House of Commons International Development Committee
Private Sector Development
Fourth Report of Session 2005–06
Volume II
Oral and written evidence
Ordered by The House of Commons to be printed 17 July 2006
HC 921-II Published on 23 July 2006 by authority of the House of Commons London: The Stationery Office Limited £25.50
International Development Committee
The International Development Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for International Development and its associated public bodies.
Current membership Malcolm Bruce MP (Liberal Democrat, Gordon) (Chairman) John Barrett MP (Liberal Democrat, Edinburgh West) John Battle MP (Labour, Leeds West) Hugh Bayley MP (Labour, City of York) John Bercow MP (Conservative, Buckingham) Richard Burden MP (Labour, Birmingham Northfield) Mr Quentin Davies MP (Conservative, Grantham and Stamford) Mr Jeremy Hunt MP (Conservative, South West Surrey) Ann McKechin MP (Labour, Glasgow North) Joan Ruddock MP (Labour, Lewisham Deptford) Mr Marsha Singh MP (Labour, Bradford West)
Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk.
Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/indcom
Committee staff The staff of the Committee are Alistair Doherty (Clerk), Hannah Weston (Second Clerk), Anna Dickson (Committee Specialist), Chlöe Challender (Committee Specialist), Katie Phelan (Committee Assistant), Jennifer Steele (Secretary) and Louise Glen (Senior Office Clerk).
Contacts All correspondence should be addressed to the Clerk of the International Development Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 1223; the Committee’s email address is [email protected]
Witnesses
Tuesday 14 February 2006 Page
Kurt Hoffman, Executive Director, Shell Foundation Ev 1
Professor Adrian Wood, Department of International Development, University of Oxford, and Sunil Sinha, Director, Emerging Market Economics Ev 7
Joe Matome, Company Secretary, Debswana Diamond Company Ev 13
Tuesday 21 March 2006
Sharon White, Director, Policy Division, William Kingsmill, Head, Growth and Investment Group, Gavin McGillivray, Head, International Financial Institutions Department, and Richard Boulter, Head of Profession, Enterprise Development, Department for International Development Ev 18
Richard Laing, CEO, CDC Group Ev 25
Tuesday 28 March 2006
Robert Annibale, Global Director, Citigroup Microfinance Group, and Jay Naidoo, Chairman, Development Bank of Southern Africa Ev 34
Peter Cameron, Fellow, Institution of Civil Engineers (ICE) and Chairman of ICE’s Appropriate Development Panel, and Petter Matthews, Executive Director, Engineers Against Poverty (EAP) Ev 46
Tuesday 25 April 2006
Lord Brett, Director, International Labour Organisation (ILO) London, Dan Rees, Director, Ethical Trading Initiative (ETI), and Albert Tucker, independent consultant and former Director of Twin Trading Ev 52
Dr Andrew Bennett, Executive Director, Syngenta Foundation for Sustainable Agriculture, Professor Keith Palmer, Chairman of Emerging Africa Infrastructure Fund and Infraco Ltd, and Michael Pragnell, Chief Executive, Syngenta Ev 62
Tuesday 9 May 2006
Bob Fitch, Project Director, Financial Deepening Challenge Fund, Enterplan, and Ann Grant, Vice-Chair, Standard Chartered Capital Markets Ltd Ev 71
Sue Clark, Corporate Affairs Director, SABMiller, and former Chair of Business Action for Africa, and Walter Gibson, Head, Global Health through Hygiene Programme, Unilever Ev 80
Tuesday 16 May 2006
Andrew Hollas, Head, Africa Markets, PricewaterhouseCoopers Ev 88
Stirling Smith, Co-operative College Ev 97
Tuesday 23 May 2006
Rt Hon Hilary Benn MP, Secretary of State for International Development, William Kingsmill, Head, Growth and Investment Group, Richard Boulter, Head of Profession, Enterprise Development, and Tony Venables, Chief Economist, Department for International Development Ev 102
Thursday 15 June 2006
Sumi Dhanarajan, Head of Private Sector team, Oxfam, Dominic Eagleton, Policy Officer, ActionAid, and Dr Claire Melamed, Trade and Private Sector Policy Manager, Christian Aid Ev 118
List of written evidence
Page
Written evidence submitted by witnesses who also gave oral evidence:
1 Department for International Development Ev 127; Ev 140; Ev 150 2 ActionAid UK Ev 151 3 Business Action for Africa Ev 156 4 CDC Group Ev 161 5 Christian Aid Ev 165 6 Co-operative College Ev 169 7 Debswana Ev 171 8 Global Alliance for Improved Nutrition (GAIN) Ev 174 9 Institution of Civil Engineers Ev 175 10 Professor Keith Palmer Ev 187 11 PricewaterhouseCoopers Ev 197 12 Standard Chartered Capital Markets Ltd Ev 200 13 Syngenta AG Ev 200 14 Syngenta Foundation for Sustainable Agriculture Ev 203 15 Unilever Ev 205
Other written evidence:
16 Africa Recruit Ev 210; Ev 214 17 Amnesty International Ev 216 18 Anglo American plc Ev 219 19 Professor Andrew Atherton, University of Lincoln Ev 223 20 Co-operative for Assistance and Relief Everywhere (CARE) and Credit and Savings for Household Enterprise (CASHE) Ev 226 21 Ian Houston, Clydebuilt International USA Ev 228 22 ComMark Trust, South Africa Ev 230 23 James Copestake and Susan Johnson, University of Bath Ev 234 24 Dr Valerie Curtis, London School of Hygiene and Tropical Medicine Ev 237 25 De Beers Group Ev 240 26 Donetsk Chamber of Commerce, Ukraine Ev 243 27 Alaric Fairbanks, Durham Business School, University of Durham Ev 248 28 FinMark Trust Ev 251 29 Foundation for Innovative New Diagnostics Ev 255 30 Fund Their Future Ev 256 31 George Institute for International Health Ev 257 32 Alan Gibson, The Springfield Centre Ev 264 33 Barbara Vitoria, ICC Zimbabwe Ev 267 34 International Institute for Environment and Development Ev 268 35 Professor Calestous Juma, University of Harvard Ev 272 36 Valentine Chitalu, Lomax Investments Ltd Ev 276 37 Marks & Spencer Ev 279 38 Jonathan Mitchell, Dirk Willem te Velde and Michael Warner, ODI Ev 282 39 Mung’omba Associates Ev 287 40 Natural Resources Institute, University of Greenwich Ev 289 41 Plan B Ev 297 42 Publish What You Pay coalition Ev 301 43 SBP Ev 303 44 Tearfund Ev 307 45 Professor James Tooley, University of Newcastle upon Tyne Ev 311 46 UK Money Transmitters Association Ev 313 47 UK Social Investment Forum Ev 318 48 UNDP Ev 320 49 WaterAid Ev 325 50 World Business Council for Sustainable Development Ev 326 51 World Development Movement Ev 329 52 WWF Ev 336
List of unprinted written evidence and papers
Additional papers have been received from the following and have been reported to the House but to save printing costs they have not been printed and copies have been placed in the House of Commons Library where they may be inspected by Members. Other copies are in the Record Office, House of Lords and are available to the public for inspection. Requests for inspection should be addressed to the Record Office, House of Lords, London SW1. (Tel 020 7219 3074). Hours of inspection are from 9:30am to 5:00pm on Mondays to Fridays.
Unprinted memoranda - International Council on Mining and Metals - Practical Action - UK Anti-Corruption Forum, including an Anti-Corruption Action Statement
Other background papers Submitted by DFID: - Letter from the Secretary of State for International Development to John Bercow MP, 24 February 2006, enclosing an assessment of Hernando de Soto’s work
Submitted by James Copestake and Susan Johnson, University of Bath: - Imp-Act (2005) Cost-effective social performance management: Meeting the social and financial goals of microfinance. Policy Note 1. - Imp-Act (2005) Working with formal financial institutions: Expanding access and achieving social performance. Policy Note 2. - Imp-Act (2005) Social performance management in microfinance: Guidelines. (Brighton: IDS Publications with the Microfinance Centre, Warsaw. - Copestake, J. G., M. Greeley, S. Johnson, N. Kabeer, A. Simanowitz (2005a). Money with a mission. Microfinance and poverty reduction. (ITDG Publications). - Copestake, J. G., P. Dawson, J-P. Fanning, A. McKay & K. Wright-Revolledo (2005b). Monitoring the diversity of poverty outreach and impact of microfinance: A comparison of methods using data from Peru. Development Policy Review, 23(6), 703- 23. - Copestake, J.G. (2006) Mainstreaming microfinance: social performance management or mission drift? - Copestake, J. G. (2002). Inequality and the polarising impact of microcredit: evidence from Zambia's Copperbelt, Journal of International Development 14. - Copestake, J.G., Bhalotra, S., & Johnson, S., (2001) Assessing the impact of microcredit: A Zambian case study. Journal of Development Studies 37(4). - Johnson, S. (2005). Gender relations, empowerment and microcredit: moving forward from a lost decade. European Journal of Development Research, 17(2), 224-248. - Copestake, J.G. (2004). Social performance assessment of microfinance: cost-effective or costly indulgence? Small Enteprise Development, 15(3). - Johnson, S., Malkamaki, M., & Wanjau, K., (2006) Tackling the ‘frontiers’ of microfinance in Kenya: the role for decentralized services. Forthcoming in Small Enterprise Development.
- Johnson, S., (2004) Gender norms in financial markets: evidence from Kenya, World Development 32(8)
Submitted by De Beers: - De Beers Group HIV/AIDS Business Case-Study 2005 - Speech by Nicky Oppenheimer, Chairman, De Beers, Africa needs a hand-up, not a hand-out, 14 June 2005 - Report on the Proceedings of the DDI Conference 2005, Accra, Ghana
Submitted by the Ethical Trading Initiative: - The Base Code - Ethical Trading Initiative: Members as at May 2006 - ETI Base Code Principles of Implementation
Submitted by International Institute for Environment and Development: - Securing land rights for the poor in Africa – Key to growth, peace and sustainable development, Camilla Toulmin - Securing Land and Property Rights in Africa: Improving the Investment Climate, Camilla Toulmin - Sustainable Markets briefing paper: Lifting the Lid on Foreign Investment Contracts: The Real Deal for Sustainable Development - Sustainable Development opinion, 2005, Land in Africa: Market asset or secure livelihood? Summary of conclusions from the Land in Africa Conference held in London, November 8-9 2004
Submitted by Practical Action: - Mapping the Market: participatory market-chain development in practice, Mike Albu and Alison Griffith, Markets and Livelihoods Programme
Submitted by Jim Tanburn, consultant and Coordinator of the Donor Committee for Enterprise Development: - Reforming the Business Environment: Current thinking and future opportunities: Thematic overview of the papers presented at the Cairo conference, 29 November to 1 December 2005
Submitted by Professor James Tooley: - Tooley & Dixon (2005) Private Education is Good for the Poor – A Study of Private Schools Serving the Poor in Low-Income Countries, Cato Institute - DVD featuring Professor Tooley’s appearance on Newsnight and his BBC World film ‘School’s Out’ which examines the growth of private schools for the poor in Lagos, Nigeria
Submitted by Unilever: - Exploring the links between International Business and Poverty Reduction: A case study of Unilever in Indonesia - an Oxfam GB, Novib, Unilever, and Unilever Indonesia joint research project - Unilever’s Contribution to Development in Africa
3366071001 Page Type [SO] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 1 Oral evidence
Taken before the International Development Committee
onTuesday 14 February 2006
Members present:
Malcolm Bruce, in the Chair
John Barrett Ann McKechin Richard Burden Joan Ruddock Mr Quentin Davies Mr Marsha Singh Mr JeremyHunt
Witness: Mr Kurt HoVman, Executive Director, Shell Foundation, gave evidence.
Q1 Chairman: Good afternoon, Mr HoVman, and in answering the question. I think that if we look at welcome to the Committee. Thank you for taking how best we can now go forward and where we are the time to come and give us evidence. As you know, in terms of how to use the available aid financing in we are just at the beginning of an inquiryinto the order to catalyse economic growth, the positive role of private sector development in growing out of thing to sayis certain lylooking back over the last poverty, if I can summarise it in those terms. year I have been, on the one hand, concerned about Obviously you from your background have made in a sense the focus on simplistic solutions to the some statements about the role of the private sector problem of development in Africa, but I have also both within the aid industryand in terms of growing been encouraged bythe i ncreasing focus over the last out of poverty. We have a particular focus on Africa, year on economic growth as a key driver and on the although it is not exclusive, and nor does your role of the private sector and the market and so on organisation focus exclusivelyon that, but that is an as delivering that growth. So, in a sense, I am much area where it seems the aid that has been distributed more optimistic than I was a year ago that the focus has not delivered alleviation of poverty. There is of attention about how to go forward from where we evidence to suggest that the reverse might be the are now has shifted onto the issues that I think are case, or at least you are asserting the reverse is the the right issues, and indeed that is about economic case. I think the question that kicks the session oV is growth and how you make that happen, because the if we are serious about achieving the Millennium work of DFID and manyothers has recentlyshown Development Goals by2015, or even getting that is keyto getting people out of povertyin Africa. anywere near closing the gap on them, then we need I think the first point that I would make comes from to achieve growth rates, it seems to be the general observations that manyof us in this room will have view, of about six or seven per cent in African made when visiting Africa which is that everybody is countries, which is substantiallybetter than they a businessman. In a sense, the informal sector is very have achieved in the past. We are about to launch large and people are forced into the informal sector substantial additional aid expenditure into those through their povertybut when theyare in there they countries, which you are obviously sceptical about have to learn how to trade and buyand sell and try the benefits from. I wonder if you could say how you to exploit the market as theyunderstand it in order think that economic growth could be achieved and to survive. Secondly, their customers are poor povertycould be alleviated and what is the role of people and theyare poor and impoverished and aid and its interaction with the private sector? suVer manyof the problems of povertybut theyare Mr HoVman: Thank you to the Committee for the customers and theyare, equally,verygood at what opportunityto engage with youthis afternoon. You theydo. Having to live o n $1 a dayor less forces you have cast the question verybroadlybut also very to focus prettywell on how youspend the income precisely. When I answer I will attempt to answer that you have. So there is a great starting point I drawing on mybackground certainlyas a Director think in Africa for this challenge that we face. The of the Shell Foundation, but that is a job I have onlysecond point I would mak e is that that starting point been doing since 1997. Mybackground goes back also means there is a lot of experience. We have had before that where I spent the previous 20 years as a in the last few years, whilst troubles exist in many development professional, so I was verymuch into countries, a number of examples of private sector the role of the development community, first as an companies and economies beginning to grow on the academic and then working for a number of basis of private sector actors, so there is a lot of international agencies—the UN, World Bank and so valuable experience and knowledge to draw on on on. I also along the wayhad a bit of private sector the ground in Africa amongst the private sector, of experience of myown as an entrepreneur raising all characteristics. In my view, that knowledge is far venture capital here in the UK to launch some more valuable than the insights that we have from so businesses; some that were successful and some that far awaybecause youge t local knowledge, local were not. I will be drawing on that broad perspective experience, local understanding of risks, and 3366071001 Page Type [E] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
Ev 2 International Development Committee: Evidence
14 February 2006 Mr Kurt Hoffman so on. So you have the fact that everybody is a average by 0.6% every year.” It is actuallyright to businessman, you have sophisticated consumers and emphasise that the oYcial ODA assistance to Africa you have an increasing amount of experience on the started to decline heavilyin the 1980s and in fact it part of local businessmen, both small, medium-sized is onlyin the last few yearspost-2000 that it has and large enterprises, private and public sector climbed back up to something like the figure in real enterprises, foreign and local enterprises, who are terms it was back in the early1980s, which would learning how to survive and grow within African seem to suggest that the less aid that was being countries. I think that is all verypositive. The poured in actuallyresulted in lower economic challenge in the question that you ask is how do we growth. I am interested in where you think that use public sector aid moneyto catalyseeconomic correlation relates, or is it simplythe fact that growth, and that is where the challenge comes African countries’ economies have been going because, in a sense, I have argued in the things that downward for diVerent pressures, be it conflict, be it I have written and I am reallyseeing with myown trade terms, be it the coloni al legacythat theyface eyes that both the delivery mechanisms and the which had never been properlydealt with? incentive structures through which aid is delivered to Mr HoVman: I think when you deal with macro level enhance development and particularlyto enhance statistics like that and you are trying to find a cause economic growth and private sector development and eVect you can only go so far in drawing the are not nearlyas well connected into the local relationships. That relationship of the graph in the market that I have just described as the local market paper is one that reallyposits the problem that there is. So the challenge is how do you harness the finance were aid resources flowing in, it mayhave been in that is available, the undoubted expertise in the relative terms theywere getting lower, but theywere policyresearchers and academics and the local flowing in and at the same time economic growth knowledge of NGOs, how do you harness that so was declining, so if the intention of the aid was to, in that it is tied and directed much more eYcientlyto a sense, facilitate economic growth then clearlyit the needs of growing local enterprise and getting was not happening well enough, it was not working economic growth underway. That to me is the real well enough. unique challenge that the aid communityfaces. Q4 Ann McKechin: I think when you said it is there Q2 Chairman: But do you not accept that funding to facilitate economic growth it is also the nature of education, funding health, funding infrastructure, aid. Would you not accept that a great deal of the aid which in a sense the public service providers’ prime in the last 30 years has been disaster relief aid, i.e. responsibilityis to facilitate, is where a lot of the aid just keeping people alive because of the AIDS moneywill go? Is that not going to help private disaster or conflict or war or an earthquake, rather sector development? V than development aid, and that perhaps we should Mr Ho man: I certainlythink that is where a lot of be looking more at how the total spend on aid is the aid moneywill go. Whether it will help or not made and whether it is more on development rather depends, in mymind, to just how closelycalibrated than disaster relief or technical assistance? that spend is to increasing the possibilityof Mr HoVman: In a sense, it always makes sense to economic growth taking place. I think one of the separate out the humanitarian side, although there is challenges has been in the past that the development always the challenge in the humanitarian spend as to communityside has accepted the argument that if we how you link that to the longer term, how you spend spend on education, spend on health, and so on that that in a waythat will laythe basis for the longer bymagic almost somehow this will create the ideal term, so in a sense you cannot excuse asking conditions for economic growth to happen and the question of humanitarian aid’s contribution private sector enterprise to emerge. It often has not to development. When you are talking about happened, and that is not because these social increasing the use of aid for development purposes, spends cannot generate the income and growth; it is for me it does come back to the question of looking because we have not had the incentive structure and into how the aid is spent and looking across the the mechanisms to tie them closelyenough to the allocation of health and education and so on, from challenge of generating economic growth on the myperspective, which is that povertyis about a lack ground with enterprise. I think that is the challenge. of income (it is about a lack of manyother things but it is fundamentallyabout a lack of income) and lack Q3 Ann McKechin: Mr HoVman, I have read your of income is about a lack of jobs, and therefore if the 1 paper and you made one very interesting hypothesis war on povertyis all about doing the best we can to linking the amount of aid which has been invested in create as manyjobs for as manypeople as possible, African countries with the growth in the economy, then the first question you ask about the allocation and what you have stated is that the aid community of aid resources is how much is being targeted on this “oversaw and implemented a near quadrupling of particular set of challenges of job creation and aid as a percentage of GDP for African countries enterprise creation and so on. The second question between 1970 and 2000. Regrettably, over the same is if you then have the money that you have being period, the per capita GDP growth decreased on spent on that focus, you say how is it being spent and who is spending it, who is deciding how that money 1 Kurt HoVman, Director of the Shell Foundation, Aid industry reform and the role of enterprise, September 2005, is invested and spent and allocated in pursuit of http://www.shellfoundation.org/news rel/Aid industry economic growth and enterprise creation. And reform and the role of enterprise.pdf this is where I have found the years that I have 3366071001 Page Type [O] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 3
14 February 2006 Mr Kurt Hoffman spent in the private sector, in comparison with mythe TB drugs and all the ed ucation and so on. To me background as a development policyresearcher, that is striking because it suggests the power of veryilluminating because what I have found from having income-creating o pportunities alongside the private sector is that there is an equation that development interventions. operates when you are in a private company in which the wayresources are allocated, either financial resources or people resources or intellect, is really Q7 Mr Hunt: I am trying to understand, if I may driven bythe achievement of a set of measurable Kurt, are you actually saying that investment in objectives. health and education crowds out the development of the private sector and that when resources go into the health and education sector of a countryin Q5 Ann McKechin: Would you not agree it is also the Africa that means that people who are educated get abilityof states to regulate that investment to make sucked into where the development moneyis being sure it is of benefit to the people that is also crucial, spent instead of helping to develop the private and if theydo not have su Ycient enforcement sector? If you are saying that, what do we do as the regimes theyare likelyto be verysusceptible to developed world when we have a crisis like AIDS in abuse? Africa? Do we stand byand sayanyintervention by Mr HoVman: There is no question about it, you must us is not going to work or do we saywe have to take have eVective regulatorycontrol over the private short-term measures to help alleviate this terrible sector to make it happen, but the point I was making crisis because if we do not people are going to die and is that when you are in a private sector company you we just have to be verycareful that we do not hinder have to deliver the results that you are after, and in private sector development at the same time? a sense manycritics of the private sector sayif it is Mr HoVman: ClearlyI am not sayingthat one stands profit that you are after the pursuit of profit damages aside when confronted with humanitarian disasters, manypeople and manyenvironments, but what I clearlynot, but what I am tryingto get at is we know have discovered is that en route to the pursuit of that economic growth comes from the activities of profit this focus on giving the customer what they enterprise. We know that is what gets people out of want brings the whole organisational focus on what poverty. We know there are all sorts of problems does the customer want, how do we make it better about the control of private sector and economic and cheaper and of higher quality, how do we get it growth, often not leading to equitable benefits and to the customer more eVectively, how do we do that environmental damage. We acknowledge all that. in a measurable wayso that more customers are We know the business model for generating wealth buying more of your products than the other and getting people out of povertyworks. We know person’s? In the development communitythe fact that and we have had a historyin the development that the links are not often made between the waythe side of spending a lot of moneyand in those moneyis allocated and the returns that it is expected countries where the needs are greatest of not having to produce is where the weakness comes because you a lot of traction on the economic growth side, so the often get allocation in terms of targets and various thing that I worryabout both in what I do as qualitative performance indicators rather than how Director of the Shell Foundation and also in much does your development spend on health or thinking about these things is how do we in a sense whatever contribute to generating jobs on the marrywhat we have learned about the role of the ground, and it is that connection that I— private sector in economic growth with the demands of providing more humanitarian development Q6 Ann McKechin: So keeping people alive is support. So it is not a question of either/or; it is a secondaryto health and education spending? question of how you exploit the synergies between Mr HoVman: The point is how you better calibrate the two. It is a question, for example, of saying, well, that spending so that it gets to the heart of the in those regions or countries or sectors where there economic growth challenge in the private sector. Let is absolutelyno moneyand therefore the market me give you an example that I have used elsewhere cannot work and the private sector cannot work you from a book called Mountains Beyond Mountains by still have the challenge. It caused me to think of some TracyKidder in which he talks about Dr Paul of the work that we have done, for example, in trying Farmer, who is a Havard medical doctor who spent to find ways to get cleaner stoves into households in a lot of time in Haiti focusing on the problem of TB Africa and Asia where the women and children are and who put a lot of eVort into pioneering highly- suVering from acute respiratorydiseases caused by designed intervention mechanisms to tackle TB inhaled smoke coming from indoor cooking fires. patients. He did an experiment wherebyhe said, This is known as Indoor Air pollution. These are the “Right, I am going to have one set of mypatients bottom-of-the-pyramid households, the $1 or $2 or where I will provide the whole package of TB less. What we have found looking back over the intervention, the drugs, the education, the support historyof engagement with it is that there were a lot and so on, and to the other control group I will just of eVorts to supplytechnical solutions of various provide the drugs, no support, no education, but I kinds but there was not an awful lot of eVort to will provide income, I will provide finance,” so in understand what the market wants and whether eVect theyhad a job. And the outcome of that there was a real opportunityand a willingness experiment was the recoveryrate of the group who to pay, even at that very poor level, for these were receiving the income was an order of sorts of development interventions and poverty magnitude more than those who had just received interventions. What we have discovered, bypoking 3366071001 Page Type [E] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
Ev 4 International Development Committee: Evidence
14 February 2006 Mr Kurt Hoffman awaywith non-profit partners and small-scale that means “pressure” on the small enterprise to enterprises in Africa and India, is that if you let meet your business plan, become increasingly the market drive the product design and you let competitive, develop products that are wanted by the market drive the marketing message and the the market. If you set the funding determinants right customer awareness message, it is possible to find a these products are pro-poor and so on. So you keep combination of a product and a social benefit that the pressure on there but if the intervention itself is will cause these poor households and poor also financiallyviable youthen fi nd that after a short communities to find ways to access the product, and while that with seed funding, the soft moneythat we that is the case in these stoves which cost $3 or $4. It represent, that you can get increasing amounts of is also the case in sanitation. IDE2, the national funding from the development finance community development group working in Vietnam, have and the capital markets and then you can begin to discovered, equally, with sanitation that by really grow these interventions in local markets that are concentrating on what poor people understand and supplying finance and resources to these small the lack of information theyhave about the benefits enterprises to become more competitive. So it is not of sanitation, constructing a consumer awareness just about getting them started, it is how you grow campaign that addresses those issues, and then them, and again this connection to the market, as designing products that meet their needs but address diYcult and as rough and as uncompromising as the their financial implications, theyhave also been very market can be, is critical to that. Along with that successful in finding ways to develop products that comes things like the transfer of technological are aVordable at the level of verypoor people. capabilities and all the things you need in order to Again, sanitation is a development requirement. So remain competitive. it is not that one squeezes out the other. It is how do you harness what we know about business models and business and applyit to development thinking in Q9 Chairman: How does our own Department for order to get the various benefits. International Development plug into this because theyare giving budgetarysupport, for example, in order to alleviate povertydirectlythrough health Q8 John Barrett: You mentioned earlier when you programmes and education programmes which you said one weapon in the war on povertyis jobs and are a little sceptical of because it makes the host clearlymanyof these jobs could be manufacturing government lazyin terms of stimulating demand and jobs but given the huge increase in manufacturing in raising their own revenue. How do you think a large China—we hear reports that almost everything aid provider like DFID should be promoting a pro- seems to be manufactured in China—do you think growth, anti-povertystrategy? there is an opportunityin Africa to produce many Mr HoVman: Firstly, I would say that the recent manufacturing jobs? If not, where do you see these White Paper in terms of capturing the arguments for jobs coming from now? private sector-led growth and pro-poor outcomes of Mr HoVman: Yes I do think there is an opportunity. economic growth reallyis an excellent paper and it We have funds now of approximately$40 million captures manyof the critical arguments, and I think focusing on small and medium-sized enterprises in that recent interventions bythe Minister have also East Africa and Southern Africa. Theyare not fully been spot on. I would say, just looking across a committed yet but we probably have helped 300 or number of the donor agencies that we deal with, that 400 enterprises, for example small enterprises DFID is far ahead of its competitors in terms of fabricating wind turbines. We see lots of evidence understanding the importance of that, so that is the that with the right finances and the right business first point to make. I think that is where the best skills it is possible to get a manufacturing capability focus of that is. To be honest here, I do not know going. The challenge is how you increase the enough about what happens after the budgetary robustness of that incipient manufacturing capacity support-type programmes and how they happen to so that it can grow, search out international markets, reallyo Ver a view on that, so there is a large chunk be robust enough to withstand the threat of of what DFID does in terms of budgetarysupport competition, and so on, and that is the challenge. It where I do not know enough about how it works is not that you cannot do it, it is how do you increase through to supporting the sorts of things that I have that robustness? Again, we find that one of the been talking about to oVer a view. Myconcern on routes to it is byas soon as youcan (and in a sense I that is that the development community, of which am speaking as a donor intervening) ensuring, as DFID is a part, and the ministries that it feeds into soon as you can, that the small enterprise you are and the local development agencies that have been creating is directlyin touch with the market, not with working with the IMF and the World Bank and all a donor like ourselves or an NGO or a not-for-profit of that, are full of the same breed of person, very organisation, but directlyin touch with the market much like me, development professionals who have and getting clear signals about how to become more spent all their life in a non-market situation and competitive. The second point is to ensure that the therefore do not have the experience-based interventions and the things that we do as a understanding as to how markets work, as to how development donor communityare themselves businesses work, and how you create growth and driven to become financiallyviable because firstly how you assess risk and invest. So my sense, without knowing a lot about how well it works, is to do 2 International Development Enterprises: http:// whatever we can do to bring into DFID and into the www.idevn.org/ development communityprivate sector experience 3366071001 Page Type [O] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 5
14 February 2006 Mr Kurt Hoffman and business experience about how to deliver painting a big picture of partnerships and creating concrete results. I think that is a great thing in the right sort of finance and all the rest of it, but the general and of great value, and there are a lot people Shell Foundation also focuses on the growth of with expertise like that, not consultants but people SMEs. I just wonder in practice, first of all, should who have actuallyrisked their own moneyand been anyinternational aid agencies be involved at that at the hard end of creating wealth and jobs in Africa. level? Can they? How has your Foundation worked, More specifically, I think that it has to be in and for example on the cooking stoves, how did you around the area of getting the markets to work decide there is a market? What did you put into it properlyand getting the incentive structures to work and how sustainable did the local businesses that right, to improve the investment climate and so on, arose become? Have theysurvived and for how long? the sort of things that the Committee will know are How much business are theydoing? Are they embodied in the Investment Climate Facility(ICF) growing from a one-person operation to a ten- of which the Shell Foundation is an enthusiastic person operation? Give us a flavour of good supporter. That is an intervention that is clearly practice. focusing at a level where an institution like DFID Mr HoVman: Okay. I think that I can probably best should focus because you have the biggest impact on use an example from India as opposed to Africa on it bygetting the signals right and so on. It is this, but in trying to find a way into this problem we structured in a waywith private sector thinking and searched, first of all, for partners who were private sector drivers and it means that the initiative represented in the market so partners who were will be looking out through the eyes of these people alreadythere so youdid not have to reinvent the in identifying where to focus. If, for example, you are wheel, you did not have to reinvent the distribution going to tackle corruption. How do you tackle mechanism or the distribution structure. First of all, corruption at a verypractical level because small we looked for a partner who was alreadyin the entrepreneurs are afraid to grow too big because market and a partner who understood that market, there will be certain penalties demanded of them which is prettyunique in terms of verysmall villages, from the local crime fraternity? How do you tackle verylow incomes, a great deal of issues, all that? Getting private sector involvement involved in interconnected with poverty. These are NGOs that the ICF is a good thing. I think that the additional we started to work with. In a sense we interrogated value that DFID can bring is in a sense recognising the short list that we identified in order to find those that to these public-private partnerships it can bring who were most alive to the challenge of, “Well, you more than moneyto the table. It has access to a are in three or four villages now and that is all very whole lot of expertise and skills and so on that, like well but this problem is a lot bigger than that and the private sector, it needs to put on the table in these you have a particular stove that you have piloted in partnerships and needs to keep them dedicated to this village but reallyyouare onlyselling 100 a the problem at hand, and in a sense the wayin which month. Don’t you want to have a bigger impact?” So DFID structures itself to participate in these this is at a human level and you are looking for initiatives, the incentives have to be there so that it is partners who are driven bya desire to go to scale. So compelled to provide all the necessaryresources that that is the first thing. The second thing is we found are important to make that initiative work. Here I that if you introduce the requirement that the am focused on the Investment Climate Facilitybut demonstration of success and the trigger to other initiatives are focused on private sector providing more funds is whether or not people will growth. What we often find in a big part of public- payfor yourproduct, not necessarilythe full price private sector discussions and so on is that private but paysomething. That causes the delivery sector companies get involved in these partnerships mechanism to look for a whole diVerent set of ways because theysee theycan get something out of them. to engage the customers than it does if theyhave the Theysee that theycan contribute something to the stoves given to them and the problem is how do you broader good but theysee that theycan get convince the women that this is good for you. I will something out of them. Like a private sector give you an example of what happened. It was a partnership theyput the resources into it in order to great breakthrough with one of our NGOs, the deliver the results. There is one person responsible Appropriate Royal Technology Institute, working for it and theyhave to deliver the results and, if not, in Maharashtra state. When we put this kind of theyare in trouble. Often we find that for public “pressure” on them and theywent around and they sector participants—and I am not focusing on focused on identifying the women in the villages who DFID here, I am just making a general point—you were natural leaders and encouraged them to think get diVerent representatives coming at diVerent about how theycould sell these stoves to other times and the attention span of the public sector women in the village. In doing this theycame upon partner is often prettylimited. There should be a verye Vective marketing message—not that using a incentives built into DFID’s engagement of these clean stove was good for you because it will decrease initiatives to ensure that it stays focused and puts all the resources that theycan into making it work. 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 Q10 Joan Ruddock: I just wondered if I might relate and pans cleaner. That is a classic consumer message back to some of the things you said earlier about the really. This NGO discovered that the “customers” informal sector being verylarge and then talking were veryresponsive to that and began then to veryspecificallyabout those cooking stoves. You are structure the market ing around that message. Then 3366071001 Page Type [E] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
Ev 6 International Development Committee: Evidence
14 February 2006 Mr Kurt Hoffman theydiscovered that the finance was not actuallya failures and a varietyof povertyproblems, youneed problem; it was finding a message that worked. That a whole mix of skills and inputs to overcome them, evolution in thinking came because of the emphasis and theydo not come from just one supplier, so they placed on getting them to listen to the market. That do not just come from the private sector, theydo not is one example of our value add. Here is a second: just come from the non-profit sector or the aid this NGO worked verywell converting local self- sector. Theynecessarilycome from di Verent sectors help groups into sales representatives and sold about and what you need to do is to find a currency that 65,000 stoves, and that is a fantastic result. But again allows these diVerent blended value investors, as it the bigger problem is that there are 10 million were, to get the returns that theyseek from putting households in Maharashtra state that are at risk. So in risk capital into these markets but allows it to exist in order to go from where you are now and to have at the same time so that the private sector role needs a much bigger impact theyfaced a real set of to be able to get a return on capital. We need to find challenges that we would call from a business side, a currencythat allows that aspiration in a particular supplychain challenges. How do youdevelop the intervention to exist alongside that of the social supply chain? How do you package the product you investor who is more interested in the social benefits V are producing in di erent components? Where do gained from developing a market-based solution. you get them mass-produced? How do you manage quality? Addressing these issues require skills they did not have. Q15 Richard Burden: So this competition does not applyto the social investors youare talking about? Q11 Joan Ruddock: If I mayinterrupt, whydid the Mr HoVman: Well, the model I was talking about private market not just deal with it? was where you bring the diVerent investors together. Mr HoVman: Too risky. In these markets the Where I was talking about competition was between margins are too low to support the private market diVerent agencies, between diVerent donors. coming in and risking capital, it is just too risky.
Q12 Joan Ruddock: Even when you have got a Q16 Richard Burden: It sounds to me like it is product you could sell to millions? creating a contracting circus which we are expecting Mr HoVman: Yes, it is still too risky. the developing world to somehow cope with when theymight have bigger priorities at the time. Q13 Joan Ruddock: This is not reallyprivate sector Mr HoVman: Yes, it is interesting. The issue of, at a development, is it? general level, how much control we see in the private Mr HoVman: It starts there because now we have sector in order to deliver and how much monopoly this NGO which has submitted to us a business plan control we see in the private sector in order to deliver that means it is going to sell two million stoves inside a certain benefit. Taken down a level, at the level you three yearsand theywill do it on a financiallyviable are talking about, I think the issue about contracting basis. So it is getting there. Theyare going to convert that you mentioned is one about getting everyone to themselves into a non-profit making business. We agree to a common definition of what the objectives had to bring in supplychain expertise from are, of the returns that you are seeking, what the elsewhere, from other businesses, to help the market. relative contributions of the diVerent players are, That was another business skill that we helped to and how those responsibilities will be discharged. introduce into that market. Chairman: Obviouslywe have other evidence sessions and I have a couple of colleagues who want Q17 Richard Burden: I am just not sure on that who to come in with questions so if you could perhaps is the bodyor who are the people that are pulling keep your replies a bit crisper so we can get to the that together? end. Mr HoVman: Well, there is a new example in the International Engineering Water Centre called Q14 Richard Burden: About a year ago the Shell IWEC which is a group which is indeed trying to Foundation published Enterprise Solutions to combine private sector investors and NGOs and Poverty3 and this was where you were talking about others in pilot projects to deliver water and the question of promoting competition amongst aid sanitation in urban and rural areas in Africa providers and you said: “A re-engineering of the and elsewhere where theyare tryingto make this development supplychain along business lines ...a work. So I think who would do it depends on who new form of hybrid enterprise that could deliver sees the greatest opportunity, I guess, and the key diVerentiallypriced services to di Verent segments of would be—it is all hypothetical so it is diYcult—to the povertymarket.” I am struggling a bit to know find an actor who has an interest in succeeding in what that means. that particular segment in the market and then to Mr HoVman: I think what I was trying to get at is recognise that that actor, whichever character it is, when you are dealing in the non-market that we are does not have all the skill sets it needs and to find dealing with where there is a varietyof market ways to link the diVerent partners together in a relationship that delivers a result. So I think we need 3 Enterprise solutions to poverty: A Report bythe Shell to let the market speak to find someone who emerges Foundation, March 2005 http://www.shellfoundation.org/ download/pdfs/Shell Foundation Enterprise Solutions who thinks theycan solve a problem and then add to Poverty.pdf on to it diVerent types of support. 3366071001 Page Type [O] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 7
14 February 2006 Mr Kurt Hoffman
Q18 Mr Singh: Mr HoVman, you are not a great fan and health and so on—and here I am truly of targets in the public sector although you call them speculating but it would be interesting to see how “measurable objectives” in the private sector. Your the resources are being allocated to tackle those thesis about targets would mean scrapping the MDGs, and I would hypothesise (but I am Millennium Development Goals. What would you happy to be proved wrong) that the vested interests replace them with? Would you not also accept that in the development communityare such that there the aid community, the Western community, the is an awful lot of money going to equally public gives moneyand allows the governments to defensible povertyproblems—water, education and spend moneyspecificallyon issues like health and environment and so on—an d not enough going on education and other issues and theywant to see some this first one of reducing povertythrough delivering results from that moneybeing spent. If we scrapped economic growth throug h generating pro-poor all the targets how would we know if our aid was enterprise activity, so again I would say let us focus eVective or ineVective? What would you replace the on that first one and unpick it and really focus in on goals with? that on the assumption that if we do better at that we Mr HoVman: On the first point about targets, targets would do better on all the other targets. need to be set so that you can identify the link between the investment that you make and achieving Q19 Mr Singh: So you do not believe in a macro role; those targets. The problem with the Millennium you believe in micro roles for specific NGOs? Development Goals (MDGs) and manytargets in Mr HoVman: I do really. Only because the closer you agencies is that theyare commonlyshared targets can get to the suppliers of finance and deliverers of across the development communityand youhave a services to have their futu res depend on how collective responsibilityfor delivering them and successful theyare on generating pro-poor economic you really cannot trace the input and output growth through enterprise creation, the more results relationship. The development communitywould you will get, but it is a diYcult challenge to do. It argue that it is a complicated business so you really does focus the attention in the next round of money cannot be expected to put a dollar in here and get an if you say you are only going to get it if you can output there. I think the first point I am making is demonstrate how manyjobs you have created and that if you use the discipline of forcing those targets how manyenterprises youhave created. to become ever more rigorous and the mechanisms and initiatives that you put in place to ensure that Q20 Chairman: Thank you very much, Mr HoVman. that dollar leads to an outcome that is measurable, I think you, together with this Committee, have you force those targets to become more realistic and supported the campaign for more resources to go to reallystand a chance of being delivered. So that is into developing anti-povertyapproaches, but how myfirst point. It is not that targets are bad. It is just we ensure it is spent i n a waythat actuallydelivers that we have a tendencyto be too soft on our targets the results, what works, is the hard part. We in terms of the link between our activities and those appreciate you taking the time to share your targets. On the MDGs, the first MDG is reducing thoughts with us. We will see where the other those living on less than a dollar a daybyhalf and evidence takes us. then all the rest of them follow on from that—water Mr HoVman: Thank you very much.
Witnesses: Professor Adrian Wood, Department of International Development, Universityof Oxford and Mr Sunil Sinha, Director, Emerging Market Economics, gave evidence.
Chairman: Thank you, Professor Wood and Mr will not mind me saying that there is actuallya very, Sinha. You have heard the first session here and we verystrong relationship across countries between are grateful to you for coming and giving your growth and povertyreduction. Countries in which thoughts and sharing them with the Committee. I growth has been faster have consistentlybeen the am going to ask Marsha Singh to kick oV. You ones in which povertyhas gone down the most. If waited so long until the end of last session you can you try and explain the variations of poverty start the next one. reduction across countries over the past 20 years or so, about 75–80% of that is explained byvariations in the growth rates, so it is extremelyimportant. In Q21 Mr Singh: I am not sure who is the best person regard to your question of what is pro-poor growth, to answer this question but it appears that there is no the simple answer is that pro-poor growth is growth correlation between growth and povertyreduction that benefits the poor, and that means growth that and various countries have had diVerent outcomes pushes up the incomes of the poor. That depends on in terms of growth and povertyreduction. We have two things. One is the overall rate of growth of the got this new concept now of pro-poor growth in economyand the other is the share of that growth terms of international development. What is pro- that is going to poor people. So we want to tryand poor growth and what are the factors that are linked make the growth of the incomes of poor people as in terms of pro-poor growth? fast as possible and that means trying to find the set Professor Wood: Thank you very much. Just on your of policies that will yield the best possible first observation about the lack of relationship combination of a rapid overall growth rate and what between growth and povertyreduction, I hope you is happening to the share of the poor. The share of 3366071001 Page Type [E] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
Ev 8 International Development Committee: Evidence
14 February 2006 Professor Adrian Wood and Mr Sunil Sinha the poor needs to be going up but the poor will be have done lots of work on India. What theyfind is better oV in a fast-growing countrywhere that whilst the overall pattern you are talking about, inequalities are widening a bit than theywill be especiallyin the recent g rowth of some industries in a slow-growing countrywhere equalities are like ICT and so on, has been verybeneficial to the shrinking. middle class, it is not true to saythat growth has not Mr Sinha: Just to add to what Adrian has said. benefited the poor. It varies bystate. For instance, Firstly, we have got to say for a long time we have the Marharashtras et cetera of the world have had used growth as a proxy. What we have been reallyhigh rates of pro-poor growth. There are two interested in is exactlywhat Adrian was talking critical things. One, the pattern of growth has been about, what is happening to the incomes of the poor. verygood in this wayof having productivity If you take the MDG1 Target of exceeding $1 a day, of agriculture growing and these non-farm what matters is how fast the incomes of the poor are opportunities in the industries that the poor can going to exceed $1 a day. When you look at that we move to. There have to be jobs of a skill level that know, as Adrian has said, that growth is absolutely theycan fill. Then youhave high rates of initial a necessarycondition and veryoften the major education and good health. The qualityof the state factor in reducing povertybecause it works is almost certainlythe decisive factor in the indirectlyas well as directly.Growth will give more diVerences between states in India. Uttar Pradesh opportunities for the poor. If you do not have and Bihar have verylittle growth and verylittle pro- growth the opportunities continue to be limited. poor growth. Marharasthra and the Punjab, What we have also found is that the response of Gujurat, the western side generallyhas much more povertyto growth varies tremendously.For 1% pro-poor growth. 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 Q23 Ann McKechin: In speaking about growth, a 4% decrease. So this is making us concentrate on obviouslyanother factor is the inequalityin incomes the outcome indicators that you are interested in, between the poor and the rich in societies. Some which is the incomes of the poor and how fast are people feel that when you have a wider gap your theygrowing, who amongst the poor incomes is abilityto use growth in the economyis constrained. benefiting, because you can get some marginalised If you agree with that assumption, how should groups whose incomes are not growing at all. That povertyreduction strategybe focused? Should it be is the number one thing. The second thing it has focused on growth and simultaneouslyempowering made us concentrate on is not just pace of growth the poor to take the benefit of it or should we but the pattern of growth. You can have growth promote distribution and reduce inequality, or is it which does verylittle for the poor. A typicalexample some magical combination of both these factors? is the so-called resource curse countries, the ones Professor Wood: It is not a magical combination but that discover oil, diamonds and so on. The it is fairlystraightforward. What youneed to do is to experience is that theycan have short periods of very give the poor more assets and more access to high growth but that does not benefit the poor markets so that theycan participate in the growth because what happens is that the linkages between process more. That is giving you the best of both the sectors that are growing and the rest of the worlds. It is accelerating growth because it is getting economyare veryweak and, through something I a larger proportion of your population involved in will not bore you with called Dutch disease, can the growth process and it is channelling some of the reduce the incomes of the poor. The studies show benefits of the wider growth to poor people who are that in that kind of resource curse countrywhat being more involved in it. When I am talking about happens is that in the long run growth is not assets, fundamentallythe most important asset is sustained and surely you do not alleviate poverty. probablyeducation for poor people, to increase the Veryoften youget conflict and that will undermine value of their labour and health also increases the growth anyway. On the other hand, you can have a value of their labour. Access to credit and land verypro-poor pattern of growth where youhave through reform of tenure schemes is veryimportant. conditions like in China in the early1980s, Vietnam Improvements to rural infrastructure are absolutely in the 1990s and so on, when you get the sectors in crucial in terms of giving poor people better access to markets. To a verylarge extent, there is not any which the poor are concentrated growing rapidly V and sectors which can use the assets of the poor— trade o here. Strategies that involve more poor namelylabour—are also growing fast. You get an people in the growth process are good for both increase in farm incomes and an increase in non- growth and a reduction in inequality. farming opportunities, so you get massive poverty Mr Sinha: Inequalitymatters. There is a triangular reduction. We are no longer saying it is pace; we are relationship between growth, inequalityand also saying it is pattern. poverty. One of the determining factors for when growth is most eYcient in reducing povertyis that initial conditions of inequalityare low. One of the Q22 Mr Singh: Would you say that India’s rate of advantages in reducing povertyin China was that growth, for example, is mainlya benefit to India’s the initial inequalitywas low. Where inequalityis middle class rather than its rural poor? high, because you have such a skewed ability to Mr Sinha: There is a huge amount of studies on participate in the economy, there is a tendency that India, as you can imagine. India’s own intellectual growth will be less eVective in reducing poverty. communityis prettyrich. Also, lots of other people What growing inequalitywill do is reduce the e Vect 3366071001 Page Type [O] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 9
14 February 2006 Professor Adrian Wood and Mr Sunil Sinha of growth on poverty. I would like to echo what Q26 John Barrett: Is there anywaythat the state can Adrian said about there being no formula. One of playa useful role in making sure it is heading in the the recent documents which you might care to look right direction and that growth is pro-poor rather at is a studydone bythe World Bank called Growth than heading in the opposite direction? Experiences—Learningfrom the 1990s 4. For the first Professor Wood: Yes. What a state committed to time, the Bank admits that there are no formulae. All making growth more pro-poor will do will be to this elusive search for some Washington, Paris or make sure that the poor are involved in the growth other consensus is not what it is about. It is about process in the sorts of ways I have described. context. Context determines what is required. In the Equally, the state will also be committed to middle income countries of Latin America, where achieving a high rate of overall growth. If I mayrefer you have very high inequality, growth is very poor at back to some of the questioning of Kurt HoVman, reducing poverty. You would need programmes and the one point that I think did not come through policies to address inequalityand particularlythese clearlyin particular in relation to the Chairman’s policies are likelyto have both an economic and initial question about Africa is if you want growth in social dimension. Veryoften, those who are stuck in Africa you have to have high levels of investment. poverty, those who are at the bottom of income You will onlyhave high levels of investment if distribution, tend to be from particular social businessmen feel it is worthwhile investing. groups. The indigenous people of Latin America, the Afro Latin or Afro Caribbean people, tend to be Q27 Chairman: It could be investment bysmall poorer than others. There is a correlation there also businesses but an awful lot of them. between social discrimination and economic Professor Wood: I was talking about the aggregate discrimination and disadvantage. You have to find volume of investment. It could be bysmall the right context. businesses, big businesses, rural businesses, urban businesses, foreign investors. That is what is not happening and has not happened in Africa. It has Q24 Ann McKechin: You have to adapt your not been perceived as worth businesses’ while to policies. Presumablyin the case of China, it is now invest. Look at the capital flight: 40% of Africa’s beginning to see much greater inequalityarising. capital stock is held outside Africa. This is the Theyhave to change their policies to tryand tackle growth bit of pro-poor growth. The keything one that growing problem. has to think about in relation to the Chairman’s Mr Sinha: Absolutely. From about the beginning of initial question is how in this context aid can be used the 2000s China has hardlyreduced poverty. to make investment less riskyand more worthwhile Growth has remained constant at 10%. The Chinese for a broad swathe of private enterprise in Africa. Government was verysensitive to these things and That seems to me to be the central issue. has adopted a policycalled “Go West.” It is too early to saywhether Go West is working. We onlyhave Q28 John Barrett: I was going to ask if you could anecdotal evidence. But theyhave seen that it is not follow up the importance of the private sector in that going to happen byitself. You need policies to veryinvestment. address that. Mr Sinha: To answer your first question, what we know is that public expenditure is veryoften not pro- poor. The studies that we now have that link the Q25 John Barrett: Professor Wood, you mentioned two—how much was the expenditure? Who the importance of basic services, health, education, benefited from it?—show that veryoften investment access to credit, securityof land tenure and how they in health, education and infrastructure is not pro- were essential in the promotion of pro-poor growth. poor. That raises the real issues that we are These are all things which DFID and others are beginning to tackle and understand. It is the political supporting anyway. How do we make sure that state economyand the nature of the state that determines involvement in these sectors is going to be pro-poor where this investment will go. What was your second or would that happen automatically? question? Professor Wood: No, it does not happen automatically. The governments of developing Q29 John Barrett: It was to follow up on that. If the countries around the world varyverygreatlyin the public sector is not often pro-poor, there is the degree to which theycare about the poorer sections opportunityfor the private sector to make sure that of their community. That depends to some extent on it delivers direct pro-poor growth. How does the whether the poor are a minorityor a majority.If they private sector playa keyrole in this? are a minority, it is more likely they will be Mr Sinha: I have spent mylife working on private overlooked because the views of the majoritywill sector development and therefore I have a certain prevail, but it also varies for anygiven proportion of understanding about what the private sector can be and cannot be expected to do. One thing that was poor people with the attitudes, background and V orientation of the government, as you will have verygood when Kurt Ho man was talking was that observed. he was not talking about large, international business. The private sector is the vast majorityof 4 World Bank, Economic Growth in the 1990s: Learningfrom a private actors from farmers onwards. Mainly, it is Decade of Reform, April 2005, http://www1.worldbank.org/ the indigenous, domestic private sector that is the prem/lessons1990s/ driver of growth. FDI, Foreign Direct Investment, 3366071001 Page Type [E] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
Ev 10 International Development Committee: Evidence
14 February 2006 Professor Adrian Wood and Mr Sunil Sinha plays a huge role but never the overriding role. Even capability of the poor countries that we are in China it is only30% of GDI, Gross Domestic targeting? Are their policies vis a vis the private Investment. We have to set the scene here. The sector currentlywell receiv ed? If there are not, what second thing is that the private sector has, through improvements would you advocate? its drive for entrepreneurship and profit, an abilityto Professor Wood: You make some verygood points create growth. It responds to the environment that there, particularlyabout the issue of how does a you set for it. The regulatory environment, the public sector agency promote development of a investment climate, will determine where it goes. private sector in another country. That is a key issue. Even in the worst governed country, there will I do not think the contradiction is as acute as you always be some sectors that it is worth taking the risk fear because, if you look at why investment is so low of investing in because the reward to risk ratio is in Africa, it is fundamentallyto do with failures of favourable. There are people queuing up to invest in government in African countries. It is political Sudan todayin the oil sector because the reward to instability, conflict, l ack of infrastructure, chaotic, risk ratio is good. You can always find some non-existent or excessive regulation. These are the investment for diamonds. The question is about things that are choking oV investment. deepening that incentive for entrepreneurship and investment so that it does get through to the broader Q31 Mr Davies: Let me stop you there. The only way sectors of the economyand the smaller typeof that DFID can aVect most of those things, excessive business which is almost certainlygoing to be more or badlyconceived regulation for example, disadvantaged from constraints in the regulatory ineYciencies, excessivelylarge government environment. This idea that the private sector steps machines, corruption and the rest of it, is to use the in and cures the problems of societyfranklyhas a leverage which conditionalitygives one. One says, certain mileage but we have to see that as more of a “We will give you a certain amount of aid and corporate social responsibilityissue and not about budget support in exchange for you changing your the broad base of creating appropriate incentives local policies.” Are you telling us that one of your and regulatoryframeworks that work. That is the answers to myquestion is that we should use role of the state. You need the state, the private conditionalityas e Vectivelyas we can to secure sector and civil societyinteracting with each other indigenous policychange in the target countries? and having the checks and balances between them to Professor Wood: It has been shown that using make sure that policies are pro-poor. conditionalityin a verydirect form is not e Vective. Chairman: The problem I think we are discussing is What is crucial is to find developing country the absence of the private sector, to a large extent, governments that are committed to taking this from the equation. approach and then channel our aid moneytowards them. Q30 Mr Davies: There is a contradiction here that is veryfundamental, is there not? Parliament has Q32 Mr Davies: That is ex post rather than ex ante decided to spend taxpayers’ money on trying to conditionality. relieve povertyin the Third World, veryrightlyso in Professor Wood: It is. That is a good wayof putting myview. Parliament set up the Department called it. The thrust of what I was saying before is that there DFID and DFID, like other bilateral donors, is a are manythings for which aid moneycan be used, state agency. The multilateral donors are just channelled through the governments of developing consortia of state agencies. We all recognise that in countries. I was not suggesting that the governments order to relieve povertywhat youhave to do is create of developing countries in Africa are too big. In wealth. The onlypeople in this world who create manycases, in some senses, theyare too small wealth are in the private sector. Experiments existed especiallyin terms of adequatelytrained, equipped in the 20th centuryin Soviet Russia with the public and paid civil servants to run things like law sector creating wealth and theywere a uniform and order and to run infrastructural services. disaster. You have these state organisations trying to Fundamentally, you cannot have high levels of create wealth but theythemselves know theycannot. private investment in a countrywhere youdo not DFID recognises at least in theorythat the private have an enabling and supportive government. This sector is keyto resolving the problem of povertyand was a truth that was recognised byAdam Smith and desperatelywants to spend some of its budget. Most it has not changed since then. of its budget goes to other governments and so forth through direct budget support. It wants to help the Q33 Mr Davies: We have to make sure that those private sector as much as possible. It realises that governments are enabling and supporting? direct investment will not necessarilybe verywell Professor Wood: Absolutely. We cannot make sure targeted or verywell selected and will also cause but those are the governments we should be distortions in the local economy. The paper that 5 supporting. DFID produced in December recognised that. Mr Davies: We have to influence the policymix of Against that background, what are the lessons we those governments. should be learning? What is the scope for DFID to aVect, hopefullypositively,the wealth generation Q34 Chairman: If you talk about budget support, 5 DFID, Workingwith the Private Sector to Eliminate Poverty , one of the arguments against budget support is December 2005: http://www.dfid.gov.uk/pubs/files/dfid- substitution. In other words, the government does private-sector.pdf not have the incentive to generate its own successful 3366071001 Page Type [O] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 11
14 February 2006 Professor Adrian Wood and Mr Sunil Sinha economyto tax byits own revenue because it is representing the interests o f the poor. You can arrive getting it from outside. There is a danger that it at some change. This is not formulaic and lowers the pressure on that government to create a mechanistic. That is the engagement in which successful economy. Secondly, if you recognise that donors—even public bodies—have a veryimportant the problem is you have all this corruption, role to play. Their involvement in the private sector bureaucracy, ineYciencyand so on, is the right thing I am afraid is not how Mr HoVman described it, as to say, “We would give you budget support if you being sort of social entrepreneurs. We have had over tackle these problems” rather than start giving a period of time now a debate on private sector budget support and then trying to withdraw it where development which is saying: do we concentrate on the leverage action does not always work? the enabling environment? Do we intervene directly? Professor Wood: DFID’s policyon this is veryclear: What we have found is that direct interv ention that budget support and indeed aid in large amounts without the enabling environment is franklynot very is given onlyto countries which have relativelyclean, productive. It is p utting your finger in the dyke and transparent and eVective public administrations or sooner or later it breaks. On the other hand, waiting show signs of being committed to developing them. for enabling environment change to happen, which It is veryimportant, but I believe that to be part of is a long term process, can make you miss out on DFID’s policies already. intervening where markets fail. In the developing countries markets fail veryregularly.There is a role Q35 Mr Davies: DFID last year produced a paper on for both but it is in a waynot to work directlyat the conditionality6 which went back on that and said level of enterprise, onlyto do so on veryrare that theywere no longer going to get into the occasions when you are trying to address other business of economic conditionality. The Secretary systemic market failures. of State has conceded in answers to questions from this Committee that that is complete nonsense and, Q37 Mr Singh: You were talking about the enabling of course, it is verynecessaryto continue with some environment. I would like to ask you about the new degree of economic conditionality. Investment Climate Facilitywhich will be launched Mr Sinha: Conditionalityhas been used for a very this year, which is aimed at improving the business long time bythe IFIs 7. It is a veryblunt instrument. environment. I understand that DFID has launched aid to state donors so far to this new facility. Is it wise Q36 Mr Davies: It can be blunt; it can be sharper. for DFID to be treading where no other states have Mr Sinha: I will show you why it is a blunt yet trodden? What value do you think this new instrument. You are saying to a government, “We facilitywill add to the existing business environment will give you money if you do X.” Let us assume for and initiatives like the World Bank’s Investment a moment that the government or the public sector Climate Assessments and Doing Business reports? oYcial who signed the loan or grant that he took Mr Sinha: The reason that is a tough question is that from you agrees with that and believes it is right to the ICF has not been fullydesigned and made do what you should do it. There are still enormous operational. It is looking a little bit more from the processes of change that have to be accomplished theoretical perspective, or at least an informed within that country. The political settlement has to perspective of where we are today. The World Bank change within that countryto bring about that has two or three windows where it intervenes policy. If you need legislation, you need the help of in the investment climate: the investment climate the legislature to pass that legislation. If you are assessments that you mentioned, the cost of doing going to talk about regulatorychange, youneed the business surveys and it has an administrative organisations involved to sign up to that. What barriers window as well. In general, these things are experience has shown us is that that does not happen driven in the waythat I find interventions are driven, automaticallyand the lure of yourmoneyis not with lots of conditionalityattached. enough. There have to be processes within that countrythat change that. If youthink the political Q38 Mr Singh: Which does not work. settlement is basicallyokay,there is good Mr Sinha: Unfortunately, I am the project director governance et cetera, it maymake sense to put of a verylarge project in Nigeria where we have this. budgetarysupport in. Even there I think DFID is Generally, it is very poor because it does not now increasinglysayingthat budget support is an understand the political economyof change. instrument for dialogue, not coming with no strings Investment climate changes are not always win win. attached as it were. In countries where the political There are winners and losers. Veryoften, if youhave settlement is generallyverygood youwill get good a verypowerful vested interest that is losing, they pro-poor growth anyway. Where you can make a lot V will block it. In some wayor the other, because there of di erence is where that political settlement is not are these limitations, in some instances it works well quite right, byputting the evidence on the table, when what is reallyrequired is a technical solution, allowing policyprocesses to be evidence based you have a willing government and a willing state rather than the capturing of the state byvested that wants to embrace change and the private sector interests, bystrengthening the voice of those who are is keen on it. It will go through. But where you have problems of some people blocking change you need 6 DFID/FCO/HM Treasury, Partnerships for poverty reduction: rethinkingconditionality , March 2005, http:// something beyond that conditionality and aid www.dfid.gov.uk/pubs/files/conditionality.pdf assistance that the World Bank provides. In 7 International Financial Institutions. designing the ICF, it was DFID’s hope that it would 3366071001 Page Type [E] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
Ev 12 International Development Committee: Evidence
14 February 2006 Professor Adrian Wood and Mr Sunil Sinha garner more support from other participants in the about stoves—it is about Uganda—mycolleague, state and from the private sector. You hear from Christopher Adam, came back from Uganda last Kurt that private sector companies are putting their week veryexcited because all the controversyin moneyforward onto the ICF. The ICF was Uganda about Museveni and the third term and supposed to be more responsive to local demand for various political uncertainties which are creating a change than the waythat the IFI programmes go in. lot of worryand concern among civil servants the It could also do things like strengthening the private sector is paying no attention to. It is just demand of the voice of those who represent the going right ahead and investing and that is interests of the poor, who are marginalised, who do fantastic. That is the situation you want to have as not usuallyhave a voice. Usuallywhen youtalk in, for example, the UK where you can have about this lovelypublic/private dialogue, what tremendous political turbulence of one kind or actuallyis happening is youhave a government and another but the private sector knows that that is a large, organised private sector and theyare not going to change the basic business rules of the working out what the policypriorities are and game so theygo on investing. That is what we need determining what the policychoices are. It was to achieve throughout Africa. 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. Q40 Chairman: Is it not possiblybecause theydo Professor Wood: I let Sunil speak first because not believe Museveni can lose? when I was working in DFID until last October I Professor Wood: In other African countries, the was responsible for investment so I might have a least hint of worryabout succession or political slightlybiased view. On past record, there are an instabilitymeans the private sector calms down. awful lot of things in which DFID has been the Mr Sinha: At the moment, I am working for the first donor in the past which have been very DAC, producing a paper on promoting pro-poor successful. A lot of other donors have come in and growth. Last year I worked on a paper on the fact that DFID is leading should not accelerated pro-poor growth through private necessarilybe seen as a bad sign. sector development, which Adrian was also involved in. We recognise that pro-poor growth Q39 Chairman: The whole of this report has been generated through the private sector but with a predicated on the basis that it is apparentlynow state laying down the rules and foundations of fashionable that the private sector will lead the game, is verygood for economic povertybut countries out of poverty. I am astonished to be we know that povertytakes other dimensions. told that this is newlyfashionable. To most of us, The message that is coming out of the DAC now it is self-evident. The DAC8 is now saying that the is that these dichotomies that we have seen, that private sector development should be the central were painted in a waybyKurt Ho Vman, are not component of resolving poverty. You have veryhelpful. Pro-poor growth would be described some of the mechanisms but what promoted not onlythrough addressing the rate of should DFID be doing on a countrybycountry growth of the incomes of the poor, but also by basis if that is the case? If growing the private progress on the other dimensions of poverty. This sector is the keyto solving povertyin a specific is reflecting what the World Development Report way, what do you think DFID should do in 20069 said: eVectively, if you do not get political countries where it is pursuing or supporting a empowerment, it is veryunlikelythat youwill get national povertystrategyto change its the policies that you need for private sector programmes to deliver changes? Do you think it development or anyform of pro-poor economic candothat? growth. In manyways,DFID is at the forefront Professor Wood: Indeed it can and indeed it does. of some of this thinking which is changing an The situation is going to varyfrom countryto agenda which was once called enterprise countrydepending on the opportunities that are development to what is now called private sector available for intervention byan outside aid agency development. In the most progressive DFID and depending on the nature of the constraints oYces, what is happening is a change from that are holding back private sector development. enterprise development advisers doing enterprise If you want to take the most basic example of development in isolation to pro-poor growth something that is holding back private investment, teams being brought together, multidisciplinary it is conflict. The involvement of DFID in teams, which will include a macro-economist, an conjunction with the FCO and the Ministryof enterprise development adviser, a governance Defence is absolutelycrucial. Promoting in every expert, somebodywho is good on basic social waywe can political stabilityis essential because services like education and health, trying to one of the things that the private sector is worried address the pattern and pace of growth about in Africa is that, if there is a change of holistically. That is still restricted to a few oYces. political regime, the basic business rules of the game are going to change. Their investments will become valueless. If I mayjust tell youan Q41 Chairman: Wherearethebestexamplesof anecdote,whichIamafraidisnotgoingtobe that?
