Select Committee on International Development Fourth Report


1.  We consider that DFID should retain its focus on both market development and investment climate approaches to PSD. Indeed, this balanced approach is the only logical one: generating and sustaining growth, through improvements to the investment climate, and then using this growth to provide opportunities for poor people to participate in markets. To increase the role of budget support in PSD would risk neglecting the systemic development of the private sector and markets. DFID has a real opportunity to provide intellectual leadership on a hybrid approach incorporating both market development and investment climate work. DFID should be aware of changing donor 'fashions' within PSD and attempt to carve out a sustainable, long-term model for its PSD policies (Paragraph 27)

2.  It is crucial that the mistakes of the 1990s — assuming that the private sector will shoulder the burden of responsibility for infrastructure investments — are not repeated. Donors and governments should help mitigate risks that the private sector cannot afford to take. The current priority must be to emulate Asia's successes in building infrastructure in Africa, with a particular focus on agriculture-supporting infrastructure. To support this, DFID must engage with other donors to ensure that the Commission for Africa-recommended increase in donor funding of US$10 billion a year up to 2010 (and, subject to review, a further increase to US$20 billion a year in the following five years) is secured. (Paragraph 36)

3.  DFID has shown leadership in establishing the Africa Infrastructure Consortium. DFID now needs to use its authority amongst the Consortium donors to build on initial momentum and swiftly generate extra investment for African infrastructure. Efforts should be made, however, to balance big loans to governments with smaller, locally sensitive grants reflecting regional and national infrastructure priorities. Consultation mechanisms should be put in place to ensure that investments by the Consortium reflect the needs of poor people and the local private sector. (Paragraph 38)

4.  DFID is becoming more engaged in the property rights agenda but capacity and activity remains limited. There appears to be no specific staff expertise in this area within DFID and capacity needs to be stepped up. The need for flexibility across varying country contexts and sensitivity around a politically-charged issue should not prevent DFID from increasing and broadening its property rights programmes, as long as this expansion is underpinned by a coherent strategy and in-house expertise. (Paragraph 43)

5.  DFID must continue to support capacity building and technical assistance on regulation, taxation and competition policies, at all levels of government. DFID's support for business environment surveys is valued and should be extended, where possible. (Paragraph 46)

6.  DFID has led the way amongst donors with its support for the ICF, an innovative policy representing an impressive, business-supported, African-'owned' partnership. The Facility has the potential to be a powerful vehicle in making Africa an easier and more attractive place to invest. However, now that initial phase funding is secured, the challenge is to ensure that the ICF focuses on bringing about sufficient, tangible changes in Africa's business environment. The ICF's role and the existing need have been well thought-out; time spent hiring consultants and carrying out more analysis must be avoided in preference to actively supporting programmes and technical assistance as efficiently as possible (without compromising on quality). (Paragraph 49)

7.  Whilst in many ways 'starting small' is beneficial to assessing national and regional needs and building momentum from the bottom up, the ICF's operations should be conducted with a view to potential increases in scale, to ensure that technical and other forms of assistance are sufficient to meet the huge need for investment climate improvements. (Paragraph 50)

8.  Good investment climates hinge on strong economic and political governance. We hope to see the symbiotic relationship between good governance and private sector development emphasised across the Department's PSD policies. (Paragraph 53)

9.  DFID should continue to place the eradication of corruption high on the donor agenda and lobby at the global level for commitment to anti-corruption measures. Specifically, DFID should actively encourage developed country ECAs to enhance transparency — internally and in the projects that they support — by implementing improved procedures on bribery and corruption; should seek to fulfil as swiftly as possible the Commission for Africa's recommendation regarding the implementation of "all necessary legal and administrative measures to repatriate illicitly acquired state funds and assets" and should lobby for the ratification of the UN Convention Against Corruption and the implementation of supporting legislation by all signatory countries. (Paragraph 56)

10.  DFID and the UK Government should engage with UK banks to encourage a review of the use of resource-backed loans to developing countries, especially those with a history of corruption and economic mis-management. UK banks should take advice from the international financial institutions on adopting appropriate conditions for loans relating to levels of disclosure and oversight requirements. (Paragraph 59)

11.  China's growing interest in African investments requires donors and governments to find mutual interests that will encourage the Chinese authorities to regulate resource-backed loans and other provision of capital more tightly, to ensure that lending does not contribute to corruption and negative developmental outcomes. (Paragraph 61)

12.  DFID has spearheaded and hosted the EITI process over the past four years. DFID's leadership has secured buy-in to the process from companies and countries alike. (Paragraph 64)

