CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 921-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

INTERNATIONAL DEVELOPMENT COMMITTEE

 

 

PRIVATE SECTOR DEVELOPMENt

 

 

TUESDAY 14 February 2006

MR KURT HOFFMAN

PROFESSOR ADRIAN WOOD and MR SUNIL SINHA

MR JOE MATOME

Evidence heard in Public Questions 1 - 61

 

 

 

USE OF THE TRANSCRIPT

1.	This is a corrected transcript of evidence taken in private and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
2.	The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the International Development Committee

on Tuesday 14 February 2006

Members present

Malcolm Bruce, in the Chair

John Barrett

Richard Burden

Mr Quentin Davies

Mr Jeremy Hunt

Ann McKechin

Joan Ruddock

Mr Marsha Singh

________________

Witness: Mr Kurt Hoffman, Executive Director, Shell Foundation, gave evidence.

Q1 Chairman: Good afternoon, Mr Hoffman, and welcome to the Committee. Thank you for taking the time to come and give us evidence. As you know, we are just at the beginning of an inquiry into the role of private sector development in growing out of poverty, if I can summarise it in those terms. Obviously you from your background have made some statements about the role of the private sector both within the aid industry and in terms of growing out of poverty. We have a particular focus on Africa, although it is not exclusive, and nor does your organisation focus exclusively on that, but that is an area where it seems the aid that has been distributed has not delivered alleviation of poverty. There is evidence to suggest that the reverse might be the case, or at least you are asserting the reverse is the case. I think the question that kicks the session off is if we are serious about achieving the Millennium Development Goals by 2015, or even getting anyway near closing the gap on them, then we need to achieve growth rates, it seems to be the general view, of about six or seven per cent in African countries, which is substantially better than they have achieved in the past. We are about to launch substantial additional aid expenditure into those countries, which you are obviously sceptical about the benefits from. I wonder if you could say how you think that economic growth could be achieved and poverty could be alleviated and what is the role of aid and its interaction with the private sector?

Mr Hoffman: Thank you to the Committee for the opportunity to engage with you this afternoon. You have cast the question very broadly but also very precisely. When I answer I will attempt to answer drawing on my background certainly as a Director of the Shell Foundation, but that is a job I have only been doing since 1997. My background goes back before that where I spent the previous 20 years as a development professional, so I was very much into the role of the development community, first as an academic and then working for a number of international agencies - the UN, World Bank and so on. I also along the way had a bit of private sector experience of my own as an entrepreneur raising venture capital here in the UK to launch some businesses; some that were successful and some that were not. I will be drawing on that broad perspective in answering the question. I think that if we look at how best we can now go forward and where we are in terms of how to use the available aid financing in order to catalyse economic growth, the positive thing to say is certainly looking back over the last year I have been, on the one hand, concerned about in a sense the focus on simplistic solutions to the problem of development in Africa, but I have also been encouraged by the increasing focus over the last year on economic growth as a key driver and on the role of the private sector and the market and so on as delivering that growth. So, in a sense, I am much more optimistic than I was a year ago that the focus of attention about how to go forward from where we are now has shifted onto the issues that I think are the right issues, and indeed that is about economic growth and how you make that happen, because the work of DFID and many others has recently shown that is key to getting people out of poverty in Africa. I think the first point that I would make comes from observations that many of us in this room will have made when visiting Africa which is that everybody is a businessman. In a sense, the informal sector is very large and people are forced into the informal sector through their poverty but when they are in there they have to learn how to trade and buy and sell and try to exploit the market as they understand it in order to survive. Secondly, their customers are poor people and they are poor and impoverished and suffer many of the problems of poverty but they are customers and they are, equally, very good at what they do. Having to live on $1 a day or less forces you to focus pretty well on how you spend the income that you have. So there is a great starting point I think in Africa for this challenge that we face. The second point I would make is that that starting point also means there is a lot of experience. We have had in the last few years, whilst troubles exist in many countries, a number of examples of private sector companies and economies beginning to grow on the basis of private sector actors, so there is a lot of valuable experience and knowledge to draw on on the ground in Africa amongst the private sector, of all characteristics. In my view, that knowledge is far more valuable than the insights that we have from so far away because you get local knowledge, local experience, local understanding of risks, and so on. So you have the fact that everybody is a businessman, you have sophisticated consumers and you have an increasing amount of experience on the part of local businessmen, both small, medium-sized and large enterprises, private and public sector enterprises, foreign and local enterprises, who are learning how to survive and grow within African countries. I think that is all very positive. The challenge in the question that you ask is how do we use public sector aid money to catalyse economic growth, and that is where the challenge comes because, in a sense, I have argued in the things that I have written and I am really seeing with my own eyes that both the delivery mechanisms and the incentive structures through which aid is delivered to enhance development and particularly to enhance economic growth and private sector development are not nearly as well connected into the local market that I have just described as the local market is. So the challenge is how do you harness the finance that is available, the undoubted expertise in the policy researchers and academics and the local knowledge of NGOs, how do you harness that so that it is tied and directed much more efficiently to the needs of growing local enterprise and getting economic growth underway. That to me is the real unique challenge that the aid community faces.

Q2 Chairman: But do you not accept that funding education, funding health, funding infrastructure, which in a sense the public service providers' prime responsibility is to facilitate, is where a lot of the aid money will go? Is that not going to help private sector development?

Mr Hoffman: I certainly think that is where a lot of the aid money will go. Whether it will help or not depends, in my mind, to just how closely calibrated that spend is to increasing the possibility of economic growth taking place. I think one of the challenges has been in the past that the development community side has accepted the argument that if we spend on education, spend on health, and so on that by magic almost somehow this will create the ideal conditions for economic growth to happen and private sector enterprise to emerge. It often has not happened, and that is not because these social spends cannot generate the income and growth; it is because we have not had the incentive structure and the mechanisms to tie them closely enough to the challenge of generating economic growth on the ground with enterprise. I think that is the challenge.

Q3 Ann McKechin: Mr Hoffman, I have read your paper[1] and you made one very interesting hypothesis linking the amount of aid which has been invested in African countries with the growth in the economy, and what you have stated is that the aid community "oversaw and implemented a near quadrupling of aid as a percentage of GDP for African countries between 1970 and 2000. Regrettably, over the same period, the per capita GDP growth decreased on average by 0.6% every year." It is actually right to emphasise that the official ODA assistance to Africa started to decline heavily in the 1980s and in fact it is only in the last few years post-2000 that it has climbed back up to something like the figure in real terms it was back in the early 1980s, which would seem to suggest that the less aid that was being poured in actually resulted in lower economic growth. I am interested in where you think that correlation relates, or is it simply the fact that African countries' economies have been going downward for different pressures, be it conflict, be it trade terms, be it the colonial legacy that they face which had never been properly dealt with?

Mr Hoffman: I think when you deal with macro level statistics like that and you are trying to find a cause and effect you can only go so far in drawing the relationships. That relationship of the graph in the paper is one that really posits the problem that there were aid resources flowing in, it may have been in relative terms they were getting lower, but they were flowing in and at the same time economic growth was declining, so if the intention of the aid was to, in a sense, facilitate economic growth then clearly it was not happening well enough, it was not working well enough.

Q4 Ann McKechin: I think when you said it is there to facilitate economic growth it is also the nature of aid. Would you not accept that a great deal of the aid in the last 30 years has been disaster relief aid, ie just keeping people alive because of the AIDS disaster or conflict or war or an earthquake, rather than development aid, and that perhaps we should be looking more at how the total spend on aid is made and whether it is more on development rather than disaster relief or technical assistance?

Mr Hoffman: In a sense, it always makes sense to separate out the humanitarian side, although there is always the challenge in the humanitarian spend as to how you link that to the longer term, how you spend that in a way that will lay the basis for the longer term, so in a sense you cannot excuse asking the question of humanitarian aid's contribution to development. When you are talking about increasing the use of aid for development purposes, for me it does come back to the question of looking into how the aid is spent and looking across the allocation of health and education and so on, from my perspective, which is that poverty is about a lack of income (it is about a lack of many other things but it is fundamentally about a lack of income) and lack of income is about a lack of jobs, and therefore if the war on poverty is all about doing the best we can to create as many jobs for as many people as possible, then the first question you ask about the allocation of aid resources is how much is being targeted on this particular set of challenges of job creation and enterprise creation and so on. The second question is if you then have the money that you have being spent on that focus, you say how is it being spent and who is spending it, who is deciding how that money is invested and spent and allocated in pursuit of economic growth and enterprise creation. And this is where I have found the years that I have spent in the private sector, in comparison with my background as a development policy researcher, very illuminating because what I have found from the private sector is that there is an equation that operates when you are in a private company in which the way resources are allocated, either financial resources or people resources or intellect, is really driven by the achievement of a set of measurable objectives.