8 OECD Development Assistance Committee. 9 Available at www.worldbank.org 3366071001 Page Type [O] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 13
14 February 2006 Professor Adrian Wood and Mr Sunil Sinha
Mr Sinha: I can onlyanswer from mylimited Professor Wood: You will see that, I think, when experience. I do not have an overall picture of you are there. DFID oYces. I have seen a lot of this happening in the Nigeria oYce where I work a lot. Q43 Chairman: Thank you very much indeed for Professor Wood: Nigeria is an example. Ghana is giving not exactlythe other side of the storybut a another example where theyhave had a very diVerent perspective. I take awayfrom this that strong team. Most of the Africa countryo Yces are the private sector onlyfunctions if the state taking this focus. functions. To the extent that DFID has the capacityto help states function, private sector development maywell flow from that. Q42 Chairman: We are going to Malawi, Professor Wood: That is an excellent summary. Mozambique and Botswana. 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 is taking to ensure that its revenues in the future, as being here. You have heard what has been you are facing diminishing returns possibly on happening and I hope you appreciate that it is all mining, will help to reduce that povertythat still part of an interesting debate. You will know that the scars the country. Committee is visiting Botswana in a couple of weeks’ Mr Matome: We have just recentlycompleted our time. I am not sure we will be meeting you but we will five year strategic plan which has what we call the certainlybe meeting yourcounterparts when we are north star in four dimen sions: revenue enhancement there. This will be a helpful introduction. The and creation, cost reduction, the organisation to success of Botswana is as a countrywith high drive all of this. One of the fou r cardinal points is average income. The abilityto turn diamonds to sustainability. For us to be able to meet the demands advantage is fairlywell documented. Myof the five yearplan we have to make s ure that that understanding is that part of this was due to the sustainability—call it social responsibility if you foresight of the Botswana Government in hiring a want—is in place. The issue of HIV/AIDS is clearly world leading diamond valuer to negotiate with De one of those elements. There is a business imperative Beers to tryand ensure a partnership that was of in it but it does have an impa ct on societyaround us. mutual benefit especiallyto Botswana of course. For example, we have recentlyapproved an Was it a tough bargain or did you find that the deal extension of the assistance to cover more members that theywanted was compatible with the interests of families. We found that it has a social impact, of De Beers at the time; or did you have to bargain looking after people who do not necessarilywork for hard to get a compromise that was workable? us but who might impact on us, byhaving some Mr Matome: Thank you all for the opportunity to be medicines given to children naturally, which is a here and give evidence to you. I am Joe Matome. I good thing to do. There are impacts for us and the am the group’s companysecretaryfor the Debswana wayin which we can prolon g lives for our business Diamond Company. As a lead up to trying to and the families concerned byextending the address your questions, Debswana is a 50/50 antiretroviral therapy to a greater part of the family. partnership between De Beers and the Government I believe we piloted a corporate response to HIV/ of Botswana. We are also considered as twins joined AIDS around the world and I believe some at the hip. Theymayhave two heads but ultimately government initiatives have taken a leaf out of that. theyhave to go in the same direction. The issue that you raise about getting a valuer, I presume on the Q46 Ann McKechin: I am focusing more in terms of government side, to negotiate the pricing of a the economic benefits because the lifespan of the product is like a three legged pot for us. There is mines is onlyperhaps another 30 years.It is how the Debswana producing the diamonds. Then it values economic legacythat youare going to bequeath to them for sale to De Beers and the Government is the Botswana in terms of allowing it to continue growth third party, the third leg of this pot, which has felt and reduce poverty. that it should look at what we have done as a Mr Matome: In the context of HIV/AIDS? companywith our valuation, so that what we put on the table for the buyer is satisfactory to the third leg, Q47 Ann McKechin: No. I mean in terms of growing which is the government. If anyone of those legs is subsidiaryindustries or skill bases or technical not there, the pot falls over and, in African terms, the capacity. food is spilt. It was a verywise thing to do, to put Mr Matome: There are a number of ways. We that three legged process in place to ensure that recognise that extractive industries are not here for everybody wins. ever. Around our communities as well as in national programmes we have looked at ways in which we can Q45 Ann McKechin: Botswana’s per capita GDP has do this. I will give you an example. This is not to say risen significantlyin the last few yearsbut at the that our mines will close in 30 years. Some of them same time its position on the human development have another 20 years beyond that, even to 50. We index has fallen from 95th in 2001 to now 131st out have looked at the project together with the of 177. I wonder what steps Debswana as a company communitywith various partners in the NGO sector 3366071001 Page Type [E] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
Ev 14 International Development Committee: Evidence
14 February 2006 Mr Joe Matome in this type of subsistence agriculture and what we for the people of Botswana. There has been good can do in villages around our mines, from whom we governance as well as the fortune of finding the stuV draw labour for creating a greater cash economyin the ground and a good tech nical partnership to within those rural areas. This has recentlycome into mine it. the form of a chicken-cum-guinea fowl rural marketing project in the eight or so villages around Q49 John Barrett: There has been a range of legs to our mine. In this, there have been a number of that stool that held it all together. things. One is to get those people in those villages to Mr Matome: That is quite important. Hopefully, do better with whatever techniques theyhave, to people might pick up some of the lessons from that. improve their technology. Secondly, to educate or Some of the countries, for example, pick up on one help them with learning about how to market or how of the models that we have which is a government, to run their businesses. Thirdly, to leave behind 50 private sector partnership in the extractive industry. years from now a model that would work to create Namibia, for one, has picked up on that. I think in other issues around the mines. We also have small Tanzania theyare following that as well now. and medium sized business activities around a companycalled PEO in which Debswana and De Q50 John Barrett: Is there active discussion with Beers have a share. The waythis model works is, for other countries that could learn from the Botswana example, working as a supplychain contractor to experience? Botswana must be aware that it does our mines and we develop the enterprise with the stand out as having been singularlysuccessful in business and staywith it for a little while. When they terms of economic growth and other issues. I are readyand mature, we pull back and they wondered whether there are active discussions going continue and we take the moneyto reinvest on with a number of other resource rich countries somewhere else. These are two examples that might that have not managed to piece things together. answer your question as to what we do to try and Mr Matome: We have an interaction with Namibia. assist. South Africa is veryclose to us. We do talk a lot but I cannot sayfor certain what there is, between those Q48 John Barrett: Some resource rich countries have Governments, in discussion. I am not reallyin that suVered from what is known as the resource curse, particular arena. You do pick up everynow and then that cycle of dependency, corruption and conflict. discussions about, for example, the new Mining Act Botswana has been a great example of avoiding it. in South Africa. A lot of discussions took place Some Members of the Committee have just come between the South African Minerals Department, back from Sierra Leone which is a victim of that. the Ministryof Minerals, and our Ministryof What can we and other countries learn about how to Minerals to see how things were done. I am aware of avoid that curse? Was there more to it than the those sorts of things but I could not tell you original deal that was done in Botswana that seemed specificallyif there is active dialogue. to set things oV on the right track? Are there other factors that we should maybe learn from what Q51 Mr Hunt: The diVerence between Botswana happened in Botswana? which has become what some people would call a Mr Matome: When you talk about the original deal, developmental state where the conditions of that was not what established the partnership. That development are encouraged and a countrylike, say, was a diVerent set of circumstances that led to the Zimbabwe which has also had a colonial historybut, 50/50 partnership between the technical partner of for various reasons, has gone in a totallydi Verent De Beers and the people of Botswana. What makes direction, is verystark. I have read that one of the Botswana successful? From the point of view of reasons for that, one theory, is the role of the black Botswana’s business, we need an environment in middle classes in Botswana and how theyhave which we can survive. There is a certain degree of operated and worked has been particularlyunique. transparencyin how the countryor the government I wonder if you could tell me whether you think there of the countrytreats us and a certain amount of is anything true in that theory or what you think it governance which, in a sense, is one of the very is that has made Botswana go down a path that is so diYcult things that Africa is grappling with in terms verydi Verent to other countries. of accountability. I will just deal with one Mr Matome: You have to forgive me for being very participatory type of environment where you can waryof tryingto criticise some of our fellow put your point forward. We have something in neighbours. I am not trying to duck your question Botswana called a kgotla system and it works by but whatever I saywould be verypersonal about saying, “Come to the gathering.” The chief, Mr Debswana’s point of view. I am not in government Bruce, will be sitting and listening to what you have so I could not put that as being the governmental to say. Even a child or a woman or whoever it is can point of view. There is an increasing middle class in saytheir piece. He then makes a decision on his own Botswana that has an interest in making sure that having heard what you have to say and he becomes the rule of law is followed because theyhave a lot to totallyaccountable for that decision. He does not protect. I would be waryof sayingthat there is not have to do exactly what you say. Those are the the same level of middle class in Zimbabwe. They pillars, in myview, that lead to Botswana being able have had people in England and other places to to have used what God has given everybody or most come and learn things before us. There is a middle people, which is what is in the ground. The question class in Botswana that makes it possible to protect of how we have used it has been the fortunate part the rule of law. We must not underestimate that 3366071001 Page Type [O] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 15
14 February 2006 Mr Joe Matome
Botswana is also essentiallya poor countrytoo. that, even those who have n on-geographically Even though DFID and others are not in the country comfortable positions, to protect what theyhave. because of its status as a middle income country, The other issue of the KimberleyProcess is a set of povertyis still there and we have to be aware of the warranties. That would also help downstream demands that povertyis going to make and the with the people who buythe diam onds. It also threats that it makes to our democracy. Democracy helps to police the issue. Our presidencyand has to be eVective. Yes, the middle class helps us with chairmanship in Botswana now, this year, of the that but, despite our status, there is still a verylarge KimberleyProcess, will surelytryto give those bodyof the poor which we have to address, whether examples to those who can l ook at improving. it is corporate or governance or international, in Self-policing is one thing. That is what must order to maintain and keep that good record that we happen. The rest of the world can do all it can but have had. I hope we will continue with it. I hope the we have to self-police whatever countrywe are in, middle class will protect it but we have to keep an eye whatever diamonds we have. on the fact that we have the poor. Q53 Chairman: You identified the government Q52 Chairman: Diamonds are a veryspecific issue about determining this as a national resource commodity. I was interested when one of your and assembling a framework abroad could apply colleagues was speaking when the President of to other minerals which do not necessarilyhave Sierra Leone was in London, saying that deep the specific identityof diamonds. It could even mining of diamonds you can secure and fence in applyto oil and gas. It is a model that could be but alluvial diamonds are a big problem. You have replicated if people wanted to follow that. created this KimberleyProcess to tryand Mr Matome: I believe so. If there are suYcient and authenticate and control patterns. That is peculiar powerful forces to prevent a good thing from to diamonds. You cannot do that with oil as a happening that will not happen. Oil, in some parts commodity. How can you take that forward in a of Africa, is extremelyvaluable, more valuable waythat reduces the capacityfor corruption? than diamonds. What is there stopping a proper Diamonds in other countries in Africa have been a collaboration between governments and those recipe for war, conflict and disaster but in technical partners? Botswana and sometimes in South Africa and Namibia theyhave been a successful contribution Q54 Chairman: The nub of what we are concerned to the dynamics of the economy. How can you about is the role of our own Department for extend that legacyto other diamond producing International Development. What kind of steps countries? could theytake, working with extractive Mr Matome: In Botswana we have been able to industries, from your experience and in other have certain conditions which ensure that our countries, that would help those resource diamonds are for development, unlike in some diYculties to improve living standards and reduce other places where that has not happened. It is a povertyrather than the opposite e Vect which has geographical fact that our diamonds come from been observed in some countries? From your volcanic pipes and therefore are relatively experience, what do you think our Department for protected as opposed to diamonds that have come International Development could do? Is there from volcanic pipes and been washed awayinto anything it could usefullydo to tryand ensure that rivers and alluvial type areas. The second thing is we get agreements with extractive industry not about the geographyof diamonds; it is about companies in a waythat would lead to poverty the laws that relate to how you handle a national reduction? resource. Veryearlyon in the life of Botswana’s Mr Matome: Yes. ICMM10, for example, is a body Independence the first President managed to that is putting us all in one mind about the box of convince everybody that diamonds were for the sustainabilityat the bottom of our north star or whole nation, not for tribe X or tribe Y, generally our four cardinal points of Debswana. The other applying to all mineral resources, anything below dayI was with a colleague from ICMM. We were six inches in the ground. Anymineral resource, at a corporate responsibilityseminar. Every regardless of which tribe it sits in or which district mining company, whether it has an international it sits in, is a national resource. That was put into connection or is home grown like Debswana, for various legal documentation, for example, that example, is realising that it has to do certain things said you cannot handle the diamonds without for its community. We have an organisation called permission. Of course you could still handle them PEO and its philosophyis that we will put money without permission and get caught for it. They in with an entrepreneur as long as he has a good made it veryclear that you cannot handle a rough idea and good drive. He maynot have the diamond or an uncut diamond without certain knowledge or the experience and some of the licensing from the state. That legal framework business technical knowledge that we have. We assisted with that issue. Thirdly, the state in full will link him with our supplychain to be able to go partnership with the extractive industry, with the forward. This can happen with oil, copper and professional experts in that area—in this case De gold. It is happening in South Africa. We cannot Beers—gave further reason for a diamond not to always have the ability to monitor and keep an eye be able to be abused. We support the Kimberley Process in order for other people to pick up from 10 International Council of Mining and Metals. 3366071001 Page Type [E] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
Ev 16 International Development Committee: Evidence
14 February 2006 Mr Joe Matome and give someone the education and training that government patronage and therefore corruption. is required to make a business sustainable. We stay Here we have a model based on something which with it. We watch it. We stayon the board up to a is supposed to be verybad for e conomic progress certain point in time but there has been perhaps a producing verygood economic progress. I am glimmer of hope in that people like DFID could fascinated bythis particula r irony. Perhaps you bring to us some of the skills that you may consider can explain whydiamonds are a special case, have retired but we are nowhere near getting because I think that is what the argument started; and oVer that kind of assistance to those amounts to. kinds of communities that we are talking about, Mr Matome: Iwillattempttodothat.Iwouldnot citing onlyone example. This is the kind of role call it a large, state owned monopoly. perhaps to have the technologyor skills transfer which would be funded bypeople like DFID, into areas which are not particularlyobvious. It is not Q59 Mr Davies: It is not onlya monopoly;it is a like giving moneyto education or an HIV/AIDS monopolyprotected bylaw so anybodywho goes programme. It helps people to self-sustain. It can in for informal diamond panning presumablyis be linked veryclearlyand veryeasilyfor those who sent to jail for a long time. You have a monopoly do want to participate with elements of the which has not just de facto emerged as a result of extractive industry. The ICMM has the same market power but is enshrined and protected by problem. Mycolleague there was saying,“Yes, we the criminal law of the land. Is that right? also want to do this but somewhere we have to pull Mr Matome: No, it is not right. I probablywas not veryclear and I beg yourpardon for that. What I back.” We onlydo a little so we can staylonger V with our projects. For those countries, like mine, was saying was that you cannot come o the street particularly, in mining where you do not get much and handle a rough diamond. Anyone who has the DFID help, we have P650 million of the resources desire to do so can applyfor a prospecting licence of the last budget, for example, going to HIV/ to find diamonds or anyother mineral. Having AIDS which would otherwise have gone into done so, theythen have veryrecent and good laws development. That is diverting resources from protecting that investment in prospecting, giving a that and that is a role DFID could playto help us number of years to prepare to extract that to meet that void. resource.
Q55 Chairman: How manyof Debswana’s Q60 Mr Davies: You have to sell the diamonds employees are Botswana nationals? presumablythrough the De Beers central selling Mr Matome: We have 6,500 employees and 98% organisation, through the Diamond Corporation? are nationals. Mr Matome: Unless you make your own arrangements with them. We have a special Q56 Chairman: Presumablyyouhave contractors contract with them so other people who are there as well. Have you stimulated the creation of and other companies—there are some Canadian locallyowned and controlled contractors to the interests also—do not have to sell to De Beers at diamond mining industry? all. Theycan choose to do so. The unique thing Mr Matome: Yes. Our procurement policies which about Debswana is that it is a companyformed we are revamping at the moment deal with several under the Companies Act and therefore with all grades of citizen ownership or empowerment. We the issues around the transparencyrequired bythe do not onlydeal with equityissues. We also deal Companies Act and all the obligations of the with how manymanagers are citizens, even if there Companies Act. When theydecided to go into is no equity, and how much training they do of partnership, thank goodness it was not to have it citizens if theydo not have the managers, and give as a parasitical act which could be a problem but points on a scale leading up to ownership. to have it as a company. There was great foresight Preference is given to supplying various types of from that point of view because it opens you up to goods to our mines on the basis of that being able to be scrutinised. Other companies may empowerment policy. or maynot choose to go with De Beers. Theydo nothaveto.Theycandoitontheirownandhave Q57 Chairman: I hope we might manage to meet their own agreements and arrangements. Even if one or two of those people. theydid go into bed with government on this issue, Mr Matome: I hope you will, yes. theymaystill choose not to sell through the central selling agencies. There is a great deal of latitude in the diamond industryor anyindustryto sell Q58 Mr Davies: This is a veryinteresting case whichever waytheywant. We choose to sell because Botswana is regarded as one of the great through De Beers. success stories, if not the greatest success story, in Africa, which is whywe are going there to have a look at how it is done and yet it is all based Q61 Chairman: That was a veryinteresting on an enormous state monopolywhich pre-empts exchange. Members of the Committee will be 30% of GDP. The conventional wisdom is that looking forward to seeing your counterparts and monopolies are a rather bad idea because theyare contractors when we are in Gaborone. You have ineYcient for standard economic sharing reasons given a veryclear account not onlyof that model and because theyare a source of excessive but of the fact that it could be transferable. That 3366071001 Page Type [O] 19-07-06 10:52:33 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 17
14 February 2006 Mr Joe Matome is of interest to us. When you see success you want for the benefit of the people, so it is good to see one to know how you can translate that success countrythat has that arrangement. Thank you somewhere else and spread the benefits. We have verymuch indeed for taking t he time and trouble. been on the borders of the Democratic Republic of Mr Matome: We look forward to seeing you and the Congo where all you see is rape, pillage and your Committee when you come to Botswana. I plunder and no sense of minerals being developed will make sure I am available. 3402131001 Page Type [SE] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 18 International Development Committee: Evidence
Tuesday 21 March 2006
Members present:
Malcolm Bruce, in the Chair
John Battle Mr Quentin Davies Hugh Bayley Mr Jeremy Hunt John Bercow Ann McKechin Richard Burden Joan Ruddock
Witnesses: Ms Sharon White, Director, PolicyDivision, Mr William Kingsmill, Head, Growth and Investment Group, Mr Gavin McGillivray, Head, International Financial Institutions Department, and Mr Richard Boulter, Head of Profession, Enterprise Development, Department for International Development, gave evidence.
Q62 Chairman: Good morning. Thank you very private sector. Also important to us is the fact that much for coming in. I wonder if you could briefly the poor are the private sector, that nine in 10 poor introduce your team before we start. people in work in developing countries are privately Ms White: Thank you very much indeed. I am occupied, and so we cannot support development Sharon White and I am the Director of Policyat e Vectivelywithout a strong focus on the private DFID. On myright is Richard Boulter who heads sector. That said, it is still a relativelysmall part of our enterprise development advisers within the our work, but it will take on growing importance Department. On myleft is William Kingsmill who and I think you should see that in the White Paper was Head of our Nigeria oYce and who is now that the Secretaryof State will launch this summer. heading our growth and investment work in the Department. Furthest to myleft is Gavin Q64 Chairman: That obviouslyis something that we McGillivraywho heads our International Financial are looking forward to. As you know, the Institutions Department which also covers CDC as Committee has recentlyreturned from a trip to a well as private sector infrastructure. number of places in Africa. If you take what we learned in Malawi—and you are quite right, the Q63 Chairman: Thank you very much. You will poor are the private sector—we were constantlytold appreciate that the Committee is just now getting theywere so poor theyhad no capacityto buy into a report on the role of private sector anything and therefore there was no ability to development as a means of alleviating and resolving stimulate a private sector to service people who had povertyand we are approaching this in a very no purchasing power, it was kind of locked into that. genuinely open-minded way. We want to know how What do you think of the policies that you can it can do it and what is being done to make it happen pursue which will actuallybreak the wayout of that and obviouslywe are interested in what youare and start to enable povertyt o be reduced byactually doing. I know that Kofi Annan has made a comment enabling those people to do something that to the eVect that private sector development and the generates economic activitya nd subsequently growth of the private sector in poor countries is growth that will reduce their poverty? Have you got essential to the alleviation of poverty. The OECD ideas and experience? Development Assistance Committee’s suggestion is Ms White: We think we want to take a multi- that “Instead of regarding private sector pronged approach and for us the G8 commitments development as just one of a number of tools, it from last year are a key part of this. When we look should be regarded as a major, if not central, part of at the financial commitment from last year, I think countryassistance that donors provide”. Given the we are clear that the extra £50 billion of ODA that terms of the International Development Act and the we expect between now and 2010 needs to be as focus on poverty, do you think that these two things much focused around infrastructure, transport, the are compatible? keyenabling environment for growth, as on Ms White: The answer is we do. DFID has education, health and basic public services. We are recognised fairlyrecentlythe importance of the also working tremendous lyhard, although with less private sector to povertyreduction and to the success than we would have liked, on the trade Millennium Development Goals (MDGs). I think it environment. Creating bigger markets for the is fair to saythat it is probablyin the last five or so produce of the poor is absolutelyvital to this. years that this has risen in prominence. Part of the DFID’s approach on the private sector, as I am sure concern around povertyreduction strategies was you are beginning to see from your country visits to their earlyfocus on social sectors, on health and Malawi, Sierra Leone and Mozambique, has been education primarily, and their under emphasis on veryfocused on small scale microfinance. This has growth and the private sector. As we look, in the had important benefits, it saw lots of women light of the 2005 G8 commitments, at what has entrepreneurs benefiting, but at the same time we driven growth in Asia and at how we can replicate have learnt the importance of going rather more that in Africa, I think we are becoming more and upstream, supporting the enabling environment for more seized of the importance of growth and of the business, working with governments to cut red tape, 3402131001 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 19
21 March 2006 Ms SharonWhite, Mr William Kingsmill,Mr GavinMcGillivray a nd Mr Richard Boulter reduce regulation, improve competition and so on across the board to this, I think there are clearly both at the macro level of trying to make sure we get gaps. Richard is head of our enterprise profession. the aid flows through, working in the right direction We have 25 enterprise or business advisers across the on infrastructure as well as the social sectors, but Department. That is a big increase from where we also working more upstream on a policy stood five or six years ago. That gives you a environment with the private sector. demonstration of the fact that this is still a relatively Mr Boulter: On Malawi, where we used to under-explored area for us. We are trying to make concentrate on microfinance, we now tend to stronger links to the private sector. Gavin was promote what is called access to finance, so we are recruited from the private sector. We have actively talking about things like savings and insurance and tried to recruit the skills that we do not have pensions to some extent. In Malawi we have a internally. Perhaps Gavin can also talk about the programme with what is called the Opportunity links we are trying to forge with people who run International Bank of Malawi that is savings driven. businesses. There are a lot of poor people coming to that bank Mr McGillivray: Having a few people in-house with to bank their savings. Then, as Sharon says, the private sector experience is helpful but so is using the investment climate is reallyimportant. One of the right people outside of DFID. We have got a very things we have learnt in the last two years is that we interesting new model with CDC and Actis, the can put time in to what we call private-public sector emerging African Infrastructure Fund, and InfraCo. dialogue and getting those two sectors together. In each, we have our moneyfocused on certain There is something called a National Action Group objectives, so there is a framework which defines how in Malawi that is bringing those two sectors together it will be used to achieve development ends. We and theyhave been focusing on the importance of recruit through a competitive process a private the investment climate. entrepreneurial entityto run that money,so we get this entrepreneurial drive behind our objectives and it is reallyproducing astonishinglygood results. In our Q65 John Bercow: Looking at the enabling private sector infrastructure programme we have environment, Sharon, as you have just described it, spent about £100 million over the last five years and presumablyit includes looking at countries in which we reckon we have precipitated through that some propertyrights are not secure or indeed non- $1.5 billion of private and DFI investment into existent. It would therefore be helpful if you could markets which it otherwise would not have gone into. give us some indication of what DFID is doing in the More than 90% of that has gone into Africa. countries where that problem is especiallyacute and John Bercow: I personallyregard this as being of the on what scale. I recentlyasked the Secretaryof State essence and therefore I wonder if it is possible to have about Hernando de Soto’s work and I got, in a note to members of the Committee describing in a fairness, a veryconstructive replywhich obviously little more detail the sorts of progress to which you had involved oYcials thinking about the work and have just referred. Is it simplya matter of capacity oVering me a summaryof their views on it. That was that has so far prevented DFID making a significant useful in terms of a one-to-one exchange and contribution in this field? If that is all it is and you are reactivelyI suppose it was certainlybetter than trying to address that within the resources available getting no reply, but I do not have any very strong then that is veryreassuring. Can youallaymyanxiety sense personallythat DFID is all that seized bythe that there is something else involved, that DFID is so propertyrights agenda, it seems to be a very,very culturallysensitive to the norms and traditions and small scale feature of your work or almost a very cultural practices in manydeveloping countries that V belated afterthought and it seems to me to be rather it is free to o er this advice for fear of being accused central. Secondly, who amongst your team advising of neocolonialism and so on, because if that were the on these matters has anyexperience of establishing attitude it would be terriblydisappointing? The realityof the matter is that this can make an and running a successful business? Do you use V V anybody from the private sector who, as opposed to enormous di erence. We are not afraid to o er merelytheorising about the subject or displaying gender advice and that is absolutelyright, I applaud some competence in the field, has actuallydone it? DFID for doing that. I have never engaged in a cheapskate tax on DFID’s gender advice approach, I Ms White: I think both your questions relate to the think that makes a great deal of sense, but if DFID is fact that this is a relativelynew area for DFID and prepared to do that because we are at a certain stage mycolleagues can talk to youin more detail about and we feel that we should encourage developing how far we have been trying to get in experts who are countries similarlyto respect women and to expand much closer to the coal face in terms of setting up opportunities and so on, surelyif we know that businesses and so on. As I am sure the Secretaryof capitalism works, the fact is it has won the arguments State mentioned, we are becoming more conscious around the world, whynot advise developing of the importance of propertyrights in terms of countries to have propertyrights, a transparent unlocking private sector development. The extent of banking system and what I call the institutional legal the issue varies bycountry.In Peru where 90% of infrastructure for competitive markets? businesses do not have securityof tenure it is an enormous problem. In contrast to Vietnam where Q66 Chairman: On the specific point that John has new securityof tenure, following the fall of made about a note on what is happening, I think that communism, had a tremendous impact on the would be helpful1. We appreciate that you are private sector climate. In answer to your question as to whether we are taking a systematic approach 1 Ev 140 3402131001 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 20 International Development Committee: Evidence
21 March 2006 Ms SharonWhite, Mr William Kingsmill,Mr GavinMcGillivray a nd Mr Richard Boulter engaged in it but, as you have said yourself, Sharon, of technical assistance. One of the developments for it is a relativelynew area and I think we are keen that us over the next year will be a sense of what DFID’s we should see more results. I do not know whether business model looks like in middle income you want to answer that point specifically. countries. We have not considered preciselyyour Mr Kingsmill: We are vitallyinterested in property proposal of whether part of the recon figuration of rights. In Nigeria, for example, we were supporting our business model might be a fee-based service with the renewal of the land registrybecause we saw how middle income countries . I know the Bank operates important in Lagos state land is as a fundamental to some extent on that basis, but it is something that building block of the market economyand the we will definitelytakeawaytoc onsider as part of the Nigerians were keen for us to do that, but we have Comprehensive Spending Review. to be aware that formal land registrysystemsare Mr McGillivray: On middle income countries, hugelyexpensive and that manyverypoor people, one of the instruments we have is the international the nine out of 10 people who we were talking about, financial institutions: the World Bank, the are going to depend on informal systems and Asian Development Bank, the InterAmerican crafting those is verydi Ycult and it does have to Development Bank, which we are shareholders in work with the traditional systems. Governments and which we fund. We are keen for them to have verystrong views on land tenure. Around 20 continue to operate in midd le income countries and years ago you would have found ODA and ODM to focus there on povertyreduction. Although our doing a lot of work on establishing new systems of bilateral programme is concentrating on lower land tenure and we have been eased out of that income countries, we have this considerable ability business because it is highlypoliticised. In all of our to work in middle in come countries through the programmes there is an awareness of propertyrights mutlilaterals. and not onlyestablishing land as the most important aspect for all poor people but to establish dispute resolution mechanisms as well, which is something Q68 John Battle: We looked at the CDC a while we were also doing in Nigeria, to make sure that the ago in this Committee. I think there was then quite people have access. These are vitallyimportant to us. a major restructuring in 2004 of the Although these areas do not cost mega billions, they Commonwealth Development Corporation and the are verylabour intensive and I think it is quite right setting up of Actis and Aureos and a refocusing of to point out that DFID is constrained in terms of its CDC rather than on large power plants in Latin labour resources. We do focus on propertyrights America to tryand see how that tied in with a verysignificantly. strategyto tackle poverty.CDC is now described as the emerging markets fund investment company. Under the Memorandum of Understanding with Q67 Hugh Bayley: Has the Department considered the Department, although it is government owned, whether it could establish a wing within the there is an idea that there should be no interference Department that works on commercial terms, that or intervention byDFID in CDC’s activities. I can provides advice, that is mainstream to DFID’s own see that from the structural point of view. How do mission on rural livelihood development, improving you see CDC fitting into DFID’s overall model of governance and so on, but on a consultancybasis to development? middle income countries? We withdrew from Latin Mr McGillivray: Where it fits in is in terms of America because the prioritywas low income 2 pioneering investment. I think you will have seen countries. If you look at this Committee’s report ,in in this booklet here3 the emphasis on building the India we suggested that perhaps in 10 years’ time we enabling environment, that is laws, regulations, should not be a donor to a middle income country policies, institutions and infrastructure, but in with a massive space programme but that if they manycountries it is a generational challenge to get reallyvalued the expertise we have in rural all those things better. In the meantime we see a livelihoods perhaps theyshould buythe services. If strong role for entities like CDC and also the IFC4 we were to develop that wayof marketing part of a coming in and going where the private sector would package of DFID services, do you think it would not of itself go, bringing in private sector partners build more of a private sector culture within the with it and showing that it can be done, that you Department and less of a social work one? can invest decentlyand profitablyin these di Ycult Ms White: It is a veryinteresting question because of environments. That is a powerful impetus to others the financial context of the Comprehensive to follow suit. Thus far—and fingers crossed—in Spending Review that we are going through with the our view the Actis CDC model is working Treasuryat the moment is that DFID’s budget with extremelywell. CDC remains with the great bulk a 0.7 target means that we are about to triple our of its capital focused on the poorer countries and budget between now and 2015 from about £5 billion V with a far greater focus than manyother to around £15 billion with around the same sta . development finance institutions, it is making That means that questions about where we put our profits and it is bringing in other moneyalongside resourcing and particularlyhow much prioritywe it. It seems to be going verywell. give to middle income countries is a live debate at the moment both in terms of cash resource and in terms 3 Department for International Development, DFID and the Private Sector: Workingwith the private sector to eliminate 2 International Development Committee, Third Report of poverty, http://www.dfid.gov.uk/pubs/files/dfid-private- Session 2004–05, DFID’s bilateral programme of assistance sector.pdf to India, HC 124. 4 International Finance Corporation. 3402131001 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 21
21 March 2006 Ms SharonWhite, Mr William Kingsmill,Mr GavinMcGillivray a nd Mr Richard Boulter
Q69 John Battle: Do you see CDC as a thin wire people on very low incomes are doing very small that pulls in the larger rope of further investment scale trading, whether it is selling bars of soap at when others are reluctant to go? Is that what it adds roadsides or something else. We are not looking to to it? middle class-led trickle down. One issue for us is Mr McGillivray: Yes. That was the principal how to replicate some of the agricultural impetus behind the restructuring. CDC has always productivitygains experienced in China, in India done good work. It has always invested decently and with the Green revolution in Africa where and created direct employment exports, foreign some of the physical constraints are much more exchange and set standards, which is verybinding. How do we go beyondsmall scale trades important, and it continues to do that, but the new which are enough to get bybut not enough to fund model now has far greater abilityto mobilise other school fees and the othe r basics of life where donor moneyalongside it. resourcing still needs to come through? We have a new agricultural strategywhich is tryingto get into Q70 John Battle: Is it just a catalyst? Do you not some of these barriers. Our approach is to tryfrom see it having a role in the future? The private sector the bottom more broadly, because the numbers of will go where it has been led byCDC. What do you poor is so concentrated at the bottom end, but see as the future for CDC in the long term? believing that we can raise incomes through private Mr McGillivray: I think within our lifetimes there sector enterprenuerism right the waythrough the will still be a strong role for pioneering investment sector. because the frontier keeps on advancing. This is the Mr Boulter: You are absolutelyright to refer to diYcult judgment that we have to make with CDC, China because that is an example where it the IFC and the EBRD5, that these large financial unleashed the potential of farmers once it gave institutions that invest in private companies keep them the right to sell their own produce. I think a on moving out to invest in the geographical areas, better countryto look at is Bangladesh, where for the sectors and the instruments where the private manyyearsparticularlyBangladeshi organisations sector is not going in of its own accord. There is a have been working in the microfinance sector and risk that organisations become comfortable. They theyhave been asking if that covers enough poor like to do business in easyplaces just like everybody people and theydefined it in terms of helping the else. So constantlykeeping at the frontier and ultra poor. We should all start from the basis that investing in that frontier is how we would see it everypoor person wants to be economicallyactive going. and so in that sense you should never marginalise them and saytheycan never be economically active, but then you have to grasp what Q71 Mr Hunt: I set up myown business. I was microfinance can do and cannot do and often you interested to hear you talking about Asia. What a end up concentrating on people being economically lot of people who have looked at the economic active part time, so you try and introduce ways to success of Asia sayis that the focus on private make the markets much more accessible to them. sector developments in Asia has been amongst the In some ways DFID is very much working at the growth of small businesses rather than big base of the pyramid to that extent. businesses and particularlyagricultural businesses. Chairman: Africa is rich in resources. How those A lot of people date the rise in China’s success back resources are distributed is an issue that Hugh to the moment when the communes were disbanded Bayley wants to raise. and farm holders were allowed to have their own small holdings. The question I have not been able to understand is how this relates to extreme Q72 Hugh Bayley: The principle behind the poverty. How possible is it for people who are Extractive Industries TransparencyInitiative earning less than a dollar a dayto set up and run (EITI) is a great principle. Would you agree that their own businesses? People like JeVreySachs, for the value of the initiative is diluted byits voluntary example, sayit just is not possible when youare so nature, that there are not so manycountries signed desperate at that level, that you cannot save enough up as you would like to see? Has DFID looked at to get anykind of business going, but then there the possibilityof creating a statutoryscheme and are other perhaps more hardheaded US economists if so, how could that work? who say anyone can start up a business, you have Ms White: We do not feel that it is made less just got to create the right environment and eVective bybeing voluntary.Given the phase of extreme povertyshould not be a bar to that. I just where we are in the stage of the initiative, being wondered what you feel about that. Are we talking voluntaryhas been veryuseful in terms of tryingto about creating an environment where eVectivelythe get the buy-in in what is a very complicated multi- middle classes in African countries can set up stakeholder setup. Two years ago we were at the businesses which hopefullybenefit everyoneor are stage with the EITI of hoping that one or two key we talking about an environment where everyone countries might come on board and since then we can set up a business no matter what the poverty? have had a domino eVect. I think Nigeria and Ms White: Our take on this is probablythe latter. Azerbaijan are now at the stage of having quite If we look at the pattern of business, particularly substantive EITI reports. Those of us who have if we look at the informal economyin Africa, been fairlyclose to it have been rather pleased that it has taken oV in the wayit has. Some have been 5 European Bank for Reconstruction and Development. calling on DFID to investigate the options of 3402131001 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 22 International Development Committee: Evidence
21 March 2006 Ms SharonWhite, Mr William Kingsmill,Mr GavinMcGillivray a nd Mr Richard Boulter having a more mandatorybasis and we have be interested to hear about what ta rgets or goals looked into this. I think one of the concerns we you have in connection with how much is invested would have with a listings basis is that you would and how many jobs you expect to come out at the lose something like 70/75% of revenues which are other end. due to state-owned desk enterprises if you are Ms White: We are activelyconsidering how we can basicallyonlyable to lock in companies who are extend the principles of the EITI to other sectors. listed in the New York or London Stock Exchange. The analysis we are doing at the moment is to look Mysense is that in two or three years’time, once at the sectors where we see the strongest we have got a broader stock of countries absolutely governance and corruption issues and theyinclude signed up, that maybe the time to revisit this procurement generallybut also construction and question, but for now, given it is quite a fragile arms. We are activelylooking at this in connection process, I think being voluntaryhas been very with the White Paper. One of the areas the useful. Secretaryof State has flagged that we will be looking to saysomething more concrete on in July Q73 Hugh Bayley: DFID has announced that at when the White Paper is announced is what the some time fairlysoon it will give up its stewardship future of the EITI looks like and how that gets of the Secretariat. Do you think there has yet been expanded. suYcient buy-in from other donors? Is it taken Mr Kingsmill: We entirelyshare yourview that seriouslyenough bythe Americans, the Japanese, growth is about jobs and that is how our partners the Dutch and others? Who is likelyto take over see it in developing countries. Theydo not talk to the helm? Will theybe as tough and forward us about growth strategies, theywant to talk about looking as DFID has been? an employment strategy as they want jobs for Ms White: That is a verygood question. We have people. That is whygrowth matters to them and always hoped that we would reach the stage with whyit matters that we find new models of growth the initiative where in a sense we could transfer the that are sustainable, because there is a desperate whole of the co-ordination role into the need for jobs. The realityis that, whilst a lot of jobs international system because there are pros and are being created in manycountries, the vast cons for it being closelyassociated with the UK majorityof people are still self-employedand they even though it is an international Secretariat. We are going to be for some time to come, and they are hoping that over the next couple of years we run verysmall di Verent businesses, each household will be in a position where the rest of the is a business and surviving in the informal sector international communityhas embraced the and that is how it will be for some time. That said, initiative to take this on board and we have been we are verykeen on promoting decent jobs and discussing this with the Bank and the IMF and making sure that where investment happens the others, but we will not do that until we are happy investors are aware of their obligations. We know and confident that the initiative will continue to run through our partnership in the ethical trade eVectively. So we are not looking to transfer initiative that in fact at the UK end there is a great responsibilitybecause of e Yciencysavings or other deal of interest in investors in businesses promoting reasons but because we believe there will be a proper adherence to labour rights and proper stronger business case for this being parked employment. We work with the Fairtrade elsewhere in the international community. Foundation also. There is a growing interest in the British commercial sector in promoting proper labour practices. Q74 Chairman: So the near future is elastic? Chairman: The other issue we have seen is that even Ms White: We hope that is sooner rather than later, in the most successful countries in Africa theyare but we have been having this discussion for 18 still struggling to find enough of a range of months. dynamics in the economy and in services as well. Q75 Ann McKechin: In your written submission6 you suggest that the initiative could be extended to Q76 Richard Burden: ObviouslyFinMark is meant other sectors. Could you confirm whether that is to be a market catalyst to try to develop the being activelypursued and if so, which sectors do financial sector. I would like to get your sense of you think could benefit? How do you see the how you feel that has performed in practice and the partnership that you have built up between private scope for replication elsewhere. companies and DFID as a result of the initiative Mr Boulter: I think the FinMark Trust has done working in the future? Perhaps you could give some extremelywell. It has been in existence three or four indication of what work you have done with years. We had considerable help in terms of timing private companies about labour rights and also in that the South African Government was putting their work in terms of sustaining economic financial access as a high priorityto the majority development in the countries in which theyare of its population and we also benefited from the operating. I have noticed in our discussions this FinMark Trust hiring somebodyfrom the banking morning there has not been terriblymuch emphasis sector who was verywell aware of the potential for on the creation of employment as a priority, it the banking sector, for example, to promote basic seemed to be mentioned as a byproduct. I would bank accounts so that manymore people could get bank accounts and therefore access through 6 Ev 127 remittances, not just savings and credit and so on. 3402131001 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 23
21 March 2006 Ms SharonWhite, Mr William Kingsmill,Mr GavinMcGillivray a nd Mr Richard Boulter
Perhaps the most tangible thing that has come out Mr Boulter: To some extent it is the demonstration of FinMark is the emphasis on a methodologyfor eVect, that people see how the data is used in finding how much poor people have access to southern Africa. To some extent now it is the credit, savings, a bank account and insurance. The involvement of the World Bank providing methodologytheyuse is now being paid for bythe additional credibility an d this information is private sector in South Africa and it is to identify important. In a sense how confident are we? We are what the potential is for expanding the financing confident enough that people who have not been market there and their methodologyis now directlylinked to DFID or FinMark have been spreading through southern Africa and further approaching FinMark saying “Can you bring this north. It has been a genuinelyimpressive to India?” or “Can you bring this to Bangladesh?”. programme and the emphasis on innovation has People outside DFID are demonstrating that this been reallyimportant plus the emphasis on getting information is reallyimportant to the financial the investment climate right for the financial sector. sector. The much harder answer for you is at what stage in a smaller countrylike Uganda or Q77 Richard Burden: When you are talking about somewhere like that will the commercial banks the developing methodologyand providing the make the methodologysustainable. Obviouslythe formal banking sector is much smaller in countries analysis are you talking about FinScope? Y Mr Boulter: Yes, that is right. Basicallyit is a like that and so that is a di cult one. surveymethodology.You mayhave read the stuV yourself. Q81 Chairman: I wonder whether the FinMark Trust has helped to deepen understanding of the case for co-operation in areas where it is operating. Q78 Richard Burden: How is that leading on to One of the things you have come across is that the anything else? I accept getting that information is Customs barriers, the tariVs, the internal tolls and veryuseful, but how is FinMark taking that to go so forth reallyinhibit trade. I just wonder whether on or is that FinMark’s contribution finished at financial services information across the board has that stage? helped people to understand that collecting your Mr Boulter: It is particularlybygoing to visit a revenue at the border maybe good for yourincome range of people through the survey. It has provided but in the long term it is bad for your trade and more information to banks about the demands that therefore your economic growth potential. Is there poor people have in terms of what sort of bank a role for something like FinMark in that? account or what sort of access to insurance services Mr Boulter: I think the best comparison perhaps is theyneed. It is something where initiallyDFID’s the World Bank’s investment climate surveys moneywas used in a pump-priming way,so we where, for example, in a large countrylike India paid for the first year’s survey and then the South what has happened is the states are looking at each African banks identified that the information other to see how theyare performing on investment coming out of the surveywas useful for them and climate indicators. It is verymuch our hope that then theyfunded half the surveyfor the next year the same thing will happen with the FinMark and and so on. Now it is self-financing in South Africa. World Bank data on financial access and that governments will saywhydo, say,25% of people Q79 Richard Burden: Do you see possibilities for in Botswana have bank accounts when the figure is this to be transferred elsewhere as a model, and is only7% for Uganda. Those are not exact figures there anyone else interested in collaborating, the but a range of examples. At the moment we are in World Bank for example? an earlystage there. We do not know that that is Mr Boulter: We have been having veryactive the wayit will happen. The investment climate discussions with the World Bank and building on surveys are acting as a mirror to show up how their greater expertise and household surveys to diVerent states are doing and I hope the same will take the methodologyto manymore countries. We happen on access to finance. have had initial missions in Zambia, Kenya and Nigeria to see whether those governments and their Q82 Mr Davies: On the Investment Climate central banks in particular want to adopt some Facility, in DFID you have really taken a very version of the methodology. By the way, that will favourable view of this initiative. You are the major be able to give us some comparison on financial donor so far that has come forward. I think you access between diVerent countries. oVered $30 million the first three years. My instinct is that this is a verysensible initiative to back Q80 Richard Burden: You seem to be suggesting because I think all of us are veryaware that one of that we are fairlyconfident that as a project the sad ironies of the develope d world is that FinMark makes economic sense for DFID. donors and indeed private individuals and charities Extending what you were saying before about are providing a lot of money in the hope of where it goes here, how can you best make sure that contributing to povertyalleviation and therefore anybenefits for the countries, in this case South wealth creation in the ver ybig countries and a lot Africa and the surrounding countries but possibly of the governments in developing countries are elsewhere, can actuallyo Ver sustainable benefits for spending an awful lot of their time and energy the people there rather than good information through perverse and unnecessarybureaucracy,ill systems but that is it? considered tax regimes and so forth and preventing 3402131001 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 24 International Development Committee: Evidence
21 March 2006 Ms SharonWhite, Mr William Kingsmill,Mr GavinMcGillivray a nd Mr Richard Boulter wealth creation from taking place. If we can change how the business rolls out following the meeting the investment climate and we can remove some of yesterday and whether we can turn the expression these obstacles we are obviouslydoing a verygood of very strong support in to practical financial day’s work. We have to probe on this Committee commitments. We are hopeful that that will whether this moneyis being sensiblyspent. I happen. wonder if you can fill us in on at what stage you are at. I gather there was a board meeting yesterday and I do not know what happened at that. It does Q86 Mr Davies: Do you not agree, Mr Kingsmill, seem to me that the most crucial decision to be that the personalityand qualities of the chief taken at this stage is the appointment of the right executive are going to be verycrucial for the success chief executive because the personalityand of this venture? Has it occurred to you that the credibilityof the chief executive is going to be a personalityand qualities of the chief executive and determinant factor in the influence that the ICF7 the fact that he or she is in place might be quite can have in those African governments. I see in the crucial for getting requisite donor commitments? business plan that some $6 million is provided a Therefore, rather than pushing to the back end of year for the cost of overhead administration, in the queue the issue of the chief executive and other words the internal bureaucracyof talking about something else, as Ms White has just Johannesburg. That $6 million should be able to done when I raised the issue, would you like to tell buyyousome reasonablygood people. I would like me what progress we are making, if anyand, if we to know where you are at in setting the thing up are not, what DFID is doing about it in terms of and whom you have so far selected for these key recruiting the right chief executive? If we are roles. coming up with between 25 and 30% of the money Ms White: The ICF came out of the Commission required we must have some influence on this. for Africa last year and we see as one of the key Ms White: Our focus at the moment has been features the ownership that the African through veryactive Co-Chairs. Niall FitzGerald in governments have on this. We are the principal particular, the Chair of Reuters, has been very, very donor so far. We are hoping for $550 million over active in fundraising, in networking and in reaching seven years and we are making progress with that. out to the business. We are at about $34 million at this stage. Q87 Mr Davies: I know Niall FitzGerald. He is an Q83 Mr Davies: You have committed $30 million impressive man. He has a veryfine business record. for the first three years. The $550 million relates to If you are putting money into an organisation what the seven-year business plan. What is the business you really want to know is who is going to be plan for the first three years so we can look and see running it and who you are backing, not who the what proportion of that DFID is contributing? other backers are. Who is going to be spending the Ms White: At the moment we are the major money? I hope Niall FitzGerald is going to be funders. We have got quite good partnerships with playing a major role in finding the chief executive keyplayerswithin the private sector, ie Shell, who is going to be based in Johannesburg, Anglo American and Unilever have all committed, although where he is based is a secondarymatter. but we are looking for broader ownership and there Who he or she is is veryimportant. So far no is interest. What we are now looking to is the progress has been made in identifying the interest that has been given bythe World Bank, by individual at all. Have you appointed headhunters? Ireland, byDenmark— Have you got a shortlist of names? If not, why not? You are spending our taxpayers’ money on this so Q84 Mr Davies: I do not think you heard me we do want some answers to these questions. correctlyor youmisunderstood myquestion. What Mr Boulter: It is a sequencing issue. At what point is the budget for the first three years to which our do you appoint the chief executive? Do you do it $30 million is a contribution? veryearlyin the process, in which case he or she Mr Boulter: It is $110 million. can help with the fundraising, or do you attract a better person if you have a firmer idea about how Q85 Mr Davies: Can you tell us where you are at big your budget is? It is laid out in the plan. ICF, in appointing a chief executive? like FinMark, is an independent institution. Yes, Ms White: We have Co-Chairs with Benjamin DFID is a major investor and we obviouslyhave Mkapa (former President of Tanzania) and Niall involvement in the processes, but we have not had FitzGerald who is the Chairman of Reuters. The a full read out of the trustees’ meeting yesterday. good thing is we now have joint chairs who are Hopefullytheywill have addressed this particular working eVectively, but we are still in process with issue because theyare veryfocused on when they the rest of the staYng. can launch this. Mr Kingsmill: That is myunderstanding too. The meeting yesterday was an exploratory meeting to Q88 Mr Davies: Did DFID see the agenda? tryto attract additional support for the ICF. There Ms White: Yes, and we have attended. is a broad welcome for the facilityfrom a verywide number of potential partners. We now need to see Q89 Mr Davies: Was the appointment of a chief 7 Investment Climate Facility. executive on the agenda? 3402131001 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 25
21 March 2006 Ms SharonWhite, Mr William Kingsmill,Mr GavinMcGillivray a nd Mr Richard Boulter
Ms White: Not specifically. The main issue for the that is of interest. DFID has been quite progressive meeting yesterday of the trustees has been very, over this and generallyover our private sector veryfocused on fundraising and getting from the infrastructure facilities. We select chief executives position where the UK is the lead donor— through open and competitive processes. In terms Mr Davies: Ms White, we have a limited amount of of getting other donors on board, particularlysome time. Can I put it to you that I think it would be Nordics, it is a challenge to get agreement on sensible to bring forward the issue of a chief paying the right amount to get the right calibre executive? You want to make progress with this. of people. You want to have a business plan with slightlymore detail than you have got here. One of the important Q91 Mr Davies: Mr McGillivray, you are just things is that you want to line up the sort of people confirming the impression that I alreadyhave; you who are going to be delivering this kind of agenda. have not grappled with this issue. You had a I would suggest, if I may, that the next time you meeting yesterday and this was not even on the have a meeting you make sure this matter is agenda. You did not tryat the meeting yesterdayto discussed urgently. If you come back to this get a consensus on what the remuneration package Committee in a few weeks’ time and you are still would be, or what the procedure would be for proposing to spend $30 million over the first three identifying and appointing someone. You have not years and you still have not the faintest idea who is got to first base on this. I repeat mypoint: can you going to be delivering the services you have in mind please look at this again and next time we see you we would like to hear that there has been some to finance, then I think you may get some rather concrete progress on this matter or, if not, there are more sceptical questioning from us than you have better reasons than you have come up with today had this morning. whyprogress cannot be made on appointing a chief executive. Myown view is that, unless youmake Q90 Chairman: Perhaps you could provide us with progress on this, you will not get this whole thing an answer as to what the timetable is.8 up and running. Ms White: We will obviouslytake on board the Mr McGillivray: Yes. veryimportant points about making sure that we Chairman: That point has been clearlymade. have got the head and the staYng of this Thank you for coming. Picking up on John adequatelyreflected, but we will also get back to Bercow’s point from earlier on, it is clear to the the Committee with a note9 on just where we are Committee, as you yourself acknowledge, that in terms of the process with headhunters and so on. moving into the area and putting private sector development as a major part of povertyreduction Mr McGillivray: It is quite a complex area in terms is relativelynew within DFID and in that sense you of getting other donors onside. We completely have been upfront about the fact that you are share your view that having the right person learning. The Committee do believe that we need leading it is essential for the success. How do you to see practical results from what is happening and get the right person? Partlyit is in terms of assuring we do want to see your ability to say to us what the marketplace of the right sort of people that you are doing and what the practical eVects are in there is a substantial venture worth working for, all of these areas. We commend you for addressing but also in terms of having a remuneration package the issues and for being honest in saying that they are relativelynew. We hope that theyare not just 8 Ev 140 a fashion and that we will hear more from you. 9 ibid. Thank you very much indeed.
Witness: Mr Richard Laing, CEO, CDC Group, gave evidence.
Q92 Chairman: Mr Laing, thank you very much for not done so? I wonder if you could identify the agreeing to give evidence to us. You obviously extent to which your strategy is targeted at heard the previous evidence session. The reducing poverty, whether it is by going for low Committee has met with you in the past. It is income countries, or identifying poverty in other interesting that in the article that you had in The countries, and also how you relate to other Guardian on 22 February10, which interestingly investors in terms of stimulating the private sector. enough for us related to Mozambique, you make As you are a public corporation accountable to the point that investing in the Maputo Corridor toll DFID what we reallyneed to know is what do you road—we were looking at roads and railways do that the private sector or the aid community there—has reduced costs to the local community, cannot do? but it does raise the question of how you identify Mr Laing: Chairman, it maybe worth explaining projects that reduce povertyand the extent to how we do what we do to get to the answer to your which you are doing things that would not question. To remind the Committee, we are fully otherwise happen because would not other people owned bygovernment. We now have about £1.5 have invested in the Maputo Corridor if CDC had billion worth of assets. Earlier the split of CDC into two entities was mentioned; that is CDC remaining 10 “The rich get richer, but so do the poor”, The Guardian, with the assets owned 100% bygovernment and the 22 February2006. creation of a fund management companycalled 3402131001 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 26 International Development Committee: Evidence
21 March 2006 Mr Richard Laing
Actis, which takes our capital and other people’s in the 1960s and that notion of trying a thin string capital and theythen manage that moneyand they and then a thicker string of investors will follow in. do the individual investments. We are now putting Could you give me any specific examples of our moneywith them and with other fund countries? You mentioned the new ideas of black managers as well. We now have a total of about empowerment and agribusiness, but examples 17 fund managers; that is people where we allocate where CDC has pioneered the investment, got the capital to them and theywill then go and do the structure up and running on yo ur terms, but then individual investments. The question therefore, to other investors have followed after and you have answer your question, is how do we allocate that been able to move away. Have you any examples? capital and how do we make sure that that capital Mr Laing: I will use the small and medium is going to places in the world where there is a enterprise as one of the top examples. The entity shortage of capital? The answer is that we will select that manages our capital is a companycalled funds and fund managers to manage our moneyon Aureos, which we will have a 50 % shareholding in. our behalf in areas where we feel there is a need. That has a series of teams of people around the The first target we have been given byour world running SME funds in Africa an d in Latin shareholder—we are 100% owned byDFID—is America. We have recentlycommitted US$20 that 70% of our investments have to go in the verymillion to a fund in India an d South East Asia, the poor countries of the world. Pacific Islands and so forth. Since 1 January2003— for the last three years—they have raised a total of Q93 Chairman: That is your own target? US$145 million in addition to our capital of a Mr Laing: I would sayit is a non-negotiable target similar amount. Bystarting with them seeding a in that we will ensure that that does happen. Our fund that gives a kick-start, theycan then go out definition of poor countries is those with a GNI per to other providers of capital and sayCDC is here— head of less than US$1,750. There is a second test and let us use South Asia as an example, the India which is that 50% of our investments, again over a fund—theyhave committed US$20 million, this five year rolling period, must go into sub-Saharan fund will work. We are now able to build the team Africa and South Asia. That waywe allocate our up, we have recruited the team, whydo younot capital to those parts of the world where it is most come and join us? The seeding of that fund enables needed. Secondly, this new structure we have is that other people to sayyes,this is real, and theywill we are now able to choose sectors where we feel commit capital. Alongside our capital others will there is a particular need for capital. For example, follow. in the last 12 months we have allocated capital to companies who manage our capital on our behalf Q96 John Battle: Will follow or have followed? Has involved in microfinance; into agribusiness—last it happened yet in India? month we finalised terms of a US$75 million sub- Mr Laing: Yes. The chief executive of the Saharan Africa agribusiness investments—black Norwegian Development Finance Institution came empowerment in South Africa—we have closed in to see me yesterday and confirmed that his the last year two funds involved in black institution would be committing initiallyUS$10 empowerment—and also small and medium million and then a further US$10 million in the enterprises (SMEs) where we have a specific target future. I know there are discussions going on with to get capital to work in SMEs. local financial institutions, some of which are ready to sign up. Q94 Chairman: You have explained the anti- povertystrategybut, for example, taking the Q97 Joan Ruddock: I am a little confused because Maputo Corridor, what do you do that other what you are saying is that things are going very people will not do when you are operating? We well and that you are doing lots of things, but we have identified that you put into those countries the have been given information saying that the majority of the money, but what do you do? number of people employed by firms managed by Mr Laing: What we do is provide the capital and CDC has fallen from 34,000 in 1999 to around in a sense that is all we do. We will provide capital 17,000 today. Is that because money is going to to teams of people on the ground. We will identify other bodies who are then doing the management those areas which I have just outlined where we feel and so you have actually taken yourself out of there is a need for capital. It will then be up to the management? individual manager of that capital to decide which Mr Laing: That is right. CDC todayconsists of 28 individual projects to go into. Clearlyif we said people. CDC three years ago consisted of about 300 that we want this to be an agribusiness fund, then people and theywould manage the individual all those projects, bydefinition, will be in projects and there would be direct investments that agribusiness, but we, based in London, do not get we would make into those projects run bythose 300 involved in the individual projects other than people. The new model is exactlyas we say;we monitoring them. have now created two fund managers who will manage our capital and we are investing with Q95 John Battle: I have a sense of the structure others and the investments are now run bythose now post-restructuring, but the CDC has been fund managers and those investments, that is where going a long time as well and it is not too far the people being employed are. The people are still removed from what the original intention was back being employed; it is just not directlybyus and not 3402131001 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 27
21 March 2006 Mr Richard Laing subsidiaries of ours anymore because theyare yes,there are. What we have t o do is to find the investments of those separate pools of capital, the appropriate models which will mean that those funds that we have invested in. farmers have a sustainable business.
