although a modest return on capital test was eventually introduced in the 1990s. One disadvantage of this relaxed approach was that it blunted the economic appreciation of CDC’s potentially important role of helping to diminish the perceived risks of investing in poor economies. If its return on capital was well below any standard likely to be demanded by foreign investors, there was little to encourage them from CDC’s performance in the 1990s. During a prolonged period of Conservative rule when almost every public enterprise in Britain was moved into the private sector, it would have been natural for CDC to be directed down the same path. Indeed it was blocked from raising debt capital from market sources and its access to the aid budget was progressively restricted. A surprising sequence of events then ensued. CDC’s Board and management concluded that privatisation was not the correct solution and this view was eventually endorsed by the Major government in 1993. However the financial constraints were not eased and it became apparent by 1996 that another attempt must be made to work out a viable future for CDC. The 1997 election brought a change of government and in October that year it was announced that CDC was to be partially privatised, with the Crown retaining a minority stake for the long term. By this means CDC would be moved into the private sector with the promise of access to increased financial resources, yet constrained still to direct its investment activities towards a list of the poorest developing countries. Legislation has since been passed to give effect to this reorientation. The operative term is to be public–private partnership. The full implications for CDC’s role as a development institution have yet to emerge. It certainly poses a question as to whether there were, or perhaps still are, alternative paths for CDC to follow. Across a spectrum ranging from full integration into the aid administration to outright privatisation, three broad choices can be discerned. Integrating CDC into the aid ministry has always been a potential option so that it could become a more direct instrument for managing DFID’s funding of social and educational and other infrastructure, while still operating on commercial terms so far as private sector initiatives were concerned. This would require a broadening of its terms of reference, but in many

xiv Prologue

ways would make CDC approximate more closely with the development arms of Britain’s European Union partners. The second option would be for CDC to remain as an arms length public corporation working within the framework of aid policy, but with its funding prospects eased by allowing it to raise external loans without a government guarantee. Essentially this was CDC’s own objective in the 1990s. The third option, which is the one currently being pursued, is the planned introduction of a majority of private equity investors into CDC in a continuing partnership with the government remaining as a minority partner. In selecting this choice the government has already conceded the need for a significant transition period before private capital can be introduced into CDC, which makes judgement of the decision somewhat hazardous. It is already evident that the initial promise of extra resources for CDC has been postponed indefinitely and has become almost irrelevant. This is because it has had to reduce lending and narrow the focus of its operations drastically in order to bring about an improvement in its financial performance as a precondition for attracting private capital, thereby abandoning areas of activity which developing countries, and indeed the aid ministry, have previously looked to CDC to fulfil. These include, most notably, managed agricultural and forestry enterprises, investment in the rural sector and the country venture capital funds for small enterprises. There must be serious questions surrounding this strategy, starting from the premise that the solution to CDC’s need for additional funding (which had driven the decision) was not to privatise it, but rather to make a new deal over its role within the aid programme and with the Treasury as regards access to external borrowing, so as to sustain the corporation as a broadlybased development institution with unique capacities and experience in small, poor countries. Over the fifty years of its existence CDC has been built up into a substantial development finance business, with some £1.2 billion of investment assets spread over twenty-five countries and some 400 separate projects and enterprises. It has become a projection of British goodwill to the developing world whose capability and integrity is widely admired. CDC’s great initial contribution in the final years of the colonial empire was to galvanise colonial administrations to identify development potential, even though many of their schemes were unrealisable. Next, CDC fulfilled an important function in the transition period and early years of independence by working closely with the new national governments although, arguably, it was slow to

Prologue xv

recognise the need for a more dynamic role with the private sector. On its part the Overseas Development Administration (ODA) came to recognise the potential for using CDC as an agency of the aid programme, with concessional funding of its investments, and a national asset was created. Yet there was a continuing tension in the relationship between the interests of a Whitehall department and those of the public corporation for which it was responsible, between the urge to control and absorb CDC and a reluctance to continue with its funding that came close to revulsion. Settled on the borders of public and private enterprise, it has often been hard for CDC to reconcile the pragmatic potential of collaboration with ODA – now the Department for International Development or DFID – and its commercial independence. The record of the past fifty years suggests that there were four occasions on which CDC came close to a premature end. That this was averted is both a tribute to the corporate self-confidence and will to survive that has been so evident in CDC’s leadership over the years, and also to its ability to move with the times by changing its mode of operations. Perceptions about development in the second half of the twentieth century were changed both by experience and by theory, interacting through institutions and applied policies. Part of the interest of the CDC story is the full record of progressive transformations of the corporation that has been documented in the sequence of official reviews of its activities, and which were also in response to evolving ideas about the development process. Creating productive enterprises and awakening governments to a pro-active role was the early priority. The special importance of rural development emerges next, reinforced by the notion of creating renewable natural resources. As poverty alleviation became the governing concept in development in the 1970s, CDC was well placed to play a full role because of its rural experience and the concentration of its activities in poor countries. The more recent acknowledgement in policy-making that faster economic growth is the critical engine of poverty alleviation finds CDC better positioned than the aid ministry to focus its investment activities on stimulating the private sector in emerging countries. It might be thought in these new circumstances that this would provide a fruitful agenda for evolving a new basis for collaboration and make for a greater readiness to relate DFID’s bilateral funding and policy initiatives to CDC’s investing activities, but there is little indication of such developments. Students of modern government will be familiar with the way in which its machinery protects ministerial positions at the expense of

xvi Prologue

the interests of institutions falling within the sway of the political system. CDC’s half century as a public corporation provides further illustration of the flinty determination, not to say cynicism, with which officials and ministers will pursue their ends. Yet a heartening strand in this narrative has been the way in which CDC has managed to establish a sense of its own purpose and an inherent vitality, which ensured that it would survive, unlike several other institutions in the field of overseas development. CDC too owes much to the good fortune of having several outstanding leaders who were committed to its ideals and were prepared to take on the system in its defence. Throughout its history, CDC has also had the benefit of a supportive cross-bench parliamentary interest, broadly reflective of wider national support for the aid programme. As a child of the Attlee government, CDC has generally been best served by the greater interest shown by Labour governments in overseas development, and it has been most challenged when Conservative governments have been in power. However this easy symmetry no longer applies as CDC faces perhaps its greatest challenge at the start of the millennium – to prepare for the introduction of private investors into its equity capital, while sustaining a mandatory developmental purpose. My own interest in CDC has been long standing and goes back to Oxford days and a research studentship at Nuffield in 1955 to study the East African tea industry. I was invited to postpone my thesis for a year in order to provide research support for Arthur Gaitskell in his study of the Sudan Gezira cotton scheme that he had done so much to create as a model development project. Gaitskell had recently been appointed a director of CDC and the policy dilemmas of the Reith era at CDC were debated with passion in the Nuffield Common Room, then in its heyday of research interest in Africa. Returning from a short spell at the tail end of the colonial service in Kenya, CDC seemed a natural career move in order to remain in the development field, and a post was duly proposed to me. The redoubtable general manager, William Rendell, was less impressed with my Kenya Treasury background than I thought was my due and I decided instead on a City-based career. Standard Chartered had its own small development corporation and, over the years, there were frequent occasions to appraise and fund some of CDC’s activities, against the preponderant influence of Barclays. On leaving the City, I was privileged to be appointed to the Board of CDC for seven years, while I was Director of the School of Oriental and African Studies, and to gain a more intimate understanding of this unique institution.

Prologue xvii

Anyone writing about CDC is indebted to Rendell’s authoritative History of the Commonwealth Development Corporation 1948–72, written after his retirement as its general manager for twenty years. I have been fortunate to have been accorded access to CDC’s records, although not to Whitehall’s, and the reader will need to bear this in mind over the interpretations offered here of official policy. A number of people in CDC have generously shared recollections with me and facilitated the research, but perhaps four names could stand for all. The sustained support of Sean Magee and Judith Gerard was crucial in overcoming early obstacles, even though their initial project for a Jubilee publication did not eventually see the light of day. Nick Selbie helped more than anyone to improve my understanding of CDC’s affairs, especially when driving home after the monthly Board informal evenings. He kindly read and commented on the manuscript. He and others naturally bear no responsibility for blemishes in the final product. Beverley Taylor was unfailingly helpful over finding registry archives and also made space for me to examine them, along with restorative cups of coffee. Several former colleagues at SOAS advised over the research process and the structure of the book and I thank especially Professors Lisa Croll and Laurence Harris for sharing their experience and wisdom. It seems appropriate to dedicate this book to those who made their careers with CDC and helped to build an outstanding development institution. MICHAEL MCWILLIAM

This page intentionally left blank

Part I A Will to Succeed 1948–62

This page intentionally left blank

1 Planning for a Better World

In the closing stages of the Second World War, as the military successes of the Allies were reaching the climax of VE Day, there was also an extraordinary effort within the British government machine to look past the ending of hostilities towards a world which would be better ordered than in the pre-war era, and which would address the aspirations released by victories won in the name of democracy. The Colonial Office was caught up in the ferment from an early stage, encouraging Governors to draw up post-war plans embracing social and economic development, and also to think about the development of manufacturing industries. The Colonial Development and Welfare Act of 1940 already provided a framework for public sector improvements, but a means of stimulating economic activity was also required. This approach to development became intertwined in the immediate aftermath of the war with a British-driven imperative to tackle food and raw material shortages and to reduce dependence on dollar purchases for balance of payments reasons. A virtuous circle was seemingly closed with the notion of a major initiative to increase the productive output of the colonies. A new Colonial Development and Welfare Act in April 1945 doubled the annual amounts allocated for grants as well as improving procedures. In October that year Labour came to power and Creech Jones became Secretary of State for the Colonies. In November he issued a despatch to Governors calling for the submission of 10-year development plans for public expenditure.1 As he wrote in a later Fabian pamphlet ‘What marked Labour Ministers was their great sense of urgency, and the importance they attached to community interest and economic planning.’2 A perception within the Colonial Office that the private sector was neither able nor altogether suitable for this role was 3

4 A Will to Succeed 1948–62

strongly reinforced by the beliefs of the new Labour government, as well as by the acknowledged successes of wartime planning to increase the output of key materials. The sense of urgency was accompanied by a belief that there was a happy correspondence between the needs of the British consumer and the creation of new productive industries in the colonies. It was reinforced by the confidence that the application of capital and energetic management could repeat in the realms of tropical agriculture and raw materials the achievements of munitions production. Half a century later, after the disillusioning experiences of so much well meant development effort, the optimism of those times seems naïve and it is hard to recapture their energising vision. Yet it was also the time of the Marshall Plan, of the first moves towards the political and economic integration of Europe, of the launch of the World Bank, of India’s independence and its transforming decision to remain in the Commonwealth. Already in 1943 the Financial Adviser to the Secretary of State, Caine (later Sir Sydney Caine) had voiced concern that post-war urgencies would require initiatives from London, which were contrary to the Colonial Office tradition of reacting to proposals from Governors. His memorandum of 12 August opened with the words: ‘There is a general uneasiness about the slow tempo of action under the Colonial Development and Welfare Act. We have an alibi, a little worn with use, in war conditions; but I am increasingly dubious whether things will be very much better after the war without radical changes in the present procedure.’3. He went on to note that the Colonial Office tradition was a reactive one, whereby Colonial Governors made applications for grants under the 1929 Colonial Development Act which were screened for approval in the Colonial Office. Neither the overseas territories nor London had adequate capacity to formulate, appraise and implement development projects; meanwhile expectations would be raised after the war. This led to a conclusion, which makes this document the defining origin of CDC, that it would be ‘necessary to set up a body independent of existing authorities … in order to conceive and carry out major projects’. He went on to adumbrate the notion ‘of a company clothed in commercial form but in fact working as the agent of government’. The Colonial Economic Development Council (CEDC), which was established towards the end of 1946, considered the responses from Colonies to consultative despatches on the preparation of development plans and on the encouragement of secondary industries using local development corporations. It was to this body that a matured version

Planning for a Better World 5

of Caine’s paper – ‘Proposed Formation of a Colonial Development Corporation’ was submitted on 10 March 1947: It has, however, become abundantly clear to us that in the interest of this country itself quite as much as that of the Colonies, a further major effort is needed, and that attention must now be directed to seeing that the Colonies are enabled to provide us with increased quantities of the food and raw materials which we so badly need today.4 A statutory corporation was proposed with wide powers to investigate, operate and promote and with access to substantial funds. On the recommendation of CEDC the proposal was quickly accepted by Ministers and Creech Jones was able to announce to Parliament on 25 June the government’s intention to set up CDC as a corporation with borrowing powers of £100 million. It would operate on commercial principles, but he was careful to emphasise that there would be close consultation with colonial governments ‘in order to ensure that [CDC’s] activities are conducted in the way best suited to promote the welfare of Colonial peoples’.5 The statement was welcomed by the Opposition. A parallel initiative to undertake the East African Groundnuts Scheme through a corporation established by the Ministry of Food had already been announced.6 Inter-departmental negotiations resulted in agreement with the Colonial Office’s view that there should be a single bill to establish both CDC, for which it would be responsible, and the Overseas Food Corporation (OFC) for the groundnut scheme, for which the Ministry of Food would be responsible, for introduction in Parliament in the following session. The ten-year development programmes that were flowing in from the Colonies were placing a heavy emphasis on improving their social infrastructure and rather little emphasis on the promotion of economic development. It was realised within the Colonial Office that the CDC proposal provided an opportunity for the Office to create a more balanced result by taking the initiative on development projects, which also accorded with the desire to bring about improvements in supplies of food and raw materials for Britain. A contemporary Treasury minute captures the sense conveyed by the Colonial Office of wishing to have its own instrument to galvanise colonial development, which neither colonial governments nor private enterprise could be relied upon to do. The purpose of CDC was seen by the Office as ‘primarily to operate big ad hoc development schemes in the Colonies on a “break-even”

6 A Will to Succeed 1948–62

basis, the reason being that the Colonial Office feel that on grounds of general policy big industrial developments in the Colonies ought not to be exploited by private enterprise and, in any case, they hold that private enterprise is not likely to show the necessary degree of activity’. The Treasury was fully in agreement with this view.7 There was also some sensitivity to opinion in the City at this blatant dirigisme, notwithstanding the home grown precedent in the creation of the Finance Corporation for Industry, with similar borrowing powers, and the recent establishment at the end of 1945 of the World Bank. Caine was dispatched to Unilever House in September 1947 to address a meeting of leading business figures and to allay their concerns over elbowing out the private sector.8 He took pains to demonstrate the evolutionary logic of the CDC initiative, starting with the beginnings of metropolitan funded development in the Colonies with the 1929 Colonial Development Act, and the role of the 1940 and 1945 CD&W Acts in providing funds for basic public services and the encouragement of development plans. The implicit assumption had been that productive enterprises would be identified and taken up by the private sector; however ‘the conclusion has been reached that without by any means ruling out private enterprise, there is a need for Government itself to take up, and provide finance for, enterprises.’ Caine was careful to point out that this was not just socialist doctrine, since the CDC proposal had been generally welcomed and moreover ‘it is a project which had been under consideration and had been favoured by several of his [Creech Jones’] predecessors’. He suggested that the reason lay in the shortage of risk capital for colonial development and the political sensitivity towards private enterprise in some colonies. ‘What we want to do with this Corporation is to start up new things which otherwise would not have been started at all.’ In an extended question and answer session not one of the business leaders present challenged the practicality of the generous mandate to be given to CDC, which Caine had characterised as ‘to combine all the powers of, as it were, a large company (such as United Africa Company), of a City Finance House and of a Bank.’ Pressed on CDC’s expected rate of return on capital, Caine expressed the view that it should be a margin over the minimum gilt edged rate. This standard proved unattainable over the following half-century. The Overseas Resources Development bill was introduced to Parliament at the beginning of November 1947 and, interestingly, the second reading debate on 6 November was led by the Minister of Food rather than by the Colonial Secretary. The high hopes of the Labour

Planning for a Better World 7

Party for the twin initiatives of the OFC and CDC were clearly conveyed by Strachey: ‘This Bill marks an epoch in Colonial development … where the State must now take the part formerly taken by the private investor.’ Private enterprise ‘has become decreasingly desirable and even decreasingly possible’ in many areas, so that government had an obligation to find ‘new, more effective, and less objectionable methods of overseas development’ namely the public corporation model, which would avoid the charge of exploitation.9 The bill was welcomed by the Conservatives, although there was disquiet at the Ministry of Food’s responsibility for the OFC, instead of the Colonial Office being responsible for both initiatives. At the third reading Creech Jones had his say, where he was concerned to mitigate the impression that CDC was solely for the benefit of the British consumer, claiming that the Colonial peoples and the world at large would gain also. ‘By collaboration with existing enterprise, by the creation of new enterprises of a public character, by association with peasant production and with cooperative groups … enterprise which was previously impossible can now be launched and can go forward for the betterment of those territories.’10 The strong bi-partisan support for CDC – Oliver Stanley characterising it as providing a third way between private enterprise and social development funded by CD&W money – was nevertheless laced with cautions over proceeding too hastily and raising expectations too high. These proved to be prescient warnings. A major conference of African Governors was held in November 1947 and the opportunity was taken to brief them on the proposals. Apart from summarising the provisions of the bill to establish the CDC, an explanatory paper for the Governors set out the wider context and once again provides a contemporary exposition of the justification for the initiative:11 Experience of the working of the 1940 and the 1945 Colonial Development and Welfare Acts and examination of the Development Plans submitted by Colonial Governments has made it clear that the total of the funds available from the Colonial Development and Welfare Vote, from local revenues, and from borrowing would be inadequate to provide more than the basic social and economic structure on which further development could be made. It has moreover become evident that, even if greater funds were available, the existing Government machinery is not suitable for undertaking directly the expansion of production. At the same time, it is surely wrong to allow the potential productive resources

8 A Will to Succeed 1948–62

of the Colonial Empire to remain undeveloped at a time when the world is suffering from severe shortages of food, raw materials and manufactured goods. With these considerations in mind, steps have been taken to establish a Colonial Development Corporation. It was explained that an increase in colonial production would be helpful to the UK’s balance of payments, but this did not mean that the Colonies were being exploited since there should be a mutual interest in development. ‘The Government feel that … they will on the one hand help the colonies to achieve their own development and on the other hand to take a step which will be useful to their common balance of payments problem.’ Nevertheless it was acknowledged that charges of exploitation would still be made, but the Government ‘are quite satisfied that such charges will be unjustifiable, but it will be very important. … to deal carefully with this point.’ Lord Trefgarne, the chairman designate, took part in the meeting and solicited proposals for the new corporation. The predominant reaction from the Governors was to question the requirement that CDC was expected to act as a commercial concern and to pay its way. The Governor of Nigeria, Lord Milverton, went so far as to comment that the profit and loss criterion ‘had been discredited for the purpose of exploiting the resources of the Colonies’.12 Caine was moved to comment that it appeared that the Governors would rather have seen an enlargement of CD&W funds than the establishment of CDC. Following the conference, a further despatch was issued in December 1947 reinforcing the message that CDC’s purpose was ‘to assist the development of Colonial resources and thus to help to strengthen the resources of the Sterling Group as a whole’.13 Sir Stafford Cripps, Minister for Economic Affairs, addressed the assembled Governors on 12 November 1947 on the economic problems facing Britain and the sterling area and placed Africa in a new perspective. ‘We have for long talked about the development of Africa but I do not believe that we have realised how from the point of view of world economy that development is absolutely vital.’ Some passages from the speech will convey the sense of boldness and vigour that animated the government: It is the urgency of the present situation and the need for the Sterling Group and Western Europe both of them to maintain their economic independence that makes it so essential that we should increase out of all recognition the tempo of African economic devel-

Planning for a Better World 9

opment. We must be prepared to change our outlook and our habits of colonial development and force the pace. … An occasional failure is the necessary price of adventurous development and we must not allow safety first to be the key note of our work. The situation is far too urgent for that, for the whole future of the Sterling Group and its ability to survive depends in my view upon a quick and extensive development of our African resources. … Three or four years is a desperately short time for major developments in your areas so there is not a moment to be lost.14 Its founding Act charged CDC with the duty of creating projects ‘for developing resources of Colonial territories with a view to expansion of production therein of foodstuffs and raw materials, or for other agricultural, industrial or trade development therein’. The geographical area of operation was the same as for the CD&W Act, that is the colonial territories, which therefore excluded India, Pakistan (and later Bangladesh), Ceylon, Sudan and Southern Rhodesia. In determining policy and activities the corporation was specifically enjoined ‘to have particular regard to the interests of the inhabitants of the territory’ (section 7(1)) and to consult with the government of the territory before going ahead with a new undertaking (section 7(2)). These provisions were addressed to sensitivities within colonial administrations over the political profile of CDC interventions. The corporation had a duty to operate on a break-even basis or better, taking one year with another (section 15). The Treasury decided that both CDC and the Overseas Food Corporation should be funded solely by means of Exchequer advances, on grounds of flexibility in determining appropriate interest rates. Equity capital was not deemed appropriate, even though the Finance Corporation for Industry had been set up on conventional lines. After starting off with a more modest figure, the Colonial Office argued that CDC should have borrowing powers of £100 million, so that it could undertake large scale projects and in order to avoid returning to Parliament for supplementary funds for some time. This was accepted by the Treasury which also accepted that the loans would be advanced by the responsible Minister, rather than directly from the Exchequer, who would therefore be accountable to the Public Accounts Committee.15 Interestingly for the subsequent history, no restriction was placed on the extent of borrowing from non-Exchequer sources within this total limit (section 11(3)). The munificence of the borrowing capacity granted to CDC may be appreciated more readily on realising that the limit of £100 million is roughly equivalent to £2 billion in

10 A Will to Succeed 1948–62

the money of today. Finally, it was established at the outset that CDC was to be the sole judge of the commercial viability of a project and it was given discretion to determine its mode of operation. Following the November 1947 conference, Governors received another despatch on CDC from the Secretary of State which enclosed a paper prepared by Trefgarne on the policy guidelines determining project selection and on the information required when submitting projects. He explained, ‘The Corporation is not primarily a finance or lending corporation, but an operating organisation which either alone or in partnership will carry out the projects in which it is interested.’16 The covering despatch advised that CDC expected to begin looking at projects by 31 March 1948, following passage of the Overseas Resources Development Act, and invited project submissions from colonial governments. It went on to reflect on the discussions at the Governors’ conference, addressing the criticism that CDC would be required to pay its way, explaining that governments were open to contribute themselves to marginal projects to make them more viable, or to employ CDC on a contract basis, but warning them not to use CD&W funds to make up losses. In a parallel communication to Trefgarne on 16 December 1947 the Colonial Office sought to clarify the degree of information detail that would be required by itself and the Treasury, having acceded to his request to drop from the bill the right to have full project information. ‘The general idea would be that Her Majesty’s Government should have the same facilities to ask questions or influence broad policy as the shareholders in an ordinary company which is seeking to raise fresh capital for a new venture.’17 This was to prove a contentious area over the next two years.

2 Tropical Allsorts: A False Start

In line with the spirit of urgency at the time, Caine had proposed that a shadow Board be established during 1947, before enabling legislation was passed, so that preliminary work could be undertaken and also so that names were known to Parliament.1 After some debate over the balance of full time and part time directors, it was decided that the chairman and deputy chairman should be substantially full time and the remainder would be expected to devote between a quarter and a third of their time to the corporation. Creech Jones recommended to the Prime Minister that the first chairman be Lord Trefgarne ‘because his approach to Colonial development accords with that of the Party, he has a first hand knowledge of Colonial conditions, has general commercial experience and knowledge of public policy and administration, and has age, health and capacity for movement on his side’.2 George Garro-Jones, created Baron Trefgarne in 1947, first entered Parliament as a Liberal in 1924. He joined the Labour Party during a seven-year spell out of Parliament in business, re-entering in 1935. He was a member of the wartime coalition ministry as a parliamentary secretary in the Ministry of Production and was appointed private secretary to Lord Greenwood in the Labour government. After the war he returned to business and became a director of the newly formed Barclays Overseas Development Corporation, which some in the Colonial Office were disposed to see as a threat. It had very mixed feelings on the merits of private sector industrial development in the colonies and had a distinct preference for state initiatives and this chimed with the instincts of the Labour government.3 Nevertheless, Trefgarne was permitted to retain a number of company directorships in his new role. The inaugural Board meeting of CDC took place on 2 March 1948, preceded by a ceremony with Colonial Office officials. The agenda 11

12 A Will to Succeed 1948–62

included a paper by Trefgarne on organisation. CDC was to be set up under an executive chairman, to whom would report a Controller of Plans, handling project investigations and appraisals, and a Controller of Operations. Reporting to him separately would be a financial controller, legal department and other central services. The Board minuted: ‘No such appointments should affect the authority of the Chairman as the head of the executive staff of the Corporation.’ Overseas, Trefgarne’s idea was to set up regional boards, which would become holding companies for CDC investments. Five such boards were envisaged, including a member of the London Board, located in Jamaica, Singapore, Kenya, Northern Rhodesia and Nigeria. On top of his responsibilities as chairman and chief executive, Trefgarne also assumed a major role in identifying new business proposals for the corporation. He and other members of the Board effectively constituted the new business arm of CDC. The establishment by Parliament of a public corporation with a duty to invest large sums of money in development projects in the colonies presented a novel challenge to traditional methods of Treasury control of public expenditure. It was accentuated by the acute shortages of capital equipment and the sensitivity to dollar expenditure. Given that each new instalment of borrowing from the Exchequer would be subject to sanction, the question was how detailed the justification would need to be in order to satisfy the Colonial Office and also the Treasury. Trefgarne took a lively interest in the financial clauses of the bill while it was still in draft, seeking both confirmation of the requirement that CDC should pay its way and, more particularly, clarification of the extent of ministerial approval of projects, which carried an implication of answerability to Parliament. Accord was reached on the basis of the letter of 16 December 1947 already referred to. However once a flow of projects came up for approval Trefgarne chafed at the clearance process. The problem was not only one of delays but, more fundamentally, whether projects themselves were to be subject to another round of scrutiny by the Colonial Office and the Treasury. The general economic situation in Britain had become more difficult, which had led the government to enhance its central planning mechanisms, and CDC was swept up in the process. In an attempt to diffuse the situation Caine proposed that monthly meetings be held between CDC and the Colonial Office, commencing in June 1948. This enabled the difficulties to be exposed, but not quickly resolved. At the July Board meeting a draft proposal from the Colonial Office was tabled. Trefgarne referred to ‘prolonged and

Tropical Allsorts: A False Start 13

difficult discussions’ on the document, which he considered was unacceptable in the amount of detail and supervision implied.4 In truth, the paper was obsessed with CDC’s potential call on foreign currency reserves and proposed that it should make detailed forecasts of future requirements. Trefgarne replied to the Secretary of State that the proposed procedure was unacceptable to the Board. ‘The matter in issue is the extent and degree of inter-departmental investigation into projects prepared by the Corporation, before the advance applied for under the Statute is sanctioned.’5 He supported his letter with nine pages of critique of the proposals, and then another four pages setting out a preferred alternative under which CDC would supply only a project synopsis, small projects would be aggregated for sanction, administration streamlined. Finally there was a reaffirmation that only CDC should address the commercial soundness of projects. Quarterly reports would be supplied for information only. Creech Jones’ response backpedalled on the earlier proposals, while affirming his need for information on CDC’s progress and intentions as the responsible Minister and in view of the national shortages of supplies and foreign exchange. ‘I am most anxious that the meeting of my requirements should not be a burden to the Corporation and I do not think that it need be.’6 Trefgarne was now substantially mollified. He confirmed that there should be a regular exchange of information and plans and was happy at the endorsement of the Board’s role as the sole judge of the commercial merits of a project. He added a third principle: the review of projects must be kept distinct from the procedure for capital sanctions, which should be granted ‘at the earliest stage, on the basis of a synopsis of the project, and that once sanction has been given they should be free to undertake commitment.’7 Creech Jones confirmed the understandings and procedure, only stipulating that there should be no material change in a sanctioned amount, without prior commitment. The Board minute noted that the outcome was the result of eight months’ negotiations. Perhaps the comment was made over the table that it was also a singular tribute to Trefgarne’s standing with Ministers and to the efforts made by Creech Jones to accommodate his demands. The July agreement lasted for only nine months, when Treasury concerns over the rationale of a proposed project to develop a forest plantation in Nyasaland to produce tung oil led to new and prolonged negotiations to devise a fuller statement of the relationship between CDC and government departments. When agreed in September 1949, the document became known as the Concordat and governed relationships until 1953.

14 A Will to Succeed 1948–62

A flow of proposals began to flow into CDC in the early months of 1948, mainly from colonial governments, but by no means exclusively so, even as initial staff appointments were being made. Notable were several projects that colonial governments were keen to push onto CDC, which were accepted without much challenge. The Kenya Government had fostered several manufacturing enterprises during the war and East African Industries was quickly sold to CDC. The Nyasaland Government had an ambitious scheme to produce tung oil on a plantation basis in the remote Vipya Plateau, which was taken on despite sceptical enquiries from the Treasury. In Tanganyika CDC acceded to a government proposal to take over a wattle growing project, where a Canadian company – Forrestal Land & Timber – had cleared several thousand acres and then abandoned them, following financial difficulties in its Argentine operations. In Uganda CDC took over an hotel project. Most interestingly, the government of Northern Rhodesia had embarked on a cement plant project which would be well placed to be a supplier for the building of a major dam on the Zambezi, but then realised it lacked the means to see it through. A Board director, Sir Miles Thomas, negotiated with the government to take over the project, leaving a residual government shareholding.8 Trefgarne himself, on a visit to the West Indies, had conceived what became the Gambia Poultry project, and was indignant when the Treasury used the capital sanction application to refer to the Ministry of Food to assess its commercial soundness.9 Even the Colonial Office did its promotional best. Following a mission to West Africa in 1947 to investigate the potential for large scale production of oil seeds, CDC was first encouraged to look at two ‘pilot’ schemes of no less than 12 000 acres each for mechanised development of groundnuts in Ghana, and then another pilot scheme of 14 000 acres in Northern Nigeria for peasant grown groundnuts. The Nigerian project, to be modelled on the Sudan Gezira scheme, was approved and became the Mokwa scheme.10 However the Board was able to resist some of the pressures. Governor Colby pressed CDC unsuccessfully in 1949 to engage in food production projects in order to relieve famine conditions in Nyasaland. Hawthorn Hall in Uganda saw CDC as a vehicle for realising several ambitious projects – a fertilizer and iron ore project, a textile factory, another hotel, and became quite hostile at the lack of response.11 Signs of acute indigestion began to emerge. In September 1948 Trefgarne minuted to the Controller of Plans ‘It is perhaps a good moment to consider whether we are in danger of biting off more than we can chew; or making the less remediable mistake of swallowing

Tropical Allsorts: A False Start 15

more than we can digest!’ A resulting paper for the Board showed that in less than nine months 13 projects had been accepted in principle and 50 were under investigation, of which 10 were at an advanced stage of preparation for Board approval.12 They were widely distributed as shown in Table 2.1. Table 2.1

Distribution of projects

Region

Number

West Indies West Africa East Africa Central Africa Far East Unallocated

15 12 12 6 4 14

At the Board meeting in January 1949 it was decided to close the door for new projects for at least four months while the current work-load was addressed. At this meeting also the concept of ‘Board approval in principle’ was established, in order to give authority for a project manager to complete investigations leading up to a formal ‘Board approval’.13 As CDC began to commit real money (approvals reached £4 million by the end of 1948), concern developed at the financial implications of having to pay interest from the moment loans were drawn from the Exchequer, whereas the funds were being invested in most cases in direct projects that would not yield revenue for some years. Already, at a meeting in May 1948, CDC had proposed the notion of fructification interest (its postponement for a given number of years). This had been discussed with the Treasury, who introduced a further point that interest might be postponed for a period, but it could not be waived altogether.14 These meetings with officials were inconclusive and so Trefgarne wrote to the Secretary of State in June arguing for some form of equity capital in CDC’s funding, proposing three alternatives: a. that the first £10–20 million of drawings should bear no interest initially, but would be liable for later interest charges in the light of trading results; b. a purely nominal rate of interest on a similar amount of capital drawings; c. nil interest on loan drawings during a deemed First Stage of CDC’s life.15

16 A Will to Succeed 1948–62

Creech Jones’ reply explained why equity capital had been refused for CDC in the first place on ‘strong arguments of general policy’. First equity would obscure whether CDC was being subsidised, which would be contrary to the intentions of the Act; second CDC’s activities ‘will be a matter of some political delicacy’ in the colonies. ‘In my view it would be fatal to the Corporation’s success if there was any question of Her Majesty’s Government taking a return on “equity” capital which would be represented as a profit out of local activities.’16 Instead he reverted to the concept of a fructification period of seven years in respect of 40-year loans, with interest rolled up in the opening period and payable over the remaining life of the loan. This proposal was accepted by the Board. It relieved an immediate problem at the cost of storing up a major one for the future. In its haste to be seen to be engaged in real development, and to respond to as many colonial governments as possible in this start-up period, capital commitments were entered into and projects were started without extensive investigation and appraisal. Having sifted some 400 proposals, fifty projects were approved by the CDC Board in less that three years; they spanned twenty colonies and mostly comprised plans for directly managed undertakings.17 All this was too much for the young organisation, struggling to overcome acute shortages of materials and equipment, with a staff of widely varying backgrounds and experience – albeit fired with enthusiasm for the corporation’s development role, and with a Board pressured by the urgencies of the times and compelled to work out its procedures and policies as it went along. By 1950 the organisation was under stress and one of the directors addressed a memorandum to the Board in very similar language to Trefgarne’s memorandum of June 1948: I consider the time has arrived when the Corporation should declare a moratorium in respect of the investigation of new projects and that its total energy should now be devoted to the running of its operational undertakings and the launching of projects already classified ‘A’. I feel there is a danger of the Corporation biting off more than it can chew, and I suggest the Board now decides on a period of consolidation.18 The most public manifestation of the extent to which the corporation was being overwhelmed by its problems was the Gambia Poultry scheme. On a smaller scale than the groundnut scheme in Tanganyika, this unfortunate venture by CDC epitomised the dangers of hasty

Tropical Allsorts: A False Start 17

implementation compounding initial errors in appraisal and judgement. Its problems led to a debate in the House of Commons and eventually gave rise to an inquiry instigated by the Lord Chancellor. It became a party political tease over the follies of socialist planning.19 The Gambia Poultry Scheme was CDC’s first operational undertaking. On a visit to the West Indies in January 1948, Trefgarne visited a large poultry farm in the Bahamas which impressed him, and where he discovered that its manager was susceptible to an invitation to come and work for CDC. Previously, Trefgarne had been asked by the Governor of the Gambia to bring a project to that colony. Noting the similar latitudes of Gambia and Bahamas and the relatively direct access to the UK by sea led to the manager being hired and making an appraisal visit in April that year. By June a Board paper gave approval in principle to a large scale poultry project for 200 000 birds to produce 20 million eggs per annum and one million pounds of poultry meat, on a 10 000 acre farm growing its own cereals. The estimated cost was £500 000. Interestingly, no further board approval was sought, although in October a revised budget requiring an extra £200 000 was approved. Meanwhile, in July Trefgarne issued a minute commencing ‘This project appears to have become involved with various points of principle. I have therefore decided to take direct charge of it from now on.’20 The CDC Annual Reports for 1948 and 1949 gave a full and optimistic account of the development of the Gambia project. There was public and parliamentary interest in the venture as critics began to sense another fiasco alongside the Overseas Food Corporation’s groundnut scheme. Already in July 1949 one MP with poultry farming experience was horrified at CDC engaging in such a large project without any prior experience.21 CDC’s report for that year struck a defensive note: [the Board] have every confidence that, subject to those continuing risks to which poultry production is liable and subject to the products receiving fair prices in the United Kingdom, this soundly conceived and executed undertaking will fulfill all that they have expected of it. … The Board venture to express the hope that its continued progress will be watched with goodwill by the British public and by responsible commentators. Matters were not going so well on the ground. Land clearance proved more difficult and costly than planned and the anticipated timber

18 A Will to Succeed 1948–62

revenue proved illusory. The cereals potential was badly misjudged, in the absence of trials; there were pest attacks and other problems. With the poultry there were difficulties with hatching and rearing, with fowl pest, with loss of meat through refrigeration breakdowns, with rejection of dirty eggs by the British market, followed by the cessation of exports. The parliamentary debate on the 1949 report was delayed until October 1950, by which time the difficulties in Gambia were more widely known and Trefgarne had resigned. Nugent gave a devastating critique of the scheme, demonstrating in detail the incredibility of achieving the stated targets for laying hens, egg production and meat, or of feeding the flock from the cultivated area. Additionally, there was the provocation of an American scheme manager and the disbursement of scarce dollars on foodstuffs, equipment and hatching eggs in preference to sourcing from the UK.22 When he was appointed, Trefgarne agreed with Creech Jones that he could stand down at his own request after three years. In the summer of 1950 he decided to implement the understanding and to retire in the autumn. His letter of resignation was up-beat: CDC had been set up from scratch and 50 projects launched. ‘It is my belief that the organisation so created is running satisfactorily, and even efficiently, though that may be thought rather a bold claim for such a young concern.’23 The emerging reality was rather different and was causing concern in Downing Street.24 The government already faced the embarrassment of the growing disaster of the Overseas Food Corporation’s groundnut scheme in Tanganyika and it needed to re-establish credibility in overseas development. It became a prime ministerial issue and Attlee’s solution was to turn to the outstanding managerial technocrat of the time. Lord Reith had been impatient for another challenge since Churchill had dispensed with his services during the war. Hints that he would be suitable as Viceroy of India were ignored and he was keen to have another assignment, although initially doubtful that CDC was on an appropriate scale of importance. Reith took up his appointment within days, at the beginning of November 1950, and a contemporary profile in The Observer gives a flavour of his standing – ‘Where in our mild, modern community, could one find a man possessing the technical and social standards of today and the peculiar caste of mind of the great imperial pioneers? In selecting Lord Reith to be chairman of the CDC, Mr Attlee has shown great insight of the man and the job.’25 Within months of his appointment Reith faced up to the realities of the Gambia situation and the result was a decision in February 1951 to

Tropical Allsorts: A False Start 19

close down the scheme. First, the Controller of Operations was sent out to Gambia to make a special report for the Board, having already procured that the manager would be dismissed. ‘The mission found much that was wrong and of which headquarters had not previously been aware. On a count, the poultry flock was found to be 20 000 fewer than had been reported. We saw for ourselves how bad farming had seriously abused the land. The deplorable condition of machinery through misuse and bad maintenance was clear.’26 But the graver charge was that the corporation had misunderstood and deceived itself over the fundamentals of the project: The purpose of the undertaking was to convert cheap cereals into animal protein (poultry and eggs). It was clearly fundamental that sufficient cereals at the right price must be forthcoming. As a Corporation we took no conclusive steps to verify that this would be the case. This was responsible for the primary and secondary causes of failure i.e. (a) that the Undertaking was placed in a Colony that could not produce the cereal requirements at the right price, whether by our own cultivation or by purchase; (b) that without waiting to prove that our farm could produce the right cereals, we embarked on poultry rearing at the outset.27 Reith reviewed the findings of the mission in a memorandum to the Board on 15 February 1951. His summary was stark: ‘If these conclusions are confirmed – and no other course is likely – it seems that the Gambia Poultry Farm scheme as originally conceived must be abandoned.’28 The Board concurred and turned to the question of how to break the news to Griffiths, the Colonial Secretary. The language of the first draft letter was robust and more tactful language was eventually substituted, thus – ‘the Board concluded that the confidence which the late chairman had felt in the management of the undertaking was not justified’, became ‘concluded that a fresh approach to the whole plan and layout might be required; and that this might involve changes in management.’ Again: ‘there seems little doubt that the scheme as originally conceived should never have been started and must now be abandoned’, became ‘as originally conceived cannot be carried out; that there must be a modification of the basic plan under which the farm was to be largely self-supporting.’29 Reith reported to the Board on 1 March that the letter had been sent and that he had subsequently discussed it with Griffiths, who was exercised over the responsibility of Board members and of corporation

20 A Will to Succeed 1948–62

officials and the impact of the announcement on his own position. In a subsequent letter to Griffiths, Reith laid out a classic statement of the political difference between a departmental disaster and one occurring in a public corporation: I am prepared to make it known in any way you like, urbi et orbe, that the Corporation is entirely and alone responsible; that no blame should, could or can be attached to you or to anyone in the Colonial Office re constitutional issue. I have been associated with the public corporation system as long as anyone in the country, and I am jealous for it. It is constitutionally improper (apart from being unjust and unreasonable) to try to blame you. Parliament agreed to set up a public corporation rather than have this work done departmentally; they denied themselves also the right to intervene in day to day management; denied themselves also the right to expect the Minister to be answerable for day to day management. When things go wrong in the department you cannot put the blame on a civil servant in Parliament; it is quite different when things go wrong in a public corporation. Finally, if somebody must be punishable, he, Reith, was quite prepared to resign.30 As regards the responsibility of the non-executive directors, Reith made two trenchant points in another letter: ‘1. The Gambia plan was accepted in the first flush of activity, maybe impetuously, anyhow without due investigation; 2. In view of the chairman’s personal interest and attitude and his confidence in the manager no director could compete.31 Actually, Reith was furious at Trefgarne’s behind the scenes lobbying to spread the blame to the rest of the Board, as well as at Griffiths’ disposition to blame everyone equally. In a note of a telephone conversation on the matter with John Dugdale, Minister of State at the Colonial Office, he reported that he had made clear that he stood with the directors and ‘that I not only regretted but resented this continual girding and sniping at them.’32 Finally, Reith had a long meeting with both Griffiths and Dugdale at the beginning of April (i.e. after the parliamentary debate referred to below), when Griffiths was still much exercised about blame falling on himself – ‘I said that Parliament had established a public corporation; that he would make constitutional history if he said flatly that following this decision he had accepted and relied on what he had been told; that if he had been misinformed it was not his fault.’ He went on: ‘As to the Gambia in

Tropical Allsorts: A False Start 21

particular, but otherwise also, the Directors had either been misinformed or not properly informed. It seemed to me I had better be categoric.’33 The Opposition staged a debate in Parliament in March, where Lennox Boyd’s attack concentrated on the misleading information and false assurances of the previous reports and on the failure to have an initial pilot scheme. Nugent drew the conclusion that CDC should not undertake commercial ventures on its own.34 The Motion of Regret on the losses and the collapse of the scheme was lost by eight votes. With so much unwelcome publicity there was tension in the CDC Board, particularly on the sensitive matter of whether Trefgarne had kept vital information from directors and had over-ridden his officials. The upshot was that the Lord Chancellor was requested to set up an inquiry which reduced the temperature, since the inspector’s report was not published until May 1952 (under a new government).35 He found in favour of the directors in that they had not been informed by Lord Trefgarne of differences between the scheme manager and head office experts over key estimates for grain production at the inception of the project. However he also found that this omission was unintentional. The real lessons were of more general import: the unwisdom of embarking on large scale development with untried crops and in new areas, without trials and pilot operations. Meanwhile the annual report for 1950 was issued promptly in April 1951 (in the preceding year it was only published at the end of July, on the eve of the recess). In striking contrast to its two predecessors it gave a crisp, even cold-blooded, analysis of the condition of CDC and its 50 undertakings. Although Trefgarne had been sent the report in draft he was offended by its tone and by the absence of any valedictory reference to himself. Rather unwisely, he made a personal statement in the House of Lords, which led to a magisterial rebuke from Lord Swinton a few weeks later.36 Trefgarne fuelled concerns within the Labour Party that CDC was about to be diverted from its developmental role. In response, Reith first focussed on his relationship with Dugdale, and carefully minuted two conversations one of which was all about the Gambia Eggs row and Trefgarne’s backstage lobbying.37 He established a basis for personal, off the record, meetings and felt that a satisfactory rapport had been achieved: ‘I know from past experience that however good the intentions of politicians and civil servants as to public corporations (and probably none more so than this one), the situation has to be carefully watched.’ The comment has resonated over the succeeding half century.

22 A Will to Succeed 1948–62

Later, in the summer, Reith had a meeting with 18 Labour MPs of the parliamentary party’s Colonial Committee, which again was carefully minuted. Reith answered questions for over an hour; they ‘covered choice of project, the importance of increasing food production, the criteria which e.g. would put a forest station rather than ranching on the Nyika, helping co-operative efforts, encouraging local association, whether the Corporation activities were ever inflationary (Booker’s complaint), consultation in Bechuanaland.’ The meeting then changed gear when one member weighed in with an attack on the annual report’s treatment of Trefgarne’s legacy, to the embarrassment of his colleagues. He was unable to substantiate his remarks and was ruthlessly demolished by Reith to the accompaniment of ‘hear hears’. At the end of the meeting appreciative references were made to the BBC and Reith’s career and ‘Lord Reith can be assured that he has the absolute and unqualified support of the Labour Party in his present post.’38 Reith was soon made aware of the thrust of criticisms directed at CDC from the Conservative side and deployed in both Houses of Parliament. To the, by now, familiar criticism over the absence of pilot projects Lord Rennell added two trenchant charges. To begin with, there was a lack of any theme in CDC’s investment portfolio: ‘The first impression which is left ineffaceably on me is that a very large number of people, with rather wildcat schemes, seem to have been able to secure hearings and, in many cases, get their schemes adopted.’ He labelled the result Tropical Allsorts. The second criticism was of the attempt to manage directly so many different kinds of project: ‘I do not know of any other attempt, in business or anywhere else, by one body of people to manage 50 assorted enterprises.’39 CDC had failed to decide whether it was going to be a project manager – in which event it should be much more focussed, or an active investor without providing management (which Rennell preferred). It appeared to be trying to do everything. To Teviot the principal lessons were the need to decentralise authority from London and to take into partnership territorial governments and private enterprise. As we shall see official policy towards CDC began to reflect this critique. In the Commons Lennox Boyd articulated a conception of the true purpose of CDC that could either become a strait jacket or a galvanising vision: ‘It is our view that its task should be to start businesses in territories where private firms are unwilling or unable to start them, and to attract other capital to those territories.’40 The restrictive interpretation initially animated Conservative policy towards CDC, espe-

Tropical Allsorts: A False Start 23

cially in the guise of the ‘alternative finance’ criterion, which is discussed in Chapter 4. But thirty years later the notion of CDC fulfilling the role of a demonstration investor and helping to diminish perceptions of risk in emerging markets for other investors was to become a defining purpose. The range of initiatives taken by CDC in this first period still has capacity to astonish: 9 projects started in 1948, 19 in 1949 and 22 in 1950, when one recalls that management and technical skills had to be recruited for each project, and that none of the head office controllers had any experience of setting up and directing commercial operations in developing countries. A brief analysis of the portfolio will illustrate the diversity: a. In the Falkland Islands CDC responded to a government proposal to set up an abbatoir and freezing plant. On a much larger scale it launched a similar project in Bechuanaland (later Botswana) which included leasing also a 600 000-acre ranch. b. There were several fisheries initiatives: off the west coast of Africa there was a project based in Gambia to extract vitamin A oil and another in Nigeria to supply the local market. A Seychelles project aimed to provide dried fish for East Africa. Another vitamin A oil scheme was located on Lake Nyasa. Tristan da Cunha had a project to harvest crawfish c. With timber there was a project to extract tropical hardwood in British Guiana, while 108 000 acres was purchased in Swaziland for afforestation. With tree crops, there were schemes to plant 30 000 acres of wattle in Tanganyika for the tanning industry, to develop 20 000 acres of tung oil plantation in Nyasaland (later Malawi), to develop a 10 000 acre palm oil estate in Malaya and to experiment with cocoa there too. d. CDC took over a hotel project from the government in Uganda and in British Honduras. e. There were mining projects in Kenya (copper/gold), in Tanganyika (coal), in British Guiana (gold). f. CDC set up an engineering contracting subsidiary, partly for its own projects (Falkland Islands, Gambia, British Honduras) and partly to undertake work for colonial governments where existing services were inadequate. g. In manufacturing, CDC took over several units set up by the government of Kenya during the war as East African Industries. It started up a cement industry for Northern Rhodesia (later

24 A Will to Succeed 1948–62

Zambia). In Nigeria factories were planned for cotton spinning and sack making. h. A 10 000 acre irrigated rice farm was created in Gambia. A much larger irrigation scheme was started in Swaziland on 105 000 acres. In Borneo the corporation acquired 14 000 acres of exJapanese manila hemp estates (the only non-dollar source of the product). CDC purchased land in British Honduras to grow bananas and in Dominica to grow citrus. Even this glimpse of the corporation’s burgeoning commitments will make clear the impossibility of CDC fulfilling the kind of expectations raised at its formation. No single organisation could hope by direct action to galvanise the economies of 38 colonies (as then defined), both in terms of local self-sufficiency (dollar savings) and by contributing vital raw materials and food for Britain. Sea harvesting might have the potential of immediate rewards, but plantation forestry had a 30 year perspective. Although 17 of the projects were closed down during the next few years (and 13 feasibility investigations abandoned), it is only fair to recall that some of CDC’s greatest future projects were in this original portfolio, albeit in vestigial form in some cases: a. Palm oil production in Malaya was transferred to the North Borneo estates and became the great BAL plantation which was eventually sold for £100 million in 1996. b. The afforestation project in Swaziland became a major source of paper pulp in the region as the Usutu Pulp Company, in a long term partnership with Courtaulds, before its eventual phased disposal to South African interests. c. Swaziland Irrigation Scheme became a major regional sugar cane and citrus producer. d. The cement factory in Zambia is a regional supplier and the hub of a group of plants. e. The mortgage finance company in Malaya and Singapore was not only a significant success in itself, but was the catalyst for a number of similar institutions in other CDC territories, as reviewed further in Chapter 9. f. The Bechuanaland abattoir became a successful national cold storage facility and CDC operated a major cattle ranching business in the country for nearly fifty years. Within a few months of his appointment the Labour Government was out of office and Reith had to contend with a much more critical

Tropical Allsorts: A False Start 25

regime as he grappled with his daunting task: to cut out failed and failing projects; to reorganise the management in a way that would establish effective control of on-going projects; to stem the losses and to re-establish the credibility of CDC within Whitehall and with the new government.

3 Stemming the Losses

Reith became chairman in November 1950, shortly before the end of CDC’s financial year. In his first report there was much effort to strip away illusions and to give a realistic account of the status of the corporation and of every undertaking. At the same time, account had to be taken of expectations of the government and of colonial governments and of morale within CDC itself. It came through in the lapidary concluding paragraphs: ‘There is both achievement and failure in this record; encouragement and disappointment. … There are many difficulties still to be met, risks to be run. The Corporation realises its responsibility and its opportunity; will do its best.’ The depth of the financial problems took a couple of years to emerge in full and there was a deliberate effort not to declare a moratorium on all new business, or to reach hasty decisions on the future of projects. For Reith the first priority was to rationalise the organisation structure, in order to establish clearer authority and locus of responsibility. In this field his reputation and experience was unmatched. The essence of his approach was first to establish that the Board of directors (appointed by the Secretary of State) was not the manager of the corporation, so that individual directors should not have executive responsibilities. Instead he established a small executive management board of controllers, headed by the chief executive, through which all board issues were processed, and the individual members of which had a chain of functional responsibility encompassing everyone in the organisation. Third, he set up a system of regional controllers, domiciled overseas with a powerful office, responsible for the performance of projects and for business in their region, and who were formally members of the Executive Management Board (EMB).1 26

Stemming the Losses 27

The ‘political’ implications of this structure were momentous. Trefgarne had made himself chief executive and the deputy chairman also had effectively full time executive responsibilities. Apart from the Gambia Eggs scheme, Trefgarne had been the driving force in several other schemes.2 Reith found no paradox, in his capacity as chairman, in defining a chief executive role in the way described above and then filling it himself for three years, until he was satisfied that a suitable internal candidate had been groomed. He laid down that, notwithstanding its name, the Executive Management Board was formally only advisory to the chief executive, who was thus personally accountable for the whole corporation. By making the regional controllers members of the EMB (as it was known), and thus accountable to himself, the chief executive had a direct line of authority to the overseas operations. Reith was clear that the chief executive should not be a member of the Board, in order to provide for stability against upsets caused by politically appointed chairmen.3 The problem that emerged forty years later was not one of over-mighty chairmen, but that the political system demanded to have a say in the appointment of the chief executive. In seeking to exert effective operational and financial control over investments, Reith decided he had to break up the divisional structure he had inherited, in order to ensure that technical experts were advisory and not operationally in charge of projects. A later reflection gives a flavour of the underlying problem he had encountered: When I came here there were 13 or 14 divisions of technical experts. Among the technical experts there were a few who were technical experts; but in general the more technically expert the less commercially and managerially experienced or even intelligent. The ghastly troubles that have come to the Corporation were due to what these people did. They were supposed to be controlled by three so-called controllers, more or less territorially allocated, but that control was by and large farcical. The divisional managers ran the place; and all project managers of their sort throughout the world were directly responsible to them here. The regional controller system was set up and the divisional manager in London disappeared – terrible they had mostly been in their effect.4 Rendell (later Sir William) was recruited in August 1952, following a report commissioned from CDC’s auditors to survey Reith’s new organisation structure and to recommend improvements in financial control. They advised the appointment of a controller of finance and

28 A Will to Succeed 1948–62

administration. Having qualified as an accountant after Cambridge before the war, Rendell had been a temporary civil servant as an assistant secretary in the Treasury between 1942–45; afterwards he joined Whinney Murray and became a partner there. He quickly made his mark as financial controller and Reith realised that he had found his chief executive as well. Appointed deputy chief executive in May 1953, Rendell became general manager and chief executive in October – on the same basis of unique authority as Reith had exercised.5 Rendell held the chief executive role for 20 years and built up a formidable personal authority during the course of his career. It played a large part in re-establishing the credibility of CDC with Whitehall and with overseas governments. The initial six-year partnership with Reith was crucial in demonstrating CDC’s determination to succeed. In its first three years – in the Trefgarne era – CDC had approved the expenditure of £32 million on 50 different projects and had spent or contractually committed £16 million. One of the signs of CDC having bitten off more than it could chew was the very slow rate of capital expenditure, notwithstanding the admittedly difficult circumstances of post-war shortages and supply problems. A slow rate of development resulted in escalating capital costs and also made it harder to determine the prospects of many projects. The task was thus to identify, rescue and control the on-going projects and to eliminate operating losses. A total of 16 special study missions were despatched and they reported by the end of 1952. Decisions were taken to close down 17 of the original projects, as well as to abandon work on 13 projects that had been approved in principle. Whereas there had been 22 board approvals of new projects and two feasibility investigations in 1950, in the following year only three projects were approved along with seven investigations. Looking at the undertakings closed down, the Caribbean was the area of most numerous failures, with eight out of fifteen projects being liquidated – most of them in agriculture. The other region of major failures was West Africa, with six out of nine undertakings being liquidated, including all three in Gambia.6 A notable feature was that five out of six sea harvesting undertakings were a failure, ranging from the Falkland Islands to the West African coast to the Seychelles. The eventual accounting for the Trefgarne era was not straightforward, since decisions to abandon projects were spread over several years and often only after further capital expenditure and losses had been incurred. It was more than an academic exercise, or even a matter of differentiating between management’s commercial judgement on project commitments in the earlier period and those projects selected later

Stemming the Losses 29

under more rigorous procedures. It was also the substance of prolonged negotiations with Whitehall over the quantum of capital write-off on abandoned projects and over interest waivers on the underlying loans. Rendell made a careful retrospective assessment of events leading up to the capital reorganisation that eventually took place in 1961.7 With regard to the first phase of activity, he took December 1951 as the defining point for projects initiated by the Trefgarne regime (i.e. one year after Reith’s appointment, but before Rendell’s arrival, and during which an additional £5.5 million was sanctioned). He chose December 1953 as the cut-off point for projects that were closed down on the first available opportunity (CDC soldiered on with several Trefgarne period projects for longer periods before finally giving up). Rendell then estimated that of the £21.2 million actually spent against these sanctioned projects, £8.2 million was lost on projects which were closed down and a further £4.0 million was lost on account of wasted expenditure and accumulated losses on projects which were reorganised and continued. In short 60 per cent of this capital expenditure had been wasted. It was a frightening legacy, not least because the underlying loan funding carried interest which had to be paid to the Treasury, along with repayment of the principal. It was evident that for a number of years CDC’s fate would depend on its ability to nurture its continuing portfolio of original projects, pending the build-up of new investments. Half of the surviving projects (fifteen in all) had no intrinsic problems. The list included the very long term forestry project in Swaziland, where it was not until 1959 that CDC succeeded in securing Courtaulds as an industrial partner, and where it had to overcome the disappointment of the South African government withdrawing from an undertaking to build a rail link. Nine of the projects shared one or more characteristics of location in South East Asia, having a commercial partner, or being loan investments that did not require a management presence. This left a group of sixteen undertakings where CDC had to grapple with significant difficulties of flawed conception and initial implementation. By 1960 it had decided to close down four of them and it extricated itself from another six in the subsequent few years. This meant that all CDC’s mining ventures failed. The two large timber extraction projects in British Guiana and Nigeria were also unsuccessful, despite having commercial partners in each case. The works division in West Africa undertook road building contracts at unrealistic prices and then mismanaged them, but abandonment of contracts before completion would have entailed huge damages; eventually three quarters of a

30 A Will to Succeed 1948–62

million pounds were written off and the remaining assets sold. CDC struggled with the tung oil project in Nyasaland (later Malawi) for twenty years before finally closing it in 1968: ‘It was initially under possibly the most notorious CDC management in Africa!’ Reith wrote.8 Set against these problems was the successful remedial work that led to the huge Swaziland Irrigation Scheme, on which Rendell became the effective head office controller throughout his career, such was his interest in this project. It was achieved by the simple expedient of keeping the project as a directly managed asset in head office’s books, rather than establishing a corporate entity that its size warranted. It also provides an ironic commentary on Trefgarne’s assumption of personal control of the Gambia Poultry scheme. Another remedial project was the Chilanga Cement Company, which had to overcome an initial technical failure to prove and acquire adequate supplies of limestone of the right quality, but which was able to go on to invite public participation in 1957. Another rescue was of the ex-Japanese hemp estates in North Borneo, where Borneo Abaco Limited became BAL – a hugely successful palm oil plantation after facing up to heavy write-offs and getting rid of the commercial partner. The successful Lobatsi Abattoir in Bechuanaland (later Botswana) was created out of a creamery factory, in which CDC was able to begin realising its capital investment in 1960. The large ranching investment was gradually rationalised: the original grandiose scheme on 16 000 square miles was progressively cut down and the residual ranches were handed over to the government in exchange for the grant of freehold on a 300 000 acre ranch nearer the abattoir at Molopo.

Swaziland Irrigation Scheme (SIS) One of CDC’s earliest projects was located in Swaziland, where a large cattle ranch was purchased in 1950 with a view to creating an irrigation scheme. It was an act of faith that took many years of trial and error to bludgeon into success, as rice gave way to citrus and sugar as the main crops. Powerful vested interests in South Africa and the West Indies were initially opposed to the emergence of a new major sugar producer. CDC’s industrial partner disinvested after ten years and the scheme was thereafter

Stemming the Losses 31

managed directly, into which tenant smallholders were introduced. In the later 1970s CDC decided to share ownership with the Swazi nation and left itself with a problematic end game. Among the initial flurry of propositions put before CDC in 1949 was an opportunistic land deal in Swaziland. It was taken up by Lord Trefgarne, who negotiated the purchase of a 10 000-acre ranch with rights to extract river water sufficient for a large irrigation scheme. As in Gambia, land clearance and preliminary works were embarked upon without soil or irrigation surveys or pilot trials. Reith was faced with one of his most difficult early decisions on whether to abandon the project. Work was halted while pilot trials were instituted, alternative canal alignments determined, and an independent expert mission undertook a review. Rendell virtually assumed responsibility for overseeing the scheme and by 1954 CDC had clarified plans for a 42 mile gravity canal to irrigate eventually 30 000 acres, with rice as the cash crop. The delays led to complex negotiations to amend the terms of the water award and CDC’s obligations to deliver water to another property. The escalation in costs required a new capital sanction from a reluctant Colonial Office. Rendell saw SIS as the flagship enterprise for CDC and staked his reputation on this. Rice was the backbone of the scheme and SIS became the largest producer in the region until problems of salinity and pests led to it being phased out in the 1970s. Pilot trials of citrus had been successful and it progressively replaced rice. Encouraged by a South African producer, trials of sugar had also been successful and a joint venture was negotiated with Huletts in 1954. However the Commonwealth Sugar Association, under pressure from the West Indies, refused to grant an export quota to Swaziland and the joint venture was abandoned. CDC then turned its attention to the domestic South African sugar market to which it was entitled under the terms of the customs union. At the same time Rendell waged a strident campaign in London. By 1997 quotas were agreed for the South African and export markets, so that the Board could authorise investment in a new joint venture with Huletts in a sugar mill and nucleus estate, to be called Mhlume, and further irrigation works.

32 A Will to Succeed 1948–62

From the outset CDC had envisaged introducing settlement farmers into SIS. To begin with there was political pressure, supported by the Commonwealth Relations Office, for European settlers and CDC had to agree to two parallel schemes involving both white and Swazi farmers. However it was mainly interested in the latter and Swynnerton prepared detailed plans for a settlement scheme, called Vuvulane, based on Kenya experience. Implementation began in 1962 and nearly 200 Swazi farmers were established over the following ten years. Following South Africa’s withdrawal from the Commonwealth in 1961 Swaziland was able to increase sugar production and to negotiate direct membership of the Commonwealth Sugar Agreement in 1965. This led to further enhancement of the irrigated area from 20 000 acres to 35 000 acres. Another consequence was a decision by Huletts to disinvest from Mhlume and from its management role, and CDC became sole proprietor. By this time there were several interrelated businesses, starting with the irrigation works as a loosely defined profit centre that sold water to four main parties: the Mhlume nucleus sugar estate and factory, which also purchased cane from the other parties; the SIS citrus and sugar plantation that sold cane to Mhlume and citrus to the national marketing company; the Vuvulane settlement scheme; and independent white farmers. Finally there was the original cattle ranch, now carrying 7500 head but not commercially viable due to statutory controls. By the mid-1970s CDC was beginning to think about releasing capital from its large investment, which by then amounted to nearly £15 million. Consistent with its philosophy at the time, the preferred partner was the Swazi government and in 1977 a half share in Mhlume was sold to an entity, ‘The King in trust for the Swazi Nation’, entitled Tibiyo Taka Ngweme, to be paid for out of future profits. This was implemented without a hitch. SIS itself had not been developed on as strict commercial lines as Mhlume. Its water charges were too low, ranching was not viable, overheads were excessive. Run as a direct project out of London, SIS had never been formally capitalised or financially disciplined because of its perceived wider developmental role. All this presented a more difficult disposal problem. Several years of

Stemming the Losses 33

slow-motion bargaining resulted in a deal in 1983 whereby the Tibiyo acquired 50 per cent of SIS (excluding Vuvulane), which was now renamed Inyoni Yami Swaziland Irrigation Scheme, or IYSIS, on a 20 year earn out basis of payment. CDC was appointed managing agent. Finally Vuvulane was sold to the newly established Swazi National Agricultural Development Corporation, again with a CDC management contract. By 1990 it was clear that IYSIS would be unable to meet its payment timetable by a large margin. Further prolonged negotiations produced a solution in 1995 whereby the outstanding debt was exchanged for a stake in the Royal Swazi Sugar Company. CDC has been responsible for the development of a major irrigation enterprise in Swaziland over the past half century. Having resolved a series of agricultural and marketing challenges on the way to establishing significant export industries, there still remains a conundrum of how best to release its remaining capital without compromising the achievement.

Chilanga Cement In 1949 CDC made its first industrial investment to build a cement plant in what was then Northern Rhodesia. Chilanga became the first CDC project in which an offer of shares to the public was made in 1957. Subsequent nationalisation by the government of independent Zambia eventually led to privatisation back to CDC. In 1995 there was again a public offering of shares in Chilanga. The project was initiated by the colonial government to reduce Northern Rhodesia’s dependence on imported cement and because the hydro-electric potential of the Zambezi was already under active consideration. However it had over-reached itself and also alienated regional producers, so that the formation of CDC offered the prospect of a welcome exit from its commitments. CDC acquired 75 per cent ownership and responsibility to complete the development. This proved more onerous than anticipated, due to inadequate preliminary investigations, and

34 A Will to Succeed 1948–62

Reith held up the development programme until all technical issues had been resolved. He also introduced an industrial partner and CDC’s stake fell to 40 per cent in 1954. Increased capacity was in place for Chilanga to secure the initial Kariba dam contract in 1955 and then the main bulk supply contract two years later, for what was then the largest dam in the world. The company was by now very profitable and a public offering of shares took place in 1957, mainly from the realisation of the government of Northern Rhodesia’s shareholding. Completion of the dam and the economic downturn occasioned by the prolonged breakdown of the Central African Federation resulted in difficult years for Chilanga, from which it was rescued by the building boom occasioned by Zambia’s emergence as an independent state in 1964. The management agreement with the Rhodesian industrial partner was not renewed and at independence CDC was responsible for managing Chilanga. In 1965 the Zambian government acquired the Rhodesian shareholding and increased its stake to 40 per cent, against 30 per cent for CDC, and a major expansion programme took place. On its completion in 1969 CDC withdrew the seconded general manager and ceased to provide the chairman of the company. There followed a twenty-year period of mismanagement and decline in the Zambian economy and Chilanga’s situation deteriorated, with severe losses for six years from 1977. However CDC maintained its engagement with Chilanga and contributed to a rehabilitation programme. Following the electoral defeat of President Kaunda in 1991 Zambia embarked on new policies of economic liberalisation, in which privatisation was a prominent feature. In 1993 CDC was able to exercise pre-emption rights and once again to become the majority owner of Chilanga by the end of 1994, with responsibility for its management. In the following year a public share offering was arranged on the Lusaka Stock Exchange and Chilanga became the nucleus of CDC’s regional cement strategy.

The outcome of stringent financial control and economies, or remedial work on the project portfolio and of a very selective approach to new business, was slow to emerge in the financial results of CDC.

Stemming the Losses 35

Operating losses peaked in 1951 and the annual report over-optimistically thought that the worst was over. But there was need for further large provisions in the following year on continuing and abandoned undertakings. Thereafter the trend was favourable, with the first net profits being recorded in 1955, as shown in Table 3.1. CDC has reported operating profits in every subsequent year, but made a net loss in 1998 after heavy provisions in the wake of the Asian crisis in that year. Table 3.1

Operating profits 1950–55

1950 £000

1951 £000

1952 £000

1953 £000

1954 £000

1955 £000

Operating Result*

(506)

(1061)

(889)

(332)

(29)

716

Net Outcome*

(1320)

(2905)

(3805)

(1304)

(511)

409

*Operating Result before interest and Net Outcome after provisions.

