Aid and the Private Sector – How to make sure people and development profits

“Busan is to do for the private sector what Accra did for civil society,” Donor, speaking at an event on the private sector in Europe.

It is perhaps no surprise that a key focus by members of the Working Party on Aid Effectiveness has been to try to bring the private sector “into the tent” through the front door of the Busan Outcome Document.

Busan comes just over a year after G20 leaders put their stamp on the Seoul Development Consensus for Shared Growth – essentially an updated version of the ”Washington Consensus” with a sprinkle of equity thrown in – and a year after Seoul convened the first ever B20, a forum of over 100 business leaders from G20 countries.

The G20 stamp is all over Busan, with a new vision for development that it is not merely “supported” but rather “driven by strong, sustainable and inclusive growth” (my emphasis - para 26b). Within this, it sees the private sector as the engine of that growth, “advancing innovation, creating wealth, income and jobs, mobilizing domestic resources, and in turn combating to poverty reduction” (para 30a). It leaves you wondering what states will be left to do.

For civil society, some of these issues – like the new vision for development – are deal-breakers in the current negotiations. And so it is not surprising that the role of the private sector in development has been a source of contentious and heated discussion in many of the sessions over the past few days and will continue to be so in the days to come. The Reality of Aid Network is focusing its 2012 report on “Aid and the Private Sector” and held a workshop on the issue at the Busan Civil Society Forum. The High Level Forum (HLF4) will itself host a Private Sector Forum, a side event and Thematic Session on Public Private Co-operation (TS, designed to build on the Paris Declaration (PD) and Accra Agenda for Action (AAA)), and a Building Block on the Private Sector (BBs, to build an agenda for beyond Busan).

Some of the contention around the issue could emanate from the fact that non-governmental organizations, despite strong efforts to be involved in the discussions, has been shut out from the process.  In all the other BBs and TSs it has a presence. But then so have Business Associations and Trade Unions.

So why now?

In the context of declining aid budgets, more emphasis is being placed on the “value for money” of existing aid resources, and how to catalyze Official Development Assistance (ODA) to generate additional development finance resources. Increasingly the focus is falling on innovative financing mechanisms, with aid as the “capital base” to leverage additional resources from the private sector or engage them in identifying solutions to development challenges.

To complement these investments donors are organizing new facilities and departments to blend ODA with funds raised on private capital markets.

Donors are also looking to new partnerships between the private sector, governments and civil society to deliver goods and services.

And so what are the key debates and reservations among civil society on this issue? There are five.

Firstly, whose private sector benefits? Civil society is not wholly opposed to aid being used to support the private sector. Most organizations recognize the potentially positive contributions the private sector can play in development. But for most CSOs (and the occasional donor!), the prerogative of aid is to support poverty reduction and supporting the realization of the rights of the most marginalized. This means that CSOs prioritize businesses indigenous to the country, micro, small and medium-sized enterprises (MSMEs), and social enterprises, like cooperatives as recipients of aid.

Secondly, for years the emphasis in development has been on creating an enabling environment for business. The World Bank’s (much criticized) flagship Doing Business Report ranks countries according to the ease of doing business. In practice, while it may encourage countries to streamline heavy bureaucratic processes that choke innovation, this has also led to excessive deregulation, flexibilization of work forces, and attacks on labour rights. For civil society, however, the focus is wrong. It is less a question of creating an enabling environment to develop the private sector (and stimulate investment), than creating an environment that enables the private sector (and investment) to contribute to development. This is a subtle difference, but important.

Thirdly, aid must demonstrate both financial and development additionality. CSOs are concerned that scarce ODA could be diverted from where there is a deficit - domestic public and private sector in partner countries – to where there is essentially a surplus - international corporations. This means that aid for the private sector must clearly demonstrate the following: 1) Financial additionality - Scarce public moneys must target the appropriate sectors and businesses that would otherwise not have the funds available; and 2) Development additionality – Investments of aid resources in the private sector must clearly work towards achieving the Millennium Development Goals and eradicating poverty.

Fourthly, aid to the private sector must ensure positive development outcomes. To date, most indicators for measuring the development impacts of the private sector are fairly facile. It is an issue that bilateral and multilateral donors are struggling with. Too often the number of jobs created is the proxy. What civil society is demanding is a system that both measures short term results, but that also values longer term impacts and outcomes – like decent work, job security, or equal work for equal pay.  Jobs provide an income. Decent work provides a livelihood.

Finally, civil society is also demanding that the private sector must follow a set of principles that guide their practice as development actors. And by this, we don’t mean corporate social responsibility (CSR). CSR can, if it is at the heart of an organization’s core business model, generate sustainable business practices; but more often than not it is just window dressing. The challenge for the private sector, as Penny Davies, the Policy Advisor at Diakonia Sweden noted in her presentation at the Reality of Aid workshop, is that when they engage in aid, they must abide by aid effectiveness principles beyond their own voluntary set of standards. Civil society has the Istanbul Principles. Why shouldn’t business have an equivalent?

Will Busan do for Business what Accra did for civil society? Yes. But unfortunately it will be “Business as usual”.

Fraser Reilly-King, Canadian Council for International Co-operation, and Jeroen Kwakkenbos, European Network on Debt and Development. Both are members of the International Coordinating Committee of the Reality of Aid Network.