Q5 Ann McKechin: Would you not agree it is also the ability of states to regulate that investment to make sure it is of benefit to the people that is also crucial, and if they do not have sufficient enforcement regimes they are likely to be very susceptible to abuse?

Mr Hoffman: There is no question about it, you must have effective regulatory control over the private sector to make it happen, but the point I was making is that when you are in a private sector company you have to deliver the results that you are after, and in a sense many critics of the private sector say if it is profit that you are after the pursuit of profit damages many people and many environments, but what I have discovered is that en route to the pursuit of profit this focus on giving the customer what they want brings the whole organisational focus on what does the customer want, how do we make it better and cheaper and of higher quality, how do we get it to the customer more effectively, how do we do that in a measurable way so that more customers are buying more of your products than the other person's? In the development community the fact that the links are not often made between the way the money is allocated and the returns that it is expected to produce is where the weakness comes because you often get allocation in terms of targets and various qualitative performance indicators rather than how much does your development spend on health or whatever contribute to generating jobs on the ground, and it is that connection that I ---

Q6 Ann McKechin: So keeping people alive is secondary to health and education spending?

Mr Hoffman: The point is how you better calibrate that spending so that it gets to the heart of the economic growth challenge in the private sector. Let me give you an example that I have used elsewhere from a book called Mountains Beyond Mountains by Tracy Kidder in which he talks about Dr Paul Farmer, who is a Havard medical doctor who spent a lot of time in Haiti focusing on the problem of TB and who put a lot of effort into pioneering highly-designed intervention mechanisms to tackle TB patients. He did an experiment whereby he said, "Right, I am going to have one set of my patients where I will provide the whole package of TB intervention, the drugs, the education, the support and so on, and to the other control group I will just provide the drugs, no support, no education, but I will provide income, I will provide finance," so in effect they had a job. And the outcome of that experiment was the recovery rate of the group who were receiving the income was an order of magnitude more than those who had just received the TB drugs and all the education and so on. To me that is striking because it suggests the power of having income-creating opportunities alongside development interventions.

Q7 Mr Hunt: I am trying to understand, if I may Kurt, are you actually saying that investment in health and education crowds out the development of the private sector and that when resources go into the health and education sector of a country in Africa that means that people who are educated get sucked into where the development money is being spent instead of helping to develop the private sector? If you are saying that, what do we do as the developed world when we have a crisis like AIDS in Africa? Do we stand by and say any intervention by us is not going to work or do we say we have to take short-term measures to help alleviate this terrible crisis because if we do not people are going to die and we just have to be very careful that we do not hinder private sector development at the same time?

Mr Hoffman: Clearly I am not saying that one stands aside when confronted with humanitarian disasters, clearly not, but what I am trying to get at is we know that economic growth comes from the activities of enterprise. We know that is what gets people out of poverty. We know there are all sorts of problems about the control of private sector and economic growth, often not leading to equitable benefits and environmental damage. We acknowledge all that. We know the business model for generating wealth and getting people out of poverty works. We know that and we have had a history in the development side of spending a lot of money and in those countries where the needs are greatest of not having a lot of traction on the economic growth side, so the thing that I worry about both in what I do as Director of the Shell Foundation and also in thinking about these things is how do we in a sense marry what we have learned about the role of the private sector in economic growth with the demands of providing more humanitarian development support. So it is not a question of either/or; it is a question of how you exploit the synergies between the two. It is a question, for example, of saying, well, in those regions or countries or sectors where there is absolutely no money and therefore the market cannot work and the private sector cannot work you still have the challenge. It caused me to think of some of the work that we have done, for example, in trying to find ways to get cleaner stoves into households in Africa and Asia where the women and children are suffering from acute respiratory diseases caused by inhaled smoke coming from indoor cooking fires. This is known as Indoor Air pollution. These are the bottom-of-the-pyramid households, the $1 or $2 or less. What we have found looking back over the history of engagement with it is that there were a lot of efforts to supply technical solutions of various kinds but there was not an awful lot of effort to understand what the market wants and whether there was a real opportunity and a willingness to pay, even at that very poor level, for these sorts of development interventions and poverty interventions. What we have discovered, by poking away with non-profit partners and small-scale enterprises in Africa and India, is that if you let the market drive the product design and you let the market drive the marketing message and the customer awareness message, it is possible to find a combination of a product and a social benefit that will cause these poor households and poor communities to find ways to access the product, and that is the case in these stoves which cost $3 or $4 dollars. It is also the case in sanitation. IDE[2], the national development group working in Vietnam, have discovered, equally, with sanitation that by really concentrating on what poor people understand and the lack of information they have about the benefits of sanitation, constructing a consumer awareness campaign that addresses those issues, and then designing products that meet their needs but address their financial implications, they have also been very successful in finding ways to develop products that are affordable at the level of very poor people. Again, sanitation is a development requirement. So it is not that one squeezes out the other. It is how do you harness what we know about business models and business and apply it to development thinking in order to get the various benefits.

Q8 John Barrett: You mentioned earlier when you said one weapon in the war on poverty is jobs and clearly many of these jobs could be manufacturing jobs but given the huge increase in manufacturing in China - we hear reports that almost everything seems to be manufactured in China - do you think there is an opportunity in Africa to produce many manufacturing jobs? If not, where do you see these jobs coming from now?

Mr Hoffman: Yes I do think there is an opportunity. We have funds now of approximately $40 million focusing on small and medium-sized enterprises in East Africa and Southern Africa. They are not fully committed yet but we probably have helped 300 or 400 enterprises, for example small enterprises fabricating wind turbines. We see lots of evidence that with the right finances and the right business skills it is possible to get a manufacturing capability going. The challenge is how you increase the robustness of that incipient manufacturing capacity so that it can grow, search out international markets, be robust enough to withstand the threat of competition, and so on, and that is the challenge. It is not that you cannot do it, it is how do you increase that robustness? Again, we find that one of the routes to it is by as soon as you can (and in a sense I am speaking as a donor intervening) ensuring, as soon as you can, that the small enterprise you are creating is directly in touch with the market, not with a donor like ourselves or an NGO or a not-for-profit organisation, but directly in touch with the market and getting clear signals about how to become more competitive. The second point is to ensure that the interventions and the things that we do as a development donor community are themselves driven to become financially viable because firstly that means "pressure" on the small enterprise to meet your business plan, become increasingly competitive, develop products that are wanted by the market. If you set the funding determinants right these products are pro-poor and so on. So you keep the pressure on there but if the intervention itself is also financially viable you then find that after a short while that with seed funding, the soft money that we represent, that you can get increasing amounts of funding from the development finance community and the capital markets and then you can begin to grow these interventions in local markets that are supplying finance and resources to these small enterprises to become more competitive. So it is not just about getting them started, it is how you grow them, and again this connection to the market, as difficult and as rough and as uncompromising as the market can be, is critical to that. Along with that comes things like the transfer of technological capabilities and all the things you need in order to remain competitive.

Q9 Chairman: How does our own Department for International Development plug into this because they are giving budgetary support, for example, in order to alleviate poverty directly through health programmes and education programmes which you are a little sceptical of because it makes the host government lazy in terms of stimulating demand and raising their own revenue. How do you think a large aid provider like DFID should be promoting a pro-growth, anti-poverty strategy?

