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Private sector and development: can we blend great expectations with a willingness to fail?

21-06-2012

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“Getting more bang for the development Euro” is not usually how we talk about “enhancing aid effectiveness”, but this was the title of a session from a recent Friends of Europe roundtable.  While involving the private sector more closely in development might therefore bring new jargon as well as additional finance, the discussion highlighted two other important issues: the high expectations that donors and the private sector have from one another, as well as the need for donors to manage potential failure and to improve their adaptability…

Temper expectations

Private sector representatives at the roundtable pointed out that while it is possible to successfully engage in channeling finance to developing countries in the form of risk insurance for farmers or local currency loans for firms, the lack of a “conducive regulatory environment” complicates this. They came back to this point several times, but also expressed the expectation that donors have the tools to alter this situation. But improving the regulatory (economic) environment ultimately boils down to “the” development question: How to get well-functioning and capable institutions in developing countries?  This is a question that has occupied the development community for decades and been met with only limited direct success, if any. It may even be that greater private sector engagement itself has more impact on improving regulatory environments than donors can have.

For their part, the public sector, or donors, also have high expectations of what can be achieved by partnering with the private sector. But while they like to talk about success stories where the public and private sector have partnered for programmes in agriculture and infrastructures, there is relatively little discussion of the extreme difficulty in scaling up any of these examples beyond pilot projects. As pointed out by one of the private sector participants, pilot projects often rely on specific individuals and organisations with particular interest in success, and thus tend to be small and comparably easy to coordinate. Scaling up then encounters a new set of problems associated with the change in institutional organization and numbers of people and institutions involved.

Interestingly, the question of “How to scale up?” is also a hot topic in other development fora, particularly regarding the “scalability” of results from randomised control trials – these are policy experiments carried out on sample groups of people or firms, with one group receiving a specific “treatment” or development intervention (e.g. a loan), while a control group receives none. The results are used to measure the impact of specific policy interventions and then to formulate broader policy prescriptions through scaling up.

While considered to be at the frontier of development research, some recent analysis suggests problems with scaling up in this field relate to the different people who organize such experiments and who are expected to carry out interventions on a larger scale. For example, one recent study shows positive results where a specific education intervention is managed by an NGO but no impact when the same intervention is managed by government. Further, interviewees in surveys may alter their responses and behaviour according to who is interviewing. Comparing local and white interviewers’ work in Sierra Leone showed that people may change their responses “to impress someone of a higher perceived social status, as well as economic incentives to secure aid!” (See also the full paper). This then suggests that scaling up of pilot projects also needs to take explicit account of the role and influence of the organization carrying it out in order to understand the possible impact.

So while there is clear room for success in public-private cooperation, the high expectations of all of those involved may need to be tempered. There is an apparent need for some evidence-based analysis of what has worked and why in some specific cases, a point I also mentioned in a previous post.

Embrace failure

While meetings such as the Friends of Europe roundtable are big on success stories, there are also clearly messages to be learnt from failures. Where have attempts to combine donor and private money not succeeded? Responses to this question were very insightful, one panelist pointed out that firstly, people prefer not to speak about failures, not least the private sector as this may affect future opportunities negatively. Secondly, the private sector generally has to be adaptable and is therefore used to monitoring progress and altering a plan that is not working. Companies also build the risk of failure into their business models.

This raises important questions for development policy: can donors also be flexible and adaptable when engaging with the private sector? What would this require? And to what degree can and should donors build risk into their models – can donors and their tax-payers also “embrace failure” as a necessary learning process?

These are clearly important challenges, but the fact that they are now being raised in discussions already represents some important progress.

Bruce Byiers is Policy Officer Trade & Economic Governance at ECDPM.

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

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Comments

Bruce

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2012-10-03 12:21:11

David, Thanks for these points - indeed the capital flight discussion seems to be climbing up the development agenda, but there have yet to be many analyses looking at how this ties in with the growing agenda on bringing EU private sector investment and finance into the development agenda. I suppose ideally one of the criteria for donors engaging with a firm would be that tax is paid in the "correct place', but unless I'm mistaken, some studies on some of the DFIs suggest that many of the beneficiaries there are actually located in tax havens - a Eurodad study i think. So if there are misgivings about the UK, they are likely to be doubly relevant for developing countries!

David Sogge

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2012-09-05 09:32:17

Another reason to lower expectations of PPPs: their use of tax havens. That's a conclusion to be drawn from a recent article by the Bureau of Investigative Journalism { available at: http://tinyurl.com/bmxauks }. As many as 70 public-private partnership projects of the British National Health Service are based off-shore to avoid paying taxes. These findings appear in a study by the European Services Strategy Unit, whose website {http://www.european-services-strategy.org.uk/} is amply stocked with critical information about public-private partnerships.

David Sogge

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2012-07-20 09:51:26

Great expectations? Given the recent cascade of revelations about how corporations actually behave, it's clear that many expectations have been far too high. We could begin by ratcheting down expectations of corporate social responsibility, for example. In 2003 several banks drew up the Equator Principles, voluntary guidelines that were supposed to nudge banks to behave better in development projects – projects often in collaboration with aid agencies and public development banks such as the IFC and FMO. And who helped launch those impeccable Principles ? Barclays Bank -- now exposed as active ringleader of one of banking’s biggest frauds -- was one. And HSBC –- now exposed as enthusiastic banker to drug mafias and other unsavoury money-launderers -– was another. Now, at least the past weeks' exposés have settled one question: there can no longer be any doubt that these corporations’ claims of social responsibility were bogus. We therefore need to ask: Are high expectations about signatories to =any= non-binding, non-judiciable guidelines justified? I think not. At least, not until we have quite substantial, unambiguous evidence (as Bruce Byiers urges) to the contrary. Further, on our expectations of public-private partnerships, it’s worth noting that now even the IMF expresses misgivings about them. In a recent public commentary* on current British economic policy, a high IMF official uses somewhat opaque terms to get across the point that the Public Finance Initiative (one of the PPP forms favoured by UK governments and corporations) is bad use of public resources and should be avoided. With doubts about PPPs now growing even in the IMF, can we expect the rest of the aid industry –- including the EU, the Netherlands and other PPP enthusiasts –- to follow suit? * http://blog-imfdirect.imf.org/2012/07/19/mind-the-gap-policies-to-jump-start-growth-in-the-u-k/

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