Memorandum submitted by the
WWF
Executive Summary
The following submission covers a range
of concerns and recommendations for making private sector more
pro-poor and pro-environment, and which should make private sector
financing more accountable.
Investment in private sector development
WWF believes DFID should require MDBs
to demonstrate the poverty alleviation and sustainable development
benefits of private sector project finance. For example, DFID
should not support public finance lending to carbon intensive
projects inconsistent with international policy commitments. DFID's
support of funding large oil and gas projects led by UK multinationals
is not consistent with its own objectives on poverty alleviation
or environmental protection.
WWF believes DFID should ensure that
all use of Financial Intermediaries is subject to the same rigour
of assessment of social and environmental impacts as other investments.
DFID should require this for significant projects funded by all
MDB's it has an interest in, so that it is able to better demonstrate
the poverty alleviation effects of its investment approach. DFID
is well positioned to expand its work on transparency to consider
disclosure of investment contracts in order to promote sustainable
development and enhance governance. A necessary component of this
transparency will be allowing civil society to hold government
accountable for the agreements with private sector.
Small Scale Enterprise
There is strong evidence that Small
and Medium Enterprises (SME) are capable of reaching greater numbers
of people within the poorer communities in developing countries.
SMEs also have a number of advantages in terms of local level
economics, social and environmental impact.
It is clear that directing funding through
larger institutions and budget support, with emphasis on macro
growth will not provide incentives for the kind of policy interventions
that will ensure the SME sector develops appropriately for social
and environment benefits. To make the most of this potential
a far more interventionist approach by government/aid agencies
is required to create an appropriate policy and support environment.
Joined -up UK policy encouraging
the development of sustainable pro-poor enterprise
A number of practical cross-department
measures should be considered to foster and encourage sustainable
pro-poor enterprise in developing countries. For example:
1) Joined up thinking on the cycle
of aid-development-trade back to the UK.
2) UK government procurement policy.
3) Ensuring corporate responsibility
of UK parent companies with interests overseas.
4) The on-going FCO Sustainable
Development Dialogues with the BRICS countries.
5) Work with the ex-pat business
communities in the UK.
1.0 INTRODUCTION
1.1 WWF welcome the opportunity to submit
to this very important inquiry on the role of DFID in promoting
private sector development in developing countries. WWF work internationally,
at a local, national and global level, in a number of sectors
which have direct private sector engagement. The following submission
covers a range of concerns and recommendations for making private
sector more pro-poor and pro-environment, and which should make
private sector financing more accountable.
2.0 SECTION 1: Investment in private
sector development
WWF would question why the IDC has decided
to review issues around PSD with regard exclusively to pro-poverty
growth whilst ignoring the hugely important issues around environmental
issues. A key part of DFID's missions is to "make sure the
environment is protected" and yet DFID has continually paid
no more than lip service to this aspect of its mission.
As the world's leading environmental
NGO WWF is well placed to comment on such issues and feels it
a huge missed opportunity on the part of the IDC to review these
crucial failures in DFID's work and PSD in particular.
WHAT ARE THE CONNECTIONS BETWEEN PRO-POOR
GROWTH AND PRIVATE SECTOR DEVELOPMENT?
2.1 The example of the extractives industry
highlights the need for better co-ordination of DFID investments,
both directly and through MDGs, and its poverty alleviation objectives.
2.2 For the extractives sector which
can bring sudden influxes of revenues to low income countries,
there is a danger that more money can only exacerbate poverty.
This 'resource curse' has been seen in many resource rich countries.
Despite efforts to direct expenditure of oil revenues, many countries
still see natural resources fuelling conflict and corruption.
