Written Evidence for the House of Commons International Development Committee Inquiry into Extreme Poverty and the Sustainable Development Goals

 

 

 

 

Submitted by Simon Clark

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Simon Clark

E: simonclarkwriting@gmail.com

W: https://www.linkedin.com/in/simon-clark-9877654/

 

                                                                                                                                                          February 2022

 

 

 

 

 

 

 

 

Contents

 

1. The Collapse of Abraaj Group and its Relationship with CDC Group

 

2. What Was Abraaj?

 

3. What Was CDCs relationship with Abraaj?

 

4. Questions raised by CDCs relationship with Abraaj

 

5. Conclusion

1.  The Collapse of Abraaj Group and its Relationship with CDC Group

 

1.1 This is a response to a request for evidence on the issue of extreme poverty and the sustainable development goals. Abraaj Group was the largest private equity firm operating in emerging markets before it filed for bankruptcy in 2018 with more than $1 billion of debt. CDC Group, the U.K.s development finance institution, provided Abraaj and companies the firm owned stakes in with at least $692.85 million of debt and equity funding. The relationship between Abraaj, which marketed itself as a pioneer of impact investing to help end poverty in developing countries, and CDC, which says its dedicated to supporting jobs, livelihoods and economic development targeted on the poorest countries and the poorest in the world, warrants the urgent attention of the International Development Committees inquiry.

 

1.2 This response is submitted in a personal capacity. I am the coauthor of a book about AbraajThe Key Man which Penguin published in the U.K. in July 2021.[1] Working with colleagues in my previous role as a staff reporter at The Wall Street Journal, our journalism first made public the problems at Abraaj in 2018.[2]

 

1.3 CDCs significant and enduring support for Abraaj, and CDCs response to the collapse of Abraaj, provide crucially important lessons for this inquiry and for the U.K. governments efforts to help end extreme poverty. In terms of this inquiry, an examination of the relationship between Abraaj and CDC can provide important information on the following issues:

 

1.3.1 To understand the extent to which the Foreign, Commonwealth & Development Offices strategies, policies and programmes target extreme poverty and make recommendations on how they might need to be changed.

 

1.3.2  To connect to the work the Committee is doing to ensure that the U.K. governments foreign aid spending is effective and achieves good value for money.

 

1.3.3 To understand how well U.K. Official Development Assistance is targeted towards tackling extreme poverty and how effectively do the FCDO policies and programmes contribute to the achievement of Target 1.1 of SDG 1.

 

1.3.4 To understand how effectively does the FCDO review the outcomes of the projects and programmes it funds that tackle extreme poverty.

 

1.3.5 To provide evidence on whether U.K. aid is being used to build pathways from extreme poverty to sustainable livelihoods.

 

1.3.6 To understand whether the FCDO is learning and applying lessons from its policies and programmes, so they more effectively tackle extreme poverty.

 

1.3.7 To understand whether the FCDO has a good evidence base for what does and does not work.

 

1.3.8 To understand whether the FCDO can play a more effective part in the eradication of poverty as a convener, thought leader and investor.

2. What was Abraaj?

 

2.1 Abraaj was a private equity firm founded in Dubai in 2002 by Arif Naqvi, a financier who is a citizen of Pakistan and a graduate of the London School of Economics. Abraaj grew rapidly and established itself as a pioneer of emerging markets impact investing, with offices across Asia, Africa and Latin America, as well as in London and New York. The firm claimed to manage about $14 billion in 2018. Mr. Naqvi spoke at global conferences about how investment funds such as those Abraaj managed could help end poverty and meet the United Nations Sustainable Development Goals.[3] Abraaj raised billions of pounds from investors, including from the Bill & Melinda Gates Foundation and the development finance arms of governments including the U.K., the U.S. and France.

