Select Committee on International Development Memoranda

Memorandum submitted by the UNDP

1.  What can the private sector do to alleviate poverty?

1.1  Development is by nature multi-dimensional and the development process is a holistic course of action that requires strategic and integrated interventions to ensure that the eventual solutions address the causes rather than recommend ad hoc cures.

1.2  Economic growth and sound macroeconomic policies are necessary but not sufficient conditions for sustainable human development and meeting the Millennium Development Goals (MDGs). To make a real difference in the quality of the life of the people at the base of the pyramid, the economic growth has to be efficient, sustainable and most importantly, equitable[155]. Accordingly, quality of growth[156] is as important as the quantum and pace of growth. High quality growth is grounded in human rights and justice (including for future generations) and builds upon participation, transparency and human empowerment.

1.3  There is a consensus in the development community on the important role of the private sector in economic growth, job creation and contribution to poor people's incomes. The Monterrey Consensus highlights the necessity to engage the private sector as a prerequisite for poverty alleviation. The UN Millennium Project Report urges the private sector to play a central role in reducing income poverty through inclusive and sustainable economic growth, while encouraging governments to provide the enabling environment for them to do so. In highlighting the need for new partnerships to tackle global challenges and achieve globally agreed priorities, the Report of the Panel of Eminent Persons on United Nations-Civil Society relations, underscores the need to connect the local with the Global and the critical role of non state actors as partners in policy making and decision making. Accordingly, the report points out the need for the UN to strengthen its relationship with the private sector.

1.4  While a vibrant domestic private sector is a sine qua non for achieving the MDGs and ensuring equitable development, with increasing globalization, the traditional role of the State is changing significantly. Since the poor interact with the private sector both as consumers and as entrepreneurs, private sector is progressively playing an important role in delivering goods and services for development including in undertaking activities for poverty alleviation. The UN's Commission on the Private Sector and Development in its Report[157] asserts that the "savings, investment and innovation that lead to development are undertaken largely by private individuals, corporations and communities." Simultaneously, civil society organizations are vital to bring about participatory and accountable approaches to meet the MDGs and improve the quality of life of the poor. Recognizing the critical role of governments in creating foundations for a healthy and dynamic private sector, the Commission advocates the need to develop innovative partnerships models (between government, multinational companies, local companies and civil society) to harness resources and capacity of the private sector to benefit national development. Also emphasized is the need to develop capacity and skills at local and national levels including those for entrepreneurs working for the bottom of the pyramid.

1.5  An efficient private sector requires sound domestic macro environment including trade policies and institutional foundations and adequate capacity that maximize the benefits from the macro global environment as well as distributional equity. This is the basis for public private partnerships (PPP) as a preferred instrument for domestic private sector development. The central role of the private sector does not in any way diminish the role of public governance. An enlightened and strong State is not only a prerequisite for a vibrant domestic private sector but also for harnessing its strength for equitable development.

1.6  An effective approach envisions a strategic partnership of the government with the private sector as well as the civil society with each sector actively participating in delivering national priorities by bringing proportional resources to the process and sharing relative responsibilities for equitable and efficient development of the domestic private sector[158]. Also, partnership with the private sector is no longer simply about mobilization of resources; it is also about learning from its wealth of knowledge about entrepreneurship, management skills and global networking.

1.7  The private sector is keen to harmonize private interest with public interest. Increasingly, the private sector is promoting new approaches to "convert the poverty into an opportunity for all concerned," including the poor people and the private sector companies. In partnership with "the poor" the private sector can motivate win-win entrepreneurial scenarios that while being profitable improve the conditions of the people living at the margin[159]. It is the inclusive partnerships and a shared agenda between small and large firms, governments at all levels, civil society and the development agencies that will unlock such opportunities. At the same time it is to be ensured that state and public policies work, and that necessary regulation for creating greater equity is in place and it works.

2.  Constraints on the private sector in developing countries - Removal of barriers to make domestic private sector development work

2.1  UNDP's experience[160] informs us that lack of adequate capacity and the absence of innovative partnerships and business models, of a policy environment to facilitate cooperation and partnerships between public and private actors and access to financing, of safety net mechanisms and basic services are barriers to private sector development. Also, while a high internal rate of return is necessary, it is not a sufficient condition for the success of domestic business. Non-economic barriers, consisting of inadequate policies, institutions, legal frameworks, insufficient knowledge among developers and lack of innovative and development oriented financial institutions are major constraints to attracting and sustaining private sector investment. Economic development stalls when governments do not uphold the rule of law which provides a solid foundation for a robust private sector.