Mr Hoffman: Firstly, I would say that the recent White Paper in terms of capturing the arguments for private sector-led growth and pro-poor outcomes of economic growth really is an excellent paper and it captures many of the critical arguments, and I think that recent interventions by the Minister have also been spot on. I would say, just looking across a number of the donor agencies that we deal with, that DFID is far ahead of its competitors in terms of understanding the importance of that, so that is the first point to make. I think that is where the best focus of that is. To be honest here, I do not know enough about what happens after the budgetary support-type programmes and how they happen to really offer a view on that, so there is a large chunk of what DFID does in terms of budgetary support where I do not know enough about how it works through to supporting the sorts of things that I have been talking about to offer a view. My concern on that is that the development community, of which DFID is a part, and the ministries that it feeds into and the local development agencies that have been working with the IMF and the World Bank and all of that, are full of the same breed of person, very much like me, development professionals who have spent all their life in a non-market situation and therefore do not have the experience-based understanding as to how markets work, as to how businesses work, and how you create growth and how you assess risk and invest. So my sense, without knowing a lot about how well it works, is to do whatever we can do to bring into DFID and into the development community private sector experience and business experience about how to deliver concrete results. I think that is a great thing in general and of great value, and there are a lot people with expertise like that, not consultants but people who have actually risked their own money and been at the hard end of creating wealth and jobs in Africa. More specifically, I think that it has to be in and around the area of getting the markets to work properly and getting the incentive structures to work right, to improve the investment climate and so on, the sort of things that the Committee will know are embodied in the Investment Climate Facility (ICF) of which the Shell Foundation is an enthusiastic supporter. That is an intervention that is clearly focusing at a level where an institution like DFID should focus because you have the biggest impact on it by getting the signals right and so on. It is structured in a way with private sector thinking and private sector drivers and it means that the initiative will be looking out through the eyes of these people in identifying where to focus. If, for example, you are going to tackle corruption. How do you tackle corruption at a very practical level because small entrepreneurs are afraid to grow too big because there will be certain penalties demanded of them from the local crime fraternity? How do you tackle that? Getting private sector involvement involved in the ICF is a good thing. I think that the additional value that DFID can bring is in a sense recognising that to these public-private partnerships it can bring more than money to the table. It has access to a whole lot of expertise and skills and so on that, like the private sector, it needs to put on the table in these partnerships and needs to keep them dedicated to the problem at hand, and in a sense the way in which DFID structures itself to participate in these initiatives, the incentives have to be there so that it is compelled to provide all the necessary resources that are important to make that initiative work. Here I am focused on the Investment Climate Facility but other initiatives are focused on private sector growth. What we often find in a big part of public-private sector discussions and so on is that private sector companies get involved in these partnerships because they see they can get something out of them. They see that they can contribute something to the broader good but they see that they can get something out of them. Like a private sector partnership they put the resources into it in order to deliver the results. There is one person responsible for it and they have to deliver the results and, if not, they are in trouble. Often we find that for public sector participants - and I am not focusing on DFID here, I am just making a general point - you get different representatives coming at different times and the attention span of the public sector partner is often pretty limited. There should be incentives built into DFID's engagement of these initiatives to ensure that it stays focused and puts all the resources that they can into making it work.

Q10 Joan Ruddock: I just wondered if I might relate back to some of the things you said earlier about the informal sector being very large and then talking very specifically about those cooking stoves. You are painting a big picture of partnerships and creating the right sort of finance and all the rest of it, but the Shell Foundation also focuses on the growth of SMEs. I just wonder in practice, first of all, should any international aid agencies be involved at that level? Can they? How has your Foundation worked, for example on the cooking stoves, how did you decide there is a market? What did you put into it and how sustainable did the local businesses that arose become? Have they survived and for how long? How much business are they doing? Are they growing from a one-person operation to a ten-person operation? Give us a flavour of good practice.

Mr Hoffman: Okay. I think that I can probably best use an example from India as opposed to Africa on this, but in trying to find a way into this problem we searched, first of all, for partners who were represented in the market so partners who were already there so you did not have to reinvent the wheel, you did not have to reinvent the distribution mechanism or the distribution structure. First of all, we looked for a partner who was already in the market and a partner who understood that market, which is pretty unique in terms of very small villages, very low incomes, a great deal of issues, all interconnected with poverty. These are NGOs that we started to work with. In a sense we interrogated the short list that we identified in order to find those who were most alive to the challenge of, "Well, you are in three or four villages now and that is all very well but this problem is a lot bigger than that and you have a particular stove that you have piloted in this village but really you are only selling 100 a month. Don't you want to have a bigger impact?" So this is at a human level and you are looking for partners who are driven by a desire to go to scale. So that is the first thing. The second thing is we found that if you introduce the requirement that the demonstration of success and the trigger to providing more funds is whether or not people will pay for your product, not necessarily the full price but pay something. That causes the delivery mechanism to look for a whole different set of ways to engage the customers than it does if they have the stoves given to them and the problem is how do you convince the women that this is good for you. I will give you an example of what happened. It was a great breakthrough with one of our NGOs, the Appropriate Royal Technology Institute, working in Maharashtra state. When we put this kind of "pressure" on them and they went around and they focused on identifying the women in the villages who were natural leaders and encouraged them to think about how they could sell these stoves to other women in the village. In doing this they came upon a very effective marketing message - not that using a clean stove was good for you because it will decrease the amount of smoke you inhale and therefore you will not get pneumonia and so on; but that using this stove will make your kitchen cleaner and your pots and pans cleaner. That is a classic consumer message really. This NGO discovered that the "customers" were very responsive to that and began then to structure the marketing around that message. Then they discovered that the finance was not actually a problem; it was finding a message that worked. That evolution in thinking came because of the emphasis placed on getting them to listen to the market. That is one example of our value add. Here is a second: this NGO worked very well converting local self-help groups into sales representatives and sold about 65,000 stoves, and that is a fantastic result. But again the bigger problem is that there are ten million households in Maharashtra state that are at risk. So in order to go from where you are now and to have a much bigger impact they faced a real set of challenges that we would call from a business side, supply chain challenges. How do you develop the supply chain? How do you package the product you are producing in different components? Where do you get them mass-produced? How do you manage quality? Addressing these issues require skills they did not have.

Q11 Joan Ruddock: If I may interrupt, why did the private market not just deal with it?

Mr Hoffman: Too risky. In these markets the margins are too low to support the private market coming in and risking capital, it is just too risky.

Q12 Joan Ruddock: Even when you have got a product you could sell to millions?

Mr Hoffman: Yes, it is still too risky.

Q13 Joan Ruddock: This is not really private sector development, is it?

Mr Hoffman: It starts there because now we have this NGO which has submitted to us a business plan that means it is going to sell two million stoves inside three years and they will do it on a financially viable basis. So it is getting there. They are going to convert themselves into a non-profit making business. We had to bring in supply chain expertise from elsewhere, from other businesses, to help the market. That was another business skill that we helped to introduce into that market.

Chairman: Obviously we have other evidence sessions and I have a couple of colleagues who want to come in with questions so if you could perhaps keep your replies a bit crisper so we can get to the end.

Q14 Richard Burden: About a year ago the Shell Foundation published Enterprise Solutions to Poverty[3] and this was where you were talking about the question of promoting competition amongst aid providers and you said: "A re-engineering of the development supply chain along business lines...a new form of hybrid enterprise that could deliver differentially priced services to different segments of the poverty market." I am struggling a bit to know what that means.

Mr Hoffman: I think what I was trying to get at is when you are dealing in the non-market that we are dealing with where there is a variety of market failures and a variety of poverty problems, you need a whole mix of skills and inputs to overcome them, and they do not come from just one supplier, so they do not just come from the private sector, they do not just come from the non-profit sector or the aid sector. They necessarily come from different sectors and what you need to do is to find a currency that allows these different blended value investors, as it were, to get the returns that they seek from putting in risk capital into these markets but allows it to exist at the same time so that the private sector role needs to be able to get a return on capital. We need to find a currency that allows that aspiration in a particular intervention to exist alongside that of the social investor who is more interested in the social benefits gained from developing a market-based solution.

Q15 Richard Burden: So this competition does not apply to the social investors you are talking about?

Mr Hoffman: Well, the model I was talking about was where you bring the different investors together. Where I was talking about competition was between different agencies, between different donors.

Q16 Richard Burden: It sounds to me like it is creating a contracting circus which we are expecting the developing world to somehow cope with when they might have bigger priorities at the time.

Mr Hoffman: Yes, it is interesting. The issue of, at a general level, how much control we see in the private sector in order to deliver and how much monopoly control we see in the private sector in order to deliver a certain benefit. Taken down a level, at the level you are talking about, I think the issue about contracting that you mentioned is one about getting everyone to agree to a common definition of what the objectives are, of the returns that you are seeking, what the relative contributions of the different players are, and how those responsibilities will be discharged.

Q17 Richard Burden: I am just not sure on that who is the body or who are the people that are pulling that together?

Mr Hoffman: Well, there is a new example in the International Engineering Water Centre called IWEC which is a group which is indeed trying to combine private sector investors and NGOs and others in pilot projects to deliver water and sanitation in urban and rural areas in Africa and elsewhere where they are trying to make this work. So I think who would do it depends on who sees the greatest opportunity, I guess, and the key would be - it is all hypothetical so it is difficult - to find an actor who has an interest in succeeding in that particular segment in the market and then to recognise that that actor, whichever character it is, does not have all the skill sets it needs and to find ways to link the different partners together in a relationship that delivers a result. So I think we need to let the market speak to find someone who emerges who thinks they can solve a problem and then add on to it different types of support.

Q18 Mr Singh: Mr Hoffman, you are not a great fan of targets in the public sector although you call them "measurable objectives" in the private sector. Your thesis about targets would mean scrapping the Millennium Development Goals. What would you replace them with? Would you not also accept that the aid community, the Western community, the public gives money and allows the governments to spend money specifically on issues like health and education and other issues and they want to see some results from that money being spent. If we scrapped all the targets how would we know if our aid was effective or ineffective? What would you replace the goals with?

