Three rules for donors: making sure public-private development finance actually works

Last year’s Sustainable Development Goals (SDGs) and Paris Agreement on climate change represent a significant political shift away from a dependency on fossil fuels towards an era of development more in harmony with the environment. They broaden the previous focus of tackling poverty to include leaving no-one behind and tackling inequality.

Both will require billions, if not trillions, of pounds to implement.

With limited aid budgets, donor governments and global institutions have quickly set their sights on leveraging private sector investment as a way of plugging this finance gap. Aid budgets are increasingly directed towards participating in private sector projects, such as big infrastructure projects like roads, ports and hospitals; service provision such as schools; energy and healthcare.

But if public-private partnerships (PPPs) are to be used effectively to implement both the SDGs and the Paris Agreement, donors need to keep three key rules in mind.

Will Addis Ababa fire the starter gun for a new approach to sustainable development?

UN Secretary General Ban Ki Moon addressing hundreds of civil society organisations

Thousands of delegates have descended on a rainy Addis Ababa, Ethiopia, for the third International Conference on Financing for Development. This is the first in three UN Summits this year that will show how much governments are willing to rise to the current global challenges, including climate change, ongoing poverty, hunger and inequality.

It is the chance to present an ambitious and transformative agenda to tackle structural injustices in the global economic system, to ensure that all development is people-centred for current and future generations and to protect the environment.

Addis presents the starter gun for the journey over the next six months that ends up in Paris in December for the climate change negotiations. AS Ban Ki Moon said to civil society groups today, a successful outcome in Addis is crucial for success in everything else.

Thinking small… who, me?

In February this year I walked into our Freetown office, in Sierra Leone, and was greeted with “Think Small! You’re here! Welcome!” – who needs a name when one has a project so closely associated with you?

Private Sector and development at the World Bank

Written by Tina Chang with inputs from Anne Lindsay and Sarah Montgomery

“Engaging the private sector is not about how we feel about business; it’s about how high our aspirations are for poor people. If we rely only upon foreign aid, then our aspirations are far too low.” (Jim Yong Kim)

President of the World Bank Group, Jim Yong Kim made the above statement in a recent Oxfam blog. Similar statements were made at this year’s annual meetings in Washington and the Bank is increasingly seeing a central role for the private sector in the fight against extreme poverty.

It may be stating the obvious to say that the impacts of the private sector on development are as diverse as the private sector itself but it does bear repeating. Ultimately this understanding is important for unlocking the (we would agree with Dr Kim) significant role of the private sector in development.

What would ‘thinking small’ look like in global value chains?

The challenges I face are obviously affected by being a small business. Middlemen buy my product and sell it to the big company. They impose their price. (Jose Luis, Nicaragua)

Big business only rarely listen to our needs because they don’t need us (Abdul, Afghanistan)

Whilst it is never as simple as “big” versus “small”, small businesses do describe a view that they are often exploited in their supply chains. The above two views were expressed by small business owners that we talked to in our (second) Think Small research that’s currently underway (see our first Think Small research here). The question is, can Global Value Chains (GVC) ever be beneficial?

The promotion of GVCs has become a hugely popular approach to enterprise development and one which is becoming a bigger focus for donors. The argument for inserting small businesses into GVCs is that this will help them to develop as businesses and thus provide jobs and benefit the economy overall; and ultimately, be good for poverty eradication.

But, given the views of small and micro enterprise (MSE) owners, we think this enthusiasm needs some tempering. It is clear, that the lived experiences of small businesses in GVCs are not automatically positive. Fairtrade research, for example highlights how value does not reach the ‘bottom’, stating;

“…there is clear desire among some to get more value out of their product. From experience, this desire comes from producers’ experience of long-term declining farm gate prices, their sense of powerless in the face of this decline, and, for those with access to the information, a painful knowledge of how their income represents an ever smaller fraction of the final retail price.”

So the question should be how can GVCs be made to benefit MSEs (who generate most of the jobs and a significant proportion of the GDP of developing countries)? Our research has highlighted 3 things that are important to consider towards this end;

1) POWER

The relative power in GVCs can determine whether these will be a negative or positive experience for MSEs. All too often, small business’s lack of voice and power leads to market marginalisation or unfavourable terms on which to do business.

In Zambia small businesses often found that they had to do business on poor terms because they needed customers and had limited options. They were also in a precarious position when things went wrong as they lacked resources, (especially financial) skills and expertise to enforce contracts when agreements were broken. Ultimately, their lack of political, social and economic power kept them trapped in this weaker position.

