Aureos Investors Day

Thank you Sev Vettivetpillai for that kind introduction, and let me welcome you all to Commonwealth headquarters for this Aureos Investor Day.

I am pleased to address you, and to have a chance to present how the Commonwealth Secretariat works with Aureos, and – just as importantly – to put in context everything that you do as investors and what we do as an inter-governmental organization. The subtext today is that we are all part of the process of promoting democracy and development – or good governance and growth – in the 53 countries of the Commonwealth.

Those 53 members are distributed across all five continents of the world. Together, they are home to a third of the world’s population, and they account for a fifth of global trade. Our membership includes the richest and the poorest, the largest and the smallest. This means that we have a depth and a breadth of experience to share, and an instinctive respect for differences between us, and the need for the cooperation which is at the heart of all we do.

The work we undertake to promote and strengthen investment in member countries unites the twin pillars of democracy and development.

The interdependence of democracy and development is well understood. It is democracy at all levels of society which creates the transparency and scrutiny which drives efficient, effective, transparent and equitable government. And it is such government which brings with it not just stability but also the environment for freedom, creativity and growth which is at the core of economic – and human –development.

The causality runs the other way as well. Successful investment promotes economic development, which raises income levels and promotes prosperity and a sustainable way of achieving the Millennium Development Goals. In turn it produces stability, as well as being a product of it. There is no longer any debate about the importance of private sector investment in generating this prosperity. It is not the only cause, but it is an essential ingredient.

I would like to outline today the practical steps that the Commonwealth Secretariat takes to support investment, highlighting particularly the important role Aureos has played in this work, before setting this in context.

We meet today as investors. You will know, I hope, that the Commonwealth Secretariat is an investor: we invest in values, people and ideas, and in building capacities. In particular, we invest in those who need us most – the smallest and most vulnerable states. You, of course, are investors in the simplest, financial sense of the word. While the Commonwealth Secretariat is small in finance and personnel, we can and do bring other skills. These skills are what we deploy to support investment in member countries, but our work is crucially dependent on partnership. Aureos is a partner.

Let me give four examples of how the partnership between Aureos and the Secretariat works.

First, in the early 1990s, the Commonwealth Secretariat undertook research into why some countries – even with a track record of reform – still failed to attract investment. We found that the key to the problem was the perception of risk – and that the smallest and the poorest countries in the world are always going to find it hard to attract investment. The result? In 1995, at the Commonwealth Finance Ministers Meeting, a decision was taken to set up the Commonwealth Private Investment Initiative, the CPII, to bring investment to those who weren’t getting it.

That remains a struggle. Foreign Direct Investment in developing countries and transition economies reached an all-time high of $380 billion in 2006 – but it remains skewed. First, towards natural resources; and second, towards just four countries – Brazil, Russia, India, China, the so-called BRICs. We still want to see it go much further. The Commonwealth, as I said before, is home to rich and poor, large and small. It has 6 official developed country members: that leaves 47 which have serious investment needs.

Second, an example from a decade later, when in 2006 an investment fund was begun for the Pacific, the ‘Kula II’ fund, which has raised $16 million from international and local investors, of which, so far, $7 million have been invested. It is through the skills and expertise of Aureos that these sums have been made available. But the fund only got off the ground when the Secretariat made the case to the Australian and New Zealand governments, and won from them their financial support – to the tune of £300,000 – to cover the Aureos costs of operating in the region. The Secretariat has taken the lead in advocating the use of official development assistance to reduce the costs of investing in small vulnerable economies. The Kula II experience, and indeed our wider partnership with Aureos, is a perfect example of such a public-private partnership in practice.

The third example shows how these partnerships can develop and broaden. Investment is not a one off event. It needs the enabling environment of economic and political stability, but it also needs nurturing to success. In 2006, the Secretariat negotiated with the Indian government to co-fund the training of managers in firms which had received investment under CPII. As a result, some 130 managers from some 30 firms in which Aureos has invested, representing 10 countries, have received training. Again, this shows the mutually supportive partnership between Aureos finance and Commonwealth reach.