Q98 Joan Ruddock: Are you confident that with Q101 Joan Ruddock: Is it not the case that in these that new arms-length you can still deliver to the least developed countries where, as we heard earlier poorest people and you can still create the today, the majority of the population are privately employment, which has to be the major aim of this employed and they are employed on the land? exercise, does it not? Mr Laing: Yes. Mr Laing: I agree, it does, and in a sense I am more confident. The original model back in 1997, when Q102 Joan Ruddock: Do you not believe that the the Prime Minister announced that CDC would countryas a whole cannot progress if there is not become a PPP11, was that shares in CDC would be real progress on the land? sold and that CDC as a whole would remain and Mr Laing: I entirelyagree, which is whywe are we would sell shares in that. The implication of that investing in agribusiness. was that we were going to have to provide veryhigh returns for those new shareholders. The advantage of the current structure where we are still owned by Q103 Joan Ruddock: The agribusiness that you government is that we are less return-sensitive and have just said you are putting large amounts of new we can direct capital to those areas where maybe moneyinto, are those at the level of smallholdings? we will not maximise our return, but we will see the We saw people putting their faith in we will bring capital go to areas where we think it is necessary. in a hundred Zimbabwean beef farmers and that The examples I have given, such as microfinance, will solve our problems when it clearlywill not. agribusiness, SMEs, we are now doing more of that Mr Laing: Some of our agribusiness investments than we would have done under the old are large-scale; for example, tea in Tanzania, teak privatisation-type structure. and forestryin Tanzania, arable farm in Zambia, horticulture in Kenya, so there is a wide spread. Q99 Joan Ruddock: We have also been told that your involvement in agriculture has fallen from Q104 Joan Ruddock: That is not a wide spread in 18% of portfolio five years ago to 10% now. Is there myview; that is big agribusiness. a similar explanation as to whythat is the case? Mr Laing: Agribusinesses which employpeople, Mr Laing: It is true that our exposure to agriculture which paytaxes, which have tens of thousands of fell. One of the reasons was that returns on out-growers of small businesses. Let me give you agribusiness were quite low. I also said that we have an example of where I think the sort of investment just this year committed US$75 million to we do reallyhas an e Vect on the ground and that agribusiness because we recognise that that is a very is a project called Wakulima, which is a tea area important area to be in. We are now able to reverse near Mbeya in Tanzania. I went there last year. The that pure emphasis on returns to emphasis on original investment was in a tea-processing plant certainlyreturns are vital—we must make profits, which was publicly-owned and which had declined we must do this sustainably—but also put capital over the years. It needed to be refurbished and our to work in places where there is a lack of capital. capital went into that refurbishment and also the purchase of some land of a core tea area round about. It certainlydid not stop there because most Q100 Joan Ruddock: You saythat youmust do it of the tea comes from out-growers—which again I sustainably. When we were on our visit to southern visited—small farmers with perhaps just one Africa, particularlyin Malawi and in Mozambique, hectare, a verysmall amount of land. The factory it was absolutelyclear that the majorityof farmers is now producing about five times the amount of could not progress because theycould not get tea that it was producing before our investment. capital together, theycould not invest in the most Where is it getting the raw leaf from? It is getting basic irrigation schemes which are absolutely it from the small out-growers. What you call these fundamental to smallholdings with the rain large-scale plants, yes, they are large-scale but they patterns that they have. What you are saying is that have a direct impact on the local communities and you started investing and then, because the profits involve large numbers of out-growers and small were not good enough, you stopped. How is that farmers. That is a demonstration that large-scale sustainable when, over a five year period, you have agribusiness can benefit local communities and gone from saying this is good business, this is bad does. business, and now it is good business again? Mr Laing: The realityis that the returns on agribusiness are lower than some other sectors. I Q105 Joan Ruddock: I can see that that very would repeat that we still see this as a very example you give does. I am not convinced that interesting area and an area which we are and will that is the general pattern. I think there are many continue to invest in. Are there problems with other models which are not going to deliver that to agribusiness? You have seen them yourself and, the smallest farmers. Leaving that aside, you said in your submission that approximately a third of 11 Public-Private Partnership. your portfolio was in energy. 3402131001 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 28 International Development Committee: Evidence
21 March 2006 Mr Richard Laing
Mr Laing: Yes. Mr Laing: Yes, jobs would be one of them. There are complications with jobs. Q106 Joan Ruddock: One of the things I found rather distressing on our visits was no reference to Q110 Chairman: I know as I have been in the climate change and no thought to adaptation which presence of people who claim the same jobs over Africa specificallyneeds in respect of climate and again. change, not that theyare contributing but theyare Mr Laing: Exactly. actuallysu Vering. How do you approach that when you look at infrastructure investment, for example? Q111 Chairman: You closed your oYce in Malawi Mr Laing: Our first objective is to get power up and where there were onlyabout five developers and running and we would do that responsiblybut if you mentioned in your Guardian article South that means burning hydrocarbons then we will. Korea introduced agrarian reforms to ensure the Another good example would be—it is in population had enough to eat before it then Tanzania—the Songas project which is taking gas diversified. Leaving aside that South Korea is a bit oVshore, piping it for 250 km to Dar es Salaam of a special case, the realityis that Malawi’s first where it is then used to generate electricity. We do priorityis to have enough to eat before theycan that because Tanzania has a desperate need for diversify. Why have you not got activities in power. As you know, you need power to run Malawi? schools, hospitals, businesses, the whole Mr Laing: Our prime objective is to find business community, and also interestingly their models which are sustainable. We cannot solve all hydropower on the day we switched on the gas- the issues that are around in manycountries, some powered generator the levels in the lakes were at an of which you have just heard DFID talk about. We all time low and the hydro was generating less. I have a genuine dilemma that where there is not a am not saying that we have a specific programme sustainable business model it would not be to just do sustainable energy; our primary purpose responsible of us to use our capital to invest in that. is to generate energy. Will we make sure we do that What we need to do is seek out those business responsibly? Yes, we will, and we will use best models. You have put your finger on a very practice in that plant to generate the electricityas important point that in the verypoorest countries eYcientlyas possible. We do not just invest in there is a real challenge to get businesses up and sustainable power. going. We will look at that, particularlythrough microfinance initiatives and so forth, but it is diYcult in those verypoor countries to find good Q107 Joan Ruddock: Do you look at adaptation? business models which are sustainable. Mr Laing: Yes. We do not just invest in sustainable power; we do invest and some of our projects are Q112 Joan Ruddock: Are you honestly telling us sustainable. For example, in Bolivia, which is one that you closed the Malawi oYce because you of the poorest countries in the world, we are could not find anyway— investing in a project called COBEE12 which is a Mr Laing: No, I did not saythat. run of the river power hydro generating scheme. This morning I was looking at some photographs Q113 Joan Ruddock: Whydid youclose the of expansion going on there to generate more Y electricityfrom the hydro. Malawi o ce? Mr Laing: We onlyhave one o Yce in London. I presume you are referring to the old CDC oYce in Q108 Chairman: The reduction in the numbers Malawi which was closed four or five years ago employed because of the changing structure—I do now. It would be wrong of me to sayhere that we not want you to manufacture figures—do you track can find good business models in the verypoorest employment generation in investments that you countries in the world in a wide range of things to have made? Again, the information as the extent to do. That is a challenge. which you have actually stimulated the creation of jobs would be helpful to your cause and interesting Q114 Chairman: You will not do it. That is where as long as it was legitimate. I wondered whether DFID or somebodyelse comes in. you followed those things through. Mr Laing: That is where aid comes in to kick-start Mr Laing: We can follow those things through and that and to get some of those going. We are not an in fact we are doing quite a lot of work at the aid programme; we are an investment programme. moment not just about that indicator of what is good developmentally, but other indicators of how Q115 Mr Hunt: I would like to follow up on some we should measure our development impact by of Joan Ruddock’s concerns. In December 2005 the what we do. We are starting with this new model Palms Shopping Centre in Lagos was opened. That that we now have when we are working on that as was backed largelybyActis, which is one of your to how we should measure our development. funds, and on the face of it providing a glitzy shopping mall in Lagos is not going to be the best Q109 Chairman: Measured bythe indicator over wayto help the poor in Nigeria, particularlythose time of jobs that you have helped to create. working in the fields. I am concerned that the structure you talked about where you have moved 12 Compan˜ia Boliviana de Energia Ele´ctrica. to a much tighter decentralised structure where you 3402131001 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 29
21 March 2006 Mr Richard Laing have slimmed down massivelybut youare then in jobs and a similar level of in vestment in other fields partnership with fund managers, correct me if I am would produce substantiallymore jobs. Whydid wrong, but fund managers are in the private sector you invest in financial terms and whydid youinvest so theyare in the business of making a profit. We in development? are reallytalking about countries where it is very Mr Laing: This was an investment made some diYcult to make a profit. It seems to me that the years back. I have to say at the time this was only rationale for what you are doing is you are something the Mozambique Government wanted saying you are going to invest in things that other to do. It does generate jobs and it generates foreign private sector people would not be interested in exchange and wealth for the country. At the time because the margins are a lot lower. Is there not a it was not seen as a dead cert. When we now look danger if you go into partnership with the private back at it, clearly it has been a great success and sector that theypush youtowards investing in the been a good investment, but at the time raising glitzyshopping malls which bring Starbucks to the capital for it was not st raightforward. Nigerian middle classes instead of investing in the incrediblyunprofitable microfinance projects in Q119 Ann McKechin: Who was it a good places like Bangladesh where the margins are investment for? This project created practicallyno absolutelytinyand theyare verydi Ycult to get oV taxable income for the Mozambique economy the ground, but those are the real things that are which, compared with, for example, the Debswana going to help people develop private sector exploitation of diamonds in Botswana, it was businesses in poor countries? completelyopposite where it was a public/private Mr Laing: With respect, I do not think it is just partnership. Whyare youinvesting in things which, doing one thing that is going to reallydefeat franklyspeaking, the global world market is more povertythrough the generation of wealth which is than capable of investing in and finding profit by what our thesis is all about. We are investing in and which has verylimited value in terms of Bangladesh in a microfinance bank, for example, development on anyscore? No local jobs, no and it is a veryimportant investment, but youare transfer of skills and no taxable income. Frankly right, we have also invested in infrastructure in speaking, it seems to me anti-development in Nigeria. An economysuch as Nigeria needs thought process. infrastructure. You need to have good oYces; you Mr Laing: If you spoke to the literally hundreds of need to have shopping malls. The middle classes, thousands of people who are employed by projects which are going to be keyto the growth of many, which are ultimatelybeing funded byCDC they manycountries, whyshould theynot have a decent would saythis is good. The realityis that manyof shopping mall to invest in? You need these projects could be funded bythe private sector infrastructure. and byvarious banks but theyare not. Part of our role is to go into these countries, take that risk, take Q116 Mr Hunt: Whydo youneed the CDC to the view that there is a market failure, that people invest in those shopping malls? are not doing this sort of thing, go in there,doit Mr Laing: Because nobodyelse is doing it. and then get others to follow. As I answered the question earlier, there is now evidence that people Q117 Mr Hunt: Are you really saying that there are are following. It would be fantastic if we did not no private sector investors who are interested in have to be there and lots of other people were doing building shopping malls in Nigeria with all that oil it, but theyare not. moneythat is feeding the middle classes? Mr Laing: All I can tell you is the facts and that Q120 Chairman: The point was made to us byone is this is the first major shopping mall in Nigeria, businessman in Mozambique that he wanted to pay it has been built with our capital and it has been a taxes and that tax exemption meant that the aid great success. What I hope will happen is that communitypulled the strings instead of the others will then follow because what we will have business community; in other words, the businesses demonstrated is that investing in this sort of are saying we should be paying taxes. If the infrastructure—it maybe an o Yce building, it mayGovernment were more dependent on business then be commercial property, other forms of property— maybe they would be more prepared to listen to we will demonstrate that it can be done, you can business—this was his sour grapes—but theywere make returns and others will follow and when they much more prepared to listen to the donor do follow then we will back oV. I am veryproud community than they are to the business of that investment as an example of what can be community. done responsiblywith our capital. Mr Laing: I have a lot of sympathy with that businessman. Q118 Hugh Bayley: MayI run with another good investment in financial terms which, on the face of Q121 Chairman: But theymight not have a deal if it, I am surprised needed CDC’s support. You put it shows theydid paytaxes, the problem being that some US$15 million into Mozal. It seemed such a Mozal had a tax holiday. sure-fire winner that I am not sure whyCDC Mr Laing: We are talking about one investment. needed to invest. When we talked to the World The norm of our business is that once theygenerate Bank about their investment in Mozal they profits theyought to paytax. Indeed, part of the accepted that it produced verylittle in the wayof development thesis here is that byemploying 3402131001 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 30 International Development Committee: Evidence
21 March 2006 Mr Richard Laing people, bygenerating profits on which taxes are Q126 Mr Davies: But you have no target globally then paid which is then income for government that or broken down bypotential activityor anything is creating the wealth that will defeat poverty. The like that? payment of taxes at an investor company level is Mr Laing: We have an overall target set bythe important. Government which is that we should make at least 5% on our capital, but that is an overall target and Q122 Mr Davies: Mr Laing, it is true to say, is it that is, broadlyspeaking, in the historyof CDC not, and it has emerged quite clearlyfrom this what CDC is looking at. morning’s discussion so far that the CDC has had for manyyears,and probablystill has, both in its Q127 Mr Davies: If you were going to make a own mind and in the public mind, a considerable market rate of return, given the average risk across crisis of identity. The public certainly have not your asset portfolio, what would you think that reallyknown whether youshould be investing on would be? purelymarket principles, in which case youare Mr Laing: I know you will not like this answer open to the accusation that you should not exist in because one has to disaggregate it. If you were the public sector, you ought to be privatised—that looking at a particular market like China, you of course was tried and did not work—or, would have to look at that market and respond alternatively, that you should be investing on non- to that. market principles in which case you are going to have trouble with the treasuryand youare also not going to generate the flow of future funds of future Q128 Mr Davies: You were saying that the investment that you would like to generate. It is fair Treasuryhas given youan overall average target to say, is it not, against that background you have of 5%. now come up with what you consider a satisfactory Mr Laing: That is a minimum that we must make third way? I am trying to probe whether that is a at the least. sustainable and coherent compromise or whether it is a muddled and unsustainable compromise. Can Q129 Mr Davies: That is a threshold of 5%. That is you tell me, first of all, how in this new regime, expressed as an overall rate of return on your total when you place money with these fund managers, investment portfolio. That is much lower than the how you define the return that you are going to market rate of return, we all understand that, but demand from them? Presumablyyousayto a fund what would be a market rate of return, given the manager I will give you this money on the basis profile of your asset book overall; in other words, that your target threshold rate of return is the an average. In some projects you might say, given following, is that right? the risk, that it should be 25%; some might be 30%, Mr Laing: That is right. some 15%. What is the average which would be the market rate of return which would be demanded Q123 Mr Davies: How do you define that? for that asset portfolio? Mr Laing: What we will do is assess a whole range Mr Laing: If you looked at it overall it would be of potential fund managers. In some parts of the high teens. world we have significant choice and in others there is verylittle choice. We will look at their Q130 Mr Davies: Between 15 and 20%? proposition, we will do due diligence on that team, Mr Laing: Yes. we will assess whether the target return that they are suggesting is (a) appropriate and (b) possible and then we will take a view as to whether we Q131 Mr Davies: You have now given me the should invest. answer I wanted. Would you like to go back to what you were trying to tell me? Q124 Mr Davies: How do you define Mr Laing: Having said that, if we then went into “appropriate”? If it is not the market rate of return, a microfinance fund we would have to take a view how are you defining “appropriate”? We as to whether it is actuallyachievable to get the understand how market rates of return are high teens and because—it comes from the point defined—theyare defined bythe market—and the being made on myright here—we feel that there is value of investment rises or falls to achieve the a real need for capital in that sector that we will market rate of return. That is how markets work. take the view that we will accept less than the high You are trying to second-guess the market. You teens because otherwise nothing would be done. In have decided that you are not being guided by microfinance we are looking for approximately purelymarket principles. I want to know on what 10%. basis you compute an acceptable rate of return. Mr Laing: The best wayto answer that question Q132 Mr Davies: In other words, you decide would be to look at specific cases. yourselves what is the appropriate rate of return which, in manycases, would be below the market Q125 Mr Davies: In other words, you have no rate of return, or perhaps in all the cases below the guiding principles on this at all? market rate of return for each sector of activity— Mr Laing: No, what we do is we have a case-by- microfinance, agricultural projects, manufacturing case, investment-by-investment guidance. projects, extracted projects—theywill all have 3402131001 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 31
21 March 2006 Mr Richard Laing diVerent rates of return depending on their sector Q140 Mr Davies: The cost of correcting this market of activity, possibly depending on their failure, Mr Laing, is—mycolleague has made this geographical location as well, is that right? calculation and he has actuallydeducted six or Mr Laing: Because we are pioneering in nature and seven from 17 or 18 and brilliantlycome up with we are choosing to go in at an earlystage—I will a figure of about 10%—the cost to the taxpayer of continue to use microfinance as an example—we delivering the service that you deliver, which is must go in and make a return. We have got to go correcting market failures, as you describe it, in and demonstrate that you can make a return on around the world is 10% on your capital. Your your capital in that particular sector. We will take capital is £1.5 billion. It is roughly£150 million a a view there is no market, we are pioneers and we year which is the cost to the taxpayer of achieving are correcting the market failure. Bydefinition the purposes which youhav e decided you wish to there is no market there. achieve. Mr Laing: On that particular fund there is a cost Q133 Mr Davies: There is no market rate of return. because otherwise this will not be done like this. Mr Laing: We have to take a view. Q141 Mr Davies: It is a useful exercise, is it not? Q134 Mr Davies: You start oV bytaking a view Mr Laing: It is a bit of arithmetic. We have to that you want to have the following rate of return weigh up this dual balance we have of getting with the following activity. You then go to fund return on our portfolio and addressing the market managers and say: we will come into microfinance failure; that there is a price to payfor going in if you can make 15%. Is that the sort of dialogue there. you have? Mr Laing: That is the sort of line, yes. Q142 Mr Davies: The question reallyis we want to evaluate the worthwhileness in your activities—I Q135 Mr Davies: You do, contraryto the am veryopen-minded about that—we want to impression you gave a moment ago, set out decide whether or not the meeting market failures guidelines for your fund managers or those who are which you have achieved in the course of a year are appointing fund managers or monitoring them. worth to the British taxpayer more than £150 Mr Laing: Yes. I was pushing back at you on the million a year or, put the other way, could we spent overall. We do on a disaggregated basis fund by £150 million more eVectivelyelsewhere in the world fund we will have a veryclear idea what our return than addressing market failures than bysubsidising expectations will be. the rate of return on the CDC between the 5% plus something and the 17 or 18%. That is the basic equation on which you have to be judged, is it not? Q136 Mr Davies: The board sets those targets? Mr Laing: You can certainlylook at it that way. Mr Laing: Yes, the board controls the company. There is a cost to addressing market failure, yes.
Q137 Mr Davies: Since we now know that the market rate of return on your particular Q143 Mr Davies: That is right and it would come investments would be high teens, would you say, roughlyto decide what the cost is. the average? Mr Laing: Yes. Mr Laing: Overall. Q144 Chairman: There is presumablya benefit also, Q138 Mr Davies: You are going to get 5% plus is there? something, perhaps two or three if you can better Mr Laing: There is a huge benefit otherwise we the treasury. We can all calculate and it is a matter would not exist and the people that we have just of simple arithmetic what the net value loss is going been talking about here would not have access to to be bythe CDCs operations over a number of capital. years. Mr Laing: No, I do not think you can. Q145 Chairman: How do you and Actis interact with DFID? You heard the evidence we heard Q139 Mr Davies: You have a market rate of return. before. The oYcials were frank enough to If you are making that you are creating value. acknowledge that DFID is feeling its wayto some Anything above that is additional value created; extent in this private sector development. You have anything below that is less than value created expertise and information in what you do which is because the risk is higher than the return. You are beyond where DFID is active. Do you feed that therefore losing to the taxpayer an amount of back into the Department? There are things you moneywhich is between the rate of return youare will not do. You have said yourself that they are achieving, which is just over 5% you hope, and the too risky for you, like Malawi where the aid figure between 15 and 20%—let us say17 or 18%— communitywould do it. Do youfeed back into which you have acknowledged to be the market DFID ideas, suggestions or information on which rate of return on that activity. theycan determine their priorities? Clearlyyou Mr Laing: If we are going in to correct market have information at the commercial end which they failure. do not, which theyneed. 3402131001 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 32 International Development Committee: Evidence
21 March 2006 Mr Richard Laing
Mr Laing: Yes. We meet regularlywith DFID. We talking about one which was at a verylow rate of have formal meetings everyquarter, we have return where the highest single figure is 10% which informal contacts probablyeveryweek and during was the number we were usi ng. There are other funds that we will cover a wide range of areas, including where we will be veryclose, over the long term, to what it is like to be doing business in these being able to make market rates. The reason we are emerging markets. is because people are not investing in it because they have actuallymissed the opportunity.Theyhave not Q146 Chairman: Do you actually pass the ball to realised that in fact theycan invest in these countries them? Do you say here is a project or here is a market and make good returns and that is whywe are there, area where we will not go but we think you could so in that sense there is no cost to our presence there. or should? In some areas there is no cost at all, but in some areas Mr Laing: We would not pass them a project, no, but there will be a cost. we would certainlydiscuss with them areas where, particularlyon the investment climate and the Q152 Hugh Bayley: I and mycolleagues were background, we feel there is need and an interaction. implicitlycriticising youfor investing in shopping centres in Nigeria or in aluminium smelters in Q147 Chairman: That is helpful because it seems to Mozambique. Is there an approach to your business me that DFID needs to be given that kind of input. within the companywhich sayswe need to make Is there anyformal mechanism? You saythat you some high return and safer investments to generate meet. Do you publish anything? the sort of returns the Treasurywants in order for us Mr Laing: We publish our annual report which to take greater risk with some low return, less safe comes out next month, so that is the formal investments? document. We have a website. Mr Laing: As guardians of this £1.5 billion we have to invest responsiblyand we are constantlylooking Q148 Chairman: That obviouslyslightlyaddresses at the portfolio to make sure that we have got Mr Davies’ questions of how you have performed appropriate risk. That means that we will invest in against your objectives. Within your report do you some firms which are less riskythan others. For address what you have learnt that could be relevant example, in India we will go into general private or useful to help stimulate private sector equityfunds where we think we will get a better development at a level below which you would return that the microfinance fund in Africa. engage and, if not, is it something you would consider? Q153 Mr Davies: Mr Laing, I continue to think that Mr Laing: We do not formallywrite a report to myapproach makes sense because youare looking DFID on that but there is no reason whywe at the target, and you have acknowledged it earlier should not. on, that the target return on your portfolio of a minimum of 5% as against what would be the Q149 Chairman: We would ask you if you could average market return required on an investment think about that whether it would be useful. portfolio of equivalent risk and you have given us an Mr Laing: Yes, I think it is a useful idea. estimate of that. Can I assume that both the 5% and the 17 or 18% are net of what you pay your fund Q150 Hugh Bayley: Quentin Davies, with his 10% managers? How would their remuneration normally deficit on return paradigm, suggests that the value of be formulated? Is it a fixed amount of 5% per the development gains you buy ought to be £150 annum? Do theyhave some incentives where they million, 10% of your capital per year. That is the get more if the rates achieved are higher? What paradigm he was putting forward. I have been would be a typical arrangement? This might explain wondering whether that is right. The model he has what struck me at first as something as a mystery created is an interesting model which you should which is when you said that the market rate of return look at, but since the Government is not in the on your portfolio would be in the order of 15 to 20%. business of sending out venture capital funds which That seems to me quite low, given the riskynature of achieve 15% returns perhaps it is not a 10% deficit, some of these investments in some of these countries. but it might be worth looking at the Government’s Maybe it is because much of the return is absorbed overall borrowing rate for the bonds, which I do not bythe fund managers and youwere talking quite know what that is. rightly about the net return to you. Could you say a Mr Davies: The gilt rate is about 4%. word about the remuneration of these new fund managers to whom you are passing on your capital Q151 Hugh Bayley: In which case you could argue to invest? that for a government it is a nil cost. Could you Mr Laing: For clarification, to your first question, comment on myparadigm which perhaps is yes, those are net numbers. The typical structure equallyextreme? would be that if we put US$100 into a fund we would Mr Laing: I do not like the £150 million number payan annual fee to the fund manager and that because we were talking about a particular sector of would range, depending on the type of fund, the business we are doing, which was microfinance, and skills required, the size of the fund, from 1.5 up to 3% our whole balance sheet is not applied to and it will varyfund byfund. In add ition to that microfinance. As I have said, our cost of addressing basic fee there is an incentive arrangement whereby this market failure will varyfund byfund. We are if the return is above what in our industryis called a 3402131001 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 33
21 March 2006 Mr Richard Laing hurdle, if theygo beyondthat hurdle then theyshare Q155 Mr Davies: Of course and that has to be and participate in the profits. Again, that sharing compared with the cost of the 300 people who did the varies from 5% to 20%, depending on the type of job before and with the returns achieved bythe 300 fund and the operation. people who did the job before directlyand the fund managers to whom you have now subcontracted the Q154 Mr Davies: Theywould probablyget on task. This is the wayyoushould be evaluated average across your portfolio, given in certain cases logically, is it not? theywill meet those hurdles, sometimes theywill Mr Laing: Yes. not, but the fund managers will be getting at least 5% return for your portfolio as a whole, maybe slightly more than that in good times if the performance is good. That would be a reasonable ballpark estimate, Q156 Chairman: I suppose the satisfaction is that would it? you have invested in projects that do make a return Mr Laing: Yes. I would be veryworried if theywere to which the market would not invest in. not getting that because otherwise theywould not be Mr Laing: Yes, that is the crucial point, yes. making decent returns. Chairman: Thank you very much indeed. 3402131002 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 34 International Development Committee: Evidence
Tuesday 28 March 2006
Members present:
Malcolm Bruce, in the Chair
John Barrett Mr JeremyHunt John Bercow Ann McKechin Mr Quentin Davies
Witnesses: Mr Jay Naidoo, Chairman, Development Bank of Southern Africa and Chairman, Global Alliance for Improved Nutrition (GAIN), and Mr Robert Annibale, Global Director, Citigroup Microfinance Group, gave evidence.
Q157 Chairman: Good morning gentlemen. Thank private sector development in tackling poverty.” I you very much for coming in and giving evidence to think there are manyof us who have felt that that the Committee, which, as you know, is investigating always should have been central to solving the the scope of private sector development to help poor problems of poverty, but I just wondered if, perhaps countries grow out of povertyand the contribution bywayof a start, youcou ld comment on how the that the private sector can make. I wonder if you Department for International Development is could introduce yourselves—we obviously know putting an emphasis on strengthening the financial who you are—first of all, to make sure we have the sector in a number of initiatives that theyhave taken pronunciation of your names correct and if there is as part of their strategyof povertyreduction. How anything in particular you feel you wish to draw to do you think you can address financial reforms in our attention, and then we will proceed perhaps to ways that benefit the poorest people in the poorest questions. countries, because that seems to me the nub of the Mr Naidoo: I am JayNaidoo. I am a South African problem? based in Johannesburg. I chair the Global Alliance Mr Annibale: How we can or how you can? for Improved Nutrition, which is a foundation based in Geneva that does work on fortification, working Q159 Chairman: How can the financial sector be particularlywith the private sector, to deliver reformed in a waythat would deliver, and to what vitamins, minerals and nutrients to basic foodstuVs. extent do you think what our own Department for I also chair the Development Bank of Southern International Development is doing can assist in Africa, which is one of the largest infrastructure that? banks in the southern African region. Prior to that I Mr Annibale: I think the whole premise that there is was a member of the Cabinet of Mr Mandela and a role for the private sector in development, prior to that I was a trade union leader. particularlyin financial development, and financial Chairman: Sounds like enough for now! inclusion is key. I think there has been a great deal Mr Annibale: Myname is Bob Annibale. I am the of work done bygreat innovators in this area, many Global Director for Citigroup in Microfinance. I of them funded initiallybydonor programmes. We have worked for twentyodd yearsaround the world, can go back as far as Bangladesh, the Grameen part of that based in the UK for Citigroup. We base Bank, BRAC and other professional units and our global microfinance business out of the UK and people who have been innovators for a verylong we cover some 30 countries from here in that area. I time around providing financial access to reform out also represent a number of microfinance networks, of manyyearsof support, and I would saythe same such as the Council of Microfinance Equity has come out of Latin America. We particularlysee Investors. I have also served at the Universityof examples there of successful institutions which were London, including the Institute of Commonwealth founded with either donor money, through bilateral Studies and St Anthony’s College, Oxford, the and multilateral funding, as well as increasinglywith Centre for the Studyof African Economics, and I private sector funding. We found institutions that have looked for manyyearsfrom a commercial came up with veryinnovative waysof reaching much perspective at how we can expand access to financial deeper certainlythan commercial banks. services, particularlythrough the e Vorts of Commercial banks have to be veryhumble in this microfinance. whole context because theycreated the gap. Clearly, as banks, we did not reach the majorityof people in Q158 Chairman: Thank you very much. Obviously the countries where manyof us operate, and we are you are here because of the background that you in 102 countries. We can clearlysee in a verylarge have, which we hope will help to inform and number of those countries people are extremely enlighten the Committee. One of the things I have to under served. The private sector, I think, brings with sayon a personal basis that slightlyconcerns me is this innovation that we see coming out of sometimes that, having decided that we ought to look into very, very focused, niche players, if you will, of say private sector development, a number of people, the microfinance institutions that we are all familiar witnesses and others who have written in, have said, with. We find that we can probablybring to the table “We are glad the Committee is doing this because it issues that theyhave not all reached, which is scale. is becoming important to recognise the role of How do you reach large numbers of people at a low 3402131002 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 35
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale cost in an aVordable way? Most of us are used to institutions, but I would look at how do you leverage having our banking services todayprimarilyin a the existing financial networks. How do you use Post hole in the wall. Veryfew of us go into a branch and O Yce banks eYciently? They either can be a failed speak to our banker regularly; we do it on the web, opportunityor theycould be like the Giro systemin we do it on the phone, we do it bycard. One of the Europe, which manypeople sti ll use. It is a matter of issues of bringing the cost down for the poor is to how do you leverage some of the banking system reach scale. I think one of the things that the that is there todaywith the in frastructure to reach financial sector has is a historyof reaching scale. The many, many more people. other is that an enormous amount of moneyhas Mr Naidoo: One of the challenges that we face, and alreadybeen spent in the private sector on I am using the example of South Africa, is that, technologyto achieve scale. It has not been where the vast majorityof peop le have been leveraged, however, around this population, and in excluded from banking services, the disincentive has some countries that could be the majorityof the been high transaction cost s and it required policy population, but we have the technology, we have the reform. Part of the transformation of South Africa product knowledge, we have experience of as it continues into the “future” fold is the agreement developing institutions and microfinance around the table of the banking institutions, the institutions have found alternative ways of assessing Government, the civil societyorganisations and the people’s risk and capabilities and with incredibly trade unions who have negotiated a new policy impressive repayment histories that commercial framework. This requires the banks, the financial banks envyin manycountries. But we have not sector, to invest in creating a viable and cost- merged these two skills verywell, and I think what is e Vective banking system where there is a negotiated a challenge and something that we are looking at transaction cost which utilises all the technologyand verycloselyis how do we link our capacity,our innovation to lower the cost of transactions. It does capital, our franchise, our investors and technology require government to put into place the appropriate with the objectives and some of the reallyspecific regulatorypolicyframe works and that is part of a skills developed bythe microfinance sector to reach broader transformation of the financial sector which much greater access to financial services for the requires banks to invest into community poor. I think that is an area where DFID has put reinvestment initiatives, to make access housing some focus, and has been a good area because it has loans and a range of other services that manypeople been about trying to combine some of the skills of have taken for granted in the South African these two sectors into actuallysaying:what can we situation. I think ther e is an important role that learn from what has been done in the Grameens of development agencies like DFID can playin the the world, if you will. Then you have to merge these policy process of finding what has worked elsewhere strengths and have them work with the HSBCs and in the world so that we do not reinvent the wheel and the Citigroups, and, more importantly, maybe even in making sure that that information is shared with the large domestic private banks. I think this is an governments like that of South Africa. There is a area which has been focused on, and it is one where role for the private sector in addressing the there has not onlybeen a need necessarilyfor large developing needs of what we call the bottom of the capital so much as there has been a need for more pyramid, the poorest of the poor, and the GAIN research and data also. There has been a lack of model has proved verye Vectivelythat we can knowledge around the majority, in the sense of what harness the infrastructure of the private sector. In financial services should be provided bythe private that instance we are seeing that we are fortifying the sector, and that is an area, I think, which is being vitamins and minerals, basic foods, whether it is challenged but is one area where DFID seems to soya sauce in China, whether it is wheat flour and diVerentiate itself from manyother donors that we maize flour in South Africa, and we have invested deal with or see. approximately$40 million in projects that we give as grants to alliances at the countrylevel, and that has, in a sense, generated investment on the side of the Q160 Chairman: I think we saw an example of that private sector close to $350 million where that cost, in Mozambique when we saw the Banco to take the cost of fortifying foods, it is 25 US cents Oportunidade, which DFID had supported, but I a year that could save the life of a young child or a think we would also agree that, whilst it was an pregnant woman or poorer communities. We have interesting prospect and we met some of the found that we are harnessing the operational customers, it is unproven in terms of what it will capacity, because the private sector produces the actuallydeliver. It is interesting to hear your food, theydistribute the food, and working closely comment that you think there is potential. with them to share a development vision brings them Mr Annibale: I think the model of veryhigh into the group of delivering to the poorest of the repayment norms, of ability to reach scale and to poor, and I think that is the role that DFID should show that the poor are also bankable has been a continue to playin initiatives that promote the role challenge in the United States, it is still a challenge of the private sector in delivering to the poorest of here, financial exclusion being amongst the highest the poor. in Europe in terms of people without a bank account. We are looking at that area too, not just out Q161 Chairman: In the answers you have both given, of curiosity, but what we have found is that you need not just because you are here, you really suggest that to engage institutions that know how to reach scale, microfinance is one aspect but the two run together. and not replicate onlythese larger traditional Theyare not options. 3402131002 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 36 International Development Committee: Evidence
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale
Mr Naidoo: Absolutely. disciplined and regular transfers that they make. We are looking at how we change our credit scoring to acknowledge remittances. Q162 Chairman: Within the diVerent options, we have had discussions about the role of the microfinance aspect but remittances in particular. Q163 Chairman: You are talking about the donors Everybody says the volume of remittances to Africa or the recipients or both? is possiblygreater than the volume of aid. Is there a Mr Annibale: In both cases, because if you are sitting scope for the banking sector, in partnership with in Ecuador in a veryvulnerable economyand you those who are passing remittances, to develop an get a transfer reliablyin dollars twice a month, you infrastructure that will actuallyadd value? At the are appreciated byyourfamilyand should be by moment, presumably, the remittances are going their local bankers. Theyshould be a pretty either in direct cash or in telephone credit, by- appreciated or valued client. passing the banking system altogether in some cases. Mr Naidoo: The challenge that we face is that a lot How do you ensure that they can be used in a way of development finance institutions lack a personal that adds value? touch. I can give you a real experience of us at the Mr Annibale: It is an area that we have looked at. Development Bank of Southern Africa. We do large The banks have done a prettypoor job of it in the projects. We tried microfinance. We did not really past, whether the United States to Mexico, which succeed at it, and so the issue is what would be the represents the largest flows, or to the rest of Latin appropriate partner, and I think, as Robert has America, where it is often the largest source of indicated here, his appropriate partner in Ecuador is foreign inflows, more than all FDI, all Foreign not Citigroup, it is someone who has the experience Direct Investment and donor funds combined. We and the personal touch and the relationship with agree that banks have done a prettypoor job people who require verysmall amounts of money intermediating remittances, but I think we are trying and where for our big bank the transaction costs are to do something diVerent—. I see this whole issue of too high. I think that it requires a diVerent paradigm remittances, if you want to really transform it, as of thinking. One of the things we do when we give being much more than one of a transfer. A transfer these concessional loans is we require the client to is easy. We transfer billions of dollars a day out of justifyto us how manypeople are employed,how London at very, very low-cost extremely eYciently manywomen, how manyyoungpeople are trained, for the financial sector alone, for the foreign how manysmall and medium enterprises, but still exchange and investment banking worlds these are large amounts of money, and so I think that transactions that goes on here. We have all that we should not reinvent the wheel. In South Africa experience. What has been lacking is to look at the itself we have this informal savings system between people who remit and their familywho receive funds people who have no bank account and each one as clients. The remitters have been seen as— contributed per week to something called the primarilytransactors: go up, paythe cash—at the “Stockvels”, which is like an informal savings green-grocer or whoever you transfer through, this scheme. has provided a limited service since the banks did not generallydo the transfers—and cash simplygoes out Q164 Chairman: Like a credit union? and cash is received. When I have remittances sent Mr Naidoo: Like a credit union. You have to take to me to test it in Mexico and elsewhere, even what exists and then begin to institutionalise them standing in the queue, people just hand me cash. No- without raising the costs of transactions, the cost of one asks if I have an account or, “Do you want to administration, and that is our big challenge. If one save anything with us?” They just hand me cash. looks at the Grameen Bank, that is part of it. As they There is no added value. We have tried something grow bigger, the costs of running an institution rise, new. I am trying a pilot, from New York to Ecuador, and we need to refine a mix where we can keep the and for Citigroup we are not using Citibank in Quito transaction costs low, we can keep the eYciency as our partner, or one of the largest commercial there and we can meet the needs of customers. banks, we are using Banco Solidario. Banco Mr Annibale: I would draw the analogy: you are Solidario is a microfinance bank with a verystrong used to probablyhaving yourbills paid on-line for network linked to the co-operatives, and theyreally free. We do not pay anything for that today. Your look to give financial services to the beneficiary; and bills are paid automaticallybydirect debit. That is a until we look at the people who we give remittances transfer. That is not much diVerent but it is a for as clients, as banking clients, and realise we are domestic transfer. The banking platforms exist connecting a familywith this transfer, the economy todayto do high-value at verylow cost or even free, of just two pieces of a family, I think we will continue and they do it for you because they bought your to see these transactions. We have dropped the price credit card and your savings account and your in the US from $40 to $5, but it requires the person mortgage and so theyallow youto make these to become a client, and that gives them, veryoften, payments for free domestically today. Think a few their first bank account. I think remittances are years ago what that would have cost you to make a undervalued in terms of the contribution theymake domestic transfer. The technologyaspect is there in to a country, and the contribution of their people, the banking system. It has to look, though, at other who work so hard that send them so regularly, get no people using it, transacting todayas clients and or little credit by the banking system today, no credit provide them with that level of competitive service scoring nor anyother recognition for the very that we get as consumers. 3402131002 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 37
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale
Q165 Mr Hunt: I am reallyinterested in what you bycommercial models, but I think that is a lower have to say, but I wonder if you could answer a number than what we see todaythat are not question about the role of microfinance. I can getting access. understand microfinance in the context of someone Chairman: Presumably if you reach lower than you who is living in povertyin the developing world who are reaching now, you create a dynamic within the wants to start a business of some sort, and I am sure economythat helps to put more e Vort into it. that mycolleague, John Bercow, will ask youabout propertyrights in connection with that at some stage Q166 John Bercow: Given that there are always this morning, but what about individuals? What several variables in the equation, and specifically, in about if you are a soldier in the Democratic this context, several factors that are relevant to the Republic of the Congo (DRC) who is on a salaryof generation of private sector development, what, in say$10 a month, or youare living in a slum in Kibera your judgment, is the relative importance of in Kenya earning significantly less than one dollar a financial sector development within donors’ broader month. Is there a development benefit? Is it going to strategyto facilitate favourable investment climates? help you to break out of extreme poverty to have a Very specifically, how much significance do you bank account even if you cannot read or write, and, attach to financial sector development by if there is a development benefit for you, if it is going comparison, for example, with infrastructure to help you to have some kind of a bank account, is development or the wider issue of economic there a minimum level? Even if you are reducing governance? your costs to the minimum possible level, so Mr Naidoo: In mymind, the situation I know best is Grameen costs rather than Citibank costs, is there a South Africa, where the variables are all integrated. minimum level of salarybelow which it simplyis not You cannot sayyouhave financial sector reform and economical, because of the transaction costs, to have then we are still in a countrythat is at civil strife. You a bank account? have to look at governance issues. The one Mr Naidoo: I think there is. The question is: what is experience I have found, taking infrastructure as an the real benefit of someone who is earning $10 to pay example, it is not that we have no large-scale 50 cents in transaction costs? There is a certain level. infrastructure projects that are reallycommercial in I use the example also of fortification. We can reach Africa. There are a range of other issues that in Africa, through the work that we do with large- surround making those things successful, and part of scale millers, 60% of the population who suVer from it is political governance to ensure that the micronutrient deficiencies, but the other 40%, which environment is created with stability, part of it is the are dependent on smallholdings and villages, we are role of donor aid and how that donor aid is blended going to struggle to reach and the costs are going to into development finance, into national revenues of rise and suddenlyfrom 25 US cents per person we go government, into private sector moneyin a waythat to double per person to reach them. I do not think mitigates risk, because all of it is about risk. For me, that we have found an answer to that; it is just that financial sector reform is one part of a broader set of on the back of microfinance can you grow other reforms that have to be in place for there to be economic activity? On the back of microfinance, sustainable economic development. Therefore, you which enables subsistence farming through the cannot separate and say: microfinance, of course, it Grameen Bank in Bangladesh, suddenlyyoubring is fundamentallyimportant, especiallyin places like new applications on that, the Grameen form and Africa where agriculture is the mainstayof the majorityof people and having access to small other forms of economic activity, which does raise amounts of moneywill enable people to have the level of disposable income; but there is a point at economic activity, but on its own we cannot solve which you say, even in places in South Africa, they the problems that face us. are indigent people who can never payfor their Mr Annibale: I agree completelywith Jay.We have services, no matter what we say, because they do not looked at groups like ProMujer in Latin America, a have jobs, theydo not have incomes and so we have veryinteresting group that looks at livelihoods and to provide a free basic service in water and veryclearlyspeaks about livelihoods, because while electricity. It does reach a point where you say that a keytool for them is microfinance and theyhave a requires direct government intervention or donor phenomenal performance level, a repayment norm intervention. that we would be envied in this countryif anybank Mr Annibale: I verymuch agree with Jay.There is a had such repayment norm like credit cards or level. We have seen it go verylow, though, the level mortgages or anything. Yet they are right that, if at which you are providing access on a viable basis theycannot provide basic healthcare programmes, to places like Bangladesh, Bolivia and elsewhere, simple access to healthcare to the women who and yet there will be communities, just as there are borrow from them, it is going to reflect itself in the here or in anyother country,which will not be financial performance too. Whatever motivates you, reached at the same viable level. You see it with Post you make these choices. If we do not educate people OYces in the Outer Hebrides or somewhere. There enough, theycannot take advantage of the is a public good about providing a certain level of opportunities; so governance too is, of course, inclusion into the society, and some of that may need important. When we get to land rights and other to come from specialised institutions— issues, as such, if the judicial process does not understanding that post conflict, war or isolated function, one cannot advance beyond a certain level communities or indigent people maynot be reached of financial products for people because we cannot 3402131002 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 38 International Development Committee: Evidence
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale enforce contracts or we are not regulated properly; certainly on us in the private sector about going so I think it is important that we look at the overall deeper, about the needs of low income people, very context, just as we do domesticallywhen we make specific mechanisms for sav ings, as you mentioned, choices about supporting careers, education, analogies to credit unions which are familiar to more healthcare and financial sector reform. It is, in manyof us and help us to rea lise that this is what manyin ways, a blend and a choice that policy-makers have the informal sector are doing. Theyare creating to make, more so than we alone can make savings clubs and credit unions which will help the necessarilyfrom the private sector. infrastructure. The governance issue is a very important one and the work that theyhave done also with CGAP (World Bank).1 DFID is supportive of Q167 John Bercow: I understand, and to some extent CGAP at the World Bank, which has been a leader can empathise with, your reluctance to put all your on issues like governance and the microfinance eggs in one basket or to plump for one option to the sector, establishing consumer rights on issues for the detriment or even perhaps to the exclusion of all verylow income and the poor and on standards that others. That said, we on this Committee are charged need to be addressed byinstitutions getting donor sometimes in our wide-ranging inquiries, and we money. I think also important are the Challenge have to remind ourselves that we are charged with Funds, which I was familiar with, having some years the veryspecific task of scrutinising what DFID ago been involved in one of the first programs in East does, and to do so eVectivelyrequires us constantly V Africa that DFID had launched and that had to ask the question: is it making a di erence? That external people looking at some of the proposals for reallyis the litmus test. Therefore, I wonder if I can innovation. Not a lot of money, but I think it come back to a similar theme about prioritisation by engaged multi-laterals and bi-laterals and some of putting this to you. DFID currently contributes the people like ourselves and the NGOs, the grass- about £30 million a year directly to microfinance or roots people, in a forum in which we do not normally financial sector development programmes. Does have an opportunityto get together. DFID’s move to direct budget support, in your view, jeopardise its grass-roots level support to the financial sector, for instance, through smaller Q168 Chairman: Lastly, if I may, interest rates on microfinance skills? the provision of microfinance. In Mozambique Mr Naidoo: Robert? recentlywe learned of some trulyexcellent work on Mr Annibale: I can speak on what I know of DFID’s microfinance and we witnessed some of the work and where I see it has an impact not just on the individual projects ourselves—very, very small-scale area of microfinance and its outreach and evolution projects. We were I think—and I can probablyspeak but also, even more importantly, on how we respond for colleagues—initiallyrather taken aback bywhat to this issue: because I think no matter how much we seemed to be ferociouslyhigh interest rates, but the talk about £30 million, it is not that much money. In argument was made to us that in fact, where the financial services globally, this is not a lot of money, sums involved are relativelysmall and where the not even in propertyprices or anythingelse in challenge is to establish a decent business plan and London, but it is significant if it is done well, and I then provide upfront the resources with which it think DFID is diVerentiating itself. I just give it could be kick-started, the interest rate itself was not enormous credit. Things like the FinMark Trust. I of such importance. Is that a view you share or is found that the work that was done with the FinMark there a problem with rates? Trust, whatever that was, £5 million over a number Mr Naidoo: Let me give you an example. In South of years, has influenced the way we look at Africa we have a serious problem with microfinance household finance and household income with a new institutions that have grown up in an unregulated understanding. It was great. FinMark Trust began environment which reallyare verymercenary,and a with a studyin South Africa and theyare now lot of people who are workers, do mestic workers, in working in a number of other countries in the region. the lower levels of remuneration in terms of the Last year we were very active in the area of scales, ended up in debt traps until the Government microcredit—on the Steering Committee of the UN intervened and started to regulate it. Microfinance Year of Microcredit, Stan Fischer of Citigroup, who institutions have to operate in a regulated was the Vice Chairman, now he is Governor of the environment, otherwise the poor get, I think, Bank of Israel—worked verymuch to influence the exploited terribly, as happened in South Africa. I World Bank and the IMF and encourage DFID to suppose that part of the work, as Robert has said, have the FinMark Trust present their work on about building up a policyenvironment, creating a financial sector household income data collection, regulatoryenvironment, creating the case studies about understanding the true dynamics of incomes which can be proven models is veryimportant work in a community. We did not know that story well. that DFID must continue to do. There is not going We did not bank this community. The World Bank, to be an organisation of scale in microfinance. I I do not believe, knew it either. I think theywere at think we have got to operate on the basis that they too high a level in their collection of data. We, in have to be veryentrepreneurial, theyhave to be very microfinance, do not use much of their data for that low-cost, theyhave to give a verypersonal touch reason. It is not translatable to what we have to do where people can trust their moneywhen investing to be able to reach more people. The FinMark Trust with someone else. So, yes, I think we should target was a verygood example of something that has, I think, had an impact on the multi-laterals and 1 Consultative Group to Assist the Poor. 3402131002 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 39
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale the grass-root operations, but I absolutelyshare products and services. I wonder if you could give us your point of view in that some of those interest rates some examples of infrastructure investments bythe are exorbitantlyexploitative. bank that have successfully stimulated m arkets in Mr Annibale: I think the whole issue of notional southern African countries, particularlyin the area interest rates is always challenging. First, it has got of knowledge transfer? that headline impact, the fact that theyare high bya Mr Naidoo: Yes, the challenge in South Africa is notional amount, as on credit cards here, for verydi Verent to the rest of Africa. We do not really example, consumer finance, when you see people have a challenge of money, it is your capacity to take paying 20 something per cent, 40 something per cent moneyand make it into bricks and mortar, and so a year, which is not uncommon. In India at the what we recognised veryearlyon is that we have to moment in manywaysthere is a problem around this extend the envelope in the DBSA2 to deal with those issue in Adhnar Pradesh. There is verymuch a challenges. Therefore, the concept of a Knowledge debate going on around the interest rates of some Bank, where in a sense we are a provider of microfinance institutions. When I compared them, concessional moneyfor projects, and so our lending however, with the banking sector’s interest rates for role is veryimportant, but beyondthat we have a consumers, what we would have called those partnership role to work with governments, work included in the financial sector, people with with the private sector, work with ordinary overdrafts, people with credit cards who are prime communities around projects that theywould see clients, theywere verysimilar, and yetour challenge their qualityof life improved, and part of it is also is much lower in terms of deliverycosts than in a third role to provide technical assistance. We have microfinance. I completelyagree with Jay,financial invested enormouslyover the last three years,in fact services need to be in an appropriatelyregulated we have invested over £50 million, in actually environment. I think people have to feel that building capacityof local governments, of private institutions are safe, as well, in terms of transparency sector, of our clients, in risk management, project and certaintyif anyoneis taking their deposits. What management, financial management skills, so that has brought down interest rates in microfinance, as theycan build sustainable enterprises, sustainable it has elsewhere, has been in markets where there is governments, and that has been, I think, our biggest competition. We have seen it in Bolivia, we see it success. In fact we have taken it one step ahead of even in Mexico starting oV where notional rates were that now and we have actuallyinvested in creating a veryhigh. It is verysimilar to what our consumer permanent taskforce with that capacitythat will help finance companyand HSBC’s and others are our clients to deliver capital projects. There is a charging working-class, middle-class people, but it range of diVerent examples where we have done that. still appears notionallyhigh. The real question will In South Africa we work with local governments be getting that innovation that microfinance has and, in manycases, where these governments have around lending and credit judgment in assessing been in a state of crisis, we intervene and we will send low-income people and products, with the scale that teams out to work with them to straighten out their is more familiar to the commercial banking sector, administration and finances and their information using platforms that can bring costs down. But, yes, and management systems. In the region we have all of us want to see rates coming down. Getting been taking initiatives to work with governments them down byforcing them or capping them is not that are privatising enterprises or enterprises that going to achieve scale. All that happens is that we have gone bankrupt, and we will go in there and withdraw as banks from lending and then the black work with the client. market comes back where people are still paying much, much more. Q170 Ann McKechin: Can you give perhaps one Chairman: We have had exactlythat debate in the example of such an enterprise? House of Commons on the Consumer Credit Bill. Mr Naidoo: Let me give you an example. Mr Annibale: People will exit that segment and they Mozambique would be an example. Mozal is a big will have less choice than theydo today.The aluminium smelter set up in Mozambique to process important thing is to give people a choice in finance. aluminium and to export it, so it is a largescale There is traditional borrowing, there is the black capital project, but what we have done was to market or the moneylenders, which are the most provide the end support in terms of infrastructure prevalent, and then there are smaller growing niches around that so local communities could have access like microfinance, and, yes, microfinance is the to clean water, have access to electricityand in a lowest cost of all those, probably, other than sense create economic activityaround that major perhaps within a small community, which would be investment which is primarilydriven bythe private like a credit union approach, but I still think that if sector. We would go in, in terms of that project, and an institution takes public moneyit needs to be very say, “Okay, what is it we can do that would support transparent in what it is charging people and where economic activityin the communities that surround those costs arise ...yes,especiallythose institutions such an enterprise?” that take public money. Q171 Ann McKechin: We were in Mozambique as a Q169 Ann McKechin: Mr Naidoo, can I ask you one committee recentlyand that particular project was or two specific questions. Your development bank discussed quite significantly. However, I think there states that it wants to become a Knowledge Bank that goes beyond funding to oVer knowledge 2 Development Bank of Southern Africa. 3402131002 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 40 International Development Committee: Evidence
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale were a number of concerns (a) about how much societyand the financial instit utions, which requires actual local employment was created because of the certain outcomes in the financial sector review and high-skilled nature of the project, and it was diYcult reform process. Part of it is the access of banking to find capacitywithin Mozambique, and (b) the services to the “unbanked”, and there are very contribution to the tax-stream of the Mozambique concrete targets set and investments that have to be Government was negligible. Given the scale of the made to deliver on those targets, there are project, I am sure local projects in the area to requirements around communityreinvestment improve roads and water sanitation are very initiatives and the role of government in facilitating welcome, but theyare not equivalent to making a those reinvestment initia tives, there are equity major contribution to the taxable income stream. I transformation targets set for the sector itself. So, am just wondering whether you have learned any yes, I think from South Africa there are important lessons from that and whether you would repeat that lessons to take, but it is also a prettyunique economy type of investment in the future? in Africa, so I would doubt that it is a repeatable Mr Naidoo: The realityis the project was taking model in its totalityanywhereelse in Africa. place. The terms of that investment were really Mr Annibale: I would onlydraw an analogyto negotiated bythe Government of Mozambique. The somewhere like Brazil. You find almost no choice we face in the Development Bank is: “Can we microfinance, for example, in Brazil, it is negligible, take that project and create a downstream activity although certain NGOs exist and veryspecific that benefits local communities around it?” Our communities have been excluded and still continue bank focuses on infrastructure delivery, which is to be, but you have a very strong banking system water sanitation, road access, et cetera, and that is a with quite a comprehensive public and private sector priority, that is the mandate of the plan. That is what banking presence and consumer finance sector, for we would do in the regular course of our work. It instance, that is going deeper. It is that sector that reallydepends on projects that are brought to us, needs to be engaged, as Jaysaid, with the right and our clients usuallyare either private sector or incentives, I hope, ra ther than punitive actions if you governments, and we have to work with the client do want them to go deeper. Brazil is putting in place that brings the project to us, and so part of our big incentives for microfinance. challenge as the Development Bank is that we do deal with large scale projects. What we are trying to Q174 Ann McKechin: But it is much easier for the do now is to work downstream and say: How do we private sector to deliver the project? focus? That is whywe have created a stand-alone Mr Annibale: It can deliver. Private banks are section 21 not-for-profit companycalled a opening branches in all the Post OYces, for example, Development Fund, which is reallyour grant- in Brazil. There is a window in the post oYce making window, where we will work on a much operated bythe Bradesco bank. The private and smaller scale with the local communities and help public sector have bank branches that can be develop those projects, but we are an infrastructure leveraged, so the infrastructure is there all over the bank at the end of the day, and that is our mandate. country. Why do MFIs3 not use it? You cannot replicate the capital base in a countrylike South Q172 Ann McKechin: Do you make any assessment Africa or Brazil, which has a well regulated, on the eVect on the poorest people in the capitalised commercial banking sector, with public community? banks too, but theyneed to be encouraged to go Mr Naidoo: Yes, we have done impact analysis, cost- deeper. That is where the innovation of the benefit analysis post investments. microfinance sector maybe helpful in a partnership with banks, because theydo not have the experience Q173 Ann McKechin: Moving on, South Africa’s of working with that segment and some of the financial sector is obviouslythe most robust in microfinance groups do. southern Africa and it has got a verystrong regulatoryframework. I wonder what lessons you Q175 Chairman: Maybe you should have a word believe to be learned about financial sector with RBS and HBOS about the value of a Post OYce development from the case of South Africa. Could network. I have one quick question, Mr Naidoo, on it be extended as a model to other southern African GAIN, which you chair, and then we have some final countries, or do you think it is in a rather unique questions on microfinance as well, and it is supposed position which is diYcult to replicate? to be a partnership to improve nutrition, but Mr Naidoo: The important lessons one can learn, ultimately, after pump-priming, to be self-financing. but I think South Africa, in a sense, is prettyunique I wonder if you could give us very briefly an in manyrespects, because we do have a highly indication of how this works and whether or not you developed private sector, the institutional have had success in getting projects that deliver the framework of government is verystrong, the macro- end gain which are self-financing and whether they economic climate is verydisciplined and so youcan have passed the initial stage? draw lessons. I do not think it is a model you can Mr Naidoo: I think that is a veryimportant question replicate elsewhere. There are important lessons, because in a sense that is a case model of success. I and one of them was the recent financial sector made a point earlier in that $40 million of reform process which led to a Financial Services contributions have been made so far to 15 projects Charter which was negotiated. It was negotiated between the stakeholders, between government, 3 Micro Finance Institutions. 3402131002 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 41
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale in 14 countries. Theyhave required in the totalityof Chairman: I am extremelyinterested. It sounds as if the implementation of these projects an investment you have gone a long way in a relatively short time. from the private sector over $350 million. If I give Can we turn to some questions on microfinance. you the example of South Africa, we deal with basic foods. The basic food consumed bythe poorest of Q176 John Barrett: 2005 was the year of microcredit the poor in South Africa, the staple diet, is maize and and there were some notable successes. I can wheat flour, and we give grants of up to $3 million remember clearlyan African chicken farmer per countryto set up a fortification alliance at a opening the London Stock Exchange, not something national level that brings together governments and that happens everyday.The attempt to raise the civil societyand industryand helps the process of issue of microcredit with the general public was one consultation that eventuallysees a policyrefund issue but raising awareness in the banking and component, which is a requirement bygovernment corporate sector was that a success? Looking back that wheat and maize should be fortified with the and carrying on, now that 2005 has now passed, has products that are specified, with the additives that it made a lasting impact and are people prepared to are specified that are laid down bythe World Health take on the initiatives that were raised last year? Organisation (WHO), and industryfeels Mr Annibale: We were one of the large funders of the comfortable because theycan absorb that cost in the year of microcredit in the private sector, and actually long-term, because over a year it costs 25 cents per in aggregate we gave more than the UN did, and the person. So our role has been at advocacylevel, at work of the Year had been started, as well, around a education level, at bringing together the programme that we launched in the UK at the stakeholders to find a common vision and a common beginning of the year, a microfinance club of the strategy, and today in South Africa all maize meal UK, at which we had over 200 people. Todayeach and wheat flour are fortified with minerals and meeting has about 80 to 100 people—and it vitamins and a lot of the flour that is produced in impresses me that theyare attending from across the South Africa is exported into the region, so it has a banks, the law firms too. We host it sometimes in V multiplying eVect. We are having soya sauce in Cli ord Chance, sometimes in Citigroup, sometimes China, we are having fish sauce in Vietnam, and the in HSBC, so it engaged an issue around a lot of nice thing about it is that we are mobilising the people who do not do microfinance most of the time, private sector to make these investments, and our and we thought that was key. It is not just preaching role, like in South Africa, ends. We playa role in to the converted, or within a development circle, an existing audience that had plentyof conferences and establishing the systems to monitor the impact, but events to go to. Getting to a wider sector was a it now has a life of its own. It does not require further challenge, and making sure that people like myself, contributions from our side. We will not make who are not in the communitydepartment or in the another grant to South Africa. We are now working public investor relations department, or whatever, in about six or seven other African countries with but actuallyreport to CEOs in the business, are another three or four in the pipeline, and so we will involved on this issue was key. We thought the year reach those countries where there is a demand and went verywell. It led to a number of events, and we where there is an appetite for people to make an have just had another one in the Netherlands with impact, and I think in your whole political global banks looking at microfinance and representatives here is a low-cost, big impact, it is comparing what theydid. Princess Maxima, who as verygood for even the representatives of an ex-banker in the Netherlands, herself was an government to take this initiative forward, and we important catalyst. I hosted a lunch for her here with find that a positive thing. I think what we are looking bankers to catalyse them. She has seen presidents of at is the wayin which one can take these projects. It the banking associations as she travels around the might be veryfocused and verynarrow, but the world, she has visited our branches and sent me impact is large and we can deliver. On the back of the emails saying that our credit policies may not being success of fortification we are now looking at early broad enough or inclusive; so I found that the Year feeding schemes, feeding schemes for children post actuallyreached a much larger group and it caused the breast-feeding period where there is a period of us to work with some of the leaders in the intense risk that theyface bymicronutrient microfinance sector and the multi-laterals in a way deficiency, so you can start adding things on that we had not before. build up the health strategyof the particular country. I think that the important thing in this Q177 John Barrett: Obviously, for microfinance to inquiryis not just about the finance level, it is the expand and to be a success, collaboration of the wayin which one can get other people to invest in banking centres is important, but it is diYcult to get development outcomes, and the best case that we the banking sector to be involved with the poorest of have to prove todayis that the private sector is the poor in society; so how can that collaboration investing in delivering the benefits of development. take place without the mission behind microcredit, It does not require subsidies. That is the whole thing. microfinance being squashed? How do we take the moneythat DFID has and Mr Annibale: I think an important thing is that we leverage that moneyup into a sustainable model to are doing everything with MFIs. From my world it get others to deliver on an economic and commercial is the strength of our commercial capacitythat will basis? I think that has been for me an important bring change. We give $10 million a year to element of success in the work that we have done. microfinance, we give perhaps $30million to 3402131002 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 42 International Development Committee: Evidence
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale
financial sector reform and education, we probablyordinarypeoplewill no t find a low-cost, simple place have given maybe $50 million in the financial sector to put moneyor have a debit card so that theycan development area in Citigroup philanthropicallythen access the whole na tional network of cash alone in recent years. It appears as just a drop in the machines. So it is about looking again at things that bucket when we have a trillion dollar balance sheet you put in for sensible purposes that actuallyfurther and we have 300,000 people. It is leveraging the exclude people. business around this issue that is key. In the UK it is for me too a quandary. It has a lot to do with immigrants, it has a lot to do with people who have Q179 Mr Davies: Mr Annibale, I wonder if I could never banked before, who are excluded, there are just explore first of all where Citigroup is coming those who have fallen out of the system, and we from in all of this. You are the global head of the talked about that earlier. Indeed, we have much firm’s microfinances and I just want to get a clear broader social issues to address, but in fact a lot of picture of what your remit is. Is microfinance people are never let in, who never banked before. I regarded in Citigroup as a commercial activity am looking at credit unions in the UK to understand among others, as a profit centre? Is it your job to again if theyare a mechanism for reaching people? maximise return on that share of Citigroup’s capital What is the intermediarybetween us and our which is deployed in microfinance, commensurate capacityas an institution and these communities? with the risk of your activities there? In other words, That is whyeverythingwe do in microfinance I do are you just another profit activity like trade finances with a guide. I work with other people, I work in or consumer credit or derivatives trading or is that their context, I work with a partnering microfinance part of the public relations or good citizenship institution because I cannot be pretentious that I aspects of Citigroup’s activities? know the verypoor as a client as well. I, the banks, Mr Annibale: That is a veryintelligent question. I do have never banked with them, or we would not have not have a peer in the major banks. I have people in V this problem. I feel that there are those who have the communitygroups, investor relations, public a airs, trust and the knowledge of this community. We have foundations, or whatever. I do not have somebody certain other capabilities to bring. In the UK I am else who works for the CEOs. Mygroup’s work is just starting an initiative here and getting some staV not mentioned in the communitysection of our to actuallylook at the issue and understand who is annual report that came out 2005. It is in the letter reaching this group, whyare theyexcluded and why at the beginning of the annual report bythe CEO as is it so hard to open a bank account? something that was one of his keyinitiatives. It refers to our building commerciallyviable and sustainable relationships, beginning with microfinance Q178 John Barrett: Are there specific products that institutions, microfinance networks and investors. I the commercial banks can see make absolute sense, am remitted with finding ways of growing both from a banking perspective and from the poor’s commerciallyviable relationships and investing in perspective? Are there examples which saythis has doing this with scale. We begin with such a low base worked? of knowledge as bankers in this segment but we have Mr Annibale: I think savings have never to be a lot of other expertise. How do I develop a large- underestimated and neither should the abilityto scale deposit savings pr ogramme for microfinance have a simple transaction account to put savings in institutions in India which cannot take deposits for or to paybills out of. We used to have that in the pass their clients and do it f or and with them? In Mexico book accounts at post oYces and places for many we did the first investment grade bond issue for a years. There was a place where the very old saved microfinance institution, it was three times and the veryyounghad their first account. It did not oversubscribed byinstitutional investors and it was quite fit into banks’ minimum balance products but profitable. We have done insurance which we never it, post oYces, had such a pervasive presence and did before for this segment. We now insure 12% of banking was made so friendlyand accounts easyto our clients in Mexico from this segment. In six open. The first thing most people need is a safe place months we have gone from zero to insuring 12% of to save and to begin a historywith the financial self-employed rural women t hat are clients of sector. That became verydi Ycult and manybanks, microfinance institutions. That will grow to 40% this of course, have minimum balances and things Jayyear.We have discovered th at it is a significant client alluded to which makes it prohibitive to have a bank segment. If we can provide qualityand appropriate account. Tryto open one and see how di Ycult it is. products to this segment I believe we can scale it and In India we are now involved in a deposit do it at a commercial return which is enviable. Yes, programme with an MFI and our bank. The there is definitelya resource invest ment to be made documentation required dates back to the Indian to do that, but it is coming out of our businesses, it Banking Act under the British in or something, and is coming out of the budgets and the product areas requires documents that perhaps 400 million people of Citigroup; we don’t onlyenable that with the in India do not have so how can theyopen an boutique of expertise that we are b uilding in account? To know your client and the requirements microfinance, but people who do the actual work are of moneylaundering and all these sensible things, from consumer business es in countries as well as when you have no materiality threshold means some capital markets groups. It has a double bottom line. will be excluded. You are simplymaking the It is recognised enormouslybyt he shareholders, by transaction costs of opening an account and the the media and byeveryonewho seem to feel that it documentation required so prohibitive that is a great initiative to have. 3402131002 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 43
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale
Q180 Mr Davies: It sounds to me that your answer exchange rate to convert sterling into dollars, and to myquestion is reallyit is a bit of both. It is image that is usually1 to 2%. The di Verence was that the building and government relations and so forth and whole fees structure was based around it being a low assisting in the achievement of your other objectives, volume of business for the banks. It was a one-oV. but also if you can build genuinely profitable We were not banking the communities that were businesses out of this or gain some customer remitting veryheavily.What we do with the Indian relationships that you otherwise would not be able community here in the non-resident Indian to achieve, then that is it as well. programme is that we do not charge anything for Mr Annibale: We start with a ladder. I believe we can remitting to India. reach verylarge numbers of people in a viable programme. Twentyfive per cent of people in Q185 Mr Davies: Y Poland, an EU country, do not have a bank account. I can go to your o ce in London— That is a significant number of potential people to Mr Annibale: —As a non-resident Indian. reach. Q186 Mr Davies: —tomorrow and I can send $100 Q181 Mr Davies: I think we have got the flavour of to India and you will not charge me for that? it. That is veryhelpful indeed. You said earlier on Mr Annibale: If you are a client of ours and you are that you thought the commercial banking system sending it to your account or any family account in had not been good at handling remittances. That is India. That was the idea of integrating banking to possiblythe understatement of the morning. This remittances, because if you want to bring the costs Committee has had quite a lot of evidence of down, the transfer alone for us in the banks on the appallinglyine Ycient handling of remittances. Of whole—with the moneylaundering regulations and course these people are some of the most deserving people just walking in with cash to send it people in the human race because, bydefinition, they somewhere—made it unattractive as a stand-alone are poor, theyare hard-working and theyare rather product, but creating it so that it is part of a product generous because theyare supporting families in for your clients means that you can push the costs other countries and so forth and often work far from much lower. We are currentlypiloting one now— their homes and then paying regularly over 20% of and we will announce it in the UK—with the their hard earned remittances into the banking Kenyan community. system, so that is obviously very bad. Taking account of the progress that Citigroup has made, Q187 Mr Davies: But both parties, the sender and what would be the all-in typical transactional cost of the recipient, would have to have an account with remittances of, say, $50 to $200 from London to Citigroup? Bangladesh or New York to Ecuador which are Mr Annibale: To be free under the NRI programme, some of the countries which you mentioned, yes. From the US to Mexico would be $8 if one of including the cost of the foreign exchange you was a client of Citigroup. We are working on the transaction, including the transfer, the all-in basis that you are a client to remit and that is partly remittance cost? for the “know your client” and the money Mr Annibale: For the banks it was not viewed as a laundering requirements. stand-alone product. If it was, one of them would probablyhave bought Western Union in the past or other banks would have done the same thing. It was Q188 Mr Davies: Okayand what would be the not in a developed segment nor was it seen as a key charge if the recipient does not have a bank account, product to deliver to the majorityof this client possiblyfor the bureaucratic reasons that youhave group. I believe the banks never invested in it enough alreadydescribed this morning? For someone who to bring the costs down to make it attractive. When I needs to pick up that moneyin cash from your looked at New York to Ecuador, where I am piloting branch in India, what would be the transaction cost? now, we went from $40 a transfer to $5. That $5 is Mr Annibale: I am not sure. I do not remember the capped, if I remember, to $3,000 or $4,000. transaction cost. In most countries we do not do transfers for people who are not a client, who just Q182 Mr Davies: $40 irrespective of amount? walk in with cash. That is whyuntil we began to Mr Annibale: Irrespective, it is a $5— bank people that remit and see the numbers of people doing remittances that costs did not decline Q183 Mr Davies: For $100 you paid the $40 charge? significantly. Mr Annibale: It was a $40 charge, it was a flat fee. It is the same you would pay if you were to transfer Q189 Mr Davies: I understand. You might transfer from London to New York. the moneyto somebody.The sender might be somebodywith an account, working in the West and Q184 Mr Davies: And the cost of foreign exchange would therefore have the moneyand a regular job would be on top of that? and so forth, enabling him or her to set up an Mr Annibale: In that case it is dollar to dollar but it account. The recipient might be somebody would be 1 or 2%, like credit cards or other transfers incrediblypoor in a vi llage in Bihar or Bangladesh that we make. If you take dollars out of your who might not have an account. Hence myquestion. account, you would use your credit card in New There is no money laundering problem if the York and you are debited and you are charged an recipient does not have an account. Would you 3402131002 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 44 International Development Committee: Evidence
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale allow the sender to transfer the moneyin such a way they are, and that their i nvestment there and their that the recipient can pick it up in cash? That was my income is more secure because theyhave a right to a question. home and permanency; and they are not going to be Mr Annibale: In Mexico it would be $8 for the thrown out and therefore disrupt the whole cash person to receive it. flow of that family. If we look at the cash flow of people in that situation we need to know the Q190 Mr Davies: We are all familiar with the De variables. There are so manyvariables of risk and Soto hypothesis that says basically that there is not removal, replacement and eviction is a keyone. The reallya shortage of capital even in the poor title itself is indisputablythe right direction, yes— countries, rather that all the capital is tied up and frozen in real estate without proper propertytitles Q193 Mr Davies: The lender has to have a mortgage and therefore cannot be transferred and the capital on a tradable asset. It does not necessarilyhave to be is therefore immobile and cannot be mobilised. As a a freehold, it could be a lease, but it needs to be result of your experience in this area, to what extent tradable so if the lender forecloses the lender can do you think that this really is a major problem of realise the value; is that right? the importance that De Soto implies and to what Mr Annibale: As you develop mortgages and you extent do you think this is not such a major obstacle develop a legal framework that supports that, and a to potential growth from developing countries? judicial process that operates correctlyon that basis, Mr Annibale: I should declare that I sit on the board you are absolutely right. Directionallyit is the route of advisers for the UN Commission for the Legal that we would like to see it go. Empowerment of the Poor, which is chaired by Madeleine Albright and Hernando De Soto, which Q194 Mr Davies: But it is veryimportant that on the was kicked oV bythe UN a few months ago. I think record we are quite clear about the advice you are land rights is a keyissue, not onlyland title. De Soto giving us this morning. Are you saying that title is was an advanced thinker in its work on the path not reallyrelevant and what is important is to have where we were talking about the segment and then some sort of right? Are you saying that that right more recentlyabout the importance of land title as must be tradable or are you saying that even a right evidence of wealth. I think along with the to remain somewhere, a right of permanent importance of giving people specific, individual residence itself is valuable as a basis for making a titles—again the governance issue comes up, the loan, even if the right is not tradable? land registry, the enforceability of the title. The Mr Annibale: I am saying that as part of the question reallyalso is we are most concerned that progression towards a tradable title, I believe that land not be taken byspeculators and byothers who the first thing to ensure is that people have a right to can take your land if, inappropriately, you just give remain where theyare. To get that directionally titles to people. Todaywhat we mostlylook at in the moving towards their having a title, which again best of microfinancing is securityof land tenure. allows them more options with their assets and their home, is the direction we should go. I think De Q191 Mr Davies: So it is the tradable rights in the Soto’s outlook is to go in that direction and it is ours form of a lease or a tradable tenancy, for example, is too, but I believe we have a need to begin and also to what you are saying, as opposed to title in respect of look at the verymanyranges historically.We have freehold title? co-operatives that have titles. Most of us live in Mr Annibale: I am not sure that todayin the legal freehold or leasehold premises in London. Manyof environment in Peru where theyhave given many those legal structures need to be considered along titles that you have actually seen many people get the wayto getting tradable titles, but I think it is mortgages who have those titles. important to have the rights of people where theyare todayand then to incorporate that because it is a Q192 Mr Davies: You are distinguishing between complicated and costlyprocess giving titles and tradabilityand security? remunerating those whose land theyhappen to sit Mr Annibale: Yes I am. I am saying one of the on today. important things is the securityof land rights and tenure because that is an important part of our Q195 Mr Hunt: Mr Naidoo, you have been on both lending. We know people are not going to move their sides of the table. You have been a trade unionist, a home in most cases unless theyare evicted in the campaigner, a part of a gove rnment which has got countries in which we operate. That is the net savings an explicit agenda to help the poorest, but also of the familyin a home and theywill repayas best president of a large bank. I am trying to understand theycan to secure that. Whether that is best secured whether microfinance or microcredit is a good thing bya transferable title against a mortgage is for consumers in poor countri es. I think we would all questionable. There are manyjurisdictions where we accept that it is a veryimportant thing for people have those and it is good order to have them. It maywho want to start business es. In Brazil, which Bob make sense for other reasons to have that legal claim mentioned, you have the largest electronics chain of enforceabilityand the ability,or even a need, to having very innovativ e ways to enable very poor enforce it, and the implications of that maybe very people to buyfridges and white goods and things like much less of a factor than the psychological sense for that, but in this country, to take the poorest people both the person who lives there and for ourselves to in this country, there is a big problem of consumer know that that person has the right to staywhere debt. You find that people wh o buya sofa that 3402131002 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 45
28 March 2006 Mr Jay Naidoo and Mr Robert Annibale would cost you or me £500, for some of the very were saddled with the interest rate charges. I think poorest people it ends up costing them £2,000 that access to credit, whether for consumer activity because theyhave to payit back over a long period or for entrepreneurial ac tivity, is very important and of instalments. So is microfinance and microcredit a getting the cost of moneydown is an important goal. good thing for consumers? In other words, enabling If we can harness the resources of the private sector them access to credit which mayhelp them get out of to get into the areas of development all well and povertycould also increase their debts, or are there good, but it has to be a longside other things like risks in that? education so we avoid the debt trap that many Mr Naidoo: I think the most important issue for people have got themselves into. consumers, whether theywant to buythings or Mr Annibale: I think the other realityis that where whether theywant to start an economic activityis you get institutions—RB S, Citigroup, whoever— access to credit. I believe that it is a prerequisite for involved, we would be a catalyst to what should be development. So access to credit is veryimportant. the largest players, t he domestic banks in these The issue of what is the regulatoryframework to countries. Domestic institutions reallyare the largest prevent what you are saying could possibly happen providers most often of banking services. We know (and has happened) is veryimportant, and that is a that we playa certain role as a catalyst.We are also requirement of what is the regulatorypolicy veryaccountable.At the end o f the dayif youdo not environment, what is the education that goes along like how the banks trade or act you have the with access to credit, what is the role of the private Financial Services Authority(FSA) and youcan call sector who is oVering that, whether the private us in; and you do. There are other bodies like the Fed sector is a moneylender o V the street or whether the in Washington et cetera. We are totallyaccountable private sector is a bank. That is whyfor me it is as the media holds us to a level of accountability fundamentallyimportant that we go in partnership which is not the case wit h moneylenders or some of around extending the right to credit. That is so the smaller institutions that mayfall under the radar. important. If you look at the role that Citigroup has That is probably one of the important roles of public had, I think it is veryimportant. What we are doing policy, that you do have a framework that sets the is getting large institutions to see that there is a bodyboundaries for ban ks and others providing finance, of citizens who are quite substantial in anycountry especiallyfor credit, as yousaid, such as is there that have a right of access to credit, but you have got being appropriate transparencyin the kind of rates to do it in a sustainable wayso that youweed out the theycharge. There is also the role for financial bad apples. Doing it in the wayand playingthe role education which is a big p rogramme receiving through DFID or through the role of you as a funding from ourselves too. Did the client know Committee in getting large institutions in the what theywere reallypayin g? Do theyunderstand it? financial services area to have a responsible wayof Because we will be held accountable for that in the how theywant to extend credit to the poor is a very end both financiallyand pu bliclyif we do it badly. important process, I believe, and that can onlycome Mr Naidoo: There is just one final point I would like about as a result of smart partnership. The issue to add to that, which is that todaypeople take credit. reallyfor me is how does one harness the From myexperience as a trade unionist, I have seen infrastructure that exists in these developing people who stand outside the gates on payday and institutions in a waythat makes them share the zap the salaryo V the worker. So you cannot stop development goals that all of us believe are people taking credit. I think it is veryimportant to important. We want the private sector to succeed. I institutionalise this and create a code of behaviour would certainlywant to see the private sector that requires responsible b anking and extension of succeed in fortifying as much food as possible as laid credit because it will happen. It has happened for down bythe standards that the WHO have. I would thousands of years. You are n ever going to stop it. love the idea that the Citigroup gets everyother The important thing is to get a code of behaviour bank to extend credit because one of the big and conduct in the area of extension of credit that challenges in Africa in entrepreneurial development can be monitored. is access to credit. I have started a business. I am in Chairman: Can I thank both of you very much for the private sector and I run an investment company. the fullness of your answers, your enthusiasm and When I went into the bank, irrespective of what I that fact that you have shared some successes. I had done in government and before, the first think the thing we are concerned about is the question I was asked is “What is your credit amounts are small against the problem, so clearlya history?” I have handled a transaction in telecoms lot more success and a lot wider spread of these kinds worth over $1 billion, I have helped build a trade of activities will be needed if we are reallygoing to union movement, I was a minister in government, see an improvement. Thank you both very much but theywanted to know “What is yourcollateral?” indeed for the exchanges and for taking the time and It is access to capital to help grow business and we trouble to be here. 3402131002 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 46 International Development Committee: Evidence
Witnesses: Mr Peter Cameron, Fellow, Institution of Civil Engineers (ICE) and Chairman of ICE’s Appropriate Development Panel, and Mr Petter Matthews, Executive Director, Engineers Against Poverty (EAP), gave evidence.
