Memorandum submitted by the
International Institute for Environment and Development (IIED)
IIED seeks to help shape a future that
ends global poverty and delivers and sustains efficient and equitable
management of the world's natural resources. The organisation
has an extensive track record in assessing the positive and negative
impacts of the private sector on efforts to achieve social and
environmental improvements. This has included major initiatives
on the paper cycle and the mining and minerals sector, as well
as ongoing work on investment agreements, markets for environmental
services, market concentration in the agri-food sector, associations
of small- and medium-sized producers in the forestry sector and
changes in property rights regimes in many African countries.
Specific points drawn from this work are made below; links to
relevant documents are listed at the end; further information
is available on request; and additional documents have been posted
separately.
The following uses the format requested
by the Committee, addressing only the issues on which IIED has
a particular interest. One central point to make at the outset
is that interventions designed to stimulate private sector activity
should support, rather than undermine, the UK Government's wider
commitment to sustainable development. Not all growth is pro-poor
- and not all private sector development supports sustainable
development.
What can the private sector do to
alleviate poverty?
What are the different types of
pro-poor growth?
Poverty is caused by more than a lack of money: it is also evident
in various forms of deprivation and marginalisation, many of which
are locally-driven and need to be tackled at local level. For
the poorest people, access to environmental resources often constitutes
a critical element of their assets and security, while environmental
hazards (floods, droughts, climatic change) have a disproportionately
high impact on the poorest people. Once this broader notion of
poverty is accepted the importance of the form and structure of
business becomes more apparent. There are private sector models
that provide benefits for poor people, including democratic member
organisations such as co-operatives and non-profit companies.
Small and medium scale enterprises are generally more beneficial,
especially when they have democratic structures. There is also
a vast range of ways in which poor people demonstrate entrepreneurial
skills in pursuit of collective, civic benefits rather than for
profit maximisation (see in particular work by the Ring network
on 'civic entrepreneurship'). Private sector development is especially
important in the agricultural sector, in which many millions of
smallholder farmers are seeking to secure their rights in land,
invest in raising yields and gain access to markets.
What are the connections between
growth and PSD?
The notion of 'pro-poor growth' needs
to be used carefully. Mainstream economic growth hardly ever preferentially
favours the poor: profits accrue predominantly to shareholders,
employees and directors, who are already well-off, while accentuating
gaps between richer and poorer.
What are the constraints on the private
sector in developing countries and how can they be addressed?
The question implies that the removal
of constraints on the private sector will be beneficial for the
poorest people in developing countries. As above, IIED would question
this generalisation and point to the need for greater rigour in
assessing the benefits accruing to poor people from economic growth
and private sector activity, and conditions under which such benefits
are achieved.
The macro level - institutions,
laws, governance, macro-economic policy
There are many challenges,
such as the need to strengthen the administration of land and
property rights as a means to encourage long-term investment by
local and foreign entrepreneurs. In many parts of Africa, most
land rights remain undocumented, bringing risks of conflict and
dispossession of poorer groups, especially where land values are
rising rapidly, such as peri-urban areas and high value farm land.
A focus is also needed on the lack of coherence between the UK's
commitment to sustainability, and current practice in developing
investment agreements. Sustainable development and poverty reduction
considerations need to be integrated into negotiation of the UK's
bilateral and regional investment arrangements. Often, these bilateral
and regional investment arrangements provide the overall governance
environment from which foreign investment contracts are negotiated
between UK-based multinationals and the governments of middle
and low income countries.[57]
Together with a group of partners in
Chile, Mali, Pakistan, Ghana and Belize, IIED has been working
to analyse the relationship between the terms of these foreign
investment contracts and sustainable development. We have identified
a range of concerns about how foreign investment contracts are
negotiated, the terms of the deals, and their wider implications
for sustainable development. The concerns include:
- Lack of transparency
in the process of developing foreign investment contracts with
significant public policy implications;
- Substantive provisions (e.g.
'stabilisation clauses') that have the potential to undermine
environmental protection or respect for human rights;
- Dispute settlement provisions
that take resolution of public policy-related issues to the private
processes of international arbitration; and
- A range of indirect impacts
on sustainable development (e.g. when legislation specifically
designed to facilitate a project precedes contract negotiations).
The UK Government can play a role in
addressing these concerns by encouraging transparency in investment
contract negotiations, and publication of concluded contracts.
Contracts should not erode the domestic policy space for poverty
reduction and sustainable development. The UK's bilateral and
regional investment arrangements also need to be reviewed for
their role in encouraging UK-headquartered companies to conclude
contracts that maximise the contribution of foreign investment
to sustainable development. If this is to be achieved, HMG (including
DFID) should play a significant role in the design, review and
monitoring of government-to-government investment arrangements.
The micro level - direct support
to businesses, microfinance
Most really poor entrepreneurial groups tend to help themselves
through local institutions such as producer associations or co-operatives.
There are many examples of credit unions, and micro-finance initiatives.
But their potential is often undermined by lack of formal recognition.
While successful development is intensely local, most development
actions and investments are planned, implemented and evaluated
centrally - by national governments and international agencies.
