Private sector for development is the “new black”

Promoting private sector development in poor countries and engaging with firms for achieving development ends is very much in fashion. In development circles, round tables and events discussing public-private partnerships are springing up more and more. Recently, a participant at one of these asked, "How much of this is actually new?" But further, what would have to happen to make any new engagement with the private sector more widely acceptable and effective? The private sector has always had a key role in development through providing jobs and incomes. It has also “engaged” with governments through public procurement – as whenever a government builds a road or a school, or when medicines or supplies are purchased, the private sector has a role. This role can even be very large in small economies where government expenditure is disproportionately large compared to the rest of the economy. Development finance institutions, such as the European Investment Bank and the International Finance Corporation, part of the World Bank Group, have also been around, providing finance to the private sector in development for a long time, so indeed, what is new? Well, the increasing rhetoric of bilateral donors and the European Commission about engaging with the private sector is relatively new. For their cooperation with the private sector to bring about positive results then raises the need to understand better what types of engagement have already taken place among donors and the private sector, to what effect, and why. There is a range of tools that has been and might be used by different donors, all with potentially different implications for the donor, the private sector and the ultimate beneficiary. The relatively long USAID experience of working with and for the private sector using a range of tools was particularly brought out in a recent meeting entitled "Reassessing Development Aid: The Future of Public-Private Partnerships”. But perhaps the key underlying message from their experience was that the position that "if its good for development, then its good for us". This positive view of private sector engagement stands in contrast to a more hesitant approach from the NGO network Eurodad. The day after the USAID event, they launched a report entitled "Private Profit for Public Good? Can Investing in Private Companies Deliver for the Poor?". This asks some important questions regarding the provision of loans by development finance institutions to promote the domestic private sector in developing countries, and particularly about the degree to which public money channeled through these finance institutions genuinely contributes to promoting development, particularly given the need to make a profit, and therefore target higher-yielding ventures. Eurodad’s findings suggest that while there is a will, current approaches do not effectively balance the profit motive with developmental outcomes, again highlighting the need to learn from experience. Eurodad also emphasized the importance of financial sector development in partner countries. Much of development finance institutions’ funding for Small and Medium Entreprises (SMEs) is channeled through financial intermediaries such as commercial banks or other financial institutions. This means that, as well as profit margins for each intermediary in the chain, intermediaries must pass on the loans to the credit constrained and SMEs. As this is something that European governments have struggled to get banks in their own countries to do in recent times, it is understandably also an issue for finance institutions operating in developing countries. Commercial banks seeking high returns are often much happier investing in safe government bonds than in risky SME ventures. As such, even with the best intentions it may be very hard for development finance institutions to reach SMEs in developing countries where the financial sector is weak. But even when a firm is found to be “bankable”, and can access the desired credit, this is not necessarily the end of the story. I am reminded of a Mozambican printing company that managed to cut the time it would take for a large printing job from 3 days to 3 hours with international investment assistance, only to be faced with a lack of demand for such printing capacity given the scarcity of firms requiring such large printed volumes. So, while provision of credit or public-private partnerships may work in some cases, it clearly is not the final word. It is good that the private sector is increasingly in the limelight. But beyond the rhetoric, stories as that of the Mozambican printing company call for broader learning. Evidence from specific cases helps to better understand when public-private partnerships work and why. There may indeed be lessons for Europeans to learn from USAID experience in this regard, starting from an acceptance that not only can private sector contribute to development by aligning with donor programmes, but donors may also be able to learn from private sector approaches to particular problems. -- 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.