A. An Increasing Emphasis on the Role of the Private Sector in Development

The general idea that the private sector is central to development is not a new one. Indeed, the World Bank’s 1989 World Development Report was entitled Financial Systems and Development. Over a decade later, the Commission on the Private Sector and Development issued its 2004 report to the United Nations Secretary-General, Unleashing Entrepreneurship: Making Business Work for the Poor, while the theme of the 2005 World Development Report was A Better Investment Climate for Everyone. Various development initiatives and trends throughout the 1990s and early 2000s also focused — at times successfully and at others less so — on issues ranging from international trade liberalization and market access, to infrastructure development and technological innovation in areas like agricultural production.

However, it is only in recent years that the private sector has arguably come to be seen as central to development efforts, and that the full range of activities and actors associated with the “private sector” began to be fully considered as part of development strategies. As one witness who appeared before the Committee, University of Ottawa senior fellow Carlo Dade, commented in a 2006 paper, “…it is not the role of the private sector that is new, but rather our awareness of its role.”[1]

While the importance of the private sector to economic growth has long been recognized, until very recently, private sector actors were not seen as development actors. As a result, they were typically treated as a secondary consideration in terms of potential vehicles of development financing and in terms of sources of ideas and input in development debates and policies, in comparison with the primary and more established group of actors: recipient governments and bilateral and multilateral development agencies. However, attitudes about development actors have been shifting. Policy discussions are now increasingly addressing the role and importance of other actors in development, including private enterprises, global funds and foundations, and individuals.

This trend has been reflected in the evolution of major international debates and initiatives pertaining to development. In the 2000 United Nations’ (UN) Millennium Declaration, which led to the adoption of eight Millennium Development Goals (MDGs), the private sector was mentioned only twice. The international community resolved to “develop strong partnerships with the private sector and with civil society organizations in pursuit of development and poverty eradication.” In an effort to strengthen the UN itself, world leaders also resolved “to give greater opportunities to the private sector, non-governmental organizations and civil society, in general, to contribute to the realization of the Organization’s goals and programmes.”[2] By 2008, however, the UN was supporting the Business Call to Action, an initiative which “aims to accelerate progress towards the [MDGs] by challenging companies to develop inclusive business models that offer the potential for both commercial success and development impact.”[3] Some 45 companies are currently participating.

Ten years after the launch of the MDGs, world leaders convened for a high-level summit to review progress towards the goals, and adopted the resolution: “Keeping the promise: united to achieve the Millennium Development Goals.” It lists various measures and calls for action intended to promote national ownership of the development process, to strengthen policies related to MDG achievement, and to ensure that previous international commitments, including with respect to development financing, are honoured. Within this overall framework, the resolution mentioned to a much greater extent than in 2000 the need to include the private sector in development efforts, to mobilize private resources, and to pursue public-private partnerships. As such, world leaders resolved

…to work with all stakeholders and strengthen partnerships in achieving the Millennium Development Goals. The private sector plays a vital role in development in many countries, including through public-private partnerships and by generating employment and investment, developing new technologies and enabling sustained, inclusive and equitable economic growth. We call upon the private sector to further contribute to poverty eradication, including by adapting its business models to the needs and possibilities of the poor. Foreign direct investment and trade, as well as public-private partnerships, are important for the scaling-up of initiatives. …[4]

The resolution also states that “Private international capital flows, particularly foreign direct investment, along with international financial stability, are vital complements to national and international development efforts.”[5]

A similar expansion in emphasis is evident in agreements on the principles of aid effectiveness. In 2005, the Second High Level Forum on Aid Effectiveness led to the adoption of the Paris Declaration which articulated five principles: ownership, alignment, harmonization, managing for results and mutual accountability. This document contains two brief mentions of the private sector. With respect to national ownership of the development process, recipient (partner) countries committed to encouraging the participation of civil society and the private sector. Those same countries also committed to intensifying their efforts “to mobilize domestic resources, strengthen fiscal sustainability, and create an enabling environment for public and private investments.”[6]

By the time of the Fourth High Level Forum on Aid Effectiveness in Busan, South Korea at the end of 2011, however, the private sector had taken on a much more prominent role in the debate about the future of development. Leaders from various developed, developing and emerging economies, and representatives of development agencies, civil society and private organizations, issued an outcome document that attempts to broaden, in their words, “an agenda that has until recently been dominated by a narrower group of development actors.”[7]

The document outlined fairly familiar principles: ownership of development priorities by developing countries; a focus on results; inclusive development partnerships, and mutual transparency and accountability. However, the document also articulates a vision whereby aid is arguably situated as a key facilitating rather than the underpinning mechanism of development. Paragraph 28 of the outcome document states:

Aid is only part of the solution to development. It is now time to broaden our focus and attention from aid effectiveness to the challenges of effective development. This calls for a framework within which:

a) Development is driven by strong, sustainable and inclusive growth.

b) Governments’ own revenues play a greater role in financing their development needs. In turn, governments are more accountable to their citizens for the development results they achieve.

c) Effective state and non-state institutions design and implement their own reforms and hold each other to account.

d) Developing countries increasingly integrate, both regionally and globally, creating economies of scale that will help them better compete in the global economy.

