1         Established in 1948, CDC is the UK’s Development Finance Institution (DFI). We’ve been at the forefront of supporting companies that help developing and emerging countries grow for the last 70 years. From 4 April, we will become British International Investment (BII).

2        DFIs invest solely in private sector businesses, banks and projects in developing countries to bring about positive economic, social and environmental change. We’re a publicly owned organisation and reinvest the profits made from successful investments into new impactful investments. 

3        Our submission outlines: the role of economic development; how DFIs help increase the quality and quantity of investment; and how our new strategy sets us on the trajectory to have even greater development impact.

The role of economic development and DFIs in overcoming poverty

4        The fight against extreme poverty requires action on many fronts, but private investment is essential. Eradicating extreme poverty will require targeted economic interventions, accessible public services, and much more. But investment is necessary for economic growth, which is instrumental to eradicating extreme poverty. We know this because no country has ever eliminated extreme poverty without raising average (median) annual income above $1,500 (PPP - Purchasing Power Parity), and no country with median income above $4000 has an extreme poverty rate above 5%.[1]
 

5         Rapid private investment has been instrumental in historical episodes of sustained extreme poverty reduction at scale. China lifted 850m people out of extreme poverty in just four decades by prioritising investment.[2] Wages and prices are connected across economies so, for example, growth in China’s coastal cities also pushed up wages in the rural interior. While businesses might not always reach people living in extreme poverty directly, the historical record shows a very clear relationship in Africa and South Asia between periods of elevated private investment and more rapid reductions in extreme poverty.[3]
 

6        Investment from DFIs boosts productivity and reduces poverty. Low productivity and high poverty are two sides of the same coin and investment is required to counter both. A country cannot sustain a decent standard of living for all unless its economy is capable of producing the necessary goods and services per person. Output per worker in Africa and South Asia is a small fraction of that in wealthy countries. Private investment reduces poverty by raising productivity. To put it into perspective, there is roughly $110,000 of installed private capital per person employed in OECD member countries but just $33,000 in Southeast Asia; $10,600 in South Asia and $6,800 in sub-Saharan Africa.[4] Without increased investment in these places, productivity will not increase and therefore poverty reduction will stall.

7         Investment from DFIs supports businesses that pay the taxes needed to finance public expenditure and anti-poverty programmes. Governments in low and lower-middle income countries are desperately short of funds. Average public revenue per person in Africa is just $390 and $1,300 in Asia, compared to around $14,000 in OECD member countries.[5] In the past five years, our investees have paid in excess of £10bn in taxes that support delivery of public services
 

8        Investment from DFIs helps to overcome the challenge of limited economic enablers - like reliable internet and electricity - that undermine business growth. People living in extreme poverty have precarious and informal livelihoods. The data shows that development involves a transformation in the organisation of labour, where poverty falls as self-employed workers and informal micro-enterprises are replaced by salaried workers hired by larger firms. Across countries this pattern starts with the youngest cohorts of workers, but it is not happening in Africa, where today young workers are no more likely than their parents’ generation to hold a salaried job.[6]  The evidence shows that economic enablers, such as reliable electricity, internet connectivity and banking services, help firms grow and create better jobs.[7] DFIs support the development of crucial infrastructure that enables businesses to thrive. For example, our investment in Liquid Telecom has helped to accelerate plans to connect Cape Town to Cairo (more information on this investment, including the development need available here).

How DFIs helps increase the quantity and quality of investment

9        Entrepreneurs and businesses in developing countries struggle to access capital on the terms they need to allow them to grow – DFIs provide patient capital where it’s most needed. Local financial sectors in many low and lower-income countries can be underdeveloped and charge high interest rates only to firms that can post collateral. Cross-border investment is inhibited by perceptions of risk and lack of scale, among other things. DFIs are more risk tolerant and can provide reasonably priced finance on terms that growing businesses need (such as long-tenor debt), directly and indirectly. The most pressing financing needs are often for risk-bearing capital (equity) for young firms, or to back large risky capital projects.

10     DFIs have different priorities to purely commercial investors – we seek development impact, not just financial returns. As impact-led investors with a development mandate, DFIs seek out investments with large social returns such as those with large positive spill overs across the economy or which reach lower-income and otherwise marginalised sections of society (as opposed to investing based solely on financial returns). DFIs can put more resources in developing such investment opportunities and use their influence with firms to increase their positive impact on stakeholders.

11      When DFIs invest in a project or company, they can encourage private sector investors to deploy capital alongside them. In 2020, our capital mobilised $555–559 million of private-sector capital into our investments. This meant mobilising $35–36 from the private sector for every $100 of our own commitments.
 

12     Decarbonising the economy is an essential part of the long-run fight against extreme poverty. The cost of capital is the most important factor in determining the price of electricity generated by renewable technologies. These projects have large upfront capital cost and DFIs been the bedrock of pioneering renewables investments in Africa and Asia. Since 2017, BII has invested over $1bn in renewables in Africa and South Asia and in the next five years all our investments will be Paris-aligned and 30% will be dedicated climate finance.

13     Capitalising DFIs is an efficient use of Overseas Development Assistance (ODA) because the money is invested, returned, and recycled. It means the same pool of money can have an ongoing development impact. In addition, by supporting economic growth, it allows countries to move on from aid. BII plans to invest $1.5-$2 bn per annum over the next five years, of which the majority will be self-funded by recycling returns. 

