Alison 18 Jul 2019 09:42am

Building the UK's trade capacity beyond Europe

In a post-Brexit world, the UK government will need to expand its trading network, and the Commonwealth countries could prove fertile ground. But many of them need to secure the infrastructure and financial stability to support their economies and trading relationships

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Caption: Images: Getty Images

Alison Coleman profiles CDC Group, which is working to deliver on infrastructure projects in some of the world’s poorest countries, and explains how ICAEW’s capacity building is helping to create strong economies where they are needed most

Nations all over the world are being transformed by major infrastructure projects aimed at creating jobs and delivering sustainable growth, and Commonwealth countries are no exception. With an eye on its eventual departure from the European Union and the need for a broader range of trading partners, Britain’s impact investment industry is gathering steam, with the potential to forge stronger trading relations with its fellow Commonwealth nations. CDC Group is working to deliver on a number of these projects, with a development mandate focused on some of the poorest countries in Africa and south Asia, home to a large number of Commonwealth nations. CFO Clive MacTavish, a chartered accountant, explains why the organisation’s role is becoming more vital than ever. He says: “Africa and south Asia are hugely important now and we have a specific mandate to improve development impact to stimulate jobs and growth in those regions.

Prime minister Theresa May visited Africa last year and our CEO Nick O’Donohoe accompanied her. We were able to see that the government is giving a greater lens to those relationships and we are happy to be part of that.” Formed during the 1940s as the Colonial Development Corporation, later the Commonwealth Development Corporation, for the last 20 years the organisation has been known as CDC Group. It has moved away from its recent history as a fund-of-funds to become a direct investor in equity and debt, transforming its role to a direct investor in enterprises alongside its private equity investments. The total value of its investments currently stands at $5.5bn. CDC is wholly owned by the UK’s Department for International Development (DFID) and enjoys what MacTavish describes as a “close, arm’s length” relationship with them.

He says: “They are very close to what we are doing, but equally they leave the overall governance and oversight to the board and the NEDs. That gives independence to CDC, but at the same time we are very responsive to the shareholder and very keen to develop their vision.” CDC has a five-year plan agreed with DFID, currently in its third year, with an ambitious and expanding portfolio of investment projects, including their largest to date, Africa’s biggest independent power producer Globeleq, in which CDC has been invested since the early 2000s.

Around 70% of the population of sub-Saharan Africa, some 600 million people, have no electricity, and that situation presents huge barriers to business growth: half of all companies cite lack of a reliable power supply as a major constraint. In 2015, CDC took a 70% controlling stake in Globeleq, an investment that will add thousands of megawatts (MW) of electricity generating capacity over the next 10 years. Putting that in context, 1,000MW is enough to support the development of over 20,000 businesses, which could provide over 800,000 salaried jobs. Globeleq currently runs power generation plants in Kenya, Tanzania, Côte d’Ivoire, Cameroon and South Africa, and total generation is approximately 1,300MW, with another 2,000MW in development. “Globeleq is a company that we feel proud to be associated with and one that we see as pivotal for Africa in terms of having support from a development finance institution to ensure its strategy is aligned with what we see as a key development.” says MacTavish.

Last year CDC embarked on one of its most ambitious investments, a $180m equity investment in the pan-African fibre and cloud provider Liquid Telecom, which is laying cable across the heart of Africa, bringing high speed infrastructure to unserved parts of the continent. “This is the sort of transformational deal that we want to support,” says MacTavish. “Demand for data on the continent is exploding at a tremendous rate and Liquid Telecom is providing the network and data centre construction infrastructure that will help satisfy that demand.”

Alongside companies in the infrastructure, communications and IT, healthcare, education and agriculture sectors, CDC is also working with financial intuitions to provide support within the individual countries and establish a functioning financial services market. In India, for example, while larger businesses receive a high proportion of investment, small and medium-sized enterprises (SMEs), and individually owned businesses, struggle to access credit and financial services.

The international Finance Corporation estimates that around 80% of SMEs in south Asia cannot access the formal financial services they need, typically due to a lack of credit history, and unfamiliarity or distrust of formal financial services. Since 2013, CDC has directly invested $40m, through both equity and debt, in Indian microfinance company Equitas, which is enabling entrepreneurs and smaller businesses in India to access vital finance. Risk is an inherent factor of CDC’s work, and the ability to identify, assess, measure, respond, monitor and report on risk in its investment activities is critical.