2.2  The conditions vary -- depending on the composition of the existing private sector, annual economic growth and institutional capacities. Accordingly, while the conceptual approach for developing the domestic private sector to contribute towards meeting the MDGs is common, specific interventions have to be tailored to the needs of individual countries. In addition, the private sector needs significant substantive support from the development community to define win-win interventions. Public investments are crucial for "private based economy" to allow the private sector to create employment and sustain long term economic growth. In the absence of adequate infrastructure, health services, education, market forces alone can accomplish little.

2.3  An absence of efficient, transparent and participatory policies, mechanisms, and institutions in the developing countries can increase transaction costs and present major barriers to the implementation of public private partnerships. Furthermore, access to finance and skills and knowledge is an imperative for entrepreneurship and the private sector to flourish in an economy[161]. In addition to having strong financial institutions, adequate skills and capacity - with an emphasis on women and youth - are critical for sustained economic growth, and central to the start-up, growth and productivity of firms. The policy environment therefore must permit access to finance, risk management tools, and knowledge base, and provide opportunities for capacity development and strengthening skills.

2.4  Micro, small and medium enterprises define the local private sector in poorer communities. These enterprises employ a large portion of the labor force, often as "survivalist" employment and in the informal economy. In several of these countries 40% of the economy is informal. And women constitute the majority of micro-entrepreneurs in these informal economies[162]. These enterprises operate outside the legal system with weak capacity and limited market information that not only contributes to their low productivity but also act as barriers to growth. Also, they lack access to financing and long-term capital leading to uncertainty and lack of sustainability[163]. A combination of heavy regulation and weak property rights further constrains the poor from doing business in their countries. In order to create business opportunities for the people at the bottom of the pyramid and to "do greater business with the poor", governments have to create enabling conditions and reforms for the formal economy and to level the playing field to reduce informality in the economy[164]. Also, the poor people have to be empowered to take advantage of their currently "dead capital"[165].

2.5  The policy reforms and capacity development issues relating to informal economies cover a broad set of issues ranging from land titling and property rights, common property resources and management, labor markets, social safety net mechanisms and security, access to credits and women's legal rights. Critical to addressing the issue of informality is defining innovative approaches that would lead to creation of entrepreneurs while generating long term assets and institutions to enforce them.

2.6  However, reducing informality in the private sector should be managed with caution and diligence. In the absence of a well developed rule of law, mechanisms that ensure accountability, transparent enforcement institutions and other enabling conditions that are able to translate the benefits to the private entrepreneurs of being in the formal sector, the transition process should be handled incrementally, creatively and strategically to mitigate the risks and harm to the livelihoods of the new entrepreneurs it set out to help.

2.7  Policy reforms accompanied by capacity and skills building can lead to significant benefits. The payoffs from reform in these areas are significant. Macroeconomic reforms can also assist in providing greater market access to the people who require it. A hypothetical improvement to the top quartile of countries on the ease of doing business can provide up to 2% points more annual economic growth[166].

3.  Donor Interventions that leverage changing the business climate towards PSD: Strategy for PSD and Equitable Growth

3.1  A significant amount of work is required to be undertaken at the country level and by the private sector to ensure that partnership efforts are translated efficiently in to livelihoods creation, fulfilling the MDGs and sustaining development beyond. The challenge of domestic private sector development has to be addressed from the perspective of capacity development (human, institutional and system-wide), enabling environment and good governance. Additionally, the interventions should address issues relating to reducing informality, access to financing and risk management (viz., microfinance, micro-insurance[167], remittances[168], etc.), providing access to skills and training for facilitating roles for the contribution of the international and domestic private sectors in helping countries to realize the MDGs[169], catalyzing and brokering public private partnerships (PPPs) for delivery of basic services[170], and mobilizing PPPs for creation of micro-entrepreneurs[171], including in post disaster recovery and rehabilitation processes[172].

3.2  Private sector development through public private partnerships should catalyze access to basic goods and services by the poor people and communities and strengthen livelihoods while promoting gender equity. There is a compelling need for reforms aimed at the smaller scale indigenous enterprises, viz., micro and small enterprises that in most developing countries are the primary engine of job creation and domestic commerce[173]. These demand based participatory interventions should be grounded in partnerships with the private sector and civil society, aim to facilitate economic and governance reforms, and develop capacity, skills and knowledge to provide policy analysis and networking tools.

3.3  Based on the Outcome Document of the 2005 Summit in September, the governments have committed to develop comprehensive frameworks to achieve the MDGs before the end of 2006. It provides an outstanding opportunity to build the necessary links between private sector development and the PRS process and ensure that PSD is an integral component of the national planning and critical to overall effectiveness of development policies and aid resources. Based on a forward looking analysis of global development trend and a preliminary assessment of the main lessons learned and results of UNDP's ongoing activities and demand from the developing countries, the activities can be classified as follow:

3.A.  Improving the environment for private sector development and private investment

3.A.1 Interventions under this category could encompass the state of governance, macroeconomic and microeconomic policies, public finances, financial systems including social security and other basic elements of the policy environment that are largely determined by the domestic decision makers. It is anticipated that good governance structure, enabling environment, and directed capacity development with and emphasis on women and youth, achieved in a participatory manner will lead to reforms that bring about institutional strengthening and frameworks to unleash and foster the private sector.