4 Adjusting the Mandate

Apart from reorganising existing undertakings and establishing effective control over CDC’s dispersed operations, the corporation had drawn important lessons from its first phase of over-enthusiastic commitments on projects, which became embedded in its culture as a development organisation. On its directly managed projects, the key lessons were the necessity for thorough feasibility investigations, combined with pilot operations, before large capital commitments were entered into. Responding to project proposals introduced by colonial governments or by business interests, without any prior determination of priorities, was a prime cause of the random appearance of the initial portfolio. The West African Oilseeds Mission in 1947 recommended a large-scale settlement scheme in Northern Nigeria, which became the Mokwa Scheme. A Colonial Office mission in 1948 recommended a large scale irrigated rice scheme in Gambia, which became Gambia Rice Farms. Entrepreneurs in British Honduras proposed a banana scheme; in Hong Kong they proposed the purchase of the ex-Japanese hemp estates in North Borneo which became BAL; another proposition led to the setting up of Atlantic Fisheries in Gambia; yet another to the purchase of land in Swaziland for irrigation. Colonial Governments were equally full of ideas: to take over government owned factories and a mine in Kenya; to undertake the Chilanga cement project in Northern Rhodesia; to take over the government’s tung oil plantation in Nyasaland; to build an hotel in British Honduras. Such a flow of schemes from all sides exposed CDC’s lack of priorities and, more seriously, its lack of commercial competence to assess prospects and to put effective management in place. Slow implementation and excess capitalisation was one consequence, already noted. The other deduction was to face up to removing incompetent managers, to put in stronger 36

Adjusting the Mandate 37

controls, and to slow down severely the number of new schemes in order to match the capacities of the organisation more realistically. The Board also drew an early conclusion that experienced business partners must be found wherever possible.1 Fortunately, this was in tune with the approach of the new government.2 The Board gave immediate illustration of this in the only major project commenced in 1951 – to provide part of the funding of a new cement producer in Trinidad under the management of Rugby Portland Cement. There was already working precedent with the Guthrie Group in Kulai Oil Palm and with Harrison & Crosfield in Malaya Cocoa and with Steel Bros in British Guiana Timbers. Naturally this approach fitted the predilections of the new Conservative administration. While CDC was deriving lessons from its early experiences, the evidence of faulty business judgement and of incompetent implementation had undermined CDC’s justification for being entrusted with Treasury loan funds. Capital sanction clearance became more onerous, with CDC in no position to protest, and scope was thus provided for policy considerations to enter into the clearance process. Trefgarne had negotiated in 1948 a remarkably liberal concordat with the Colonial Office (and Treasury).3 Capital sanction for individual projects was to be given at the stage of a commitment in principle, on the production of limited details, with the emphasis on speedy decision providing there was general compliance with government policy. The public row over the Gambia Poultry scheme, coupled with evidence that CDC had overspent against individual capital sanctions without securing supplementary estimates approval, alarmed the Treasury, and it became clear that closer control from Whitehall would be required. A revision of the Concordat was proposed formally in mid-1951 and negotiations commenced over a nine point checklist against a covering justification that the Colonial Office needed to be able to assess the degree of risk being entered into by CDC – on the analogy of the prudent banker.4 At this point the imminence of a general election prevented finalisation and, indeed, the new Conservative Secretary of State, Lyttelton, introduced new considerations. The emphasis on a checklist was replaced by a concern that CDC should establish the prima facie case for an investment, but he expected to see evidence of investment interest from local or UK investors or the colonial government and the association of local experience in managing boards: ‘I know that you and your Board [Lyttelton wrote] are acutely aware that no commercial undertaking has ever successfully carried out your task. But then you are not a purely commercial undertaking but an instrument of development required only “to cut even”.’5

38 A Will to Succeed 1948–62

Lyttelton was the first Conservative Secretary of State to assume responsibility for CDC. An experienced businessman himself, he felt that CDC’s early misadventures were in part caused by a faulty corporate structure and because, as he told the Commons, ‘many of the cannons which govern commercial enterprise were ignored’ .6 His judgement remained severe when he wrote his memoirs a few years later: Government Departments when faced with practical business sometimes make elementary mistakes … The constitution of the Colonial Development Corporation … bore all the marks of the amateur. It should have been made clear from the outset that the role of the Corporation was not to manage a whole jumble of projects, but to do exploratory work. No board of directors sitting in London can manage at once a rubber plantation in Borneo, a coal mine in Tanganyika, a poultry farm in the Gambia, a ranch in Swaziland, an hotel in Belize, a cement factory in Kenya, a shark fishery off the coast of West Africa and an abattoir in the Falkland Islands.7 Apart from agreeing revised criteria for capital sanctions – and the details were wrangled over for several years – CDC needed to be able to demonstrate that it was exercising more effective control over its operations. The Colonial Office acknowledged that it did not wish to become involved in detailed administration and that it lacked appropriate expertise. The issue was resolved in the spring of 1953 when Rendell, as the new financial controller, finalised a set of procedural documents and a directive to regional controllers, all of which were approved by the Colonial Office as satisfying its requirements. Although he had respect for Reith and for the firm manner in which he had set about establishing a more effective structure of authority, Lyttelton still felt that a more functional organisation was required. They discussed the matter in some detail in November 1953, after which Reith produced an aide-mémoire for wider consideration.8 Rendell observed that the issue was ‘the most difficult problem of the Corporation i.e. its extension both geographically and as to the subject matter of its operations. This is not paralleled in the commercial world (apart from purely financial institutions) since commercial concerns tend either to operate in one area or to deal with a homogeneous commodity(ies).’9 Lyttelton’s proposal was discussed at a Board informal meeting in January 1954, Rendell of course being present, and Reith polished a

Adjusting the Mandate 39

résumé of the meeting. In tactful terms it concluded that the Reithian model of strong territorial management through regional controllers and a functional head office control should meet the objectives the Secretary of State was seeking, without the procedural and taxation and authority complications that would flow from the establishment of several functional corporate boards under a holding company.10 CDC’s relations with the Colonial Office during the rest of the decade – and notably until Reith’s retirement in March 1959 – can best be described as strained. To Reith’s prickly amour propre there was added Rendell’s combative nurturing of the convalescent organisation, once he became its chief executive in October 1953. On the other side of the fence, Sir Hilton Poynton, permanent under-secretary of the Colonial Office, was often exasperated by this troublesome aspect of his responsibilities and he became fundamentally out of sympathy with CDC’s purposes.11 With a Conservative government in power, the stage was set for a difficult period. Four issues will serve to illustrate the way in which ostensibly technical matters became charged with feeling and wider policy considerations, as CDC’s mandate was progressively redefined. To begin with, there was a skirmish over interpretation of the Act and capital sanction procedures. A more fundamental debate opened up over the balance to be struck between the inauguration and management of new undertakings and making more secure revenue producing investments, such as loans guaranteed by colonial governments. In turn, this opened up the question of whether CDC was engaging in activities that were more appropriately the province of private enterprise institutions. Most alarming of all was the propounding of a doctrine that CDC’s remit should expire with the transition of colonies to independent nations.

Financial Issues Working Party In 1954 the Colonial Office came to the view that it was ultra vires for CDC to draw down Exchequer loans for the purpose of financing trading losses, notwithstanding the fact that CDC had been provided with no capital at its formation and was still, at this time, producing an overall operating loss. The cases in point were British Guiana Timbers (which showed a loss of £73 000 in 1953) and the Gold Coast roads project which lost £106 000 in 1953. However this was scarcely a new phenomenon, since such losses had been openly referred to when requesting capital sanction in previous years. Rendell was moved to

40 A Will to Succeed 1948–62

write, ‘You can hardly blame us if there is a growing suspicion here that someone is bent on putting CDC out of business.’12 The Colonial Office decided to set up a Working Party in September 1954 to address this and several other financial issues which had become the subject of disputatious exchanges. A draft report was ready by the following spring, which was not finalised until October. On the issue of trading losses, rules were agreed for capitalising past losses, thus implicitly acknowledging that trading losses had to be funded if projects were to be nursed into success. However Treasury orthodoxy was endorsed by laying down that they had to be funded out of CDC revenues and not from Exchequer advances. Rendell was determined to take the opportunity to communicate his concern that interpretations were being placed on CDC’s founding legislation that would frustrate the original intentions of Parliament. ‘In the long run the Working Party would come up against the real issue which was that of the Corporation’s status as an independent and responsible organisation.’13 Several sessions grappled with refining procedures for capital sanction, but Rendell was adamant on a point of principle that ‘sanction for schemes should not be refused unless they were outside the Act, or there was a specified direction by the Secretary of State under section 9(1)’.14 The Colonial Office held out for the right to criticise a project, and perhaps to veto it, with the result that the report had to record an inability to agree.15 Years were to pass before suspicions were allayed that capital sanctions procedure was being used as a device for interference without concomitant responsibility, and sensitivity on this matter was never far below the surface in relations between CDC and its sponsoring department.

What is ‘development’? Although the 1951 Conservative government had much to criticise about the way that CDC had been launched, Reith quickly established a bridge; indeed, there was a strong theme of Tory interest in colonial development reaching back to Oliver Stanley in the wartime coalition government. In response to concerns that the Tories wanted to abolish CDC, Lyttelton wrote a robust letter to Reith in the summer of 1952 which cleared the air. ‘The problems of colonial development are a challenge to our generation. One of the chosen instruments is the CDC. We have confidence in what you are doing. We shall support you and feel sure that with your efforts the Corporation will prosper

Adjusting the Mandate 41

and provide a stable and continuing career for all those who are working for it.’16 Nevertheless there was nervousness on the other side of the House that CDC would be diverted from its original purposes. The combination of closing down so many of Trefgarne’s original failing projects and the new management’s concern to find quicker yielding and less risky investments, led into a controversy which rumbled on for years in Parliament and in relations between CDC and the Colonial Office. It went by the name of the ‘Finance House Issue’. The term was first used in the 1954 report of the Public Accounts Committee on CDC, where the query was raised as to whether CDC ‘had changed its function from that originally envisaged and was in effect a finance house’.17 But the line of implied criticism went back to Trefgarne’s resentments at Reith’s style, as well as to the change of government. Thus, Lord Douglas in 1952: ‘It appears that the Corporation is being diverted entirely from the purpose for which it was initiated and that it is becoming a kind of investment trust for the purpose of helping private enterprise.’18 For Rendell the issue was mundane, albeit vital: CDC needed to diversify its portfolio to include an element of safer and faster revenue producing assets; in any event it was more important to look at the project being financed rather than to the mode of financing it.19 Meanwhile, the Colonial Office had a concern of its own, that if colonial governments had ready access to loans from CDC they would evade the discipline of the London capital market, but in any event should obtain prior clearance before approaching CDC.20 The concern of the Opposition that CDC was withdrawing from real development reached its extreme form in an unsuccessful amendment to the 1956 Overseas Resources Development Bill, when an attempt was made to force CDC to restrict its business to entities under its own control, unless certified by the Secretary of State.21 Unfortunately, the Conservatives were somewhat confused on the issue. On the one hand they appeared to sympathise with the argument that CDC should be doing more direct development, which led Lennox Boyd, whilst opposing the amendment, to undertake that he would seek to ensure that a proper balance was maintained in CDC activities and to ignore the more pointed criticisms. On the other hand there was a strand of thought within government that it should be fostering a private enterprise alternative to CDC and should therefore be constraining its remit, which we shall come to shortly. The controversy also reverberated within the CDC Board – along with two other disputes with the Colonial Office reviewed below – and

42 A Will to Succeed 1948–62

which created something of a crisis in relationships. As he was setting off on a 1300 mile road trip in Tanganyika looking at projects there, Gaitskell wrote to Reith, after being sent copies of letters and notes of recent meetings: You will remember that all along I have been doubtful of the emphasis given in the CDC to finance house work, and that it has seemed to me that we have become a sort of letter box in Lombard Street rather than a body actively planning overseas development. To me the major problem of the latter is not how to find bits and pieces of capital to supplement private enterprises which are short of it, and to enjoy a profit therefrom, but how to get a majority of the people of these territories to feel that we are helping them to build up their own economies.22 A few weeks later, on returning to England, Gaitskell was moved to write a five page paper to his colleagues, elaborating his views and seeking to articulate a wider significance to the debate. He was much exercised by the challenge of communism and of burgeoning nationalism in the developing world and he felt strongly that insufficient attention was being given to their implications by CDC. Development was more than a commercial issue and CDC as ‘the British taxpayers’ instrument’ could take a longer view and thus frame its investment policy ‘as a trustee holding to be passed on ultimately to local government or people’ and hence avoid an impression of ‘ merely developing our economy in their land’. One deduction from this was that CDC might be given a wider development remit, so that it was also a conduit for grant aid capital for infrastructure development, perhaps responsible for CD&W funds.23 Sir Hugh Beaver also pondered the wider significance of the tensions, noting that the Colonial Office and CDC appeared to have increasingly contrasting perceptions of the objectives of the corporation. ‘The CDC is experiencing what has been my experience in regard to all activities that get started by the State outside the direct control of the civil service. Sooner or later the time always arises when the civil service and the Treasury wish to impose or re-impose their close control and direction … I think in fact it is felt that the CDC has gone pretty well far enough.’ He concluded: ‘I think that we are bound to pose the question quite seriously to the Government … is it considered that the gesture that has been made towards colonial development has in fact been sufficient?’24

Adjusting the Mandate 43

A debate of this nature was hard to bring to a point of resolution. Rendell attempted to focus on the practicalities, such as the financing costs of projects before they become income earning and on the burden of servicing lost capital. Another consideration was the need to be sure of a safe source of revenue in order to cover central overhead costs and to comply with the statutory duty to break even. A target revenue of £350 000 was defined for this purpose, implying a loan portfolio of safe investments of about £35 million. This figure was reached in 1956. The Colonial Office sought to give substance to the Secretary of State’s assurances on maintaining balance and attempted to make a definition of finance house business in terms of lack of involvement in project planning and execution when making a loan.25 The debate rumbled on, with Parliamentary interest in the matter being given an exaggerated prominence in CDC’s view. It resisted the notion that the Colonial Office should be involved in participating in a judgement of risk as a distinguishing criterion, or in a test involving management or consultancy services. Eventually accord was reached prior to the Public Accounts Committee meeting in February 1958. No hard and fast proportions were to be laid down and the prime distinction was agreed to be between loans to governments, statutory corporations and government guaranteed entities and all other business.26 In the simplistic terms in which much of the debate was being conducted, CDC’s loans did indeed constitute a large – but not actually growing – proportion of its business. More to the point is to consider the allocation of investments between primary production, processing and manufacture on the one hand, and utilities, property and housing on the other hand. See Table 4.1. To modern eyes, much of the discussion at the time must seem off the point, in that there was little attempt to evaluate the development value of infrastructure and housing projects, the scarcity of alternative sources of funding, or the priorities of the colonial governments. Table 4.1

Allocation of loans and investments

Loan Weighting Primary Investments Finance House Investments

1953

1957

1961

84% 56% 44%

79% 48% 52%

75% 45% 55%

One of CDC’s first and most successful initiatives was to set up a building society in 1950 to help relieve the housing shortage in

44 A Will to Succeed 1948–62

Singapore and Malaya. It became the model for other ventures and led CDC to seek out other ways to promote affordable urban housing in the growing cities of the developing world. In October 1955 the government law officers suddenly decided that housing finance was ultra vires the CDC legislation. Learned counsel supported CDC, but government was insistent and the Attorney General ruled further that a covering ministerial statement, pending legislation, was not acceptable. At this time CDC had contractual commitments to Kenya and Southern Rhodesia and it had to face the embarrassment of requesting the governments there to withdraw planned loan drawdowns until amending legislation had been passed in August 1956. A drawing of £500 000 was due on the Southern Rhodesia housing loan and £450 000 plus future instalments on the Kenya housing loan. It was a stressful experience and increased the Board’s sense of isolation.

Making room for the private sector Perhaps the biggest threat to CDC’s continuing mandate after the Conservative government took office in 1951 was the notion that CDC represented a dubious socialist experiment in an area that was much more appropriately handled by private enterprise. A signal of changing priorities came early on in guidance to CDC: ‘In general, we are likely to be more sympathetic to projects for loans to private enterprise than to a Colonial Government or statutory authority.’27 This view was circulated in a dispatch to Governors.28 On being informed that staff were worried about the continued existence of the corporation, Lyttelton had responded with an open letter of reassurance to Reith which has already been quoted. Notwithstanding the fine words, the government did have an alternative agenda. It was illustrated not only in the restrictions placed on CDC as colonies reached independence, but also in restrictions where private capital was perceived to be available, and finally in the fostering of a private sector alternative institution. At the Commonwealth Economic Conference at the beginning of 1953, an announcement was made of the setting up of the Commonwealth Development Finance Corporation (CDFC), organised by the Bank of England. Its capital and funding were to come entirely from the market and financial institutions. The new company took a very cautious view of its role. A year later it was about to implement its first transaction. CDFC decided not to originate projects itself, preferred loans to equity, would normally only invest in the expansion of

Adjusting the Mandate 45

existing private enterprises, and would seek not to displace normal market sources of finance.29 For its part, the government wanted to see a more active role for CDFC, in support of its stance of restraining CDC, and sought to steer propositions its way. This led to a sharp deterioration in the relationship with CDC, particularly over two episodes in Central Africa. Riscom was a case in point. It was a project to establish a steel industry for the Central African Federation, based on iron ore deposits in Southern Rhodesia and an existing small government owned operation. Substantial capital had to be raised and CDC became very actively involved.30 CDFC was also interested in contributing. Because Southern Rhodesia was not among the original territories eligible for CDC operations, the advent of Federation resulted in an interpretation that projects could only be entertained there providing they showed also a benefit to the Northern Territories.31 It was in terms of this constructive fudge that CDC sought clearance to proceed in late 1955. However the new Overseas Resources Development Act in August 1956 (stimulated by the need to define CDC’s vires to include housing), also contained a clause tightening the eligibility criteria for Rhodesian business. Although application had been made under the old criteria, in the absence of approval CDC made a further submission to establish eligibility under the new rules. With negotiations reaching finality, and with the financing arrangements having been modified very much under Rendell’s influence and then approved by his board, CDC suddenly learned in October 1956 that approval would not be given to invest in the project.32 CDC resolved to challenge the interpretation. Strenuous efforts were made to strengthen the case for eligibility, as well as arguing that the project should have been admitted under the criteria at the time of the original application.33 It emerged at this point that the Secretary of State had been in secret communication with CDFC, urging it to take over the whole of CDC’s financing role. With considerable reluctance CDFC had agreed to do so.34 This freed the Colonial Office from embarrassment with the Rhodesian and Federal Governments of being responsible for sabotaging a high profile development project. Lennox Boyd then saw Reith on 23 November. The line taken at this meeting was no longer the question of whether CDC satisfied the criteria of the Act, but a startlingly new one: since an alternative source of finance had been established from CDFC, it would be quite inappropriate for CDC to be allowed to undertake the transaction. Reith protested strongly at this further shifting of the goal posts.35

46 A Will to Succeed 1948–62

On the following day he was able to confirm directly with CDFC the fact of the secret discussions to displace CDC.36 The issue of policy and legal interpretation was fought for another six months, and CDC was able to place on record a formal rebuttal backed by opinion from leading counsel.37 But it was to no avail. As an ironic footnote, CDFC decided subsequently not to participate in the Riscom financing after all, and it had to be completed in South Africa. A contemporaneous move to narrow CDC’s sphere of activities, using the same argument of the availability of alternative finance, took place with respect to Northern Rhodesia. During 1956 CDC was approached by the mining finance house Rhodesian Selection Trust to provide part of the funding for a new mine on the Copperbelt at Chambishi and expressed interest. With negotiations at a late stage, the Colonial Office intervened to quash the deal on the grounds that CDC would be displacing conventional sources of mining finance and, in any case, the deal could attract parliamentary criticism as blatant finance house business.38 On this occasion CDFC was not interested in the project, but the ban on CDC remained. Elsewhere in Africa the Colonial Office pushed hard for CDFC to play a role in Ghana and, especially, in Nigeria. However there was a fatal flaw in the strategy in that CDFC was both risk averse and it never built up a skilled and experience team of project appraisers. It proved quite unequal to the role being assigned to it; instead CDFC became increasingly irrelevant as a significant source of finance for development projects in the Commonwealth. Its path was to cross again with CDC some twenty years later in very different circumstances, and the episode in reviewed in Chapter 12.

The emergent Commonwealth A more serious issue over the scope of CDC’s operations arose in connection with the imminence of the Gold Coast’s independence. In May 1956 Lennox Boyd announced in Parliament that Britain was ready to accept independence for the Gold Coast and, in a subsequent broadcast, expressed the hope that it would come in 1957. The government of the Convention Peoples Party was returned in an election in July and the stage was set. At the end of August Lennox Boyd wrote a letter to Reith which caused consternation in CDC. Acknowledging that the 1948 Act in no way debarred CDC from continuing to operate in a territory after it achieved independence, Lennox Boyd went on to

Adjusting the Mandate 47

assert: ‘it would be contrary to the original intentions of Parliament if the Corporation were to go on financing further schemes in a territory after it had achieved independence, for, at that stage, the responsibility of the United Kingdom Government for its development ceases.’39 He went on to deduce that CDC could continue to support existing schemes where necessary, but that it should not embark on any new schemes after independence. This policy change (which indeed it was, despite the claimed interpretation of Parliament’s original intentions) was to be given legal effect in the independence constitutional instrument of the Gold Coast, rather than by amending the Overseas Resources Development Act. Lennox Boyd concluded his letter by inviting Reith to discuss the implementation of the policy but, amazingly, did not find occasion for three months. In mid-1956 the colonial independence timetable, as perceived by CDC, was as follows: Gold Coast in 1957; Malaya in August 1957 following the constitutional conference in January 1956; the Nigeria constitutional conference in 1956 anticipated granting self-government for the regions, but no date was contemplated for independence for the federal government; in Singapore the British Government had rejected the demand at the May 1956 conference for independence in 1957, because of Singapore’s defence role; the Central African Federation had no target date, nor did the newly established Caribbean Federation. Reith’s considered reflections on Lennox Boyd’s letter were not formulated until October, no doubt due to the difficulty of securing a meeting with the Secretary of State.40 He began by anticipating that all the territories noted above would be independent within five years. He went on to argue that what CDC was set up to do in the way of financing developments which were not attractive to private enterprise and of providing management where it was not otherwise available, would not cease with independence; indeed demand was more likely to increase. Furthermore, continuity was also in Britain’s interests. CDC could do what was needed since ‘it has fitted and prepared itself for such requirements.’ If government rejected this approach, he argued that ‘no organisation of intelligent humans geared to a difficult job can be expected to tolerate stagnation still less liquidation by controlled stages. If its members see no hope of expansion, collapse is sure and quick, the best men will leave; no good ones join.’ Reith concluded that the government’s implied policy of liquidation of CDC must be challenged and he drew hope from the fact that legislation would be necessary to achieve the government’s aims. At the meeting in November 1956 Reith handed a copy of his paper to Lennox Boyd,

48 A Will to Succeed 1948–62

who tried to avoid a general policy discussion and to focus instead on implementation issues. Lennox Boyd rested his general case on the argument that he could not answer to Parliament for CDC activities in self-governing dominions, which did not convince Reith at the time and subsequent events have shown to be specious. Reith was shown the text of the clause it was proposed to add to the Ghana Independence Bill that was about to be published, and which Parliament would be told would be the model for other territories. It provided that, upon enactment, Ghana would be excluded from the territories in which CDC could invest, other than in continuing operations.41 Reith particularly regretted that the Secretary of State proposed to announce the general applicability of the clause, prior to any further discussion with CDC. Lennox Boyd responded by agreeing to meet with the Board. This meeting was held on 17 December, when only three directors were able to join Reith and Rendell. It was a stormy encounter.42 The official attitude to CDC emerged at the outset, when a direct parallel was drawn with the colonial service: CDC must accept the inevitability of a decline in its operations as territories proceeded to independence. Salt was rubbed in with the announcement that the Secretary of State’s warning letter of 30 August must be taken as the cut-off date for new projects so far as Ghana and Malaya were concerned and a further warning was delivered about ‘contrived commitments’. The only helpful clarification was the review of independence timetables: there was no date for Nigerian independence, so that CDC operations there would not be restricted; the West Indies federation would be dependent for at least ten years; Singapore would retain a special status on defence grounds; there were no other candidates for independence in the near future. These pronouncements signified an underlying determination to limit Britain’s overseas commitments. The message to be derived from the linking of CDC’s future with the winding down of the colonial service was that Britain’s task was to make an exit from its colonial responsibilities as quickly and cleanly as possible, with minimal ongoing commitments. It was for the international community – through the United Nations and the World Bank – to take up the general aid responsibility to these new states. Such views were alarming to independence leaders as much as to those who appreciated the social and economic hazards of the transition process, which included CDC Board members. This attitude also failed to take into account the emerging competition for influence in the developing world which was provoked by the Cold War.

Adjusting the Mandate 49

In the next developments on the Ghana Independence Bill CDC assumed an aggressive role in opposing the declared policy of the government, and in seeking to influence events both in Parliament and in Accra. CDC briefed friendly parties in both Houses of Parliament prior to the second reading of the Bill on 24 January 1957, with the result that opposition was voiced to the clause terminating CDC’s involvement with the country.43 It was sufficiently worrying for the government to agree to an adjournment of the bill in the Lords for several days during the committee stage, while it reconsidered whether it could accept an amendment to withdraw the clause. At this point CDC fumbled its opportunity, in that it was unprepared with an alternative proposal and made no attempt to sustain its lobbying effort. The government decided to retain the clause and prevailed against the amendment. Reith was mortified: ‘Driving back to the office … afterwards, I was something enraged because I knew there had been a shocking slip up on my part and others.’ Meanwhile Rendell had been focussing on the fear that Nkrumah might take the view that CDC was not needed after independence. The regional controller was despatched to Accra over the critical weekend, where he had ready access to ministers and civil servants, despite the Secretary of State being in town. He was able to see the Finance Minister (Gbedemah), the Minister of Trade and Labour (Botsio), and Geoffrey Bing who was the constitutional adviser to Nkrumah.44 The Gold Coast position was that it wanted CDC to continue investing there (but wished for its designation to be changed from Colonial to Commonwealth). Bing immediately drafted a strongly worded despatch that Nkrumah signed and handed to Perth before his departure on 1 February. His ministers were not pleased that the draft bill sent to Accra had not included the crucial clause 3(4) excluding CDC, which they only saw in the published bill, without having an opportunity first to comment. Perth was forced to acknowledge in the Lords on 5 February that the draft bill sent out to Accra did not contain clause 3(4) and he sought to convey the impression (incorrectly) that the government in Accra had seen the clause before the bill was published. He compounded his economical account of events by affecting not to be aware of the contents of the memorandum handed to him four days earlier on 1 February by Nkrumah.45 Although CDC only had one operating project in Gold Coast at the time (in road construction), negotiations on six new projects had to be stopped as a result of the Secretary of State’s letter of 30 August 1956. CDC had played a larger role in Malaya, with investments in seven major

50 A Will to Succeed 1948–62

projects and a cordial relationship with the government in Kuala Lumpur – to the extent that the regional controller was appointed the first chairman of the Federal Land Development Authority in 1956. The ban on new investment was felt keenly and it prompted a statesmanlike protest from the chief minister, Tunku Abdul Rahman. He wrote to Reith: I did of course take this matter up with the Minister of State in the course of our discussion and I have left him under no misapprehension as to the disappointment which I and my colleagues felt over the inability of Her Majesty’s Government to agree to your Corporation embarking on new investments in Malaya after Independence. I have not however made any public issue of this, and do not propose to do so. He felt that the right approach was Parliamentary debate and pressure from other Commonwealth governments through diplomatic channels, in the ‘hope that the combination of this approach on both fronts may now produce real reconsideration of the policy of Her Majesty’s Government in this matter.’46 Reith did not hesitate to place on public record the depth of his disagreement with government on this issue in the CDC annual report for 1955, as well as on the contemporaneous dispute relating to investment in the Central African Federation.47 He concluded: It is surely commonsense that the now established, efficient and profitable CDC should be permitted to invest in emergent and emerged territories; CDC has been assured on behalf of both Ghana and Malaya Governments that it would be a great pity if emerging members of the Commonwealth were, at a critical stage, to be deprived of help of the experienced CDC personnel; of course ‘Colonial’ would have to come out of CDC title. This plea was not to be answered until 1962. The government was not easily persuaded to change its policy towards development in the emerging Commonwealth and of CDC’s role therein. Its review of Britain’s role in Commonwealth development was published as a White Paper in July 1957, where the new line was articulated: ‘the special responsibility which Her Majesty’s Government has for colonial Dependencies ceases when they achieve independence. The Government therefore does not envisage government to government loans as a normal means of assisting such coun-

Adjusting the Mandate 51

tries.’48 It was government policy that CDC ‘should not invest money in new schemes in any territory after independence. In the view of Her Majesty’s Government this would be inappropriate for a United Kingdom statutory corporation, particularly one whose essential purpose is the fulfilment of the United Kingdom’s special responsibility towards its own dependent territories.’49 As already noted the policy was to remain in place for another five years. There was no relaxation of the government’s stance during the remainder of Reith’s chairmanship to April 1959. The retiring governor of Kenya, Sir Evelyn Baring, had been identified as his successor, but was not immediately available to take up the appointment and so the deputy chairman, Sir Nutcombe Hume, was appointed chairman for eighteen months. Baring was that somewhat rare being, a financially sophisticated colonial governor, who had been a long-standing enthusiast for CDC’s mission. With pre-war experience as a director of the company managing the Sudan Gezira cotton scheme, wartime experience in the economic department of the Foreign Office, Baring was appointed Governor of Southern Rhodesia in 1942 and then High Commissioner to South Africa from 1944–51. While there he followed closely CDC’s early projects in Bechuanland with the abattoir and in cattle ranching (about which he voiced strong misgivings as to its over-ambition); in Swaziland with the irrigation scheme and the forestry project, about which he was especially enthusiastic. As Governor of Kenya from 1952, Baring had had the frustration of being forced by the Colonial Office to go to the World Bank rather than to CDC over the planned African settlement scheme in the White Highlands, which was a crucial element in the strategy for Kenya’s transition to independence. He was appointed Lord Howick in the 1960 New Year’s honours and joined the Board of CDC as deputy chairman in April and became chairman in December. It soon became his major aim to convince the government that CDC should remain in business in the emergent Commonwealth. A carefully meditated memorandum was sent to the Colonial Secretary Ian Macleod in June 1961, stimulated by intelligence from the Colonial Office that CDC was about to be cut off from further investment in Tanganyika, as had already happened in Nigeria and Malaya.50 Howick sought to establish three points: a. ‘political independence does not automatically equip a territory for economic independence. There is no other organisation equipped to take over our role in these territories.’ None of the

52 A Will to Succeed 1948–62

international agencies at this time had an established regional structure; none provided management; none invested in equity (the aspirations of the International Finance Corporation were being blocked by the US Congress). Examples were given of the variety of CDC’s interventions and experience. b. ‘The Corporation can become an important instrument of United Kingdom economic policy, particularly in the export market,’ by stimulating demand for UK suppliers through its investment activities. Moreover, within the limits of commercial prudence CDC could make politically significant investments, as had been done with African smallholders in Kenya and low cost housing in Jamaica. c. CDC ‘can only be fully effective in the dependent territories if it has a chance of some expansion in newly independent territories.’ This would require a change of name (Overseas Development Corporation was favoured). But the principal reason was the prospective loss of experienced staff and of morale if CDC was to have no prospect of initiating new projects in its territories after independence. The campaign with Macleod was sustained during the following months, but influential Conservative members of Parliament were also briefed, with particular emphasis on CDC’s contribution in stimulating British exports, and on its role as an investment agency rather than as a form of direct aid. He also made much of the political support for CDC from the new Commonwealth leaders, quoting in aid Nyerere from Tanganyika and Manley from Jamaica, the combined chief ministers from the Eastern Caribbean, as well as the views previously expressed to Reith by Nkrumah and Tungku Abdul Rahman. Erstwhile colonies ‘on account of the strength of the flood of opinion in favour of independence at all costs, attain self-government while still very underdeveloped from an economic point of view, while there is still a very small educated class and while their finances are in a straitened condition. These need extra help.’51 All the arguments were drawn together in a major submission to Lord Perth, Commonwealth Secretary of State, in December 1961. Newly independent countries needed help of exactly the sort CDC was equipped to provide: knowledge of the economies, project management experience, rural development know-how, ability to draw in investing associates from UK and European companies, development agencies and the IFC. Figures were presented of a rising trend of UK exports that had been generated by CDC investment. Much was made

Adjusting the Mandate 53

of the threat to CDC’s continuing management from the loss of key staff (the chief agriculturalist had just been poached by the World Bank) and from the diminishing role of the regional control offices. Finally, Howick was careful to acknowledge pressures on UK public finances and to stress that the restoration of CDC’s area of operations ‘need not lead to a flood of new drawings. In all these circumstances, we recognise that the UK Government may wish to proceed carefully and on an experimental basis for dependencies which become independent.’ Nevertheless a change of name was urged.52 By February 1962 Rendell was able to record that Howick’s letter had been discussed by Ministers ‘we have reason to believe that the arguments which are used in the letters are those which carry most weight in the right quarters at this time.’53 On 25 July Howick was called to the Colonial Office to be informed that on the previous day the Cabinet had agreed to restore CDC’s area of operations and had decided to change its name to Commonwealth Development Corporation. Although taken aback at the absence of consultation over the name change, Howick accepted it. The Cabinet had agreed that legislation was necessary and proposed therefore to announce everything in the Queen’s Speech in November. Howick made an urgent plea for an immediate announcement to Parliament, in view of the staff position and of the interest of a number of overseas governments, and this was accepted.54 It took a year for the new CDC bill to reach the statute book, during which period another seven colonies had attained independence and with several more to follow before the end of 1963. The easement of the ban had occurred only just in time. CDC had almost ceased to undertake new business in 1962, pending resolution of its status and undertook only £1.5 million of new project commitments. At the insistence of the Commonwealth Relations Office, the permission to operate in independent Commonwealth countries was subject to a concordat recorded in an exchange of letters. Against the background of the looming Rhodesian crisis, the CRO wanted to be sure that the Secretary of State could direct CDC ‘in wholly exceptional circumstances’ to cease all business in an independent Commonwealth country or Southern Rhodesia. CDC acknowledged the policy point but, in its turn, wished to establish that any attributable loss could be the subject of a claim for cancellation of its debt to the Exchequer. Sandys would go no further than to record, ‘I have taken note of what you have said, but can enter into no commitment.’55

5 Financial Reorganisation

The litmus tests for CDC’s survival were threefold. First, it had to demonstrate business competence in a notably hazardous area of endeavour. As we have seen, operating profits were being earned by 1955 and a reputation for competence was on the way to being established. Second, it had to secure a mandate to develop its business, against the grain of Conservative political philosophy. The struggles over the area of permitted operations, of lending to government entities, over alternative finance and the creation of CDFC, were evidence of the real threats to CDC’s role as a development institution. The third test related to whether government would accept the need for CDC to wipe out the consequences of its earlier mistakes, through a reorganisation of its balance sheet, so that its continuing development role was not crippled by having to service and repay lost capital. It needs to be emphasised that CDC was constituted as a financial anomaly: it was provided with no equity capital and yet it had a mandate to undertake the riskiest possible forms of investment – starting up new ventures in remote colonies, with a strong emphasis on tropical agriculture. Instead of risk capital there were interest-bearing loans at the government’s prevailing borrowing rate. This hazardous structure was immediately exposed by the early mistakes from poor investment decisions, of geographical and product scatter, of escalating costs, such that within three years there was a millstone of lost capital represented by interest bearing Exchequer loans that had to be repaid. It was this legacy which Reith and Rendell had to surmount in order to transform CDC into a viable development business. As with the disputes over its mandate, CDC was only able to make progress via stages that were hard fought, as is evident in following events up to the 54

Financial Reorganisation 55

appointment of the Sinclair Committee in 1959 and the settlement arising from it in 1961. In Reith’s first annual report – for 1951 – a big effort was made to strip away illusions about the financial condition of CDC. Substantial provisions and write-offs were added to the operating loss to produce an overall deficit of £4.6 million. With no capital or reserves in its balance sheet, there was no ability to offset this sum. It had therefore to be carried forward, along with the obligation to pay interest on the underlying borrowings and to repay them ‘unless the case which the Corporation has presented to Government on these fundamental difficulties leads to some measure of relief’.1 It was perhaps a tactical error to make a case for relief so early on, when the fate of many projects was still unclear; nevertheless there was sympathy for the corporation’s predicament. This was made clear in the House of Lords on 28 May in the debate on CDC’s annual report. Not only was there the expected sympathy from the Labour benches – ‘The Corporation is stifled by the financial straitjacket in which it is confined’ (Lord Ogmore), but also from the Conservative benches – ‘I am quite satisfied that in its present structure … the Corporation cannot operate successfully in the manner in which its sponsors and godfathers designed it to operate’ (Lord Rennell).2 For the government Lord Munster confirmed that it was prepared to relieve CDC from liability for interest in respect of capital advances that could properly be deemed ‘dead’, but he rejected the writing off of capital losses for the present.3 Then, in August 1952, Lyttelton wrote to say that he had secured the Chancellor’s agreement to introduce legislation for a once-for-all write off of capital losses on abandoned projects, in addition to the interest waiver already agreed to.4 CDC busied itself with defining its case. In its accounts for 1952 the accumulated deficit – with additional provisions and losses for the year – had risen to £8.4 million. At the same time, there was correspondence with the Colonial Office on the projects to qualify, especially with regard to those where there was only partial abandonment of a project, or where projects were judged to be over capitalised. CDC was able to have the cut-off date moved twelve months to December 1953, but was unsuccessful on the other issues. The Treasury would not accept the case for partial abandonment or over-capitalisation and, at a meeting on 30 March 1954, Lyttelton revealed that the maximum write-off would be restricted to £3.8 million. This compared with the £6 million of abandoned capital investment and another £2 million relating to over-capitalisation. He went on to indicate that there would

56 A Will to Succeed 1948–62

be no objection to placing the difference in a Special Losses Account in the balance sheet.5 The matter was considered by the CDC Board when the brave decision was taken not to accept the Secretary of State’s offer.6 As a consequence of the Board’s decision, the write-off clause was withdrawn from the 1954 Overseas Resources Development Act. The terms of the rejection were discussed with the Colonial Office and embodied the key phrase ‘our decision is that we would like to be excused from write-off on present terms but that we should be allowed to reopen the matter if we wanted’.7 This led to difficulties later on because the government regarded the matter as closed and did not accept any obligation to reopen it.8 Reith went on public record in his 1954 annual report. ‘CDC felt unable to accept a capital write-off on terms which would have given CDC not much more than half what is in its opinion fair.’9 But it did proceed to set up a Special Losses Account of £6.3 million. In the following year CDC made its first operating profit and increased the Special Losses Account to £8.0 million and drew a line on the past. Only £5.7 million of this total was eligible for interest waiver at this stage.10 When Reith attempted to reopen the question of write-off with Lennox Boyd in 1956 he was firmly put down: CDC was now making a profit and its case for further relief was thereby weakened.11 Reith decided to give a public airing of CDC’s financial grumbles in the 1956 annual report, which was quickly taken up in Parliament by Lord Ogmore who wondered out loud ‘There seems to be a feud between the Secretary of State for the Colonies and the Chairman of the CDC, Lord Reith’.12 The setting up of the Special Losses Account was no more than a presentational device, since it in no way relieved CDC from repaying the Treasury borrowings underlying them. CDC was pricing its own loans generally on the basis of just covering its interest and general administration costs, so it was difficult to see where the cash flow would come from to repay these unproductive borrowings. The prospect was aggravated by other factors, which were carefully explained to the Colonial Office in mid-1957. A point was approaching when CDC would have to make new borrowings from the Treasury in order to repay annuity instalments on loans relating to the Special Losses Account, with the consequence that CDC would both lose the interest waiver on the earlier borrowings and be substituting higher interest rates on the new loans, thus aggravating its plight. An even more alarming situation related to the future burden of deferred interest on long term borrow-

Financial Reorganisation 57

ings, on which interest payments were postponed for the first seven years, but still payable over the remaining life of the loan. The 1956 accounts showed that the burden of this deferred interest already amounted to £6.8 million, and it was now calculated that by 1962 the figure would rise to £25 million.13 Although the government was unsympathetic to CDC’s predicament, the Labour Opposition was openly concerned at the diminishment of CDC’s potential arising from this debt burden. In the spring of 1957 it published Labour’s Colonial Policy, where it pledged to write off the Special Losses Account, so that CDC could resume a more active development role. It also pledged to reverse the government’s restriction on CDC’s area of operations. However the initiative remained with the party in power.14 Through these and other exchanges the Colonial Office was gradually convinced that an independent review of CDC’s financial position was necessary. Its own actions contributed to this pressure because, in agreeing to raise CDC’s borrowing powers from £100 million to £150 million in 1958, and also stipulating that £20 million of this increase must come from non-government sources, it effectively sold the pass (as CDC quickly spotted) on the need for the corporation to have a credit-worthy balance sheet to show to the capital market. Reith publicly canvassed the notion of converting the Special Losses Account into equity in the 1955 annual report and he returned to the question of writing off lost capital combined with debt cancellation in the 1957 report, and to both issues in 1958 – his last report. Within the corporation there were some other ideas as well: to defer repayment of the Special Losses Account for 40 years at nil interest, on the precedent of the British Government’s arrangements with the US and Canadian loans,15 or to be granted more favourable loan terms as to interest rate and initial interest moratorium,16 or a full blooded proposal to turn CDC into a public company with £160 million of equity and a borrowing limit of one quarter of the equity.17 These ideas illustrated that there was more than one way of alleviating the problem of escalating interest obligations and the treatment of the original borrowing. The outcome of this increasing activity was the appointment by the Secretary of State on 8 April 1959 of a committee of enquiry into the financial structure of CDC, under the chairmanship of Lord Sinclair.18 Sadly, but in the circumstances unsurprisingly, the announcement was made the day after Reith’s retirement as chairman. Lennox Boyd had informed him the previous September that his appointment would not

58 A Will to Succeed 1948–62

be renewed, despite lobbying efforts over the summer by various members of the Board. Submissions to the Sinclair Committee analysed CDC’s financial position in detail and explored capital reorganisation alternatives. A well-balanced contribution was made by a member of the Board, Sir Clem Please. He wanted to see government funding divided into equity and loan capital in proportion to a judgement of portfolio balance; parliamentary control would be exercised through the medium of the annual report; there should be a write off of Special Losses.19 The Committee examined the current portfolio and commitments and found that, within five years, CDC’s profits would peak and then decline into mounting losses, as a result of the impact of deferred interest becoming due for payment; meanwhile the due but unpaid element of deferred interest would build up to £22 million within eight years, and thereafter decline slowly (para 37). Looking at the profitability of the portfolio, the Committee found that CDC was barely making a margin over the average cost of funds. ‘The earnings rate is low by normal commercial standards having regard to the proportion of capital invested in risk-taking ventures’ (para 42). The sober conclusion was that CDC would be unable to continue in business while meeting its financial obligations ‘unless there is a change either in its financial structure or in the nature of its activities’ (para 43). In attempting to reconcile the developmental and risk-taking intentions of Parliament with the requirements of government funding, the Committee came up with the conclusion (led by Rendell’s submission)20 that CDC’s capital liabilities should be in different categories, depending upon purpose, namely: A Stock to fund ‘finance house’ type lending which would carry Treasury rates of interest – to comprise 25 per cent of capital. B Stock to finance risk investments which would be serviced and repaid out of the operating results – to comprise 53 per cent of capital. C Stock to finance the Special Losses Account, which would bear nil interest and would only be repayable when all of B Stock had been redeemed – to comprise 22 per cent of capital. Procedures were then laid out for servicing the different stock categories and for the creation of a limited reserve fund. In effect, if not in name, Sinclair proposed the establishment of an equity capital base, with a proportion of loan capital half the size of the equity, and a perpetual obligation eventually to redeem the Special Losses debt. Part of

Financial Reorganisation 59

Sinclair’s conclusions still have force today, as CDC is being prepared for partial privatisation: It must be recognised that no modifications to the financial structure can by themselves transmute what is clearly a very difficult operation into an easy or highly successful one. The Corporation is charged with an exceedingly difficult task, but one that Parliament has clearly regarded as of great importance … . If Parliament wishes the Corporation to continue its efforts to assist economic development in the Colonial territories that remain it should be realised that the ordinary rules for payment of interest and repayment of capital must be relaxed. (paras 76 and 78) The CDC Board agreed to accept the Sinclair Report, even though it had not recommended writing off the Special Losses debt. This is not surprising, since its general tone was supportive and the main recommendations followed the lines of Rendell’s paper. A period of six months ensued before the government was ready with its own conclusions about the report. To the House of Commons, Macleod said that the need for capital restructuring was accepted, but that the government would not necessarily follow Sinclair on the method.21 To CDC there was a much harder message. As regards general policy, there was to be no change to the area of operations permitted to CDC, or to the borrowing ceiling from government of £130 million. CDC must learn to revolve its capital and to maximise its external borrowings from the market (where it now had a limit of £20 million). In a complete reversal of stance, CDC’s main business should be loans (including loans to companies) and its equity risk must be strictly controlled. As regards the Sinclair recommendations, the A Stock should also cover secured loans to companies; such funding should be on Exchequer terms and lent at matching maturities and rates i.e. with minimal margin to CDC; the long term borrowings for other business represented by B Stock must also be at Exchequer rates and the criterion of ability to pay was rejected: if CDC was unable to repay such borrowings Parliament would be approached for a write off; the same terms would apply to C Stock loans backing the Special Losses Account.22 It seemed clear to CDC that the core message of the Sinclair Report, that the corporation was fast becoming financially unviable, had not penetrated. The financial controller’s reflection was ‘HMG are unprepared to take the essential steps to put CDC on a secure footing and envisage that at some stage we shall have to default’. He concluded

60 A Will to Succeed 1948–62

that CDC would actually be better off not to accept the government’s proposal.23 Although the issues were quite technical, the argument which raged over the next eleven months had serious implications for whether CDC would continue to be able to fulfil its parliamentary mandate to create projects for developing the productive resources of the colonies. Parliament had shown it was keenly interested in what would be done about the Sinclair Report, so that the government was conscious of political pressure to resolve the problems.24 Sir Nutcombe Hume, the interim chairman after Reith’s retirement, took a prominent role – as did Howick himself when he was appointed deputy chairman in April 1960 and then chairman that December. On the government side, the Minister of State, Lord Perth, the Colonial Secretary, Macleod, together with Treasury and Colonial Office officials were all engaged. By chance, CDC’s political stock was riding very high in Whitehall in 1960. It performed an enormous favour to the government in respect of Kenya, following a crisis of confidence after Macleod’s handling of the constitutional conference in January and his announcement of an accelerated timetable for independence. A flight of savings from the building societies threatened insolvency for them, which would have seriously exacerbated the situation. In response to a plea, CDC agreed to examine the problem with the benefit of its successful experience of building society management in Malaya and Singapore. It then agreed to step in to underwrite their solvency and to manage the institutions.25 The episode greatly reinforced CDC’s moral leverage, especially since Howick was fresh from his gubernatorial service in Kenya and was well aware of the significance of CDC’s action. CDC was concerned to stress the importance of improving the credit worthiness of its balance sheet, so that it could tap the capital market for loans.26 But the point did not really catch on, despite the importance attached to it in Macleod’s July paper. Much more interest was shown in CDC’s fall-back proposal of ‘a once and for all write-off (or at least sterilisation) of the Losses and Liabilities Account’, perhaps as a foretaste of the official reluctance to allow CDC to develop an independent funding capability.27 In the following weeks the notion of ‘sterilisation’ was worked on actively, for it came to have increasing appeal to the government. As progressively refined, the concept was that capital losses and deferred interest would be segregated into a special account in the balance sheet, with a counterpart liability to the government. This liability would only be reduced on the basis of an ability to pay – with a concomitant reinstatement of borrowing limit as special losses

Financial Reorganisation 61

were liquidated. The appeal of all this lay in the perception that legislation would not be required.28 But the arrangement would also ensure that CDC’s condition would not deteriorate to a point where it was unable to meet its obligations, as feared by Sinclair. On the other hand, it did not face up to the corporation’s need for equity capital. Howick made a last ditch effort in January 1961 to convince Perth that more should be done about write-off, as opposed to sterilisation: ‘To be quite frank, the more we look at this proposal the less we like it’ he wrote after the first meeting.29 They met again without CDC being satisfied. The government felt that the situation was sufficiently sensitive politically that the Colonial Secretary needed to be in a position to say when he made a statement in Parliament that CDC were in agreement with the settlement. The matter dragged on for another two months. The Treasury was adamantly against any write-off, but there was agreement that the sterilisation account could be set up at £20 million (comprising £9 million of special losses and £11 million of deferred interest), which would be redeemed out of net profits on a formula basis: 60 per cent to be applied towards redemption, after a modest initial allocation to reserves. As a sign of the importance attached to the matter Perth attended the Board meeting on 6 April 1961 to finalise matters. He was accompanied by the head of the Colonial Office, Sir William Gorrell Barnes. The Board agreed to the settlement with three provisos, which were all accepted: that the ban on CDC undertaking managed projects on its own be lifted (Perth conceded, ‘though the Colonial Office did not like them’); that there should be no imposed formula split between equity type investments and loan investments, as implied by Macleod’s July 1960 paper (Perth conceded, although the government might still wish to express its preference); that the quantum of divisible profit was to be determined by CDC alone, following agreed definitions. This last proviso led to a serious spat with the Treasury and the Parliamentary statement was delayed for three weeks. It required a personal meeting between Howick and Macleod before the government capitulated to CDC’s definition.30 Its face-saver was that the government would require a full review of the position in three years’ time. Howick also persuaded Macleod to agree to include in his statement that CDC ‘for its part would have preferred the adoption of the Sinclair

62 A Will to Succeed 1948–62

Committee’s recommendations involving some equity capital.’31 In the event, the review of CDC did not take place until another government was in office five years later when there was a very different climate of opinion towards development.

6 The Score Card

Looking back over its first fourteen years, the over-riding impression is how narrowly CDC survived its initial structural disabilities, its own mistakes and the subsequent threats to its continuation. The fact that it did overcome them was due to the happenstance of two remarkable personalities, Reith and Rendell, and their somewhat improbable partnership over six years. In the hands of less determined – or more consensus-seeking – characters, it is doubtful whether CDC would have been given the opportunity to become a major development agency. Evidence that this is no idle speculation is provided by two contemporaneous institutions that were less fortunate in their leadership. The sibling Overseas Food Corporation, which was set up under the same Act as CDC in 1948, never recovered from its failed groundnut scheme in Tanganyika. Its operations were drastically reduced in 1951, and then in 1954 it was decided to transfer its assets to the colonial government to form the nucleus of its Agricultural Development Corporation. The Tory inspired Commonwealth Development Finance Corporation never attracted a board or management with appetite or capacity for overseas project finance. It was reactive and timorous and became increasingly irrelevant as a significant source of development finance for the Commonwealth. In a melancholy end in the 1980s its portfolio was sold off to a large pension fund and, ironically, CDC purchased some of the investment paper at the break up, as narrated in Chapter 12. Our narrative has shown how CDC’s initial enthusiasm for its mission was undermined by incompetent management and by misjudgements on projects and of its capacity to handle the flow of prospective business. CDC was also disabled from the start by an inappropriate financial structure, in deference to Treasury objections to 63

64 A Will to Succeed 1948–62

providing equity capital for the corporation. The change of government in 1951 could well have been fatal, since it was easy to represent CDC as another example of socialist folly and as a threat to private enterprise overseas. This threatening climate was reinforced by the sponsorship of CDFC as an alternative development vehicle and by ministerial support for views developing within Whitehall for cutting CDC down to size, if not closing it down altogether. Lyttelton was an enthusiastic supporter of CDFC and was sceptical whether CDC could make a go of it. Lennox Boyd strongly endorsed the official line on preventing CDC investing in the emergent Commonwealth and refusing to reopen the question of writing off lost capital. Macleod endorsed the same policy and also rejected the Sinclair Committee report, but then he changed tack in the wake of the Kenya building society crisis. Perth comes over as someone trying to maintain relations with an increasingly difficult Reith, while unprepared to engage too deeply with the details, so that more than once he found himself on the wrong foot. With all these factors and persons against them, the achievements of Reith and Rendell stand out all the more prominently. Reith started with the prestige of having been recruited by Attlee to save a sinking ship, and of his creative record at the BBC, Imperial Airways and in the wartime government. The qualities that proved so valuable were his confident grasp of what made for effective administration; his acute sense of constitutional amour propre which endowed CDC with its sense of identity distinct from Whitehall’s; his utter commitment to the interests of the corporation – however infuriating this seemed to others; and his combative energy in pursuing these aims. The recruitment of Rendell as financial controller in 1952 was an inspired appointment. He combined tough efficiency with a huge capacity for work. More unusually, his wartime Treasury experience made him unafraid of Whitehall. He could play its procedural games with the best and could not be put down easily. More remarkably still, Rendell became enthused over CDC’s developmental role and personally engaged in the arduous turn-round and progress of many projects. Perhaps his monument is the Swaziland Irrigation Scheme. Even in these early days it was something of a wonder that such a strong personality should have forged a mutually respectful partnership with Reith, and to such good effect. By 1962 CDC was operating effectively on the ground. It had over 100 projects, with aggregate total commitments of £116 million. The original Parliamentary approval for £100 million of borrowings had

The Score Card 65

been raised to £150 million. CDC was recording increasing operating surpluses, while the financial settlement post-Sinclair gave it a defensible balance sheet and had removed the threat of future insolvency. There was a new and uplifting tone following Howick’s assumption of the chairmanship in December 1960. As we have seen, he immediately played an active part in securing the settlement on CDC’s financial reorganisation. But his major aim was to get CDC back strongly into the development business in the emerging Commonwealth. Here his experience, reputation and political connections proved decisive.

This page intentionally left blank

Part II An Agency for Development 1963–79

7 Easing the Funding Constraint

The Sinclair settlement on CDC’s financial structure was to be reviewed after three years, as Macleod had promised when making his announcement to the House of Commons in April 1961. CDC was keen for the review to take place and Rendell sought to activate it in April 1964.1 However initial preparations for the review were overtaken by the general election and change of government and Labour’s decision to set up the Ministry of Overseas Development in succession to the Department of Technical Co-operation. Two years passed before officials were ready to activate the review, which took the form of an inter-departmental working party. CDC was invited to attend its meetings without being a member of it. The working party was set up in May 1966 without specific terms of reference and its report was eventually issued in October 1967.2 The long delay in re-examining CDC’s financial arrangements was ameliorated by one helpful interim decision in 1965. The ODM, as it was called, agreed to an outright waiver of interest for seven years on a limited range of equity projects, to be agreed on a case by case basis.3 £6 million of investments qualified for this treatment by the end of 1967, although CDC found the clearance process onerous. Britain’s financial difficulties at this time led to the introduction of a new constraint on CDC’s operations, which it found difficult to accommodate for some time. The first intimation had occurred back in 1961 when the Treasury sought – for balance of payments reasons – to impose an arbitrary annual drawing limit on CDC of £6 million in the middle of the year, and with a similar figure for the following year. Up to this time, CDC had had the flexibility to draw down loans as the funds were required, within its overall borrowing ceiling. CDC demonstrated that it had contractual commitments of £9.7 million and an estimated requirement for £15 million in the following year. This was accepted.4 Toward 68

Easing the Funding Constraint 69

the end of 1965 the problem recurred. The government’s new National Plan had placed a ceiling on the aid programme for three years and CDC’s allocation had been fixed without discussion at £6 million for 1966–67 and £7 million in the following two years. On the face of it, this threatened to put CDC in breach of contractual commitments, as well as precluding all new business. Rendell wrote to ODM reminding them that CDC’s legal commitments were underwritten by the Treasury; that it would surely be fair to take into consideration the quantum of capital repayments to the Treasury of about £9 million annually; that CDC might have to make a public announcement were it forced to suspend all new business.5 This was followed by a meeting between Howick and Rendell with the permanent secretary, when an understanding was reached. It confirmed that all existing commitments would be funded, but meanwhile CDC would make every effort to raise external funding from other sources. CDC undertook to arrange that expenditure on new commitments would be contained within a cash limit of £2 million a year in the next two years. It was acknowledged that a review of CDC’s financial resources was probably required.6 Unfortunately for CDC, it was also made clear that government accounting arrangements precluded any credit being given to CDC for loan repayments to the Treasury. Detailed guidance was issued to regional controllers on the action to be taken to restrict cash expenditure.7 CDC moved quickly on the borrowing front. It first drew a blank in New York, but a £5 million loan for three years was soon in place from a syndicate of banks in the City.8 On the introduction of the ODM Permanent Secretary, Sir Andrew Cohen, Rendell flew to Washington for talks with the US Government’s Agency for International Development. AID was prepared to lend $2 million on very liberal terms, but tied to the procurement of US goods and services by overseas subsidiaries of CDC.9 The transaction was seen by the Americans as a form of compensation to the British government in return for increasing its subscription to the new East Asia Development Bank. The discussions were difficult.10 The Treasury appears to have been taken aback by the syndicated loan, fearing that CDC had opened up a new leak in the balance of payments. It sought to impose a condition on the borrowing consent that future loans would be within the indicated overall funding ceiling for CDC, which was robustly rejected by ODM.11 Rendell shrewdly pointed out that the Treasury was both seeking to hold back CDC as a budgetary restriction (fair enough in a crisis), but at the same time to control CDC’s activities on balance of payments grounds – all the time ignoring the return inflow of repayments and earnings.

70 An Agency for Development 1963–79

A further attempt was made in June to restrict CDC’s access to commercial borrowing. It was proposed that loans would only be approved if it could be shown that repayments could be accommodated within CDC’s cash flow, without any risk of the Exchequer being forced to make additional unplanned loans to CDC, and that the terms were not significantly more expensive than borrowing from the Exchequer. There was even an observation that it would be unacceptable if Exchequer loans were only used for equity type investments (which were eligible for interest waiver), while commercial borrowings were used for more directly remunerative projects.12 Rendell had something of a field day in responding to all this, but his letter also marks a significant step towards the evolution of a new funding relationship which was being debated at leisurely intervals in the working party.13 He had no difficulty in dealing with the cost of commercial borrowing, even in the absence of a Treasury guarantee. He wondered whether the Treasury had noticed ‘a remarkable improvement in CDC’s credit worthiness with financial institutions both at home and abroad which has opened up the possibility for CDC to borrow considerable amounts on competitive terms as to interest and repayment’. Three borrowings were listed, of which two were actually cheaper than the equivalent rate from the Exchequer (see Table 7.1). Table 7.1 Commercial borrowings by CDC

Anglo American Corporation Arbuthnot Syndicate Barclays DCO in S.Africa

£3 mn £5 mn £0.25 mn

11 years 3 years 7 years

Cost

HMG rate

6.25% 6.88% 5.50%

5.68% 6.90% 5.88%

Rendell illustrated the need for funding flexibility due to unforeseeable cash flow fluctuations and the value of access to financial markets in this connection. One of the adverse factors that CDC had had to contend with was the rising cost of borrowing from the Treasury. He was indignant at the implied lack of confidence in CDC’s financial management to finance its operations with competence and could not resist a dig in return: ‘I hardly think that the present state of the British economy which is at the root of CDC’s difficulties, really justifies the very arrogant terms in which Treasury seem to have stated their conditions for allowing CDC to exercise a privilege which is expressly provided for in ORDA.’ Furthermore, if the Treasury were seriously proposing to backslide on the projects eligible for interest waiver, as their letter indicated, ‘we shall take

Easing the Funding Constraint 71

steps to draw attention in the appropriate place to the fact that the terms of a ministerial statement in the House of Commons are not being fulfilled’. He then went on to reflect on the implications of the emergence of an annual ceiling on drawings from the Treasury: ‘If we have to work on an annual ceiling which will bite’ CDC would have to work out the relationship to the volume of new business it could commit to, which it had been reluctant to do heretofore. More comprehensive forecasts and cash flow estimates would themselves help to limit the risk of surprises, especially if CDC had the flexibility of accessing market funds ‘in a responsible and profitable manner’. The Treasury backed off after this broadside. In October, CDC arranged another syndicated loan of £5 million from the City for three years, with £3 million to be drawn in 1967–68 and £2 million in 1968–69, although Treasury approval to take up the loan was delayed for four months until early March 1967. The other issue of concern arising from the introduction of an annual ceiling on borrowings from the Exchequer was the extent to which CDC would be in a position to write new business; in other words, was it to be allowed to be a growing concern? Howick led off with a powerful letter to Cohen.14 CDC enjoyed a reputation because its financial investment was combined with commercial management and on the job training for nationals; but this would be undermined if CDC ceased to undertake new business and milked the countries in which it had already invested – as had been pointed out by Mboya in Kenya. For good measure, Howick then made a plea that the Treasury be more accommodating on the implementation of the interest waiver concession to include investment in its development corporations, or Devcos as they were called, since ‘there is little chance of justifying investment at present rates of interest in Devcos unless we do receive the waiver. … I am sure you realise that Devcos are the key projects for industrialisation and African governments attach the greatest importance to the development of secondary industries’. Rendell followed up with a more considered submission to ODM.15 He analysed three scenarios – nil new business commitments over the next three years; writing new business at the average level of the past three years of £12 million a year; and a new business level half that of the past three years. In all scenarios the level of government funding was as already indicated – at £6 million in 1967–68 and £7 million in the following two years. As his chairman had done, Rendell argued strongly that a complete stoppage on new business would be disastrous for CDC’s reputation and on internal morale. But the real thrust of the paper was to

72 An Agency for Development 1963–79

demonstrate that CDC had a track record of stimulating significant exports from the UK from its operations and that its own impact on the balance of payments had been positive in each of the last three years. He concluded on a confident note: ‘In so far as CDC is in competition with other forms of Aid, it is for HMG to decide on the relative merits of the contestants.’ The argument went home and by December CDC had secured an increase in the Treasury allocation sufficient to fund the median scenario: £9.2 million in 1967–68, followed by £9 million in the following two years. Regional controllers could again be authorised to go out for new business. The urgency of dealing with the imposition of annual borrowing limits at an acceptable level, and of demonstrating CDC’s ability to borrow from the City, slowed down the deliberations of the working party, although policy was – in effect – being made on the hoof. The first thoughts of CDC’s management for the working party were to focus on setting up an adequate reserve fund to finance long term investments, either by achieving further concessionality on borrowings in order to enhance cash flow generation, or by the introduction of equity capital. It was also noted that CDC’s overall borrowing ceiling from the Treasury of £130 million was getting tight and could be breached in 1968. An important Board paper analysed developments since 1961 and set out CDC’s aims for the working party.16 Over five years CDC had made gross investments of £61 million, or an average of £12 million a year, yet there was only £32 million of new liability to the Treasury, as a result of financing investments from self generated funds (including disposals and borrowings). The picture on the revenue side was less impressive: only £345 000 had been added to the reserve fund over the five years, which was scarcely better than breakeven. The actual operating surplus had grown from £3.5 million in 1961 to £5.6 million in 1965, but provisions and write offs had taken £3.6 million and £2.2 million had had to be applied under the Sinclair formula towards reducing the Deferred Liability Account. Projections indicated that this break-even level of operations was set to continue, because of the sharp rise in borrowing costs from the Treasury, which left no room for future accidents. Four ways in which the situation could be ameliorated were identified to the Board: a. Implementation of the Sinclair recommendation that CDC should be provided with equity capital equivalent to its own equity investment portfolio – as had been publicly advocated in CDC’s just published annual report for 1965.

