Anatole Pang is a former Conservative council candidate for Twickenham, and is resident in Beijing where he has worked for four years. He is currently an active member of Conservatives Abroad there.
Andrew Mitchell’s recent controversy has overshadowed one early piece of work he undertook at the Department of International Development (DfID) – namely, an attempted overhaul of the now almost defunct Commonwealth Development Corporation (CDC). In 2012, Mitchell extracted a sum of money from the privatised private equity business Actis, which had been spun-out in 2004. However, three years on from the parliamentary committee’s report, almost nothing has been done about the parent company and, in the meantime, the shape and purpose of development finance has changed.
CDC, as it stands, is effectively a slightly less useful version of the host of European Development Finance Institutions which constitute the members of the EDFI. It acts primarily as a fund of funds rather than a typical investment fund. Yet, although it claims a remit to aid the development of private capital in the countries on which in focuses, it can do precious little since it does not have the scale to make a difference through finance, nor does it undertake direct micro-investment to achieve material ends. It does not, indeed, have any offices outside of London. Instead it acts more as a cheerleader for those who are trying to raise funds in a given market, always one step removed from the commercial decision-making it seeks to influence.
It also is lacks the capacity to do one important job, which it could and should do: actively aid British interests by helping our own companies abroad. This is how the emerging giants of development finance – China’s CDB, Brazil’s BNDES and in the future, probably, the new BRICS Development Bank – behave, and it has been a template for success. It is also far from without precedent nearer home, as demonstrated by the Danes from whom we can always learn a thing or two. Their fund, the IFU, has a mandate to actively help Danish companies in emerging markets – every investment must be alongside a Danish corporate and the twin objectives are to further both the target country and Denmark. A simple and surely laudable aim.
Whether the government can do this within the structure of the CDC is open to question. Perhaps, instead, we need to establish a new entity altogether, for the sake of argument let us call it the UK Development Bank. There are three compelling arguments in favour of such an organisation:
- Helps British companies. The purpose of development banks is that they can support British companies trying to trade or invest into difficult frontier markets. A UKDB could provide financing and equity support alongside investors and exporters, gaining them access which they would otherwise struggle with. British SMEs, in particular, have a difficult enough time with trying to do this, and a development bank would be a godsend for them, with strong knock-on effects for our economy and employment. To be fair, the UKTI has done a good job, but it needs financial muscle to support it.
- Helps British foreign policy. The reality is that development banks act as a useful and commercially driven alternative path for soft diplomatic engagement in those emerging markets where we are so under-served. Insofar as it would control a portion of aid, it would do so on a semi-commercial basis, and still be recognised for it by the governments and people benefiting from it. At the same time, it would speak the language of the newer economic powers, including the BRICS and beyond, since it would behave and act alongside institutions they use every day.
- Zero cost to the taxpayer. A UKDB, taking in a range of debt and equity investments, would be designed to do more than break even, but actually generate moderate returns. Aid money will always dissipate, but a formal banking structure insists on the recipients being focused on what they are doing. And, best of all, a British development bank would be able to obtain its funding through a sovereign-backed bonds*, meaning it would not be on our own books, and the financing would probably end up coming from the likes of China in the first place.
This plan would not necessarily marginalise the current DfID budget. Some programmes which the British government chooses to sponsor are social grants, which are impossible to generate returns from. However, a good deal of this money could in fact be brought into the structure of a bank for a much more efficient and gainful distribution. Such an organisation would also work alongside the revamped UK Export Finance agency which emerged from the restructuring of the former Export Credits Guarantee Department. Indeed, the two could potentially be merged, although typically they are separate elsewhere.
The Conservative Party should include a proposal for this cost-free and strategically critical body in the manifesto for next May. It could do more than decades of attempted soft support for foreign policy, and at one stroke improve the lot of Britain’s small and medium exporters who constitute so much of both employment and GDP. The UK has not created a sovereign wealth fund, and is unlikely to do so in the near future, but a British development bank should be at the heart of a Conservative foreign and trade policy, and rectify decades of neglect and comparative disadvantage in the key emerging markets – Indonesia, Vietnam, Mexico, Kenya to name a few – which constitute our future customers.
The time has come for British development finance to help British companies.
* For the sake of clarification, this means a bond issued by and under the new bank, which obtains UK sovereign credit rating through guarantee only