The CDC Group, the UK’s Development Finance Institution (DFI), published its new five year strategy today.
Overall, the strategy marks a welcome shift away from investing in isolated, profitable projects towards a more strategic approach. An approach in which DFIs such as CDC use their commercial skills to play a transformative role in contributing to the achievement of the Sustainable Development Goals (SDGs).
This change in emphasis will have implications for both CDC and its main stakeholders. And it also suggests that it will need to be governed differently by its only shareholder the Department for International Development (DFID). It should also change how it works with other DFIs. This won’t change overnight but we all have an interest in it working and the new strategy provides a good enabling framework.
CDC’s new strategic priorities are ambitious: embedding development throughout its operations (reflected in the choice of countries, sectors, financial products, and partners); investing responsibly (setting environmental, social and business integrity standards); addressing key development challenges in new ways (e.g. using an impact accelerator facility) and growing its operations significantly in a way that responds to market needs and satisfies tax payer concerns.
Four tests of success: implementing the strategy
Development Finance Institutions (DFIs) are a key feature of development architecture. ODI’s research over the last decade has analysed the achievements and challenges associated with DFIs including CDC. This analysis should guide the implementation of their new strategy.
1. More active targeting of transformative and collaborative projects
DFIs already tackle global challenges and have a macro-economic impact, but more needs to be done. DFIs themselves tend to focus on the financial and development impact of individual projects. But because the DFI sector has grown rapidly over the last decade, macro-economic impacts have become more visible. Our recent work on DFIs, cited by Secretary of State for International Development Priti Patel, in parliament, indicates that DFIs already contribute significantly to economic growth and productivity in Africa. They are actually more effective (at stimulating growth) than traditional aid.
To successfully implement the CDC strategy, more active targeting of transformative and collaborative projects framed in a macro-narrative will be necessary. As mentioned by Priti Patel in the foreword to the strategy, CDC cannot solve development challenges alone – its work must complement other aid approaches.
2. Move from competition to collaboration amongst DFIs
DFIs do work together on some projects, but ODI analysis suggests that DFIs sometimes compete with each other for projects in the use of subsidies. We noted the need for improved collaboration amongst DFIs so that these subsidies achieve the greatest possible development impact. Creating a pipeline of investable projects (in frontier countries, sectors and instruments where the private sector does not already go, or could be encouraged to invest with the help of DFIs) is key.
If CDC’s new strategy is to be a success, fostering collaboration around sector transformation must be a theme for the future.
3. Re-balance the need for development impact, financial returns and risk taking
ODI analysis informed the CDC reform process in 2011 and 2012, comparing CDC against other DFIs. We were also specialist advisor to the House of Commons’ report suggesting CDC had, at the cost of development impact, too aggressively prioritised financial returns. In part this was due to the type of financial instruments used and country coverage. The report also suggested using a separate fund that focuses on additional development impact by taking higher risk.
CDC’s new strategy includes a new impact acceleration facility that appears to be a direct response to this recommendation. This innovative approach should ensure CDC focuses on additional development impacts.
4. Find your place in the expanding development landscape
The landscape of development finance is changing rapidly and CDC needs to find its place in it. In 2000, DFIs tended to be small players. They have since come out of obscurity, investing around $75 billion a year in the private sector in developing countries. That is equivalent to half of overseas development assistance spent in 2014. In a paper with the Centre for Strategic and International Studies we argue that this brings new demands from shareholders and stakeholders. DFIs will need to clearly articulate how they contribute to development goals.
The new CDC strategy is framed ambitiously around the UN’s Sustainable Development Goals, but CDC must also realise that this requires a different way of thinking if it is to be successful in implementation and delivery.
The new CDC strategy requires a new way of thinking and working
The effective implementation of the new CDC strategy will require an active approach from the start including with a wider set of stakeholders. CDC will now 'invest to transform whole sectors' and as well as investing in individual projects, according to CDC’s Chairman Graham Wrigley, it will 'solve market and sector problems'. This shift has the potential to be truly transformative. The opportunity now is to turn that into action, even when it’s challenging.
To support this, DFID must set the correct parameters to incentivise collaborative partnerships around CDC. It also requires a significant change in mindset by CDC investment officers. They must shift away from thinking in terms of isolated projects with high financial returns, towards a more collaborative, strategic approach in which investment (together with other policies and instruments) transforms whole sectors. Engagement with public sector officials in developing countries and the creation of effective relationships with key actors will be crucial in this. If the new strategy is to be a success, CDC also needs to take a more active and more visible part in development debates showcasing the transformative potential of DFIs. This new strategy is an ambitious first step in setting out a CDC vision of how it aims to achieve that.