Theresa May, Britain’s prime minister, has taken an admirably tough stance on tax avoidance and pledged a crackdown on the use of offshore havens by UK corporations. Her government has also rightly highlighted the role of financial transparency in the fight against corruption. It is troubling therefore that Britain’s Department for International Development is planning to quadruple funding for its private equity arm. The CDC, formerly known as the Commonwealth Development Corporation, has a long record of investing through offshore havens.
According to plans outlined this week, DfID hopes to increase the cap imposed on spending at the CDC from £1.5bn to £6bn. With parliamentary approval the international development secretary would be able to increase that cap further - to £12bn, or a sum equivalent to the entire development budget in 2015. This is at odds with government commitments to eliminating wasteful aid spending, imposing accountability and cracking down on tax havens.
The CDC was set up in 1948 to invest in agriculture in the colonies. It has been through various iterations since, ending up in the past decade as the private sector lending arm of DfID. It invests both in and alongside other private equity funds. Past governments made some efforts to address concerns among experts about whether its investments were compatible with UK aims, enshrined in law, to use the aid budget uniquely to combat poverty. The CDC, for example, now puts more of its capital in the poorest countries in Africa and South Asia.
But the institution has yet to dispel scepticism about its role as an agent for development. CDC officials have regularly found themselves struggling to defend the gains for poor people of investments in high-end apartments, gated communities and shopping malls. The group also continues to invest heavily in oil and gas.
Many of these investments have been channelled through havens such as the Cayman Islands and Mauritius sometimes in equity partnerships whose end beneficiaries are opaque. At the very least the government must review this practise, which sees UK taxpayers’ money funnelled through channels also used for illicit flows.
Most important, the government should place the CDC under the same broader level of public scrutiny as DfID. Priti Patel, the secretary of state for international development, has made value for money and accountability priorities at the department. Yet on both those counts, her plans to increase funding to the CDC fall short.
The group makes extravagant claims about its achievements. For example it says that in 2015 it contributed to the creation of more than a million jobs in the developing world. Yet, compared to the multilateral lending agencies Ms Patel has threatened to stop financing in her battle against waste, the CDC provides little hard evidence of its real impact in reducing poverty.
The UK government’s commitment to spending 0.7 per cent of national income on aid stems originally from the desire to quash the perception, recognised by Mrs May, that the Conservatives were the “nasty party”. There are growing signs, however, that the increases in aid that have resulted have been accompanied by a sharp deterioration in the quality of UK development efforts, as the aid budget gets diced up and used for other ends.
There is an important role for aid in encouraging private sector investment, and providing risk capital to catalyse growth. But it is questionable whether the most efficient way to do this is through the CDC.