Mr Hoffman: On the first point about targets, targets need to be set so that you can identify the link between the investment that you make and achieving those targets. The problem with the Millennium Development Goals (MDGs) and many targets in agencies is that they are commonly shared targets across the development community and you have a collective responsibility for delivering them and you really cannot trace the input and output relationship. The development community would argue that it is a complicated business so you really cannot be expected to put a dollar in here and get an output there. I think the first point I am making is that if you use the discipline of forcing those targets to become ever more rigorous and the mechanisms and initiatives that you put in place to ensure that that dollar leads to an outcome that is measurable, you force those targets to become more realistic and to really stand a chance of being delivered. So that is my first point. It is not that targets are bad. It is just that we have a tendency to be too soft on our targets in terms of the link between our activities and those targets. On the MDGs, the first MDG is reducing those living on less than a dollar a day by half and then all the rest of them follow on from that - water and health and so on - and here I am truly speculating but it would be interesting to see how the resources are being allocated to tackle those MDGs, and I would hypothesise (but I am happy to be proved wrong) that the vested interests in the development community are such that there is an awful lot of money going to equally defensible poverty problems - water, education and environment and so on - and not enough going on this first one of reducing poverty through delivering economic growth through generating pro-poor enterprise activity, so again I would say let us focus on that first one and unpick it and really focus in on that on the assumption that if we do better at that we would do better on all the other targets.

Q19 Mr Singh: So you do not believe in a macro role; you believe in micro roles for specific NGOs?

Mr Hoffman: I do really. Only because the closer you can get to the suppliers of finance and deliverers of services to have their futures depend on how successful they are on generating pro-poor economic growth through enterprise creation, the more results you will get, but it is a difficult challenge to do. It does focus the attention in the next round of money if you say you are only going to get it if you can demonstrate how many jobs you have created and how many enterprises you have created.

Q20 Chairman: Thank you very much, Mr Hoffman. I think you together with this Committee have supported the campaign for more resources to go into developing anti-poverty, but how we ensure it is spent in a way that actually delivers the results, what works, is the hard part. We appreciate you taking the time to share your thoughts with us. We will see where the other evidence takes us.

Mr Hoffman: Thank you very much.

Witnesses: Professor Adrian Wood, Department of International Development, University of Oxford and Mr Sunil Sinha, Director, Emerging Market Economics, gave evidence.

 

Chairman: Thank you, Professor Wood and Mr Sinha. You have heard the first session here and we are grateful to you for coming and giving your thoughts and sharing them with the Committee. I am going to ask Marsha Singh to kick off. You waited so long until the end of last session you can start the next one.

Q21 Mr Singh: I am not sure who is the best person to answer this question but it appears that there is no correlation between growth and poverty reduction and various countries have had different outcomes in terms of growth and poverty reduction. We have got this new concept now of pro-poor growth in terms of international development. What is pro-poor growth and what are the factors that are linked in terms of pro-poor growth?

Professor Wood: Thank you very much. Just on your first observation about the lack of relationship between growth and poverty reduction, I hope you will not mind me saying that there is actually a very, very strong relationship across countries between growth and poverty reduction. Countries in which growth has been faster have consistently been the ones in which poverty has gone down the most. If you try and explain the variations of poverty reduction across countries over the past 20 years or so, about 75-80% of that is explained by variations in the growth rates, so it is extremely important. In regard to your question of what is pro-poor growth, the simple answer is that pro-poor growth is growth that benefits the poor, and that means growth that pushes up the incomes of the poor. That depends on two things. One is the overall rate of growth of the economy and the other is the share of that growth that is going to poor people. So we want to try and make the growth of the incomes of poor people as fast as possible and that means trying to find the set of policies that will yield the best possible combination of a rapid overall growth rate and what is happening to the share of the poor. The share of the poor needs to be going up but the poor will be better off in a fast-growing country where inequalities are widening a bit than they will be in a slow-growing country where equalities are shrinking.

Mr Sinha: Just to add to what Adrian has said. Firstly, we have got to say for a long time we have used growth as a proxy. What we have been interested in is exactly what Adrian was talking about, what is happening to the incomes of the poor. If you take the MDG1 Target of exceeding $1 a day, what matters is how fast the incomes of the poor are going to exceed $1 a day. When you look at that we know, as Adrian has said, that growth is absolutely a necessary condition and very often the major factor in reducing poverty because it works indirectly as well as directly. Growth will give more opportunities for the poor. If you do not have growth the opportunities continue to be limited. What we have also found is that the response of poverty to growth varies tremendously. For 1% growth, what the studies show is that you can get a 0.6% decrease in poverty, in fact some studies show as little as 0.3% reduction in poverty, or you can get a 4% decrease. So this is making us concentrate on the outcome indicators that you are interested in, which is the incomes of the poor and how fast are they growing, who amongst the poor incomes is benefiting, because you can get some marginalised groups whose incomes are not growing at all. That is the number one thing. The second thing is it has made us concentrate on is not just pace of growth but the pattern of growth. You can have growth which does very little for the poor. A typical example is the so-called resource curse countries, the ones that discover oil, diamonds and so on. The experience is that they can have short periods of very high growth but that does not benefit the poor because what happens is that the linkages between the sectors that are growing and the rest of the economy are very weak and, through something I will not bore you with called Dutch disease, can reduce the incomes of the poor. The studies show that in that kind of resource curse country what happens is that in the long run growth is not sustained and surely you do not alleviate poverty. Very often you get conflict and that will undermine growth anyway. On the other hand, you can have a very pro-poor pattern of growth where you have conditions like in Chine in the early 1980s, Vietnam in the 1990s and so on, when you get the sectors in which the poor are concentrated growing rapidly and sectors which can use the assets of the poor - namely labour - are also growing fast. You get an increase in farm incomes and an increase in non-farming opportunities, so you get massive poverty reduction. We are no longer saying it is pace; we are also saying it is pattern.

Q22 Mr Singh: Would you say that India's rate of growth, for example, is mainly a benefit to India's middle class rather than its rural poor?

Mr Sinha: There is a huge amount of studies on India, as you can imagine. India's own intellectual community is pretty rich. Also, lots of other people have done lots of work on India. What they find is that whilst the overall pattern you are talking about, especially in the recent growth of some industries like ICT and so on, has been very beneficial to the middle class, it is not true to say that growth has not benefited the poor. It varies by state. For instance, the Marharashtras et cetera of the world have had really high rates of pro-poor growth. There are two critical things. One, the pattern of growth has been very good in this way of having productivity of agriculture growing and these non-farm opportunities in the industries that the poor can move to. There have to be jobs of a skill level that they can fill. Then you have high rates of initial education and good health. The quality of the state is almost certainly the decisive factor in the differences between states in India. Uttar Pradesh and Bihar have very little growth and very little pro-poor growth. Marharasthra and the Punjab, Gujurat, the western side generally has much more pro-poor growth.

Q23 Ann McKechin: In speaking about growth, obviously another factor is the inequality in incomes between the poor and the rich in societies. Some people feel that when you have a wider gap your ability to use growth in the economy is constrained. If you agree with that assumption, how should poverty reduction strategy be focused? Should it be focused on growth and simultaneously empowering the poor to take the benefit of it or should we promote distribution and reduce inequality, or is it some magical combination of both these factors?

Professor Wood: It is not a magical combination but it is fairly straightforward. What you need to do is to give the poor more assets and more access to markets so that they can participate in the growth process more. That is giving you the best of both worlds. It is accelerating growth because it is getting a larger proportion of your population involved in the growth process and it is channelling some of the benefits of the wider growth to poor people who are being more involved in it. When I am talking about assets, fundamentally the most important asset is probably education for poor people, to increase the value of their labour and health also increases the value of their labour. Access to credit and land through reform of tenure schemes is very important. Improvements to rural infrastructure are absolutely crucial in terms of giving poor people better access to markets. To a very large extent, there is not any trade off here. Strategies that involve more poor people in the growth process are good for both growth and a reduction in inequality.

Mr Sinha: Inequality matters. There is a triangular relationship between growth, inequality and poverty. One of the determining factors for when growth is most efficient in reducing poverty is that initial conditions of inequality are low. One of the advantages in reducing poverty in China was that the initial inequality was low. Where inequality is high, because you have such a skewed ability to participate in the economy, there is a tendency that growth will be less effective in reducing poverty. What growing inequality will do is reduce the effect of growth on poverty. I would like to echo what Adrian said about there being no formula. One of the recent documents which you might care to look at is a study done by the World Bank called Growth Experiences - Learning from the 1990s[4]. For the first time, the Bank admits that there are no formulae. All this elusive search for some Washington, Paris or other consensus is not what it is about. It is about context. Context determines what is required. In the middle income countries of Latin America, where you have very high inequality, growth is very poor at reducing poverty. You would need programmes and policies to address inequality and particularly these policies are likely to have both an economic and social dimension. Very often, those who are stuck in poverty, those who are at the bottom of income distribution, tend to be from particular social groups. The indigenous people of Latin America, the Afro Latin or Afro Caribbean people, tend to be poorer than others. There is a correlation there also between social discrimination and economic discrimination and disadvantage. You have to find the right context.