The whole development business and the Millennium Development
Goals (MDGs) are based on meeting the needs of poor people, yet
poor people themselves have no role in design and implementation
of 'development'. Most of the discussions and documents about
what should be done are not accessible to them and are conducted
in foreign languages. Most decisions about what is funded and
how the funds are used are made without consulting them, and provide
no accountability to them. Addressing this failing on the part
of national and international agencies should be the central challenge
in assessing ways to tackle poverty at local level.
What type of donor interventions
have strong leverage in changing the business climate (in partner
countries) towards PSD and pro-poor growth?
Creating an enabling environment and
favourable climate for investment for poor and rich alike by providing
technical assistance on:
Property rights,
through support to register rights to land and property, especially
vital in regions where most property rights are undocumented.
Registration of land and property rights is key but must be designed
in ways which strengthen, rather than weaken the rights of poorer
more vulnerable groups who have frequently lost out in previous
titling programmes.
Investment promotion
is of little help to the very poor who do not tend to make attractive
investments (often because they are informal). A better approach
is to build up the capacity of community and enterprise groups
to negotiate workable partnerships on a collective basis with
larger business.
Public procurement
can be a very useful strategy if directed to processes such as
Fair Trade or community produce. Standards and ecolabels of other
sorts tend to discriminate against the poor, because of significant
transaction costs.
Micro-finance
is a critical element but it is frustrating to see how few donors
pursue working examples such as the Grameen Bank - or build on
locally developed models of credit unions etc.
Making markets work better for poor
people - UK
retailers are now major procurers from and investors in mid- and
low-income countries. Both forms of investment offer opportunities
to 'make markets work for the poor'. The UK Government
(DFID) is aware that it must start engaging with the private
sector in order to maximise the development impact of these investments.
1. Export markets to the UK
Consumers in the UK now expect high
quality food from around the world, produced according to high
ethical, environmental and safety standards, at an affordable
price and in all seasons. This opens up new market opportunities
for agricultural producers in developing countries. But the way
these private sector supply chains are managed - through rationalisation
and through standards and certification processes - is also a
potential barrier for smaller scale producers, who form the backbone
of the African rural economy. This is a Commission for Africa
priority: developing countries stress that 'private standards
can be even more exacting than official ones, leading to the exclusion
of small farmers and concentrating business in the hands of large
firms.'
Market access in agriculture is the most contentious issue in
the Doha Development Agenda but private standards are outside
the WTO mandate. The issue of fairness in trade continues to be
high on the public agenda. However, although sales in fairly traded
products are growing they are a very small component of total
supermarket sales. The issue is therefore about how to mainstream
fairness, equity and the development agenda into supermarket supply
chains.
DFID is engaged in a joint project with IIED and NRI
to explore these issues. Forming close partnerships with food
retailers, manufacturers, standard-setting bodies, traders and
producers, this project aims to create opportunities and identify
favourable outcomes for producers in developing countries to participate
in international supply chains, given the rise of private standards.
More information can be found at www.agrifoodstandards.org
2. Supermarket expansion into mid- and low-income countries
Conventional thinking has been that
the position of smallholders, processors and agribusinesses in
their national markets is stable and that the key issue is therefore
how to gain access to the more profitable niche markets, mainly
for export. Yet a growing body of evidence shows that regional,
national and local markets are themselves being transformed by
imports and re-structuring. Penetration by transnational and domestic
supermarket chains is proceeding at a rapid pace in emerging markets,
where more than 50% of the growth in global food retail markets
is expected to occur. This is having a major impact on market
structure; domestic markets increasingly have more in common with
export markets in terms of standards required, business practices,
prices, and ownership, so they are less of a refuge for the small
players. Small-scale agriculture, which supports the livelihoods
of the majority of rural poor, is poorly prepared for the rapid
changes that are taking place in the structure and governance
of national and regional agrifood markets. There is thus an urgent
requirement for policy to focus on ways to include small-scale
producers in these markets undergoing dynamic change.
DFID is a major participant in a consortium
of donors supporting research and policy development to prepare
producer organisations, governments, businesses and donors for
these changes. See www.restructuringmarkets.org
Infrastructure services (water, sanitation)
Experience shows that the
lowest-income groups, with the least access to water and sanitation
services, receive the fewest benefits from private provision.
This is not because of some inherent contradiction between private
profits and the public good. It is because, as they are currently
regulated, neither publicly nor privately operated utilities are
well suited to serving the majority of low-income households who
currently lack adequate water and sanitation. If local governments
choose to involve private companies in water and sanitation provision,
they need to set the terms in favour of poor groups. Privatization
should not be promoted unconditionally as the key to achieving
the water and sanitation targets within the MDGs.
What aid instruments can be used
by donors to encourage PSD? Private benefits versus benefits to
society (public goods) - how much is this an issue?
