Examination of Witnesses (Questions 62
- 79)
TUESDAY 21 MARCH 2006
MS SHARON
WHITE, MR
WILLIAM KINGSMILL,
MR GAVIN
MCGILLIVRAY
AND MR
RICHARD BOULTER
Q62 Chairman: Good morning. Thank
you very much for coming in. I wonder if you could briefly introduce
your team before we start.
Ms White: Thank you very much
indeed. I am Sharon White and I am the Director of Policy at DFID.
On my right is Richard Boulter who heads our enterprise development
advisers within the Department. On my left is William Kingsmill
who was Head of our Nigeria office and who is now heading our
growth and investment work in the Department. Furthest to my left
is Gavin McGillivray who heads our International Financial Institutions
Department which also covers CDC as well as private sector infrastructure.
Q63 Chairman: Thank you very much.
You will appreciate that the Committee is just now getting into
a report on the role of private sector development as a means
of alleviating and resolving poverty and we are approaching this
in a very genuinely open-minded way. We want to know how it can
do it and what is being done to make it happen and obviously we
are interested in what you are doing. I know that Kofi Annan has
made a comment to the effect that private sector development and
the growth of the private sector in poor countries is essential
to the alleviation of poverty. The OECD Development Assistance
Committee's suggestion is that "Instead of regarding private
sector development as just one of a number of tools, it should
be regarded as a major, if not central, part of country assistance
that donors provide". Given the terms of the International
Development Act and the focus on poverty, do you think that these
two things are compatible?
Ms White: The answer is we do.
DFID has recognised fairly recently the importance of the private
sector to poverty reduction and to the Millennium Development
Goals (MDGs). I think it is fair to say that it is probably in
the last five or so years that this has risen in prominence. Part
of the concern around poverty reduction strategies was their early
focus on social sectors, on health and education primarily, and
their under emphasis on growth and the private sector. As we look,
in the light of the 2005 G8 commitments, at what has driven growth
in Asia and at how we can replicate that in Africa, I think we
are becoming more and more seized of the importance of growth
and of the private sector. Also important to us is the fact that
the poor are the private sector, that nine in 10 poor people in
work in developing countries are privately occupied, and so we
cannot support development effectively without a strong focus
on the private sector. That said, it is still a relatively small
part of our work, but it will take on growing importance and I
think you should see that in the White Paper that the Secretary
of State will launch this summer.
Q64 Chairman: That obviously is something
that we are looking forward to. As you know, the Committee has
recently returned from a trip to a number of places in Africa.
If you take what we learned in Malawi—and you are quite
right, the poor are the private sector—we were constantly
told they were so poor they had no capacity to buy anything and
therefore there was no ability to stimulate a private sector to
service people who had no purchasing power, it was kind of locked
into that. What do you think of the policies that you can pursue
which will actually break the way out of that and start to enable
poverty to be reduced by actually enabling those people to do
something that generates economic activity and subsequently growth
that will reduce their poverty? Have you got ideas and experience?
Ms White: We think we want to
take a multi-pronged approach and for us the G8 commitments from
last year are a key part of this. When we look at the financial
commitment from last year, I think we are clear that the extra
£50 billion of ODA that we expect between now and 2010 needs
to be as much focused around infrastructure, transport, the key
enabling environment for growth, as on education, health and basic
public services. We are also working tremendously hard, although
with less success than we would have liked, on the trade environment.
Creating bigger markets for the produce of the poor is absolutely
vital to this. DFID's approach on the private sector, as I am
sure you are beginning to see from your country visits to Malawi,
Sierra Leone and Mozambique, has been very focused on small scale
microfinance. This has had important benefits, it saw lots of
women entrepreneurs benefiting, but at the same time we have learnt
the importance of going rather more upstream, supporting the enabling
environment for business, working with governments to cut red
tape, reduce regulation, improve competition and so on both at
the macro level of trying to make sure we get the aid flows through,
working in the right direction on infrastructure as well as the
social sectors, but also working more upstream on a policy environment
with the private sector.
