Though the importance of the private sector role in economic growth has long been acknowledged, it is only in recent years that the full range of players and activities related to the private sector have started to be wholly embedded in development strategies and programmes.
A recent major shift in the landscape of international development has led policy discussions to increasingly address the role of the private sector in development, particularly from the viewpoint of resources. As part of this trend, several bilateral and multilateral development agencies have moved to increase their engagement with the private sector and emphasize the role that the private sector can play in overcoming development challenges. In a bilateral donors’ statement entitled, In support of private sector partnerships for development, issued at the UN Private Sector Forum on the Millennium Development Goals in 2010, a number of governments’ development agencies pledged their support to enhance the role of the private sector in the development process, both as donors and beneficiaries. Similarly, the sixth meeting of the Group of Twenty (G20) Summit in 2011 saw heads of government welcome a report on financing for development prepared by Bill Gates for the event. The summit’s final declaration covered issues relating to the importance of financial inclusion and access to financial services for small and medium-sized enterprises (SMEs) around the globe. In September 2013, the United Nations Secretary General unveiled a Post-2015 Business Engagement Architecture, which outlined building blocks on how to motivate and support global businesses in realizing their full potential to advance sustainable development through action, partnership and co-investment.
Coinciding with this evolving donor interest in leveraging more private sector resources, companies are also growing more interested in donors’ expertise, their network with recipient governments and their funds to support them in strengthening both the commercial viability and sustainability of their businesses when they invest abroad. With the interests and undertakings of donors and businesses in developing countries increasingly overlapping, greater amounts of aid budgets are allocated to market development partnerships where development and business opportunities meet. Numerous market development interventions are today based on this entangled model: linkage of diverse actors in a value chain; promotion of entrepreneurship and investment; and supply of market data, among many others. These programmes offer a good model to encourage higher environmental, social and governance standards: better energy- and resource-efficient production processes; more proficient business-management systems; respect for labour rights; and sound relationships with suppliers, to mention a few.
It is noticeable that bilateral donors are increasingly promoting development partnerships through closer ties between companies in home markets and companies in aid-recipient countries, the latter typically being SMEs with a restricted access to markets, finance and technical expertise. From the perspective of development cooperation agencies, there is genuine interest in tying development cooperation objectives to commercial returns for domestic businesses; an interest in combining aid resources with private resources in order to increase the development impact; and a belief that either a business will commit and continue its work after the completion of donors’ partnership programmes or another business will replicate the business model. However, despite the rapidly-growing demand for business partnership programmes that first benefit the target group in a developing country or region but then also benefit domestic enterprises in the donor’s country, the challenge of distinctly differentiating any such programme from tied aid is a continuing one. Business partnership programmes run the risk of distorting local markets, crowding out small technology providers and hosts of small, viable, entrepreneurship models. Hence, a key distinction between a traditional export programme and a real development plan is the extent to which the the donor governments’ choice of recipient countries, industries, and types of projects, reflect a balanced, functional coupling of developmental goals and commercial profits for all partners alike.
To this end, multilateral agencies, such as the United Nations Industrial Development Organization (UNIDO), play a vigorous role in working together with bilateral development agencies to ensure an honest brokering between the development priorities of private sector recipients, and the sustainable, commercial interests of private sector donors. The reason for this is that multilateral agencies, like UNIDO, are in a relatively independent position due to the multilateral stakeholder nature of their membership and their professional knowledge, as well as their stable relationship with the recipient governments which are member states. In stepping up its support for SMEs in developing countries, UNIDO is increasingly part of hybrid partnership programmes, with bilateral development agencies and the domestic firms acting as main donors to the projects. Often, these partnerships are designed to generate local business and employment opportunities for the local private sector (e.g. through creation of market linkages, the adaptation of technology to developing countries context, local procurement, etc.). With a longstanding experience of partnering with the private sector to achieve inclusive and sustainable industrial development, UNIDO ensures these partnerships respond to the national plans and priorities of developing countries, but do not deprive the domestic private sector of their sustainable business case. The organization also takes additional measures to examine donor corporate performance in the environmental, social and governance areas to ensure the selection process is inclusive and transparent.
Although there is a lack of broad evidence based on the results achieved by these business partnership models and approaches, UNIDO and other multilateral agencies are working hard, together with bilateral donors, to identify where their interventions can be most effective and to achieve higher systemic development impact. Assessing the additionality of business partnership programmes, over and above what the private sector can solely provide to the project, will help “untie tied aid” from these emerging partnerships schemes.
This blog was previously published on Making It Magazine and is reproduced with permission.