HL Deb 04 May 1995 vol 563 cc1511-21

5.16 p.m.

Lord Trefgarne

My Lords, I beg to move that this Bill be now read a second time. This is a short Bill, but is nonetheless extremely important to the work of the Commonwealth Development Corporation. Its aim is simple and straightforward. It is to ensure that CDC continues in the ever-changing global economic environment to provide the most effective economic assistance and advice to developing countries. I shall say more about the specific provisions contained in the Bill in a moment, but first I want briefly to set out the reasons why I am bringing the Bill forward and why I very much hope that it will command the support of every noble Lord.

That there is overwhelming support for CDC among your Lordships is obvious. We have just seen the Government's own CDC Bill make swift progress through its Committee stage following a Second Reading debate back in March when CDC was praised by speakers from every corner of the House. We are all keen that CDC continues to promote development in countries around the globe. None of us wants it to be hampered in doing so by outdated legislation.

It may be that your Lordships would have expected the provisions I am bringing forward today to be incorporated in the Government's Bill. I would have been delighted if that had been possible. Unfortunately, as was foreseen during our Second Reading debate, the matter of extending and clarifying CDC's powers cannot be addressed in that Bill because of the narrowness of its scope. A change to its Long Title would have been necessary and I am well aware of your Lordships' reluctance to take such a step. That is why I now seek to address this important matter by means of a Private Member's Bill.

Recognition of the need for the legislation long pre-dates the passage of the Government's current Bill. The quinquennial review of CDC, conducted in 1993, identified a number of constraints which Section 2 of the 1978 Act placed upon the corporation's activities and recommended that legislation should be introduced to extend CDC's powers. The relevant provisions of Section 2 have been in substantially the same form for almost 40 years during which time concepts of what constitutes sound economic development have changed, as have the needs and nature of developing countries. My Bill seeks to update and clarify CDC's powers so as to reflect those changed circumstances.

I hope and believe that my Bill will have the general support of everyone in this House and that it can progress smoothly through its remaining stages and on to the other place. I am most grateful to my noble friend Lady Chalker for being here today to respond personally. I greatly look forward to what she has to say and hope and expect that she too will be able to give her support and encouragement.

Having said that, I have no doubt that there may be need for some amendments in order to make the Bill as effective and workable as possible. I should welcome the prospect of such amendments. I know that discussions have already taken place between my noble friend's officials and the CDC about various detailed elements in the Bill. I trust that those will continue in a constructive vein with the urgency that is necessary to allow the Bill to be considered in the other place before the Summer Recess.

Perhaps I may now turn to the specific provisions contained in the Bill. CDC normally conducts its business through incorporated joint venture companies to which it provides financial assistance by way of share and loan capital, thereby spreading risk with other investors and achieving more development than if CDC funded projects entirely on its own. I am advised that the wording of Section 2 of the 1978 Act envisages CDC's investment funds passing directly or indirectly to a project company for the promotion of new or the expansion of existing enterprises and that CDC's funds should be applied primarily to additional assets or capacity, and I emphasise the word "additional". These requirements inhibit CDC purchasing existing shares, securities or assets. This severely limits the role that the corporation can play where host governments are divesting themselves of enterprises or where a project involves buy-outs, buy-ins and rehabilitation.

Indeed, the transfer of ownership itself is sometimes the very step which releases energy for growth in enterprise and thus CDC needs the freedom to apply its funds to the purchase of existing shares, securities and assets, provided, of course, that the economic benefit test can be fulfilled. By adding the words, regeneration or reconstruction (including corporate and financial reconstruction) to subsections (2) (a) and (b) of Section 2 of the 1978 Act, I propose to cure this limitation. I am told that this new power will be particularly relevant in South Africa, and, as a matter of interest, is a power already enjoyed by most comparable development financial institutions—for example, the IFC.

Effective money and capital markets help to improve business access to finance, savers' access to savings opportunities and thereby the efficient allocation of scarce funds into productive investment. That coincides closely with the CDC's fundamental purpose of developing the economies of host countries, but it needs to be included as a specific power. The amendment proposed in Clause 1(4) (bb) will enable CDC, for example, to undertake the promotion of country or sector funds, investment in quoted or unquoted equities and the formation or encouragement of stock or securities exchanges or dealings mechanism. The subsection would also have the effect of allowing CDC to promote and manage such funds.

