Commonwealth Development Corporation Bill [Lords]

HC Deb 24 May 1999 vol 332 cc38-79

[Relevant documents: The Second Report from the International Development Committee, Session 1998–99, on The Provisions of the Commonwealth Development Corporation Bill [Lords] (HC 212), the Eighth Report from the International Development Committee, Session 1997–98, on The Future of the Commonwealth Development Corporation (HC 936) and the Government's Response thereto (HC 1100 of Session 1997–98.]

Order for Second Reading read.

4.28 pm

The Secretary of State for International Development (Clare Short)

I beg to move, That the Bill be now read a Second time.

I am very pleased to recommend to the House today a Bill that will transform the Commonwealth Development Corporation from a small-scale, Government-owned investment organisation into a public-private partnership that will operate on a larger scale and channel private sector investment into the poorest countries. We hope also that the new CDC will encourage by example much larger flows of foreign investment into the least-developed and poorest economies, by proving that such investment can be safe and profitable.

As the House knows, the Government have given a greatly increased commitment to the promotion of development, and to the reduction of poverty in the poorest countries. We have established a separate Government Department that now has Cabinet status. We have increased that Department's capacity so that it now has expertise on a wider range of policy issues such as trade, debt, international investment, agriculture reform and environmental agreements. The Government can therefore take full account of the needs of developing countries, before deciding on our position in international negotiations on all those issues. We have also reversed the long years of constant decline in the volume of aid spending as a proportion of gross domestic product, by increasing my Department's budget by 28 per cent. over the next three years. That is the largest increase to be made in any Department's budget.

Also, we have re-examined and refocused the Department's work, and in November 1997 we set out our new policy in the White Paper entitled "Eliminating World Poverty: A Challenge for the 21st Century". That White Paper refocuses all the work of the Department on the eradication of poverty and on mobilising the international system to meet the agreed targets of halving by 2015 the proportion of people in the world living in poverty. Other targets include getting all the world's children into basic education, and providing basic health care to all, by the same date.

Mr. Bowen Wells (Hertford and Stortford)

Does the Secretary of State share my concern that, although her White Paper is so radical, the House has had no opportunity to debate it, despite promises from the business managers? A thorough debate on the White Paper and its implementation is long overdue.

Clare Short

I certainly agree that the White Paper is worthy of debate. We have had interesting discussions on it in the Select Committee on International Development, which the hon. Gentleman chairs so ably. The problem is that the Government are committed to large amounts of new legislation, and it is difficult to get all our business through the House. I take the hon. Gentleman's point, and would welcome any opportunity to hold a debate.

As part of our policy commitment to the systematic reduction of poverty in the poorest countries we have made it clear that development and poverty reduction cannot be achieved through improvements to social policy alone. That is an important point, but it has not been fully accepted in previous debates. Economic growth must outstrip population growth, or poverty will grow. That is what happened to much of sub-Saharan Africa during the 1980s.

We seek to promote Government investment in education for all and in basic health care for all. However, we also seek efficient economic management and the encouragement of a thriving—and responsible—private sector and of inward investment. It is clear that the big increase in economic growth that is needed in the poorest countries will not be achieved unless there is a big increase in inward investment. Our work to encourage development must focus on creating conditions that will encourage increased inward investment in the poorest countries.

For that reason, we propose the transformation of the Commonwealth Development Corporation from a wholly Government-owned institution into a public-private partnership.

Mr. Desmond Swayne (New Forest, West)

What is the difference between a public-private partnership and a privatisation, or partial privatisation?

Clare Short

I am about to outline the difference in great detail—although I should have thought that the hon. Gentleman would understand the meanings of words. Privatisation takes something that is owned by the Government and allows commercial rules and market forces to determine its future. A public-private partnership means that the Government retain a stake and that some public sector objectives are entrenched in the relationship with the private sector. That is what we seek to secure—[Interruption.] There is no need for the hon. Member for Chesham and Amersham (Mrs. Gillan) to giggle about it; she might find it difficult to understand these matters, but if she listens carefully, she will understand a little more.

Mr. Edward Leigh (Gainsborough)

Will the Secretary of State give way?

Clare Short

If the hon. Gentleman wants to speak on the same point, it might help his thought processes a little if I explain it so that he may better understand it.

The Commonwealth Development Corporation was established in 1948 as the Colonial Development Corporation, to develop the resources of the then colonies. It was wholly Government-owned and was funded by loans from Government. Its remit was extended in the 1960s to the independent Commonwealth countries, and, in 1963, it changed its name to the Commonwealth Development Corporation. Since then the corporation has developed a long record of successfully identifying and managing investments in difficult conditions. It has investments in more than 400 enterprises in 55 developing countries.

The corporation has made a substantial contribution to development, and I pay tribute to all the staff who have worked for it so successfully. However, on coming to office, the question that I asked about the CDC—as well as all the other activities of my Department—was whether it could make a bigger contribution.

It was clear that, for as long as the corporation remained in the public sector, it would be constrained by public sector financial controls. Even with our growing development assistance programme, the CDC would obviously face severe limits on available funds. I was therefore very interested in examining whether it was possible to reorganise the CDC so that it could enlarge its investments by tapping into private sector funds.

My second and bigger objective was to examine whether the CDC could be used to leverage larger private sector investment into the poorest countries. If the CDC was bigger and could make investments that achieved a rate of return attractive to the private sector, it could demonstrate that the private sector could invest successfully in countries that it currently shuns. That is a second and important part of my objective in recommending the reorganisation of the CDC.

We therefore propose to create a new CDC that is a true public-private partnership and which provides for direct private sector involvement and also for the on-going involvement of the Government as a partner. We see that as a long-term partnership and we intend to retain a substantial minority holding in the CDC for the foreseeable future. That means that the Government will have a long-term stake in CDC's success.

As well as our ordinary shareholding, the Government will hold a golden share, which will exist as long as we have a substantial interest in the CDC. That will protect the CDC's investment and ethical policies and, therefore, its development role.

Mr. Nicholas Soames (Mid-Sussex)

I warmly welcome the step that the right hon. Lady is taking, and pay tribute to the work of the Commonwealth Development Corporation. Does she agree, however, that, while the Government will retain a golden share, it will be important for the CDC to secure from where it wishes the funds that it needs for its future development? Does she agree that it should be able to go to capital markets outside as well as in this country?

Clare Short

The CDC is free at the moment to raise funds offshore because it is not constrained by the rules on a publicly owned investment organisation. One of the major reasons for the CDC's ceasing to be wholly Government owned is to enable it to raise funds within Britain to enlarge its investment portfolio.

Several hon. Members

rose—

Clare Short

Perhaps I may finish this paragraph and then I will give way to all the hon. Gentlemen—I think that they are Gentlemen—who are attempting to intervene. Of course, I am not questioning their gentlemanliness.

Let us be clear that a continuing Government role is necessary to protect the CDC's development role. The hon. Member for Chesham and Amersham might like to concentrate on that point. Pure privatisation would simply drive the CDC out of the least-developed countries. A privatised CDC would simply behave like other commercial investment companies. A wholly publicly owned CDC is limited in the way in which I described. The public-private partnership is thus essential to our objective of increasing private sector investment and ensuring that that goes to the poorest countries.

Mr. Gary Streeter (South-West Devon)

The Secretary of State has described the primary difference between a public-private partnership and a partial privatisation, which is that the Government intend to retain their minority holding for the foreseeable future. Obviously, that presupposes that the Government may get rid of that holding at some stage. If they do, will the CDC still be a public-private partnership?

Clare Short

It is not merely a case of the monetary holding but also of the golden share to which I alluded. If the hon. Gentleman has read the debate in another place as I am sure he has, he will understand that. If the Government got rid of their golden share and all the principles that are entrenched—where the CDC will invest and the ethical principles of investment—the CDC would be privatised. I have worked hard to ensure that that cannot be done without returning to the House. There was a technical difficulty, but we have secured that now and that is right.

Mr. Leigh

May I return to the question that my hon. Friend the Member for New Forest, West (Mr. Swayne) asked? I am not clear how the present proposal differs from privatisation. After all, in previous privatisations the Government retained a golden share. The essence of a privatisation is that the Government sell the majority of their shares. How is this proposal different from an effective privatisation?

Clare Short

Oh dear me! I think the hon. Gentleman was a Minister in the previous Government and yet he was obviously not clear about what they were up to. There were transitional golden shares to assist privatisation, but they were all phased out. This is an indefinite golden share and that is the difference. I hope that I have helped.

Mr. David Heath (Somerton and Frome)

Perhaps we can move away from the definition of privatisation. One of the knottiest problems with which the Secretary of State's Department has been wrestling is the future tax status of the corporation. Will she explain what that will be during her remarks today, or will we have to wait for the Standing Committee, in which case it will make it more difficult to have a reasoned debate on the subject?

Clare Short

I shall explain how we will do that today. The principle is agreed and clear but the full details and the amendment will be introduced in Committee.

The emphasis of the partnership will be on the CDC continuing to do what it does best: investing in the poorest countries that other investors shun. Its purpose will be to maximise the creation and long-term growth of viable businesses in developing countries—especially the poorer countries—to achieve attractive returns for shareholders, and to implement social, environmental and ethical best practice. The challenge is to ensure that the CDC continues to focus on the poorer countries. It may help Opposition Members in understanding the difference between privatisation and partnership to know that that focus will be secured through the investment policy required under the articles of association, a copy of which has been placed in the Library. Hon. Members who made points of order might like to know that.

The policy sets out a list of developing countries for whose benefit the CDC may invest, and requires that at least 70 per cent. of its investment over a rolling five-year period is for the benefit of the poorer of those countries. It also states that the CDC will aim to ensure that 50 per cent. of its investment each year will be for the benefit of sub-Saharan Africa or south Asia and notes several sectors, such as manufacture of equipment for military purposes, in which it may not invest.

Mr. Andrew Robathan (Blaby)

The Secretary of State knows that the Select Committee considered that difficult issue. If the policy changes slightly, or military investments are made, what sanctions will be imposed—short of sacking the whole staff by using the golden share? How exactly will the ethical policy be enforced?

Clare Short

It will be entrenched through the articles and through a series of procedures such as the ethical committee, on which appointees of the Secretary of State will have a majority. The policy will not be amendable without the consent of that committee. The ultimate sanction is the golden share. None of that will be changeable without a majority on the committee and the permission of the golden shareholder. The policy should not be immutable because there may be improvements in the ethical policy, or the poorest countries may develop so that we need to change the list, but it is entrenched so that change to it cannot be forced by market forces. Investors will know that it is a permanent, unchangeable part of the organisation's structure.

Mr. Andrew Tyrie (Chichester)

What will happen if the CDC makes losses? Will a proportion score against the public sector financial deficit? Rather than the approach taken so far to get money to the least—developed countries, have the Government considered the development of a loan insurance scheme?

Clare Short

The CDC will be a private limited company with minority Government ownership under the same rules as any other plc. There are already all sorts of loan insurance systems. The Export Credits Guarantee Department is, in a way, such a system, and there is also the World Bank MIGA—Multilateral Investment Guarantee Agency—loan insurance system. The short answer is no.

Mr. Tyrie

Those are subsidised insurance schemes.

Clare Short

Indeed, but as the hon. Gentleman knows, one reason why the private sector will not invest in such countries is political instability and weak enforcement of bank regulation and contracts. My Department, the World Bank and others now work with much better understanding, especially after the east Asian crisis, of the conditions for beneficial inward investment, but there is always a reputation time-lag. If the CDC can be a cutting edge player that comes in earlier to demonstrate track record and rate of return, it will increase the private sector flow into countries that are shunned. That is the whole idea. The investment policy that I have described will be put in place before private participation is invited and the partnership is established; any subsequent changes to it will require the agreement of a majority of ordinary shareholders and the golden shareholder. The investment policy will entrench the CDC's focus on developing countries.

As I have said, we expect the CDC to operate as an exemplary social, environmental and ethical business. That approach is reflected in its business principles and policies, which cover social, environmental, health and safety matters and business ethics, as well as a statement of the general principles by which the CDC will conduct its business. Copies of those principles and policies are available in the Library. The CDC is to be congratulated on those documents, which reflect a great deal of careful thought. They have been developed over the past 15 months through a full consultation process, involving staff throughout the organisation. The precise mechanisms for dealing with any changes to those policies will differ from those for the investment policy, reflecting the fact that they will continue to evolve in line with best practice—as I pointed out earlier—but they will also be entrenched in the company's constitution and protected under golden shareholder reserved rights.

