CDC Group – Written evidence (ZAF0026)

 

April 2020

 

Contents

 

Section 1 – overview

 

Section 2 – about CDC

 

Section 3 – the development challenge we address in Sub-Saharan Africa

 

 

Annex: CDC investment case studies

 

 

 

 

 

 

 

 

 

 

Section 1 - Overview

 

CDC is an important part of the UK’s economic development co-operation with countries in Sub-Saharan Africa

 

  1. CDC’s work makes contributions to several areas of cooperation set out in the 2019 African Union (AU)-UK Joint Communiqué. These areas include, “work to mobilise investments for Africa’s sustainable transformation,” “invest in people and build opportunities to deliver a skilled workforce,” and “creating the conditions to allow full participation of women and disabled persons in our societies.”

 

  1. CDC’s mission also aligns with the objectives of the African Union’s Agenda 2063, especially Aspirations 1 and 6:

 

CDC has a long history supporting development in Africa and is committed to doing more

 

  1. Our commitment builds on a history of pioneering investments and strong development impact in Africa.

 

  1. As announced by the former Prime Minister in Cape Town in August 2018, CDC is committed to investing up to £3.5 billion in companies across Africa by 2022. 

 

Section 2 – About CDC

 

Through CDC, the UK supports private sector-led development. Creating jobs, reducing poverty, and financing the Sustainable Development Goals (SDGs)    

 

  1. Established in 1948, CDC was the world’s first impact investor. Today, we are wholly owned by the Department for International Development (DFID) and have a dual objective to support business growth in Africa and South Asia that lifts people out of poverty, and to make a financial return. This approach was characterised by our second Chair, Lord Reith, as ‘doing good, without losing money.’ All proceeds from our investments are reinvested to improve the lives of millions of people in Africa and South Asia.

 

  1. As the UK’s development finance institution, we are a champion of the UN’s Sustainable Development Goals (SDGs). We contribute to all the Goals but have a strategic focus on Ending Poverty (Goal 1) and Decent Work and Economic Growth (Goal 8). In addition, our investments often have a wider impact, for example, providing Affordable and Clean Energy (Goal 7) or supporting Gender Equality (Goal 5). We track all new investments we make against the Goals.

 

CDC deploys long-term patient capital to support sustainable business growth and positive development impact

 

  1. CDC employs three broad categories of financial product: direct equity, direct debt, and intermediated equity.

 

  1. Through our direct equity investments, we can support larger businesses to accelerate their positive impact. This can be achieved through job creation, delivering new products and services, and increasing economic activity across whole supply chains. For example, in 2019 CDC invested $180 million into Liquid Telecom to support the roll out of better quality internet across Africa. Our investment will help Liquid Telecom expand its fibre network into places that do not currently have affordable access to the internet, like the DRC, where only 5.6% of people have connectivity.

 

  1. Our direct debt investments often achieve development impact in a similar way. For example, in January 2019 CDC provided a €90 million 18-year loan, as part of a €1.26 billion financing programme, to Nachtigal Hydro Power Company. The Nachtigal hydro-electric power project on the Sanaga river in Cameroon will, once commissioned in 2024, produce over 2,900 GWh a year adding nearly 30% to the country’s installed capacity.

 

  1. CDC also makes intermediated equity investments, where investments are pooled with the capital of other investors and managed by a third-party. Through these investments we can channel finance to smaller businesses. For example, through the fund manager SGI Frontier Capital, CDC supported the first private equity fund focused on Ethiopian SMEs. In January 2016, SGI invested in a dairy processing business called Family Milk (incorporated as MB PLC). With our investment the company is implementing international best practices in dairy processing and product development and aims to develop the country’s first UHT milk processing plant.

 

  1. CDC is also able to support smaller businesses through direct investments into financial services businesses. For example, CDC supports banks to increase their lending to local SMEs. One such investment is our June 2019 commitment to invest in the pan-African BMCE Bank of Africa. Headquartered in Morocco and with operations in 20 African countries, BMCE Bank reaches some of Africa’s most challenged countries such as Burkina Faso and Madagascar. Across many of its markets banking penetration and access to finance remains disproportionality low, such as in Benin and Niger. CDC’s investment will help increase access to finance for SMEs in these markets.

 

  1. Beyond investments in individual businesses, we also aim to change the dynamics of markets. An example of this is our subsidiary company MedAccess which seeks to reduce the price, and increase the availability, of medical supplies and equipment. It does this by providing volume guarantees to suppliers giving them certainty of demand and reducing their risks. Its first investment is supporting the sale of viral load diagnostic tests (a key tool in assessing if HIV patients are receiving effective treatment) to national government testing programmes at a significantly reduced rate. It is anticipated that the agreement will save public sector purchasers over $50m over the next four years and beyond, and that at least 10 countries in sub-Saharan Africa are expected to introduce this technology by end of 2019.

 

CDC takes an impact-led commercially rigorous approach to all its investments

 

  1. For each investment CDC makes it uses a comprehensive framework to assess the expected development impact it will have. Our framework follows the recommendations of the Impact Management Project – a global consensus of how to define, measure and monitor impact. This forum of over 2,000 impact investment organisations aims to build consensus on how to best measure, manage and report the social, environmental, and economic performance of investments.

 

  1. We also provide practical, hands-on support with our investments to help businesses achieve good environmental, social and business integrity standards. For example, we undertake regular training for fund managers and have a freely available ESG toolkit. We also work with leading institutions, such as Imperial College with whom we produced the Healthcare Impact Framework to establish how we can best contribute to universal healthcare coverage.

 

  1. We also learn from our past investments. To do this we have a substantial joint evaluation programme with DFID through which we learn from, and share our experiences with other development partners and with industry.

