Private sector development
Private Sector Development (PSD) is a term in the international development industry to refer to a range of strategies for promoting economic growth and reducing poverty in developing countries by building private enterprises. This could be through working with firms directly, with membership organizations to represent them, or through a range of areas of policy and regulation to promote functioning, competitive markets.
For more than a half-century the least developed countries (LDCs) have been treated as charity cases by wealthy countries in the West. Donor governments, international financial institutions, and NGOs have been dominant actors providing aid, technical assistance, and funding. While the public sector achieved some significant development impacts, particularly in agriculture and health, development institutions and their ways of working have varied little in decades despite massive changes to the global economy. With stagnant budgets and outdated modalities, the public sector-led approach to development has clearly stalled.
Increasingly, however, it is the private sector — companies and investors — that have the potential to have a transformative impact on the world’s poor. Over the last decade, companies and investors have become more engaged in development problems, largely through corporate social responsibility (CSR) and philanthropy initiatives, particularly in the LDCs. As the private sector gains experience on development issues there is now a shift towards development efforts that create both business value and social good, which generate business and economic value while addressing key environmental and social issues — what Michael Porter has termed “Shared Value.”
This trend will only accelerate as the planet’s population in the middle of this century passes 9 billion with nearly 2 billion consumers living in frontier markets of the LDCs. In the coming decades, the private sector -companies and investors- will no longer be partners in global development through corporate sustainability efforts alone, the private sector will shape the global development agenda across a wide range of sectors — food security, health, energy, environment, human rights and governance. This new era of Private Sector-led Development will fundamentally alter the landscape, transforming the roles of donors, development agencies and private companies alike. It has the potential to scale solutions to our greatest development problems — climate change, resource depletion and violent extremism while also creating new markets and investment opportunities.
Overview
Supporters argue that PSD is an important part of poverty reduction.[1] Whether as workers, subsistence farmers or entrepreneurs, most poor people already participate in markets. Strengthening these markets in ways that secure higher incomes for the poor is therefore seen by PSD advocates as a fair and efficient way to fight poverty. Earning a decent income in the private sector, it is argued, is also more dignifying than relying on hand-outs.[2]
As with all development interventions, PSD programmes are under pressure to measure and report their achievements, monitoring and evaluating their work in ways that are both credible and cost-effective.[3] One source of further information about methodologies for measuring the results of PSD, including the approaches currently used by different donors, is the Donor Committee for Enterprise Development.[4]
An April 2013 EPS PEAKS paper found a strong and well-established case for donors to intervene in private markets to deliver subsidies for development purposes. The researcher found that the theoretical reasons for intervention were well established by the economics literature, but that the practical approaches and frameworks for delivering subsidies to private sector entities are more complex and less understood.[5]
The approaches that do exist vary widely and not just in one dimension. The researcher identified some key criteria that can be used to evaluate different approaches and instruments and gave examples of their usage by different donor institutions. In practical terms, they said that thoroughly-researched cost benefit analyses should be used to assess project impact and that it was vital that donors recognise that by actively distorting a market outcome, there might be significant consequences to be understood and analysed.[5]
Approaches to private sector development
Business environment reform
Where entrepreneurship and markets are stifled by inappropriate regulation, excessive taxation, lack of fair competition, lack of voice or an unstable policy environment, growth and poverty reduction are likely to suffer. Typically, donors first fund business environment analyses, such as the World Bank's Doing Business Reports, identifying the major constraints to business growth. They then work with government and other stakeholders to implement reforms.
The private sector itself can play an important role in advocating for a better business environment. Many development agencies thus work to strengthen the capacity of businesses and business associations to engage in public-private dialogue with governments.
Modalities of private sector development
Private Sector-led Development fundamentally differs from the traditional approach to development. It is characterized by four modalities that have emerged in the last decade. Taken independently, these elements are significant in their own right; taken collectively they represent mutually reinforcing trends that when combined will address global development challenges while also unlocking vast new market opportunities.
1. Shared Frameworks and Metrics
As highlighted above, there is a growing interest in aligning core elements of corporate strategy with the SDGs and the 169 agreed-upon targets. Meanwhile, the investment community is also looking for ways that current environmental, social, governance (ESG) investment strategies can evolve to better reflect and report against the SDGs. Here, companies like Unilever and Safaricom are looking at ways they can align their strategy with the SDGs to deliver value to shareholders while addressing the challenges that impact their supply chains and their customers. By aligning frameworks and metrics, these companies are able to leverage the global development community.