Corporate Social Responsibility and
beyond
There is continued uncertainty over
the meaning of 'corporate social responsibility'. For some actors,
including the European Commission, the term 'CSR' refers only
to activities that go beyond compliance with legal requirements:
[CSR is] a concept whereby companies
integrate social and environmental concerns in their business
operations and in their interaction with their stakeholders on
a voluntary basis. (European Commission, 2002)
This is sometimes contrasted with calls
to strengthen 'corporate accountability' through law. Voluntary
and regulatory approaches have too often been treated as mutually
exclusive. Indeed, CSR or 'corporate responsibility' practice
is often embedded within the legal and regulatory environment.
For example, in South Africa, new laws promote black economic
empowerment. And in many middle and low income countries, implementation
and enforcement of environmental or social legislation remains
a major challenge. At IIED, we have found that it is more helpful
to understand CSR as being about the overall contribution of business
to sustainable development.
IIED has worked on the role of donors
in encouraging responsible business practice. This offers insights
into how donors could stimulate private sector-led growth which
also favours sustainable development.
In March 2004, the Swedish Ministry
for Foreign Affairs, in collaboration with the Swedish International
Development Co-operation Agency (Sida), the International Business
Leaders Forum, IIED and the World Bank, convened an international
conference to examine how bilateral and multilateral development
co-operation agencies could create an enabling environment for
responsible business practices in middle and low income countries.
The conference report (Fox and Prescott, 2004) notes that significant
work is already being carried out by donors, even if it is not
specifically labelled 'corporate responsibility' or 'corporate
social responsibility'. The conference identified a range of areas
where donors could play an even greater role, including:
- Setting an example by integrating
'responsible business practices' into donor agencies' own activities;
for example by integrating corporate responsibility issues into
lending or procurement; ensuring that key policy documents reach
the business community; and maintaining corporate responsibility
expertise.
- Helping public sector actors in
middle and low income countries to create the conditions for responsible
business behaviour, for example by strengthening public governance
frameworks for implementation and enforcement of minimum social
or environmental requirements.
- Support the development of non-governmental
organisations in middle and low income countries whose activities
could help to create locally rooted drivers of responsible business
practices
- Relating the 'corporate responsibility'
or 'CSR' agendas to local businesses and to small and medium-sized
enterprises in middle and low income countries. (This is considered
further below).
- Investment in leadership development
to stimulate the emergence of individual corporate responsibility
leaders from middle and low income countries
There is currently considerable appetite
among both policy-makers and some businesses in revisiting the
relationship between 'business and development'. For example,
the so-called 'fortune at the bottom of the pyramid' approach
pioneered by CK Prahalad and Stuart Hart and the World Business
Council for Sustainable Development's work on 'doing business
with the poor'. Equally, UNDP's programme on Growing Sustainable
Business offers an expanding set of activities of considerable
promise. But much of this interest focuses on the opportunities
for large, multinational enterprises. It is not designed to deliver
broader sustainable development outcomes, as distinct from for
example, increased access to consumer goods for the world's poorest
consumers.
Evaluation of the relationship between
private sector development and poverty reduction in middle and
low income countries needs to consider the role of small and medium
sized enterprises (SMEs) in the economies and social fabric of
those countries. SMEs are a major economic force, upon which large
numbers of people in developing countries depend for their livelihoods.
And they are often strongly embedded in the social fabric of the
communities where they operate.
One of the most challenging critiques
of CSR tools, particularly codes of conduct and supply chain standards,
is that they can exclude SMEs in developing countries from lucrative
markets, thus harming livelihoods. This might suggest that corporate
social responsibility practices should be shaped in a way that
does not adversely affect the economic viability of SMEs in developing
countries. Yet the cumulative social and environmental impacts
of SMEs are also highly significant, even though their individual
impacts are small. SMEs are often over-represented in industrial
sectors with high environmental impacts, and they may not be subject
to the same regulatory and enforcement processes that can mitigate
the negative impacts of large companies. There is therefore potential
for significant progress towards sustainable development if SMEs'
social and environmental performance could be ratcheted up. This
implies the need for sensitive engagement with existing SME associations,
based on a realistic discussion of the benefits and the costs
of CSR.
The 'business linkages' theme is also
evolving as an element of the CSR agenda for large companies operating
within developing countries. The aim is to use local suppliers
and outsourcing where possible, in order to maximize the transfer
of assets and skills to local communities, and to create a multiplier
effect that increases local business activity, employment and
income. Business linkages are generally made through procurement,
outsourcing or subcontracting of activities between large and
smaller firms.
Three promising avenues for future development
cooperation efforts that can stimulate both SME-based private
sector development and responsible business practices in support
of sustainable development are therefore:
- Efforts to ensure that 'bottom of
the pyramid' business models reach SMEs;
- Ensuring that the 'business linkages'
agenda pays more attention to the capacity needs of SMEs and makes
the most of their endowments of human and social capital; and
- Integrating CSR considerations into
existing enterprise development and business support services
for SMEs.
February 2006
57 By 'foreign investment contracts', we mean negotiated
agreements between a business enterprise and a state for the purposes
of an investment project in that state. The agreement sets out
terms and conditions applicable to the investment project. It
is 'foreign' for these purposes when it is associated with a foreign
business with capacity to control important management decisions
or associated impacts Back
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