Q24 Ann McKechin: You have to adapt your policies. Presumably in the case of China, it is now beginning to see much greater inequality arising. They have to change their policies to try and tackle that growing problem.

Mr Sinha: Absolutely. From about the beginning of the 2000s China has hardly reduced poverty. Growth has remained constant at 10%. The Chinese Government was very sensitive to these things and has adopted a policy called "Go West." It is too early to say whether Go West is working. We only have anecdotal evidence. But they have seen that it is not going to happen by itself. You need policies to address that.

Q25 John Barrett: Professor Wood, you mentioned the importance of basic services, health, education, access to credit, security of land tenure and how they were essential in the promotion of pro-poor growth. These are all things which DFID and others are supporting anyway. How do we make sure that state involvement in these sectors is going to be pro-poor or would that happen automatically?

Professor Wood: No, it does not happen automatically. The governments of developing countries around the world vary very greatly in the degree to which they care about the poorer sections of their community. That depends to some extent on whether the poor are a minority or a majority. If they are a minority, it is more likely they will be overlooked because the views of the majority will prevail, but it also varies for any given proportion of poor people with the attitudes, background and orientation of the government, as you will have observed.

Q26 John Barrett: Is there any way that the state can play a useful role in making sure it is heading in the right direction and that growth is pro-poor rather than heading in the opposite direction?

Professor Wood: Yes. What a state committed to making growth more pro-poor will do will be to make sure that the poor are involved in the growth process in the sorts of ways I have described. Equally, the state will also be committed to achieving a high rate of overall growth. If I may refer back to some of the questioning of Kurt Hoffman, the one point that I think did not come through clearly in particular in relation to the Chairman's initial question about Africa is if you want growth in Africa you have to have high levels of investment. You will only have high levels of investment if businessmen feel it is worthwhile investing.

Q27 Chairman: It could be investment by small businesses but an awful lot of them.

Professor Wood: I was talking about the aggregate volume of investment. It could be by small businesses, big businesses, rural businesses, urban businesses, foreign investors. That is what is not happening and has not happened in Africa. It has not been perceived as worth businesses' while to invest. Look at the capital flight: 40% of Africa's capital stock is held outside Africa. This is the growth bit of pro-poor growth. The key thing one has to think about in relation to the Chairman's initial question is how in this context aid can be used to make investment less risky and more worthwhile for a broad swathe of private enterprise in Africa. That seems to me to be the central issue.

Q28 John Barrett: I was going to ask if you could follow up the importance of the private sector in that very investment.

Mr Sinha: To answer your first question, what we know is that public expenditure is very often not pro-poor. The studies that we now have that link the two - how much was the expenditure? Who benefited from it? - show that very often investment in health, education and infrastructure is not pro-poor. That raises the real issues that we are beginning to tackle and understand. It is the political economy and the nature of the state that determines where this investment will go. What was your second question?

Q29 John Barrett: It was to follow up on that. If the public sector is not often pro-poor, there is the opportunity for the private sector to make sure that it delivers direct pro-poor growth. How does the private sector play a key role in this?

Mr Sinha: I have spent my life working on private sector development and therefore I have a certain understanding about what the private sector can be and cannot be expected to do. One thing that was very good when Kurt Hoffman was talking was that he was not talking about large, international business. The private sector is the vast majority of private actors from farmers onwards. Mainly, it is the indigenous, domestic private sector that is the driver of growth. FDI, Foreign Direct Investment, plays a huge role but never the overriding role. Even in China it is only 30% of GDI, Gross Domestic Investment. We have to set the scene here. The second thing is that the private sector has, through its drive for entrepreneurship and profit, an ability to create growth. It responds to the environment that you set for it. The regulatory environment, the investment climate, will determine where it goes. Even in the worst governed country, there will always be some sectors that it is worth taking the risk of investing in because the reward to risk ratio is favourable. There are people queuing up to invest in Sudan today in the oil sector because the reward to risk ratio is good. You can always find some investment for diamonds. The question is about deepening that incentive for entrepreneurship and investment so that it does get through to the broader sectors of the economy and the smaller type of business which is almost certainly going to be more disadvantaged from constraints in the regulatory environment. This idea that the private sector steps in and cures the problems of society frankly has a certain mileage but we have to see that as more of a corporate social responsibility issue and not about the broad base of creating appropriate incentives and regulatory frameworks that work. That is the role of the state. You need the state, the private sector and civil society interacting with each other and having the checks and balances between them to make sure that policies are pro-poor.

Chairman: The problem I think we are discussing is the absence of the private sector, to a large extent, from the equation.

Q30 Mr Davies: There is a contradiction here that is very fundamental, is there not? Parliament has decided to spend taxpayers' money on trying to relieve poverty in the Third World, very rightly so in my view. Parliament set up the department called DFID and DFID, like other bilateral donors, is a state agency. The multilateral donors are just consortia of state agencies. We all recognise that in order to relieve poverty what you have to do is create wealth. The only people in this world who create wealth are in the private sector. Experiments existed in the 20th century in Soviet Russia with the public sector creating wealth and they were a uniform disaster. You have these state organisations trying to create wealth but they themselves know they cannot. DFID recognises at least in theory that the private sector is key to resolving the problem of poverty and desperately wants to spend some of its budget. Most of its budget goes to other governments and so forth through direct budget support. It wants to help the private sector as much as possible. It realises that direct investment will not necessarily be very well targeted or very well selected and will also cause distortions in the local economy. The paper that DFID produced in December[5] recognised that. Against that background, what are the lessons we should be learning? What is the scope for DFID to affect, hopefully positively, the wealth generation capability of the poor countries that we are targeting? Are their policies vis a vis the private sector currently well received? If there are not, what improvements would you advocate?

Professor Wood: You make some very good points there, particularly about the issue of how does a public sector agency promote development of a private sector in another country. That is a key issue. I do not think the contradiction is as acute as you fear because, if you look at why investment is so low in Africa, it is fundamentally to do with failures of government in African countries. It is political instability, conflict, lack of infrastructure, chaotic, non-existent or excessive regulation. These are the things that are choking off investment.

Q31 Mr Davies: Let me stop you there. The only way that DFID can affect most of those things, excessive or badly conceived regulation for example, inefficiencies, excessively large government machines, corruption and the rest of it, is to use the leverage which conditionality gives one. One says, "We will give you a certain amount of aid and budget support in exchange for you changing your local policies." Are you telling us that one of your answers to my question is that we should use conditionality as effectively as we can to secure indigenous policy change in the target countries?

Professor Wood: It has been shown that using conditionality in a very direct form is not effective. What is crucial is to find developing country governments that are committed to taking this approach and then channel our aid money towards them.

Q32 Mr Davies: That is ex post rather than ex ante conditionality.

Professor Wood: It is. That is a good way of putting it. The thrust of what I was saying before is that there are many things for which aid money can be used, channelled through the governments of developing countries. I was not suggesting that the governments of developing countries in Africa are too big. In many cases, in some senses, they are too small especially in terms of adequately trained, equipped and paid civil servants to run things like law and order and to run infrastructural services. Fundamentally, you cannot have high levels of private investment in a country where you do not have an enabling and supportive government. This was a truth that was recognised by Adam Smith and it has not changed since then.

Q33 Mr Davies: We have to make sure that those governments are enabling and supporting?

Professor Wood: Absolutely. We cannot make sure but those are the governments we should be supporting.

Mr Davies: We have to influence the policy mix of those governments.

Q34 Chairman: If you talk about budget support, one of the arguments against budget support is substitution. In other words, the government does not have the incentive to generate its own successful economy to tax by its own revenue because it is getting it from outside. There is a danger that it lowers the pressure on that government to create a successful economy. Secondly, if you recognise that the problem is you have all this corruption, bureaucracy, inefficiency and so on, is the right thing to say, "We would give you budget support if you tackle these problems" rather than start giving budget support and then trying to withdraw it where the leverage action does not always work?

Professor Wood: DFID's policy on this is very clear: that budget support and indeed aid in large amounts is given only to countries which have relatively clean, transparent and effective public administrations or show signs of being committed to developing them. It is very important, but I believe that to be part of DFID's policies already.

