Aid and the private sector – who benefits?

A leading international aid network’s latest biennial report reveals that the increasing role of the private sector in the global aid industry is doing little to benefit the poor – instead, it is the private sector businesses, aided by Northern governments, who reap profit from their involvement in aid.

The Reality of Aid Network’s report, Aid and the Private Sector: Catalysing Poverty Reduction and Development?, is written by authors from civil society organisations worldwide whose research draws on knowledge and expertise from aid agencies, academis, community-based organisations and governments. It features evidence from across the world that demonstrates the goal of poverty reduction is often an afterthought when it comes to private sector involvement in aid.

Among other issues, the report addresses the role of “development finance institutions” (DFIs), state-based institutions created to blend overseas development assistance (ODA) with capital and initiatives from the private sector.

Reality of Aid Chairperson, Jorge Balbis, said: “The role of the private sector in aid is rapidly increasing. In these times of financial crisis, Northern governments are increasingly looking to private businesses to boost their aid obligations.

“But there are serious questions as to whether this involvement is creating development outcomes that reduce poverty and strengthen the capacity of poor and vulnerable populations to claim their rights. In fact, much of our research point to the opposite – poor people are not benefitting, while already profitable corporate businesses are.”

He went on: “Reconciling private sector interests with poverty reduction is difficult. And at the moment it is not happening.”

While poverty reduction is the intended mandate for most DFIs, according to an evaluation of the World Bank’s IFC investment portfolio “fewer than half of the projects reviewed included evidence of poverty and distributional aspects in project objectives, targeting of interventions, characteristics of beneficiaries, or tracking of impacts”.

The report, comprised of 30 contributions revealing experiences and insights from both aid-giving and aid-recipient countries, questions whether DFIs are suitable to tackle poverty and inequality. It draws in evidence from DFIs including those run by Belgium, Finland and Sweden.

Reality of Aid recognizes that the private sector is a necessary component of development. But it believes the deployment of aid for private sector development must focus on strengthening the economic rights of people living in poverty.

As this latest report demonstrates, too often the focus of donors has been on large-scale investments or infrastructure development to increase economic growth. And too often these interventions target the formal economy instead of addressing the realities of significant informal economies.