The UK's power struggle: Private sector investment vs. traditional aid

CDC’s investment in Madagascar Lychee Export, a lychee export business based in the port of Toamasina and a major employer, has helped improved production processes and resulted in much needed employment opportunities. DfID and CDC’s new mandate is to focus more aid on private sector investments to create jobs and promote economic development. Photo by: CDC Group plc

The United Kingdom invests more overseas aid in nonrenewable power than renewable power, a recent report by the Overseas Development Institute found, but officials from CDC Group — the U.K.’s development finance institution and owner of Globeleq, the largest energy producer in sub-Saharan Africa — argue that investing in “a mixed energy base load” in some cases makes the most sense for sustainable growth.

“We do invest in renewables, but like anywhere, we know that there has to be stability of energy supply,” Lynsay Taffe, director of communications at CDC Group told Devex.

“Part of that base load has to come from things like gas and more traditional energy forms,” she said, except for coal, which CDC doesn’t invest in.

It seems unfair, Taffe explained, to expect developing countries to rely on renewables when even the most industrialized countries must use a mixed base load “to make sure the lights will always turn on.”

A third of CDC’s current investments are in the energy sector, Taffe told Devex. Its focus on energy reflects the CDC’s new mandate — and the mandate of the Department for International Development — to focus more aid on private sector investments to create jobs and promote economic development where typical investors dare not tread: least developed countries and fragile states.

“CDC occupies this niche, where it’s trying to be like a private investor and make profits, but also trying to operate on a frontier and push forward the boundaries of where private investments are going,” Paddy Carter, a research fellow at ODI, told Devex.

DfID invested more than $1 billion in CDC in July to be dispersed over three years — the maximum allowable investment according to the 1948 Parliamentary Act establishing CDC — amounting to its first new investment of capital into the CDC in 20 years. As the institution’s only stakeholder, DfID will continue to CDC’s strategy to maximize impact. The aid agency’s decision was the result of a massive shift at CDC three years ago, when the organization decided it would only invest in South Asia and sub-Saharan Africa, and only in sectors proven to create jobs.

“We now have confidence in how [CDC] now works following a radical reform,” Michael Haig, deputy head of communications at DfID, told Devex.

“This is a really important part of our work to boost jobs and growth in poor countries to end dependency on aid in the long run,” he said. “It will also help create new markets for British businesses to invest in.”

Before the reforms, CDC received negative press attention for some of its investments, for example a luxury hotel in Nigeria.

Changes to CDC’s mandate, however, refocused investments on the world’s poorest.

“Before 2012, we invested on the basis that investing in the economy of a developing nation would do good automatically,” Taffe said.

“Nowadays we try to direct our money towards the most job-creating sectors and the ones that will have the greatest impacts on the poorest people,” she said. “Although [some investments] can show impact on the face of it, others might not instantly appear to be projects you’d think an organization like ours would be likely to make.”

When an investment seems less intuitive, Taffe added, CDC “will make a case for it.”

Still, questions remain about who exactly will hold CDC to account for its investments.

Taffe told Devex that while DfID, as a shareholder, has oversight over the strategy and will take CDC to task if it steers off-track, the agency does not have oversight on decisions about specific investments, or which businesses receive capital.

The Independent Commission for Aid Impact, DfID’s watchdog, doesn’t have oversight of CDC, and neither does the National Audit Office or the International Development Committee in Parliament. However, as Taffe pointed out, CDC will still be answerable to these bodies through their coverage of DfID’s management of CDC.

The publicly owned finance institution is also a signatory to the International Aid Transparency Initiative, which requires it to disclose details of all investments to the public.

“The [DfID] money goes into one pot, it isn’t earmarked for anything, but instead is meant to help us expand our reach and look for more businesses to invest in,” Taffe said.

The director of communications pointed to CDC’s recent investments for a look at how the DfID money will be spent. Recent CDC capital went to businesses in a variety of sectors, Taffe said, including agribusiness, manufacturing, infrastructure, financial institutions, health, education and construction. Beneficiary countries include Sierra Leone, Cameroon, Uganda, India and Tanzania, according to the CDC Annual Report.

But some observers question whether DfID’s investment adheres to the department’s goal of achieving “additionality,” or providing aid only in instances where others can’t or aren’t doing enough.

“Private equity funds have become more active in sub-Saharan Africa in the last five years,” Judith Tyson, a research fellow at ODI specializing in financial market development for developing countries, told Devex. “The problem for CDC is doing something that [those firms] aren’t already doing.”

“It should be asked whether aid ought to be spent elsewhere, like on infrastructure in these countries,” she said.

Tyson also pointed out the complexity of measuring economic growth. While metrics exist to determine the number of jobs created directly by an investment, indirect effects on the economy are harder to measure, an issue CDC acknowledged.

Indeed, Taffe told Devex that CDC officials have been working for the past 18 months on a formula for measuring direct and indirect impact. It is expected, she said, that next year’s review will also offer an opportunity to review the institution’s work, as well as make the Sustainable Development Goals more central to strategies for investment.

For more U.K. news, views and analysis visit the Future of DfID series page, follow @devex on Twitter and tweet using the hashtag #FutureofDfID.

About the author

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    Molly Anders

    Molly Anders is a U.K. Correspondent for Devex. Based in London, she reports on development finance trends with a focus on British and European institutions. She is especially interested in evidence-based development and women’s economic empowerment, as well as innovative financing for the protection of migrants and refugees. Molly is a former Fulbright Scholar and studied Arabic in Syria, Jordan, Egypt and Morocco.