Q35 Mr Davies: DFID last year produced a paper on conditionality[6] which went back on that and said that they were no longer going to get into the business of economic conditionality. The Secretary of State has conceded in answers to questions from this Committee that that is complete nonsense and, of course, it is very necessary to continue with some degree of economic conditionality.

Mr Sinha: Conditionality has been used for a very long time by the IFIs[7]. It is a very blunt instrument.

Q36 Mr Davies: It can be blunt; it can be sharper.

Mr Sinha: I will show you why it is a blunt instrument. You are saying to a government, "We will give you money if you do X." Let us assume for a moment that the government or the public sector official who signed the loan or grant that he took from you agrees with that and believes it is right to do what you should do it. There are still enormous processes of change that have to be accomplished within that country. The political settlement has to change within that country to bring about that policy. If you need legislation, you need the help of the legislature to pass that legislation. If you are going to talk about regulatory change, you need the organisations involved to sign up to that. What experience has shown us is that that does not happen automatically and the lure of your money is not enough. There have to be processes within that country that change that. If you think the political settlement is basically okay, there is good governance et cetera, it may make sense to put budgetary support in. Even there I think DFID is now increasingly saying that budget support is an instrument for dialogue, not coming with no strings attached as it were. In countries where the political settlement is generally very good you will get good pro-poor growth anyway. Where you can make a lot of difference is where that political settlement is not quite right, by putting the evidence on the table, allowing policy processes to be evidence based rather than the capturing of the state by vested interests, by strengthening the voice of those who are representing the interests of the poor. You can arrive at some change. This is not formulaic and mechanistic. That is the engagement in which donors - even public bodies - have a very important role to play. Their involvement in the private sector I am afraid is not how Mr Hoffman described it, as being sort of social entrepreneurs. We have had over a period of time now a debate on private sector development which is saying: do we concentrate on the enabling environment? Do we intervene directly? What we have found is that direct intervention without the enabling environment is frankly not very productive. It is putting your finger in the dyke and sooner or later it breaks. On the other hand, waiting for enabling environment change to happen, which is a long term process, can make you miss out on intervening where markets fail. In the developing countries markets fail very regularly. There is a role for both but it is in a way not to work directly at the level of enterprise, only to do so on very rare occasions when you are trying to address other systemic market failures.

Q37 Mr Singh: You were talking about the enabling environment. I would like to ask you about the new Investment Climate Facility which will be launched this year, which is aimed at improving the business environment. I understand that DFID has launched aid to state donors so far to this new facility. Is it wise for DFID to be treading where no other states have yet trodden? What value do you think this new facility will add to the existing business environment and initiatives like the World Bank's Investment Climate Assessments and Doing Business reports?

Mr Sinha: The reason that is a tough question is that the ICF has not been fully designed and made operational. It is looking a little bit more from the theoretical perspective, or at least an informed perspective of where we are today. The World Bank has two or three windows where it intervenes in the investment climate: the investment climate assessments that you mentioned, the cost of doing business surveys and it has an administrative barriers window as well. In general, these things are driven in the way that I find interventions are driven, with lots of conditionality attached.

Q38 Mr Singh: Which does not work.

Mr Sinha: Unfortunately, I am the project director of a very large project in Nigeria where we have this. Generally, it is very poor because it does not understand the political economy of change. Investment climate changes are not always win win. There are winners and losers. Very often, if you have a very powerful vested interest that is losing, they will block it. In some way or the other, because there are these limitations, in some instances it works well when what is really required is a technical solution, you have a willing government and a willing state that wants to embrace change and the private sector is keen on it. It will go through. But where you have problems of some people blocking change you need something beyond that conditionality and aid assistance that the World Bank provides. In designing the ICF, it was DFID's hope that it would garner more support from other participants in the state and from the private sector. You hear from Kurt that private sector companies are putting their money forward onto the ICF. The ICF was supposed to be more responsive to local demand for change than the way that the IFI programmes go in. It could also do things like strengthening the demand of the voice of those who represent the interests of the poor, who are marginalised, who do not usually have a voice. Usually when you talk about this lovely public/private dialogue, what actually is happening is you have a government and a large, organised private sector and they are working out what the policy priorities are and determining what the policy choices are. It was meant to do a little bit around that, to change that dynamic. I cannot answer more than that. I do not know how it is going to work.

Professor Wood: I let Sunil speak first because when I was working in DFID until last October I was responsible for investment so I might have a slightly biased view. On past record, there are an awful lot of things in which DFID has been the first donor in the past which have been very successful. A lot of other donors have come in and the fact that DFID is leading should not necessarily be seen as a bad sign.

Q39 Chairman: The whole of this report has been predicated on the basis that it is apparently now fashionable that the private sector will lead countries out of poverty. I am astonished to be told that this is newly fashionable. To most of us, it is self-evident. The DAC[8] is now saying that the private sector development should be the central component of resolving poverty. You have described some of the mechanisms but what should DFID be doing on a country by country basis if that is the case? If growing the private sector is the key to solving poverty in a specific way, what do you think DFID should do in countries where it is pursuing or supporting a national poverty strategy to change its programmes to deliver changes? Do you think it can do that?

Professor Wood: Indeed it can and indeed it does. The situation is going to vary from country to country depending on the opportunities that are available for intervention by an outside aid agency and depending on the nature of the constraints that are holding back private sector development. If you want to take the most basic example of something that is holding back private investment, it is conflict. The involvement of DFID in conjunction with the FCO and the Ministry of Defence is absolutely crucial. Promoting in every way we can political stability is essential because one of the things that the private sector is worried about in Africa is that, if there is a change of political regime, the basic business rules of the game are going to change. Their investments will become valueless. If I may just tell you an anecdote, which I am afraid is not going to be about stoves - it is about Uganda - my colleague, Christopher Adam, came back from Uganda last week very excited because all the controversy in Uganda about Museveni and the third term and various political uncertainties which are creating a lot of worry and concern among civil servants the private sector is paying no attention to. It is just going right ahead and investing and that is fantastic. That is the situation you want to have as in, for example, the UK where you can have tremendous political turbulence of one kind or another but the private sector knows that that is not going to change the basic business rules of the game so they go on investing. That is what we need to achieve throughout Africa.

Q40 Chairman: Is it not possibly because they do not believe Museveni can lose?

Professor Wood: In other African countries, the least hint of worry about succession or political instability means the private sector calms down.

Mr Sinha: At the moment, I am working for the DAC, producing a paper on promoting pro-poor growth. Last year I worked on a paper on accelerated pro-poor growth through private sector development, which Adrian was also involved in. We recognise that pro-poor growth generated through the private sector but with a state laying down the rules and foundations of the game, is very good for economic poverty but we know that poverty takes other dimensions. The message that is coming out of the DAC now is that these dichotomies that we have seen, that were painted in a way by Kurt Hoffman, are not very helpful. Pro-poor growth would be promoted not only through addressing the rate of growth of the incomes of the poor, but also by progress on the other dimensions of poverty. This is reflecting what the World Development Report 2006[9] said: effectively, if you do not get political empowerment, it is very unlikely that you will get the policies that you need for private sector development or any form of pro-poor economic growth. In many ways, DFID is at the forefront of some of this thinking which is changing an agenda which was once called enterprise development to what is now called private sector development. In the most progressive DFID offices, what is happening is a change from enterprise development advisers doing enterprise development in isolation to pro-poor growth teams being brought together, multidisciplinary teams, which will include a macro-economist, an enterprise development adviser, a governance expert, somebody who is good on basic social services like education and health, trying to address the pattern and pace of growth holistically. That is still restricted to a few offices.

Q41 Chairman: Where are the best examples of that?

Mr Sinha: I can only answer from my limited experience. I do not have an overall picture of DFID offices. I have seen a lot of this happening in the Nigeria office where I work a lot.

Professor Wood: Nigeria is an example. Ghana is another example where they have had a very strong team. Most of the Africa country offices are taking this focus.

Q42 Chairman: We are going to Malawi, Mozambique and Botswana.

Professor Wood: You will see that, I think, when you are there.

Q43 Chairman: Thank you very much indeed for giving not exactly the other side of the story but a different perspective. I take away from this that the private sector only functions if the state functions. To the extent that DFID has the capacity to help states function, private sector development may well flow from that.

Professor Wood: That is an excellent summary.

Chairman: Thank you very much indeed.

Witness: Mr Joe Matome, Company Secretary, Debswana Diamond Company, gave evidence.