To this effect, we will rethink what aid should be spent on and how, in ways that are consistent with agreed international rights, norms and standards, so that aid catalyses development.[8]

As part of this overall vision, participants in Busan emphasized the importance of public institutions and effective policies. They also stated: “We recognise the central role of the private sector in advancing innovation, creating wealth, income and jobs, mobilising domestic resources and in turn contributing to poverty reduction.”[9] Various pledges followed, such as calls to engage with business associations and trade unions, to "enable the participation of the private sector in the design and implementation of development policies and strategies…," and to put in place innovative financial mechanisms to mobilize private financing. At the same time, however, Homi Kharas, a senior fellow with the Global Economy and Development Program at the Brookings Institution, has argued that the expanded recognition of the importance of new forces in development — such as new donors and private sector financial resources and innovation — has still not led to those same stakeholders being incorporated as real partners with respect to decision-making about international development. He wrote in June 2012 that “…while Busan signaled the expansion of the range of partners in development, it did not formalize their roles: the key international structures of accountability remain narrowly focused on traditional donors and partner countries alone.”[10]

The Group of Twenty (G20) has also recently addressed the role of the private sector in development, particularly from the standpoint of resources. At the 2011 G20 Summit in France, leaders welcomed a report that had been prepared for them by Bill Gates on financing for development. In so doing, they recognized “the importance of the involvement of all actors, both public and private, and the mobilisation of domestic, external and innovative sources of finance.”[11] The summit’s final declaration also discussed issues such as the scaling up and diversification of sources of financing for infrastructure, as well as issues pertaining to financial inclusion and access to financial services for small and medium enterprises around the world, the compliance of multinational enterprises with applicable tax laws, and transfer pricing legislation. As an example of a more specific pledge, the G20 leaders also stated that they “will work to reduce the average cost of transferring remittances from 10% to 5% by 2014, contributing to release an additional US$15 billion per year for recipient families.” At the same time, the declaration stressed “the pivotal role” of official development assistance.[12]

There was a major announcement related to the private sector at the 2012 Group of Eight (G8) Summit in Camp David, Maryland, which builds on the group’s existing food security commitments from 2009 (private sector partners are already contributing an estimated $3 billion to the G8’s work in this area).[13] The United States announced the $300 million initiative — the New Alliance for Food Security and Nutrition.[14] It is intended to accelerate the flow of private capital to the agricultural sector in African countries, scaling up new technologies and other innovations to increase agricultural productivity, thus reducing the risks to vulnerable communities. It is a partnership between G8 nations, African governments, and the private sector targeting “inclusive and sustained agricultural growth.”[15] In the Summit’s final declaration, while acknowledging their measurable progress against poverty in Africa following a decade of focused G8 efforts in that continent, the leaders of the world’s most important industrialized democracies declared that: “International assistance, alone, however, cannot fulfill our shared objectives.” At the same time, G8 leaders reaffirmed their “commitment to the world’s poorest and most vulnerable people,” recognizing the “vital role of official development assistance in poverty alleviation and achieving the Millennium Development Goals.”[16]

Overall, the above narrative demonstrates that the development community has clearly awoken to the role that private sector actors can and should play in development efforts. However, a consensus about the exact extent of that role has not yet emerged. It should also be noted that the growing recognition of the importance of the private sector is not the only change underway in the landscape of international development. Debates about roles, responsibilities, and approaches to development are also being shaped by the emergence of bilateral aid programs outside the traditional core of the Organisation for Economic Co-operation and Development (OECD) donor governments. In addition, there is increasing attention around new forms of development cooperation that include south-south partnerships.

B. Bilateral Aid Agencies and the Private Sector

As part of the trend described above, several bilateral and multilateral aid 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 September 2010, a number of these agencies issued a bilateral donors' statement “in support of private sector partnerships for development.”[17] Signatories included the donor agencies of: Austria, Denmark, Finland, Germany, Japan, the Netherlands, Norway, the United States (U.S. Agency for International Development — USAID), the United Kingdom (Department for International Development — DFID), Sweden and Switzerland.

Among this list, the Committee was briefed on the strategies that are being pursued by two leading bilateral development agencies, USAID and DFID. These agencies are focusing considerable resources on private sector activity in poor countries and on public-private partnerships as innovative mechanisms in the pursuit of development results. The two examples offer interesting lessons for Canada, and their approaches are therefore described in detail next.