2. Blended Finance
The World Economic Forum defines Blended Finance as “the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets.” This helps to alleviate concerns faced by investors in these markets, mitigating risks and managing returns in line with similar investments in developed markets. By de-risking investments, donors and development finance institutions (DFIs) enable institutional investors to make impactful investments that also deliver strong returns in alignment with their fiduciary responsibilities.
3. Systems Approaches and Collective Impact
While the private sector may increasingly be in the lead, it will not be able to address complex development challenges on its own. As the case of Thai Union demonstrates, companies and investors will need to work as part of complex, multi-stakeholder initiatives with governments, NGOs, advocacy groups and others using systems approaches and the tools of collective impact to generate returns while delivering development outcomes.
4. Not Just for the Multinationals
Perhaps the most intriguing aspect of Private Sector-led Development is that it is not being led only by the large multinationals; instead there are a growing number of national and regional level companies leading the way. According to McKinsey, by 2025, 50% of the world’s largest companies will be based in developing countries. In the era of Private Sector-led Development, it will be innovative corporates and investors from the Global South that are leading the charge.
Business linkages and value chain development
A value chain is a series of activities that enterprises undertake when they produce a good or service, adding value to the inputs at each stage. Value Chain Development thus seeks to maximise the value of any given type of product, whilst incurring the least possible cost to the producers, in the places along the production chain that give the most benefit to poor people. One way is to improve production processes. Another way is to increase the commercial linkages between the businesses that poor people own or work for, and businesses that can offer them new and more profitable opportunities as customers or suppliers.
Business development services
This approach seeks to build markets in services that improve the performance of individual enterprises. Some of the most important BDS markets are in training, consultancy, marketing, market information, information technology and technology transfer. For many within the development community, donors should ideally not undertake BDS directly; instead they should facilitate commercial BDS providers to be self-sustaining, through the improvement of their techniques and the sourcing of new clients. BDS markets can be sustainable where providers recover their costs via the fees they charge for services.
However, business development services are also found in developed countries where the argument advanced is that the market for business development fails and therefore the government should enable this market.[6] Developed countries experience suggests that fees for publicly supported advice was a policy that did not work.[7] In fact, the evidence suggests that subsidised intensive work with relatively few business clients works well,[8] which suggests the requirement for DBS to be self-financing is too onerous.
Making markets work for the poor
The Making markets work for the poor/M4P approach aims to understand how poor people interact with market systems, and how these systems can be changed to improve their lives. It aims for large-scale, sustainable impact by focusing on overall markets, rather than targeting individual actors within that market. In this sense, an M4P programme may incorporate various elements of value chain development, BDS and/ or business environment reform. Donors that have pioneered the M4P approach include the UK's Department for International Development (DFID), the Swedish International Development and Cooperation Agency (Sida) and the Swiss Agency for Development and Cooperation (SDC).[9][10]
Green growth
A number of development agencies are engaged in developing markets to channel finance raised for climate change mitigation and adaptation in industrialised countries towards initiatives that reduce carbon emissions in the developing world.[11] Low Emission Development Strategies (LEDS) are used to bridge the public and private sectors with the goal of enabling growth in a given industry or region.[12] If managed appropriately, they argue, the challenge of responding to climate change could generate decent jobs and incomes for many millions of poor people.[13]
Women's entrepreneurship development
In many parts of the developing world, women are systematically excluded from business opportunities. Discrimination can disadvantage women in their access to the knowledge and skills needed to be successful in business. At the same time, laws that disadvantage women in gaining access to property can make it hard for women to raise the necessary capital. Many donors actively support programmes that help women to overcome these and other barriers.
Local economic development
Local Economic Development (LED) typically starts by analysing the economy of a particular region or municipality, identifying opportunities to enhance its prospects. LED strategies may combine any of the following: business environment reform, value chain development, infrastructure development, innovation and technology policy, planning and/ or skills development. LED programmes often involve local and regional governments, the private sector and civil society in programme design and implementation.[14] LEDknowledge.org is an open access database of publications on Local Economic Development. In addition, the Donor Committee for Enterprise Development has a knowledge page on Local Economic Development and Clusters.
Public-private partnerships
Many development agencies are now working directly with businesses to deliver development impacts. Such public-private partnerships or public-private development partnerships cover a wide range of activities. A common characteristic of most PPPs is the aim to leverage the development impact of companies’ core business activities. One increasingly common approach is to create a Challenge Fund, whereby companies bid for donor funding, competing to maximise the development impact of the grant money made available.[15] Other PPP programmes assist companies in finding business partners in developing countries, or offer technical support and expertise. Through some PPP programmes, companies can directly contribute to donor and development agencies' development projects.[16] The Donor Committee for Enterprise Development provides a mapping of its member agency PPPs.[17]
Access to finance
Affordably access to finance is seen by most experts as vital to private enterprises in the developing world. While some development agencies therefore see it as part of Private Sector Development, many treat it as a separate field in its own right.