Q196 Chairman: I would thank you both for coming coming from. There were a lot of very interesting in and apologise, first of all, for the disruption at the comments in that. Perhaps I could start bysaying beginning and the consequence that we are now that the Committee interacts regularlywith NGOs, overrunning. What I am going to suggest, so that we who obviouslyhave a range of opinions but have a all know where we are, is that we aim to finish this at little bit of nervousness and sometimes opposition about 12:40. We want to hear from you so please do toward the engagement of the private sector in not misinterpret that, but if you could bear that in infrastructure. I think manyof us recognise that the mind, the crisper you are the more information we capacityis in the private sector, but I just wonder can get. Otherwise one or two of mycolleagues will whether you have any take on the way that NGOs leave and this will not be good for the dynamics of feel that there is a conflict between private sector the event. Thank you very much for coming in. I involvement in infrastructure and poverty trust that you were listening to the earlier exchanges. reduction, or perhaps the other wayround, how you Clearly, we have made references to infrastructure feel we can engage the private sector in ways that are and it is infrastructure issues that we particularly central to delivering povertyreduction, particularly want to hear about from you. Can I ask you very in the infrastructure area? briefly to introduce yourselves and tell us your main Mr Cameron: Certainly, yes, NGOs do have and areas of expertise in the field. have had some poor views of infrastructure Mr Cameron: Thank you very much and thank you developments that have been carried out, for inviting us. Myname is Peter Cameron and I am supposedlyin the interests of the poorer people. Jay a Fellow of the Institution of Civil Engineers and Naidoo referred to a clause called “development Chairman of the Institution’s Appropriate vision”, and we would translate that into four Development Panel (ADP). For those of you who do specific areas. Firstly, engage and empower the end not know what that is, it is a panel organised user. In other words, manydevelopments up until through the Institution of Civil Engineers but, now have tended to be imposed on indigenous unusually, it brings in a very wide level of expertise people, “We believe what we are suggesting is right”, from DFID support, various NGOs, WaterAid, rather than engaging them and finding out exactly 4 TRL , the School of Tropical Medicine and so on. what the problem is and how theywill best use it. So it does have a verywide impact and brings in Secondly, that we have in the past swept away the expertise that has done a lot of work in developing indigenous rights of people. We think particularlyof countries, developing and encouraging small-scale major dam projects like the Sardar Dam in India improvements generallythat will reach millions of where people’s rights of fishing downstream rivers, people rather than the large ones that have a much and grazing the fields alongside the rivers have been more limited impact. Myevidence has tended to be swept aside in the interest of “major infrastructure more towards the philosophical side looking at the development”. Growth needs to be sustainable and keyissues that surround the development rather often therefore bottom-up as part of engaging the than the development itself. local people. It is understanding exactlywhat they Mr Matthews: Myname is Petter Matthews. I am want but also ensuring that it is a development that Executive Director of Engineers Against Poverty, theycan maintain, that theyhave the capacityto known as EAP. We are an independent, non- deal with it. It is developing roads that theyhave the governmental organisation, set up about six years capacityand machinerythemselves to be able to ago bythe UK’s leading professional engineering look after rather than like witness Zambia years ago institutions, including the Institution of Civil where we built tarmac highways which quickly fell Engineers and the Institution of Mechanical into potholes and theydid not have the facilities to Engineers. We enjoya veryclose working mend those properly, or the supply of water pumps relationship with the professional engineering through a cheap source but there is no immediate institutions and do a lot of programme work with access to all the spare parts so after a year or so the the Institution of Civil Engineers. We work on large engineering-related projects in low and middle- water pumps fall into disrepair. It is avoiding social income countries, predominantlyin infrastructure anxietyand marginalisation where if we come in and the extractive sectors. One of the key with a big development, be it an extraction area of propositions that underpins our programme work is mining, where a certain part of the community that social improvements, particularlypoverty immediatelygets good jobs, immediatelyyouhave reduction, can in manyinstances be delivered the marginalisation of those who have not got those through mechanisms that will also create better jobs and therefore you develop a social commercial opportunities for the companies. insecuritythat can cause problems. However, I think that with a clearer understanding of what is needed Q197 Chairman: That is obviouslycentral to what for growth, the private sector and the government we are interested in. MayI sayalso, Mr Cameron, agencies can combine together verymuch more to that the ICE submission5 was both interesting and develop that. However, it could be slow growth. We not what we would immediatelyhave expected. I need to be prepared to go slowlyin places rather think your introduction has explained where you are than a big hit. Mr Matthews: If I could maybe add a specific 4 Transport Research Laboratory. around the non-governmental organisations. I think 5 Ev 175 that civil society—and NGOs are a key part of civil 3402131002 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 47
28 March 2006 Mr Peter CameronandMr Petter Matthews society—is a good deal more diverse than it was 10 conditionality attached to those grants. If it becomes or 15 years ago. I sometimes think that non- too onerous, as I think theyhave been in the past, governmental organisations in their interaction with then the whole thing collapses. business exist on a kind of continuum. At one end of that continuum you have campaign organisations Q199 John Bercow: But on the other hand there is a like Friends of the Earth and Greenpeace, whose fiduciaryresponsibilityto the taxpayer,is there not, role it is to expose some of the shortcomings of and therefore there is a question of trying to companies, and on the other end of that continuum establish a balance between on the one hand wanting you have organisations like Engineers Against to give a relativelyfree or in some cases almost Poverty, some of the Care organisations and the complete free rein to local operators and, on the Overseas Development Institute which work with other hand, having some regard to the fact that one business in a far more collaborative way. I am often has responsibilities domestically? asked as the director of an NGO who works in Mr Cameron: Yes—and Petter will explain more— collaboration with business if I see that as being in the Institution and the ADP have been looking at conflict with some of the activities of the more procurement methods that would help procure campaigning organisations. Myanswer is the same: sustainable solutions for projects overseas. I think absolutelynot. We work closelywith companies and that is probablythe wayto go. What we do not want we have the trust of the companies that we work is the conditionalitysuch as in order to do this with. I am aware that one of the reasons theyare development it must be totallyprivatised because so working with us is a consequence of the pressure often that does not buyin and empower the theyare getting from the campaigning communityfor whom it is designed. organisations, so I believe that there is a synergy between the campaigning and the collaborative Q200 John Bercow: I am always keen to try to nail NGOs. In terms of their attitude to the role of the things down to have a specific rather than a general private sector in delivering infrastructure, I think point. Can you oVer the Committee one example of there is a far more nuanced understanding of the what you would regard as an overly onerous importance of the private sector now that probably condition? was not there 10 years ago. I shared a platform Mr Cameron: I think probablythe one we have just recently, as did Peter, with a representative from mentioned, the Biwater aVair in Tanzania is a key ActionAid who has done some reallygood work in one where, for whatever reason, it was partlypushed Tanzania and produced a report called Turningo V bythe World Bank to saythat we must have a fully the Taps before the Biwater pull-out debacle last privatised service. In the UK the problem of a year from Tanzania. The individual from ActionAid privatised water supplytends to be looking more at was saying, “Look, it is not an ideological position. the hiking of charges without enough concentration We have done some work to identifysome of the on the repairing of leaks. Overseas you can have the problems that there have been when the private easypart veryquicklyestablished of an urban water sector has been involved in the deliveryof supplybut it still leaves the people in the ghettos, the infrastructure but it is not an ideological position.” margin towns without water, or if theywant water Theyare an absolutelykeyplayerand what we need theyhave to payinappropriate levels of fee for it. to do is create an environment where theycan make Mr Matthews: Going back to your original question, a positive contribution and avoid some of the absolutelyI would agree with the Commission for problems there have been. There are still Africa in its recommendation that donors re-think misunderstandings between NGOs and companies. their role in supporting investments in There are diVerent organisational cultures and infrastructure, but in some wayI think the diVerent decision-making processes, but I think Commission for Africa was picking up on a trend that was alreadyevident. I think that re-thinking there has been an enormous amount of ground made had alreadybegun. Probablyin the 1960s and 1970s up over the last 10 years. these investments in infrastructure were delivered Chairman: That is helpful, thank you. John Bercow? largelythrough the public sector and there were enormous problems and a lot of failures. In the 1980s and 1990s the pendulum swung the other way Q198 John Bercow: I am still keen to get a sense of and there was an overemphasis on the private sector, the extent of the changes in practice that you think again ideologicallydriven in the same wayit was in are required to bring about greater, quicker and the 1960s and 1970s. Since then there is a more sustainable progression? Do you, for example, agree nuanced understanding of the role of the private with the Commission for Africa recommendation sector which is less ideologicallydriven. I think that that donors should re-think their approach to is correct and right and we would support that. infrastructure development in order to co-ordinate Amongst the bilateral donors, DFID have been more eVectively, to involve the local private sector, progressive in some of their ideas and their approach and to issue grants rather than loans? to this. For example, Peter mentioned the issues Mr Cameron: The simple answer is, yes, we certainly around conditionality. The way that I would see it, do think that there should be a much closer co- the removal of conditionalityis not giving carte operation with the local people to develop what they blanche where you hand over resources to be actuallyneed. A grant can be a good wayof moving consumed in a wayseen fit bythat government, but that forward, but so often the problem has been the there is an assessment of whether that government is 3402131002 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 48 International Development Committee: Evidence
28 March 2006 Mr Peter CameronandMr Petter Matthews a strong partner and a good partner. If it is, then I are veryimportant, part icularlyfor a number of think you make the grants or the loans available and small and land-locked countries in Africa. After a you allow them to decide what the priorities are, but move awayfrom manyyearsof supporting large if theyare not a good partner—and I think DFID infrastructure projects the donors, including DFID, has done this recentlyin Kenyafor example—then are moving towards them again. Perhaps you could you may have to find other channels for your funds, let me know what your view is as to what you if you believe there is a corrupt system in place and attribute this change in fashion. As the Chairman resources are simplygoing to fuel corruption. has mentioned earlier, there is a danger that it is a changing fashion which is going to be a fad and then Q201 John Bercow: What are DFID’s strengths and move back to small projects again, or do you see this weaknesses in supporting infrastructure in as a new permanent wayof thinking which is going developing countries? As a follow-up to that, do you to result in a sizable change? think that DFID, which has been verywaryof this, Mr Matthews: I guess myanswer necessarilywill be should seek to specialise in infrastructure, or is it partlyspeculative a nd what I would like to see. It is right that it should eVectivelysubcontract that a good question and I am not sure I have thought responsibilityto others? about it specifically. I guess one of the key reasons is Mr Matthews: DFID has been involved and it has likelyto be the problems there have been in making been a keymover in some veryimportant and vital progress towards the Millennium Development initiatives. The Infrastructure Consortium for Goals, particularlyin sub-Saharan Africa. I do not Africa, for example, is getting widespread support think based on myown anecdotal experience there among civil societyorganisations. Theysee the was ever a view that investment in infrastructure is potential of that body. The existing infrastructure on not an important part of the pro poor growth and the ground in sub-Saharan Africa at the moment has development. However, I think previous experience got enormous problems. Take, for example, the one has shown that investments in infrastructure are of the lack of regional integration. The original stock incrediblydi Ycult, so part of that mayhave been the of infrastructure during the colonial period was fact that it is verydi Ycult if we are putting money established primarilyfor moving people and goods into projects and it is fuelling corruption and it is out and into Africa rather than promoting regional leading to projects that are not meeting the needs of integration, and even since the colonial period and the poorest, so instead you jump on to another periods I have talked about in terms of investment in bandwagon, as it were. It is extremelywelcome that infrastructure, it is still a problem. Regional there is this new interest in infrastructure and it has integration still has not occurred for a complex come to the surface again. We have got an number of political, social and cultural reasons, but opportunityto get it right because I think we have it has happened, and the Infrastructure Consortium is a keyemployerthat can make that happen. been through the myopic approaches that public is DFID’s role in driving forward that process of being best and private is best and now we have a more involved is a progressive one and we would support nuanced understanding of bringing together the V that. The Investment Climate Facilityis another one relative strengths of the di erent sectors. Also I DFID has been supporting quite activelythat can think companies and civil societyhave got the create the conditions that can encourage investors to management tools for making those partnerships get involved in sub-Saharan Africa. In some ways work more eVectivelythan theyhave done in the the problem in sub-Saharan Africa is not so much past. You hear this term sometimes “multi-sector over-exploitation; it is one of indiVerence where partnerships” bringing together business, state and investors have not been prepared to put anymoney civil society. I have been involved in trying to set up in, and therefore it is still seen as a high-risk, low- those partnerships and it is time-consuming and return environment to work in bymanycompanies, diYcult and often has costs attached in the early rightlyor wrongly.I think DFID’s involvement at stages of establishing them. However, a lot of those kind of levels is extremelygood. In terms of progress has been made and I think the conditions specialising, I am not certain. That is what I think are right now where we can get the infrastructure theydo well at that kind of level, the multi-lateral right if we can get the i nvestments right, and if we level. I think theyalso do well quite often at a micro can do that I think the interest will be sustained. level in the example of supporting Engineers Against Poverty, where we work in the larger scale of things on relativelysmall and individual projects but they Q203 Ann McKechin: Mr Cameron, you made a very are supporting us to tryand develop innovative good point about the roads being built without any initiatives with one companywithin one project and abilityto maintain them. I think there is some then use that to influence DFID’s policyand shocking figure of 40% of water pumps in a corporate and government policy. I hope I have at developing countryat anyone time are not least begun to answer your question. operational due to lack of maintenance. Have we got John Bercow: Indeed and I am most grateful to you. the right infrastructure in place to make sure that when we do carryout these new infrastructure Q202 Ann McKechin: I think, Mr Matthews, you projects theyare going to be sustainable and theyare have answered part of myfirst question about the going to be able to have the income to maintain them working between cross-border and regional in the future and not, as Mr Matthews said, repeat infrastructures which I think you quite rightly say the mistakes of the past? 3402131002 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 49
28 March 2006 Mr Peter CameronandMr Petter Matthews
Mr Cameron: I think we are beginning to realise regional approach and a continental approach. So I what the mistakes in the past were, and therefore think in summaryit is the membership of the taking a broader view and taking a more realistic Consortium and it is the fact that that membership view and ensuring that we direct our resources not to allows it to have a continental reach and a regional make those mistakes again. Two or three years ago reach to solve the problems that has not been we co-hosted a workshop on behalf of DFID possible in the past through a more national based looking at their research programme and we made approach. great eVorts to emphasise the importance of Mr Cameron: An interesting comment is that much developing infrastructure, be it infrastructure on the of the inherited transportation infrastructure within bigger scale or on the micro scale. Certainlymoves Africa is concerned with links from extraction areas have been made to absorb that and you can see to the ports from the colonial days and very little in clearlythrough our contact with DFID that all areas terms of infrastructure between the main of infrastructure are being looked at and promoted communities, and that needs to be addressed. in a more sustainable way. Q205 Chairman: I understand when it was set up Q204 Chairman: Mr Matthews, you mentioned the there was a challenge to identifyfive projects. We Africa Infrastructure Consortium. I was interested, have been advised of two, which is the hydroelectric this Committee having visited Africa, that plant for Senegal, Mauritania and Malawi, and the everywhere we went we saw energy problems and one I have alreadymentioned in Mozambique and electricityproblems. Uganda seemed to be under a Malawi. What about the other ones? Are others Ted Heath regime and South Africa was heading for identified and what progress has been made on that? the same situation. I am talking about rotational Mr Matthews: I actuallyhave verylittle power cuts such as we had in the three-dayweek. information. I did not even know of those two. I Malawi was having similar problems. The Africa knew that theywere identifyingthose keyprojects. Infrastructure Consortium is obviouslyinvolved in Mysearch of the Internet yesterdaydid not reveal trying to solve Mozambique’s and Malawi’s even those projects to me, so I am interested to problems and other ones, as I understand it, in West hear that. Africa, but what is it about the Africa Infrastructure Consortium that makes you feel this is innovative Q206 Chairman: That is interesting that you do not and beneficial compared with other similar kinds of know what stage theyare at. Theyare plans. agencies? Certainlythere is ƒ60 million from the European Mr Matthews: There are other initiatives like Commission and ƒ260 million from the European NEPAD that are also important and to some extent Investment Bank for funding projects of that scale. bring together a similar group of partners, so it is not One of the things that occurred to me when I was the onlyone. I think theyhave got the right reading and looking at the problem, particularlyof organisations involved, the Africa Development electricityin Uganda or South Africa or wherever it Bank being based in Africa, the regional was, was that all the talk was about new organisations, the big multilateral and bilateral hydroelectric projects and new thermal stations. donors. If you are going to achieve policy coherence This is part of the solution and I accept theyhave to it is essential that you have those right players on have a proper infrastructure, but particularlyin board. Manyof the problems that are facing sub- Africa where we have got sun, we have got wind, and Saharan Africa are regional continental problems. I we have got rivers, we have got tidal round the was in South Africa as were our previous witnesses coasts, do you think that the Africa Infrastructure as well. One of our institutional supporters is the Consortium is or should be a route for more South African Institution of Civil Engineering and sustainable projects? I accept that hydroelectric is theyhave just conducted a major studyof capacity sustainable in one sense, but it does depend a bit on in engineering in South Africa. After three years of the scale of the project. Clearlythermal stations are work, theyhave produced an interesting report not the definitive answer. Do you think it would be called Numbers and Needs. South Africa is in serious the right wayfor that kind of priority? problems in terms of its engineering capacity. One of Mr Matthews: I suspect that it would be better to the problems is that if more moneygoes into have a mixed approach. Sometimes when we are infrastructure, as has been recommended bythe talking about infrastructure, we think in terms of the Africa Commission and the Sachs Report that social and economic infrastructure so investment in moneyfuels corruption and leads to projects that large energyprojects is going to attract the foreign does not meet the needs of the poorest. If South investment, for example ports, airports and road Africa has the scale of problems that it has got in networks might be seen initiallyas investment in terms of engineering capacityto applythose kinds of financial infrastructure, and that is absolutelyvital, resources, we can onlybegin to imagine what some but if that kind of investment occurred at the of the poorer countries in sub-Saharan Africa have expense of social infrastructure which goes directly in terms of their problems around meeting capacity. to help poor people with investments in water and Even if you live in a country like South Africa, which sanitation and associated services, then that would is relativelywell endowed, theyoften go to work be a mistake. So I think that it has to be a mixed outside of South Africa. There are lots of South approach. I think that you have to look at individual African engineers in Britain and parts of Europe, for countries and identifywhat are the unique example. That is the kind of problem that needs a opportunities there. If you look at the way that 3402131002 Page Type [E] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
Ev 50 International Development Committee: Evidence
28 March 2006 Mr Peter CameronandMr Petter Matthews telecommunications infrastructure has developed them more time to then devote to small-scale crop throughout sub-Saharan Africa, you sometimes production close to where theyare living. So it is hear this phrase “technological leapfrogging”. If you the consultation. It is a verybig, di Ycult problem are developing a telephone or telecommunications for us from the developed countries to be able to system now you would not do it in the way it was get into their mind-set and understand what it is done in Britain 50 or 100 years ago because there are that theyreallydo need. That is the big challenge. new technologies that are much cheaper and much more accessible. I am not aware if a studyis being conducted but the impact of the mobile phone on the Q208 Chairman: I think the point that depresses the V economic development in manyparts of sub- consultation e ect is if somebodycomes along and Saharan Africa, from anecdotal experience, is says, “I am going to build a big power station,” but enormous. In summary, I think it needs to be a then we ask how much does that investment deliver mixture of those approaches for the financial and compared to what a comparable amount of money social infrastructure, and that there is an could do to improve the opportunities and life opportunityto be innovative in terms of the choice chances for women, bearing in mind in manycases of infrastructure that you put in place. The key to that will have an economic benefit for a whole that is something that Peter said earlier of ensuring community? that there are mechanisms for consultation so that Mr Matthews: Quite often the kind of projects that certainlypoor people and other sections of society Engineers Against Povertyis involved in are trying can express their views as to what is appropriate. to make those connections. We work in While we can pat DFID on the back and the infrastructure in the extractive sector so it is often Infrastructure Consortium to some extent, it is not large-scale projects. I was in West Papua recently clear to me how the Infrastrucutre Consortium is with BP on a Tannguh project, a $5 billion going to be engaging with civil societyand business. investment in liquid gas for export to Asia. I know that Business Action for Africa, one of the Looking at the internal mechanisms that BP uses, initiatives that came out of the Commission for it is extremelywell-intentioned and in the wayit set Africa, is looking at engaging with the Infrastructure up the project and what it wants to achieve socially Consortium. It is absolutelyvital that that occurs. It and environmentallythere are enormous maybe occurring but I am not aware of it. developmental opportunities, but its procurement Chairman: I think that is helpful. I think you have system, for example, is dispersed amongst a identified some communication gaps here that number of diVerent parts of the companyand it is perhaps the Committee can shine a light on. I am not aligned with their social investment strategy. going to bring Ann back in just with the observation, There are opportunities there for marginalised before introducing her, that those of us who went to sections of the communities in enterprise Uganda were struck bythe fact that we watched development, girls and women being a keypart in young girls and women queuing for water. They manyinstances of the marginalised sections of were not walking because theydared not leave the communities. That was an opportunityfor a camps but theywere queuing for five or six hours companyto do much more. We were giving them simplyto fill up their water carriers to take them into support around enterprise development, trying to the camps. I have to saythat the men were sitting maximise the amount of goods and services that around watching them do it! I think, Ann, we had were sourced locally, and we were trying to better have the question. encourage them to bring together their requirements in terms of meeting qualitystandards Q207 Ann McKechin: It is one which myother and technical specifications in the goods and colleague, Joan Ruddock, has raised with other services theyrequired but also marryingthem with witnesses and it is the question about a national social objectives. If theycan meet those quality gender strategywhen we are looking at the issues standards, can we get those delivered bysections of involved in eradicating povertyand how youfeel the communitywho have been marginalised, donors can invest and support gender responsive including girls and women? Can we create specific services looking at girls and women. The issue of opportunities? There are things that companies and decision making and the issue of collecting water is governments can do? When povertyreduction a veryrelevant one. Veryoften theyare the poorest strategypapers are being put together, there needs people but theyare often the most frequently to be encouragement from multilateral and ignored. bilateral donors to include a gender perspective Mr Cameron: Again, it comes back to the point we when you are designing the safety net and keep making about consultation with the end user. identifying what those priorities are. Quite often, There have certainlybeen studies where local even if there is a desire there on the part of the women have been involved in the design of shelters government who is putting together the poverty and made an enormous diVerence. Immediately reduction strategypaper, the mechanisms to reach theyare empowered. Theysay,“Yes, we can marginalised sections of the communityoften do understand now the problems of construction but not exist, so sometimes donors can bring that you can understand what it is we actually need perspective if it is making the resources available within our shelters.” Access to water is another through grants or expertise or participatorydata example of that, how theyneed not just closed gathering which can enable decisions based on the access to their water supply, but that also gives needs of girls and women, for example. 3402131002 Page Type [O] 19-07-06 10:59:43 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 51
28 March 2006 Mr Peter CameronandMr Petter Matthews
Mr Cameron: Linked to that capacitybuilding Q210 John Barrett: And are there opportunities for within the communities often encourages girls and donors to move forward and is DFID missing a women to be much more involved, and much more trick anywhere that you are aware of? readilyinvolved in learning and understanding Mr Matthews: In the more recent projects around even simple technical issues. water privatisation, I think a lot of the blame has been delivered at the door of the companies; in some cases probablyunfairly.I think the trick that Q209 John Barrett: As was mentioned earlier on, was missed was often in the waythat the project water has a keyrole to playin both health, was packaged and the kind of information that it education and manyother aspects in the developing was based on for planning. Often public opposition world. Could you touch on what you think the mayhave been ignored and there was not su Ycient donors could do to achieve the desire to get at least consultation. This was one of the interesting things minimum standards of water deliveryto a that came out of Turningo V the Taps, the maximum number of people and where you feel the ActionAid research. That report was published a privatisation of water can fit into this? We are often year or so before the virtual collapse of that project, lobbied bya number of groups that privatisation but if you look at the recommendations and the means bad news. I think we have seen both the problems that theywere raising, theycame to good and the bad aspects on our trips to a number fruition a year later, so that they spotted them, they of countries where it can work towards the delivery were evident. I think a lot of that was a result of of a water supplyto those who do not have it. project packaging. Bythe time the companyarrives Mr Cameron: There are two clear almost divided on the scene some of the keydecisions have already parts of that. On the one hand, it is the rural been made about the finances, about the consultation, about the form of risk management problem of water supplywherebymanymillions of that is going to be used. To some extent, the people are living remote from a water supply. There companies have been set up to fail. It was of are programmes that have been going on of hand concern to me reading recentlyabout the meeting pumps and of playpumps and so on which have there has been in Mexico on the release of the UN’s V made an enormous di erence, and through the World Water report because that report says that private sector there should be the opportunityof a lot of private companies are pulling out of the expanding those programmes of providing simple, projects theyhave been involved in and are unlikely sustainable pump systems that provide water where to get involved in projects in the future and I do it is needed and also provide water and irrigation not think we can aVord to lose that expertise. I do for crop production, which then immediatelystarts not think the private sector have all the solutions to lift income. In the urban areas it is verydi Ycult but I think that theyare part of the solution. If they because the urban areas, as we know, are growing disappear from the scene then that is going to set veryveryfast and youset up a private contract, back progress. say, for supplying an area of water supply, and often that is linked to fees for the amount of water Q211 Chairman: There is some responsibilityon the taken and, as I said earlier, that can marginalise the NGOs in their campaigns if theyare identifying rim of poor people on the periphery. We need to real and substantive issues that theydo not V find mechanisms. Often it is a partnership between promote them in a waythat e ectivelydrives away privatisation and the public local authorityto take the verypeople who are needed to solve the problem. on that social aspect which cannot generate the Mr Matthews: I understand that. income that a purelyprivate contract would expect, Chairman: Thank you very much. I apologise that so that the marginalised people do obtain water or you have been kept waiting. As you have seen, the at least shared water taps within reasonable Committee are under some pressure of time distance from where theyare living. There is an because clearlywe would have finished a few example of where people have been given land minutes earlier. Nevertheless, I think you have rights to where theyare living. It maybe that it highlighted a few quite helpful points which we started from a squat basis, but where theyhave got verymuch appreciate, and indeed yourwritten some rights on to the land where theyare living, briefings, certainlyfor me, were quite informative theywill more readilypaymoneyfor the water and enlightening and will obviouslyhelp us in because theyhave got a direct right which theyare writing our report, so thank you both very much making use of. indeed. 3414551001 Page Type [SE] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
Ev 52 International Development Committee: Evidence
Tuesday 25 April 2006
Members present:
Malcolm Bruce, in the Chair
John Barrett Mr Quentin Davies John Battle Ann McKechin Hugh Bayley Joan Ruddock John Bercow
Witnesses: Lord Brett, a Member of the House of Lords, Director, International Labour Organisation (ILO) London, Mr Dan Rees, Director, Ethical Trading Initiative (ETI), and Mr Albert Tucker, independent consultant and former Director of Twin Trading, gave evidence.
Q212 Chairman: Good morning to you, gentlemen. building of employers’ organisations in Eastern Welcome to the Committee. I know you are there as Europe, and trade unions in Africa. We have a three individuals rather than as a team, so I do not relationship with a whole series of donors. The expect you to speak for each other as a collective. I better ones—and this includes DFID—are the ones am sure you will all have an opportunity to answer with whom we have partnerships, which is a much questions which relate to you and to come in on any more eVective wayof delivering results. Others still which you feel you want to add to. Perhaps I could have a ‘flag’ mentality—for example the United start. As a Committee, we are looking at the whole States—where individual projects are proposed or gamut of private sector development: How can we required, and that approach does not provide the make it happen? What works and what does not same degree of coherence and capacitybuilding at work? In this particular session we are looking at the the nation level as that within the partnerships that ethical side of things and whether ethical business we have. We have a three-year partnership practices can promote more employment and agreement with DFID coming to an end, worth development opportunities, or, on the contrary, about £15 million, and a new one hopefullystarting whether unethical practices can have this year, worth about £20 million, but the greater counterproductive eVects. Perhaps I could ask you element of our work is done in response to DFID at to explain what you think donors—and obviously the country level. Again, because our constituents at we are talking in this context particularlyof the countrylevel are both employersand trade government donors—can do to ensure that unions and government, that quite often leads to companysupplychains and employmentconditions what theywant being put forward rather than are fair; in other words, how theypurchase and how perhaps what the donors t hemselves think is in the theydeal with employees.What is the role of donors, best interest. Therefore, we have diVerent responses as opposed to what the companies will do on their in diVerent parts of the world. Our current package own initiatives? Could I start with you, Lord Brett, of work being done with DFID funding includes and then your colleagues will come in. child labour; the traYcking of women for labour purposes in West Africa and in China; jobs in Africa; Lord Brett: Thank you very much, Chairman. The SME development; micro insurance and micro International Labour Organisation is verymuch finance dialogue; and in Nigeria social security constituent driven. It is the onlyUN agencywhich is work—so we have a whole gamut of activities and not whollygovernmental. The control of the we respond verymuch to the donors. If the countries organisation, both at the conference and at the adopt an intelligent approach—as I believe the governing body, is shared equally between the Dutch and the British do in their relationships with workers’ and employers’ groups, who have 50%, and the international community—they tell us which of the Government’s. In that sense, there is always the our programmes theybelieve theycan support as voice of both the employers/business and also the part of our core activities, and which at the country voice of trade unions. That means that the ethical level fit in with what DFID are doing in terms of its base from which we start is a given, because of both international relations with that particular the constitution of the ILO and also how it works. government either in support for projects or indeed When it comes to the role that we have with donors, directlywith organisations in the country it is of course to facilitate the policies of DFID in this concerned. For example, in relation to child labour country, or of whichever government is seeking to and HIV/AIDS we have major support from DFID provide sponsorship. It was driven originally—the at a worldwide and at national levels. reason whywe were created in 1919—bythe protection of workers, which expanded from just Q213 Chairman: Dan Rees, of the Ethical Trading labour rights to health and safety, et cetera. With Initiative, what do you think members could do? globalisation, it has become much more with What can theydo wrong? additional tasks put upon us that are related to the Mr Rees: Time is short, so there is no time reallyto world of work—which of course is our raison d’eˆtre. introduce myorganisation, but I would initiallysay That means we have been pressed in recent years to four things. One of the things donors do best is give do for example skill training, employment, capacity money. To DFID’s credit, it has had a programme 3414551001 Page Type [O] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 53
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker of ethical trade since 1997; it has supported, amongst waysometimes—is qu ite important. For example, others, the Ethical Trading Initiative, the Fair Trade one of the things DFID has been verystrong at is movement and manyother things in doing work piloting approaches, but where I see a weakness is which is pertinent to this inquiry. Obviously, if that bringing that to the mesh of business and private is of interest to you, then I can go further into that. sector life and linking that in. Learning from A programme of support is important. I think it DFID’s better work, so that the farmers are on fair should do that and it could do more of that, but, as trade and ethical trade, or, even, in international well as that, the Government can use its natural development, how that learning is shared and advantages to good eVect in other areas too. If I can applied, I think is a weakness. I think, also, with step back briefly, when we talk about private sector some of the systems we have, particularly around development and we talk about ethical trading in codes and standards, the waywe are financing this is particular, I think there is a tendencyto look at that we are putting costs back to suppliers and the business somehow outside the main development poorest in the chain, so sometimes we find that model or as actors who are not principallyin the businesses from the private sector do verywell out of development decision making. The potential of the work, because it helps them build their business, business and indeed manyof the answers that but a lot of the costs in terms of compliance gets business is being asked for lies in a much closer co- pushed back to suppliers. I think donors can look at operation with government, trade unions, national how to mitigate that in the waytheyapplyfunding, governments, national business and NGOs. On that because I think there is a verystrong focus on the note, I think the government must take market side. I think also the learning from some of responsibility, wherever government is, in creating these approaches needs to be shared in the market an enabling environment for business in order to place, so you create market conditions where trade ethically. The reality is that members of the consumers activelychoose businesses that take an ETI and indeed other companies are sourcing from ethical approach, so that, in eVect, you create countries around the world where the rule of law circumstances where there is market advantage in does not always apply, where labour law is not being ethical. I think donors have a verystrong role applied, and I think encouraging governments to act to play, because, in a way, they are investors in this, like governments and to enforce labour laws and to theyare investors in the ethical approach, theyare raise the bar in terms of creating that ethical investors in the development. I think that is a central environment is a veryuseful thing that governments role and I see that could be stronger, that role of could and should be doing. I think DFID does it and talking to consumers about what has worked and it could be doing more of it. Of course, if you are what has not worked, of talking to the private sector going to advocate that abroad, you also need to do about what can be applied and support development it at home. I think government in general—and I do better than other practices. I think that is one not just point the finger at DFID—could have a element. The other element is the entrepreneurial more coherent approach to ethical trading and could element. I think the private sector can be very have a more joined-up approach to what it means by eVective in the international context but I think there ethical trading and encouraging UK PLC to have a is a question of hard and soft infrastructure. Donors clearer view of this, to have clearer standards on this, have been verygood at sending technical expertise in including things like reporting on it, and all of that to develop a product or qualitybase to do something package, if you like. I hear much from DFID but I veryspecific to support a particular business but do not hear nearlyso much from DTI, for example, then that is the end of it and, after a three-year on this subject. Lastly, I think the UK Government programme, we expect people to perform perfectly is a big buyer. If we look at just the NHS alone—I in the market. It does not happen. The kind of think £15 billion—this would dwarf the vast relationships that donors can sponsor is one, I think, majorityof companies around the world. What is it of mutual development, perhaps—a kind of win- doing to ensure that ethical standards are a part of win, with poor farmers or poor community-led that massive purchasing power? If it did, it could businesses taking a small- and medium-sized have a massive impact in the markets and it could enterprise kind of approach but also supporting, I also speak with more authorityto the private sector. guess, a modern apprentice type of approach for young social entrepreneurs in developing countries. Q214 Chairman: If I could get a comment from Mr Young people are veryentrepreneurial in the Tucker. Currently, the transition is between donors countries I have worked in, but the outlets and and companies and clearlythere are practices, so opportunities and the infrastructure for them to perhaps you could give your view of that, in terms of bring that to the fore have been limited. In some the role of donors and companies. areas it is cultural: young people are not seen as Mr Tucker: Thank you. I think in the Fair Trade having anything special to oVer. I think donors can movement we have demonstrated that link between support the development of the entrepreneurial a lot development and business. If you think that fair more but with social purpose. Finally, in the Fair trade has grown exponentiallyin the last 10 or 12 Trade movement we have found co-operatives quite years, it is still a small percentage of global markets valuable. I know there are mixed experiences of the but it has touched over five million poor farmers and success of co-ops, but we have found that poor- raised the ethical agenda veryhigh, even for those people-led co-operatives, when theyare successful, outside of fair trade. What donors can do and also have invested much more widelyin the communities what theyshould not do—which is to get out of the they are working in and in in frastructure 3414551001 Page Type [E] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
Ev 54 International Development Committee: Evidence
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker than traditional shareholder-led private-sector theywould own and whic h would be introduced to interventions, foreign direct investment or whatever, the Market, and that was Divine Chocolate. We come in and the profits move out. Where donors can decided that the farmers would have ownership. We support businesses in situ, developing their capacity had the Devil’s own job getting the capital to deliver and working mutuallywith strong business expertise this, particularly a s the structure was very externallybut in a longer term way,I think longer unfamiliar. Then, interestingly, we decided to go term support and capacitybuilding, as opposed to back to DFID, and DFID dec ided that it could not the training intervention, might be a stronger thing put cash into this, because of competition rules and for donors to support as well as supporting the so on, but it gave a guarantee. This helped with consumer end. I think the consumer end is quite leverage, to get the brand oV the ground. That brand important. is now supplying all the co-ops chocolate and doing Lord Brett: Could I emphasise the issue of co- verywell. DFID’s intervention, byaccident, came at operatives. Co-operatives in Africa had a bad various points, but after that intervention I believe reputation because theywere seen to be top-down, that DFID decided this was something theycould state-driven organisation, and verymuch liable to not do anymore—the guarantee structure was far cronyism and corruption. Therefore the word “co- too troublesome. I think there is a wayof looking at operative”—a bit like the word “trade union” in the chain and seeing where DFID, particularlywith Eastern Europe—had a problem in the post-single- their experience, can do significant interventions. partystate in Africa, but it is keybecause, as has More importantly, after that, we were not really been said, it brings people together, it provides local involving DFID in debriefing and looking at the training and leadership, it is multi-functional. It is replication value of that and how else we could have not onlyabout livelihood. For example, with one of done it better, because we were making it up as we the major problems, HIV/AIDS, the village co- went along—as were the farmers—and we were not operative is the keyto spreading information and sure what would be the end result. We could not give spreading assistance. A large component that we are at the beginning a nice neat little trajectoryof how it putting to UK Government is about co-operatives in was going to happen, but what we knew was that we Africa because we think this is a verycost-e Vective were going to do it. When we measured risk it was wayof bringing assistance which will not blow away very, very diVerent: we would do it, either with this in three years time because it is grounded in the much space or with that much space, but we would people and cooperatives can—as theydid in this do it. Our chances of success depended on the key countryin the nineteenth and twentieth century— elements where we could get support and it needed develop veryquicklyfrom a small base. We think it a veryentrepreneurial approach. We did it together, is a major area for further investment. almost despite ourselves, but we had not taken that learning on to say, “Can this be macro’d up? Can it be used in other contexts? Can this approach be Q215 Richard Burden: Could I just come back to the changed to make other systems, which are struggling first point that you made, Albert, about DFID to make it work, work?” That partnership, in being specificallybeing good at piloting things but it is a entrepreneurial and innovative, we have been question of translating that through the mainstream looking at and so have some of the donors. We have practice. Could you expand a bit more on how easily done it and say, “We have improved on this great that could happen, with maybe an example or two of thing. Look at it.” It is great now—I am proud of the where a project has gone quite well but there is brand and it is going to do well—but, if it sits there, something theycould have done which could have it has done no good. How can the bigger players in taken them further. the market be moved into doing more supportive Mr Tucker: If I could give you an example of interventions like that? We did not reallydevelop. something that worked, despite the system and That is quite a detailed example, and there are many structure that were there, it is Divine Chocolate. others. There are good bits of research that DFID When we started trying to launch that, we had has done, particularlyaround things like climate decided, because of fair trade principles, that we change, use of water, energyuse, which we could would give ownership to the farmers because the have applied with some of the farm co-operatives we value would be in the brand that was created. We were working with, but we had no idea about them had gone into the liberalised environment in until we stumbled across them accidentally—and I Ghana—although it was not fullyliberalised, know that DFID deals with a lot of diVerent internal liberalisation had taken place but not things—so there needs to be a system to get that external—to support farmers to respond to that interaction a bit better. because liberalisation usuallyjust wiped out small farmers. We had brought the experience of working in coVee with Cafe´direct from Latin America into Q216 Ann McKechin: Lord Brett, the Director that context, and built up farmer organisations. General of the ILO stated earlier this year that we DFID put what was a verysmall amount, I think it potentiallyface an “unprec edented global jobs crisis was something like £70,000 to develop a coVee of mammoth proportions” throughout the world. programme in Tanzania and in Ghana with the He said that one of the keys to tackling the issue of coVee farmers. After this three-year intervention, employment was the policy and regulatory DFID had done that and it is gone. Five years later environment for enterprise and investment. DFID in or three years later, we got to the stage with the turn has talked about creating an Investment farmers where we decided to create a brand which Climate Facility. Could you pass comment as to 3414551001 Page Type [O] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 55
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker whether you think an initiative such as the economy. Clearly, when you go into diVerent Investment Climate Facilityis an appropriate countries the majorityof the population is under 30. mechanism for job creation and if there are anyIs there anymeasurewhich yo u think can be taken other strategies which we should be trying to follow to channel job opportunities towards young people in general principles in terms of widening in terms of creating a skill base and allowing them to employment opportunities. be able to exploit that? Lord Brett: I am encouraged because DFID prior to Lord Brett: The ILO is the lead agencyfor the Youth the adoption of the strategyfor investment endorsed Employment Network (YEN). The African Union the core labour standards. Not everyDFID o Ycer, Summit on development last year endorsed the I am sure, was aware of them or of supporting whole question of putting employment at the centre them—but the Secretaryof State did. He endorsed a of economic planning. It is interesting, the words document and it was circulated widely. That gives “employment” or “jobs” do not appear anywhere in the worker organisations the confidence that, if an the Millennium Development Goals (MDGs). It is investment strategyis based on a recognition that it there now, in paragraph 46 of the conclusions of the shall not have the impediments of child labour, Millennium Summit, because it endorsed the forced labour, but that there will be freedom of findings of the World Commission on Globalisation, association and eVective collective bargaining and on which I served, which said, basically, that if we there will be no discrimination then that is a are going to solve povertywe have to put the priority foundation on which you can build. I do not think on employment. That is where the Director General there are manyof the class war problems that we had was coming from in his statement. It is not just a perhaps forty years ago in this country, where trade question of youth unemployment being an issue for unions—and I was an active trade unionist—were youth: political stability in Africa will depend on never quite sure whether theyapproved of profit young people not being educated and cast on the making in companies and if theydid theydid not scrapheap but educated and able to use their want people to know about it. I think that the education in fulfilling their livelihoods. That makes problems that are faced byworkers in Africa and youth unemployment an absolute crucial issue. How Asia are such that theyunderstand entirelythat that you do it is involving the state in universal is a facile discussion to have. The question is: How education; the donors in providing the wherewithal do you make an eVective, profitable business, to help achieve that; and the private sector has a whether it is public or private, that provides a major part to playin the skilling of the labour force, livelihood for them? I think the core labour not in the educational sense but in the vocational standards endorsement is important. The Director sense. Some of that is being done, but I do not think General pointed out that the tip of the iceberg of multinationals in Africa and elsewhere have done recognised unemployment, 185 million worldwide, enough outside their own narrow requirements to is just that: the tip of an iceberg. The keything in help in that task. De Beers in Botswana are doing a Africa, in particular, but in general terms, is that we good job trying to spread the skills outside the are talking about a formal economywhich excludes diamond industry, which will disappear in about 30 a lot of people. When I met the President of years time. Not many multinationals have been that Senegal—and it was a rather chastening experience far-sighted. There is a major job to be done—and some years ago when I was vice-chairman of the again it comes back to the partnership between civil governing bodyand I was leader of the workers society, national government and the international group—he said, “Ah, you represent the elite in my agencies and the 10 major donor countries that country.” It is not usual to be called a person who donate 70% of the ODA aid in the world. represents the elite when you are a trade union leader Mr Tucker: In preparing for this meeting, one of my and I was politelypuzzled. He said: “You represent colleagues from West Africa highlighted something the 6% of the workers in mycountrywho are in that donors can do. One of the things is this problem formal employment and organised in unions. I, that job creation or sustaining jobs or strengthening unfortunately, have also to take care of the 94% who jobs does not appear in anyof the targets or points are not.” That is, I think, the biggest challenge for of view for donors. Particularlyin the context of the trade union movement in the world and it is the Africa, there is no real focus on it. Where a colleague biggest challenge for the ILO and it is the biggest from, say, Oxfam says, “How many jobs would you challenge for DFID: How do we bring poverty sayOxfam have created in their how manyyearsof eradication not just to those who have to be going to Africa?” it feels like a criticism. But I bet protected bylabour laws because theyare in the you they have done better than they think—but it formal economybut to all those people, the poor has not been a focus. I think we need to put it more and the poorest of the poor? The ILO wants to get as a focus, so that all of us can work harder at either to the poorest of the poor, the 500 million landless sustaining jobs—which manyof us do and the fair labourers. How do we work together get to that? An trade movement does verywell—or creating jobs. I Investment Climate Facilitythat brings investment think the target of the investment in terms of donor but with guaranteed labour standards is very finance should begin to put that in as one of the key important. indicators. Q218 Ann McKechin: You think that the emphasis, Q217 Ann McKechin: The ILO has estimated that when countries are growing their economies, is that reducing the world’s youth unemployment rate by theymayneed to look at growth employment half would add US $2.2 trillion to the global policies. 3414551001 Page Type [E] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
Ev 56 International Development Committee: Evidence
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker
Mr Tucker: Yes. that denial, I think, which is the problem in China and some other countries, but even more so if you Q219 Ann McKechin: And to use that growth? are not putting in place safetynets at the same time. Mr Tucker: Yes. Q222 Hugh Bayley: If I were looking for a wayto Q220 Ann McKechin: Rather than end up with criticise your line of argument, I would say that ILO having growth but not terriblysignificant increases has set fine benchmarks or aspirations for these in formal employment. goals of freelychosen employment,social security Mr Tucker: Yes, creating the circumstances, both and so on, but the question is: How do you reach governments and countries. those goals? If you look at China, as part of their industrialisation process theyare dismantling the Q221 Hugh Bayley: Are employment and growth state-provided welfare which was a feature of ends in themselves? If you look at China and India, Maoist communism, so that healthcare, for where industrialisation has created millions of new instance, is provided bylocal communities. If you jobs, some of those jobs are on very, very low rates are one of the big industrial towns in the East, you of payand in terms of great exploitation—and some mayhave quite good healthcare systemsprovided by people have been left behind altogether. Reallythis your province. If you are from the rust belt in the takes us back to your conversation with the North or the underdeveloped rural West, you may Senegalese President. What can the ILO do to stop have absolutelynothing, and if youare a migrant people being left behind in the industrialisation worker and you go to town in search of labour you process? Or is that just the wayit happens, like it did do not get anybenefits at all because youare a in the industrial revolution in Europe in the 19th foreigner in a diVerent city. Fine, you set the goals Century? and you advocate compliance with the goals, but by Lord Brett: The concept that the ILO has adopted is your own admission there are only three already the concept of decent work. Decent work is freely developed countries in Asia that fullyprovide all chosen, with labour rights and social security. In the this. How do you try to ensure that the process of last question, social securityis key.Onlythree states industrialisation in China or India or smaller states in Asia have anyreal social security,Australia, New in Asia scoops up the poor and the dispossessed as Zealand and Japan. Therefore, to build social well as the more skilled workers who are unionised security—and that is the way you provide a safety or maybe unionised who clearlygain from net—is the answer in many ways to how you stop industrialisation? people being left behind. Now the Chinese Lord Brett: I would argue that the core labour Government, of which I have mixed views, does standards are not aspirational, theyare enabling. understand that problem. It is trying to address the Theydo not in themselves set anything,but is it fair, fact that it now boasts that onlythree million people is it decent, is it reasonable that people should have are now not able to be fed and clothed properly— to suVer forced labour or that theyshould su Ver and when I sayboast, I need to point out, of course, child labour or that employers should be able to that the figure was much larger 20 or 30 years ago. discriminate against women? Is it fair that workers The problem with China is how theystruggle out should not be allowed to belong to trade unions or of—and this is a personal view, not an ILO allowed to collectivelybargain? All those things, if institutional view—having a communist state put in place, enable the rising of people’s standards. without communism. If you have a capitalist state Having said that, I was a member of the TUC and you do not have the safety valves of the free General Council, I recall, when we celebrated that press, democratic governance, and independent we had got an Equal PayAct. We got it exactly100 trade unions, then it seems to me you have similar years after the TUC Congress called for it. Maybe diYcultymaking capitalism work, and youprobably we have to understand that in politics we think in have a diYcultyin making communism work if you terms of five-year Parliaments and we have to think do not have the faith of communism. That breeds the longer. Interestingly, I was in the Vatican in 1996 kind of corruption which is a major feature of China. meeting the Pope with other Labour leaders, The ILO seeks to provide the advice and technical including John Monks of the TUC, and it was said, assistance to help put safetynets in place. As for “Well, we had a meeting in 1896 which led to the wage levels, the ILO has been traduced bysome by Congress of Berlin which led to the creation of the saying that they do not want to set minimum ILO,” and I commented, “Oh, well, we are having a international wage levels byinsisting on having basic meeting because someone put in the diary, ‘Bring core labour standards. It is not the case. If a country forward in 100 years’.” He said, “No, no, we in the wants to have a minimum wage, it will be negotiated Vatican, in terms of policies, think in terms of at the level that countrycan a Vord, bythe trade centuries.” I suppose, if you have been around for unions, the employers and the government. The 2,000 years without too many democratic elections, right should not be denied people of being able to you can do that. Maybe our problem in development belong to trade unions of their choice and of being is that we are not thinking long-term. We are still able to sit down and bargain with employers in a thinking far too short in terms of donors. We pride framework—much as theydo in the Republic of ourselves, rightly, I think, but when they are looking Ireland, for example—with government and beyond one year/two years to three years, five years, employers agreeing not just on the bread and butter to 2015, maybe that in itself is too short. The ILO, issues of wages but on a wider social premise. It is which has onlybeen aroun d for 80-odd years, can 3414551001 Page Type [O] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 57
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker only try and build on it year on year. I think that is as “a not-very-stringent voluntarycode of the answer: “We will get there—not as quicklyas we practice”1. I suppose, therefore, the follow-up and want, but if we do not keep trying we will get there related point, and the focus of the question, is: Can even more slowly.” signing up to a voluntarycode make anysignificant Mr Rees: China is obviouslyhugelysignificant, but I diVerence in terms of corporate behaviour guess I would just like to point out that decent work, overnight? If not, over what sort of period might it access to trade unions to represent workers, the do so? Will it do so simplybyvirtue of the fact of the application of the rule of the labour law are massive signing, or does that signing need to be a signing to issues all around the world, not just in China. I a series of quite specific principles; for example, on appreciate your point, but I think it is still a priority the basis of which wage levels should be determined for donors, in order to do whatever theycan to according to companyaverage or some other index, encourage the rule of the law and the rights of and, in terms of working conditions, quite precise workers to join trade unions. If I look at, say, principles? And does it have to be accompanied also Bangladesh: 20 million people in Bangladesh, one of bysome sort of mechanism of scrutinyor the poorest countries in the world, are dependent in assessment? In other words, you do not just take some wayon the garment industry.I do not think it people at their word: “You have signed up, you have is right to saythat those who do have work are ticked the box, that is jollygood,” and nobodyever somehow some waged aristocracy: they are earning knows otherwise. about half a dollar a day, which, by anyone’s terms, Lord Brett: In the ILO London OYce, we look at all is absolutelyappalling. the Corporate Social Responsibilityreports (CSRs) of British multinationals and half of them leave Q223 Hugh Bayley: You want a conditionalitywith more than a little to be desired. Theyare, at best, labour conditions being the condition on which aid opaque and quite often misleading. We have is given. instigated in myo Yce in London, not on a name and Mr Rees: ETI does not have that position, because shame basis but on a constituencyservice, to write that goes beyond our particular mandate, but we into British multinationals, “We have seen your think it is vital that the role of government should be CSR report. In relation to our area of interest, which beefed up in terms of enforcing the laws of the land. is labour standards, where we think it is either We are talking about, as you referred to in China, opaque or misleading. We suggest that theyquote the laws of the land just being adhered to, the rights directlyfrom the ILO Declaration on Fundamental of workers and citizens in countries just being Principals and Rights at Work. We point out adhered to and enforced. We could go an awful long companies which have done it, and where there can wayin combating povertybyjust encouraging be no duplicity, or confusion in what the company governments to act as responsible governments intends its policyto be. Another question is: How do should, to allow workers to have the protection of you police it? By having a code, you invite scrutiny, the laws that exist and to organise and bargain for but the question is then how you do it. One of the themselves. I think it comes back to a view about how rights are realised. Are theyhanded out by problems with CSR is that companies tend to governments or promoted byforeign business, or do pretend it is easy. It is not. Tesco have a million people realise them through self-determination and suppliers; theyhave 30,000 major suppliers. The joining organisations of their own choosing? To a supplychain runs around the world, so ensuring that certain extent it is both, but you have to create both what you promise in your code is applied is actually Y conditions. That is the first comment I would like to quite di cult. I think sometimes companies are too make. The second is that the vast majorityof people glib about saying what they can do. I have my own who are involved in making products that end up in list of companies which are good and companies the UK market of course do not have permanent which are not so good—and of course, as with employment, do not have secure-waged Sherlock Holmes, the real question lies with the dogs employment; and there could be much more done to that do not bark. What about the companies that do look beyond that tier of the supply chain into large not produce reports? Are theybetter or worse? We groups of workers like home workers and are in the infancyof CSR and it is here to stay.It is smallholders, manyof whom are willing, manyof an area where the ILO was soon “oV the mark”. The whom are verypoor, manyof whom have a crucial tripartite mechanism is verypowerful and a very role in supporting others, in order to bring them into great advantage—but not when it came to CSR, the business process, in order to bring them into the because we could not get Governing Bodyconsensus development process, if you like. ETI has done work of whether we should be involved in a voluntary in this area and so have others, but I think it is a vital initiative area when we set international law. It took part of what we consider corporate responsibilityto a decade for that to work itself out. It has now be in terms of impact for poor people. worked out.