3.A.2  Accordingly, the interventions would build upon knowledge base and experience in areas relating to democratic governance, enhancing equity, decentralization and local governance including transparency, accountability, access to justice, and public administration and civil service reform. The efforts would focus on strengthening the enabling environment including transformation of the informal sector, supported by transparent rules and legislation, incentives, accountability mechanisms and simplified access to financial and other resources.

3.A.3  The experience of the Special Unit for South-South Partnerships (SUSSP) of UNDP indicates that access to financial services is the key for the development of small and medium enterprises (SMEs). The strategies and approaches are country based as well as region specific; for instance, while different strategies have been used in Africa and Asia to make financial resources and services available for the development of SMEs, there is significant opportunity for the countries in the regions to learn from each other.

3.B.  Innovative PPP models for supporting entrepreneurs and small enterprise development


3.B.1  Domestic private sector development is based on unleashing the potential of the private sector and entrepreneurship in developing countries as well as engaging the existing private sector nationally and internationally in meeting that challenge. It is through PPP that the developing countries can create employment and income growth as well as improve the quality of life for the poor. The PPP is based on sharing of resources, and rewards for potential delivery of the service and/or facility. It is therefore critical to look far beyond the contributions of the private sector that take the form of Corporate Social Responsibility (CSR) alone — however important and welcome that always will be. In fact the CSR contributions must lead to outcomes that provide tangible and sustainable basis for strengthening the domestic private sector.

3.B.2  Development partnerships, like PPPs represent a new model in development cooperation[174]. There is growing evidence from the developed countries, where PPP mechanisms have been used for government procurement and finance, that they actually do deliver better value. However, the scope of what can be done in PPP in developing countries is much wider and it is expected that such partnerships will be an enduring feature of domestic private sector development as well as government procurement. Given the diverse interpretations and definitions of PPP it is important to develop a coherent demand based framework for meeting the MDGs while complying with the recommendations of UN Reforms exercise.

3.B.3  However the importance of this kind of development partnerships is not yet matched by capacity at the national levels to develop and successfully manage them. In part, this is because such partnerships will be determined after assessment of the types of partnerships that will work best in different circumstances[175]. Also, such development partnerships will work best if the national planning processes are interdisciplinary and cross-sectoral. Interventions under this component could therefore seek to build upon successful models that can be replicated and/or taken to scale, validate new models and explore out-of-the-box opportunities that will provide business opportunities in bottom-of-the-pyramid markets. It is anticipated that the activities will lead to sustainable delivery of basic services, facilitate access to broader financing and market based safety net options, and assist in building skills and knowledge development. Such interventions could lead to creation of demand based PPP Development Facilities (PDF) at national and/or local levels and ensure equitable, viable and sustainable partnerships for PSD at the bottom of the pyramid.

3.C.  Creation of knowledge products and Networking systems

3.C.1  There is a critical need for a coherent structure and provision of real time information and knowledge for private sector development. Knowledge sharing and networking including learning are intrinsic to an effective and credible private sector development strategy. Interventions could aim to provide a knowledge sharing and networking platform to regularly provide global inventory of lessons, good practices, new information, and cutting edge knowledge, and guidance to advance private sector development as an integrated planning strategy for national planning priorities. Information could be shared through mail-groups, workshops and other initiatives to promote peer interaction and mutual support as well as build upon, complement and partner ongoing activities and actors.

3.C.2  It would also include guidance manuals, diagnostic tools and user-friendly implementation toolkits that can catalyze, at the national level, public private partnerships for pursuing business opportunities at the bottom of the pyramid markets as well as for sustainable delivery of basic services. The toolkits would provide concrete demand driven program frameworks for PPP and private sector development.

3.C.3  While promoting advocacy and communication strategies to engage diverse stakeholders in the partnerships would be an important component, the knowledge management platform would also promote peer to peer learning and facilitate South-South transfer of knowledge, skills and relevant resources for PSD and PPPs. South-South Cooperation has taken on a special importance over the last few years, especially within the context of the increasing weight many developing countries are gaining in the global economy and the benefits accrued by the sharing of experiences and peer review.