USAID

USAID, the largest bilateral aid agency in the world,[18] has a long tradition of working with the private sector. This cooperation has intensified in the last few years as a result of the U.S. government’s desire to achieve “resource efficiency.”[19] In September 2010, President Obama signed a Presidential Policy Directive on Global Development, “the first of its kind by a U.S. administration.”[20] The Chief Innovation Officer and Senior Counselor to the Administrator at USAID, Dr. Maura O’Neill, described this approach for the Committee. She said that the President “challenged us to imagine the conditions where AID or aid are no longer needed.”[21] The policy side of the President’s Directive is focused on sustainable development, placing “a premium on broad-based economic growth, democratic governance, game-changing innovations, and sustainable systems for meeting basic human needs.”[22] The Directive states that “Economic growth is the only sustainable way to accelerate development and eradicate poverty.” Similarly, the U.S. Government’s 2010 Quadrennial Diplomacy and Development Review states: “We are changing the way we do business, shifting from aid to investment — with more emphasis on helping host nations build sustainable systems.”[23]

USAID Administrator Dr. Rajiv Shah has articulated the Agency's new approach in various forums, including in an October 2011 speech on public-private partnerships. In it, Dr. Shah argued that while there is no one "recipe" for success, there are three key ingredients for sustainable and broad-based economic growth: robust country institutions; human capital development; and, "the emergence of a strong and dynamic private sector." He argued that this third point is the most difficult aspect for traditional development actors. He said:

I know this is uneasy territory for many in the development community.

The early experience of corporate investment in the developing world was characterized by activity that notoriously caused great harm. Sweatshops, infant formula, Bhopal — all words that conjure images of corporations taking advantage of bad regulations, enriching elites and exploiting the poor.

Those early experiences led to a deep mistrust of the private sector, by developing countries and the development community alike.

As a result, our community became far less comfortable partnering with the private sector.

...

But the modern corporation has a much more enlightened understanding about the aligned interests it shares with the development community.

Walmart knows that when it partners with USAID to buy crops from subsistence farmers in Guatemala at fair prices, it helps lift these farmers from poverty while strengthening its own supply chain.

Coca Cola knows that our Global Development Alliance to bring clean water to communities around the world helps fight disease, while allowing the company to build bottling facilities in locations much closer to its customers. ...[24]

Dr. Shah therefore urged the development community to "step out of its comfort zone and imagine new linkages with private sector firms.”[25] The details of these partnerships will be discussed in another section of this report that deals specifically with that subject.

DFID

The United Kingdom has also increased the focus on private sector activity in its approach to international development. In an October 2010 speech, the country’s new Secretary of State for International Development, Andrew Mitchell, described the rationale for doing so by articulating three key messages related to the future direction of British development policy:

·         His first point was “that it is wealth creation, jobs and livelihoods above all which will help poor people to lift themselves out of poverty. Aid is a means to an end, not an end in itself.” While acknowledging that “there is no magic growth cocktail,” and that governments need to be humble about their role in encouraging economic growth, the Secretary indicated that DFID would work with developing countries to build competitive investment environments, to reduce barriers to market entry and trade, and to ensure a sound regulatory environment.

·         The second point relates to the organization of DFID, which Secretary Mitchell indicated would be reconfigured to enable it to implement the vision outlined in his first point on poverty alleviation through wealth creation. The Secretary stated that DFID would need to become “a government department that understands the private sector, that has at its disposal the right tools to deliver and that is equipped to support a vibrant, resilient and growing business sector in the poorest countries.” In order to accomplish this goal, the Secretary indicated that DFID would “need to add new types of people with different skills.”

·         Third, the CDC — the UK’s development investment institution — would be repositioned “so that it rediscovers its development mission, and acts as an engine through which the British taxpayer supports inclusive investment in some of the poorest places in the world.”[26]

The Secretary also indicated that he would be creating a new Private Sector Department within DFID as a reflection of these priorities. A comprehensive overview of DFID’s approach was then set out in a May 2011 document entitled The Engine of Development: The Private Sector and Prosperity for Poor People.[27]

In his presentation to the Committee, Gavin McGillivray, the Head of DFID’s Private Sector Department, noted that even with DFID’s increasing focus on the private sector, all of its activities must be for the purposes of reducing poverty in accordance with the country's 2002 law, The International Development Act. In his words, “Everything we do, including our entire engagement on private sector development, is a means to an end, and that end is to reduce poverty in the poorer countries of the world.”[28] He explained the connection between engagement with the private sector and the department’s legislated mandate as follows:

…the evidence is strong, that poverty reduction is driven principally by economic growth. We know that economic growth is driven principally by successful private investment and private enterprise. So it’s an absolutely legitimate means for those seeking to achieve poverty reduction to try to achieve more successful private investment and private enterprise in the poorer countries of the world.[29]

Moreover, DFID’s strategy document indicates that UK aid will continue to be untied. In other words, this new approach does not represent a shift whereby aid is being used to advance UK commercial objectives abroad.

Mr. McGillivray also told the Committee that his department has two broad strategic objectives with respect to private sector development. The first is to increase investment by improving the investment climate in low-income countries so that it will occur across a range of sectors that have the potential to benefit poor people (e.g. agriculture; infrastructure). He explained that increasing investment opportunities involves work with private sector actors ranging from multinational corporations to smallholder farmers. Moreover, he argued that creating this enabling environment for investment requires strong public institutions. The Department’s second objective is to improve service delivery in those same countries by engaging with non-state actors. Such engagement is intended “to achieve more accessible, more appropriate, or higher-quality and more affordable basic services in, for example, health care, medicines, schooling, vocational training, water, sanitation, power, communications, and transport.”[30] Lastly, DFID hopes that its new strategy will also help the Department to gain greater leverage from its own resources as well as efficiencies.[31]