Q224 John Bercow: If the witnesses were obliged to Q225 Chairman: You said you had a list. Is that you put it veryprecisely,what would theysaywould be personallyor the ILO? the emerging lessons from the Ethical Trading V Initiative about the e ective use of the codes of 1 “Is it wrong to buycheap clothes?”, The Observer, 2 April conduct for promoting labour standards? To put it 2006. Online at http://observer.guardian.co.uk/magazine/ in context, The Observer recentlydescribed the ETI story/0,,1743042,00.html 3414551001 Page Type [E] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
Ev 58 International Development Committee: Evidence
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker
Lord Brett: I personallyhave a list of companies in of improvements that they have aske d of their the UK, and, if there is a single thing about some of suppliers, but, if it is similar to the year before, it is the better ones then it is that theytend to be close to 30,000 diVerent improvements. These companies who have got their fingers burnt. They numbers and this scope is not insignificant. We are tend to be companies which did not start oV being beginning to get momentum. Of course it is not quite as ethical as theynow are, but have had some enough. I absolutelyagree with you:there needs to bad experience in PR terms from things that might be more independent scrutiny. One of the diYculties be put in the North Sea that should not have been. is bywhat yardstickand how. I think people such as yourselves and consumers are asking simple questions, such as: “How can I buyproducts that are Q226 John Bercow: Forgive me, Lord Brett, for produced ethically?” and the reality is that it is a interrupting you, but I feel sure this will be a point of fantasticallylong and complicated answer, and, at consensus between us. The fact that theythemselves the moment, as Bill pointed out, there are no have experienced bad PR—which is something guarantees. Moving forward, what are the key about which none of us here give a tinkers cuss, but issues? I think the keyissues are that there must be it is incrediblyimportant that there should be a more companies who are challenged to make this mechanism that is preventative rather than reactive commitment and theymust be reporting more after the event. Although we do not give a stuV publiclyupon it. I think that companies must be about their bad publicity, and it might be that it is challenged, in order to integrate their ethical richlydeserved and the opprobrium heaped upon them subsequentlyis well warranted, we do not want decision making and ethical standards into their people to have to suVer in the first place before core business practice, that is reflected in price and corrective action has to be taken if the suVering is the in ordering and lead times. That is where we will result of inadequate procedure. reallyget the purchase on the market. Lord Brett: I think it has encouraged others who Lord Brett: Can I comment on one major weakness have taken on CSR to make sure that theydo not get in the UK. We have an OECD code of conduct. We themselves in that position—because, if you take it have a mechanism for reporting and a mechanism on, you are inviting greater scrutiny—because you for investigation. Who knows of anycompany are more than likelydeemed guiltier because you which has been investigated bythe DTI? Who knows have taken a promise which has been broken, rather what the results were? Who knows how that than not having made a promise in the first place. In investigation took place? The answer is: If you that sense, it is quite valuable. know, then you know more than I do. In essence, Mr Rees: Referring to the statement in The Observer that is the problem. I know from talking to investors that the ETI was not a verystringent monitoring in the city, major pension funds, that they would like initiative, that is true, but we were never set up to be to know in order to put some pressure on those a monitoring initiative. We were set up to do two companies, so that theydo not find themselves in a V things: to get commitment from business and to situation where theyare the su erers when V promote international labour standards in a certain something comes out that a ects the share price. way, and to develop good practice in the Therefore, there seems to be a DTI reluctance to be V implementation of corporate codes of conduct. We perhaps as e ective as it should be or at least as always took the view and we take the view now—it transparent. That I should sayis purelya private is like a double-edged sword—that these codes can grumble rather than from myinstitution. be good things for poor workers or bad things for Mr Tucker: I think there is a danger of looking at a poor workers, depending on how theyare applied. single bullet solution on these issues. For us in the That is a strategyto which we remain committed. On fair trade movement, ETI has been useful in terms of the emerging lessons from ETI, I think there are partnerships theyhave brought together, but, from many—and it is a shame for me personally that it myperspective, in order to be harsh about it, I would comes at this time in the meeting—but, to follow saywe alwayssaw it as a baseline. It created the Bill’s point, I think that getting commitment from climate in which discussion could be heard in companies, public commitment, that theyhave companies that do not normallydo it. In the fair responsibilities in this area is a huge step forward. If trade movement we found that, if we had businesses you look back, in the last five years there has been a that had ethics as a central core and took it to the sea-change, in getting large companies to make this marketplace saying, “Ethics are important and they commitment and in generating the expectations that are central to our business,” then you start having a this is what theyshould be doing. I think one of the reaction, and that combination of things starts successes of the Ethical Trading Initiative is built, raising the joint levels of engagement, ethical and so from what Bill said, on international labour on. If Fairtrade brands had not been successful, standards and the language of the ILO that the ETI some of this debate would not be happening, so I Base Code is the standard that British companies are think it is quite important that these diVerent points working towards. I think other lessons are that there of attack are there. I also think we should use the can be benefits from this. If I could refer you to what market to make sure that companies know it is a ETI members alone did last year: in 2005 they market disadvantage not to move in this direction. scrutinised the performance of some six and a half However we can make that work, bypromoting thousand factories and farms around the world, businesses that take notice and creating incentives employing an estimated two and a half million for businesses that have an ethical position will be workers. I do not yet have the figure on the number quite important. The framework . . . I hesitate to say 3414551001 Page Type [O] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 59
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker the regulatoryframework, as politicians are always and bonuses and job se curityrelyon buyingcheap, being criticised for too much regulation, but the ethics go out of the window. How do you get that framework and the incentives for companies is quite buy-in? I would put a keyperformance indicator in an important area to look at for donors and for the job description of the buyer. If there was a risk government. How do you create incentives for and it was found out afterwards that it was bought businesses to act more ethicallywhich has an impact without the minimum wage being paid in China or on suppliers? If you have a market opportunity what-have-you or with some conditions which he coming up, you will take these commitments more knew about or did not bother to ask about . . . . If seriously. I think there is a basket of approaches, you ask those three questions and get satisfactory including the support of pioneer brands that are answers, from myexperience that companyis going to say, “Actually, this is a market proposition serious about CSR. If you do not—well, the answer that consumers will buyinto.” is obvious—theyare not serious.
Q227 John Bercow: Mr Rees said a few moments Q228 Hugh Bayley: How does the Ethical Trading ago, in response to the question, that his Initiative measure compliance with its Base Code? organisation, his initiative, is not set up with a How does DFID measure the outcome and success monitoring role. I think I can probablydeduce from of its financial support to ETI? the answers you have given thus far that you would Mr Rees: I did not get a chance to respond to John not exactly cry into your soup if your brief were Bercow’s question. Do I have time to do that? extended. I wonder whether members would accept that there is, in some sense—and we cannot be too Q229 Chairman: If you do not take too long, yes. sanctimonious about this—an analogyor a parallel Mr Rees: I think independent scrutinyis vital, and I with domestic practice. For example, Lord Brett will come on to what we do in just a second. From referred to the Equal PayAct, and even now your question, I was not sure if the proposal for pressure has to be exerted to ensure that, although “labour standards random breath testing” is the the Government itself in its direct dealings applies right way. I think more visibility definitely needs to the content of the legislation, it has to check to be shone on the companies. Within the ETI, we now ensure that subcontractors to the Government are feel we have a much stronger basis of what we doing so and to remove them from the lists of understand good practice to be—which was our contractors if theyare not. That is quite a recent initial focus. We have developed what we believe to development and it remains ongoing in terms of be much more robust indicators between companies. equal paylegislation and its implementation. I I take Bill’s point that the comparabilitybetween wonder whether Mr Rees feels that one thing we them is vastlydi Verent—the diverse membership is could do would be to initiate a scheme, for example, diYcult—but that is where we want to be. I think the which one might call “the labour standards answer is not, with respect to your phrase, an equivalent of random breath testing”. You would “ethical scorecard”. There are no guarantees. It is randomlyselect companies for an ethical audit on a ludicrous to expect or suggest that huge global regular basis. I am bound to saythat schools do not companies, with the complex supplychains that they get that much notice to the fact that theyare going to do have and the kind of numbers that theyhave be subjected to a rather rigorous detailed and time- talked about, can be looked at as ethical. The reality consuming OFSTED inspection process. We do not is that theyhave some of the best and the worst want it to be a veryheavyand burdensome and practice at the same time due to the nature of their damaging regulation, but presumablyit is businesses. We have to identifywhat we think good reasonable to check that people are adhering to and looks like. It has to be fairlysimple and we have to implementing the commitments that theyhave shine the light on it. That discussion is going on professed to support and to which theyhave signed within the Ethical Trading Initiative at the moment. up. Could there not be an ethical scorecard, for You are not far wrong in terms of mypersonal view example? Myfeeling is that youneed rigorous of our mandate of where it should go: I do not think implementation of what is reasonable. It would not we should necessarilybe the independent scrutineer be a good idea, in the spirit of the worst and most but I think we can do much more to reflect the good unrealistic of the anti-capitalist NGOs, to expect work that our members are doing against the work companies to defythe laws of economics, but it is that others are not doing, so I take those points. reasonable to say: You should not do things that What do we do to assess the compliance of ETI palpablybreach human rights and youshould members? We ask them to report annually. We have implement what you have agreed to do. quite a complex annual reporting framework, where Lord Brett: I find it easier to ask three questions of companymembers are asked to explain in some the CSR report. First, is the CSR policyboard detail about what theyhave done to scrutinise their driven? How often does the board discuss it? supplybase, what improvement actions theyhave Secondly, is it adequately resourced? Gap have 92 achieved in which factories and whytheyhave not inspectors to inspect factories worldwide, which is achieved improvement where improvement is understandable, given the product theyproduce; BP needed, and that is measured on a year-on-year do not have it because it is a diVerent kind of area. basis. Thirdly—key in the procurement, absolutely crucial—is there a buy-in from the buyers? If there is Q230 Hugh Bayley: Do you ever suspend a member a choice between buying cheap and buying ethically from membership because of non-compliance? 3414551001 Page Type [E] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
Ev 60 International Development Committee: Evidence
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker
Mr Rees: Members have left because that was in the Theyare going to spend less moneyo n other things, oYng. Our process for a suspension of membership so you will actually fail to maximise output and is quite— employment. You will actually ensure that total output in the world of employment is less than Q231 Hugh Bayley: Which companies have left your otherwise it would be. You will have achieved, membership? though in reverse direction, the eVect of monopoly Mr Rees: Companies that have left our membership pricing. I want to give you the opportunity of include small supplier companies, for example, who, answering this fundamental question and tell us when the anti was upped, decided theydid not want what your attitude to it is. If you can refute this to be a part of the ETI. companies in seafood, for concern, I think you ought to have an opportunity example. to do so on the record. Lord Brett: It is a false question. Number one, in Q232 Chairman: Could you send us a list? 1944, in Philadelphia, at the International Labour Mr Rees: I certainlycould. It might be better to do Organisation’s first conference after the war—it that. I could write you a note on the whole process became part of the United Nations earlyin 1946— of what we go through in terms of the scrutinyof our it was agreed that labour was not a commodity. The members, what our process is in terms of holding fundamental statement: labour is not a commodity. them to account and what the outcome has been, It cannot be treated like other commodityprices. and including the improvement. How does DFID That becomes the question: What is the safeguard measure this? Built into our partnership—we are in that labour has? We have explained that in terms of negotiation currentlywith DFID—are measures of core labour standards. It is then a question of setting the companyperformance based on an annual not at an international level but at a level that reporting process. So there are indicators in there for development in a countrycan succeed. In myview example that 75% of all ETI members must there is another flaw in your argument. We do not demonstrate that theyare implementing the ETI live byeconomics alone, we live bydemocracy.The Base Code and the principles of implementation, truth of it is that if a government is not delivering for and there are measures of how we do that. Again, I the vast majorityof its people, because in its can write you a note, if helpful, on how we intend to economic beliefs it maynot make sense to do it, it measure that going forwards2. will no longer remain the government. The realityis Chairman: That would be helpful. We are under that economics are tempered bypolitics and, some pressure of time, because there are a lot of therefore, if we were living in a static societywith no colleagues who still want to come in, so perhaps I growth in it, you might have some strength in your could ask everybody to be conscious of that. argument, but the truth is that we know we have grown our societyin the last century,in the last 100 Q233 Mr Davies: There is no doubt at all that the years in this country, to a standard of living that objectives you have been setting out today are nobodycould have believed possible 100 yearsago. admirable, humane, attractive ones, and no-one And we have done it byraising standards as we have would doubt your sincerity in pursuing them, but is gone along. When the Government introduced there not a fundamental problem that really pensions 100 years ago, presumably some would elementary economic theory tells you that if you have argued at the time that it was pricing people out increase the price of something you reduce the of jobs. demand for it. If you succeed in increasing the price of labour byintroducing maximum hours, minimum Q234 Mr Davies: Lord Brett, you have not either wages, social securitycharges and so forth—and I answered or refuted myeconomic question; you am talking about the real output costs of labour, the have simplymade a normative statement of your costs of labour in relation to productivity—you will own to the eVect that you do not think that reduce demand for labour and you will not achieve economics applies to the labour market. your objective of maximising employment. In other Mr Tucker: If I could come in on that— words, you may do a good job for the people who get Chairman: I am going to ask Joan Ruddock to come the benefit of the minimum wages or the maximum in now. hours or whatever it is, or the social security payments, but you will be fighting against your Q235 Joan Ruddock: One of you, I think Albert objective of drawing in those landless labourers, the Tucker, said in the initial round that you thought the half a billion to which Lord Brett referred who have Government could do more in terms of UK PLC. I no chance of employment at all. Similarly, if you am wondering about the parallel that I see existing succeed through fair trade in increasing the price in the major supermarkets, for example, where they that consumers payfor whatever products, theywill have some fair trade products but just a few. Is that have less moneyto spend on other things. Theywill not just a PR gesture? To what extent is this really spend more moneyon a limited number of addressing the problems of the poor farmers of the producers and theywill have to spend more money world of whom we are all so well aware? If I maygive on fair trade itself through paying more commission. you an example. I was recently in Tesco—I do not have a full choice about supermarkets, which is why 2 Background papers submitted bythe Ethical Trading Initiative: ETI: Members as at May 2006; The Base Code; I have to go to Tesco—and I suddenlyspotted a bin and ETI Base Code Principles of Implementation. Not of Fairtrade pineapples. “Fantastic,” I thought, “I printed. Copies placed in the Library. will buya pineapple,” and then I happened to see 3414551001 Page Type [O] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 61
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker next to it a bin four times as large of pineapples at pressure on our own farmers, which has become a half the price. You ask yourself whether it might not major political issue in this country. That is the be better if all the pineapples were at a mid price direction in which theyare going. between the two. What is the real contribution? Is Mr Tucker: It is not systemic. We are trying to get this going to make real change? Can the consumers to be aware that it is not sustainable. Government do more to influence these companies? Again, looking at meat, the downward pressure on At the end of the day, is this just a way of saying that meat, I contend, led to the kind of practices that led if I am in that store I am going to respond to that to BSE, which we paid for. We might have thought PR gesture. we were paying cheaply, but actually the real cost of Mr Tucker: There are two aspects to your point: food we will payfor in the end because it will have there is the consumer end and there is the other impacts, whether a development impact, or development end. For farmers in coVee in fair trade lack of wealth creation. It will have an impact. It is in the last five years, fair trade has handed 12 million true. It is as valid here as it is in developing countries; back to farmers in terms of price structure, and it is but theyare just at di Verent stages. It is important to related to trade. As you know, in fair trade, when oil know that, when you look theoretically at other prices are at minimum price levels the premium positions. shrinks, so it responds to the fluctuation in world prices, but it puts some limits in there bywhich Q237 John Barrett: Much of what I will ask you people can plan. At the consumer end, what we relates to coVee. Manyof the products have V V found—again in co ee, for example—the co ee processing and packaging and distribution retailing market in this countryhas been stagnant for the last sectors, but what the coVee grower receives is five years. The Fair Trade market has been growing important. How do we make sure in relation to these from anything from 15 to 30% year on year. ethically-traded products that the maximum is going Consumers are saying, “We do not want to beggar back to those who have been involved at the early our neighbours bythe waywe shop.” It is still a stage? For instance, I would argue that we need not relativelylow level of consumers, but that is moving payanymore for our supermarket price for co Vee on on. We have seen young people responding in a the shelf for the coVee grower to get a fair deal for his similar way. They do not have the great purchasing coVee production; so the economics stand up quite power of the rest of the population. What the Fair easily. We are looking for a win for the consumer Trade movement has succeeded in doing is and a win for the producer but it is each stage of the sensitising the consumers to the fact that the waywe process that has to be looked at. Is it trade trade or shop impacts on your security, your agreements; is it manufacturing agreements; or is it insecurity, your safety in the market and so on. We labour laws that make sure that a fair deal for the have started getting consumers to reallythink about product gets through in the end? their purchasing habits, and it is important for the Mr Tucker: All those things have a role to play. We economyhere as well that this principle begins to have been dealing verypragmaticallywith this issue apply. Getting cash into the system and getting and there are a couple of things that are happening. business—creating wealth—is important. If you We are subject to economic forces. In Latin have social improvement, that generates greater America, for example, with fair trade working with opportunities at greater value. We are seeing roads farmers and developing capacityand with people built because people suddenlyhad an additional trading in the market, as I said earlier, we are finding income coming through. We have seen managers some skills coming up in those countries. Also, in trained up that are creating other businesses because Latin America there is growth in supermarkets theyoperate in fair trade and want to have access to happening now, and that is quite an interesting world markets, to be able to understand world dynamic. For example in Brazil we have invested 12 markets, and theydevelop other things that are million over five years to create a consumption nothing to do with fair trade. Theyare actually culture in Brazil of coVee. This led to a market creating wealth. Similarly, companies then see how environment where you could produce coVee that the markets are working and codes of conduct, and works in that market, and then you have more theyare implementing them in those countries. chance to export—although theyhave not got that Gradually, as I said earlier, we find the systems rising far yet. In Africa, for example, the consumer culture up. We are subject to global economies, it is true, but is prettylow so the idea of capital investment needed if you think of where fair trade and ethical trade were for a producing country, on the risk you will find the 10 years ago and where we have got to now—and if market here—a retailer who is going to take a you look at our growth trajectory, economists market risk to be buying direct finished products cannot believe it because theydid not think it would from you—it is a big risk gap at the moment. I think work. All I can sayis that we have grown it from a there are other things that are stimulating consumer zero starting-point over 10 years, so there has been culture in some of these developing countries. There veryhigh growth. are issues about relative wealth and there is a package of activityaround creating the supermarket culture and creating a culture involving coVee. In Q236 Joan Ruddock: If the largest economists do not manycountries where co Vee is produced, local believe it, these companies themselves do not, I consumption is prettypoor-qualityco Vee because think, actuallybelieve it because theyare driving the best qualityhas been exported. There is a job to down our food prices all the time and putting be done in creating demand and then raising the skill 3414551001 Page Type [E] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
Ev 62 International Development Committee: Evidence
25 April 2006 Lord Brett, Mr DanRees andMr Albert Tucker base to produce the kind of coVee we would buy Mr Tucker: I would saythat at the moment it regularlynot buyonce, with all that capital probablylooks that way.I am taking a longer- investment. There is some other economic activity term view. we need to develop to be able to add value totallyat Chairman: We could probablyextend this session. the manufacturing end, at source. It is being The fact is, there has been a big response to what you explored in diVerent countries at the moment. do, and manyof us would like to know, when I see a shirt for £4 in Tesco, should I buyit or not? Some of the things you have said about indicators and some of the evidence you said you would give in Q238 Mr Davies: Mr Tucker, in one sense I think writing we will come to in our report because we are you are confusing the undoubted benefits to your looking for measures that consumers can make a members of Fair Trade with the issue of whether or judgment about, and at the same time trying to raise not you are maximising wealth creation and everybody’s share. I want to thank all three of you employment in aggregate. verymuch for coming along.
Witnesses: Professor Keith Palmer, Chairman of Emerging Africa Infrastructure Fund and of Infraco, and Non-Executive Director of Guarantco, Mr Michael Pragnell, Chief Executive, Syngenta, and Dr Andrew Bennett, Executive Director, Syngenta Foundation for Sustainable Agriculture, gave evidence.
Q239 Chairman: Thank you, gentlemen, for your is going down, even though output is going up; and patience. You see the waythe Committee’s minds the qualityof output improves at the same time. are working, although one or two members of the However, the keydevelopmen t is the release of the Committee maynot be able to staythe pace. entrepreneur, if I can put it in crude, unsophisticated Obviously, this section is looking at agriculture and terms. What we saw in India was indeed a ‘green the role that agriculture can play. Not only DFID revolution’ in the Seventies, with a huge investment but other agencies involved in development all tend in technologyinputs; and we are now starting to see to saythe keyis agriculture, which is such a large the benefits of that in terms of its impact on the part of the economyof developing countries, or even potential of the overa ll Indian economy. I would not potentiallydeveloping countries. That is the sort of totallyseparate from that what we have seen in thing we would like to explore. As a starting point, Pakistan, where there have been similar it has been said that the success of the Asian improvements in agriculture. Again, it is lubricated economies—latterlyindustrial economies—is due to essentiallybythe av ailabilityof finance or money— the fact that theyhave solved their agriculture I will not go into where that comes from at this problems first. Can you give us a flavour of the stage—and by the entrepreneurial spirit and the extent to which that has not happened in Africa, why freedom to do things on the ground that make things it has not happened and whether it could happen, work. We quite palpablyhav e not seen that in Africa and whether the Asian experience could and should of course. The reasons are manyand varied. Other transfer to agriculture? than the volatilityof rainfall, which clearlyh as an Mr Pragnell: That is an enormous question, impact on harvest year to year, there really is no Chairman, but I will start to tryand broach it. In reason whywe should not have seen considerable verysimple terms we have seen three—if I contrast improvement in agricultural productivity, that in three diVerent approaches: what we have seen in itself feeds economic development. Why? I guess one China, what we have seen in India and of what we has to saythere are manyexamples of poor have seen in Africa. Essentiallyin China there is a governance; inadequacyof education and communist government but in eVect a capitalist healthcare; the inadequacyof the right sort of system, with which the administration has continued infrastructure development; the absence of finance wrestling given the enormous size of the population to lubricate all sorts of things that we have seen and the economy, or potential size of the economy. examples of in India and China—not lack of interest What theydid for manyyearswas to put self- bycorporations such as ours. We are the leaders in suYciencyin food supplyat the verytop of every our industry; we are the leading supplier in the five-year plan—until quite recently, when the African Continent—we are active in over thirty Chinese Government recognised something the rest countries and we employover a thousand people on of us could see, that actuallythat was an the ground. Last year our sales were almost $160 unattainable goal. What it did was align a whole million, and of that over half was in sub-Saharan series of activities and interests from attracting Africa. However, the big problem we face is the lack technologyand attracting investment to developing of trickle-down. Lots of moneyseems to find its way trading systems and supply systems—and, dare I into government, but we do not see that percolate even sayit, middle-class consumers in cities like through the economy. I do not know whether Shanghai. That brought with it a whole economic Andrew would like to add to that, as someone who development, particularlydown the east coast and has lived on the ground for manyyearsin Africa. along the south. We see migration from land into the Dr Bennett: There is the issue of the small and cities of about 20 million populations a year. We see, medium size enterprises in Africa, which has not as a result, productivityimprovements in taken o V in the same wayas it has in Latin America. agriculture, which means employment in agriculture There are probablygood reasons in terms of the 3414551001 Page Type [O] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 63
25 April 2006 Professor Keith Palmer, Mr Michael Pragnell and Dr Andrew Bennett climate in which one tries to create some small and Mr Pragnell: Yes. medium size enterprises. Some of the actions of donors have on occasions not necessarily encouraged SME development. Q242 John Battle: I thought that that was very, very encouraging, except the general tone and direction—if I were to caricature it as top down— you used the trickle-down model but I am speaking Q240 Mr Davies: Such as? particularlyabout Africa, which is locked out of the Dr Bennett: If you give things to people, it does not economyof the world really.What is going on in create much incentive to people. If you give seed Africa? I think there is still a mindset that you away, people expect to be given seed and create a plough the land; you plough until you water, and seed industry, but it kills the seed industry. There is you hope something happens. You organise the an importance in relation to Africa of understanding people to do it, or you collectivise the land to do it, the power of the donor communityin relation to the and it seems to me that it is still big-scale top-down. rest of the economyand the need to make sure that I want to know what more can be done for what one does encourages small and medium size agricultural businesses in the plural, and in the enterprises, not necessarilycreates a greater role for plurality, and in their complexity. One thing that government and others in that chain. strikes me, following some of the comments that Professor Palmer: As to your question, the answer is Keith Palmer has just made, is that the whole veryclear. Asia has succeeded in bringing together question of those input services, what are called in the infrastructure, the supplyindustries to supply the report “extension services”—who provides agriculture, the technologies and the green them? Should it be governments, NGOs, DFID? revolution in a waythat has been quite spectacularly Who should get into that whole mess there and say successful, despite some external disbenefits. It that it simplyis not going to work to plough the land should be regarded as a major triumph because we and get water to it; you need much, much more? were predicting massive starvation in India thirty Who should provide the extension services? Should years ago. I counterpoise that with the experience it be NGOs; should it be SMEs, because even there, over the last thirtyyearsin Africa. It has been one of reports are saying they are failing to get engaged at decline, a reduction in real incomes in agriculture. It that kind of pitch? Where is the balance—or rather has been an example of increasing poverty, as it is not the balance, it is the catalyst. Where will be the catalyst to make sure that agricultural businesses measured bythe international indicators. I am start to work in the African context? afraid the answer to your question, what is causing Mr Pragnell: That is an enormous number of it, is as ever that it is complicated. The reason questions. If I can go back to the opening statement African farmers, small farmers are verypoor, is of the Chairman, that getting agriculture to the top because the inputs theyneed to grow things— of the list of priorities would help enormously. The fertiliser, pesticides and seeds theydo not have circumstances in China are verydi Verent, but if we access to generallyat all; if theydo have access they were to see that as a diktat of policyin an African are veryexpensive because of verylimited state, that would be a start. But in the sense that it distribution channels. Theysell their products to had a goal—not just that agriculture is important intermediaries. Theyusuallyhave onlyone or two but that “agriculture is important because we want people to choose from—take it or leave it—so they to obtain self-suYciencyin food supply”;or “We do not get a verygood price. When theyfinally want to develop a major export business in these harvest the crop and find somebodyto buyit, if they crops”; or “We want to put all our rural populations do not have storage, theyhave to sell it immediately to work much harder and that will create markets for because otherwise it rots in the fields. I think that products that theyproduce”, because what agricultural development in Africa is quite simple: it agriculture can do is create a total business system. is simplya matter of bringing together the things Product is produced; it is high volume. You need everybody knows you need. You need irrigation and infrastructure to handle it—storage, the road electricityto operate pumps because irrigation systems, the communications systems. You need cannot work without it. We need better technological inputs to improve the yields and to transportation and storage facilities. We do not have improve the quality, but you cannot generate that them, but if you provide those, even in the absence until the farmers themselves generate cash, so you of the green revolution type products, there is need training systems. Training systems spawn enormous potential to increase the productivityof SMEs, small companies that act as retailers in both farmers and to increase their incomes. That is the directions, either bringing inputs to the farmer or by only way you can reduce poverty. helping to trade what theyproduce. Investment in infrastructure brings diVerent industrial investment into an economy, and that in itself brings the know- Q241 John Battle: If I remember rightly, Syngenta how to enable local people to do these jobs. That in sponsored a report on Africa recentlyon agriculture, itself is a form of education and training. There is a whole cycle of activities which over time will have which was published in the John Smith Institute3. the sort of impact you refer to; but for all that to take 3 The Smith Institute, Goingfor Growth: Science, Technology place we need a level playing-field; we need a and Innovation in Africa, Edited byProfessor Calestous transparent regulatorysystem;transparent judicial Juma, 2005 systems; we need to be sure, as Andrew said, that aid 3414551001 Page Type [E] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
Ev 64 International Development Committee: Evidence
25 April 2006 Professor Keith Palmer, Mr Michael Pragnell and Dr Andrew Bennett does not undermine such activities. If it is to be Professor Palmer: There are two things you have to sustainable, it demands private sector involvement do at the same time, and it is verydi Ycult. The first and giving people themselves a belief that theycan thing that you must do in Africa is develop a better their lot in a productive fashion. national seed industry; you have to get people Professor Palmer: I am interested you have asked creating seeds and getting them distributed to people about extension services because it is a really who will benefit from them. At the same time you problematic area. In this country, in the United have a concern obviouslyto help immediately,but States and in developed countries generallyin the the trouble is that if you give seeds free to people, earlystages, agricultural development was strongly then you tend to destroy the seed industry because supported bygovernment funding and government- you take away the marketplace because it is provided services; extension services were an supplanted bygiving free seeds. It is the food-aid important element of it, but a whole range of services syndrome except further down the agricultural including credit support, and there are government chain. There are ways of squaring that circle, and it is programmes even todayin the US. That approach in reallyimportant that donors learn the lesson of how Africa over the last thirtyyearshas been a dismal they destroyed the seed industry in Africa. It is very, failure. National governments and donors have veryweak, and rebuilding it must be a priority,but made things much worse. A real challenge for rebuilding it in a waythat verypoor farmers can V donors interested in supporting small farmers on the a ord to get their hands on those seeds. ground—and I agree it cannot be top-down—is to find mechanisms for targeting donor funding in an Q244 Joan Ruddock: ObviouslyAndrew Bennett intelligent wayso that that role of providing has a familiaritywith Malawi and Africa generally. essential services and supporting small farmers can It seems to me that there is some evidence that the be done bynon-conventional providers. NGOs new farmers’ clubs are working, where people acting certainlyhave a role, and a couple of NGOs would collectivelyhave more buyingpower and can share do it verywell. The SMEs, the national private expertise, and perhaps have the capacityto respond sector, has a role. It is not easyto get them to do more eVectivelyto donors and to the private sector these things, but an intelligent approach to working in partnership. Is that your experience? structuring partnerships is probablythe onlyway Dr Bennett: Farmers working together I think is very donor support in Africa can work. sensible and absolutelynecessary.When we have defunct national extension services it is the only alternative. The question is, how theyconnect up. Q243 John Battle: I will tryand draw out a practical Often theyare clubs that are brought together example. Our Committee has visited Malawi twice around inputs, not necessarilyaround outputs. in recent years. The first time we went, DFID were Increasingly, farmers are producing for markets. providing seed packs for farmers after the drought, The happydaysof subsistence farmers producing to get them going again. That was literallya hand- surplus and then must go to market have gone; they out programme, and then that dried up and stopped. all need cash. Therefore more and more farmers are Who should be providing those seed packs now; looking at how to produce income. Food crops are should it have been DFID in the first place; did they not hugelyrewarding because in manycases food undermine private sector development bydoing it; prices are not veryhigh. Some of the most successful and in the meantime, given the dearth of private farming clubs are around vegetables and small- sector development in Malawi, who is going to stock, where theyhave been tied into a market chain. jump-start future development? Veryoften, the producer gets less than 15% of the Dr Bennett: The starter-pack programme, as you consumer price. Unless you can extend your reach know, was much criticised, but it was there to into the market trail and collect more from either the respond to a particular need, an immediate need; processing or marketing process—and let us face it, farmers were not getting the necessaryinputs to most of Africa is about serving local markets. We produce enough food at a time when Malawi seemed heard earlier about the export markets, but the great to have gone from a position of surplus. Where demand is to feed the cities, and to do so when you criticism might be levelled is the waywe think about are facing HIV, which is reducing your labour force the sustainability of that activity. How do you get in rural areas and reducing your capacity to out of it? It needs a strategic approach. It is great to respond—if you do not plant early you do not get respond to miseryand we must do it, but one also a crop. needs to understand that there was an embryo seed industryin Malawi. There was a verye Vective input Q245 Joan Ruddock: Is there anysignificance in the supplysystem,run byAdmark, which is now fact that the majorityof farmers are female? defunct. There was a view that inputs were not Professor Palmer: There must be, yes! necessaryto promote farming; that youcould do it Dr Bennett: In manyplaces the tenure issues are bysome form of self-generating lower input system. major. In manycases traditionallywomen have been That has not worked particularlywell either. There the producers and managers of household budgets. are verypoor soils in Malawi from which youdo not In manycountries migration of male labour has get anything unless you put something in. Bad years been a major factor. If you go to Malawi, huge will happen; that is the realityof agriculture; but it is numbers used to go to work in the mines in South when you respond in the short term without thinking Africa. I do not know whether there is anyindication long-term that you need the benefit of hindsight. that the dynamic has changed since the tragedy of 3414551001 Page Type [O] 19-07-06 11:11:27 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 65
25 April 2006 Professor Keith Palmer, Mr Michael Pragnell and Dr Andrew Bennett
HIV. I think manyyoungchildren are heading to be the right thing to do. Some bodyhas got to take households rather than veryold people who are the risk that it is a good thing in principle, but it may beyond the capacity to work fully for a day in the turn out bad in practice, because things do go wrong. field. Most extension programmes or rural It is particularlydi Ycult in these parts of Africa development programmes learned veryearlyon that because the farmers who mayor maynot respond actuallyin manyof the issues it was women who are verypoor people for whom absence of made the decisions. That is a fact of life. infrastructure is not the onlyconstraint on responding. Theyneed access to credit so theycan Q246 Chairman: You said all markets tend to be buythe input to put the fertiliser down and buythe local; presumablyyoumean local or regional. In seeds. You have a verycomplicated situation where Malawi there was the issue that there was maize the irrigation investment will either be a around neighbouring countries, but the cost of sensationallygood thing and reduce poverty getting it was veryhigh and there were other food immensely, if all the other things necessary happen, products that were regarded as irrelevant and or it will be a complete waste of moneyif theydo not therefore were not eVectivelymarketed. What are happen. That is what Infraco is trying to do, to use the mechanisms one needs to make markets work donor moneyto take some of the earlyrisks and put eVectivelyand what is the role of donors? Is that the infrastructure in place, and then to tryand something national governments can sort out? How arrange the other complementarythings that have to can we remove the obstacles? happen. So the governments in the rich countries are Professor Palmer: Growing markets means putting taking the risk, and if it happens it will be a jolly in two things: transportation systems and better good thing for poor farmers. Myview is and has telecommunications systems. Markets are just the always been that unless donors are prepared to abstract concept; what we have been trying to do is provide that sort of support it [pre-emptive join up the producers. It is not currentlyan e Vective irrigation investment] will not happen. The private marketplace serving an eVective market because sector will not take the sorts of risks involved, Sub-Saharan Africa does not have the low-cost investing tens of millions in irrigation, onlyto see a transportation links to get things to market and still low supply-response in terms of that particular be profitable. The first thing you have to do is scheme of agriculture. It is therefore veryimportant identifysituations where simplybringing down costs that donors do give resources to do that, and do it and improving the access to infrastructure will, in in a way—and this is important—that if rich farmers and of itself, not onlyincrease markets but also benefit, theyend up payingback some of that money farmers’ incomes without anyincrease of so that it can be used for other development needs. production on the land simplybecause people have If the benefits are to go to verypoor people, they less expensive inputs and get more for their outputs should be allowed to keep those benefits. This because theypayless awayto intermediaries. should not be a case of wholesale subsidyof infrastructure necessarily, because some of the beneficiaries will always be to aVord to payfor it. Q247 John Barrett: Turning to private sector investment in agriculture, it seems to me that there Dr Bennett: Chairman, it is also useful to look at are opportunities there in transport, infrastructure some of the success stories. I think some of the most and storage, which would dramaticallyincrease successful micro or small irrigation schemes have agricultural production and the results that flow been where theyhave been producing high-value from that. It does not seem as though the private produce for a close market and responding quickly. sector, either from outside or from within sub- Producing carrots 300 miles from the market is not Saharan Africa is responding. What do you think going to work. Historicallythere was a huge are the blockages; or is it that there are better investment in irrigation in Africa, in the 60s and 70s; opportunities elsewhere? and there is a famous World Bank report that says Y Professor Palmer: This is exactlythe challenge we most of them are operating below 20% e ciency. are grappling with, as I mentioned in mynote to you. That is because the social model was wrong. They The problem is that there is almost no irrigation in went for a large blueprinted irrigation scheme with Africa. Actually, today there are literally millions of clever reticulation and beautiful engineering without Africans who are dying because we have a drought, asking who were the people who were going to farm and this is quite apart from anything else; this is it and what was the market for. The Gazera worked something that should be at the top of everybody’s extraordinarilywell when it was run like a military agenda—but you are right, it is not happening. In operation; but the moment it became a democratic Africa we have been looking at situations in Zambia societyit did not do quite so well. We need to learn and Mozambique and Tanzania to see whythe the lessons of the past before increasing investment potential is not being exploited. It is quite in irrigation. Small-scale irrigation is where there has straightforward in a way. There is great potential if been the greatest success—little stop dams, small you put the irrigation in; agricultural activity will go vegetable schemes, good for nutrition as well as up because you can control water flows and use good for income generation. Once you start putting modern seeds and get a better modern agriculture, water on food crops, then the rate of return starts to and incomes will go up. However, if you invest in look somewhat less than able to paythe investment irrigation and that does not happen, then you lose all back because food crops have a prettylow value, your money. The challenge is to find a way of and transporting them long distances does not pay creating the infrastructure ahead of it being proven for it. 3414551001 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 66 International Development Committee: Evidence
25 April 2006 Professor Keith Palmer, Mr Michael Pragnell and Dr Andrew Bennett
Q248 Chairman: Manyof the schemes have been multinational companies—but also the farmer s destroyed of course in Zimbabwe, but you did have themselves not necessarilyhaving the technical large-scale farms there which did invest. expertise to move forward? Interestinglyenough, when we were in Malawi the Mr Pragnell: The wayI would think of public/ President said he had invited Zimbabwean farmers private partnerships is slightlydi Verent. For a to undeveloped tracts of Malawi to see how they companysuch as ours, investing in excess of $800 would applytheir techniques. I think we all agree million a year in R&D, in many areas at the leading and understand the need for small-scale farming, but edge of technological development at one extreme, is there scope for both? Is there indeed a need for and at the other extreme our products finding their both? wayinto the activities of subsistence farming in some Professor Palmer: The answer is definitely“yes”.At of the poorest parts of the world, you can consider this moment the agribusiness ventures that are being that there is quite a gap in terms of our core expertise developed in southern Africa are being spawned out and what ultimatelyour products are used for. We of emigration bywhite farmers who have been have experimented with, or had some experience of expelled [from Zimbabwe] and have been invited public/private partnership in Africa—most recently into Mozambique and Tanzania and Zambia to the seeds venture with a Zimbabwean seed company. deploytheir expertise. The whole concept is to create I have to saythat unfortunatelyfor all the sorts of new nuclei where local farmers relyon the expertise reasons that you can imagine we have had to shut of these farmers, but to build a scheme so that the that down at the end of Februarythis year.It was benefits are extended out to a verylarge number of going nowhere, as were manyother things verypoor farmers who would not be able to do this associated with agriculture and other activities in without somebodyproviding the nucleus of services Zimbabwe. In China, on a much larger scale, we required to make these profitable ventures. It is very have had a much happier experience. We partnered interesting that governments are understanding this with two or three other producers to invest in a major herbicide manufacturing plant, which we time around, for example the importance of giving commissioned in 2001. We coupled that then with secure land tenure, long leases or freehold; that they training programmes for verysmall farmers on the are creating the conditions to allow people to do south-eastern coastal rim of China, where the farming on a commercial basis and then asking average farm size was about half an acre. We put donors to support the outgrower schemes around energyinto training the farmers, and partnered in those, which will benefit poor farmers. the establishment of a manufacturing venture, which has proved to be successful. We have got the system Q249 John Barrett: Will there always be that conflict running. Now, instead of hand-weeding, theyare though between keeping relativelylarge numbers of using a herbicide which enables them to repeat the smallholders working in agricultural areas as against crop, whereas before theycould onlyhave produced that drift of people towards the city, which would a single crop—now theyhave a double or even a relativelyincrease productivityon the land and triple crop. tackle the povertythere, because if donors are too heavilyfocused on supporting smallholders it may Q251 Richard Burden: How far was that experience well be theywill never deal with the povertytheyare specific to those particular circumstances? trying to tackle? Mr Pragnell: The wayI described it, it was very Mr Pragnell: You touch on an extremelygood point specific, but the skills that we drew on were skills we because if agriculture is to playthe role it can playas deployin manycountries in the developing world in a catalyst in economic development overall, terms of training. We have active training improving productivityhas got to be priority programmes going on throughout central America number one. Having made the commitment to and manyof the countries in South East Asia. agriculture, it is then productivityimprovement, and Indeed, we have training programmes in some of the that means progressivelyless employment.As most sophisticated markets as well. We regard that familymembers go o V to do other things and as part of our mandate of driving sustainable participate in other parts of the economy, whatever agriculture so that as we are introducing products we theymaybe—even if it is onlyopening a trade store also ensure that farmers understand how to use them at the end of the road to sell produce, at its and the benefits that theycan bring. The investment simplest—that demands input technology. To in the manufacturing plant in China was a major imagine we can hold smallholders forever in, dare I investment but it meant that we brought the whole call it, a form of economic Utopia, i.e., where things political system at the provincial and national level do not change, would not be right. into what we were trying to do, with a lot of encouragement from both. Professor Palmer: It is an important question. We Q250 Richard Burden: This follows the same should not be trying to invent new things when there discussion and it is about the role of public/private are examples of successful partnerships in existence. partnerships in terms of small-scale farmers. Can I have alreadyreferred in the evidence I submitted 4 you point to some examples of good practice to an NGO called Technoserve America, an wherebythose sorts of partnerships have been able agricultural focused NGO that is extremelye Vective to intervene in situations where the scale of involvement is not reallyattractive to large 4 Ev 187 3414551001 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 67
25 April 2006 Professor Keith Palmer, Mr Michael Pragnell and Dr Andrew Bennett in understanding that what you are trying to do is Q253 Joan Ruddock: You do when it is GM. create sustainable business ventures and then access Mr Pragnell: We do not. If however we want to see government donor grant moneyto specificallymake productivityimprovement of the sort I have just them aVordable for the group of people who cannot described in the example, which I admit is the best aVord to paythe full cost. Theyhave recently example of the lot—but you see it in other crops as produced a report that I referred to. In Uganda there well—then saving seed, you go in the opposite is a fishing industrythat is now well developed where direction—because actuallywhat happens is that Technoserve were the glue, the integrator on the yield progressively degrades if you operate ground, that got all the parties together in a business exclusivelyon saved seed. Not saving seed is another sense and made it a great success. There are a wayof enhancing value on a per-unit area, and number of other examples. Theyshow very therefore output and therefore revenue. It is consistentlythat if these are set up as aid projects, something that I recognise is said, but the realityis theyare almost alwaysunsustainable; if theyare set slightlymisunderstood. The reason the up as facilitating small business development, Zimbabwean venture failed was, as you can imagine, African national private-sector people working with nothing to do with that; there were all the sorts of and with funding from donors, you can create over reasons we read about in the newspapers. The trial in Burkina Faso was an insect-resistant cotton with time, with a lot of commitment and eVort and a gene introduced into the cotton. getting all the infrastructure in place as well, a really thriving industry. These are the models I think that are the onlywayto do this. Some bits and pieces Q254 Joan Ruddock: It was GM. without all the other bits and pieces does not work. Mr Pragnell: A GM cotton. Regulation is extremely important in our industry, be it in use of chemicals— for obvious reasons—or the toxicological Q252 Joan Ruddock: I wanted to take up on up the environment where considerations have to be taken issue of the Zimbabwean seed company. Obviously, account of, and of course we were introducing a GM it has failed but it is a model that you might want to product. There is a similar frame that has to be replicate elsewhere. Is this not a problem as much as created nationally, and what we did was help the donors giving out free packs, in terms of the Burkina Faso Government to set up a regulatory development of the local seed companies, because system which would enable them to control what once multinationals get involved the criticism is that mayeventuate, and it was verysatisfactory.You often the indigenous varieties are lost and the maywell then ask, should not somebodyelse do that—“don’t you have a vested interested in all of farmers then cannot replant seeds from their own this—you are the supplier?” In some senses that is crops because theymove into the ownership of the true. However, we are also the developers of the multinational companies? Prices inevitablybecome knowledge in this area and we work with regulators such that local farmers maynot be able to a Vord all over the world, when asked, to help them move those particular seeds. You saythis is a successful their regulatoryprocesses and rulings forward. potential partnership, but there are manycriticisms, Seventyper cent of agricultural research now is in as I am sure you are aware, of why that is not so. In the private sector, so it is logical that the know-how your evidence you wrote about the Burkina Faso will come from the private sector in the development and how you were engaged there in trials that of these regulations. required a new regulatoryprocess, and I would like Dr Bennett: The conservation of indigenous planting to know what those trials were trying to achieve. material is a key issue for everybody. That is why the Mr Pragnell: If I take the seeds question: seed Global Crop DiversityTrust was set up, of which varieties varyenormouslywithin anygeography, Syngenta is one of the sponsors of the endowment and of course theyhave been developed over many fund and which the Foundation is working on. generations—in some instances hundreds of years There will be accidents. The Consultative Group on quite literally. This is for quite simple reasons. You International Agricultural Research has manyof the want the right seed in the right soil in those specific gene banks, and there have been occasions when climatic conditions. Imagining that it would be local varieties have disappeared not simplybecause advantageous to ride roughshod over indigenous the seed industries but because of civil war and seed varieties probablywould not work. However, various other problems; and maintaining these imagining we might we be able to introduce collections around the world in the public domain technologyin a nearbyarea in the form of new seed under the auspices of the International Treatyon varieties can help in terms of enhancing yield. If you Plant Genetic Resources for Food and Agriculture look for example at the yield curve of maize or corn, is an essential issue that the public and the private as the Americans call it, and you go back to 1900 and sectors need to collaborate on. finish in 2000, the yield curve makes a steady improvement in terms of productivityof the order of Q255 Mr Davies: I am certainlyintrigued by 2 percentage points everysingle year.That progress Syngenta’s interest in Africa. As I understand your is to be encouraged rather than discouraged. As far market, you are in the business of producing high- as saving seeds is concerned, nowhere in the margin crop protection agents—fungicides, developing world would we ever discourage farmers herbicides, insecticides and so forth. Since the from saving seeds if that is what theywanted to do. marginal productivityof these chemicals has been However— falling rather dramaticallyin the United States and 3414551001 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 68 International Development Committee: Evidence
25 April 2006 Professor Keith Palmer, Mr Michael Pragnell and Dr Andrew Bennett the EU, you have increasingly got into developing Q261 Mr Davies: How are we going to get from new, also high-margin, cloned seed types, which “now”—because we basicallyagree about the lack obviate the need for these chemicals. But these of market for your products and technologies now— things are all high margin, and you have just said to “eventually”? What sort of timescale and what you have a very high R&D budget and have to sort of— reclaim that in the high-margin products that you Mr Pragnell: It starts bygetting agriculture on the are marketing. In Africa—at least north of the public agenda, which is one of the reasons we Limpopo and south of the Sahara, you have, it seems welcomed the opportunityto participate in the to me, verylittle in the wayof a realistic market for seminar at Number 11 Downing Street and we high-margin products of this kind. You have small launched this book. It is getting recognition that farmers with no capital and usuallyno title to the agriculture is not just about farming; it is a land that theyare farming. Therefore, while I can see fundamental stepping-stone in economic that Africa is attractive as a regulatoryenvironment development, or can be, for all the reasons we for running trials on new crop types, such as in covered earlier. However, government has a role to Burkina Faso, in terms of your mainstream business play. There are and have been issues in governance I do not quite see what the prospect is. It maywell in manycountries in Africa, which I am sure many be that theoreticallyyoucould get verysubstantial of the Committee are as familiar with as we are. increases in yields by applying massive amounts of agricultural chemicals in Africa, but not surelyon Q262 Mr Davies: Governance? the present structure of African agriculture and with Mr Pragnell: Governance. Without a level playing- the present purchasing power of African field and a predictable, legal and judicial system— agriculture? and there are issues around land tenure and, frankly, Mr Pragnell: Approaching 30% of our sales are to issues around corruption. All of that is true. We emerging markets, which is a veryhigh proportion believe that there will be progress provided we are of our sales, and this is because agriculture in many sensible—and our sales in Africa are volatile—we do emerging markets is a very dynamic activity. not see a steadygrowth in sales; sometimes we see a dip in sales, as we did last year. Q256 Mr Davies: You are including Asia there, Q263 Mr Davies: Basically, we have got to redesign which is verydi Verent. Africa from the social and political point of view in Mr Pragnell: I am including Asia, Latin America, order to— central America— Mr Pragnell: More or less, if you like.
Q257 Mr Davies: Verydi Verent—diVerent land title Q264 Mr Davies: In the meantime, what can donors and, as you rightly say, in China proximity to— do? You saythat giving out seeds is not a veryclever Mr Pragnell: The herbicide example in China is a thing to do, and giving out food also—we know product that was developed 40 years ago; it is not about the diYculties of doing that. one of your leading-edge very high-margin R&D- Mr Pragnell: Except under extreme conditions. intensive that we have invested 200 million to bring the product to market et cetera. Manyof the Q265 Mr Davies: We all agree under extreme products we sell in Africa are extremelyeasyto use. emergencyconditions, of course. There have been It is not that theyare— some criticisms byDr Bennett about investment in irrigation schemes and maybe other forms of infrastructure and roads. What is your message? Q258 Mr Davies: What proportion of your sales is Dr Bennett: I did not criticise; I counselled caution. in Africa? Let us learn the lessons of historyand make sure we Mr Pragnell: Approximately$160 million. do not make mistakes again. We cannot redesign Africa. Africans redesign it and that is whywe Q259 Mr Davies: North of the Limpopo! should work with certain organisations like Mr Pragnell: I cannot give you the exact number but NEPAD. Thirdly, but even more important, is that it is of the order of around $80 million in sub- there are a lot of people in Africa, and there will Saharan Africa. We are the largest single supplier continue to be more of them, and theywill need to and verylong-established. We have got people on eat, trade and manage. Our job is verymuch to the ground— support those processes. That requires ongoing knowledge and intelligence and that is where I find, particularlythese daystalking to people who are on Q260 Mr Davies: Probablyless than yoursales in the ground from the companies—know what is one state of the Mid-West or one province of France, going on. If you ask them what needs to be done, I should imagine. theyhave some verygood constructive practical Mr Pragnell: Certainlyless than one or two states in ideas and I would like to work with them on those. the mid-west of the United States, yes. But the Professor Palmer: Even though there is not a single reason whywe are there is that we have a long-term answer one has to allow, within the constraints—we view, speaking candidly. As long as we are washing cannot wait to redesign the continent—there is a lot our face—and we are—then we believe that of initiative and imagination in some of these eventuallythere will be opportunities for— countries in the private sector. If you can identify 3414551001 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 69
25 April 2006 Professor Keith Palmer, Mr Michael Pragnell and Dr Andrew Bennett well-motivated individuals who want to take a land tenure arrangements in Africa are traditional leadership role and develop agriculture, we should and go back longer than I do. Myview has been that find mechanisms for supporting them. It takes a lot you need to create in the interim, as it were, a of time and it is diYcult, and the failure rate is very facilitation mechanism because farmers cannot buy high. There is a role for donors in providing what we the inputs theyneed to g row crops, theycannot pay sometimes call patient capital. It does not earn the for infrastructure unless theycan get credit because sorts of rates of return that Syngenta would require they pay for it ultimatelyout of the sale of product at on its investments, but would be targeted on the end of the season. At the moment there is a huge building infrastructure and all the services to make dearth of available credit for those sorts of purposes. these businesses successful, but the absolutely The absence of land rights which you can secure essential element is a local private sector player that credit on is one reason, but onlyone of the reasons has the imagination and the leadership capabilityto for that. The schemes that I have been involved with drive it forward. Once you find such a situation it are credit guarantee facilities where lenders benefit will take years before these will mature. not from collateral in land but in part on some sort Mr Pragnell: Can I give two examples of where we of guarantee facility—in some respects like the are seeing things that have been done now? Perhaps guarantee schemes which have been available to surprisinglyRwanda is one such where the Minister American farmers for a verylong time and which of Education, Science and Technologyhas within have been made available in lots of countries in the his purview agricultural and environmental Asian area to facilitate the banking system providing development as well. He of course is Rwandan. He working capital. It is very, very important how you was educated outside Rwanda in Belgium and was a set such things up because in the past in Africa they universityprofessor for several yearsbut was invited have had guarantee schemes which have been used back to come and do preciselythis job. The to channel resources inappropriatelyand there has Rwandans have a veryclear view, and a clear series been a lot of corruption and a lot of verybad of verypractical initiatives theyare taking to rebuild investments were made because people were taking their rural economy, which will be of enormous risk onlybecause the risk was being taken bythe benefit to the economyof Rwanda overall. That guarantee facility. I am very conscious that if one would be one example of an African government takes the view that that sort of facilityhas a role to that is seizing the problem and setting about it with play, which I strongly believe—and the devil is in the a series of practical solutions. We are seeing detail—if you keep the devil out of the detail you something of the same thing but in verydi Verent have a real possibilityin Africa in particular to make circumstances in Kenya, where we have taken the progress because there are some verywell- opportunityto invest in horticultural development researched studies that have been published recently for the development of exporting. So we are able to that show the absence of working capital is a critical produce young plants, as they are described, the tiny constraint on quite a lot of poor farmers. little things you see in pots, year round under glass, employing about 500 people, so we are providing Q267 Ann McKechin: It has got to have business employment. We are providing know-how. It is a discipline and— form of technologytransfer, if youlike. But we are Professor Palmer: It has got to have a thorough also developing the burgeoning horticultural business case and involve the beneficial sharing of industryfor export markets. We tend to focus on all risks, otherwise you have moral hazard problems, things that have not worked and gone wrong, but and it has to be structured so that judgments about there are also examples, as we have seen, where who should get it and on what terms is taken by things have gone right. competent professionals not bygovernments. In the past, governments were taking those decisions and Q266 Ann McKechin: Professor Palmer, on a regular those decisions were not guided bybusiness reality. basis our Committee has debated land tenure and the problems of land tenure as Quentin Davies Q268 Chairman: Professor Palmer, you talked about mentioned, is how people are able to use credit to the need for infrastructure investment, but whyis it extend their businesses or their smallholdings. I am so diYcult to prioritise that and diYcult to get a little cynical in that my previous occupation was as funding for that? Everywhere we go, people say, “we a propertylawyer,and land tenure reform is a need infrastructure; we need roads and water” and tortuous and long-term proposal. There is also a yet it seems to be very diYcult to turn that into question about whether or not the current value of reality. the land in manyparts of sub-Saharan Africa will be Professor Palmer: Talking about infrastructure, it is of anyvalue to take credit from. You have been a verybig basket of things. People are usuallytalking involved in initiatives in terms of trying to provide about town water systems and power stations. I credit in agribusiness in southern Africa. Do you think the most compelling infrastructure from your experience consider there are workable investments we are involved with are verysmall- alternatives to this rather than simplylooking at scale; it is stringing electricitywires into an area to land reform as the answer in relation to credit? provide power for small irrigation systems, which Professor Palmer: The ultimate solution where land involve small amounts of money. These are not tenure arrangements are such that you cannot get businesses that can be privatised in a sense; these are credit—is to change the land tenure arrangements, extremelyvaluable local initiatives where we are but as you suggest this would take generations. The trying to find local people who will invest in them. 3414551001 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 70 International Development Committee: Evidence
25 April 2006 Professor Keith Palmer, Mr Michael Pragnell and Dr Andrew Bennett
The reason it is verydi Ycult to get local private Professor Palmer: I cannot speak for them. investors involved is that theyhave great di Yculty accessing money to invest anyway, but the risks I Q274 Chairman: Wherever you go, if you ask any mentioned earlier—if you build this infrastructure small business about expansion or development, and if the supplyresponse on the land is not there, theywill say“access to funding”. When youask the you lose all your money. This is an inherently very financiers, they say, “there is no shortage of money”. riskyinvestment until it has matured and is Theyall want bigger projects that are easier to generating results. The idea embedded in Guarantco manage. Theycannot be bothered with all this hand- is for donors to take some of the earlyrisks, holding, and it seems to me that in Africa it is structured on sustainable business models, and then especiallyimportant. I have a little bee in mybonnet require people that benefit later when their incomes about the role of the Highlands and Islands have gone up and theycan a Vord it, to pay Development Board in its earlyyearstwentyor forty something back so that moneycan be reinvested in years ago where it put up money which produced a doing more of that sort of thing. good return, but when challenged as to whythey need to exist, their argument was that actuallythe conventional forces would not do it but the overall Q269 Chairman: That says what is required, but why return was quite respectable. Is that what you are have people not got the money? They do not have trying to do? the security. How do you crack that problem? Professor Palmer: It is what we are trying to do. At Professor Palmer: Through the credit enhancement the moment the development finance institutions, schemes that I have just mentioned. You have the not just the World Bank but everyone I have spoken possibilityof using donor resources to share some of to, saytheywould like to have more exposure to the risks of building a sustainable venture. agriculture, but none of them are doing it. There is hardlyanyinvestment. All we are about is tryingto create the business environment in which you can Q270 Chairman: Are you confident you will have make these things work. It is too earlyto sayit is the funding? definitelygoing to work, but the intelligent use of Professor Palmer: We are doing verywell at the donor moneyon a verysmall scale can catalysethese moment. The infrastructure ventures we are other private investors coming in, and involved in are showing real signs of some success, development finance. and I am prettyconfident that this can be made to stack up—if we get both the development value and Q275 Chairman: I do not want to ask you for a the commerciality. disproportionate response, but do you have any capacityto give us a case study? Professor Palmer: I attached as an appendix to my Q271 Joan Ruddock: I was interested at the fact that evidence some 14 case studies because I think there would be actuallydonors because when we sometimes these claims are unconvincing unless you were in Africa recentlywe heard both the EU and the have seen the evidence. One particular one that we World Bank saying that they were looking at major are veryproud of is in Uganda where there are some infrastructure investment in order to support verypoor farmers who are out-growers to a palm oil agriculture, amongst other things, but certainly project that is going forward there, and theydid not support agriculture. I just wondered if, on the scale have access to a ferry. It is on an island and they did you are talking about, those two institutions are not have access to a ferrythat provided an adequate relevant, and do you get support? a service for transporting the crops. The roads were Professor Palmer: Theyare veryrelevant in a substandard; the electricitydid not exist and there particular way. was no water into the houses. In less than 12 months we have put together a project that will benefit 5,000 out-growers. It will cost almost a trivial amount of Q272 Joan Ruddock: What kind of conditions do money. That is because although we are only theyput on? spending a trivial amount of money, we are bringing Professor Palmer: What theyshould do, in myview, in other partners who will fund it once the is not make big loans to governments; theyshould be structuring of the project is put together. All the putting funds into these much more locallysensitive things we are trying to do is catalysing and creating operations, providing resources to people who can possibilities so that other people will bring their do things on a scale of a $5 million project—it is a moneyto the table. huge amount of moneyin Africa, but does not get noticed in the World Bank. I do not think the World Q276 Joan Ruddock: It raises such worries in many Bank should be doing all of these things; I think they people’s minds immediately: I hope this is a should be funding it and finding more nimble sustainable project environmentally. channels to implement them. Professor Palmer: Please rest assured because we are spending public money, but we would anyway have the highest environmental standards. Q273 Joan Ruddock: That is myimpression too, but Chairman: Thank you very much indeed. I am sorry I suspect that is not what theyplan to do. about the time but it has been veryuseful. 3414551002 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 71
Tuesday 9 May 2006
Members present:
Malcolm Bruce, in the Chair
John Barrett Richard Burden John Battle Ann McKechin John Bercow Joan Ruddock
Witnesses: Mr Bob Fitch, Project Director, Financial Deepening Challenge Fund, Enterplan, and Ms Ann Grant, Vice-Chairman, Standard Chartered Capital Markets Ltd, gave evidence.