Mr Boulter: On Malawi, where we
used to concentrate on microfinance, we now tend to promote what
is called access to finance, so we are talking about things like
savings and insurance and pensions to some extent. In Malawi we
have a programme with what is called the Opportunity International
Bank of Malawi that is savings driven. There are a lot of poor
people coming to that bank to bank their savings. Then, as Sharon
says, the investment climate is really important. One of the things
we have learnt in the last two years is that we can put time in
to what we call private-public sector dialogue and getting those
two sectors together. There is something called a National Action
Group in Malawi that is bringing those two sectors together and
they have been focusing on the importance of the investment climate.
Q65 John Bercow: Looking at the enabling
environment, Sharon, as you have just described it, presumably
it includes looking at countries in which property rights are
not secure or indeed non-existent. It would therefore be helpful
if you could give us some indication of what DFID is doing in
the countries where that problem is especially acute and on what
scale. I recently asked the Secretary of State about Hernando
de Soto's work and I got, in fairness, a very constructive reply
which obviously had involved officials thinking about the work
and offering me a summary of their views on it. That was useful
in terms of a one-to-one exchange and reactively I suppose it
was certainly better than getting no reply, but I do not have
any very strong sense personally that DFID is all that seized
by the property rights agenda, it seems to be a very, very small
scale feature of your work or almost a very belated afterthought
and it seems to me to be rather central. Secondly, who amongst
your team advising on these matters has any experience of establishing
and running a successful business? Do you use anybody from the
private sector who, as opposed to merely theorising about the
subject or displaying some competence in the field, has actually
done it?
Ms White: I think both your questions
relate to the fact that this is a relatively new area for DFID
and my colleagues can talk to you in more detail about how far
we have been trying to get in experts who are much closer to the
coal face in terms of setting up businesses and so on. As I am
sure the Secretary of State mentioned, we are becoming more conscious
of the importance of property rights in terms of unlocking private
sector development. The extent of the issue varies by country.
In Peru where 90% of businesses do not have security of tenure
it is an enormous problem. In contrast to Vietnam where new security
of tenure, following the fall of communism, had a tremendous impact
on the private sector climate. In answer to your question as to
whether we are taking a systematic approach across the board to
this, I think there are clearly gaps. Richard is head of our enterprise
profession. We have 25 enterprise or business advisers across
the Department. That is a big increase from where we stood five
or six years ago. That gives you a demonstration of the fact that
this is still a relatively under-explored area for us. We are
trying to make stronger links to the private sector. Gavin was
recruited from the private sector. We have actively tried to recruit
the skills that we do not have internally. Perhaps Gavin can also
talk about the links we are trying to forge with people who run
businesses.
Mr McGillivray: Having a few people
in-house with private sector experience is helpful but so is using
the right people outside of DFID. We have got a very interesting
new model with CDC and Actis, the emerging African Infrastructure
Fund, and InfraCo. In each, we have our money focused on certain
objectives, so there is a framework which defines how it will
be used to achieve development ends. We recruit through a competitive
process a private entrepreneurial entity to run that money, so
we get this entrepreneurial drive behind our objectives and it
is really producing astonishingly good results. In our private
sector infrastructure programme we have spent about £100
million over the last five years and we reckon we have precipitated
through that some $1.5 billion of private and DFI investment into
markets which it otherwise would not have gone into. More than
90% of that has gone into Africa.
John Bercow: I personally regard this
as being of the essence and therefore I wonder if it is possible
to have a note to members of the Committee describing in a little
more detail the sorts of progress to which you have just referred.
Is it simply a matter of capacity that has so far prevented DFID
making a significant contribution in this field? If that is all
it is and you are trying to address that within the resources
available then that is very reassuring. Can you allay my anxiety
that there is something else involved, that DFID is so culturally
sensitive to the norms and traditions and cultural practices in
many developing countries that it is free to offer this advice
for fear of being accused of neocolonialism and so on, because
if that were the attitude it would be terribly disappointing?
The reality of the matter is that this can make an enormous difference.