Private sector development in conflict-affected environments
Conflict presents unique challenges and unique opportunities for Private Sector Development. One the one hand, conflict disrupts the regular functioning of markets and in their place creates a war economy. PSD practitioners must be sensitive to the impact of their activities on the conflict situation, e.g. effects on the distribution of resources, as well as the impacts that conflict will have on their activities. On the other hand, where it generates job creation and trade, Private Sector Development can play a vital role in peacebuilding.[18]
Industrial policy
Industrial policy is broadly defined as selective government intervention to promote a specific economic sector and promote structural change.[19] It may target manufacturing, agricultural or services sectors. If and how donors should promote industrial policy is much debated in development circles.[20]
Innovation policy
New or improved are important drivers of competitiveness, growth and employment generation. In the context of private sector development, “innovation is understood as the commercially successful introduction or implementation of a technical or organisational innovation.”[21] Donor agency support to innovation covers a broad range of activities, including the creation of appropriate framework conditions for innovation, and the development of innovative capacities of companies. This may include business advisory and support services, finance and skills development; business incubators and technology extension services, as well as value chain and cluster approaches.[22][23]
Private sector development following the financial crisis
For many people, the Global Financial Crisis has raised questions about the ways in which markets should be regulated in order to ensure long-term, sustainable development. At the same time, with many countries now faced with slower growth and higher unemployment, reviving economies by kick-starting the private sector is seen by many as at the heart of a global response.
See also
References
- ^ 'Prosperity for all: making markets work', London: 2008.
- ^ See for example Michael Fairbanks et al, In the River They Swim, Templeton Press
- ^ Practical Guidelines for conducting research. Summarising good research practice in line with the DCED Standard Muaz, Jalil Mohammad (2013)
- ^ Donor Committee for Enterprise Development, Measuring Results
- ^ a b Miller,H. April 2013, What practical approaches/frameworks are there for effectively delivering subsidy to private sector entities for development purposes? Economic and private sector professional evidence and applied knowledge services Helpdesk request, http://partnerplatform.org/?gz82am1p
- ^ Mole, K. F. and Bramley,G. 2006,``Making policy choices in nonfinancial business support: an international comparison Environment and Planning C: Government and Policy vol 24 pp 885 - 905
- ^ Bennett R.J. (2008) SME policy support in Britain since the 1990s: what have we learned? Environment and Planning C: Government and Policy, 26(2): 375-397
- ^ Mole K.F., Hart M., Roper S., and Saal D. (2011) "Broader or Deeper? Exploring the most effective intervention profile for public small business support" Environment and Planning A 43(1) 87 – 105
- ^ 'A Synthesis of the Making Markets Work for the Poor Approach', Springfield Centre. (2008) Bern: Swiss Agency for Development and Cooperation, October 2008
- ^ Making Markets Work for the Poor: Challenges to Sida’s Support for Private Sector Development, Swedish International Development Cooperation Agency, Stockholm: October 2003
- ^ Donor Committee for Enterprise Development, Green Growth
- ^ "LEDS in Practice: Mobilizing a local green economy – GreenCape in the Western Cape, South Africa". Low Emission Development Strategies Global Partnership (LEDS GP). Retrieved 26 August 2016.
- ^ International Labour Organisation, Towards decent work in a sustainable, low-carbon world, Geneva:ILO, 2008.
- ^ International Labour Organization website, Local Economic Development
- ^ "- Africa Enterprise Challenge Fund". Retrieved 16 January 2017.
- ^ DCED directory of public-private partnership programmes, categorised by different types of support, target regions and countries
- ^ "Partnership Mechanisms of DCED Member Agencies" DCED. Retrieved 28/03/2012.
- ^ Dr Naoise MacSweeney, Private Sector Development in Conflict-Affected Environments: A Review of Current Literature and Practice, Cambridge, UK: DCED, 2008.
- ^ e.g. Pagg and Saggi (2006) The case for industrial policy: A critical survey
- ^ "Industrial policy - DCED". Retrieved 16 January 2017.
- ^ BMZ Working Group on Promoting Innovation Systems
- ^ e.g.World Bank (2010): Innovation policy. A guide for developing countries
- ^ GTZ (2009):Innovation and Technology Policy in the Context of Technical Cooperation