I am confident that those mechanisms will be effective in securing the CDC's development role. We consider that it is absolutely essential that those policies, and the mechanisms to protect them, are clearly set out from the start in the partnership framework and in the company's constitution. They will then be an essential part of the company's identity and will be clear to all future investors.

As hon. Members would expect, before my right hon. Friend the Prime Minister announced the proposed partnership at the Commonwealth Heads of Government conference in October 1997, we had commissioned expert external advice on the viability of the proposal. The advice made it clear that, provided that the partnership was well designed, there was likely to be strong private sector interest in investing in the new CDC. Clearly, that is our aim and I therefore took pains to ensure that the design of the new CDC would make it attractive to private sector investors.

A CDC that will attract private investment requires a framework such as the one that I described, so that there is no fear of unpredictable Government interference. The public sector interest is strong and clear; it will be entrenched from the start and will not depend on the exercise of unpredictable intervention—for example, intervention from one Minister after another changing their mind, or as a result of a change of Government. The principles will be entrenched, so that anyone considering investing in the corporation will be able to see what future performance is likely to be. That also means setting an appropriate capital structure for the CDC and ensuring that the CDC is tax efficient, so that it can compete with other comparable institutions, as has been pointed out.

There has been some media interest in the CDC's tax treatment. It was most important to ensure that the tax treatment was right, and that took a little time. However, I am now confident that it is right. It is obvious that the CDC has to be able to compete with offshore funds, if it is to achieve its goal of investing in developing countries using capital raised in a competitive private investment market dominated by offshore funds. From the start, it was clear to me at least that it would be unacceptable for a major instrument of the UK's development policy to be based offshore. I realise that, some time ago, the hon. Member for South–West Devon (Mr. Streeter) said to the Financial Times that it should be offshore.

Mr. Streeter

I said "could be".

Clare Short

No, the hon. Gentleman said "should". In effect, he said, "Stop dithering—put it offshore."

It seems to me that a body with a major golden share in a Government holding, which is an instrument of our development policy, should be based in Britain. I asked my advisers where it could be based offshore because I thought that it might be bearable to place it in Africa, but they replied, "The Cayman Islands—or Ireland." It would be nice if it were in Ireland, but this is a British—a United Kingdom—development institution.

Mr. Streeter

Jersey.

Clare Short

They did not suggest Jersey, and I do not think that Jersey would do the trick for the purpose of competing with other offshore funds. That was the origin of the tax problem: other funds go offshore and benefit from very low tax, but an instrument of British development should be based in Britain or, I should say, in the United Kingdom. That was the circle that we had to square.

With the Treasury and the Inland Revenue, we considered all possible options, and I can today announce our conclusion that we should provide tailored tax treatment for the CDC public-private partnership. We discussed whether there should be a class of development institutions, which would have been another way of approaching the problem, but we settled on a tailored tax treatment that will enable the CDC to compete for funds with companies that are based offshore. That treatment will endure so long as the Government hold their golden share in the CDC. The main element will be exemption for the CDC from corporation tax arising on income and chargeable gains from its investment activities. Instructions have been sent to parliamentary counsel and I intend to table the necessary amendments in Committee. The solution is a good one which will enable the CDC to compete fairly and be a major instrument of British development policy.

The International Development Committee has also expressed interest in the CDC's capital structure, and it is right to say that restructuring is needed. Currently, the CDC's balance sheet consists of about £750 million of interest-free debt to Government and reserves of some £515 million; obviously, as a public corporation, it does not have any share capital. We intend to restructure the CDC's capital to create a balance sheet which potential investors will recognise as commercially viable and which will be a strong balance sheet, suited to the CDC's business needs. We do not propose to leave interest-free loans on the balance sheet once the partnership is established; that would, in effect, be a subsidy to shareholders, which is clearly wrong. We shall restructure the loans into equity, or commercial loans, or a mixture of the two. We shall keep the International Development Committee fully informed as those decisions are made, and lay any proposals before the House.

As the House will know, there is always a potential state aids angle in any Government sale. After informal soundings with the European Commission, we do not consider that tax or balance sheet proposals will either distort intra-Community trade, or be likely to create any difficulty. However, to provide investors with certainty, we plan to notify the Commission at the same time as we inform it of the capital restructuring—a process required to ensure that there is no hidden subsidy in capital restructuring. We expect speedy clearance from the Commission on both questions.

As I have made clear, we want to encourage wide participation in the CDC, and that will ultimately lead to our seeking a listing. The CDC's business principles will ensure that it is very much an ethical investment, so it is likely to appeal to the growing sector of ethical investors. However, we do not intend to target ethical investors alone: interest could also be expected from, for example, those who are already targeting emerging markets and who are interested in moving into poorer frontier markets.

The timing of a listing will depend on several factors, including market perceptions of pre-emerging markets and of the CDC's track record and forecast performance. The key will be to ensure that new capital is introduced at the right time for the success of the CDC's business. However, we recognise that listing might not be possible at the time when other conditions are right for creation of the partnership; in that case, we would look at alternatives for a transitional period. For example, the CDC might have a good track record, but if there is turbulence in emerging markets, the time might not be right for a listing. We must move at the right times and to the right stages during the process of transformation.

The CDC's financial track record is obviously a key issue. Clearly, 1998 was a very difficult year for emerging markets. The International Finance Corporation, which is part of the World Bank group, produces an index that measures, for example, what is happening in emerging markets; it fell by 22 per cent. in 1998. Against that background, the CDC's performance was creditable: although for the first time in many years it made a loss in 1998, that was largely due to provisions against investments in Indonesia and Pakistan; although the underlying investments were good, the provisions were necessary because foreign exchange problems meant it was not possible to get money out of those countries.

Overall revenue in 1998 was £147.2 million with an operating surplus of £110.4 million. Although both figures are lower than in 1997, they have held up well in difficult market conditions. In previous years, the CDC has generally achieved profitability targets, with returns comparable to or above those of other development finance institutions. However, it is obvious that returns at historical CDC levels will not be enough to attract private investors.

Mrs. Cheryl Gillan (Chesham and Amersham)

The Secretary of State obviously examines the CDC's figures. Does she envisage that the CDC will make a loss in the next financial year or return to its position of the year before last?

Clare Short

I have not made such a projection, and I do not think it would be useful for me to do so. The CDC runs its own business. Although I exercise some supervisory powers, I do not consider myself to be an expert when it comes to the economic performance of emerging markets. I read about such matters with a great deal of interest, but I do not think my predictions would be very valuable in guiding the CDC in its investment operations.

We are confident that the CDC will be able to increase its profitability and make the returns needed to attract private investors. Much of the improvement will come from the CDC's capturing for itself more of the profitability of the investments it makes. Historically, the CDC has largely invested in secured debt, which is obviously relatively low risk and therefore offers low returns. In preparation for the partnership and to increase its capacity to attract private sector funds, the CDC has started the process of shifting to risk capital—meaning equity and quasi-equity. It will, therefore, capture a higher return on its investments.

In 1998, more than 60 per cent. of new investments were risk capital, compared with around 30 per cent. in 1997. That is important not just in order to attract private sector funds but from a development point of view. Equity investment leads to a stronger commitment to the development of a business with long-term growth prospects. Risk capital is in short supply in the poorer countries. A larger CDC creating more equity investment will bring much greater benefits to developing countries.

Mr. Andrew Rowe (Faversham and Mid-Kent)

Some of us are concerned that the easiest way for the CDC to make serious savings on its overheads in difficult market conditions is by closing some of its offices in countries where its investment is coming to an end. Yet, when the CDC gave evidence before the Committee, it pointed out that one of its best selling points was its unrivalled network of offices in countries in which few of its competitors were active. Has the Secretary of State discussed with the CDC the fact that, in order to make itself more attractive to the capital market, it is in danger of eliminating the very asset that makes it an attractive development instrument?

Clare Short

The hon. Gentleman is absolutely right. That is what would have happened if we had simply privatised the CDC and it had cut costs by closing offices in difficult markets and moving to easier markets. That is why we must have a partnership and why we have had to entrench the rulings about the countries in which the CDC invests. We have said that at least 50 per cent. of the CDC's investment in developing countries must go to the poorer countries, which will prevent the search for greater returns leading to the kind of action that the hon. Gentleman described. This measure is designed deliberately and carefully to prevent that outcome.

The hon. Gentleman will be aware that the low-risk loan investments that the CDC has taken in the past have the first call on return and offer low rates of return. An equity stake in a business offers an interest in its long-term creativity. By opting for equity, one potentially increases the rate of return and commits to creating in developing countries businesses with a capacity to generate more long-term economic growth. The move to equity is necessary to attract private sector investment, but it will also bring benefits by helping to create businesses in developing countries.

Mr. Streeter

Has not the Secretary of State forgotten the other part of the equation? The reason why equity investments are often referred to as risk capital is, of course, that they have no security, and if the company in which one is investing fails, one might lose the total value of the investment. At least with secured loans, more often than not, one gets back some of the asset and is able to recover some of the investment. Will the right hon. Lady take that into account? The shift from secured loans to equity alone will not, perhaps, give her the uplifting returns that she seeks.

Clare Short

The hon. Gentleman does not seem to understand the whole purpose of the exercise, which is to get more private sector investment into countries into which it currently does not flow. That will be done directly through the CDC and by proving, through the CDC, that such private sector investment can be profitable and secure. The rates of return that the CDC, as a lender of last resort in very secure loans, at present achieves will not attract the private sector. The CDC must be able to handle equity investment if it is to succeed in bringing private sector investment into developing countries, which will not thrive economically unless we can bring them more such investment. It might help the hon. Gentleman if he reads my explanation in Hansard later.

Mrs. Maria Fyfe (Glasgow, Maryhill)

I have very little knowledge or experience of the stock market, but a question has occurred to me while I have been listening to my right hon. Friend. If the CDC should go into substantial profit, would there be an opportunity both for private sector investors to have a reasonable return on their capital and for there to be greater investment in developing countries?

Clare Short

My hon. Friend describes the position exactly. At the moment, the private sector tends not to invest at all in sub-Saharan Africa. She will know that during recent globalisation, the international flow of private sector investment has massively increased, but 90 per cent. of that goes to the 11 most-developed countries and very little goes to the rest. The Bill's purpose and the objective of successful development is to create conditions in which the private sector will want to invest in the poorest countries. If equity investment brings a commitment to more creative companies in those countries and a higher rate of return, investment in those countries will be attractive to the private sector, which is the overwhelming objective of this exercise.

In the past, the CDC has also tended to be a lender of last resort because it is a public sector institution, so it is required not to compete for investments that are attractive to the private sector, as the hon. Member for South-West Devon will know. It is, in effect, required to seek a rate of return that is lower than the commercial rate; otherwise, the public sector would be unfairly crowding out the private sector. The new CDC will no longer be constrained by being wholly publicly owned, so it will be able to seek good investments that offer attractive financial returns and make a greater contribution to sustainable development.

The Bill is the first stage in the creation of the public-private partnership that I have described. The Bill is largely technical, and the policy issues that I have outlined—other than the entrenchment of the Government's shareholding—do not generally appear in the Bill. As I have said, those issues are covered in the background papers that have been deposited in the Library, and they are essential to understanding the Bill's purpose and effects.

The Bill, taken narrowly, covers four main areas. The first is the provisions needed to transform the CDC into a public limited company. Initially, the Government will hold all the shares. The intention is to proceed with that transformation as soon as practical after the Bill becomes law. As I have explained, the timing of the eventual sale of the majority holding will depend on a number of factors and in particular on market conditions.

Although the transformation of the CDC is a technical issue, I should explain a little further why we are proceeding in the way that we have chosen. At the moment, the CDC is a statutory corporation that is obviously not a suitable legal vehicle for the partnership. The Bill departs from the technique usually employed in privatisations whereby legislation transfers the assets of the public corporation to a newly formed successor company. Instead, the Bill transforms the CDC directly into a public limited company without creating a new legal entity. No transfers of assets are involved, because the CDC retains the same legal identity and remains in being, both before and after the transformation.

That legal technique is being used because many CDC assets are held abroad. Had the successor company method been used, every individual asset would have had to be transferred under the local laws applying in all countries in which it operates. That would have been laborious and time-consuming, to say the least. We were pleased to find such a good legal remedy to what was at first a headache.