We are not afraid to offer gender advice and that is absolutely
right, I applaud DFID for doing that. I have never engaged in
a cheapskate tax on DFID's gender advice approach, I think that
makes a great deal of sense, but if DFID is prepared to do that
because we are at a certain stage and we feel that we should encourage
developing countries similarly to respect women and to expand
opportunities and so on, surely if we know that capitalism works,
the fact is it has won the arguments around the world, why not
advise developing countries to have property rights, a transparent
banking system and what I call the institutional legal infrastructure
for competitive markets?
Q66 Chairman: On the specific point
that John has made about a note on what is happening, I think
that would be helpful[1].
We appreciate that you are engaged in it but, as you have said
yourself, Sharon, it is a relatively new area and I think we are
keen that we should see more results. I do not know whether you
want to answer that point specifically.
Mr Kingsmill: We are vitally interested
in property rights. In Nigeria, for example, we were supporting
the renewal of the land registry because we saw how important
in Lagos state land is as a fundamental building block of the
market economy and the Nigerians were keen for us to do that,
but we have to be aware that formal land registry systems are
hugely expensive and that many very poor people, the nine out
of 10 people who we were talking about, are going to depend on
informal systems and crafting those is very difficult and it does
have to work with the traditional systems. Governments have very
strong views on land tenure. Around 20 years ago you would have
found ODA and ODM doing a lot of work on establishing new systems
of land tenure and we have been eased out of that business because
it is highly politicised. In all of our programmes there is an
awareness of property rights and not only establishing land as
the most important aspect for all poor people but to establish
dispute resolution mechanisms as well, which is something we were
also doing in Nigeria, to make sure that the people have access.
These are vitally important to us. Although these areas do not
cost mega billions, they are very labour intensive and I think
it is quite right to point out that DFID is constrained in terms
of its labour resources. We do focus on property rights very significantly.
Q67 Hugh Bayley: Has the Department
considered whether it could establish a wing within the Department
that works on commercial terms, that provides advice, that is
mainstream to DFID's own mission on rural livelihood development,
improving governance and so on, but on a consultancy basis to
middle income countries? We withdrew from Latin America because
the priority was low income countries. If you look at this Committee's
report[2],
in India we suggested that perhaps in 10 years' time we should
not be a donor to a middle income country with a massive space
programme but that if they really valued the expertise we have
in rural livelihoods perhaps they should buy the services. If
we were to develop that way of marketing part of a package of
DFID services, do you think it would build more of a private sector
culture within the Department and less of a social work one?
Ms White: It is a very interesting
question because of the financial context of the Comprehensive
Spending Review that we are going through with the Treasury at
the moment is that DFID's budget with a 0.7 target means that
we are about to triple our budget between now and 2015 from about
£5 billion to around £15 billion with around the same
staff. That means that questions about where we put our resourcing
and particularly how much priority we give to middle income countries
is a live debate at the moment both in terms of cash resource
and in terms of technical assistance. One of the developments
for us over the next year will be a sense of what DFID's business
model looks like in middle income countries. We have not considered
precisely your proposal of whether part of the reconfiguration
of our business model might be a fee-based service with middle
income countries. I know the Bank operates to some extent on that
basis, but it is something that we will definitely take away to
consider as part of the Comprehensive Spending Review.
Mr McGillivray: On middle income
countries, one of the instruments we have is the international
financial institutions: the World Bank, the Asian Development
Bank, the InterAmerican Development Bank, which we are shareholders
in and which we fund. We are keen for them to continue to operate
in middle income countries and to focus there on poverty reduction.
Although our bilateral programme is concentrating on lower income
countries, we have this considerable ability to work in middle
income countries through the mutlilaterals.
Q68 John Battle: We looked at the
CDC a while ago in this Committee. I think there was then quite
a major restructuring in 2004 of the Commonwealth Development
Corporation and the setting up of Actis and Aureos and a refocusing
of CDC rather than on large power plants in Latin America to try
and see how that tied in with a strategy to tackle poverty. CDC
is now described as the emerging markets fund investment company.
