AT FIRST glance, it appears the classic case of the family silver being sold off too cheaply. Four years ago, part of the government organisation that funds development in the Third World was sold off to its employees for the modest sum of £373,000.
Now the company, Actis, is said to be worth up to £600 million, with the former civil servants who led the buy-out in line for a sizeable chunk of the proceeds if the government decides to privatise it. Already they have been earning six-figure sala
ries and sharing in multi-million-pound profits.
The story has for many months been occupying the attentions of the satirists at Private Eye. This evening, Radio 4 will broadcast a documentary on its File on Four programme. And today The Scotsman can reveal that the National Audit Office is currently investigating the sell-off of Actis.
Actis was hived off from its parent company, the Commonwealth Development Corporation (CDC), by the government in 2004. It had operated as an in-house funds manager for CDC, and invested in projects across the world. Its aim was to encourage developing countries to help themselves by setting up new firms or supporting fledgling businesses, creating thousands of jobs in the process.
This would help to grow their own economies and break with the "hand-out culture" on which many poverty-stricken nations rely at the most severe times of drought, famine and flood.
The CDC was born out of Britain's post-war socially-aware Labour government that also heralded the National Heath Service. In the intervening years it has fallen under the auspices of the Department for International Development (DfID), now headed by former Scottish Secretary and Paisley MP Douglas Alexander.
Its task is to invest in projects that the private sector considers too risky. At a basic level, it can be seen as a success – CDC's net assets increased from £2 billion in 2006 to £2.7 billion in 2007. This has been done without a penny of public subsidy – the last cash injection in CDC was in 1996, by John Major's Tory government.
But tough questions are being asked about the profits being generated by Actis, with the government being criticised for selling it too cheaply in 2004 to a consortium led by senior partner Paul Fletcher.
Also of concern to opposition MPs is uncertainty over government plans to "fatten up" CDC by allowing Actis – in which it retains a 40 per cent share – to use offshore "tax havens" to avoid paying tax to the developing nations that it is meant to assist.
The other concern about the use of tax havens is that it makes it easier for CDC's many fund managers to keep their accounts out of the public eye – and disguise any hoarding of reserves that could assist an eventual sell-off.
Michael Moore, the Liberal Democrat shadow Scottish secretary, has been tabling Commons questions for months in an attempt to uncover the truth about Actis. Yesterday, he told The Scotsman that his office had just learned that the National Audit Office, the official financial watchdog for the UK government, was pressing ahead with an investigation into the 2004 sale of Actis.
While the NAO's remit does not cover Actis, it can nevertheless conduct a probe into the actions of DfID, which proceeded with the sale when it was headed by the then International Development Secretary Hilary Benn.
Mr Moore told The Scotsman: "I formally wrote to the National Audit Office several months ago asking for them to inquire into this sell-off and see if the taxpayer had been treated appropriately.
"We just checked that out and today they said they were still gathering the papers together, but they confirm they are investigating this. This is the first independent inquiry I'm aware of.
"Without casting aspersions on individual civil servants, there is certainly a legitimate public interest in understanding how the value of the company was so low, and the rewards for this company – once run by civil servants – are now so high. On the face of it, it raises a lot of questions."
According to an inquiry last year by the Commons public accounts committee, Actis recorded a turnover in 2005-6 of £48 million. Its value at the end of June 2006 was judged at being somewhere between £182 million and £535 million. In 2006, around £3.6 million of profit was "available for division among members" – on top of average salaries for each of the 190 or so workers in excess of £100,000.
Meanwhile, the profits recorded by Actis's "parent company" CDC, according to accounts published in April this year, were £672 million, compared to £375 million in 2006.
CDC chief executive Richard Laing said the profits had been boosted by the strong performance of Actis, which is responsible for almost two-thirds of its investments.
Herein lies the rub – that Actis, while being cut free from Whitehall (and now occupying a reported £5 million office block alongside the River Thames), has dramatically increased the resources of CDC to re-invest in developing countries.
Actis also reminds critics that the government is entitled to 80 per cent of its profits – though this arrangement ceases next year, fuelling the privatisation rumours. Mr Moore, asked whether he feared there had been profiteering at taxpayers' expense, said: "I'm not sure we are in a position to judge. Actis is not the only organisation that CDC uses. The justification for selling off Actis is that it's been an anomaly as the department uses other fund managers. I'm not suggesting they got that wrong in principle about whether or not Actis should have been retained in-house. But there is a legitimate question from the British taxpayer about how much was spent. If the profits don't come back to CDC then the developing world is being short-changed.
"We have got into a more than slightly farcical situation. Douglas Alexander has gone out of his way to avoid putting the subsidiary accounts into the public domain. Why does it matter? The answer is that where they are based, and the amount they pay in tax, may give us an insight into whether they're being plumped up for possible sale.
"Also, we need to know whether we're living by the same transparency and best practice rules that we are trying to encourage the companies we are investing in to abide by."
A NAO spokesman confirmed an investigation was ongoing but was unable to say when its findings would be published – if at all.
He said: "We are doing some work on the reasonableness of the sale price and the profit-sharing arrangements."
A DfID spokesman said: "Actis operates on a break-even basis and after remuneration of members, is yet to make a profit. Should Actis make profits, DFID is entitled to receive 80 per cent of them up to 2014.
"Actis has returned more than £2 billion to CDC for reinvestment, and raised some £4 billion of third party capital for investment into businesses in developing countries.
"CDC has grown in value from £1 billion to £2.7 billion, whist making 74% of new investments in poorer developing countries and attracting some £800 million of other capital alongside its own.
"Actis and CDC have outperformed the targets the government set. Their strong record of profitability demonstrates the viability of investing in poorer countries, in which many businesses are crying out for capital. It is these businesses that will generate the jobs and income that the poor need to escape poverty."
Ethical roots corrupted by massive cash incentives?SEVERAL weeks ago, MPs held a parliamentary debate to praise the work of the Commonwealth Development Corporation and its 60 years of providing international assistance to the world's most deprived communities.
The CDC, as it is more commonly known, was a product of the 1945 Atlee government and reflected the ethos of those post-war years. A minister named Creech Jones, then secretary of state for the colonies, was the architect of Britain's efforts to move beyond simply providing water supplies or boosting agriculture to measures to "increase the wealth of the colonies themselves".
Now the CDC is a key player in the UK government's commitment to hit the eight "millennium development goals" set by the United Nations in 2000 – namely to eradicate extreme poverty and hunger, achieve universal primary education, reduce child and maternal mortality, combat diseases such as malaria and HIV/Aids and ensure environmental stability by 2015.
The CDC has been restructured on six occasions – but it is the change that was instigated in 2004 that has caused increasing alarm. Critics fear that a supposedly ethical investment vehicle has been corrupted by financial incentives, and vast profits are now being created that are not going to poor Africans but the back pockets of City fat-cats.
The government remains the only shareholder in CDC, while CDC is the largest asset on the books of the Department for International Development.
Gareth Thomas, a government minister speaking during the parliamentary debate in May, said the CDC now looked "very different" to that established by Mr Jones and provided help through 40 investment managers around the world. This had led to it being able to attract £325 million of private investment in the past year alone.
Mr Thomas admitted that privatisation rumours had been "doing the rounds". He said: "I should make it clear that we are not looking at privatising the company, but we are looking at tightening up its investment policy still further. We are not having a battle with the CDC about that, but working collaboratively with it."
Last night DfID had little to say; today it will await the latest series of allegations that threaten to drive Actis towards the front pages and spark new controversy.