Easing the Funding Constraint 73

b. A broadening of the interest waiver concession to cover all equity projects. ‘On balance one is inclined to prefer this proposal to that of equity capital,’ Rendell opined. c. A general move to apply concessional interest rates to CDC borrowings. This was seen as second best to the previous proposal. d. An easement of the terms applying to the Deferred Liability Account – by conversion of the account into equity or writing it off. A different view of priorities emerged at the Board meeting: directors were strongly in favour of the equity solution and Rendell annotated ‘Board reiterates claim for equity capital which should not be prejudiced by management’s immediate preference for extension of interest waiver.’ Management’s instinct was the surer, since the Treasury strongly resisted any claim for equity capital in the working party, whereas it was prepared to consider help to the revenue account. By July 1967 CDC was able to write to ODM after a constructive session of the working party ‘If a joint recommendation can be reached that … the interest waiver concession can be made available to CDC for its equity/equity type investments, on the assumption that equity capital itself will not be available to us, CDC would be very satisfied.’17 Negotiations now focussed on how to define such a concession administratively. The Treasury preferred a fixed amount each year and first tried to set a level equivalent to the current level of waiver concession of £1 million a year. CDC argued that £3–4 million was required if there was to be any meaningful assistance. The issue was indeed settled at £3 million for 1968–9 and £3.5 million for 1969–70. The report of the working party was eventually sent to CDC in October 1967 with the information that it had been accepted by Ministers (the final draft had already been seen by the Board earlier in the month). CDC achieved two elements of financial relief from the whole exercise: a. The block allocation of waiver money, on which CDC would only be required to provide ex post report of how it had been applied. b. A revision of the formula for applying profits to paying off the Deferred Liability Account. A measure of the impact of the change is that had it applied during the past five years, CDC would only have had to repay £308 000 instead of the actual repayment of £2.2 million, and its reserves would have benefited accordingly.18

74 An Agency for Development 1963–79

The report is notably well written and conveys a strongly positive attitude towards CDC’s place in Britain’s aid programme. There is a sympathetic presentation of the difficulties CDC had contended with – in the developing countries and in respect of British public finance constraints: ‘we are agreed that its status in the British aid programme justifies consideration of a measure of relief from its main burden, the cost of money. … CDC is widely regarded as one of the most effective methods of applying aid’. As a result of its mode of operation ‘the overall effect of this is that aid provided through CDC is managed very near the point of application, something which is not always possible to secure in government to government aid’. There was appreciation of the conflicting pressures on the organisation: ‘CDC’s activities and financing are so varied that it sometimes seems as if it has to satisfy criteria fixed for nationalised industries, the control of public expenditure and of private investment overseas, separately and together.’ In its concluding remarks the working party noted the changing context in which aid was applied, including the effect of Britain’s possible entry into the Common Market: ‘It might be desirable to consider whether CDC could be used to manage government to government aid or whether its usefulness could be applied in other ways.’19 One other significant development is associated with this working party and the contemporaneous negotiations to bring CDC more formally within the framework of public expenditure control. The capital sanction procedures had not been revised since 1955. They were severely out of date as regards individual capital sanction amounts and in the implication that the Treasury could be called upon to fund the total of projects approved by the Board, which greatly exceeded the formal CDC borrowing limit from the Treasury. A new agreement was negotiated to place CDC within the framework of annual budgetary allocations, but it was combined with acknowledgement of CDC’s access to external borrowing and to substantial relaxation in administrative procedures. The new Planning Framework, as it came to be called, covered the next Exchequer financial year and the three following financial years. It involved forecasting board commitments and disbursements, self-generated funds, commitments to the Exchequer, the projected level of new term borrowings from government and other sources. CDC accepted a responsibility to manage its affairs within this new framework and Rendell strongly commended the arrangements to the Board.20

8 Aid and Development

The decisions taken by the new Labour government to amend the Sinclair settlement opened a new era, since they allowed CDC to accumulate reserves through its operating account. Meanwhile the planning framework settlement allowed both for growth and an intention for funding stability, notwithstanding Britain’s own budgetary problems. It followed a lengthy period of thirteen years under the Conservatives when CDC had struggled to establish its basic viability and its credibility as a development agency. As we have seen, CDC had had to fight a long battle to be allowed to operate in the newly independent nations of the Commonwealth, against an attempt to marginalize it with a preferred private sector institution. In the twenty years since the war, opinion on development had had to digest the phenomena of the real experience of societies undergoing rapid change, many of them in the wake of emergence from colonial rule, as well as the difficulties of institutional development at the international level, the politics of international trade, and the imperatives of alliance building in the Cold War. CDC had originally been a creation of Labour and of the optimism of early post war thinking on economic reconstruction. How was the evolving debate on development likely to affect its role? The protagonists were mostly in and around the Labour party, so that discussion was flavoured by another absorbing issue of the export of socialism to the developing world. Since the majority of leaders of colonial emancipation movements proclaimed themselves to be socialists, this seemed a reasonable agenda. In fact there had always been two strands of thought in British socialism: an element which was concerned with the class struggle and the defeat of capitalism, which translated in the colonial context into support for freedom as soon as 75

76 An Agency for Development 1963–79

possible and to a focus on achieving independence status notwithstanding the complications of small states, plural societies and garrison locations. The other strand was humanitarian and moral, with a focus on poverty alleviation and a belief in trusteeship notions – national and international.1 Official Labour policy was reformist and concerned with political advance, economic improvement and social welfare, yet was goaded by more radical elements. Creech Jones had the task of reconciling the pressures in the first Labour government. Reflecting on the record later, he explained well the constraints of constitutional practice, consent and local circumstances preventing the simple export of socialism and that ‘colonial problems are more fundamental than the regulation of alien exploitation’. He presented instead a picture of reformist, pro-active intervention in the cause of nation building and economic development – including of course the establishment of the CDC.2 In the developing countries the rhetoric of nationalism had disconcerting features for well meaning supporters of colonial emancipation and orderly reform. The strident emphasis on ‘freedom now’ was disconcerting to those aware of practicalities, especially in the area of skilled manpower. Much effort was devoted to devising acceptable methods of continuing to provide expatriate skills, both through national schemes and, above all, through international agencies as technical aid, but they were short lived.3 Hostility to foreign capital was also a feature of the times. To the traditional exploitation arguments against imperialism was added a virus from the Cold War: neocolonialism, which was labelled as ‘the greatest threat to emerging countries’ at the Third All African Peoples Conference in Cairo in 1961.4 This incipient hostility to foreign direct investment was of great concern to CDC and had a significant influence on its investment strategy. It was a particular preoccupation of one of CDC’s most influential and long serving directors, Sir Arthur Gaitskell, whose career had been spent with a cotton irrigation scheme in the Sudan, which he made famous for its attempt to resolve the conflicting interests of capital and nationalism and peasant cultivators.5 Gaitskell believed strongly that economic nationalism could be tamed by devising forms of partnership between foreign investors and the governments and communities in the countries where they invested. ‘It is a moment of history when the flexibility of our attitudes to the claims and functions of capital is as much on trial in underdeveloped territories as it is within our own industrial field of shareholders, management and labour. And in a sense the same issue is at stake – the issue of what sort

Aid and Development 77

of relationship between capital, management and labour, between foreign investor and local nationals can give a sense of fair shares in a productive process.’6 If voices in the developing world sometimes seemed inclined to bite the helping hand, the formidable confidence of the Communist bloc in tackling economic growth was a constant challenge for socialists. The Oxford don, Thomas Balogh, was one who sought to spell out a socialist solution for colonial development which points up well the contrast of working within a liberal society.7 His vision was for the sterling area to become a supranational bloc led by Britain, bolstered by exchange controls and control of trade and investment, as well as by forced saving (reduced consumption) in Britain. The aim would be to create ‘a co-operating sterling Commonwealth’ with institutions to foster development, including a strategic role for CDC in the original Trefgarne mode. Labour’s return to power in 1964 after thirteen years provided a fresh opportunity to define its role towards the developing world, with the authority to implement it. The first step was to create a new Ministry of Overseas Development at cabinet level and to set up an economic planning staff. Shortly thereafter a White Paper was published setting out the objectives and policies of the aid programme and CDC’s place therein.8 The moral justification for aid is enunciated, entailing a concomitant economic sacrifice, which was reinforced by balance of payments constraints that restricted Britain’s capacity to provide overseas assistance. There is open recognition that development is inseparable from the modernisation of traditional societies. The focus is on poorer countries, with priority for the Commonwealth, but with an indication that the former criterion would be the key test. Finally, there is emphasis on donor collaboration and on acting as a member of the world community. Half way through the UN’s decade of development, there was consciousness that the rates of growth in poorer countries were slowing down, that agricultural output was a particular cause for concern, especially in the light of accelerating population growth and the emergence of large scale urban unemployment. Two specific obstacles to growth were highlighted, the shortage of qualified manpower and emerging shortages of foreign exchange to finance imports. A deduction was drawn of the need to increase technical and financial aid, since a pessimistic view was taken of private financial flows and of the prospects for increased export earnings. Interestingly, the section on CDC

78 An Agency for Development 1963–79

appears in a chapter where it is bracketed with the private sector. Aid should complement private investment, but the important issue was the climate for foreign investment. Here the emphasis was placed on the steps foreign investors could take to remove fears of domination, by training local management and by sharing ownership. CDC was held up as an example in language which must have gladdened Gaitskell, pointing to its role in ‘pioneering new patterns of co-operation with local enterprise’. Mention is made of smallholder agricultural projects, the provision of skilled management, CDC’s attention to welfare. ‘It can, in effect, provide for selected projects the combination of financial help and technical management expertise which is characteristic of the best forms of private enterprise.’9 Two years later another White Paper reviewed the content of the British aid programme in greater detail, again endorsing the role of CDC and illustrating the beneficial results of the new interest waiver policy.10 The approach of these White Papers was to see aid as a principal motor of faster economic development, by easing the external financing constraint and the skilled manpower constraint, both channelled to the public sectors of developing countries. This was consistent with the statistical record on financial flows of the previous fifteen years, when official aid predominated. But this approach showed little awareness of how development took place, other than as a consequence of public investment. As subsequent history was to show, it greatly underestimated the roles of international trade, domestic saving and foreign investment in the countries that did succeed in growing. The perception of CDC as being (morally) better than many private investors and as offering forms of co-operation with local communities and investors which were different from – and better than – old fashioned direct investment and foreign control, played a significant part in this period in steering CDC towards investment in agricultural smallholder schemes and housing schemes in collaboration with governments, and in state sponsored development corporations. The Pearson Commission of 1967–69 was the ‘grand assize’ on the postwar experience of international aid as the engine of faster development.11 It re-endorsed the target of resource flows to developing countries at 1 per cent of GNP and official aid flows at 0.7 per cent of GNP, to enable them to attain a sustainable rate of growth of 6 per cent a year. The underlying model implied a correlation between capital investment and economic growth. Pearson saw aid as a manageable variable that was the key to overcoming the external constraint on

Aid and Development 79

development, and consequently more promising than relying on trade or foreign investment. Institutions such as CDC, funded through the aid programme, yet investing in out of favour developing countries, acquired a special prominence in this intellectual construction.12 It was no surprise therefore that CDC’s borrowing limit was increased to £260 million in 1969 in a new bill and that it was empowered to invest outside the Commonwealth for the first time.13

Select Committee on Overseas Aid A new Select Committee on Overseas Aid was set up in 1969 and began extensive hearings on the aid programme, under the influence of the Pearson Report. It completed evidence by June 1970, when Parliament was dissolved. The Conservatives were returned to power and the ODM was promptly abolished, with its functions taken over by a new department of the Foreign and Commonwealth Office, the Overseas Development Administration (ODA). A new committee was appointed in December with the task of compiling a report from the evidence already taken. The Select Committee had devoted two sessions to CDC in early 1970, with Howick and Rendell as lead witnesses, supported by the Finance Controller, Totman, and the Head of Agriculture, Swynnerton.14 The hearings provide a window on CDC thinking at the close of the 1960s, although as we shall see, by no means the full picture. Apart from seeking to hold government to the principal recommendations of the Pearson Report, the Select Committee’s focus of special attention was rural development. The hearings with CDC were therefore central to its interest. The 1969 CDC bill, raising its borrowing limit and empowering it for the first time to invest outside the Commonwealth, was also topical. CDC displayed a very muted interest in extending its geographical remit beyond the Commonwealth. Application had been made to enter two countries within easy reach of existing regional control,9 Ethiopia, where one of its directors had decided to take Mitchell Cotts into a tea project there, and Cameroon, in which CDC already had an historic relationship with the Cameroons Development Corporation before the merger of the British Cameroons Protectorate into the larger entity. Preliminary consideration was being given to entry into Ceylon, Indonesia and Thailand, but no enthusiasm was in evidence. More strikingly, Central and South America, and India and Pakistan had been ruled out for early consideration. The British colonial orientation of CDC was very apparent.

80 An Agency for Development 1963–79

The Select Committee tried to understand how CDC identified projects for investment and the criteria it employed, what its priorities were and what were the constraints on expansion. There was a flow of illustrative anecdote and some recurring themes. The 1948 Act enjoined break-even operations overall and all capital provided from the Treasury was in the form of repayable loans. Projects must therefore have the prospect of profitability, but CDC was emphatically not a profit maximiser. The principal selection criterion was ‘need’, which was articulated mainly by the governments of host countries. This was perhaps an early shorthand for development value, but the key aspects were that it cast CDC in an essentially reactive mode and it also meant that governments were seen as its most important counterparties. When invited to say what were the limiting factors in taking on new projects and in what ways could government be more supportive, CDC responded in terms of its current preoccupations. Experienced managers were in short supply; this, and the sunk costs of proving a project, severely limited the number of new projects that could be investigated at any one time. The uncertainty of government funding allocations, notwithstanding the new planning framework procedure, was a continual worry. The uncertain costs of borrowing from the Treasury in a period of rising interest rates was another great concern in planning long term projects. It is apparent from reading these responses that CDC had not seen the Select Committee as providing an opportunity to pursue a more fundamental public understanding of its problems or their solution. No attempt is made in this forum to present the case for equity capital to match its equity investments, and there was reluctance to respond to the invitation to develop a wish list of how CDC might be enabled to play a larger role.15 Perhaps it was illustrative of a reluctance to talk out of school in front of a Parliamentary committee, given that the monitors were listening in. Nevertheless, there were other instances of unpreparedness. The written submission had made reference to the desirability of a government insurance scheme against blocked remittances from developing countries, but it became apparent that CDC had given no thought to what would be required.16 More embarrassingly, Howick was obliged to withdraw two claims that CDC was more cost effective than other forms of aid and that its returns were superior.17 It is hard to resist a sense of complacency in CDC’s approach to the Select Committee as one reads the endlessly reiterated achievements of smallholder tea in Kenya, the Swaziland irrigation scheme, and smallholder tobacco in Malawi.

Aid and Development 81

The strong orientation of CDC towards agricultural development at this time is the lasting impression of these hearings. It was doubtless much reinforced by Howick’s personal enthusiasm, especially for the smallholder schemes, and his experience during his Kenya governorship of the transformation of the prospects of the African land areas under Swynnerton’s leadership, especially with the pioneering success in demonstrating that tea could be a profitable crop for peasant growers under appropriate management conditions. Swynnerton had joined CDC on leaving Kenya, as head of its agricultural department, and his immense experience was now being deployed widely. The formal response of the new government to the Select Committee’s report was positive, so far as CDC was concerned, especially as regards agreeing that CDC funding should be increased.18

To expand or not to expand? At the end of 1967, following the working party, CDC had been given an indication that its funding allocation would rise from the £7 million level to £10 million (probably to £11 million thereafter). Howick sought to cement the figure in a letter in which he demonstrated how this would enable CDC to do more in the priority areas of agriculture and smallholders, low cost housing and development corporations, providing there was also adequate provision for interest waiver to protect against high interest rates.19 This was repeated in the planning framework bid the following summer, in which it was also made clear that during the four year period CDC would aim to raise £15 million from the City. Meanwhile interest rates were rising to 8 per cent and beyond, which made the interest waiver procedure absolutely essential to CDC’s ability to undertake agricultural projects and low cost housing. An informal working party was convened in early 1969, shortly before the Select Committee was established, to examine the funding problem. CDC laid out its case for being enabled to make commitments at the rate of £12 million a year, based on Treasury funding of £10 million in 1969–70 followed by £11 million, and still raising £10 million from the City.20 The innovation in CDC’s proposal was to break down its investments into three categories, carrying different rates of Treasury interest: a. Category I comprising 60 per cent of investments, would be high development value (but risky) projects, with a Treasury interest rate of 5.5 per cent.

82 An Agency for Development 1963–79

b. Category II comprising 20 per cent of investments, would be utilities, development corporations, poor country tourism and housing projects, with a Treasury interest rate of 6.5 per cent. c. Category III comprising 20 per cent of investments would be industry and property projects, with a Treasury interest rate of 7.5 per cent. This model produced a weighted average interest rate of 6.1 per cent. The line of thinking was accepted and the Treasury offered to increase the amount of waiver money to £6.5 million out of £10 million, in order to produce an average interest rate of 6.5 per cent. The same approach was agreed the following year. Internally, Rendell agonised that this approach evaded the fundamental need for equity, although accepting that a capital reorganisation was not politically achievable and that CDC would have to reserve its arguments for better days. He was worried too that the procedure of agreeing the amount of interest waiver money was a threat to CDC’s operational independence; by contrast, the Treasury’s concern was that the arrangements should be kept from the eyes of the Select Committee.21 Overlapping these ruminations, the Select Committee requested CDC at the beginning of 1970 to set out its capacity to make use of a larger aid allocation than the £11 million level which was the basis of current discussions with ODM. It made two submissions, both of which were published; in the revised version it committed to being able to use another £5 million a year over the five year period commencing 1970–71.22 Its actual allocation in this first year was increased by £2 million to £13 million. In November 1970, after the General election, the ODA – as it had now become – reverted to the issue of expansion, asking CDC what it would be able to invest if Treasury constraints were relaxed, together with a hint that the terms could be improved if CDC accepted conditions relating to the location and nature of its investments.23 CDC made marginal revisions to its earlier submission to the Select Committee. The proposed expansion ‘rested heavily’ on agriculture and low cost housing, which were the two areas ‘in which CDC takes regular promotional initiatives’, whereas ‘CDC is usually a passive factor in the promotion of true industrial projects’. Rendell was quite reserved to the Board about the prospects of achieving the target figures. A geographical analysis suggested CDC ‘saturation’ in the Caribbean and the High Commission protectorates; political instability had become a serious worry in East and Central Africa, together with

Aid and Development 83

intrinsic problems of small markets and ‘the defects of administration and management skills’; expansion into the newly approved nonCommonwealth countries of Thailand and Indonesia was proving slow, and there was Parliamentary concern over moving too quickly outside the Commonwealth. How to overcome these obstacles? Rendell examined the notion of CDC accepting lower financial returns in order to stimulate business without enthusiasm. The other route was to expand the area of operations more quickly to other developing countries, where ODA was already suggesting that consideration be given to Pakistan (but not to India). ‘It looks as if we shall need to consider a leap outwards in one direction or another’, although ‘it needs quite a conscious adjustment to become used to a situation in which money may be pressed on us.’ CDC had every reason to believe that its forecasts would become the planning framework commitments, but the expansionary mood in Whitehall soon passed, as can be seen from the following sequence in Table 8.1. Table 8.1

Funding bids and allocations 1971–75

£ million Nov. 1970 ODA submission Mar. 1971 ODA response Actual allocations

1971/2

1972/3

1973/4

1974/5

Total

20 15 14

25 16 15

30 20 16

35 24 18

110 75 63

Much consideration was given during 1971 to the directional allocation of CDC’s investments, both as regards geography and category. This area of discourse became increasingly sophisticated between the participants over the following twenty-five years; it eventually formed an important part of the framework for privatisation. ODA started with a concern that CDC should restrict its investments in the more developed countries within its remit, which it defined as nine countries: Hong Kong and Singapore in Asia, Cyprus and Malta in the Mediterranean, and Bahamas, Bermuda, Barbados, Jamaica and Trinidad in the Caribbean. Following Nancy Mitford, CDC promptly labelled this the U and non-U list, with U standing for underdeveloped rather than the upper classes. It disliked the whole approach, firstly because it introduced an element of departmental fiat, as opposed to the formal ministerial scheduling and de-scheduling of countries

84 An Agency for Development 1963–79

approved for investment, and secondly it disliked the designation of need as the over-riding test for investment, as against a country’s ability to support a good project.24 Meetings with ODA led to some narrowing of the gap: it was agreed that CDC’s emphasis would be on promoting investment in priority countries rather than disinvesting from the non-U ones; the two categories were accepted by ODA as an aggregate objective rather than as individual country targets; and a much more favourable attitude was being taken to enlarging the approved country list. ‘The softening of the distinction between Commonwealth and non-Commonwealth is, of course, in line with the current policies of the present Government.’25 Nevertheless CDC disliked the sense of conditionality – of being steered away from certain countries and certain kinds of investment – especially away from low cost housing. It moved Howick to enlarge on the policy implications in a letter to ODA in which he virtually concluded that it would be better for CDC not to increase its level of investment rather than to accept the degree of influence over CDC’s investment decisions that was now proposed.26 This stance did nothing to encourage the ministry to improve its allocations to CDC. A few months later CDC was asked to surrender £1 million of its 1971–72 allocation, in return for it being added to the following year’s one. This was acceded to, but the million pounds was not made good. The more liberal approach to increasing the countries of operation was soon reflected in a longer scheduled list of non-Commonwealth countries. As we have already seen, the 1969 CDC Act was followed by the initial approval of Cameroon, Ethiopia and Indonesia in 1970 and Thailand followed in 1971. In the following three years Tunisia and Zaire were added in 1972, Costa Rica and Ivory Coast in 1973, and Rwanda in 1974. The question of influencing the functional direction of CDC’s investments was resolved after a year of discussion in August 1972. A new funding concept was defined – investment in renewable natural resources, which would attract low cost, long term loans of 25 years carrying 3 per cent interest, with repayments spread over the last 18 years. The amount available was not defined in advance, other than being part of the annual budget allocation, which therefore gave CDC maximum incentive to make use of this low cost source of funds. Rendell noted that it would enable CDC to compete with the World Bank for public sector agricultural projects where ‘CDC has definitely felt priced out of the market’ and that there would be greater incentive

Aid and Development 85

to undertake its own direct projects. ‘CDC investment has shown signs of lagging recently and certainly will need to be pushed.’ However it would have to be careful in the way it deployed this privileged funding when working with private sector investors.27

9 Jubilee Stocktaking

As CDC approached its 25th anniversary in 1973, several occasions were presented for reviewing what had been achieved over the period. Its twentieth anniversary and the favourable conclusions of the working party provided the theme for a reflective annual report in 1968. The 1971 annual report contained Howick’s valedictory thoughts after twelve years as chairman. At the beginning of 1973 it was Rendell’s turn to retire after twenty years as general manager of CDC, which prompted reflections from his successor. The year 1973 was something of a watershed in other respects as well. The oil crisis in the autumn of that year was a severe setback to the economies of the developed world for several years. In Britain it signalled the end of a period of Conservative rule, following the winter of discontent. Thus, by 1974 there was a new chairman, new general manager and a new government, all in short order. It is a natural moment to consider what had been achieved over the quarter century and to seek to understand CDC’s own self-image as a development agency.

Financial outcomes By 1973 CDC’s operating remit covered 40 countries, of which eight were outside the Commonwealth. Its investments were spread over 233 projects, on which £244 million had been invested or formally committed. Its annual investment capacity had increased to the point that in 1973 the Board approved 52 investments with a value of £48 million and £25 million was actually disbursed, while there were 52 on-going project investigations. The interest waiver arrangements were proving effective in enabling CDC to undertake agricultural projects and in 86

Jubilee Stocktaking 87

that year eleven new agricultural projects were approved and supplementary investments were made in another eleven. This was significant because the interest rate on its standard Treasury borrowings that year reached 12.87 per cent. CDC’s investment portfolio of £181 million comprised £40 million of equity or direct equity investments, or 22 per cent of the total, and £141 million of loans. In terms of the new concept of investing in renewable natural resources, 17 per cent fell into that category. In this portfolio CDC had made provisions of £13 million in respect of ‘funds at present unremittable’, or 7 per cent. In 1973 CDC produced an operating surplus of £14 million, which represented a return of 8.6 per cent over average capital employed in that year. Operating expenditure had accounted for nearly 15 per cent of gross income, although CDC preferred to express costs in relation to its balance sheet, where this represented 0.9 per cent of total investments and commitments. It was a lean organisation. This level of profitability enabled CDC to make provision for blocked remittances, to service Treasury loans (including interest equalisation provision) and to pay UK corporation tax for the first time. This left a negligible amount of only £200 000 for addition to reserves, which stood at just under £1 million — after twenty-five years. The balance sheet still carried the frozen Capital Adjustment account, where the liability was slowly being reduced under the agreed formula, but it still amounted to £17 million. In financial terms CDC was able to argue that it had demonstrated its ability to operate on commercial lines, after its early misfortunes. It was now managing risk effectively in commercial and financial terms, while still being exposed to political and economic risk from circumstances such as the Rhodesian Unilateral Declaration of Independence, or blocked remittances from Nigeria and Ghana. Despite having no equity capital CDC had continued to engage in long term development, with a significant proportion of its assets represented by equity investments and renewable natural resources investments. It was earning a sufficient margin over Treasury money costs to sustain a widespread portfolio through six overseas regional controls, encompassing thirteen country offices. CDC was clearly discharging its statutory mandate to pay its way, taking one year with another. Let us now review its activities in terms of the kinds of development being achieved on the ground, where noticeable regional differences had become evident.

88 An Agency for Development 1963–79

In 1973 the Caribbean region held nearly one quarter of CDC’s total investments and commitments and was the largest regional portfolio, with 58 projects. The region had been the scene of misdirected enthusiasm in CDC’s earliest days, most of which were speedily eliminated in the first phase of Reith’s and Rendell’s leadership. In their place CDC had invested actively in power generation, mortgage finance, housing and commercial development, and in tourism — mainly hotels. By 1973 there were eight investments in power generation and CDC was managing five island electricity undertakings in Dominica, Grenada, Montserrat, St Lucia and St Vincent. CDC invested in hotels, mortgage finance and housing in nearly all of the 13 countries of this region. However Jamaica was the principal destination for its investments, with 16 out of 58 projects. CDC had discovered one significant local entrepreneur in Jamaica and strongly backed the Matalon group in several property, hotel and one industrial investment; otherwise it was more typically involved with the island governments as partner or loan guarantor. In the whole region there were only two agricultural projects in 1973. The portfolio had become increasingly anomalous in relation to British aid policy, although it was robustly defended by CDC on grounds of portfolio risk dispersal. Malaysia was the principal locus of CDC activity in the East Asia and Pacific region, with nearly half of the 38 projects in 1973. It was a region of contrasts, including the already well developed economies of Hong Kong and Singapore, in respect of which ODA was already putting pressure on CDC not to invest further. CDC had invested in Fiji since its early days and was now also in the Solomon Islands. It was grappling with the recent addition of two large non-Commonwealth countries, Indonesia and Thailand. The region ranked second in disbursed investments, at £37 million, but first in terms of outstanding commitments for new investments, at £20 million. One of CDC’s earliest investments was a Malaysian oil palm estate, which gave it the experience to introduce oil palm to Sarawak and Sabah in Eastern Malaysia on large plantations, but also with smallholders. BAL Estates was to become its star plantation investment, eventually realising £100 million when sold in 1996.1 More recently in 1971 after five years of trials CDC had commenced the first oil palm plantation in the Solomon Islands. CDC had also been a pioneer in cocoa growing in Malaysia. The region was the home of its successful creation of mortgage finance businesses, initially in Singapore and Malaysia, but now comprising half a dozen companies through the region. There was significant property development activity, of which

Jubilee Stocktaking 89

the most innovative was the commitment in 1973 to invest with local interests, and to manage, the development of a new town for 50 000 people near Bangkok in Thailand. There were sizeable loans to utilities and to government guaranteed projects, reflecting the orientation of CDC at this time. The East Africa region included the offshore islands of Mauritius and Seychelles and the recent approval of Ethiopia. It was the busiest one, with total investments and commitments of £47 million in 1973 spread over 58 projects, and notwithstanding increased political instability. Kenya was the leading destination for investment. The expulsion of Asians from Uganda had cast a pall over development there, affecting especially the prospects for collaboration with government over the development corporation and for smallholder schemes, where CDC had done much preparatory work. Its sole surviving mining investment was in a marginal copper mine in western Uganda, where CDC was bought out by the government in 1974. In Tanzania CDC’s most interesting project, dating from 1959, was a large managed plantation of wattle along with an arable farm, which included production of hybrid maize and wheat seed for the national seed company. Over time the emphasis changed and tea growing became a major feature. In Kenya there were flagship investments in urban housing schemes and mortgage finance, in utilities and — above all — in the statutory Kenya Tea Development Authority which CDC had helped to devise. At this point it embraced nearly 80 000 tea growers and CDC had committed to support major further expansion of the scheme. It had also committed to invest in a large government controlled sugar smallholder scheme linked with a nucleus estate and sugar mill. In all these projects CDC was working with the public sector, where the former colonial roles of Howick, Swynnerton and Griffiths-Jones were proving to be no obstacle — rather the contrary. It was invested in two local horticultural export companies and managed them. On the industrial side there were investments in grain milling, edible oils, textiles, as well as in the tourist sector, which was also the focus in Seychelles. Investment in the development finance companies is reviewed below. In Central Africa CDC had been a major source of finance for the Kariba dam in 1956, at the time of the Central African Federation, and its £15 million loan had been guaranteed by the Rhodesian and Zambian governments. UDI had resulted in the rebel government refusing to meet its financial obligations to CDC. Following successful legal action against the Central Africa Power Corporation, who placed

90 An Agency for Development 1963–79

the funds into a blocked account in Zambia, a deal was negotiated with the Zambian government. This provided that the funds could be invested by CDC in local projects, and thus become eligible for eventual repatriation, providing matching sterling was also invested in the projects in a ratio of two blocked pounds for one new pound.2 At the same time the Zambian government was engaging in an active programme of nationalisation and compulsory participation in businesses through the agency of a state holding company. In 1973 the state became a majority shareholder in CDC’s flagship industrial investment, Chilanga Cement, which had provided the cement for the Kariba dam. Nevertheless, CDC made further loans for capacity enlargement and also helped to finance increased production of cement on the Copperbelt. It invested in textiles. In agriculture there was a major association with the World Bank in a project to train and settle farmers on tobacco farms, under CDC management. It was also a large lender to the state sugar plantation, which had been nationalised. In Malawi CDC had pioneered the growing of flue cured tobacco, which had now become a government project with tenant farmers and managed by CDC. It had also financed other smallholder schemes (see below). There was the customary portfolio of utilities and housing loans and a development corporation. It had made a loan to the local textile company. The three High Commission protectorates in Southern Africa contained several of CDC’s largest and long standing agricultural investments in a portfolio of £28 million comprising 20 projects. Botswana was the location of Molopo cattle ranch, a 366 000 acre property carrying a herd of 20 000 head of cattle, which was managed as a direct project. In its early days CDC had also established and run the national abattoir, which had subsequently become a statutary corporation with continuing CDC support. Meat was the country’s principal export. Swaziland contained CDC’s great sugar and citrus irrigation scheme. There were also two large forestry projects. Shiselweni produced eucalyptus timber mainly for the mining industry and was managed by CDC. Usutu was a joint venture with Courtaulds, where 123 000 acres of conifer had been planted in the 1950s as the raw material for a pulp mill. In the 1960s CDC had played a crucial role in the development of a rail link for Swaziland’s mining sector, which was also beneficial to reducing transport costs for its sugar and pulp projects. By 1973 it still had a small loan outstanding and a stake in the iron ore mine.

Jubilee Stocktaking 91

In the West Africa region Ghana’s hostile nationalism after independence provided little opening for CDC when it was permitted to invest again in 1963, but two textile loans were put on the books in 1968 and 1971 and suffered severe remittance difficulties. In Nigeria a £3 million portfolio of a dozen investments had been established prior to independence, which had grown to £5 million by 1963 under the continuity rules. Over the following decade it was expanded to almost £16 million. Although the portfolio had some similarities with other CDC countries, with hotel, housing and property development, it was distinctive in the weight of industrial projects. Textiles, cement, tyres, development finance all featured, but CDC was also continuing to explore ways of making a contribution to the agricultural sector. In the early days it had struggled unsuccessfully with timber and in the 1960s it invested in rubber. In 1970 it started two new pilot projects, one to investigate the growing of rice and wheat near Lake Chad, which was funded for eight years by the British aid programme but never became a project. The other was to test the feasibility of a major irrigated sugar project, the Savannah Sugar scheme. The pilot project proceeded to implementation under CDC management. CDC made a 10 per cent investment in the corporate equity, but the Federal Government undertook to shoulder all development costs. It proved unequal to its obligations and an increasingly fraught relationship was eventually terminated. In the mid-1970s, in the wake of the civil war, of the impact of rising oil revenues, of political instability and increasingly disorderly economic management, CDC was progressively sidelined from a constructive development role in Nigeria. Gambia had been the scene of CDC’s infamous poultry project. A long void was eventually filled by a hotel investment in 1971. Sierra Leone had also had a hotel investment from 1960, followed by a utilities loan. The overall picture of CDC in West Africa was rather depressing. Its culture was quite unsuited to the buccaneering environment of Nigeria where CDC’s vaunted management contribution to project development was despised in the heady confidence of the early independence years. Smallholder agriculture was the antithesis of the model in which everyone wanted to be a ‘big man’ as quickly as possible. Within the great diversity to be found in CDC’s portfolio of 233 projects in 1973, three distinctive approaches to development had been evolved. The trinity comprised housing finance, the establishment of smallholders growing export crops in association with modern tropical agricultural management, and the creation of development finance

92 An Agency for Development 1963–79

corporations (Devcos) in association with government to finance smaller scale projects in conjunction with local entrepreneurs. The corporation built up expertise in these fields which was transplanted from country to country. When justifying its development contribution and seeking wider support for its activities, much emphasis was placed by CDC on these three development techniques. Each had occupied a rather special place in its own story.

Housing finance One of CDC’s earliest projects was the formation of a building society in Singapore in 1950, the Federal and Colonial Building Society. It was successful and the manager, Burgess, became one of the corporation’s most successful businessmen as the Singapore venture burgeoned into a family of building societies in the region. In 1956 the baton was passed to Nigeria where a successful operation was established until it was caught up in the civil war and the CDC interest was bought out in 1972. The Caribbean then became the focus of initiatives, starting with Jamaica in 1957, but spreading throughout the region over the following 15 years with 11 mortgage finance businesses. Jamaica provided the opportunity for an important enlargement of the field of activity when CDC funded a succession of estate development schemes in conjunction with a local entrepreneur, with mortgage finance being provided through a joint venture with a British insurance company. Eleven housing development projects were undertaken in the region, including a large scheme in St Lucia in which CDC invested over £10 million. Housing estate development appeared to be a logical extension of CDC’s growing experience in this sector. Apart from the Caribbean, opportunities were found in most other regions, with some notably large schemes in Kenya (where CDC became a direct developer) and in the Thailand new town of Nava Nakorn. Over a twenty-year period mortgage lending and the direct funding of housing developments, often in association with the CDC mortgage companies, became the largest single asset class in the balance sheet, accounting for almost a quarter of total investments. The fact that there was such a niche opportunity at that time everywhere but in East and Central Africa, where local building societies had already been established, was a reflection on the conservatism of the colonial banking system, which was unprepared to undertake the maturity transformation of banking deposits into mortgage lending. CDC

Jubilee Stocktaking 93

exploited the situation with great determination, despite the reservations of the Colonial Office and its successors, as already noted in the controversy over ‘finance house’ business and the later reservations about the development value of urban housing. East Africa provided the most striking demonstration of CDC’s expertise and reputation, and at a time when its relationships with Whitehall were exceedingly fragile. The Kenya Lancaster House conference in early 1960 charted the colony’s path to independence on a timetable which took local business opinion by surprise. There was a crisis of confidence in financial markets and one casualty was the building society movement, which suffered a haemorrhage of deposits. The political dimensions were alarming and there was a desperate plea to CDC to step in and stabilise the situation, notwithstanding that this undermined policy guidelines against refinancing other loans and that it entailed high risks. The episode is instructive in its illustration of CDC’s hard headed approach to the containment of risk while structuring a long term solution to the problems, while at the same time responding to the political imperatives with an alert sense of the reputational opportunity that was being presented to it. The first approach to CDC for help was in June 1960 from the Kenya Government, which had already felt impelled to make a temporary advance to one of the building societies which was experiencing accelerated withdrawals of deposits and lacked a supportive institutional shareholder. CDC’s expert on building societies, Burgess, was sent to Kenya to examine the situation. Within weeks all three societies were in difficulties.3 CDC continued to evaluate the problems, refusing to be pushed into any commitment until all the facts were known, which led in early October to a direct and urgent ministerial appeal to Howick for financial support and for the assignment of Burgess to manage the crisis. Rendell visited East Africa and cabled concern that one of the building societies, First Permanent, which was an offshoot of a Northern Rhodesian company, was unsoundly managed.4 By the end of the month CDC had the measure of what it should do: a. Existing institutional support from parent insurance companies (Pearl Assurance and Norwich Union), banks (mostly Barclays DCO) and the government should be locked in and enhanced. b. CDC would then offer £2 million to cover the net estimated liquidity shortfall to June 1961, secured on the mortgage assets of the building societies. Convertibility of the loans back to sterling was to be guaranteed by the Currency Board.

94 An Agency for Development 1963–79

c. CDC was satisfied with the management of two of the building societies, but that of First Permanent was ‘suspect’ and its operations should cease. d. CDC loans would be channelled through a special entity which would be vested with powers to control the managements of the societies.5 In early 1961 the position of First Permanent deteriorated and by midyear there was an imminent prospect of it having to prevent the further withdrawal of deposits. A meeting in the Colonial Office in July assessed the situation and CDC was asked to consider taking over the building society and running down its mortgage book. As explained to the Board, if First Permanent had frozen its deposits ‘the effect would be to precipitate a financial crisis in both Central and East Africa affecting all the other building societies, Post Office Savings Banks, commercial banks and similar institutions’.6 However, taking over First Permanent would entail CDC accepting a liability for £4.35 million. Apart from being indemnified from ultimate loss, CDC was concerned that such a large funding liability should be counted outside its normal borrowing limit. An understanding was eventually reached with the Treasury acceptable to CDC.7 By this time additional financial support was also needed for the other two building societies. By the autumn CDC had undertaken to set up a new building society in Kenya to take over the assets and liabilities of First Permanent and had assumed a total commitment of £5.6 million to the three societies. Implementation entailed legislation in Kenya and Northern Rhodesia. The ‘new’ First Permanent was incorporated in the following year. This was not quite the end of the drama, however. In 1962 the Kenya Building Society defaulted on a loan repayment to CDC and it became clear that it would be unable to correct the situation by the year end. In November CDC proposed to take full control of KBS and to run down its mortgage portfolio, providing the terms of the £4.35 indemnity from the Treasury relating to First Permanent could be extended to include KBS. Although its maximum theoretical liability was over £5 million for the two societies, CDC felt that the risk was acceptable, since the First Permanent portfolio was reducing in an orderly fashion.8 The ‘new’ KBS was incorporated in 1963 and the corner was turned in the year prior to Kenya’s independence. Deposits began to grow at First Permanent and a new scenario opened up. With the existing

Jubilee Stocktaking 95

building societies all closed to new mortgage business, there was a gap in the market that had a political dimension: to service the needs of the new African elite. This was now classic business for CDC and in 1965 it proposed to all three East African governments the establishment of new territorial mortgage finance companies, to be managed by CDC through First Permanent, with the governments as 40 per cent minority shareholders.9 By the following year it made further sense to propose hiving off the remaining assets of First Permanent to the national housing finance companies. This aspect was being driven by the break up of the East African currency area and by Tanzania’s concern that Kenya mortgage assets were being partly funded by Tanzanian deposits. CDC now felt able to release HMG from its indemnity (the maximum liability had already come down to £3.8 million) because it was confident that the winding up of its rescue operation would actually yield a capital profit of around £200 000.10 All this took a while longer, partly because the Kenya government jibbed initially at taking over what it regarded as expatriate mortgages from First Permanent, but this was eventually accomplished by the end of 1968.11 There is no doubt that CDC’s demonstration of well-judged business competence made an impact in Whitehall. The fortuitous timing of the Kenya intervention materially eased the settlement on the Sinclair Report in 1961 and gave Howick and Rendell enhanced influence in the following years. Whitehall was never comfortable with the prominence accorded by CDC to housing finance, notwithstanding the justification advanced in terms of promoting urban social stability for the emerging middle classes, and of stimulating local construction industries and the techniques of low cost housing. This attitude influenced the inflexible response to the vires ruling in 1955. The aid administration viewpoint was that housing finance was not a suitable object of aid, that it did not assist with the generation of foreign exchange, and that the provision of housing should be a function of rising wealth in the country rather than of aid. CDC argued that it needed to have a sizeable element of relatively safe bread and butter earnings and that alternative infrastructure projects were being increasingly pre-empted by the World Bank. Official feeling was that housing finance was still too easy an option. In the five years 1967–72 housing accounted for 31 per cent of new investments, whereas in the following five years the proportion dropped to 14 per cent. By 1980 it accounted for under 15 per cent of the total portfolio, on a declining trend.

96 Table 9.1 Year of investment

CDC mortgage finance companies

Mortgage finance company

Peak investment

Exit year

Jamaica Housing Development Company

£0.44m in1959

1967

1961

Trinidad & Tobago Mortgage Agency

£0.10m in1963

1976

1960

Caribbean Housing Finance Corporation–Jamaica

£1.93m in1991

Cont.

1967

Trinidad & Tobago Mortgage Finance

£4.67m in1976

1981

1968

St Lucia Mortgage Finance

£2.57m in1983

Cont.

1968

Guyana MortgageFinance

£3.12m in1975

1987

1969

Barbados Mortgage Finance

£4.0m in1975

1998

1969

Dominica Mortgage Finance

£1.11m in1976

1995

1970

St Vincent Housing Finance

£0.63m in1976

1979

1974

Jamaica Mortgage Bank

£1.0m in 1974

Cont.

1976

Rodney Bay Mortgage Finance

£1.0m in 1988

1991

East Asia 1950

Federal & Colonial Building Society

£9.93m in1958

1972

1969

Singapura Building Society

£1.67m in1974

1981

1972

Malaysia Building Society

£1.94m in1972

1979

1964

Hong Kong Building & Loan Agency

£1.05m in1970

1991

1959

Borneo Housing Mortgage Finance

£1.05 in 1970

1991

East Africa 1960

KBS/Kenya Building Society

£1.9m in 1961

1968

1962

First Permanent Building Society

£1.2m in 1962

1970

1968

Housing Finance Co. of Kenya

£8.27m in1989

Cont.

1964

Mauritius Housing Corporation

£1.7m in 1991

1992

Caribbean 1960

1967

Tanzania Housing Bank

£0.28m in1973

1979

1968

Housing Finance Corporation– Uganda

£0.09m in1970

1983

Nigeria Housing Development Society

£2.43m in1970

1971

West Africa 1958

Jubilee Stocktaking 97 Table 9.2

CDC housing develepment companies

Start

Project

Peak investment

Exit

1968 1968 1968 1968 1968 1969 1970 1972 1972 1973 1975

Caribbean East Caribbean Housing, Barbados Rock Dundo Dev., Barbados Guyana Housing Development St Ann Dev., Montserrat Urban Development Corp., St Lucia Turtle Beach, Jamaica Rodney Bay, St Lucia Bayside Development, Jamaica Portmore Land Dev., Jamaica Ocho Rios Commercial Centre, Jamaica National Housing Corp., Jamaica

£0.46m in 1972 £0.54m in 1971 £1.58m in 1972 £0.40m in 1968 £0.62m in 1975 £0.45m in 1980 £10.43m in 1988 £0.98m in 1974 £2.64m in 1979 £0.39m in1985 £0.45m in 1975

1979 1980 1987 1991 1979 1990 1991 1992 1987 1986 1987

1974 1994 1994

East Asia Nava Nakorn, Thailand Akogare Estates, Papua New Guinea Mana, Papua New Guinea

£1.8m in 1980 £0.22m in 1995 £0.26m in 1994

1991 1996 1996

1964 1968 1973 1979 1979 1989

East Africa Nairobi City Council – Kariokor, Kenya Nairobi City Council – Jamhuri, Kenya Nairobi City Council – Madaraka, Kenya Nairobi City Council – Buru Estates, Kenya Nairobi City Council – BBE Central Housing Koma Rock Estate, Kenya

£0.13m in 1965 £0.39m in 1970 £1.0m in 1973 £2.3m in 1979 £1.6m in 1979 £5.0m in 1989

1989 1985 1991 1981 1991 …

1957 1957 1962 1969 1988

Central Africa Rhodesia Housing Government Housing, Malawi Zambia Housing Malawi Housing Corporation Zimbabwe Low Cost Housing

£1.0m in 1957 £1.0m in 1958 £1.0m in 1962 £1.6m in 1979 £0.6m in 1992

1986 1986 1982 1996 …

1950 1995

West Africa Lagos Executive Development Board Precious Fields Estates, Ghana

£1.25m in 1951 £1.42m in 1995

1960 …

Smallholder agriculture In the minds of its founders, CDC was seen very much in terms of undertaking large scale agricultural projects under its own management. The aim was to create new export industries targeted at the British consumer and generating a collateral bonus of economising on

98 An Agency for Development 1963–79

purchases from the dollar zone. Such developments would of course be economically beneficial to the colonies. Several of the initial attempts to implement this vision were failures – in Atlantic fisheries, Nyasaland tung oil and Guyana forestry – as well as the humiliating cause célèbre of the Gambia poultry scheme. Other projects were slowly developed into substantial agri-businesses in palm oil in Sabah, citrus, sugar and forestry in Swaziland, ranching in Botwsana, wattle and arable farming in Tanzania. They were themselves the source of expertise for other ventures in later years, although this approach to development became hard to implement as the colonies moved to independence and did not re-appear for another twenty years or so. There was, however, another strand of policy towards tropical agriculture since the earliest days, concerned with improving the prospects of indigenous farmers through the introduction of new or improved crops and cultural practices, all in association with external capital and experienced management. It was particularly associated with Gaitskell, who was appointed to the CDC Board in 1954 and remained a director for twenty years. His career had been with the Gezira cotton scheme in the Sudan, which was widely held up as the outstanding example of private enterprise working in successful partnership with government and peasant smallholders. CDC was under constant challenge to apply the Gezira principles to other agricultural projects, but management was initially cautious, since the main effort was to sort out which of the inherited schemes had sound potential and then to get them going successfully. CDC’s first serious initiative with smallholders was in Malaya, where a palm oil estate had been established under the conditions of the Emergency (and where the manager and regional controller had been murdered in 1954). The government had decided to extend palm oil cultivation from an estate based industry to include smallholders. In 1956 Kulai became the nucleus estate for the programme, training field supervisors and setting up a large plant nursery and establishing the first 400 hundred smallholders. CDC was closely involved through a working party in the detailed planning of the programme and its regional controller was appointed the first chairman of the Federal Land Development Agency. It made an initial loan of £600 000 and undertook factory processing of palm kernels until FLDA was in a position to build its own factories. Over the years FLDA settled some 12 000 smallholders, but CDC was prevented from involvement in the on-going programme due to the ban on new business in independent Commonwealth countries. CDC went on to introduce palm oil cultiva-

Jubilee Stocktaking 99

tion to Sabah in 1959 with an estate project. Following the new philosophy, part of the land was reserved for smallholders, but a lesson was learned. With no population pressure and plentiful employment opportunities, as well as the availability of government subsidised settlement schemes, take up on CDC’s scheme was poor. By 1969 there were only 20 smallholders on it. The Swaziland Irrigation Scheme, started in the 1950s, envisaged the introduction of smallholders from an early stage, but the economic imperatives of establishing viability of the project deferred any initiative. Interestingly there was local political pressure to introduce white farmers when a feasibility study was undertaken in 1959. The first settlers were introduced in 1962. The other major stimulus on CDC to invest in smallholder agriculture came from Kenya. Swynnerton, whose name is most associated with Kenya’s famous plan during the Mau Mau Emergency to improve the living standards of African farmers, and Kenya’s Governor, Howick, who had enthusiastically implemented the plan, both joined CDC on leaving the Colonial Service. Howick became chairman and Swynnerton was appointed head of the agriculture department.12 The Swynnerton Plan included a target to introduce smallholder tea cultivation on a large scale. This was initially controversial, since the world tea industry had been developed largely on a plantation basis, and there were serious concerns over quality control and the possible adverse effect on the reputation of Kenya tea on world markets, as well as doubts over the organisational challenge. The department of agriculture had initially addressed the problems with a pilot project in 1953, leading up to commercial trials. It had established some 1600 acres of tea on smallholdings by 1959, whereas the Swynnerton Plan called for the planting of 12 000 acres by 1968. At this point CDC was approached. A mission was organised, involving local tea company representatives, which reported favourably on the development to date. CDC then entered into an intensive dialogue with the government over a period of nearly two years on the creation of a ‘bankable’ project. The principles worked out here were to re-appear in many subsequent schemes. A statutory authority – the Special Crops Development Authority, which was subsequently renamed the Kenya Tea Development Authority – was empowered to raise finance and to invest in processing facilities and to make loans in the form of services and supplies to smallholders. It had responsibility for inspection, purchase, collection, transport and sale of the green leaf from farms to the factory companies. These were created as separate corporate entities, allowing for

100 An Agency for Development 1963–79

external investors in them. The authority could employ staff. All its costs were recoverable through a financial cess (tax) on leaf processed. The department remained responsible for field supervision of cultivation practices, for plant nurseries, research and training, while the government was responsible for the critically important system of feeder roads.13 The First Plan to develop 9000 acres of tea called for funding of £900 000 and was financed by CDC; it was subsequently augmented to 11 500 acres with support from the West German government. There were already 15 000 smallholdings by the end of 1962, when the World Bank began to consider giving support to smallholder agriculture for the first time. In the following year it agreed to support the Second Plan for a further 14 000 acres, with a loan of £1 million and CDC contributed £200 000. In 1967 CDC appraised proposals for a Third Plan to add another 35 000 acres, for which it contributed £450 000 and the IDA £875 000. Financing the associated factory developments resulted in a series of further projects and there were eleven on the books by 1973. CDC was drawn into an altogether more political smallholder programme in the run up to Kenya’s independence. Immediately after the Lancaster House conference in January 1960 the colonial government began to formulate plans for acquiring farms from white settlers and breaking them up for settlement by Africans with a main cash crop, either as yeoman farmers with 50 acres or peasant farmers with 15 acres. Land purchase would be funded by the British government and CDC and the World Bank were invited to finance the development and settlement costs. Intense negotiations took place to hammer out a viable scheme. CDC insisted that money could only be drawn against specific sub-projects on high potential land approved by the World Bank and itself. These required supporting technical staff, training of farmers and a tight administrative structure. Eventually it agreed to commit £1.5 million out of a total project cost of £8.8 million.14 By September 1961 the government had decided to slow down the implementation of settling 1800 yeoman farmers, but the plan to settle 6000 peasant families remained on track. More importantly, it had decided to superimpose for political reasons the settlement of 12 000 landless families outside the carefully crafted framework of the CDC/World Bank scheme. The overall programme entailed the purchase of 360 000 acres of land from white farmers over a period of three years from mid1961 at a revised total cost of £14 million.15 With further modifications the loan agreements were ready for signature by the year end.

Jubilee Stocktaking 101

In 1962 the British government agreed to increase the high density settlement scheme from 12 000 to 60 000 families on a million acres of purchased land. Meanwhile the first sub-project proposal under the CDC/World Bank scheme was not put forward until November 1962 and was sent back for revision. Political and constitutional developments led to further delays and changes, such that by November 1963 it was agreed to reduce the finance required, with CDC’s share dropping to £825 000. By now CDC was disillusioned with the whole scheme and was minded to back out, since no advances had actually been made by March 1964. However the political dimension became all important, since withdrawal by CDC would have triggered a like withdrawal by the World Bank. A carefully phrased letter was sent by the Colonial Office to Howick. ‘We would not presume to try to influence your Board’s commercial judgement: it would be quite improper for us to attempt to do so.’ But The withdrawal of the Bank and the Corporation would, I am sure, lead to a serious deterioration in the morale of the remaining European farmers, whose confidence in the future is likely to be sustained by the participation of outside organisations in land settlement, and whose withdrawal from Kenya could have most serious consequences for the economy of Kenya in general. There is also the important role which the International Bank and the CDC can play in ensuring that the land settlement schemes are carried out at the agreed standard and in the manner proposed. Their withdrawal from the scene would remove an element of restraint which is very desirable if the local authorities are to live up to their responsibilities.16 The hint was taken and the scheme went ahead, albeit slowly. It is clear that CDC would never have made the investment on the basis on which the Kenya land settlement scheme was finally implemented, if presented in that form at the outset. Nevertheless its dogged insistence on properly structured proposals over these three years was impressive and can only have enhanced the professional standing of the corporation. Swynnerton’s experience was brought to bear on the proposed settlement scheme to be incorporated into the Swaziland Irrigation Scheme, but the first external opportunity after Kenya arose in Malawi. Following a mission in 1967, a Malawi Smallholder Tea Authority was created, modelled on KTDA, and CDC committed to invest in it. More

102 An Agency for Development 1963–79

modest in scope than the Kenya scheme, it proceeded by stages towards 8000 acres of smallholder tea and involved 3500 farmers. CDC’s commitment was £1.3 million.17 A failed tobacco plantation project in Malawi was turned into an influential smallholder project. CDC had struggled for years in the 1950s to grow successfully fluecured tobacco on its Kasungu estate. By the early 1960s it had mastered the cultivation problems, but without seeing its way to an economically viable estate. The project was written off and transferred to the government in 1964, with a proposal that it be made the basis of a settlement scheme. The Kasungu Flue-Cured Tobacco Authority was set up in 1968, funded by loans from CDC, and three successful settlement projects were implemented under CDC management and involving nearly 1000 farmers.18 This experience was subsequently transferred to Zambia to a flue-cured tobacco settlement scheme and two projects at Mukonchi for settlement farmers. Malawi proved a successful market for CDC’s expertise on smallholder schemes. In 1977 it undertook to manage a Smallholder Sugar Authority, following a mission the previous year, to establish 326 farmers next to a government controlled nucleus estate managed by Lonrho. CDC invested in both projects.19 1978 saw the establishment of the Malawi Smallholder Coffee Authority under CDC management. The task here was to rehabilitate 1900 acres of smallholder coffee from an earlier government run project which had collapsed in disorder, and to add another 1400 acres of new plantings.20 CDC invested in the project, but the costs of its management agreement were carried by the British aid programme for three years, which was an interesting precedent of collaboration between the aid programme and a CDC project. Unsurprisingly, given CDC’s close relationship with the government, there were further opportunities for smallholder projects in Kenya. In 1971 a huge sugar project was launched under government controlling ownership, managed by Booker, to develop a 3200 hectare estate at Mumias, with 9200 ha of outgrowers. CDC did not undertake the feasibility study here (perhaps a sign of its confidence in this kind of project), but nevertheless invested in the project with both equity and loan. In 1975 it helped to finance an expansion of the outgrower element to 26 000 ha and a total of 17 000 outgrowers.21 A major coffee smallholder sector had developed in Kenya amounting to some 60 000 ha, but poor extension services after independence and restricted credit facilities had resulted in a third of the area becoming very neglected. Following an appraisal by CDC and the World Bank in 1979, CDC

Jubilee Stocktaking 103

agreed to lend £8.5 million on a project to rehabilitate 15 000 ha and involving 200 000 smallholders.22 The project was not managed by CDC, but the government agreed to close CDC/World Bank involvement in the preparation and approval of the annual work plan. The picture in West Africa was rather different. There, CDC made substantial loan investments during the 1970s in Ivory Coast – rubber in 1974, oil palm in 1979, and rubber again in 1980, and in Liberia – oil palm and rubber in 1979. It only undertook a management role in the two familiar territories of Cameroon and Ghana. CDC had managed for fifteen years from 1960 the huge Cameroon development corporation, Camdev, which had taken over the former German estates at the end of the war in what was then a British trust territory. Since the new state of Cameroon was outside the Commonwealth, CDC had been precluded from considering new investment there until 1969. After the ending of the management agreement in 1975 CDC had continued with a series of technical consultancies and then, in 1977, it had mounted a joint mission with the World Bank to consider new investment. The outcome for CDC was a loan investment of £4.5 million in a new estate, incorporating 2000 ha of rubber and oil palm outgrowers and a continued close advisory and monitoring role.23 With regard to Ghana, in 1976 CDC was employed by ODM as a consultant to assess an import substitution oil palm project which would consist of a 4500 ha nucleus estate with 300 smallholders on 1200 ha plus outgrowers. The outcome was that CDC agreed to lend £3 million and to manage the Twifo Oil Palm Plantation.24 The distinctive feature of CDC’s agricultural investment in Asia was the absence of management responsibility for the smallholder programmes. Huge estate investments were initiated in Papua New Guinea in 1976 at Higatura and in 1984–5 at Milne Bay, but the associated smallholder projects were the responsibility of government and the World Bank. In other large projects involving smallholders, CDC had the role of investment banker, in the Thailand rubber replanting project in 1977, in sugar in Papua New Guinea and Fiji in 1979 and in the Indonesian rubber projects. Under Swynnerton’s leadership CDC became very active in seeking out opportunities for financing smallholder agricultural development, as the foregoing examples have illustrated. There was intensive discussion within the corporation on the lessons to be learned from the early projects and of the merits of different modes of implementation.25 As Table 9.3 shows, the main surge in smallholder projects came after Peter Meinertzhagen became general manager in 1973. Out of more

104 An Agency for Development 1963–79

than 50 agricultural projects involving smallholders between the first ones in Malaysia in 1959 down to 1990, there were ten projects in the fourteen years before Meinertzhagen’s appointment. Then, during the twelve years in which he ran CDC 34 commitments were entered into. After his time there was a marked falling off in new projects and with minimal management involvement in them. CDC’s commitment to bring large numbers of small farmers into the cash economy cannot be doubted. It is less certain that a commercially run development institution was the best vehicle for achieving such an objective. For CDC the dilemma was resolved by blurring the issue through an increasing reliance on banking type transactions covered by government guarantees. The CDC approach to smallholder agriculture was to focus on a single cash crop, involving centralised processing and controlled marketing. It favoured an autonomous management structure underpinned by legislation, regulations and field discipline. This produced a good loan recovery record. But this authoritarian model had disadvantages: it increased the farmers’ risks and vulnerability; it was at the expense of motivating the farmers or acknowledging their own socio-economic priorities. CDC’s preferred model was the nucleus estate with surrounding settlement farmers or outgrowers, and was the basis of the regime just described. It carried within it the potential for conflicts of interest between the processing authority and the producer – with the former dominating. The scope for unscrupulous exploitation of the farmer who was at the tail end of the chain of financial deductions from sale revenues, has unhappily been a feature of the subsequent history of a number of schemes. From the standpoint of the income and welfare of small farmers engaged in the production of export crops, a model based on farmers owning their own land for food and cash crops, supported by technical and marketing services, and selling to a processor (or preferably a choice of several processors) has the potential to optimise incomes. It rests on an assumption that they will be supported by public sector technical services. Sadly, they have become notably inadequate in so many of the countries where smallholder schemes were launched. In the 1960s CDC believed it could identify roles where it could make a development contribution by obtaining management contracts alongside its financial investment, such as at Kasungu in Malawi and Kaleya in Zambia; or by loans to specially devised crop authorities under government guarantee, such as KTDA and the tea and coffee authorities in Malawi; or by direct loans to governments for funding such programmes, such as Kenya smallholder coffee and the

Jubilee Stocktaking 105

Cameroons Development Corporation. The more CDC took up a banking role, without collateral management or a nucleus estate investment, the harder it became to define a functional contribution to the development outcome. Some projects did have this characteristic – financing the tea factories in the KTDA scheme was a large scale example. But in this period CDC did not seek to push itself as an equity investor and the political climate was against it. Thus financing coffee pulperies for the Kenya Coffee Authority was a loan transaction, nor did CDC become involved in oil seed mills or cotton ginning. The ethos of the agricultural department of CDC was of an international service organisation and much of its expertise would have been most appropriately deployed as technical aid to the agricultural administrations of developing countries. Under Meinertzhagen’s leadership CDC’s role as a development agency was very much to the fore and its smallholder strategy could be centre stage. It would require a different political environment to bring into prominence again the development potential for directly managed agricultural projects of the sort that CDC had ventured in its first years.

Devcos During the period when colonies were moving rapidly towards political independence, economic nationalism was rife and CDC was sensitive that its role as a foreign investor might not always be welcomed. Its promotion of smallholder schemes was a means of addressing the problem in agriculture and an equivalent innovation was needed for industry. The answer was seen in applying the notion of partnership to the establishment of development corporations managed by CDC and in which it would be partnered by the government of the territory. By setting up a joint venture with a government CDC addressed directly the issue of exploitation. This had the incidental effect of institutionalising CDC’s presence in a country over the independence period, so that it could be seen to be actively engaged in appraising projects, with the benefit of high level access to government policy thinking. At a time when continuity of development funding was a major anxiety for the new governments, the commitment of new capital by CDC to a Devco (as these development corporations came to be known) was a significant demonstration. At the same time there was a tactical issue for CDC in its relations with the British government, since approval to establish a Devco would soften the ban on new business in countries after they had attained independence.

106 Table 9.3 Year

CDC smallholder projects

Africa

1959 1960 Swaziland: Vivulane sug. 1961 Kenya: Nyambeni tea : Tea Dev.Auth. : Land Dev. Sch. 1968 Malawi: Smallholder Tea 1970 Malawi: Kasungu tobac. 1972 Zambia: Mukonchi tobac. 1972 Tanzania: Seed Company 1974 Ivory Coast: rubber 1975 Zambia: family tobacco 1976 Zambia: E. Mukonchi tobac. Kenya: Mumias sugar 1977 Malawi: Linyangwe tobac. : Mpasadze tobac. 1978 Cameroon: Camdev Malawi: Smallh’der sugar 1979 Ivory Coast: oil palm Malawi: Smallh’derCoffee : Nat. Seed Co Liberia: rubber : Decoris oil palm 1980 Malawi: Tsemembe tob. Cameroon: Hevecam rub. Ivory Coast: rubber 1981 Zambia: Kaleya sugar Kenya: coffee 1982 Ghana: Twifo oil palm

Asia/Pacific Malaya:Kulai oil palm : Mostyn oil palm

Papua NG: Higatura oil palm Thailand: rubber

Indonesia: Coklat Ransiki cocoa Papua NG: Ramu sugar Fiji: sugar

1985 Kenya: Oil Crop Dev. Zimbabwe: Rusitu dairy 1986 Ivory Coast: Palmindustrie 1987 Zimbabwe: Southdown tea

St Lucia: Model Farms bananas

Ecuador: Palmoriente Costa Rica: macadamia Honduras: oil palm

1983

1984

Caribbean/ C. America

Indonesia: rubber Sri Lanka: Pelawatte sugar Papua NG: Milne Bay oil palm Vanuatu: coffee Philippines: NDC oil palm Indonesia: rubber Indonesia: rubber

Belize: citrus : sugar Jamaica: coffee

Jubilee Stocktaking 107

The establishment of Devcos was seen, rightly, as being quite different from making a purely financial investment in a development finance company, such as the 1959 investment in the Malayan Industrial Finance Company (although in this case CDC had played a formative role in setting up this organisation and served on its board, despite a very small shareholding). The true starting point for Devcos had been an approach by the development corporation of the Northern Region government in Nigeria in March 1958, which was looking for sources of finance for its activities after Nigeria became independent in 1960. This led CDC’s regional controller to explore the possibilities of creating CDC managed joint venture development institutions in the other countries of his region, excluding Ghana which was already off limits. The Colonial Office gave guarded approval to the initial proposal to set up Devcos in Northern and Eastern Nigeria, although it would have preferred to see only a federal wide institution. It was made clear that the capital sanction would have to fit the cut-off rules relating to the forthcoming independence of Nigeria.26 Rendell organised two seminars in London in November 1958 for prospective managers of what were now called the Devcos, to sort out the principles on which they were to operate. He spelt out that, although CDC aimed to be the principal shareholder and manager of the Devcos, they were to be independent entities controlled by their own boards of directors recruited locally, to which the CDC manager would be responsible. The aim would be to ‘ensure good development compatible with commercial success’.27 In response to the question as to why suitable projects could not as well be found by the local head office, ‘GM said that in his view the financial reasons were of less consideration than the psychological advantage Devcos would have in seating CDC and local representatives round a table rather than on opposite sides of a table.’ On one major point Rendell had been too sanguine, indicating at the meeting that capital sanction clearance would not be required for individual projects undertaken by Devcos. The Treasury saw this as a major breach of public expenditure control and Reith girded himself for battle. However Rendell acknowledged that there was force in the Treasury point and was mainly concerned that a prolonged argument would result in CDC being excluded altogether from making the initial investment, under the cut-off rules. An exchange of minutes saw Rendell using the argument that half a loaf was better than no bread and in Reith backing off ‘if you – realising what’s involved and at issue – wish to proceed’.28 A carefully structured exchange of letters with the

108 An Agency for Development 1963–79

Colonial Office settled the lines of compromise: CDC would provide the Office with notification of all the Nigerian Devco projects and would follow any adverse advice given on public policy grounds from HMG; Nigeria would be recognised as a special case and not be a precedent for other countries; CDC would not seek application for any additional capital funding for the Devcos after the cut-off date.29 The two Nigerian Devcos were established and began to live up to CDC’s expectations, with a flow of good projects and good relations with their boards. Northern Developments (Nigeria) Ltd – subsequently New Nigeria Investments – was 50 per cent owned by CDC with an initial investment of £625 000 and managed by it. The ban on supplementary support was lifted after independence and an increased investment was approved in 1962, as part of a larger reorganisation, and again in 1964 and 1965.30 By the mid-1970s the company had 32 investments with a book value of £7.3 million. Industrial and Agricultural Company Ltd – subsequently Development Finance Company (Eastern Nigeria) Ltd – was eventually established on exactly the same basis, following a visit by Hume as interim chairman to Nigeria.31 By the mid-1970s there were 21 investments with a book value of £2.2 million. Sadly for CDC, first the civil war over secession of the East and, subsequently, the progressive nationalisation of its investments in Nigeria, destroyed the rationale of the Devco initiatives there. Attempts to set up Devcos in Gambia and Sierra Leone were failures, essentially due to lack of projects. A modest initiative in Borneo was more successful in that Borneo Development Corporation, which was established originally to undertake one industrial development, was opened up to equal participations by the governments of Sabah and Sarawak, and then undertook a wider programme of industrial and commercial estate development. A similar factory development company was successfully established in Singapore in conjunction with the government. East Africa and Malawi was the other region where CDC had the opportunity to establish Devcos prior to independence. The first approach had been made by Tanganyika in 1959. In approving it the Colonial Office stipulated that CDC should adhere to the agreement reached in connection with Nigeria, namely that in this case individual project sanction would be required for the Devco’s investments.32 Progress was very slow, in part due to the interest of the West German government to provide financial support in this same sector. The outcome was a proposal in April 1961 for a tripartite company, with CDC providing the manager. The German investment was to be made

Jubilee Stocktaking 109

through its development agency DEG (Deutsche Gesellschaft für Wirtschaftliche Zusammenarbeit). The Colonial Office was prevailed upon to relax its approval requirements to those applicable in Nigeria. With independence day set for 9 December 1961, the timing factor became critical if CDC was not to fall foul of the cut-off rule. Rendell negotiated critical points in Dar-es-Salaam and Board approval was given on 11 November with official clearance following shortly after, in time for the investment to be made. At the end of 1965 the Dutch development agency FMO (Nederlandse Overzeese Financierings–Maatschappi) became a shareholder, on the basis of each party holding one quarter of the capital. Tanganyika Development Company (subsequently Tanzania Development Finance Company) was managed by CDC until 1974, by which time it had 46 projects and a portfolio book value of £6 million. Uganda had had its own, rather successful, development corporation since 1952. As in Nigeria, it faced worries over future sources of funding as independence became imminent. Several approaches were made to CDC to invest in the Uganda Development Corporation (UDC), or in its major agricultural subsidiary, but this was declined on the policy grounds of not wishing to hold a minority shareholding in a government controlled corporation, where CDC might find itself associated with prestige-or politically-inspired projects. The matter was reopened towards the end of 1961, which resulted in a proposal to set up a joint Devco. The UDC would contribute a portfolio of major industrial investments and CDC would contribute £1 million in cash and would manage the company.33 There was then a setback in that the Treasury blocked approval of CDC’s investment, as part of a tense negotiation with Uganda over its pre-independence financial settlement. When the project could be revived some 18 months later, it had shrunk by half, but the approvals came through this time.34 It was envisaged that other investors might participate and indeed the German government did so through DEG on a one third basis, by the time the company was launched in 1964. By inheriting a portfolio from the outset, Development Finance Company of Uganda made a promising start, which encouraged CDC to increase its commitment in 1967 and the portfolio increased to 28 projects with a book value of £2.9 million. The expulsion of the Asian community from Uganda in 1972 and the consequent economic disruption effectively brought to a close the company as an active business. Meanwhile, there had been broadly parallel developments in Kenya. There, the initial discussions in 1961 already envisaged a tripartite

110 An Agency for Development 1963–79

sponsored company with DEG, on the Tanganyika pattern, again with CDC providing the manager. The Kenya government’s existing agency, Industrial Development Corporation, would be the shareholder and would cease to make industrial investments on its own account. The new company was not finally incorporated until September 1963, with CDC contributing its one third stake of £500 000.35 Prospects were more favourable than in Tanzania and additional capital was soon needed, over which ODM stalled its approval for nearly six months. Subsequently, Holland’s FMO also became an investor on the same basis as in Tanzania. By 1975 Development Finance Company of Kenya had a portfolio of 49 investments with a book value of £8.2 million. CDC provided the manager of the company up to 1973. The Malawi Devco, Investment and Development Bank of Malawi (Indebank), was not established until 1972. Again, DEG and FMO were one quarter investors alongside CDC, but with half the capital of the other Devcos. CDC provided the manager. By 1975 Indebank had a portfolio of 11 investments with a book value of £2.4 million. Apart from their perceived political merits for CDC of demonstrating a partnership approach to investment in industrial projects, the Devcos had other attractions. The management role offered a valuable training experience for CDC staff in the direct appraisal and structuring of transactions, presented to a local board and working with local businessmen. Moreover, the small size of transactions opened up a field of investment which CDC in London could not address on an economic basis. Somewhat to its surprise, CDC encountered little pressure for the Devcos to invest in unsound projects for political reasons. Nevertheless, by the mid-1970s the gloss had gone from the concept and CDC was becoming less enthusiastic over satisfying the repeated demands from the Devcos for more capital. CDC’s requirement to service sterling Exchequer loans from its investments was tougher than that faced by the other two overseas investors. DEG was not required to service its fixed capital and it also had access to privilege trust funds; FMO had access also to trust funds on privileged terms. Moreover, the Devcos were only achieving modest financial results. The three overseas investors began to consult together and in 1974 they delivered a joint message to the Devco boards. The European partners should no longer be regarded as automatic providers of whatever new capital was required, and the Devcos should aim to raise funds on the strength of their own balance sheets. The partners also agreed between themselves that, while wishing to maintain equality of shareholdings, this would not debar either the introduction of new shareholders or the provision

Jubilee Stocktaking 111

of other forms of financing to the Devcos by either of them on a bilaterally negotiated basis. Weaning the Devcos from reliance on shareholder financing proved difficult and CDC continued to provide additional support for several more years.36 Twenty years later CDC was to pioneer a fresh attempt to invest in the small industry sector, without the encumbrance of a government partner, through the medium of regional venture capital funds. Table 9.4

A family of Devcos

Northern Nigeria Investments Development Finance Co. Nigeria Sierra Leone Investments Ltd Borneo Development Co Tanganyika Development Finance Co. Development Finance Co. of Kenya Development Finance Co. of Uganda Investment & Development Bank of Malawi

1959–74 1959–73 (a) 1961–65 1962–75 1961–88 1963–91 1964–73 (a) 1972–cont.