Under the Memorandum of Understanding with the Department, although
it is government owned, there is an idea that there should be
no interference or intervention by DFID in CDC's activities. I
can see that from the structural point of view. How do you see
CDC fitting into DFID's overall model of development?
Mr McGillivray: Where it fits
in is in terms of pioneering investment. I think you will have
seen in this booklet here[3]
the emphasis on building the enabling environment, that is laws,
regulations, policies, institutions and infrastructure, but in
many countries it is a generational challenge to get all those
things better. In the meantime we see a strong role for entities
like CDC and also the IFC[4]
coming in and going where the private sector would not of itself
go, bringing in private sector partners with it and showing that
it can be done, that you can invest decently and profitably in
these difficult environments. That is a powerful impetus to others
to follow suit. Thus far—and fingers crossed—in our
view the Actis CDC model is working extremely well. CDC remains
with the great bulk of its capital focused on the poorer countries
and with a far greater focus than many other development finance
institutions, it is making profits and it is bringing in other
money alongside it. It seems to be going very well.
Q69 John Battle: Do you see CDC as
a thin wire that pulls in the larger rope of further investment
when others are reluctant to go? Is that what it adds to it?
Mr McGillivray: Yes. That was
the principal impetus behind the restructuring. CDC has always
done good work. It has always invested decently and created direct
employment exports, foreign exchange and set standards, which
is very important, and it continues to do that, but the new model
now has far greater ability to mobilise other money alongside
it.
Q70 John Battle: Is it just a catalyst?
Do you not see it having a role in the future? The private sector
will go where it has been led by CDC. What do you see as the future
for CDC in the long term?
Mr McGillivray: I think within
our lifetimes there will still be a strong role for pioneering
investment because the frontier keeps on advancing. This is the
difficult judgment that we have to make with CDC, the IFC and
the EBRD[5],
that these large financial institutions that invest in private
companies keep on moving out to invest in the geographical areas,
the sectors and the instruments where the private sector is not
going in of its own accord. There is a risk that organisations
become comfortable. They like to do business in easy places just
like everybody else. So constantly keeping at the frontier and
investing in that frontier is how we would see it going.
Q71 Mr Hunt: I set up my own business.
I was interested to hear you talking about Asia. What a lot of
people who have looked at the economic success of Asia say is
that the focus on private sector developments in Asia has been
amongst the growth of small businesses rather than big businesses
and particularly agricultural businesses. A lot of people date
the rise in China's success back to the moment when the communes
were disbanded and farm holders were allowed to have their own
small holdings. The question I have not been able to understand
is how this relates to extreme poverty. How possible is it for
people who are earning less than a dollar a day to set up and
run their own businesses? People like Jeffrey Sachs, for example,
say it just is not possible when you are so desperate at that
level, that you cannot save enough to get any kind of business
going, but then there are other perhaps more hardheaded US economists
who say anyone can start up a business, you have just got to create
the right environment and extreme poverty should not be a bar
to that. I just wondered what you feel about that. Are we talking
about creating an environment where effectively the middle classes
in African countries can set up businesses which hopefully benefit
everyone or are we talking about an environment where everyone
can set up a business no matter what the poverty?
Ms White: Our take on this is
probably the latter. If we look at the pattern of business, particularly
if we look at the informal economy in Africa, people on very low
incomes are doing very small scale trading, whether it is selling
bars of soap at roadsides or something else. We are not looking
to middle class-led trickle down. One issue for us is how to replicate
some of the agricultural productivity gains experienced in China,
in India and with the Green revolution in Africa where some of
the physical constraints are much more binding. How do we go beyond
small scale trades which are enough to get by but not enough to
fund school fees and the other basics of life where donor resourcing
still needs to come through? We have a new agricultural strategy
which is trying to get into some of these barriers. Our approach
is to try from the bottom more broadly, because the numbers of
poor is so concentrated at the bottom end, but believing that
we can raise incomes through private sector enterprenuerism right
the way through the sector.
