How to involve the private sector in development cooperation
As businesses hold an important key to tackling poverty, development cooperation initiatives designed by donors need to be implemented with the private sector, by the private sector and for the private sector.
The growing policy consensus on the role for the private sector in development has not yet led to a large roll-out of concrete mechanisms and projects. Experiments such as the European Business and Technology Centre (EBTC) in India deliver promising results but need to be accompanied by wider measures to make the regulatory environment of developing countries more conducive to business.
Why should the private sector be involved in development cooperation?
Not all development actors and researchers would firmly underwrite the idea that the private sector needs to be involved in development cooperation. However, it is evident that a country’s economy can grow sustainably in the long run only when its Gross Domestic Product (GDP) rises. If more companies produce added value goods and services, they can make profit from the sales thus hiring more local staff. People with a stable income pay more taxes and are likely to increase their consumption which in turn stimulates additional production and service delivery. When the private sector develops, creates a surplus and embraces innovation, it increases the number of citizens in employment, outside of the civil service and public sector financed programmes. This is not rocket science and yet, for decades, development policy researchers and aid practitioners have shunned mixing development and commercial objectives. This recalcitrance stems mostly from ideological considerations, to keep the realm of development cooperation ring-fenced from other policies or political influence. It also arises from fear – sometimes justified – that multinational corporations distort the local economy whilst their profits do not trickle down and are instead slushed away to the country of origin. Such thinking has only fuelled aid critics who point out that large parts of Africa have not witnessed decent growth figures for decades and hence claim that development projects are often just a drop in the ocean. Intensive engagement with the private sector has been a critical missing link and could contribute to making development cooperation initiatives more relevant and impactful. Moreover, development cooperation policies could even deliver tangible results by encouraging European companies, in particular small and medium-sized enterprises (SME) which represent 98% of all companies in the European Union (EU), to internationalise, trade more actively beyond the EU’s borders and become operational in developing economies. Their interaction with local companies gradually builds up the private sector by integrating these companies into global value chains in order to create access to valuable new technologies as well as international demand.
Growing policy consensus on the role of the private sector
Recently, both the EU and the United Nations (UN) are finally moving to redress the situation and recognise ever more explicitly the role and contribution of the private sector. At UN-level, the Sustainable Development Goals (SDGs) contain plenty of references to the importance of the private sector which is poised to play a pivotal role in the overarching post-2015 development framework. Point 14 of the introduction puts forward that the implementation of the SDGs will depend among others on the active engagement of the private sector whilst goal 8.3 elaborates on supporting entrepreneurship and growth of micro, small and medium-sized enterprises (MSMEs). In addition, EU policy documents have over the past years increasingly put the involvement of the business community in the limelight. The 2011 ‘Agenda for Change’ was a milestone as it underlines that economic growth needs an enabling business environment and a competitive local private sector that is equipped to harness the opportunities offered by globally integrated markets. More recently, in the 2014 Communication on ‘A stronger role of the private sector in achieving inclusive and sustainable growth in developing countries’, the EU goes on to recognise that “European companies can contribute to enterprise development in partner countries by integrating local micro, small and medium-sized enterprises into their supply chains, especially in the agriculture and agro-food sectors, as well as through transfer of technology including eco-innovations or renewable energy solutions.” The EU also intends to “co-finance market-based schemes for MSMEs to access business support services from local providers including business intermediary organisations.” A growing policy consensus on the benefits of private sector development and engagement is clearly emerging. However, it is not yet crystal-clear what can be done concretely to translate theory into practice. The question still remains HOW exactly the EU should develop new ways of engagement to leverage private sector activity and resources for achieving development goals and WHICH types of funding and projects should be developed to catalyse new partnerships that are relevant for businesses.