The second area contains provisions that are needed to restructure the CDC's balance sheet. As I have explained, it will be necessary to give it a financial structure that suits the needs of the partnership. That part of the Bill also makes provision for the continuation of Government financial assistance while CDC plc is wholly owned by the Government—subject to a cash limit.

The third area is tax. Clause 27(3) says that the Act shall not come into force until a draft order that makes provision for tax treatment for the CDC has been laid and approved. As I said, I intend to table detailed amendments in Committee which will set out the tax treatment to apply to the CDC, which I described earlier.

Clause 18 entrenches the Government's role in CDC plc. As I have made it clear, the Bill creates a partnership between the Government and the private sector, involving a substantial and long-term Government interest. Given that proposal, as I have said in answer to questions, if a future Secretary of State wanted to dissolve the partnership and fully privatise the CDC, he or she should be required to seek Parliament's approval before doing so.

Mr. Rowe

A thought has just occurred to me; I wonder whether the Secretary of State could set my mind at rest. Should the CDC incur losses over the next few years, they will not fall on her departmental development budget—will they?

Clare Short

The Department will hold a minority share; profits will go to it. It would have the same liability as the majority of shareholders if there were a sustained period of loss. However, the likelihood is that there will be gains, not losses, to the Department. A disaster would have some consequence, but it would not be major or one about which the hon. Gentleman needs to be concerned. Logically, if the thing were to collapse completely, the loss of value in shares would affect the Department.

Clause 18 entrenches the requirement for Parliament's approval for any change or desire to privatise. It does so by entrenching the two key aspects of the Government's side of the partnership: first, a substantial economic interest and, secondly, the golden share, with the important rights that it reserves to the Secretary of State. Clause 18 requires the Government to hold at least 25 per cent. of the CDC's ordinary share capital and to continue to hold the golden share. The clause cannot be amended or repealed without Parliament's consent. I think that I said to the Select Committee that I was struggling with that matter. Members of the Committee will be pleased to hear that we found a solution.

Clause 18 also prevents a Secretary of State from agreeing to changes in the CDC's constitution that would diminish the Government's rights as holder of the golden share, except with the approval of Parliament. Together, the provisions of clause 18 will ensure that the fundamental nature of the partnership, as it is being presented today, cannot be altered without Parliament's consent. I am sure that that is right.

We cannot reduce poverty in the world without faster economic growth in the poorest countries. Such growth will not be achieved without higher investment, and that requires much higher inward investment. There is massive and ever-growing capital investment around the world, but, sadly, very little of it flows to the poorest countries. We hope that the new CDC will help to improve that, both by channelling private sector investment and by acting as an example to other investment institutions, showing that such investment can be profitable. I commend the Bill to the House.

5.9 pm

Mr. Gary Streeter (South-West Devon)

For more than 50 years, Conservatives have supported the Commonwealth Development Corporation. For 35 of those 50 years, when in government, we nurtured and encouraged it and its important work in investing in the developing world—investing in business and in people and bringing hope and dignity where there was none. During those years, the CDC created thousands of jobs and changed thousands of lives. Conservative Members pay warm tribute to the skill and dedication of its staff, who have achieved so much over the past half-century.

Today's debate is really about how we can best take the CDC into the 21st century, to help even more effectively the millions of people in the world who live in abject poverty. The words "abject poverty" are easy to say, but the misery, squalor and pain which are the daily experience of so many people alive today and which those simple words represent, must motivate us to do something about it. I pay tribute to the Secretary of State for the attempts that she has made since taking up her post to do precisely that.

It is a good thing to care about the problems of the world's poorest, but it is even better to do something about them. The CDC has played its part in the past, and must do so in the future.

There are three key economic ways of improving living standards in the developing world. On the one hand, well-targeted aid has a part to play in meeting people's needs; on the other hand, the private sector and foreign direct investment are vital in generating the wealth and jobs that are necessary to transform the prospects of the world's poorest. Somewhere between those two key pillars has been the role of the CDC. It is not concerned with aid, and it is not—strictly speaking—the private sector. It is a vehicle for investing in small businesses, taking a stake in a community, stimulating private enterprise and supporting local entrepreneurs. That is what the CDC has been good at for 50 years. It has been a necessary halfway house between aid and private sector investment, and our role as the Opposition is to ensure that the Bill does not undermine its vital developmental role.

Mr. Rowe

I hope that my hon. Friend will include in his encomium evidence given by the CDC that, to the largest extent practicable, it has upheld a non-corrupt form of trading for 50 years. In response to a question from us, it claimed that one of its biggest single assets was the fact that its reputation enabled it to browbeat those who tried to corrupt it, and to refuse to be corrupted.

Mr. Streeter

I pay tribute to my hon. Friend, who is second to none in his understanding of the word "encomium".

I agree with my hon. Friend. We know that, sadly, corruption is a real issue in far too many countries. The integrity of the CDC, and the model that it has been able to provide over the years, have been an important part of the performance of this excellent corporation.

It is well known that, at the same time as nurturing the CDC's activities over the past 20 years, the Conservative party has been promoting privatisation and removing the dead hand of the state from many former nationalised industries. That is well known to the Secretary of State, who has opposed every one of our privatisations. Conservative Members believe in the private sector, and in marketplace solutions. I have worked as a lawyer in the private sector for 20 years and more, advising business people on, primarily, buying and selling private limited companies. I have also seen the public sector at close quarters, notably while I was a Minister in the last Government. The public sector is necessary, and can be excellent; but there are many things that the private sector can do better, and investing in businesses is an obvious target area.

For a large part of our 18 years in government, we examined ways of securing more private sector involvement in the CDC. We considered whether we could privatise it, in full or in part, and how we could harness and focus private sector energy and resources without hurting the people whom the CDC had been set up to support. The problem, of course, was finding a way in which to produce an attractive return for private sector investors without letting go of the CDC's vital developmental nature. We could have done it easily if we had been prepared to risk hurting the poorest of the poor in the developing world, but we were not prepared to do that.

Meanwhile, while we were privatising and changing for ever the economic and industrial landscape of the United Kingdom, the Secretary of State, then in opposition, was roaming around attacking the evils of privatisation at every turn. What a delicious irony: the person who, at her core, opposes and despises privatisation and the private sector, should now be tasked with putting into effect new Labour's first privatisation.

Clare Short

There is hardly anyone here, it is a serious matter and the hon. Gentleman still has to play silly infant school games. I have been a member of the Labour party since my youth and have always believed in the mixed economy. There is a role for the state and for markets. Under his Government, the market part of the role got way out of control.

My Department gives advice to the former Communist countries and to many developing countries about privatisation. I say to them, "Learn from our mistakes. Do not give big windfall gains to the private sector. Do it fairly and efficiently, so that you get good services. Learn from the mistakes of the British Tory Government." People worldwide are doing that.

Mr. Streeter

I am delighted that the right hon. Lady has learned from her mistakes. None the less, she must accept the fact that, throughout the 1980s, she bitterly opposed every privatisation that was introduced by the then Conservative Government, who transformed our economic and political landscape.

When we heard the Prime Minister announce the privatisation, we all wondered how the Secretary of State would be able to come to terms with perhaps her greatest personal challenge to date: to privatise something that even Conservative Governments for 18 years could not find a way to privatise without hurting the people whom the CDC was set up to help.

We waited with bated breath. Surely even the Secretary of State would not be able to pull off such an amazing volte-face, but, when it emerged, the solution was a classic piece of new Labourism. We should have guessed. The solution was simply to change the name. The Secretary of State opposes privatisation, so do not call it that; call it "public-private partnership" instead. It is Orwellian double-speak at its best.

The Bill converts the Commonwealth Development Corporation into a Companies Act company, of which up to 75 per cent. will be sold in one tranche to the private sector, with provision for the remaining shareholding to be sold in due course. It is privatisation in all its glory. It may be a partial privatisation to start—up to 75 per cent.—but that is how many of our privatisation took place in the 1980s. It is privatisation. If it looks like a dog, walks like a dog and barks like a dog, it is probably a dog. The Bill will privatise the Commonwealth Development Corporation. I know it, the Secretary of State knows it, the whole House knows it.

Therein lies my concern at what the Secretary of State is trying to do with the CDC. It is not that introducing the private sector is, in itself, wrong; of course not. We of all people would be hard pushed to argue that. It is that the Secretary of State is not owning up to the reality of what she is doing. If she does not face up to the reality of what she is doing, she will inevitably be blind to the dangers and pitfalls of taking the CDC down the path that is set out in the Bill. There is a real risk that the CDC will be sold cheaply, shareholder pressure will take it away from its developmental objectives, and the people whom the CDC was set up to help will be left behind.

During the passage of the Bill, our aim is to ensure that those dangers have been fully and properly considered and that, when we finally come to vote on Third Reading, every hon. Member can do so in the full knowledge of what they are doing. It is like that with the Government: if people want to know what they are doing, never mind the headlines, read the small print.

Dr. Jenny Tonge (Richmond Park)

I am sure that the hon. Gentleman speaks from great experience about selling things off cheaply, but, before he goes any further, can he make it absolutely clear that his party sees no other way: either the CDC is a Government-owned company, or it is privatised? He is saying that his party sees no middle road whatever. He has made a categoric statement this afternoon.

Mr. Streeter

There is, of course, a case for retaining the CDC in the public sector while seeking to improve its performance. There is also a case for fully and properly privatising the CDC, and for at least obtaining a proper return for the Department for International Development budget. However, there is absolutely no case for selling the CDC off cheap—so that, over time, shareholders will inevitably and increasingly force its board to consider primarily the bottom line, thus moving the CDC away from its developmental objectives. That is the prospect staring us in the face as we consider the legislation, and that is my concern.

We shall not divide the House on Second Reading. However, in Committee, we shall want to explore in detail four key issues. First, have the CDC's developmental principles been adequately protected; or will the Bill destroy that heritage? Secondly, will the Department for International Development budget receive a fair price for our taxpayers' investment over the past 50 years? Thirdly, will the privatisation protect the poorest in the developing world—the very people whom the CDC was established to help? Fourthly, do the Government's proposals for the tax treatment of the new CDC deserve our support? Unless we are satisfied on those four key issues in Committee, we shall reserve our position on Third Reading.

Once private sector shareholders are involved, they will want to drive the company to increased profits and better returns on their investment. Such a development is inevitable, entirely natural and understandable. Therefore, the question is whether the Bill will secure the CDC adequately to its developmental moorings, to prevent it being driven out to the sea of commercial return, leaving behind the reason why it was established initially.

If the Bill is passed as drafted, the way forward is sadly clear. It is likely that, in a year or two, 75 per cent. of the company will be sold off, probably—as the CDC's financial track record in recent years has been so modest—at a bargain-basement price. Investors in the company will be pension funds, which are able to bide their time and to see a long-term opportunity. After a few years of the CDC seeking to strike a balance between developmental objectives and making a return for its shareholders, the company will almost certainly fail.

The CDC's rate of return is less than 8 per cent. It will have to get that up to 15 per cent. or more, and that will be hard to do unless it is guided only by bottom-line considerations. The Secretary of State explained that the CDC will be able to increase its rate of return from 8 to 18 per cent., primarily by shifting money from secured loans to equity investments. Of course it is true that potentially greater reward may come by investing in equities rather than loans, but the risks of loss also may be greater.

There is absolutely no guarantee that moving from secured loans to unsecured equities will boost returns. If there were such a guarantee, why do not all United Kingdom banks forget about lending money to companies and simply invest in share capital? The point of risk capital is that one may not only increase one's return, but lose one's investment.

Clare Short

Does the hon. Gentleman think that it is possible for the poorest and least-developed countries to attract private sector investment? If he is right in his critique, no investment in those countries will be attractive to the private sector. Although I know that he is wrong about that, perhaps he will either agree that he is wrong, or state plainly that he believes that those economies will never attract private sector investment and, therefore, are in long-term difficulty.

Mr. Streeter

I do not think that the Secretary of State is listening to me—I was not saying that at all. One of the points that I shall make in a moment is that many private sector investors are already investing in those emerging markets. However, the CDC that she is shaping for the future will simply become another investment bank or investment fund manager. Unless we get the matter right—this is why we have to examine it very carefully in Committee—the CDC will not be distinctive from any other fund manager.