Q277 Chairman: Good morning to you both and I had some experience of the multilateral thank you very much for coming in to give us organisations. I also worked brieflyfor Oxfam in the evidence. As you will know, the Committee is really ’80s and ’90s. As you say, a lot of people have given interested in how we can grow the private sector in a lot of evidence. I was here for the DFID evidence poor countries as a means of improving economic session, and I think that the DFID memorandum5 support for the government and, obviously, set out veryfairlythe keyareas to work on, which economic conditions for people. I think what we are themselves have been set out bythe World Bank’s reallyinterested in is what works. I have to say,with report, I think, on “Doing Business in 2005”6. I think the brief, it has got lots of indications of great the fact that growth and jobs are keyto development initiatives that people are working on and attracting and that the private sector is keyto both is now funds to, but we are rather short on examples of accepted wisdom, but the actual mechanisms and what reallyis working and in particular of the ways of working and, indeed, training and interaction between the private sector and the background of people involved in development is development agencies, the extent to which theycan still quite new. I think one of the reasons you have work together or the extent to which theyhave not got the examples of what works and the track discrete responsibilities, so if you can bear that in record, if you like, on the private sector working well mind that would be helpful. Also, bywayof and smoothlywith development organisations introduction we would reallyvalue yourviews on across the board is because that is still new for both what you think our own Department for cultures. There is a cultural problem of how you see International Development can do in encouraging the world, which I think is now prettymuch sorted, private sector development; whether you think they but for people who were brought up, as I was, on the are good at it and what their strengths and sort of Nyerere school of development studies, weaknesses are, and, to the extent theyhave where you were talking about basically socialist strengths, and we know as a department theyhave models of redistribution in Africa, especially, but in this context, what you think they could most although those models have not worked and have reasonablyfocus on in waysthat would be positively not been found to be productive, there are an awful helpful for enabling the private sector to do the lot of people for whom that is the basic training business and encourage growth, jobs, and which it is diYcult to accommodate to the new improvement in poor countries. Ladies first? models of the private sector being a force for good Ms Grant: Thank you very much, and thank you for and part of the solution for poor people rather than the opportunityto give evidence today.I assume I an exploitative and negative force, especiallyagain am here on the basis not onlyof myactuallyrather in Africa. I think the intellectual work has now been new job with Standard Chartered but also because I done and we are a long waydown that road but you have been involved on the interface between are talking about people in long-term business, business and development most recently—and whether it is NGOs, governments, multilaterals, for inspiringlyfrom mypersonal point of view—in whom working naturallyand easilywith the private South Africa where the relationship between sector is still quite new. business, government and the civil societyis very special for historical reasons. But also where I think Q278 Chairman: Even allowing for the fact that the all three groupings see themselves as playing a part majorityof people in poor countries are in the in the national project, in nation building, and have private sector, theyare at a verylow level and it is the communication systems and mechanisms coming onlyform of economy,so although theyknow it is from the historywhich do mean theytalk about the private sector it is not active enough and does not economic development and national development deliver enough for them. all the time, though it is obviouslya verytense Ms Grant: Exactly, and again a lot of the problems relationship, as in manycountries, some of the time. are of terminology. When a lot of people in Before that, I was the Africa Director in the Foreign development, academics and others, thought of the OYce in London when DFID and the Foreign OYce separated, and that was also veryinteresting and 5 Ev 127 6 important experience for me, and then before that I World Bank/ International Finance Corporation/Oxford University, DoingBusiness in 2005: RemovingObstacles to was in New York in our delegation to the UN, where Growth, http://www.doingbusiness.org/Documents/DB- I was also on the board of UNDP and UNICEF, so 2005-Overview.pdf 3414551002 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 72 International Development Committee: Evidence
9 May 2006 Mr Bob Fitch and Ms Ann Grant private sector in the past theymeant basically opportunitytosubmit pape rs and to come in. I think multinationals working on a global scale, and that that is a Civil Service wayof working that does not has been the private sector going into Africa. As you match up veryeasilyto the waythe private sector say, the fact that 90% of people in Africa are in the works and I think we have not got that much private sector and not in public sector employment is tolerance for another lot of summits, another lot of again something I think you need to keep repeating discussions—discussions on policyin particular. We because it helps to break down all the stereotypical would like a quick run-through of what is possible, ways of looking at the relationship between business and then a follow-up with the business as to who is and the state and poor people, so I think it is a new going to take it forward and a small team to actually area. We verymuch welcome, certainlyin Standard work on it, so that we learn bydoing rather than by Chartered Bank where we work in diYcult and talking about it, and we are veryup for that. For emerging markets, Asia, Africa and the Middle East, looking at pilot schemes and at diVerent ways of the new emphasis bythe Secretaryof State in his sharing risks on new kinds of funding we are already speech on the private sector, which mentioned the involved in a lot of Business Action for Africa’s private sector verymuch in the terms youhave just discussions and we have a verystrong government done, Mr Chairman, and where it is obviouslyhigh relations team doing that. When it comes to doing on the agenda of DFID to develop new alliances, business and promoting business, our focus is on new ways of working, and a much more intensive small and medium businesses in Africa and dialogue with the private sector. We certainlyas a elsewhere in the developing world and that is where bank have got that dialogue. We have been meeting we would like to look at working together with various oYcials, especiallythe Financial Inclusion DFID. As we found in the UK, there is a limit to Team, over a period of months; we have got some how much government servants can get involved meetings coming up now, verymuch focusing on the and promote and develop business on the ground White Paper agenda on this agenda. We contributed themselves. The important things are the ones we to Business Action for Africa, and I verymuch know about—the investment climate, the regulatory commend them, and we sign up to everything that frameworks, the enabling environment. the Business Action for Africa submission to this 7 Committee said ; which are the keyareas to work Q279 Chairman: We have other questions on that on, where we are at the moment and how far we need but, Mr Fitch, it is the interaction between the to go. Certainlyfor us in Standard Chartered, and in private sector and DFID that is of interest to us and mypersonal role as an adviser in that bank, we are you have the experience of the Challenge Fund, but veryopen to new waysof working, to new ideas, to briefly, what do you think DFID’s expertise in this new risk sharing whether it is funding, looking area is and how do you think you can best interact together at things like credit rating for countries, to stimulate the private sector? I take Ann Grant’s where we have expertise and experience which point entirelythat private sector is private sector and Y perhaps NGOs and government o cials have not, governments facilitate or get in the waybut cannot and where we would like to relyon our skills and actuallydo it. experience for the agenda which is being developed. Mr Fitch: Yes. I think DFID’s strength over the last We would like to have, and I think we do have, the seven or eight years in this area has been its opportunityto contribute as DFID decides what it innovativeness and willingness to challenge can best do in individual countries, especiallyAfrica, perceived wisdom, and part of that has been very but more broadlywe want to be part of that, and we much looking at this private sector engagement think we have the dialogue with William Kingsmill issue. I think theyhave had one or two fundamental and others that we need in order to make that input. realisations along the waythat has helped that. One Finally, on the ways of working, I did not realise of the things theyhave realised is that the private until I joined the bank that there is actuallya global sector needs to get on with doing business which is shortage of financial professionals; there are not making a profit. Whereas profit-making was enough people in the banking sector to go around. perceived to be perhaps non-desirable in the Theyare constantlybeing poached from one bank to development world eight or 10 years ago, DFID has another, there are huge new demands because of led a process of embracing that where it is seen to be growth from China and India for that kind of ethical and coincidental with its own ambition, international expertise, and it is verydi Ycult, even which is to help reduce poverty, and I think one of for a bank like mine that is verykeen to participate the more enlightened parts of our approach recently in all this, and we do not have people to spare to has been to engage on a business-to-business type of come to two-daymeetings or to develop policy agenda rather than looking at more of a kind of documents. We need to get sharper and smarter and corporate social responsibilitytypeagenda. The briefer. For example, I am going to suggest to corporate social responsibilitymaybe part of the DFID, if we are going to look at new Africa motivation of the private sector for getting involved, Challenge Enterprise Fund, that we have somebody but I think what DFID has realised is that that type to come to the bank to do half an hour’s quick of involvement is not likelyto be sustainable. The presentation where I might possiblyget some of my most sustainable private sector participation is senior colleagues, especiallyif it is before work really where it is driven byprofit, so what DFID has very gets going in the morning, rather than the much gone about is looking for that coincidence of developmental and commercial interest, and that 7 Ev 161 has been extremelyimportant. Along the waythe 3414551002 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 73
9 May 2006 Mr Bob Fitch and Ms Ann Grant other realisation theyhave had—and I saythis at the Ms Grant: I would agree with all of that. I think it risk of you saying: “Well, you are a private is not an either/or; it is a commonplace thing to say. consultant; you are bound to say that”—is that they When you look at who is going to do something realise to do this business, DFID themselves are not about it, for us as a banking financial services sector the best bodyto do the business typeof interaction. the regulatoryframework is veryimportant. It can The private sector has some diYcultyin having have a multiplier eVect and be system-wide, but it is constructive conversation with civil servants, a means to an end and, if it is not implemented however good and enlightened theyare, and I think correctlyand if youdo not have the commitment or, their willingness to look at ways of outsourcing that indeed, the people to applythe regulatorystandards type of intermediary role has been very important as then that is a genuine problem. There are veryfew well in pushing this agenda forwards. countries where there are enough people to tackle regulatoryrequirements, even once theyhave them in place. Those are the kind of things which are very Q280 Ann McKechin: The current fashion for donor important. For us certainlyone of the things we do strategyat the moment in private sector around the world is help regulators in countries development seems to centre on investment climate where we ourselves are regulated to make those work, and I am trying to get some indication of what systems work, and that is an area of expertise where the relative importance is of the financial sector we can reallyhelp and where we are alreadygetting development as part of that, and how you would involved. The question is whether I suppose we do attach the same significance to financial sector that on a systematic or structured basis, but I think development as you would to corporate governance that is one example. Another example where I think or infrastructure development, because all of this is the financial sector could be reallyimportant is verykeyto current thinking in DFID. working on the credit ratings of countries. Again, a Mr Fitch: I would not even like to tackle the issue of lot of multilaterals are doing work on that and which is more important. We have to accept theyare public sector NGOs and governments, but in the all extremelyimportant elements of the same banks people do credit rating for a living and some approach and integration is often the key, I think, to of that expertise could be quite usefullyborrowed making these things work and perhaps one of the and have a multiplier eVect. It is a bit like weaknesses, the integration between those diVerent microfinance; it is not an end in itself but something aspects of an economic development programme is which would enable people to join the formal lacking. The financial services and the development economyand to prosper, but theyare not going to of it is essential but I think we have to be clear, or at do it because theyhave microfinance. That is one of Y least myown view is that financial services are not the things that is a necessarybut not su cient V the driver of development; theyare an enabler. The condition for taking o . fact that people can get moneyis going to enable their development but it should not necessarilybe seen as the driving feature of their development. Other things should be driving development and financial services should be empowered to respond Q282 Ann McKechin: Donors are sometimes to whatever kind of commercial opportunityarises. criticised for being better engaged with large-scale enterprises and multinationals rather than Small and Medium-sized Enterprises (SME), and certainly Q281 Ann McKechin: So it is a secondaryline of in developing countries there seems to be quite a gulf development? between the two sectors. There is in our own country Mr Fitch: Yes. I think this whole issue of sequencing but I think it is more marked when you go into the is extremelyimportant. When we look at the private developing area. Do you believe that is true of DFID sector engagement in development, there are some in particular and, if so, how would you believe they sectors you could identify where there is potential should address the needs of the SME sector as well for systemic change in developing countries, and as the large-scale international companies theyare financial services is one of them because it reaches alreadyengaging with? out to everyother service. Information and Ms Grant: I think it is a spectrum. Especiallyfor Communication Technology(ICT) maybe another things like the regulatoryenvironment youdo have because it has the abilityto improve information to deal with the big players globally but DFID’s transfer in a waywe could not dream of even 10 tradition is to work at grass roots and with quite years ago, lack of information being one of the small people. What is happening now maybe is a critical impediments to development, so I think we rethinking, as Bob and the DFID people who gave need to look at sectors having diVerent potential evidence to you said themselves, looking at the roles, and infrastructure has been given quite a high whole spectrum of DFID’s activities with a view to degree of focus bythis Committee. Clearly,also, so looking at the relevance of the private sector. So I do manystudies into the impediments of private sector think there is a focus obviouslyon microfinance, growth keep coming back to the fact that financing microcredit, on small and medium enterprises. The is often seen to be the critical one but infrastructure diYcultyagain, which is something that all is often the one that gets pinpointed most, governments find, is of getting involved at the right particularlyamongst small businesses, as the real level with people who are extremelynumerous and impediment to their development. perhaps not easilydealt with in a collective. 3414551002 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 74 International Development Committee: Evidence
9 May 2006 Mr Bob Fitch and Ms Ann Grant
Q283 Ann McKechin: Do you think we should be the earlier challenge fund initiatives and is one of spending more time trying to build up connections the things that DFID should be applauded for, for between the SME sector on the one hand, and the seeing that potential connection. larger multinational corporations on the other in Ann McKechin: Should it spend more moneyin terms of supplychains, distribution chains? These terms of training, to b e specific? You have pointed seem to work in some areas but theyare veryweak, out lack of capacityin financial advisers even and there seems to be no connection in other parts within your own organisation, and it seems to me at all. that training and technical skills— Ms Grant: I think most multinationals have a very strong network of small and medium businesses. It Q285 Chairman: Y Think of the role of the banks in is di cult to generalise, and it depends what this countrywhich is taking somebodywho has an business you are in. You can fly in, do it yourself idea and saying: “You need to understand the and flyout but that is perhaps not the norm, and basics of keeping a cashflow and how to do a certainlyfor a bank we have a renewed and a business plan before you go and talk to a bank or strong focus on small and medium enterprises anything else”. Is there a role in poor countries for everywhere we work, and we do spend a lot of time organisations like DFID to help people at that with our suppliers and customers. So I would not stage? saythere is no attention paid to it but I think it is Y Y Mr Fitch: There is and there has been plentythat di cult to get it right, and it is di cult to generalise has been done. The big diYcultywith that across countries as to what works. But it is also a approach is, again, sustainabilitybecause services job for the countries themselves to look at their are often set up on a free service basis, often with own relationships with business and their own a lot of expatriate overhead built into the delivery, communication not just with the top business so as soon as you take away the external subsidy people who maybe advise the President on a regular that process stops, and this has been one of the basis, as is the case in South Africa, but also to challenges. How do we prevent things coming to a make sure there is the right kind of support and juddering halt as soon as that external assistance communication with people lower down the comes to an end? What is the smooth exit plan? economy. That is the real challenge. There is no doubt that Mr Fitch: The important words in your original training is an essential part of it, and capacity question were “engaging directly”. By definition building, but it is training and capacitybuilding at donors cannot engage directlywith SMEs, there are government level as well to change the mindsets, so too manyof them, and in terms of making impact that when you are developing the regulations and on development you have to have an impact on a the legal frameworks it is not just a theoretical large number of SMEs, and in the past—and still, construct but something that theybelieve in and in fact—there is a huge amount of moneyspent by want to pursue. donors on trying to promote development of the Ms Grant: Even on the training it is a question of V SME sector but it is done in a verydi erent way. who does it, and I agree verymuch with Bob. We It is being done increasinglythrough looking at the had an interesting conference last year in Standard enabling environment, and in the past it was done Chartered called “Banking the Missing Middle” for looking at things like business support services. The people who are not quite subsistence but also not real challenge in SME development and micro regular bank customers, and we launched our own enterprise development is how you foster their small and medium enterprise-sized business in development without reallydisrupting the market. Africa last year also, helping people to get to the point, where theycan bank, and then there is a Q284 Ann McKechin: Global market forces? point of investing in future customers. If you can Mr Fitch: This is where, you are absolutely right, get banking people to help with business plans and bringing bigger businesses into the supplychain with financial literacyand get customers to first Y mechanisms is something which worked very base, that is probablymore e cient than setting up successfullyin some of the east Asian targets, where some kind of DFID-led super structure which then theyattracted inward investment and made sure it hands them over to a bank. So it is getting banks was well connected then to the indigenous economy to look at the financial incentives for them to invest and the benefits moved downwards, and DFID in future customers looking further down the line, again have tried to look at this with the Business rather than for DFID to set up its own training Linkages Challenge Fund and theyhave worked on programme, for example. trying to promote that kind of connection. I think much more could be done and much more strategic Q286 John Bercow: I am puzzled, Chairman, eVort could be done and this is where the real because I just picked up on what Mr Fitch said a opportunityis with the investment climate facility moment ago about the diYcultyof the exit strategy and the Africa Enterprise Challenge Fund working and the great problem of the sustainabilityof such in parallel. What was lacking perhaps in earlier business advisoryservices, how to construct a challenge fund work, where it was kind of a business plan and so on, and I understand in part bottom-up initiative to tryand encourage business but not altogether, if you will forgive me saying so. to do things, was that top-down initiative also to It does not seem to me that intellectuallyit is address enabling environment issues, and I think anything like on a par with Einstein’s Theory of that is one of the things we have all learned from Relativity. There is no great complex issue to 3414551002 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 75
9 May 2006 Mr Bob Fitch and Ms Ann Grant resolve here and, with reference to what Ann said, Chairman: We have more detailed questions on this at the risk of being provocative I do not think there from colleagues so you will not be let oV the hook! is a huge debate to resolve as to whether it is a Mr Fitch: I said earlier that I thought one of the DFID superstructure or a business-led and then strengths of DFID was its innovativeness but in business-continued initiative. The question is, if it manyorganisations a strength can also become a is accepted that this is supremelyof benefit in weakness, and I think sometimes there is too much establishing and building a business class and of looking for new answers rather than seeing what therefore promoting development, surelyit is not merit there is in existing approaches, and there is beyond the wit of people of good will in public and a tendency—and this is not just DFID but the private sector alike to thrash out an agreed development communityas a whole—to look short programme which, if it is going to yield significant term rather than long. As consultants, as we are, benefits, need not and should not be short-term and we try to detect three-year cycles in development from which, therefore, one should not franklyat thinking and development practice and that is what this stage be speculating overlyabout the exit we expect to see. And the cycles repeat, although strategy. The question is not the exit strategy— sometimes there are new words or slightlychanged when, how, is it finessed—but when will it get approaches. But I think you have a valid point in started, for what period will it operate, and with asking whywe can not have a more stable what likelyresults will it function? Forgive me for approach. It maynot be perfect, but we can deal being slightlyimpatient but it seems that sometimes with those imperfections through implementations. in these situations one can make them more complicated than theyare, and it is not that Q288 John Barrett: Verymuch following on, with complicated. the use of challenge funds there has been that Mr Fitch: No, and I have quite a lot of sympathy innovation in DFID and there has been the success with your view. What I would have to say is what in that the Financial Deepening Challenge Fund you would need to do to pursue that approach is (FDCF) was able to stimulate twice as much create a business plan to work out how much private sector investment as the amount of DFID money you needed to pursue things to the level you grant funding but, as you say, along with want to, to achieve the scale of impact, given the innovation there are risks. Can you say from your number of poor people in the world, work out what experience with the FDCF exactlyhow DFID the cost of delivering that is through whatever should be developing to deliver its development financial means you can, then work out where that objectives? To follow up John Bercow’s point, if the moneyis going to come from, and then saywhat private sector is involved, if you are setting up a proportion is going to be public sector, and work successful business and part of that is not to have out how you fill in the diVerence. That is the an exit strategyfor getting out of the business, it challenge; that is whyit is di Ycult. If you throw becomes self-sustaining and that is the answer to moneyat it I agree youcan do it, but have we got one problem. that amount of moneyto throw at one single part Mr Fitch: Again, at the risk of being overlycritical of the development conundrum? of one of myclients, one of the frustrations we did have with Financial Deepening Challenge Fund is that one of our roles as management was to go out Q287 John Bercow: I understand that there are and tell the rest of the development community, always competing clients in the public resources and anybody interested, of the successes and the strengths of the instrument and we got many and political— positive responses from other development Mr Fitch: And there is an issue of scale, as well. agencies, whose question would generallyat the John Bercow: Okay, but if it is accepted that this end be: “That is reallyinteresting, that is great, is a crucial prerequisite for achieving growth and what are DFID going to do next?” To which my reducing poverty, and given that both of you have a answer was: “I do not know, what would you like verygood lead into DFID at the veryhighest level, them to do next?” Sometimes it is that lack of, I forgive me asking this obvious question but why suppose, a strategic plan as far as we can see. I has this politicallychallenging but intellectually think the FDCF was verysuccessful. If youlook fairlysimple matter not been addressed? We do not at some of the projects and work now being done want to exaggerate our own importance but you byVodaphone and Deutschebank, as well as some knew perfectlywell, Mr Fitch, that youwere of the organisations in the developing world, there coming to talk to us; I know you do not make the are some clear examples of how the private sector world change yourselves overnight but these are can get embedded in veryappropriate processes. reallythe essences of the matter, and Ann made the We have learned lessons about weaknesses as well; veryimportant point I thought with a degree of it is a risk-taking initiative. Some of the projects frustration which I understood, that she was not all that have been funded perhaps would not have that interested in sitting around talking about been, given what we now understand about how matters; a brief analysis, look at the options and markets develop. I think we have learned about then get on with it. If we were having a review in some of the processes. We have learned that maybe a year’s time where in this crucial matter would we it was wrong to have a lower limit on a grant of be? Would we be talking about further discussions £50,000 and an average grant size of around half a to be had? Meanwhile people are dying. million because the realityis youcan onlythen 3414551002 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 76 International Development Committee: Evidence
9 May 2006 Mr Bob Fitch and Ms Ann Grant fund fairlywell-developed project ideas and it same; credit unions are pr oliferating because that is stifles some of the innovation at the entrylevel. So where there is a source of credit, insurance and we have learned manythings. Myfrustration is that investment capital. We are not seeing that in Africa here we are now, designing the Africa Enterprise and I just wonder whether you are fostering credit Challenge Fund in 2006, I was involved in the unions to make aconnection between the remittances design work of the Financial Deepening Challenge from migrants but also on the ground level? There are Fund in 1998, and the funding for the Financial commercialbanksnowinAfricabutwhatyoucannot Deepening Challenge Fund actuallycame to a halt get is insurance because the rates are too high, but in 2004, so we are staring at a three to four year credit unions have cut through that. Would you be funding gap for the market place and the danger supporting the development of credit unions in there is that we are losing the momentum we built Africa? In Latin America theyare going, and in India up if we believe in the success of challenge funds. theyare going well, and there is an alternative, but is So I think this comes back to your point, that this it being fostered in Africa? is a problem in development programming. Ms Grant: Firstly, we are basically a trading bank so we are focusing a lot both on micro finance— Q289 John Barrett: So is the new African Enterprise although I would saymicro enterprises—but also on Challenge Fund going to draw on that experience? remittances, and there is nothing micro about Mr Fitch: Yes, and DFID are working hard to make remittances. Theyare mega, reallybig, and the wayin sure that is the case, and there is clear evidence that which they have been managed, as you say, means that is happening. there must be a huge role for a more competitive and Ms Grant: Could I respond to your challenge which is better run business of transferring remittances. We that if we are here in a year’s time we will just be are as a bank on the UK Remittances Task Force talking in the same circle? I think with the dialogue looking into all of this butI have to saywe are looking over the White Paper and your inquiry and so on, we at it as a business and systematically, again, it is quite can do it. As you say, it is not rocket science. If it is new for us. We were involved in the UN Year of acceptedthatourmajorcontributiontodevelopment Micro Credit and there was a veryexciting, verywell in Africa, for example, is to be a successful business runandverybusinesslikeUNSummitwhichIwentto and that what we want to do, what we have a vested last November—and I do not veryoften get the interest in, is to see a lot more people, small, medium opportunityto saythat!—where we were looking at and large, also being successful, the countries remittances, micro finances, the kind of flows that go themselves being successful and having the right kind between our two businesses, for example, in the two of regulatoryenvironment, if that is our starting markets we know well in the Gulf, and in India, point and I think it is, we just have to find cost- Pakistan and Bangladesh, with absolutelyhuge eVective, realistic ways of maintaining that dialogue transfers all the time. The question is how we as an and gettingsome jointworking going.I thinkwe have international bank can partner and link up with that framework in the discussions we will be having, credit unions, with micro finance institutions, which not onlyas a bank but also as Business Action for themselves are turning into banks, as you say Africa, and I verymuch commend DFID for setting especiallyin Latin America, but it is veryexciting. I that up. It reallydoes the business for business; it is have been presenting it as a commercial opportunity verywell run; it hits the spot in terms of the to the bank, not as some kind of corporate social information thatwe need,and itgives usa readymade responsibility, though hopefully it would have platform for dialogue and for a quick meeting if we enormous benefits all round. want one on a particular subject. So I think our financial sector colleagues in Business Action for Q291JohnBattle:Twofinalpoints.Firstly,oneofthe Africa and others do see this process and the White reasons whythere has not beenthat progress, asfar as Paper process as getting us to that point where we access to remittances through local banking is stop talking and start doing things together. concerned, that banking cost is moving ahead, but whatisnotmovingaheadatthesamespeedisthelegal Q290 John Battle: There is one element, as we are on framework in these countries. So, if you are running a this subject of inventing new instruments, that seems businessandifthedebtisnotpaidyoucanpursuethat to me to be missing which is credit unions. Our through local courts or whatever. Secondly, DFID Committee did a report a year or so ago on 8 outsources themanagement ofchallenge funds,but is remittances ; migrant workers who collect a lot of that the right thing to do? moneyfromwork andsenditback home.Muchmore Mr Fitch: To the first I would just say“Yes”. On the than the aid budget goes back, but what happens is management of the challenge funds, and given that I the traditional banks and commercial institutions have a vested interest because I work for a private taxed the transaction so that not all the moneygets companythat earns moneyfor managing challenge back. So in California the fastest growing banks are funds on DFID’s behalf, the answer is also “Yes, it is now credit unions of El Salvadorian migrant the right thing to do” because I think we can do it on workers; a quarter of the people in El Salvadorian a far morecost-eVective basis than theycoulddo it in- credit unions are getting the moneyfrom the migrant house;costeVectivebecausetheypushusveryhardto workersinandinvestingitinprojects.InIndiaitisthe deliver to a fixed price, and we have managed to do 8 International Development Committee, Sixth Report of what the private sector needed us to do which was to 2003-04, Migration and Development:How to make migration manage things to fixed timescales. We never missed a work for poverty reduction,HC79 deadline of managing challenge funds, which the 3414551002 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 77
9 May 2006 Mr Bob Fitch and Ms Ann Grant private sector was not used to with donor level Ms Grant: I very much hear what you are saying and programmes, not just the DFID. Ann will perhaps be endorse it all, and I know it is one of myChairman able to comment more on this but from mypoint of and CEO’s strongest messages that, as we said, our view I think we are better able to talk and interface major contribution wherever we are is to be a with the private sector about business issues because successful business but also to operate to the highest we are a private sector business as well. So I do think standard. I think something that has changed even there is a strong rationale for it. more recentlythan youtalking about DFID’s Ms Grant: I would agree with that. We were not thinking having evolved is the regulatoryframework involved in the previous challenge funds but we are around banks now. I had no idea about that before I verymuchlookingforwardto discussinginalotmore joined a bank and I am no expert on the constraints depth the Africa one which is coming up, and we have now and the extraordinarycombination of anti meetings set up to do just that. On what else needs to moneylaundering, anticorruption legislation, now be done in order for remittances and other things to antiterrorism legislation, designed to track the work well and to work the same, what we are all movement of money. The fact that as a bank we are talking about is how we bring poor people, or people subject to a regulatoryenvironment in the US, the not previouslyparticipating in the formal economy UK and Hong Kong to saythree of the tightest, it is into that field, and I think credit bureaux is a very just not possible, even if you really were trying hard, Y interesting and important wayof making sure that to buck the system. It is very di cult now, I think, to the financial sector can flourish. We have been have the same kind of freedom to transfer corrupt lobbying all over our footprint in Africa, and Asia in monies that was possible in the past. There is a legal V particular, for countries that have not, to establish constraint; there is a huge e ort and commitment in credit bureaux. It is a basic step for getting to all the our bank on legal and compliance issues. A verylarge part of our resources and time goes into making sure other more elaborate and fancythings we have been V talking about, and I think that is somewhere where that we do not get it wrong and that all our sta are perhaps we can talk more systematically with DFID trained. Operating like that, for example, as we do in Nigeria to the highest global standards is also one of tomakesurethatispartoftheirlobbyingand,indeed, thereasonswhywearemanagingtorecruitandretain part of the British Government’s lobbying generally. good staV. There is competition for talent but also Theyareonesmallexampleofwherewhatlookslikea there is competition between banks on reputation— fairlytechnical boringissuethat isnot worthbringing otherwise we are prettymuch the same—but the up might make all the diVerence between an economy V reputation of a bank like ours which works, say, in being able to take o or not. Asia, Africa and the Middle East, if we were to do a corrupt deal or mess around in the Philippines or in Q292 John Battle: The traditional role of a bank, Ghana, that would aVect our share price in London Standard Chartered being one and the commercial and elsewhere immediately, so I think there is a huge banks, has been as a vehicle for handling moneyand incentive for us to get it right. Showing byexample investment well, really, and I am an aficionado of and working with Banking Councils and Chambers credit unions in myown neighbourhood but I know of Commerce in all the countries where we work, we we have to use another clearing house bank to get would make the business case for doing the right V there so I am veryinterested on that clearing house thing, and I think that is the most e ective wayof V bank being absolutelyclean, managing the money making sure that the regulatorystu is real and, of well and not being a rip-oV profit operation. I can get course, there is no question of us, as you say, not loyal creditthrough the creditunion and driveout the getting involved. loan sharks but I cannot do that through a commercial bank who have withdrawn all their Q293 John Battle: What about working with oYces or units from myneighbourhood. Let me ask governments and DFID, to give two examples? about banks that have operations in developing Sometimes the governments themselves maywell be countries because quite often the criticism is that they corrupt and it maybe the bank being veryoutspoken, end up being the bodythat launders moneythat is and courageouslyoutspoken, to challenge involved in the moneythat is collected corruptly,so corruption in governments. When HilaryBenn was how do you help sort that out? I am not suggesting asked recentlywhether he could sum up his White that you are in collusion with those robbing the state Paper in one word, he said “governance”. How can and the public sector and taking the aid moneyand you work with DFID and governments in Africa to shoving it in the bank, but you have it so how can you be more proactive on behalf of transparency—well, help clean up the act so that moneyis managed well? especiallyclean money? What anti corruption measures can the bank take to Ms Grant: As I say, the one big thing we do is lead by contribute to clean moneyso it works for example. On your more proactive point, just because development, and can you name and shame people things are not done publiclyit would be unusual to involved in corruption? Would you go that far? saythe least, in myverylimited experience in the Would you refuse deposits from people when there bank, to have a bank Chairman or CEO criticise in are trials taking place and theyhave been accused of the waythat a minister might or a senior o Ycial in mismanaging? How far would you go in helping to government or even somebodyin a multilateral clean up the moneyact so there is real transparency? organisation, but that does not mean those In a sense moneyis for development, not just for conversationsdonottakeplace.Idothinkitwouldbe private gain at the expense of everybody else. unusual for them to be public, but the fact that we 3414551002 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 78 International Development Committee: Evidence
9 May 2006 Mr Bob Fitch and Ms Ann Grant work in Nigeria, and our commitment to the moneyhow do youexplain the fact t hat over the last five we put into Nigeria last year as a bank was very yearsyourbankhasmadeverysignificantloanstothe considerable, had the eVect of reassuring other Government of Angola which has a verybad record investors. It means we are one of the largest taxpayers of corruption,mismanagement of its oilrevenues and in that sector, and I think that is a real commitment, a is obviouslydespera telypoor. How do those loans sit long-haul commitment to a countrywhich does with everything you have just said? enable us to speak franklyat the top level. I am not Ms Grant: The loans have actuallybeen to Sonangol, sure there is a market for an outspoken banking voice to the oil corporation, not to the Angolan but it does not mean that it could not be part of the Government,andonthebasisthatwedealtwiththem mix, and wedo of course keep in veryclose touch with as one of a consortium we have been satisfied with governments, with the World Bank and the Fund, thoseloans andthewayinwhi chtheyhave beenspent manyof whom we also bank in manyof these and repaid. On transparencywe are pushing for more countries. transparencyso that other people can share the information that is currentlycommercially Q294 Richard Burden: You have been veryclear on confidential, but we work to the highest standards in that issue, both in terms of your own business that loan context, although obviouslywe have had a interests in rooting-out corruption and how perhaps much longer relationship with the Angolan on a quiet basis people can have an impact in some of Government than this new regulatoryframework, the countries you operate in. You also earlier on put maybe for 10 or twenty years. some emphasis on networks internationallyand regulations for that network. Q297 Joan Ruddock:There is a contradictionthere, is Ms Grant: Absolutely. there not, because you may say you are operating to the highest standards in a financial context, but the Q295 Richard Burden: You put that forward as impact or lack of impact on that country’s something that actuallyhelps in that regard. I am just development is something that is not being taken interested to know whether you think that some of account of. The World Bank has suggested that these those international networks and regulations you are particular kinds of resource-backed loans are, in the building up can sometimes cut across each other as case of Angola, the core obstacle to the country’s well, and if so is there anything that needs to be done development. in that area? You mentioned the States, you Ms Grant: All I can sayis that it is not true that we do mentioned the UK, verymultilateral bodies; if they not take those factors into account. There is a very are all meshing together to help root out corruption strong and veryrobust process inside the bank for that is brilliant, but you could find that they end up looking at the implications of that kind of deal. It is creating holes that you can fall down the middle of. now,withourreputationandriskmanagementinside Ms Grant: It is diYcult for me to comment because I the bank, much stronger than it has ever been and am not an expert banker, indeed I am not sure I ever these issues are veryfullydiscussed. A judgment is will be, but also because there is competition between made as to whether theyshould go ahead or not and regulatoryauthorities as to who can be the sti Vest— allIcansayisthatitmaynotcomeoutalwayswiththe certainlythe US, the UK and Hong Kong are answer that you would wish, but it is not true that it is probablythe tightest. If youare subject to one of not veryfullyand veryseriouslyconsidered when any those then you do not fall between two stools because such deal comes on the table, and deals are walked you accept those standards wherever you operate. awayfrom on the basis of, if youlike, the non- The challenge now is to bring the huge economies of financial factors. India and China and the banks and financial institutions that operate in those countries into the Q298 Joan Ruddock: The level of indebtedness of same game, but with people needing to raise finance Angola is equivalent to half their GDP; it is not globallyand being global players,there is a very getting better. The involvement of your bank in the strong push for anyone who wants to raise capital basic resource industry, which could and should be anywhere to be playing by pretty much the same delivering to the people of that countryand moving rules. I have heard people moaning about regulation them out of poverty, is not happening. Do you see because, while it is verywelcome in principle, it is anyneed for change? Is there something that needs often obviouslyextremelytedious for some people in to be done that is not being done at the present time, practice. We are veryclear that the balance of and are you the only people who we might make this advantage is in the kind of regulation that we are criticism of or, for example, do you see China doing subject to. What we want is a playing field where things that even you are rejecting? everyone observes that level of regulation and where Ms Grant: On all the financing that I am aware of we are able to compete fairly. The trend is all one way into Angola there has been a verylarge consortium and I do think it will be for better and more of international banks because of the scale of the comprehensive regulation for the reasons we have funding that is involved. Sonangol is not in debt to set out. us, the repayment record was one of the very significant factors in going ahead in the past. If what Q296 Joan Ruddock: I am puzzled, having heard you are saying is that we should not be lending to everything you have said, which suggests that Angola, that is a conclusion which the bank has not everything is moving in the direction of more come to yet and I can give you an assurance that the transparency, good governance and everything else, factors you have raised and the factors that have 3414551002 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 79
9 May 2006 Mr Bob Fitch and Ms Ann Grant been raised bythe World Bank and others are now International established these in 2000 and the real fullyconsidered everytime there is a proposal for question that we are driving at is, is it not really such a deal with the bank, not just with Angola, and important, and probably slightlyat odds with what it would be verycarefullythrashed out inside the you are saying—we are not questioning the view that bank. the bank says we have a commercial judgment and we are applying those standards—that there is a lack Q299 Joan Ruddock: You do not think there is any of external accountabilityor transparencyand, as need for anynew mechanism that will actually Joan has suggested, indications that in some cases ensure that these sorts of resource-rich countries do the Chinese are prepared to come in and provide not get loans that will substantiallyundermine the finance which does not bear the same comparison. path out of povertyand actuallycontribute to That completelyundermines what the IMF or the continuing corruption and negative outcomes. You international communityare tryingto do in terms of do not think there is anymechanism that should be improving governance and getting rid of corruption, put there bythe international communityor so at the veryleast youstand somewhat tainted by anybody else, this is just a fact of life? association if you do not have any independent Ms Grant: No, I do not think it is a fact of life, I think accountability. it is a matter of judgment whether or not you are Ms Grant: We signed up for the Equator Principles, engaged in the economyof a countrywhich has the Global Compact and everything else. I am sorry, serious flaws in its government and in the but this particular group is a new one to me and I am distribution of its resources. To set up such a not aware of our participating in it. Maybe I could mechanism would be verydi Ycult, and I would get back to you on the Wolfsberg Principles. myself say that the trends and the thrust of what is happening is such that a commercial decision now is Q304 Chairman: What we would like to know is broadlybased and takes account of all the factors whether there should be some kind of external that you and others have raised. My own view would comparator, which would get you oV the hook to be to rest on that commercial judgment, and if you some extent as well as make the international are taking a wider view and a longer term view of communityfeel that there was a standard that your bank’s involvement and your everybody was applying, because there is a danger bank’s reputation and so on, I would rather rest on that you are competing for finance and you are up that judgment rather than on some kind of sanctions against perhaps Chinese financial institutions that system which would prevent the private sector do not follow the same criteria. Albeit you have a working with governments that were generallynot reputation, these are big sums of money—3.5 billion held in high regard bythe OECD 9. You would then dollars secured byoil revenues I guess is quite an reallyrisk polarisation and yourchances of bringing attractive investment but mayundermine other in India, China and others would actuallybe less. I objectives. would rather rest on the pressure and the realityof Ms Grant: It is a veryimportant discussion and a all the factors I have spoken about being actually veryimportant dialogue and it is worth thinking quite powerful drivers and becoming more so. about how best to involve China in a regulatory framework instead of assuming it is going to drive Q300 Joan Ruddock: The condemnation of the IMF everything to the bottom. My own view is that there and the World Bank about these forms of loans is is a big challenge, for NGOs as well as for business not suYcient. and for governments, to actuallyengage with China Ms Grant: Those past loans? on the basis on which it might provide the kind of finance and kind of investment that we are talking Q301 Joan Ruddock: Do you expect some change? about. Again, we need to make sure that theyare Ms Grant: All I am saying is that I would rather rely part of a discussion and not spoken about rather as a motor for change on the kind of commercial than spoken to. pressures, public awareness and so on than on what you were suggesting, that something must be done in Q305 Chairman: It would be helpful if you are a mechanism or regulatoryway. willing to reflect on that and perhaps give us a considered note10, because it is unfair to pursue it in Q302 Joan Ruddock: Are you familiar with the the present context but we are anxious to see if we Wolfsberg Principles? can make some constructive suggestions. Ms Grant: No. Ms Grant: That is that external validation. Joan Ruddock: Then I will not ask you about them. Q306 Chairman: Could I just round this oV by Q303 Chairman: The point there is that a number of asking you both the same question. We have a lot of NGOs and TransparencyInternational have said initiatives and youhave sa id, yes, we think we can theyare concerned about what Joan is talking about deliver. The question first of all is do you think that and that theydo not sit comfortablywith private sector driven growth is be ginning to deliver, international standards, and theytried to set up do you have some firm evidence of that, and would some sort of objective criteria. According to our you be willing to say in five years time, given that you brief, 12 leading banks and Transparency are fairlyupbeat about some of these initiatives, the
9 Organisation for Economic Co-operation and Development 10 Ev 200 3414551002 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 80 International Development Committee: Evidence
9 May 2006 Mr Bob Fitch and Ms Ann Grant extent to which sustainable growth in the private to rise up over the next five years I think not, but sector will have delivered—I cannot ask you to there will be reallysignificant evidence and examples measure the results—significant results? Bob, would of what works. One of the reallybig challenges for you like to start? Africa is just the size of the market, as South Africa Mr Fitch: I do not have hard evidence to back up a found that bydoing everythingright, ticking most of claim that the growth is happening now. I guess my the boxes, doing all the stuV theywere asked to do, instinct, and I would not claim it is much more than the fact is theyare still quite a small market in global that, to be honest, is that we have an opportunityat terms. The question is whether some of the lessons the moment in the marketplace where a lot of the on private sector development in India and China private sector in the developed world is constrained, can possiblybe applied to some of these verysmall it is fighting within saturated markets and it needs to markets and, if not, which I guess is the answer when look for its future opportunities. Of course, there we are talking about scale, what more can be done maybe more immediate opportunities in manyparts to reduce the barriers of individual countries, what of Asia, but there is evidence albeit it circumstantial more could be done about breaking down the that manybusinesses are now looking at how they barriers between countries so that you have regions can participate in the private sector in Africa as well that make sense, customs unions and so on. One of as in Asia, so myexpectation in the five yearperiod the problems that Africa has is the competition, you have talked about is, yes, there will be clear signs obviously, from other parts of the world where it is of that happening, but I would not expect it to easier and quicker to make moneyon a bigger scale, without the need to make all the investments that we translate into a massive economic transformation in Y a five year period, but there is evidence that it is are talking about, so it is the relative di cultyof beginning to happen. In the interaction I have with making moneyin small markets or people entering new markets. What is happening, we are finding as businesses in the UK and elsewhere in the developed a bank, is obviouslyhuge interest from the Middle countries there is more sign of people talking about East, from India and from China in Africa, and we new commercial activity, not something driven from are accompanying that business on both sides; that a social development angle, and I think that is a big V is if you like a bright spot, but in terms of the di erence. traditional growth that we are talking about it is Ms Grant: I would cite what is happening in South going to be verypatchyacross the board and some Africa and Botswana where there is real evidence of parts of Africa would do verywell if theyget it right, the growth of a middle class, and I have some very but if theydo not, the price of being left behind is interesting figures I saw yesterday from the bank on going up all the time. the size of our small business and the growth of the Chairman: Thank you very much indeed, both of middle class there, so maybe I could send you a note you. We can perhaps now talk to companies that are on that too. There is no area of the world which is so active in the field and see what theythink. Thank easyto generalise about than Africa, and if we were you very much for coming in and giving us your to saythat the 54 countries of Africa were all going views.
Witnesses: Ms Sue Clark, Corporate AVairs Director, SABMiller, and former Chair of Business Action for Africa and Mr Walter Gibson, Head of Global Health through Hygiene Programme, Unilever, gave evidence.
Q307 Chairman: Thank you both very much. You and Africa. I am also wearing the hat of the current have heard what we have been talking about but you chair of Business Action for Africa who have are actuallypractitioners in the field, as it were, and submitted evidence to the inquiry. Just a word about can perhaps give us some practical examples. One of SABMiller, we are one of the largest global brewers the things, just taking up Ann’s final shot, is that in of beer and bottlers of Coca-Cola. We operate in manyof the poor countries bydefinition your about 60 countries and about 80% of our earnings customers are poor people with limited incomes, yet comes from developing economies. We were the keyis how to find enough of a market there and founded in South Africa in the late 1800s and we to grow it. I suppose the question that then arises is now operate in 29 countries across Africa; in fact, how can a multinational companythat is operating Africa provides about 40% of our overall group in big markets and big figures operate at a level that earnings. We employabo ut 14,000 people and I actuallydevelops a market from the kind of people guess with the multiplier eVect that is about 150,000 who are living at the bottom end of the economic people through the indirect supplychains that we scale. The experience you have had of doing that operate. One of the things to stress is that our maywell help us find other waysof growing those business is about brewing beer and bottling soft markets to the point where theybecome less poor drinks for local consumption, so it goes right to the people and, bydefinition, more attractive markets. heart of what we were saying about how do we Perhaps Sue Clark might start. develop those markets with essentiallypoor people. Ms Clark: Thank you very much and thank you for There are essentiallythree things to sayat the outset. inviting me along today. I am here in my capacity of One is that we very much believe, as has been Corporate AVairs Director for SABMiller and in discussed this morning, that successful, profitable that capacityI sit on our business boards in India businesses are the real e ngine for growth and the real 3414551002 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 81
9 May 2006 Ms Sue Clark and Mr Walter Gibson key to lifting people out of poverty. As we have examples. I am not cutting youoV, we will come heard this morning and we would concur, and I back to that, it is a veryinteresting issue and we would like to share some examples with you, would like to hear more about that and also how it utilising and leveraging our value chains, both might translate in other areas. The same applies, I downstream at the supplyend and upstream at the guess, in that Unilever is a long-established distribution end, are clearlyveryimportant and, as companywith a lot of low value, everydayproducts, we have found, partnerships are reallythe most but nevertheless it would b e interesting to see how eVective wayof delivering the most e Vective you do that and also how you interact with the outcomes. Perhaps I could just give you a couple of development community, in other words how the examples of where we are actuallybuilding markets two things can come together. on the ground. One of the keyexperiences we have Mr Gibson: The first thing to sayis that as a business had is in Uganda where eVectivelythe issue was opportunitywe see this as reallyimportant and we providing an aVordable product for people in are committed to— Uganda where some 70% of people are living on under a dollar a day. The problem was that to provide a commercially-produced beer using Q309 Chairman: Your starting point is that it is a imported barleywas just too expensive, so the issue business opportunity? was how could we substitute an imported product Mr Gibson: It is a verylarge market, we are in a lot with local production. We looked at using a form of of the countries where that market exists and, as you sorghum to produce a clear beer so we worked with have said, we have a long historyof working in those the local agricultural institute to select a strain of markets and trying to reach people on low incomes V sorghum that we could use in the clear beer process. and trying di erent things. Another advantage we We then partnered with the Government who have is that the kind of products we deal in are the basicallyagreed that if we could develop a local products of everyday life, the products of basic agricultural base around sorghum theywould give health, hygiene and nutrition and we have a lot to V us an excise break on the tariVs. Having got the right o er as well in terms of promoting the health and strain of sorghum, having got that agreement with welfare of people, which is actuallymotivating for government, we then linked up with a local NGO, people who know the diverse business, but it is quite Afro-Kai, and we went out to the farmers and we a challenge getting your products to people who only oVered them the opportunityto grow sorghum, have a dollar a dayto spend. One challenge is giving them a guaranteed income at the end of it and distribution, for example, and if we take India as an giving them the seeds to do it and, through the NGO, example you are dealing with villages a long way helping them to produce the product and giving from anyshops and the sheer distribution and Y them assistance in that. At the same time we then penetration of the market is quite di cult. V invested in developing our breweryto enable us to A ordabilityis another challenge, making products Y use that sorghum product. The first year was quite that are of su cient qualityfor our standards, that V V diYcult: 350 farmers came on board and as you have people can a ord and want to use and o er them heard in evidence from your previous witnesses it is value for money. The other thing that we are quite hard to get farmers to come to something that learning more and more is that you have really got is unfamiliar to them, theyhave had bad experiences to understand those consumers in the same waythat in the past with middlemen who have not paid them, we understand the consumers in developed markets, V theyare slightlyreluctant about putting all of their you have to o er them products that work for them eggs in one basket. In the first year we had 350 in their settings, you cannot just scale down and take farmers on board and I am pleased to saythat in the the cost out of a product that works in another year that has just completed we are now up to 8,500 market. That is something we need to do more of. As farmers involved in the project now. They an example of what we have done I would take themselves are earning some four to five times what Hindustan Lever in India which wanted to grow its an average Ugandan is earning which enables them market in the rural villages of India. The first thing to obviouslybuyeducation, food and health. That theyrealised was that theyneeded to find new product has now got a 20% share of the market and mechanisms of distribution to get the products out we are spending some million pounds on buying there, theyrealised that theyneeded to help income sorghum and, consequently, the eVects that that has generation in those communities to generate the flow for distribution, for transport and processing et of cash that enabled the trading in our goods to take cetera up the value chain is significant. From our place and theystarted quite a innovative scheme point of view as a brewer one of the keythings that called Shakti which, if anybody is interested, is we are looking at is where can we source locally written up in Prahalad’s book, The Fortune at the agricultural products that displace imports? That is Bottom of the Pyramid, you can find out more the Ugandan example and we have a similar example information about it there. The basic idea was that now, we have rolled that out in Zambia. We have a all over India there were self-help groups springing verysimilar example which I am delighted to share up, mainlywomen who were borrowing small in Ghana where we use maize to displace imported amounts of moneyfrom the Grameen bank and barley. using that moneyto trade, so we decided to tryand set up a scheme where we would work with those Q308 Chairman: In a minute Joan Ruddock might self-help groups and see if theywould be interested want to follow some of those points up, she has one in trading directlywith us in our products. That has or two specific questions, but you are giving us been highly successful as a sustainable mechanism 3414551002 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 82 International Development Committee: Evidence
9 May 2006 Ms Sue Clark and Mr Walter Gibson for breaking through some of the chains that consult with local communities or did you consult previouslyexisted and cut out quite a few with local communities? How have theybeen middlemen so that we are now dealing directlywith brought along and theref ore how sustainable is this these ladies who have become almost like a sales operation which sounds to be one of considerable force in their local areas. One of the huge benefits of size if you have 8,000 farmers involved? this, apart from increasing our share of the market Ms Clark: There are some interesting questions in the rural areas, has been that it has given a whole there. Broadlyspeakin g there have clearlybeen new self-esteem to the women who participate in benefits to the farmers in terms of the income. One the scheme. of the issues that we saw at the outset was that agriculture is not our core business, and that was Q310 Chairman: I am sure that that is true, but is reallythe keything about working with an NGO, there a role for government in that? You are a reallyto work with us and to work with the farmers multinational company, you are operating a market to do that consultation and to help them to basically opportunityand it has benefits, no dispute. Is that understand crop rotation and what theycould do to just something you do and government should just make sure that theydo not become solelydependent let you get on with it, or is there a role to interact with on SABMiller and our business. When it comes to government and help? the gender issue, clearlywhen yougo out into the Mr Gibson: I was reflecting during the earlier market you see the women working very much in the conversation and some of the questions you were field and it is quite interesting that the people we deal asking earlier about how DFID could help, and I with are a verymixed gender balance, but I am sure just wonder whether there is scope for organisations you have seen yourself how much work the ladies in like DFID to get behind or aligned with some of the field actuallydo. On the environment, clearlythe these schemes at quite a practical level, because I am water issue is veryimportant for us and we sure that in the case of Shakti there were other things understand that as a brewer we use a lot of water in that could have been done around that scheme in our businesses. All of our breweries meet the UN driving the commercial side of it: the supplyof the standard, so about 78% of them are below the five goods, the trading of the ladies and all that kind of hectolitres of water to one hectolitre of water which thing, but there are other things around that that is the industrial norm. What we are reallytryingto could benefit those communities, for example in do now is to focus on how we can get greater health provision, insurance, savings schemes, the eYciencyof water use, how we can recyclewater use, type of thing that DFID might want to get involved how we can use water in the local communitythat we with and that theycould do on quite a small scale to have used in our breweries, and in manycases we are see what worked, and then perhaps with the private using this waste water to benefit the local sector develop models which can be scaled up communities byputting it onto agricultural land elsewhere. and things.