13.  The EITI implementation process needs to be expedited within signatory countries. Under-represented oil and gas producing regions, such North Africa, the Middle East and Latin America, need to be brought on board. (Paragraph 65)

14.  Parallel measures to build capacity and open the political space available to civil society will greatly enhance EITI's potential to improve transparency and accountability. (Paragraph 66)

15.  DFID should keep an open mind as to potential strategies for underpinning the EITI with mandatory disclosure requirements and should, at the very least, actively consider transferring from a voluntary to a mandatory approach in 2008-9, when further international implementation and political will has been secured. DFID must energetically explore when, how and to whom EITI's Secretariat should be transferred, with the ultimate aim of international 'ownership' the driving decision-making factor. Securing and consolidating further 'buy-in' from other donors will be particularly important to achieving this. DFID needs to move ahead with extending the EITI framework to other sectors such as procurement, construction and arms. (Paragraph 68)

16.  DFID should expand its resources for property rights work to ensure programmes and projects are prioritised for fragile and conflict-affected states. (Paragraph 70)

17.  DFID needs a clearer strategy for improving nascent, disabled and damaged investment climates. DFID's emerging work-stream in this area must be strengthened to develop a specific PSD strategy for fragile and conflict-affected states, with strong links to complementary policy areas such as transparency in the natural resources industry and conflict reduction. This is particularly important given DFID's increasing profile in such countries. (Paragraph 72)

18.  It is clear that in very poor countries, where there is very little capital or purchasing power, donors and governments have a particular obligation to step in and 'fill the gap' between private sector reach and the poorest of the poor. (Paragraph 73)

19.  DFID had no clear answers on specific PSD strategies for the poorest countries, beyond work on the enabling environment and regional integration. A specific work-stream on improving the investment climate of the poorest countries would help identify a coherent strategy and more creative approaches towards this end. (Paragraph 76)

20.  We recommend that DFID continues its leading role in demonstrating the value of the MMWP approach. adequately supported with sufficient funding and other resourcing. The Department must build on the successes of the FinMark and ComMark initiatives and scale up these innovative programmes. The technical assistance and creative thinking that underpin these MMWP programmes must not be sidelined by the increasing profile of either investment climate work or budget support. (Paragraph 83)

21.  In the absence of global targets on employment, a key priority for donors is achieving a more explicit focus on creating and sustaining jobs, especially within African countries. This should include increased support for improving the technical skills of those at the lowest end of the job markets. Consideration should be given to developing international targets on employment, with a particular focus on young people. DFID's current reliance on investment climate reforms as a means to create jobs is insufficient to reach the groups who are most in need, especially young people. The Department should seek to build partnerships with governments and companies that closely link education with job creation. (Paragraph 87)

22.  Bringing the millions of informal workers in developing countries under international labour law protection is a major priority and DFID needs to seek active dialogue with the private sector, governments, multilateral organisations and other donors on how to ensure that investment climate improvements and other PSD strategies prioritise minimum labour standards enforcement. (Paragraph 89)

23.  The FinMark Trust has deepened understanding and co-operation around financial sector development in southern Africa in a highly cost-effective and sustainable fashion. Negotiations with the World Bank regarding the FinMark methodology need to be taken up at a high political level to ensure that this important tool for financial sector development is successfully replicated and scaled up. (Paragraph 94)

24.  If a series of key constraints can be addressed, there is no reason that Africa cannot emulate Asia's successes in achieving agricultural growth. A lack of agriculture-supporting infrastructure is the primary barrier, and increases in infrastructure funding must be targeted towards this sector. Irrigation is a particular concern. DFID must work with other donors to achieve the Commission for Africa-recommended 50% increase in funding for irrigation before 2010. Another priority is re-building the seed industry within Africa. This package of measures should be closely linked into other investment climate improvements such as addressing property rights and land tenure. (Paragraph 97)

25.  The MMWP approach must underpin DFID's interventions in agriculture to ensure that market distortions are avoided. (Paragraph 99)

26.  In order to stimulate private sector investment in African agriculture, donors and governments must take the investment risks that companies cannot. (Paragraph 100)

27.  Donors need to target funding in an intelligent way that mitigates private sector risk by providing early bursts of finance, supports the role of SMEs, co-operatives and small-holders (rather than creates a greater market role for government or donors) and allows projects to be run on business lines. Successful multi-donor initiatives of this kind already exist (for instance, Infraco). DFID should show leadership by pursuing the replication of such models. Partnerships are key to ensuring that the necessary linkages are built within the market that will bring the benefits of growth to small and large farmers alike. (Paragraph 102)

