On Aid Part 3: Private Sector Finance: Aid or Investment?

If you have 30 minutes to spare, you need to read an article by Matt Kennard and Claire Provost in Mail&Guardian Africa. It’s long, but well worth your time, particularly if you’re on the fence about private sector financing of international development. Yes, development organizations need more money if the SDGs are to be achieved, and there is certainly space for the private sector to play a role. The question is, what role?

Before I get going on the topic, let me take you back. All the way back to 2005, to Ahkalkalaki, in the ethnic Armenian region of Georgia. I was at a presentation of the Millennium Challenge Corporation (MCC) which was discussing its new project to (re)build the road into the region from the main East-West highway across the country. First impressions? Ecstatic. It had taken us four hours to traverse 40 km along the banks of a fairly swiftly flowing river. The scenery was second to none, but beyond that, one of the worst parts of my job. Imagine making the trip from Tblisi in under two hours (probably not. The food in Georgia is also second to none so we always stopped to eat regardless of the time of day or if we were even hungry). Anyway, the presentation was well underway, when a local community leader in this very marginalized, very impoverished region asked just who would be doing the actual construction. ‘We generally hire contractors out of Turkey.’ Murmurs of the inappropriate sort erupted (let’s recall the less than cordial relationship between Armenians and Turkey harking back to 1915). Would local people be hired? ‘Hard to say,’ replied the oblivious MCC rep, ‘but probably not. They usually bring their own workers.’

‘The door is too far. Our best option is out the window,’ my Russian colleague was whisper-shouting in my ear. Agreed. The room had erupted. Why build a road, why say it’s a USD 10 million investment in the local economy, when no one in the community was actually going to benefit? (Fortunately, violence did not ensue. But we ushered the MCC rep out of town as fast as possible - I sacrificed what promised to be a fabulous meal following the meeting for the sake of peace).

So, why this story? In this instance, because Kennard and Provost’s article featured the MCC (whose motto is ‘if you want to do aid effectively, you need to approach development like a business’). The MCC interview brought me right back to 2005 and my then astonishment that such a ‘grand’ organization could be so careless. But reading the feature further, my rapidly increasing astonishment of just how blatant the MCC is about ‘profitable’ development had me seething.

The MCC only works with selected countries based on “a set of criteria that reflects countries that are basically run well politically, democratic, market-based economies and invest their money in people.” (Given the gross underinvestment by the Georgian government in ethnic minority regions, it certainly begs the question ‘which people?’). Let’s pretend that we can extrapolate these criteria to other private sector corporations that are increasingly partnering with NGOs on international development. What does that mean for actual development?

First, it means the money that is desperately needed by least developed countries and fragile states likely won’t be coming from the private sector. It’s difficult to safeguard an investment when you a) can’t guarantee a return and b) can’t guarantee peace. For example, as noted in the Guardian, ‘the private sector has no way of knowing upfront whether a certain (development) action will achieve desirable results, so the public sector actors need to take risks and test new models.’ Newsflash: development is always a risk, on a scale of low to high. It’s why risk management is part of project management.

Second, it means that development organizations that are being pushed to seek funding through the private sector will prioritize funding for programmes that are less risky and in stable regions (you can read more about this issue here). Fragile states beware - the push for private sector finance is not going to benefit you.

Third, it means that development dollars start to look more like investment dollars. ‘Value for money’ as the basis for funding will become ever more entrenched and so the inefficient work of development and peacebuilding (the remote areas, the conflict affected areas, the areas lacking in substantial natural resources for exploitation) will be increasingly difficult to fund. And those people and those countries will continue to be ‘left behind.’ And the investments that do get made? Those roads that were built (ostensibly to connect investment sites to major ports and markets) which now connect remote regions and villages with vital services? Yeah. After the road is built, who will maintain it? Does the government have the legal right to operate and maintain it using public funds? Do they even have enough public funds to do so? Will it just be crumbled potholes in a few years time? ‘Development’ (read: CSR) isn’t a one-off investment - government capacity to manage infrastructure, raise funds and do maintenance (or contract it out) over the long term is all tied up with that. Wasted investments are not helpful.

The area of private sector financing of development is not very well regulated at this point. As the push for private sector finance and public-private partnerships increases, it will be trial and error when it comes to assessing ‘do no harm’ and actual impacts on broad-based poverty reduction. Language on accountability and enforcing that language will be crucial. Case in point is the Addis Outcome Document from the Financing for Development Conference in July 2015. The content is big on private finance as the future of development, but fails to articulate the necessity of private finance supporting sustainable development, protecting and advancing human rights, and accountability to poor communities. Weak language entices private sector finance more than anything else. It changes the nature of development from being ‘for the people’ to being a feel-good approach to profit-making.

For example, in Kennard and Provost’s article, there is a quote from a senior representative of MasterCard. ‘Let the private sector do what it does best: profitability is sustainable. Aid is temporary. 2 + 2 = 5.”

No it does not!!!! The math in this case is unsustainable, irresponsible and ruinous. There is a disconnect between development sustainability and private sector sustainability. One is about living sustainably and responsibly within the ecological boundaries of the earth. The other is about continually making money. It is not, by definition, socially responsible.

Further, so much of development is about building the capacity of government at national and local levels to deliver quality public services. There is no profit in that. Private sector isn’t going to finance that. And so poverty reduction and the pursuit of actual sustainable development will suffer funding gaps in countries where donors no longer want to tread if they are not seeing value for money (as though the price of the quality of life between an individual in South Sudan should somehow be the same as in Indonesia. But I digress), and the private sector sees no immediate profit. They will, however, invest in (not donate to) commercial projects that may (or may not) benefit local communities. The elephant in the room is that sustainable development and poverty reduction is so much more than short term economic gains in a few select communities.

There is a place for private sector finance in development - in investing in government economic development strategies. Let’s not confuse the two sectors: private sector and development sector. They can and should cooperate. However, the actual funding of development should remain the remit of international donors and national governments (where they have the capital to do so). Budget support for least developed countries and fragile states is crucial to the world’s commitment to ‘leave no one behind.’ It underpins almost everything else.

So, I finish with a question: how many of you think the private sector will agree to impartial, no strings attached budget support?

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Yeah. That’s what I thought.