Select Committee on International Development Minutes of Evidence


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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