The most recent high profile example is the World Bank's attempts
to restrict the Chadian government's use of oil revenues from
the Chad-Cameroon pipeline on arms. When the Chadian president
amended the Petroleum Revenue Management law, reducing the amount
of money that would be ring-fenced for sustainable development,
the WB was forced to suspend all loans to the Chadian government.[176]
The huge social and environmental problems associated with extractives
projects demonstrate the need for development institutions to
develop effective governance structures, rather than become involved
in controversial projects. DFID's support of funding large
oil and gas projects led by UK multinationals is not consistent
with its own objectives on poverty alleviation or environmental
protection.
2.2 The activities of companies based
in emerging economies - China and India, for example, will be
of increasing influence in the extractive sectors in developing
countries. Patterns of investment from emerging economies in sub-Saharan
Africa, for example, will be of increasing importance in determining
the trajectories that poverty alleviation programmes take. DFID
can engage these concerns in several ways:
1. DFID can work across government
departments to examine the effects of UK private-sector financial
support for the business activities of Chinese and other companies
in developing countries. Working with banks to develop lending
guidelines would help to address these concerns, and there are
opportunities open to DFID to do so. For example, the IFC, on
the board of which DFID sits, are instrumental in uptake of the
Equator Principles by private financial institutions. The IFC
and EBRD are also engaged in capacity-building projects, training
bankers in emerging economies on sustainable investment.
2. DFID and the IDC should review
the recent report by WWF on this subject. The report, Shaping
the Future of Sustainable Finance: Moving the Banking Sector from
Promises to Performance, ranked the financing policies of 39 international
banks across 13 issue areas, from climate change to human rights.
The study also benchmarked the banks' policies against international
norms, and found that banks are failing to uphold environmental
and social standards developed by UN agencies and other international
bodies. Paul Q. Watchman. Partner at international law firm Freshfields
Bruckhaus Deringer and recognised expert on banking stated about
the report - "The report marks a new maturity and objectivity
in the work of the NGO community. This is an important report
and WWF and BankTrack are to be congratulated for methodically
peeling away the rhetoric and collective epiphany of the banking
community and focusing on the reality of what is being done by
the banks to discharge their new found social and environmental
responsibilities. For some banks it makes surprising, and I suspect
for Chairmen and CEOs of a number of leading banks, unpalatable
reading."
3. DFID can work with other government
departments to ensure that public sector procurement of goods
originating in developing countries are produced in a way that
supports poverty alleviation.
4. DFID can ensure that UK government
policy supports the emergence of more sustainable businesses in
the emerging economies - recognising that this will have indirect
impact upon their investment in developing countries. This can
be encouraged through bilateral trade and investment initiatives.
5. DFID should work with UK government
departments to ensure that where appropriate the policies outlined
above (1-3) are reflected in EU policy.
CREATING AN ENABLING ENVIRONMENT BY
PROVIDING TECHNICAL ASSISTANCE ON THE REGULATORY ENVIRONMENT
2.3 DFID has historically been involved
in producing investment-friendly regimes for hydrocarbon extraction,
through funding projects such as reforming Russia's tax regime,
advising Georgia on oil and gas pipeline legislation. A full analysis
of DFID's relationship with the oil sector is available in the
report "Pumping Poverty - Britain's DFID and the oil industry"[177].
This report highlights the incongruence between supporting projects
such as BP's Baku-Tblisi-Ceyhan pipeline in the Caucasus through
the International Finance Corporation and the European Bank for
Reconstruction and Development (EBRD) and DFID's commitments to
achieving the Millennium Development Goals.
2.4 DFID has been involved in more
positive initiatives, such as hosting the Extractive Industries
Transparency Initiative (EITI), and chairing the OECD taskforce
on Strategic Environmental Assessment. WWF supports both of these
initiatives, which need greater impetus from DFID to increase
uptake and implementation of the tools available.