Mr Boulter: You are absolutely
right to refer to China because that is an example where it unleashed
the potential of farmers once it gave them the right to sell their
own produce. I think a better country to look at is Bangladesh,
where for many years particularly Bangladeshi organisations have
been working in the microfinance sector and they have been asking
if that covers enough poor people and they defined it in terms
of helping the ultra poor. We should all start from the basis
that every poor person wants to be economically active and so
in that sense you should never marginalise them and say they can
never be economically active, but then you have to grasp what
microfinance can do and cannot do and often you end up concentrating
on people being economically active part time, so you try and
introduce ways to make the markets much more accessible to them.
In some ways DFID is very much working at the base of the pyramid
to that extent.
Chairman: Africa is rich in resources.
How those resources are distributed is an issue that Hugh Bayley
wants to raise.
Q72 Hugh Bayley: The principle behind
the Extractive Industries Transparency Initiative (EITI) is a
great principle. Would you agree that the value of the initiative
is diluted by its voluntary nature, that there are not so many
countries signed up as you would like to see? Has DFID looked
at the possibility of creating a statutory scheme and if so, how
could that work?
Ms White: We do not feel that
it is made less effective by being voluntary. Given the phase
of where we are in the stage of the initiative, being voluntary
has been very useful in terms of trying to get the buy-in in what
is a very complicated multi-stakeholder setup. Two years ago we
were at the stage with the EITI of hoping that one or two key
countries might come on board and since then we have had a domino
effect. I think Nigeria and Azerbaijan are now at the stage of
having quite substantive EITI reports. Those of us who have been
fairly close to it have been rather pleased that it has taken
off in the way it has. Some have been calling on DFID to investigate
the options of having a more mandatory basis and we have looked
into this. I think one of the concerns we would have with a listings
basis is that you would lose something like 70/75% of revenues
which are due to state-owned desk enterprises if you are basically
only able to lock in companies who are listed in the New York
or London Stock Exchange. My sense is that in two or three years'
time, once we have got a broader stock of countries absolutely
signed up, that may be the time to revisit this question, but
for now, given it is quite a fragile process, I think being voluntary
has been very useful.
Q73 Hugh Bayley: DFID has announced
that at some time fairly soon it will give up its stewardship
of the Secretariat. Do you think there has yet been sufficient
buy-in from other donors? Is it taken seriously enough by the
Americans, the Japanese, the Dutch and others? Who is likely to
take over the helm? Will they be as tough and forward looking
as DFID has been?
Ms White: That is a very good
question. We have always hoped that we would reach the stage with
the initiative where in a sense we could transfer the whole of
the co-ordination role into the international system because there
are pros and cons for it being closely associated with the UK
even though it is an international Secretariat. We are hoping
that over the next couple of years we will be in a position where
the rest of the international community has embraced the initiative
to take this on board and we have been discussing this with the
Bank and the IMF and others, but we will not do that until we
are happy and confident that the initiative will continue to run
effectively. So we are not looking to transfer responsibility
because of efficiency savings or other reasons but because we
believe there will be a stronger business case for this being
parked elsewhere in the international community.
Q74 Chairman: So the near future
is elastic?
Ms White: We hope that is sooner
rather than later, but we have been having this discussion for
18 months.
Q75 Ann McKechin: In your written
submission[6]
you suggest that the initiative could be extended to other sectors.
Could you confirm whether that is being actively pursued and if
so, which sectors do you think could benefit? How do you see the
partnership that you have built up between private companies and
DFID as a result of the initiative working in the future? Perhaps
you could give some indication of what work you have done with
private companies about labour rights and also their work in terms
of sustaining economic development in the countries in which they
are operating. I have noticed in our discussions this morning
there has not been terribly much emphasis on the creation of employment
as a priority, it seemed to be mentioned as a byproduct. I would
be interested to hear about what targets or goals you have in
connection with how much is invested and how many jobs you expect
to come out at the other end.
Ms White: We are actively considering
how we can extend the principles of the EITI to other sectors.
The analysis we are doing at the moment is to look at the sectors
where we see the strongest governance and corruption issues and
they include procurement generally but also construction and arms.
We are actively looking at this in connection with the White Paper.
