Select Committee on International Development Memoranda


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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