In the meantime however DFID continues to be faced with decisions
regarding projects that are seeking Multilateral Development Bank
lending purely as political risk insurance. The next in line is
the Sakhalin II project led by Shell in far east Russia, which
is seeking funding from the EBRD, as well as the UK Export Credit
Guarantee Department.[178]
The US$ 20 billion project has already impacted the remote Russian
island's fishing industry, with catches down 70% close to the
construction. This is critical, as fishing generates 30% of the
island's economy. In addition, the project threatens the 100 remaining
critically endangered western grey whales. The project is designed
to produce gas for export to Japan and oil for export, whilst
local communities have severely limited energy options. Shell
was forced to recognise indigenous communities in 2005 to attempt
to comply with EBRD policies, but any plan developed now the project
is half built is of limited value. The project was not subject
to a Strategic Environmental Assessment, which could have improved
the design at an early stage.
2.5 This was proposed in the EBRD's
Natural Resources Policy, but DFID has not sought to enforce this
as a requirement. The project is also not subject to the EITI.
DFID should not support public finance lending to carbon intensive
projects inconsistent with international policy commitments.
2.6 WWF believes DFID should require
MDBs to demonstrate the poverty alleviation and sustainable development
benefits of private sector project finance. This
was one of the recommendations of the World Bank's Extractive
Industries Review - that lenders should develop indicators to
report at the project level on the impacts (positive and negative)
on poverty alleviation. WWF believes DFID should require this
for significant projects funded by all MDB's it has an interest
in, so that it is able to better demonstrate the poverty alleviation
effects of its investment approach.
PRIVATE SECTOR DEVELOPMENT FINANCING
2.7 MDBs are increasingly using Financial
Intermediaries (FIs) such as local banks in developing countries
to deliver financial support at a local level. The situation is
outlined in the WRI report MDB 'Lending through FIs - Environmental
and Social Challenges'.[179]
For example the IFC's portfolio consisted of 50% support to IFIs
in 2003. As a result MDBs can be indirectly supporting high impact
activities such as mining, forestry or tanneries, without the
mainstream safeguards being applied. This loophole means that
a significant and growing proportion of MDB distribution of funds,
especially aimed at micro-finance or SMEs has minimal or no oversight.
WWF believes DFID should ensure that all use of Financial Intermediaries
is subject to the same rigour of assessment of social and environmental
impacts as other investments. This would require enhanced
disclosure of requirements, reporting on implementation and interaction
with local stakeholders. At present the limited disclosure on
the projects supported throught FIs makes it impossible to demonstrate
how successful they may or may not be. Even where there are environmental
and social requirements for financial intermediaries, there is
often very limited capacity within local banks to make such assessments.
DFID should also play a role in building capacity in FIs to
align their investments with sustainable development.
PRIVATE BENEFITS VERSUS BENEFITS TO
SOCIETY
PUBLIC PRIVATE PARTNERSHIPS / CORPORATE
SOCIAL RESPONSIBILITIES
2.8 The blurring of public and private
sector leads to particular challenges in regulating corporate
behaviour. In order to operate in areas previously the exclusive
domain of the public sector, the private sector is receiving certain
rights and powers to enable its activities. However the responsibilities
to citizens that the state may have are not transferred with the
rights to multinationals, leading to concerns over the abuse of
such powers, and the ability of stakeholders to hold corporate
actors to account. This situation is further complicated by the
involvement of state enterprises, which may have conflicting interests
with those of government departments responsible for applying
and enforcing environmental law or upholding human rights. This
area has been the subject of recent studies by WWF, Amnesty International
and IIED,[180] who
are concerned that the contracts between multinationals and host
states may bypass the environmental, human rights and sustainable
development frameworks we have been working to put in place. DFID
is well positioned to expand its work on transparency to consider
disclosure of investment contracts in order to promote sustainable
development and enhance governance.
2.9 A necessary component of this transparency
will be allowing civil society to hold government accountable
for the agreements with private sector. This will require strengthening
of expertise and capacity within civil society groups to respond.