Q44 Chairman: Thank you very much indeed for being here. You have heard what has been happening and I hope you appreciate that it is all part of an interesting debate. You will know that the Committee is visiting Botswana in a couple of weeks' time. I am not sure we will be meeting you but we will certainly be meeting your counterparts when we are there. This will be a helpful introduction. The success of Botswana is as a country with high average income. The ability to turn diamonds to advantage is fairly well documented. My understanding is that part of this was due to the foresight of the Botswana Government in hiring a world leading diamond valuer to negotiate with De Beers to try and ensure a partnership that was of mutual benefit especially to Botswana of course. Was it a tough bargain or did you find that the deal that they wanted was compatible with the interests of de Beers at the time; or did you have to bargain hard to get a compromise that was workable?

Mr Matome: Thank you all for the opportunity to be here and give evidence to you. I am Joe Matome. I am the group's company secretary for the Debswana Diamond Company. As a lead up to trying to address your questions, Debswana is a 50/50 partnership between De Beers and the Government of Botswana. We are also considered as twins joined at the hip. They may have two heads but ultimately they have to go in the same direction. The issue that you raise about getting a valuer, I presume on the government side, to negotiate the pricing of a product is like a three legged pot for us. There is Debswana producing the diamonds. Then it values them for sale to De Beers and the government is the third party, the third leg of this pot, which has felt that it should look at what we have done as a company with our valuation, so that what we put on the table for the buyer is satisfactory to the third leg, which is the government. If any one of those legs is not there, the pot falls over and, in African terms, the food is spilt. It was a very wise thing to do, to put that three legged process in place to ensure that everybody wins.

Q45 Ann McKechin: Botswana's per capita GDP has risen significantly in the last few years but at the same time its position on the human development index has fallen from 95^th in 2001 to now 131^st out of 177. I wonder what steps Debswana as a company is taking to ensure that its revenues in the future, as you are facing diminishing returns possibly on mining, will help to reduce that poverty that still scars the country.

Mr Matome: We have just recently completed our five year strategic plan which has what we call the north star in four dimensions: revenue enhancement and creation, cost reduction, the organisation to drive all of this. One of the four cardinal points is sustainability. For us to be able to meet the demands of the five year plan we have to make sure that that sustainability - call it social responsibility if you want - is in place. The issue of HIV/AIDS is clearly one of those elements. There is a business imperative in it but it does have an impact on society around us. For example, we have recently approved an extension of the assistance to cover more members of families. We found that it has a social impact, looking after people who do not necessarily work for us but who might impact on us, by having some medicines given to children naturally, which is a good thing to do. There are impacts for us and the way in which we can prolong lives for our business and the families concerned by extending the antiretroviral therapy to a greater part of the family. I believe we piloted a corporate response to HIV/AIDS around the world and I believe some government initiatives have taken a leaf out of that.

Q46 Ann McKechin: I am focusing more in terms of the economic benefits because the lifespan of the mines is only perhaps another 30 years. It is how the economic legacy that you are going to bequeath to Botswana in terms of allowing it to continue growth and reduce poverty.

Mr Matome: In the context of HIV/AIDS?

Q47 Ann McKechin: No. I mean in terms of growing subsidiary industries or skill bases or technical capacity.

Mr Matome: There are a number of ways. We recognise that extractive industries are not here for ever. Around our communities as well as in national programmes we have looked at ways in which we can do this. I will give you an example. This is not to say that our mines will close in 30 years. Some of them have another 20 years beyond that, even to 50. We have looked at the project together with the community with various partners in the NGO sector in this type of subsistence agriculture and what we can do in villages around our mines, from whom we draw labour for creating a greater cash economy within those rural areas. This has recently come into the form of a chicken-cum-guinea fowl rural marketing project in the eight or so villages around our mine. In this, there have been a number of things. One is to get those people in those villages to do better with whatever techniques they have, to improve their technology. Secondly, to educate or help them with learning about how to market or how to run their businesses. Thirdly, to leave behind 50 years from now a model that would work to create other issues around the mines. We also have small and medium sized business activities around a company called PEO in which Debswana and De Beers have a share. The way this model works is, for example, working as a supply chain contractor to our mines and we develop the enterprise with the business and stay with it for a little while. When they are ready and mature, we pull back and they continue and we take the money to reinvest somewhere else. These are two examples that might answer your question as to what we do to try and assist.

Q48 John Barrett: Some resource rich countries have suffered from what is known as the resource curse, that cycle of dependency, corruption and conflict. Botswana has been a great example of avoiding it. Some Members of the Committee have just come back from Sierra Leone which is a victim of that. What can we and other countries learn about how to avoid that curse? Was there more to it than the original deal that was done in Botswana that seemed to set things off on the right track? Are there other factors that we should maybe learn from what happened in Botswana?

Mr Matome: When you talk about the original deal, that was not what established the partnership. That was a different set of circumstances that led to the 50/50 partnership between the technical partner of De Beers and the people of Botswana. What makes Botswana successful? From the point of view of Botswana's business, we need an environment in which we can survive. There is a certain degree of transparency in how the country or the government of the country treats us and a certain amount of governance which, in a sense, is one of the very difficult things that Africa is grappling with in terms of accountability. I will just deal with one participatory type of environment where you can put your point forward. We have something in Botswana called a kgotla system and it works by saying, "Come to the gathering." The chief, Mr Bruce, will be sitting and listening to what you have to say. Even a child or a woman or whoever it is can say their piece. He then makes a decision on his own having heard what you have to say and he becomes totally accountable for that decision. He does not have to do exactly what you say. Those are the pillars, in my view, that lead to Botswana being able to have used what God has given everybody or most people, which is what is in the ground. The question of how we have used it has been the fortunate part for the people of Botswana. There has been good governance as well as the fortune of finding the stuff in the ground and a good technical partnership to mine it.

Q49 John Barrett: There has been a range of legs to that stool that held it all together.

Mr Matome: That is quite important. Hopefully, people might pick up some of the lessons from that. Some of the countries, for example, pick up on one of the models that we have which is a government, private sector partnership in the extractive industry. Namibia, for one, has picked up on that. I think in Tanzania they are following that as well now.

Q50 John Barrett: Is there active discussion with other countries that could learn from the Botswana experience? Botswana must be aware that it does stand out as having been singularly successful in terms of economic growth and other issues. I wondered whether there are active discussions going on with a number of other resource rich countries that have not managed to piece things together.

Mr Matome: We have an interaction with Namibia. South Africa is very close to us. We do talk a lot but I cannot say for certain what there is, between those governments, in discussion. I am not really in that particular arena. You do pick up every now and then discussions about, for example, the new Mining Act in South Africa. A lot of discussions took place between the South African Minerals Department, the Ministry of Minerals, and our Ministry of Minerals to see how things were done. I am aware of those sorts of things but I could not tell you specifically if there is active dialogue.

Q51 Mr Hunt: The difference between Botswana which has become what some people would call a developmental state where the conditions of development are encouraged and a country like, say, Zimbabwe which has also had a colonial history but, for various reasons, has gone in a totally different direction, is very stark. I have read that one of the reasons for that, one theory, is the role of the black middle classes in Botswana and how they have operated and worked has been particularly unique. I wonder if you could tell me whether you think there is anything true in that theory or what you think it is that has made Botswana go down a path that is so very different to other countries.

Mr Matome: You have to forgive me for being very wary of trying to criticise some of our fellow neighbours. I am not trying to duck your question but whatever I say would be very personal about Debswana's point of view. I am not in government so I could not put that as being the governmental point of view. There is an increasing middle class in Botswana that has an interest in making sure that the rule of law is followed because they have a lot to protect. I would be wary of saying that there is not the same level of middle class in Zimbabwe. They have had people in England and other places to come and learn things before us. There is a middle class in Botswana that makes it possible to protect the rule of law. We must not underestimate that Botswana is also essentially a poor country too. Even though DFID and others are not in the country because of its status as a middle income country, poverty is still there and we have to be aware of the demands that poverty is going to make and the threats that it makes to our democracy. Democracy has to be effective. Yes, the middle class helps us with that but, despite our status, there is still a very large body of the poor which we have to address, whether it is corporate or governance or international, in order to maintain and keep that good record that we have had. I hope we will continue with it. I hope the middle class will protect it but we have to keep an eye on the fact that we have the poor.

Q52 Chairman: Diamonds are a very specific commodity. I was interested when one of your colleagues was speaking when the President of Sierra Leone was in London, saying that deep mining of diamonds you can secure and fence in but alluvial diamonds are a big problem. You have created this Kimberley Process to try and authenticate and control patterns. That is peculiar to diamonds. You cannot do that with oil as a commodity. How can you take that forward in a way that reduces the capacity for corruption? Diamonds in other countries in Africa have been a recipe for war, conflict and disaster but in Botswana and sometimes in South Africa and Namibia they have been a successful contribution to the dynamics of the economy. How can you extend that legacy to other diamond producing countries?

