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New EU Communication on the Private Sector

Commission Européenne - MEMO/14/345   13/05/2014

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European Commission

MEMO

Brussels, 13 May 2014

New EU Communication on the Private Sector

Why EU development cooperation focuses on the private sector

Creating growth and job opportunities are a crucial part of development assistance, as developing countries are in urgent need of decent employment and income generation opportunities, whilst at the same time having to cope with a fast-growing, young population.

In many developing countries, the expansion of the private sector, particularly micro-, small and medium-sized enterprises (MSMEs) is a powerful engine of economic growth and the main source of job creation. The private sector provides some 90 percent of jobs in developing countries, making it an essential partner in the fight against poverty. It is also needed as an investor in sustainable agricultural production if the world is to meet the challenge of feeding 9 billion people by 2050. And through innovation and investment in low-carbon and resource-efficient solutions, it will have a major role to play in the transformation towards an inclusive green economy.

Yet, the private sector in developing countries often faces a formidable range of obstacles compared to their rivals in other emerging markets: widespread and rising informality, lack of access to finance especially for the “missing middle” of medium-size enterprises, weak inter-firm linkages and regional economic integration, lack of export competitiveness, complexity of registering business and taxation, infrastructure shortages, a spluttering electricity supply, legal uncertainty and corruption.

How the EU supports private sector development

The European Commission works closely with governments in developing countries to help them develop and implement policies in support of private sector development. It provides substantial grant funding across a wide range of activities, including regulatory reforms, capacity-building (eg providing training and sharing expertise) and the provision of business development services, with a particular focus on strengthening local micro, small and medium-sized enterprises.

Over the last decade, support by the Commission for private sector development has averaged €350 million per year. This, combined with development assistance and private investment from Member States, makes the EU a key player in supporting local private sector development in partner countries.

EU assistance covers a wide range of areas in the private sector, such as support in creating an enabling business environment. A better business climate helps to promote efficient domestic investment, attract foreign direct investment and increase productivity, thereby raising income and employment opportunities.

Assistance is given to reduce administrative and regulatory barriers for business, provide support to relevant ministries to help them trade, and review existing legislation and policies.

Support is also provided for enterprise development through services such as training, advice and information services, which aim to improve technical and managerial skills and encourage the transfer of know-how and technologies. EU projects and programmes also involve support for professional institutions, such as chambers of commerce, industrial federations or SME associations, as well as the promotion of reliable local financial institutions.

Other areas of support include the promotion of investment and co-operation activities among businesses, and the facilitation of access to financial markets. An important focus is also put on support for microfinance and financial inclusion.

Approximately 50% of overall EU support to Private Sector Development in developing countries is granted to partner countries on the African continent, including Sub-Saharan Africa and Northern Africa (€1.2 billion between 2004 and 2010).

Working with partners

In implementing its support to private sector, the EU works with international organisations (including European Investment Bank, or EIB, UN Agencies, etc), public institutions from partner countries (e.g. ministries), private companies (i.e. consultancies), civil society organisations (including professional associations, chambers of commerce and industry), EU member states and their development agencies, and with universities and research institutes.

The EU is also increasingly looking at the European and local private sector as partner in the formulation and implementation of its development assistance. Possible forms of private sector engagement in development cooperation can include public-private policy dialogue for the identification of priorities in the reform of domestic business environments, multi-stakeholder partnerships for development around skills development or shared infrastructure, private-public partnerships for the private provision of public infrastructure services, or the integration of private companies in blending projects of eligible financing institutions. Such forms of collaboration have to be justified on grounds of cost-effectiveness and should be governed by mutual accountability and shared interests.

In addition, substantial financing in the form of senior loans, credit lines and equity investment are being provided to the private sector in developing countries through the EU Regional Financing Facilities and the ACP Investment Facility, a revolving fund managed by the European Investment Bank.

Blending

A key way that the EU to implement private sector development objectives and mobilise private financing for development is through blending - combining EU grants with other public and private sector resources, such as loans and equity, in order to leverage additional non-grant financing.

Since 2007, the European Commission, together with Member States, has set up eight regional blending facilities, covering the entire region of EU external cooperation. €1.6 billion grants from the EU budget, the European Development Fund (EDF) and Member States have financed more than 200 operations of EU blending mechanisms.

EU grant contributions to individual projects have leveraged more than €16 billion of loans by eligible finance institutions, unlocking project financing of at least €42 billion, in line with EU policy objectives.

Private sector and energy

If businesses want to expand, they will need energy. This is why the European Commission channels its support to fill in the gaps for energy infrastructure and off grid solutions that allows people to benefit of sustainable energy services.

Through innovative financial schemes as well as microfinance, the EU is leading the way in channelling private sector investment into the energy sector in the developing world. The private sector is thus a key player in this holistic approach; and the EU and Member States will look to mobilise additional support of up to several hundred million euros to support concrete new investments in sustainable energy for developing countries – working with financing institutions and the private sector to create a leverage effect to multiply this amount many times over.

Private sector and agriculture

Developing a viable and vibrant agriculture sector presents a significant market opportunity for companies, especially small and family farmers, who are the largest private investors in agriculture. Further integration into the agricultural economy provides the possibility for rural and urban farming households, as well as agribusinesses, to earn a living to increase wealth and prosperity.

The World Bank estimates that by 2030 the total volume of agriculture and agribusiness will be USD 1 trillion, from USD 313 billion in 2010.

The EU’s Work on Aid for Trade

The EU (and its Member States) is the world's largest provider of Aid for Trade (AfT) and a longstanding provider of development assistance to support increased international and regional trade.

Africa accounts for the largest share of AfT from the EU and its Member States: the latest estimations indicate that commitments amounted to about €4.7 billion, corresponding to 43% of total AfT in 2012 - the best ever year for EU and Member States Aid for Trade, totalling more than €11 billion worldwide.

Examples of EU cooperation projects in the private sector

In Paraguay, an EU-funded Economic Integration Programme supported the creation of a Single Window for Exports, which reduced the total time for administrative procedures needed to export meat from 40 days to 50 minutes and boosted the number of enterprises in Paraguay oriented to exports by 500% since 2004, resulting in a significant increase in exports.

In Tunisia the microfinance industry was underdeveloped, with only two Financial Services Providers serving around 300, 000 clients. Thanks to policy dialogue with the EU, and as part of the joint donor budget support operations launched before the revolution, in 2011 the government reformed the legal and regulatory framework for the national microfinance industry in line with best international practice to allow new operators to serve the unmet demand (estimated at 700,000 clients) for microfinance from vulnerable groups.

The Enterprise Growth Programme and Business Advisory Services (EGP-BAS) provides consultancy services to SMEs from Eastern Partnership countries, (Azerbaijan, Belarus, Georgia, Moldova and Ukraine), helping them to develop and improve their businesses. To date, more than 600 SMEs have benefited from this support, with the outstanding result that 90 % of them increased their turnover by an average of 43 % after one year.

In Tanzania, the Trade and Agriculture Support Programme contributed to improve quality standards and increase productivity in the tea and coffee value chains by 50%. Besides increased access to international markets, net income of smallholder farmers was increased by at least 20%, with a direct impact on household assets, women’s empowerment, better children’s education and improved food security.


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