The fourth and final example also points the way forward. The Aureos Africa Fund has thus far raised over $200 million for investment in small and medium sized enterprises in Africa. It could only do so, based on a feasibility and due diligence study supported by the Commonwealth Secretariat. The Africa Fund is significant in that it is drawing on sources of finance from within Africa itself, promoting the mobilisation of domestic savings and helping to deepen domestic financial markets. The Commonwealth is happy to be behind this move.

This shows how our partnerships evolve. The original CPII had a broad investment focus, while its second incarnation in 2006 refines the focus to concentrate on smaller deals and the SME sector in particular: the mainstay and the dynamo of any economy, and a public good in its own right. The next stage is to supplement foreign investment with domestic and local resources.

CPII – in its different incarnations, and with its different regional funds – is the flagship of our investment work. The $800m raised in the various funds over the past decade is a clear indication of that, and the rates of return testify that it is money well spent. Most of that money is from the private sector in developed countries, but not all of it. Developing country governments have invested too, as have developing country individuals and companies.

This activity to promote investment takes place within a range of activity designed to support prosperity in Commonwealth countries.

Within that, is a programme to support SMEs which is worth just over £1 million in the current year. We develop national and sectoral SME policies and strategies; we improve the business management skills of SME managers; we teach the optimum use by SMEs of Information Technology. From the very specific (like training manuals on horticultural chain management for SMEs in East Africa), to the very strategic (like developing entire SME national strategies for countries like Uganda and Seychelles), we are building up the people in whom you are investing.

That is why we have also been working on removing the barriers to accessing finance in Commonwealth countries, especially in the Small and Medium Sized Enterprise sector. This, for instance, has seen the establishment of a database in South Africa for the construction industry, to make it easier for banks and firms to find information and facilitate investment. We have also launched a review of the leasing sector in selected countries, and we plan to undertake detailed financial sector reviews in some regions in the next year.

More broadly, we have been active for many years in promoting the legislative and regulatory framework for investment in many sectors, especially for countries with abundant natural resources.

And, as I have said with the interdependency between democracy and development, the work that the Commonwealth undertakes in support of democracy and good governance plays a key role in generating the conditions for successful investment.

At the heart of the Commonwealth’s interest and support for investment is a concern for the welfare of the peoples of all the organisation’s members.

Investment is an essential part of promoting that prosperity, but it is not the only one. Firms and economies can only thrive if they are able to sell their products and trade. For many of our countries, especially the smallest and poorest, they need two things to allow them to do that.

The first is support for their trading infrastructure. We offer help for countries in defining their export strategies and making the case to donors and international institutions for support in their work. We also support what we call Aid for Trade: in areas like strengthening customs procedures and improving quality standards, particularly in agricultural goods.

The second is effective rules of the game. We have long argued for a truly rules-based and multilateral trading system, away from the potential imbalance and exploitation in bilateral trade deals. I hope that the recognition of multilateral cooperation we have seen in the response to the current financial crisis globally can be harnessed towards securing a successful conclusion to the Doha Round of Trade talks. That process has offered and can still offer significant development gains.

As I said, the Commonwealth Secretariat is no investor. But even as we see the current global uncertainty becoming a global slowdown, it is worth remembering that Africa is the only region of the world which the IMF believes will see above-trend growth in 2009 – at 6.3%. You are investors and not philanthropists. You rightly want a good return – and our experience with CPII is that there are very good returns to investors.

But two things are clear. First, that financial returns and improving the lives of individuals in developing countries are connected objectives. Second, that - as the world changes - casual assumptions about ‘safe havens’ and ‘basket cases’ are no longer valid.

This is just an illustration that the frontier at which we all must work is always changing. The initial barrier which Aureos and we have worked to break down is the perception of excessive risk amongst foreign investors. This has been a success, with private equity funds following where we have jointly led, especially in Africa. Now, there are new frontiers: not least in attracting domestic investment. If developing countries believe in themselves they will keep and invest their money in their countries.

I am glad that we have been able to put together our different skills and perspectives with such success for so long, and I look forward to continued and effective partnership.

I wish you all the greatest of success over the remainder of the day in pursuit of our shared objective of prosperity – and peace – for all. ‘Prosperity and Peace’, ‘Democracy and Development’, ‘Governance and Growth’: our inter-dependent and alliterating goals. Thank you.

ENDS