Third World needs food, not shopping malls

As global food shortages devastate some of the world's poorest countries, a British government-owned international development fund set up 60 years ago this month stands accused of deserting them.

CDC, formerly the Commonwealth Development Corporation, was established by Clement Attlee's post-war government in the same year as the National Health Service and in the same spirit of social regeneration. But it passes its landmark anniversary disfigured by 11 years of transformation under New Labour ­ for which the world's poor are paying the price.

Originally formed to "undertake individual productive projects likely to increase the wealth of the colonies themselves", CDC soon established a reputation as an effective developer of businesses which, in awkward parts of the world and not spectacularly profitable, would have struggled to attract private investors.

Projects as diverse as irrigation in Swaziland, mining in Kenya and fish drying in East Africa benefited as a result and by its golden anniversary in 1998 CDC could boast over 400 projects in 50 different countries, with 40 per cent of investment in the crucial area of agriculture.

New Labour arrived with new priorities, however: in particular to expand the fund without pouring any more taxpayers' cash into it. And that meant earmarking CDC as its first partial privatisation. International Development Secretary Clare Short soon brought in a new chief executive in the shape of Goldman Sachs banker Alan Gillespie with the brief to prepare the fund for a sell-off.

Gillespie noticed what any banker would: the fund's worthy rural projects could only ever generate single-digit returns when any private buyer of the fund would want 25 per cent. Despite objections from development specialists and even the Tory opposition, Gillespie pushed through radical changes. "It was with considerable reluctance that the board concluded that many of our agribusiness investments, with which CDC has been proudly associated throughout its history, are unlikely to meet our minimum financial requirements," he recorded.

The result, noted Oxfam, was that "investments are in things like shopping malls... which cater to the wealthy elite or expatriate community. These have a neutral or even negative impact for the poor". CDC shut offices in Uganda and the Ivory Coast and opened new ones in Egypt, China and Mexico, staffed, in the words of the Economist magazine, "by people who know more about making deals than growing pineapples".

By the time Gillespie quit in 2002, however, the stock markets had moved against him and the sell-off was scrapped. But far from retreating, the transformation of CDC was accelerated by Gillespie's replacement, another banker, Paul Fletcher from Citibank.

In 2004 the new International Development Secretary Hilary Benn agreed to sell off the job of running CDC's funds in a private equity deal that remains shrouded in controversy. The new fund management firm, Actis, is a partnership of former CDC directors whose pay has quadrupled and who take a substantial slice of the profits on selling CDC's investments.

On its own terms the strategy, giving the fund managers a huge incentive to boost CDC's returns, has worked: CDC reported record £672 million profits for 2007.

At the same time, however, CDC's investment in agriculture has now fallen from 40 per cent to just six per cent of its portfolio. In its place has come banking, power, property and mobile phones. CDC insists that high returns encourage private sector investors into the developing world. Critics argue that they invest in these businesses anyway and that CDC has lost sight of its purpose to "invest where others are generally unwilling to do so".

The World Bank's 2008 World Development Report blames the West's failure to invest in Third World agriculture for much of the current extreme poverty - a scourge that, through the Millennium Development Goals, the British government is signed up to halving by 2015. Returning its 60-year-old development fund to its founding values would be a significant contribution. ·