(a) Effective cessation of operations

What conclusion can be drawn from this jubilee review of the condition of CDC in the mid-1970s? It had shown itself to be effective in handling public aid funds to developing countries, and it was a safe and a competent agency. It had evolved the ability largely to steer clear of dud project proposals, while still tackling difficult and risky situations, especially in agriculture. Its administrative costs were low and its financial returns were modest, reflecting its limited objective only to break even. CDC saw itself very much as a development agency of the British aid programme, working with the governments of its chosen countries. This orientation was very much in the spirit of the times. Its working methods were distinctive. It was able to invest in equity as well as loan instruments notwithstanding its inappropriate capital structure and to undertake direct projects. Its ability to put management on the ground was unique amongst the official development agencies. In 1973, out of a portfolio of 233 project investments 48 were listed as being under direct CDC management. Although this proportion might seem modest, the list encompassed many of the projects in its highest profile activities of housing, Devcos and smallholder agriculture, as well as its large plantation investments. As we have seen, CDC placed great emphasis on articulating its development contribution in terms of three particular kinds of activity. The housing sector as a priority had always been a source of concern to

112 An Agency for Development 1963–79

those responsible for the aid programme and its high point had now been reached. Urban housing was undoubtedly important and CDC made the most of the arguments for its social value, but the more important truth was always that it constituted a safe element of the investment portfolio and a reliable source of income. Housing finance provided a means for CDC to stabilise its operations at a difficult time of transition in the developing world. It created a family of institutions and stimulated a number of significant urban housing projects. Its expertise showed up the lack of enterprise of colonial banking but, more importantly, it provided the corporation with fortuitous political leverage at a period of sensitive relationships with the government in 1960. Despite the social benefits, housing finance became increasingly out of step with the direction of aid policy, and CDC progressively realised its investments in this sector. The promotion of Devcos had contributed materially towards CDC’s reputation as an acceptable foreign investor in the years of transition to independence in Africa. The focus on smaller projects provided a useful opportunity to broaden activity away from funding government schemes. Despite the absence of overt political pressures, the formula of a joint venture with government was to become increasingly restrictive. The right approach to venture capital investment had still to be worked out. Thus it was that investing in smallholder agriculture became the distinctive image of CDC at this stage in its history. It epitomised CDC’s close collaboration with the governments of developing countries and also Meinertzhagen’s deep personal concerns for agricultural betterment. Sadly, the model of investing in statutory agricultural institutions was to prove vulnerable to the subsequent deterioration of these structures in so many countries. The model of nucleus estate and satellite smallholders was more robust – providing the nucleus estate was run commercially. Yet it is hard to resist the conclusion that the very concept of smallholder agriculture within a framework of disciplined technical support, complex financial controls and organised marketing, was a product of idealised colonial development – as achieved by the Gezira scheme and by Kenya’s Swynnerton Plan. It did not survive well into the world of the 1980s.

10 Targeting the Poor

The election of a Labour government in 1974 and the appointment of Judith Hart as Minister of Overseas Development presaged a big shake up in aid policy. Hart was something of a development specialist in a strongly socialist tradition. In a book published two years earlier one of her key arguments was to dissociate aid from private investment, ‘it is a complete nonsense to regard private investment as aid’ and aid targets and statistics should be suitably purified.1 There was a specific implication for CDC. ‘We should redefine the purposes and functions of the Commonwealth Development Corporation … and since it is scarcely appropriate for a socialist government itself to be involved in direct foreign private investment in developing countries, its present functions and practices would need review.’ The major policy thrust given to the ODM was for a greater concentration of aid on the poorer countries and on rural development. The outcome was an influential White Paper More Aid for the Poorest,2 which has been the thrust of British aid policy ever since. CDC was concerned about the prospects for aid programme funding and, after its first meeting with the Minister in April, whether it would have to retrench its operations.3 One of the problems in relation to the new policy was CDC’s large commitment to housing and its modest commitment to renewable natural resources projects, and also the extent of its investments in better off developing countries. Meinertzhagen was warned that this would colour the allocation of aid funds.4 It did. The allocation for 1975–76 was held at £18 million, instead of the earlier indicated increase to £20 million that CDC had been pressing for. By the beginning of 1975 there was consensus that a new working party was needed to explore the implications for CDC of an increased concentration on poorer countries and on rural development. 113

114 An Agency for Development 1963–79

The 1975 Working Party was the first review of CDC since Meinertzhagen became general manager. He submitted a comprehensive position paper to the Working Party5 and also a full paper to the Board setting out the proposed CDC negotiating position.6 In the position paper CDC’s role was presented as filling the gap between government to government aid and profit oriented private enterprise. There was an opportunity to undertake business-like economic activity using concessionary finance and offering experienced management. It was essentially a plea for understanding CDC’s developmental role and sustaining support for it, but it was also a plea not to alter the basis of its operations. The objectives for CDC’s negotiators were defined as to maintain the essential structure of the corporation and to achieve a larger allocation from the aid programme. CDC was concerned to establish four points. The first was that it invested in discrete projects and not in development programmes. Second, that it had a statutory requirement to pay its way, which implied an intention to undertake only viable projects and – less obviously – a need to have a balanced portfolio of secure and more risky investments. The third point concerned the area of operations, where there was concern that CDC would be under pressure to disinvest from countries like Singapore and Hong Kong and only to invest in the defined poorer countries. Lastly, with regard to funding, the main aim was to achieve more concessional terms and an annual allocation above £18 million. Interestingly, it was decided not to re-open the case for equity capital, but the possibility should be explored of achieving a write-off of the Special Losses Account. It will be apparent that CDC was quite apprehensive about the new Minister’s intentions. ‘It may be that the Minister will insist on a restriction of new investments to the poorer countries and to projects most likely to help the poorest sectors of the community [especially since] the Overseas Development Administration has delayed giving approvals in recent months for any scheme which does not fit in with its current priorities, rather than giving an outright refusal.’ The Board was asked whether CDC should offer not to invest in specified richer countries or unapproved activities, and even whether to cease investing in association with private enterprise. It took a more robust stance and firmly minuted its concern that the White Paper policies threatened to undermine CDC’s mandate and that it should oppose any attempt to prevent it from investing in projects and countries outwith its own priorities, or to undertaking projects in conjunction with the private sector.

Targeting the Poor 115

In the event, the Working Party found common ground. When it examined CDC’s future commitments, 49 per cent were in the desired poorer countries, as were two thirds of its current investigations. Likewise, three quarters of its investigations were in respect of renewable natural resources projects. In effect, the management was more in tune with the thrust of aid policy than the rhetoric had implied. CDC found that it could accept, after initial reservations, a target for future commitments of two thirds to be in poorer countries and two thirds in renewable natural resources projects.7 The Board accepted that it should keep away from new commitments in hotels and middle income housing. With regard to funding, the Working Party recommended that the aid allocation should be increased from £18 million to £20 million in 1976–77 and to £23 million in 1977–78 in order to offset an anticipated decline in cash flow from the new investment priorities, but it recommended against any softening of the terms of the loans. It failed to reach a conclusion regarding the Special Losses Account. Over areas of operation, CDC was prepared to put on record that it had ‘no intention’ to extend commitments to Hong Kong, Singapore, Cyprus and Gibraltar. The Report had considered whether CDC should extend its operations to South Asia, but reached the now surprising conclusion that India did not need CDC expertise (in agriculture), that ODM had been unenthusiastic about Sri Lanka (although CDC was prepared to re-examine the prospects), and that CDC foresaw ‘insuperable difficulties’ over moving into Bangaldesh. It was decided that there should be an Interim Review of the Working Party’s conclusions in 1977. This took place in July that year.8 Over the intervening two and a half years it was found that out of £97 million of new commitments, 84 per cent had been in respect of poorer countries and 65 per cent in respect of renewable natural resources projects. Out of current investigations, no less than 89 per cent were in renewable natural resources projects. CDC had clearly aligned itself with the new aid policies. The Interim Review also looked at the question of increased funding, noting the projected decline in cash flow and the prospect of a funding deficit. It recommended that allocations to CDC should rise to £34 million in 1978–79 and to £38 million in the following year. Significantly, the Interim Review concluded with an affirmation of the closer relationship that had been reached between CDC and ODM. ‘There is now a clear understanding that the activities of ODM and CDC are complementary to one another in furtherance of UK’s aid strategy whilst still permitting CDC

116 An Agency for Development 1963–79

to discharge its statutory duty to pay its way taking one year with another.’9 It remained to deal with the problem of the Special Losses Account, which proved soluble now that CDC’s role in the aid programme had been reaffirmed. Under powers granted by the International Finance, Trade and Aid Act 1977, the government wrote off the whole of the Deferred Liability of £16.9 million still owing by CDC. The corporation was able to charge the balance of £3.2 million on the Capital Adjustment Account against capital reserves, which had been created by a timely revaluation of fixed assets. Thus the whole of the £20.1 million Capital Adjustment Account was eliminated. CDC’s 1977 balance sheet was the first set of accounts since its formation where it was not showing as an intangible asset the carried forward lost capital from its start-up years. In another sense, too, it was the start of a new era, as from 1977 CDC began to generate meaningful annual surpluses and to build up reserves. Between 1976 and 1980 they rose from £1.5 million to £32 million.

Part III Making a Business of Development 1980–93

This page intentionally left blank

11 Commercial Borrowing Mirage

The election of a Conservative government in May 1979, led by Mrs Thatcher, wrong-footed both ODA and CDC. Whereas Labour policy had been for an expanding aid programme, the new government’s determination to restrain the growth of public expenditure resulted in an immediate cut.1 In June a reduction of £50 million for the current year’s budget was announced. Already, ODA was in trouble with the Treasury for overspending its 1978–79 budget. To mitigate the situation, it had made a plea to CDC to refrain from drawing £15 million of its loan allocation (out of £34 million) in March, against an understanding that it would be restored in the following financial year. CDC acceded reluctantly, and then the change of government took place. This resulted in ODA’s separate ministry status being abolished and, instead, it was made a department of the Foreign and Commonwealth Office. The new chairman Lord Grey had a meeting with the new minister Neil Marten in July, but the elaborately prepared brief went to waste. Marten was unable to give any guidance on the future direction of aid policy or the role of CDC, pending a review by senior ministers. By August ODA had decided that CDC’s contribution to the cut in the aid budget would be a reduced allocation of £30 million for the current year, as against the previously advised figure of £38 million, and that no commitment could be made to restore the £15 million already foregone at ODA’s request from the previous year’s allocation. The immediate impact of the funding cut back was not all that dramatic, since CDC was running large cash balances at the time. This arose from the slow rate of disbursement of funds on investment projects, especially in the agricultural sector, as well as on account of projects that lapsed for one reason or another, whereas CDC would normally draw its annual ration of funds from the aid budget on an 119

120 Making a Business of Development 1980–93

entitlement basis. In order to help overcome the potential embarrassment of excess liquidity, CDC had followed a policy during the previous two years termed ‘controlled over-commitment’. This envisaged a high rate of Board investment approvals in the knowledge that the rate of disbursement would actually be much lower. Originally set at £60 million, approval rates were raised to £90 million in 1979, though disbursements were expected to be only £30–40 million, which war much closer to the availability of cash from the aid budget and self-generated funds.2 Actual disbursements in 1977 and 1978 had been £36 million and £33 million respectively. However, there was an underlying assumption that commitments would be turned into investments and that Treasury loan drawings were on an upward curve, so that the arithmetic would eventually be in balance. The sleight of hand removal of £15 million in March 1979, followed by the summer cut of £8 million, could be accommodated in cash terms at the time, but it carried a more sinister message for the assumptions upon which CDC had been operating. CDC’s response to this transformation of its funding environment was nevertheless surprising. A paper in November 1979 carefully reviewed several options and sought guidance from the Board.3 The decision was to select the most aggressive option: to retain the £90 million level of new commitments for another year, dropping thereafter to £70 million, adjusted for inflation. How was this possible? The Board appears to have been strongly influenced by management concerns at the adverse effects of high inflation on the real value of the loan portfolio. Between 1974–77 the inflation rate had averaged nearly 18 per cent and a calculation had been made that CDC needed to add £47 million a year to its loan portfolio at current prices if its real value was to be sustained. This analysis underpinned the argument for trying to maintain a high level of investment activity. The other consideration was that in the discussions with ODA over the cut back in aid programme allocations, officials had broached the idea of CDC topping up its funding requirements with commercial borrowings. ODA had also mentioned the possibility of using part of its allocation to subsidise interest rates on commercial borrowings.4 In short, the way seemed to be opening for CDC to access financial markets, to the extent that government funding was not available. The model endorsed by the Board envisaged total CDC commercial borrowing building up to a maximum of £140 million over the following five years, as against a total of government borrowing of £440 million. In February 1980 CDC was advised that the aid budget allocation for 1980–81 would be further reduced to £25 million, whereas the figure indicated before the change of government for that year had been £42 million. Despite the evidence that its model had become unrealistic,

Commercial Borrowing Mirage 121

CDC continued to approve new business in conformity with it. Meinertzhagen protested vigorously to ODA at the reduced funding allocation, but nevertheless recommended to the Board that the £90 million level of new annual commitments be maintained for the time being, and pending the completion of the review of CDC which the government had by now decided upon.5 A nagging uncertainty created by the change of government was how far the policy framework set by the 1975 Working Party would be retained. Its remit ran to the end of 1979. During that summer ODA was even doubtful whether a full-scale policy review would be required, and certainly there was no initial policy guidance from the new minister.6 By early 1980 however the government had decided to undertake a fresh review of CDC. An exploratory meeting with ODA indicated that there would be a marked change of emphasis away from poorer countries and renewable natural resources projects and towards ‘the narrow view of British interests which may well dominate the review’.7 In this new environment CDC was apprehensive that ministers did not appreciate CDC’s developmental role and that, with cuts being imposed on the aid budget, ODA officials would be more concerned to protect their own aid programmes than CDC’s operations – where CDC was already facing disproportional reductions. Lord Grey, a former Governor of Northern Nigeria, who had succeeded to the chair on the death of Griffiths-Jones and pending a fresh appointment, vented his frustration: It is impossible, however, in the present state of our relations with the Government, where we lack any clear understanding of how politicians view CDC and the role they intend for us, to feel confident that what civil servants say will bear close approximation to what ministers decide… The true public interest will only be served if there is an opportunity for CDC to make its case where the decision making power really lies – with Lord Carrington?8 The Board approved a letter from Grey to Lord Carrington the Foreign Secretary seeking a meeting.9 This took place on 1 April 1980. Carrington first made clear that decisions on the future of CDC and its financing must await the outcome of the new review. This gave Grey the opening to request that CDC ‘would have a direct opportunity of influencing the Ministerial judgement’. Against the protest of officials that it did not accord with Whitehall practice that outside bodies should be given the opportunity of commenting on Civil Service advice to Ministers, Carrington firmly ruled that ‘if he wished to see Lord Grey he would see

122 Making a Business of Development 1980–93

Lord Grey’.10 In the event, this was Grey’s last important intervention for CDC, since he retired within weeks in favour of a nomination by the new government of Lord Kindersley, a banker from the City. The terms of the new review of the role of CDC were settled quickly to reflect ‘HMG’s wish to give greater weight to political and commercial considerations alongside basic developmental objectives’11 and the policy context of a declining aid programme. The Review was chaired by an ODA official and was conducted by officials drawn from FCO/ODA, Treasury, Department of Trade and CDC itself. Meinertzhagen attended the first meeting, but did not otherwise participate directly, perhaps on status grounds, since the ODA permanent secretary was also not a member of the Review. In view of the fundamental importance of the issues for CDC and the unique opportunity to communicate into the Whitehall network, this was probably unwise. The review group met ten times between April and December and the CDC board was kept well informed of its progress. At an early stage the Treasury was conveying a message that it wished to see a loosening of the quantitative constraints on CDC’s investment programme. Also the Treasury ‘has been keen to explore how far CDC might be able to exist without any further assistance whatsoever from HMG and to see CDC borrowing in other than sterling’.12 What did CDC hope to gain from the review? It welcomed the notion of more investment flexibility and undertook its financial modelling on the assumption of committing half of its investments to poorer countries and half to renewable natural resources, as compared with two thirds as heretofore. This was endorsed in the final report. CDC readily accepted the steer to work more closely with British industry, while making the point that its special expertise was in agricultural projects, where it was very concerned to maintain its cadre of specialists. More dubiously, CDC argued that investment in industry had less development value than investment in agriculture.13 CDC’s principal concern was to justify maintaining its level of activity at a level of £90 million of board approvals. This would require – its models indicated – £40 million per annum of borrowings from the aid budget, as compared with the current reduced allocation of £25 million. If this were not achievable, then CDC wanted to explore other means of improving its financial position through tax concessions, more concessional funding terms, conversion of government loans to equity, and commercial borrowing. All this was discussed with and endorsed by the Board.14 At this point CDC was not all that enamoured of commercial borrowing as the solution to maintaining its level of activity, warning ‘the more CDC had to rely on commercial borrowing, the more it would

Commercial Borrowing Mirage 123

have to concentrate on commercial rather than developmental activities’.15 Moreover, unless it could sustain a high level of activity, CDC saw little prospect of being able to undertake a meaningful level of coinvesting with British industry. This tendency to perceive a conflict between investing for commercial success and investing for development benefit (and hence to play down using market funds and investing in the business sector), coupled with an insistent stance that funding to sustain a £90 million level of Board approvals was necessary to preserve the integrity of the organisation in management terms, took CDC out on a limb and it lost sympathy within ODA. By the autumn of 1980 it was clear that there was no support for CDC to receive allocations from the aid budget much above £25 million a year. Meanwhile, the more that the Treasury looked at the scope for commercial borrowing – which it had been promoting initially – the more it saw problems. ODA made the deduction that CDC should commence a scaling down of its level of activity, even before the Review report was submitted to ministers. CDC saw matters in a different light: it would not have a need for commercial loans for a year, or even longer, and meanwhile it was important not to compromise its position in its overseas markets by any indication that it was not in a position to entertain new business. ODA felt that this was unsafe and pressed its concerns.16 With no clear indication as to how the problem was to be resolved, the text of the Review report had nevertheless to be finalised, since its synthesis of the arguments and the analysis of future options was the key document for ministerial decision-making. The analysis of CDC’s financial position followed the preoccupations of management: a concern in an inflationary environment over obtaining sufficient resources to maintain the real value of the investment portfolio, over 80 per cent of which consisted of loan assets. In terms of 1980 prices, the portfolio was only 75 per cent of its value in 1967, even though it had increased three times over the period in nominal terms. The final report presented three options for consideration: a. Sole funding from the aid programme, which would require a funding level from the aid budget of £55–60 million to enable CDC to maintain a level of activity to preserve the real value of the portfolio (defined as £90 million per annum of board investment approvals). b. Mixed ODA and commercial funding, which was estimated still to require £40 million of ODA funding in order to enable the defined target of board approvals to be sustained.

124 Making a Business of Development 1980–93

c. An independent CDC, with existing government loans converted into equity and all future borrowings to drawn from the market. This was put up essentially as a coconut shy and was not discussed seriously, other than to accept the CDC view that it would result in the elimination of its agricultural risk taking activities and would also preclude co-investing with British industry. In further discussion of future funding levels, the report records that a continuation of the current level of Treasury funding at £25 million a year would result in a reduced level of activity and enforced contraction of the organisation and of its specialised staff. The Review report refrained from making a specific recommendation on the allocation to CDC from the aid budget above the current level, thus acknowledging the contemporary fiscal reality. Instead, it leaves the spotlight on whether to permit CDC to borrow commercially as the deus ex machina. There is a clear analysis of the issues posed for a public corporation that contemplates a commercial borrowing programme, although there is no evaluation of the weight of the points noted. The report records that all borrowing by CDC, as a public corporation, and whether from the Treasury or from the market, counted against the public sector borrowing requirement (PSBR). It was a major fiscal preoccupation of the government to reduce the PSBR, as part of its battle to restrain growth of the money supply. It also records that all CDC’s investment expenditure counted in the public expenditure totals, which were monitored closely as an indicator of the extent to which government was contributing to inflationary pressures. It noted further that the PSBR problem would be avoided if CDC were to borrow in foreign currency through an overseas subsidiary, although this would in turn generate complications for CDC, including a requirement for legislation. The possibility is even recorded – along with Treasury reservations – of CDC being formally excluded from the PSBR definition, given that all its investment expenditure is abroad and could hardly be a factor in UK inflation. The stage was being set for a charade that would play – with refinements – for nearly twenty years, as the common sense solution of permitting CDC to raise capital from the market to supplement what could be contributed from the aid budget was blocked by procedural and doctrinal obstacles. The Treasury’s role was to insist upon fiscal orthodoxy and to elaborate the defences when weaknesses emerged in its position. CDC had both to plead its cause within Whitehall and to endeavour to reach out to a political constituency. In this it was to be unsuccessful. As finalised, the text of the report effectively still left everything to play for as regards the scale of future government funding and the con-

Commercial Borrowing Mirage 125

tribution to be made by commercial borrowing. The trouble was that CDC appeared to be trying to force the government’s hand by maintaining an unsustainable level of board investment approvals, combined with an insouciant stance that cash would not run out for another year or longer. By the beginning of 1981 Ministers were being deployed in an effort to shift the Board’s stance: ‘I must express my serious concern that the Board is not prepared to consider holding back new commitments during the present period of uncertainty about future financing of CDC.’17 The riposte was a meeting with the Secretary of State, Carrington, on 10 February at which CDC’s pitch for being supported at its current level of activity was persuasively argued and Meinertzhagen held the line. His objective was to persuade government to exclude CDC from the definition of PSBR, so that it could undertake a programme of market borrowing. A direct approach was made to the Chancellor of the Exchequer, Howe, to reinforce the plea.18 By late March ODA had discovered a method of bringing CDC to heel, which may have been unfair but was effective. By long-standing convention CDC was required to obtain political sanction for individual investment projects. This was to enable the Foreign and Commonwealth Office and diplomatic posts to hold back an investment if there was a major diplomatic issue with a country, and it was intended to be a rarely used device. Now, however, it was used indiscriminately and by late March eleven projects and £35 million of investments were stalled. As a meeting note recorded: ‘The Minister appeared to regard the matter as a wholly pragmatic one in that ODA would use such weapons as were available to it to impose financial sanctions on CDC.’19 The stand off between CDC and the government was sustained throughout 1981.20 Kindersley maintained pressure on Carrington; The Times was enlisted. The Treasury began to cast around for ways of relieving CDC’s financial position, short of allowing commercial borrowing. One idea was to relieve CDC of debt repayments in the year; another was to agree to a £10 million increase in the allocation to CDC for two years – to be taken out of the Contingency Vote. In December the Treasury capitulated and a formal announcement was made to the House of Commons on 14 December that CDC would be allowed to borrow up to £15 million a year in foreign currency, with a Treasury guarantee, in the three years 1982–3 to 1984–5.21 With this achievement under its belt, the CDC Board formally accepted the report and conclusions of the 1980 Review in January 1982, a year after it had been completed. It did so on the basis of

126 Making a Business of Development 1980–93

implementing the planned level of activity over which it had fought so doggedly. Board approvals had actually amounted to £129 million in 1981 and a similar figure was anticipated for 1982. It therefore endorsed a proposal that, in the event of commercial borrowing not being approved when requested, the shortfall would be made up by selling part of the loan portfolio, so that its planned level of operations could be sustained.22 Soundings with its bankers, Barclays, quickly established an interest in a programme to purchase a portfolio of loans, either with or without recourse to CDC, at a rate of £20 million a year. However ODA was strongly hostile to the concept and effectively banned further consideration by threatening to offset any such transactions against its own funding allocations to the corporation. There was, of course, no objection to CDC improving its cash flow by realising equity investments, so the logic was hard to discern. Meinertzhagen accepted the situation. Perhaps the determining factor in not challenging ODA’s stance was the slowdown now evident in new business. The deepening of the international recession induced by the oil crisis was also leading to the lapse of approved projects and to slower project implementation due to procurement difficulties, exchange control problems and delayed start-ups. Thus the tension created by the CDC Board approving too high a volume of investments faded away with the decline of new business. Indeed, a potentially embarrassing cash glut was in prospect. By October 1982 ODA was conveying a warning that in order to be in a position to undertake a commercial borrowing ‘it will be necessary to demonstrate that the money is needed for early disbursement against identified projects’.23 CDC was planning to make a first use of its entitlement to undertake a commercial borrowing under the new policy in the first quarter of 1983. However it encountered severe problems with the Treasury over the basis on which this could be undertaken. At root was the reluctance of the Treasury to allow a public sector body any discretion to make arrangements that reflected its own business needs, or to concede that it was not the sole repository of wisdom. Thus, it sought to insist that CDC borrowed long term money at fixed rates to match its lending, rather than to allow discretion to minimise costs with variable rate or short term borrowing. Again, it was worried about the exchange risk of foreign currency borrowing and sought to stipulate multi-currency loan arrangements. CDC then noticed that both the World Bank and the European Investment Bank had been granted access to the London capital market during the year and it reopened the question of being allowed, after all, to borrow in sterling – thus side stepping the

Commercial Borrowing Mirage 127

Treasury’s concerns over foreign currency risks. This was actually conceded in January 1983, on the basis of CDC being granted access to the National Loans Fund – the pool of borrowings raised by Her Majesty is Goverment itself. A more worrisome issue related to the precise purpose and timing of any market transactions by CDC. In its first twenty years, CDC had been able to draw on Exchequer loans on demand, providing it was operating within its total borrowing ceiling. But since 1967 its drawings were rationed to an annual allocation, as part of the aid budget. The problem of matching them with actual disbursements to individual investment projects was resolved by taking the allocations in full in each financial year and holding the proceeds as a cash float until required. Alternatively, the new loan drawings were applied to premature repayment of earlier Treasury loans. This had the beauty of reducing cash balances while strengthening cash inflow in later periods that were more closely correlated with expected investment disbursements. The practice of holding a cash float did not sit well with public sector cash management practices: to the Treasury, allocations from the aid budget were for expenditure and not for squirreling away for a later occasion. But for CDC it was a matter of acquiring the financial resources for legal commitments that might take three or more years to crystallise. We have already seen how CDC’s strong liquidity position from 1979 enabled it to withstand an arbitrary cut in allocations from the aid budget and to sustain a higher level of board approvals than ODA considered prudent. The prospective introduction of a commercial borrowing programme represented a risk of further weakening of financial discipline, from a Treasury perspective, which decided that the time had come to tighten the rules. CDC was informed that the practice of pre-payment of Exchequer loans was no longer acceptable.24 The screw was tightened further as regards commercial borrowing: ‘(It) is available to CDC solely to finance investment which it cannot find from its own resources and from the aid programme.’25 The denouement came swiftly. Plans were finalised in early March 1983 to make the first drawing of £15 million from the National Loans Fund by the end of that month. A procedure was agreed to meet the criterion of need, whereby drawings would be related to disbursements made during the year to projects that had initially been funded from other CDC resources. On 11 March CDC advised ODA that its end March cash balances were likely to exceed £30 million, including the proceeds of the new borrowing and also the £10 million proceeds of an equity disposal. On 24 March the borrowing was halted by the

128 Making a Business of Development 1980–93

Treasury on account of CDC’s cash position.26 An immediate protest by Kindersley to Howe was to no avail. The moment is poignant, for this was the closest CDC came to being permitted to borrow market funds in its remaining life as a public corporation, although the issue was to haunt its relationship with government for the next 15 years. It is hard to resist the conclusion that this setback was a momentous bungle. CDC had fought hard since 1980 to establish the right to supplement its resources from the aid budget by market borrowings, both in the quinquennial review meetings and through vigorous political interventions by Kindersley. Against a background in which a great fetish had been made of restraining public expenditure, of reducing inflationary pressures through containing the PSBR, of a tough minded attitude to overseas aid, CDC had succeeded, against the scepticism of its own sponsoring department, in winning the right to a small annual borrowing programme, guaranteed by the Treasury. Its reluctant concurrence was plain to everyone involved. But instead of seizing the main prize, CDC argued endlessly over details, gained most of what it wanted, and then made the cardinal and, indeed, crass error of exposing a fatal flank. Instead of managing its cash flow at the sensitive public finance yearend, CDC allowed a large cash balance to accumulate. This provided the perfect justification for Treasury orthodoxy to rule that there was no justification for the proposed borrowing, or for an unnecessary addition to the PSBR. It is a fruitless, yet inevitable, reflection that had CDC used its hard won authority to establish a regular market borrowing programme between 1983 and 1986, thus entrenching the precedent of supplementing aid budget allocations by private sector loan funding, the privatisation of the ownership of CDC might have remained a theoretical debate. A close reading of the 1980 Review report suggests that another opportunity was missed as a result of CDC’s preoccupation with securing access to commercial borrowing. Tucked into the discussion in Chapter 3 on financing options is a paragraph on borrowing costs.27 It notes that if the current level of loan allocations were made on a nominal basis, similar to the terms applied by the World Bank to IDA 3 facilities ( –4 per cent for 50 years with 10 years’ grace), CDC would be virtually able to continue its target level of activity at a negligible cost to the aid budget. Despite being noted as being worthy of serious attention, the idea was oddly not pursued any further. It was only to resurface some 12 years later in the context of a later CDC funding crisis.

12 A Salvage Proposal

It will be recalled that the Commonwealth Development Finance Corporation (CDFC), had been set up in 1953 by the Bank of England at the behest of the new Conservative government to demonstrate an alternative model to CDC of a private sector development finance institution for the Commonwealth. Apart from the Bank of England as leading shareholder, together with several large banks, some 140 companies were induced to subscribe towards its capital of £26 million, of which £7 million was paid up. CDFC’s subsequent investment record was dismal and by 1980 its accumulated losses had reduced shareholders’ funds to below £1 million, for a portfolio of £24 million. At this point the recently retired deputy chairman of the Bank, Sir Jaspar Hollom, became chairman of CDFC. The Bank also made available £10 million of concessionary loan finance and Hollom put in train a vigorous programme of rationalisation. There was a certain irony in the situation in that CDC’s own residual capital losses from the first years had eventually been written off in 1977 and it had enjoyed an element of concessional finance itself (through partial interest waivers) since 1965. Here now was the crippled private sector rival to CDC being accorded some of the same treatment, courtesy of the Bank of England. Although the Bank of England was a nationalised institution, its 45 per cent investment in and loans to CDFC were formally defined as being in the private sector. By 1980 the position at CDC was that capital employed amounted to £332 million, reserves to £32 million and there were pretax profits of £29 million. The notion germinated that CDC might perform a white knight role. Apart from CDC’s more successful record as an investing institution in markets where CDFC had failed, discussions over the 1980 quinquennial review gave rise to the thought that CDFC might provide an 129

130 Making a Business of Development 1980–93

answer to the question of capital market access for CDC. If it were to acquire a controlling shareholding, short of a majority, in CDFC it could then be used as a borrowing vehicle for raising market funds, without offending the rules on public sector borrowing. The Treasury was intrigued and saw further merit in the notion of bringing about a separation between CDC’s developmental role (which required concessional lending from the aid programme), and its activities in the private sector, which could be funded from market borrowings raised through CDFC. Moreover, this could facilitate closer collaboration with British industry.1 During the summer of 1981 exploratory discussions took place between CDC and the Bank of England, without the knowledge of ODA or the Board of CDFC. A paper to the CDC Board in September defined the objective of the discussions as first ‘to allow CDC to develop its role in support of UK industry and commerce without jeopardising its own image as a development agency to provide concessionary finance for projects of real economic benefit to the recipient country’, and second ‘to allow CDC to raise funds on the commercial market for (private sector) projects without having to obtain consents or be subject to the restrictions presently being imposed on the public sector’s right to borrow’.2 It was recognised that legislation would be required to enable CDC to invest in CDFC, which could not be introduced for over a year. The proposal under discussion with the Bank of England envisaged CDC subscribing for up to 50 per cent of the capital of CDFC in a new class of shares, with the Bank of England continuing as a 22 per cent shareholder. CDC would become responsible for the management of CDFC and would receive a management fee. The Board authorised continuing discussions. By early 1982 the complications and risks in the way of achieving a deal were beginning to dominate: many of CDFC’s 60 projects were in developed Commonwealth countries and in countries where CDC was not represented, which implied costly management effort. Several years of continued loss-making were in prospect and also there were tax complications. A deal could only proceed with the active support of ODA and the Treasury, especially with regard to CDC’s future funding arising from the Quinquennial Review, which was still unresolved. On the other hand, there was a potential political attraction in CDC playing the white knight role and there was also some attraction in differentiating between CDC’s public sector and private sector roles, by using CDFC increasingly for the latter. ODA was now brought into the picture and Board opinion moved in favour of the outright pur-

A Salvage Proposal 131

chase of CDFC (perhaps for only £2–3 million), provided this was deemed to be in the public interest. The Bank of England appeared to favour this solution. However the chemistry of the prospective deal was already beginning to dissolve. On CDC’s side the Government’s concession in December 1981 that CDC would be permitted to borrow £15 million a year in foreign currencies from the market under a Treasury guarantee appeared to open a more optimistic vista for future funding. At CDFC Hollom’s rationalisation was beginning to succeed and the terms of any deal with CDC suddenly hardened. A meeting between Hollom, Kindersley and Meinertzhagen in April 1982 revealed a significant gap between the two sides. It was also clear that there was no strong urge to bridge it by either party.3 A subsequent lunch at the Connaught Hotel confirmed the stand-off: With one of the main attractions not being so necessary for us, I do not believe it would be sensible for us to behave like an enthusiastic buyer and I do not think our political masters would encourage us. On the other hand there are still some arguments in favour of a merger of the two organisations. We will therefore wait until your rationalisation programme is completed and the long-term prospects for CDFC on its own considered. If at that point you feel there is merit in the two organisations joining together, and the political background favours it, we would be very willing to give further serious thought to specific proposals.4 By 1984 the remedial work on CDFC had restored shareholders’ funds to £8.3 million, with a possible realisable value of £15 million. Profits amounted to £2.5 million on a portfolio of £23 million. It is a nice question whether CDC could have achieved an even better result itself if it had been braver in negotiating a purchase in 1981. It seems more certain that losing CDFC as a market borrowing vehicle was a lost opportunity. After Meinertzhagen’s retirement an attempt was made by CDC’s management in September 1985 to interest his successor John Eccles in reviving a deal, in the knowledge that the Bank of England was again looking at the disposal of CDFC. The notion was that there was still merit in separating CDC’s commercial (equity) and developmental roles and in using an established name to access capital markets, all of which would further emphasise CDC’s independence from government. Eccles’ response was that the objectives of increasing private sector and equity investment could be better achieved without the

132 Making a Business of Development 1980–93

complications of acquiring CDFC.5 In the following year the Bank of England sold CDFC to an investment trust. In the subsequent sorting out a number of its investments were offered to CDC, but only one of them had any appeal on account of a joint exposure to a borrower in difficulties. CDC purchased the loan at 10 per cent of its face value.

13 Nothing But a Bank

After a twenty-year run of proconsuls as chairmen – Howick, GriffithsJones, Grey – CDC acquired a personality from the City in 1980, following the election of the new Conservative government. Lord Kindersley came from Lazards and he quickly brought a brisker attitude to CDC’s affairs. As we have seen, he campaigned vigorously on the commercial borrowing issue, using his senior political contacts to good effect. A year after joining CDC he initiated a searching review of the corporation, to be conducted by a consultant with industry experience, John Eccles, and assisted by a retired senior executive from the corporation.1 During the six months between September 1981 and April 1982 the team visited all seven regional offices and most of the major managed projects. The one-paragraph terms of reference prescribed a straightforward review of structure and organisation. There was no mention of the new context of aid policy and only a conventional reference to the changing overseas world. What emerged, however, was a devastating critique of the condition of CDC: the great Reith/Rendell machine had outlived its effectiveness and urgently needed reform; more searchingly, that CDC was on a trend to becoming a development loan agency and was losing its commercial rationale. Eccles made clear from the outset that he did not regard this outcome as either inevitable or desirable, and that there was a more dynamic alternative strategy of equity investment in the private sector. This revolutionary document signalled the possibility of a re-invention of CDC. It was accepted by the Board, but a decade and more was to pass before its philosophy could truly be said to characterise the business of CDC, notwithstanding that Eccles himself was to succeed Meinertzhagen as general manager in 1985. 133

134 Making a Business of Development 1980–93

What had gone wrong with CDC’s organisation and way of doing business? It will be recalled that the essence of Reith’s management structure was for the general manager to be totally accountable for the corporation’s performance – to the extent that even the Executive Management Board was only advisory to the general manager, and to make the regional controllers in turn responsible for everything in their regions – in effect as general managers in the field. The technical departments were in a support role. Eccles’ finding was that the organisation had failed to adapt to the growth in business over 30 years, that it was too large and too busy for a convention that all decisions emanated from one person – with no delegation of powers within head office and with 16 executives reporting to the general manager, who also had a schedule of responsibilities for personnel matters. This situation was made worse by a detected change in attitudes within CDC, whereby head office had become more interventionist and more bureaucratic. The consequence was a sense of uncertainty overseas as to where authority within the management rested, resulting in a tendency to await head office views rather than tackling problems. It resulted also in confusion between developmental and commercial objectives, in ‘a falling off in the commercial and management sharpness which used to distinguish CDC activities’.2 It led to a conclusion with profound implications: ‘It is likely that those in CDC giving more emphasis to “development” as opposed to “profits” are now more influential than at any time since CDC’s early days.’3 The proposed remedies for addressing this situation were to the point. The singular authority of the general manager should be shared with three deputies for Operations, Finance, and Administration in an Executive Committee, which would replace the Executive Management Board of nine members. The general manager should devolve his personnel schedule to Administration. The regional controllers and technical departments should report to Operations, and Finance would resume responsibility for project evaluation in order to provide an independent critique of investment proposals. The regional controllers’ offices should be reduced from seven to four, and a number of representative offices should report directly to London. There were numerous consequential recommendations. The other prong of Eccles’ critique concerned trends in the business being undertaken by CDC over 30 years. The number of invested projects which CDC managed itself had fallen from 90 per cent to 18 per cent of the portfolio. The number of projects in which it held equity

Nothing But a Bank 135

had fallen from 89 per cent to 46 per cent of the total. The very distinctive contribution of CDC’s managed agricultural schemes was diminishing: estate projects were not favoured in many countries, the high degree of government participation in development was reducing the role of foreign equity and management. CDC was increasingly becoming a lender in large transactions with government agencies. A worrying consequence was that there had been no real growth in the investment portfolio since 1971 and the scale of its overseas organisation was becoming less easy to justify. Contraction was in prospect. The 35 pages of detailed organisational recommendations were all predicated on a scenario of a ‘period of run-down of traditional activities that would, at the end, reduce CDC to the status of a conventional development bank … there is an influential body of opinion inside CDC, relying on trends already apparent, that this is bound to happen’.4 At this point the adrenalin starts to flow. The final chapter, entitled ‘An Alternative Strategy for CDC’ sets out why Eccles did not share the pessimistic view and why he ‘considers that a different and more dynamic future for CDC is worth pursuing, with good chances of success’.5 What were the elements of this vision? It rested on a policy judgement that developing countries would need foreign investment and specialised assistance for the foreseeable future and that CDC was well placed to respond to this challenge. ‘No other agency concerned with Third World Development combines CDC’s capacity for financing, organising and leading, applying commercial acumen, managing, and understanding the many practical problems of getting economic development working on the ground’.6 There follows a discussion of some of the new ideas garnered during the course of the inquiry. A common characteristic was the urge to move to a pro-active, business-seeking mode, which sought to capitalise on CDC’s pool of management experience and country knowledge. In agriculture, it was felt there was still scope to initiate managed schemes with aid funds being used to finance local partners. There was scope for a more sophisticated role by investing in seed companies, breeding herds, production of planting materials; by investing in storage, distribution and agricultural credit, by offering management and project management separately from investment. In industry, CDC had been altogether too timid; it should seek to invest alongside British companies and to establish venture capital companies with local investors (especially in South East Asia); it should offer to take over management of poorly

136 Making a Business of Development 1980–93

performing public enterprises. The report concludes, ‘CDC’s main advantages over other development agencies – ability to make things happen and get things done – need to be put positively to work.’7 The structure of the Eccles report seems designed to show that CDC had lost heart and lost its way since Rendell’s heyday. It goes close to accusing management of wanting to throw in the towel by ‘contracting into being nothing but a banker’. The detailed critique of the condition of the management also suggests that Rendell had held the organisation together by sheer force of character in later years as well as by firm priorities; all this had come apart under gentler leadership. In accepting the report, one might have anticipated that the Board would have moved quickly to a change of executive leadership, but more civilised priorities pertained. Meinertzhagen had three more years to serve before normal retirement and it fell to him to begin to implement the organisational changes. His working assumption was that he would be succeeded by an internal appointment and candidates were identified. Only at a late stage did the game change. Eccles had been appointed to the Board of CDC in October 1982. It was he who was selected to succeed Meinertzhagen in April 1985. As a consequence he had to resign as a member of the Board under CDC’s Reithian convention that the general manager should not be a director.

14 The Fan Club

Towards the end of 1981 the Foreign Affairs Committee of the House of Commons decided to hold an inquiry into CDC, stimulated by the government’s reformulation of aid policy that it intended to give greater weight to political, industrial and commercial considerations. There was also a specific concern that ‘CDC’s financial future and very existence as a publicly funded quasi-autonomous public body was in doubt’.1 It was not made clear what precisely gave rise to the alarm over CDC’s future, since the matter was not an explicit theme in the Committee’s hearings. It had presumably caught wind of the concerns generated by the cut-back in funding and the delay in re-establishing a financial planning framework. Its report, The Work of the Commonwealth Development Corporation, was published in October 1982. The Committee therefore had the benefit of the 1980 quinquennial review report which had been finalised in January 1981, as well as of the government’s conclusions on the review, announced in December. More intriguingly, the Eccles report was contemporaneous with the period during which the Committee was taking evidence – the autumn and winter of 1981. There is no indication that the Committee was aware of CDC’s own soul searching exercise while it was taking place, or while preparing its own report. Meinertzhagen and colleagues presented a picture to the Foreign Affairs Committee that betrayed nothing of the critique of CDC developed by Eccles. It seems a fair deduction that, towards the end of his career, the picture presented to the Committee was very much that of Meinertzhagen’s CDC, which both complements and corroborates the Eccles report. An inquiry of this kind also provides a dated picture of the intellectual understanding of the role of development finance institutions in 137

138 Making a Business of Development 1980–93

addressing the perceived issues of the time. An exploration of these contextual aspects will help to set the scene for the content of the report. CDC’s strong agricultural emphasis had been corporate policy since the mid-1960s.2 It had provided the basis for its willing adoption of targets for investing in renewable natural resource projects and in poor countries in the 1975 quinquennial review. In deference to the government’s new emphasis on Britain’s commercial interests in aid policy, the targets had been significantly moderated in the 1980 quinquennial review, but otherwise CDC’s development orientation was not seriously questioned. From the corporation’s stand-point the Foreign Affairs Committee was told that CDC was no longer expected to undertake wholly owned and controlled projects, although it was still interested in a management role on projects.3 In response to the concerns of the Brandt Commission, the Committee explored the degree of CDC (and ODA) interest in improving domestic food supplies and renewable energy. On the latter, Meinertzhagen made polite responses, while on the former he expressed clear reservations on account of the policy environment in most countries.4 It appeared to be common ground with everyone that governments should play a leading role in development projects and that CDC would be undertaking a large part of its investments in conjunction with the public sector. One of the expert witnesses underlined the point by praising the demonstration effect in the public sector of CDC’s high operating standards.5 So what were the sleeping assumptions? The role of international trade as a development stimulus does not feature in the Committee’s discourse. The transformation of economies in East Asia through international trade had not impinged as providing relevant lessons, indeed members of the Committee appeared, if anything, to have an unfavourable view of export crops as a motor of development. In contrast with the view that development was essentially a matter for public interventions – whether through infrastructure or by organising peasant production – was the more limited view of the developmental role of private investment. The pressure on CDC to work more closely with British industry overseas was articulated in terms of enabling industry to become more successful with the benefit of CDC’s experience of overseas conditions, and not because of any consciously held view of its developmental impact. It was reflected in the rather curious attitude coming through the evidence which appeared to equate financial success in investment with a presumption of reduced development value and – per contra – to equate taking increased risk with

The Fan Club 139

positive development value. This stance was not well calculated to promote CDC as a demonstration model to industry. The Foreign Affairs Committee’s review of CDC’s operations is strongly coloured by the favourable light in which the corporation was viewed and by Meinertzhagen’s complacent approach to the inquiry. The Committee wondered out loud whether the relationship between ODA and CDC was ‘chummy’.6 The management team’s responses are pre-occupied with particularities, with an absence of reflective comment and they convey no sense of strategic thrust. The tone is somewhat defensive, conveying a desire to be left to get on with its worthy mission of demonstrating development on the ground with the resources made available to it. The soft focussed relationship was not conducive to too much probing; nevertheless the Committee fastened on to several points of continuing interest. In seeking to explain why a foreign investor would seek funding from CDC Meinertzhagen was made to concede that CDC was seen as a lender of last resort to complete the financing of a project, without whose participation a venture would not take place. It prompted the tart observation that in such circumstances ‘it suggests there is something wrong with the project’.7 The reputation of being there to round out a financing package, rather than being seen as an initiating investor, has dogged CDC down the years and has played a large part in the lending orientation of CDC even in private sector projects. The Committee noted the preponderance of loans in CDC’s portfolio, but missed the deduction – spotted by Eccles – that CDC was fast becoming a banking institution in its asset portfolio. Equity investment was presented in terms of gaining information and influence, rather than justifying risk taking, and the Committee had been clearly informed that CDC was no longer aiming to establish de novo managed projects, as already noted. The Committee had observed the marked decline in the proportion of equity investments and sought to understand the reason for this. Meinertzhagen first explained that there had been a marked reduction in opportunity, which was conceived solely in terms of agricultural projects, but he went on to argue that sole development by CDC was ‘highly undesirable’. Furthermore with regard to the preferred model of smallholder schemes ‘all the benefits go to (the smallholder) and not to the financiers’.8 The implication of this approach on CDC’s financial results was not pursued. Indeed there was pronounced lack of interest in the financial performance of the corporation, in what were still the

140 Making a Business of Development 1980–93

early days of the Thatcher government. Admittedly, the financial position was not easy to get to grips with, what with concessional funding from the Treasury and the complex presentation of CDC’s accounts, which had led the Committee to retain an accountant adviser. It readily grasped the implication of concessional funding for CDC’s ability to undertake renewable natural resources projects and to invest in poor countries, but it did not appreciate the significance of the faster build up of reserves that was taking place for its ability to invest more in equity. The notion of measuring the overall rate of return earned by CDC on its loan funds and reserves was still in the future. Likewise, although the Committee was informed that CDC made a financial appraisal and an economic appraisal of a project, no quantification was offered or asked for. The main focus of inquiry was on CDC’s relationship with government, since its mandate had been triggered by concerns over the future funding of CDC’s operations, and by the implications of the government’s new policy towards aid. CDC did not hesitate to mention the harmful effects of uncertainty over funding levels on its ability to enter into investment commitments, as had happened in 1974, although it tactfully forbore to mention the 1980 hiatus, both occasions arising from a change of government.9 This was accepted by the Committee, which not only called for a firmer forward funding framework, but coupled this with a recommendation that CDC’s self-generated funds be disregarded, so as to ensure that there was always a positive flow of government funding to CDC net of repayments. Such was the Committee’s approval of CDC’s role that it went further and recommended that ‘the Government seek ways of progressively and substantially increasing the finance available to the CDC for investment’.10 It then gilded the lily with a recommendation that CDC be made exempt from UK corporation tax. The destabilising effects of the uncertainty over funding was supported by testimony, but the notion that the Treasury would pump funding into CDC without regard to its financial needs was naïve. It was also wishful thinking in the contemporary circumstances to envisage a return to a world of annual increases in aid allocations to CDC, the more particularly since CDC made a poor case to the Committee for additional funding. Its argument, in effect, was that if it was provided with more money CDC would gear itself up to use it, which was scarcely likely to melt the Treasury’s heart.11 In these circumstances, it is not surprising to find that the Committee lacked enthusiasm for the new plan for CDC to fund part of its investment programme through commercial borrowing. It

The Fan Club 141

worried that the developmental nature of CDC might be adversely affected as well as its ability to invest in poorer countries. These were precisely the concerns that were to resurface sixteen years later over the privatisation of CDC. The Committee puzzled over the rationale of CDC’s concessional borrowing rates from the Treasury, given that they were not fully passed on through its own lending terms. It worried that the consequential build up of reserves might somehow reduce CDC’s accountablility to Parliament,12 or else lead to a weakening of its development purpose,13 through being attracted to higher earning projects. It is hard to discern much force in these concerns. The Committee was on to a much more interesting issue when it pressed both ODA witnesses and CDC on the extent of policy co-ordination between them.14 Did ODA have a policy strategy towards CDC? Did it consult CDC on aid policy? What about giving more priority to food security, or to renewable energy? ODA strenuously denied having ambitions to influence CDC in such ways and the Committee approved of non-interference. The recent episode of withholding capital sanction in order to reduce CDC’s rate of commitments was not revealed. Of even greater significance was that everyone missed the potential for ODA and CDC to align resources, skills and objectives to achieve more effective development together.15 The ghost of Reith and the doctrine that CDC derived its mandate directly from Parliament stood in the way of building a strategic partnership. The Committee noted with approval some examples of co-ordination between ODA and CDC in technical assistance, but instead of drawing a conclusion that this should become a norm, it chose instead to stress the importance of guarding CDC’s independence.16 The new Conservative policy on aid required CDC to be more alert to opportunities to work with British commercial interests abroad and placed priority on Commonwealth countries rather than poor countries. On the former, CDC made appropriate positive responses and drew attention to the evidence produced for the 1980 quinquennial review of its range of collaborations. For its part, the Committee did not wish to put further pressure onto CDC in this direction, adding for good measure ‘we see no need for the CDC to form a closer relationship with the Department of Trade’.17 Indeed, it was critical of the reduction in the target for investment in poor countries and recommended instead that CDC should dispose more speedily of its investments in Hong Kong, Singapore and Malaysia.18 It was in tune with government policy in not wishing CDC to be authorised to operate in

142 Making a Business of Development 1980–93

more non-Commonwealth countries (and was critical of the recent investment in Ecuador). It wished to see a more pro-active effort in the remaining dependent territories, although Meinertzhagen advised that the Eastern Caribbean was ‘extremely difficult’.19 The Committee found it hard to make sense of CDC’s area of operations and received no help from ODA or CDC in this regard; and a member rightly commented ‘the list as it stands is a rag bag’.20 The Report noted perceptively ‘We are concerned that CDC activities may be spread more widely than operational or developmental factors would justify, bearing in mind the limited capital resources available.’21 The comment still resonates. Interestingly, the Committee did not link its plea for a larger aid allocation to CDC to the need to cover such an extensive area of operations. It was prepared to make a special plea for Mozambique to be added to the list, but shied away from considering the case of why CDC was still excluded from operating in India and Pakistan. The Foreign Affairs Committee – as led by its Overseas Development Sub-Committee – emerges from the inquiry as a member of the CDC fan club, but its report lacked intellectual bite, or much in the way of insight. CDC was seen as a British version of the World Bank that was in need of more funding in order to undertake more projects, and justifying special tax treatment, rather than as a path breaker for foreign direct investment in developing countries, or even – as the Committee tried to put to Meinertzhagen – that CDC ‘act as a public entrepreneur’, to which it received a limp response.22 Certainly, no one at this time was expecting CDC to demonstrate financial success in its own results. Not only is there no hint of the alternative strategy posed by the Eccles report, nor were the tools in place to apply a more rigorous assessment of development impact.

15 A Major Review

As we saw in Chapter 11, the 1980 Quinquennial Review had been dominated by the issue of CDC’s permissible level of activity and how it was to be funded. It paved the way for the breakthrough for CDC to be allowed to borrow from the market in foreign currency, guaranteed by the Treasury. After the initial stumble, the National Loans Fund (NLF) provided a source of funds for several years at the government’s own borrowing rate from the market. However, the intention remained to enable CDC to raise external loans without impinging on the Public Sector Borrowing Requirement, by borrowing foreign currency funds through an overseas subsidiary. In 1985 government was ready with a technical bill to make this possible: introduced in November it was eventually passed in the following June. Ever ungrateful, CDC did not welcome the complications entailed by this funding route (it would have much preferred to retain access to the NLF). It was notably curmudgeonly over the finalisation of the arrangements, which dragged on over many months. Eccles was adamant that CDC should not be perceived as a grant aided body, since this would compromise, in his view, the desired commercial orientation of the corporation. In an exchange of letters between Kindersley and the Minister, Raison went to great lengths to allay CDC’s anxieties, including accepting a last minute amendment placing a statutory obligation on the Minister to consult with CDC before introducing grants.1 The power to make grants to CDC was included in the bill. Eccles had succeeded Meinertzhagen as general manager in the spring of 1985 and a new, more independent tone became evident in the relationship with ODA. Another Quinquennial Review was due in 1986 and – in contrast to his predecessor – Eccles decided to lead the CDC team himself. John Vereker, who later in his career returned to 143

144 Making a Business of Development 1980–93

the ODA as its permanent secretary, was chairman of the inter-departmental review committee. It was in session between April 1986 and the following February and produced the most formidable document of the series: seventy pages of report and as many again of appendices. With the Conservative government well established by now, the terms of reference could reflect its new world view: not only to take account of ‘the distinctive contribution which CDC can make to development as part of HMG’s commercial and financial relations with developing countries’, but also ‘to consider the extent to which the CDC’s activities can help to strengthen the private sector in developing countries.’ CDC was even to be submitted to the catechism to which public bodies were being exposed more generally, ‘What is the body for? Why are these functions vested in a public sector body? What is the balance of argument for dispensing with or reducing them, or for contracting out or privatisation?’2 The phrase ‘strengthening the private sector in developing countries’ was gradually to acquire great significance for CDC’s future, as demarcating an area of endeavour outside traditional thinking about aid. Years were to pass before the implications were fully articulated, but the 1986 Quinquennnial Review marks the first attempt to define CDC’s special role in these terms and to give prominence to it. Moreover, the point is noted explicitly that the official aid programme is precluded from investing in private sector projects, so that CDC’s role is complementary to ODA’s operations. No other public agency had CDC’s capacity and the 1986 Review saw no case for changing the conclusion of the 1980 Quinquennial Review that privatisation was inappropriate. Its additional justification for retaining CDC in the public sector that because ‘CDC’s main objective was developmental rather than simply commercial’, this required concessional funding from the aid programme, begged a large question which was not addressed further at this time.3 The main reason for the generous scale of the Review was the great attention given to methodological issues. ODA went into the exercise resolved to bring about a sophistication in CDC’s appraisal methodology and in the assessment of CDC’s development performance. On its side CDC was distinctly apprehensive that too much elaboration would lead to a loss of commercial drive and to excessive monitoring costs. Sub-committees wrestled with technicalities and the main body crafted solutions over fourteen sessions. Seeing which way the wind was blowing, CDC moved fast to set up an evaluations department during the course of the Review, to spike criticism of its economic appraisal

A Major Review 145

efforts. An analysis of CDC’s appraisal guidelines had noted that there was no provision at that time for either environmental or social aspects, which was to be rectified, together with new guidance on economic appraisal methodology. Perhaps more serious, the Review recorded that on examining 168 Board approvals over the five years, economic rates of return had only been calculated in respect of 22 per cent of the projects by number, albeit 52 per cent by value. A major upgrading of the procedural relationship between CDC and ODA was thrashed out in a revised Planning Framework Memorandum, which included new requirements for the submission of interim accounts and of corporate plans.

Performance review The review of CDC’s performance between 1981 and 1985 attempted to break new ground by analysing the record against three criteria – its development performance, its financial performance and in terms of ministerial targets. A sub-committee of economists was convened to tease out tests for development performance, which it found hard to define. However the sub-committee did agree that the financial results were indicative of sustainability and it extracted numbers to show the relative importance of renewable natural resources projects (56 per cent), of projects located in taxed or free markets (47 per cent), of employment creation (66 per cent), of transfer of technology (18 per cent), of provision of management or technical assistance (37 per cent), of location in poor regions (50 per cent). But all it felt able to encapsulate by way of a conclusion was that CDC ‘is clearly making a contribution to many different aspects of development’.4 When it came to assessing financial performance, the Review found it difficult to get past the bland requirement set out in successive Acts that CDC’s financial duty was to ensure sufficient revenue to meet its obligations, taking one year with another. The Review identified three factors that particularly affected financial performance: the size of the investment programme; the composition of the portfolio; and the revenue account. On the first topic, the Review found nothing of substance to note, which meant that it ignored the record that was set out in the appendices of a steady decline in commitments since 1981, when expressed in constant value terms. Also, it had nothing to say on the question of CDC’s investment capacity, although this had been such a thorny topic only a few years before. Having laid out figures on the regional and functional composition of the portfolio, it could

146 Making a Business of Development 1980–93

think of nothing to say about them either – not the relative decline of Africa, or the increased commitment to renewable natural resources, or the importance of power and water investments in the portfolio, or the minor (10 per cent) commitment to industry. In contrast, the examination of the revenue account broke new ground. Having noted the rising trend of provisions against the investment portfolio (up from 12 per cent in 1980 to over 14 per cent in 1985) there is an examination for the first time of the financial returns achieved by CDC. With assets shown at cost (i.e. not revalued), and after deduction of provisions, the equity portfolio showed a return of 11.7 per cent over the period 1980–85 and the loan portfolio a return of 7.2 per cent, which gave a melded average return on the whole investment portfolio of 8.0 per cent. The analysis stops at this point. There is no examination of CDC’s overall financial results, after administration costs are allowed for, which would have shown an average return in the period (before taxation) of 3.1 per cent.5 In short, there was no disposition to assess CDC’s financial performance as a commercial enterprise, due to the weak statutory financial test. More seriously, the Review made no recommendations regarding future targets from its examination of CDC’s performance, while its conclusions verged on the banal: ‘The evidence shows that CDC’s investments did contribute to the development of the recipient countries. The CDC’s objectives should be to achieve as much development benefit as practicable with the financial, commercial and political conditions in which it operates.’6 It will be recalled that the ministerial targets set for CDC had been modified after the 1980 Review. The target for new commitments to renewable natural resources projects had been lowered from 66 per cent to 50 per cent and likewise for commitments to poorer countries. A late addition (in January 1985) was that two thirds of new commitments should be to Commonwealth countries. These targets were easily achieved, with scores of 56 per cent for renewable natural resources, 70 per cent for poorer countries and meeting the Commonwealth target in its first year. CDC had been prevented from investing in the nations of the South Asian sub-continent at its formation in 1948, since they were no longer part of the definition of colonial territories. In terms of aid policy the restriction had always been anomalous, but was especially so after CDC had been authorised to invest in non-Commonwealth countries in 1969. Bangladesh was the first to be authorised in 1980, followed by Sri Lanka in 1982. But approval for India and Pakistan was not given until 1986, while the review was in progress, which was potentially of enormous impact on

A Major Review 147

the scope of CDC’s operations. In the earlier period the exclusion of the sub-continent was due to the colonial dependency focus of CDC, which was reinforced by the political desire to make room for the private sector Commonwealth Development Finance Corporation to operate in independent Commonwealth countries. But once the focus on poverty had become a central tenet of aid strategy in the 1970s, the continuing justification for the exclusion of CDC from South Asia has to be sought in bilateral aid politics.

Organisation and management In Whitehall parlance, CDC was a public body not subject to market disciplines. A new methodology had been devised since Mrs Thatcher became Prime Minister to create a discipline of ‘cost aims’ for such bodies. As now applied to CDC, the choice fell on measuring the ratio of gross and net operating costs to the total of investments and board commitments. The calculation revealed a satisfactorily improving trend over five years, with the gross ratio of costs to investments falling from 1.5 per cent to 1.2 per cent between 1981 and 1985, and the net ratio an even sharper fall from 0.9 per cent to 0.6 per cent.7 It was recommended that CDC should adopt the 1985 figures as its cost target for the next five years. In other words, no further improvement in efficiency was to be required. CDC also escaped any stricter measure, such as one relating operating costs to operating revenues, which would have helped focus attention on maximising the operating cash flow of the corporation.8 The chapter of the Review on CDC’s organisation and management reads strangely against the background of the Eccles report of 1982 and of his appointment as general manager in the spring of 1985. The organisation described in the Report still had ten executives reporting to the general manager, with overseas operations and investments grouped in four geographic posts, and the specialist service functions reporting directly to him. Its conclusion that ‘no fundamental change’ was required in the organisation meant effectively that, on assuming office, Eccles no longer felt impelled to implement the organisational reforms he had previously advocated. However, there were reformist urgings to contend with from Whitehall instead. If CDC can be said to have got away lightly with responding to the government’s drive to improve the efficiency of public bodies, it had more of a struggle on its hands with another proposal that seemed to

148 Making a Business of Development 1980–93

strike at the heart of the Reithian settlement. A considerable divergence of view had become evident, as between ODA and CDC, on the relevance and application of appraisal methodology to CDC’s development mandate. CDC had accepted that its approach had lacked sufficient rigour and, as already noted, had taken steps during the review period to set up a Business Development and Evaluation Department. But ODA was looking for more than this and pressed hard the case for having a formal involvement in CDC’s management processes and, in particular, for the appointment of a senior ODA official to the Board. This was strongly resisted and the Report was left to record that the issue was unresolved and, more ominously, was ‘to be brought to the attention of Ministers and the Board’.9 It was to become a cause of damaging dispute.

Contribution to development The Review set itself to identify the extent to which CDC’s contribution to development may be said to be distinctive, particularly in comparison with Britain’s aid programme delivered through ODA. This was an important question because the responses should contain the justification for CDC’s continued place in Britain’s aid strategy and also should provide a means for assessing which parts of CDC’s operations were of greatest value. Three interrelated aspects of CDC’s activities were identified as being distinct from ODA and other official aid programmes (apart from the obvious point that CDC was not a grantgiving body). These were its contribution to the development of the private sector overseas, its ability to make equity investments, and its capacity to provide management as well as capital. When all three were combined, one had an archetypal CDC enterprise, such as the BAL palm oil plantation or Chilanga Cement. From its earliest days CDC had engaged in the creation and subsequent management of enterprises, primarily but not exclusively in agriculture. To many it was what CDC really stood for. As the business grew, the proportion of managed projects declined to a minor part of the portfolio, and by the time of the review period 1981–85 only 16 per cent of new investment was directed into such projects.10 Nevertheless, CDC remained unique amongst development agencies in having the capacity to combine its own management with investment. Rather surprisingly, the report does not seek to relate CDC’s special capabilities with its record and ask the relevant questions. Should CDC

A Major Review 149

have been doing more to play to this unique strength? What was the explanation of the decline in managed business? Were there still opportunities in a world of independent nations, rather than of colonial dependencies? The short answer is that in the environment of prickly nationalism since the 1960s the opportunities for managed agricultural projects were greatly diminished in Africa and the Caribbean. There might have been more scope with industrial projects, but CDC had been a much more hesitant manager on this side, and it had the further inhibition of not being seen to displace private investors. Despite the assertion that CDC was strongly oriented towards the private sector, the figures indicated a somewhat different picture: at the end of 1985 only 35 per cent of total commitments were to the private sector (with the average of new commitments over the previous five years being 38 per cent).11 As much as 50 per cent of outstanding commitments represented pure loans to the public sector, which in principle was also within the purview of the main ODA aid programme. Instead of attempting to address such issues the Review gives currency to the notion of ‘CDC as a catalyst’ – a catch phrase which formed a barrier to clear thought within CDC for more than a decade. In defiance of the chemical metaphor, one was invited to believe that examples of catalytic action were evidenced by a joint venture between CDC and the public sector; by the rehabilitation of a parastatal body by CDC; by mere participation in consortium financing; by providing training in management skills; by financing small businesses. Missing from the narrative was evidence where CDC could be said to have provided a demonstration investment that was taken up by others, or evidence that CDC as lead investor had brought along co-investors to a project (as opposed to coming in to complete a financing package). The serious underlying issue was whether CDC should be performing more strongly in its area of distinctive strength and, conversely, doing less development banking business. The Review recorded a somewhat tentative conclusion that there was some evidence to support a belief that CDC’s private sector investment ‘may grow as a proportion of future commitments’,12 rising from 35 per cent to ‘at least 45 per cent and perhaps well over 50 per cent’. But no target was actually proposed and the final observation was a limp enjoinder that CDC ‘should be encouraged to give priority to viable investment opportunities which serve (the development of the private sector overseas)’.13 Even if the analysis lacked intellectual bite, there was no mistaking the acknowledgement that CDC was recognised as having a distinctive

150 Making a Business of Development 1980–93

development role, which carried the government’s approval, and that CDC was expected to expand its activities in this area of assisting the development of the private sector overseas. It is all the more surprising, therefore, that within less than a decade CDC would find itself making net loan repayments to government, as an act of policy of a continuing Conservative administration.