Of course we want private sector investment in emerging markets, but such investment is already being made. Surely it is right that the CDC should play a particular and peculiar role in development, as it was established to do.

I am not saying that it is wrong for the CDC to move from loan to equity. I am simply saying that, in a volatile market, such a move may not offer the panacea that the Secretary of State believes it will. What will happen if investors in the new CDC do not receive the rate of return that they are expecting? She has not answered that question.

The directors of the CDC are people of good faith. They will try hard to meet the financial targets, while remaining true to what they understand to be the CDC's developmental focus. We wish them well and hope that they succeed but, if the rates of return are not adequate, the shareholders will gradually turn the screw, insisting on higher-value investments and better returns. Gradually, the developmental focus will be all but forgotten as the new CDC becomes just another investment bank or fund manager. I have noticed before that, when the Secretary of State knows that she has lost the argument, she starts chatting to the person next to her. I wish that she would listen. She might learn more about the industry.

Clare Short

rose—

Mr. Streeter

Does the right hon. Lady want me to give way?

Clare Short

That is what standing up at the Dispatch Box means. I was saying to my hon. Friend the Under-Secretary, "Poor chap, he cannot seem to understand how the entrenched requirements on the proportions of investment make what he is suggesting impossible." I was listening to the hon. Gentleman. It would have been rude to make my comment loudly, so I made it quietly, but as he wants me to be rude in public, let me be so.

Mr. Streeter

I am grateful to the Secretary of State, because she has made my case. I shall explain why she has not entrenched the developmental objectives of the CDC in the Bill. She thinks that she has done so by saying which countries the CDC can invest in, and through and by the incorporation of the statement of business principles, but that does not protect against shareholders wanting to take the investment portfolio away from creating jobs and investing in long-term communities in the developing world and putting it into high-value, high-tech investment that will result in the CDC being no different from any other investment bank or fund manager. She has not entrenched that principle properly. The shareholders will gradually turn the screw, insisting on higher-value investments and better returns. Gradually, the developmental focus will be all but forgotten as the new CDC becomes just another investment bank. The CDC that is filling the vital gap between aid and the full-blown private sector will, little by little, inch by inch, relocate itself firmly in the private sector investment camp, leaving a huge void behind it.

I do not take any pride in saying that. I wish that the truth were otherwise. I want the plan to succeed, but the Secretary of State expects us to vote tamely for the Bill. She hates criticism and questions. I am simply trying to point out to her that she may not have achieved her objectives. I wish that she had discovered a magical way of combining two mutually inconsistent principles—riding two horses at the same time—but I fear that she has not. It is likely that, within a few short years, all the noble aspirations of the CDC when it started 50 years ago will have been left behind.

The Secretary of State thinks that she has entrenched the CDC's development principles but, after closer examination, I fear that she has not. I was sent the statement of business principles on 11 May. It is a worthy document and I do not disagree with a single word in it. It contains some excellent phrases. It says:

The way we do business is to set out in our mandate: To maximise CDC's success in creating and growing long term viable businesses in developing economies, achieving attractive returns for shareholders and implementing ethical best practice. It says that the CDC will

"be open and honest in our dealings, while respecting commercial and personal confidentiality".

It talks about the core values, saying that it will

"recognise that economic development results in environmental change"

and that

Sustainable development seeks to maximise the potential of environmental resources". It is all good stuff and I support it. However, the mission statements and developmental principles of other large corporations use almost identical language. Shell says:

We aspire to be a leader in the economic, environmental and social aspects of everything we do; first choice for our shareholders, our customers, our employees, those with whom we do business, society and future generations. We will strive to help to build a better world in which current and future generations enjoy greater economic, social and environmental security. We will embrace the concept of sustainable development in our business decisions, large and small. In this way we will continue to create value for our shareholders and society, while being responsive to society's changing expectations. I do not criticise the CDC's business principles, and I certainly do not criticise Shell's. I simply say that the adoption of those principles by the CDC is no more than any major international player does these days. It is part and parcel of today's global business environment, and it does not protect the special developmental status of the CDC.

The principles do not in any way prevent the CDC from investing in top-drawer, highly successful companies which make high-tech products, employing only a handful of local people, in the permitted countries. Nothing in the statement of business principles prevents that investment from becoming the norm. If I am wrong, the Secretary of State can intervene and tell me so.

The second attempt at entrenchment is to insist that 70 per cent. of all the CDC's investments are limited to an agreed number of developing countries, 50 per cent. in sub-Saharan Africa or south Asia. That is set out in the investment policy and, again, I support it. There is a long list of countries—involving about two thirds of the world—including South Africa, India, China, Zimbabwe and Kenya.

Surely the Secretary of State will not pretend that that measure prevents the new CDC from becoming a commercially driven investor in those emerging markets, no different from any other such investor. That is already happening. When I was in Kenya recently, I spoke to one of the CDC's field managers, who was being instructed to move away from the long-term, job-creating, community-focused investment on which the CDC has built its reputation. He was now being encouraged to look at shopping malls, office complexes and high-tech companies—sectors in which several other private investors are operating.

There are examples of fund managers investing in emerging markets. Perpetual Investors talks about its funds in Thailand, the Philippines, India, Taiwan, Indonesia and Malaysia. Genesis Emerging Market Funds has significant investments in Botswana, Ghana, Jordan, Kenya, Lebanon, Mauritius, Oman, Saudi Arabia, South Africa and Zimbabwe. Hundreds of private sector investment organisations are beginning to invest in the emerging markets—and a good thing, too. My concern is that others are doing what the CDC is gradually going to get into.

The moorings to which the Secretary of State is attaching the new CDC are too weak, and the currents tugging the new CDC out to sea will be strong, and will get stronger. We know that a burgeoning private sector is the very thing that those developing countries need, but other organisations can help provide that. The Secretary of State is not facing up to the radical change of direction for the CDC that she is instigating. Unless we can strengthen the Bill in Committee, the likelihood is that, in not many years, the CDC will have floated free from its developmental moorings. The House should consider the Bill in the light of that clear risk.

A host of other matters need to be looked at carefully in Committee. The tax treatment of the CDC is a critical concern. As long ago as 7 July 1998, the Select Committee on International Development was told by the Secretary of State that preferential tax treatment would be forthcoming. She explained that it has been longer in coming than she would have liked, and that is fair enough. However, it is disappointing.

The House of Commons is debating the Second Reading of a major Bill, which has the consequences that I have explained. The tax treatment is at the centre of whether the company succeeds and flourishes in the private sector. We do not have a scrap of paper that tells us what that tax treatment is. That is not good enough. It is all very well to say that it will be brought before us in Committee, but the Committee is likely to start in a fortnight. Surely we could have the information now. We must reserve all our positions in relation to the tax treatment of the company.

Is the Secretary of State really saying that the Government will create a special tax status for one company in the United Kingdom, 75 per cent. of which will be owned by the private sector? What an extraordinary idea. She says that going offshore would be wrong. What is wrong with CDC funds going offshore? Has she consulted the Prime Minister, who talks about globalisation and our role in the global economy? Why is placing funds on a tax-efficient offshore basis politically unacceptable?

It is an abuse of the House to treat us in this way. We want to consider carefully the balance sheet of the new CDC; to clarify the future position of Government guarantees and soft loans; and to know when it is intended to float or sell off the newly created shares. We want to explore all those matters in great detail in Committee.

The Secretary of State must think again. She believes that she has discovered a third way in investment in developing countries—a private sector that will be content with pursuing developmental objectives at a modest rate of return—and that, by calling it a public-private partnership, rather than a partial privatisation, she has cut the Gordian knot that prevented us from taking that step; but there is no such third way.

Mr. Leigh

The Government are retaining less of a share in the new company than the Conservative Government retained in a privatised British Telecom; and we retained a golden share for many years. I am also worried by the fact that, as the corporation is keeping 39 per cent. of its return on capital employed—£468 million—it could be a target for predators. It will be a private company and there is nothing in the golden share to deter predatory interest.

Mr. Streeter

My hon. Friend makes an extremely important point. There are real concerns and fears. That is why I say that the enshrinement and entrenchment that the Secretary of State thinks that she has achieved may not be in place. That is why we need line-by-line scrutiny of the Bill. I warn the Minister that we will spend a long time in Committee. There is an awful lot to consider. I hope that the Secretary of State will be there, too, because decisions will have to be made. We intend to table sensible amendments that the Government will want to consider and, probably, accept.

My hon. Friend is right to say that this partial privatisation is extremely dangerous and could well hurt the very people whom the corporation was set up in 1948 to support. The way that the Secretary of State has chosen is self-deluding and potentially dangerous. I know that she does not like criticism, but I urge her to consider carefully what I have said. There are real dangers. I urge her to be flexible enough to allow the Bill to be strengthened in Committee.

No one could support private sector involvement more than Conservative Members, but we are not prepared to see 50 years of precious heritage sold off cheap and on false pretences. We will not stand by quietly and watch as the people of the developing world lose a vital lifeline to dignity and prosperity.

5.38 pm

Angela Smith (Basildon)

I have listened with great interest to the debate this afternoon. It seems to me that the hon. Member for South-West Devon (Mr. Streeter) has missed some crucial and fundamental points. It is worth reminding the House that it was a Labour Government who established the Commonwealth Development Corporation in 1948. Then, as now, Labour Members recognised our wide responsibilities throughout the Commonwealth and the world. The object, which we will continue to stick to, is to invest in the world's poorest countries.

Since 1948, the corporation has become one of the world's leading providers of development finance. I am loth to cite statistics, as one can lose what is behind the figures, but it is worth noting that £1.6 billion is being invested in more than 400 enterprises in 54 countries. That is practical aid and support, especially for those smaller enterprises that would not attract major international finance.

We can note with interest some of the investments that have been made. I was surprised to learn that £4 million was invested in the largest poultry farmer in Nicaragua; £4 million in the Ugandan textile industry; and £13 million in the Philippines cement industry. Those investments would not have been gained from large international financial companies, but they are absolutely crucial to the companies and communities involved, bringing local sustainable development. The finance and support has gone to those countries that have the most underdeveloped private capital markets and the least capital. By contrast, the majority of private investment has gone straight to the wealthiest developing countries.

It is worth reminding the House of the statistics, although they cannot show the real pain that lies behind them. One in four people lives on less than $1 a day. The scale and depth of poverty cannot be conveyed by statistics. They do not convey the individual suffering and misery. When people can die from poverty, not just from starvation, we have an obligation to help those on the margins of life. Extra ethical investment can be of great help and, for some people, is a matter of life and death.

Both sides of the House can agree that we can be proud of the work that the CDC has undertaken. Given that success, any change would be viewed with caution. However, we have to seek ways to build on that success. Many of us believe that there should be more private investment in those areas of greatest need. The Bill and the new arrangements for the CDC can help to bring that about.

First, the Bill will enable the CDC to raise private sector capital to increase private investment in the poorest countries. In addition, it aims for long-term partnerships between the private and public sectors to bring about the sustainable development that is so crucial. Perhaps most importantly, it will also ensure that we use the CDC's commitment to ethical business practice to enhance ethical, social and environmental awareness and to encourage private investment to sign up to those concerns. Enhanced business investment is good if it helps poor people and if the social elements and environmental policy are good.

If the Bill is successful, it could be a model for other countries that want to work with private business to encourage ethical overseas investment. We have in the CDC a unique asset, with unique experience. We have a duty to use that and to do what we can to extend it. What distinguishes the CDC from other investments is its ethical stance, and I welcome the assurance from my right hon. Friend the Secretary of State today that that is foremost in her mind. The Bill could open up new opportunities for investment and development. More importantly, it will build on the important work that has already been undertaken. The CDC will use the experience of staff in offices in 27 countries to continue its work.

Today, we seek to improve and extend business investment by offering the support and advice of the CDC to target finance where the need is greatest. That is where the challenge lies—to ensure that the focus continues on the poorest countries and communities. Because of the success of the CDC, we should view any change with caution, but I welcome the Department's consultations and discussions with the NGOs. It is essential that they are involved because their expertise is key.

It may be a couple of years before market conditions are right for establishing the partnership. I ask my right hon. Friend the Secretary of State to consult widely on the composition of the board. Business and commercial interests are essential, but she will need to satisfy herself and those who have an interest in the partnership that the board and board members have the knowledge, experience and—especially—the commitment to undertake that vital role. It is also crucial that board reports should be available for scrutiny by Members of Parliament, because we will wish to review and examine the successes. Those will need to be open to public debate. Where the structure works well, other countries may follow. It is more difficult—but necessary in the interests of transparency and accountability—to allow Parliament the responsibility and the opportunity to review areas that may fail. We need to ensure that we can discuss those openly and to learn any lessons necessary. If we wish to use the partnership as a model, we must ensure that other countries also have the opportunity to learn from our mistakes as well as our successes.

