CDC PUBLIC/PRIVATE PARTNERSHIP

CDC Group plc

1. At 8 December 1999 CDC was transformed from a statutory corporation, which was originally set up by the UK Government in 1948, into a public limited company registered under the name CDC Group plc. Powers for this were contained in the Commonwealth Development Corporation Act 1999. This paves the way for creation of a Public/Private Partnership with the introduction of private capital. The framework designed for the Public/Private Partnership will ensure that CDC maintains its focus on poorer countries (see paragraph 7, Investment Policy), entrenched by means of a special share. This became effective at transformation. For the time being, CDC remains wholly Government-owned. When business conditions are right, the majority shareholding will be sold to private investors (upon which the Public/Private Partnership will come into being), with the Government retaining a substantial minority shareholding as well as the special share.

2. CDC is concerned with investment in pre-emerging and emerging markets and, increasingly, is concentrating on investment in private equities. CDC provides risk capital directly and through third party funds under management. These include regional funds under the Commonwealth Private Investment Initiative (CPII). Through CDC Industries, it manages over 30 businesses involved in such industries as juice processing, palm oil, cement, sugar, acquaculture, horticulture and tea. CDC has 32 overseas offices around the world and operates throughout sub-Saharan Africa, south and east Asia, the Pacific and the Americas. At 31 December 1998, CDC had £1.5 billion invested in over 420 businesses in 54 countries. Activities cover a wide range of sectors, including financial services, power, transport, telecommunications, retail, information technology, property/tourism and mining.

The Public/Private Partnership

3. The Prime Minister announced in October 1997 the Government’s intention of introducing private capital into CDC and creating a Public/Private Partnership. This is intended to enable CDC to contribute more effectively to the sustainable development of poorer countries. The Prime Minister said:

"I think that Lord Cairns, the Corporation’s chairman, will agree that the Commonwealth Development Corporation has demonstrated how effective well-targeted investment can be in increasing prosperity…..The Corporation has made a major contribution to promote economic development, particularly in areas of greatest need, such as sub-Saharan Africa and South Asia.

But, despite this success, I believe it is an under-utilised asset. It can do more. It has the capacity to play a much greater role in mobilising new private finance for poor countries.

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 public and private sectors….. The new partnership will allow the CDC to borrow on the capital markets. It will give the Corporation substantial extra funds to invest each year 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."

4. The White Paper Eliminating World Poverty: A Challenge for the 21st Century published in November 1997 noted (Paragraph 2.37):

Our main instrument for investing in the private sector in the poorest countries is the Commonwealth Development Corporation (CDC). Its particular strengths lie in its ability to help create and manage new business and to act as a catalyst for other investors. From its own resources it currently finances around £300 million of new activities a year in the poorer countries, of which over 30 per cent is for projects in sub-Saharan Africa. 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. As the Prime Minister has announced, the proceeds generated will be ploughed back into the development programme."

CDC Act 1999

5. The Act enabled the transformation of CDC from a statutory corporation, governed by its own legislation, into a public company limited by shares. It also provided for the financial relationship between DFID and CDC in the period leading up to sale of shares to private investors. Finally, the Act entrenched Government’s involvement in CDC so that the Government shareholding cannot be reduced below 25%, or the rights of the special share varied in any way, without the approval of Parliament. The Bill was originally introduced in the House of Lords in November 1998 and received Royal Assent on 27 July 1999.

6. At House of Commons Committee stage Government amendments were introduced relating to CDC’s tax status under the Public/Private Partnership. These have the effect of exempting CDC from UK corporation tax, allowing CDC to compete on a level playing field with competitors located off-shore.

Institutional arrangements - key documents

7. The design of the Public/Private Partnership is underpinned by a number of key documents. These include the:

Memorandum and Articles of Association. In accordance with the Companies Act 1985, CDC, on registration as a company, required a Memorandum and Articles of Association. The Memorandum sets out the objectives and authorised activities of CDC Group plc. CDC’s Mission Statement is:

to implement policies designed to maximise the creation and long-term growth of viable businesses in developing countries, especially poorer countries, to achieve attractive returns to its shareholders and implement social, environmental and ethical best practice in the conduct of its and its subsidiary undertakings’ business."

The Articles of Association regulate how CDC will be managed as a company. They set out, inter alia, the rights of the special shareholder (Article 11); the requirement for CDC to act in accordance with an investment policy having a particular focus on investment for the benefit of poorer countries, especially those in sub-Saharan Africa and South Asia (Article 51); and for CDC to operate according to a statement of business principles, committing it to social, environmental and ethical best practice (Article 52). Under both Article 51 and Article 52, CDC is required to report each year on compliance in its annual report. These two articles may not be changed without the written consent of the special shareholder. Article 92 authorises the special shareholder to appoint two non-executive directors.

(Relative to document below)

Investment Policy. This safeguards CDC’s developmental focus. Under the Investment Policy, CDC may only invest in listed countries/territories. These are those classified by the World Bank as low or middle income (based on 1996 data). 70% of new investments, over a rolling five year period, must be in countries with a GNP per capita below the weighted mean for lower middle income countries; and a target of 50% of new investments each year should be in sub-Saharan Africa and South Asia. Any changes to the Investment Policy require the approval both of a majority of ordinary shareholders and of the special shareholder.

Statement of Business Principles. This document sets out CDC’s business principles. It covers the four policy areas of business integrity, social issues, the environment, and health & safety policy. It is intended to secure CDC’s continued commitment to high ethical business standards. The business principles and policies will be monitored by a sub-committee of the main Board (on which four directors will sit, including both HMG appointed directors). Any changes must have the agreement of at least three of the four directors of the business principles committee when approved at board level and therefore of at least one of the directors appointed by the special shareholder.

Other agreed documents include a Memorandum of Understanding concerning the relationship between CDC and DFID during the period leading up to sale and a Deed of Covenant relating to CDC compliance with the Investment Policy.

Next steps

8. Following transformation of CDC into a plc on 8 December 1999 the next major step will be capital restructuring. This is expected to happen early in 2000. There will then be a transitional period until sale of the majority shareholding to private investors at a later date. In this period, CDC will seek to establish a successful track record as a public limited company investing in developing economies which will be attractive to potential future investors.