It’s essential to consider voice and power when inserting MSEs into GVCs to avoid exploitative relationships. Initiatives which seek to improve the bargaining position of MSE suppliers, to reinforce their rights to land and water or to tackle social and political exclusion rather than simply ‘integrating’ them into supply chains have lead to greater benefits for those participating in these GVCs.

2) RISK & VULNERABILITY 

Being included in global markets and supply chains can result in higher risks for MSEs (as the example from Zambia highlights). MSEs are often the most risk sensitive and vulnerable and short term risks can have long term impacts for them. Unfortunately, in some cases, buyers are able to pass risk down the chain, so that the MSE can bear the majority of risk in the bad times, whilst reaping a smaller portion of the gains in the good times. (Vorley & Fox write an interesting, if slightly dated, paper on this).

Initiatives which consider risk and vulnerability, on the other hand, can mean that GVCs can have a much more positive impact on MSEs. There are various activities which could help people cope with risk and so mitigate their vulnerability, for example;

• Social protection schemes can provide a safety-net when times are difficult.
• Macro-economic policies can reduce risk and decrease vulnerability of small-scale traders and businesses. Small scale producers and traders in our research talked about the importance of price stability as a tool to help in managing and planning their finances.

3) SUPPLY and DEMAND
Demand is a key consideration which is often neglected in livelihood development programmes but which our research found is a major issue for many MSEs. GVCs can potentially be a really good mechanism in addressing this demand challenge by providing stable and good buyers for MSEs (provided issues of risk and power have been addressed!).

However, GVCs are not the only solution and other, often more appropriate options, should not be neglected.

Focussing on local and regional markets can bring more widespread benefits. MSEs often produce goods and services that are more locally appropriate and are better able to compete at a local than global level. Inserting small businesses into global markets requires intense efforts to meet standards and other demands, and only benefits a small proportion of MSEs. Improving access to and conditions in local and regional markets is more likely to have more widespread benefits more easily. A critical problem in many of these is a lack of demand – quite simply it is harder to sell when most of your customers are poor. Again, social protection can be a way of injecting cash and boosting demand in these local markets. [See footnote: 1] 

Another useful tool in this regard would be encouraging countries to use public procurement to support local businesses or encouraging countries or localities to develop trade and investment strategies that support MSEs and have a local and regional focus and which prevent enclave development.

Supply issues are also a major concern for small businesses. The supply constraints that most MSEs face can make it difficult for them to be inserted into GVC as they can’t provide the goods or services in sufficient quality or quantity to meet the demands of the buyer. Helping MSEs to meet these supply constraints requires comprehensive and proactive support, based on local needs and context. This is often inadequate or neglected in favour of size-blind policy reforms.

These three considerations are essential to making sure that the effects of GVC are positive for small businesses.

With these three considerations in mind, the role of Government can’t be ignored; government needs to play a proactive role if we’re going to see GVCs being more positive for MSEs. They need to play an important role in guiding national development and trade and investment strategies so that MSEs are able to benefit. They also need to play a role in supporting MSEs and facilitating discussions between big and small business to ensure that MSEs are not marginalised.

And so we come back to the voice of a small scale entrepreneur…

Those representing small-scale fishing to the government are the big companies, not us fishermen… and that’s when the fisherman loses. (Edmundo, Nicaragua)

For GVCs to work for small businesses there needs to be change around the three issues raised here. The role and contribution of MSEs in these systems needs to be valued and rewarded fairly. Power, risk and vulnerability need to be addressed and strategies to include them fairly need to consider issues of supply and demand. The benefits of GVCs may not be automatic; but with some work and careful consideration the benefits can be there.

——

[1] These can be beneficial because that injection of money into local markets is likely to stay within that local economy – through people buying local goods and services.  These transfers can stimulate and support the local economy during difficult times and also have significant multiplier effects – the cited Malawian study for example, found that for every $1 transferred; at least an extra $2 was generated within that community. (Davies, S & Davey, J. 2008. “A regional approach to estimating the importance of cash transfers on the market: the case of CTs in Malawi.”)

Using Public-Private Partnerships (PPPs) to channel UK aid

The use of public-private partnerships (PPPs) to deliver UK aid has been multiplying and looks set to increase in the coming years. All of these PPPs have some kind of arrangement between the public and private sector for the private sector to deliver some or all of the goods or services which traditionally fell under public sector responsibility, such as health care provision or building a road.

