CONCLUSIONS AND RECOMMENDATIONS
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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