I am further advised that CDC currently may only undertake consultancy which is directly related or incidental to its projects or can be regarded as an activity incidental or conducive to the exercise of its powers.

CDC's expertise, even without finance or management, can make a significant contribution to development in countries in which it operates, and Clause 1(4) (bbb) is designed to correct that omission. Clause 1(5) contains formal consequential provisions with which I shall not detain your Lordships.

I hope that I have been able to explain the straightforward nature of this small but important Bill. I hope that the need for it is clear to every noble Lord. I hope, too, that it will attract widespread support. Without it, there is a real risk that the CDC will be increasingly constrained in its efforts to achieve its economic development objectives. That is something I am sure none of us wants to see. I commend the Bill to the House. I beg to move.

Moved, That the Bill be now read a second time.—(Lord Trefgarne.)

5.23 p.m.

Lord Redesdale

My Lords, I support the Bill. The additional powers that the CDC will gain under this brief Private Member's Bill will be useful. The Bill allows the CDC to invest in funds and to buy shares in companies, as the noble Lord pointed out. That is particularly important as the past five years have shown a massive increase in the amount of private investment in companies in developing countries. Indeed, on a global scale, the private capital which is being pumped into those companies far outstrips, and is far more important than, any aid that one country can give to another.

The importance of the Bill is that the CDC will be able to invest in a company, and the money that it invests will attract others to invest in the same company. Therefore money supplied by the CDC will draw in a large amount of investment. Obviously investing in developing countries is a risk business. But CDC involvement in the companies, and with the CDC having some control over the way in which those companies' money is being managed, would give great confidence to people to invest.

The noble Lord also mentioned that the Bill would be helpful in South Africa. Regarding transfer of ownership—I refer to management buy-outs—the Bill gives black businessmen and entrepreneurs an ability to buy into companies for which they now work which they have not had previously. I hope that the Government will give the Bill a fair wind. I hope, too, that the Bill has the desired effect.

5.25 p.m.

Viscount Waverley

My Lords, I, too, support this Private Member's Bill for reasons that I shall outline. Ultimate success will depend on Opposition support, as opposing the Bill at this stage would destroy effectively the chances of its passing through its stages in another place.

I spoke at some length at Second Reading of the Government's Bill and see no benefit in re-emphasising examples of the corporation's excellent work. I shall, therefore, confine my remarks to illustrate why the Bill has merit. Importantly, it adopts recommendations contained in the quinquennial review which were not included in the Government's CDC Bill. Secondly, while CDC's function is economic development, it is operating in the private sector and therefore needs to have similar tools to other private sector investors.

The corporation has hitherto concentrated on businesses involved in primary agricultural production. That sector is not the most profitable and carries high risk. CDC's current strategy is to improve the profitability on its agri-businesses by investing more in downstream processing and marketing. That can often be done most effectively by participating in existing businesses. And that is where the difficulty lies.

At present, there are statutory constraints limiting CDC's freedom of action. Indeed CDC's policies in South Africa are concentrating on assisting disadvantaged black entrepreneurs in dismantling large corporations seeking to divest their non-core operations. CDC is investing in a fund to meet this objective, which is to be encouraged. But operations will be constrained without the legislation proposed by the noble Lord, Lord Trefgarne, which clarifies CDC's powers.

It is now recognised that financing economies through the development of local capital markets provides for a more stable and cheaper source of finance than reliance on bank finance or foreign investors. Recent events in Mexico illustrate that.

This legislation will allow CDC's newly-formed financial markets department to expand its role to include stimulation and effective development of local financial markets. Those three issues illustrate the necessity, in my view, for this Bill to be enacted.

I should be pleased to hear of unequivocal support from the Government, and recognition from the main Opposition party that the Bill is necessary for CDC's future activities.

5.30 p.m.