The one term PPP can refer to a wide range of different initiatives, some of which can have quite complex structures. For example, PPPs in international development have both a donor government such as the UK and a host government receiving UK aid as the public sector partners, but often the donor governments often channel their money indirectly to PPPs, via the World Bank, the Private Infrastructure Development Group and various other channels. There has also been a recent increase in sales of PPP equity, with over 75% of these transactions now being made through offshore infrastructure funds.

And when it comes to the private sector partner(s), they could be various different business sizes, structures or sectors; ranging from small-scale farmers, artisans or local entrepreneurs to UK companies and transnational corporations.

Given this diversity of the public sector, private sector and PPP structures, it is not possible to make any general assumptions about what the development impacts will be for all PPPs. This means that assumptions must be tested at the assessment, monitoring and evaluation stages for each PPP by all of the actors involved.

CAFOD’s new discussion paper picks out some of the key arguments that we have identified from the international debate about the advantages and disadvantages of using PPPs to deliver UK aid and then raises questions which we think will help the policy debate to better understand:

• The nature of the value that PPPs add to the delivery of the environmental and poverty reduction objectives of UK aid
• the ways in which the learning from the impact of these PPPs is informing policy and practice

The paper is the first in a series looking at the use of PPPs to deliver UK aid. CAFOD would like to hear your opinion about these questions. Are they the right questions to ask? Are there questions missing? What do you think are the added benefits of using PPPs to deliver aid? What has been your experience of applying the learning from implementation to new UK aid funded PPPs?

All comments are welcomed and can be sent to:

Beck Wallace, Lead Analyst on Extractive Industries & Corruption bwallace@cafod.org.uk

Will women always be a bit on the side for the World Bank?

At the London launch of the World Bank’s latest report on gender today, one of its contributors praised the report as being a departure from previous “just add women and stir” approaches to gender in development policy and practice.

 There is much to be welcomed in the new report, in particular recognising the importance of the economic empowerment of women and tackling the barriers in formal, informal, economic and social institutions that can prevent it.

But the report is short on action – a challenge that needs to be picked up by Bank staff, member countries and civil society to make sure that the good analysis gets put into practice.

As the title of this blog suggests, this doesn’t mean just doing a few extra things to help women, but instead truly shifting thinking, policy, practice and the incentives, measurements and targets that guide policies and reforms.

A good example of a case for reform are the Doing Business rankings of the World Bank. Back in 2008, these were criticized as being gender-blind. A lack of data and methodological limitations of constructing the rankings have meant that three years on, they remain that way – although we now have a side report on business women and the law. It doesn’t receive a fraction of the marketing support, media attention or policy influence that the main rankings do. Despite making up a significant majority of small-scale entrepreneurs in poor countries, women remain a bit on the side.

Does it matter if we are doing both sets of things – the ones for women and the ones for the “mainstream” business community? The answer lies in opportunity costs, an issue raised by one of the commentators at today’s launch.

This year’s gender report lays out a raft of things that should be done to help women become more successful in their economic life – they are only marginally touched upon by the Doing Business rankings. If the profile of these essential reforms is sidelined by gender-blind, conventional economic policy tools like the doing business rankings, governments simply cannot do their best – either for women or the economy at large – with the limited financial and human resources at their disposal.

The microentrepreneur: definitely marginalised

It’s perhaps not so controversial to say that small businesses in developing countries need more support, as CAFOD is doing in its current campaign.

The problem as always is when you get down to those devilish details.

Most of us, use the handy acronym “SME” when talking about this disparate group of businesses which are not multinationals. It’s an easy catch-all, but it means projects helping firms with two hundred employees can be counted as helping SMEs.

This is a problem, if you are trying to help the poorest and hardest to reach. A recent evaluation by the World Bank’s watchdog of the International Finance Corporation (the private sector lending arm of the Bank) found that it could not be sure that it fulfilled its mandate of reaching the poor and tackling poverty.

This is not a surprise, when the IFC’s own numbers show that seventy per cent of its loans to SMEs (by value) go to the “M”s – which it defines as those needing a loan of $2 million or less! The poor microentrepreneur is still out in the cold.

Anti-corruption: Parliamentary “wash-up” cleans up British business

The dying days of this parliament have seen the passing of a landmark new law to fight corruption. Yesterday the Bribery Act received Royal Assent during the so called pre-election “wash up” where the parties decide which bills will survive and which will fall. This ends a decade of thwarted attempts to reform our outdated bribery laws.

This is good news for the developing world. We know that bribery and corruption can have a devastating impact on poor countries. The U4 Anti-Corruption Resource Centre has estimated that 25 percent of African states’ GDP is lost to corruption each year.