Q311 Chairman: For example, theycould work in Q314 Joan Ruddock: MayI just ask in that context partnership with you to help that and on the back of whether you are monitoring the water table? that theymight identifywhether there were other Ms Clark: We are monitoring the water tables in all companies that could be encouraged to go down the of our breweries and one of the things we are now same road. doing more and more of is watershed management Mr Gibson: Exactly, there might be multiple and how can we actuallystudyour watersheds, how alliances that could be developed that could have can we actuallywork with our suppliers to quite a big impact. understand how much theyare using in the Chairman: Joan, do you want to come back on the production of the agricultural side of things. I have beer story? to saythat it is an area that we can see increasingly is going to require a lot of partnerships with the local Q312 Joan Ruddock: Yes, the beer story, it is communities as we go forward. absolutelyfascinating. You spoke about Zambia but I understand you have a similar operation in Q315 Joan Ruddock: That is veryinteresting. What Uganda, I believe. lessons do you believe this case has for our Ms Clark: I am sorry, if I did not make it clear but understanding reallyof the role of business in Uganda was verymuch the storyI was talking about development? and we are now rolling it out into Zambia. Ms Clark: It is the development of markets, producing aVordable products, which is key; we Q313 Joan Ruddock: I wondered where the balance think there is verymuch a virtuous circle here in of benefits lies between what you have gained as a investment which leads to jobs, leads to creation of companyand what local people have gained. For products, demand, increased excise, profit at the end example, were people required to change their and so the circle goes on. It kind of reinforces the farming practices in certain ways, has there been any role that business has in communities and the lessons change in the gender balance of who is doing the increasinglyfor companies working in Africa are farming and who you are contracting, how you look how can you be more innovative about your supply at the environment and the pressures of establishing chains? One of the interesting things worth major plants for drinks—we know there is a lot of mentioning is the agricultural subsidies have come water required et cetera, et cetera. How did you oV sugar in the last year and the sugar price has 3414551002 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 83
9 May 2006 Ms Sue Clark and Mr Walter Gibson doubled, so we are now sourcing sugar locallyin who drink irresponsiblypa rticipate in riskysex, as Mozambique and Tanzania, so from a development theydo in a whole bunch of other riskythings, and angle the whole issue of subsidies is crucial to how it we have programmes to tackle that. When it comes actuallya Vects behaviour on the ground. The to our own workforce we basicallyprovide partnership point of view is veryimportant; this was voluntary counselli ng and testing and HIV/AIDS a government/NGO/business partnership and all programmes, we provide free anti-retrovirals for our three actors in that played a very significant role. employee and up to four of their immediate dependents. Q316 Joan Ruddock: Will all those actors remain, is Joan Ruddock: Excellent, thank you. this entirelysustainable on this basis or would there be a change to a more traditional commercial Q320 John Battle: You do the bottling for Coca- model? Cola? Ms Clark: Certainlyfrom our perspective it is a Ms Clark: In some countries. model that works, from the NGO’s perspective it is a model that works and I guess over time how government perceives it and how theymanage their Q321 John Battle: What is your relationship with tax revenue from it will be something we have to them if you are part of the Coca-Cola supply chain follow. because sometimes theyhave been criticised for not carrying out a proper ethical audit or being socially responsible and environmentallyresponsible. Do Q317 Joan Ruddock: Do you think there is a real you have a dialogue with Coca-Cola that fits your consensus now within the business communityon environmental and ethical policies, or do theirs tell the contribution that business can make specifically you what to do? to international development as opposed to being a Ms Clark: It is quite interesting. We do obviously business for its own sake and just getting a have a dialogue with Coca-Cola but Coca-Cola has commercial return? a range of bottlers and we are actuallyone of the big Ms Clark: There increasinglyis. Something like the bottlers. Veryoften theydeal with verysmall local Business Action for Africa network that has been family-owned bottlers and in these instances maybe established goes to the heart of that and there is a there are issues on the ground. The fact that we are change and certainlyan understanding increasingly a big multinational with our own principles, when it amongst business that the profit motive is clearly comes to operating on the ground it is our values and important but you cannot do that without taking all our principles that reallyhold sway. your stakeholders with you, and when it comes to emerging markets that does mean actuallylooking at the market in a little bit of a diVerent wayand Q322 Chairman: Just finishing oV on that, you have being much more innovative, as I have described. said Uganda and Zambia, are you spreading elsewhere and what are your competitors doing? I Q318 Joan Ruddock: You have spoken about the understand that you had about 99% of the market in supplychain in terms of the farmers and then there South Africa so you had to go elsewhere to expand will be truckers and all sorts of people involved. Do your market, but what is the potential for following you see it as part of your role to ensure some kind of this practice in other countries? Whynot ethical basis for the operations of those in the supply Mozambique or Malawi or Nigeria or whatever? chain and seeing that theydevelop well in the Ms Clark: The issue is that everymarket has a general sense? diVerent solution and one of the keythings to our Ms Clark: Yes, it is a matter of degree how far our success is actuallylooking at things on a verylocal responsibilitygoes, but we have a series of principles market basis. There is not a one size fits all so we are that we share with our suppliers in the supplychain. looking at the development of cassava as a substitute One of our sustainable development principles is for sugar which will have application in some of our that in places like South Africa, Tanzania et cetera markets, the use of maize has applications in Ghana. where we are actuallyverymuch involved at the It is diYcult to give a one size fits all solution, but as distribution end and where, as mycolleague from I have shown we are verymuch looking at each Unilever described, we have established local individual market and saying what can we do here? businesses to run depots and distribute our beer in I do not know if that answers your question. the local communitywe actuallyprovide them with Chairman: That is helpful. John Barrett. training, and as part of that business training there is training about HIV/AIDS awareness and a whole Q323 John Barrett: If I could turn to Mr Gibson and series of other aspects. ask some questions about the Global Partnership for Handwashing with Soap, it never fails to strike me Q319 Joan Ruddock: I was just going to ask you that. that when we visit a number of developing countries Alcohol and sex often go together so I am going to and we go to visit hospitals and ask what are the big ask about whether you have some involvement in the killers, you might think it is going to be HIV, health of your workers in that sense. malaria, TB, but people say it is diarrhoea that is Ms Clark: Yes, alcohol is clearlyused responsiblyas killing the kids and access to clean drinking water part of a normal, healthy lifestyle and there is no and basic hygiene could make a massive diVerence. evidence that links increased AIDS with people who Unilever are part of that Global Partnership for drink. There is some evidence to suggest that people Handwashing with Soap and reading the papers it 3414551002 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 84 International Development Committee: Evidence
9 May 2006 Ms Sue Clark and Mr Walter Gibson says people do hand wash in some areas but on five your message across, to design the campaign, to to 15% of occasions when it should be practised. Do understand consumer needs and the triggers of you know what the percentage is in this country? behaviour that you are trying to press, how best to Mr Gibson: It will be higher than that but it will not communicate those in an eVective way, how to run a be 100%, it is probablya lot lower than youmight mass media campaign. think. In fact, mycolleague, Dr Val Curtis of the London School of Hygiene and Tropical Medicine has done some tests on this amongst students and it Q325 John Barrett: Has the public sector taken this comes out around 40 to 50%, even among people on board or have theywatched youdoing it? who are studying hygiene. Mr Gibson: Theyhave definitelytaken it on board. In fact, the PPP in handwashing has developed a model of which this is a critical component, so every Q324 John Barrett: It is a veryinteresting time you go into a country there will be some kind of partnership and I wondered if you could say a bit consumer or co-operative research to tryand about how the partnership actuallyworks. understand the need and make sure that the Mr Gibson: It is a wonderful thing because there is campaign is tailored to meet that need. actuallya shared vision at the heart of it, a shared objective, which brings the public sector and the private sector together, and that is about reducing Q326 John Barrett: Have there been anyexamples of diarrhoea through promoting handwashing with where there has been a conflict? It seems like the kind soap because, as you rightly pointed out, diarrhoea of example where everybody would be pulling in the is a major killer and there is lots of good scientific same direction, but have there been diVerences that evidence to saythat the simple act of washing your have had to be compromise d and diVerences hands with soap at the right time, which is mainly reconciled? after defecation or before preparing food, would Mr Gibson: Between the public and the private lower that incidence byabout 50%, so the task we sector? have to do is to find the right wayof promoting that John Barrett: Yes. use of soap, scaling it up and reaching all the Mr Gibson: There have been some quite vigorous vulnerable people; that is mainlysmall children and debates. I have actuallyjust been to a meeting in mothers who look after children. The private sector Washington of the steering committee for the PPP in interest is the increased use of soap will expand the handwashing and the level of discussion now is market; the public sector interest is promoting really, really good and the level of understanding of health, reducing the burden of disease and thereby what each partner can bring to the partyas it were is having an impact on povertybecause the diarrhoea now verygood. We are at the point now where we in itself maylead to lower attendance at school, understand each other well enough to be able to do particularlyamong girls, it leads to poor education, something reallyquite big and significant. it leads to lost time at work so there are lots of indirect consequences apart from the health consequences, and so as a public health agenda in Q327 Joan Ruddock: Do you actually produce and terms of povertyit is reallysignificant. There is a make soap in the countries rather than import the coincidence of the public and private sector interest soap into the countries? which is around promoting the change in behaviour Mr Gibson: I would hesitate to answer that for every that is crucial and that we are both interested in. It countrybut we do produce locallyin many is finding the right interventions, getting the countries, that is true, I do not know if it is true in evidence for them and driving that to scale. There is everycountry. recognition that neither the public nor the private sector can do that on its own. We have our own initiatives as a business to promote handwashing Q328 Chairman: Is that true of the packaging tied to some of our brands like Lifebuoy, and we materials as well? have been quite successful, we have reached 70 Mr Gibson: In manycases, yes,the packaging would million people in India with that campaign, but that be produced locally, but it depends on the type of is a drop in the ocean compared to the size of the packaging. I can give you a more detailed answer if problem so we need the public sector to assess, reach you would like. and have the impact of scale that we are looking for. What we bring is the kind of skills that we have as a business and one of the things that we have learned Q329 Joan Ruddock: It appears to me to be a very through the Public Private Partnership (PPP) is that important principle; it was when you mentioned it is quite surprising in a waylearning about LifebuoyI could just see huge boxes of Lifebuoy partnerships and what each partner brings. There soap being imported into countries, whereas clearly maybe some surprises in terms of what yourinitial it would help the business climate enormouslyif you expectations were, so one of the things that the actuallyset up a means of making soap and private sector has found that it can contribute really distributing it and everything else. successfullyto a partnership like this is an Mr Gibson: In a lot of our major countries like India understanding of marketing because behaviour and Indonesia we would manufacture at probably change is in our DNA and we understand how you more than one site in the country, simply because of go about an eYcient marketing campaign to get the distribution costs. 3414551002 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 85
9 May 2006 Ms Sue Clark and Mr Walter Gibson
Q330 John Bercow: I suppose as far as children are admittedlydoes not relate to handwashing, but it is concerned, Mr Gibson, there are two avenues for an example of a health point. There was a queue of encouraging good practice; one is through the home kids waiting at a feeding centre and there was a and the other is at school for those children young man, probably no more than 14, severely fortunate enough to attend. scarred around the mouth with very, very badly Mr Gibson: Yes. chapped and bloodied lips, who was an albino. That young man—Joan alerted me to him—was standing Q331 John Bercow: Is there a simple plan in mind to in a queue and, okay, it was not normal practice tryto disseminate good practice and the means of there to be wearing sunhats, but that kid was delivering it amongst schoolchildren? You have a suVering, not just because he was bloodyhungrybut mass audience there and a teacher who is because his head was going to be damaged further, presumablyregarded as a role model. It should his health was going to suVer. We said to the NGO not—to go back to myline of enquirywith the it is scorching hot sun, the boyis an albino, does he previous witnesses—be something that requires the not need a hat and there was a prosaic, utterly most enormous sagacityto address, should it? unmoved response, “Well, I suppose he might”— Mr Gibson: There are several elements to arriving at almost like what time of dayis it, “it is 12:20”. If I the simple plan. I do not think we have the simple had had a spare one I would have given it to him, but plan but I would love to have the simple plan. There I asked was there not a policywhen yousee such are several elements: first of all you need an small-scale problems to address them, to which the intervention that works and is going to work in most replywas “Oh well, we’ve never been asked”. If ever places, so you need to have some kind of universal there was an example, if you will forgive me saying message that children will relate to and react to first so, of someone working in a large organisation who of all, and that is something that we are working on no doubt had all sorts of big plans and policies and with academic colleagues who are leading that field, resources at her disposal, who had failed in a very there is that chunk of it. Then there is the question human sense on a human scale to do something of how you communicate that, how do you actually about a small problem that was immediate, that was get your message to the children? Is it best done it. I was completelyshocked byit; can youo Ver me through teachers or is it best done directly, and we anysort of comfort that this was an isolated case, or have not quite got the best model there. The other is it verycommonplace, because I do not regard it as factor that we need to bear in mind is that to do this a laughing matter? in all the countries where it is necessaryyouare Mr Gibson: Let us stick with handwashing, shall we? going to have to work through a lot of ministries of What is Unilever doing? We are running a campaign education, so it is not something that a private sector which we call Swasthya Chetna, which is currently companycan do on its own, and that is another mainlyin India but we are moving that into Africa, benefit of these public private sector partnerships, which is a wayof quite cost-e Vectivelygetting the opening doors to these channels to get an agreed message of handwashing primarilyto package of communication to where it is needed. schoolchildren, so it started in India, it has gone into There are lots of good experiments going on, I would manythousands of villages in India and it uses the say, but no firm consensus on how best to do it or a children to propagate the message. As far as we can plan of how to get to everyschool in the world. There tell it has been quite successful and we have reached, are lots of good things going on in manycountries. we think, 70 million people using that approach. That is the limit of what we can do with our resources. We have learned quite a lot about how to Q332 John Bercow: Can I verybrieflyfollow up talk to children in that process, what works and what because agreement on a model would help. does not work, and we want to get to everychild in Mr Gibson: Yes. the world who needs this message in the same way that I think you do. My submission is that to get to Q333 John Bercow: But it is quite important to your simple plan there are some stages you have to concede the point that just because one cannot do go through. We will keep doing Swasthya Chetna, everything does not mean they should do nothing, we will keep doing what we can, we will keep and it maytake a long time to spread the practice as working with the public private partnership and they widelyas it needs to be spread, but at least making a will talk to the children as well because part of that start (a) achieves something and (b) oVers the involves schoolwork, but to get to the bigger plan of prospect, does it not, of imitation—if people see that how you reach every child with a really compelling something good is being done theymight tryto message that you think will change behaviour, you imitate it elsewhere. This is in no sense a personal need to bring together all the actors, you need to criticism of either of our witnesses, it is just a have real evidence that the behaviour change frustration that has been burning inside me for some mechanism that we are going to use is eVective and time which I would like to put to you. Joan has gone is scaleable and that is the kind of thing we are trying out of the room but I know that when we were on to achieve. That is the wayI would like to get to the one of our recent visits we both felt that something simple plan, it is to get all the actors but it is not quite simple that could have been done for a child something that we can do on our own. was not, and when we raised it with genuinely John Bercow: I understand. caring—presumably—representatives of an NGO Mr Gibson: The PPP handwash is a great start theylooked at us rather blanklyand said “Well, we because it brings together a number of diVerent haven’t been asked”. The example I have in mind actors—the World Bank, Unicef, soap companies 3414551002 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 86 International Development Committee: Evidence
9 May 2006 Ms Sue Clark and Mr Walter Gibson and USAID. amongst others, and then at a countryunderstand more about the p eople at the extreme level the governments who control access to schools, ends of the value chain and what would make a for example. It is quite a big challenge getting to a diVerence to them. That is one of the things that simple plan, but I do agree that it is actuallywhat we struck me on reading that report, that there were a are all striving for. number of ways that you could improve. Ms Clark: Could I oVer a slightlydi Verent take on that question? When it comes to big businesses, what Q335 Ann McKechin: One of the ways that was you were talking about, the very local responses, it suggested was the issue about contract workers who is all about culture to be honest and as a big global had verydi Verent terms and conditions. Your own business what we can do is reallytryand develop employees were obviously enjoying excellent terms that culture and those values in local people, because and conditions, but one of the contract workers said you cannot mandate from the centre that somebody “If I become pregnant or ill I lose myjob.” That is has got to provide a hat or help an orphanage, what surelyone of the issues, the relationship between one you have got to try and do is develop that culture area of the chain to the next. and visiblyreward that culture on the ground. An Mr Gibson: We tryto keep a veryclose eyeon that interesting example that comes to mind based on and tryand raise standards when we can. The your example is in Zambia where a local team of Government clearlyhas a role to playthere— finance people had got together, started to sponsor an HIV/AIDS orphanage, found a little boywho was verybadlyburned from head to toe, liaised with Q336 Ann McKechin: In terms of the labour laws, the team in South Africa, theymanaged to get a yes. specialist doctor to take the boyon, theyraised the Mr Gibson: In terms of the legal framework for moneyto get him there, it is verymuch a cultural employees, and they have tried very hard to impose issue about what happens on the ground and the role better standards on contract companies. It is more a of big business is reallyto tryand instil that culture question of compliance than actuallychanging the and reward that culture. law.
Q334 Ann McKechin: Mr Gibson, you have Q337 Chairman: In the report on this surveyin obviouslycarried out some veryinteresting research Indonesia it says that “For supply and distribution with Oxfam which was reported on last year, and in chains to benefit poor people even more, there need the conclusions you stated that the company could to be other social institutions and resources in place improve its interactions with people living in such as credit and saving schemes, marketing poverty. I just wonder if you could perhaps give us associations, and insurance schemes as well as 11 some indication of what you thought those changes diversification of income streams . . . ” Is that could be or keyfindings were for the company,and something again that development agencies and the whether or not you have carried it forward in your like can assist with? Is that the kind of crossover current business models. point where the partnership can work? Mr Gibson: To take the latter part of your question Mr Gibson: Yes, that was the kind of thing I was first, we have a major kind of initiative within the alluding to earlier when I said that maybe there is an companyat the moment to reallyunderstand how opportunityfor development agencies to get best we can meet the needs of the bottom of the alongside some of the enterprises that the private pyramid, so that is being handled at the highest level sector are starting, so theyclearlyare tryingto in the company. The executive committee is going to encourage enterprise on a small scale but big ask to bring together a group of verysenior people companies also take initiatives—for example, the to work out a real strategyfor doing that. I think one Kecap Bango initiative that is mentioned in the V of the things that we recognise and can share with report is another form of enterprise and a di erent you now is that as I said earlier we need to get a much wayof trading that benefits the farmer. There might better handle on the needs of people on reallylow be opportunities for development agencies to get incomes and not make assumptions based on alongside those and really, in a way, amplify the V understanding from other situations in richer benefit to those people through o ering them other V markets, because it is not just about aVordability, it things that the private sector cannot o er. There is is about the appropriateness of your product, can perhaps more that can be done through dialogue. you get it to the person, can it be kept stable, do they have to travel a long wayto get it, all those sorts of Q338 Chairman: Another one where you have an things need to be taken into account. We are looking interesting summaryof Unilever’s contribution is veryhard at that and we will probablydo what we Development Africa. Obviouslyit is yourown take, have always done, I think, which is to try things. We but you talked about trading between Nigeria and will probablytrysome practical experiments, we will Ghana and the diYcultyof getting transport routes; probablychoose some areas where we think there is you have said that it has taken time to get transport a particular need and we will trythings, just like we tried smaller unit doses to help people buy 11 Exploringthe Links Between International Business and aspirational products; we will trythings in markets Poverty Reduction: A Case Study of Unilever in Indonesia, An Oxfam GB, Novib, Unilever, and Unilever Indonesia and see what works. That is probablyhow we will joint research project, 2005, page 86, http:// get into it. We are quite keen to follow up the www.oxfam.org.uk/what—we—do/issues/livelihoods/ research that we did with Oxfam, reallyto downloads/unilever.pdf 3414551002 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 87
9 May 2006 Ms Sue Clark and Mr Walter Gibson routes established and it can still be a struggle. Is this anything that the donor countries can do, positively to do with roadblocks and physical things like that, or negatively? I am asking you both the same or is it the qualityof the roads? question. Mr Gibson: I am not a real expert here, I have to Mr Gibson: I am greatlyencouraged bywhat I see in confess, but I think it is about just a shortage of good the business at the moment. Some countries are roads quite honestly, just very poor physical more advanced than others and have more infrastructure that makes transport verydi Ycult. confidence than others. India is currentlystrong and is taking the lead in manyareas, but the learning that that is generating is being picked up in other places Q339 Richard Burden: Could I ask you two and models that have been developed there have questions about the Investment Climate Facility been picked up, so one of the things that we can do which you are one of the founding sponsors of. First is transfer knowledge and best practice and see a new of all from Unilever’s point of view what do you will in Africa to reallytryand make that a success. think the business case is for getting involved in China is a huge opportunity; we are in there for the initiatives of that sort, but also specificallyon the long term but it is starting to show positive signs. Investment Climate Facilitywhat added value do Ms Clark: From our point of view, yes, we are very you think that specifically brings over and above encouraged bywhat we see. If youlook at our plans other initiatives of the World Bank and so on? we see good growth coming from Africa, but we always have to remember the exogenous factors, Mr Gibson: The business case is quite climate particularly. In Tanzania when we look straightforward in the sense that we want to grow ahead to the next year, with the drought there we are our business in Africa. There are a number of not as confident as we were. Clearly, economic obstacles to that that are not entirelywithin our stabilityis important: Botswana was alwaysthe control and we can see the benefits of being in a great growth model but over the last year has partnership like that where the objective is to suVered two significant devaluations, which has an encourage investment in Africa and remove some of impact. What more can donors do? From our those barriers. It seems like quite a powerful vehicle perspective it clearlyis about continuing to focus on to help address some of the concerns, so it will help the investment climate, but maybe for big businesses us to hopefullybe more successful in terms of it is how we can work in partnership to deliver perhaps overcoming some of the barriers—the infrastructure. Some of the agricultural initiatives physical barriers, the regulatory barriers, the trading that I talked about would be more successful if there barriers—which as an organisation we cannot deal were more small-scale irrigation schemes; getting with on our own, but it is again coming back to the our product out into rural areas still needs roads, benefits of partnerships where you have people who infrastructure, bridges and things, so there is more have an influence in other sectors. I think that would work needed to be done there. help us so, yes, it is an investment to help us grow our business in Africa. How does it add value over other Q342 Chairman: Do you make specific initiatives? It complements some of the other representations to donors on those fronts? Ms Clark: We are starting to, yes. We are in initiatives because it is not directlyseeking to discussions in diVerent countries, we are in stimulate the enterprise itself, it is more just trying to discussions in Zambia, we are in discussions in create a favourable climate in which enterprise can Mozambique. flourish and, as far as I know, there are not too many other organisations that are doing that. Q343 Joan Ruddock: Just a small point, you mentioned drought. What advice do you get or seek on climate change and what is the need to mitigate Q340 Richard Burden: If you talk about the World the known now or predictable eVects of climate Bank’s investment climate assessment and things change, particularlyin Africa? like that, does it reach something that initiatives like Ms Clark: To be honest, it is something that we are that do not reach? just now starting to turn our attention to. The latest Mr Gibson: I am not too familiar with that one, to be figures I have seen would have Africa reducing its honest, so I am perhaps not the best person to ask on rainfall by30% and India increasing it by30%, that, but again if you would like an answer on that I which would have significant impacts on our am sure we could supplyyouwith that. business, so it is something we are starting to turn our attention to. We reallycan see practical e Vects of it in South Africa where barleyis reallysu Vering Q341 Chairman: In conclusion, you are both now because of what appears to be climatic change. describing business successes, things that you have Mr Gibson: I was passed a note bya colleague to say done to grow your own businesses, which is after all that we manufacture in 18 African countries and what you exist to do. What is your feeling about the there is soap manufactured in almost all of those. business climate for your kind of companies in the Joan Ruddock: Hopefullyyoucan get into the ones poorer countries? Do you feel that it is going you have not yet got into. forward on all fronts, or do you feel that there are either certain countries or certain areas where you Chairman: You are not shipping it out of Port are either static or going backwards? Is there Sunlight then. Thank you very much. 3414551003 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 88 International Development Committee: Evidence
Tuesday 16 May 2006
Members present:
John Barrett Ann McKechin John Bercow Joan Ruddock Mr JeremyHunt Mr Marsha Singh
In the absence of the Chairman, Joan Ruddock was called to the Chair
Witness: Mr Andrew Hollas, Head, Africa Markets, PricewaterhouseCoopers (PwC), gave evidence.
Q344 Joan Ruddock: Can I welcome Andrew Hollas, you are doing with the donor agencies that you can who is the Head of Africa Markets for justify, in the way you clearly sought to justify in PricewaterhouseCoopers. Thank you very much for your opening remarks? your written submission12, Mr Hollas, and thank you Mr Hollas: If you accept that the private sector is a for coming todayto help us with our inquiryinto legitimate provider of ser vices anywhere in the private sector development. I would like to begin if economy, if the British Government wants to spend I may by asking you if you can possibly justify why money on development assistance, maybe spending it is that donor funds which are for private sector some of that moneywith private sector institutions, development should be going to what are generallycharacterised byexcell ence, quality, eYciency, top regarded as veryexpensive multi-national quality people, value for money, accountability, consultancies. always delivering results, then spending some of that Mr Hollas: Before I respond to that prejudice can I moneywith consultants who are characterised by just give you a few words as to who and what I am that kind of behaviour strikes me as being a very because I think it might be relevant to your good thing. Typically, many other institutions that understanding? Perhaps most of you here think that are involved in development do not necessarilyhave because I am Andrew Hollas, Head of Markets in those characteristics. Whynot therefore spend it Africa for PricewaterhouseCoopers, I sit in some with the private sector? Can I digress again great big oYce tower on the other side of the river. because— Joan Ruddock: No, surelynot. Mr Hollas: In fact I do not at all. I moved to Africa Q346 Joan Ruddock: Just let me be certain that in the 26 years ago as a relatively young man, needless to question I have asked you are certain what I am say, and I have spent all of my professional career trying to get at. Clearly you can be an exemplary based in Africa. I have lived in Kenya for all those companydoing all this work but what might be the 26 years and through that period of time I have added value to the development process? Arguably, worked in about 30 diVerent African countries, so the Department itself, DFID, could provide its own the perspective I seek to bring to this Committee is services for itself. It could be spending all of its not that of a UK based partner of some great big moneymore directlyin encouraging the private multinational but of a practising private sector sector to develop in the countries that it is charged businessman who has lived and worked for most of with donating funds to. his professional life in the emerging markets where I Mr Hollas: That latter point is the keyone. My believe I have played a part in building a very proposition would be that the fundamental successful business which I would be quite happyto approach to development should be a private sector- debate with you is probably one of the best examples led approach to development. Whydoes economic of contribution to sustainable development than growth take place? Economic growth takes place anything that you are likely to hear in this when you have a very active and vibrant private Committee. I am sorry—do I call you madam sector. Look at the historyof our own countryhere. Chairman? Look at what is happening in India, China, Joan Ruddock: Just Chairman. We are a very whatever. What is the characteristic typically of informal Committee. I should perhaps point out Africa? It is that it does not have a particularlyactive that the Chairman of the Committee is currently private sector. When it does have an active private abroad on International Development Committee sector the need for donors and development business, so you have me instead. assistance will probablyincreasinglydiminish. To Mr Hollas: I am sorry—having temperamentally mymind therefore the fundamental proposition of responded to your question I have lost the flavour of aid policyshould be about tryingto develop the it so if you were to repeat it to me I would be grateful. private sector. If you are asking to try and develop the private sector it strikes me as quite logical that Q345 Joan Ruddock: We have donor funds available you use the private sector, particularly the private for private sector development. That is the subject sector that is based in emerging market countries, as into which we are inquiring at the moment. We are an instrument of development assistance. Mypoint wondering whya proportion of those funds should of emphasis is not so much the private sector as a be spent on organisations like yours. What is it that service provider to a user of donor funds but a development policythat is fundamentallyfocused 12 Ev 197 on the development of the private sector. If there is 3414551003 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 89
16 May 2006 Mr Andrew Hollas one thing that I passionatelybelieve, and, quite can deliver more than any bodyelse does”, or frankly, the reason I have come from Nairobi and whatever, so I do not think it is unreasonable to put am sitting here today, it is that development policy it to you very simply like this. Based on your very at the moment has simplynot embraced the extensive experience, both in terms of duration and fundamental mind shift that is necessaryin order to geographical scope, c an you identify for us, Mr support the private sector as the principal agent of Hollas, three projects with which you and your development. business have been involved that have been beneficial to one or more developing countries in Q347 Joan Ruddock: There maybe some sympathy Africa, emulation of which you have not seen by any in this Committee with that view you have just other companyin Africa? expressed, but are you able to demonstrate how your Mr Hollas: The last bit worries me because I would companyin its relationship with DFID has not claim a huge great uniqueness. Bear in mind that improved outcomes with regard to the growth of the we are a provider of consulting/advisoryservices. private sector where DFID is involved in-country? We do not run our own projects. We do not create Mr Hollas: That kind of request for quantitative factories or businesses. We do not build dams, proof of something is verydi Ycult to achieve. roads, whatever. We are a service to projects that are Typically, DFID will work through programmes or undertaking that kind of thing. A unique project— projects and will hire PricewaterhouseCoopers or and we are going to talk about it later but let us flag whatever to help in that project. We will have our it up—is the Global Fund. We are currentlydoing contract, our terms of reference. We will satisfythat some work in Kenya for DFID which is a similar we have met those terms of reference. I am not kind of thing. It is multi-donor. It is eVectively entirelysure that I am the person here who is basket support funds going into the education sector qualified to saywhether or not that DFID where an awful lot of moneyis going, not through programme then achieved its objective or not. a series of projects but is going into the government financial system and DFID wants assurance as to what happens to that moneyand accountabilityfor Q348 Joan Ruddock: I thought you were arguing that money, and I think that is a very good model that you have something special to bring to this where PricewaterhouseCoopers as a Kenyan arrangement, that you would improve the outcomes. companyis playinga veryimportant role. The Mr Hollas: I do. You were asking me a question specificityof yourquestion is what causes me some specificallyabout DFID programmes. If I may diYcultybecause I suppose the nature of my broaden the question and answer what is the evidence is not what that is about. I was not contribution that myorganisation has made to necessarilyhere to talk about individual projects. I development in Africa byworking with DFID and was here to talk more about our whole approach to other development partners, then I am more development and working with the private sector. comfortable answering that question because I do not feel comfortable in commenting veryspecifically on anyDFID project. I have not researched for that Q350 John Bercow: If you were to be asked, which is but, looking at the more general situation, I will what I am in fact asking you, to summarise that happilyrespond. Where a donor needs a service, and approach to a group of people who have just often that service with our kind of organisation is descended from Mars and are completelyunfamiliar associated with assurance over the use of funds, the with the existence, let alone the work, of the management of funds, the financial management Department for International Development, or systems that go with those funds, I am extremely indeed the work of PricewaterhouseCoopers, how confident that where myorganisation has been would you summarise that approach? involved in that kind of thing the control of the Mr Hollas: PricewaterhouseCoopers’ core skills disbursement of funds has been verye Vectively typically tend to be in financial management and undertaken. In our submission one of the things we assurance, and if a donor or a private sector talked about was the Global Fund on HIV/AIDS, organisation wishes to use those services then the Tuberculosis and Malaria, which is a very most eYcient and eVective means of finding those interesting and innovative example of how vast sums services will come from a private sector organisation of moneyhave been moved verye Vectivelywith a such as ours. That is applicable not just to our kinds verylow administrative cost byusing a non- of services, which goes back to myopening point: it bureaucratic, essentiallyprivate sector model to is not just applicable to assurance and financial manage the disbursement and control of funds. management and the kinds of consulting services we Joan Ruddock: We will want to talk to you about provide; it would also be applicable to manyother that. services that are needed bythe donor communityin order to be eVective. Q349 John Bercow: I understand that you feel a little tentative and diYdent about over-claiming. On the Q351 John Barrett: I wonder if you could let the other hand, business people on the whole are not Committee know just where PwC stand in relation given to under-claiming and if theyare in to their competition. Who else is in the market for competitive situations theyare usuallyinclined to similar work? What are your unique selling points say, “What we oVer is bigger than what everybody and what gives you a competitive edge? You else does, better than what everybody else does, mentioned early on that you yourself have long cheaper than what everybody else does”, or, “We experience in a number of African countries and that 3414551003 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 90 International Development Committee: Evidence
16 May 2006 Mr Andrew Hollas also there was a lot of local involvement byPwC, but we are really talking ab out in the private sector is could you give us a general flavour of what makes what is helping Africans, Kenyans in your case, to PwC diVerent and who else is in that market? develop their own small businesses, get their own Mr Hollas: Obviously, I think PwC is the best at this, businesses oV the ground and support themselves. having worked for them for 32 years and nobody To me there is a mismatch between policies that do else, having been a partner in the firm for 20 years that and spending moneyon large international and so having a veryhigh level commitment to my consultancies. When you look at the countries that own organisation. In Africa the other big three have been successful in developing the private accounting firms, Deloittes, EY, KPMG, are all sector, the Chinas, the Taiwans, the Koreas, going present. PwC is probablythe biggest and probably back, I do not think that anyone would say that the the most active in the donor sector. keyto the success of their model was spending lots of moneywith consultancies like PwC. Of course, you Q352 John Barrett: Do each of the other three have have a business to run and I have no doubt that you sections that are into the same work? have a lot of highlyexperienced consultants and I Mr Hollas: Yes, but the model has changed, Mr welcome the fact that a lot of them are locally Barrett. In years gone by typically we had those recruited now, but what I reallywant to ask is how firms, Price Waterhouse and Coopers and Lybrand, are you helping the type of private sector as we were in those days, which tended to have teams development that eliminates development policyin of people predominantlybased in London or in a small village in a remote part of Kenya rather than Washington if you were working for USAID. just being a big contract for a government Those teams of people would typically pick up a department or an infrastructure project? contract and flyinto a country,do the job and go Mr Hollas: You demonstrate a healthydegree of awayagain. Theyhoped the job was successful, cynicism there. The rural areas in Kenya will sometimes it was, sometimes it was not. The model develop, yes, by smaller businesses starting there, has changed significantlyand, certainlyin but perhaps the biggest driver to development in PricewaterhouseCoopers’ case,—and, to be honest, those rural areas will be if the economyas a whole I do not feel entirelycompetent to comment on the grows. I think you have to take a holistic approach model of our competitor firms—the focus was very to this and I think there is a great danger that you deliberatelyabout eight yearsago to shift from what focus on saying, “All we have to do is get small we called essentiallyan export model of resources business to grow and that solves all the problems of based in the UK or the US to building reasonably employment and poverty alleviation in rural areas”. large teams of people based in centres in Africa, Small business will grow when the bigger economy particularlyin Nairobi where I am, and there is a big grows. I think it is challengeable how much all the team in India, and those are teams of Indians and focus that donors have—and this is purelyopinion, Africans. Yes, I am of European origin but I represent about one per cent out of 100% of my bythe way;I am not an academic, I am not a organisation. Ninety-nine per cent of my firm are researcher—on small scale enterprise development, eVectivelyindigenous Africans of African or Asian achieves. When you get broader economic descent and theyare the people who are actually development it is characterised bya lot of small working on most of these contracts. That is our businesses developing, but trying to create the small unique selling point. That is our competitive businesses does not necessarilycreate economic advantage. The same is true of India. We are development. You keep coming back to spending all bringing in local expertise with local capability this moneyon international consultancies. which can interface with other stakeholders because PricewaterhouseCoopers is not an international theyunderstand those culturally,that gives us our consultancy. PricewaterhouseCoopers is a local eVectiveness, and we are sustainable. We do not organisation. What contribution do we make in the finish a contract and go away. We are there on the countries we operate in? We are the biggest single ground. We want to sustain the business because we trainer of professional accountants. We train more want to build our own practice. Yes, we want to do than are trained in anyother organisation. Those more work for donors but it is about doing it with accountants then go out and work for donors, they those people on the ground, and, of course, we are work for corporations, theywork for government, highlymotivated to see the economies of our African theywork wherever. Accountants, whether youlike region grow ourselves because that is going to them or not, are fairlyessential to an e Vective produce more business for us. We have a real economic process and the biggest single trainer of stakeholder commitment to this. Again, without those accountants in the emerging world is probably sounding too much like a cracked record, PricewaterhouseCoopers and that is a contribution recognising the motivation of the private sector to that we can be prettyproud of. You talked about see the development of these emerging markets is a India and China. Development took place in India veryfundamental issue. Our success is in the success and China because it was led bythe private sector of those market places. That is whyI am there. and then the private sector bought services from PricewaterhouseCoopers. Our fastest growing Q353 Mr Hunt: I just have a slight warning bell business in the world in PricewaterhouseCoopers is ringing from what you are saying. I wholeheartedly in China. It is a recognition that as you get private agree with you about the importance of the private sector development you need our kinds of services sector to development but it seems to me that what and you need them to be provided locally. There is 3414551003 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 91
16 May 2006 Mr Andrew Hollas a contradiction in your question that I do not fully large multinational companies, most of which are understand, that we somehow focus on this little bit not based and whose headquarters are not based in and that other little bit is not so good. Africa. Is that right? Mr Hollas: The client base of mybusiness in Africa can be segmented verybroadlyinto three. What we Q354 Mr Hunt: I suppose I was asking you to call the PwC 1,000 clients, the Unilevers, the explain why you think we should focus on your little Barclays Banks, the oil companies, whatever, the bit; that is all. ones that you think we are exclusively working for, Mr Hollas: Mylittle bit is not a little bit. Mylittle bit represent one third of our client base. is a fundamental statement that aid policies, Ann McKechin: But more of your profit comes development policies, historicallyI think have been from there. quite wrong because theysimplyhave not embraced Mr Hollas: No. Whyare youso hostile to talking the private sector. If I dare saythis within this more— hallowed hall, as it were, if you look at Prime Minister TonyBlair’s letter that was circulated on where we are on the Commission for Africa, the Q357 Ann McKechin: Mr Hollas, I would be grateful Gleneagles Agreement and what-have-you, a five or if you would just answer the questions rather than six page letter, it did not mention the private sector that we have a studyabout our attitudes behind once13. If you look at the JeVreySachs report on them. We are here to find facts so it would be very meeting the Millennium Development Goals it does helpful if you would just answer the factual not mention the private sector at all, but it is the questions. private sector that is going to be the engine of Mr Hollas: Okay. A third of our revenue comes from economic growth14. It has been in this country, it has those PwC 1,000 multinational companies. A third been everywhere in the world. of our revenue comes typically from very significant, important local companies. Local companies might be power companies, utilitycompanies, Kenya Q355 Ann McKechin: I have to say, Mr Hollas, that Airways, those kinds of companies, big locally I found the written submission from your colleague owned companies which need a qualityservice that verydefensive, which I found surprising. I wonder if can be provided from our kind of organisation. you could take away the defensive attitude and About a third of our revenue comes from perhaps answer some specific questions. When you involvement with the public sector. The public talk about economic growth, and you are saying that sector maybe either funded bydonors, and typically development theoryhas been going in the wrong in Africa it veryoften is funded bydonors, or it may direction, are you talking about sheer economic be funded bygovernments themselves, a direct growth of GDP or are you talking about that linked contract with the Government in Nigeria or to employment on the development side that aVects something like that. We are not there primarilyto the poorest people? When you talk about the fact serve those big international clients. I am in Africa that you think we spend too much time down at one because I want to be in Africa. I have been there for end of the economic cycle, the small end, are you nearly30 years. saying we should be spending more time on most of your clients and the biggest client sector, which will be the multinational companies, which the big six Q358 Ann McKechin: We are not here to talk to you accountancyfirms are in business to service? about your own personal role in Africa. We are here Although I note your statement about PwC being a to talk about PricewaterhouseCoopers and the firm local company, you are part of a very large that you represent. transnational network where profits are derived Mr Hollas: But I represent PricewaterhouseCoopers from some levels of partnership which are not based in Africa. in Africa. Mr Hollas: Can I correct you as a matter of fact on Q359 Ann McKechin: What I am trying to clarify is that last point? that clearlythe experience of yourcompanyrelates Ann McKechin: Yes. to multinational companies, high income earning Mr Hollas: The profits of PricewaterhouseCoopers indigenous companies and large scale consultancy Africa Central, which is the name of the business contracts and that is where your area of expertise that I belong to, staywhollywithin that partnership. lies. Is that correct? The profits of PricewaterhouseCoopers in the UK Mr Hollas: Yes. staywhollywithin the UK. We are not— Q360 Ann McKechin: That is what we want to try Q356 Ann McKechin: But the principal reason why and clarify, how you think that expertise can be used you set up in all these countries is to service firstly towards assisting development and how you rate that you are diVerent from local consultancyagents. 13 Letter dated 09 March 2006, from the Prime Minister, What extra do you provide? Chancellor of the Exchequer and the Secretaryof State for Mr Hollas: We are a local consultancyagent. That International Development is myfundamental point. Ninety-nineper cent of my 14 Witness correction: This statement is factually incorrect—I V should have said it makes very little reference to the private sta are national citizens of the countries in which sector primarily as a provider of altruistic/philanthropic we operate. We are the biggest trainers of assistance not the principle level of economic development accountants in Africa. 3414551003 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 92 International Development Committee: Evidence
16 May 2006 Mr Andrew Hollas
Q361 Ann McKechin: Are there other consultancye Ycientlyand as e Vectivelyas we can. There is a agents which were formed and are based within the degree of altruism in it but there is also a degree of continent? our doing good bydoing good business. I think that Mr Hollas: Yes. is fundamentallyimportant to development.
Q362 Ann McKechin: What I am asking you is, what Q364 Ann McKechin: Do you think you have over- is the comparison between what you oVer and what extended yourself in the past on contracts or gone theyo Ver? Do they, for example, have more into areas in which you do not have as much experience of the SME sector which I would not knowledge of the local area? You have talked about expect one of the big six accountancyfirms to one or two good examples. I am just wondering specialise in? Theydo not specialise in it here in whether there have been some where, as you Europe. Theyobviouslyspecialise in large scale previouslysaid, things did not go as well. What contracts and large scale companies. That is where lessons did you learn from those and what changes your expertise clearly comes from and always has did you make? done. What I am trying to say is, does a local Mr Hollas: I do not believe in myexperience I have consultancyfirm which mayhave been developed been involved in disasters. Do I believe that some and brought up indigenouslyin Africa and which projects have worked better than other projects? has been servicing the small and medium sized sector Yes, of course. I am honest enough to admit that; have more experience of that sector than your firm that is life. Sometimes it could be PwC’s fault, that V would have? Where are the diVerences? I am asking we had sta changes or maybe put the wrong a technical question which I am sure as an resources onto a job initially. More often than not accountant you should be well able to answer. where things go wrong it is perhaps because the Mr Hollas: Sure, there are organisations which work terms of reference or expectations were not properly onlyfor verysmall clients, so theyknow more about set beforehand. There was not a proper working for those verysmall clients than I do. Does understanding of stakeholder requirements. Very PricewaterhouseCoopers do work in the SME typically there is not an understanding of what sector? Yes, it does, but it does work that is not government needs and what its interests and interfacing necessarilywith those verysmall motivations are. organisations. Let me give you an example in Uganda, an umbrella project called PRESTO, Q365 John Barrett: You mentioned a little while ago funded bythe US Government, that was looking at that there was probablylack of recognition of the how finance could be provided through institutions importance of the private sector and you quoted the into the small scale sector. There needed to be a Prime Minister’s letter and JeVreySachs’ report 15.Is central project management unit. There needed to be your feeling that the priorities are now changing people who could design and run training. There because people are now realising that the private needed to be people who could build consulting sector does have that keyrole, because again in the capacityin other smaller organisations. It is a very countries which have been successful the private nice marriage of PricewaterhouseCoopers, the sector is playing a larger part in that? Do you think donor fund and the SME sector and all the that the focus of DFID and other donors’ work on institutions that work in the SME sector. investment climate work is the right wayforward? PricewaterhouseCoopers was doing the things we Clearly you need the infrastructure, you need the rail are good at doing and other institutions, lending out system, you need a number of issues in order for in rural areas, providing services out in rural areas, entrepreneurs to thrive. You are saying that you were doing what theywere good at. These things are thought that in the past people would say, “Let us not mutuallyexclusive. The suggestion is that if you create businesses”, and you are saying now, “Let us combine the capabilities you get a better result. It is create the climate in which these businesses can not one or t’other. thrive”. Is that focus on investment climate work the right wayto go? Mr Hollas: Yes, I do like the investment climate Q363 Ann McKechin: Are you doing more projects work. I am verynervous of the dimension of the which combine that level of expertise? Would that be questioning here, is it this or is it that, because I do a growing trend of the consultancyindustry,to seek not think life is like that anyway. I think it is a more out more partnerships which can widen the area of holistic approach. We must have small and medium experience and knowledge that theycan pass on? If scale enterprise development. We also have to have I can give you an example, you do not have much large private sector development. It is not that we experience in the voluntarysector or in the not-for- take one and not the other. I think work around the profit sector, but obviouslythese are key investment climate is good. It is not going to be the components in terms of developing the private absolute cure-all of things because generally sector as well. I am trying to find out whether there speaking the private sector, when provided with is a changing philosophyin yourorganisation and opportunitythat it feels with acceptable risk it can how you achieve those sorts of partnerships. get an acceptable return on, will find its own Mr Hollas: We work in partnership with other facilities. That is what our business is entirelyabout. organisations but there is no change in philosophy. Myphilosophyis a commitment to sustainable 15 JeVreySachs and UN Millennium Project, Investingin development in the countries in which we operate. Development: A Practical Plan to achieve the Millennium We do that byrunning our own organisation as Development Goals (2005) 3414551003 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 93
16 May 2006 Mr Andrew Hollas
Perhaps more relevant is looking at what are the Mr Hollas: I think it is critical. You must run public characteristics of India and China that have led to utilities like private sector organisations. The cost of the rapid economic growth made bythe private power in Kenyais four times th e cost it is in South sector there. Can we create such circumstances in Africa. Whyis that? There are perhaps reasons Africa that might lead to similar development? I around the availabilityo f hydro power and things think we need that kind of analysis. I know we have like that but the reason fundamentallyis that they got to be a little bit careful that we do not focus just are ineYcient. It is changing, thankfully, because the on micro projects, on some kind of investment Kenyan Government has changed. We have facilities or building business associations or things ineYcient organisations. You sayyouhave travelled of that nature. This more holistic approach to to Africa. Have you had the pleasure of travelling on private sector development I feel is necessary. Kenya Airways? Joan Ruddock: I have. Q366 John Barrett: Do you feel that DFID are on Mr Hollas: There is an organisation that has the right track and working with the right partners completelytransformed as a result of a change in the or people? management culture and organisation. You used to Mr Hollas: I have huge respect for DFID. I have sit at an airport and wait for three days to see worked for DFID a number of times. I have huge whether a plane was going to turn up. Now you get respect for virtuallyeveryindividual I have ever on Kenya Airways in preference to British Airways come across that worked in DFID. I think theyare or anybody else because it is such a well run airline. incrediblyable, incrediblysincere and incredibly It is run byKenyans.That is a classic example. If we committed people. Does DFID properlyunderstand could do that with the telecoms companies, if we and work with the private sector? No, in myview, could do that with the utilities companies, if we which I think is a great shame because I think there could do that with the ports, if we could do that with is such great talent there that could build this the road networks,— If I can be pre-emptive, I know partnership between the private sector and DFID, privatisation is the dirtyword here and that that still looking at how it can do more to create an enabling does not end up with providing water for the poor environment and, almost as a political instrument, slum people who live in Kibera. That has actually seek to influence governments and policies and got nothing to do with privatisation. Privatisation is environments so that the private sector can then just to do with the eYcient running of an organisation. get on with it. If you have a development need, which is to provide water into Kibera, you have to work out how you Q367 Joan Ruddock: What is the private sector as will use that organisation to provide water into you see it? Those of us who have paid a number of Kibera rather than saythat it is privatisation that visits to developing countries see that the majorityof stopped it happening. Over and over again in Africa people who are in the private sector are engaged as you will find that when private sector participation individuals, verysmall, minute entrepreneurs, starts to happen in public utilities those utilities Y V farmers, traders, all that sort of thing. When you are become much more e cient, much more e ective talking about DFID enabling, who or what is DFID and that either the price goes down or the qualityof enabling or should be enabling in your view? service goes up and theysell a range of services. Mr Hollas: Let us take an example, say, Kenya. Most African countries have a huge percentage of Q370 John Bercow: Mr Hollas, as it happens I very their GDP within the public sector, much bigger much agree with what you have just said. I would than typically exists in the UK or the US or just make the point in passing that there is no wherever. How can we shift that economic activity question of us either being hostile or cynical. All we from the public sector into the private sector? That are trying to do is ask probing questions because we is what I think fundamentallyDFID should be are conducting an inquiry. Please do not feel that we seeking to tryand address. I am not sure I have are out to get you; absolutely not, but we are out to answered your question. ask questions that we want to ask and to get the answers we are seeking. As I said, I happen to agree Q368 Joan Ruddock: No, I am not sure you have with what you have just said but I would like very either. I am talking about the majorityof ordinary brieflyto come back to what JeremyHunt was people being private sector workers. Theywork for asking you about a few moments ago because I am themselves. Theyare not part of a huge government not quite convinced of your broader thesis, which is public sector bureaucracy, so when you say we that if you get development then to an extent over a should move expenditures from the public to the period the rural areas and the livelihoods of people private sector what does that mean? there will in a sense take care of themselves. That Mr Hollas: Whilst lots of people might be working thesis seems to be the development equivalent of for themselves the amount of GDP that sits within saying we will trickle down economics, which was the government system is much bigger. All those the subject of much debate in our own countrynot people might be working for themselves but theyare verylong ago. I would like to put to youthat I rather working for peanuts because economic development share Jeremy’s concern. When we visit developing is not taking place. countries we are not sniYng at the verysubstantial commercial development that in some cases has Q369 Joan Ruddock: So are you talking about taken place, but it has tended to be heavily privatising utilities essentially? concentrated in big cities and we are often very 3414551003 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 94 International Development Committee: Evidence
16 May 2006 Mr Andrew Hollas struck bythe enormous disparitybetween that because theyarestate based , on strong foundations concentrated development and activityin big cities with which later on to compete on the world stage, and the virtuallybarren nothingness in the rural and that does not exist in Africa? areas. How in practical terms is the development of Mr Hollas: To be honest, the issue of ownership is the sort that Jeremywas sayingis so often lacking to mymind of relativelysecondaryimportance. We and which we know to be lacking going to take could debate that but I do not think that is the point place? Do you accept that unless there are some I would like to respond to. What happened in India levers of either macroeconomic or microeconomic and China was that the state, even if the state intervention it is going to happen incrediblyslowly, retained ownership, recognised that it needed more if at all, and, if you like, the distorted character and of the characteristics of the private sector and the massivelyuneven nature of development is a needed the expertise of the foreign private sector in proper concern of our committee? order to facilitate the development of those very Mr Hollas: Thanks for that and let me saythat monolithic organisations, so theytook on the whilst I might find the circumstances hostile I do not characteristic of the private sector. find you hostile. John Bercow: We are not, I assure you. Q373 Mr Singh: But theyhad solid structures in Mr Hollas: If mypassion runs over then forgive me. place. Going back to Mr Barrett’s question, I do think this Mr Hollas: Yes, theyhad the structures in place. is a holistic thing and I am not here to argue that you How solid theywere I do not know because they ignore the small and medium scale enterprise sector. were probablyveryine Ycient and veryine Vective. I You do not. You are absolutelyright. Interventions am not an expert on India and China but I think it that do look at rural credit, rural finance, training, was the recognition that “These monolithic even perhaps more innovative things about how you organisations are not achieving the levels of service can go out and buyservices in those rural areas, that we require and are not going to fuel the trade policythat might help the rural farmer, are economic growth that we need. We do not want to clearlya critical part of the development processes. give up ownership of them for political reasons. I actuallythink there is a part for PwC to playin that Therefore what can we do?”, and theyadopted a because I have alreadydescribed that if youwant model of joint ventures, of partnerships, of some umbrella projects and project management and sales, but certainlyof taking on private sector assurance over the use of funds and the use of behaviour. technologyfor training and things like that an organisation like ours, working through other Q374 Mr Singh: But theydid have an economy,and intermediaries in local villages and communities, can I recognise the ineYciencies in it, which was largely be a veryuseful part of that process. I am not run for the benefit of that countryand not for the arguing for one or the other. I do though believe that benefit of international capital. a lot of that development in the rural areas will be Mr Hollas: Yes. Having said that, lots of companies trickle-down. Whether that is politicallyincorrect or are making veryattractive profits because that is not I am not sure. whytheyare investing. Whether it is through dividends out of companies of their own or whether it is through management agreements or whether it Q371 John Bercow: If it is your view let us hear it. is through service contracts, royalties, licences, there Mr Hollas: I trulydo believe that, and, bearing in are diVerent kinds of return that are coming out of mind that more and more of Africa’s population is that. In addition to the Chinese political will there is moving to cities anyway; I think we have just gone an awful lot of foreign expertise being used to create beyond 50% of the population now living in cities, that development. As I say, I do not think the issue the economic model and the response is changing. I is necessarilyone about ownership. The issue I think do not for a moment argue that the small scale is about the expertise. enterprise is not going to be a veryimportant part of development and PRESTO is particularlyaimed at Q375 Mr Singh: PricewaterhouseCoopers could helping it. Theyare useful projects but I still believe make a state-owned industrywith its expertise and the more holistic, bigger economic development is consultancyjust as e Vective as a privatelyowned what will reallyhelp those people. company? Mr Hollas: Absolutely, as long as that state-owned enterprise—and we have done an awful lot of work Q372 Mr Singh: There are quite a few things going on state-owned enterprises; some have stayed in round in myhead at the moment. You mentioned government ownership, some have changed— India and China on more than one occasion in terms recognises the need for change. If you have a state- of all the private sector development and economic owned enterprise where the managing director is growth going on there, but is it not true to saythat going to be appointed not because of his abilitybut both India and China developed an economic base because he happens to come from the same tribe as more or less run or sponsored bythe state and so the president or is the brother-in-law of the minister theyhad an economywhich was largelyprotective, of something, if you get that kind of decision making growing because of that protection, and were then within state-owned enterprises, which sadly able on their own terms to liberalise and engage in typically happens still in many African countries, world markets and that their growth is based, then you will not get that change. However, if they 3414551003 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 95
16 May 2006 Mr Andrew Hollas say, “No, we are going to put proper governance company is now in the process of being privatised procedures in place. We are going to appoint people and PricewaterhouseCoopers is the lead transaction in an appropriate way, the right man for the job with adviser. That has resulted in verysignificant sale the right kinds of skills”, I think the ownership to proceeds to the government of billions of shillings, some extent is secondary. Having said that, I think the biggest single financial transaction that has it is often that change of ownership that is necessary probablyever happened in Kenya,so that is a receipt to create the conditions to put the right governance to government, but the bulk of the investment into and management in place, but I think one could that sector has come from local subscribers. What debate that. we are going to have now is a generating company which is publiclyquoted, which is owned by Q376 Mr Singh: You talked about trickle-down and shareholders, manyare institutional—local pension the fact that you believe economic development funds, insurance companies et cetera—but eventuallywill trickle down in Africa to the rural thousands upon thousands of individual Kenyans areas. There is no evidence of that in China and subscribed to that oVer. Secretaries, even India, is there? messengers, all kinds of people were buying shares in Mr Hollas: Of trickle-down? that oVer, and now hopefullywe are going to have a Mr Singh: Yes. well-run, commercial organisation owned Mr Hollas: I am not an expert on China and India predominantlybythe people of Kenyawith but I have visited both and I seem to see a lot of government realising a substantial financial gain activityat the lower levels. If youlook at indicators from doing it. I think it is a verygood success story like people being able to provide health for and now hopefullywe will get electricitystarting to themselves, people who are able to educate be generated at prices that industrycan a Vord and themselves, that is happening all the time. Whether people can aVord, and a government which will it is because more and more people, say, have sons perhaps then be able to spend the moneyto help get or brothers or fathers or daughters or sisters who electricityinto the Kiberas and the rural areas and work in bigger companies but now have the ability what-have-you. to trickle down the moneyif not the actual Mr Singh: It will be interesting to see if your employment I do not know, but I would claim no predictions come true. Thank you. expertise in that area. Q379 Joan Ruddock: Mr Hollas, just on that point, Q377 Mr Singh: From myreading of it the fear of the Marsha Singh has asked you about the public good governments and establishments of both countries is but there are aspects of public good which are not of a huge national rupture between urban and rural represented in what you have just said and I wonder society. That is why I think the question my if there has been anyindependent evaluation of what colleague asked about the importance of growing you have done and what the Government of Kenya development in Africa, especiallyin the poor have done. Has that been independentlyevaluated in regions, is as crucial as business development to terms of what is the public good? African countries. Mr Hollas: To be honest, I do not know. My Mr Hollas: I do not see a dichotomybetween assumption is that there are people within the World business and rural. Economic activitycan take place Bank and possiblywithin DFID and academics in rural areas; it can take place in urban areas. I do V around the world and what-have-you that look at not see a di erence between the two. Presumably these things. Perhaps there are Kenyan somewhere in your committee you are looking at parliamentarycommittees that look at these things. trade policies and things like that, which will Joan Ruddock: We would like to think so. Perhaps perhaps have quite a lot more to do with rural we should inquire. development in Africa than possiblythe role of big international consultancies, as you keep insisting on calling them. Q380 Ann McKechin: You have spoken about the need for a holistic approach. Clearly, if you are Q378 Mr Singh: Is there an example that you talking about other privatisation the need to create can give of a privatisation brokered by credible, sustainable, taxable income streams is very PricewaterhouseCoopers that has been good for the important because a huge amount of moneyleaves countryand good for the people or better for the the African continent everyyear.How do we create people and better for the countrythan what existed that system to make sure money does not disappear before? into tax havens? Mr Hollas: We are doing a verybig one at the Mr Hollas: The process, which has been verymuch moment in Kenya, which is the privatisation of the supported bythe British Government, of developing electricitygenerating company.As I think is true in independent revenue authorities within Africa, the the UK, the separation of ownership of the Kenya Revenue Authority, the Uganda Revenue generating capacityfrom the distribution capacity Authority, the Tanzania Revenue Authority, happened in Kenya as part of the power sector Zambia Revenue Authority, has been incredibly reform. There are two state-owned enterprises. One successful, and if you were to plot the tax revenues is Kenya Power and Lighting Company, which is a (and I am not an economist so this is somewhat distribution company, and the other is KenGen, anecdotal) that have been collected in those which is a generating company. The generating countries in the last 10 years you would see a very 3414551003 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 96 International Development Committee: Evidence
16 May 2006 Mr Andrew Hollas significant upward curve, that more and more Q384 Mr Hunt: I would like to ask you a specific people are paying taxes and taxes are being levied question and a more general question about your with more and more certainty. work for the Global Fund to Fight AIDS, TB and Malaria. I know that theyare a client of yoursand you work with them in 67 countries as a local fund Q381 Ann McKechin: There has been some concern agent so you may feel constrained in what you say, about corporation tax and whether or not some have which we would understand, but there are two views got to such low levels of corporation tax that they about the Global Fund. One is that it works are not sustainable and, as private industry extremelywell as a vehicle for harnessing hopefullydoes develop particularlyin natural international support for the battle against HIV/ resources which are increasing verygreatlyin value AIDS. There is another view that theyemploy200 now, they have robust systems where everyone who people in Geneva which is one of the most expensive is exploiting that growth legitimatelyin the country cities in the world. Theyhave administrative costs, I is providing their proper share of tax towards think, of $60 million although I mayhave that government so that theycan sustain the public wrong. I would be veryinterested in yourview about services which I would stress are vital in terms of the Global Fund and its eVectiveness. sustaining that growth. Mr Hollas: I cannot comment on the people based Mr Hollas: Myassertion—and it is purelyopinion— in Geneva. I do not know what their administrative is that most private sector enterprises that are owned costs are. The Global Fund as a head oYce is not our locallyor internationallyhave an inclination to pay client. We are a contractor to that head oYce. Could their taxes. Where taxes are not paid in Africa, we it be based in Nairobi as opposed to Geneva? It can point most often at politicallyconnected would be good for Nairobi if it was. Maybe there are institutions that are run bypresidents or cabinet good reasons to have it there. The Global Fund is ministers or whatever. seeking to move moneyinto projects to do with the prevention or relief of those various diseases, HIV/ Q382 Ann McKechin: Corruption is quite rife. I AIDS, TB and malaria. Theyhave looked for an would like to talk about legitimate tax and legitimate innovative model for being able to move that money companies so that theypaya proper proportion of that could achieve two things. One is it can move tax. You would advise governments that that is moneyveryquicklyand, secondly,it can move the important? moneyat relativelylow cost. I believe the cost of Mr Hollas: If we look at myown organisation and moving the moneyfrom the central organisation most of our clients, in most of the countries I into the recipient is verylow, fractions of a mentioned, particularlyeast Africa but also west percentage. It is eVective in that it moves it very African countries, theyhave seen the corporate tax quicklyand it is e Ycient in that it moves it at rates come down to sensible levels, typically around relativelylow cost. The Global Fund has virtuallyno 30%. Since those tax rates came down to that level staV based in anyof the countries it wants to the amount of tax that companies have paid has disburse moneyto. That is what the Global Fund gone up significantly. has contracted out eVectivelyto other organisations. There are primarilytwo dimensions. One is the fund management, the banking and disbursement of the Q383 Ann McKechin: It gets to a point where it is so money, being the cashier. There is also the Local low that theyare not getting the right level of Fund Agent, the LFA. PricewaterhouseCoopers is income. There have been some projects developed in predominantlya local fund agent, not the fund the past where theyhave paid verylittle tax. We went manager. The role of the fund agent is eVectivelyto to Mozambique and the Mozal aluminium smelter is give the Global Fund assurance that the moneythey a classic case where there is verylittle tax coming in want to disburse to recipients is going to people they from that project. That reallyis a worrythat want it to go to and that those people have the governments feel theyhave to negotiate that typeof capacityto make use of those funds. Typicallysayin contract. Africa, there will be hundreds of grant recipients in Mr Hollas: I do not know that particular instance everycountry,some much bigger than others. They but you may well in certain instances say tax will tend to be local NGOs, other types of local holidays say 10 year periods are legitimate institutions, possiblyeven private sector institutions instruments used bygovernment to attract in some instances, a corporate organisation that investment. Huge economic benefit is attracted from might be distributing condoms or something like that investment, whether or not government takes that. The Global Fund is using that as its interface anytax on it. It is better to have that smelter with the disease suVerers. The role of generating employment for people and giving no tax PricewaterhouseCoopers is to give the Global Fund to the government for 10 years. The issue may well assurance that that moneyis getting to where it is then be at what point in time should those holidays needed and that organisations are capable of using come to an end and should an organisation start to it eVectively. It is a fantastic model. paytax on a legitimate basis. Myfeeling is that most organisations across the two sectors of international and local nearlyalwayslook for certaintyand Q385 Mr Hunt: You started oV by saying that you equity, knowing what the rules are and making sure thought the fundamental mistake in aid policywas a that theyare applied fairly.If theyare, there is very lack of focus on private sector development. When little objection to the payment of tax. you look at the policy towards HIV/AIDS, it typifies 3414551003 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 97
16 May 2006 Mr Andrew Hollas a lot of the shift in policywhich has been to invest in world is spending on do ing those things is an insult things like health, education and humanitarian relief to the developing world anyway and we should be which, in the north east of Kenya, has been very spending massive amounts of moneyon helping our important recently. In the end, these policy fellow human beings have a better life. I am also approaches come down to how you divide up the saying that I think real sustainable economic money. Are you saying that less money should be development will come when the private sector leads spent on health, on AIDS prevention and it. Therefore, even if it is rhetoric, even if the humanitarian relief and more moneyshould be politicians and organisations just start to recognise spent on pump priming private sector development? and talk much more about the importance of the If you are not saying that, are you just really arguing private sector, I am not saying they need to spend for a change in rhetoric which would not have much loads of moneyon helping t he private sector to do impact on the ground? what it wants to do. That is up to the private sector. Mr Hollas: I hope I am not arguing for a change of We have the money. We will spend it if we can get a rhetoric because I am not a politician. I am just a proper return but let us be encouraged to do so. Let person committed to Africa who is trying to run a us see a change in the policy environment. successful business there. There is an aspect of Joan Ruddock: That is a verygood point at which to development policywhich is about the relief of end. Thank youverymuch for coming all the way suVering. We cannot let people starve or die or be from Nairobi and answering all our questions so uneducated. The amount of moneythe developed frankly.
Witness: Mr Stirling Smith, the Co-operative College, gave evidence.