Lord Broadbridge

My Lords, I congratulate the noble Lord, Lord Trefgarne, in bringing forward this valuable—nay, essential—Bill, which, I understand, together with the main Bill, substantially adds to and rounds off meeting the aspirations of the CDC. Last August, as a member of the Commonwealth Parliamentary Association delegation to Zambia, I was able to see the CDC at work on the ground, as it were. Indeed, I had a most comprehensive and useful briefing from the CDC before leaving England. I have also lived and worked in Nigeria for a period and that is another country in which the CDC is working.

In general, but in particular as a result of my visit to Zambia, I believe that the CDC's range of powers needs to be further clarified and, in particular, extended to enable it fully to follow through its strategies, which are, of course, developed in discussion with the ODA and the Treasury. The pace and nature of the economic environment across the world has radically changed since the CDC Act of 1956, some 40 years ago, which was, after all, set only 10 years after the end of the Second World War and in the midst of independence movements among the countries of our former empire, in many of which the CDC now operates.

The economies of the developing countries are becoming more and more dependent upon the inflow of private capital. In the case of Zambia, historically the country has been saved from bankruptcy by the support of the World Bank, IMF, ODA and CDC. The average GDP last year was 40 American cents per person per year. The principal economic activity is the mining and downstream production of copper, cobalt and their derivatives by the state mining corporation. It is now intended to privatise that activity, firstly to enable its expansion and secondly to give an injection of adrenalin to management and staff.

CDC clearly has a major role to play in facilitating such processes and to do so it needs to be able to operate freely in financial markets. The transfer of ownership itself, as the noble Lord, Lord Trefgarne, said, is frequently a step which releases energy for growth in an enterprise. CDC therefore needs the freedom to apply its funds to the purchase of existing shares, securities and assets. That is an objective of the Bill.

The CDC has been consistently advised that the present Act envisages CDC's invested funds passing directly or indirectly and only to project companies for the promotion of new enterprises or the expansion of existing ones. CDC's funds have to be applied primarily to additional assets or capacity. That requirement for additionally generally precludes CDC's purchasing existing shares, securities or assets and therefore severely limits its role in privatisations, management buy-ins and rehabilitation projects, which are a particular feature of CDC's intended activities in Africa. The Bill will liberate that situation.

It is now widely accepted that the development of money and capital markets is a key component of the successful development of a country's economy. CDC's fundamental purpose is the development of the economies of host countries. It follows that the promotion of money and capital markets by CDC in host countries is consistent with CDC's fundamental aim. CDC lacks a power to do so. But this Bill would bring CDC's powers in that aspect of the financial sector into line with the activities that the International Finance Corporation and the European Bank for Reconstruction and Settlement are permitted to undertake.

Finally, as has already been mentioned, there is the subject of consultancy. CDC currently undertakes consultancy provided only that it is related directly or indirectly to CDC projects. The staff of CDC have a vast store of diverse experience and expertise. That expertise, if used in additional situations where CDC finance and management are not playing a part, could make a huge contribution to development in countries in which CDC operates. It would be so-called "dry" consultancy and would be made available on a fee charging basis with full cost recovery, so that it would not be subsidised by CDC's other operations. As a former marketing and financial consultant with Peat, Marwick, Mitchell, who has lived and worked on assignments in countries such as Egypt, the Lebanon and Nigeria, how could I disagree? The Bill will make such work possible.

In conclusion, I wish the main Bill well but feel that it is only one half of the corporate walnut. In order that the tree may grow big and strong, any tree man will tell you that you need both halves of the walnut. I firmly believe that this Bill is the other half. Let us therefore put them together. I support the Bill.

5.34 p.m.

Lord Judd

My Lords, I too should like to congratulate the noble Lord, Lord Trefgarne, on having raised what is clearly an important issue. He was right to emphasise the goodwill that exists in all parts of the House towards the CDC. It has a fine record in the third world, and one in which we all take pride. I assure the noble Lord that, in considering the Bill, should we decide—we have not as yet made any such decision—on reflection that some amendments might be appropriate to strengthen it, they will be brought forward in the spirit of constructive contribution to the concerns that he expressed.

