A European blueprint for a stronger role of the private sector in development cooperation

Thursday, May 15, 2014 - 15:49

By Javier Pereira, Europe Advocacy Coordinator 

The new European Commission Communication on the private sector ‑ “A stronger role of the Private Sector in achieving inclusive and sustainable growth in developing countries” – is disappointing. Once again a policy document on the private sector fails to recognize the crucial distinctions between different kinds of “private sector.” The key distinction glossed over in this case is between the important process of building up the domestic private sector as a vital part of economic transformation, and the creation of financial and other incentives designed to attract foreign investors.

In addition, the Communication seems basically blind to the development cooperation effectiveness principles, starting with the partner counties’ leadership and ownership of development processes. The Communication ignores that the business sector is now globally seen as an “important actor in development cooperation” in its own right ‑ not just a partner in delivering that cooperation. And it is as a development actor that the sector is expected to comply with and reinforce the effectiveness principles. Finally, the Communication states what the EU will do in terms of its aid programmes, but says very little about the processes to make sure such plans align fully with national priorities.

Despite mixing different things in the same bowl, there is a relatively good focus up front on supporting the local private sector in developing countries), with a special emphasis on women, youth and human rights. And the differentiated approach it follows for supporting the domestic private sector considering the different size (and hence, needs) of firms and the differentiated social and economic needs & opportunities of countries (fragile states, MICs,…) is very welcome indeed. The framework also includes a helpful set of criteria for supporting private sector actors, which covers key questions that will need to be asked – including development impact, additionally, adherence to social, environmental and fiscal standards.

But what is left more to the imagination of the reader is why use aid to support the private sector at all? Is it not in order to support countries’ economies to diversify and move into value addition and manufacturing? The private sector is key here since it can offer not just decent jobs but also taxes and innovation. But the Communication seems to miss the bigger transformation picture, as well as avoiding the question of tax revenues. It is instead – apparently - stuck on jobs and transforming the informal sector into the formal, but does not go much further. 

Conversely, the strategic framework is to strengthen the role of the private sector, in terms of building it, using it to deliver government aid and other services, and leveraging financing from it. But disappointingly, while the EU clearly engages in a multitude of policy areas that touch upon economic transformation and the different roles of the private sector, the strategic framework appears to focus solely on EU aid, which makes this a huge lost opportunity.

The framework sets out a number of areas where support is to be focused. These include:

  • creating a business environment conducive to private sector initiative, recognising the need for ‘ownership by governments’: Though support is to be based on government demand alone but also on proper assessment of a country’s ‘latent comparative advantage’. Clearly, all efforts will need to be made to ensure this does not translate into policy interference on behalf of the EU.
  • women as entrepreneurs and workers: though the emphasis is on work rather than decent work or unpaid work, neither of which are mentioned here.
  • access to finance and deepening financial inclusion: while it is often difficult for the private sector in developing countries to access finance, the Communication fails to  acknowledge that donors have thus far struggled to find a way to deal with finance for multiple small enterprises, while entrusting this to banks is not an effective option. Nor does the Communication propose alternative solutions such as supporting or building national development finance institutions that can effectively bring finance to local companies.

The discussion of the conditions for private sector engagement is also unsatisfying. The Communication says ‘All companies investing or operating in developing countries should ensure that they have policies in place to prevent bribery and tax evasion, and systems to assess risks and mitigate potential reverse impacts related to human rights, labour, environmental protection and disaster related aspects of their operations and value chains.’ But at the end of the day, this remains ‘soft’ and omits the critical question of how to ensure that FDI stays in the country (see the recent report from the European Parliament showing 90% of FDI flows rapidly back out of the countries!).

Unsurprisingly, there is much talk of leveraging and blending, something of an EC favourite despite outstanding concerns around transparency and accountability for development results. But most alarmingly, having said lots of good things about the importance of the evidence base, poverty and human rights focus and complementarity with aid effectiveness principles, the Communication goes on to talk of facilitating PPPs, including in the provision of basic services such as access to sustainable and affordable energy, water, healthcare and education, as well as agriculture and nutrition especially in rural areas. Despite assurances that this is to benefit women and the most marginalised, the reality is that making poor people pay for essential services increases their marginalisation further.