I welcome the fact that the Government will hold the golden share. Unlike Conservative Members, I believe that to be crucial and I welcome the Government's commitment to it. Even when 100 per cent. of ordinary shares have been sold to the public, the Government will still have that golden share. It does not give voting rights, but it allows a member of the Government—preferably the Secretary of State—to attend meetings and to speak at them. That is important, as it ensures that development remains at the heart of the CDC and the reason for its existence. That will ensure that the Government's ethical policy remains in place.

I began by stating that a Labour Government established the CDC in 1948. The Bill changes the organisation but its provisions, if used effectively, will build on and develop the CDC's existing role, and bring more private investment to the very poor developing countries whose needs are the greatest.

5.45 pm

Dr. Jenny Tonge (Richmond Park)

Liberal Democrat Members welcome the concept of the Commonwealth Development Corporation becoming a public-private partnership. We do not agree with the Conservatives that there is no middle way. Of course we do not: we believe that there has to be, or we would not be Liberal Democrats. The Bill offers the potential that more money and investment will go to developing countries. We appreciate that, although good development practice must emphasise education—especially for girls—and health issues, which must be accompanied by economic development.

I am a member of the Select Committee on International Development and, from the countries that I have visited and the Government officials to whom I have spoken, it is clear that there is a desperate need and desire for investment and development. However, I regret to say that, so desperate are they for growth in their economies, they tend to dismiss questions to do with the environment, labour standards or sustainability. I shall return to that later.

We have no objection to the concept of a public-private partnership in this context. We support it, provided that it really is the best way forward, and provided that the Government guarantee that it will not mean that, ultimately, there is less money in the development aid budget. If the public-private partnership fails—I shall express many reservations about it—will the Government ensure that the promised increase in funding for developing countries will continue and eventually reach 0.7 per cent. of gross domestic product?

The problems of the poorest countries are legion. They include bad governance—which is not helped by those countries' colonial past—environmental disasters, civil wars continuing and breaking out all the time, and the AIDS pandemic. In some areas, the disease affects up to 25 per cent. of the population and, sadly, many of those affected are the economically active. All those factors, and others, make investment in those countries risky and unattractive.

However, the past record of the CDC bears examination. We have heard a lot about the CDC's virtues from the hon. Member for South—West Devon (Mr. Streeter). The CDC has been able to take risks that the private sector could not take. Funded by Government loans, it has not had to achieve high financial returns: its target has been a three-year average return of 8 per cent, and it has been able to receive UK Government backing to access markets closed to private investors.

The Bill aims to ensure that the CDC will still be able to do its development work while at the same time attracting private capital, but will it succeed? I confess to being sceptical about the match between development objectives and the financial requirements of markets. My gut reaction is that it cannot work.

I was interested to read in today's newspapers that the chief executive of the Commonwealth Development Corporation is to leave the organisation. Either he thinks that the concept behind the Bill is brilliant but that he is not up to the task, or he thinks that it is lousy and he wants nothing to do with it.

Clare Short

The chief executive is a very fine man who strongly supports the Bill. We have worked closely together on the proposals. He is coming up to 60 and wants to be replaced before the transformation so that the organisation goes from strength to strength. He will do so in all honour and with the full agreement of the Government. There is no suggestion that he has any criticism of the Bill, nor that we have any criticism of him. It is a question of his age and of ensuring that the CDC is led by someone who can see it through its transformation period. I think that it is important to have that clarification on the record.

Dr. Tonge

I am delighted to hear that, and glad that the Secretary of State has had an opportunity to say so. None the less, I share many of the reservations expressed by the hon. Member for South-West Devon.

I must confess that I have no experience of investment or the workings of the City. My lifetime investment has been in my children and in working for the national health service, a very public company, though perhaps not, I suspect, for much longer. Nevertheless, I have considerable reservations. The International Development Committee was told that private investors are interested in ethical investment. We were also told, conversely, that the companies looking to sustainable development in low-income countries are few and far between. The ethical investment market currently amounts to £2 billion per annum, a tiny proportion of the entire market.

The CDC's returns in 1998 showed a loss of 3.4 per cent. compared with a modest Government growth target of 8 per cent. The CDC is not currently required to pay any interest on loans. In future, the CDC will aim at an overall rate of return of 15 per cent. in order to attract private investors. I simply cannot see how that can be achieved without compromising the purposes of the CDC.

We were told that there have been special factors recently in India and Pakistan, in which the CDC has experienced huge difficulties that affected the rate of return. Emerging markets have been turbulent, but there will always be countries in difficulties. The areas that really require CDC attention, such as sub-Saharan Africa and south Asia, have far more serious problems than those of India and Pakistan, and conditions there are much more turbulent. Those are the countries most in need, and I am sceptical that the project will benefit the poorest of the world.

We have heard something about taxation, and I shall not—indeed, given my background, I could not—go into it in great depth. However, the Bill is only half a Bill as the detailed tax proposals have not been put before us. No doubt, greater business minds than mine will tackle the tax proposals in Committee, but I feel that it insults the House to fail to table those proposals with the Bill.

The Secretary of State said that an offshore banking arrangement would be unacceptable. She previously told the Select Committee that such an arrangement would be intolerable. Tailored tax arrangements have been announced to put the CDC in a special category. How fair will that be for other companies that trade ethically? We must see the detail. I am unconvinced that the CDC can be a one-off case in a special taxation category, and I hope that the muddle can be sorted out satisfactorily in Committee.

The CDC sent the Select Committee a copy of its business principles before the Bill reached Second Reading, and they are laudable. The CDC aims to implement the best ethical practices itself and in all subsidiary companies that work for it. It will exhibit "honesty, integrity and fairness." It will employ good environmental, health and safety, and social issues policies. However, the document is full of verbs such as "recognise", "seek" and "identify". I should prefer it to contain words and phrases such as "insist", "enforce" and "make legally binding". The document reminds me of the Organisation for Economic Co-operation and Development code of conduct for multinational enterprises, which is advisory and full of hope but which contains no compulsion. We have heard it all before, during the negotiations on the multilateral agreement on investment.

We all know that multinationals—unlike the hon. Member for South-West Devon, I shall name no names—produce glossy brochures containing codes of conduct. Sadly, we also know that the companies do not always adhere to them. We understand that the Governments of poorer countries are responsible for ensuring the protection of their environment and the welfare of their people. However, they are desperate for investment and industrialisation and they are tempted to turn a blind eye to bad practice. The CDC must not be allowed to follow that path.

The so-called golden share, held by the Government, is claimed to be the mechanism by which CDC investments will be reviewed and monitored. Will it ensure a legally binding adherence to the business principles set down by the CDC, and will that cover any subsidiary companies? Or will a thin veil be drawn over that aspect of CDC business so that investors can be attracted?

My final concern is the percentage of CDC business that will be done in the very poorest countries, such as those in sub-Saharan Africa and south Asia. What percentage will be done in countries in which a larger return on investment can be assured? The Government require that at least 70 per cent. of investment should be in poorer countries. That is fine, and we have heard today which countries are the poorest.

The Government also require that the CDC should aim at 50 per cent. investment in sub-Saharan Africa and south Asia, where the poorest people of the world live, but if the Government wish to stick to their White Paper's excellent aspirations, which we all support, they must not "aim" but insist that those countries receive 50 per cent. of the investment. Furthermore, they must insist that that investment helps the poorest of those countries, not lining the pockets of the wealthy and corrupt.

If the Government insist on those things, will the CDC be able, given all the problems in those countries, to attract sufficient private investment that will provide a good return for shareholders? I fear that it will not. A memorandum to the Select Committee from Sir Michael McWilliam, a former member of the CDC board, pointed out that

"the CDC should be made to satisfy two masters—the God of the Development Community and the Mammon in the City."

It remains to be seen whether the CDC can deliver.

The Liberal Democrats will not vote against Second Reading, but we hope that problems will be addressed and resolved in Committee. Unless they are, the Government will not achieve their noble purpose of seeking to alleviate poverty in the world.

5.58 pm

Dr. Doug Naysmith (Bristol, North-West)

Thank you, Mr. Deputy Speaker, for allowing me to make a few remarks in this important debate. I do so with a little trepidation, because I feel very much an amateur in this area, and I know that most hon. Members present have much more experience of development matters than I do. Nevertheless, as a long-time member of the World Development Movement and a supporter of other charities and pressure groups that aim to redress the clear imbalance between the richer, mostly western nations and the poorer, developing countries, I welcome the Bill. In particular, I welcome the safeguards outlined today by my right hon. Friend the Secretary of State.

The Bill has benefited from the scrutiny that it received before it came to Second Reading. It started life in the other place, and it has been well aired in the Select Committee on International Development. The Government have promised that that type of pre-legislative process will become more common. Apart from the Financial Services and Markets Bill, the Immigration and Asylum Bill and the draft Food Standards Bill, the process has not yet become the norm. I look forward to the process happening more frequently in future, and I welcome today's publication of a draft Freedom of Information Bill.

I support the Bill, which will convert the CDC into a plc with a difference. The public-private partnership and the ability to attract private sector funds into parts that other public limited companies cannot—or will not—reach will be important. However, the difference that an ethical dimension will build into the whole project is even more important.

From reading the transcripts of previous debates and evidence sessions in Committee, it is obvious that the CDC is already a well-respected vehicle, which has supported much high-quality development work—at present, about 400 projects in 50-plus countries. It is also obvious that many people who know a lot about these matters feel that much more can be achieved if private sector investment can be levered in where it is wanted and needed. The CDC has not been able to support as much potential development as it could have, at least partly because of Government financial rules and the limits on Government expenditure and because, unfortunately, direct state involvement can sometimes be a disincentive to prospective private partners.

It is clearly the case, however, that the Government's known commitment and explicit priorities for development help to establish trust. Much, of the CDC's success has come from its close ties with the British Government. Therefore, the loosening of those ties must be undertaken with care.

Probably the most important feature of current CDC projects is that a high proportion of them—as high as 80 per cent., and a mixture of equity and loans—are in the poorest developing countries, which are those with a per capita gross national product of less than $1,600 or thereabouts. Certainly that should continue to be the case, and it has been mentioned in virtually every speech today. The eradication of poverty must continue to be the aim.

Existing policies try to ensure that supported projects are economically and commercially viable, sound in development terms and satisfactory when judged as ethical businesses. Christian Aid has advocated social and environmental impact assessments before investment decisions are taken, and independent monitoring of codes of conduct for ethical businesses in each country.

If it can be shown that private investors can achieve attractive returns in the markets of the poorest countries without exploitation, it will be of great value. Christian Aid has also welcomed the Government's decision that proceeds from the sale of holdings in the CDC should be used to boost the aid budget. That should certainly happen, with the proviso—unnecessary, I hope—that they are an addition to an increasing aid budget and not a substitute for part of it.

The Government have already done much and they intend to do more to protect the CDC's development role, particularly during its transition into its new form. Despite the strictures of the hon. Member for South-West Devon (Mr. Streeter), many non-governmental organisations already believe that there are sufficient protections.

The concern now must be that the CDC must become sufficiently attractive to investors so that it can run successfully as a business. Judging by the story in last Friday's Financial Times, it may yet be some time before the CDC's investment portfolio is in shape to attract private sector investment, but the Secretary of State has explained the background to that story. Nevertheless, the aim must be to complete the legislation and put the change in place as soon as possible, so that there is no delay when the time is right to set up this public-private partnership.

I support the Bill and wish the CDC every success in its new form.

6.3 pm

Mr. Bowen Wells (Hertford and Stortford)

The hon. Member for Bristol, North-West (Dr. Naysmith) anticipated how I intended to open my remarks by describing the two reports of the Select Committee on International Development on the subject as a pre-legislative process. One of the few recommendations of the Committee that the Secretary of State has not been able to honour—it is not her fault, but that of the organisers of Government business—is the recommendation that the Bill be the subject of a pre-legislative process. We have done our best to take evidence on the subject and we published it in two reports, the last of which was published about a month ago. I hope that the House has found that useful.

