Public support to business: Combining commercial and development approaches?
With the increased recognition of the private sector's role in development, public actors should actively seek to combine their approaches to business support. Under the universality principle of the SDGs, they should strive to increase the coherence and synergy of their business support instruments that pursue commercially-oriented economic diplomacy objectives, with those that have development objectives.
The private sector has always been a key actor in economic and social development. Rising productivity and structural changes require investment, job creation and technological upgrading, all of which ultimately depend on private sector involvement. But it is the interaction with the public sector and the society at large, in terms of norms and values, institutional and regulatory environment, as well as policies, that shape development outcomes. Some private sector activities might lead to development outcomes, while others might have negative consequences such as the degradation of the environment, labour and social conditions. How best to harness the potential benefits from the private sector in terms of inclusive and sustainable development is the challenge. One dimension to foster sustainable transformative processes in developing countries, is by facilitating domestic and foreign direct investments (FDI), as well as trade flows. The international community, and increasingly donors, have played an important role to that end, including in supporting the establishment of conducive policies and private sector support measures to foster inclusive and sustainable development outcomes.
Developing countries seem more than ever determined to achieve sustainable development based on internally driven processes and initiatives. While developing countries increasingly promote inwards investment and global value-chain integration as strategies to create more and better jobs, partner countries increasingly aim to work with businesses to achieve development objectives, thereby operating at the ‘other end’ of the value chain. These external actors have developed a range of policies and instruments to better leverage profit-making activities for development outcomes, including by engaging with international business and often firms from their own country. Donors are in particular increasingly using public official development assistance (ODA) to leverage private sector finance (PPPs, catalytic mechanisms, private to private), as well as engaged in partnerships with private sector activity for development through encouraging productive investment (see Table for an illustration of different partnerships). Drawing on the useful categorisation of the programmes and instruments donors use to engage the private sector for development provided by the Donor Committee for Enterprise Development (DCED), we can identify three major forms of collaboration between donors and the private sector:
At the same time, and often absent in the development discourse, developed country governments also promote internationalisation and outwards investment as part of their own industrial, trade and investment policies, for their own economic benefit. Though not explicitly aimed at development objectives, and while building on the growing interest of companies in developing countries and emerging economies’ markets, these approaches also impact on development outcomes in third countries and could therefore become more development-friendly. Approaches adopted also include the same three categories identified above for development cooperation, i.e. (1) cost-sharing or financial support for private investments, (2) technical advice and (3) matchmaking and linkages services. Instruments used aim at facilitating trade finance, risk mitigation instruments, export promotion, including, for instance, promoting the internationalisation of small and medium-sized enterprises (SMEs). Some of the instruments used entail references to social and environmental sustainability (as highlighted in the case of export credit agencies by Prof. Andreas Klasen in his article in this issue of GREAT Insights). But surprisingly, there is little reference, among developed countries policy actors, of the potential conflict of interest and lack of coherence, or on the contrary potential synergy between development-driven and commercially-driven public support strategies and instruments. These dynamics put developed country instruments and policies for engaging with the private sector at the centre of development outcomes. Comparing development and commercially-oriented sets of instruments, they entail some similar features and challenges for governments in engaging with the private sector and therefore learning opportunities, including across different ministries, departments and institutions. This is particularly relevant in the current context of growing economic diplomacy towards not only emerging countries, but also other developing countries.
A growing number of donor governments are explicitly linking trade, development and foreign affairs institutionally by putting the development ministry under the responsibility of the Ministry of Foreign Affairs (e.g. Australia, Canada and the Netherlands) and more explicitly combining their trade and development strategies (e.g. Finland, The Netherlands, the UK). Some other developed countries keep a clearer institutional demarcation between the institutions in charge of their economic diplomacy and those in charge of development cooperation, including toward the private sector (e.g. the European Commission, France, Germany). While the institutional design reflects some political preferences in explicitly combining or not economic diplomacy and development policy, the impact in practice is unclear, and merits to be further investigated. Does foreign policy and economy diplomacy interests capture development cooperation? Or does policy coherence for development increases as a result of the potential synergy between them? Some countries, likeThe Netherlands, explicitly advocate for policy coherence, claiming to be able to positively combine development efforts with self-interest motives, in particular from their own domestic business.
