The private sector is and must be a source of economic growth and opportunity that will allow people to improve their lives. While the public sector can create a sound basis for development and a good environment for investment, the private sector will generate the vast majority of jobs, help improve public services, and ultimately provide most of the tax revenues that the public sector needs.

And let’s not forget that the private sector does not depend on aid funding. Most DFIs got an initial capital grant from their governments but then have to generate their own funds by getting investment loans repaid or making a profit on equity investments. They have to make profits in order to be able to reinvest. Besides, the idea is to fund projects that can stand on their own, which means they have to be profitable.

Will the EU learn the lessons?

DANIDA funded a business plan competition, held at the World Bank Development Marketplace, while InfoDev funded an ICT inducator at an Internet centre called BusyInternet, one of my case studies. The competition gave an award of 1000 USD to the best business plans in several categories, one of the IT start-ups I was following won the competition and they were able to purchase materials, and inputs into their business as a result, and gain notoriety which could attract much needed equity investment into their business. What they would have needed from the capital markets was in the order of 20,000 USD equity investment from a “busines angel” or venture fund. Venture Funds however do not invest in such small companies, but rather from the half a million upwards. Bank loans had a 24% interest rate, and required a house or a car as collateral.

Microcredit wasn’t available for this segment of companies, as they capped around 10,000 USD, and often still had a 30% interest rate. This gap between the half a million and the 10,000 is called the “missing middle” which is only bridged when the economy formalises further, and when banks start accepting work contracts, equity and cash flow as collateral for a loan. As inflation is tackled, the interest rates will also go down. Until then, companies will continue to depend on kinship and family-based financing, the core of business finance in most developing nations. The Danida grant didn’t solve the underlying problem of lack of liquidity of a capital markets in this category.

Aid funded enterprises will be a drop in the ocean, and will find a hard time scaling up after the initial push if the economy and society around them doesn’t have the basic infrastructure that supports the growth. They may provide easy “success stories” but their impact will remain low, so an audit of private sector aid might be a useful exercise in aid quality.

The lesson is that donors should still focus on supporting developing nations in providing universal health care and free education, resilience from natural disasters, social protection (transfers to the poorest, and pensions systems) that reduce inequalities that really hamper the possibility for meritocratic society ever developing based on equal opportunities. Good market governance should also include market regulation, anti-trust laws, supporting tax administrations, clamping tax evasion and avoidance, establishing clear property rights.

Call it “market building” where we build functioning markets that enable participation, just like we talk of “state building” in building good governance for citizen participation in politics.

Have a look at this interesting story from Al Jazeera.

http://www.aljazeera.com/programmes/insidestory/2013/02/201321181029585206.html

Legality v/s Morality is always the question is it not? Here is a British firm being accused of tax avoidance (not a crime) which would have enabled Zambia pay for education. Interesting conundrum.

If aid organizations are looking to private sector companies that adhere to the view that their primary responsibility is to increase the wealth of shareholders, then you probably should expect that somehow the form of that aid will still be tied to growth and increased profits for the company, and is not likely to seriously challenge the status quo–including existing social and economic injustices. However, if you try partnering with certified B (Benefit) Corporations which are expected to consider the interests of all stakeholders, have a purpose beyond just making a profit, and are expected to meet certain standards regarding fair wages and work conditions, you might just see some aid that supports real change.

I think that there are four reasons,

1. It is not (perceived as) the function of aid to build rights : call me naive but I feel that shifting power equations are best done when the efforts and resources are home-grown. That way there is no danger that the government will take a stand that this is being pushed by vested foreign interests. Happens a lot in countries like India the most recent case being demonstrations against a nuclear power plant.

2. Risk to themselves and others: when aid agencies start working on power & voice issues, they send out a challenge to the current power holders, often governments. This puts them and the people they work with at risk, especially if their work is effective (if there is no risk in governance work, it just means that nobody is really taking you seriously). Appetite for risks are often variable and the more risk averse back off.

3. Humanitarian imperative : Governments in autocratic countries hold the power to block civil society and even aid agencies if they feel they are getting too ornery. Continuing to put pressure on governments puts the ability of aid to reach the poor in jeopardy.

4. Economics is primus : I think bilateral and multilateral aid often values economics over human rights and voice. There are hundreds of examples around the world and indeed you have alluded to some in this post.

Now you’ve stood up and accepted it, maybe I’ll take a leaf out of your book and get down to alcoholics anonymous!