One of the areas the Secretary of State has flagged that we will
be looking to say something more concrete on in July when the
White Paper is announced is what the future of the EITI looks
like and how that gets expanded.
Mr Kingsmill: We entirely share
your view that growth is about jobs and that is how our partners
see it in developing countries. They do not talk to us about growth
strategies, they want to talk about an employment strategy as
they want jobs for people. That is why growth matters to them
and why it matters that we find new models of growth that are
sustainable, because there is a desperate need for jobs. The reality
is that, whilst a lot of jobs are being created in many countries,
the vast majority of people are still self-employed and they are
going to be for some time to come, and they run very small different
businesses, each household is a business and surviving in the
informal sector and that is how it will be for some time. That
said, we are very keen on promoting decent jobs and making sure
that where investment happens the investors are aware of their
obligations. We know through our partnership in the ethical trade
initiative that in fact at the UK end there is a great deal of
interest in investors in businesses promoting proper adherence
to labour rights and proper employment. We work with the Fairtrade
Foundation also. There is a growing interest in the British commercial
sector in promoting proper labour practices.
Chairman: The other issue we have seen
is that even in the most successful countries in Africa they are
still struggling to find enough of a range of dynamics in the
economy and in services as well.
Q76 Richard Burden: Obviously FinMark
is meant to be a market catalyst to try to develop the financial
sector. I would like to get your sense of how you feel that has
performed in practice and the scope for replication elsewhere.
Mr Boulter: I think the FinMark
Trust has done extremely well. It has been in existence three
or four years. We had considerable help in terms of timing in
that the South African Government was putting financial access
as a high priority to the majority of its population and we also
benefited from the FinMark Trust hiring somebody from the banking
sector who was very well aware of the potential for the banking
sector, for example, to promote basic bank accounts so that many
more people could get bank accounts and therefore access through
remittances, not just savings and credit and so on. Perhaps the
most tangible thing that has come out of FinMark is the emphasis
on a methodology for finding how much poor people have access
to credit, savings, a bank account and insurance. The methodology
they use is now being paid for by the private sector in South
Africa and it is to identify what the potential is for expanding
the financing market there and their methodology is now spreading
through southern Africa and further north. It has been a genuinely
impressive programme and the emphasis on innovation has been really
important plus the emphasis on getting the investment climate
right for the financial sector.
Q77 Richard Burden: When you are
talking about the developing methodology and providing the analysis
are you talking about FinScope?
Mr Boulter: Yes, that is right.
Basically it is a survey methodology. You may have read the stuff
yourself.
Q78 Richard Burden: How is that leading
on to anything else? I accept getting that information is very
useful, but how is FinMark taking that to go on or is that FinMark's
contribution finished at that stage?
Mr Boulter: It is particularly
by going to visit a range of people through the survey. It has
provided more information to banks about the demands that poor
people have in terms of what sort of bank account or what sort
of access to insurance services they need. It is something where
initially DFID's money was used in a pump-priming way, so we paid
for the first year's survey and then the South African banks identified
that the information coming out of the survey was useful for them
and then they funded half the survey for the next year and so
on. Now it is self-financing in South Africa.
Q79 Richard Burden: Do you see possibilities
for this to be transferred elsewhere as a model, and is there
anyone else interested in collaborating, the World Bank for example?
Mr Boulter: We have been having
very active discussions with the World Bank and building on their
greater expertise and household surveys to take the methodology
to many more countries. We have had initial missions in Zambia,
Kenya and Nigeria to see whether those governments and their central
banks in particular want to adopt some version of the methodology.
By the way, that will be able to give us some comparison on financial
access between different countries.
1 Ev 140 Back
2
International Development Committee, Third Report of Session
2004-05, DFID's bilateral programme of assistance to India, HC
124. Back
3
Department for International Development, DFID and the Private
Sector: Working with the private sector to eliminate poverty,
http://www.dfid.gov.uk/pubs/files/dfid-private-sector.pdf Back
4
International Finance Corporation. Back
5
European Bank for Reconstruction and Development. Back
6
Ev 127 Back
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