While donors increasingly support the private sector, use private sector finance and engage with their activities to achieve development objectives, lines between development cooperation and economic diplomacy are becoming increasingly blurred. In the case of both development and commercially-oriented instruments, the underlying reason for public and private actors to engage with each other relates to sharing costs, risks and resources. Modalities seem increasingly similar. Differences are clearly found in the stated objectives. But development-oriented approaches increasingly recognise the need for partnership with the private sector to be financially and commercially sustainable. And commercially-oriented approaches to public-private cooperation, often designed along economic diplomacy objectives, slowly but also increasingly recognise the need for environmental and social sustainability. Challenges and opportunities to improve existing instruments are also very similar for both approaches. In fact both development and commercially-oriented approaches should promote financial and developmental sustainability. This is not to say that both approaches are intrinsically the same and should be merged as one. Indeed, aid should not serve to subsidise business interests, and its focus should remain on core development objectives. Aid should also not be captured by political or strategic interests around economic diplomacy. Civil society organisations are right to be concerned and play a useful watchdog role in that respect. The key challenge, however, is to build stronger synergy between a development-oriented approach and a commercial one, across the board of public-private cooperation, identify better complementarity, while defining clear roles for each type of instruments. This requires addressing some critical questions. For instance, are instruments for promoting business ‘engagement in development’ simply a version of commercial instruments but more targeted at poorer developing countries? ECDPM findings in its upcoming study suggest that a majority of business support instruments with a commercial objective are targeting Asian countries while many of the development instruments focus in particular on the African continent. But the underlying reasons - sharing risks, costs and resources - are very similar in both sets of instruments. Click on the image to enlarge
In a world of growing interest and indeed reliance on private sector activities and finance to promote development and increasing alignment of objectives, the similarities and potential synergies between both the objectives and the means of instruments for public-private cooperation point to the potential opportunity of combining funds currently channelled through commercially-oriented public instruments to more development-related investments. The adoption of the Sustainable Development Goals (SDGs) in September, with a universality principle, offer an ideal opportunity for public actors, including beyond the narrow development community, to work towards greater coherence and synergy between the set of approaches and instruments they use to engage with the private sector, better combining commercial and sustainable development objectives across the board. About the authors Dr San Bilal is the Head of the Economic Transformation and Trade Programme at the European Centre for Development Policy Management (ECDPM) and editor of GREAT Insights. Sebastian Grosse-Puppendahl is Policy Officer at ECDPM. Contact Sebastian Grosse-Puppendahl: sgp@ecdpm.org or Twitter: @SebGroPup.
Private sector key for development
The private sector has always been a key actor in economic and social development. Rising productivity and structural changes require investment, job creation and technological upgrading, all of which ultimately depend on private sector involvement. But it is the interaction with the public sector and the society at large, in terms of norms and values, institutional and regulatory environment, as well as policies, that shape development outcomes. Some private sector activities might lead to development outcomes, while others might have negative consequences such as the degradation of the environment, labour and social conditions. How best to harness the potential benefits from the private sector in terms of inclusive and sustainable development is the challenge. One dimension to foster sustainable transformative processes in developing countries, is by facilitating domestic and foreign direct investments (FDI), as well as trade flows. The international community, and increasingly donors, have played an important role to that end, including in supporting the establishment of conducive policies and private sector support measures to foster inclusive and sustainable development outcomes.
Donors increasing engagement with private sector
Developing countries seem more than ever determined to achieve sustainable development based on internally driven processes and initiatives. While developing countries increasingly promote inwards investment and global value-chain integration as strategies to create more and better jobs, partner countries increasingly aim to work with businesses to achieve development objectives, thereby operating at the ‘other end’ of the value chain. These external actors have developed a range of policies and instruments to better leverage profit-making activities for development outcomes, including by engaging with international business and often firms from their own country. Donors are in particular increasingly using public official development assistance (ODA) to leverage private sector finance (PPPs, catalytic mechanisms, private to private), as well as engaged in partnerships with private sector activity for development through encouraging productive investment (see Table for an illustration of different partnerships). Drawing on the useful categorisation of the programmes and instruments donors use to engage the private sector for development provided by the Donor Committee for Enterprise Development (DCED), we can identify three major forms of collaboration between donors and the private sector:
- cost-sharing or financial support for private investments in developing countries, including through (matching) grants, loans (guarantees), equity;
- technical advice to businesses (either directly through programme staff or via grant support); and
- matchmaking services that link companies with donor-funded programmes, implementing partners or more advanced business partners in developed countries
Economic diplomacy and business promotion
At the same time, and often absent in the development discourse, developed country governments also promote internationalisation and outwards investment as part of their own industrial, trade and investment policies, for their own economic benefit. Though not explicitly aimed at development objectives, and while building on the growing interest of companies in developing countries and emerging economies’ markets, these approaches also impact on development outcomes in third countries and could therefore become more development-friendly. Approaches adopted also include the same three categories identified above for development cooperation, i.e. (1) cost-sharing or financial support for private investments, (2) technical advice and (3) matchmaking and linkages services. Instruments used aim at facilitating trade finance, risk mitigation instruments, export promotion, including, for instance, promoting the internationalisation of small and medium-sized enterprises (SMEs). Some of the instruments used entail references to social and environmental sustainability (as highlighted in the case of export credit agencies by Prof. Andreas Klasen in his article in this issue of GREAT Insights). But surprisingly, there is little reference, among developed countries policy actors, of the potential conflict of interest and lack of coherence, or on the contrary potential synergy between development-driven and commercially-driven public support strategies and instruments. These dynamics put developed country instruments and policies for engaging with the private sector at the centre of development outcomes. Comparing development and commercially-oriented sets of instruments, they entail some similar features and challenges for governments in engaging with the private sector and therefore learning opportunities, including across different ministries, departments and institutions. This is particularly relevant in the current context of growing economic diplomacy towards not only emerging countries, but also other developing countries.