A concrete experiment: EBTC in India
One specific EU project which interweaves commercial and development objectives in an ingenious cocktail is the ‘European Business and Technology Centre’ (EBTC, www.ebtc.eu) in India. With EU co-financing, a consortium led by Eurochambres, the Association of European Chambers of Commerce and Industry, started in 2008 to equip 4 offices across India with 20 staff who serve European cleantech SMEs to enter the Indian market. Whilst the project’s overall objective is to combat climate change, the EBTC has connected European SMEs with Indian companies, local authorities and investors so as to facilitate the conclusion of commercial agreements and technology transfer. India is in need of European expertise to contribute to cleaning up its polluted rivers, installing renewable energies to electrify rural areas and making its cities less congested. The project operates under a win-win philosophy because the successful joint exploitation of business opportunities leads on both sides to growth and employment. This potential would remain untapped if EU companies stayed home and did not receive support to penetrate the Indian market, which currently occupies a dismal 142nd place on the Ease of Doing Business ranking of the World Bank. The Centre has brought to India hundreds of European SMEs, some of which installed LED street lights in factories and spread devices to monitor the quality of water in real-time. The EBTC staff also facilitated the market exploration of SMEs bringing closed sanitation solutions and waste processing technologies. EBTC organised dedicated matchmaking activities, such as the setting up of European pavilions at trade fairs, where these EU companies can showcase their expertise and connect with Indian local authorities, companies and investors in order to conclude business deals. After the setting up of successful pilot projects and when there is mutual interest, there is ample scope for scaling up since these type of joint ventures stimulate job creation and profit on both sides. Rather than shying away from models that are enabling commercial activities in the development sector, researchers and practitioners should consider that the profit made by European SMEs is an important Key Performance Indicator (KPI) for creating impact and long-term sustainability. Profitable deals hint towards the fulfilment of local communities’ needs and are thus an excellent yardstick for the benefits to the population. No development project can match the efficiency gains, economies of scale and long-term results which companies bring to the table when they detect a business case that is aligned to the local needs and interests. The EBTC in India was followed by several like-minded support initiatives in other Asian countries (EU SME Centre in China, EABC in Thailand, EIBN in Indonesia, etc.) and can be replicated in other developing and emerging economies, including Africa. Click on the image to enlarge
Creating a better enabling environment for business
Aside from focusing on increasing the cooperation between companies to create international value chains, development policies and projects should also aim at working with business intermediary organisations, both in Europe as well as in developing markets, to improve the business climate and create a better enabling environment for business to thrive in. A complex web of tariff and non-tariff barriers along with a rising use of localisation policies in developing economies constitute a real obstacle for local as well as foreign SMEs. Adverse legal framework conditions range from lengthy procedures to establish a business to weak protection of Intellectual Property Rights (IPR), complicated and ever-changing taxation rules, lengthy procedures to obtain proof of origin and different administrative, technical or environmental standards that are difficult to comply with. In a 2014 Position Paper on ‘Strengthening the Role of the Private Sector’, Eurochambres stressed the priority for development policies to aim at shaping, in developing countries, a regulatory framework that is conducive to entrepreneurial activity, from a fiscal, financial, economic and administrative point of view. Through assisting SMEs on the ground, business intermediary organisations as well as business support initiatives, such as the EBTC, generate relevant insights that are extremely valuable for EU Delegations as well as local and national authorities. By organising conferences and targeted meetings, writing position papers or delivering reports on existing market obstacles, their intelligence can feed into Free Trade Agreement negotiations and other bilateral government-to-government dialogues. Policy-makers in the host government are often eager to hear from the hands-on experience from the business community which measures they can take to enable more growth and employment.
Strengthen business support organisations and initiatives
It is the private sector which creates the jobs, goods and services that the world’s most vulnerable people need to be lifted out of poverty. As businesses hold an important key to tackling poverty, development cooperation initiatives designed by donors need to be implemented with the private sector, by the private sector and for the private sector. In the table above the red arrow shows how business intermediary organisations and business support initiatives deliver services to the local SMEs and new entrants from Europe whilst the blue arrow represents the advocacy efforts. The purple arrows lead to the long-term impact. The green arrows demonstrate the engagement of the European private sector, both business organisations and SMEs, with the aim of contributing to and developing the local private sector. Business intermediary organisations and concrete business support initiatives find their raison d’être in helping to navigate companies through complex environments but also in reporting the barriers to the responsible public sector bodies, both in the EU and in the target country. They help implement concrete services and activities for enterprises, while, on the other hand, they collect through their activities relevant economic intelligence on the basis of which they can structure their advocacy work. Fostering lasting linkages between European and local enterprises as well as business organisations and building up the capacities of these organisations is a far more effective and sustainable mechanism than any other intervention from donors, which is by definition limited to the duration of the project or the funding. Eurochambres recommends the European Commission and other donors to focus on the further strengthening of business intermediary organisations in partner countries endowing those with the expertise, skills and networks from Europe to support the matchmaking of SMEs and advocate for more efficient and open markets. In the event that such intermediary organisations are weak, non-existent or simply not having a pan-European reach, development cooperation interventions should serve to pool resources and design new initiatives, as in the case of the EBTC in India. About the author Philippe Adriaenssens is Advisor, International Affairs at Eurochambres www.eurochambres.eu.
This article was published in GREAT Insights Volume 4, Issue 5 (August/September 2015).