Mr Matome: In Botswana we have been able to have certain conditions which ensure that our diamonds are for development, unlike in some other places where that has not happened. It is a geographical fact that our diamonds come from volcanic pipes and therefore are relatively protected as opposed to diamonds that have come from volcanic pipes and been washed away into rivers and alluvial type areas. The second thing is not about the geography of diamonds; it is about the laws that relate to how you handle a national resource. Very early on in the life of Botswana's Independence the first President managed to convince everybody that diamonds were for the whole nation, not for tribe X or tribe Y, generally applying to all mineral resources, anything below six inches in the ground. Any mineral resource, regardless of which tribe it sits in or which district it sits in, is a national resource. That was put into various legal documentation, for example, that said you cannot handle the diamonds without permission. Of course you could still handle them without permission and get caught for it. They made it very clear that you cannot handle a rough diamond or an uncut diamond without certain licensing from the state. That legal framework assisted with that issue. Thirdly, the state in full partnership with the extractive industry, with the professional experts in that area - in this case De Beers - gave further reason for a diamond not to be able to be abused. We support the Kimberley Process in order for other people to pick up from that, even those who have non-geographically comfortable positions, to protect what they have. The other issue of the Kimberley Process is a set of warranties. That would also help downstream with the people who buy the diamonds. It also helps to police the issue. Our presidency and chairmanship in Botswana now, this year, of the Kimberley Process, will surely try to give those examples to those who can look at improving. Self-policing is one thing. That is what must happen. The rest of the world can do all it can but we have to self-police whatever country we are in, whatever diamonds we have.

Q53 Chairman: You identified the government issue about determining this as a national resource and assembling a framework abroad could apply to other minerals which do not necessarily have the specific identity of diamonds. It could even apply to oil and gas. It is a model that could be replicated if people wanted to follow that.

Mr Matome: I believe so. If there are sufficient and powerful forces to prevent a good thing from happening that will not happen. Oil, in some parts of Africa, is extremely valuable, more valuable than diamonds. What is there stopping a proper collaboration between governments and those technical partners?

Q54 Chairman: The nub of what we are concerned about is the role of our own Department for International Development. What kind of steps could they take, working with extractive industries, from your experience and in other countries, that would help those resource difficulties to improve living standards and reduce poverty rather than the opposite effect which has been observed in some countries? From your experience, what do you think our Department for International Development could do? Is there anything it could usefully do to try and ensure that we get agreements with extractive industry companies in a way that would lead to poverty reduction?

Mr Matome: Yes. ICMM[10], for example, is a body that is putting us all in one mind about the box of sustainability at the bottom of our north star or our four cardinal points of Debswana. The other day I was with a colleague from ICMM. We were at a corporate responsibility seminar. Every mining company, whether it has an international connection or is home grown like Debswana, for example, is realising that it has to do certain things for its community. We have an organisation called PEO and its philosophy is that we will put money in with an entrepreneur as long as he has a good idea and good drive. He may not have the knowledge or the experience and some of the business technical knowledge that we have. We will link him with our supply chain to be able to go forward. This can happen with oil, copper and gold. It is happening in South Africa. We cannot always have the ability to monitor and keep an eye and give someone the education and training that is required to make a business sustainable. We stay with it. We watch it. We stay on the board up to a certain point in time but there has been perhaps a glimmer of hope in that people like DFID could bring to us some of the skills that you may consider have retired but we are nowhere near getting [started]; and offer that kind of assistance to those kinds of communities that we are talking about, citing only one example. This is the kind of role perhaps to have the technology or skills transfer which would be funded by people like DFID, into areas which are not particularly obvious. It is not like giving money to education or an HIV/AIDS programme. It helps people to self-sustain. It can be linked very clearly and very easily for those who do want to participate with elements of the extractive industry. The ICMM has the same problem. My colleague there was saying, "Yes, we also want to do this but somewhere we have to pull back." We only do a little so we can stay longer with this [our projects]. For those countries [like mine], particularly, in mining where you do not get much DFID help, we have P650 million of the resources of the last budget, for example, going to HIV/AIDS which would otherwise have gone into development. That is diverting resources from that and that is a role DFID could play to help us to meet that void.

Q55 Chairman: How many of Debswana's employees are Botswana nationals?

Mr Matome: We have 6,500 employees and 98% are nationals.

Q56 Chairman: Presumably you have contractors as well. Have you stimulated the creation of locally owned and controlled contractors to the diamond mining industry?

Mr Matome: Yes. Our procurement policies which we are revamping at the moment deal with several grades of citizen ownership or empowerment. We do not only deal with equity issues. We also deal with how many managers are citizens, even if there is no equity, and how much training they do of citizens if they do not have the managers, and give points on a scale leading up to ownership. Preference is given to supplying various types of goods to our mines on the basis of that empowerment policy.

Q57 Chairman: I hope we might manage to meet one or two of those people.

Mr Matome: I hope you will, yes.

Q58 Mr Davies: This is a very interesting case because Botswana is regarded as one of the great success stories, if not the greatest success story, in Africa, which is why we are going there to have a look at how it is done and yet it is all based on an enormous state monopoly which pre-empts 30% of GDP. The conventional wisdom is that monopolies are a rather bad idea because they are inefficient for standard economic sharing reasons and because they are a source of excessive government patronage and therefore corruption. Here we have a model based on something which is supposed to be very bad for economic progress producing very good economic progress. I am fascinated by this particular irony. Perhaps you can explain why diamonds are a special case, because I think that is what the argument amounts to.

Mr Matome: I will attempt to do that. I would not call it a large, state owned monopoly.

Q59 Mr Davies: It is not only a monopoly; it is a monopoly protected by law so anybody who goes in for informal diamond panning presumably is sent to jail for a long time. You have a monopoly which has not just de facto emerged as a result of market power but is enshrined and protected by the criminal law of the land. Is that right?

Mr Matome: No, it is not right. I probably was not very clear and I beg your pardon for that. What I was saying was that you cannot come off the street and handle a rough diamond. Anyone who has the desire to do so can apply for a prospecting licence to find diamonds or any other mineral. Having done so, they then have very recent and good laws protecting that investment in prospecting, giving a number of years to prepare to extract that resource.

Q60 Mr Davies: You have to sell the diamonds presumably through the De Beers central selling organisation, through the Diamond Corporation?

Mr Matome: Unless you make your own arrangements with them. We have a special contract with them so other people who are there and other companies - there are some Canadian interests also - do not have to sell to De Beers at all. They can choose to do so. The unique thing about Debswana is that it is a company formed under the Companies Act and therefore with all the issues around the transparency required by the Companies Act and all the obligations of the Companies Act. When they decided to go into partnership, thank goodness it was not to have it as a parasitical act which could be a problem but to have it as a company. There was great foresight from that point of view because it opens you up to being able to be scrutinised. Other companies may or may not choose to go with De Beers. They do not have to. They can do it on their own and have their own agreements and arrangements. Even if they did go into bed with government on this issue, they may still choose not to sell through the central selling agencies. There is a great deal of latitude in the diamond industry or any industry to sell whichever way they want. We choose to sell through De Beers.

Q61 Chairman: That was a very interesting exchange. Members of the Committee will be looking forward to seeing your counterparts and contractors when we are in Gaborone. You have given a very clear account not only of that model but of the fact that it could be transferable. That is of interest to us. When you see success you want to know how you can translate that success somewhere else and spread the benefits. We have been on the borders of the Democratic Republic of the Congo where all you see is rape, pillage and plunder and no sense of minerals being developed for the benefit of the people, so it is good to see one country that has that arrangement. Thank you very much indeed for taking the time and trouble.

Mr Matome: We look forward to seeing you and your Committee when you come to Botswana. I will make sure I am available.

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[1] Kurt Hoffman, Director of the Shell Foundation, Aid industry reform and the role of enterprise, September 2005, http://www.shellfoundation.org/news_rel/Aid_industry_reform_and_the_role_of_enterprise.pdf

[2] International Development Enterprises: http://www.idevn.org/

[3] Enterprise solutions to poverty: A Report by the Shell Foundation, March 2005 http://www.shellfoundation.org/download/pdfs/Shell_Foundation_Enterprise_Solutions_to_Poverty.pdf

[4] World Bank, Economic Growth in the 1990s: Learning from a Decade of Reform, April 2005 http://www1.worldbank.org/prem/lessons1990s/

[5] DFID, Working with the Private Sector to Eliminate Poverty, December 2005: http://www.dfid.gov.uk/pubs/files/dfid-private-sector.pdf

[6] DFID/FCO/HM Treasury, Partnerships for poverty reduction: rethinking conditionality, March 2005, http://www.dfid.gov.uk/pubs/files/conditionality.pdf

[7] International Financial Institutions

[8] Development Assistance Committee

[9] Available at www.worldbank.org

[10] International Council of Mining and Metals