28.  In its ongoing dialogue with the private sector (through groups such as Business Action for Africa), DFID needs to press for investments in developing countries to incorporate training, skills and technology transfer. The AfricaRecruit initiative should continue to receive support as a successful strategy for boosting human capital within Africa and addressing the 'brain drain'. This and other country-level skills programmes should receive longer-term donor support, in partnership with the private sector where possible. (Paragraph 106)

29.  We agree that there is great scope for increased private sector involvement in healthcare provision. Private sector growth will only gain momentum in developing countries if basic services such as education and health are improved. Donors need to recognise the role of private sector providers of education and healthcare and strengthen partnerships with these bodies. (Paragraph 109)

30.  We consider assigning total responsibility to national governments for the equitable distribution of the benefits of growth to be an inadequate response by DFID. Achieving DFID's ultimate aim of poverty reduction requires not just triggering growth but assisting partner governments in finding the right strategies to ensure that poor people benefit from growth. DFID needs to build a coherent strategy for PSD in middle income countries with large inequalities. This strategy should involve dialogue with the Governments of China and India, in particular, about how to include the poorest sectors of their countries in economic growth. (Paragraph 112)

31.  We agree that there is a continuing role for CDC as an investment pioneer and provider of risk finance. The 2004 restructuring seems to have been successful in reinforcing CDC's 'demonstrator effect' and its ability to mobilise other money alongside its own. (Paragraph 117)

32.  Whilst accepting the UK Government target of a 5% market return [on CDC's investments] should be met wherever possible, we consider that returns should be balanced with directing finance where it is most needed to reduce poverty. (Paragraph 118)

33.  CDC's portfolio of investments must continue to be carefully scrutinised for their overall contribution to poverty reduction. CDC's social and environmental record is patchy and we recommend close monitoring by DFID on where and how CDC invests. Acting as an investment catalyst is a necessary but not sufficient contribution to poverty reduction: CDC must ensure that its 'development footprint' is a wholly positive one. (Paragraph 119)

34.  DFID's annual expenditure on microfinance work remains limited and part of DFID's increasing budget could be usefully spent in expanding microfinance projects beyond their currently very limited range, embedded in a broader strategy of deepening financial markets. This could include partnership with the banking sector in providing business case evaluated unsecured loans to small businesses whose principals have few assets of land or other security. (Paragraph 123)

35.  Microfinance institutions have to operate in a regulated environment, otherwise poor people are liable to be exploited. In parallel with its support to microfinance, DFID must seek to build policy environments that provide appropriate levels of regulation and competition. (Paragraph 124)

36.  An idealised notion that 'the market will provide' must not stand in the way of SMEs in undeveloped or missing markets receiving urgently needed basic assistance, which can be supplied and funded, to an extent, by donors and governments. Support to SMEs in the form of free business development advice and technical assistance is largely absent from transition and developing countries. Whilst any return to large-scale market intervention must be avoided by donors, DFID should not proceed to the other extreme and focus exclusively on investment climate work where SME growth is concerned. (Paragraph 129)

37.  DFID and other donors must be sure to include and prioritise SMEs in their dialogue with the private sector about social and environmental impacts. In their efforts to address SME growth, donors must concurrently pursue routes to improved adherence to international labour standards and codes on social and environmental abuses. (Paragraph 130)

38.  Challenge funds are a useful tool for direct engagement with the private sector and can help to catalyse market activity where it is slow or non-existent. For reasons of sustainability and coherence, however, it is vital that DFID embeds challenge funds in wider PSD programmes — not least to prevent gaps in funding. The linkage of the African Enterprise Challenge Fund with the ICF is a promising sign that DFID is aware of this need to integrate grant funding with systemic enabling environment improvements. (Paragraph 135)

39.  Numerous successful examples support the use of PPPs as a means to finance and implement PSD. The UK Government has shown innovation in spearheading the International Finance Facility for Immunisation and should explore other creative funding models for PPPs such as the self-financing Global Alliance for Improved Nutrition. In addition, the UK Government should engage with governments and donors to address the funding problems experienced by the growing body of PPPs working on healthcare R&D, especially those working on neglected diseases. (Paragraph 140)

40.  Encouraging commercial banks to better facilitate remittance flows is a key example of how DFID can influence the private sector in contributing to development outcomes. To help increase remittance flows, banks must reduce transaction costs. The UK Government should engage with banks to encourage cheaper and more competitive services. (Paragraph 143)