As the hon. Member for Richmond Park (Dr. Tonge) explained, that report contains much of the detail that the Secretary of State proposes in the Bill. Indeed, I would say from the outset that the objective of the Bill is one that we would all wholeheartedly embrace. The Government are attempting to expand the Commonwealth Development Corporation so that it can take on more business and expand the private sector into some of the more difficult countries of the world and act as a catalyst to bring in other private sector investors and local investors to enhance the private sector in those countries.

As the White Paper, which the Secretary of State introduced, straightforwardly states, development will take place not simply through aid, but through the private sector—through which there has been a much larger flow of funds to developing countries than that from the aid budget, even given the increase that the right hon. Lady managed to secure from the Treasury. I thoroughly congratulate her on that, but it will not be a fraction of what we could and should anticipate coming from the private sector.

The Bill, which will enable the CDC to be used as a vehicle for private sector investment, is to be wholly welcomed. We must also welcome the fact that the CDC in its new form will bring more and not less money to the countries involved, in particular the poorest countries in which it is difficult for the private sector to operate.

The devil is in the detail in this Bill, as the Select Committee said. The Secretary of State has managed to answer most of our questions about documentation—the publication of the articles and the memorandum of association, and the details of the special share and the development policy to be followed. We have been able to examine those in detail. Indeed, we know the business principles and ethical investment policy that the CDC will pursue. Together, those present a considerable burden and onus on the CDC, which might act as a detriment to attracting sufficient private investment, although I hope that they will not.

I shall recall some of the achievements of the CDC for hon. Members because those will inform the House about how it will have to change when it is in its new form. There are some worries. As the House knows, I had the honour and privilege of serving the CDC as an employee for nearly 15 years. In that time, we undertook many developments, many of which were highly successful. As the hon. Member for Bristol, North-West remarked, they relied on the relationship with the Government. Low-interest loans received from the Government enabled the CDC to carry out the work. The Government thought that the CDC filled a special niche, as was set out in the Bill that set it up in 1948. It was not to be a competitor with other private investors; it was to fill a niche where private investors could not or would not dare to tread.

One of the CDC's early investments was in Swaziland. The then King of the Swazis negotiated with the CDC a long lease on large tracts of hillside that had been denuded of all vegetation. The CDC found that the Caribbean pine tree—which agriculturalists had located in Belize—would grow well on the high plateau lands of Swaziland. It invested in clothing the hills with a large forest, which took about 13 to 15 years to mature—because of the conditions in Swaziland, the trees grew faster than they do in the Caribbean. The forest gave rise to an industry in wood products, which still flourishes today, and a mill to produce pulp for paper was founded in the country as a result. The partnership between the King of the Swazis and the CDC has greatly promoted the Swaziland economy, not only by creating a new forest and paper products industry, but by major investment in sugar through the Swaziland irrigation scheme. That has been a huge success and a training farm is based there that helps many African and other agriculturalists to learn the latest techniques in tropical African agriculture. That improves yields and people's ability to feed themselves and to produce cash crops to sell worldwide.

That is the sort of thing that can be done with long-term loans that do not require dividends or returns on capital for 15 years while the trees grow. Another investment was required in the factory that produces the pulp, and a further one in a railway line from Swaziland to ports in South Africa and Mozambique to allow export of products to South African or overseas paper producers. A private investor would be loth to undertake such a scheme because of the time taken for the investment to reach maturity. It was that niche that the CDC filled so brilliantly in that example.

Another example from Africa is the CDC's investment in Kenya in the production of coffee and tea by smallholders. Those products now head the lists of Kenyan exports. That resulted from a land reform achieved by a former chairman of the CDC and Governor of Kenya, Sir Evelyn Baring. With the co-operation of the people around Nairobi, he reorganised landholdings to bring together sufficient acreage of farmland to enable people to grow coffee and provide a farm for themselves to sustain their families and produce surpluses to sell in the market. Co-operative tea and coffee factories were set up and have been a huge success.

The only worrying thing is that the theory that people produce fewer children as they get richer has proved mistaken in this case, because they have become more productive in that respect as well as in tea and coffee. Economically, and in terms of producing independent people who can vote, pay tax and participate in their country's democracy and civil society, the project has been a huge success. Again, the success was due to the sort of finance provided by the CDC. Organising smallholders is not the most profitable activity in developing countries, but that was what the CDC did in producing first-class development.

Clare Short

I pay tribute to the hon. Gentleman and his colleagues for their valuable work. If the poorest countries cannot attract investment on terms other than those that he describes, is not the future gloomy? If it is not possible to find beneficial, commercially interesting investments in those countries, they will be marginalised from the world economy. The south-east Asian countries, which have had the biggest reduction of poverty in the past 50 years, received aid to invest in education and health, but they created conditions that attracted large-scale private investment. That is what caused the major advance. I respect his argument, but it worries me. If the CDC cannot make the transition that we seek, the prognosis for the economies of the poorer countries is gloomy.

Mr. Wells

I could not agree more. I am describing the role that the CDC played in initiating development where previously it was not happening. That has led to other, greater development. In Malaysia, the CDC pioneered the diversification of the economy from simple dependence on rubber plantations into palm oil, which is now its second or third largest export. Once diversified, the economy was less dependent on one product. Both industries generated funds that attracted further investment to process the rubber and palm oil. That provided the revenue for the Government to increase investment in health and education. Malaya's economy is now described as a tiger.

Countries have to move to the bigger league, if I can call it that, to allow real investment—the private flows from which Malaysia has benefited so hugely that it produces motor cars and exports them to this country. The CDC has not taken part in those much more profitable and normal investments. I shall not take too much more time wallowing in past successes. What the Secretary of State is trying to achieve needs to be achieved, but it will come at the sacrifice of some of what the CDC was able to do in the past.

On handling finance, the need to locate the CDC offshore and shield some of its investments from exchange risks is shown by the housing market. CDC investment in housing has diminished over the years, because if pounds are used for long-term investments in housing mortgages, the money has to be returned to pounds from the local currency 20 years later when that currency may have been considerably devalued. That not only affects the interest repaid on the loan, but means that the money is repaid in, for example, devalued Guyana dollars. I was involved in housing mortgage finance in Guyana; a factor of 60 times what the money was worth when it was invested is involved. In purely financial terms, housing was a bad investment.

The new CDC structure may allow it both to borrow Guyana dollars and avoid the exchange rate risks. If that is tax free, it will not be taxed in Guyana or the United Kingdom, so it can roll over. I hope that the CDC will be able to undertake such investment, which will enable it to contribute to a valuable and profitable housing market, alongside other investors. Throughout Africa and Asia, there is a huge need for extra housing development. Social housing is also needed, but such investment will help with that because building housing for people who can afford to buy it means that people who cannot will be able to move into the houses vacated by the buyers. There are many opportunities of a different character. As I have shown, we are changing the character of the CDC profoundly by altering its financial arrangements and putting it largely into the financial sector.

The CDC executive was told that it should not engage in refinancing. If some company or group was willing to make an investment in a power or hotel company, the CDC would not invest. It would say, "If you think it is viable and you can make your money out of it in the private sector, you go ahead; the CDC will not bother." However, in the small Caribbean islands, the CDC was the first investor in international tourism. In St. Lucia, Antigua and Grenada, the first international-style hotels were built by the CDC and completed in 1962. That was the foundation of tourism in that area.

The then chairman of the CDC, Sir Nutcombe Hume, said that he would never invest in international tourism because that was not what development was about. However, he did so because no one else would invest in those hotels. That started a huge new industry. Indeed, in terms of earning power, tourism is the only viable and buoyant industry in Antigua, Grenada, St. Lucia and Barbados. The CDC was an initiator of such investment; it took a highly developmental role, of which we can all be proud. The Labour Government who set up the CDC, successive Governments and all those people employed in the CDC have worked hard to bring that about.

Members of the executive of the CDC were not interested in investing in equity; they were told not to do so. Now, the reverse will take place—it is already beginning. The reason for not going into such investment was that it was much more risky. There is a banking principle that one does not use loans—with which the CDC was financed—to invest in equity, with all the attendant dangers: when the money would be repaid; when the dividend would be received; or whether the dividend would be enough to repay the loan and the interest in due time. That will change, and so the character of the CDC will be greatly changed.

That change could make the CDC more, rather than less, viable, provided that we get right those details to which the Secretary of State referred in her introductory remarks. The question of tax is absolutely crucial. We shall have to go into that matter in Committee, and examine exactly how it will apply. According to my notes, we were talking about exemption from capital gains tax and chargeable gains. That matter needs further exploration in Committee, to ensure that the CDC is not put at a disadvantage when investing alongside other private sector companies, which will be keeping their money offshore. Such companies would not be taxed in this country and would be able to recycle their money and reinvest it overseas without having to bear the tax that the CDC would have to pay if it did not have that tax exemption. If we put the CDC into that position, it would be unable to invest alongside other private sector investors, which is one of the Secretary of State' s major objectives, and one that I very much welcome. The CDC should be involved in such investment, not only in partnership with other international lenders, but by gathering together and harnessing capital in the countries themselves. It should be working alongside those countries, both in investment and in management.

I hope that one of the features of the existing CDC that will be retained is the capacity for investors to manage their own investments. In the many difficult political circumstances and in the potentially unstable economic conditions of the least developed world, that is probably the only real security for investors. If they manage the project or are responsible for its management and can decide who to recruit and appoint, there will be a degree of security that cannot be provided in any other way. In so doing, they will be giving an example to local people as to how to manage properly and efficiently. They will be able to train local people as managers. That would be one of the most effective developmental strategies that we could undertake. I hope that we shall encourage the CDC to continue to manage projects overseas, albeit with an equal opportunities programme to bring in women. People from the country concerned and from other countries should be involved and moved around, as the CDC has begun to do. It should do that even more and should carry out appropriate training.

Clare Short

As the hon. Gentleman will know, the Department has a holding in the European Bank for Reconstruction and Development. The bank's chief economist, Nick Stern, thinks that the move from loans to equity and, therefore, the greater commitment to improving the quality of the management of the business, rather than securing a return on the loan, will possibly have great creative impact. The reason for that move is not merely to obtain a higher rate of return that will make it attractive to commercial investment; it will improve the long-term management capacity of the company into which the equity is placed. That potential benefit of the change could have great importance.

Mr. Wells

I very much agree with that point. I want the CDC to be encouraged by the directors in actually pursuing that. However, the change will not be easy to achieve. The right people must be found; they must be properly trained and supervised. However, doing so will provide security and that vital interest in the day-to-day management and in taught management. That would make it impossible for Governments in the states in which the CDC was operating to make political appointments to the management—a problem that has faced the CDC in the past. Such political appointees were not able to manage properly; they had neither the training nor the background and were forced into the management of the company. Thereby hangs a serious tale, which, in the case of the Guyana Electricity Corporation, ended with the collapse of the company, so that, for some months, there was no light in Guyana's capital city. Management is most important and I hope that it will be developed systematically, using modern management techniques.

I come now to the question of borrowing. The CDC will be able to expand if it reaches the point at which it can borrow on the international markets. Until now, its great restriction has been that it was subject to the constraints of the public sector borrowing requirement and the amount that could be borrowed in the private sector. Once money from the aid budget was not being invested in the CDC, its ability to expand was dependent on borrowing from the Treasury. It will be released from that constraint by the Bill, once the shares are sold to the private sector. I understand that the Treasury rules provide that the Government should sell 60 per cent. of the shares to private sector investors and the CDC would then be able to borrow on the private markets. That goal must be reached as soon as is practical, because it is from that borrowing that the CDC will be able to expand.

My next point relates to timing. If we were to turn the CDC into a company under the Companies Act 1985, but wholly owned by the Government—as it would be possible and practical to do by the end of this year—the CDC would be unable to borrow from the private sector because its shares would be wholly owned by the Government. In those circumstances, I worry as to whether the CDC could maintain its investment programme—roughly running at about £250 million a year—because its only source of money would be self-generated funds, unless the Department is considering allowing the CDC to borrow from the Treasury during that interim period. I suppose that that would be possible, but perhaps the Under-Secretary of State could let us know about that when he sums up. Will he also confirm whether some of the aid budget will be allocated to the CDC to enable it to expand its lending and investment programmes during the interim period before the shares are sold off and it can borrow in the private sector?

That period is crucial because the CDC will be attempting to build a track record during those years. If its ability to borrow and expand is constrained too much, there will a bad effect on the track record that it presents to private investors.