“We have an exhaustive and detailed three-stage investment process, starting with an initial screening of the company,” explains MacTavish. “During the later stages teams specialising in the due diligence work around investments carry out both internal and external assessments and present their findings before we make an investment.” Following investment, CDC undertakes regular quarterly monitoring of each investment, particularly on the direct side, where there is either a direct debt or a direct equity relationship, to provide detailed insight into how the company is performing. “We look at their environmental and social particulars, the development case, the financials – a number of different aspects which help us track the story and equally stay close to the way that the risks are presenting themselves,” says MacTavish.

In terms of social and environmental governance, CDC works closely with invested companies to identify if and where they are failing to meet international standards and produce plans to help them get on track. In 2017, CDC invested $15m in RFL Electronics Ltd, a producer of consumer electronics and white goods for Bangladeshi consumers with plans to export overseas. As well as providing finance, CDC has worked closely with the company helping it to improve its environmental and social performance. The investment included support to address the job quality challenges and align the company with international standards on labour and working conditions. “We may be able to offer technical assistance and make grants available to companies that need help, and this can cross into other areas, such as gender diversity, job quality and climate change, where we are increasingly able to show that CDC’s capital comes with great benefits for these associations,” says MacTavish.

He also highlights the importance of robust financial management and accounting systems in the successful outcome for these projects. “Every business that we invest in has to have decent financial controls and reporting in place,” he says. “They must be able to articulate their results and their financial strategies, and the accountants out in the field are absolutely key to this. Our investment teams will work with companies to identify where more resource needs to be put into these areas.” As part of the post-Brexit agenda, the ability of the UK to use its soft power and influence to help support British trade and companies has been brought into focus, and with that has come a heightened focus of attention on organisations like CDC.

MacTavish says: “Although not directly linked to British companies or trade, there is a greater sense that the British government is trying to present more holistically all the things we are doing in countries like Ethiopia or Ghana, and Bangladesh, and as part of that, hopefully enhance trading relationships. One of things we are working with DFID on now is to get closer to UK Plc and build connections with companies to help them understand more about investing in Africa and south Asia, while allowing them to tap into our knowledge of things like business integrity, and environmental and social governance and development impact.

“It is through the strength of CDC as an institution and what we can do to support the UK that we share that knowledge more widely. If they can learn from that, British companies might want to invest alongside us. We are very proud to be a British institution with a long-standing history, and a development mandate that is having a great impact within our market.”

How ICAEW helps build business infrastructure in commonwealth countries

ICAEW plays an active role in developing and building mutually satisfying relationships with other countries and in the development of infrastructure and impact projects taking place in the Commonwealth and beyond. It does this primarily by strengthening the accountancy profession, and practices required to support the successful completion of these international projects, as Mark Campbell, director, international capacity building at ICAEW, explains.

He says: “The success of these development projects relies on high standards of accounting and financial management, yet practices are variable. Many countries lack a focus on professional accountancy exam results and are accepting of poor pass rates; as low as 15% or 20% in much of the world. The failure of graduates in accountancy to become professionals represents a huge loss of human endeavour.

“With our ACA qualification in the UK, over 80% of students that take the ACA are successful. An 80% fail rate has a very negative impact on a country, so we are trying to work on this. We understand the causes of exam failure and we try to help our overseas counterparts.” Factors in low pass rates include low quality teaching, poor classroom experience, badly set exams, and inadequate quality learning materials, or in some cases, no learning materials at all.

“Some of these are easier to address than others,” says Campbell. “The problem of poor learning materials can be resolved without putting too many feet in the country. We work with international suppliers of learning materials that can be customised for each country – for example, if it’s an agricultural economy we’ll ensure there are more relevant case studies.” The prime objective is to produce more accountants, and as results from some of ICAEW’s earliest projects show, it is working. “We started working with Ghana, specifically the Institute of Chartered Accountants of Ghana (ICAG), in 2011 and have completed around eight projects there,” says Campbell.

“We can measure an increase in the number of professional accountants and an increase in number of students of 30% year on year. This is a result of our introduction of professional quality materials, which enhanced the professional accountancy qualification examination system and the brand of the country’s national qualification.” To date around 55 such projects have been completed in over 30 countries. The regulation of accountants and auditors is another area where ICAEW is making an impact.

“We’ve been working with the Asian Development Bank since 2015, focusing on four countries, helping them to establish an effective inspection regime,” says Campbell. “We’ve also produced an international good practice guide for regulating auditors and quality assurance inspections. Over time these efforts will make a huge difference to the quality of audits.” An important role for ICAEW’s international capacity building team is engaging in dialogue with senior officials within the various countries about the importance of finance and accounting best practice.

Campbell says: “We emphasise the importance of raising good revenue and doing it in a fair way, and the benefits from increased public revenues through taxation, for example, generating more spend on public infrastructure and services. By addressing these issues with the country’s most senior people, for example, the accountant general or the government finance minister, they understand the importance and give us their full support.”