41.  We consider that, as part of its dialogue with diaspora organisations, DFID should explore existing diaspora practices regarding remittances and other inward investment schemes and help engage the private sector to find additional ways — beyond remittances — to channel investment into home countries. (Paragraph 145)

42.  DFID should seek to embed its support for ethical trading in a package of wider measures, including improvements to the enabling environment; the widespread implementation of labour standards; a more coherent approach to ethical trading across government and the development of an ethical code to govern government procurement policies. In addition, DFID needs to build up a more sustainable approach to supporting fair trade, with long-term, predictable funding a priority. Adequate consideration must be given to scaling-up pilot programmes and disseminating learning. As part of the increased focus on youth employment that we recommended in Chapter 4, DFID should seek to expand its work in supporting young entrepreneurs. DFID must engage with companies to ensure that fair trade schemes do not push costs back to suppliers and the poorest in the supply chain. (Paragraph 154)

43.  The ETI has demonstrated that securing commitment from companies to a basic ethical code is possible. However, the ETI currently has no ability to monitor ethical trade and there is a global gap in formal scrutiny. We suggest that the ETI could be usefully expanded into a monitoring mechanism that ensures more independent scrutiny of company operations. To enable this, sufficient funding arrangements should be put in place, which will need to include increases to DFID's current contribution of £0.5million per year, in conjunction with seeking further funding from corporate members of ETI. (Paragraph 155)

44.  Whilst a number of companies are 'going beyond' PR-driven CSR policies to implement responsible behaviour in their core business operations, many policies remain superficial, 'tick box' corporate gestures, rather than meaningful attempts to grapple with social and environmental impacts. Furthermore, the CSR focus is concentrated in the multinational business sector, rather than on SMEs, which are often over-represented in industries with high social and environmental impacts. DFID must seek to re-dress this balance. We urge the Department to support improved implementation of international codes for multinational companies such as the OECD Guidelines for Multinational Enterprises. This will entail lobbying for far greater collaboration and coordination across Whitehall and introducing Government initiatives to push companies into CSR policies. (Paragraph 160)

45.  The Oxfam-Unilever project exploring the links between business and poverty reduction in Indonesia is an exciting new model for assessing corporate behaviour and ensuring that growth benefits 'the base of the pyramid'. DFID should, in its ongoing dialogue with business and civil society organisations, support similar projects, where they are likely to assist poverty reduction through private sector growth. (Paragraph 162)

46.  Co-operatives — when performing efficiently — represent a private sector model that provide many benefits and opportunities to poor people. We hope that the resurgence of interest in co-operatives is not a passing fashion: co-operatives represent a cost-effective and sustainable way to support PSD. DFID's Strategic Grant Agreement (SGA) with the Co-operative College has been mutually beneficial, helping both partners to raise the profile of co-operatives as key contributors to PSD. We support the need to put in place a new SGA with the Co-operative College when the current Agreement expires in March 2007. (Paragraph 166)

47.  The co-operative movement has a particular role in public sector delivery and in making trade work for poor people. Co-operatives can provide an effective vehicle for the large-scale provision of public utilities, and governments planning public sector reform and privatisation projects should include co-operative enterprises amongst the private sector options. DFID's 2005 grant of £50 million to rural electricity co-operatives in Bangladesh is a positive indication of the Department's renewed commitment to the co-operative sector, and we anticipate similar expressions of support from DFID in the short-term future. The important role of co-operatives in PSD should be adequately communicated to all DFID country programmes to ensure a coherent approach to this under-recognised PSD model. (Paragraph 168)

48.  Business forums act as a vital conduit for public-private dialogue and private sector action on poverty reduction. Business Action for Africa (BAA) is a highly promising outcome from 2005 and it is crucial that DFID continues its support for the forum. In conjunction with support from BAA's growing corporate membership, DFID should assess current funding levels with regard to ensuring that BAA can continue to expand as a crucial partnership for PSD. (Paragraph 172)

49.  We observe a number of indications that DFID's administration and organisational design have not 'caught up' with the Department's growing prioritisation of PSD within its thinking and policy-making. For a start, somewhat of a cultural divide seems to exist between DFID and the private sector — their ways of working and organisational cultures are very different, and bridging this gap represents a challenge that DFID has not yet fully addressed. (Paragraph 181)

50.  Involving the private sector in policy-making — an integral part of building PSD policies — will require DFID to accommodate the different working styles in public and private sector bodies, otherwise the capacity of companies to contribute to PSD approaches may be compromised. One aspect of overcoming the cultural gulf is 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. (Paragraph 183)