2.10 One tool which DFID has been championing
with the World Bank is Poverty and Social Impact Analysis
(PSIA). PSIA is the analysis of the distributional impact of policy
reforms on the well-being or welfare of different stakeholder
groups, with particular focus on the poor and vulnerable. PSIA
has an important role in the elaboration and implementation of
poverty reduction strategies in developing countries. It promotes
evidence-based policy choices and fosters debate on policy reform
options.
3.0 SECTION 2 Small Scale Enterprise
PRO-POOR GROWTH, HOW TO ACT AT A
LOCAL LEVEL TO ENCOURAGE SUSTAINABLE PRO-POOR ENTERPRISE
What can the SME do to alleviate poverty?[181]
3.1 There is strong evidence that Small
and Medium Enterprises (SME) are capable of reaching greater numbers
of people within the poorer communities in developing countries.
SMEs may be less efficient in terms of delivering economic growth
at national level, but can have significant advantage in terms
of local level economics (equity), social and environmental impact.
3.2 With the majority of private sector
organisations in developing countries in the category of small
and medium scale enterprise (SME), it is essential to support
the development and profitability of this sector. The livelihoods
of tens of millions of women and men in developing countries depend
at least partly on gaining an income from small scale manufacturing
and processing activities.
3.3 Although apparently very local in
scale and operating in an informal, unregulated sector, such enterprises
may in fact be tied into regional, national or even international
markets as part of supply chains. The reality, however, is that
it is the small scale enterprises that are the most vulnerable
to rapid change, and the least well positioned to benefit, since
they have very little market power, and may not have ready access
to the information, knowledge and skills required to identify
and exploit new opportunities.
3.4 Supporting SMEs must involve strengthening
their market position and their ability toadapt to market changes.
What are the different types of pro-poor
growth?
3.5 At a purely economic level SMEs
have disadvantages to large scale enterprises, in terms of increased
transition costs, salaries and opportunities for workers and contribution
to national economies. They are also harder to pull in to regulatory
frameworks.
3.6 However, also SMEs also have a number
of advantages in terms of local level economics, social and environmental
impact:
- SMEs can provide
opportunities for poor people that are more flexible e.g. in transitions
from rural to urban and from family labour to share cropping to
waged labour. Profits accrue and are re-invested locally, are
more resilient to external influence (e.g. global market fluctuations)
and are more likely to be locally accountable.
- SMEs can provide
more flexible working conditions, be more sensitive to local culture
and provide greater levels of social equity
- Environmental
impacts are more local and thus more likely to be quickly identified
and dealt with, transport distances are shorter and use of local
natural resources more likely, increasing the incentive to manage
sustainably.
Creating an enabling environment for
supporting SMEs
3.7 There are a number of critical elements
in creating an enabling environment for SMEs:
- Market Access - for local, regional
and international markets. This requires improved access to market
information, market surveys and improved links to purchasers
- Improved enterprise skills development.
Enterprise skills are traditionally low in this sector, in particular
the ability to adapt to market changes.
- Access to appropriate credit
3.8 There is evidence to show that support
for SMEs will require an intermediary body which can provide skills
training, market knowledge and support regulation and quality
control. In the early stages, these intermediaries will require
significant aid or government support to become established enterprise
support bodies.
3.9 The policy environment has a big
impact on development of SMEs. Encouragement of SMEs requires
a more interventionist approach to respond to policy changes than
large scale enterprise. Where standards are imposed (either regulation
or voluntary) and act as 'entry tickets' into a market place,
it is important to intervene and ensure that SMEs are provided
with an opportunity to take advantage, otherwise a very large
opportunity to create change may be lost.
Aid Instruments to encourage SME development
3.10 It is clear that directing funding
through larger institutions and budget support, with emphasis
on macro growth will not provide incentives for the kind of policy
interventions that will ensure the SME sector develops appropriately
for social and environment benefits. To make the most of this
potential a far more interventionist approach by government/aid
agencies is required to create an appropriate policy and support
environment.
