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Leveraging Private Sector Participation for Development

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published
25 September 2015

With countries like Myanmar approaching critical points of no return in their economic and social development, financing and support mechanisms must promote sustainable and socially-responsible growth. “We are open for business – but not at all costs,” said Aung Tun Thet, the Economic Advisor to the President of the Republic of the Union of Myanmar, “We will dictate the kind of investment we want.”

The European Development Days 2015 (EDDs) brought together a wide range of actors to discuss the many tools and policies available to developing countries looking for financing alternatives. “In the past it was either you accept our prescription or you don’t get any funds, it’s no longer the case. We have the choice because it’s no longer through the banks – we can do it through trade, we can do it through partnerships,” said Aung.

The International Trade Centre

The International Trade Centre (ITC) is a joint agency of the World Trade Organization and the United Nations, bridging the gap between trade policy, and development and poverty reduction, specifically through working with small and medium sized enterprises (SMEs). Arancha Gonzalez, Executive Director of the ITC, participated on an EDDs panel, ‘Growth, jobs and partnership with business’, that featured a variety of voices, including the Minister of Commerce and Industry of Liberia, a representative from the United States Agency for International Development, and the Head of European Affairs at Italy’s largest power company. 

 

 

Gonzalez emphasised the critical role that inclusive economic growth plays in development. Trade is a critical element in enabling sustainable development in developing countries by facilitating productivity and innovation.

To encourage growth in developing countries, ITC supports SMEs to become competitive and internationalise opportunities in order to build production capacity and become competitive internationally. “[We] love the private sector, because they mean markets, they mean buyers, they mean value chains that - if run responsibly - can embed thousands, millions of SMEs into their supply chains,” she said.

The ITC therefore sees the private sector’s role as not only one of engagement with SMEs, but also as a partner in  upholding acceptable standards of labour and ensuring that vulnerable communities, including women,  are included to benefit from the opportunities of trade in a sustainable manner. “It has to be a growth that is compatible with our objective of making sure we transmit a planet to the future generations that is in good shape,” she said.

Gonzalez sees access to finance as an important element in ensuring that SMEs can reach markets. “If you have a great product but you don’t have credit, you cannot trade.” She believes that, in order for SMEs in developing countries to access credit, lenders must accept some risk. While some interventions may not be immediately successful, a degree of trial and error is necessary for identifying the most effective approaches. “There is no magic wand, there is no super button we can push to solve the problems of the bottom billion,” Gonzalez said.

The European Investment Bank

The European Investment Bank (EIB) also recognises the importance of engaging with higher-risk projects. As part of their investment strategy, the EIB has introduced the ‘Impact Financing Envelope’ specifically for projects in the ACP (African, Caribbean and Pacific) that present higher-risk situations. This €500 million fund focuses on projects that are, for example, in the agricultural sector or “in a fragile state which we would not normally operate in,” said Sabine Bernabè, Senior Economist at the EIB.

 

 

The EIB evaluates every project using its Results Measurement framework (ReM) to try to ensure that a positive impact is achieved. Bernabè participated on the ‘Data for development: improving our ability to leverage numbers’ panel, where she presented the basics of the ReM. According to EIB’s website, the ReM is based on three pillars: 

  1. An assessment of a project’s consistency with EIB mandate objectives as well as its contribution to EU priorities and country development objectives.
  2. A series of sector-specific standardized indicators to capture economic, social, environmental and institutional outcomes of the project.
  3. An assessment of the EIB additionality over market alternatives.

By considering country-specific development objectives in the first pillar of evaluation, the EIB attempts to focus on the country’s own priorities. The second pillar ensures that outcomes are measurable using indicators identified at the beginning of each project, for example, how many kilometres of a physical output were built.  The third pillar identifies what the EIB brings to the project that couldn’t have been supplied by the market. “For example, for [water pipeline projects], you need long-term financing, and most financing available in developing countries is very short term, so banks do not offer loans that are long enough,” explained Bernabè. 

This framework provides the EIB with a systematic way of measuring impact and ensuring project alignment with development goals, while circumventing time-consuming efforts to measure externalities. For example, concurrent public health campaigns would influence project goals such as reducing incidences of waterborne diseases. However, it would be difficult to quantify and monitor the campaign’s individual impact - especially when considering the number and scale of some of the projects with which the EIB is involved. Thus, the ReM allows decision makers at the EIB to efficiently monitor the effectiveness of their loans. 

Blending

Along with the need for innovative strategies to ensure impacts align with development policies, there is also a need for innovation in terms of the financing mechanisms themselves. Phillippe Orliange, Executive Director for Strategy, Partnership and Communication at the Agence Française de Développement (AFD), advocated at the EDDs for blending – a financing strategy that mixes grants and loans for funding development projects. Orliange participated on the panel ‘Building a caring world: a common challenge for Europe and emerging countries’.

 

 

Blending is a fairly recent tool in the financing arena. The European Commission introduced the mechanism in 2007 starting with the EU-Africa Infrastructure Trust Fund. Despite concerns that impact delivery may sometimes have been less than ideal, Orliange still supports its development. “It’s true that there are critics, it has been a bit of a setting up phase […] That should not prevent us from seeing how it can be done better because the development agenda demands us to do better,” he said.

Orliange sees blending as a key component in the future of development financing, particularly because of its ability to unlock other funding sources. European Union grants can, for example, be used to secure loans which would have otherwise been refused. “When you give €1 in donations, well you finance €1. When you put €1 in donations that could release €10 in loans, you now have €11 at your disposal,” he said. 

As we have all undoubtedly heard many times, 2015 represents a pivotal year in the future of international development. “It’s the best time to restructure the development agenda, and, in this redo, the subject of financing is obviously central,” said Orliange. 

Ensuring that development practitioners are aware of the financing mechanisms and trade supports available for achieving the SDGs will be crucial to ensuring the best fit between country’s individual development goals and financial and strategic support resources. “Now we say ‘ok we will look at, review your recommendations’. We will try to tailor it and customize it to fit our own situation, because each country has their own culture, own perspective on development,” concluded Aung.

For some more examples of the many different financing mechanisms available, we have listed a few links below that may be of interest:

European Commission and European External Action Service staff can also visit the capacity4dev.eu group Learning on Blending where they can post questions, launch discussions, upload project examples and share anything that may be of interest to colleagues working on blending. Please note you will need to be logged in with a validated EC/EEAS account in order to access this information.

 

This collaborative piece was drafted by Emma Brown with input from the EIB, AFD and ITC with support from the capacity4dev.eu Coordination Team. Teaser image copyright European Commission. 

DISCLAIMER: This information is provided in the interests of knowledge sharing and capacity development and should not be interpreted as the official view of the European Commission, or any other organisation.

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