4.  How is the Private Sector engaging in development?

As a follow up to the "Unleashing Entrepreneurship", nearly fifty UNDP country offices are engaged in activities relating to private sector development. Selected Examples from UNDP's Engagement, include

  •   Creation of new Products and Markets: UNDP, Allianz and GTZ partnership for creation of demand based micro-insurance products;

  •   Provision of goods and services for creation of micro-entrepreneurship as a part of the recovery process following a natural disaster: UNDP, UNF and The Coca Cola Company partnership to provides community based sustainable water and sanitation services to selected Tsunami affected countries;

  •   Partnership with business to help address entrepreneurial solutions to poverty by addressing challenges at relevant points in the investment cycle to reduce the risks and associated investment costs: UNDP's Growing Sustainable Business Initiative

  •   Alleviating poverty through public-private partnerships in poor cities throughout the developing world by enhancing access of the urban poor to basic services such as water, sanitation, solid waste management and energy through inclusive partnerships between local government, business and communities. UNDP's initiative on Public-Private Partnerships for the Urban Environment (PPPUE).

  •   Facilitating the creation of a "Private Sector Advisory Board" under the aegis of the High Level Commission on Legal Empowerment of the Poor. The private sector representatives from the developed and developing countries and spanning the spectrum of private sector constituents will assist in translating the Commission's recommendations in to field based activities. UNDP and UNECE.

  •   Promotion of entrepreneurship, assistance and linkages between businesses (micro, small , medium and large firms) and both, domestic and international markets through business development services and access to finance, viz., Enterprises Africa, African Management Services Company (AMSCO), Mongolia Enterprise, Business Incubator Initiative (Bulgaria). UNDP Regional Bureaux, UNDP Country Offices and local private sector in respective regions and countries.

  •   CSR Related: Working with Global Compact and its members to set up national platforms for public policy dialogue and partnerships building. UNDP HQ and UNDP Country offices.

February 2006

155   The use of equity compared to pro poor endorses lack of dichotomy between pro poor and pro rich growth. Sustainable growth by definition must be equitable and therefore "pro poor." Please also refer to UNDP Policy Note: The Role of Economic Policies in Poverty Reduction. 2002. Back

156   For instance, redirecting resources to the sectors in which the poor work, the areas in which they live and/or the factors of production that they possess, the emphasis being on raising the productivity of the poor. Back

157   "Unleashing Entrepreneurship- Making Business Work for the Poor" Back

158   For the developing countries, the PPP model must address the needs of the poor and the disadvantaged, reduce their vulnerabilities and generate equitable economic growth and development. The Millennium Project's analysis has found that small amounts of money well targeted to improve basics like water access; infrastructure education, etc. can help to reduce the extreme poverty.  Back

159   The world's fastest growing market now, it argues, is at the "bottom of the pyramid." With nearly four billion people living on less than US$1500/year, the opportunities for the private sector are sizeable. Back

160   UNDP PSD Tool Kit (Draft, First Phase); also refer to Back

161   Unleashing Entrepreneurship: Making Business Work for the Poor, UNDP, 2004, pp10-12 Back

162   In the Philippines, women own 44% of the micro enterprises, more than 80% in rural areas. In Zimbabwe women run the majority (67%) of enterprises and small enterprises. Unleashing Entrepreneurship. P9. Back

163   Richer countries see far less informal and much more small and medium enterprise activity. Back

164   The policy reforms and capacity development issues relating to informal economies cover a broad set of issues ranging from land titling and property rights, common property resources and management, labor markets, social safety net mechanisms and security, access to credits and women's legal rights. Concept Note. High Level Commission on Legal Empowerment of the Poor. Launched by Nordic Countries. Olav Kjorven Back

165   It refers to informal assets that even though being significant, cannot be used as collateral to obtain loans. De Soto, Hernando. The Mystery of Capital. Black Swan. 2000. UK Back

166   Doing Business in 2005: Removing Obstacles to Growth. The World Bank. 2004 Back

167   UNDP, Allianz and GTZ. Terms of Reference. Microinsurance: Demand & Market Prospects: India, Indonesia, and Laos. January 2005 Back

168   UNDP. Remittances Roundtable Summary: next Steps. January 2006. Back

169 Back

170   Public Private Partnerships for Urban Environment (PPPUE); Back

171   Empowering the Poor Through Markets: UNDP Experiences. BRSP and BDP. 2004. New York Back

172   UNDP: Empowering communities to meet water & sanitation needs sustainably in the recovery of selected Tsunami affected countries. Partnership with UNF and the Coca Cola Company. 2006 Back

173   Launching the Millennium Project Report & priorities for 2005. Mark Malloch brown. 17 January 2005. Back

174   PPP Spectrum of Options, Annex I Back

175   As Dani Rodrik points out, open economies and "best practice institutions are seldom key factors at the outset in promoting economic growth in developing countries. Each successful country's domestic investors are motivated by very country-specific and government led strategies "requiring local knowledge and experimentation for successful implementation." Back

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