My own view is that the sooner we sell the shares and launch the CDC in its private-public sector role, the better, which brings me to the balance sheet. Waiting too long for a track record would be a mistake; the CDC should go quickly into the private sector, so that it can begin to borrow, to adjust to the disciplines of the private sector and to make the equity investments necessary to enable it to accomplish what the Secretary of State wants. Certain interim steps could be taken—for example, dressing up the balance sheet by issuing preference shares. Such shares would have a coupon of, say, 8 per cent. They would attract ethical investors and commercial investors from the insurance world who are interested in an emerging market portfolio. They would also have transfer rights, so that they could be transferred into proper, full equity share at a later date to be decided by the investor. In that way, we could attract private sector investment into the CDC sooner.

Whether the preference shareholding would qualify the CDC to borrow from the private sector is a detail that we need to explore, but that sort of imaginative thinking has to go into the balance sheet and how to dress that up in the interim period. There is no doubt that it would be perfectly possible to produce a balance sheet for the CDC that would be attractive to the private sector almost immediately, because the CDC has accumulated profits and surpluses within the budget totalling almost £550 million. In addition, there are Government loans that are not currently being repaid, or on which interest is not being paid, which could be converted into equity.

Those are major hurdles which the CDC must overcome as it transfers to its new role of investing in vibrant sectors of society. In its developmental role, it will help countries to escape dependency and enable them to achieve self-confident development. As those countries generate their own resources, they will be able to invest revenues derived from the taxation of those resources in housing, education and health, which are vital to proper development.

I shall conclude with a statement made by Sir Michael McWilliam to the Select Committee. I asked:

Can the CDC achieve its aims of development more effectively if this Bill goes through? What do the panel think, yes or no? Sir Michael's conclusion was:

I think the end result as one comes out of this transition period will be more focused development, a clearer idea of where they really are making a contribution and the ability to attract partner funds will also be enhanced and that again will reinforce their development purpose. I think this whole process, uncomfortable as it may be and muddly as it may be in some respects, has a very worthwhile objective at the end of the road. It is a worthwhile objective to find a way of enhancing, encompassing and bringing together private sector investment in the extremely poor and not-so-poor countries of the third world, so as to bring about economic development that complements social and other development.

6.34 pm

Mr. Phil Hope (Corby)

I shall be brief and stay within the time allowed to me.

I strongly support the Bill because it gives us an opportunity to pursue the White Paper's goals and objectives of eliminating world poverty. The hon. Member for South-West Devon (Mr. Streeter) said, revealingly, that the Conservatives did not privatise the CDC because it would hurt the poorest of the poor. What does that tell us about the Conservatives' motives in all their other privatisations?

I am convinced that the Bill is about long-term partnership, as the CDC attracts new private capital for investment in the public good in developing countries. The CDC will target and expand its work in the poorest countries and will ensure that its investment is ethical, with social, environmental and health and safety issues taken into account. I remind the House that, in October 1997, when launching the White Paper, my right hon. Friend the Prime Minister said of the sale of the CDC:

I can also promise that all the money Government raises from the sale will be ploughed back into our development programme". That is an important point.

The White Paper's goal of halving the number of people living in extreme poverty by 2015 is extremely important. Achieving that goal is not just about aid, or trade, or development support; it is about investment. My right hon. Friend the Secretary of State made it clear that we have to get private sector investment into developing countries. The ambitious programme that the Government have set out will turn the CDC into a major instrument in the achievement of that goal, and I hope that this will become a model that all other countries will follow. In that way, developing countries will be able to go forward with us and achieve the elimination of global poverty.

6.36 pm

Mr. Edward Leigh (Gainsborough)

One of the key reasons why I take an interest in this subject is that, when we were at the Department of Trade and Industry, Sir Tim Sainsbury and I were involved in the successful privatisation of the Export Credits Guarantee Department. That company is not entirely dissimilar from the CDC, even though, because we were dealing with potentially far more prosperous markets, we faced far fewer problems when the ECGD was privatised than the Government are facing today. The then Labour Opposition opposed that privatisation, but we rejoice when sinners repent of their former mistakes.

I have a few questions to ask the Government—after all, the CDC was founded in 1948 and it has been successful, so we have to be certain that the motives and factors prompting change are powerful. The CDC borrows long, at 25 years, and lends short, at an average of seven years; that adds to its surpluses. How will being in the private sector facilitate its ability to continue to do so? If the CDC's current borrowing power is insufficient, and if it will have more freedoms in the private sector, will it be able to borrow as cheaply in the private sector as it borrows now? Since 1995, the corporation has borrowed from the Exchequer at a zero rate of interest. Can that continue when the CDC is in the private sector?

Can the Treasury concede a special tax structure to a private company, to enable that new private company to compete with offshore companies? Will not that set a precedent, which the Treasury normally resists vigorously? The CDC is an extremely small burden on the UK taxpayer, so why are we changing its status now? If we are doing so because of its insufficient borrowing powers, could not those powers be extended in some other way—for example, by allowing the CDC to borrow overseas, which would free it from the shackles of the public sector borrowing requirement?

As I said in an earlier intervention, I understand that the CDC's reserves at 31 December 1997 stood at £486 million—some 39 per cent. of its capital employed. My concern is that the CDC will be a target for predators who are more interested in its reserves than in its work. The Secretary of State is completely committed to her subject and I do not for one moment question her good faith in this matter; I do, however, question the ability of the new company that she is creating to resist predators once it leaves her control.

That is all important, because 80 per cent. of the CDC's investments are in countries whose per capita income is less than $1,600. I have no doubt that the new CDC will continue to invest in those very poor countries, but, like my hon. Friend the Member for South-West Devon (Mr. Streeter), I am not convinced that, once it is in the private sector, it will not concentrate its investments in such countries in the better, more fruitful and more commercially viable investments that are already the subject of private sector interest.

Clare Short

That is a very important point. We do not want the CDC or its successor to make unprofitable, second-rate investments. High-return, high-tech investments are not taking place in the poorest countries, but they want and need that investment. If the CDC were to move into sectors with high rates of return and help to lever that kind of investment to some of the poorest countries in the world, that would be extremely beneficial to those countries' economies. It would not be a bad thing.

Mr. Leigh

The right hon. Lady is absolutely correct. However, my point follows on from the excellent speech made by my hon. Friend the Member for Hertford and Stortford (Mr. Wells). He brings great experience to this debate and gave a string of examples—which included hotels in Antigua—where the CDC, under its current structure, had led the way by investing in projects that were not initially attractive to the private sector. I have no doubt that the right hon. Lady is correct: it is right and proper that the CDC should be able to make more profitable, high-tech investments. However, we are concerned that the private sector is already doing that. We are not convinced that, once freed from Government control, the new CDC will not forget its roots, which are so important to the developing world.

The CDC's return on capital employed fell from 8.3 per cent. in 1996 to 7.3 per cent. in 1997. How will private partners be attracted in such an atmosphere? The Government admitted that there was a problem in their evidence to the Select Committee when they said that returns at that level would "not be sufficient". Will socially desirable projects be sacrificed in order to increase returns? The Prime Minister said:

I am less interested in whether an institution is public or private than whether it works. We all agree with that. However, what proof do we have that the CDC will work better as a public-private institution—apart from vague exhortations about the merits of the "third way"? Is this project a sacrifice to the ideology of the third way?

What proof do the Government have that the CDC could not continue its work in its current form? Could it not be allowed to borrow overseas? In any event, is this project not a privatisation in all but name? If it is, why not admit it? What is the point in obtaining a substantial minority shareholding? If the golden share is retained, is not the substantial minority shareholding of 25 per cent. superfluous? The Government will sell what the CDC owes it as shares, but will the new shareholders want to continue to invest in future projects of the type that we have described? Will they set new priorities?

I believe that the CDC as we know it and have come to admire it is being sacrificed on the altar of the third way. The third-way mantra is that the public and private sectors can inevitably run companies together. The Post Office will be the next victim of the third-way ideology—although that will be an even more timid toe in the water because the political complexities are far greater: in that instance, it will be our constituents complaining, not some of the poorest people in the world.

I have a different third way. I believe that there are several wrong approaches to international development. One wrong approach is to wash one's hands of it and say that people in the developing world are none of our concern. All hon. Members are passionately concerned about poor countries and want to help them. Another clearly wrong method is the woolly-headed, generous approach, unrelated to market disciplines, which has proved disastrous in many countries. 1 do believe in the third way: a hard-headed, market-disciplined approach. If the company achieves that, well and good; but why not at least have the courage to admit that this is a full-scale privatisation? If it is, I suspect that some of the poorest people in the world may suffer, and that we may have to create a new Commonwealth Development Corporation in the future.

6.45 pm

Mrs. Cheryl Gillan (Chesham and Amersham)

This has been an interesting and full debate about the Commonwealth Development Corporation, which has been operating since 1948. In a way, I suppose that we have been considering what it will do in the next millennium. I join hon. Members on both sides of the House—not least my hon. Friend the Member for South-West Devon (Mr. Streeter), who opened so ably for the Opposition—in paying tribute to the corporation for the way in which it has discharged its aims and objectives since its inception.

We welcome this opportunity to examine the organisation's forward planning. I stress to the Secretary of State that the Opposition's motives are as good as her own: we have no vested interest in seeking the failure of any privatisation or public-private partnership—whatever the right hon. Lady wishes to call this measure. I hope that she will consider my remarks in that spirit. However, the process is not without its difficulties—not least of which is the U-turn that the Labour party has made on this issue.

The Opposition are supportive of the corporation's contribution. It is a public corporation and it will remain even more so under the next Labour Government."—[Official Report, 20 May 1996; Vol. 278, c. 65.] Those are the words not of some left-wing fanatic but of the Under-Secretary.

The Parliamentary Under-Secretary of State for International Development (Mr. George Foulkes)

Who says that I am not a left-wing fanatic?

Mrs. Gillan

If the cap fits, wear it. The Under-Secretary is responsible for steering the Bill through the House, and perhaps the fact that his heart is not in it has contributed to the delay in the passage of this measure.

It has taken a remarkably long time to bring the Bill to the Floor of the House considering that it began its passage through the legislative process on 7 December last year when it received a Second Reading in another place. From its First Reading in this place on 10 March, it has taken two and a half months to reach this stage today—although that is not as long as the Foreign Secretary takes to answer some written questions. The hold-ups in the passage of the Bill are indicative of the problems attached to it.

Unfortunately, the Bill's passage has coincided with the CDC's announcement that it made a £42 million loss in 1998—its first annual deficit since 1954. That is hardly a helpful result considering the Government's plans for its future. The Bill has at last reached the House and we have had a chance to listen to hon. Members' views about the proposals and the so-called public-private partnership, which is privatisation by another name—as my hon. Friend the Member for New Forest, West (Mr. Swayne) pointed out in an intervention during the Secretary of State' s speech.

We know that the legislation gives rise to some difficulties. That is recognised not least by the Department, which has been wrestling with the problems highlighted in another place, in the Select Committee and in today's debate. The key is in the Secretary of State's speech. The Secretary of State was honest enough to say that she had struggled with this issue and that she believed that she had found the solution. I hope that she has—sadly, only time will tell—but it is only right that we should have an opportunity to raise with her our fears and trepidations and examine the problems that we believe the CDC may face as she takes it down this route. The Secretary of State referred to tailored tax treatment. However, as many of my hon. Friends have pointed out, we have not had an opportunity to examine the details of that tailored tax treatment, which will not be available until the Committee stage.

The Secretary of State talked about the problems of the timing of the listing and the CDC's financial record. When I asked her about future profitability, she said that she was no Mystic Meg, but she went on to read from her script that the CDC's profitability will increase.

Clare Short

The hon. Lady claims to wish the CDC well, so she should not make irresponsible remarks. Everybody in the world knows that emerging markets have faced difficulties this year, and any responsible decision to float the CDC on the stock market will therefore take into account the state of emerging markets and the likely interest in investing in the company. The hon. Lady' s colleague the hon. Member for Hertford and Stortford (Mr. Wells) made constructive points about making sure that the balance sheet can perform well in the meantime.

There is a gap between making responsible criticism, and denouncing the whole operation and trying to score points that would reduce the possibility of the project having the most beneficial future. It is unnecessary to descend into cheap point scoring instead of tackling a complex and interesting transition.

