Preparations for this year’s European Development Days on the 16th and 17th October are now well underway. Among 4 panels in which ECDPM will participate, we are co-organizing a panel to look at “How can we maximise inclusive growth and development: The Pros and Cons of Private Sector Engagement and Blending Instruments”. The idea for the panel builds on the growing interest and demand among donors, developing country governments and the private sector itself for engaging business for development ends, something we have discussed here before and in a recent discussion paper.
Although there are no clear dividing lines, we find it useful to distinguish between “private sector development” and engaging the “private sector for development’. While the former relates to the domestic, developing country private sector, with a strong donor focus on the business environment, the “private sector for development” agenda refers more to engaging with the international private sector to achieve development ends.
This international angle can then be further broken down into private sector activities (e.g. Foreign Direct Investment) and private sector finance (e.g. public-private partnerships for infrastructures). While there are some blurred lines between these categories, they can help bring clarity to discussions.
Our panel will discuss all three aspects to some degree and seeks to highlights some of the main pros and cons. The European private sector wants to know how to engage with donors, and the development finance institutions are interested in seeing to what degree blending of grants and loans can serve to promote the private sector in developing countries.
To promote discussion prior to the panel itself, in early October ECDPM will be publishing a special edition of its monthly GREAT Insights with contributions from a range of experts, including some of our panelists.
Some draft contributions that already came in give a flavour of the main points for discussion. Focusing on financing, Klaus Rudischhauser of the EC highlights the importance of using blending of EU grants and loans to leverage additional public non-grant financing for important public investments but that these are also “equipped to unlock private investments for achieving EU development objectives.” Nonetheless, he cautions that “while the involvement of the private sector holds great potential, a cautious and selective approach is necessary to ensure that development objectives are paramount and market distortions are avoided.”
Sarah Gonzalez of USAID in Brussels says we should “embrace pragmatic alliances at the intersection of development objectives and commercial interests.” and comments that “some European donors have not yet found a healthy balance between cautious due diligence and skepticism, and so they let pass the skills, technologies and resources of the private sector”.
Imoni Akpofure from the IFC also highlights that a “small amount of initial capital, with some well targeted advisory services, can marshal the talents and finance of private sector investors to create economic activity that ultimately is self-financing.” Nonetheless, as the EIB contribution points out, “serving a diverse group of private sector clients requires tailor-made approaches, integrating mutual reliance and the use of innovative financial instruments to leverage impact.”
At the same time, José María Vera of Oxfam Spain worries that the focus on engaging the private sector “opens the way for activity that deviates from the goal of achieving the greatest possible impact in poverty reduction;… that economic goals and visibility for activities are more highly valued.” He also believes that the private sector for development agenda opens up room for “abusive use of intermediaries and new financial actors that considerably reduce operation transparency and limit responsibility.”
Development practitioners will need to find a way to to balance these challenges, and this requires a far greater understanding of what sort of private sector engagement has worked where, to what degree, and why. This is something we will continue to work on at ECDPM, while we hope that the EDD and discussions it leads to will also help to provide some interesting insights. In particular, we would like to stimulate reflection and debate on the following questions:
What are your views on these points?
ECDPM is organizing the High Level Panel “How can we maximise inclusive growth and development: The Pros and Cons of Private Sector Engagement and Blending Instruments” in collaboration with BusinessEurope, Agence française de Développement, the European Ivestment Bank and Kreditanstalt fuer Wiederaufbau. It will take place on 16 October, day 1 of the EDDs, at 14:30 in Auditorium B.
This blog post features the author’s personal views and does not represent the view of ECDPM.
I totally agree with Max Bulakovskiy. Private sector involvement in development is more sustainable especially when bridging private sectors from more developed societies with the developing societies. Mutual action will be driven by creating win-win situations and move to creating less donor-dependent societies. Certainly questions relating to 'abusive use of intermediaries' and reduction of transparency can arise- but those are questions still relevant to presently regardless of who are implementing development action. Encouraging CSR action among private sector actors is one way of combating the challenges related to ethics and transparency.
I am going to be a little bombastic in my rhetoric in order to encourage discussion. The private sector as a partner in development is not particularly new. Through procurement contracts over 60% of ODA flows are already channeled to the private sector, and 2/3rds of that to large multinationals. As the telegraph and guardian have recently pointed out consultants based in northern countries have turned development into a thriving industry. What is different in the most recent resuscitation of the Washington consensus is the emphasis on complex financial instruments to "deliver on development," and I think we have all seen in recent years just how effective these can be in creating growth and reducing inequality (sarcasm is difficult to express in written form sometimes.) I would second the point made by AFD brussels that the focus of both the private sector in development and private sector development should be in strengthening and shoring up the capacity of the domestic private sector in country. Rather than supporting large multinational firms with scarce ODA and increasing developing countries exposure to exogenous shock through forced trade and procurement liberalisation, energy should be put into ensuring that local banks and cooperatives in country have the capacity to take on the kind of risk necessary to invest in MSMEs. We have recently seen that private investment in developing countries is pro-cyclical as the capital flight that occurred during the financial crisis had to be filled with public money through investments by development finance institutions (DFIs) such as the IFC and the FMO. As the financial times recently reported perhaps the emphasis should lie in creating and supporting development banks within developing countries to invest in MSMEs, which used to exist before the structural adjustment programs in the 90s forced them to be privatised. Furthermore more effort needs to be made in ensuring that private flows actually remain in developing countries long enough to benefit the local communities. Illicit capital flight from developing countries through tax avoidance and other means is estimated to exceed 1 trillion dollars which makes development assistance a drop in the bucket. We need to be smarter with ODA and focus on the public financing gaps that can address these concerns before we start passing on responsibility to the private sector.
Involving private sector in socling societal challenges is a healthy way to make development more sustainable. Look at the success stories for the BoP or the concept Kramer and Porter describe as a "shared value" - developing innovative business models that combine societal impact and economic benefice can really answer many of the issues arising. In our way we try to bring ahead the knowledge the social enterprises share with the mainstream businesses in order to help the latter to find a solution for the "last mile" issue. Annother issue is that there is not enough innovation put forward. There are many innovative ways Development Agencies and Donnors can apply - look at the examples provided by the Jamel Poverty Lab with the Randomised Trials - it might also help solve a number of issues in a less expensive way... All this is to be discussed....
To me, one of the main question is : How can help local private sector to have a better access to credit? Local bank have a significant role to play and could contribute to unlock the potential of growth.
An off the wall question! What happens if the revised Cotonou P A is not ratified by all ACP/EU member states by the deadline of end of October 2012??????????????? Alan David Pena