Institutional setting and dynamics
A growing number of donor governments are explicitly linking trade, development and foreign affairs institutionally by putting the development ministry under the responsibility of the Ministry of Foreign Affairs (e.g. Australia, Canada and the Netherlands) and more explicitly combining their trade and development strategies (e.g. Finland, The Netherlands, the UK). Some other developed countries keep a clearer institutional demarcation between the institutions in charge of their economic diplomacy and those in charge of development cooperation, including toward the private sector (e.g. the European Commission, France, Germany). While the institutional design reflects some political preferences in explicitly combining or not economic diplomacy and development policy, the impact in practice is unclear, and merits to be further investigated. Does foreign policy and economy diplomacy interests capture development cooperation? Or does policy coherence for development increases as a result of the potential synergy between them? Some countries, likeThe Netherlands, explicitly advocate for policy coherence, claiming to be able to positively combine development efforts with self-interest motives, in particular from their own domestic business.
Finding synergy
While donors increasingly support the private sector, use private sector finance and engage with their activities to achieve development objectives, lines between development cooperation and economic diplomacy are becoming increasingly blurred. In the case of both development and commercially-oriented instruments, the underlying reason for public and private actors to engage with each other relates to sharing costs, risks and resources. Modalities seem increasingly similar. Differences are clearly found in the stated objectives. But development-oriented approaches increasingly recognise the need for partnership with the private sector to be financially and commercially sustainable. And commercially-oriented approaches to public-private cooperation, often designed along economic diplomacy objectives, slowly but also increasingly recognise the need for environmental and social sustainability. Challenges and opportunities to improve existing instruments are also very similar for both approaches. In fact both development and commercially-oriented approaches should promote financial and developmental sustainability. This is not to say that both approaches are intrinsically the same and should be merged as one. Indeed, aid should not serve to subsidise business interests, and its focus should remain on core development objectives. Aid should also not be captured by political or strategic interests around economic diplomacy. Civil society organisations are right to be concerned and play a useful watchdog role in that respect. The key challenge, however, is to build stronger synergy between a development-oriented approach and a commercial one, across the board of public-private cooperation, identify better complementarity, while defining clear roles for each type of instruments. This requires addressing some critical questions. For instance, are instruments for promoting business ‘engagement in development’ simply a version of commercial instruments but more targeted at poorer developing countries? ECDPM findings in its upcoming study suggest that a majority of business support instruments with a commercial objective are targeting Asian countries while many of the development instruments focus in particular on the African continent. But the underlying reasons - sharing risks, costs and resources - are very similar in both sets of instruments. Click on the image to enlarge
Toward greater coherence under the SDGs?
In a world of growing interest and indeed reliance on private sector activities and finance to promote development and increasing alignment of objectives, the similarities and potential synergies between both the objectives and the means of instruments for public-private cooperation point to the potential opportunity of combining funds currently channelled through commercially-oriented public instruments to more development-related investments. The adoption of the Sustainable Development Goals (SDGs) in September, with a universality principle, offer an ideal opportunity for public actors, including beyond the narrow development community, to work towards greater coherence and synergy between the set of approaches and instruments they use to engage with the private sector, better combining commercial and sustainable development objectives across the board. About the authors Dr San Bilal is the Head of the Economic Transformation and Trade Programme at the European Centre for Development Policy Management (ECDPM) and editor of GREAT Insights. Sebastian Grosse-Puppendahl is Policy Officer at ECDPM. Contact Sebastian Grosse-Puppendahl: sgp@ecdpm.org or Twitter: @SebGroPup.
This article draws on the insights from a forthcoming ECDPM study, financed by DFID, that maps out the key instruments used by developed countries public authorities to support private sector, both for development and for commercial purposes.
This article was published in GREAT Insights Volume 4, Issue 5 (August/September 2015).
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