When a Bill is put forward, it is important to probe the rationale behind it and the implications which may be within it. First, I am not quite clear why there is such urgency; nor am I altogether clear why the Government are so fullheartedly in support of it, thereby implicitly also in support of the urgency, if they themselves did not see fit in such an important matter to cover this ground in the Bill that they were drafting. This is a constructive occasion and I do not want to be mischievous; but I find myself a little confused by government policy towards the agencies for which it is responsible at the moment. I find it interesting, to say the least, that we have the Crown Agents being put into a privatised form and that in their privatised form they are to be responsible for services largely to the public sector in the third world. We are told that the CDC is to remain in the public sector and is increasingly to be responsible for servicing private developments in the third world. At first sight, that is not altogether logical. Perhaps the Minister will be able to put us straight later. To find the Government so readily endorsing a new Bill brought forward by the noble Lord, when presumably they had been putting a lot of thought into what they wanted in their own Bill, does not altogether engender confidence about the firmness of hand in this particular area.

Let me make it quite clear that we all accept that the private sector has a vital part to play in development. We all want to see that private sector in the third world being a genuinely indigenous private sector and not a dependent private sector; hence the need to ensure the accumulation of capital within the developing countries themselves and to avoid a situation in which they are utterly dependent on foreign investment controlled from outside. But in doing that, and if the CDC is to play a fuller part in doing that, we have to examine the changes in emphasis which will come about—it is a change of emphasis—in the contribution being made by CDC to the whole process of development.

I want to put on record how much I appreciate the very helpful and full way in which the CDC has gone out of its way to brief me and my colleagues and make itself available, which is commendable. In writing to me the CDC referred to the need, which was emphasised by the noble Lord, to get away from the development concepts of the 1950s. It also referred to the changing environment in which the CDC operates. For those of us who spent much of our lives working in development on third world issues, those statements are incredibly generalised. What characterises most developing countries are the differences between them and the circumstances which are special to each of them. Therefore, if we are to establish a case for that change of emphasis, it would be very useful to hear a somewhat more detailed analysis of precisely what those general observations mean and how the change will be applied in specific circumstances.

What has always impressed me most in the record of the CDC is that its preoccupation has been to get close alongside professional management in terms of management expertise—hands-on management expertise—in building the real economy, in widening the base of self-supporting producers in any particular developing country and in extending the range of people able to participate in the real economy.

As the Bill goes forward we shall look to be reassured as to how we shall avoid the tendency, with the new potential being opened up by the Bill, for the CDC to become increasingly preoccupied with the financial side of management as distinct from its "hands-on" approach to management, to which it has made an outstanding contribution. It would be sad if, by taking on what is arguably an important task, something on which its record is proven were allowed to wither. We shall want to hear more about the balance and about how the finest proven record can be maintained.

In saying that, I should like to emphasise that we are not suggesting that it is not important for the economies of third world countries to take off; of course that is crucially important. We are asking how far that take-off and the role of the financial markets in promoting it are the responsibility primarily of the CDC, and why the CDC needs to take on more responsibilities in that area when the IFC, the EBRD, and others with that specialist experience are available. We seek more information on the rationale and analysis behind the Bill and more detail about how it will be applied.

In that context it may be possible for the Minister to give us a categorical assurance this evening that some way will be devised which ensures that the priority for investment will continue to be the existing recipient countries and that we will not find ourselves careering off to eastern Europe or something of that kind. Anything that the Minister can say in that regard will be helpful. We must remember that the resources available for new investment have been generated from the existing countries in which the CDC is operating.

I spoke of change of emphasis and perhaps I can say a brief word in relation to the change of expertise. I emphasised that the tradition of the CDC has been particularly in relation to "hands-on" management. How will the necessary financial skills be developed to extend its responsibilities into the new roles? All of us—I am not trying to make points; I am trying to look at the situation objectively—will recognise that in recent months it has been dramatically brought home that there are great hazards in the world of international finance, even in the world of well-established merchant banking. We shall need to know a great deal more about how the composition of the board will change to incorporate the kind of experience and disciplines that are essential.