 

2.2 In 2018, Abraaj filed for bankruptcy following an investigation by investors including CDC into whether their money had been misappropriated. In 2019, Abraajs founder and five other former executives of the firm were criminally indicted by the U.S. Department of Justice on charges of fraud, theft and attempted bribery. Two of the executives have pleaded guilty as of February 2022. Mr. Naqvi maintains his innocence. The Dubai Financial Services Authority has fined Abraaj $315 million[4] for misleading investors, and it has fined Mr. Naqvi $136 million.[5]

 

2.3 The collapse of Abraaj has important lessons about the extent to which private capital can help end extreme poverty, and how missions to end poverty can go very awry. One of Abraajs main projects was a $1 billion healthcare fund which the firm raised to buy and build hospitals and clinics in developing countries in Asia and Africa to help improve global health standards. CDC committed $50 million to this fund in 2015.[6] Emails between Abraaj executives cited in The Key Man show that the firm couldnt target providing services to the poorest citizens in countries where it operated because they wouldnt make enough money by doing so. Target market will be the lower half of the pyramid,an Abraaj executive wrote to colleagues in 2017. Not the Bottom of the Pyramid which is unlikely to be economically sustainable. We will focus on helping those at the bottom of the economic ladder move upwards. We will focus on creating the next generation of consumer.[7]

 

3. What Was CDCs relationship with Abraaj?

 

3.1 CDC had a long and important relationship with Abraaj. In 2012, Abraaj bought Aureos, a private equity firm which CDC had helped to start in 2001. Aureos was led by a former CDC executive, Sev Vettivetpillai, who became an Abraaj partner after the takeover. The chairman of Aureos at the time of the sale to Abraaj was Sir Graham Wrigley. Sir Graham subsequently became chairman of CDC from 2013 until January 2022. Aureos was funded by many development finance institutions, including CDC, and other investors including the Gates Foundation. After Abraaj bought Aureos, Abraaj established ongoing relationships with many of these investors, including CDC and the Gates Foundation.

 

3.2 CDC became an important investor in Abraaj. CDC provided at least $692.85 million in equity and debt to Abraaj and its portfolio companies.

 

3.3 It was difficult to obtain comprehensive information about CDCs total financial commitment to Abraaj. In November 2020, a CDC spokesperson told me that CDC had $237.9 million of exposure to Abraaj. When I asked CDC again in December 2021 how much money CDC had pledged to Abraaj in total, I was told a different amount: $180 million. Following an email exchange with CDC in December 2021, I compiled the following list of CDC investments in Abraaj and related companies:

 

$150 million committed to Abraaj funds

$30 million to the SGAM AI Kantara Fund, which Abraaj took over

$269 million to Aureos funds, which Abraaj took over

$30 million co-investment in Care Hospitals, an Abraaj company

$48.85 million in Rainbow Hospitals, investing alongside Abraaj

$165 million loan to Indorama, a Nigerian fertilizer company in which Abraaj owned a stake.

$692.85 million total (This sum is equivalent to 7.4% of CDCs total assets in 2020).

 

3.4 In 2019, I sent a Freedom of Information Act request for information about Abraaj to CDC. In December 2019 CDC wrote to me to say that they wouldnt answer my questions because the public interest of withholding this information outweighs the public interest in its disclosure.I complained to the Information Commissioner, who upheld CDCs decision.

 

3.5 I was surprised by CDCs response to my Freedom of Information Act request. How could the public interest in withholding information outweigh the public interest in its disclosure when CDC, which is owned and funded by the British government and British taxpayers, had provided $692.85 million of funding to Abraaj?

 

3.6 In December 2021, Sir Graham Wrigley invited me to talk to CDCs board about Abraaj. I was glad to attend the board meeting, and I told the board about CDCs response to my Freedom of Information Act request. A CDC executive present at the board meeting responded that he would give me the same answer again if I were to ask for information. This response was problematic because to me it showed a lack of transparency.

 

3.7 Abraajs $1 billion healthcare fund was marketed as a solution to healthcare poverty in developing countries and CDC supported it. The fund provided healthcare services which had to be paid for. This raises the obvious question of how very poor people could afford to pay for the services. This problem was debated by Abraaj internally. CDCs views on this subject are unknown to me but will be an important factor in whether the organisation can help the U.K. government end poverty through its investments.

 

4. Questions raised by CDCs relationship with Abraaj

 

4.1 Has CDC thoroughly investigated and audited its financial relationship with Abraaj? Has it determined how it came to provide so much funding to the firm and what mistakes it may have made in the process?

 

4.2 Has the House of Commons and/or the FCDO scrutinised CDCs relationship with Abraaj in any way? Have any conclusions been drawn by the House of Common and/or the FCDO?

 

4.3 CDCs headcount has tripled from 161 in 2015 to 479 in 2020. It has 479 employees in London and 60 in the rest of the world, up from 3 in the rest of the world in 2015. Even with this headcount growth, the problems at Abraaj went undetected until late 2017. How did this happen? What are the London-based employees doing?