Future funding All this was still in the future. In its own appraisal of future funding requirements, the Review took a bullish view. CDC had made a formal bid to grow the level of its business very substantially: namely that the quantum of board approvals should rise from £130 million to £180 million by 1990 and that disbursements on new investments should increase from £91 million to £149 million. Its case was reinforced by the Secretary of State’s approval of India and Pakistan as countries of operation during the course of the review; also (a more political point) by a risk of CDC becoming a net recipient rather than a net investor in central and southern Africa.14 The Review concluded that it was both ‘feasible and desirable’ to plan for continuing growth to the £180 million level of board approvals by 1990.15 When it came to consider how this large increase in activity was to be funded, the Review chose to present its figures in a manner which maximised the contribution of the aid programme to CDC’s investment activity. Thus, in the five-year period under review, drawings from the aid programme were shown to have been equivalent to 52 per cent of CDC’s investments, whereas under the preferred future funding scenario such drawings would still account for 45 per cent of the investment programme in the five years down to 1991–92.16 This would be achieved by allowing annual aid drawings to rise from £45 million a year to £60 million. At the same time the Review endorsed a programme of commercial borrowings, building up to £30 million a year by the end of the five years. While such a presentation was flattering to the role of the aid budget in supporting the distinctive contribution of CDC to development, it represented a very partial presentation of the contribution of external funding to CDC’s operations. Indeed it was positively harmful in two important respects. First, in a period of public finance stringency and of diminishing public support for development aid, it did no favours to CDC to present its funding requirements in a way that emphasised its

A Major Review 151

dependency on annual injections of new money. At a time when ingenious ways were being sought to make public bodies more self-reliant, here was a projection of CDC’s needs that appeared to carry an opposite message. Second, by concealing CDC’s capacity to generate funds for investment from its own operations, the wrong incentives were signalled to management. On the one hand there was a lack of financial motivation to optimise cash flow and financial performance; and on the other, there was an unhealthy focus on the tactics of maximising the aid programme allocation. The point can be illustrated in a simple tabulation in Table 15.1 that contrasts the way funding is presented in the Review and an alternative presentation. In the Review external funding allocations are shown gross, but self-generated funds are shown net, after loan interest and

Table 15.1

Alternative funding

A. Focus on aid programme funding 1981–85 Actual

1987–91 Projected

£ million

%

£ million

%

HMG Funding – gross External Borrowing – gross Total External

196 30 226

52 8 60

275 95 370

45 16 61

Self-Generated Funds – net Cash Balance Reduction Total Self-Generated Total Investment

146 3 149 375

39 1 40 100

227 7 234 604

38 1 39 100

B. Focus on contribution from cash flow 1981–85 Actual £ million HMG Funding – net External Borrowing – net Total External

1987–91 Projected %

£ million

%

45 30 75

12 8 20

41 47 88

7 8 15

Self-Generated Funds – gross Cash Balance Reduction Total Self-Generated

297 3 300

79 1 80

509 7 516

84 1 85

Total Investment

375

100

604

100

152 Making a Business of Development 1980–93

loan repayments and payment of taxes. The alternative presentation draws attention to CDC’s gross cash generation capacity, but then only shows the net benefit of the contribution from external funding. The contrast could hardly be more striking. In one the presentation of CDC’s forward funding needs highlights that the aid programme will provide 45 per cent of its investments and that CDC will contribute only 39 per cent from its net cash resources. The other presentation shows that the government as a whole will only account for 7 per cent of CDC’s funding requirements and that the corporation will generate the cash for 85 per cent of its planned investment needs.

Conclusions Looking back over the marathon endeavours of the 1986 Quinquennial Review, it can be seen to have marked both a change and a maturing in the relationship between CDC and the machinery of government, as moderated through its sponsoring department. Much of the assessment of CDC was favourable. The efforts made to assess performance and to clarify the nature of CDC’s contribution to development yielded a favourable balance of judgement and an understanding that CDC had capabilities that were outside the reach of the bilateral aid programme, particularly in relation to the private sector overseas. It led to an endorsement of CDC’s bid to increase its scale of activities – especially following the approval of India and Pakistan as areas of operation, and to recognition that this required additional external funding – from the aid programme and from commercial borrowing. The ministerial targets associated with this assessment were notably undemanding. New commitments to renewable natural resources investments were lowered from 50 per cent to 40 per cent; the target for poor countries was raised from 50 per cent to 60 per cent, with India and Pakistan now in the frame; the Commonwealth target was reaffirmed at 66 per cent. More surprisingly, there was no target for investment in the private sector, but merely an injunction to seek to increase the proportion above present levels. The cost aim was to maintain the existing ratio. A new unified borrowing rate from the Exchequer was agreed of 3.5 per cent for 25 years (with 7 years’ grace), and it was agreed that CDC should be able to invest in leasing and financial service companies. However, there was an astringent tone to the conclusion that reflected the wrangles over methodology and procedures. ODA was now demanding greater professionalism from CDC

A Major Review 153

as a development agency and more rigour in its monitoring relationships. There were not only recommendations that CDC should sophisticate its guidelines for investigating projects so as to include environmental and social factors, but demands for improvements in its operational procedures as well. Investment proposals should comply with existing requirements to include economic appraisals and assessment of development value, the quality of appraisals should be better controlled, and there should be a programme of evaluation studies of completed projects. The Planning Framework Memorandum governing the reporting relationship with ODA had been extensively revised and elaborated. Left unresolved, and looming over the Review’s conclusions, was the resisted proposal by ODA for involvement in the management of CDC through direct representation on the Board. The counterpart to this more demanding environment was a re-assertion by CDC of its statutory independence from the machinery of Whitehall and of its entitlement to do things in its own way – within ministerial and statutory guidelines. A more prickly era was dawning.

The aftermath The ministerial response to the Review was a shock for CDC. Howe wrote to Kindersley in July 1987 raising four issues. The case for increased funding from the aid programme to support increased investment was rejected outright, even though the enhanced role in the private sector was strongly endorsed. This revealed that there was no ministerial support for CDC to occupy a larger share of the aid programme, notwithstanding its commercial and private sector orientation. A tough stance was taken on the need for CDC to improve its procedures and effectiveness. The Secretary of State went on to observe, ‘The immediate need is to look for ways of creating a greater involvement for the Board in CDC affairs’ and openly supported the appointment of an ODA official to the Board – ‘the Government favours that’.17 CDC was taken aback. All the procedural recommendations of the Report had been accepted by CDC. It decided not to fight on the funding issue, but to reserve all its indignation for the attempt to force an ODA official onto the Board. Kindersley wrote that the Board ‘are seriously worried that it would change the nature of CDC relations and accountability to Government’. Arguments were marshalled to rebut the proposal and CDC worked up a detailed case that such an appointment was not intended by the CDC Acts and that new legislation

154 Making a Business of Development 1980–93

would be required to implement it. Furthermore, introducing a ‘policeman’ ran counter to the notion of the independence of statutory corporations. More political considerations were also introduced – ministers had found it convenient in Parliament to be able to resist enquiries on matters of management detail, which would no longer be possible with an official on the Board. Indeed, ministers would now find themselves accountable for CDC decisions once the official link had been established. Overseas, there would also be a change in the perception of CDC’s independence; for example, CDC had been in a position heretofore to negotiate debt rescheduling with governments outside the Paris Club of government creditors. All this added up to a situation where ‘the short term needs of government would take precedence over the long term needs of CDC and its projects’. The passion was palpable and the government backed down from forcing its views on to the corporation.

16 A New Era

In the normal course of events, CDC could look forward to five years without fundamental policy review before the next quinquennial was due in 1991. CDC had a clear brief to increase its engagement with the private sector overseas; India and Pakistan had been brought into the approved country list; offshore commercial borrowing had been authorised in the 1986 Act. Eccles was now firmly in position, having been through the most comprehensive departmental review to date, and also by now having the measure of management skills within the corporation. CDC was more than ready to move into a new era. Notwithstanding a warning that CDC could not look to a rising level of aid programme allocations,1 the pace of investment rose strongly over the five years 1986–91. By 1991 Board approvals were over two and a half times higher at £160 million, and the level of disbursements had more than doubled to £157 million, against £291 million of commitments outstanding. Achieving these results required energetic action at every level in the organisation and representatives had to find and develop new business. With authorisation to operate in India and Pakistan, investment approvals were over £100 million by 1990, which moved Eccles to comment, ‘There seems no reason to doubt that India will become CDC’s number one country within the next 2–3 years.’2 The performance of the existing portfolio had also to be improved. One major aspect was the volume of loans in arrears. They had been rising worryingly since the Mexican debt crisis in 1982, as so many developing countries had difficulties in servicing external debt obligations. CDC followed an interesting strategy in this regard. Far from seeking protection as part of the government’s aid programme, CDC was careful to keep itself out of the Paris Club of government debtors, which negotiated as a group with defaulting countries, and likewise it 155

156 Making a Business of Development 1980–93

kept out of the London Club of commercial debtors. Instead, CDC preferred to negotiate directly with the governments concerned, where it could maximise its influence from long standing connections and its project management reputation and, most importantly, demonstrate its willingness to negotiate tailor made solutions. Much effort went into this. For example, in 1989 in Zambia the Board was advised that, as a result of an arrangement to accept partial repayments in local currency for investment into new projects, as well as rescheduling some loans, CDC had received £15 million in repayments over the past three years, with only £2.7 million being incurred by way of additional commitments.3 Again, in 1990 a deal was done with Tanzania whereby £9.7 million of arrears and £10.7 million of a loan shortly due to mature were transformed into a new loan, repayable over 12 years in equal instalments in local currency. The instalments would be used to fund the costs of the CDC office and other payments.4 The other way in which more value could be extracted from the portfolio was by realising mature investments. There was a marked honing of negotiating skills, with early milestones being such transactions as the disposal of 25 per cent of the Swaziland Usutu forest and paper mill as Courtaulds disinvested, which raised £9.3 million in 1989–90, with CDC still retaining a 26 per cent stake in the business; the disposal of an industrial estate in Bangkok for £11.2 million, showing a 16 per cent rate of return since 1974; the disposal of an office building in Singapore for £7.8 million, showing a 25 per cent rate of return; the flotation on the Malaysian stock exchange of Sarawak Oil Palms, by selling 20 per cent for £3 million and retaining a 44 per cent investment with an initial market value of £6.6 million.5 From negligible levels in 1986 and 1987, the accounted proceeds of realisations in the subsequent four years became significant, as shown in Table 16.1. Table 16.1

£ million 2 yr average

Realisations 1987–91

1987

1988

1989

1990

1991

0.7 0.7

1.1 0.9

11.1 6.1

12.8 12.0

25.7 19.3

The financial impact of this increased level of activity and ‘working’ of the balance sheet was to be seen in the improvement in the generation of cash from internal sources (from operations, loan redemptions and equity realisations), which began to rise markedly and, indeed, to

A New Era 157

greatly exceed the net cash flow from government, after allowing for loan interest repayments as seen in Table 16.2.5 This trend did not go unnoticed within ODA – at a time when public expenditure was under increasingly severe constraints, and it influenced the conduct of discussions over allocations from the aid programme under the Planning Framework Memorandum.6 Table 16.2

Internal Government

Source of cash flow 1987–91

1987 £ million

1988 £ million

1989 £ million

1990 £ million

1991 £ million

89.8 (27.8)

96.9 17.3

127.5 24.8

143.7 18.5

132.3 21.6

As recommended by the 1986 Review, CDC began to institute a process of corporate planning, with the first plan covering the four years 1987–90. Two years later, this was succeeded by a second plan for 1989–93. In these documents (and their successors) the management began to develop a methodology for relating an analysis of CDC’s operating environment to the achievement of specific targets, financial ratios and consistent resourcing. It was also a means whereby CDC could define to itself a range of aims and priorities including ones which required persuading government to change existing policies. These plans were shared with ODA and accordingly played a role in preparing the ground for the next quinquennial review on the objectives to be agreed for directing CDC’s investments in accordance with Britain’s aid policy aims. For its first corporate plan 1987–90 CDC set targets for board approvals for new investments, but the more active approach to new business resulted in a significantly higher achievement after the first year, as shown in Table 16.3. Table 16.3

Targets Actual

Board approvals 1987–90

1987 £ million

1988 £ million

1989 £ million

1990 £ million

185 128

185 249

185 199

185 224

There was no difficulty in achieving the 1986 Review investment targets for poorer countries of 60 per cent and Commonwealth of 66 per cent, with outcomes in 1990 of 72 per cent and 87 per cent.

158 Making a Business of Development 1980–93

However, the 40 per cent target for investment in renewable natural resources projects proved unattainable, with only 23 per cent achieved.

Bessborough Gardens CDC had been located in Hill Street, Mayfair, since its inception and had gradually spread into neighbouring properties. The lease was due to expire in 1990, which led to a decision in 1984 to relocate to rented, purpose built offices. A suitable proposition was identified in a development by the Crown Estates near Vauxhall Bridge, and a deal was struck for completion in 1988. The fitting out of One Bessborough Gardens provided a significant opportunity for modernisation and cultural change, which was seized. The building was designed in terms of flexible, open plan layouts: there were to be only two private offices, for the chairman and the general manager. Work-stations, with terminals at every desk, were all linked to data communications and to the computer system for data base access. There was a range of meeting rooms, a beverage room on every floor, a single staff restaurant. Eccles was clear that the move symbolised wider issues – the need to adapt and take advantage of the latest office standards; the opportunity to emphasise teamwork and communication; the occasion for introducing a new corporate identity.7 The decision to rent had been taken with an eye to ODA and to possible political concerns over purchasing a property. The issue was reopened unexpectedly when it was learned in early 1990 that the Crown Estates had decided to sell a 124-year lease on the property. An evaluation of the proposition indicated that it would make financial sense for CDC to try to purchase the lease, since there was an indicated return of 12 per cent on the investment. ODA was predictably alarmed at what the Treasury would think, fearing both a reduction in future aid funding and pressure for CDC to relocate out of London, as so many public entities were being compelled to do. The new chairman, Sir Peter Leslie, appointed in July 1989, considered it prudent to arrange a special meeting with the new Minister of State, Lynda Chalker, to go over the sensitivities and to ensure that ODA was fully briefed.8 This proved successful and a deal was consummated in January 1991 at a cost of £21.1 million. CDC ensured that its equity realisations in that year jumped to nearly £26 million, so that there could be no accusation that the lease had been purchased with aid programme funds.

A New Era 159

Reorganisation By the end of 1990 Eccles’ determination to drive the organisation harder led him to decide to emphasise the distinctive skills required for the different aspect of CDC’s business and a management reorganisation took place at the end of that year. It established functional leadership in London with respect to the managed businesses, the investment portfolio and the acquisition of new business, in order ‘to improve the overall receptivity of CDC to new business and to sharpen up the servicing of existing investments’ in Eccles’ words.9 At the same time two technical departments of agriculturalists and engineers were dissolved and the expert staff were redistributed to business departments. The hegemony of geography was dissolved in London and regionally. Eccles had already compromised the Reithian doctrine of decentralised regional control by his initial emphasis on regional operational control from head office; now regional co-ordination itself became subsidiary to the aim of professionalising business skills. As Eccles explained later, the growth in the number of overseas offices and the varying demands upon them ‘were proving troublesome, and so the opportunity was taken to widen the London capability … to make sure the twenty representatives achieved their objectives and received the service required’.10 The department for New Business would set standards for the whole corporation and act as a training ground. The department for Managed Businesses would put managers in the lead over technical specialists.

Grappling with Treasury orthodoxy The steps taken by Eccles following the 1986 Review all served to galvanise CDC into a more business-like posture. He created a dynamic for growth, as instanced by the emphasis on stimulating cash flow through realisations and on pursuing loan arrears; the drive for new business, especially with the private sector; the office move; the management reorganisation; the introduction of corporate planning with ambitious objectives. Notwithstanding serious disappointment over the introduction of commercial borrowing and on the level of programme aid, these years were a relatively benign period in CDC’s relations with government. An unsympathetic investigation by the National Audit Office (NAO) at the end of 1988 into ODA’s sponsorship of CDC brought the two bodies together in a defensive alliance, as also in the follow-up enquiry by the Public Accounts Committee of the

160 Making a Business of Development 1980–93

House of Commons.11 It threw a revealing light on the difficulties of reconciling Gladstonian public finance with the realities of a public sector that extended into such an arcane area as a branch of the aid programme charged with operating on commercial lines. In Treasury parlance, CDC was classified as a Non-Departmental Public Body, as already noted. However the NAO was precluded from investigating it directly, because CDC did not meet the qualifying test of more than half of its funding being in the form of grants. Instead, its enquiry focussed on ODA’s ability to influence the scale and distribution of CDC activities; on its ability to monitor the economy, efficiency and effectiveness of CDC; and on its ability to monitor and control the financial risk to the Exchequer of CDC’s operations. The thrust of the NAO approach was that ODA should have equipped itself through information returns and direct investigation to exert far more detailed monitoring of CDC’ s activities and control over project selection and quality. The government had required the instigation of comprehensive Financial Management Surveys of all Non-Departmental Public Bodies in 1984 and ODA was considered to have side stepped this obligation. The NAO was openly uncomfortable that the cumulative effect of the introduction of concessional funding of CDC had been to weaken the discipline implied by its statutory break-even obligations, as a result of the build up of a substantial reserve and of the cash flow from self-generated funds. Throughout its report the NAO used the analysis of the 1986 Quinquennial Review to show that CDC had been permitted by ODA to operate on standards and targets which lacked rigour and took too much on trust. Notwithstanding the stricter criteria that had resulted from the Review, it was still the case (as we have already noted) that there was no target for investment in the private sector; that the achievement of development benefit was articulated in terms of ‘as much as is practicable’; that the ODA was somewhat laid back in its awareness of CDC exposure to risk. Management worked hard with ODA to deflect and moderate NAO criticism before its report was finalised because, as Eccles noted, ‘There is no doubt that if the NAO view were to prevail the logical outcome would be to become a division of the ODA.’12 It was possible, however, to read between the lines, which is what the Public Accounts Committee proceeded to do in the summer of 1989. Its cross-examination and report endorsed the lines of criticism developed by the NAO, despite robust defence from the ODA team.13 Reading over the exchanges, one is left with the impression that CDC had come to occupy a privileged, if not cosy, position within the

A New Era 161

British aid structure. Funding allocations to CDC had risen in line with the growth of the total aid programme, in sharp contrast to the squeeze on the bilateral programme, ‘as a matter of policy’. ODA had honoured the doctrine that CDC was answerable to its Minister through the Board, which hugely reduced the amount of detailed information it sought and – more importantly – the extent to which officials felt accountable for performance. The 1986 Quinquennial Review marked a big step in requiring CDC to improve its appraisal methods and in the evolution of performance targets, but the NAO was surely correct in drawing attention to the lack of rigour in assessing development benefit and in measuring financial performance. However, the Public Accounts Committee did no more than underline these points, since it lacked the expertise to make specific proposals for improvement. Nevertheless an agenda was being established for the next Quinquennial Review.

Thinking about private finance With the passage of the CDC Act 1986 empowering commercial borrowing through an overseas subsidiary, the planning framework discussions were able to build in an assumption of annual commercial borrowing by CDC, which moderated its demands on the aid programme. The preferred scenario arising from the 1986 Review was to allow for £15 million of borrowing in 1988–89, £20 million in the following year and £30 million in 1990 and 1991. CDC established a borrowing vehicle in the Cayman Islands and made other preparations, only to find that the Treasury had thought up a new argument for refusing to authorise CDC to proceed. This was the notion that no commercial borrowing by CDC could take place unless the corporation could borrow (with Treasury guarantee) on terms at least as favourable as those obtainable by HMG. The absurdity of this posture was tacitly conceded for two years, in that CDC was given an allocation of £20 million from the Treasury contingency fund in lieu of going to the market. On the first occasion CDC was made to accept a rate close to the government’s borrowing rate, and on the second a concessional rate was conceded in compensation for the lower than anticipated allocation from the aid programme. At the beginning of 1990 a curious exercise took place, in which ODA set up a working group with the Treasury and CDC to examine options for resourcing CDC, with a view to seeing if it could be made less dependent on government financial support.14 The Working

162 Making a Business of Development 1980–93

Group failed to secure reconsideration of the Treasury stance on commercial borrowing and did not address the necessary implication – that unless the aid programme took up the shortfall, CDC would face a severe funding gap in its planned investment programme. In its planning submission in May that year (while the Working Group was meeting) CDC had indicated an external funding requirement in the following three years of £90 million, £95 million, £100 million; whereas the amount pencilled in by ODA to be met from the aid programme was £60 million for each of these years, in the expectation that commercial borrowing would fill the gap. By the autumn ODA felt it could do no more than reiterate the £60 million allocation, since the Working Group had not discovered any credible alternative to commercial borrowing. The stage was being set for an increasing divergence of views on the appropriate scale of CDC’s activities and how they were to be funded. The Financial Allocations Working Group, known as FAWG, noted that there might be an option of privatising CDC, but concluded that ‘it would be inappropriate to pursue … at this stage,’ as it was better left to the next quinquennial review. The FAWG exposed a significant dilemma over CDC’s capital structure, but felt unable to propose a resolution to it. CDC’s capital structure represented an uneasy compromise between a development bank and a venture capital institution, with reserves of £144 million and government loans of £568 million. A gearing ratio of 3.9 to 1 was low by the standards of development banks (and could have been twice that figure), whereas the ratio was high by reference to venture capital entities. The International Finance Corporation was showing a ratio of 1.4 to 1 (although permitted to go up to 4 to 1) and the British venture capital company 3i (owned by the clearing banks and the Bank of England at that time), had a ratio of 2.2 to 1. The increasing orientation of CDC towards investing in the private sector overseas pointed towards the IFC or 3i model, which implied a willingness to open its capital beyond the allocations of the aid programme, so that it could have a larger base of core capital to undertake such business. Of course, the development banking model was only plausible with the removal of the Treasury objections to commercial borrowing. These issues reverberated within CDC’s boardroom without resolution until late in the decade. Having side-stepped the issues of commercial borrowing, ownership and capital structure, the remaining activity of the FAWG was to take up concerns raised by the National Audit Office and the Public Accounts Committee (PAC). The PAC had expressed doubt over ODA’s

A New Era 163

ability to exert strategic control over CDC, because of the large amount of reserves that had been built up.15 This mechanical approach to the implications of the financial scale of CDC’s operations was explored further and the FAWG placed on the record that an increase in selfgenerated funds above forecast would lead to a planned reduction in aid support in the first instance.16 This might have been justified on the understanding that the planning framework forecasts would always represent CDC’s optimum level of activity. However recent history had already shown that CDC had a higher investment capacity than could be funded from the aid programme and also that ODA had been unable to live up to the investment scenario it had endorsed in the 1986 Review.17 Thus the statement reads more like an encouragement to under-performance. The PAC had been critical of CDC’s targets for measuring development benefit and also its financial targets. On the former, the FAWG had nothing new to propose and was content to leave CDC with an unquantified objective for investing in the private sector and in equity, and to remit the issues to the next Quinquennial Review. However it did note that ‘a good case existed’ for incentivising the achievement of higher investment in renewable natural resources and in equity, by using ODA grant funds.18 With regard to introducing a financial target more rigorous than a simple requirement to break even taking one year with another, there was progress in the limited sense that a concept of return on capital employed was recognised as relevant.19 CDC had achieved a return of 6.9 per cent in 1989 and an average of 5.5 per cent over the preceding four years. It was left that refinement of a target should be left for the Quinquennial Review. CDC’s reluctance to be tied down prevailed over adopting a target for self-generated funds. ‘It is doubtful whether any useful purpose would be served by setting a formal target in this area.’20 For an organisation that was seeking to demonstrate the capacity and the necessity for a rising trend of new investment, this was an unhelpful posture and it was instrumental in fuelling suspicions that CDC was hoarding financial resources. The PAC’s greatest scepticism had been reserved for the lack of independent evidence on CDC’s efficiency and for the basis of the existing targets, which measured operating costs against the total of investments and commitments. The FAWG acknowledged that a static target based on 1985 was unsatisfactory, but again it had no firm proposal, nor did it examine any other measures such as relating costs to revenue. After five years with Eccles at the helm CDC had moved into

164 Making a Business of Development 1980–93

higher gear as an investing institution and now displayed a more commercial approach to its business. Yet this was still associated with a marked hesitation to embrace a more challenging financial measure of its performance, or to acknowledge openly the critical role if its selfgenerated funds.

17 Monopolies and Mergers Commission

By the spring of 1991 CDC was keen to agree the terms of reference for the next Quinquennial Review, which was due to start in September, and they were duly settled in early May. But almost simultaneously, CDC became aware that the Department of Trade and Industry (DTI) was considering a reference to the Monopolies and Mergers Commission (MMC), as part of a cycle of references under section 11 of the Competition Act, to examine questions relating to the cost and efficiency of public corporations. This was confirmed in a letter from the Secretary of State, who opined that the review would ‘complement’ the Quinquennial Review. CDC immediately had doubts about the vires of being subject to an investigation under the Competition Act and made clear to ODA that the basis for a reference had not been made.1 In formally accepting the principle of a reference, Leslie noted ‘the independent and untrammelled nature of the MMC’s reports may well present us with an outcome which could be quite unexpected.’2 This proved to be a prescient observation, not so much as to outcomes, but with regard to the range of issues that the MMC found it appropriate to open up. The enquiry was announced formally in November and initial contacts were made, while data gathering commenced. Interestingly, Eccles himself was a former member of the MMC and hence had a privileged understanding of what might be in store. He established a rigorous internal discipline: all information to the MMC was numbered and channelled through a designated officer (more than 260 documents were so marked); there were to be no one-to-one meetings; no informal discussion of CDC policy. At an initial meeting with Eccles the MMC chairman made it clear that he was interested in the totality of CDC’s operations and that the enquiry would take a broad 165

166 Making a Business of Development 1980–93

approach, regardless of any views of ODA and DTI. More important for CDC, there would be no continuing dialogue with ODA during the course of the enquiry. An overseas visit programme was arranged.3 In the event, CDC was provided with a copy of the record of ODA’s briefing meeting with the Commission. This should have given it comfort on several sensitive points: ODA was not seeking representation on the CDC board; it thought that ‘there was a case for commercial borrowing on policy grounds which should transcend the “least cost rule”’; it thought ‘that CDC’s role as a catalyst was an important one, and that CDC’s involvement might improve projects which would have gone ahead in another form if CDC had not invested in them’. However, ODA also saw the reference as an opportunity for CDC to be probed more thoroughly than was possible under its own statutory relationship.4 Members of the Commission split into teams and visited nine countries in January 1992 to meet ministers and officials, businessmen, CDC representatives and to inspect CDC projects. After digesting the written submissions, a series of 44 questions were formulated as the basis for the first hearing on 6 February. It was held with Leslie, Eccles, and a team of senior managers, but virtually every response was handled by Eccles himself. In a prior note to the Board, Eccles sought to identify what appeared to be the topics of greatest significance arising out of the inquiry: a. ‘The potential conflict between development and commercial considerations.’ This was not posed as a question in so many words, but several of the questions were germane to the issue, including ones on privatisation and charging market rates of interest. b. The rationale behind the financial and development targets, opening up discussion about the return on capital in relation to CDC’s break-even statutory duty, and also raising the topic of quantifying CDC’s overall development impact. c. Manpower issues, but more especially the 1991 reorganisation and the relation between London office and the representatives. In fact it was already evident that the Commission would be testing the proposition that there was over-concentration of authority in the chief executive and that it had detected a degree of confusion over the implementation of the new organisation scheme. d. The chestnut of the chief executive not being a member of the board, where Eccles firmly flagged the party line. ‘If the management came to think that it was working for Ministers and not for

Monopolies and Mergers Commission 167

the Board as it does now, then the nature of the Corporation would change, and its independence, which has been the principal reason for the successes that CDC has achieved, would in my view be lost.’5 Interestingly, in view of what transpired at the hearings, Eccles did not sound any kind of concern over the MMC’s fourteen questions on the methodology of CDC’s investment and monitoring procedures. However, he had drawn attention to the wide-ranging potential of an inquiry into ‘efficiency and effectiveness’. The opening series of questions on strategy sought to understand why CDC did not have explicit country strategies, as opposed to identifying projects in an approved list of countries; whether the ODA targets for poor countries, the Commonwealth and for natural resources projects had an adverse impact on financial performance; whether there should be explicit growth objectives and whether there should be an assessment of the overall development benefit achieved by the portfolio. Eccles smelt danger in the shape of over-complication and bureaucracy, rather than that interesting general questions had been posed, and went on the defensive. CDC was concerned to maximise the impact of individual projects and saw little value in aggregation or in country plans. Moreover, as regards an overall financial return – ‘We just do not think like that’.6 On the question of growth, the Treasury had constantly questioned whether CDC should grow at all: ‘growth is not in our accountability chain accepted as anything which we have any right to pursue … it is not accepted as one of CDC’s targets by the whole quinquennial review procedure’.7 This was a strange comment in the light of CDC’s obsessive concern over the years with the annual allocation of new money from the aid budget and Eccles’ own efforts to raise CDC’s game. Turning to questions of organisation and structure, the Commission had been astonished to discover that the chief executive and senior management were not executive directors of CDC and did not therefore share formal responsibility for fulfilling its statutory duties. The result was that the board delegated the discharge of its responsibilities to someone who was not one of its members. Leslie came to the point directly: the Secretary of State appoints the board and if he came to appoint the executive directors this would compromise its independence, ‘we … feel that it would be a very big mistake to make a change’.8 Eccles pointed out that he had been a member of the Board and left it when he became chief executive. ‘I firmly believe that it is

168 Making a Business of Development 1980–93

better for the operations and independence of the corporation that the executives are not appointed by the political system but are appointed by the board.’9 The Commission took the point that the existing arrangements served to insulate the executive from the political system, with which it had sympathy, but it remained unhappy with the consequence that the executives did not share full statutory responsibility for CDC. In their final recommendations this led the Commission to propose that legislation be introduced to enable the members of the Board as appointed by the Secretary of State to have the power themselves to appoint executives as additional directors. Part of the Commission’s concern was the delegation of the powers of the board to the chief executive and with the consequential concentration of authority in one person. Here there was an interesting lapse of historical awareness, in that the Commission was not made aware of the unique arrangements put in place by Reith, nor was this clarified during the hearing. Eccles sought to present a picture of concensual decision making, whereas the formal position established by Reith and perpetuated thereafter was that committee conclusions were advisory to the chief executive. The famous dual signature custom on all CDC Board papers was to demonstrate that the chief executive had accepted a committee’s conclusions. It also explained Eccles’ vigorous dissent from giving up the chairmanship of the key committees. The Commission had picked up a concern within CDC’s management during its travels over the effects of the recent management reorganisation, which had been in place for just a year. Eccles gave an interesting justification of what he had been trying to accomplish, both in a meeting with officials in January and at the hearing. It brought out very clearly his intentions: the need for better performance arising out of the challenging operating environment, especially growing country debt problems and the poor outlook for commodity prices; the increased focus on investing in the private sector and the consequential increase in investment risk; the greater reliance on cash flow for new funding because of constraints on the ODA aid programme. ‘It was therefore important to sophisticate CDC’s approach and with that the approach of individual members of the senior team.’10 But the Commission had been surprised to discover an absence of job descriptions in the new organisation and, even more so, that Eccles was very resistant to introducing them, on a philosophical argument about self-reliance: ‘I think it is wrong not to expect (CDC) people to work out what it is they believe their job to be … for effective performance that is the culture that we need.’11 A more cynical inter-

Monopolies and Mergers Commission 169

pretation would be that the absence of definition underscored the need to be alert to the messages coming from the chief executive’s office. The Commission decided to test on the record whether the relationship between ODA and CDC presented significant difficulties for CDC, which evoked a thoughtful and characteristic response. Noting that CDC was inevitably not a major priority to the department, Eccles felt that the problem was not so much with the department as such, but with a political system that ‘talks a lot about sustainable development, it talks a lot about the role of the private sector and does not seem to have approached the question “what opportunities might we be missing by not redefining CDC’s position and giving it more backing?” on such matters as capital structure, liquidity, relationship with the Treasury’. He went on to draw attention to the uncertainty about the future of public bodies after ten years of Thatcherism, especially as CDC had been formally classified as an executive agency or Non-Departmental Public Body, yet had some of the characteristics of a properly constituted public corporation. He concluded: ‘there has not been sufficient intellectual effort put into deciding what CDC is for and where it is going.’12 This was quite a challenge and the MMC perhaps missed an historic opportunity by only responding to it selectively in its eventual report. In particular, it failed to get clear in its own mind what is CDC’s distinctive contribution to development and to relate this to its financial structure and continuing relationship with government and the aid programme. The hearing on questions concerning the financial framework elicited some responses from CDC which puzzled the Commission. It started by exploring whether CDC should have a financial target, over and above the statutory requirement to break even, which would serve to reinforce its objective to maximise development benefit. Although Eccles was prepared to acknowledge a link between increased selffinancing and the build up of reserves and a larger equity book of investments, he was adamant that CDC was not to be seen as being driven by financial return at all because the Act did not require CDC to earn a return on capital employed.13 It was consistent with this stance that the Commission had discovered that CDC was not charging market rates on its loans to private sector borrowers. There was resistance to the observation that this distorted local capital markets and there was much talk of the difficulty of establishing what a market rate would be. Eventually Eccles acknowledged, ‘I do not think that the teasing out of the intellectual process has been adequately done. It is an area that could do with quite a lot more thought.’14 The Commission’s recommendation in this regard was accepted by CDC.

170 Making a Business of Development 1980–93

The key issue over the financial framework for CDC’s operations was to probe its views on privatisation – a topic that had been in the air since the 1980 Review. Noting that previous discussion of the matter had not delved very deeply, Eccles advanced two lines of thought. The first was that CDC wished to be able to look forward to a prospect of achieving real growth, year on year, but this was becoming increasingly difficult to reconcile with constraints on public expenditure and aid. The conclusion was that there would need to be some change in CDC’s financing regime in order to introduce an additional flow of funds.15 His second thought, in responding to the Commission, was that he saw no philosophical or fundamental objection to the privatisation concept. He went on to sketch a scenario where a partially privatised CDC operated in part with concessional aid funds and in part with private capital and borrowings, and he alluded to the way that the World Bank operated through different lending windows. However he was very conscious of the practical difficulties to be resolved. This last was a key point with Leslie, who saw little point in CDC trying to make the running on such a complex matter. ‘It really is for Government to say “we now want to look at the possibility of some totally different structure and means of doing it.”16 What is interesting in all this is the indication it gives as to how little detailed consideration had been given to the issues within CDC over the previous decade. In effect, all its hopes had been pinned on gaining access to commercial borrowing and the frustration of the 1986 permissive legislation by the Treasury had left CDC floundering, but with a grievance. The Commission then turned to a lengthy session on CDC’s investment appraisal methodology and the monitoring and evaluation of results. Although four years had passed since the 1986 Quinquennial Review and the emphasis it had given to these very topics, CDC emerges as defensive and intellectually resistant to the systematic use of economic internal rates of return, to quantification of development value, and to appraisal problems including ‘project optimisation’. More surprisingly, there was a tendency to take refuge in a minimalist interpretation of the Act when challenged on performance issues. Given its desire to be seen in business terms, no awareness comes through that CDC should be compared to private sector standards of performance, or of its own role as showing the way for foreign investment in poor countries. Typical, was the resistance to rigour in defining threshold returns for accepting projects, with a preferred emphasis on whether the project would work on the ground. In short, the stance was to want to have it both ways – to resist the sophisticated methodology of

Monopolies and Mergers Commission 171

aid evaluation on the grounds that CDC had a practical business to run, but to resist also measures of overall performance because of its development role. Immediately following the session on 6 February the Commission prepared a document of ‘Tentative Conclusions and Recommendations’, which was sent to CDC for comment before the next hearing on 5 March.17 This procedure was interesting in that it laid out very openly the areas where the Commission had continuing concerns and CDC was invited either to concur or to rebut. The challenge was taken up with zest. It gave management an opportunity to restate its position in unambiguous terms, to propose reformulation of the conclusions, and to rebut.18 In addition there was an important exchange of letters just prior to the hearing. The MMC wrote to Eccles asking for his view on how CDC’s performance should best be judged and offered four tests for consideration: its financial results, sustainability, its contribution to development, and value for money. Eccles replied with an eight-page letter, overnight.19 The problem with judging CDC’s financial results, he argued, was the combination of an undemanding statutory objective with concessional funding, while operating in high risk situations. Eccles focussed on the continuing justification for concessional funding: it enabled CDC money ‘to go to places that other peoples money would not reach’ in terms of risk and geography, and it enabled a build up of reserves to match its equity investments. He went on to claim ‘it would be wrong for CDC to go beyond its statutory duty’ of break-even; just because of this policy CDC would deliberately modify its profit objectives by reducing lending rates to capture more marginal projects, or increasing the amount of equity investment, or increasing its risk exposure, rather than accept a duty to maximise. Food for thought, indeed. With regard to the overall financial results, Eccles made four crisp points. Has CDC fulfilled its statutory duty? Yes. Has the statutory duty been sensibly interpreted? Yes, if one looks to the balance between equity investments and supporting reserves and at the prudent ratio of 3:1 of loan to equity assets. Will the present level of performance continue? He was confident that it would. Finally, comparisons with other development finance institutions were irrelevant because of CDC’s statutory test of break-even. On the issue of sustainability, Eccles offered an interesting piece of deconstruction analysis. He distinguished between physical sustainability, such as controlling soil erosion and improving crop yields, and

172 Making a Business of Development 1980–93

various kinds of financial sustainability as evidenced by whether projects had failed (none in the last five years), or the potential for projects to go into receivership or reconstruction (perhaps a dozen or more), or the presence of loss making or otherwise sick projects in the portfolio (again perhaps a dozen or more). The Commission promptly took up his offer to substantiate the record.20 Lastly, on the question of CDC’s contribution to development, ‘we would argue that evaluation studies are not required in order to establish whether or not there is a contribution to development’. Instead, he preferred the view that ‘provided the financial rate of return was satisfactory, it was likely that the economic rate of return would be also, in the absence of any identified determinants, environmental or social’. The second session with the Commission on 5 March was a somewhat extraordinary occasion. Eccles immediately opened on an adversarial note and established a prickly atmosphere. He had decided to make an opening statement in order to focus attention on a dominant theme.21 It was central to the inquiry, he argued, whether the MMC concluded that CDC is a business or a bureaucracy. If it was agreed to be a business – as CDC held – then it should be judged by the standards of good corporate governance and not like a donor agency. He pointed out that the CDC Board was accountable to the Secretary of State and that, as a result, CDC was not subject to departmental instructions and therefore enjoyed a considerable measure of independence. He referred to the thoroughness of the 1986 Quinquennial Review: all its recommendations had been implemented; its conclusion on achieving development benefit was couched only in terms of ‘as much development benefit as practicable within the financial, commercial and political conditions in which it operates’, and he effectively warned the Commission not to go beyond this by seeking too much quantification. Eccles was fearful that the MMC would give insufficient weight to the factor of ‘business judgement’ in assessing the management and board of CDC. It led on to a plea for flexibility and an absence of prescription and definition when interpreting the organisation structure. Eccles concluded by urging the MMC to confirm that it had been correct for CDC to operate in a businesslike way and that it should evaluate CDC’s overall performance in this light. It will be clear from this résumé that Eccles was presenting a false antithesis between business and bureaucracy. CDC was enjoined to behave in a businesslike way in order to achieve public policy aims of development overseas, which was to be financed out of public money. Inevitably, CDC would have to answer to the proper use of that

Monopolies and Mergers Commission 173

money, in both an accounting sense and in the sense of achieving development benefits, and bureaucratic rules would be evolved to monitor and measure its activities. The accountability of the board to the Minister was an important constitutional point, but the inescapable reality was the working relationship with the ODA. It would seem that the purpose of the intervention at this stage of the inquiry was to try to move the Commission away from a perceived over-emphasis on quantification and from a potentially critical stance towards CDC’s lack of sophistication in its investment appraisal and monitoring procedures. In pursuing this aim, there followed several hours of ill-tempered cross-examination of CDC’s written responses to the tentative conclusions circulated by the Commission. It was an uncomfortable occasion – deliberately engineered from the CDC side. Reading through the exchanges, the management’s concerns come through clearly enough: to avoid being tied down by bureaucratic procedures for the sake of intellectual tidiness, rather than commercial results; to preserve management flexibility to deal with the variety of project experience; to avoid systematic comparison with other development finance institutions; to pounce on any loose wording or comments that were not grounded in firm evidence; to illustrate the particularity of CDC’s business; to demonstrate through the mastery of much detail that CDC knew what it was doing without the need for over-riding monitoring procedures. The episode probably did impress on the Commission that it was dealing with an organisation which had evolved a very distinct sense of its identity and assurance, and with a chief executive who was very much in command of its operations. This would have reinforced its eventual positive verdict on CDC’s competence. However it did not deflect the Commission from its conclusions that quite a lot needed to be done to sharpen up CDC’s investment appraisal, evaluation and monitoring procedures and, in the event, these were mostly accepted and implemented. Before withdrawing to finalise its report the Commission held a final hearing with the Board of CDC – that is without any of the executives being present. The session took place on 11 March. It did not provide much support for the important role cast for the Board as the holder of the statutory mandate; instead it tended to expose an absence of knowledge and an absence of reflective capacity to respond to the Commission’s questions. On the 1991 reorganisation, Leslie gave an interesting exposition of the way that Eccles had invigorated the management and had injected a more commercial attitude into the corporation, and he endorsed the

174 Making a Business of Development 1980–93

emphasis on functional lines of control that had been introduced. To the question of whether too much authority was concentrated in the chief executive, he responded pragmatically that the set-up suited the energy and capabilities of the man. The time to consider any change was with his successor. On the issue of board appointments, he was openly sceptical whether the MMC was on the right lines in believing that the Secretary of State would merely ‘rubber stamp’ the Board’s independent selection of a chief executive. On CDC’s financial structure, the Commission sought to gain a view from the board as to whether partial or total privatisation would be helpful, but it became clear that the board had not prepared itself to take advantage of this opportunity. There was regret at the frustration of commercial borrowing and apprehension over the introduction of private capital into CDC, but no attempt to use the occasion strategically. Looking back over the three hearings, the Commission appears to have had three main areas of concern. First, on governance, it felt that too much authority was concentrated in the chief executive within the organisation structure and by delegation from the board. This perception was probably underscored by the conduct of the hearings. The Commission was not persuaded by CDC’s special pleading in favour of the executives not sharing in formal board responsibility as full directors, on account of insulating them from political interference. Second, the Commission saw clearly that CDC had an inappropriate financial structure for the task in hand, but it failed to secure a good dialogue either with Eccles or with the board on how to improve the situation. As a consequence, it did not get very far on the question of defining a more meaningful measure of financial performance, or of the relationship between equity investment and the appropriate level of reserves. It was somewhat thrown by Eccles’ insistence that CDC was not concerned with financial maximisation and did not pursue how far the desire for growth could be satisfied by fostering cash flow more aggressively within the existing funding regime. Evidently, it decided not to expose the absurdities of the Treasury’s frustration of commercial borrowing by CDC. It also decided not to undertake a full analysis of the implications of introducing private capital into CDC (although it was clearly attracted by the idea), having received little encouragement either from board or management. Finally, there was the whole area of assessing the evidence for CDC’s development role, from project appraisal through to monitoring and evaluation. Here the Commission stuck to its guns, probing the unsystematic use of economic and financial rates of return, the lack of interest in aggregate assessment,

Monopolies and Mergers Commission 175

and the need to produce an overall assessment of development impact and to publish it. In reflecting on CDC’s responses at the hearings, several points stand out. CDC’s concern to present itself as a commercially driven organisation seems to have got in the way of emphasising the distinctive nature of its developmental contribution to promote the private sector in developing countries, which had been recognised in the 1986 Quinquennial Review. The even more distinctive capability of contributing management to projects was positively downplayed, being presented as very much an exception. Next, Eccles’ evident reluctance to accept a financial maximisation model resulted in little attention being directed to the question of how far CDC could generate more business from its own resources. It leaves a paradoxical impression of CDC’s dependency on an annual fix from the aid programme, which was shortly to become a serious emotional problem. Lastly, there was the missed opportunity of not using the occasion of an investigation by such an independent and powerful body as the MMC to force into the open the commercial borrowing issue, instead of accepting the ban as a reluctant fact of life. Likewise, CDC had the resources, if it had been so minded, to put into the public domain a considered analysis of its capital structure and of the implications of introducing private capital. It was somewhat strange just to take the line that it was for government to make proposals, especially since the MMC was evidently anxious to open up the question and went so far as to publish its own tentative suggestions, as an appendix to the final report. The report of the MMC was published in June 1992.22 The document is impressive for the depth and range of its descriptive analysis of the corporation’s activities. Its accuracy is vouchsafed by the volume of orderly marshalled written evidence and by the practice of submitting the full text to CDC for factual checking. Its authority flowed from the thoroughness of the inquiry itself. The Commission’s overall assessment of CDC will by now be unsurprising: CDC was a competent organisation, but its business judgements were insufficiently supported by quantified analysis for investment appraisal, monitoring and evaluation. The Commission concluded that CDC’s effectiveness was impaired by various government-imposed constraints. The report listed 38 recommendations, of which nine were identified as priority ones. Three of them were for government to consider: a. CDC should be allowed to borrow foreign currencies from the market. The Treasury declined to alter its conditions.

176 Making a Business of Development 1980–93

b. A capital reorganisation should be undertaken to introduce equity capital, perhaps leading to partial privatisation. The issue was remitted for further consideration by the forthcoming Quinquennial Review. c. The severe constraints on CDC’s ability to hold liquid assets should be eased. This was likewise remitted to the forthcoming Quinquennial Review. The six recommendations for action by CDC were all accepted, albeit with certain implementation caveats, which showed that the MMC had, in essentials, won its points: a. CDC should adopt a policy of charging market rates of interest. b. Economic and financial rates of return should be calculated as a condition of acceptance of new investments. c. CDC should generally approve projects only if they meet specified rate of return thresholds. d. CDC should not invest if it cannot satisfy itself that the social and environmental impact of a project will be acceptable and will remain so. e. Risk, including political risk, should be explicitly identified in appraisals and sensitivity analysis should be applied to the variables. f. CDC should set up a representative programme of project evaluations and report annually to the board. CDC also agreed to set up a Board Audit Committee forthwith and it agreed to publish a development report on its overall operations.23 The process of agreeing the detailed official responses to the Commission’s recommendations and clearing them with ODA proved contentious and went on until the early part of 1993. The formal responses were eventually tabled to Parliament on 23 March.24 Although management had by now become preoccupied with the conduct of the postponed quinquennial review, it was a long time before the responses to the MMC were finally dealt with. There was an obligation to report progress on implementation to Parliament and the MMC itself monitored the exercise and was disposed to be critical of lack of precision and commitment. CDC was ready with a follow up report by September 1993, but it took until April the following year to concert a document with ODA for publication. At the last moment publication was cancelled due to inability to secure agreement over the

Monopolies and Mergers Commission 177

question of appointing executives to the board. Astonishingly, a final report to Parliament was delayed until July 1995, a year after the completion of the Quinquennial Review and after significant changes had taken place within CDC itself.25 Of the issues that had been held over because of the impending quinquennial review, the government was now obliged to state its position without further prevarication with regard to three matters: a. b.

c.

On the question of bringing executives onto the board, the government had decided to have its way and to introduce legislation. On balance sheet reorganisation, it was explained that there were no plans for creating an equity base for CDC, let alone introducing private capital. The proposals for easing liquidity constraints on CDC were rejected on the grounds that alleviation was being achieved in other ways.

Meanwhile the MMC itself had been under investigation, in respect of the costs that its inquiries imposed on its victims. For CDC, the answer was that the inquiry, up to the submission of the report, had consumed 3000 hours of executive time, which was costed at £157 000 on the basis of a £325 per diem charge-out rate. Nevertheless, it had good reason to be pleased with the overall outcome of the inquiry and the platform it provided for the postponed Quinquennial Review.

18 A Crisis of Identity

As we have seen, the MMC found CDC to be an effective institution which ‘provides a particularly valuable form of assistance to the economies of the developing countries’.1 True, it had identified plenty of scope for detailed improvements in the way CDC worked, but its most significant finding was that CDC should be freed to expand its activities at a greater rate, by removing certain constraints and by a capital reorganisation. It was this strategic theme that CDC hoped would be the main business of the delayed quinquennial review. The re-election of the Conservatives in April 1992 for a fourth term sharpened the sense that CDC needed a major policy declaration to clarify its role as virtually the only surviving public corporation; or conversely to state what the alternative was to be. During the course of the two years of a protracted review process lasting to nearly the end of 1993 (with the Report not actually formally accepted until the following May), these hopes were turned to ashes. An exploration of the conflicting objectives of ODA, the Treasury and CDC, reveals how and why these high expectations were dashed. Pressures on the aid budget and, at a deeper level, the desire to exercise greater control over its various components, characterized the position of ODA. A Tory Treasury could see no justification for any favours to CDC and had a basic preference to see it removed from the public sector. This left CDC, with its ambition to grow within a public sector framework, high and dry and friendless when it came to a crunch. The members of the MMC signed their Report on 10 April 1992, but the crucial chapter containing the assessment and recommendations was not seen by CDC until its publication in June. Soon after the election, draft terms of reference for the new Quinquennial Review were sent to CDC by ODA and there were shared hopes that the exercise 178

A Crisis of Identity 179

could be completed within a few months. First, there needed to be agreement on the scope of the review. CDC’s classification by the Treasury as a non-departmental public body already brought it within the remit of government instructions to consider whether there was scope for contracting out, privatisation or transfer of all or any of CDC’s functions outside the public sector. As Eccles noted in a briefing note to the Board, ‘A fourth Conservative administration is likely to lead to a mounting crisis of identity for CDC’.2 Exploratory conversations with ODA reinforced the point: how was CDC to be justified as possibly the last public corporation at the end of four terms of Tory administration dedicated to privatisation? Its status and the supporting strategy had to be a central issue for the Review, since most other matters would derive from the government’s decisions on this. In turn, this called for an early political lead and preferably for a government policy statement to clarify CDC’s role, so that the Treasury and ODA would have a framework within which to conduct the Quinquennial Review.3 In short, the government must be persuaded to make up its mind whether – in terms of its own objectives for international development – it needed an institution like CDC. If the answer was affirmative, then was it prepared to go down the road indicated by the MMC and establish a conventional capital structure in return for enhanced accountability? The alternative was a path leading to realisation of its investment.4 The preferred model was of a public corporation equipped to play an enhanced role in promoting overseas development and this was perceived to be quite distinct from privatisation. The next step was to try to inspire the Minister, notwithstanding ODA’s preference for generating policy options out of the review process itself. CDC felt this would be too drawn out and there was a degree of anxiety on account of the fact that Eccles was nearing the end of his term (which had been extended to April 1994 to encompass the MMC and quinquennial review periods). The basis of appointment of his successor and the composition of the Board were very much tied up with the issue of CDC’s destiny. Eccles had a related concern that a private sector culture had still to take firm root within CDC, which he saw as being bound up with the corporation’s freedom to adopt private sector remuneration practices. Chalker dined with the Board in June, preceded by a letter from Leslie hoping that the circumstances ‘will encourage us to think strategically at the beginning of a new Parliament with an administration which seeks change and continuing improvement in the performance of the public sector’.5 The encounter was upbeat, with a number of ideas being floated of how CDC could

180 Making a Business of Development 1980–93

play a larger role, and this was reflected in a following letter. Investment in the private sector of developing countries was increasingly being emphasised as being ‘the key to the galvanisation of the stalled economies and societies of many countries of the Third World’ and this meant that ‘CDC needs a clear remit to move decisively forward to play an enhanced role’.6 The Minister’s response ignored the strategic high ground, but conveyed two concrete messages. As to the first, ‘What is now clear is that there is no prospect, as things stand, of CDC’s being allowed to borrow commercially … We have to look elsewhere.’ The second was that, although CDC was open to bid for additional aid programme resources, no encouragement could be offered ‘to find any additional resources above the £70 million, £75 million and £80 million already indicated for the period 1992/93–1994/95’.7 CDC was unaware that this marked the point of departure for a significant policy reversal that would only become apparent at the end of the year. Leslie felt that a renewed attempt should be made to deploy the case for an enhanced role for CDC. The Board first met at one of its informal evening meetings to agree a statement of its long-term strategy in the light of the MMC Report, on the basis of which Leslie wrote again to the Minister. The document first noted the declining role of aid in development and its displacement by private capital flows, export led growth and a reduction in the economic role of the public sector. In contrast to this trend CDC was being treated, especially through its funding, solely as an instrument of aid policy, whereas there was now scope for it to play a much more active role in promoting the private sector in developing countries – through an extension of its activities and growth in its investment portfolio. CDC’s structure and funding should be changed to take advantage of these opportunities, following the recommendations of the MMC. The conclusion was critical: We do not see early privatisation as an early option but, over time, we consider that the possibility of an increased access to private sector funding both through loans and, in due course, equity will emerge and the structure must allow for this. We see this as an evolutionary process under the guidance of ODA and within the public sector. We do not consider that any decision on the likelihood or the level of possible eventual private sector involvement is required today, but should be taken as CDC develops in its new form and in response to changes in its environment.8

A Crisis of Identity 181

In his letter to the Minister, Leslie welcomed the confirmation of the planning framework funding levels, but he also noted the competition for aid funds in a restrictive budget environment. He tried to lead Chalker’s attention back to the central theme raised by the MMC of enabling CDC to do more: ‘Are we not therefore in danger of missing an opportunity of capitalising on the skill, experience and success of CDC if we continue to think about the corporation in terms of the implication for the Aid Budget and the constraints imposed by the position of the Treasury?’9 The Quinquennial Review meetings were by now under way, so that it could be argued that CDC had failed in its attempt to persuade the government to make a policy statement on CDC which would govern the proceedings. However, the chairman felt that one more attempt should be made to persuade Chalker of the growth scenario for CDC. In preparing for the encounter CDC tried to think out more thoroughly its case for enhanced support for a publicly owned development finance institution, and it introduced a persuasive new line of argument.10 The thesis ran as follows. The UK has bilateral interests in promoting the development of the third world and CDC is uniquely equipped to contribute. There is a growing consensus over the importance of fostering the private sector in developing countries to achieve faster growth and of the role of capital flows to supplement domestic private capital formation. The UK’s interests will not be properly satisfied by channelling funds only through multilateral institutions, such as IFC or regional development institutions, since the political and commercial collateral benefits would be lost. ODA lacks the knowledge and experience to be the sole conduit for assistance to strengthen the private sector, and any attempt to administer an incentive or subsidy scheme to persuade companies to invest in developing countries was fraught with difficulties. Against this background CDC had a track record that had just been validated by the MMC to enable it to fulfil this part of the UK’s development strategy, at a minimal public finance cost. This had averaged only £10 million a year over the last six years (after netting off interest payments, loan repayments and tax). Even in gross terms, CDC only accounted for 8 per cent of the aid budget. Privatising CDC would turn it into a different institution as regards risk and reward and the public policy bilateral benefits would be lost. This led to the conclusion that a publicly owned CDC would best meet important national development, political and commercial objectives.

182 Making a Business of Development 1980–93

This emphasis on promoting Britain’s bilateral policies was shrewd because it sought to reach out beyond the aid programme towards the FCO and DTI and their remit to advance national and commercial interests in countries which were not necessarily priorities for traditional aid. There was a palpable feeling of frustration that an opportunity was about to be missed for want of political determination to challenge Treasury dogma. Already there was premonition that ODA and its minister were not prepared to go for the up-beat strategy, which was reinforced by the meeting with Chalker in late September at which the Treasury was represented as an insurmountable obstacle. It was by now clear that the Quinquennial Review was not going to be driven by ministers and that any case for change would have to be won in working meetings with officials. Prior to the first meeting in August 1992, ODA circulated a paper addressing the question of why CDC exists as a public corporation, which it characterized in rather self-deprecating terms as ‘intellectual gymnastics’.11 Unfortunately this well argued paper was seen as a hostile initiative by CDC, although its reasoning was very much to the point. ODA started by disposing of the issue which had troubled the MMC, whether promoting sustainable development – ‘doing good’ – was incompatible with achieving target economic and financial rates of return; clearly there was no inherent contradiction. It then went on to examine, in the context of government’s policy to facilitate the workings of capital markets and to improve the policy environment in developing countries, whether there was a role for subsidizing overseas private investment in various ways, especially where a degree of market failure might exist. The classic case is where investors were still imputing a risk premium after a country had undertaken desired policy reforms, so that incentivising new private investment as a form of ‘merit good’ could be justified. However formidable difficulties were foreseen in trying to devise a workable and non-wasteful scheme. The perception of the conditions under which CDC could be most effective in this role was prescient and they are worth listing for their relevance to the debate which took place six years later: a. Play down rather than assert the link with HMG. b. Eschew financial arrangements with recipient governments based on its status as a UK public sector body. c. Invest (increasingly) in poorer countries where private investors fear to go and more particularly in those pursuing economic reform.

A Crisis of Identity 183

d. Invest only exceptionally in countries readily able to attract private Direct Foreign Investment because in such countries there would be little or no additionality or demonstration effect. e. Invest in the sort of sectors that private direct investors would put capital into: sovereign based lending to (non-commercial) public sector bodies would be excluded as being akin to bank lending.12 Having identified CDC in this way as an ‘instrument of aid policy’, the final section of the paper went on to examine several respects in which this could be made more effective: a. Three quarters of the bilateral aid programme at a minimum interpretation was directed to the poorer countries, whereas CDC’s target was only 60 per cent; should this be raised? b. Should the list of eligible countries be reviewed through the lens of the UK’s bilateral political and commercial interests (with a reduced Commonwealth bias), in order to focus on a smaller number of priority countries? c. Should there be more emphasis on investment in the private sector in order to strengthen the demonstration effect? d. Could there also be more investment in the ODA priority sectors of forestry and agriculture? The paper acknowledged that this line of reasoning cut across CDC’s preference for spreading portfolio risk, by geography (to include middle income countries), by sectors (to include infrastructure utilities) and by instruments (loans and equity). But it did not recognise the crucial implication of restructuring the balance sheet in order to produce a stable capital structure to offset the enhanced risk profile. The August review meeting discussed the ODA paper, but CDC appears to have regarded it as a bit of a distraction from the fundamental issue of whether government was minded to remove the constraints on growth.13 Thus it did not dissent from the characterisation of CDC’s role as filling a capital investment gap resulting from market imperfections, nor even to the ‘instrument of aid policy’ exposition. The September meeting went on to consider the ‘larger’ issues including privatisation.14 CDC opened by saying that it was not seeking a change of ownership, which seems to have surprised officials. Nevertheless the Treasury insisted that privatisation was very much on the agenda, given ministerial policy that there had to be special

184 Making a Business of Development 1980–93

reasons for an activity to remain in the public sector. Its own view was that if CDC had not already existed it would not be invented now and, certainly, that its continuance should not be taken for granted until alternatives had been fully examined. This hard line was sustained at the October meeting, with emphasis on the alternatives of contracting out CDC functions, or relying instead on the multilateral agencies.15 The Treasury wanted to seek an immediate policy ruling on the privatisation issue, whereas ODA preferred that the issue be deferred until the review had been completed. Eccles reported to the Board that the review was reaching ‘a difficult stage’. By this time Eccles had convinced himself that the Treasury and ODA had set aside the MMC’s view that CDC should be encouraged to grow by removing the constraints, and that instead they were intent on slowing it down and narrowing its scope. A degree of exaggeration began to emerge, as arguments were sharpened for the coming showdown. The case for a greater concentration of investment in poor countries and for accelerating equity disposals were represented as reducing the future operations of CDC, rather than as a response to a sharper definition of CDC’s distinctive purpose and to constraints on the aid budget. More provocatively, the Treasury doctrine for public corporations that there should be executive members of the Board, appointed by the Secretary of State, (in opposition to the original Reithian concept), was increasingly seen in apocalyptic terms as bringing about the likely failure of CDC.16 This last issue burgeoned into a major confrontation, involving the whole Board, in the following year. A sharp reminder of the real pressures being exerted on the aid budget came with the Chancellor’s Autumn Statement. A 3.5 per cent increase in aid for developing countries was then to be frozen for three years, which carried an implication of significant cuts in bilateral aid programmes, since contributions to multilateral institutions were externally determined and sacrosanct. CDC actually feared that a cut would be imposed on the planning framework allocation of £75 million. This did not happen. ODA had made a clever deal with the Treasury for the future, whereby CDC would only draw new loans at the rate of scheduled loan repayments as from 1994–95 and also that interest payments on all borrowings would be waived, at an initial annual interest saving of £28 million. It was clever because ODA would have £47 million extra for its aid budget (none of which was promised to CDC). Additionally the Treasury could ‘afford’ such a concession because the interest payments did not enter into the public expenditure statistics,

A Crisis of Identity 185

which was a more important consideration at that time than foregoing a minute reduction in the Public Sector Borrowing Requirement.17 Less clever was the fact that officials had overlooked that a consequence of the interest waiver concession would be a £10 million higher tax bill on CDC, and also that the Treasury lacked powers to reduce interest to nil without an amendment to the CDC Act. The Minister had now to explain to CDC that it would not benefit directly from the extra resources released to ODA. She went on to advise that the threshold for potential commercial borrowing had been raised again, since ‘any eventual borrowing could only be undertaken on terms which are at least as favourable as those on which HMG can borrow, and would not count towards PSBR. The latter requires that the lender would not demand an HMG guarantee.’18 However CDC was authorised to access privileged US loan funds from its Caribbean Basin Initiative list of countries, so-called ‘936 funds’. To Parliament, Chalker made a statement whose plain meaning was that CDC would have access to £30 million of interest saving, to £20 million of 936 funds in due course and that it would be able to undertake commercial borrowing as well, on conditions.19 Insiders knew better. The reality was that the growth scenario proposed by the MMC had been abandoned so far as it entailed additional resources from the aid programme, or from capital markets. In these changed circumstances CDC felt it was crucial to focus attention on the overall flow of funds between CDC and HMG, and not just on its relationship with the aid programme. This would bring out that, on a net basis – after allowing for return payments of capital, interest and tax – the cash flow benefit to CDC was quite modest. In the four years 1988–91 the net inflow to CDC from HMG had averaged £20 million a year and a similar figure was expected in the current year. The estimate for 1993–94 was down to £11 million on account of tax payments. However in the following year the abandonment of the planning framework assumptions and the move to interest waiver would have the effect of making CDC a net contributor to HMG at the rate of some £21 million a year.20 This was far from the public presentation of the government’s funding of CDC, in part because ODA had a rather different approach to the numbers. Its focus was on CDC’s overall cash flow and its ability to undertake new investment. The truth was that CDC’s self-generated funds far exceeded the contribution of net government funding; moreover the interest waiver decision would significantly enhance its cash flow, even when the extra tax was

186 Making a Business of Development 1980–93

taken into account. It could thus also be said without distortion that, at a time when bilateral aid programmes funded by ODA were having to be reduced, CDC would still be capable of increasing its annual investment rate. A contemporary analysis shows up the contrast between the two perceptions of where CDC stood in relation to government funding,21 as shown in Table 18.1. Table 18.1

Two perceptions of CDC

CDC view

1993–4

1994–5

1995–6

Net Funding Relationship with HMG: i. Planning Framework ii. Nil Net Funding and Interest Waiver Deterioration in Expectations

£m 11 11 …

£m 12 –21 –33

£m 17 –21 –38

111 75 190 — 190

147 28 190 15 205

168 27 195 20 215

ODA view Self Generated Funds New Aid Loans Gross Investment Capacity – A 936 Borrowing Gross Investment Capacity – B

Table 18.1 also illustrates the cause of a growing source of difficulty between CDC and ODA. By trying to insist on a positive flow of funds from the aid budget (and from HMG overall), CDC had no incentive to emphasise its ability to generate and manage its cash flow from investment disposals – rather the contrary – and in reality self-generated cash flow was rising strongly. This inevitably gave rise to official suspicions that CDC was playing its cards too close to its chest and that, if official funding was squeezed, it could still achieve its investment targets as a result of disposals. This came to a head in the following year in 1993. It was still unclear whether government was prepared to go to the trouble of reorganising CDC’s balance sheet in preparation for future developments. The decision to waive interest on all government loans from 1994 amounted to the effective conversion of loans into a form of non-remunerated capital, which would clearly enhance cash flow, notwithstanding the extra taxation incurred. But this was hardly an unambiguous market signal and CDC continued to press for clearly defined equity. The picture was complicated by ODA’s flirtation at this time with the notion of turning CDC into a foundation limited by guarantee. Coopers & Lybrand were appointed in November 1992 to

A Crisis of Identity 187

advise ODA on the matter with respect to both CDC and the Crown Agents, from whence the idea had originated. The intervention of independent consultants at this juncture was timely in one very important respect. They concluded that if government continued to attach importance to the market failure problem of private investment in poorer developing countries, for which CDC was an effective instrument of policy, the corporation should be retained within the public sector. Turning CDC into a foundation would be an unsatisfactory halfway house because government would have lost effective control of future changes in policy, yet would still have difficulty in establishing firmly the ‘clean break’ to release it from moral responsibility in the event of a CDC foundation getting into difficulties. The report doubted whether operational effectiveness would improve on balance; meanwhile writing off government loans on transferring CDC to a foundation would be costly. Any attempt to substitute private loan capital for government loans would undermine the foundation’s viability fatally. Nor did the report give any comfort to the Treasury notion of immediate privatisation: a sale could indeed be achieved, but only at a considerable discount to book values. Overall, ‘it is highly unlikely that government would be able to meet its current objectives after privatisation at an acceptable cost’.22 Two other judgements by Coopers & Lybrand are worth noting in the context of the quinquennial review discussions. As the MMC before them, they fully endorsed the argument that CDC should have funding certainty from the aid programme, which was not being delivered through the present planning framework procedures. This was desirable in order to remove the perverse signal that gave CDC a disincentive to realise investments because this might reduce aid budget allocations. But the consultants were quite unsympathetic to CDC’s commercial borrowing aspirations. They could see no reason why CDC should be exempted from the least cost rule – with one significant exception. If government was unable to ensure funding certainty for CDC, then a limited amount of commercial borrowing should be allowed. In parallel with the consultants’ study, CDC also examined the foundation proposal, subjecting it to a much more detailed investigation than that undertaken for the government.23 Assuming that a foundation took the form of a non-distributing company limited by guarantee (‘foundation’ not in itself being an English law entity), the paper concluded that such a structure would enable CDC to continue to fulfil its existing development objectives in a way that would not occur under privatisation. However this outcome depended upon the government

188 Making a Business of Development 1980–93

endowing the foundation with most of the existing loans to CDC, so that it was in a position to raise market loans on fine terms, and settling a formal relationship which released the Treasury from any contingent liability for CDC. It was extremely hard to envisage how this could be achieved in a way that still made room for a continuing aid policy relationship with ODA. Thus, while the foundation concept had its attractions as a means of removing constraints on growth without direct privatisation, it was unlikely to sit comfortably with other government policy requirements. The exercise had clarified some issues, although ultimately it did not provide a resolution to the continuing debate on CDC’s future, which was becoming increasingly fraught by the beginning of 1993. In the nine months since the MMC had completed its report, and notwithstanding monthly sessions of the quinquennial review since July, government policy towards CDC had still not been clearly articulated. Warm sentiments from the Minister were contradicted by the announced move to nil net funding and the Treasury’s reiterated blocking of access to capital markets. Did this officially mean that CDC was to be denied any growth from external funding? No decision had been taken on balance sheet reorganisation to establish equity capital, but it was very unclear whether privatisation was still regarded as a near term objective. Was Tory doctrine to prevail? There was no meeting of minds over the appointment of executives to the Board, but it looked as if some easement of Treasury restrictions on cash balances was in prospect. The first skirmish on a revision of performance targets in December had seen the Treasury arguing that CDC should direct all new business to poorer countries (thus increasing pressure to realise investments in others), and that it should undertake all new business in the private sector (thus removing a significant source of demand for public infrastructure loans). This would have had the effect of making CDC into a more focussed instrument of aid policy. Meanwhile, CDC had had an outstanding year in 1992, with unprecedented demand for its facilities. Board approvals and commitments in principle rose by a third, and in December CDC put in an aggressive planning framework submission which was based on annual growth in new investments of 8 per cent, falling to zero growth on the implementation of nil net funding. However, the successful sale of a large investment in Hong Kong so improved CDC’s immediate cash position that ODA refused to allow the corporation to draw its final £30 million tranche from the aid budget, on the grounds of not meeting the proof of need. Thus 1992 turned out to be a year of nega-

A Crisis of Identity 189

tive government funding. This further confused CDC’s case and appeared to provide a justification for nil net funding. With a meeting arranged with the Minister in mid-February 1993, a toughening of attitude was in evidence, almost to the point of caricature. ODA was seen as wanting to cut CDC out of the aid programme budget – ‘All else is subordinate’ – and thus cutting across the main thrust of the MMC report. CDC should respond by accentuating its dissent in any further discussion of the draft responses to the report for Parliament. If ODA was no longer prepared to provide net loan funding to CDC from the aid budget, then there would no longer be any good reason for CDC to be sponsored by such a department.24 If ODA were thus effectively discontinuing financial support – and with market funding also denied – CDC would reluctantly be forced to address the only alternative: ‘I think that we should now be starting to contemplate a Private Sector solution, although I hope it won’t come to that.’25 What hurt especially was the sense that, at a time of admitted tough fiscal constraint, CDC’s contribution to UK bilateral interests was ranked by ODA below its other priorities for programme aid, humanitarian aid and project aid. CDC’s sense of hurt was buttressed by a somewhat cavalier attitude to the financial magnitudes involved, principally by failing to acknowledge the cash flow benefit it would gain from the waiver of all interest payments.26 It also chose to ignore that its high level of annual investments – now around £200 million, which was made possible by the substantial reserves now existing within the balance sheet, loomed large in relation to the rest of the bilateral aid programme. CDC was not sure that the February meeting with Chalker achieved much more than a venting of its frustrations. In his follow-up letter Leslie reiterated the essentiality of obtaining a firm decision on whether government wished to retain its investment in CDC: ‘We really do need the Treasury to declare its position if we are to progress.’ To his Board he underlined the need ‘to end current drift and death by attrition’.27 Events now moved more quickly. A meeting between Treasury and ODA ministers on 11 March decided not to change CDC’s status and privatisation was taken off the agenda. This broke the logjam to a resumption of the quinquennial review process. In reformulating its stance CDC felt it would be valuable to get on record that it should now be a long term policy objective to introduce private sector funding into CDC, initially in the form of loan capital, as a prelude to cessation of general aid budget allocations.28 And it still cherished a hope that there would be a relaxation on the external

190 Making a Business of Development 1980–93

funding front, if not from the aid programme, then through market borrowing. At this late stage in the debate CDC decided to seek advice from the City on its wider financial problem. S. G. Warburg had already been advising on technical questions of access to capital markets. In September 1993 it was appointed to advise further on the consequences of the government’s decision: first to assess the risk entailed by the denial of access to fresh injections of aid budget funding; and second to advise on potential sources of funding from capital markets and on the appropriate capital structure for CDC.29 The report made several significant points. On the question of risk, Warburg sought to pin down the degree of risk in CDC’s investment portfolio. This was seen to reside not so much in the characteristics of the projects themselves, where CDC had established a reputation for identifying financially viable projects, but in the political risks of the countries in which it invested – especially the remittance risk. The Bank of England had developed a widely used matrix of recommended provisioning for individual countries, and 20 per cent of CDC’s portfolio fell in the category requiring provisions to be made in excess of 59 per cent, and a further 20 per cent in a medium risk category of between 14–58 per cent. The rest of the portfolio was invested in countries in which foreign investors were still not active. Against this test, CDC’s accumulated provisions of 22 per cent of its investment portfolio were reasonable. Yet this level of provisioning was high compared with that adopted by the International Finance Corporation (9.5 per cent) and by commercial banks active in developing countries (10 per cent). This was only partly explained by CDC’s reluctance to write off investments, since it devoted much effort to work-out programmes. The conclusion was that CDC accepted a higher degree of risk than a commercial institution would do. Supportive evidence for this view was ‘that no private sector institution does exist that has a portfolio at all similar to CDC’s, despite the demonstrated ability of CDC to earn a return on its investments and to continue to grow’. Turning to CDC’s balance sheet and its ability to borrow, Warburg introduced the important observation that the conversion of CDC’s reserves into equity would not have a significant impact on its credit standing, since creditors ‘would look mainly to CDC’s ownership for comfort’. Furthermore, the creation of public dividend capital, as recommended by the MMC, would create an obligation to pay dividends and it was government policy not to do this except as a prelude to privatisation. Hence the conclusion that ‘so long as the present status within the public sector is preserved, the drawbacks of converting any

A Crisis of Identity 191

of CDC’s capital into equity to be held by the Government exceed any benefits which might accrue’. If CDC were permitted access to international capital markets the report assessed that a triple A rating could be attained to support up to £250 million of borrowings.30 The report then proceeded to launch several torpedoes against the Treasury’s objections to borrowing: a. It confirmed that with funds raised overseas and invested overseas, there would be no direct public expenditure or monetary effect on the British economy. b. The contingent liability on the Treasury (in the absence of a guarantee) would be minimal by virtue of the strength of CDC’s balance sheet and its competent management record. c. The small magnitude of prospective borrowings in relation to the government’s own borrowing programme ensured that there would be no impact on the government’s credit rating. d. Other public institutions had been allowed to borrow in the market: British Nuclear Fuels, Guaranteed Export Finance Corporation, universities, notwithstanding that each case had had to be specially justified – as would CDC. e. CDC could tap markets by the route of private placements, which would not compete directly with the government’s own funding procedures. ‘As a public sector company, in a carefully selected market, it would be possible to demonstrate that any additional cost which would result from CDC borrowing in its own name need not be significant,’ if indeed a meaningful comparison could be made, since government would be unlikely to seek access to such markets. Notwithstanding these cogent arguments, Warburg realistically discerned that access to international debt markets was not a lasting panacea. It concluded that if CDC was to make the development contribution of which it was capable, ‘it is essential that CDC should be able to look forward to the reinstatement of its funding under the aid budget when it has reached the limits of the borrowing it can prudently undertake’. This only served to reinforce the judgement it had jointly reached with ODA that ‘the developmental mandate precluded transfer, even if undertaken gradually, of CDC into private ownership,’ to which was added that it ‘would treat with suspicion attempts to attract outside investors into CDC’s capital’.31 Despite this intellectual reinforcement, CDC was to remain disappointed over its borrowing ambitions. The Treasury was impervious to what boiled down to a moral argument that the country’s overseas

192 Making a Business of Development 1980–93

development agency should not be seen to be making a net contribution of funds to the Exchequer from its operations overseas. The situation might have been different if Parliament or the development community had taken an interest in the matter, but the details were too arcane. To CDC itself, the government stance could be much more robust because the corporation was generating better than expected results and was able to finance a rising level of investment notwithstanding the funding squeeze. As Eccles himself had already acknowledged, ‘the level of CDC’s activity is much more dependent upon the performance of the portfolio than upon the cash flow between HMG and CDC. This will remain so.’32 It is tempting to conclude that the struggle had been a waste of effort and had needlessly soured relationships with ODA; that CDC should have accepted with good grace that public corporations could not have independent access to capital markets; and that ODA was best able to judge the apportionment of a restricted aid budget between competing claims. It might be thought also that CDC could have done more to build up a supportive constituency in Parliament and with development organisations in support of its claim for more resources from the aid budget, but there were inhibitions. Conservative governments had never been natural proponents for a publicly owned development agency. Privatisation was the governing policy and CDC was very reluctant to be pushed down that track. The aid community was not greatly interested in CDC’s orientation towards fostering private sector development, so there was not much in the way of common interest. In short, CDC could not rely on instinctive support from the ruling party or from the development community in what might appear at best as a finely balanced argument. CDC’s combative stance towards its sponsoring department during the quinquennial review resulted in skirmishes on two other fronts. They provide further illustration of the discomforts that could arise from being at arms length from, but not out of reach of, Whitehall in the conduct of its business. The first issue related to the increasing prominence of good governance as a criterion in bilateral aid politics. The second one concerned the extent of the Treasury’s reach in controlling remuneration in the public sector.