Example of the Goodwoods programme in
East Africa[182]
3.11 The Goodwoods project in Kenya
is an example of how strong intervention can allow small scale
enterprise to grow in a way that promotes social equity and environmental
sustainability. The programme in East Africa was supported by
WWF and Oxfam to support market entry for woodcarvers using sustainably
harvested wood.
3.12 With severely diminished hardwood
stocks, Kenyan carvers have predominantly used illegally logged
hardwoods from Kenyan forest reserves or from Tanzania. The practice
has been highly unsustainable, threatening the livelihoods of
carvers and their families, as well as significantly contributing
to the loss of East African forests of global biodiversity importance.
3.13 This project focused on working
with various partners to encourage carvers to shift to carving
neem 'Good Wood', which is sustainably grown and harvested by
coastal farmers.
3.14 To guarantee the environmental
sustainability of the 'Good Wood' carvings to the consumer and
to have the ability to access ethical crafts markets, a major
aim of the project has been to achieve Forest Stewardship Council
(FSC) certification. The prospect of new markets and re-invigorating
export markets has been an incentive for carvers to switch to
Good Woods and participate in the certification scheme.
3.15 The 'Good Woods' project is an
innovative project in many ways. It has been a very holistic project
that has been able to combine work from field to policy level
and private sector to government involvement. It has also been
judged as a rather successful attempt of a true integration of
livelihood and conservation approaches. This has been achieved
using a market based approach. It was one of the first projects
attempting to apply certification to woodcarving and farm forestry.
4.0 SECTION 3 Joined -up UK policy
encouraging the development of sustainable pro-poor enterprise
4.1 A number of practical cross-department
measures should be considered to foster and encourage sustainable
pro-poor enterprise in developing countries. For example:
6) Joined up thinking on the cycle
of aid-development-trade back to the UK. Closing the
loop between aid going out from DFID and measures to support trade
back to the UK and Europe from developing countries. A current
example comes form the EU sugar regime. The EU will open its markets
for importing sugar to all countries in 2009. It will be important
to provide aid now to the sugar producing least developed countries
to assist them to produce sugar in a sustainable and competitive
way, so they can take maximum advantage of this new market. Therefore
aid can directly support poverty alleviation in the poorest countries,
by taking advantage of new trade measures.
7) UK government procurement
policy. There has been much success to date in the debate
over UK public procurement policy. This has hitherto focused on
environmental public procurement, but has not embraced a development
agenda. The UK government could aim for preferential access for
the same 'green' goods and services, but from developing countries
- supporting sustainable private sector enterprise development.
8) Ensuring corporate responsibility
of UK parent companies with interests overseas. The removal of
the Operating and Financial Review (OFR) has reduced the reporting
requirements of UK companies on the social and environmental impacts
of their overseas business interests. It is essential that the
Company Reform Bill re-instates the reporting requirements, to
ensure that UK companies are accountable for their impacts on
workers, communities and the environment overseas.
9) The on-going FCO Sustainable
Development Dialogues with the BRICS countries (Brazil, Russia,
India, China and South Africa) could play a critical role in supporting
private sector in these rapidly expanding economies to develop
in a more sustainable manner.
10) It will be important to work
with the ex-pat communities in the UK who have significant
business interests overseas, for example the Indian Business Council.
These groups collectively have considerable economic strengths
which can be built on.
February 2006
176 http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20778928~pagePK:64257043~piPK:437376~theSitePK:4607,00.html
Back
177
http://www.carbonweb.org/pump_pov.htm Back
178
http://www.panda.org/sakhalin Back
179
http://pdf.wri.org/iffe_mdb_lending.pdf Back
180
http://www.iied.org/SM/CR/documents/Liftingthelid_000.pdf Back
181
D. Macqueen, IIED, 2005 Back
182
KENYA 'GOOD WOODS' PROJECT LESSONS LEARNT REPORT, Susanne F. Schmitt
and Deborah Heaney WWF-UK October 2005 Back
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