Our new strategy

14     Five years ago, we set out a vision for how we could contribute to tackling the key development challenges facing Africa and South Asia, building on the focus we began in 2012, when we narrowed the regions where we invest and took on more risk. Over the last strategy period (2017-2021), our investments made a positive difference to people’s lives by committing almost £7bn to more than 600 impact-led investments; mobilising around £2.5bn of additional capital from private sector investors alongside our own commitments; supporting businesses that employ almost 1 million workers and have paid more than £10bn in taxes. You can read out our Impact Gamechangers – case studies on some of our most impactful investments – here.

15     How we measure impact has improved over that time, and last year ICAI endorsed our approach to development impact and learning. The ICAI report found:

“After three years of close engagement between ICAI and CDC, this year’s follow-up review has been able to conclude that CDC’s investment decisions now address development impact throughout the investment cycle and consideration of impact is driving active management of investments to a much greater extent than before the ICAI review.” ICAI, para 3.11, page 12.

It went on to say:

“There have been clear improvements to CDC’s approach to achieving development impact since the fieldwork for the original ICAI review in 2018. CDC’s investment decisions now emphasise development impact much more. The consideration of impact is driving active management of investments to a much greater extent than before the ICAI review. We also found strong evidence that CDC’s new M&E [monitoring and evaluation] mechanisms are being applied and are feeding into learning. CDC is now a more reflective organisation with the systems, processes and culture in place to learn from good quality M&E about how to promote development impact through its investments.” ICAI para 4.87, page 30.

16     BII recognises the value of independent scrutiny of our performance. It is vital for accountability and for providing insight that helps us to learn and improve as an organisation. We are also pleased that ICAI has recognised BII’s positive and proactive engagement with its review process.

17      Our 2022-2026 strategy builds on what we have learnt; the successful track record of the last decade; and the mandate at the heart of our work for nearly 75 years. It sets a new ambition for scale and innovation, and our roadmap for supporting the SDGs.

18     Three things are needed to achieve the UN’s SDGs by 2030 and meet commitments under the Paris Agreement:

• Economies must grow to provide decent jobs and raise living standards for all.
• Economic activity must be transformed to become environmentally sustainable.
• The benefits of growth must be shared across all sections of society.

19     Our new strategy responds to these by setting out how we will invest to support productive, sustainable, and inclusive development.

• Productive development – by raising the productivity of an economy so that it can support a decent standard of living for all;
• Sustainable development – helping transform the economy to reduce emissions, protect the environment and adapt to the changing climate; and
• Inclusive development – sharing the benefits of higher productivity and greater sustainability with poor and marginalised sections of society.

20    We have a different role in the development toolkit than humanitarian organisations or grant-financed programmes targeting extreme poverty, but we believe we have an important part to play in achieving SDG1. BII prioritises investments in low income countries, and countries afflicted by conflict and fragility, and those which reach lower-income sections of society in middle-income countries. Consideration of the depth of poverty is a key part of our investment decision-making process in which we use a comprehensive framework to assess the impact of all investments, in line with Impact Management Project. It meets international best practices (including alignment with the nine Operating Principles for Impact Management, launched in April 2019). Furthermore, our new portfolio-wide scoring system ensures that investments that reach people living in extreme poverty will receive the highest score. The benchmark of $5.50 is to ensure a well distributed ‘inclusivity’ score – it is not a target of who we are aiming to reach. (You can read more about our Impact Score which considers productive, sustainable and inclusive development in our new strategy, here.)

21     Eradicating poverty remains central to what we do. Everything we do is ultimately about ending poverty and delivering a decent standard of living for all. This takes place over time. Our primary role is to help transform economies over time so that they move from being low income, high poverty countries, to lower-middle and then to upper-middle income status, where nobody lives in extreme poverty. Decarbonising the economy and protecting and restoring the natural environment is a crucial part of this mission. But we also take the view that poverty is not solved once people’s daily consumption reaches $1.90/day, which represents a completely unacceptable standard of living. The aspirations of billions of people extend far beyond the poverty lines of $3.20 and $5.50, and we believe our mission will not be fulfilled until those aspirations are met.  
 

Annex 1

The figure to the right shows the historical relationship between investment rates and the change in the extreme poverty headcount rate over time in Africa and South Asia. It is a “bin scatter” plot, which means many observations are placed in ‘bins’ to make the relationship easier to see (so each dot represents an average of many data points). The investment rate is measured according to whether it is above or below average for each country, over time. It shows that within countries, periods with above average investment are strongly associated with more rapid reductions in extreme ($1.90) poverty.

Source: Carter and Thwaites (2021) ‘Investment and Poverty Reduction’.

Annex 2

The figure below shows output per worker across regions. Average output per worker (the dots) in sub-Saharan Africa is around 15% that of OECD member countries. The disparities are even greater in some sectors, notably agriculture.

Source: Author’s calculation using data from Penn World Table 10.

Annex 3

The figure below shows the relationship between the extreme poverty rate and median income across countries. The median is a better measure of average (or typical) income because it is not distorted by outliers of extremely wealthy individuals. SDG1 is deemed to be achieved once the extreme headcount rate falls below 3%. Looking down the y-axis, it can be seen that there are no observations of countries’ poverty rates below 3% until median income reaches about $1500. 

Source: Lant Pritchett (2020) ‘Randomising development – method or madness?’