Applying the good governance test CDC was alert to the issue that doing business in the sometimes turbulent societies of the developing world would confront it with ethical

A Crisis of Identity 193

dilemmas from time to time, and that its status as a public corporation, with Parliament in the background, enjoined particular care when dealing with government institutions. In its operations it sought to insist on the highest standards in commercial and financial dealings and likewise as an employer. Nevertheless, this did not add up to complete inoculation from hazard. Early in 1992 the Board approved two investments which troubled ODA and ministers. In Sri Lanka a programme of reform in the financial services sector was taking place under the guidance of the World Bank. It involved the privatisation of the National Development Bank, where CDC agreed on 4 March to take a 5 per cent shareholding alongside a number of other foreign investors, and also to make a substantial $18 million loan for onlending to small and medium sized businesses, once the bank had been privatised. A public prospectus was to be published in April, followed by the share offering. However relations between HMG and Sri Lanka had deteriorated during the past year, with much concern felt for the human rights situation of the Tamils. An ODA assessment led the Foreign Secretary to decide that no further aid should be given to Sri Lanka until after the imminent general election.33 CDC was caught up in the ruling, so that capital sanction for the investment was deferred. CDC argued, to no effect, that it should not have been included in the ban, since it was investing in a privatisation exercise alongside other commercial parties. Its loan when drawn would be to a privatised institution and to have to withdraw from the transaction at this late stage would be disruptive and damaging to its reputation. Only two months later, after the general election, a junior minister visited Sri Lanka and a decision was taken to resume the aid programme and to give clearance to CDC’s investment. This episode was arguably panic-driven by electoral sensitivities as much as by good governance considerations, and in the event the two-month delay did not disrupt the privatisation schedule. The Malawi incident created more difficulty. In February 1992 CDC agreed to participate in a major hydro-electric investment in Malawi, alongside the World Bank, European Investment Bank (EIB) and the African Investment Bank, by contributing a £15 million loan to the financing package. Having obtained clearance in principle from ODA the previous October, capital sanction was duly sought in March to finalise the commitment, but approval was withheld. Again, there was mounting concern over human rights in the country and over President Banda’s reluctance to countenance democratic opposition to his rule. Along with other donors, HMG decided to suspend its country

194 Making a Business of Development 1980–93

aid programme as a mark of disapproval, while continuing with humanitarian aid. The World Bank formally approved its investment, but the EIB withdrew from the consortium on account of the political situation. After several months ODA sought to produce a rationalisation of its position in a ministerial letter to CDC.34 Although CDC’s distinctive role was mainly in relation to investment in the private sector, the corporation was nevertheless seen to be part of the overall aid effort for policy purposes. A distinction could be drawn between CDC investment in the private and in the public sectors. Ministers would require CDC to cease new investment in the private sector in circumstances where they had decided, on good governance grounds, to suspend all bilateral aid and to withdraw from existing activities. But CDC would be required to withhold new investments in the public sector in circumstances where ministers had decided only to withhold new commitments under bilateral programmes, while still allowing certain poverty alleviation programmes and support for Non-Governmental Organisations (NGOs) to continue. Malawi was such a case and the loan to the electricity corporation ‘should not at present proceed’. CDC found this distinction over simplistic and discussions took place to refine the criteria and to recognise its position as a long term investor in a country. But pleas to release the embargo were to no avail. In early 1993 President Banda agreed to hold a referendum on the continuance of single party rule in June, which provided ODA with a peg on which to hang a further review of the position.35 On both sides it was recognised that the situation was close to the minister having to give a direction to CDC under the terms of the Act, which had never occurred in CDC’s history to date. The required procedure was that the text of a direction would have to be published in the annual report and reported to Parliament. There was no political desire to face such publicity and ODA prolonged the delay. Fortunately for everyone but President Banda, the outcome of the referendum and the favourable report by international observers on its conduct, enabled ODA on 7 July to give clearance to the investment.

Pay restraint The government’s increasingly successful efforts to bring public expenditure and inflation under control entailed severe policies of pay restraint in the public sector, monitored by the Treasury. How should

A Crisis of Identity 195

this policy apply to CDC, a statutory corporation operating overseas, and competing for staff with the private sector? The Treasury had chosen to classify CDC as a Non Departmental Public Body and a letter was duly received in December 1992 ‘to draw your attention to the Government’s policy of pay restraint, the importance which Ministers collectively attach to this policy, and to your reaching a settlement in the coming year within the 0–1.5 per cent range’.36 CDC did not operate a system of annual scale increments with automatic progression; instead there was an annual review with a general salary increase applicable to all staff and individual performance increases. For l993 a general increase of 1 per cent was applied and, in addition, an amount equivalent to 3.4 per cent of the wage bill was allocated for discretionary payments. No consultation took place on the interpretation of the pay guidelines. This caused consternation when discovered and CDC was asked to reconsider its award. Instead it defended its position robustly, which called forth a strong ministerial reprimand, and the demand for an assurance that CDC would operate fully within the terms of government policy in future. This was not quite the end of the story, since the Treasury undertook an inquiry and officially ruled that CDC had breached the pay guidelines. Taking place against the background of the strains of the quinquennial review, the episode provided one more indication of the extent to which CDC had distanced itself from its sponsoring department, as Eccles’ term as chief executive drew to a close.

The review completed An agreed text of the Report of the quinquennial review was finalised in the closing weeks of 1993. It marked the end of a marathon commencing in April 1992 that had been very different from the quick sprint which had been envisaged following the MMC report. It also marked the end, but for a few months, of Eccles’ nine year appointment as chief executive of CDC, commencing in 1985. Near the start, he had led for CDC in the 1986 Quinquennial Review; he had masterminded the responses to the 1992 MMC inquiry, and finally there had been the gruelling experience of another quinquennial review at the end of his time. Once again a major report was produced.37 It represented a further advance in defining the distinctive contribution of CDC to development in the context of the British aid programme, and it was also a considerable step forward in the evolution of operating

196 Making a Business of Development 1980–93

targets for its activities. The customary examination of CDC’s performance during the review period will be reflected in our retrospective on the changes to CDC during Eccles’ time as its chief executive. Important here are the pronouncements on the policy framework and on the outcome of the major debates that had so prolonged the review. The issue of privatisation, which was an explicit part of the terms of reference of the Review, had been determined by ministers in April on the basis of making no change. Nevertheless the report listed the six options that had been examined and included an annexe which summarised their advantages and disadvantages. Privatisation theology was based on the proposition that the public sector should not undertake activities that might be done better by the private sector. The conclusion of the Review was robust: ‘There is strong evidence that it would not be possible to retain a privatised CDC in its present form carrying out its current development objectives.’38 This was because governments would lose strategic control and the new owners would have different priorities in order to improve the return on capital. Interestingly, the line of argument advocated by Leslie that CDC would eventually prove capable of transfer to the private sector as emerging markets became more attractive to investors, initially through the introduction of loan capital, did not feature in this discussion. However, it was acknowledged in the earlier review of policy objectives.39 The MMC had recommended the conversion of government loans into equity to facilitate the introduction of private capital and of borrowing, and to provide a more commercial capital structure. The decision on privatisation eliminated the Treasury’s interest in reforming CDC’s balance sheet and its stance on borrowing was unchanged, as we have seen. Thus the whole issue was dismissed with the phrase that it should ‘meanwhile be kept under review’. It was clear that the decision to waive interest on all government loans would create a situation whereby CDC would have a capital structure that was substantially equivalent to equity. However no interest was shown in the difference of market perception thereby created, or in giving an indication of preparing CDC for exposure to the capital market at some future date. As already noted, the decision in the autumn of 1992 to do no more than replace maturing loans by new ones from the aid budget (‘nil net funding’) and to waive interest on all loans, as from 1994, had effectively removed the growth scenario from the purview of the Quinquennial Review. However this did not mean that CDC was condemned to stagnation, because of the robustness of its cash flow from operations. It was more an occasion of lost opportunities, as had been advocated during the Review dialogue.

A Crisis of Identity 197

The projection included in the Review envisaged that self-generated funds would grow at a rate of 12 per cent annually over the following five years (including a £10 million a year contribution from equity disposals), and that CDC would be able to finance one third more new investments by 1998, at £245 million. CDC’s continued ability to grow without new infusions from the aid budget was, of course, what lay behind ODA’s hard heartedness as it strove to cope with cuts in other parts of the aid budget. CDC held a partly concealed joker in its hand, in the form of the contribution to be made to the funds available for new investment by the realisation of equity holdings. Decisions on the sale of individual stakes was clearly a matter for CDC alone, but the consequences were a potentially significant ingredient in the overall funding picture. CDC’s line was that equity stakes were realisable only when the proceeds were more significant than the value it could contribute through active involvement in the business in question, and providing it could sell into a willing market. Officials were inclined to feel that something was being held back, but had difficulty in ascertaining what this was. In bidding for incremental additions from the aid budget in the old planning framework discussions, there was a perverse incentive for CDC to play down equity disposals. The absence of a conventional balance sheet capital structure and the slack statutory requirement had delayed the introduction of return on capital criteria, until the 8 per cent target introduced by CDC in its 1992 corporate plan, following the recommendation of the 1990 Financial Arrangements Working Group. This target was now endorsed by the Review, subject to revalidation in three years’ time. Earlier projections of cash flow had included a £2 million a year contribution from disposals, but under pressure CDC agreed to increase the figure to £10 million and then, by the time the Review was published, to £15 million. It was made plain that CDC saw itself primarily as a lending institution that had the additional capacity to provide equity finance, rather than as a venture capital investor.40 It was perhaps unfortunate timing that in the three years 1990–92 CDC had raised £84 million from equity disposals, mainly from three large investments in Asia.41 The articulation of CDC’s contribution to policy objectives in the opening chapter of the Review represented an advance on previous statements. It was set in the general context that the purpose of the aid programme was to promote sustainable economic and social development and good government, in order to reduce poverty and to improve the quality of life of poor people, but with special recognition of the role of the private sector and market-based economic policies. CDC

198 Making a Business of Development 1980–93

was presented as the major bilateral instrument of the aid programme’s support for the private sector. It noted that government aid policies could fail in their objective unless they were complemented by risktaking investors who were prepared to make commitments in an improving investment climate. CDC was cast for this role and, since it did not aim to displace other willing investors, this amounted to addressing an important dimension of market failure: diminishing exaggerated perceptions of risk in countries which had previously been seen as unfavourable to investment. Moreover, by augmenting capital flows to countries where private investment was reluctant, CDC had an opportunity directly to encourage other investors. The only obvious weakness in the fairly detailed exposition of this argument was the silence over addressing the reason for CDC’s low rate of return on capital, which was scarcely an encouragement to follow in its footsteps. Three performance targets had been set by the 1986 quinquennial review: a. New commitments to poor countries (IDA definitions) to be 60 per cent of the total. The average for the five years was 62 per cent, but this had risen to 71 per cent in the last three years. b. Priority should be given to private sector projects and to increased equity investment, but without a specific target. The average for the five years for commitments to the private sector was 62 per cent, on a rising trend culminating in 86 per cent in 1992. Equity commitments had averaged 15 per cent. c. New commitments on renewable natural resources projects to be 40 per cent of the total. The average for the five years was 35 per cent, but on a declining trend culminating in 27 per cent in 1992. In the discussion on country targets ODA had initially proposed continuing the 60 per cent poor country target, whereas the Treasury – as already noted – had pointed to the logic of moving to a 100 per cent target to maximise development impact. CDC was attached to the argument for maintaining a degree of portfolio diversification in order to reduce risk, and the outcome was to settle for 70 per cent as the level recently attained and incorporated in the corporate plan. Surprise at the decision to drop an explicit target for Commonwealth countries is mitigated by the realisation that there was a coalition of interest between ODA, which felt that the poverty criterion was more important than complying with a political grouping, and a Conservative government which had notably lost its enthusiasm for the Commonwealth under Thatcher, and where the sentiment still prevailed.

A Crisis of Identity 199

The 1986 Quinquennial Review had rather weakly given a best endeavours signal to CDC over commitments to the private sector and to equity investment. Actual performance was encouraging, as noted above. Although the Treasury had again advanced the logic of 100 per cent commitment to the private sector, CDC and ODA attached importance to its potential role in the privatisation of utilities, which could justify continuing investment in public sector utilities, and so a target for 80 per cent for the private sector and 25 per cent for equity was settled. There had been a marked decline in renewable natural resources commitments under Eccles, without adverse criticism from ODA. Although the 1992 corporate plan continued to repeat the 40 per cent target figure, it was agreed in the Review to drop it altogether and the report merely noted that CDC had not been able to meet the previous target ‘mainly because of market factors’. When one recalls the enormous importance attached by Howick and Meinertzhagen to this sector, and especially to smallholder agricultural schemes, it is worth pausing to reflect on what had happened. Most of CDC’s renewable natural resource projects had been in the public sector, so that its reorientation towards investing in the private sector played the major part in its inability to attain the target. A strongly reinforcing factor was the deterioration in the competence and reliability of public sector institutions in most of its operating countries, which greatly reduced the appetite for schemes relying upon government agricultural extension services and marketing structures. As had become customary from these reviews, the final report recorded a number of agreed detailed modifications to CDC’s working relationship with ODA – increasing flexibility in the management of its cash, which had been a major objective; procedural clarifications and changes; refinements of reporting requirements, and the like. It also drew attention to the need for new legislation to modify CDC’s powers in several desired ways, and to increase overall borrowing limits to make room for possible loans from the European Investment Bank and other approved sources, such as 936 loans. The question of the composition of the Board had not been resolved, but would also require legislation – as we shall come to – if the government was to get its way. If one attempts to stand back from the two years covered by the MMC inquiry and the quinquennial review, what had really emerged from all the talk and analysis? As a starting point, the three parties to the quinquennial review – CDC, ODA and the Treasury – came to the table with contrasting viewpoints and expectations. CDC hoped that the successful outcome, as it

200 Making a Business of Development 1980–93

perceived it, of the MMC inquiry – with its endorsement of CDC’s competence and desire to see it play a larger role – would pave the way for a faster rate of growth. This would be facilitated by positive funding from the aid programme and borrowing from capital markets, accompanied by a capital reorganisation. Although the MMC had remitted the issue of privatisation to the quinquennial review, CDC had conspicuously given no encouragement to such an outcome. For its part ODA was never persuaded by the argument that growing allocations from the aid budget were really needed, given the size and robustness of CDC’s self-generated cash flow, in order that CDC could continue to play a prominent role in the bilateral aid programme. It was prepared to continue to argue for access to commercial borrowing, but not to fight for it ministerially. It wanted to retain CDC as an instrument of the aid programme, integrated with the priorities of aid policy. Finally, the Treasury was never interested in the argument that CDC was creating a valuable asset for Great Britain plc, through the build up of reserves, and it was unmoved by the bilateral arguments of enhancing British influence and exports. Thus there was total lack of sympathy for the case for growth supported by commercial borrowing. It maintained a hard line on classic Treasury concerns of public expenditure containment, the public sector borrowing requirement, compliance with doctrines for exercising control over public corporation boards and their remuneration. Privatisation was taken seriously, with CDC now constituting one of the last remaining candidates, but the Treasury came to accept that it was a Foreign Office ‘no go area’, which risked too much political fuss. CDC had evolved a posture whereby it wanted to remain as part of the public sector for purposes of funding and the advantages it gained in reputation and project access in its markets, but on its own terms. Under Eccles’ leadership there was a pronounced temperamental aversion to becoming more integrated with ODA’s strategies on aid and to the implications that were perceived to flow from this: more emphasis on the economic evaluation of investment projects (as distinct from their financial results), widening consideration of development impact and the social and environmental dimensions of its activities, collaborative assignments with and for ODA. Thus it sought to combine strong opposition to the privatisation agenda and continuing access to the aid budget with the retention of a robust operational independence and resistance to creeping tendencies for more numerous and onerous targets. The trouble with this approach was that the terms on which CDC wanted to remain in the public sector were not on offer. Thus it

A Crisis of Identity 201

was confronted with an uncomfortable world – no help with growth from the aid budget or from commercial borrowing, no capital reorganisation, harassment on pay policy and the composition of the Board, but no privatisation either. CDC tended to bridle at being categorised by ODA as an instrument of aid policy and wanted instead to be seen in grander, perhaps more romantic, terms as a benevolent manifestation of HMG helping to make the world a safer and more prosperous place. Such a vision was out of tune with the political climate created by 15 years of Conservative rule. It was a misfortune for CDC that the MMC Report had to be launched into an unsympathetic environment for enhancing the role of a public corporation operating in emerging markets. In this sense CDC misconstrued its perceived opportunity. The government’s very tough line, year after year, over public expenditure reached into every corner of Whitehall. Aid to developing countries was not a Tory priority and was viewed, anyway, through more calculating eyes. The notion of an annual infusion of public funds into a public corporation that showed every sign of being able to stand on its own feet was against the grain of Tory policy, and pointed rather to an exit from the public sector. The apparently simple expedient of overcoming Treasury obfuscation over commercial borrowing required political clout and determination, but this was absent. CDC should have read the public finance signs sooner in 1992, notwithstanding the reassurances it extracted from its minister, realising how vulnerable it was to privatisation. A wiser strategy would have been not to make a fuss over increased funding and to have aligned itself more closely with ODA against doctrinaire privatisation. Working together, ODA and CDC could have treated the privatisation test questions as a ritual game to be played out with the Treasury, whereas ODA actually thought that CDC favoured privatisation for much of the time.42 Meanwhile the Treasury became more serious about it, until the Coopers & Lybrand report effectively killed the issue. All the agonising over the level of government funding for CDC only served to draw attention to the fact that its contribution had become quite marginal to CDC’s capacity to sustain a large volume of annual investment from self-generated funds, and that this capacity was being enhanced from the interest waiver decision. Although Eccles was driving CDC to a sharper commercial approach to its operations, implemented through quite aggressive recruitment and staff turnover, this was being reflected rather slowly in its terms of business, or in the importance attached to overall financial performance. Higher priority

202 Making a Business of Development 1980–93

was attached to top line growth in annual investments and to the predilection for competing with the multilateral banks for competitively priced infrastructure lending. CDC’s target of 8 per cent return on capital employed was scarcely an incentive for others to invest in emerging markets. It was slightly devastating that the Quinquennial Review Report contained an annex showing that CDC earned substantially less than the standard required of commercial bodies in the public sector, or from what would have been achieved by investment in benchmark gilts.43 As would become apparent in the following years, the way ahead for CDC was to find a way of reconciling its development role with much greater attention to enhanced operating returns, with more deliberate policies to capture capital returns from equity investment, and to manage funds as well as to invest on its own.

19 A Business of Sorts

After nine years as chief executive, Eccles retired in April 1994. In the report on CDC which he wrote in 1982, preceding his appointment, Eccles had criticised the corporation for losing commercial sharpness and he feared it was in danger of becoming ‘nothing but a banker’. How far had its nature been transformed in the intervening period? The evidence requires quite careful interpretation in the sense that it is not difficult to make out a case that not all that much had changed in terms of the overall figures, yet the reality was that CDC had become a very different institution, and the evidence is there. First, let the continuities be acknowledged. After prolonged debate, it had been determined by a Conservative government that CDC was unsuitable for privatisation, and this had been endorsed by two independent reports from Coopers & Lybrand and SG Warburg. The growing intellectual consensus that developing countries should do more to encourage their own private sectors, and should be more receptive to market forces in international trade and investment, seemingly endorsed the wisdom of the British government owning an agency dedicated to investment initiatives in support of these arguments. The working party reviews of 1986 and 1993 had refined the objectives of CDC investment, but had not radically altered them. Thus it was accepted that CDC still had a role in public sector infrastructure, especially if privatisation was a prospect, and that there was defensive justification for continuing investment in selected middle income countries. If we compare some overall magnitudes over the decade 1983 (the year before Eccles’ appointment) and 1993 (his final year), the elements of continuity as well as some change are apparent: a. Loan assets comprised 79 per cent of the portfolio in 1993, compared with 81 per cent a decade earlier. Although the equity 203

204 Making a Business of Development 1980–93

b.

c. d.

e. f.

content seemed little changed overall, its proportion of new business had risen more markedly from 10 per cent to 17 per cent. Investment in renewable natural resources projects had declined from 50 per cent to 41 per cent of the portfolio, reflecting the drop in new business in this area and the change in emphasis. The number of managed projects had fallen from 44 to 32 and their portfolio weighting from 17 per cent to 9 per cent. In 1983 there was no investment in South Asia or in Central and South America; these areas now accounted for 20 per cent and 8 per cent respectively. Africa, as a consequence, had dropped in relative significance from 49 per cent to 35 per cent. The total number of countries in which CDC had invested had risen from 47 to 51. Investment in basic development (power, housing, transport) had remained around 30 per cent of the portfolio. There were 341 projects in the portfolio in 1993 compared with 255 a decade earlier.

Nevertheless there were indications of enhanced performance over the decade, starting with the growth of the total investment portfolio, which had expanded from £507 million in 1983 to £1279 million in 1993. Internal cash generation had grown even faster, from £62 million to £180 million and this had enabled CDC to increase its level of new investment from £59 million to £217 million over the decade. Despite a more than quadrupling of provisions against investments from £62 million to £280 million, the level of reserves had also grown more than three times from £93 million to £330 million. This growth in CDC’s investing capacity, which required a higher flow of new deals, an ability to turn them into achieved investments and the means to finance them from self-generated funds, was impressive indication of a more energetic institution. It was achieved despite the frustrations over government funding and on external borrowing. However CDC’s overall financial performance showed little change, with the return on capital employed increasing from 5.6 per cent in 1983 only to 5.9 per cent in 1993, including significant investment realisation profits. The near identity of these two numbers goes a long way to accounting for the continuity of the decade. As the MMC had endorsed, CDC was an efficient organisation in administrative terms, so that its low financial return could not be explained on grounds of a costly bureaucracy (with the debatable exception of forcing a radical reduction in the number of country offices). The notion that CDC

A Business of Sorts 205

should meet the test of a return on capital employed had only been introduced in the working group preceding the MMC reference in 1991. It had been taken on board with some hesitation, and with much reference to the statutory requirement of only being required to break even. Given CDC’s preference for remaining within the public sector and for continuing to receive annual net injections of new funds from the aid budget, its lack of enthusiasm for a financial performance measure that would focus on the cost of capital was understandable. It remains surprising. The target of 8 per cent that was agreed in the 1993 Quinquennial Review was below HMG’s own long term cost of capital at the time of 10 per cent, let alone a standard required for private investors. Two factors primarily accounted for this acceptance of a modest level of return on capital. First, CDC’s predilection for lending to public sector infrastructure and natural resource development projects had left it with substantial exposure to overseas governments. This had led to the need to make very large provisions, particularly in Africa and Central America, as so many governments there failed to maintain external debt servicing during the decade. Profits were depressed on this account. Second, the emphasis on volume growth and the concomitant attractions of lending led to a more general softening of the terms on which CDC did business. Indeed, its overt competition for business with the multilateral institutions maintained the pressure for fine lending terms. A more insidious influence on the terms of business was the policy that CDC should not take business away from willing private sector investors. Thus it came to think of itself – and to be thought of – as a last-resort financier which invested in projects that private sector institutions were not prepared to undertake, but without exacting the full risk premium. The result was that CDC was still behaving much like a bank in respect of the bulk of the assets placed on its books, without the resource gearing from borrowings that one would find in a bank, and with the consequence we have seen of an uninspired return on capital employed. Yet this was far from being a complete picture of the condition of CDC by 1994. There is no doubt that significant changes had taken place in its business culture, even though there was delay in this being reflected in its aggregate figures; nor doubt that they stemmed from the priorities and personality of its masterful chief executive. Looking back over the period, one is struck by the slow pace of change in the early years and – in contrast – by its hectic pace at the end. Having been a member of the Board since 1982, and author of a most trenchant

206 Making a Business of Development 1980–93

report on the condition of CDC, Eccles moved very cautiously in his early years. His first management reorganisation went against the argument of his own report by re-emphasising geography against function. He only moved decisively to reverse this in 1991, with the creation of new functional directors for portfolio management, new business, and managed projects. Regional control was pushed down a level and reported to the deputy chief executive, and the agricultural and engineering departments were broken up. Meanwhile a system of performance pay had been introduced in 1988, which was the cause of so much difficulty over compliance with public sector pay policy, as we have seen, and a period of deliberate transformation of the executive staff ensued. A phase of accelerated departures and new recruitment sought to increase the number of individuals with financial and commercial experience (‘city slickers’ as the old timers called them) in place of people motivated more by a desire to work in an institution concerned with economic development in poor countries. However turnover at the top of the organisation was not pushed aggressively. Of the seven senior colleagues Eccles inherited in 1984, five retired in the normal way and the other two remained throughout his term. Only one of the new appointments to the top management team failed to stay the course. The change in style was evident in the pressure for enhanced deal flow and in the tough minded, and resourceful, approach to sorting out problem projects. Here Eccles led from the front and demonstrated a marked aptitude for negotiation. 1991 was the decisive year – triggered by the opportunity to purchase the long lease on the Bessborough Gardens headquarters, and the necessity to finance the deal from realisation of equity investments and not from the aid budget allocations. A whirlwind of activity realised £27 million from five different transactions by the time the lease purchase negotiations matured in July, requiring the payment of £21.5 million.1 The value of establishing a specialist team to undertake such deals was demonstrated, but it also showed that the portfolio could be managed proactively, as opposed to the traditional stance of CDC being a willing seller when the time was right. CDC’s exposure to non-payment of government guaranteed debt had led to an alarming growth in provisions in its accounts since 1987, rising from £116 million in that year to £249 million in 1992, on a still rising trend. CDC was not a party to Paris Club rescheduling negotiations on government debt and it was most reluctant to write off debts.

A Business of Sorts 207

Instead, it preferred to engage in direct negotiations with defaulting governments, in order to demonstrate its willingness to be a continuing project investor, using repayment proceeds in local currencies wherever possible to reinvest in new projects that would eventually generate a stream of foreign currency dividend payments. In turn, this led to a lively interest in governments’ privatisation plans. The drive to negotiate special deals to exchange debt for equity got under way in Malawi in 1988, where there were debt arrears from the government of £11 million. CDC negotiated to acquire state farms in exchange for debt, and by the middle of the following year £6 million had been so reinvested, with a prospect that the rest of the debt would subsequently be applied in this fashion to meet future capital requirements.2 In 1989 a framework was negotiated with the Zambian government for the settlement of arrears by a mixture of conversion of debt into equity, individual rescheduling and cajoling the authorities to resume debt servicing. It was the maturing of a campaign that had achieved payment of £15 million arrears with the commitment of only £2.7 million of new sterling investment. It enabled CDC to engage with a number of new projects in the country – approving £17 million of new business in 1990 – while eating into the arrears backlog. However, having reduced arrears to £13 million in mid-1989, they increased again to £18 million by late 1990.3 These tactics led to some strain with the IMF, which was a competing and, in its view, privileged creditor. It did not welcome CDC’s initiatives outside the Paris Club framework. Eccles visited Zambia in May 1991 to review the situation and to meet with the President. He decided to continue a two pronged strategy of keeping the IMF on side so far as possible, while still pursuing the local manager’s ‘ingenious ideas to achieve debt rollover’, and especially to achieve a significant privatisation. There was perceptive comment on the contrast between Museveni’s Uganda and Kaunda’s Zambia at that time. ‘In the one the rhetoric is credible, it is a problem of implementation, in the other it is hard to believe either in the rhetoric or the ability to change.’4 Kaunda was voted out of office in the autumn election that year, which appeared to open a window of opportunity for CDC to renegotiate its arrears position (by now £24 million) with the new government. Five investment opportunities were identified as potentially suitable for debt rollover. CDC’s strongest card was its almost unique posture of still being willing to invest in the country. It was therefore able to be a key player in assisting the Zambian government to achieve privatisation deals to satisfy the Washington institutions. But its firm

208 Making a Business of Development 1980–93

condition was that blocked funds must be released to form part of any deals. Progress was very slow, but several transactions were eventually achieved, pre-eminently the privatisation of Chilanga Cement. Concern over Tanzania’s debt arrears was an issue throughout the 1980s. The first formal agreement to deal with arrears of nearly £3 million was made in 1981, which involved converting arrears of dividends, interest and fees into a twelve year loan, together with a new £1 million loan to CDC’s principal business, Tanwat.5 But the situation deteriorated again and eventually another agreement was negotiated in 1990, when arrears of £10 million were consolidated with existing debts of like amount into a new loan repayable by instalments over ten years.6 CDC agreed to accept interest payments in local currency and it also improved its taxation position. This cleared the decks for pursuing a number of new investment projects in the following years. In 1991 and 1992 there were similar examples of debt conversion in West Africa – in Ivory Coast and Cameroon, and in Central America – and in Costa Rica and Honduras. These strenuous exercises enabled CDC to achieve significant annual releases of provisions that were no longer required and to offset a still high level of new provisions. Most importantly, CDC was also enabled to maintain a positive stance towards investing in new projects in countries that were otherwise almost totally unacceptable to new foreign investment.7 In such a widely dispersed undertaking it was essential that the chief executive should see for himself conditions on the ground from time to time. In Meinertzhagen’s time overseas tour reports convey a flavour of the political and business scene, of particularities of projects – especially in agriculture; they inspired reflections on the condition of developing countries. The tone of Eccles’ reports is utterly different. The observation is sharper. Courtesy calls are replaced by focussed meetings and problem-solving negotiations. There is a sense that an electric charge has been released. The asset disposals in 1991 were galvanised by visits to St Lucia, Malaysia, Thailand and Hong Kong. Breaking a log jam on debt arrears was the focus of several visits: Costa Rica and Ecuador in 1991, Cameroon in 1990 and again in 1992 (twice), Zambia in 1991 and again in 1992 and 1993. The leadership role is most evident from assessments of business potential generated by overseas visits, by the questioning and probing to improve the management of projects and in the search to overcome obstacles. The reports to the Board following a visit (along with Eccles’ innovation of a monthly written report to the Board) captured aspects of management style that

A Business of Sorts 209

otherwise leave little written trace in a busy organisation. A few examples will illustrate the authoritative grasp and drive for results. Eccles visited Malaysia in August 1989 at a time of economic success and national self-confidence and his overall impression was ‘that Malaysia is going past us’. Years ago Malaysia had been the source for some of CDC’s most successful projects and business experience, but the organisation had become reactive and marginalised. The reflection was to the point: Malaysia is a test case because if we allow it to go past us we are in the long run signing some sort of CDC death warrant. Much of the world will become developed and one long term result might be that ODA grant money would slowly be phased out and CDC would get an increasing role as the commercial end of the aid programme. However, if we fail to operate successfully in the middle income countries we shall debar ourselves from that future role. In order to operate in middle income countries, we need to become increasingly comfortable with three factors, equity, industry and the private sector.8 Going on to Indonesia, Eccles was confronted by a rapidly deregulating economy and an ebullient business atmosphere. It confirmed his decision to remove the representative office from the control of Kuala Lumpur and to establish a separate command under a new representative. He decided that the era of large smallholder projects jointly with the World Bank had ended, and that the emphasis now should be on forming relationships with the larger private sector groups. ‘I would expect the opportunities to exceed our ability to finance them in full.’ India in October 1990, after the Gulf War, was facing economic difficulties, yet CDC was well on the way to implementing £100 million of approved investments. ‘There seems no reason to doubt that India will become CDC’s number one country within the next 2–3 years’. But hard negotiations were needed to improve its investment status to place it on a par with the IFC and to achieve greater freedom over rotating its portfolio without official consents. Eccles was struck by the quality of Indian professionals and the question of recruiting them for overseas service with CDC was noted for action. ‘It is clear that CDC is welcome in India and that our ability to provide foreign exchange and to invest in equity is helpful at a time when there is a tight foreign exchange position and little commercial interest in

210 Making a Business of Development 1980–93

investing in India because of regulation and discrimination against foreign investors.’9 Uganda was visited in June 1991 to assess the intent of President Museveni’s government on reviving the economy. Eccles concluded, ‘the intent seems serious’, but he was not satisfied with the project opportunities that had been identified so far. ‘Both the rhetoric and the fact that estates are being handed back to their former owners are encouraging and … we could go forward once we have found the right projects to invest. A doubling of our exposure would still only be £40 million!’10 In 1994 CDC acquired six tea estates in western Uganda to rehabilitate nearly 3000 hectares of tea. Just as the Swaziland Irrigation Scheme was the project closest to Rendell’s heart, it would appear that the three great oil palm projects in Papua New Guinea came to have a similar fascination for Eccles, with their combination of pioneering development, severely challenging difficulties and their great potential. In his last years he made no less than three visits to these remote properties. In anticipation of Papua New Guinea’s independence in 1975 (when it joined the Commonwealth), a joint CDC/IBRD mission assessed the potential for oil palm development at Higatura on the basis of CDC undertaking a 4800 hectare nucleus estate and factory and the World Bank funding a 5000 hectare smallholder scheme under government management. The project got under way in 1976 and the first profit was earned in 1984. The following year (Eccles now being general manager) CDC committed to a joint venture with the government at Milne Bay for a 3700 hectare nucleus estate with a 1000 hectare outgrower scheme. There was also to be a cocoa estate. In 1987 a third project was committed to at Poliamba for a 4300 hectare nucleus estate and a 1200 hectare outgrower scheme. Thus, the three schemes envisaged 20 000 hectares of oil palm, with 60 per cent under direct CDC ownership and management. By 1992, CDC had invested £56 million in the three properties, £24 million of it in equity. Eccles visited the projects in August 1991. Palm oil prices were low and there was an urgent need to attack the cost base of the operations. He was doubtful whether head office experts had much to contribute to the management on the ground, now that it knew what was required. Any opportunities to increase the nucleus estate acreage should be taken in order to increase mill throughput, and a big effort was needed to motivate enhanced outgrower production.11 Eccles was back again in November 1992, when the law and order situation had deteriorated badly and the manager at Milne Bay had been murdered.

A Business of Sorts 211

Searching for underlying causes, Eccles concluded that ‘many of the frustrations arise from a present inability to join in … The way in which we and the World Bank set up Higatura did not encourage integration with the countryside. Even with the smallholder project the institutional framework and the disciplines have been such that something of a barrier has emerged.’12 There was a need to contract out more work to local villages and to create share ownership. Meanwhile an integrated management structure was being devised, on economy grounds and also to ensure translation of best practice to all three schemes. ‘I doubt whether we have much choice but to soldier on’ and there was still a long way to go before Milne Bay and Poliamba became profitable. He concluded, ‘I remain an optimist and believe that with a talented people eager to benefit from development … success will be achieved. It is central to CDC’s role to operate successfully in such conditions.’ The last visit was in February 1994, shortly before retirement, when the management integration was being reinforced by a financial reconstruction under the banner of Pacific Rim Oil Palms. With Milne Bay as well as Higatura now in profit, the emphasis was on encouraging performance. The outlook was altogether more rosy: ‘I have a degree of confidence that this Pacific people will join others and achieve economic success. They are certainly capitalists by nature.’13 During his term as chief executive, Eccles arrested a trend towards development banking and in its place reoriented CDC towards investing increasingly in the private sector, which accounted for the bulk of new commitments by the end of his time.14 The switch was wholehearted, but far from being uncompromising. He wished CDC to remain in the public sector, with continuing new funding from the aid budget; he wished to continue being able to invest in public sector institutions. Above all he wished CDC to be measured against the performance of other government and multilateral institutions and not against private sector ones. As with those colleagues whose principal career commitment had been to CDC, Eccles responded to the challenge which CDC represented of helping to make a real difference to the well-being of parts of the developing world. In doing so CDC had become a business to be reckoned with.

This page intentionally left blank

Part IV Reinventing CDC 1994–99

This page intentionally left blank

20 Strategy Review

Roy Reynolds was recruited from Shell to succeed Eccles in June 1993, joining the corporation in October and taking over as chief executive in May 1994. He was to hold the post for five and a half years until the end of 1999. He had an extended opportunity to get to know CDC before Eccles’ retirement by visiting the regions and major projects and, most importantly, by establishing a rapport with ODA. At the beginning of 1994 it was agreed that it would be appropriate for him to initiate a strategic review of CDC, with support from the McKinsey consultancy. In some ways the exercise was analogous to the review of CDC undertaken by Eccles in 1982, before he became chief executive, but with interesting differences. In 1982 Eccles had had to wait over two years before gaining responsibility for re-orienting CDC; this time Reynolds was immediately committed to the implementation of the strategic review. In place of the sustained narrative and analysis of the 1982 document, this time there was no formal report. In its place was a series of team presentations to the Board with overhead slides: an Interim Performance Review was presented in March; Developing a Strategic Framework followed in May together with an Interim Report; and in July came Implementing the Strategy – Key Areas For Action. The priorities that were endorsed as a result of this process then formed the basis of corporate plans in the following years, including a series of modifications to the corporate structure. The arrival of a new chief executive and the instigation of a strategic review provide a significant boon to the corporate historian. The obligatory review of recent performance associated with such events strips away layers of promotional gloss and reveals a candid self-portrait that is intended to form the basis of the next phase of aspirations and image building. The outcome of this self-appraisal has already been 215

216 Reinventing CDC 1994–99

used in summing up the Eccles era to show the continued dominance of loan assets, the heavy weighting of infrastructure projects, the rise of South Asia and Central and South America, the substantial growth in self-generated cash as a source of new investments, and the low return on capital employed. Some of the detail revealed hitherto unremarked aspects of CDC’s operations: a. A review of the equity portfolio showed that five projects out of 168 accounted for 70 per cent of dividend income. 100 investments paid no dividends. b. The best 25 equity investments showed aggregated capital gains over book value of £180 million, and the overall carried gains (net of losses) still amounted to £115 million. CDC’s accounts only showed book values. c. Over the past decade annual provisions against loans had averaged 3.3 per cent of the loan portfolio. Total arrears currently accounted for 12.2 per cent of the portfolio and were growing in absolute terms. d. The worst operating results were from low growth, poor countries. e. An examination of specific industry sectors showed that CDC had been a poor investor in the textile sector, with eleven out of 19 projects showing loan arrears or making losses. Its oil palm investments had been over-influenced by non-commercial considerations of development value and prestige. Its largest single investment (a collection of managed farms in Malawi) was something of a financial disaster. The deduction from the analysis was a complex message: having analysed CDC’s portfolio in terms of country risk, asset class, project selection, financing terms, there was no simple explanation of performance because good and bad examples could be found in every category, although country performance had the greatest influence. In effect the review team had highlighted the huge diversity of CDC’s activities by geography, by investment sector, by mode of investment, and the difficulty of achieving good performance across the whole portfolio, whether assessed by development impact or by financial criteria. At the second presentation to the Board in May 1994 the review team first revisited the performance record and operating environment. There was a candid self-assessment: ‘The position conveyed to the outside world has been that CDC has been constrained by a shortage of funds. However, up until now, CDC has in fact been constrained

Strategy Review 217

not so much by an absence of funds but, rather, by an absence of good quality business. This has led in some years to the search for fast disbursing outlets for surplus cash balances (e.g. major lines of credit to financial intermediaries). Such projects have fallen short of CDC’s additionality criteria.’1 It concluded that on current plans CDC was unlikely to improve its return on capital above 8 per cent over the rest of the decade, yet the policy environment called both for greater reliance on self-funding and an improvement in development impact. The question was what should CDC’s strategic response be to this state of affairs? It was clear that CDC needed to be a lot more discriminating and much more ready to prioritise its investment activities, if it was to achieve the twin aims of both improving on development impact and on financial performance. The somewhat slippery concepts of ‘additionality’, ‘turning point economies’, ‘private sector frontier’ are deployed with suggestive skill. ‘Additionality’ was approached by reference to what the private sector would not supply – long term loans and risk capital, skill in project structuring, reputational association. This was not altogether satisfactory since it all too easily could lead to situations where CDC was left to provide tail-end or top-up finance, or to pursue second best projects. A more robust approach would have been to see additionality as an ability to add greater value to a project than could be achieved by a competing provider. ‘Private sector frontier’ was presented as a zone of opportunity between investments that could only be viable with the help of public subsidy and investments that easily attracted the private sector. Again, such a focus was likely to push CDC towards projects of marginal viability rather than focussing on the demonstration merits of capturing projects with outstanding potential. ‘Turning point economies’ were defined as those where market perceptions of risk were unwarranted on account of an improving policy environment, where there was scope for CDC to change such perceptions by financially successful investments. A total of 19 of CDC’s 52 countries of operation were, somewhat optimistically, identified as falling into the turning point category.2 Options were reviewed to narrow CDC’s focus to a small number of business sectors – or just on to financial services; or to a small number of countries – or just its core region of Africa. However this was rejected in favour of a selective amalgam of sectors, including financial services, and of country focus. This was justified on grounds of retaining flexibility and historical continuity. A powerful sentiment came through of the urgent need to improve the corporation’s performance culture,

218 Reinventing CDC 1994–99

through more specialisation and individual accountability. From more than 180 pages of charts and narrative emerges a fireburst of specific ideas for energising the performance of CDC, of overcoming funding constraints, of toughening criteria for development impact. Significant themes were: a. A focus on turning point economies (although without emphasising the corollary of making an exit from low potential ones). The suggested aim was that they should account for half the portfolio over ten years. b. CDC should demonstrate that it was capable of bringing additionality in every new investment (not to justify displacing other investors, but in order to demonstrate that it was making a special or unique contribution). c. Selection of target business sectors outside agriculture, such as power and telecommunication, where CDC would set out to acquire and develop appropriate skills. d. Improving financial transaction skills in project finance, the ability to mobilise institutional equity, promoting financial intermediaries in liberalising financial markets. e. Culling the portfolio of mature managed businesses. f. A plea for a more aggressive approach towards pricing its funding closer to perceived market rates. g. Creating co-investment structures with private interests on an industry and regional basis. By July this work in progress analysis had been distilled into an implementation document which had three aims: to achieve greater selectivity with respect to countries, sectors and financial products; to be more pro-active in pursuit of business; to enforce greater accountability for performance. The review had shied away from a drastic simplification of CDC’s business arena; instead it would sustain the complex overall coverage of the developing world. Under this permissive umbrella CDC would aim to initiate a transformation that would greatly increase its collaboration with private sector co-investors, enhance its capabilities to invest in chosen sectors, and would sharpen its skills for appraising and structuring equity transactions. In the following five years CDC sought to refashion its organisation to meet these aims. The most prominent move was to differentiate from the total investment portfolio two distinct business entities. An executive was recruited to head the managed businesses – soon called

Strategy Review 219

CDC Industries, and to rationalise it. Likewise, another executive was recruited to head a Financial Markets department, encompassing over 40 financial sector investments. Thus there were three business heads as managing directors respectively for the investment portfolio, industries, and financial markets. Meanwhile the aim to build up specialised sector knowledge got under way in the new business department and in 1996 the importance of sector specialisation was recognised by creating a fourth managing director post heading a team of sector specialists. Responsibilities were shifted between these four leadership posts, but the main structure survived until Reynolds’ retirement.

21 A Battle of Wills

As already noted, Reynolds quickly established a good relationship with ODA, which was cemented by the collaborative atmosphere of the Strategy Review process. This was fortunate because he inherited a simmering dispute between the Board of CDC and ODA that put the relationship under considerable strain for two years. The origins went back to the 1986 Quinquennial Review when, as we have seen, ODA made a play to have direct representation on the Board of CDC, as a means of having a more direct influence on improving its development impact. This was strongly resisted, so that the Report had to record ‘No agreement could be reached on whether the ODA should be represented on the CDC Board’1 and the issue was referred to Ministers. Although CDC was informed in writing that the government favoured the appointment of an ODA official to the Board, the Secretary of State was left in no doubt that the Board ‘are seriously worried that it would change the nature of CDC’s relations and accountability to government’.2 CDC was also confident that the change could not be enforced without legislation and the issue was allowed to lapse. By the time of the MMC inquiry in 1991 the issue had changed. The Commission was puzzled to find that none of the senior executives were members of the Board under the Reithian settlement. Eccles testified ‘I firmly believe that it is better for the operations and independence of the Board that the Executives are not appointed by the political system but are appointed by the Board’3 and this line was strictly adhered to in all the exchanges. In essence, CDC was more concerned about the risks of its executives falling under the controlling influence of ODA, if their appointments and pay came within its grasp, than about the old-fashioned appearance of a Board that comprised only non-executive directors. The MMC explored with the Board a 220

A Battle of Wills 221

compromise proposal that the chief executive be appointed by the rest of the Board (who themselves were appointed by the Secretary of State), which met with pronounced scepticism from Leslie. He believed there must be great doubt whether Ministers would accept a passive rubber stamp role, and it would not resolve the uncertainty as to whether the chief executive was accountable to the Board or to the Minister. In any event, it had become evident that CDC’s non-compliant stance was protected by its Act and that legislation would be necessary if government was to have its way. The MMC concluded ‘we consider it is in principle unsatisfactory that the Chief Executive, and indeed other senior executives, should not be on the Board and so share directly in shouldering the Board’s statutory responsibilities’.4 It recommended that government should consider introducing legislation enabling the Board to appoint senior executives to their number. During 1992 it was made clear to CDC on several occasions that it was firm Treasury policy with respect to public corporations that the Secretary of State should appoint all board members, which should include executive directors, and set their pay. However the Board remained opposed to its application to CDC. It had some good arguments to deploy: the question of privatisation was very much in the air at this time and it seemed illogical to be thinking of strengthening official control at such a juncture; CDC was increasingly needing to align remuneration policy with the private sector and this would be undermined if Whitehall standards were imposed; CDC’s managerial independence had stood the test of time and ‘don’t fix it if it ain’t broke’ seemed a relevant maxim. It was resolved not to look for a compromise, other than accepting reluctantly the MMC formula, if it had to. By 1993 government had concluded that it did have power to appoint executives to the CDC Board, but not to fix their remuneration, so legislation would still be needed. Two events during the year then affected the debate. The decision in March not to privatise CDC strengthened the official argument that it should be brought into line. CDC’s blatant breach of the government’s pay guidelines (in the eyes of the Treasury, albeit strongly rebutted by CDC) only reinforced the call for discipline to be imposed. Leslie cautioned ODA not to bring matters to a head until and unless government was ready to legislate, since there was a real prospect of the current Board resigning. This seems to have been taken to heart. The Report of the 1993 Quinquennial Review merely restated the policy stance, and noting that ‘legislation would be needed fully to implement government policy’.5 The Minister’s acceptance of the outcome of the review made no mention

222 Reinventing CDC 1994–99

of the topic, but the long matured government response to the MMC Report included a statement of intention to legislate.6 This was the situation inherited by Reynolds. The fact that government could ultimately get its way by introducing legislation involved an element of bluff on both sides. The threat of legislation might have induced the Board to accept the inevitable and – as was indeed proposed – agree voluntarily to do the Treasury’s bidding. This was resisted. On the other hand, potentially controversial legislation was not welcome to the managers of government business. But there was a third factor that upset this simple duality – CDC desperately needed a new bill. Its borrowing powers had last been revised in 1978 to a maximum of £850 million, and it had been getting worryingly close to this limit for several years. By early 1994 current borrowings were up to £834 million. Arising from Reynolds’ strategy review there was also a strong requirement to revise the corporation’s vires, in order to provide it with a flexible mandate to take part in privatisations and to participate in collective investment funds. Discussions with ODA on the scope of a new CDC bill commenced in early 1994, leaving aside the Board question. In the summer CDC was advised that there would only be room for a minimalist bill and it appeared that the Board issue was lost in the long grass. By the autumn there was doubt over getting any space in the legislative timetable in the winter of 1994–95. This was made worse by Treasury insistence that any legislation could not be limited to a simple bill to increase borrowing limits and to implement the interest waiver policy, but would have to include a clause to deal with the Board question. CDC remained strongly opposed to such a clause, but nevertheless agreed to undertake an intense lobbying effort to gain a slot in the parliamentary timetable. It was by now clear that the Treasury was motivated solely by a desire to control CDC pay, rather than any strong adherence to governance principles, and CDC had no compunction in lobbying for a simple financial bill. There was a moment of gloom when the Queen’s Speech contained no reference to a CDC bill. But reassurance was given that CDC’s needs were understood if time could be found for a simple measure. In December parliamentary counsel were instructed to produce a two clause only bill (borrowing and interest waiver). The euphoria was short lived: at a meeting with Chalker in the new year CDC was presented with an ultimatum – unless it accepted a third clause dealing with remuneration of executives on the Board, there would be no bill. Furthermore, if CDC were suspected of organising opposition to this provision, the bill would be withdrawn.

A Battle of Wills 223

The members of the Board met to review the situation at the end of January. It was common ground that the Reithian model had served CDC well. There was great apprehension that the Treasury would impose civil service pay levels on CDC, thus making it impossible to recruit effectively from the financial sector at a time when CDC was seeking to add to its expertise. There was also concern that the public sector norm of three-year terms of appointment for directors would be unsettling for career executives. The complete absence of ministerial sympathy from a Conservative government was isolating, and there was no expectation that the Labour opposition would be interested in CDC’s viewpoint. It was time to bow to the inevitable. The Minister was informed of the unanimous view of the CDC Board that the clause empowering ministerial appointment of executive directors was not in the long-term interests of CDC, but accepted that the Government must prevail. Finally, if there was to be a full bill, a plea was made to deal with the corporation’s vires requirements as well.7 CDC now bent its efforts to mobilising parliamentary support for the bill, even though it was published without a vires clause. It was duly passed as a three-clause bill: interest waiver, an increase in the borrowing limit to £1.5 billion, remuneration of executive directors.8 The vires issue led to a bizarre sequel. ODA’s reluctance to complicate the bill politically by including new powers for CDC first took the form of arguing that its needs could be met by agreeing to a more liberal interpretation of the existing Act, which would have left the directors legally vulnerable, and was rejected. The next idea was to introduce the new powers by way of amendments when the bill went to the House of Lords, but this was ruled out of order by the Public Bill Office, on the grounds that the scope of the bill was being altered. There seemed no alternative but to have a second bill. CDC was told that another government bill was out of the question, which left only the possibility of introducing a Private Member’s bill in the House of Lords, providing it could be assured of government support, and that of the Opposition as well. Lord Trefgarne (son of CDC’s first chairman) agreed to sponsor such a bill, which received its first reading in April 1995, following careful briefing of the Labour Opposition by CDC. As virtually his last service to CDC, Leslie was able to write a congratulatory note to Trefgarne in May, after a successful second reading debate. Sadly, there was a sting in the tail. When the Private Member’s bill reached the House of Commons in July it was objected to by the Opposition, who had become suspicious of the intentions behind it, suspecting a plot to change the role of CDC away from development as

224 Reinventing CDC 1994–99

they understood it. The bill therefore failed. This was highly frustrating for Reynolds, since the enhanced powers were an important feature of his new strategy. They were also an important feature of the ambitious initiative that was nearing fruition in conjunction with the Commonwealth Secretariat to launch an investment fund for the Commonwealth to be known as the Commonwealth Private Investment Initiative (CPII), where CDC’s current inability to purchase shares in existing businesses was a severe constraint. Early in 1996 a sustained campaign got under way: the Commonwealth Secretary General wrote to the Prime Minister, the new Chairman Lord Cairns wrote to Chalker, Reynolds wrote to the head of the Policy Unit in Downing Street, and a meeting was held with the Labour Party to allay its suspicions over the proposed extension of CDC’s powers. A crucial difficulty was the reluctance of ODA to take responsibility for a government bill, as opposed to supporting another Private Member’s bill, with all the risks that route entailed. CDC’s line of argument was that this was not good enough and that it gave all the wrong signals in connection with its Commonwealth-wide efforts to win backing for the new investment fund. Labour’s tactical stance was helpful to the cause, by making clear that it would abstain from voting unless the bill was a government one. The campaign intensified in March, with letters to other members of the government. ‘I am anxious that you should be aware of our growing concern that the entire CPII initiative may simply fail without this modest piece of legislation’ by prejudicing fund raising and inhibiting CDC’s management of the fund.9 Meanwhile CDC’s parliamentary consultant advised that there was no pressure on the legislative timetable and that the difficulty lay solely within ODA. Cairns addressed a final plea to Chalker at the end of March and he was rewarded with success a few days later, when the Minister conceded that the bill would be a government measure. It was passed in the House of Commons on 20 May and in the House of Lords on 14 June. The Bill widened CDC’s powers in three areas – a. the provision of finance for reorganisation, reconstruction and rationalisation (including privatisation); b. the provision of general consultancy services; c. promoting the development of financial markets, including investing in funds that in turn purchased quoted securities. None of these relaxations excused CDC from continuing to meet criteria on development impact and value added in its investments. There is an ironic footnote: having won the power to appoint executives to the Board in the 1995 bill, the government took no steps to use its new authority. From CDC’s perspective, it was rather as if having

A Battle of Wills 225

lost the battle it had won the war. More interestingly perhaps, the good relationship established by Reynolds and Cairns with ODA had created a basis of trust in the sensitive area of remuneration. Meanwhile fresh stirrings on the future status of CDC induced caution. A unitary Board of executive and non-executive directors under Cairns’ chairmanship, but with a new chief executive, was eventually to emerge in the closing days of 1999, as CDC was transformed into a Companies Act entity preparatory to privatisation at some date in the new millennium. At this point the Secretary of State’s formal powers over board appointments shrank to the appointment of two non-executive directors to represent the Crown interest. The long campaign to keep Whitehall at a proper distance from the CDC executive had succeeded.

