Select Committee on International Development Fourth Report



The Department for International Development (DFID) and Private Sector Development

Private Sector Development (PSD), an approach to poverty reduction that underlines the central importance of economic growth within development processes, represents a relatively new area for DFID. Broadly, we commend the policies and financing mechanisms that DFID is using in support of PSD. DFID has developed an array of innovative PSD policies and is showing intellectual leadership in pursuing investment climate improvements simultaneously with supporting market development strategies.

However, we have some serious reservations concerning whether DFID's organisational and operational capacities have kept pace with the Department's rapid proliferation of policy interventions towards PSD. There is a lack of either sufficient strategic planning or appropriate resource allocation for PSD within DFID. There is a degree of DFID trying to 'run before it can walk' — rushing to implement a mix of policies that are not necessarily thought-through or linked. This may be to the detriment of following up and sustaining existing policies. DFID's primary task now is to take a step back and consider its overall PSD strategy. Innovation is not a panacea for sustainable, long-term PSD policies that are coherent with other areas of DFID's work and underpinned with appropriate resources.

Ensuring that DFID's organisational design supports a coherent approach to PSD is of key importance. A considered and co-ordinated strategic plan with appropriately resourced, practical and time-bound plans for the full implementation of existing PSD policies needs to be developed and implemented.

PSD is not so much a discrete sector as a 'way of doing things' that cross-cuts a variety of policy areas, from agriculture to health. In developing its overall PSD strategy, DFID needs to seek integrated and co-ordinated solutions that permeate its organisational structure and embed PSD as a mainstreamed development approach that is assimilated into policy-making throughout the Department.

DFID also needs to find ways to involve the private sector in policy-making by changing its ways of engaging with the private sector and bringing more business expertise 'in-house'. Currently, somewhat of a cultural divide exists between DFID and the private sector. Bridging this gap will involve slimming down the time and opportunity costs associated with participation in policy consultation, which are evidently perceived by the private sector as a barrier to their engagement with DFID. Bringing more business expertise 'in-house' at DFID — through changes to recruitment criteria and through secondments — will also help integrate the private sector within the policy-making process.

Private Sector Development and poverty reduction

Private sector development emphasises the central importance of economic growth to reducing poverty. The links between the private sector and poverty reduction are manifold; PSD aims to maximise the benefits of these connections for poor people to achieve job creation, markets that work for poor people and the growth of the local private sector in developing countries.

The typical private sector entity is not a large multinational company, but a rural small-holding, a market stall or co-operative factory. 90% of people from sub-Saharan Africa are in the private sector: the Secretary of State for International Development, Hilary Benn, recently stated, "Poor people are the private sector".

Sustained poverty reduction will require the development of small and medium-sized enterprises through domestic and foreign investment and the movement of businesses from the informal to the formal economy.

Growth is a necessary, but not sufficient, condition for poverty reduction: the pace and pattern of growth both affect its ability to be pro-poor. Meanwhile, a series of factors affect the private sector's ability to deliver 'the right kind of growth': the climate in which investment takes place is foremost amongst these factors. The regulatory environment; the presence of supporting infrastructure; rights to property and land; governance; corruption; access to financial, physical and human capital — all of these factors will nurture or inhibit investment climates.

Creating the right conditions for growth and job creation is a primary function of governments. However, donors can assist the ability of both governments and the private sector to generate and sustain growth. As well as supporting governments in improving their investment climates, donors can address the systemic factors — such as poor employment opportunities and conditions, a lack of access to assets such as finance, health and education and dysfunctional market conditions — that prevent poor people's participation in markets. Certain country circumstances, such as conflict, fragility and access to natural resources, will put such constraints in even sharper focus, and will require specific donor interventions.

Donors have a key role in mobilising the resources of the private sector — primarily finance, human capital and regional and international networks — and stimulating the investment of these resources in ways that contribute to poverty reduction. In particular, donors can act as investment pioneers, providing initial funding for investments perceived as too risky by the private sector and demonstrating the investments' potential. Donors and governments can also help markets reach even the very poorest, by sustaining markets that are not profitable for the private sector through microfinance.

Whilst the primary function of the private sector is clearly to drive growth, there is an increasingly wide acceptance that the manner in which private sector entities trade, invest, employ staff and address their social and environmental impacts has a profound impact on poverty reduction. Donors can maximise these pro-poor responses in a number of ways, for instance, through direct engagement with the private sector through public private partnerships and support for changes to trading structures and practices.

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Prepared 23 July 2006