We congratulate the noble Lord, Lord Trefgarne, on bringing forward the Bill. It raises important points for examination. We shall look at them constructively during the course of our deliberations. We shall only introduce amendments if we really feel that they will help. Above all, we shall look at the Bill as we do anything else brought forward in the context of aid and development; that is, in the context of the Minister's declared commitment to the priorities she herself stressed in development policies. Those include the needs of the poorest, which is what our aid programme is all about. In other settings the noble Baroness emphasised the importance of development programmes which insist on international management of the environment; on occasions she emphasised the importance of human rights and democracy in development policies.

We are all agreed that the CDC is a powerful instrument. How will this Bill strengthen and assist the Minister in fulfilling her objectives, which we applaud, in those three contexts? It is exciting to hear that the Bill will help in South Africa. But will it help the poorest? Will it extend the number of people participating in the real economy? If so, how? What about Gaza and the West Bank? Those areas were discussed when the last CDC Bill was being debated in this Chamber. The guidelines and schedules which the Minister may want to introduce will be most important.

Finally, lest there be any misunderstanding—I would hate that—on this side of the House we have terrific respect for the record of leadership and integrity of the CDC to date. But when considering legislation of this kind it is important to bear in mind not only what is possible in the present situation with the present human chemistry; not only what is unthinkable in the present situation with the present human chemistry; but also what may be opened up to a completely different set of players—cowboys or whatever—were they to arrive on the scene. It is the duty of the House to be deeply and convincingly reassured on issues of that kind.

5.45 p.m.

Baroness Chalker of Wallasey

My Lords, it may be for the convenience of the House if I now contribute a few words about the Government's attitude to this Commonwealth Development Corporation (No. 2) Bill. I must say straightaway that I am most grateful to my noble friend Lord Trefgarne for his explanation of the Bill; it was very clear. And let me say, so that it is beyond doubt, that we welcome the Bill very much indeed. The House has just discharged the Committee stage of the Government's CDC Bill. I hope that it will not take long before that Bill completes its remaining stages. It contains important provisions on increasing the CDC's borrowing limits and we want those to come into effect as soon as possible.

During the debates on both Bills, we have heard sound support for the CDC in all parts of your Lordships' House as well as in the other place. That confirms the high and well-deserved reputation to which the noble Lord, Lord Judd, referred. It also confirms the desire on all sides for the CDC to continue to perform its extremely valuable work in promoting development. Indeed, the combination of the two Bills will help unshackle where shackles exist, the ability of the CDC to contribute still further. That was the very point made by the noble lord, Lord Redesdale, in welcoming the Bill.

As my noble friend Lord Inglewood said during the Second Reading of the Government's Bill, it is important to give the CDC an answer to its needs as swiftly as possible. The Government's Bill deals with CDC borrowing limits. At the time that that Bill was drafted it was not possible for it to deal with the issues which are now the subject of the No. 2 Bill. Some specific points in relation to legal powers were still under consideration when the Government's Bill was introduced. That is why I can wholeheartedly welcome my noble friend's Bill.

In the No. 2 Bill my noble friend has put forward the measures that the CDC needs to carry out the policy objectives contained in the quinquennial review and which the Government have set it. There is no doubt that my noble friend's Bill updates and improves the whole way in which the CDC can operate.

A number of questions were asked in relation to the CDC and the Bill. My noble friend Lord Trefgarne explained that after the Government's CDC Bill had been introduced we concluded that it was not possible to add additional measures to it within the Long Title of the Bill. In coming to that decision I had in mind the feelings which have often been expressed in your Lordships' House; that is, that your Lordships' House is reluctant to extend the scope of Bills. That is why a Private Member's Bill provides a good opportunity to bring forward those additional measures which the CDC will find so useful. I very much welcome the interest that is being taken beyond government circles in the future of the CDC. That is entirely healthy. It is very good that these issues are now included in the Bill before the House.