22 Escaping the Funding Impasse

Notwithstanding ODA’s approval in March 1994 for CDC to extend its operations to the new South Africa, accompanied by strong encouragement to make an early impact, no additional funding was made available. Likewise, the department’s approval of the thrust of the strategy review was not accompanied by any positive resource message. Indeed the politics of the bilateral aid budget bore harshly on CDC in 1994. Its strong operating cash flow reinforced the official perception that CDC was rich and, moreover, that there were additional hidden riches to be prized out. ODA decided that it wanted a share of this cash flow for itself. In December CDC was informed that the ‘nil net funding’ regime would be transformed into one in which CDC would be required to make net contributions to the aid programme, starting in 1996/97, thus giving one year’s notice of its intentions.1 The news caused consternation and Leslie protested to the Minister in apocalyptic terms. It was not so much the amount of the prospective cut that hurt, as the utter absence of policy context and policy intention. A follow up meeting with Treasury officials early in 1995 confirmed that the block on market borrowing was still in place – indeed a new excuse had been devised. It was now argued that HMG’s own credit rating might be compromised by CDC raising funds on its own name and on less fine terms.2 More interestingly, CDC was encouraged to think about raising capital through intermediate financial structures, with the examples of the Private Finance Initiative in mind. This development led to an acknowledgement that the question of CDC’s capital structure, which had been left alone by the 1993 Quinquennial Review in the light of the ‘no privatisation’ decision, would have to be re-addressed. Warburg was brought into play again to examine ways in which CDC might establish intermediate holding companies with external investors. Clearly, there was scope for CDC to enlarge its role in 226

Escaping the Funding Impasse 227

managing funds through specialised financial vehicles, and even a role in managing assets on the ground for other owners, but Warburg warned that this could give rise to difficult issues of preserving CDC’s development purpose, while satisfying investors’ requirements. ODA now agreed that a further attempt should be made to review CDC’s funding and that this should embrace questions of structure, by which was meant reorganisation of the balance sheet on corporate lines. However, with the retirement of Leslie in mid-1995 the exercise ran out of steam. Instead, another unavailing attempt was made later in the year by CDC to shift the Treasury’s stance over commercial borrowing. There was also further exploration of ways in which private capital could be associated with CDC. With the deadline approaching for CDC to become a net provider of capital to ODA, a final attempt was made to make the case for at least preserving a break-even funding position, by demonstrating how well CDC supported and complemented the aims of the aid programme. There appeared to be support for such a conclusion from the outcome of the Fundamental Expenditure Review that ODA had been subjected to during 1995. Its findings, so far as CDC was concerned, placed emphasis on enhancing CDC’s developmental role in preference to targetting the rate of return on capital employed. But it was to no avail, and it was confirmed that CDC would have to make a first net repayment to ODA of £10 million. An emollient letter from the Minister praising CDC’s performance and looking forward to closer collaboration with the bilateral aid programme did little to sweeten the pill. The review of CDC’s funding and capital structure that had been planned early in 1995 before Leslie’s retirement was postponed for two years. A new working party eventually produced a report in March 1997, in the run-up to the general election.3 It marked a big step forward in thinking about CDC’s future. The study noted that the constraints imposed by ODA restrictions on funding and by Treasury policy on borrowing meant that CDC’s potential was not being fully realised, yet they were unlikely to be relaxed. Paradoxically CDC was becoming less significant on the international scene just when the role of the private sector in development was more widely acknowledged. It was noted that CDC’s investments had been equivalent to 65 per cent of IFC’s portfolio in 1986 and by 1995 it had fallen to 30 per cent. Over the same period the Dutch development agency FMO had increased its portfolio from the equivalent of 21 per cent to 40 per cent of CDC’s. Maintaining the status quo would result in further relative decline and under-utilisation of CDC’s acknowledged capabilities. It went on to examine two alternative options. The first was to transform CDC into a

228 Reinventing CDC 1994–99

predominantly equity investing institution, which would maximise its demonstration effect in the private sector. Moreover, after a transitional period, the enhanced cash flow from dividends and realisations could make CDC self-sustaining. The second option would be to model CDC on development banking lines, by allowing a significant element of debt gearing, as was permitted to IFC. Both of these options would require a restructuring of the balance sheet to create equity capital, and to provide a basis for loan gearing in the case of the IFC model. The report noted that ODA would have to adjust its bilateral aid programme priorities in order to support the transition period for the equity option, but it would be unlikely to be able to accommodate the move to the IFC model within the aid budget. In short, there appeared to be no way forward for CDC while it remained in the public sector constrained on the one side by ODA’s priorities in the bilateral aid programme and on the other by the Treasury’s policy on external borrowing. This analysis led into an examination of ways of introducing private capital into CDC in order to enable it to move forward again. There was a concluding discussion of the development impact implications. Apart from noting the benefit resulting from an enhanced ability to invest in pre-emerging market economies, attention was drawn to the danger of a privatised CDC adopting a more cautious attitude to risk, which raised the question whether this could be overcome in some way. Three possibilities were noted in the report: a. Entrenching a development mandate in the Memorandum and Articles of the new CDC. b. Setting up a regulator to enforce development compliance. c. Setting up a fund out of privatisation proceeds to be managed by CDC and focussed on priority development targets. At this point CDC still had a strong preference for remaining in the public sector while continuing to press for alleviation of ODA and Treasury constraints. It feared that the privatisation route would lead to a displacement of development impact by pressure to improve financial returns. The tension between the perception of CDC as a valued development agency and the reluctance to fund its growth within the public sector was unresolved in the remaining weeks of the Major government. It was left to the return of a Labour government in May 1997 and the appointment of a new Secretary of State, Clare Short, with the character, Cabinet authority and intellect to challenge orthodoxy, for a possible way of squaring the circle to be found, that

Escaping the Funding Impasse 229

would release CDC from its funding straitjacket. If there was to be no room for CDC in the aid budget and the Treasury was immovable on commercial borrowing, a solution was required which involved private sector ownership without sacrificing CDC’s development role. Events now moved quickly. The newly named Department for International Development, or DFID, appointed investment bank advisers in August 1997, who reported by the beginning of October on how majority private capital could be introduced into CDC, and on the mechanism for ensuring continued development priority. A decision was made by the Labour government to create a new model of privatisation. Instead of a phased sell-down to the private sector, which had been a feature of several earlier schemes for privatisation where there had been concern over the transition, and instead of relying solely on the provisions of a golden share to protect special interests, it was now decided to construct a stable partnership between government and private investors. Not privatisation so much as a public–private partnership. This was a defining moment for CDC. During nearly 18 years under Conservative governments the issue of privatisation had been perceived as a recurring threat. Now there seemed to be the potential for accomplishing privatisation without distorting CDC’s development role. Before examining how this was to be accomplished, a brief recapitulation of its antecedents will help to underline the significance of the policy decision. The 1980 Quinquennial Review, which took place shortly after the election of a Conservative government with Margaret Thatcher as prime minister, had to reckon with the prospect of a declining aid programme with a more commercial emphasis attached to it. There was also a requirement to consider introducing private funding into CDC. One of the options considered was the sale of CDC, which was treated to a short disparaging analysis. The effect of cutting off CDC from the aid programme would have been to make it risk averse and its capacity ‘to play a pioneering role through risk taking projects in the natural resources sector would be sharply curtailed and eventually eliminated’. The precedent of the Commonwealth Development Finance Corporation ‘which has failed to make any major impact’ was discouraging and there must be doubt whether CDC’s specialised skills would be attractive to commercial interests. The Review had concluded, ‘We are in no doubt that such an extreme course would be a major loss to the development effort.’4 The subsequent 1986 Quinquennial Review had been specifically required to address the case for retention of CDC in the public sector. Its answer to the constitutional question was to maintain the status quo. ‘It remains true that, since the CDC’s main objective is developmental

230 Reinventing CDC 1994–99

rather than simply commercial, such activities inevitably fall to be supported, in part at least, with concessional resources … The existence of CDC as a separate body to carry out its present functions remains necessary. No alternative body exists which could take on the CDC’s role.’5 The FAWG working group set up in 1990 and charged with examining ways of making CDC less dependent on government financial support, but with the caveat that it should continue to serve as an instrument of overseas aid policy, had been unable to solve the conundrum. At least it made some advance in explaining the problems. From the standpoint of the private investor, CDC’s geographical focus on poor countries was too risky; CDC’s developmental objectives would not be consistent with commercial requirements; and CDC’s financial returns did not meet the standards set by venture capital firms with which it would be compared. The conflict between risk and profit would lead a privatised CDC to switch its emphasis to shorter-term horizons and to invest more in middle income countries. This led to the conclusion that privatisation ‘could lead to tension between the public and private shareholders over the relative financial and developmental merits of potential investments, and thus to a loss of common purpose within the organisation and on its Board’, and finally that ‘it would be inappropriate to pursue the issue of privatisation at this stage’.6 In the expectation that the Monopolies and Mergers Commission would wish to explore the privatisation issue, Eccles produced a paper in the summer of 1991. It fastened on the crucial significance of enabling CDC to escape public expenditure and funding controls if the government’s shareholding were reduced below 50 per cent. The model developed was prescient in that it also envisaged a formal agreement between CDC and government, to cover such matters as a restatement of the development aims and objectives of CDC; a continued element of public funding to support them, combined with an ability to borrow commercially; and the appointment by government of the non-executive members of the Board.7 The signals from ODA at the time were discouraging: the idea of a joint ownership of CDC by government and the private sector was unlikely to be welcome.8 The MMC enquiry had stimulated an independent intervention from the Deputy Director of the Institute of Economic Affairs, Frank Vibert, who had produced a thoughtful proposal on how the privatisation of CDC might be accomplished. It envisaged retaining a tranche of passive public capital and a continuing ODA relationship whereby CDC might manage certain ODA funds and also receive targetted technical assistance; and where the Treasury might provide insurance for CDC investments in

Escaping the Funding Impasse 231

desired areas of risk.9 However the MMC also failed to reach a conclusion on whether some form of privatisation was achievable while still keeping intact the developmental purpose of CDC. It contented itself with keeping open a vision of the promised land: ‘The potential advantages of introducing some private capital seem to us to be significant, however, and we hope that this question will be further pursued by CDC, ODA and the Treasury.’10 In the wake of the MMC Report and the skirmishing during 1992 over the remit of the next Quinquennial Review, the privatisation question seemed to loose momentum and no government purpose was detectable to bring about a change of ownership. At the end of the same year a fresh stimulus to thought emerged when Coopers & Lybrand was retained by ODA to review the status of CDC in the context of the notion of placing it into a foundation, perhaps in conjunction with its possible merger with the Crown Agents. It was made clear that there was a government policy aim to remove trading organisations from the public sector, in the absence of special factors. The consultants noted the tension between ODA’s policy that CDC should still be required to pursue its developmental aims and a Treasury disposition to question whether it was a proper objective of policy to be attempting to stimulate private sector activity in developing countries. Their overall conclusion was that CDC’s public sector status was advantageous and, specifically, ‘it is highly unlikely that government would be able to continue to meet its current policy objectives after a privatisation of CDC at an acceptable cost’.11 This report, as already noted, had turned government away from further thoughts of privatisation, as confirmed in its decision of March 1993. Consequently, the report of the 1993 Quinquennial Review merely reaffirmed this outcome. ‘There is strong evidence that it would not be possible to retain a privatised CDC in its present form carrying out its current development objectives.’12 Warburg’s advice to CDC at the end of the year confirmed this message. ‘We do not believe that CDC can carry out its developmental mandate over the long term unless it remains part of the public sector.’13 A thoughtful internal note in the summer of 1993 reflected on these developments. It observed that the situation could change quite quickly and CDC would be wise to seek to position itself for the future by getting approval to establish a conventional capital structure, by continuing to press for access to debt markets, and by improving its return on capital. Indeed, as we have seen, this became the agenda of the following four years.

23 Understanding Public–Private Partnership

Following the creation of DFID under a Cabinet minister, it quickly became known that a major new aid White Paper was in preparation, as development NGOs and aid specialists were consulted on drafts, that would stand comparison with Judith Hart’s White Paper of 1975. As with this earlier document, Eliminating World Poverty: A Challenge for the 21st Century1 made a renewed commitment that poverty alleviation must be the governing principle of the aid programme, and not the pursuit of national economic and political interests. There was a commitment to multilateral action and frequent use of the word ‘partnership’ in relation to collaboration with NGOs, business and recipient countries. All government policies affecting developing countries over trade, foreign policy, environment, agriculture, were to be made consistent with these aims. There was an indication of increased resources for the aid programme. Tucked into the text was the planned announcement on the future of CDC, where partial privatisation was presented as a means of enlarging the resources at CDC’s disposal through the introduction of majority private sector capital.2 The decision to resolve CDC’s funding dilemma by the route of partial privatisation was due to be revealed on publication of the White Paper in November 1997. However this timetable was upset by Britain’s role as host of the Commonwealth Heads of Government Meeting in October that year. The Labour government had determined to demonstrate a renewed commitment to the Commonwealth, and among the initiatives taken was a project to launch a Commonwealth Business Forum, with an inaugural meeting in London on 17 October, just prior to the heads of government gathering in Edinburgh. The first chairman of its Council was Lord Cairns, the chairman of CDC. Shortly before the meeting, Downing Street wished to beef up the Prime Minister’s 232

Understanding Public–Private Partnership 233

address to the opening session and decided to announce its policy decision on CDC, in a demonstration of the new government’s desire to build bridges to the private sector. The catch-word was to be public– private partnership, as a key passage in the speech revealed: I am less interested in whether an institution is public or private, than whether it works. The CDC is a public institution. I believe it can be improved by becoming a public–private partnership. I can announce that we have decided to allow the CDC to develop a new relationship with the private sector. This will require legislation to allow private investors to invest money in CDC, turning a state corporation into a partnership between the public and private sectors. Some of this money will take the form of lending and some will be equity. The government will retain a substantial minority holding and will continue to set a framework for the corporation’s operations in order to preserve its unique character and special skills. This new partnership will allow the CDC to borrow on the capital markets. It will give the Corporation substantial extra funds each year to invest in development. I can also promise that all the money the Government raises from this sale will be ploughed straight back into our development programme.3 The statement contained several messages: legislation would be required; government intended to retain a substantial minority shareholding for the long term as evidence of partnership; a formal framework would be established to ensure continuity of the development purposes of CDC under majority private ownership; CDC would now be released from the constraint against access to capital markets; this step would give it substantial additional resources for investment annually; and the proceeds of sale to the private sector would be ploughed back into the aid programme. It was also very apparent that the means by which these outcomes were to be achieved were still very uncertain and that there were many critical issues still to clarify and negotiate with CDC, and within the machinery of Whitehall. At this point the International Development Committee (IDC) of the House of Commons perceived an opportunity and seized it. This Committee, which is appointed under House of Commons Standing Orders to examine the expenditure, administration and policy of DFID, the sponsoring department of CDC, has powers to send for persons, papers and records and to appoint experts to elucidate matters. It decided to conduct an inquiry into the policy initiative ‘to provide an

234 Reinventing CDC 1994–99

opportunity for the government to explain its plans, for interested parties to comment, and to enable the Committee to evaluate the Government’s proposals’.4 The inquiry took place prior to publication of a bill; it received written submissions in the spring of 1998 and held evidence hearings in July. Thus there is a public record of intentions and opinions at this formative stage, and of the judgement of the Committee in the report it issued at the end of that month. The government’s response to the report was published towards the end of October,5 and a bill was introduced into the House of Lords in November, and passed. At this point, and prior to the bill coming before the House of Commons, the International Development Committee decided to hold a second inquiry in March 1999 and published its report in April.6 The second reading of the bill took place in May and completed its passage in June. The government’s response to the second report was published at the end of June.7 DFID’s initial submission to the International Development Committee in April 1998 reiterated the aim of increasing the resources available to CDC and indicated the issues still to be resolved over entrenching its development mandate and ethical policies, and that there was a problem to resolve over tax status. Two novel elements in the paper were that it envisaged joint projects with CDC and that CDC might manage initiatives for DFID or manage special funds for the department.8 This was an interesting indication of the warmer relationship Reynolds had established with the department. The second element was the attempt to re-define the nature of CDC’s development impact. This was presented in terms of the demonstration effect of successful investment by CDC in the private sector by encouraging more investment in the poorer developing countries and diminishing the perception of risk of operating in those markets. It was acknowledged that this would require CDC to invest to a greater extent in equity and to improve its own rates of return. Heading off potential left-wing criticism, the paper went on to argue that concentrating on higher rates of return was more likely to improve the sustainability of livelihoods created by such equity investments.9 When the IDC examined the Secretary of State and her officials on 7 July, its point of departure was to question whether selling down to a minority shareholding was the best way forward. Clare Short responded robustly, by placing the main emphasis on the claim that CDC would have more resources than hitherto as a result of being enabled to tap capital markets. When it was pointed out that this could be achieved more simply by continuing to fund CDC through the aid

Understanding Public–Private Partnership 235

budget, she appeared to argue that the demonstration effect would be lost if CDC remained wholly owned by government. This overstated the case; meanwhile there was the opportunity cost on the aid budget to consider as a result of CDC displacing other aid objectives, which was nearer the heart of the matter. Much was made of the impossibility under Treasury rules of enabling CDC in its present form to access capital markets. Unfortunately the IDC had insufficient grasp of this arcane topic to do other than take it on trust, and an opportunity was lost to expose its speciousness. Even without this opening, the Committee might have pressed for a statement as to why the aid budget had moved to negative funding of CDC and no longer had room for an annual funding contribution, given the importance being attached to reviving the private sector in developing countries.10 The IDC’s other main area of concern was over the preservation of CDC’s developmental role in poor countries, once it was majorityowned by private investors. It was explained that the government’s intention was to endow CDC with a ‘certainty of framework’ as regards having to maintain 70 per cent of its investments in poorer countries (as defined: 1955 per capita incomes of $1670) and 50 per cent in subSaharan Africa and South Asia, and to follow ethical business practices. At this point, no one was able to explain quite how this was to be done, but the impression was given that the requirements would be embodied in the Memorandum and Articles of the new company. It led Short to throw out an invitation to the Committee: ‘If you have any suggestions that might secure [the framework] in a better way we would be very interested.’11 One point, however, was made explicit: once the new framework was established, CDC would be freed from the departmental supervisory regime of quinquennial reviews, twice-yearly planning framework submissions, political clearance of investments, approved country lists for operations, all of which had dominated the relationship with its sponsoring department heretofore. There was a further implication: CDC would no longer be subjected to pressure to disinvest when a country graduated to middle income status (as it had in Hong Kong, Malaysia and Singapore), provided it maintained its overall target ratios. Attention then turned to the role of the proposed Golden Share. Why was this necessary? Two purposes were elicited from the Secretary of State, which indicated a degree of uncertainty in official thinking. On the one hand the retention by government of a Special Share, or Golden Share as it was generally called, was intended to reinforce the entrenchment of the investment policy and ethical code, since the

236 Reinventing CDC 1994–99

future majority owners of the company could otherwise promote an amendment of the articles. The second declared purpose was to provide a mechanism whereby the approval of Parliament would have to be obtained if a future government wished to pursue the complete privatisation of CDC. Short attached great importance to this objective, but had run into technical obstacles. A Golden Share to prevent unwelcome takeover of a company could be of indefinite duration, but was capable of being surrendered at any time. If, however, it were linked with an indefinite provision requiring reference to Parliament (by way of laying a statutory instrument stating an intention to dispose of shares), it appeared that the Office of National Statistics would take the view that CDC had been rendered so different from other companies that it would no longer be classified in the private sector – thus defeating the whole purpose of the public–private partnership strategy. The government was also aware that such a procedure might be perceived unfavourably by investors, by introducing a third party (Parliament) into a bona fide negotiation for disposal. Short shared these problems very openly with the Committee. An attempt was then made to clarify why the government wanted to keep a minority shareholding in CDC for the long term. The response was that it wished to actualise the concept of partnership by means of a substantial shareholding, which would not be accomplished merely by retaining a Golden Share. In addition, the government wanted to be able to share in the future economic success of CDC, which was compatible with the sentiment that there was no pressure to maximise disposal proceeds from the sale of a majority shareholding. When the Committee turned to financial questions, it became clear that government was still at a formative stage in its thinking. No decisions had yet been taken over restructuring the balance sheet, or the future of the £750 million of interest free loans. However Short was keen to share with the Committee the problem of the tax status of CDC. The corporation had been fretting for some time that, while it was not optimally organised to minimise the impact of UK taxation as compared with well established practice by other multinational businesses, it had continuously failed to establish a case for complete tax exemption. As an official development agency it was felt to be inappropriate to reorganise its investment holdings through low tax jurisdictions; indeed Short regarded this line of thinking as ‘an intolerable suggestion’.12 In its place, she told the Committee, a proposal was being investigated to create a new category of development investment institutions, of which CDC would be the first example that would enjoy the same tax

Understanding Public–Private Partnership 237

benefits as companies using offshore holding companies. It was an interesting glimpse of the potential influence of a determined minister with a seat in the Cabinet. CDC submitted a memorandum to the IDC at the end of May which revealed how it wished to be seen by the Committee as it stood on the threshold of the new world of public–private partnership.13 On the development side, CDC effectively left the making of the intellectual case to DFID and went no further than identifying its role to provide risk capital. However it did indicate that one of its main purposes was to develop closer collaboration on development with DFID. The main thrust of the memorandum appears to have been to make the case for CDC’s increased attraction to external investors. There was open acknowledgement of inadequate profitability in the past and of overemphasis on volume growth, and that the organisation actually lacked experience of making equity investments which would require what was described as a change of culture. Attention was drawn to its country experience and to the depth of management in the field – 120 executives in the managed businesses, 100 in the country offices and 50 in the financial intermediaries. The most surprising aspect of the paper was that, despite acknowledgement of the transition phase it was embarking upon, no attempt was made to indicate that years would be required before returns could be achieved that would satisfy investors. But in an implicit acknowledgement that this would be the case, a plea was made for an easement of restrictions on market borrowing prior to the government sell-down to a minority shareholding. Cairns and Reynolds appeared before the Committee on 7 July, after the DFID witnesses. As in the earlier session, the Committee started with questions about the rationale for the partial privatisation route. Cairns was blunt, ‘the option of remaining entirely within Government control is an option with which we would be entirely happy,’ but for a crucial proviso – a loosening of the purse strings of the Treasury to enable CDC to achieve more of its potential.14 Conversely, he also argued that ‘we have never seen a purely privatised CDC as being the correct answer’ because of the special advantage gained from a close relationship with Government. Hence the arrival, in conjunction with DFID, at the third way of public–private partnership. Sadly, the Committee failed to tease out the assumptions behind these interesting statements. As with Short in the morning session, there was no disposition to challenge either the Treasury constraint on borrowing, or the departmental aversion from making budgetary room

238 Reinventing CDC 1994–99

for CDC. Nor was the Committee alert enough to question the continuing relevance of the special advantage from CDC’s close relationship with government. This had been clear enough in the early days of CDC’s involvement with the public sector in developing countries, but was rather less evident as a result of the recent focus on investing in the private sector. Public–private partnership appeared to be offering the seductive proposition that CDC could continue to benefit from the special relationship with government, while escaping from the funding constraint resulting from full public ownership. Cairns quantified this to the Committee as being able to expand at 12–15 per cent a year, as compared with CDC’s present plight of only being able to grow at 8 per cent or less. Whether either of these aims – of special benefits or faster growth – is achievable is still far from clear. The IDC’s concern over whether CDC could retain its old developmental characteristics while trying to achieve sharply higher profitability targets was reflected in its subsequent questioning. CDC conceded that this would entail raising the target rate of return on new investments to 20 per cent from 8 per cent, and the overall return on capital from 8 per cent to 15 per cent or better. Part of this would be achieved by the new emphasis on equity investment. As Cairns put it, ‘we have been taking equity risks and only been receiving a loan type of reward for them’.15 There was also a tendency to be dismissive of the threat to development value from financial pressures for quick results and higher profitability, with the claim of a virtuous connection between maximising both commercial and developmental returns. Plainly, the real world is not always in such a serendipitous configuration. An important point emerged over the temptation, as the Committee saw it, to increase investment in middle income countries as a route to financial success. Cairns pointed out correctly that CDC’s comparative advantage lay precisely with the poorer countries in which it had specialised for so long, whereas elsewhere ‘we become just another set of investors’. However he did not follow through the logic of this line of reasoning, which was for CDC to focus all its investment activity in the poorer countries and not just the proposed 70 per cent; or of the unwisdom of entrenching a simple talismanic number. Having taken evidence from the government and from CDC, the Committee published its report at the beginning of August. It was a trenchant document. Noting that the shared purpose of both the government and CDC was to increase the funding available to the corporation in order that its activities could be expanded, and that the chosen route of bringing in a majority of new investors would require a trans-

Understanding Public–Private Partnership 239

formation of its financial performance, the Committee made clear that its own key concern was the preservation of CDC’s development role. The implicit question was whether these three aims were compatible, as the government seemed to be asserting. The Committee was frankly disbelieving of the assertion ‘that successful equity investment automatically equals good development’,16 but unfortunately did not take the advice which could have led from this correct perception to a more positive formulation of the relationship. Instead, it harked back to a more old fashioned view – typical of CDC’s own early thinking – which saw investment in agriculture and infrastructure as having more developmental value than equity investment in the commercial sectors of the economy. The Committee’s scepticism was strongly reinforced by a piece of American research on the US Agency for International Development’s experience of fostering venture capital investment.17 It was of doubtful relevance, but it helped the Committee to conclude that public– private partnership was unlikely to be commercially viable for some time. It led to the major recommendation that the government should not dispose of shares in CDC (‘establishment of the Public–Private Partnership’) until such time as CDC had completed the cultural transformation of its management, a track record had been established demonstrating the profitability of the new equity portfolio, and private sector interest had been established in the new CDC operating under the new guidelines. The Committee took very much to heart CDC’s observations on the magnitude of the challenge facing the corporation’s management and it absorbed the implication that there was likely to be a funding problem during the transformation period. It went on to recommend that the government should resume net new funding to CDC on a significant scale to enable it to build up its new equity portfolio. Thus the thrust of the report was to recommend delay in the implementation of the restructuring of the ownership of CDC until the corporation was more ready for the change. This was coupled with an understandable anxiety to know much more than was vouchsafed in the hearings about the details of how the new regime would ensure a continued development purpose for CDC. The Committee was concerned that there should be effective arrangements in place to facilitate monitoring of CDC by Parliament, and gave notice that it would continue to take an active interest. The government’s response to the IDC report was published towards the end of October 1998. Over the summer work had progressed on refining the mechanisms for implementing public–private partnership

240 Reinventing CDC 1994–99

and with the drafting of legislation, although it was as yet unclear that a bill would be introduced before the end of the year. Responding to the Committee’s doubts over the commercial viability of its proposals, the government accepted that CDC’s return on capital was not sufficient to attract private investors and that a track record of improving profitability would first need to be established. This carried an important message that there was not going to be a forced sell-off at heavily discounted values, in order to achieve majority ownership by the private sector. It paved the way for acceptance also of the principal recommendation for delayed implementation. In recognition of the impact of the current Asian economic crisis, a further condition was acknowledged by government, that financial markets would also have to be suitable for introducing private capital into CDC. A further important point was made that momentum should be maintained in the restructuring of CDC’s business. Cairns’ plea for enabling legislation had been accepted, although its inclusion in the new parliamentary session had yet to be announced. With regard to increasing the amount of official funding of CDC during the transition period, the government was cautious. It noted the recommendation, and revealed that it had retreated from negative funding of CDC in the current year back to the ‘nil net funding’ regime. It then added, ‘We will further examine the case for additional funding of CDC over the coming years in order to allow it to expand further its equity portfolio.’18 The onus would be on CDC to demonstrate that it could make good use of additional funding over and above its self-generated cash flow. Meanwhile there was progress to report on the elaboration of the framework for the public–private partnership. The Memorandum of Association of the new corporate CDC would set out three aims: investment in developing countries, especially the poorer economies; the pursuit of policies to maximise the creation and long term growth of viable businesses, following ethical best practice; and the achievement of attractive returns for shareholders. The Articles of the company would include a requirement that CDC would have both investment and ethical policy statements designed to achieve its Memorandum objectives, and to implement such policies and to report thereon. It had been realised that it would be unwise – because overly rigid – to set out the details of these policies in the Articles themselves. Instead, after being developed in detailed consultation with DFID, they would be adopted by the new Board. Any subsequent change in the policies would require the consent of a majority of ordinary shareholders and the consent of the government as holder of the Golden Share (the

Understanding Public–Private Partnership 241

qualms of the Office of National Statistics having apparently been overcome). This formulation was important because it not only gave power to the Secretary of State to ensure that CDC did not weaken its developmental commitments, but it also gave protection to private investors that DFID could not make them more onerous, without their consent. A promise was made that the Memorandum and Articles and the two policy documents would be made available to Parliament when legislation was introduced. In only one area had thinking not progressed over the summer of 1998, namely gaining a clearer intellectual understanding of CDC’s distinctive developmental role beyond its support for the growth of sustainable businesses, with concomitant benefits for employment, livelihoods and tax revenues. CDC could also claim to have the capacity to generate powerful externalities (social returns higher than financial returns) by virtue of its focus on doing business in poor countries that have an adequate policy environment. It could claim to have unique knowledge and experience here (especially in Africa) that is scarcely challenged by any other financial institution. Given acceptance of the proposition that the dearth of investment in the private sector is a major constraint on growth in poor countries, and that this shortfall has been exacerbated by market perceptions of risk that are higher than would be warranted by their fundamental policy and resource environment (again, especially in Africa), then the importance of CDC’s demonstration role is evident. With more than 50 years’ experience to call upon, along with its reputation for consistency of commitment and willingness to take the long view, the social value of CDC’s investments far exceeds its private value. The full logic of this argument for generating strong externalities and for CDC’s demonstration effect in reducing risk perceptions to other investors required that it should also earn a return on capital that would satisfy its own shareholders. Such analysis also pointed up the artificiality of requiring that 70 per cent of CDC’s investments be in poorer countries, since externalities would be increased by moving closer to investing 100 per cent there. This was implicitly acknowledged in one of Cairns’ responses to the IDC, although in fact CDC remained wedded to a theory of portfolio dispersal which somewhat contradicted its claimed desire for focus.19

24 Reconciling God and Mammon

The CDC bill was taken in the House of Lords in December 1998 and then introduced into the House of Commons in the following March, with the second reading debate taking place in May. This provided the International Development Committee with an opportunity to hold further hearings in March and to publish a second report ‘to assist the House in exercising informed and detailed scrutiny of this important piece of legislation’.1 As an indication of the drive to complete the legislative process, the bill had been introduced into the House of Lords without the Statement of Business Principles being available for inspection and before CDC’s future tax status had been resolved into text. This was still the case in March. The absence of the Statement of Business Principles drew a tart comment from the IDC.2 On taxation, it had to be content with an assurance that amendments to the bill would be introduced at the committee stage, which did not prevent it from exploring the issues in some detail. DFID and CDC were examined again, particularly with a view to clarifying the intended workings of the control regime. Additionally, the Committee was keen to hear the views of people with a City background. The passage of the bill through the House of Lords, and the further explanations produced to the IDC, made possible a thorough airing of the amended regulatory regime for ensuring the continuation of CDC’s development role. The starting point was that the new company would have an original development purpose in two clauses of its Memorandum of Association. Its governing Articles would require the Directors to adopt an investment policy fulfilling requirements which included a concentration on poorer countries and special attention to sub-Saharan Africa and South Asia, and to adopt a Statement of 242

Reconciling God and Mammon 243

Business Principles. The Special Shareholder would have powers under the Articles to prevent a third party from owning more than 15 per cent of the company, to veto changes relating to the investment policy and business principles articles, and to appoint two directors. The bill required the Crown to hold both the special share and not less than 25 per cent of the ordinary shares and not to dispose of either without first obtaining the consent of both Houses of Parliament. The Investment Policy and Business Principles documents, having been evolved in detailed consultation with DFID as ‘drafts’ were to be adopted by the Board of the new CDC as one of its first acts, while still wholly owned by government. The Investment Policy was to be supported by a contractual Deed of Covenant with the Secretary of State. These mutually reinforcing arrangements not only defined CDC’s development role through its own legal governance structure, but also ensured – through the powers accorded to the government as Special Shareholder – that this role could not be arbitrarily altered by future majority investors in the company. Moreover any future government could not give up its Special Share and sell out from CDC without first obtaining full parliamentary approval. Little wonder that the IDC found little to cavil at in these comprehensive arrangements, which also met the main concerns of Traidcraft – the NGO that had been closely monitoring developments and had submitted evidence. The one grumble, already referred to, was CDC’s failure to finalise the Statement of Business Principles prior to the start of the legislative process, and this was rectified prior to the secondreading debate. The other concern of some substance was the absence of provision for external validation of compliance with the Statement of Business Principles, although CDC subsequently indicated that it might be receptive to such arrangements.3 While being content overall that the new arrangements would ensure CDC’s continuing investment concentration on poorer countries, the Committee remained sceptical whether the new pressure on CDC greatly to improve the profitability of its operations could be satisfactorily reconciled with its development role. It was not convinced that satisfying the God of the development community was compatible with the demands of Mammon in the City, notwithstanding the weight of written and oral evidence that a satisfactory balance was capable of being struck. This was a pity and appears to have been the result of undue attention to the limiting case, where it was clear that maximum commercial returns would not necessarily coincide with maximum development benefit. More fundamentally, the Committee

244 Reinventing CDC 1994–99

had not fully absorbed the presentation made to it on the nature of CDC’s distinctive economic role.4 If CDC was to fulfil its demonstration role to the private sector, CDC must capture for itself the financial returns due to an equity investor and move decisively away from banking transactions. Whereas DFID and CDC went to great lengths to inform the Committee and to share their thinking on the evolution of the new control regime – which was indeed the area of greatest concern to its members – the same could not be said for the changes required to render CDC attractive to investors. The Committee had a much harder time trying to get the measure of how investor credibility was to be established, of how the balance sheet would be restructured, of the future taxation status of CDC, and of what would happen in the transition period. It became evident from the Committee’s proceedings that a number of the issues were still undecided and had not yet been negotiated with CDC. In particular the implications of a possibly prolonged transition period before outside investors could be attracted into CDC emerged only gradually. Indeed the written evidence spelt out how unready CDC was for private investors. A telling comparison was drawn with the introduction of 3i to the market (formerly Investors In Industry), which was able to show a ten year track record of compound annual rates of return in excess of 16 per cent prior to flotation.5 The Committee first directed its attention to the transition period that would be required to demonstrate that CDC could indeed achieve financial returns acceptable to the market. It concluded that a period of four years was likely to be required as a minimum period, if unfavourable disposal terms were to be avoided. This produced a defensive government statement that ‘we will only go to the market when we think CDC is correctly positioned’,6 and that there was no pressure to get at the sale proceeds quickly. A couple of days later, CDC published its 1998 results, which had been devastated by the Asian economic crisis and showed a negative return on capital employed of 3.4 per cent, following heavy provisions. Given that CDC would need to establish a track record for investors, the question was raised whether the balance sheet should be reorganised forthwith into the form in which it would eventually be floated, or whether there would be an intermediate stage. The Committee gained a good grasp on the issues. The amount of equity capital needed to be related to the nature of its investment assets, but it also had an important bearing on perceptions of profitability. In the transition period CDC would benefit if there were continued government privi-

Reconciling God and Mammon 245

leged funding, which would become inappropriate once private investors were involved; but this would confuse the presentation of a track record. It was evident that the government was quite unready to resolve these issues prior to the bill being considered and that there was a leaning towards a two-stage process. But on these issues Parliament was to be left in the dark as it considered the bill.7 Looking at the record, the Committee retained ‘serious questions about the credibility of CDC’s ambitious financial objectives and its plans for achieving them’,8 but it did not recognise a possible major implication. If there was to be a prolonged period before CDC could be brought to a level of profitability sufficient to enable government to sell down to a minority shareholding, this would destroy the stated major reason for embarking on the public–private partnership model in the first place, namely to take CDC out of the aid budget and to give it access to more resources than it presently enjoyed. Another implication was also missed. In the evidence for the first report, much was made of the potential for enhanced collaboration between CDC and DFID.9 A prolonged transition might be expected to enhance these opportunities. However by early 1999 the issue had gone cold and DFID went to some lengths to distance itself from any suggestion that it might be expected or even accused in some way of subsidising CDC’s activities. Perhaps issues of departmental turf had become prominent in the interval. Meanwhile, as already noted, the future taxation status of CDC remained unresolved, and was left for the committee stage of the bill. The IDC made a serious effort to understand the relevant issues.10 CDC was liable to capital gains tax on realisation of investments and, when privatised, investors would be subject to capital gains tax again when trading its shares. It would be unable to escape this ‘double taxation’ because on the one hand the Secretary of State refused to contemplate that CDC should hold investments offshore in a low tax jurisdiction, and on the other hand CDC would be unable to comply with the strict conditions whereby investment trusts were able to escape this treatment. The Committee was informed that the government had decided not to create a new class of development institution for tax purposes, as originally proposed; instead it had decided to create a unique tax status for CDC alone, while the government remained a shareholder. It was acknowledged that this could be criticised, but perhaps not too seriously, since the measure was only designed to bring CDC onto a comparable basis with other international companies for tax purposes.

246 Reinventing CDC 1994–99

The IDC ended its second report with the words ‘we still have grave concerns’. The second reading debate took place on 24 May 1999 and the committee stage of the bill in mid-June. Both Conservative and Labour speakers were keen to claim credit for CDC’s past successes. There was much teasing of the Secretary of State for her conversion to privatisation, which she passionately rebutted: public–private partnership was something quite different and much better. The Conservatives felt that the special tax status was an unnecessary indulgence to left wing dogma, but did not object to the fundamental need to place CDC into a competitive tax position. The bill became law in July and by the end of the year Reynolds had retired. He was succeeded as chief executive by Alan Gillespie who had been a managing director of Goldman Sachs. The Board was reorganised in accordance with the provisions of the Act to consist of two executive directors (chief executive and the finance director) and five non-executive directors, including two representing the government’s shareholding with Cairns remaining as chairman. At the start of the new millennium the new policy statements on investments and business principles were adopted and CDC started a new life as a company wholly owned by the Crown.

25 Facing the Future

It is easily overlooked that there is no inevitability about corporate survival. We live with those that succeed and easily forget the failures. Reflecting on CDC’s half century in the development business suggests that among the qualities for survival are not only an ability to adapt to changing fashions and circumstances, but also the existence of a corporate ethos which embodies a pronounced will to overcome adversity. Looking back over the record one can now see that on four occasions the CDC story might have had a premature ending, but for the vigorous corporate belief in its unique development role. CDC’s poor investment judgement and execution in its first three years, and especially the embarrassing publicity over the Gambia Poultry Scheme, was sheltered initially by the government which had established the corporation. Once the Conservatives were in power in October 1951, it was a perfect candidate to be closed down as a socialist folly, but for the determination of Reith and Rendell to demonstrate that they were capable of surmounting the problems and their commitment to CDC’s aims. Its sibling, the Overseas Food Corporation, which was responsible for the Groundnuts Scheme fiasco, had no such corporate vitality and was shut down. The next danger point was the Colonial Office plan to prevent CDC from doing business in the emergent Commonwealth and to allow it to run down as Britain’s colonial responsibilities came to an end. Fading away with dignity, like the colonial service, was not Reith’s style, or that of his successor Howick. We have seen how in 1959 and 1960 CDC positioned itself with Devcos in Nigeria, smallholders in Kenya and the rescue of the building society movement there in order to demonstrate that the corporation had an important on-going agenda. The reward came in 1963 247

248 Reinventing CDC 1994–99

with the change of name and extension of the area of operations to most of the Commonwealth. While CDC proceeded increasingly to thrive, a number of competing institutions failed to devise a survival strategy for the testing environment of economic nationalism that was sweeping the developing world. The most public casualty was CDFC, which has been recounted. The development corporations of Barclays Bank and Standard Chartered Bank never built up sufficient reputation to become successful providers of long term development finance and their mandates were withdrawn by their parent institutions. Another brave attempt was a consortium venture capital company for Africa, SIFIDA, which sustained a lonely struggle in the 1970s and 1980s to make the case for private sector investment in Africa, until its backers progressively withdrew support. Having twice avoided closure, the next threat arose from CDC’s very success during the following twenty years in becoming an instrument of the aid programme. Towards the end of Meinertzhagen’s term as general manager, CDC had become closely integrated with the aid department, working with the public sector in developing countries. There was a discernible convergence of objectives and appraisal methodology, with a move for ODA officials to work in CDC, perhaps leading to effective control of the corporation. But it was arrested, somewhat abrasively, by Eccles’ iron determination to define a more commercial and singular role for CDC, albeit still as a public corporation. The changing intellectual climate on development, with its growing recognition of the importance of fostering the role of the private sector, was supportive of this switch in emphasis. In this sense, CDC was saved not so much from a premature ending as from absorption into the administration of bilateral aid. Finally, in the mid-1990s there was the political threat to CDC as one of the last public corporations still evading privatisation. Despite the rough treatment it received from the Treasury over access to external funding (to the cynically minded a deliberate tactic), and from ODA over aid programme funding, CDC adhered obstinately to the view that it should properly be a public corporation. There was clear recognition that outright sale, although achievable at a cost, would result in a complete alteration in its investment policies and to the loss of much of its development value. The danger peaked in 1993 and was only negotiated with the help of timely consultancy reports.

Facing the Future 249

CDC’s navigation of these hazards involved three significant transformations in its business over the half century. The first related to its changing role in developing countries. In 1948 CDC was a blatant instrument of national self-interest to help solve the shortages of food and raw materials after the war, by developing the productive potential of the colonies. In order to allay anxieties on the part of colonial governors and the hostility of emergent nationalism, this role was presented as being in the interests also of the colonies. But there was no mistaking the motivating drive. Having survived this naïve induction to some of the realities of overseas development, CDC adopted a policy of working very closely with, and taking most of its projects from, colonial governments. This approach led all too easily into the postindependence era where economic development was seen predominantly to flow from government initiatives. Thus a large part of CDC’s investment activity came to be associated with the public sector and to working closely with the aid programme in the 1960s and 1970s. The Eccles Report of 1982 sought to reposition CDC as an investor in the private sector in developing countries, although the full developmental rationale for this change of emphasis took some time to emerge. For a decade the policy was put into effect to a large extent through development banking transactions, rather than as an equity investor, but the latter became progressively the dominant mode of investment. CDC now sees itself as a private equity fund with a special geographical focus on poor countries. The second transformation was essentially a process of evolving a management culture inside CDC that was independent of Whitehall and the public service. Although CDC was established on the basis that the Board was to be the sole judge of the commercial justification of an investment, there was from the beginning a requirement to provide the Colonial Office with project information and to seek individual capital sanction. The early investment mistakes provided plenty of pretexts for interference. We have charted the struggle to establish a reputation for professional competence, without second-guessing from ODA, which was reflected in a progressive acceptance that CDC should comply with guidelines and targets, rather than seek individual approvals for its investments. Nevertheless, the capital sanction procedure remained in place, and the power to intervene was used, as we have seen, to rein back the rate of investment in 1981 and to hold back politically sensitive commitments in Sri Lanka and Malawi in 1992. The sequence of quinquennial reviews, the annual planning framework

250 Reinventing CDC 1994–99

and the sharing with ODA of the corporate plans, all meant that CDC’s management had to conduct its business within these external disciplines. On the ground the corporation developed admired capabilities, especially in tropical agriculture with smallholders and in sustaining relationships with the governments of developing countries in increasingly trying conditions. It became best known for its wholly owned and managed projects, even though the greater part of its investment portfolio consisted of long-term loans. CDC employees were never designated as public servants and the Board’s jealous defence of its exclusive right to appoint the senior executives helped to create a distinctive cadre and loyalty. The secondment of staff to and from Whitehall has never been a feature of CDC. The tension over compliance with government pay policy in 1993 served to underline the extent to which CDC was determined to manage its own affairs. Although it remains for the present a wholly government-owned company, following the 1999 Act, the management has been freed from the whole panoply of reporting to DFID and its periodic reviews, and now has only a shareholding relationship to negotiate. Its effective emancipation from Whitehall is complete. Meanwhile, it grapples with a further reorientation of its management culture to leave behind the remaining traces of its development banking ethos in favour of an equity culture that is more typical of venture capital and private equity funds. The third strand of transformation has been financial. CDC started life with a huge pot of funds to invest, which was essentially available on demand. It argued continually over the terms on which the money could be drawn, but its availability was not in question once Reith and Rendell had generated confidence that the initial losses would not be repeated. This lasted for seventeen years down to 1965, when the government’s financial problems resulted in the introduction of an annual drawing limit against its overall borrowing entitlement. This put CDC into a condition of financial dependency that was the source of periodic strain, on account of the inability of the public finance system to be either predictable or reliable. It created severe management problems for an organisation whose business involved long term contractual commitments, with substantial lead times between investment approvals and disbursements. There were moments of tension in the 1970s, 80s and 90s, but their real impact on the business became increasingly marginal, due to the transformation that was taking place in CDC’s self-generated cash flow. The switch to concessional funding in 1971 and the cumulative effect of a growing balance sheet and the build-up of reserves had a pronounced beneficial effect on annual cash

Facing the Future 251

flow. In 1976 cash generation amounted to £20 million, of which £16 million, or 84 per cent was accounted for by net funding from the aid budget. Ten years later, net official funding of £36 million was only 49 per cent of total cash generated of £74 million. By 1996 cash generated amounted to £313 million, after net repayment of £5 million to the aid budget. The rhetoric of the discourse with ODA often belied the truth that CDC was capable of self-sustaining growth without any net contribution from the aid budget by the early 1990s. However it was also true that CDC had the capability to invest at a faster rate than its own cash generation allowed while loan transactions remained an important part of its business. It was this sense of constrained potential that led eventually to the decision on public private partnership, in order to provide access to private capital and to faster growth. It remains to be seen whether this is required in its new capacity as a private equity investor. Throughout its history the term ‘partnership’ has been evocative within CDC, so that the new minting of ‘public–private partnership’ to describe the intended introduction of private capital into CDC’s balance sheet reverberates down time’s corridors. Reference has already been made to Arthur Gaitskell whose membership of the Board lasted for twenty years from 1957. He held passionate views on partnership in development and these were very much part of the intellectual furniture of the corporation. There were two strands to his notions of partnership, which derived from his career with the Gezira cotton scheme in the Sudan. One was the linking of peasant cultivators with external capital to create infrastructure and processing facilities for bringing the resultant output to world markets, which was tested by CDC in many variations with different crops and localities. It was not quite the universal panacea that perhaps he had hoped, but it became an acknowledged technique for introducing commercial production methods in association with peasant cultivators, and CDC was its most famous exponent. The other strand was the notion of partnership between foreign capital and the governments of developing countries, which was a brave attempt to strike a bargain with the anti-capitalist nationalism that was such a feature of the end of the colonial period. CDC sought to establish its bona fides in the emergent Commonwealth with a number of partnership structures, most notably in the family of Devcos, the Caribbean power companies and in its agricultural projects in Swaziland. They undoubtedly served their purpose in improving CDC’s standing with governments and in providing access to some interesting transactions, although disadvantages emerged over time from such close relationships.

252 Reinventing CDC 1994–99

CDC was under pressure to promote another, low key, concept of partnership in the 1980s in response to the government’s desire that the aid programme should reflect a more businesslike relationship with developing countries. It led CDC to monitor the extent to which the projects it invested in led to export orders for British industry, although it was never required to make British purchases a condition of its investments. It was also under pressure to co-invest with British firms, while not displacing them in projects. CDC never fitted comfortably into the UK plc model, although there were some good partnership examples, such as with Courtaulds in Usutu Pulp in Swaziland and with Rugby Portland Cement in Trinidad Cement. Once CDC was actively searching for private sector partners, these were more likely to be found amongst local entrepreneurs; otherwise it was happy to collaborate with investors on a global basis to find the strongest names in power generation, cement and such like. And so to the latest manifestation of partnership, where CDC is being reconstituted so as to embody a fruitful meeting point between public development policy towards poor countries and private equity investors. Fortunately, there appears to be no undue pressure to force the pace and a transition period has been conceded, during which CDC will be given time to prove the potential of such a partnership. This will entail responding successfully to a triple challenge from the government, from the City and from developing countries. The public policy requirement is that CDC should continue to fulfil its developmental role in support of British aid policy, without being subject to policy control from DFID. As we have seen, this is to be enforced by means of the entrenched investment and ethical policies that cannot be modified without the approval of government as owner of the Golden Share. As evidence of its continuing support for CDC, the government intends to retain a permanent minority shareholding of not less than 25 per cent, and this can only be overturned with the approval of both houses of Parliament. The public justification for preparing CDC for partial privatisation in this way, both by the Prime Minister and by the Secretary of State, was that CDC would thereby gain access to additional resources and would be enabled to realise its capacity to play a larger role in development. However the reality since 1997 has been different. The strain of reorganising CDC into an institution that invests only in equity – in order to improve its financial returns – has stopped growth in its tracks for the duration, while the obstacles to external borrowing and additional support from the aid budget remain in place. However this is being mitigated to some extent

Facing the Future 253

by CDC’s efforts to expand its role in managing funds for co-investors through regional and sectoral special purpose funds. The requirement that CDC place the majority of its investments in defined poor countries, while justifiable on developmental grounds, is nevertheless still a major constraint imposed by the public sector partner. It raises the question whether there is a countervailing benefit that can be expected to flow to CDC from a permanent government shareholding. One answer, hard to quantify, lies in the reputational advantage to CDC in developing countries of a perceived continuing British government shareholding, including the retention of local tax benefits. More importantly perhaps, the prospect was raised in the first International Development Committee hearings of a real partnership with the bilateral aid programme, even though in the 30 years since CDC has been presented as part of the aid programme examples of aid support for CDC projects have been rare. Under the proposed new dispensation of joint ownership with private investors the hazard of providing unwarranted subsidies to shareholders will increase the difficulties of practical collaboration. The most promising area will be portfolio transactions: managing special funds on behalf of DFID, or the sale by CDC to DFID of government debt or project assets which CDC continues to manage. In the absence of significant evidence that DFID as a continuing minority shareholder can make a contribution to CDC’s success, pressure is likely to develop for disposal of the entire shareholding since, even within its investment constraints, a wholly private CDC is likely to be better perceived by investors. The City challenge for CDC is to establish a credible track record demonstrating acceptable rates of return on capital. This will not be easy. Until the 1990s CDC adhered strongly to the view that its statutory obligation was only to break even. It ceded to its borrowers and partners much of the financial benefit it obtained from its concessional funding, since this was seen to be part of the development benefit it provided to projects. Moreover, its balance sheet was not structured on commercial lines, which made conventional comparisons difficult. This means that its historical record is of little help as a guide to potential investors. As from 2000 CDC has a corporate balance sheet, but this is still of little help because no decisions had been made on the treatment of the interest free government debt. Nevertheless there is now a major effort to replace loan assets with equity and quasi-equity assets, to dispose of sub-standard investments, and generally to enhance profit generation. There seems a good prospect that within five years the portfolio will consist almost entirely of equity holdings and, providing

254 Reinventing CDC 1994–99

they have been well selected, the earning potential of the business will emerge. Any pressure to introduce private capital before the transformation is completed is only likely to be achievable at the cost of a substantial discount to book values. The prospect therefore is for a lengthy delay before the public private partnership becomes a reality and that CDC will remain a government-owned company while its business is reorganised. There is, indeed, a serious argument that it would be advantageous for CDC to remain at least as an unquoted investment fund, since its main competitors amongst emerging market equity funds – especially in Latin America and East Asia – are private funds. Although this might appear to fly in the face of the declared intention of creating a partnership between government and private investors, the intriguing possibility is already emerging that this aim could be achieved by an alternative route. Instead of introducing private capital at the parent company level, CDC could develop partnerships ‘downstream’ through its current strategy of creating special purpose funds with co-investors, under its own management. How will these new partnership structures affect CDC’s standing in the developing world? CDC’s operations have been anchored in the Commonwealth for historic reasons, although they have also been reaching out to a wider circle of countries for the past thirty years. When the poor country focus of aid policy was first articulated, the Commonwealth dimension was not emphasised, but since 1980 it has come back into prominence with a specific Commonwealth target for investments in place between 1986 and 1993. Such a history of involvement in these emerging economies, lasting through and beyond the turbulence of decolonisation and the economic experiments of the 1970s, has established a precious heritage of commitment through adversity and accumulation of on-the-ground knowledge. This reputation has been a valuable source of new business and the experience has been invaluable in enabling it to assess country risks better. The more stringent focus on stimulating private sector development will no doubt be welcomed in general terms, but its implementation will take some getting used to, especially in countries where CDC has been established for a long time. Here CDC will be something of a prisoner of its past because of the legacy of development banking transactions on favourable terms, and of its managed businesses. Many long established counter-parties will have to adjust to a more aggressive partner. These are transitional problems, but they suggest that the narrowing of CDC’s developmental focus to making successful equity investments in poor countries, coupled with its requirement to be a

Facing the Future 255

demonstration partner in terms of corporate governance and ethical standards, will not be the easiest of challenges to meet. In effect, CDC will be saying to its designated country partners: ‘we propose to demonstrate that we can invest in your businesses at a rate of return which impresses global investors and to insist that these businesses follow the highest international standards of corporate behaviour. In so doing, we will help to attract more investment and will contribute to faster economic growth.’ The language might be different, but there is perhaps an underlying unity with Gaitskell’s ideas of partnership nearly 50 years ago. Both approaches are trying to foster economic growth through commercial development and using foreign capital to supplement domestic savings. Both are seeking to demonstrate that this can be done without exploitation – in the one case by shared ownership involving governments, and in the other by following the highest standards of corporate conduct. CDC will need to deploy all its accumulated understanding of diverse societies in the developing world to ensure that its more bracing contemporary message is well accepted and to resolve long-standing tensions of successfully combining development and business.

Epilogue

The October 1997 announcement of the partial privatisation of CDC was designed to enable the government to escape from a funding dilemma – the unwillingness of ODA and its successor DFID to find room any longer for CDC within the aid programme, and the unwillingness of the Treasury to allow another exception to the doctrine that public corporations are banned from access to the capital market. The plan was presented as enabling CDC to operate on a larger scale than heretofore, while still being constrained to invest in poor countries and with a continuing minority government shareholding, hence the vaunted public–private partnership. During the succeeding four years a number of flaws have been exposed in the government’s model and it is now possible to propose answers to three critical questions: What are the problems with public–private partnership as applied to CDC? What could have been done to avoid them? What might still be done to mitigate them?

What are the problems with public–private partnership? The most striking consequence of the privatisation announcement is that the promised extra resources for CDC have not materialised. Far from being enabled to operate on a larger scale in its designated countries, CDC has been set on a track where it has difficulty in deploying its natural cash flow and its balance sheet has shrunk. The reason for this unwelcome outcome is not hard to discover. CDC is struggling to raise its return on capital to levels comparable with private equity funds with which it now has to be compared, in order to have a chance of attracting institutional investors in its equity. This has led it to divest from straight lending and to set about liquidating its loan 256

Epilogue 257

portfolio. It has resulted in a reduction of more than a third in its staff and in a sharp reduction in its representation in small countries. It is leading to a cull of its investment portfolio and, in particular, to the controversial decision to withdraw from the agricultural sector and to seek the disposal of most of its investments there. All this has occurred prior to the introduction of private sector investors and while CDC is still wholly owned by a ministry that is dedicated to poverty alleviation and which attaches high priority to rural development strategies. These results have flowed from a strategic error over the way in which private capital is to be introduced into CDC in order to realise the public–private partnership. The mistake was to conceptualise private sector involvement in terms of the ownership of CDC, since this necessarily requires that the financial performance of the whole business be raised to a level that is attractive to institutional investors. This has been taken to imply that CDC must offer earnings returns of 20 per cent or better, especially in view of the perceived risks of its geographical remit and of the alternative investment opportunities with other private equity funds.

What could have been done instead? The public–private partnership concept would have been better expressed in other ways than selling a stake in the parent company, if the government’s aim truly was to introduce a flow of private capital into CDC’s operations. This could have been achieved without legislation in the first place by relaxing the obstacles to CDC’s access to debt markets. This issue has been analysed extensively in earlier chapters. The old arguments concerning the Public Sector Borrowing Requirement and control of inflation were always weak as applied to CDC, which only invests overseas, and they no longer have any force. Secondly, CDC could have been encouraged to develop further its existing fund management ventures, whereby external investors placed capital in country or sector funds managed by CDC. The outstanding example is the Commonwealth Private Investment Initiative. Financial returns attractive to private sector investors can be targeted in such funds without imposing the same standard on the whole of CDC. In its concern to entrench the development role of CDC beyond interference by its future majority private sector owners, the government opted for an overly simplistic framework. As has become apparent already, this has not prevented CDC from moving out of rural development and small countries. In my view the developmental role of CDC

258 The Development Business

Commonwealth Private Investment Initiative In 1995 CDC was requested to advise on a failing initiative to set up a Commonwealth privatisation fund. It proposed that the mandate be altered to that of investing in the private sector in Commonwealth emerging markets and that there should be a family of regional funds starting with Africa. Commonwealth Finance Ministers endorsed the proposed Commonwealth Private Investment Initiative (CPII), commencing with an Africa fund. CDC undertook to manage the fund and to invest $25 million in it. A further $39 million was raised from public investment institutions in Commonwealth countries and Comafin was formally launched by President Mandela in 1996. CDC’s experience of managing venture capital can be traced back to the Devcos it launched in the 1960s, although they were mainly term lending institutions. Its first true venture capital fund was established in Papua New Guinea in 1987, followed by one in Ghana five years later. A Financial Markets Division was set up in 1994 and the family of country venture capital funds quickly rose to 13 with $200 million to invest, of which CDC contributed one third. This experience was vital to the credibility of Comafin, since it was agreed that CDC would share investment propositions with it and also be prepared to co-invest alongside it. A $17 million fund for the South Pacific, the Kula Fund, was launched in 1997, followed by a $108 million South Asia Fund at the end of that year. The family of Commonwealth funds was completed by a Caribbean fund, the $20 million Tiona Fund in 1998. Altogether $209 million was raised for the CPII, of which $85 million or 40 per cent was contributed by CDC. The CPII is a demonstration that CDC’s reputation as an experienced investor in the emergent markets of the Commonwealth can be used to mobilise additional capital for investment in private sector enterprises there.

would have been better defined and monitored through a Development Regulator at arms length from DFID, while still mandated by Parliament to interpret policy objectives and insights to CDC. The importance of rural development and agriculture in small poor countries would have been more successfully interpreted under such a regime. A Development

Epilogue 259

Regulator would be an appropriate mechanism for re-negotiating aspects of CDC’s investment policy and its percentage commitment to investing in poor countries, which are likely to require adjustment over time.

What might still be done? It would be unrealistic to expect the present government to legislate to introduce a Development Regulator. But if it is prepared to recognise the undesirable consequences of the reorganisation of CDC that have emerged (alongside some welcome improvements in its operations), a policy decision could halt the planned disposal of a majority shareholding to private investors. This would remove the financial imperatives that are currently distorting CDC’s operations as a development institution. It would then be possible to achieve the desired partnership with the private sector by relaxing the Treasury ban on commercial borrowing and by encouraging CDC to bring in co-investors to managed private equity funds with appropriate target rates of return. Such a decision would also remove the constraint that apparently exists on DFID to make funds available to CDC from its growing aid budget and to derive benefit from CDC’s overseas management experience, without fear of conflicts of interest. DFID could then re-assert the priority of agricultural development and the rural sector by setting up an Agricultural Development Fund financed from the aid budget but managed by CDC, and where CDC could also co-invest on individual projects. As we have already noted, there were high hopes at the time of the first hearings of the International Development Committee in 1998 that public–private partnership would lead to closer collaboration between DFID and CDC, but this was allowed to fade away. It would be in the public interest, and hence a proper matter for ministerial leadership, to overcome parochial obstacles to such collaboration. This is the kind of issue that a Development Regulator would have been well placed to monitor on behalf of Parliament. CDC’s role as a demonstration investor in poor countries with a perceived high level of investment risk will undoubtedly be enhanced by the current efforts to raise its level of financial performance and to take a more proactive role as an equity investor. However it is not necessary that this should apply to all of its activities, since there are important areas of developmental investment that are not necessarily or immediately of interest to foreign investors. The template that is being imposed on CDC in preparation for private investors to take a majority stake in the company is destroying a distinctive element of its

260 The Development Business

hard-won reputation in the developing world. CDC has had a unique experience of agricultural investment and management in the tropics, both with smallholders and on an estate scale of operation. The importance of bringing in new techniques and crops and of raising income levels in the rural areas can hardly be overstressed. It should be a continuing strand of British aid policy towards poor countries to retain this agency capability, rather than to permit its dismemberment as an unintended consequence of seeking to involve private capital in CDC’s ownership. It is not too late to reformulate the policy framework.

Appendix 1: Principal Reports Commonwealth Development Corporation: Annual Report and Accounts, 1948–99 Report on the Gambia Egg Scheme. HMSO 8560, 1952 Report of the Joint Working Party of the Commonwealth Development Corporation, Colonial Office and Treasury. CO 1955 Report of the Committee of Enquiry into the Financial Structure of the Commonwealth Development Corporation. HMSO 786, 1959 Commonwealth Development Corporation Financial Arrangements: Report of Working Party, 1967 Report of the Select Committee on Overseas Aid. HMSO 299, 1971. Minutes of Evidence by CDC, 26 January 1970 HMSO 111–I, and 15 April 1970 HMSO 98–viii Report of the CDC/ODM Working Party 1975 Report of the CDC/ODM Review, 1977 Review of the Commonwealth Development Corporation, ODA, 1980 Review of Organisation, Structure and Methods of Operation (Eccles Report) CDC, 1982 The Work of the Commonwealth Development Corporation, Fourth Report of the Foreign Affairs Committee, Session 1981–82, HMSO 1982 Review of the Commonwealth Development Corporation, ODA 1987 ODA Sponsorship of the Commonwealth Development Corporation, Report of Controller & Auditor General, Session 1988–89. HC 275, 1989 Report of the Financial Arrangements Working Group, ODA 1990 Monopolies and Mergers Commission: A Report On The Efficiency And Cost Of, And The Services Provided By, The Commonwealth Development Corporation. HMSO Cm1983, 1992. Review of the Commonwealth Development Corporation, ODA 1993 Review of the Status of Crown Agents and Commonwealth Development Corporation, Coopers & Lybrand, 1993 Financial Consequences of Recent Government Decisions, SG Warburg, 1993 CDC Capital Reserves and Structure: Report of Working Group. ODA 1997 International Development Committee: The Future of the Commonwealth Corporation. Stationary Office 936, 1998

261

262 Appendix 1 International Development Committee: The Provisions of the Commonwealth Development Corporation Bill (Lords). Stationary Office 212, 1999 Re-inventing the Commonwealth Development Corporation under Public Private Partnership, Sir Michael McWilliam. Centre for the Study of Financial Innovation, 2000 The History of the Commonwealth Development Corporation 1948–72, Sir William Rendell. Heineman 1976

Appendix 2: CDC Leaders

Chief Executives

Chairmen

1948

Trefgarne – de facto

1950

Reith – de facto

Lord Trefgarne Feb. 48 to Oct. 50 Lord Reith Nov. 50 to Mar. 59

1953

W. Rendell (Sir William 67) Oct. 53 to Jan. 73

1959

Sir Nutcombe Hume Apr. 59 to Nov. 60 Lord Howick Dec. 60 to Jun. 72 Sir Eric Griffiths-Jones July. 72 to Feb. 79

1960 1972 1973

P. Meinertzagen, Sir Peter ’80 Feb. 73 to Mar. 85

1979

Lord Grey Feb. 79 to June 80 Lord Kindersley July 80 to June 89

1980 1985

J.D. Eccles Apr. 85 to Apr. 94

1989 1994

Sir Peter Leslie July 89 to May 95 Dr R. Reynolds May 94–Dec 99

1995 1999

Lord Cairns June 95– A. Gillespie Dec. 99–

Notes: a. Trefgarne was de facto chief executive, as was Reith until Rendell’s appointment. b. Rendell and his successors were entitled General Manager until the designation Chief Executive was introduced in 1990. c. Trefgarne was chairman designate from July 1947, until the enabling Act was passed. d. Nutcombe Hume and Lord Grey were both Deputy Chairmen who filled a gap: following Reith’s retirement and Howick’s assumption; and following Griffiths-Jones’ death in office and Kindersley’s appointment.

263

Appendix 3: Ministers Responsible for CDC 1948–98 Departmental title

Ministerial title

Name

Colonial Office

Secretary of State for the Colonies “ “ “ “ “ “ “ Minister of Overseas Development “ “ “ “ Minister for Overseas Development Minister of Overseas Development “ “ “ Minister for Overseas Development “ “ “ Secretary of State for International Development

A. Creech Jones Oct. 1946–Feb. 1950

“ “ “ “ “ “ “ Ministry of Overseas Development “ “ “ “ Overseas Development Administration Ministry of Overseas Development “ “ “ Overseas Development Administration “ “ “ Department for International Development

Period of office

J. Griffiths O. Lyttelton A. Lennox-Boyd I. Macleod R. Maudling D. Sandys B. Castle

Mar. 1950–Oct. 1951 Oct. 1951–July 1954 July 1954–Oct. 1959 Oct. 1959–Oct. 1961 Oct. 1961–July 1962 July 1962–Oct. 1964 Oct. 1964–Dec. 1965

A. Greenwood A. Bottomley R. Prentice J. Hart R. Wood

Dec. 1965–Aug. 1966 Aug. 1966–Aug. 1967 Aug. 1967–Oct. 1969 Oct. 1969–June 1970 Nov. 1970–March 1974

J. Hart

March 1974–June 1975

R. Prentice F. Judd J. Hart N. Marten

June 1975–Dec. 1976 Dec. 1976–Feb.1977 Feb. 1977–May 1979 May 1979–Jan. 1983

T. Raison C. Patten L. Chalker C. Short

Jan. 1983–1986 1986–1989 1989–May1997 May 1997–

264

Appendix 4: CDC Profile 1951–97

1951

1961

1971

1981

1991

1997

Number of Projects

53

101

210

233

310

405

Number of Managed Projects

37

33

51

42

26

32

Proportion of Projects with Equity

89%

63%

55%

46%

49%

56%

Equity % of Portfolio

58%

31%

18%

10%

19%

25%

RNR % of Portfolio

47%

37%

19%

42%

46%

33%

Number of Countries

23

26

37

47

50

54

Commonwealth % of Countries

100%

100%

95%

77%

78%

70%

Number of Overseas Offices

5

6

12

16

22

27

Notes 1. Managed projects have had a high profile from the earliest days, but their relative significance has declined markedly since the 1970s. 2. The proportion of projects in which there is an element of equity investment has hovered around 50 per cent for thirty years, whereas the weighting of equity in the portfolio only began to rise significantly in the 1990s. 3. CDC has been a significant investor in renewable natural resources projects throughout its history. 4. The investment portfolio has been characterised by wide geographical dispersal since the earliest days, supported by a regional office network.

265

Appendix 5: CDC Financial Highlights 1951–97 1951

1961

1971

1981

1991

1997

Operating Surplus

£’m (1)

£’m 4

£’m 10

£’m 36

£’m 70

£’m 133

Costs % of Investments

0.5%

0.4%

0.8%

1.9%

1.6%

1.6%

Pretax Surplus

(3)

3

9

31

66

85

Return on Capital Employed

–

3.8%

6.2%

8.2%

7.5%

6.4%

Internal Cash Flow

–

5

11

50

132

254

Net Government Loans

10

19

14

30

47

(10)

Total Investments

19

81

138

410

1,037

1562

Loan Investments

8

56

113

368

838

1172

11

25

25

42

199

390

2

2

6

44

207

249

Equity Investments Provisions Held Reserves

(4)

–

1

49

217

564

Total Government Loans

21

78

133

313

658

755

Capital Employed

17

80

145

377

878

1336

266

Notes 1

Planning for a Better World

1 HMSO, Cmd 6713, November 1945. 2 ‘Labour Achievements in the Colonies’. p. 15, in The Way Forward, Fabian Colonial Bureau 1950. This view was by no means unanimous, even in socialist circles. Rita Hinden represented a robust line of dissent from the prevailing optimism that bold programmes of development to solve problems of scarcity in Britain were necessarily in the best interest of the colonies. Cf Common Sense in Colonial Development, Fabian Colonial Bureau, 1949. 3 An elegant piece on the Caine memorandum – on the occasion of its silver jubilee – was published in the CDC Magazine, no. 2 of 1993, written by Professor Mike Faber, CDC Board member and Dr Barbara Ingham. The full background to the creation of CDC is recounted in ch. 6 of D. J. Morgan’s Official History of Colonial Development vol. II, Macmillan 1980. The context of the Caine memorandum is given in vol. I, p. 183. 4 CO/852/867/1, CEDC (47)7. 5 HC Debates vol. 439, c439, 25 June 1947. 6 The groundnut project had been initiated by Unilever and then adopted by the government. It proved to be a spectacular failure. Cf the analysis by S. H. Frankel in his The Economic Impact on Underdeveloped Societies, Blackwell 1953. In the public mind for a generation CDC was frequently assumed to have been responsible for the groundnut scheme. 7 Quoted by Morgan, p. 322 from Treasury file IF 239/638/01 Part A p. 29. 8 A copy of the speech and record of the discussion is in CDC archives. 9 HC Debates vol. 443, c2016, 6 November 1947. 10 HC Debates vol. 446, c133, 20 January 1948. 11 Conference of African Governors 1947, Paper 19. 12 Minute 18 of the debate by the African Governors on Paper 19. 13 Quoted by Morgan, p. 334. 14 Address by Sir Stafford Cripps, Minister for Economic Affairs, Cabinet Office Press Release, 12 November 1947. 15 Morgan, p. 325. 16 Secretary of State despatch to Governors, 17 December 1947. 17 Caine to Trefgarne, 16 December 1947.

2

Tropical Allsorts: A False Start

1 Morgan, p. 325. 2 Quoted by Morgan p. 326 from memorandum of 17 July 1947 from Secretary of State to Prime Minister on File 18706/9/71 Ec.General. 3 The debate is reviewed in Dr M. Cowan’s Early Years of the CDC: British State Enterprise During Late Colonialism, African Affairs, January 1984. 267

268 Notes 4 BP 37/48 of 1 July 1948, Colonial Office to CDC of 21 June 1948. 5 Trefgarne to Secretary of State, 6 July 1948, tabled to Board of 15 July 1948. 6 BP 43/48A of 30 July 1948, containing Secretary of State to Chairman of 15 July 1948. 7 BP 43/48B of 30 July 1948, containing Chairman to Secretary of State of 20 July 1948. 8 BP 18/48 of 1 April 1948 Statement of Projects for the CDC submitted by Central African Territories, Sir Miles Thomas. 9 Board Minutes, 17 June 1948. 10 BP 32/48 of 17 June 1948 Mechanised Agriculture in the Gold Coast; BP 49/48 of 4 August 1948 Pilot Project for the Production of Groundnuts in Nigeria. 11 BP 10/51 of 1 February 1951. 12 BP 14/48 of 2 December 1948. 13 Board Minutes 6 January 1949. 14 BP 23/48 of 20 May 1948 and BP 28/48 of 3 June. 15 BP 59A/48 of 27 June 1948, Trefgarne to Creech Jones. 16 BP 59B/48 of 27 June 1948, Creech Jones to Trefgarne. 17 By December 1949 250 proposals had been rejected or withdrawn, 118 were still under active consideration (with 52 at a late stage of investigation and negotiation) and 28 had been approved. Annual Report for 1949. 18 E.C. Tansley (later Sir Eric), member of the Board to February 1951. His memorandum was tabled to the Board on 6 July 1950. In terms of his definition, this meant a portfolio of 28 operational projects and 51 projects that had been accepted in principle; however this proved still to be too heavy a load. 19 The history of the Gambia Poultry Farm is recounted in staccato, Reithian detail in the annual report for 1950, contrasting dramatically with the narrative of the two previous annual reports signed by Trefgarne. See also Report on the Gambia Egg Scheme HMSO Cmd 8560, May 1952. Interestingly, Rendell barely mentions the episode in his History, just noting that Gambia was ‘the source of CDC’s greatest disaster in the early days.’ Op. cit. p. 75. 20 Cmd 8560 para 42. 21 HC Debates vol. 467, c 2839, 29 July 1949. 22 HC Debates vol. 478, c 2312, 19 October 1950. 23 Trefgarne to J. Griffiths, 23 August 1950. 24 In the course of a wide-ranging conversation between Reith and John Dugdale, Minister of State at the Colonial Office, on 24 November 1950, minuted by Reith: ‘He said that Mr Attlee, on telling him to go to his present job, mentioned particularly that he was unhappy about the progress made by CDC.’ 25 The Observer, 19 November 1950, quoted by McIntyre in The Expense of Glory – A Life of Lord Reith, Harper Collins 1993, p. 303. 26 BP 30A/51 of 9 March 1951, para 13. 27 Ibid para 2. 28 BP 22/51 of 15 February 1951. 29 Contained in BP 22/51. 30 Reith to Griffiths, 9 March 1951, contained in BP 30C/51. 31 Reith to Griffiths, 12 March 1951. 32 Note dated 29 March 1951, contained in BP 30E/51. 33 Aide mémoire, 3 April 1951, contained in BP 30F/51.