51.  Adopting a streamlined approach should not require radical or costly changes to DFID's approach, merely an adapted style. Time will not permit DFID staff to visit every individual company involved in a particular aspect of PSD. This is why we recommend that DFID makes better use of business forums networks such as Business Action for Africa, and industry groups in the UK and across countries of operation, as a means to link with a number of private sector actors simultaneously in a time- and cost- effective way. (Paragraph 184)

52.  In our view, not only does the limited number of PSD specialist staff affect DFID's ability to engage effectively with the private sector, it is also an insufficient number to cover DFID's 36 country offices plus its two UK-based headquarters. We believe that DFID should set a minimum target of one PSD adviser for each of its 36 country offices in addition to the current Growth and Investment Group within DFID headquarters. (Paragraph 185)

53.  The development of multidisciplinary teams in country offices, which integrate PSD expertise with other policy specialisms, should be emulated across all 36 DFID country offices. (Paragraph 188)

54.  We believe that greater integration should also be sought within DFID's Policy Division. Deploying an PSD Adviser to every team — for instance, in the way a Social Development Adviser currently sits within most teams — would involve too large-scale an increase in staff to be cost-efficient. But, following the Department's restructuring in 2002 — which aimed for enhanced fluidity of staff deployment — DFID should have the structure in place to ensure that PSD Advisers can work flexibly across different teams according to work priorities. We advise DFID to use the flexibility and fluidity of its post-restructuring arrangements to maximum effect, and move PSD Advisers in and out of Policy Division teams to support changing priorities and the cross-cutting nature of different policy areas. (Paragraph 189)

55.  We recommend that if, as we have recommended, the numbers of PSD Advisers are expanded, a minimum target should be set to recruit advisers who have both business qualifications and business experience. (Paragraph 190)

56.  We advise that increased use of secondments into and from the private sector will assist the development of common understanding between DFID and the private sector. (Paragraph 191)

57.  We support DFID's current outsourcing of challenge funds to consultancies and risk finance to the CDC Group. Not all DFID policies will benefit from being outsourced to the private sector and we do not recommend expanding the use of outsourcing beyond its current usage, which is focused on policies which involve the most direct engagement with the private sector. (Paragraph 193)

58.  DFID will also strengthen its resources for PSD by ensuring that it utilises the strengths of other UK Government Departments through effective co-ordination of policies linked to PSD. A particular area where improved co-ordination would be beneficial is the implementation of international regulatory codes on the private sector's social and environmental impacts. (Paragraph 194)

59.  DFID will strengthen its resources for PSD by ensuring that it utilises the strengths of other UK Government departments. This will involve more efficient co-ordination with other departments, where appropriate, to ensure a shared vision for achieving the development promises for 2005 and the role of PSD in meeting global targets. A particular area where greater co-ordination would be beneficial is the implementation of international regulatory codes on the private sector's social and environmental impacts. (Paragraph 195)

60.  Donor co-ordination is particularly important within PSD due to the wide-ranging nature of the private sector's potential engagement with poverty reduction. DFID should ensure that it co-ordinates effectively with other donors over PSD, and continue its active participation in international co-ordination initiatives such as the Donor Committee for Donor Agencies for Enterprise Development and the OECD PovNet. (Paragraph 197)

61.  The sustainability of policies is clearly a concern within any development sector. But we feel that in its approach to PSD — a new and disparate area — DFID is at particular risk of innovating at the expense of following up and sustaining existing policies. New ideas and pilot schemes are not a panacea for sustainable, long-term PSD policies, especially in the case of bilateral projects, where DFID cannot rely on other donors to step in after initial phases. DFID should focus on 'implementing as well as innovating' with regard to PSD. Existing policies should be carefully assessed for scalability and sustainability before new policies are launched. (Paragraph 202)

62.  We advise that DFID should take pro-active steps to integrate PSD as a 'way of doing things' across the full range of policy areas, from agriculture to health and education. Integrating PSD approaches within other policy areas will transform PSD's current status as somewhat of an 'add-on' — a stand-alone channel of work — to a mainstreamed development approach that is assimilated into policy-making throughout the Department. (Paragraph 206)

63.  It is imperative that DFID's PSD policies are underpinned by a clear strategic plan. Without this long-term vision and coherent strategy, DFID's capacity for innovation could result in a scatter-gun approach to PSD — an incoherent mix of policies that will undermine the private sector's potential to contribute to poverty reduction. We anticipate DFID's PSD strategy being spelt out as soon as possible, together with deliverable, practical and time-bound plans for the full implementation of existing PSD policies. (Paragraph 208)

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