As my noble friend said, it is important that the Bill should leave the House in a shape which enables it to be dealt with speedily so that the CDC may have the increased adaptability to deal with very new situations. I am happy to ensure, as far as I am able, that that is achieved. My noble friend spoke about the control of powers in his Bill. There is a well established system by which the Government and CDC discuss and agree the way in which the CDC's statutory powers will be exercised. For example, I have set a strategic target for the proportion of new lending in poor countries. We shall look with CDC at how the powers in the Bill may affect targets and the setting of appropriate limits and guidelines. As an example, we would expect the CDC not to use powers to provide consultancy services to set up a major consultancy business in competition with existing firms. It has better things to do with its money. I can assure the noble Lord, Lord Judd, that the government guidelines for CDC I announced last year—that at least 70 per cent, of new investment should be in poorer countries—will continue. There should be no diversion of activity to middle income countries. We shall watch that most carefully. Nor is there any change in the objectives for the CDC. What we are after, and what my noble friend's Bill does, is to give us a better way to fulfil the existing targets and to give CDC a greater degree of flexibility, which it needs.

The noble Lord, Lord Judd, took some pleasure in teasing me a little, as I knew he would, as to why CDC is being retained in the public sector when the Crown Agents are being transferred to the private sector. The real reason behind that is a practical one. The Crown Agents and CDC have very different histories. Their roles are different. The legislative proposals we have brought forward recognise the distinctive identity and purpose of each organisation and they provide for continued growth into the future both for CDC and Crown Agents. I have explained in our debates—and may have to do so again later tonight—that the Crown Agents have spent a relatively brief period as a public corporation. They are a trading body, albeit with a distinctive and important ethos. It is that very ethos we are seeking to preserve through our proposals for transfer to a foundation in the private sector. There are good reasons why the Crown Agents should no longer continue to be owned by government. We have rehearsed those reasons on previous occasions in debating the Crown Agents Bill.

On the other hand, the CDC has a distinctive role as part of the British aid programme. CDC acts as a catalyst for private sector investment in developing countries because it shows the way in which others can invest profitably in poor countries. In Paris only yesterday we were debating among the 24 OECD countries the risks involved in development. Development is of itself a risk business. A private sector CDC might take a very different attitude to profit and risk from one that is in the public sector. That attitude might be incompatible with the developmental objectives set for it by government. That is why we have judged that continuing public sector status is the right answer for CDC.

The noble Lord, Lord Judd, asked how CDC will cope with its new risks. That is very much a matter for the board of CDC. I do not try to second guess the board. There are not likely to be precise board changes that will in any way affect this. The CDC has the professionals. We seek to work with them and to help them where they need assistance, which is not very often, into new areas of operation. But we shall be looking not only at where they operate but how they operate. We will trust their commercial judgment unless there is very good reason to discuss something to the contrary with them.

I very much welcome my noble friend's willingness to consider the possibility of amendments at a later stage. No doubt the noble Lord, Lord Judd, will find some ingenious amendments to put down to the Bill. I think my noble friend understands that there are some points of drafting and construction which I would like to have looked at by the experts. These are very technical issues. I want to get the legislation right, as I know my noble friend does, and I want to do that while we have the chance to do so. We shall be very happy to work with my noble friend on these issues as speedily and as co-operatively as possible.

The CDC operates within a planning framework for its activities agreed with government. That is exactly what we revised last year following the quinquennial review. The new powers proposed in the Bill will be exercised within that framework. It will be adapted to take account of the scope offered to CDC to extend its activities in particular ways. Subject to those points, I am happy to confirm that the Government accept this measure in principle. I encourage your Lordships to give it a Second Reading.

5.56 p.m.

Lord Trefgarne

My Lords, I am greatly obliged to my noble friend Lady Chalker for her encouragement for the measure. Indeed, I am grateful to every noble Lord who spoke during the course of our short debate. They were, broadly speaking, in support of the measure. I recognise that the noble Lord, Lord Judd, was not able to give quite such unequivocal support as emanated from other noble Lords, but the noble Lord speaks from a wealth of experience and knowledge in these matters and I look forward to having his constructive contribution when we reach the next stage. I shall certainly be very happy to deal with some of the specific points he raised. That is the right word, is it not? The noble Lord was looking for specific examples of where the corporation might improve its mode of operation and its area of activity.

That said, I again thank your Lordships. I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Committee of the Whole House.