Notes 269 34 35 36 37

HC Debates vol. 485, c1317, 13 March 1951. Cmd 8560. HL Debates vo1. 171, c229, 11 April 1951 and vol. 172, c67, 13 June 1951. Minute dated 29 March 1951. Reith was concerned at attacks on board members and Dugdale was challenged: ‘had he not realised that he might be faced with resignations if this sort of thing went on?’ 38 Aide mémoire, 4 July 1951. 39 HL Debates vol. 172, c38, 13 June 1951. 40 HC Debates vol. 488, c148, 29 May 1951.

3

Stemming the Losses

1 Rendell’s discussion of these issues is authoritative, especially ch. 3. He became, of course, the principal beneficiary of Reith’s scheme and one does not find in his History any reflection on its potential flaws. 2 They included the Bahamas agricultural undertaking, Gambia River Farms, West African Fisheries, Swaziland Irrigation Scheme. 3 BP 111/51 of 8 November 1951, ‘Head Office Organisation’. 4 Reith to Sir W. Hutton, 6 June 1954. 5 He retained the role of financial controller for several years and added that of head of administration in 1956, as originally recommended in the Peat Marwick report. 6 ‘Gambia is on my conscience and will not come off it unless and until CDC can do something in that country to begin to eliminate the ghastly memories of its misdeeds,’ Reith to Governor of Gambia, 15 May 1956. The comment still has force today. 7 Progress Report, July 1961. In his History, Rendell addressed the charge that the new management lacked incentive to rescue many projects started by the Trefgarne regime and argued (p. 36): ‘No one in Hill Street was in doubt that CDC’s credibility as an operational organisation was at stake and any wholesale policy of abandonment would certainly have destroyed it forever. …It must also be remembered that there were still several members of the Board who had served under Lord Trefgarne and were not lightly satisfied that projects approved under the former regime had within two or three years no future but the scrap heap.’ 8 When CDC was trying to make up its mind what to do on the Vipya Plateau, Laurence van der Post was working for CDC and wrote a survey report recommending animal husbandry; however CDC favoured a forestry trial. His experience on the survey provided the background for his famous Venture to the Interior.

4

Adjusting the Mandate

1 Annual Report for 1951, p. 5 – ‘(CDC’s) deliberate policy is to look for experienced private sector partners to share in investment and management.’ 2 HL Debates, vol. 176, 28 May 1952. Statement by Lord Munster c1604. 3 The original understandings were formalised in BP 115/49 and in a Secretary of State circular of 20 January 1950.

270 Notes 4 Secretary of State to Reith, 14 August 1951, tabled as EMB 108A/51. 5 Secretary of State to Reith, 15 February 1952, tabled as BP 26/52. Lyttelton spelt out to the House of Commons four criteria he intended to apply before giving capital sanction: 1. Is the Colonial Government willing to participate? 2. Is local knowledge being mobilised e.g. through Board representation? 3. Has local capital been brought in? 4. Has CDC sought to involve UK or overseas investors? HC Debates, vol. 503, c2373, 17 July 1952. 6 HC Debates, vol. 503, c2370-, 17 July 1952. 7 The Memoirs of Lord Chandos, London, Bodley Head, 1962, p. 201. 8 Aide mémoire of Chairman’s conversation with the Secretary of State, 6 November 1953. 9 Minute Rendell to Chairman, 16 November 1953. 10 Draft Memorandum to Secretary of State, 10 February 1954. It appears that the paper was not actually despatched. 11 The most vivid illustration of this attitude is reflected in the following note to Rendell from Sir Reginald Salloway, operations controller, a propos a conversation in the company of several others: ‘Sir Hilton Poynton intervened to say that he was a great enemy of CDC and that he had had more than he could stand from Lord Reith. He considered that there was no need for the CDC, whose work could be done much more cheaply and effectively by the Colonial Office.’ Note of 18 February 1957. 12 Rendell to Colonial Office, 24 August 1954. 13 Working Party meeting on 27 September 1954. CDC office note. 14 Working Party meeting on 4 April 1955. CDC office note. 15 Working Party Report, paras 7 and 13 – ‘(the Government) considered the Secretary of State could not divest himself entirely of the right to withhold sanction of a project’. 16 Secretary of State to Reith, 14 August 1952. 17 Third Report of the Public Accounts Committee, 27 July 1954. 231 HMSO. 18 HL Debates vol. 176 c 1589, 28 May 1952. 19 Working Party 3rd Meeting, 15 October 1954. CDC office note. 20 Working Party, ibid. The issue of prior clearance for borrowing from CDC had been taken up in a dispatch from the Secretary of State to Governors, 12 January 1953. 21 HC Debates vol. 557 c 8180, 25 July 1956. 22 Letter dated 5 December 1956. 23 Personal Memorandum by Mr A. Gaitskell, 28 December 1956, circulated to the Board. The author well recalls the genesis of the paper in discussions at Nuffield College, Oxford, where Gaitskell held a research fellowship in order to write up his career achievement – Gezira: A Story of Development in the Sudan, Faber 1959. 24 Note dated 26 November 1956. These comments were to have resonance forty years later in a renewed debate over the future of CDC. 25 Rendell to Colonial Office, 6 September 1956 and C.O. to Rendell, 30 October 1956. 26 The controversy is well summarised in Rendell’s History, p. 54–56. 27 Colonial Office to Deputy Chairman, 11 November 1952. 28 Secretary of State dispatch 33/53, 12 January 1953.

Notes 271 29 Aide mémoire of Reith’s meetings with Sir Edward Peacock on 5 May 1953 and with Sir Frederick Godber on 13 May 1953. 30 The episode is well told in Rendell’s History, p. 45–50. 31 The applicable test was whether an investment in Southern Rhodesia could be shown as one for developing the resources of the Federation as a whole, which was clearly set out in a letter from the Colonial Office to Rendell of 9 March 1956, in amplification of section 13(3) of the Federation of Rhodesia and Nysaland (Constitution) Order in Council 1953. The 1956 ORDA introduced an amendment (without consultation with CDC) which introduced a stricter criterion of whether an investment by CDC was needed for the expansion or promotion of enterprises in the Northern territories, in section 2(2). The government explicitly rejected an attempt in Parliament to soften the test to one of ‘advantageous or convenient’ (HC Debates vol. 557, c199–201, 25 July 1956). 32 The rejection was contained in a telephone call on 17 October, followed by a letter from Lennox Boyd to Reith on 24 October. The official letter of explanation was not sent until 21 December 1956. 33 Reith to Secretary of State, 9 November 1956. 34 CDFC had dropped out of the negotiations and had to study the latest proposals afresh. The Rhodesian government had wished to deal with CDC alone on the loan. Ironically, CDC was reserving a third of the proposed commitment for CDFC. 35 Official note of Secretary of State’s meeting with Reith, 23 November 1956. 36 Aide mémoire, 24 November 1956. 37 Rendell to Colonial Office, 6 June 1957. 38 The exchanges came to a head in January 1957. Aide memoire, 17 January 1957. 39 Secretary of State to Reith, 30 August 1956. 40 Memorandum, 23 October 1956. 41 Clause 3(4) read ‘Without prejudice to the continuance of any operations commenced by the Colonial Development Corporation in any part of Ghana before the appointed day, as from that day the expression ‘colonial territories’ in the Overseas Resources Development Acts 1948–56, shall not include Ghana or any part thereof.’ 42 Rendell made a detailed note of the meeting, dated 17 December 1956. 43 This account is based on a narrative minute recorded by Reith on 12 February 1957. 44 Letters and cables exchanged between Wilmot, the regional controller, and Reith between 25 January and 14 February 1957. 45 Nkrumah wrote to the Controller of Operations, Sir Reginald Salloway, on 8 March rehearsing events over the publication of the Bill and the memorandum handed to Perth. He went on to make an eloquent case for CDC’s continued involvement in order to encourage other foreign investors and also to moderate tensions over control between foreign companies and the government. This remarkable document was shown to Lord Rennell (who had been helping CDC in the Lords) and its existence became known to the government. Lennox Boyd was apprehensive that Reith might publish it and, unwisely, attempted to browbeat him on the telephone on 20 March. Nkrumah believed that the reason for his brusque treatment over clause

272 Notes

55

3(4) lay in a parallel dispute with the Colonial Office over the non-settlement by his government of a Swiss claim arising from the 1948 riots, whose details are beyond the scope of this study. Chief Minister to Reith, 2 March 1957. Annual Report 1955, paras 12–16. The United Kingdom’s Role in Commonwealth Development. HMSO Cmnd 237, July 1957, para14. Ibid, para 31. Howick to Macleod, 22 June 1961. Howick to Bernard Braine MP, 10 November 1961. Howick to Lord Perth, 14 December 1961. Rendell memorandum to EMB, 27 February 1962. Howick’s account of the meeting is contained in a letter to his deputy chairman, 26 July 1962. Sandys to Howick, 5 December 1963.

5

Financial Reorganisation

46 47 48 49 50 51 52 53 54

1 2 3 4 5 6 7 8

9 10

11 12 13 14 15 16 17 18 19

Annual Report for 1951, para 8. HL Debates vol. 176, c1549–, 28 May1952. Earl of Munster, HL Debates, vol. 176 c1612. Secretary of State to Reith, 20 August 1952. Parliament was informed on 30 July. HL Debates, vol. 183, c1231. Aide mémoire dated 30 March 1954. Board Minutes, 8 April 1954. Reith to Secretary of State, 15 April 1954, and Reith to Minister of State, 16 May 1954. In the debate on the ORDA bill Lord Lloyd gave a frank explanation of the failure to reach agreement with CDC. When pressed as to whether the issue could be reopened, Lloyd gave a very guarded response, limiting himself to a possible reconsideration only of the original offer. HL Debates, vol. 189 c1521–, 16 November 1954. Annual Report for 1954, para 5. ‘To an extent the figure is arguable plus or minus; but it is entirely fair; and so the past is passed.’ Annual Report for 1955, para 7. In the event the Special Losses Account was increased to £8.8 million in 1958 in Reith’s last year; from then onwards any losses were charged to the profit and loss account. Secretary of State to Reith, 13 November 1956. HL Debates vol. 204, c1243–, 17 July 1957. Aide mémoire of 25 June 1957 and Meeting Note of 1 July 1957. Labour’s Colonial Policy, II Economic Aid, May 1957. Memorandum dated 25 June 1957. Memorandum dated 3 February 1958. Memorandum dated 29 July 1958. Report of the Committee of Enquiry into the Financial Structure of the Colonial Development Corporation. HMSO 786, September 1959. Memorandum dated 14 April 1959.

Notes 273 20 Memorandum dated 29 April 1959, which proposed the creation of stock to be serviced from the operating surplus. It contains interesting refinements that were not taken up by the Sinclair Committee. 21 HC Debates, vol. 626 c781–782, 7 July 1960. 22 Aide mémoire, ‘The Capital Structure and Operations of the CDC’, Colonial Office, 15 July 1960. 23 Memorandum dated 20 July 1960. 24 This was reflected for example in the meeting note between Lord Perth and Lord Howick on 11 January 1961, when it was explained to Howick that the Colonial Secretary needed to be able to tell Parliament when it reassembled that the arrangements for financial reorganisation had reached finality and that CDC were in agreement with the settlement. 25 The flavour is given in a minute dated 20 October 1960 from the financial controller, Totman, to Rendell – ‘Gorrell Barnes … clearly indicated that HMG regarded CDC’s willingness to do something for the building societies as a quid pro quo.’ 26 For example, Nutcombe Hume wrote to Sandys on 21 September 1960– ‘I am personally of the opinion that with the willing cooperation of HMG, the CDC could be so reformed and organised that it could raise capital in the market without having to depend on further funds from the Exchequer.’ 27 Nutcombe Hume to Permanent Secretary Treasury, 31 October 1960. 28 However Treasury lawyers kept the issue in doubt up to the last minute, including in the draft of the statement to be made to Parliament, before backing down. 29 Howick to Perth, 12 January 1961. 30 The point at issue was that the Treasury wished to define divisible profits before any provision for capital losses, but including any capital gains in the calculation. CDC insisted that this was against proper accounting practice, unfair and potentially dangerous to its financial viability. 31 Lord Howick letter to members of the Board, dated 27 April 1961. The Secretary of State’s statement was made in the House of Commons that day. HC Debates vol. 639 c627–8.

7

Easing the Funding Constraint

1 Rendell to Colonial Office, 27 April 1964. 2 ODM to CDC 17 February 1966, indicating that a review was now contemplated. This was confirmed in May. The report of the working party Commonwealth Development Corporation Financial Arrangements was forwarded to CDC on 17 October 1967 and it forms part of BP130/67 of 9 November 1967. 3 The detailed arrangements were contained in CO to CDC of 17 August 1965, contained in EMB 280/65 of 20 August. The Minister’s announcement was made on 21 June in Parliament. Eligible projects were intended to be new agricultural and forestry projects, territorial Devcos and low cost housing schemes. CDC had to pass on most of the benefit of the interest waiver on loan transactions.

274 Notes 4 EMB 267/61 of 29 September 1961. The proposed restriction had first been raised by the CO in August. Regional Controllers were instructed to look for alternative sources of finance, as well as to reign back cash requirements. Short term loans were raised from the North Borneo Government of £1 million and from Union Acceptances in South Africa of R1 million. 5 Rendell to ODM of 26 November 1965. File 503371. 6 Rendell to ODM of 15 December 1965. 7 Contained in BP 9/66 of 13 January 1966. 8 Arranged by Arbuthnot Latham. Its offer letter of 7 February 1966 is contained in BP 20/66 of 10 February 1966. 9 BP 21/66 of 10 February 1966. 10 Although the line of credit was eventually established, its restrictive conditions resulted in it remaining unused. 11 ODM to Rendell 17 March 1966 and his reply of 21 March 1966. File 50337. The Treasury also proposed that loans be tied to purchases of British goods and services, which was likewise resisted by ODM. 12 ODM to Rendell of 9 June 1966, summarising the Treasury proposals. Circulated to the Board in BP 67/66 of 14 July 1966. 13 Rendell to ODM of 29 June 1966, also contained in BP 67/66. 14 Howick to Cohen of 8 February 1966. File 50337. 15 Rendell to ODM of 22 April 1966. The supporting tables showed that over the three years 1963–65 CDC’s net investment position was a favourable inflow to the UK of £5.4 million (outward investment less capital repayments and revenue inflows), and that over the same period CDC’s investments had stimulated £31.4 million of UK exports. 16 Review of CDC Financial Structure, BP 58/66 of 9 June 1966. 17 Totman to ODM of 13 July 1967. 18 The calculation is given in Annexe C of the Report of the working party. The different result arose from the treatment of accumulated interest. CDC had previously had to make provision for this and also to calculate repayments in relation to the pre-interest figure; now payment only became due in respect of the actual net accounting surplus. 19 Extracts from Commonwealth Development Corporation Financial Arrangements, ibid. 20 Framework for Exercise of Borrowing Powers, contained in BP 77/67 of 13 July 1967.

8

Aid and Development

1 Rita Hinden, ‘Socialism and the Colonial World’, in New Fabian Colonial Essays, Hogarth 1959. The essay is an elegant articulation of dilemmas confronting socialists in the uncomfortable realities of the post-colonial world. ‘What British socialists are now learning is that evil is not undone simply by withdrawing from the scene of the crime; there is a debt to history waiting to be discharged.’ 2 Arthur Creech Jones, ‘The Labour Party and Colonial Policy 1945–51’ in New Fabian Colonial Essays, ibid. His essay concluded by aligning Labour policy, correctly, with international opinion of the time, its ‘record of

Notes 275

3

4 5

6 7 8 9 10 11

12 13 14

15

16 17 18

19 20 21 22 23 24 25 26 27

liberation and nation building was not only in tune with its own ideas and purposes but with the world which the war of 1939–45 had ushered in’. Barbara Ward sets the scene well in her essay ‘New Perspectives’ in Restless Nations, George Allen & Unwin, 1962. The intractability of the problems of employing expatriates on any scale are analysed in Margery Perham’s essay ‘Political and Psychological Problems of Development’ in the same book. My article, ‘Economic Development and the Race Factor in Kenya’ analysed the manpower situation there in the run up to independence in Economic Development and Cultural Change, vol. XII no. 1, October 1963. Perham, ibid. Sir Arthur Gaitskell, brother of the leader of the Labour party, was a director of CDC from 1954-1973. He had been managing director of the Sudan Gezira Scheme. A good example of Gaitskell’s thinking is his contribution to New Fabian Colonial Essays, ‘Internal Economic Development’. Thomas Balogh, ‘Britain and the Dependent Commonwealth’ in New Fabian Colonial Essays. Overseas Development: The Work of the New Ministry Cmnd 2736 HMSO 1965. ‘The Private Sector and the Commonwealth Development Corporation’ para 109, Cmnd 2736, ibid. Overseas Development: The Work in Hand Cmnd 3180 HMSO 1967. Partners in Development: Report of the Commission on International Development, Praeger 1969. The phrase was coined by George Woods, president of the World Bank, as recorded in the preface. Partners in Development, p. 110. ORDA 1969 Select Committee on Overseas Aid, Session 1969–70,Minutes of Evidence (Sub-Committee A), 26 January 1970. 111–I HMSO; Minutes of Evidence (Sub-Committee B), 15 April 1970. 98–viii, HMSO. Even when fed a question about being permitted to recycle loan repayments, rather than return them to the Treasury, the response was in the form that it would be a welcome development but Treasury was presumed to be not in favour. Minutes A45. Minutes A31 and A32. Report from the Select Committee on Overseas Aid, Session 1970–71, 299 HMSO 1971. Observations by the Minister for Overseas Development, Cmnd 4687 HMSO 1971, paras 48–89. Howick to Cohen of 8 November 1967. The actual allocation in the following year, 1968–69, was £9 million. CDC to ODM of 6 February 1969. BP 17/69 of 13 March, BP 26/69 of 10 April and BP 43/69 of 12 June 1969. Minutes of 26 January 1970, Appendix IV, ibid. BP 131/70 of 12 November 1970. BP 35/71 of 11 March 1971. BP 35/71 ibid. Howick to ODA of 9 June 1971. BP 86/72 of 14 September 1972.

276 Notes

9 1 2 3 4 5 6 7

8 9 10 11

12 13 14 15 16 17 18 19 20 21 22 23 24 25

26

Jubilee Stocktaking The early days of BAL are fully narrated in Rendell’s History, p. 138–41. For further detail, see Rendell’s History, p. 260–2. Diarised record of events in Rendell’s papers. Ibid. Also Secret Minute of 14 October 1960. BP 73/60 of 26 October 1960 Kenya Building Societies and BP 79/60 of 24 November 1960 Kenya Building Societies. BP 72/61 of 14 September 1961 Building Societies in East Africa. The understanding was set out in a joint Note of 16 August 1961 and in a side letter from the Colonial Office to CDC dated 25 August 1961, both attached to BP 72/61. BP 80/62 of 8 November 1962 Kenya Building Society. BP 43/65 of 13 May 1965 Housing In East Africa. EMB 295/66 of 13 September 1966 Building Societies in East Africa – Proposals for Reconstruction, and letter to MOD of 20 September 1966. BP 131/67 of 9 November 1967 Transfer of Assets and Liabilities to Successor Territorial Companies, and BP 108/68 of 14 November 1968 Housing Finance Company of Kenya. Plan to Intensity the Development of African Agriculture in Kenya, Goverment Printer, Nairobi, 1954. There is a good description of the formation and early phase of the KTDA in Appendix III of the 1970 Select Committee’s Evidence, op. cit. BP 6/61 of 5 January, BP 25/61 of 9 March and 33/61 of 13 April 1961, Kenya Land Development and Settlement. BP 60/61 of 13 July and BP 68/61 of 14 September 1961, Kenya Land Development and Settlement. Sir Algernon Rumbold to Howick dated 4 March 1964, attached to BP 89/63 of 14 November 1963, Kenya Land Development and Settlement BP 8/78 of 12 January 1978 Malawi Smallholder Tea Authority. BP 62/76 of 9 September 1976 Kasungu Flue-Cured Tobacco Authority – Malawi. BP 46/77 of 14 July 1977 Dwanga Smallholder Sugar Project – Malawi. BP 29/78 of 13 April 1978 Smallholder Coffee Authority – Malawi. BP 1/77 of 13 January 1977 Mumias Sugar Company: Expansion of Factory and Outgrowers Scheme. BP 20/79 of 8 March 1979 Kenya Smallholder Coffee. BP 62/77 of 13 October 1977 Cameroon Development Corporation – Second Development Programme. BP 11/77 of 10 February 1977 Ghana Oil Palm Project – Twifo Oil Palm Plantation. A series of 16 papers had been prepared in 1966–7 for seminars on CDC’s smallholder experience, which formed the basis of Swynnerton’s paper Smallholder Development – Summary Paper of 14 November 1967. Twenty years later, CDC conducted a formal review of its smallholder experience by its senior agriculturalist Review of Smallholder Agricutural Programme – Final Report, April 1989. CO to Rendell 30 July 1958, ‘We would not regard it as consistent with the Government’s policy for the Corporation to provide the proposed regional

Notes 277

27 28

29 30 31

32 33

34 35 36

10

development companies with further capital after Nigeria becomes independent to enable them to undertake new projects (c.f. Malaya).’ EMB 409/58 of 5 December 1958 Aide Memoire of Meeting Held at 33 Hill Street on 20 November 1958, and ditto on 25 November 1958. Exchange of minutes between Reith and Rendell 11 February and 17 February 1959. Rendell had first spoken with the Treasury to establish the lines of an agreed solution. The exchange of letters is attached to BP 9/59 of 26 March 1959. BP 108/65 of 14 October 1965 Northern Nigeria Investments Ltd – Increase of Capital. This was quite an embarrassment to Rendell, who had undertaken not to request a supplementary sanction, but Hume negotiated the matter directly with the Minister. The point was still sensitive with him twelve years later cf. his History p. 128. The background history is narrated in BP 86/61 of 9 November 1961 Tanganyika Development Company. BP 18/62 of 8 March 1962 Development Finance Company of Uganda. The idea was that UDC itself would progressively revert to the role of sponsoring projects with mainly a social or political justification. BP 79/63 of 10 October 1963 Development Finance Company of Uganda. BP 35/63 of 13 June 1963 Development Finance Company of Kenya Ltd and BP 14/66 of 10 February 1966 DFCK – Increase of Capital Resources. BP 50/75 of 11 September 1975 Development Finance Companies in East and Central Africa – Situation Report and Proposals for Additional Finance, BP 5/78 of 12 January 1978 DFCK – Additional Finance, BP 18/78 of 9 March 1978 Industrial Development Bank of Malawi – Additional Finance.

Targeting the Poor

1 Judith Hart, Aid and Liberation – A Socialist Study of Aid Politics, pp. 242–8. 2 Overseas Development – The Changing Emphasis in British Aid Policy – More Aid For The Poorest. HMSO Cmnd 6270, 1975. 3 CDC to ODM letter of 9 April 1974. 4 ODM to Meinertzhagen letter of 29 November 1974, where CDC was identified as having 22 per cent of its investments in housing and only 18 per cent in renewable natural resources, while 45 per cent were in countries above the then poor country threshold of $375 per capita. 5 CDC and the British Aid Programme, attached as an appendix to BP17/75. 6 CDC/ODM Joint Working Party, BP17/75 of 13 March 1975. 7 Report of CDC/ODM Working Party 1975, ODA June 1975. 8 Report of CDC/ODM Review, July 1977, tabled as BP 52/77 on 8 September 1977. 9 Hart wrote a friendly letter to Griffiths-Jones after the Interim Review which indicated that the suspicions over CDC’s role had been allayed. It concluded ‘I am sure we shall build further on the continued and constructive relationship between CDC and ODM established through co-operation both in London and overseas.’ It was tabled with BP 52/77.

278 Notes

11

Commercial Borrowing Mirage

1 ODA to CDC dated 6 August 1979 and response of 10 August, tabled as BP 72/79. 2 BP 56/79 of 12 July 1979 ‘Resources Available and Commitment Objectives’. 3 BP 88/79 of 8 November 1979 ‘CDC Resources and Commitments’. 4 BP 72/79 of 13 September 1979 ‘Negotiation with ODA over Treasury Allocation of Funds’ The paper includes ‘Note of a meeting held with ODA on 20 August 1979’ at which alternative sources of funding was discussed. 5 BP 19/80 of 13 March 1980 ‘Treasury Allocation of Funds’. 6 ‘Note of a Meeting held with ODA on 20 August 1979’ included with BP 72/79 ibid. 7 ‘Note of Meeting with ODA on 12 February 1980’ File 50337. 8 Minute of 14 February 1980 on File 50337. 9 Board papers of 13 March 1980. The letter accepted the cuts already imposed, but challenged the indication of still further cuts. Hence the request to discuss the corporation’s role, in the ‘hope that our proved ability to help less developed countries to help themselves would accord with the Government’s philosophy’. 10 Account of the meeting contained in BP 30/80 of 10 April 1980. 11 Terms of reference for Review of Commonwealth Development Corporation 1980 ODA January 1981. 12 BP 48/80 of 12 June 1980. 13 Minutes of Review Meeting of 13 June 1980 para 5, contained in BP 54/80 of 10 July 1980. 14 Board Minute 6566 of 12 June 1980 and Minute 6578 of 10 July 1980. 15 Minutes of Review Meeting of 23 July 1980, para 10, contained in BP 68/80 of 11 September 1980. 16 There was an interchange of letters with Meinertzhagen and Kindersley, tabled to the Board as BP 85/80 of 13 November 1980 amd BP 97/80 of 11 December 1980. 17 Minister of State, Neil Marten, to Kindersley, 12 January 1981. 18 Kindersley to Howe, 20 March 1981. In seeking the exclusion of CDC from the PSBR definition he argued, plausibly, that such a decision was unlikely to be the object of Parliamentary criticism. 19 Note of Meeting at ODA on 26 March 1981. It was attended by Kindersley. File 50337. 20 By the year end CDC was awaiting capital sanction on 12 projects and £78 million of investment, and clearance in principle on a further 15 projects with a value of £71 million. CDC to ODA dated 5 February 1982. 21 HC Debates vol. 15 c 17w, 14 December 1981. This was subsequently extended to a fourth year to 1985–86. ODA to CDC dated 18 January 1983. 22 BP 6/82 OF 21 January 1982 and Minute 6872. 23 ODA to CDC dated 20 October 1982. 24 ODA to CDC dated 24 October 1982. 25 ODA to CDC dated 18 January 1983. 26 File note of 24 March 1983 on File 50355. 27 Review para 3.22.

Notes 279

12

A Salvage Proposal

1 Board Minute of 13 November 1980, which reported on discussions with the Treasury. 2 BP62/81 of 17 September 1981, ‘Commonwealth Development Finance Corporation Ltd’. 3 File Note by Meinertzhagen, 27 April 1982. 4 Kindersley to Hollom, 13 May 1982. 5 Exchange of Minutes, 3 and 9 September 1985.

13

Nothing But a Bank

1 Review of Organisation, Structure and Methods of Operation , J D Eccles and A E Lewis, April 1982. 2 Ibid, para 12.08. 3 Ibid, para 19.07. 4 Ibid, para 31.01. 5 Ibid, para 31.02. 6 Ibid, para 31.03. 7 Ibid, para 31.22.

14

The Fan Club

1 The Work of the Commonwealth Development Corporation. Fourth Report from the Foreign Affairs Committee, Session 1981–82. October 1982. HMSO. Para 4. The inquiry was undertaken by its Overseas Development Sub-Committee. 2 Evidence Q71. Meinertzhagen ‘There was a conscious decision by the CDC Board some fifteen years ago that the biggest impact we might be able to make in the developing countries was through assistance of the agricultural sector and this was in the days before the World Bank would invest in agriculture.’ 3 Evidence Q12. Meinertzhagen ‘I do not think we would ever repeat our direct projects which … were relics of the past.’ 4 Evidence Q29 and Q30. Meinertzhagen ‘If only (governments) would get their pricing policies right, their own farmers would produce as much as they require.’ He might also have criticized the economic argument for preferring domestic food production. 5 Memorandum by M Faber, Director Technical Assistance, Commonwealth Fund for Technical Assistance. Professor Faber was later appointed a member of the Board of CDC from 1988 to 1996. 6 Evidence Q139. 7 Evidence Q275. 8 Evidence Q295. 9 Evidence Q57: Meinertzhagen ‘For a period, because we did not know whether the funds would be forthcoming, we had to go slow on new business and this had a disastrous effect on us from which we did not recover for three or four years.’ See also Q62. The 1980 financing hold up was covered in the ODA evidence.

280 Notes 10 11 12 13 14 15 16 17 18 19 20 21 22

15

Report para 60. Evidence Q313–319. Report, para 106. Report, para 107. Comments are scattered through the evidence e.g. Q117–122, 140–146, 171 and 177. This issue was to resurface when the department was seeking to promote its public-private partnership model for CDC in 1995. See chapter 23. Report, para 37. Report, para 38. Report, paras 80 and 82. Evidence Q53. Evidence Q215. Report, para 83. Evidence Q330–331. The Committee noted with approval that to some extent ‘CDC acts as a catalyst’ and wanted it ‘to put more energy into this type of activity’. Report, para 70.

A Major Review

1 The draft clauses were debated during 1985. CDC’s reservations were contained in a record of a meeting of 9 October and the particular concern over the grants clause was repeated in a letter from Kindersley to Raison of 22 October. There was a further exchange of letters the following June which was circulated to the Board with BP47/86 of 3 July. CDC’s underlying fear was that a change from loans to grants would be accompanied by official accountability appropriate to a grant aided body as opposed to that applied to a statutory corporation. 2 Review of the Commonwealth Development Corporation 1986, ODA March 1987. The terms of reference are contained in para 2. The government’s guidance on policy reviews of non-departmental public bodies was printed as Annexe 1. 3 The notion that investment which generates acceptable financial rates of return cannot by definition be developmental, is at the heart of the hostility to foreign direct investment. The equivalent over-simplification on the other side of the ideological divide is the belief that grant aid is ipso facto developmental. 4 Review, para 4.22. 5 Net surplus before taxation expressed as a return on average net assets in the year, averaged for the five years. Accounts data are laid out in the Review, appendix 4.3. 6 Review, paras 4.58 and 4.59. 7 Review, para 2.21. 8 Over the same five years, such a measure would have shown that a deteriorating trend was reversed after 1983, but with a question mark for the future: 5.9% – 7.0% – 6.9% – 5.5% – 5.8%. 9 Review, para 7.7. The formal recommendation was couched in stronger language. ‘Ministers may wish to consider, taking into account any views

Notes 281

10 11 12 13 14 15 16 17

16 1 2 3 4 5

6

7 8 9 10 11

12 13 14 15 16 17 18 19 20

which the CDC Board might express, whether it would be desirable for a senior ODA official to be appointed to the Board.’ Para 7.45. However 20 percent of the total portfolio was in CDC managed projects. Appendix 4.1. Review, appendix 6.5. Review, para 6.26. Review, para 6.31. The African situation is analysed in para 10.8 – 10.13. Review, para 10.48. Review, para 3.10 and appendix 10.1. Howe to Kindersley 1 July 1987 and the reply dated 7 July 1987. CDC’s detailed responses to the issues are contained in an ExCo paper 240/87 of 14 July 1987.

A New Era Howe to Kindersley dated 1 July 1987. Monthly Report to Board, November 1990. This became substantially true. Monthly Report, May 1989. Monthly Report, June 1990. CDC began to prepare analyses of cash flow generation in 1976, when the two sources were nearly in balance: £20.1 million from internal resources and £18.9 million from government. ‘The growth in CDC’s self-generated funds has not only been much faster than was expected at the time of the last CDC review in 1986, but has more than offset the shortfall in their external funding.’ Letter from Chalker, Minister of State, to Bowen Wells MP, dated 14 June 1991. CDC Magazine 1st issue 1988, supplement on One Bessborough Gardens. Meeting Note dated 9 August 1990. Chief Executive in the 1990 Annual Report of CDC. File Note prepared for the Monopolies and Mergers Commission enquiry, 9 January 1992. Overseas Development Administration: Sponsorship of the Commonwealth Development Corporation. Report of the Controller and Auditor General. Session 1988–89. HC275, March 1989. Monthly Report, November 1988. Committee of Public Accounts. Twenty Ninth Report, Session 1988–89. HC304, July 1989. Report of the Financial Arrangements Working Group (FAWG), 30 August 1990. PAC Report, para 10. FAWG Report, para 7.2. The actual shortfall of funding against the quinquennial review recommendations amounted over the four years 1988–91 to £66 million. FAWG Report, para 8.2. FAWG Report, para 9.2. FAWG Report, para 9.3.

282 Notes

17

Monopolies and Mergers Commission

1 Upon inquiry with the MMC secretariat in May, CDC was surprised to discover that it had no knowledge of its impending reference. File Note 23 May 1991. 2 Letter to Secretary of State, 23 May 1991. 3 Note of meeting, 20 November 1991. 4 Note of meeting, 19 November 1991. 5 BP 17/92 of 5 February 1992. 6 MMC Hearing, 6 February 1992, p. 15. 7 Ibid, p. 15. 8 Ibid, p. 21. 9 Ibid, p. 21. 10 File Note, 9 January 1992. 11 Ibid, p. 32. 12 Ibid, p. 39. 13 Ibid, p. 42. 14 Ibid, p. 45. 15 Ibid, p. 49. 16 Ibid, p. 51. 17 CDC: Draft Tentative Conclusions and Recommendations, 21 February 1992. BP 28/92 of 4 March 1992. 18 Response to Draft Tentative Conclusions and Recommendations, 28 February 1992. Doc No 249. 19 MMC to Eccles, 3 March 1992. Eccles to MMC, 4 March 1992. 20 See para 1.21 of the MMC Report. 21 MMC Hearing, 5 March 1992, p. 3–7. 22 A Report on the Efficiency and Cost of, and the Services Provided by, the Commomwealth Development Corporation. HMSO Cm 1983, 1992. 23 The writer was the first chairman of the Audit Committee. 24 HC Debates vol. 221 c 653 w, 23 March 1993.

18

A Crisis of Identity

1 MMC Report, para 1.68. 2 Note for Board Informal Meeting ‘Where Do We Go From Here?’, 30 April 1992. 3 Note of discussion with ODA on 8 May and follow up letter of 12 May 1992. 4 Chief Executive’s Monthly Report, BP 44/92 of 4 June 1992. 5 Letter to Minister, 13 May 1992. 6 Letter to Minister, 9 June 1992. 7 Minister to Chairman, 3 August 1992. 8 Long Term Strategy, statement drafted 8 July and finally adopted by the Board on 1 September 1992. 9 Chairman to Minister, 7 August 1992. 10 Briefing paper for the Chairman: ‘The Rationale For CDC To Grow As A Government Owned Institution’, 10 September 1992. 11 Covering letter to ‘Role of the Commonwealth Development Corporation in the 1990s’, 31 July 1992.

Notes 283 12 Ibid, para 19. 13 Note of Quinquennial Review meeting of 4 August 1992 and Chief Executive’s Monthly Report BP 66/92 of 5 August 1992. 14 Note of Quinquennial Review meeting of 9 September 1992. 15 Note of Quinquennial Review meeting of 7 October and Chief Executive’s Monthly Report BP 88/92 of 4 November 1992. 16 Note for Board Informal Meeting, 2 November 1992. 17 Note following a meeting with officials to clarify the announcement, 25 November 1992. 18 Minister to Chairman, 19 November 1992. 19 ‘As from 1st April 1964 the outstanding aid loans to CDC will bear a zero rate of interest. CDC will be able to borrow externally provided that its borrowing meets the government’s rules. That should assist it. The zero interest on past aid loans affects all past aid loans. Currently, CDC pays some £25 million per year in interest, which will rise to about £30 million over the next few years. So the new arrangement will be of benefit, although I cannot yet detail how it will be used. We have also been able to find a way of giving CDC the prospect of borrowing overseas from funds available for some Caribbean Basin Initiative countries. These are what is known as ‘the 936 funds’. It is possible that these too could amount to about £20 million a year in due course. If wisely used, that is good news for the CDC and especially for CDC in the Caribbean.’ House of Lords Hansard, 24 November 1992. 20 There is a curiosity over the numbers used in the exchanges. A CDC analysis The Cost of CDC of 6 October purported to show that in the six years 1986–91 the net flow of funds from HMG averaged £16 million a year. However CDC’s accounts for these years show that the figure was already only £9 million a year. The figure of £16 million was used in exchanges with ODA, e.g. at the Quinquennial Review meeting of 4 December. To add to the confusion, ODA had produced a paper for the Quinquennial Review on the cost of CDC to public funds, QR (92)WP5 of 2 December, which contained a large double counting error and purported to show that there was a net flow of funds from CDC to ODA of £18 million a year, and hence that there had been a favourable financial return to the taxpayer, even on an opportunity cost basis. This analysis had been corrected by the time of the final report a year later. 21 Exchange of letters between CDC and ODA of 11, 15 and 16 December 1992. The CDC table was designed to point up the contrast between the Planning Framework scenario and the new dispensation to bring out the deterioration in funding expectations, which ignored the improvement to cash flow from interest waiver. The ODA approach was wishful over 936 funding, which had yet to be tested; on the other hand the cash flow projection made a negligible assumption for investment disposals, so the overall picture was not unreasonable. 22 Report on Review of the Status of Crown Agents and Commonwealth Development Corporation, Coopers & Lybrand, March 1993. 23 BP 17/93 of 3 February 1993, Quinquennial Review Status. 24 Paper for Board Informal Meeting, 31 December 1992 and Minute Eccles to Chairman, 15 February 1993. 25 Minute by Chairman to Directors, 15 February 1993. The issues were discussed at Board informal meetings in January and February, leading up to the meeting with the Minister on 17 February.

284 Notes 26 Two lines of argument were used: (i) The prospective drop in net loans from £49 million to nil, without acknowledging the continuing receipt of matching loans of £28 million from the aid budget, thus: Before £mn +75 –26 49

After £mn +28 –28 0

(ii) The swing from £15 million a year of net annual new funding (new loans less repayments, interest and tax) as set out in the planning framework bid, to a net outflow on public sector account of £20 million after nil net funding (new loans less repayments and tax). This presentation also overlooks the net benefit of interest waiver amounting to £20 million. Thus:

New Loans Repayments Net Loans Interest Tax Inflow/Outflow

Before £mn +85 –28 57 –31 –11 +15

After £mn +28 –28 nil 0 –20 –20

27 Chairman to Minister of 23 February 1993 and Chairman’s Note to Board of 25 February 1993. 28 Leslie minute of 23 March 1993. 29 Financial Consequences of the Recent Government Decisions, SG Warburg, November 1993. 30 The conventional standard was: interest cover on loans of 15 times, ratio of total borrowings to total assets of not more than 30 per cent, free cash flow to total debt over 50 per cent, funds from all operations over 100 per cent of total debt. 31 Ibid, p. 25. 32 Eccles minute of 21 July 1993. 33 The situation was reviewed in the Chief Executive’s Report, BP 29/92 of 1 April and in a letter to ODA of 26 March 1992. 34 Minister to Chairman of 1 November 1992. 35 Minister to Chairman of 29 March 1993. 36 ODA to CDC of 7 December 1992. 37 Review of the Commonwealth Development Corporation, ODA, 1993. 38 Review, Annexe 9 para 23. 39 Chairman to Minister of 11 June 1993; Review paras 2.15 and 8.3. 40 Paper to the quinquennial review Equity Investment and Realisation Policy, 28 April 1993.

Notes 285 41 Modern Terminals, a container terminal in Hong Kong, for £45 million; Nava Nakorn, industrial estate in Thailand, for £10 million; and Ocean Properties, office building in Singapore, for £8 million. 42 This is referred to in the record of the Quinquennial Review meeting of 7 October 1992 and in the note of the meeting with the Minister on 17 February 1993. 43 Review, Annexe 8 Cost of CDC. The Resource Cost of CDC compared the total return on CDC’s investments between 1987/8 – 1992/3 with an alternative investment of the portfolio at the required rate of 8 per cent real. The implicit subsidy averaged £51 million a year. The other approach of a Present Value calculation between these two periods showed a loss of portfolio value, as between that actually achieved by CDC and the alternative investment in a gilts portfolio, amounting to £212 million.

19

A Business of Sorts

1 The five deals were Hong Kong Building & Loan for £1.5 million in March, Ocean Properties for £7.8 million in May, Nava Nakorn for £11.2 million in June, Rodney Bay for £3.5 million in July, Sarawak Oil Palms flotation for £3 million in July. 2 Monthly Report, BP 42/89 of 4 May 1989. 3 Monthly Report, BP 80/90 of 7 November 1990. 4 Monthly Report, BP 50/91 of 5 June 1991. 5 BP Tanzania Debt 7 November 1981. 6 Monthly Report, BP 41/90 of 6 June 1990. 7 The sequence of new provisions, releases and write-offs between 1990 and 1993 was as follows:

Total provisions New Released Written Off 8 9 10 11 12 13 14

1990

1991

1992

1993

£mn 187 39.5 16.2 1.8

£mn 207 49.2 24.8 3.7

£mn 249 45.8 22.3 0.8

£mn 280 59.4 26.5 1.6

Monthly Report, BP 78/89 of 6 September 1989. Monthly Report, BP 80/90 of 7 November 1990. Monthly Report, BP 50/91 of 5 June 1991. Monthly Report, BP 69/91 of 4 September 1991. Monthly Report, BP 96/92 of 2 December 1992. Monthly Report, BP 17/94 of 2 March 1994. The private sector share of new commitments rose rapidly from the 1988 figure of 54 per cent. 1989

1990

1991

1992

1993

62%

74%

74%

83%

96%

Tabulation in Interim Performance Review, 25 March 1994.

286 Notes

20

Strategy Review

1 Interim Report, para 3.12. 2 In Africa: Gambia, Ghana, Kenya, Malawi, Tanzania, Uganda, Zambia, Zimbabwe. In Central America: Dominican Republic, Ecuador, Guatemala, Guyana, Honduras, Nicaragua. In Asia: Bangladesh, Pakistan, Philippines, Sri Lanka, Vietnam.

21 1 2 3 4 5 6 7 8 9

22

A Battle of Wills Report, conclusion 21. Chairman to Secretary of State, 1 July 1987. MMC evidence, 6 February 1992. MMC Report, para 3.52 and recommendation 3. Report, para 10.5. House of Commons 25 March 1994 (cols WA 22–3). Chairman to Secretary of State, 1 February 1995. Commonwealth Development Corporation Act (1995 c 9), 28 June 1995. Cairns to Chancellor of the Exchequer, March 1996.

Escaping the Funding Impasse

1 In 1995–96 CDC was to receive a net increase of £5 million in funding, as compensation for the interest it would have to pay until the CDC bill had been enacted. In the following year there was to be a net repayment to ODA of £10 million. 2 Apart from its intrinsic implausibility, CDC was able to establish that this view was not shared at the Bank of England. 3 Commonwealth Development Corporation: Capital Resources and Structure, Report of a Working Group. ODA. March 1997. 4 Report of 1980 Review, paras 3.23 and 3.24. 5 Report of 1986 Review, paras 1.20 and 1.22. 6 FAWG Report, paras 2.2 and 2.4. 7 Preliminary Thoughts On How to Privatise CDC plc, dated 29 August 1991. The covering note to the Board read (in part) ‘In recent years we have been seeking ways of loosening some of the constraints which follow from being a public corporation dependent for all of its funds on public expenditure. One route to take is to become less than 50 per cent owned by HMG. Such a move would take CDC technically into the private sector but retain a substantial HMG and Aid Programme interest in CDC.’ 8 Eccles to Permanent Secretary, 3 July 1991. 9 F. Vibert, Restructuring CDC, 18 December 1991. 10 MMC Report, para 1.34. 11 Coopers & Lybrand Report, para 336. 12 Report of 1993 Review, Annex G para 23. 13 Warburg Report, p. 4.

Notes 287

23

Understanding Public–Private Partnership

1 Eliminating World Poverty: A Challenge for the 21st Century, Cm 3789, November 1997. 2 Para 2.37 contains the following passage – ‘The Government believes the CDC to be an under-utilised asset. We will therefore seek to enlarge the resources at CDC’s disposal by introducing private sector capital and creating a dynamic Government/private sector partnership with the Government retaining a substantial minority holding; a partnership that will provide leadership as an ethical and socially responsible investor in poorer countries.’ 3 Trade, Development and Sustainable Development: The Commonwealth in the Global Economy. Government Press Notice 27 October 1997. 4 The Future of the Commonwealth Development Corporation. Eighth Report of the International Development Committee, Session 1997–98. Stationery Office HC936, 1998. The chairman of the Committee, Bowen Wells, was a former employee of CDC and has been in a position to ensure regular Parliamentary interest in CDC over the years. 5 Government Response to the Eighth Report, from the Committee Session 1997–8. Stationery Office HC1100, 1988. 6 The Provisions of the Commonwealth Development Corporation Bill (Lords), Second Report of the International Development Committee, Session 1998–9, Stationery Office HC 212, 1999. 7 Government Response to the Second Report, from the Committee Session 1998–99, Stationary Office HC 604, 1999. I was in a position to track these developments fairly closely and to have some influence on the conduct of the debate, although not on the outcomes. Prior to the first evidence hearing in June 1998, an issues memorandum was prepared for CDC’s public relations advisers. In October I gave a seminar at the School of Oriental and African Studies, attended by CDC and DFID representatives, on the proposed public–private partnership. The two Committee reports were the subject of critiques in The Round Table, published before the second evidence hearing and before the House of Commons debate respectively. (The Future of the Commonwealth Development Corporation, Issue No 349, January 1999 and Satisfying the God of the Development Community and Mammon in the City, Issue No 351 July 1999.) Finally, a seminar was held in the City, under the auspices of the Centre for the Study of Financial Innovation in October 1999, where both the chairman of the International Development Committee and I gave presentations. This led to the publication by the Centre of my pamphlet Reinventing the CDC under Public Private Partnership in March 2000. 8 DFID memorandum of April 1998, Eighth Report, para 5.11. 9 DFID memorandum ibid, paras 4.1,6.1,and 6.4. 10 Evidence, Eighth Report, Q2, Q5, Q7–9. 11 Evidence, Eighth Report, Q26. 12 Evidence, Eighth Report, Q43. 13 CDC Memorandum of May 1998 in Eighth Report. 14 Evidence, Eighth Report, Q66 and Q67.

288 Notes 15 Evidence, Eighth Report, Q81. 16 Eighth Report, para 24. 17 The Venture Capital Mirage: Assessing USAID experience with Equity Investment. Quoted in Eighth Report, para 12. 18 Government Response, Recommendation 4. 19 Eighth Report, Evidence Q82. See also CDC memorandum para 4.3.

24

Reconciling God and Mammon

1 Second Report, para 3. 2 Second Report, para 28 ‘We consider it unacceptable that Parliament is being asked to approve legislation to establish the CDC public private partnership without having seen the full draft statement of business principles, which will direct the investment priorities of the company.’ 3 Government Response, Recommendation 10. 4 Second Report, Q58. See also my memorandum to the Committee of March 1999. 5 Letter to the Committee from the chief executive of 3i Group of March 1999 in the Second Report. 6 Second Report, Evidence Q81. 7 Second Report, Evidence Q106 Bowen Wells ‘So Parliament is left to guess what the government is going to do and how it is going to form the balance sheet and profit and loss account.’ A minimal share capital of £10 million was introduced in December 1999. 8 Second Report, para 39. 9 Second Report, DFID memorandum para 5.11, CDC memorandum para 1.1. Evidence Q102. 10 The issues were explained in Greenbergh’s memorandum in Second Report, and in Q5 and following.

Bibliography Assessing Aid, World Bank/OUP 1988 Attitude to Africa, Penguin 1951 Balogh, Thomas, ‘Britain and the Dependent Commonwealth’ in New Fabian Colonial Essays, Hogarth 1959 Brandt Commission, North South: A Programme for Survival, Pan 1980 —— North South: Cooperation for World Recovery, Pan 1983 Campbell, Jock, The New Africa, Africa Bureau 1962 Can Africa Claim the 21st Century?, World Bank 2000 Chandos, Lord, The Memoirs of Lord Chandos, Bodley Head, 1962 ‘Colonial Development: The Future of the Commonwealth Development Corporation’, Planning Vol XIX 1952 Cowan, M. Early Years of the CDC: British State Enterprise during Late Colonialism, African Affairs 1984 Creech Jones, Arthur, ‘Labour Achievements in the Colonies’ in The Way Forward, Fabian Colonial Bureau 1950 —— ‘The Labour Party and Colonial Policy 1945–51’, in New Fabian Colonial Essays, op. cit. Eliminating World Poverty: A Challenge for the 21st Century, Cm 3789, Stationery Office 1997 Eliminating World Poverty: Making Globalisation Work for the Poor, Cm 5006 Stationery Office 2000 Frankel, S. H. The Economic Impact on Underdeveloped Societies, Blackwell 1953 Gaitskell, Arthur, Gezira: A Story of Development in the Sudan, Faber 1959 —— ‘Internal Economic Development’ in New Fabian Colonial Essays, op. cit. Hart, Judith, Aid and Liberation: A Socialist Study in Aid Politics, 1972 Hinden, Rita, Common Sense in Colonial Development, Fabian Colonial Bureau 1949 —— ‘Socialism and the Colonial World’, New Fabian Colonial Essays, op. cit. Investment in Development, ODI 1965 Jaycox, Edward, The Challenges of African Development, World Bank 1992 Killick, Tony, A Reaction too Far: Economic Theory and the Role of the State in Developing Countries, ODI 1989 Labour’s Colonial Policy: II Economic Aid, 1957 MacIntyre, David, The Expense of Glory: A Life of Lord Reith, HarperCollins 1993 McWilliam, Michael, ‘Economic Development and the Race Fanter in Kenya’, Economic Development and Cultural Change, 1963 Morgan, D. J. Official History of Colonial Development, Macmillan 1980 The New Africa, Bow Group 1962 Overseas Development: The Work of the New Ministry, Cmnd 2376, HMSO 1965 Overseas Development: The Work in Hand, Cmnd 3180, HMSO 1967 Overseas Development: The Changing Emphasis in British Aid Policy – More Aid for the Poorest, Cmnd 6270, HMSO 1975

289

290 Bibliography Partners in Development: Report of the Commision on International Development, Praeger 1969 Perham, Margery, ‘Political and Psychological Problems of Development’ in Restless Nations, Allen & Unwin 1962 Plan to Intensify the Development of African Agriculture in Kenya, Government Printer, Nairobi 1954 Rendell, Sir William, History of the Commonwealth Development Corporation, Heinemann 1976 Rimmer, Douglas, ‘African Development in Economic Thought, in The British Intellectual Engagement with Africa in the Twentieth Century, Macmillan 2000 Ryrie, William, First World, Third World, Macmillan 1995 The United Kingdom’s Role in Commonwealth Development, Cmnd 237, HMSO 1957 Ward, Barbara, ‘New Perspectives’ in Restless Nations, ibid

Index African Governors Conference 7,8 alternative source of finance 45–6 area of operations 9; restriction 47, 49, 50–3; reinstatement 53; extension 79, 82; U and non-U 83–4; 1975 working party 115; Foreign Affairs Committee 141–2; South Asia 146; see also investment targets BAL 24, 30, 88 Balogh Thomas 77, 275n7 Bank of England 130–2, 190 Barclays Bank 126 Baring, Sir Evelyn see Howick Beaver, Sir Hugh 42 Bessborough Gardens 158, 206 Board composition: directors 27; evidence to MMC 166–7; MMC views 174, 220; ODA director 148, 153, 220; 1993 Review 184, 221; remuneration 222; 225, 246 borrowing powers 9, 57, 68–9, 71, 79, 222 Botswana (Bechuanaland): Lobatsi abbatoir 24; Molopo ranch 23, 90 Brandt Commission 138 break-even obligation: concerns 8; definition 9; 1970 Select Committee 80; 1973 assessment 87; 1986 Review 145–6; MMC hearings 169,171; see also financial performance Caine, Sir Sydney 4, 6 Cairns, Lord 224, 237 Cameroon: Camdev 79,103 Caribbean: Belize (British Honduras) 24, 36; Guiana hardwood 23, 29, 37 gold 23; 1973 appraisal

88; housing finance 92; Trinidad cement 37 Carrington, Lord 121, 125 cash flow: alternative presentations 151–2; Table 16.2, 163, 185, Table 18.1, 197 Chalker, Lady 179–80, 185, 188–9, 194–5, 281n6 Chilanga Cement 13, 24, 30; project history 33–4; 90 Cohen, Sir Andrew 69 Colonial Development Corporation (CDC) and aid policy: post-war 4; 1957 White Paper 50–1; 1964 White Paper 77–8; Select Committee 79–81; policy alignment 115, 121; 1997 White Paper 287n2; 1993 decision 189; see also Creech Jones; Howick; Lennox Boyd; public–private partnership Colonial Development Corporation (CDC) corporate structure: development bank 135, 162, 205, 211, 228; foundation limited by guarantee see Coopers & Lybrand; non-remunerated public capital 186; public corporation with loan capital 9; venture capital 228; see also commercial borrowing; equity capital; privatisation; public–private partnership Colonial Development Corporation (CDC) and development: x–xii; ‘need’ as a proxy 80; industry versus agriculture 122; commercial versus development benefit 123, 138; strengthening the private sector 144, 149, 181, 198; performance criteria 145; comparison with ODA 148; catalyst role 149; evidence to

291

292 Index MMC 172; improving the investment climate 198; demonstration effect 234, 241, 244; generating externalities 241 Colonial Development Corporation (CDC) perceptions of role: bilateral policy 179–82; development bank 135, 162, 205; developing the colonial estate xiv, 5–7, 249; investor return to government 6, 202; to private investors 238, 244, 253; private sector relationship –catalyst 149, demonstration 234, foreign investor 135, last resort finance 139, 205, strengthening 144, 149, 181; venture capital 249, 256 Colonial Development and Welfare Acts xi, 3, 6, 7 Colonial Economic Development Council 5 commercial borrowing: permitted by Act 9; 1958 ceiling 57; Macleod 59; Nutcombe Hume 60, 273n26; 1966 loans 69–71; 81; 1980 Review 121–5, 1983 debacle 126–8; Foreign Affairs Committee 140; 1986 Act 143; 1986 Review 150,161; government guarantee withdrawn 185; Coopers & Lybrand report 187; SG Warburg 191; 1993 Review 192 Commonwealth Development and Finance Corporation (CDFC) 44; Riscom 45–6; 63, 129; merger proposal 130–1; 132 Commonwealth Private Investment Initiative 257–8 concordat: origins 10, 12; 1949 agreement 13; 1953 revision 37–8; 1955 revision 40; 1967 superceded by planning framework 74 Coopers & Lybrand: report 186–7

corporate planning 187 Creech Jones, Arthur 3, 7, 76, 267n2, 274n2 Cripps, Sir Stafford 8 DEG 109–10 Devcos: survey 105–11, Table 9.4; Nigeria 107–8; East Africa 108–10 Douglas, Lord 41 Dugdale, John 20–1 Eccles, John: consultant to CDC 133; Board member 136; Report 133–6; MMC member 65; 1986 Review 143, 147; 1991 reorganisation 159, 173; 1st MMC hearing 166–70, 2nd hearing 171–3; appointment extended 179; appraisal 203–11; CDFC 131; 1992 Review 179, 184, 189, 192, 200–1 equity capital: excluded at formation 9; Trefgarne 15; Treasury 16; Reith 57; Sinclair 58, 62; 1966 working party 72–3; converting reserves 191; 1998 bill 245, 288n7 Faber, Prof. Michael 267n3, 138, 279n5 finance house issue: PAC challenge 41; bill amendment 41; Gaitskell 42, 43 financial performance: Caine 6; statutory requirement 9, 114; first profits 35; 1986 Review 145–6; efficiency measure 147, 163; FAWG 163; MMC 167, 169, 171; 1993 Review 197; 1983–93 comparison 204–5; Strategy Review 217; see also special losses; break-even obligation FMO 109–10 Foreign Affairs Committee: 1982 Report 137–42; development

Index 293 impact 138; CDC relationship with government 139–40; commercial borrowing 139; area of operations 141–2; fan club 142 fructification interest 15–16 Gaitskell, Sir Arthur: research assistant to xvi; finance house issue 42; partnership vision 76, 275n5; smallholder schemes 98 Gambia: rice farm 24, 36; Reith 269n6; hotel 91; failed Devco 108; see also Gambia Poultry scheme Gambia Poultry scheme xi, 14, description 17–21; official inquiry 21; Rendell’s History 268n19 Ghana (Gold Coast): oil seeds mission 14; independence bill 46–49; 1973 round-up 91; Twifo oil palm 103 good governance: Malawi 193–4; Sri Lanka 193 Gorrell Barnes, Sir William 61, 273n25 Grey, Lord 119, 121 Griffiths-Jones, Sir Eric 89, 121, 133, 277n9 Griffiths, James 19–20 groundnuts scheme xi, 5, 63, 267n6 Hart, Judith 113–14, 277n2, 277n9 Hinden, Rita 267n2, 274n1 Hollom, Sir Jaspar 129, 131 housing finance: survey 92–7; 1955 vires 44; Federal & Colonial Building Society 43, 92; East African building societies 93–5, Tables 9.1, 9.2 Howe, Lord 125, 128, 153, 193 Howick, Lord: appointment 51; Macleod and Perth 51–3; case for growth 71; smallholder schemes 81

Hume, Sir Nutcombe

51, 273n26

IFC 181, 190, 227–8 IMF 207 India: 1975 working party 115; 146, 155, Eccles visit 209 Indonesia 103; Eccles visit 209 interest waiver: on lost capital 29,55; on equity projects 68, 73; 1969 working party 81–2; 1980 missed opportunity 128; new proposal 184, 186; legislation 222–3 International Development Committee: 1st Inquiry 233–41 (DFID evidence 234; CDC evidence 237; report 238–9; government response 240); 2nd Inquiry 242–6 investment capacity: initial over-estimation 15–16; controlled over-commitment 120; 1986 Review 150–1, 153; by 1991 155, 163; by 1993 204; under-utilised asset 237, 287n2 investment targets: first steps 83–4; 1975 Review 115; 1980 Review 122, 146; 1986 Review 152, 157, 198; 1993 Review 198–9; 1983–93 comparison 204 Investors in Industry (3i) 244 Ivory Coast 103 Kenya: building societies rescue 93–5; Devco 109–10; East African industries 14, 23; housing loan 44; KTDA 89, 99–100; land settlement 100–1; smallholder sugar and coffee 102; 1960 confidence crisis 60; 1973 round-up 89 Kenya Tea Development Authority 89, 99–100 Kindersley, Lord: appointment 133; commercial borrowing 125; CDFC negotiations 131; and Eccles Report 133

294 Index Lennox Boyd, Alan: Gambia Poultry 21; role of CDC 22; Riscom 45; Ghana independence bill 47–8; capital write-off 56 Leslie, Sir Peter: Bessborough Gardens 158; MMC reference 165; Board composition 167, 221, 223; negative funding 226; privatisation 170, 196; 1991 reorganisation 173; 1993 Review 179–81, 181, 196 loan arrears: Paris and London clubs 155, 206; Malawi rescheduling 207; Zambia rescheduling 156, 207; Tanzanian rescheduling 156, 208; risk acceptance 190, 205 Lyttelton, Oliver (Lord Chandos) 38, 40, 55–6

Marten, Neil 119, 125 Monopolies and Mergers Commission: 1991 reference 165–77; ODA evidence 166; tentative conclusions 171; main concerns 174; priority recommendations 175–6 Munster, Earl of 55

Macleod, Ian: Sinclair Report 59; Kenya 60 Malawi (Nyasaland): debt rescheduling 207; fish oil 23; Kasungu tobacco 102; power scheme 193–4; smallholder tea 101, sugar and coffee 102; Vipya tung oil 13, 23, 30, 269n8; 1973 round-up 90 Malaysia (Malaya and Borneo): BAL 24, 36; cocoa 23, 37; Eccles visit 209; Federal Loan & Building Society 24, 43–4, 92; FLDA 98; Kulai oil palm 23, 37, 98; Malaya Industrial Finance Company 107; 1973 round-up 88 managed projects: early lessons 36; unique role 52, 111; political obstacles 149; Meinertzhagen 138–9; 1993 position 204; CDC Industries 219 Meinertzhagen, Sir Peter: appointment 86; smallholder projects 103; 1975 working party 114; 1980 Review 122; Foreign Affairs Committee 137–9; contrast with Rendell 134, 136

Ogmore, Lord 55 organisation: Trefgarne 12; Reith 26–7, 168; Lyttelton 38; Rendell 134–6; Meinertzhagen 134; Eccles 134, 147, 168, 159, 173; ODA 148; Reynolds 218–19 Overseas Resources Development Acts 6, 9; 1954 Act 56; 1956 Act 45

National Audit Office 159 Nkrumah, Kwame 49, 271n45 Nigeria: Devco developments 107–8; fisheries 23; housing finance 92; Mokwa scheme 14, 36; oil seeds mission 14; Savannah sugar scheme 91; 1973 round-up 91 non-departmental public body 147, 160, 195

Papua New Guinea 103; Eccles visit 210–11 Paris Club 155, 206 partnership: with investors 2, 37, 141, 252; with HMG 252–3, see also public–private partnership; with Ministry 42, 74, 141, 163, 234, 237; with overseas governments 22, 105, 251; with smallholders see separate entry Pearson Commission 78 Perth, Lord: Ghana Independence bill 47, 271n45, 273n24; Sinclair 61 planning framework: 1967 introduction 74; 1969 working party 81–3, Table 8.1; 1975 113; 1976 115; 1979 115, 119; controlled over-commitment 120; 1987 revision 145, 153; 1990 162; 1992 180, 188;

Index 295 negative funding 226–7; reversion to nil net funding 240; see also concordat Please, Sir Clem 58 Poynton, Sir Hilton 39, 270n11 privatisation: summary xiii, 229–31; Epilogue; 1980 Review 124; 1986 Review 144; FAWG 162; MMC 170, 231; 1993 Review 180–1, 183, 189, 196; Coopers & Lybrand 187; SG Warburg 191; 1997 working group 227–8; Vibert paper 230; Cairns 237; see also International Development Committee, public–private partnership Public Accounts Committee: 1954 Report 41; 1989 Report 160, 162–3 public–private partnership: Blair speech 233; White Paper 287n2; increasing CDC’s resources 233, 287n2, 234, 238, 245; compatibility with development role 235, 238–9, 243; certainty of framework 235, 240, 242–3; Golden Share 235–6, 243; balance-sheet structure 236, 244–5; tax status 236, 245; collaboration with DFID 234, 237, 245; transition period 237, 239–40, 240, 254; meeting investor needs 238, 245, 253; relationship with foreign governments 254 Quinquennial Reviews: 1975 Review 114; 1980 Review 121–5; 1987 Review 43–53; 1993 Review 178–84, 195–202; see also working parties Raison, Timothy 143 Rahman, Tunku Abdul 50 Reith, Lord: appointment 18; constitutional responsibility for Gambia Poultry 20, (see also Gambia Poultry; Gambia);

reorganisation 26–7; CDFC 45; Malawi Vipya 30; colonial independence 47; Tunku Abdul Rahman 50; special losses 55, retirement and appraisal 57, 64 Rendell, Sir William: appointment 27–8; Trefgarne era 29; SIS association 30–1; function versus geography 38; working party 40; finance house issue 43; Riscom 45; Ghana independence 49; area of operations 53; Sinclair Committee 58; 1966 borrowing 69–70; growth 71–2; interest waiver 82; appraisal 64 Rennell, Lord: tropical allsorts 22; Ghana independence 271n45 Reynolds, Roy: appointment 215; vires legislation 222–4; see also Strategy Review Salloway, Sir Reginal 270n11, 271n45 Select Committee on Overseas Aid 1970 79–81 Short, Clare: decision on publicprivate partnership 228; 1997 White Paper 232; evidence to IDC 234–5; CDC bill second reading 246 Sinclair Committee: appointment 57; proposals 58–9; Parliamentary interest 60–1, 273n24 Sierra Leone 91; failed Devco 108; Guma Valley loan 132 smallholder schemes: 1970 Select Committee 80–1; survey 97–105, Table 9.3; Kenya tea 99, sugar and coffee 102, land reform 100–1; Malaya oil palm 98; Malawi and Zambia 101; West Africa 103; Papua New Guinea 103; conclusions 104, 112; Foreign Affairs Committee 139; see also Kenya Tea Development Authority; Swynnerton

296 Index special losses account: defining the problem 29, 55–6; Lyttelton 55; Labour Party pledge 57; Sinclair Committee 57–8; sterilisation 60–1; formula revision 73; 1977 write-off 116 Sri Lanka (Ceylon) 146, 193 Stanley, Col. Oliver 7, 40 Strachey, John 7 Strategy Review Chapter 20 passim; ‘additionality’ and ‘turning point economies’ 217–18 Swaziland: SIS see Swaziland Irrigation Scheme; Usutu 24, 29; 1973 round-up 90 Swaziland Irrigation Scheme 24; project history 30–3, 99 Swynnerton, Sir Roger 79, 81; Swynnerton Plan 99; 103 Tansley, Sir Eric 16, 268n18 Tanzania (Tanganyika): Tanwat 14, 23, 89; Devco 108–9; debt rescheduling 208; see also groundnuts scheme Thailand: Nava Nakorn 92; rubber replanting 103 Thomas, Sir Miles 14 Totman, John 79 Trefgarne, Lord: appointment 11, African Governors conference 10; resignation 18, personal statement 21; son 223

Uganda: Devco 109; Eccles visit 207, 210; 1973 appraisal 89 Vereker, Sir John

143

Warburg, SG: Report 190–1 Wells, Bowen 287n4 working parties: 1955 Financial Issues 40; 1967 Financial Arrangements 68, 73–4; 1969 Funding Needs 81; 1977 Interim Review 115; 1990 FAWG 161–3; 1997 CDC Capital Reserves and Structure 226–228; see also Quinquennial Reviews World Bank: Kenya settlement scheme 51, 100–1; project management 52; competition with CDC 95; support for KTDA 100; smallholder coffee 102; Papua New Guinea 103; Cameroon 103; access to London market 126; comparison with CDC 142, 279n2; Sri Lanka and Malawi 193 Zambia (Northern Rhodesia): Chambishi 46; Kariba Dam 34, 89; debt rescheduling 207; see also Chilanga Cement Zimbabwe (Southern Rhodesia): housing loan 44; Riscom 45