Mrs. Gillan

That intervention does not do the Secretary of State justice; it is unworthy of her. She represents a party that talked down every privatisation carried out by Conservative Governments. Nothing in my remarks so far has been other than the truth, and I am trying to be constructive. I said at the beginning of my speech that I hoped that the Secretary of State would respond to that, but obviously that will not be the case.

There has been much praise of the CDC on both sides of the House. The hon. Member for Basildon (Angela Smith) said that she wanted the CDC's focus to remain on the poorest countries, and she wanted wider consultation with non-governmental organisations, which we can all applaud. However, the language that the hon. Lady used gave the impression that she believes that the Government will retain total control of the CDC. The hon. Member for Richmond Park (Dr. Tonge), in her rush to support the third way, almost forgot that she intended to be critical of the Bill. She seemed to welcome the Bill and then said that it would not work. She is trying to be all things to all people, but I agree with the scepticism that she expressed later in her contribution.

The hon. Member for Bristol, North-West (Dr. Naysmith) welcomed the draft Bill on freedom of information, and there are so many unknown quantities in this Bill that I tend to agree with him that we need more freedom of information, perhaps to know the details on which we are legislating today. If ever a Bill needed a pre-legislative process, it is this Bill, which contains so many unknown quantities that we shall not know what we are talking about until the Department for International Development chooses to reveal the details.

My hon. Friend the Member for Hertford and Stortford (Mr. Wells), the Chairman of the Select Committee on International Development—

Mr. Streeter

The distinguished Chairman.

Mrs. Gillan

Indeed, as my hon. Friend says, he is the distinguished Chairman of that Committee. My hon. Friend the Member for Hertford and Stortford, who has already made such a great contribution to the Bill's passage, acknowledged that the devil is in the detail, and went on to prove his command of the detail of the Bill. I hope that, in Committee, Ministers will prove that they have as much command of the detail as my hon. Friend does.

In a brief contribution, the hon. Member for Corby (Mr. Hope) said that he hoped that the Bill would be the model for all to follow. I hope so too, but unless questions are answered, that will not be the case.

My hon. Friend the Member for Gainsborough (Mr. Leigh) reflected Conservative Members' concerns about whether the new CDC will be a target for predators. I hope that the Under-Secretary will address that issue in his winding-up speech.

There is a problem with the Bill. Privatisation was very close to our hearts when we were in government, and if it had been possible, we would have moved towards privatising the CDC in the belief that we could have improved its lot in the world. We judged that it was not possible, and that has been reflected in the proceedings to date. When the Bill passed through the upper House, there was a feeling of consensus, but when one reads the debate, one realises that it was mainly due to the fact that the CDC commands such affection, and its work such respect. There was consensus about its contribution to the development of poorer countries, but there was disquiet about the incompleteness and inadequacy of the Government's plans. The same concerns have been expressed today.

When my hon. Friend the Member for South-West Devon opened for the Opposition, he said that we would not seek to divide the House on Second Reading. I agree with him, and we shall not seek a Division. Let me instead reiterate for the Minister the detailed matters that we hope to explore. My hon. Friend described four of those in his speech.

First, have the CDC's developmental principles been adequately protected, or will the Bill destroy its great heritage? That question has come from all sides in this debate. Will the Department's budget receive a fair price for our taxpayers' investment during the past 50 years? I hope that the Minister will answer that question. Will the privatisation protect the poorest people in the developing world? They are the very people whom the organisation was set up to help, and we do not want there to be any diminution in that help. Do the Government's proposals for the tax treatment of the new CDC deserve our support? I presume that the Minister will be able to say little about that tonight because we will have to wait until nearer the Committee stage for the detailed measures to emerge.

I hope that the Under-Secretary understands our deep-seated concerns. The process of reforming the CDC started in October 1997, and 19 months later, we are left with unanswered questions, unpublished documents and no direction or guidance on certain key aspects of the Bill. That has been reflected in debates in the other place and on the Floor of this House and in two reports by the Select Committee. I hope that the Minister will be able to answer some of our detailed questions tonight. If not, I hope that he will be able to give us the answers in Committee. We shall reserve until Third Reading our judgment on whether he has succeeded, and we may feel that we have to vote against the Bill because of the concerns articulated today which the Government have not yet addressed.

Like other hon. Members on all sides of the House, I wish the Bill well in the next stage of its proceedings, but I want the Minister to ensure that he responds to all our questions and concerns. The CDC deserves that.

6.57 pm

The Parliamentary Under-Secretary of State for International Development (Mr. George Foulkes)

We have had a predominantly thoughtful debate on the policy and principles behind the Government's proposal to establish a public-private partnership for the CDC, which, as my hon. Friend the Member for Basildon (Angela Smith) said, was set up by a Labour Government in 1948.

There was an interesting contrast between the petty, carping, negative tones of the principal Opposition spokesmen and the constructive, helpful welcome for the Bill by the knowledgeable, thoughtful Chairman of the International Development Committee, the hon. Member for Hertford and Stortford (Mr. Wells). He has worked for the CDC, is familiar with its aims and knows what he is talking about, and is not merely a spokesman who is trying to climb the greasy pole of the shadow Cabinet.

The public-private partnership is at the very heart of the Government's development focus on working with others to eliminate poverty. As the hon. Member for Hertford and Stortford and other members of the Select Committee said last year in their report on the future of the CDC, the partnership is a

"challenging and unique opportunity for the best characteristics of the public and private sectors to be combined to make a significant contribution to poverty eradication".

After careful thought and consideration, that was the unanimous conclusion of a Select Committee that has Conservative members and a Conservative Chairman.

In today's debate, the proposals have been welcomed by Labour, Conservative and Liberal Democrat Back Benchers. It is only the Opposition spokesmen in this House who have criticised and questioned the Bill. When the Bill passed through the House of Lords, the Opposition's tone was completely different, perhaps because they have a little more knowledge about and understanding of development.

The hon. Member for South-West Devon (Mr. Streeter) praised the Secretary of State for the White Paper, the comprehensive spending review and everything that has been done. He should therefore understand that it is inconceivable that someone with that commitment and record would do anything to undermine the CDC's development role.

This is not a privatisation. Under public-private partnerships, there will not be windfall gains or fat cats, as we saw under Tory privatisations. That has been assured through a combination of measures, such as the 25 per cent. shareholding, the golden share, the memorandum of understanding, the deed, the memorandum and articles of association and investment policy—[Interruption.] If, instead of gossiping among themselves, Conservative Members were to read such articles, they might be a little better advised and more informed.

The development of objectives will be entrenched in the public-private partnerships, as my right hon. Friend the Secretary of State has described. Private investors will not be able to walk away—as the hon. Member for South-West Devon said—from the objectives. Some may choose not to enter partnerships, but if they do so, they will know of the ethical investment policy to which the CDC must adhere. Investors will enter the partnership on that basis.

The hon. Member for South-West Devon said that we will create a huge development void in the poorest countries of sub-Saharan Africa and elsewhere. There is currently such a huge void in foreign investment. The purpose of these partnerships is to mobilise private capital for such countries and to demonstrate the attractiveness of investment in them. We shall be highlighting the attractiveness of the 70 per cent. of the poorest countries—not emerging markets, but pre-emerging markets, as the Chairman of the Select Committee rightly said.

The Opposition have suggested no alternative. The hon. Member for South-West Devon said that he intends to strengthen the Bill in Committee, but he has given no indication of how he will do so.

The hon. Member for South-West Devon also raised the question of tax treatment. Several hon. Members did so constructively, but the hon. Gentleman was negative and carped. I confirm to him and to others that, under the Government's extraordinary arrangements, a unique tax regime will be introduced for this public-private partnership, in which the private sector will have a majority shareholding. The tax amendments will exempt the partnership from United Kingdom corporation tax, arising, as the Chairman of the Select Committee said, from income and chargeable gains in its investment activities. The exemption will not extend to VAT, stamp duty, and so on. The proposal aims to create a level playing field, but nothing beyond that.

Mrs. Gillan

The Minister is obviously having a great deal of difficulty, as he blusters through a quite remarkable attack on my hon. Friend the Member for South–West Devon (Mr. Streeter). Does the Minister still believe to be true what he said in 1996, when he stated that the CDC

"is a public corporation and it will remain even more so under the next Labour Government"?—[Official Report, 20 May 1996; Vol. 278, c. 65.]

Has he not made a complete U-turn?

Mr. Foulkes

The hon. Lady was accusing me earlier of being a left-wing fanatic.

Clare Short

It is true.

Mr. Foulkes

I would not be in the Labour party if I were not left wing. The Labour party is a radical party.

In some ways, the hon. Member for Richmond Park (Dr. Tonge) was helpful; she welcomed the general proposals and rightly asked a number of specific questions, which can be discussed in Committee. Committee is the right place in which to discuss all such detail. The one thing that I did not appreciate was her misunderstanding in saying that the fact that full details of tax proposals were not yet available was an insult to the House. She is a relatively new Member. I have been in the House for 20 years, and have seen the introduction of major proposals not just in Committee but on Report. The unavailability of details is not really an insult to the House. We have been working on them and will table amendments on them in Committee, on which we shall have detailed discussion.

Dr. Tonge

Does the hon. Gentleman agree that the tax proposals are an integral and essential part of the Bill, without which it cannot be debated properly?

Mr. Foulkes

I have given an indication—my right hon. Friend the Secretary of State also did so—of the basis of the tax proposals. All that we have not done is provide what the hon. Member for South-West Devon described as "a piece of paper". We all know the value of some pieces of paper. We have given a clear indication of what has been agreed on the tax proposals. Detailed, technical amendments—that is all that we are talking about—to give effect to what my right hon. Friend the Secretary of State and I have said will be tabled in Committee. [Interruption.] Opposition Members can mutter as long as they like, but it will not alter the truth: we have given details of the exact tax proposals and said that amendments will be tabled in Committee.

The hon. Member for Hertford and Stortford asked some sensible questions—unlike his Front-Bench spokesman, the hon. Member for South-West Devon—on CDC finances. Some Opposition Members said that they would not want to wish this PPP ill, but then challenged and questioned CDC finances. No one underestimates the challenge that the CDC has been set to improve its financial returns while adhering both to its investment and ethical policies. My right hon. Friend the Secretary of State explained why CDC returns have been modest. She also described the 1998 results.

I can tell the House, and particularly the hon. Member for Chesham and Amersham (Mrs. Gillan), who has been asking about this matter, that the CDC—not the Government—expects a return to profitability in 1999. I hope that the hon. Lady will join me in hoping that that is so and encouraging the CDC in its efforts—[Interruption.] I am answering the debate. The hon. Lady asked a question, and she has her answer. She should be satisfied, instead of muttering away.

Several hon. Members asked about the CDC's financial relationship with the Government. The point about the period between the CDC becoming a public limited company and the assumption of private shareholdings is important. I refer hon. Members to the memorandum of understanding between the directors of the CDC and the Secretary of State, in which it says that the Secretary of State will give careful consideration to requests for assistance or guarantees under sections 9… and 10 … assessing them against their impact on the value of the public sector's interest in CDC and on development and with regard to other claims on the funds available to her and all other relevant considerations". For the period in question, arrangements will be exactly the same as they are at the moment.

This has been a useful debate. I welcome all the positive contributions to it, particularly from my hon. Friends, who are notably all fellow co-operators—people who believe in ethical investment and who understand it.

Mr. Wells

Will the Minister provide in Committee details of options available to the Government on dressing the balance sheet for sale?

Mr. Foulkes

I shall certainly look into that, and undertake—if it is possible—to do so.

We rejected the privatisation route. Instead, we are creating a public-private partnership, which gives us the best of both worlds: responsibility and enterprise, accountability and profitability. We also rejected the offshore route—the tax-haven route which the hon. Member for South-West Devon wanted. We have come up with a neat solution to give the CDC advantages, enabling it to compete on a level playing field without siting it offshore: again, the best of both worlds.

The public-private partnership will provide a double bonus for development. All the proceeds of the sale will be ploughed back into our development budget for further work in the poorest countries of the world, helping to eradicate poverty. That is one of the bonuses; the other is that the CDC will be able to mobilise further funds from the private sector for its development work. All hon. Members should welcome that, and I commend the Bill to the House.

Question put and agreed to.

Bill accordingly read a Second time, and committed to a Standing Committee, pursuant to Standing Order No. 63 (Committal of Bills).