 

4.4 What is CDCs explanation for justifying that no information should be provided about Abraaj to the public because the public interest of withholding this information outweighs the public interest  in its disclosure. Do the FCDO and the House of Commons support CDCs lack of transparency?

 

4.5 Does the failure of Abraaj and CDCs response to it show that deeper questions need to be asked about CDCs role as a tool in the U.K. approach to helping to end poverty? CDC is such an important part of the U.K. governments strategy to help end poverty that the U.K. government will inevitably be judged based on CDCs actions.

 

4.6 What lessons can be learned from the Abraaj healthcare fund? Can the provision of healthcare services which arent free at the point of use in developing countries really help end poverty? Or should the U.K. government instead more actively support the provision of taxpayer-funded free healthcare services in developing countries? The Abraaj healthcare fund still exists but is now managed by TPG, a U.S. private equity firm.[8]

 

5. Conclusion

 

5.1 CDC, which will be renamed British International Investment in April, plays a very important role in the British governments effort to end global poverty. To fulfil its mission, CDC committed at least $692.85 million to Abraaj. And yet to my knowledge there has been no detailed investigation into what happened at Abraaj and CDC by the British government or the House of Commons.

 

5.2 How does the silence from CDC, the FCDO and the House of Commons over the collapse of Abraaj help meet the governments stated objectives to end poverty and to be transparent in its actions? The goal for British International Investment is to bring not just capital, but the highest levels of ethics, standards and transparency to its investments.[9] How does CDCs conduct in the Abraaj case reflect that it is bringing the highest level of transparency?

 

5.3 A dedicated investigation is needed into Abraajs healthcare fund. If the funds investments cannot reach the poorest because the fund needs to make a profit then that is an important finding to put on the record for the good of the world.

 

5.4 The House of Commons International Development Committee could call current and former CDC executives to testify to this inquiry. They Committee could ask Sir Graham Wrigley, the outgoing chairman, Diana Noble, a former chief executive who interacted with Abraaj, and the current chief executive, Nick ODonohoe. Clarisa de Franco, a CDC executive, played an important and constructive role in identifying the problems at Abraaj from late 2017 onwards. No doubt her testimony would be helpful to the committee.

 

5.5 CDC has a dual objective to support business growth that lifts people out of poverty and to make a financial return. The Key Man shows that Abraajs executives mainly interacted with wealthy financial professionals and not with poor people. In the Epilogue of The Key Man, I wrote that this is part of the problem and that global debates about the economy and ending poverty must include people who live on a few dollars a day. Conferences about poverty and the global economy that dont include poor people have as much integrity as a room full of men discussing how to improve gender equality.[10] When I spoke to CDCs board in December 2021, I suggested that they could create a subcommittee of workers from companies in which CDC funds invest in developing countries and give this subcommittee a mandate to express an opinion each year on CDCs overall strategy from their point of view. In this way, a view of CDCs effectiveness from the people who it is trying to help could be used to better inform CDCs executives.

 


[1] https://www.penguin.co.uk/books/316/316807/the-key-man/9780241439104.html

[2] https://www.wsj.com/articles/abraaj-investors-hire-auditor-to-trace-money-1517598630

  https://www.wsj.com/articles/private-equity-firm-abraaj-raised-billions-pledging-to-do-goodthen-it-fell-apart-1539706575

[3] https://www.youtube.com/watch?v=tJ_EL3qkyYc

[4] https://www.dfsa.ae/news/dfsa-fines-two-abraaj-group-companies-total-usd-315-million-deceiving-investors-and-regulator

[5] https://www.dfsa.ae/news/dfsa-action-against-abraaj-founder-mr-arif-naqvi-and-former-coo-mr-waqar-siddique-referred-financial-markets-tribunal

[6] https://www.cdcgroup.com/en/our-impact/fund/evercare-health-fund/

[7] Simon Clark & Will Louch, The Key Man. London: Penguin, 2021, page 203

[8] https://therisefund.com/portfolio/evercare

[9] https://www.cdcgroup.com/en/news-insight/news/enlarged-remit-announced-for-the-uks-development-finance-institution-to-deliver-jobs-and-clean-growth

[10] Simon Clark & Will Louch, The Key Man. London: Penguin, 2021, page 293