 

  1. At a portfolio level the companies CDC invests in drive significant development impact.

 

Section 3 - The development challenge we address in Sub-Saharan Africa

 

Formalising and growing the private sector is critical to achieving sustainable economic development in Sub-Saharan Africa

 

  1. No country has escaped poverty without a thriving private sector. The private sector provides around 90% of employment in the developing world (including formal and informal jobs), delivers critical goods and services, and contributes to tax revenues and the efficient flow of capital.[1]

 

  1. Sub-Saharan Africa has a large jobs deficit. It has been estimated that 20 million new jobs are needed to be created annually to accommodate Sub-Saharan Africa's rapidly expanding labour force.

 

  1. Despite the critical need for employment many economies in Sub-Saharan Africa lack the scale to support the necessary job creation. The lack of formalised businesses of any scale is significant. For example, the UK has over 15,000 businesses that reported over $50 million in revenues, whereas Ethiopia has less than 20 businesses of the same scale.

 

  1. These issues are compounded by poor macroeconomic factors, such as high interest rates and unstable exchange rates which make it difficult, costly or risky for companies to borrow and has affected investor sentiment. Africa, a continent with 15% of the world’s population, accounted for just 2% of global inflows of FDI in 2015.

 

The investment environment in sub-Saharan African economies has weakened

 

  1. In recent months, economic growth in Sub-Saharan Africa has slowed, with weakening external demand, supply disruptions and elevated policy uncertainty weighing on activity in major economies. This has been compounded by the impact, since the beginning of 2020, of the COVID-19 crisis. Efforts to limit the spread of the virus has weighed on supply chains, demand and trade in most parts of the world.

 

  1. Commodity exporters are being impacted by further weakening demand and falling prices, with oil exporting economies such as Nigeria and Angola being particularly exposed. Most African currencies have also depreciated against the US dollar in the first quarter of 2020 and the risk of fiscal or debt crises has increased in already-fragile countries, such as Ghana and Zambia.

 

  1. In this context the support of Development Finance Initiations (DFIs) to deliver sustainable economic development in Sub-Saharan Africa is critical.

 

CDC focuses on three broad enablers to unlock private sector growth

 

  1. Supporting SMEs: the financial sector needs to grow more rapidly than the rest of the economy to fuel other sectors – CDC plays a leading role in strengthening local banking sector to improve SME access to financing and mobilizing capital across the continent.

 

  1. Infrastructure: across much of the continent inadequate infrastructure is a key constraint to sustainable growth and increased productivity – CDC plays a role in supporting the private sector here, particularly in the energy sector.

 

  1. Sectors critical for inclusive growth: CDC’s other priorities focus on job-creating sectors – namely food and agriculture, manufacturing, construction and real estate, health and education

 

Regulation and public governance are key enablers of economic development

 

  1. The regulatory environment is critical in ensuring the right conditions are there for investment and sustainable inclusive economic growth. At a UK government level this important work is led by DFID.

 

  1. The regulatory environment varies considerably across Sub-Saharan Africa. There are some countries who are making positive reforms to increase transparency and improve the business environment. There are other counties where the lack of rule of law, good governance and widespread and corruption make investing extremely challenging. Policy instability impacts the business climate (e.g. abrupt tax increases, cap on commercial interest rates, lack of transparency in policy changes).

 

  1. From our experience of investing in counties outside of Africa there are successful examples of reforms that could be replicated. For example, the introduction of transparent electronic bidding processes in government procurement in India has increased investor confidence in the solar industry. Innovative regulations can also drive financial inclusion (for example, mobile banking – Mpesa in Africa, Aadhaar and Jandhan in India).

 

Development finance and investment is only one tool in the fight against poverty and achieving the SDGs.

 

 

Annex: selected case studies of CDC investments into Sub-Saharan Africa

 

    Supporting people in times of crisis. During the Ebola crisis, we worked with Standard Chartered Bank to increase lending to local businesses in Sierra Leone – helping them stay open during the crisis, ensuring jobs were protected and livelihoods maintained. We have since extended our partnership with Standard Chartered and similar banks, helping to facilitate US$1 billion in trade between companies in sub-Saharan Africa since 2015.

 

    Tackling Africa’s energy challenge. 600 million people remain without access to electricity in Africa. Many of these people have never had access to the grid, so we have made some pioneering investments in home solar. As a result, 700,00 people across East Africa are able to light their homes through a solar panel on their roof bought from one of our companies, M-KOPA. This equates to 90 million hours of kerosene free lighting per month – which has a huge impact on air quality and health.

 

    Helping to mitigate climate change. CDC has several investments in sustainable forestry across Africa and is actively exploring opportunities to do more. For example, CDC is supporting Miro Forestry, a sustainable timber business operating to Forestry Stewardship Council standards. CDC’s investment is helping Miro support the natural environment by replanting on severely degraded land and thereby protecting the indigenous forest. To date, the investment has supported the planting of over 4.5 million trees across Sierra Leone and Ghana.

 

     Leading a digital revolution. Access to the internet can be transformational, providing people with access to information, services and opportunities. Yet in the DRC only 5.6% of people have connectivity. We have backed Liquid Telecom to help it expand its network into places that do not have affordable access to the internet, like the DRC and Sudan – ensuring that the people in these countries aren’t left behind.

 

     Increasing access to affordable medicines. People across Africa can’t access life-saving medicines, vaccines and diagnostics - not because they don’t exist, but because of a market failure. We’ve created a new social finance company that guarantees demand for drugs at scale in order to drive down costs and increase access. MedAccess is reducing the cost of new mosquito nets by an average of 40% combatting malaria, and protecting the health of millions of people in countries including Burkina Faso and Côte d’Ivoire.

 

Received 9 April 2020

 


[1] Source: IFC Annual Report 2015