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Talking Points

Beyond development as a business by-product?

16-03-2012

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That the private sector is important, if not key, to economic development is nothing new. However, with the increasing rhetoric on the need to “enhance the role of the private sector in development”, events around this topic are mushrooming. BusinessEurope organized a seminar in Brussels on March 15th, with the European Commission, the European Investment Bank, as well as business federation and private sector company representatives present. While we have commented before on the need to distinguish “which” private sector we are talking about, here we were very much discussing how the EU private sector could get involved in development….

So, what would it really take to have genuinely effective private sector involvement in development? Five main points came out of the seminar.

1. We need more of such focused events to improve private sector-development policy understanding

Private sector operators and development policy makers come at “development” from quite different angles. They need to learn each other’s language, and understand their respective starting points and ultimate goals before common ground and approaches can really be found.

Participant comments on the European Commission’s new development policy, the “Agenda for Change”, underlined this: there doesn’t seem to be much in it for them, in the view of some private sector operators, apparently. Indeed, “private sector” is mentioned only 3 times in the “Agenda for Change” compared to 28 mentions of “aid” (and one of “SMEs”). Still, in the development policy world, this was considered a major turning point in the EC’s approach. The Commission called it an “agenda for change” after all.

We also need to understand the limits of what either party can actually do. There is an expectation that the EC could help resolve “governance” problems for EU companies in developing countries. But development policy-makers and researchers have for decades been, and still are, grappling with how to use development finance and trade policy to promote the effective rule of law and to create more effective states in general. Indeed, this is the development question. The EC is limited in how much it can do with its existing tools, something the private sector must understand. Nonetheless, greater engagement and understanding from both sides may reveal novel ways of addressing governance issues through collaboration, so its worth investigating further and continuing to improve mutual understanding.

2. Maybe the EC will need to make institutional changes to “involve the private sector”.

A key complaint from the private sector was the lack of information about who in the Commission to speak to about development related projects. Is there someone they can make proposals to? Who can act as a sounding board? How should they “get involved” from Europe?

The implications of the drive in development policy towards partner country “ownership” has meant that EC delegations, not Brussels, have most of the authority for working with partner country governments to design and implement development programmes. As such, most opportunities for the private sector may actually exist in the partner countries, with EU-based companies losing out. Indeed, BusinessEurope hopes for an EC office dedicated to building the role of the private sector in development policy to address this imbalance. Who exactly should be playing that role? In any case, the policy-makers in DEVCO wouldn’t appear the most appropriate people given their more bureaucratic role in guiding EU policy, not serving as a business promotion or information centre. Does the EC recognise that it may need to address this to “involve the private sector”? Are there lessons from bilateral donors and their private sectors in this regard?

3. There are some interesting lessons for development policy – lets draw them out and scale them up

The BusinessEurope seminar presented some examples where private companies have used donor money or subsidized loans to make development-related investments in developing countries. The presentations highlighted a light-bulb factory in Lesotho that also made “social investments”; a company working on fortifying food with local food producers around Africa, a cement “academy” established in collaboration between cement makers and a University in Egypt; and similar plans from wind turbine producers for the energy sector. While laudable, these were relatively small-impact projects.

If the EC wants to promote and scale-up such ventures, it is important to understand what drove the development aspect of the investments in the first place. In some cases it was a lack of qualified staff; in others it was the consumer market at the “bottom of the pyramid”; in others it was the potential for accessing larger markets while serving a social purpose. But what role does the aid genuinely play in these kinds of ventures? Is it a safety net, a “turbo-booster”, or just a little extra pocket money? Would Philips have considered investing in Lesotho without that grant? Was EUR 300,000 of DANIDA, the Danish development agency, money to kick-start the cement academy decisive to initiate the project? Indeed, this is the question taxpayers asked of the EIB and the EC when they distribute loans and grants.

Development policy-makers need to try hard to dissect such case studies and understand what lessons they can draw to move beyond corporate social responsibility-type projects and genuinely “involve” the private sector in development. The goal should be a catalytic effect from joining aid and private investment, not a few additional schools built around industrial plants. So, to what extent is the development aspect key to these projects, and where is it simply a fortuitous by-product? A more systematic analysis of these aspects could indicate where development policy, and combining aid and the private sector, can really help to trigger a greater development impact. Clearly, there is a need to go beyond small projects.

4. EU investors may be able to teach us lessons for Private Sector Development policies

Much of existing private sector development policy within developing countries is about “improving the business environment”, but how much does this really matter? Evidence suggests that the “business environment” varies considerably across firms within the same region, country, and sector. Even in “unfriendly environments” there are still firms that have managed to start up, survive, grow, and even make money. Apart from that, an informal trader is very different from a mining company, and so are export manufacturers from monopoly service providers. So can we really promote private sector development by reforming policies that ultimately do not affect all firms in the same way? How much does the regulatory environment really figure in investment calculations for EU companies? Was that part of the calculation for those companies mentioned above when they designed their projects? Or is it market information and contacts that really count? Ultimately, what would encourage greater linkages between EU investors and local firms?

5. We need to focus more on where we can find joint interests

The “new” focus on the private sector as a partner in achieving development may stem from a number of reasons: the financial crisis in Europe, competition from China, India, and Brazil – or a simple realisation that the private sector could contribute more to achieving development ends. It is important that development policy-makers and the private sector are explicit where their interests and values lie to see how and when these can be aligned for development purposes. It will not always be possible. Also, corporate social responsibility may be nice, but it is not what is required to catalyse development. Indeed, according to a seminar participant, in these straitened times, development grants represent an “interesting market” – so let’s see where this view can align with development objectives.

Profit and developmental objectives can be obtained together, but more needs to be understood about where this alignment takes place and the degree to which public finance can adjust the risk-balance faced by investors and recipient countries. Developing countries may not always be well placed to avoid carrying all the downside risk. Similarly, development finance should not simply be a channeling of funds to the EU private sector.

More broadly, if development is the goal, then the focus has to be on how to raise employment and productivity in developing countries. And if aid can tip the balance that really turns EU private sector into a positive force for development beyond its role in investing and creating jobs, then all the better.

So all in all, the BusinessEurope meeting was a welcome step in bringing two quite different groups together. Given ECDPM’s interest in policy research and dialogue, this is an initiative that we can only applaud, and hope will be repeated more regularly and build on more analysis around the above themes.

Bruce Byiers is Policy Officer Political Economy of Reforms and Development at ECDPM.

This blog post features the author’s personal views and does not represent the view of ECDPM.

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