Clare Short, Secretary of State for International Development, is preparing to include a 60 per cent sell-off of the corporation, a state-owned company which invests in poor countries, in the Queen's Speech.
The Government does not want to involve itself in the day- to-day running of the new private company. But the Independent on Sunday has learnt that it plans to impose tough penalties on managers who stray from the corporation's ethical aims.
A letter from Ms Short shows that she favours "sanctions" for managers who break a tough code of development criteria after the corporation is privatised.
The sanctions could include demotion, or even dismissal. The Department for International Development is also considering granting bonuses, such as those given to salesman, to those bosses who achieve the "ethical" aims of the corporation.
The letter, which detailed plans for selling part of the corporation, was sent last month to the general director of Traidcraft Exchange, a charity which advises companies on fair trade in business overseas.
"We are at the moment considering what sanctions might be appropriate for non-compliance with the agreed policies," the letter said. "While this proposal on its own may not be sufficient to ensure compliance, there may be some scope for a link between development performance and remuneration, and we will look further at whether that might be useful."
The corporation was formed in 1948 as the Colonial Development Agency, to invest in commercial projects in the poorest regions of the British Empire. It is now run by the Department for International Development and has $2.6bn (pounds 1.6m) of investments in countries such as Zambia, Honduras and Pakistan.
The corporation, which also manages businesses abroad, is banned from involvement in tobacco, gambling, nuclear power and pornography. It must spend 70 per cent of its money in poor countries.
"We specialise in poorer developing countries. But we believe strongly that all our investments have to be entirely commercial," a spokesman said. "A business wouldn't be sustainable unless it is commercial, but in showing we have a track record of success we hope to attract other investors over time. We couple that commercial approach with an ethical approach."
Civil servants are drafting a White Paper to enable the corporation to become a private company. Its new status will help it to borrow on more commercial terms, without its loans affecting the Government's Public Sector Borrowing Requirement.
The Government will retain a "golden share" in the new public company, giving it the power to veto any proposed changes to the company's investment and ethical aims. However, ministers do not want to be seen to be interfering in running it and aim to take only two seats on the board.
Proceeds from the sale will go to the Department of International Development for aid projects.
The corporation put up the money to develop the world's largest white fish farm on Lake Kariba in Zambia. It has also invested in mobile phone networks in Egypt and Africa and plans projects in Cuba next year.