Memorandum submitted by the United Nations
Development Programme (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[146].
Accordingly, quality of growth[147]
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[148]
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[149].
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[150].
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[151]
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[152].
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[153].
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[154].
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[155].
Also, the poor people have to be empowered to take advantage of
their currently "dead capital"[156].
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[157].
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[158],
remittances[159],
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[160],
catalyzing and brokering public private partnerships (PPPs) for
delivery of basic services[161],
and mobilizing PPPs for creation of micro-entrepreneurs[162],
including in post disaster recovery and rehabilitation processes[163].
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[164].
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[165].
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[166].
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 50 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
146 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
147
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
148
Unleashing Entrepreneurship-Making Business Work for the Poor. Back
149
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
150
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$1,500/year, the opportunities for the private
sector are sizeable. Back
151
UNDP PSD Tool Kit (Draft, First Phase); also refer to www.results.undp.org Back
152
Unleashing Entrepreneurship: Making Business Work for the Poor,
UNDP, 2004, pp10-12. Back
153
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
154
Richer countries see far less informal and much more small and
medium enterprise activity. Back
155
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
156
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
157
Doing Business in 2005: Removing Obstacles to Growth. The World
Bank. 2004. Back
158
UNDP, Allianz and GTZ. Terms of Reference. Microinsurance: Demand
& Market Prospects: India, Indonesia, and Laos. January 2005. Back
159
UNDP. Remittances Roundtable Summary: next Steps. January 2006. Back
160
http://www.undp.org/business/docs/mdg_business.pdf Back
161
Public Private Partnerships for Urban Environment (PPPUE); http://pppue.undp.org/ Back
162
Empowering the Poor Through Markets: UNDP Experiences. BRSP and
BDP. 2004. New York. www.undp.org/business/docs/empowering_markets.pdf Back
163
UNDP: Empowering communities to meet water and sanitation needs
sustainably in the recovery of selected Tsunami affected countries.
Partnership with UNF and the Coca Cola Company. 2006. Back
164
Launching the Millennium Project Report & priorities for
2005. Mark Malloch Brown. 17 January 2005. Back
165
PPP Spectrum of Options, Annex I, Ev 325. Back
166
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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