Q386 Joan Ruddock: Welcome, Mr Smith from the economyand the informal sector. Most people in Co-operative College. Thank you for your Africa exist not just in the private sector but in the submission16 and for coming along todayto answer informal economywhere theyhave no links. They our questions. What do you think are the key links are not taxed. Theyare below the radar. That is not between the co-operative sector and private sector to saytheyare not a Vected byit; theyhave to payall development which, as you know, is the subject of sorts of informal taxes but getting into a co- this inquiry? operative helps them engage with the formal Mr Smith: When you talk about the links between economy. That is very important and that is why I the co-operative sector and the private sector, the think theyare part of the private sector but a little bit point we wanted to make is that the co-operatives diVerent. are a part of the private sector. DFID has produced its own document on private sector development Q387 Joan Ruddock: As we have alreadyobserved, analysing the private sector. They talk about sizes or we have a lot of people—vast numbers—in the types of private sector but the ownership question private sector, informal as you say, and that is now has not been paid as much attention as it should have a verypopular issue with the donor community,how been. There tends to be an assumption that you get to engage them to become a more eVective private big organisations, PLC multinationals, and the sector. Do you think that that being so fashionable small micro-entrepreneur which Mr Bercow was and donors wanting to engage with that kind of talking about, verysmall, individual entrepreneurs, development is going to mean that perhaps co- and that is about it. The case we are putting to you operatives are just left out because nobodysees them todayis that co-operatives are a veryimportant part as so relevant as trying to establish a small PLC? of private sector organisations. If you take the very Mr Smith: There is a little bit of historyto this. Our small, individual coVee or cocoa farmer in apex organisation in the UK, along with Joseph somewhere like Tanzania, it is verydi Ycult for that Chamberlain in 1903, introduced the co-operative individual grower of coVee or whatever it is to statutes in the colonies. Bythe twenties and thirties, engage with the larger market. Theyhave planted there was a lot of that. The co-operatives were very their crops. Theyare about to harvest their crops. fashionable as a model in the thirties, forties, fifties Theyhave had to borrow moneyfrom a money and in the post-independence period. Theywere lender to survive for six months. At harvest time they often used especiallyin commodities like tea and are in the situation of having to realise the moneyas coVee as a wayof taking the moneyawayfrom the quicklyas possible so theysell it to whoever they farmer because theybecame linked to central can, which often can be a middle person, and theydo government marketing organisations. In the eighties not get the proper price that theyshould get. A co- and nineties, theybecame veryunfashionable. The operative enables what we call collective problem we have had is trying to get them back onto entrepreneurship so that an individual member can the agenda and recognised. I have seen some of the bulk buyseeds or fertilizers. The co-operative other evidence submitted to your Committee and provides access to markets that the individual, small obviouslya co-operative needs to be an enabling farmer could not possiblyachieve. Co-operatives are environment in the private sector and the investment able to provide a link between the formal part of the climate has to be right. That needs to include the right kind of regulation and entryand exit terms 16 Ev 169 because co-operatives are businesses. If theydo not 3414551003 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 98 International Development Committee: Evidence
16 May 2006 Mr Stirling Smith work theygo out of business. That is what we are not £500,000 for tsunami rec onstruction projects. That seeing, part of the legislative framework actually would not have happened without the Strategic changing to provide the enabling environment. We Grant Agreement. The second achievement has been are quite pleased that DFID has a “how to” note on in the policyarea where we are having some success the co-operative and we would like to see other in shifting development discourse to include co- donors adopt that view. operatives and re-educating people about the bad stories from the sixties and seventies. Those have Q388 Joan Ruddock: When I was in Zambia I came been substantial achievements and we would like to across quite a number of villages where theywere carryon with those. Finally,we want to build our trying to establish farmers’ clubs at the behest of no capacityso that we can help co-operatives in the one, seemingly. This was a kind of indigenous south achieve their own development goals. growth. DFID was not present and there were not anyother international NGOs. Is this something Q391 Mr Singh: Do you think DFID properly that you have observed? grasps the concept of co-operatives and adequately Mr Smith: There is quite a strong co-operative supports the co-operative movement in terms of tradition in Africa anyway. We would argue that co- development or do you think there is a long way to operation is a verynatural, human phenomenon. It go? became a bit disrupted bythe colonial independence Mr Smith: Institutionally, there is a diVerent level of process. Often co-operatives have savings clubs and awareness in diVerent parts of DFID. There are things like that. It is making sure that we are not obviouslypolicypeople in London that we have over-regulating them. The entryprice for registering been working with who drafted the “how to” note. as a savings co-operative is often too high. It is trying Richard Boulter has been veryhelpful with that. to keep the element of a spontaneous, pre-co- That is okay. The problem we have often found is in operative helping them along but at the same time the field. I travel quite a bit and knock on the door making sure that theyare regulated properlyso that of DFID to tryto arrange a meeting in advance. The members are protected. rural livelihood advisers have a chat and theyhave not learned about strategic grant agreements. We Q389 John Barrett: When your Strategic Grant have the meetings. We do put our case but DFID Agreement (SGA)with DFID runs out later in the countryprogrammes tend verymuch to focus simply year, will you be seeking to renew the funding? on work with governments, correctlyso, on work Mr Smith: That has been a terrific initiative of with health and education ministries. Getting the DFID. There is a bit of a danger of DFID sometimes message across and getting the people in the country talking to the usual suspects. The Strategic Grant oYces to accept and understand the case and see it Agreements were mechanisms wherebynon- as part of the private sector reform we have not had traditional development players could have a as much success with as we would now like. At the dialogue with DFID. The SGA has now been policylevel, the “how to” note and the Civil Society extended to March next year in order to permit us to Unit, we are quite happywith the progress we have have a dialogue with DFID about what the future made. We hope translating that into the country relationship might be. We would like further dimension will start happening over the next few support. It has been enormouslyhelpful for us in years. raising our game in terms of international development work. It has helped DFID in terms of Q392 Ann McKechin: You stated earlier about policyexchange and policydevelopment. I do not getting the enabling environment right and I wonder think the “how to” note would have been as good as if you would give an example of where it has it is without us. That has also enabled us now to have happened and still has to happen in terms of dialogues with the World Bank. The UN now developing countries and what role the Co-operative recognises a lot of co-operatives so we hope the SGA College can playin building the institutional will be continued in some form or another. capacityin developing nations to facilitate that type of environment. Todaywe have had a discussion Q390 John Barrett: What achievements would you with a representative of PricewaterhouseCoopers. highlight as being a reason for this to continue? There seems to be a missing link between the co- Mr Smith: There were three outcomes we were operative sector and the not-for-profit sector on the looking for particularlyfrom the Strategic Grant one hand and profit orien tated companies and their Agreement. One was to do with awareness. We have advisers and consultants. I wondered whether there been able to get the message out to our members. is anyfacilitation between the two sectors or whether Although there was a vague, touchy-feely, woolly there are still problems in trying to get them to speak interest in international issues and co-operative to each other. members had been verysupportive about fair trade, Mr Smith: In terms of the enabling environment, the real understanding was not there. Because of the perhaps the best thing to do is to give some examples work we have done with the SGA, we are now and a bit of history. Tanzania now has a very good getting a lot of co-operative societies coming to us co-operative policy. Theyhave recognised the and saying, “We now want to do something. We importance of co-operatives in the economy. They have £50,000 or £100,000. How can we give support have put them into the PovertyReduction Strategy to a co-operative in the south?” The SGA has helped Papers (PRSP). Theyhave changed the Co- us in our own appeal to members. We have raised operative Act. Theyhave reco gnised the existence of 3414551003 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 99
16 May 2006 Mr Stirling Smith the pre co-operative and how theycan be helped so gave? Secondly, as guardi ans of the taxpayers’ that is verygood and a great change in the past they investment at international level, how can we be sure have virtuallynationalised the co-operatives, kind of as donors that any moneythat DFID spends on bending the stick. The problem in Tanzania was that helping the development of co-operatives does go often the local level co-operative oYcers have not into those new types of co-operative, where the been trained and are not aware of what the benefits staywith the people who are working in Government’s own policyand regulatoryprovision them and not into the typ e of co-operatives that have now is. The sort of thing you need in Tanzania is to become an agent of state control? provide that training for the co-operative Mr Smith: Take, for example, Kuapa Kokoo in department’s staV. If you take a less than Ghana. Theyprovide the fair trade chocolate. They satisfactoryenabling environment for example like are the main source of the fair trade chocolate. That India, if you take Tamil Nadu, in the last 20 years is a co-operative of cocoa farmers. It is not registered locallyelected co-operative boards have onlybeen in under the Ghanaian Co-operative Act because that charge of their co-operatives for one year. For the is one of the old fashioned, bad Acts. Theyfound a other 19 years the Registrar of Co-operatives has wayround that. That was supported byDFID in been in charge all the co-operatives in Tamil Nadu Ghana. It is quite possible to support co-operative and that is a consequence of the 1907 Co-operatives enterprises. Theydo not necessarilyalwayshave to Act and subsequent Acts which gives those people be registered under co-operative legislation. We enormous power. In Andhra Pradesh, currently might prefer it to be so but there are ways around there is an argument because theydid change the co- that. There are ways to encourage new style co- operative law. In India, co-operative law is a state operatives. You can even find in the same familyof subject so diVerent states have diVerent co-operatives new and old styles. If you go to constructions. In Andhra Pradesh, theyhave very Kilimanjaro, the coVee co-operative there is made good co-operative law and an old law. The up of 110 local, village based coVee co-operatives Government has just decided to shift the milk co- with an apex organisation or a co-operative union. operatives. Milk co-operatives have been very Some of them are more member controlled than successful and there are 11 million members of milk others so you have to try and pick the ones that seem co-operatives across the country. The Government to be more reform minded. In terms of guaranteeing has just decided to shift the milk co-operatives from taxpayers’ money, it is a question of simply the new Act to the old 1964 Act which puts the developing more co-operative expertise within power back in the hands of the registrar of co- DFID. DFID used to have a co-operative advisory operatives. These are two extreme examples of the committee with co-operative advisers. I am not enabling environment. There are now UN guidelines necessarilysuggesting that but we have partners and and International Labour Organisation knowledge about who the reform minded people are Recommendation 193 on co-operative policy. A lot and tryto select them. Anyco-operative is subject to of governments seem veryreluctant to let go. The the same kind of audit and regulatoryprocedures Act theyseem to have theyseem to have inherited that ensure the moneyis being properlyspent. DFID from the British colonial period. Theyhave not has just invested £51 million into electricityco- updated the law. The second part of the question is operatives in Bangladesh. That will be properly more diYcult for me to answer. The smaller, local audited and checked. level co-operatives would not be big enough to be the client of organisations but theydo make a profit and it is important to stress that co-operatives are not Q394 John Barrett: You mention the scale of “not for profit”. What happens to the surplus in co- investment in Bangladesh. Often when we think of operative jargon? The members have to decide what co-operatives we think of small scale selling. What happens to the surplus. In the old days, it was the do you think can be learned on that larger scale divvy. For working class women in Britain, the divvy investment? What can DFID learn to move forward was the major source of moneythat theycontrolled with the co-operative movement, because there is the in the 19th and earlypart of the 20 th century. The perception of the co-operative movement and there dividend is still veryimportant now but the profits is what exists. can go back into the communityso youhave a lot of Mr Smith: We mention in our evidence that there co-operatives sponsoring local schools, clinics, and can be verylarge co-operative enterprises. If you providing those services. One of the principles about take the top 300 in the world, their footprint is more co-operation—one of the Rochdale principles—is than a trillion dollars. Bangladesh is byfar the concern for the community. biggest investment in a co-operative. We had a bit of an argument with DFID about it. Theytended to see it as being an eYcient instrument for rural Q393 Mr Hunt: You have described veryclearlyand electrification and tended to ignore the co-operative helpfullythe di Verence between the new types of co- side of the equation. We resolved it satisfactorily. operatives that you are trying to encourage which The lesson is that you can have large scale co- have a veryimportant role in development and what operatives and theycan d eliver public utilities. We co-operatives have been in the past. How can we as tend to see the whole issue of those big, public donors help the development of co-operatives in services either as being public sector or as being countries where the legal environment is not privatised. The Americans have tended to see them favourable to the development of the new type of co- as being a third way, as being co-operative run operative such as the example in India that you just enterprises. There are the electricityco-operatives in 3414551003 Page Type [E] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
Ev 100 International Development Committee: Evidence
16 May 2006 Mr Stirling Smith
Bangladesh; we have water co-operatives in other support for them. If you are presenting an places which are delivering those utilities eVectively alternative, you need to be technically and to the consumers who are also the members. It is a financiallysound and co-op eratives usuallydo not veryimportant lesson and we would like DFID to have that kind of financial or human resource to look at that as an alternative to the normal model of make the case, although theyhave done it in a few privatisation. cases.
Q395 John Barrett: You mentioned that co- Q399 Ann McKechin: The co-operative movement operatives are committed to public sector reform but has been one of the main players in the fair trade earlier on you mentioned that co-operatives are part initiative of the United Kingdom which has been of the private sector. Is that part of the problem? A verysuccessful. I am just wondering how yousee the lot of people do not know whether it is part of that fact that there has been an incredible increase in fair potential for public sector reform or if it sits in the trade goods in this country. How can DFID best private sector. How do you deal with that dilemma? support the abilityof the co-operative sector to Mr Smith: We are schizophrenic. Co-operatives contribute to fair trade? How do you see that have an identityproblem. Although theyare private relationship growing? sector organisations, theyhave similar Mr Smith: We have done a bit of research into the characteristics of civil societyorganisations and cross-over between fair trade and co-operatives in social movements. We used to talk about the co- Europe. Where you have a strong, committed co- operative commonwealth. A co-operative is simply operative movement and a reasonablyokayfair a stepping stone to achieving a better society. We trade movement, you find the best sales for fair have to live with that as co-operators because we trades. The biggest fair trade markets in Europe are have those diVerent forms of identityand tryto in the UK and Switzerland, where co-op retailers explain to people that we can be both a private sector have been pushing very strongly. If you look at the organisation and have explicit, clear social goals as Fair Trade Labelling Organisation’s own standards well. for co-operatives, the origin was that small producers should be organised into democratically Q396 John Barrett: It is a unique selling point rather run farmers’ organisations which, in 99% of cases, than a problem? have been co-operatives. We have seen fair trade as Mr Smith: We would like to think so, yes. being co-op to co-op trade. The problem fair trade has had is that, as it has become so popular, the co- Q397 Joan Ruddock: Has there been any operative suppliers of all the products simplydo not independent evaluation of, in your case not exist. Flowers are a case in point. You do not get privatisation but co-operation, moving from a state smallholders growing flowers in Zambia, Kenya, controlled utilityinto co-operation? Ethiopia and those sorts of countries. We would like Mr Smith: There has been a verybig independent to see some proactive support to help smallholder evaluation carried out bythe Bangladesh Social groups get into some of those other markets where Y Science Organisation. The storyis that it is there clearlyis a demand and where it is di cult for American rural electricityco-operatives that have them to make the capital investment necessaryif you been working there for about 20 years now. People are going to grow and produce flowers and ship them do not know this but most rural electricityin to the UK. We would like to see specific support for America is provided byco-operatives. Jimmy those smallholder groups. Carter’s father was a director of a rural electricityco- operative. The model was so successful. If you look Q400 Ann McKechin: There could be EU at south Asia, you will note that the general regulations? electricityutilities are not great performers. The Mr Smith: Yes. lights often go out. According to all the research and independent evaluation, yes,theydeliver verywell Q401 Mr Singh: How useful do you think credit compared to the public sector electricityutilities and unions are in reaching those people beyond the reach that is for sure in south Asia. of the banks and micro-finance institutions? Is a credit union an institution on which DFID should Q398 Joan Ruddock: I am interested in how you get focus more? in on the act. We have heard the case of the Kenyan Mr Smith: I was in Kenya last year and I met a lot Government privatising. It becomes known very of verysmall credit union groups, individuals who quicklywhen a government is thinking about a could not open a bank account b ecause the privatisation in a developing country. Is there a minimum size of a bank account was, I think, 5,000 point at which you proactively try to get involved shillings. Groups collectivelywere able to save when that sort of thing is known, or does it onlyever moneyand form savers’ credit co-operatives. The come about from the grass roots, from an in-countryKenyancentral organis ation of credit unions was movement, that a co-operative gets adopted as an opening small village banks which enabled these alternative to privatisation? groups to open collective accounts and theyhad a Mr Smith: As a British co-operative, we are not big customer relations oYcer supporting those groups, enough players to have a presence everywhere. It helping them to make the right kind of decisions. tends verymuch to be local people making the case. Theywere doing verysmall things, particularly Often, it would be better if we could provide some setting up places to wash vegetables in the vegetable 3414551003 Page Type [O] 19-07-06 11:11:28 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 101
16 May 2006 Mr Stirling Smith market so that the vegetables looked better. In of $50 or $100 to help micro-enterprise that you can Gikomba, one of the biggest markets in east Africa, not only support yourself; often you can employ two in Nairobi, the credit union group there had put the or three other people as well. In this particular moneytogether and opened a toilet. If youare a village it prevented people having to go 10 miles to woman trader trying to run your stall for the day, the nearest clinic because there was a nurse and she having a toilet to go to is prettyimportant so they provided medicines and basic advice. We would like charged two shillings to use the toilet. I went and to see much more support for those small, co- used it, although not the ladies’ obviously. In a rural operative credit unions. area in Uganda, the people do not have electricity yet so people run their fridges, fans and radios on big Q402 Joan Ruddock: Is there anything more you batteries. How do you recharge your battery? One would like to sayto us? guy’s living was recharging batteries. He was able to Mr Smith: I think we have covered all the points that do it bya loan from the credit unions. Theyare you might be interested in. Thank you. enormouslyimportant for providing small amounts Joan Ruddock: Thank you very much indeed. 3419381001 Page Type [SE] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
Ev 102 International Development Committee: Evidence
Tuesday 23 May 2006
Members present:
Malcolm Bruce, in the Chair
John Barrett Joan Ruddock John Battle Mr Marsha Singh Ann McKechin
Witnesses: Rt Hon Hilary Benn, a Member of the House, Secretaryof State for International Development, Mr William Kingsmill, Head, Growth & Investment Group, Mr Richard Boulter, Head of Profession, Enterprise Development, and Mr Tony Venables, Chief Economist, Department for International Development, examined.
Q403 Chairman: Good afternoon, Secretaryof which people are going to be able to change the ir State. Thank you very much for coming in. lives for the better. The onlyother point I would Hilary Benn: Could I introduce myteam. On my make is, in order to support private sector right, William Kingsmill who is the Head of the development—and no doubt we will come on to Growth and Investment Group in PolicyDivision; this—it involves an incre diblywide range of next to him, Richard Boulter, Head of Profession, activities, from fighting corruption to building Enterprise Development; and, on myleft, our Chief roads. You can find in the range of work that DFID Economist, TonyVenables. is involved in a lot of things going on which are helping, in one wayor another, private sector Q404 Chairman: Thank you very much. We are development in developing countries. getting towards the end of this report. We have not quite finished. As you know, we started it in the Q405 Chairman: I wrote to you on behalf of the belief that dealing with povertyrequired economic Committee on 28 March relating to the White Paper growth and economic growth required a successful and highlighting the keypoints that we thought were developing private sector. That is the essence of what relevant to private sector development. We were we are looking into. The OECD Development reallysaying—whichis the reason we picked up on Assistance Committee would underpin that by that—yes, it is a White Paper, but for us private saying, “Instead of regarding private sector sector development needs to be a part of the future development as just one of a number of tools, it strategyfor DFID. I know it is not published, but should be regarded as a major, if not central, part of are you going to be able to assure us today that the countryassistance that donors provide.” How do White Paper will be putting private sector you react to the idea that private sector development development at the heart of the strategyfor is or should be at or veryclose to the centre of Department? delivering povertyreduction? Hilary Benn: It will certainlybe part of what is at the Hilary Benn: I think it is fundamental. If I maysay, heart of the strategy. But, in order to have good that is one of the reasons whyI verymuch welcome private sector development, for example, you need this inquiry. In picking economic growth/private to have good governance. If you do not have good sector development as the first of the speeches I governance, you are not going to get the private made in the run-up to the consultation on the White sector developed. If your definition, Mr Bruce, of Paper, I did that quite deliberatelybecause it seemed private sector development being at the heart to me that we needed to debate and discuss this issue includes good governance being at the heart of what more. In a lot of the talk about development, I do it is that needs to happen in developing countries and not think this figures as prominentlyas it ought to. the action that we need to take to support good As you will know, in the course of that speech1 I used governance, for example, then the answer is: yes, it the phrase “Poor people are the private sector” is. But you need a lot of diVerent factors in place, in which seemed to me a wayof tryingto make the very order, bluntly, to create a climate in which people simple point that if you are interested in helping the with moneyin developing countries will be prepared poor you need to be interested in private sector to invest in the future. Sub-Saharan Africa’s tragedy development. That is the first thing. The second is: is that just under 50% of the wealth it generates every where in the long term is the moneyto change year flees the continent to find a home somewhere people’s lives for the better going to come from? and else. Therefore, if Africa finds it diYcult to hang on the answer is: From economic growth and to just under half of the wealth it itself generates— development. You onlyhave to look back over 200 question—how exactlyis it going to encourage other years of British history to know that is how we did people to come in and invest their own money? it. Therefore this is going to be the main means by Q406 Chairman: When we started this inquiry, one 1 Growth and poverty reduction—creatingmore and better jobs or two people said, “We are glad the Committee is in poor countries, 19 January2006, 1st White Paper Speech byRt Hon HilaryBenn MP , Secretaryof State for looking into this because people are beginning to International Development http://www.dfid.gov.uk/news/ regard it as”—and I hate to use the term— files/Speeches/wp2006-speeches/growth190106.asp “fashionable to see private sector development as a 3419381001 Page Type [O] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 103
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables means of dealing with povertyand solving some of the work we are doing on tra de policymatters, the problems of the poorest countries.” As a sort of because in the end developing countries want the newcomer to this Committee, I was somewhat chance to earn and trade their wayout of poverty. shocked at the idea that private sector development Therefore, world trade rules, as we all know, which was something that could come and go as a fashion, get in the wayof that, are b ad for economic as opposed to being absolutely—as you yourself development, and, even when you have those have said, Secretaryof State—essential, and yetfor changes, countries n eed to have things to sell. Some manypoor countries it is just not happening. Of countries are doing better than others for a whole course I think your own submission2 says the range of complex reasons—to do with their history, governments or the countries concerned have prime whether theyare landlocked, whether theyhave responsibilityfor creating that climate, but natural resources, how sma ll the markets are. In presumablythe international community,the donor essence, that is what we are trying to focus on, but it community, has to do two things. One is, wherever encompasses, as your inquiryhas alreadyshown, an possible, to ensure that its aid does not cut across incrediblywide range of activities, all of which in that and, better than that, that it helps the private some wayor another hel p to create a climate in sector to develop. What I am not entirelyclear about which there is more chance that economic is how the DFID strategyreallyaddresses that. development is going to lif t people out of poverty. Hilary Benn: I must admit, I did not realise it was Chairman: We will come on to some of those topics fashionable, so I share your puzzlement in that as the meeting goes on. respect. What are we trying to do? We are trying to help people to increase their income byenabling them to find ways of earning a better living than they Q407 Mr Singh: When you launched the White enjoy or do not enjoy currently. Secondly, it is about Paper for consultation on 19 January, you said, working to help partner governments to improve the “Let’s imagine a poor farmer in Malawi. What do climate in which investment can come and business you think her chances are of a better life, and that of can take place. Thirdly, it is about improving her children?” We went to Malawi in March and people’s access to finance, particularlyfor the very found the private sector did not exist in terms of poorest, who, bydefinition, because theyare poor business and economically, and I had the strong do not have a lot in the wayof assets—to things like impression that Malawi is going to be a basket case micro-finance and to banking, and propertyrights, for ever and ever and I came back so depressed from so that people have collateral, enabling poor people that. What can we do in Malawi to kick-start that to enforce their rights. I would give you a very economy, to do something to that economy so that interesting example—which gives me the chance to it can grow and so there can be some hope for the make a small advertisement. We have just published people there? this little booklet Development Works3 which is Hilary Benn: One of the immediate priorities in trying to explain how a range of things that we do as Malawi—as you will have seen, I am sure, during a department has an impact on people’s lives. We are your visit—is keeping people alive—because of the funding, in Tajikistan, third partyarbitration drought, people who live, as you know, on the courts—just to take a concrete example of the point margins year in and year out. When it really gets bad I was just making. Those courts have given 800,000 and you sell everything you have ever owned and people (about 12% of the population) access to legal you are dependent on what others give you, and that services and have solved 275 disputes over land. maykeep youalive—as I saw also in Somalia last Giving people title to land could be just a question week—the question is: How do you get back on your of certainty: “I have got this in perpetuity, so it is feet? That is the first thing. Secondly, Malawi is a worth mywhile investing: putting fertiliser in and countrywith verylittle in the wayof natural improving the land”—and it is what we have also resources. It has a small market, bluntly. I remember done in supporting land certification in Ethiopia— from a visit I paid there, meeting the business or it could be, “I have got some title to the land, that community in Blantyre and asking, really, the might allow me to put that as collateral to get access question that you have just asked me, “What are the opportunities for economic development?” that they to some finance.” That is just a practical example. I Y think it is about governance, as I mentioned earlier, said, “It is prettydi cult. There might be potential and that ranges from the right economic policies, for some tourism around the lake”—because that is one thing as far as that sector that Malawi has. because—if you do not have the right economic “But”—I remember a man saying to me—and I do policies, inflation rips and it is going to hit poor not know if it has changed since—this was three or people. It is about fighting corruption. The very four years ago—“the longest lease you can get on a basic responsibilityof governments is not having a lease of land around the lake is 15 years.” Question: war. Having spent a veryinteresting dayin Somalia Who is going to come and invest in a hotel and jobs last week, a countrydevastated by15 yearsof if you are not sure in 15 years time whether you are conflict, people are eking out an existence –although still going to have the asset? That taught me an some war lords are doing verywell out of it—but is important lesson: If you want at least to exploit the anybody going to come and invest money in Somalia potential that there might be an opening for tourism, while the conflict goes on? No, theyare not. Finally, the thing you needed to deal with first was the length 2 Ev 127 of land leases. That is the place to start. Malawi is a 3 DFID, Development Works 52 weeks a year, http:// verydi Ycult example, I will be absolutelyfrank with www.dfid.gov.uk/pubs/files/development-works.pdf you. The other thing I would say is that, in part 3419381001 Page Type [E] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
Ev 104 International Development Committee: Evidence
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables because it is a small market, I do believe there is the Q410 Chairman: We went to the Dedza Potteryand potential within the developing world—particularly everybody laughed and said, “That’s the only for sub-Saharan Africa—for greater regional industrythere is in Malawi and everybodygoes economic intervention. After all, look at what we there.” There is virtuallynothing else. have done in Europe. We see some signs of that in Hilary Benn: If you look at what some other sub- Southern Africa, the East African community, Saharan Africa countries have been able to do where which is now beginning to get going 20 years after it theyhave great agricultural potential—and one was first mooted and then fell bythe waysideand is thinks in particular of Kenya in floriculture and coming back. With countries like that, if we were to Zambia and others in vegetables—what you need encourage them to link with neighbouring countries, there is the right infrastructure. You need to be able to create bigger markets, maybe you would get more to get them on a plane tonight, to get them here likelihood that people would come and invest, tomorrow, so that we are prepared to buythem. You because then it connects more and more easilyto need to find a wayof bringing together a lot of what others are doing in other countries with tariVs smallholder farmers. I met an organisation recently and so on and so forth. I think it is a reallytough that has been doing that in Kenya. It enables you to V example, actually. tap that, but deals with all the stu , frankly, that you have go to through if you are going to get a contract with some of the supermarkets, and helping them to deal with the standards that are set. Because you Q408 Mr Singh: What do we do in Malawi in terms have the European regulations, and then you have of looking at land reform and title to land, in terms the regulations that are set bythe industryitself, and of high interest rates in the economy, in terms of then some individual supermarkets have their own business regulations?—which, across the areas we higher standards on top of that. To be able to deal visited, were incredible really. We have just passed with all of those requires a lot of eVort and it needs our RegulatoryReform Act. What are we doing to to be worth everybody’s while for you to make that encourage them to have something similar? investment, and: “Are you certain that you are going Hilary Benn: I will give you one very permanent to have a long-term contract with a supermarket?”— example of something we have done in Malawi that and we know it does not quite work like that. was supported byour Business Linkages Challenge Fund (BLCF), and that was working with the Great Q411 Mr Singh: Would you agree with me, finally, Lakes Cotton Companyin Malawi. The Business that Malawi for the long-term, for the foreseeable Linkages Challenge Fund tries to link business in future, is going to be dependent on aid from the developing countries with others who have western world? knowledge for improving products that theymight Hilary Benn: It is heavilydependent currentlyand I be able to draw on. In this case it was improved think that will remain the case unless some of the cotton seed and other support. That has helped potential that we have touched upon can be about 200,000 smallholder cotton farmers and exploited—and regional integration I would increased production byabout 250% in a year.That highlight especially. is a practical example, but it is one in a countryof . . . TonyVenables has been there recently. Q412 John Barrett: Where there has been private Mr Venables: About 13 million, is the answer. sector development and it has been a success is the Hilary Benn: 13 million is the answer on population. large DFID programme in India. We have seen a lot Mr Venables: I have just come back from a visit to of success there. Equally, alongside medieval Malawi and I think the number is 86% of the poverty, we see the Californian lifestyles of the rich population is based in agriculture. Thinking about and famous. How do you justify to the UK taxpayer Malawi means, first of all, thinking about that when we are promoting private sector agricultural development , in particular maize. A lot development we are not just making the rich richer of these farmers are more or less subsistence farmers. but we are also helping the poor? A lot of private sector development will verymuch miss out on that group which has just been referred to, which is the rural poor. Q409 Mr Singh: Theywill not grow anythingelse. Hilary Benn: First of all, the evidence is prettyclear How can we get them to grow things which other to me, and I think to all of us, on economic people might want? development. If you look at India and what is Mr Venables: The veryinteresting thing, I found happening there, and you look at China as the most during a visit there, was the considerable striking example of all, the economic growth that unexploited potential in agriculture. Yields on those two countries have seen has undoubtedlylifted hybrid maize with fertiliser are three/five/eight times a large number of their citizens out of absolute greater than on traditional varieties without poverty—China being the most successful country fertilizer, so it is a matter of reallydeveloping the in the world at having done that in the last 25 years. supplynetworks to get the fertilizer, to get the seed If we are serious about trying to reduce the number to the farmers. There is quite a vibrant private sector of people who live in absolute and dire policy, agri-dealer network developing, importing fertilizer, economic growth is the wayto do it. However, getting seed to small farmers, and that is obviously within any country, there is a choice about how you something DFID is trying to foster. distribute the fruits of economic growth. You have 3419381001 Page Type [O] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 105
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables the great disparities you have referred to in India. Government in improving infrastructure, in Look at Brazil: a middle income country: enormous irrigation, giving people access to alternative crops disparities. Look at the distribution of wealth there that theymight grow trying to help them make the and compare it with Scandinavia. What is the markets more eVective. Because it is one thing to diVerence between the two? Political process over a grow things, but it is another thing if all your stuV long period of time: the society’s politics making a goes oV because it takes too long ever to get it to a choice about how theyare going to distribute that market—where youdo not k now that anybody will wealth. Countries have to decide that for themselves, want to buyit. I think the answer is di Verent things but it is not an argument for not continuing to tryin di Verent circumstances, but, in post-conflict veryhard to help economic growth and development countries—and it goes back to myearlier point in the countries in which we work, because, in the about governance, Mr Barrett—you have to do end, it is going to have a benefit on the verypoorest. things in the right order. You need stability— because if you get relative stability then you have a V V better chance of economic development taking o Q413 John Barrett: One of the keydi erences, as and investment coming in than if you have a lot of you have mentioned, is that issue of stability. disorder. From a development point of view, if you Certainly, a lot of African nations are in conflict or look at what we are doing in individual countries in post-conflict. Has DFID looked at a specific strategy supporting reconstruction after conflict has ended, of developing the private sector in post-conflict or V V you will find a di erent focus to our programme at conflict countries? There are quite clear di erences an earlier stage than you will probably find from a from where we have seen successes—and we have later stage. seen the growth in India and China—if we look at somewhere like Sudan. If the peace agreement holds in Sudan, how do we move forward there? It is very Q414 John Barrett: Does DFID have anyone in diYcult to mirror with a countrythat has been India or China looking at the consequences of relativelystable and move things forward. The success, so that if success does happen in Sudan or Congo is another area, and Sierra Leone. Mozambique or Congo, you will not have these huge Hilary Benn: When a countryis in the course of a divisions? You will learn from the lessons, so that conflict, it is prettydi Ycult—depending on the theyare not repeated again. We are working towards nature of the conflict. But even in those economic success in the African countries. If that circumstances, people are veryenterprising in trying then results in huge divisions and inequalities, we are to keep bodyand soul together. I met a woman in back to square one, I think. I just wonder if you have Northern Uganda last week, who started bytelling the resources or whether there are economists me how she had been kidnapped for a month bythe looking at this issue? LRA, been beaten everydayand forced to be a Hilary Benn: Tonymaywell want to comment. If porter, but she was queuing outside this hut where a inequalities and unequal distribution of wealth and generator was grinding sorghum and maize— power and opportunityleads to political conflict— because the food ration theyget is not milled: the that is, the people feel so stronglyabout it that they man charges, so you bring your food, he puts it in the start to do something about it—then that is a hopper and out it comes. I said, “How are you problem in countries. In the end, as I said earlier, I raising the moneyto pay?”—becausetheyhave got think the politics of the countries themselves must nothing, all theyare getting is the food ration and sort it out. What is interesting in China, for example, the water—and she said, “I brew beer.” As I walked since you mentioned it, is that recently—I think at around this camp in Gdbee there were lots of people the last People’s Congress—for the first time brewing this extraordinaryconcoction which discussion was heard about the gap between the rich eventuallygets fermented into beer that theysell to and the not so rich in China; the gap between the people. Theyare all living in the camps because of urban areas where this extraordinarydevelopment the fear of conflict but she had found a reallycreative has taken place, and the great povertythat there still wayat least to raise a little bit of finance in order to is in rural China—which, in part, accounts for the be able to assist. Take another example: enormous internal migration of people in China. Afghanistan: a post-conflict country. As you know, Mr Venables: As the Secretaryof State has said, we have a big programme in Afghanistan, working there are political choices for the countries both to support the Government in building its themselves to make about their income distribution. capacityto do the job that people would normally One aspect of growing inequalityis often the look to government to do, but focusing in particular regional dimension: urban/rural within China, on alternative livelihoods. That is particularly coastal/interior. Learning about determinants of complex and challenging in Afghanistan because a those inequalities, and in particular learning about lot of people grow the poppy—not because they are how to spread economic development faster from particularly keen on the poppy, but if you get a one medium to another, is something veryimportant bigger return from growing the poppythan youdo that I think we are paying attention to in China and for something else, and it is question of putting food India and seeking to learn from for the African on the table and looking after your family, then it is context as well. not surprising if people see the incentives in that way. What we are trying to do there—as the Q415 John Battle: I would like to focus a slight Government try to enforce the law which says you moment longer on the specific strategies for post- should not grow poppy—is to support the conflict countries. If you take Sierra Leone, after the 3419381001 Page Type [E] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
Ev 106 International Development Committee: Evidence
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables conflict there, we found in Freetown that young men with development but it was veryinteresting because who had come in from the countryside, having been I asked them, “If you got more knowledgeable about involved in militias, were wandering around the diamonds and you could then negotiate for a better capital city. You could see that, without them having price with the diamond dealer, what does the anything to do, they would slip back into violence. diamond dealer say?” and one woman put her hand In the Congo, people being encouraged, instead of up and she said, “Theydon’t like it.” I thought that being part of the informal militias, to join the regular was a verycreative example of development, because Army—but then the Army not getting paid, so they it was trying, if they were lucky to find one, to put had no money—but not anywhere near a them in a stronger position to barter with the programme of public awareness which that group of diamond dealer, to raise some more moneyand at people could be engaged in. Again, people who were least have a bit of an income. In Sierra Leone, I just poor and had joined the Army, were no further would saythe biggest obstacle to investment, along, but there was no real business incentive to try internal and external, is corruption. Unless Sierra to see what useful economic activitytheycould be Leone decides it is going to crack down on engaged in to build up their country. I want to put it corruption reallyseriously,the potential it has, both to you in slightly tougher terms, if I might, because in the diamond mines and for rutile and for other for a short time when I was Minister in the DTI there natural resources is not going to be exploited in the was the conflict in Kosovo. What did we do? We, in wayit might. In the Democratic Republic of the Britain, at the end of the conflict realised that there Congo (DRC), two things. One is that we are going were power stations down and water plants down, to do some work on roads. As you will have seen for and we took teams of experienced business people yourselves, of course, the transport infrastructure and engineers to go in and help reconstruct them as and moving about is incrediblydi Ycult. The second businesses, to get the water and electrics up and thing we are looking at currentlyis things we might running. We did it within weeks. A team was flown do immediatelyafter the election. Because this great out bythe RAF to do it. I wonder what is the open aspiration, which I am sure you found, that strategy. Is there a specific, post-conflict business people have for the elections as the solution to the strategy, if you like, for places like Sierra Leone and problem, will quicklyturn to the question, “Okay, the Congo that DFID can lead and reallypush the we have had the vote, where is the better life?” Some agenda along a bit, to make sure that young men are quick impact works and projects that we can put in not left standing around on street corners, or in place—and we need to do it with other donors—are camps that we could hardlydescribe as camps, reallyimportant, because we need to show people without anyresources—not even payingtheir that engaging with the political process and voting salaries—trying to keep their families? Because does produce some benefit. But it is a long haul in the unless we get in there, and quickly, I cannot see how DRC, as you will know. you root out violence, frankly. Hilary Benn: It is a verysearching question. Indeed, Q416 Chairman: The interesting thing in Bukavu the countries that you highlight have diVerent was how much of an economyit was. Having been circumstances. As you talked about water and the told it was a failed state, there was serious trading electricityinfrastructure, I must confess mymind going on there. There was substantial building with turned—more controversial in some quarters—to proper roofs and things. Nothing in Northern Iraq, because that is preciselywhat we have been Uganda, but there you are, having been told you are seeking to do in Southern Iraq in the situation that in the most failed state of all failed states, and yet we find there. That is a prettydi Ycult environment there is activity. On the infrastructure point, the in which to work, and it has got more diYcult, both roads are horrendous or non-existent, but cross the because of securityconcerns, and people actually border into Rwanda and the interesting thing, trying to blow up stuV when we fix it, but also driving across this wonderful road, is that there are because of the legacyof 30 yearsof a lack of dozens of people working on it, keeping the ditches investment and with not being able to get the right clear. There is nobodyworking on the road even fuels to keep the existing power stations up and keeping it open the other side of the border in the running. That is one point, but we have in the Post- DRC. Things just do not connect. Common sense Conflict Reconstruction Unit a group of people tells you that if you put the right things together, you whose task it will be, in those circumstances, to come have started to create an economy, and part of it is and tryto get some of those basic things going, but public and part of it is enterprise. I would not pretend that it would extend to trying to Hilary Benn: Clearly, there is a much more capable find jobs for all the young men who are otherwise not scope on the one side of the border, in terms of employed. In Sierra Leone, I went up to the diamond Rwanda’s capacityto do these things, than on the mining area and saw a lot of young men up to their other side, and that comes down to governance and chests in water, six days a week, panning for gold. the legacyof the terrible conflict. From memory, they got a bit of money and a cup of rice everyday,but theywould be veryluckyif they Q417 Ann McKechin: Can I go back to what John ever found anything that was worth selling. We were Barrett was talking about earlier, rapidlygrowing funding a communityorganisation there. Part of its economies and increasing urbanisation, which is work was giving training courses to those who particularlyhappening in Africa. When I look looked for diamonds in understanding the value of through your written submission to this inquiry, diamonds. You might wonder what that has to do there is a great deal of emphasis about the issues of 3419381001 Page Type [O] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 107
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables infrastructure and investment climate and Hilary Benn: That is an extremelyimportant point. regulation, but there does not seem to be a The movement from the rural areas to the towns and particularlyclose correlation with the actual cities, which is going to be of benefit in defining creation of jobs. Globally, if you look at the social change in developing countries—which is economy, the percentage of the world’s wealth alreadystarting—over the next 50 years. . . People which exists in income has declined, year on year, for come to the cities in search of a better life. It could 30-odd years. In many countries, as is happening in be because of the drought in the village where they India and China, there is a growing disconnect are living or half the familyare going because that is between growth on the one hand and poverty where job opportunities are—I do not know, to be reduction on the other. I think China has got to the rickshaw drivers in Dhaka, leaving their wives and point where it has not sizeablyreduced povertyin children living a precarious life back at home, to take the last couple of years, whereas it did a huge a practical example. We are working on social amount beforehand. I am trying to find out how we protection, and the Ethiopian example of the safety tryto address that in terms of development. That is net scheme—which we mayhave discussed before— not to saythis Committee will be against investment which I saw in operation when I was in Arba Minch plans for infrastructure, but it is how we tryto relate in Januarywas reallyquite striking because it that to the creation of jobs for the verypoorest, and connected all the things we have just been discussing. whether we have a veryfirm connection between As part of the safetynet scheme, people get food, the two. theyget cash, theyget cash for work. Part of the cash Hilary Benn: I suppose the first point I would make for work was to extend the road up the mountainside is how does one define a job. It is not a debating from Arba Minch, to make it slightlyeasier for point, because you have the formal economy and people who have woven their mats out of leaves or you have the informal economy. In diVerent who have cut bamboo or grown crops to walk down countries, in some, the informal economycan be a the hill. I think it is three hours from the village we lot, lot larger than the formal economy. Therefore, went to visit—three hours, down the hill, to get to Arba Minch and five hours, against gravity, to come what it is about—the point I made earlier—is people back up again. It would improve the water supply, being able to increase their incomes and improve which is good for health and lots of other things, but their lives byfinding a wayof earning a living. If that the most important thing was that people have been is your definition of a job, then it is my definition of able to save a bit of cash. I have talked to some of a job too. As far as I am aware there was not a huge the farmers and one said, “We’ve been able to buy amount of debate at the time the Millennium kitchen utensils and the other one said, “I’ve been Development Goals (MDGs) were saying should we able to buyclothes for mykids” and the third one have a jobs target. Some people have raised that as said, “I’ve bought some small animals this year and, an idea subsequently. To be honest with you, I have if I can save a bit more, if the scheme operates next no idea how you would measure it, and, in a sense, year I might be able to buy some more.” It is a very the income povertytarget is a proxybecause, if fewer important project for us and we are talking to a people are living in absolute poverty, it is because number of countries about how we might support their incomes have improved and their incomes have more social protection schemes. The bigger question improved because theyhave found a wayof earning is: How are we going to have a safetynet when things a better living. And I think that is a reasonable proxy go wrong? And: How are theygoing to be looked for jobs in that sense. If you are asking me if our after in retirement?—particularlyif the social strategythat we have set out in a particular place is support structures that looked after them when they to tryto create x number of jobs, the answer is: No, were living in rural areas in villages is no longer there it is not. It is to do the things I have tried to describe: and theyfind themselves living in slums in towns. to create a climate in which it is more likelythat economic development is going to take place, more likelythat people will come and invest. Through Q419 Chairman: You made the point before that it that, people will get formal jobs and better chances is up to countries to sort out their own poverty, and to earn a living, to improve their incomes, their lives, we were talking about China and India. In India to be able to look after their families better. That is theyhad an election two yearsago which was fought verymuch the approach that we take. on a paraphrase of the slogan “You’ve never had it so good”. Millions of people obviouslydid not think so and changed the Government. In India you can Q418 Ann McKechin: If people are being asked to do that. In China you cannot. I suppose the two make more changes in their lives, moving from questions are: How does that colour our attitude to subsistence farming towards agri-business towards China as opposed to India? Given that India has our urbanisation, the economic risks that theyhave to biggest programme, how is that programme geared take along that journeyare much more severe than in a waythat might assist—if one assumes I am right previous generations. Your own speech has referred about the reason for the change—that demographic to the issues of social benefit systems and protection process, and, in other words, give those people who systems. I am trying to see where is the alignment did not feel theywere sharing in it, a share? between, on the one hand, the issues of protection to Hilary Benn: Of course, you are absolutely right catch the verypoorest, and the issues of promoting about the political system as it currently operates in economic growth and to make sure that these two China. I think all of our hope is that, over time, the are coherent? opening up of the economy, the influence of 3419381001 Page Type [E] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
Ev 108 International Development Committee: Evidence
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables discussion and debate in the outside world will bring that? Is there a coherent, solid structure that is going change to the political system within China. I think to take us forward or will we come up with another that is quite clear. That is the case for involvement. acronym next month and another idea and be hard The Chinese are going to manage that process at and dismissive of the approach of the Department? their own particular pace, but I have made the I hope the Department or you would not take it in a reference to the People’s Congress last autumn cynical sense at all. I am looking for a stronger because the fact that theyare now openlytalking strand of coherence, pulling the whole eVort about the gap between rich and poor shows that through. what is happening on the ground is beginning to feed Hilary Benn: I do not think we do anything as through to the debate that is happening even within window dressing, to rebut that first of all. We are not the current political system in China. And I, for one, afraid to innovate. We are not. One of the questions welcome that. As far as India is concerned, our when you do innovate, if it has been shown to work, partners are the federal government and the states is : Who is going to pick it up and then carryit with which we work. In those circumstances, if the forward? The question is: Is it the job of DFID, states want to do diVerent things with us because having shown the kind of innovation that is possible, theyhave changed political complexion and they to do that? For example, through the Financial V have a di erent approach then we will work with Deepening Challenge Fund, working with them. In some of the states where we have been Vodafone, to show that you could transfer money operating, theyhave carried on with some of the across using a mobile phone. It shows it is technical, programmes that theyhave inherited. In others they it is possible, and one would hope that the business V have decided theywant to do it di erently. Our job, communityand business sector would say,“That’s a in those circumstances, is to respect of course the good idea. It has been shown to work. Some of the democratic decision of the people and the best way costs of trying to find out whether it was working to do that is to work with the elected government in have been borne bysomebodyelse, we are going to supporting the things theysaytheywant to do. pick that up and run with it.” I think that is the first question. There are examples of some one-oVs. The Q420 John Battle: One of the things that we need to guaranteed loan we gave to the Divine Chocolate get clear is that sometimes we have initiatives and Company, to be absolutely frank—and I know that theythen look like policy“quick wins” I think is the has been raised in evidence with you—was a one-oV phrase that you use. I am massively conscious—and for a particular reason. Do I think DFID should be we have done it in Britain for about 20 years in the in the business generallyof giving loan guarantees? inner cities—that we invent schemes to help things sort out and theyend up as acronymsthat we then It is verycomplex, it takes a long time. No, I do not run awayfrom and tryto forget about. The think that is what we should be doing. It was expression about “innovation in the private absolutelyright to do it in that case, for reasons that sector”—and there are lots of schemes within DFID I think everybody understands—because of the that DFID is pulling through: Extractive Industries importance of Fair Trade chocolate. The Extractive TransparencyInitiative (EITI), the Investment Industries TransparencyInitiative is absolutely Climate Facility, the FinMark Trust, challenge solid, moving forward, with a growing number of funds—where have I heard that before? In Britain in countries which are participating. Bearing in mind the 1980s under Kenneth Baker. But I am just that is an entirelyvoluntaryinitiative, I think it has wondering whether we are going for innovation in a been, frankly, so far stonkingly successful. scatter-gun wayor a window dressing way,which could, in the long term, not quite be knitted together Q422 John Battle: If I use the expression “to go out but could be a weakness rather than a strength. You into the field of the countries that we visit” I think mentioned, for example, the little rainbow booklet DFID’s ideas, imagination and initiatives are world of DFID (Development Works 52 weeks a year)– and class—leading the wayin new thinking of how to do let me saythat the material that DFID puts out for development. I am completelyconfident of that the people, in general, in this country, to let them wherever I have been, whether it is in Ghana or even know what DFID is doing—and I am thinking of dealing with conflict resolution. What I am wanting the green handbook, the rough guide4—is superb to push you on is what about back at base? Out in material. I hope we could perhaps get a copy the field (to use that expression), if a group of staV ourselves of the little booklet and distribute it to our have good ideas to match a particular situation and constituencies. V Hilary Benn: We will have to send it to you. go for it, does it remain a one-o or does it become part of building a central rope that pulls the thing Q421 John Battle: For example, in Tajikistan, you through? Again I am going back to myown mentioned about legal services. The ironyis that the experience. I found that in the DTI, we had Business veryinnovative policies there are being slightly Links, the Small Business Fund, IT For All, and undermined byour policies here in Britain. I am none of them within the silos knew what the other trying to contrast whether we are going through, in were doing. Business people would go along for IT DFID, some of the “initiative-itis” that perhaps we For All and then be referred to Business Links who have gone through here. How would you respond to had never heard of IT For All. How are you coordinating that, so that, as well as good ropes 4 DFID, The Rough Guide to a Better World, http:// going out from the tent, the guide pegs are pinned www.dfid.gov.uk/aboutdfid/intheuk/bsd/rough-guide.asp down hard? 3419381001 Page Type [O] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 109
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables
Hilary Benn: One of the diVerences between the DTI have some private sector funds. I hope that other approach and the DFID approach is that there is a donors will come in. I think it is a reallygood lot of devolution and decentralisation. You will find proposal to directlyaddress practical means in that particular projects and programmes happening which you can improve the business climate, get in individual countries are, frankly, responding to more investment, and carrythe economic the circumstances there on the ground—which is an development and growth—and, through that entirelyrational and extremelysensible thing to do. process, help people. That is what we are working on I hope you would find across the organisation that at the moment, but we need the support of others to staV were aware of the kind of funds and make it successful. programmes and projects that you have just been talking about, either because theyare directly Q423 Chairman: Is there a role for the European participating in supporting them or that we are Commission in that? You have mentioned the doing a reasonable job in learning the lessons. We do World Bank and you mentioned individual donor use a varietyof means of communication. We send groups and committees. people to retreats and so on. William was heading Hilary Benn: That is a verygood question. I confess Y our o ce in Nigeria, and, from a country I do not know whether we have approached the perspective, was it . . . . I am trying to remember your European Commission on the Investment Climate analogy. The guy ropes. Was it all securely anchored Facility. I will have to find out, or remind myself of in the ground? what I have forgotten, and mayI let youknow 5. Mr Kingsmill: We certainlytried to anchor it in the Chairman: Yes, please. ground. Speaking as someone who spent three years in Nigeria and now has spent about five months in the PolicyDivision—and Sharon White, the Q424 Ann McKechin: I wonder if you could give Director of the PolicyDivision came along to give some examples of current collaborations with other evidence—we see it as our remit in the Policy donors in private sector development. You have Division to suck in knowledge from the field and mentioned how you try to learn from other examples then to disseminate it. That is part of our job. We do but I wonder whether you have coordinated and had respond to requests for new policies. There are a joint project together. Also, to what extent should obviouslyrequests for new policies, but a large part you bring in the expertise from people like the Treasury, the Department of Work and Pensions, of our job is just disseminating what is working at the DTI when you are trying to bring forward these the moment; how is our policybeing put to good new innovative projects and programmes of private eVect. We are verylucky,we have a lot of sector development? How do you try to use the skills professional groups. Todaywe have the Head of the we alreadyhave in other government departments? Enterprise Development Group, Richard Boulter, Hilary Benn: An obvious example of working very who has a network of enterprise development closelywith the Treasurywould be on remittances, advisers around the world. Also in mygroup, the where we collaborated extremelyclosely.As we Growth and Investment Group, we have economists know, theyare a veryimportant source of finance for who are all over the world. Wherever we have an developing countries—indeed, on some estimates oYce, there is an economist—except possiblyBrazil. larger in amount than the total amount of overseas Those are veryimportant networks. We use the IT assistance. A particularlypractical part of that work systems we have to make those networks work and has been around trying to reduce the cost of sending we have learning events: a professional group will the moneyhome. That has involved talking to banks get together at least once a year and we will share and moneytransfer companies, encouraging them to what is working and what is not working. So we are V see that there is a market here, and if theyare more certainlytryingveryhard. We do invest a lot of e ort expensive than their competitors then people might in trying to make sure we are not reinventing the choose to use their competitor to send the money wheel and that we are maximising on success. back. I would saythat is one good example. Mr Boulter: Leaping on to the international scene, Working with DEFRA on climate change, that is we are involved in international donor groups. I longer term, but climate change and a country’s hope most of those groups would echo what you say, abilityto deal with that will have an impact on in the sense that some of the innovations that are economic development. But, in terms of specific coming through DFID are advertised, almost examples, working with other donors on some of marketed in those groups, and theyare tested by these initiatives .... other donors and sometimes the other wayaround. Mr Boulter: Perhaps there are two types. One is If the Germans are doing a certain thing in where we join up with a multinational organisation Bangladesh, we will ask our DFID people if it is like the International Finance Corporation (IFC). working there, and then we might send that This is the case in China, Bangladesh, the Balkans information around our enterprise network. and in Africa. Often the IFC will be like the Hilary Benn: The Investment Climate Facilityis coordinator. We will go in on a particular good and solid. It is an African idea to tryto do programme with other donors. We have been doing something about improving the business climate. that for a number of years, and through the We are championing it. We persuaded the World experience, deepening the relationship, particularly Bank to put some moneyin. The Irish have said they in Bangladesh, where we are working up together will put some moneyin. I hope the Norwegians and the Dutch will provide some financial support. We 5 Ev 150 3419381001 Page Type [E] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
Ev 110 International Development Committee: Evidence
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables with the IFC and the European Communitya large Ann McKechin: I just wanted to clarifybecause your programme of investment climate type activities. written submission just refers to the widening of Then, in other countryexamples, perhaps DFID financial services from comm ercial banks as might start oV doing research, talking to the necessarybut did not provide anyother examples. I Government of Bangladesh, designing a was a bit concerned about the emphasis on it. programme, and then, with the support of the Thank you. Government of Bangladesh, will look out for other donors to come in. That is happening with a new Q426 Chairman: Secretaryof State, if at the moment financial sector programme. you have, as I understand it, 25 business and enterprise advisers in the Department and your Q425 Ann McKechin: On the question of the budget is projected to triple over the next nine years, financial sector—if I could come back to your and you are telling us the private sector is a crucial written submission and also when you are talking component of reducing poverty, what are you going about public services—there is a great deal of talk to do to increase the capacityof the Department to about the use of the private sector, but there is engage with business and enterprise?—in other absolutelyno mention of the cooperative words, to employpeople with business experience or movement, the mutuals—the mutual insurance to give your staV secondment to a business companies model, for example –the Friends’ environment where theymaygain a little bit more Society, the not-for-profit sector. Are we stuck in understanding of how businesses work. one model in terms of what we consider to be private Hilary Benn: One of the things we are doing in enterprise or are we getting the correct level of parallel to the drafting of the White Paper, and as expertise? We have expertise in diVerent strands so that White Paper takes shape, is to ask ourselves that projects can be appropriate to circumstances. In preciselythat question: On the areas that are going some circumstances a purelyprofit-run private to be priorities for activity—and this is one; climate enterprise maynot be best solution. change, natural resources, governance are going to Hilary Benn: The whole support we are giving to be others—are we structured in the right wayin micro-finance is absolutelyabout mutualityand order to be able to do that? That is the first point. cooperatives. I can think of one verystriking The second point is that the group of enterprise example in Lahore, where in a women’s cooperative advisers, excellent though theyare, is not the sum theyhad a micro-finance scheme upstairs, and, as total of the resources we have for working on this. ever—the women meeting on a regular basis—very William was just making the point about the large good at paying back the money, and on the ground number of economists, and, when you talk to our floor there was a group of women sitting economists in our countryprogrammes, part of embroidering t-shirts. The t-shirts were imported what theyare working on is the verythings that we from India and theywere embroidering them with have just spent the last hour and a bit discussing. The enormous skill in Lahore and exporting them on private sector development work that we do is not behalf of Gap to the United States of America. It is solelythrough the enterprise advisers, because, if the most striking example of the kind of modern one takes, as I think one has to, the verybroad global economy. The most interesting thing of all definition of what that is about, the people working was listening to the women talk about how having a on the role of electrification in Bangladesh, the roads job, earning an income, had changed their status in the DRC are contributing to private sector within their own family. Basically, they said, “Our development. I think the challenge is to make sure, husbands look at us with a bit more respect now that as your question has implied, that all of the diVerent we bring the cash home and we are able to have a bits fit together eVectively. But the fact that we are slightlybetter life for our families.” Those are two engaged in this veryimportant wide range of work, examples I remember. Another example on I think, is testament to all the staV who are working cooperatives is the rural electrification programme, on it. I would not just count it in terms of the number a big programme that we are currentlyin the process of enterprise advisers. of starting in Bangladesh—and that too helps Mr Boulter: In terms of building capacity, for economic development because you need power and example, as you have heard about the annual that is being done through cooperatives. retreat, the annual retreat is coming up in July. It is Mr Boulter: In some ways we both innovate and try going to be shared between the enterprise advisers to re-innovate. We are almost trying to re-innovate and the infrastructure advisers, between the byfinding opportunities to work with cooperatives, enterprise advisers and the livelihood advisers, and but a good example in Northern Uganda, including we have a common agenda on private sector in the camps there, are village savings and loan development, either in terms of agriculture or rural societies—rather like the equivalent of farmers welfare and that sort of thing. clubs—coming together and starting with their savings and then trying to find out how they can start Q427 Chairman: I accept that theyall contribute to credit. In the old days, you would have to do that private sector development, but the point I am trying through a credit union or you would do it through to put myfinger on, nevertheless, is, if youare micro-finance but DFID Uganda is working with engaging with trying to promote private sector these people from these camps to say, “How can we development, you need people with business help your financial access?” without going through a experience and credibility. If one goes back to the formal model that maynot exist. DTI’s business advisers—to give him some credit, 3419381001 Page Type [O] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 111
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables
Michael Heseltine’s initiative on that, which I think Ann McKechin: She is in the room. has carried through—there should be people who know about business and are engaging with the Q429 Chairman: What are you, a poacher or a business community. I wonder whether, as things gamekeeper? Do not answer that question. The expand, we need more of that, if you can aVord point that was of interest to me, particularlyas it them—and presumablysalaries in the public sector came from her, was that she said there is a civil are not quite as attractive as salaries in the private service wayof working—she should know—that sector, if you want people who have clout. does not match up veryeasilyto the waythe private Hilary Benn: Yes. It partlygoes back to Mr Battle’s sector works, and the private sector have not got question about the range of initiatives we have had, that much tolerance for another lot of summits, some of which have been verysuccessful, so we another lot of discussions. “We learn bydoing rather clearlymust be doing something right, and public/ than bytalking”, and that is reallythe point I am private partnerships are about what we can bring getting at, do we not need to have people working in and it maybe ideas and it maybe finance, but the field, working in your Department who really do recognising that private sector expertise is with understand how business thinks and not second- people who work in the private sector. We have not guessing, if we reallygoing to have an engagement touched on CDC at all, and I know you have taken that is going to make a diVerence? a close interest as a Committee in the past in CDC, Hilary Benn: Undoubtedlythat would help, but I but that is par excellence a model which is absolutely would saythat if youlook at the range of things that private sector people talking to private sector we have been doing, the list of examples that Mr people, trying to encourage them to invest their Venables was referring to earlier, with the private moneyin places theymight otherwise not think of sector, notwithstanding the fact that this is the doing, and currentlyCDC is doing extremelywell. public sector, this is the civil service, of course if Restructuring that we put in place a year and a bit things do not go right you will be the first ones to ask ago shows that that was the right model to use, us the question: now, did you think this through? because, if you are after investment capital, the best Had you anticipated this? What measures did you wayto encourage people to invest is for those who put in place to deal with this? We are accountable for are thinking of investing seeing people who they the public moneyand what we do in a waythat is recognise as being in their industryand sector diVerent to the accountabilitythat the private sector talking the same language, having the same works to, which is if you make a profit then background, the same experience, and saying, “Hey, everybody is happy and if you make a loss you might it is all right to come and invest in Africa”—or Asia, get dumped and replaced bysomebodyelse; it is a in low income countries—“because in the right diVerent form of accountabilityand we have to live circumstances you can make the same returns here within the framework that we have got. I hope the as you would somewhere else.” I think that is the fact that we have been able, through a number of reallyimportant example of the wayin which we try examples that I have given, to work successfullywith to approach this work—which responds to the very the private sector to respond to the needs that they point you just made, that you need people with have identified shows that we are not doing a bad credibilityand knowledge in order to get the private job. Could we do better in future? Of course we sector involved. could.
Q428 Chairman: We have had evidence from a Q430 Chairman: You have anticipated the point I number of businesses, diVerent companies, financial was making, which is who is taking the risk? By companies, practical companies like, say, Unilever. definition, one gets the judgment that the public First of all, I understand there is a secondment sector is risk averse, for the veryreasons youhave scheme between the Foreign OYce and Unilever just stated. where people go from the Foreign OYce to work for Hilary Benn: Yes. up to a year with the Unilever environment and presumablygain that kind of business experience. Q431 Chairman: You get punished for failure and Do you think there would be some value, not you do not get much reward for success, whereas in necessarilyfor Unilever, but for a commercial business, obviously, risk is essential to success. companyengaging with companies, in sta V having Again, if we are reallygoing to create that enterprise, that secondment of exchange? is there not a need for that partnership to involve a Hilary Benn: I am in favour of secondment. I can little bit more willingness to take risk, and in that think of one specific example of an oYcial who went situation who is going to take that risk, is it civil to work for BP for a period of time. To be honest, I servants or is it ministers? do not know how extensive that is, but perhaps I Hilary Benn: In the end all risk comes down to could check and let you know, if that would be ministers, bydefinition. If youwant risk-free helpful6. development, do not get up in the morning. That is Chairman: It would be useful to know. We had myview, so what we tryand do within DFID is to evidence from Ann Grant who is a poacher turned go into it with our eyes open, and some of the gamekeeper or vice versa, and interestinglyenough, projects that we are engaged in—I am talking more given that she is now in the private sector— generallyhere rather than specificallyabout private sector development—are high- risk projects. 6 Ev 150 Working in the DRC is, in some respects, high risk 3419381001 Page Type [E] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
Ev 112 International Development Committee: Evidence
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables because there is not certainty, as you will have seen were told by oYcials from DFID in March of this for yourself, about what the outcome of the political year? Given that state of aVairs, are you optimistic process is going to be, but is it the right thing to do? that this will come oV, that it will happen? Unquestionablyit is the right thing to do and I will Hilary Benn: It will get going, but clearlythe more defend it to the hilt, and when things go wrong then resources it has got the more work it will be able to we have to, I think, explain have we first considered do. As I said in answer to the earlier question, it is a what the risks were, did we go into it with our eyes cracking idea, it has come from Africa, we have open, do we put it down to experience, do we learn given it the most support of anybody, our eVorts to the lessons from it? In the end, others will be the persuade others so far have brought fruition in terms judge as to whether it was the right thing to have of the World Bank and the Irish, and I mentioned done or not. There is a veryinteresting question two other countries that are thinking about about risk when it comes to working with the private contributing. Yes, to be blunt, I wish others beyond sector, because in the end that kind of financial risk DFID would come in and back it, but it is not for is reallydown to them to take in myview, and that want of trying on our part and one would really need is whyin answer to Mr Battle’s earlier question I said to ask them whytheyhave not come forward in the we can take some ideas so far, but if we show that numbers that are required. things are possible and work and you can make moneyout of doing it, then the appropriate Q434 Mr Singh: Is it because theydo not believe in organisation to take that forward and take the it as stronglyas youdo? continuing risk is indeed the private sector. Hilary Benn: I am not so sure about that. It maybe because there are other things that theyare putting their moneyinto which are working in the same area, Q432 Chairman: I am going to ask Marsha Singh to it maybe to do with the pressures that theyhave got come in, but just as a little hobby-horse I want to say on their development budgets, but I think it is really that, on a UK example, 30 or 40 years ago we set up worth backing, not least because it has such a strong the Highlands and Islands Development Board to private sector involvement in terms of the companies tryand stimulate economic development in what that have been prepared to put moneyin so far, Niall was then a veryeconomically-backwardpart of the Fitzgerald’s leadership, the African involvement in it United Kingdom. I can remember the chairman of as well. I hope it is reallygoing to take o V because it the Highlands and Islands Development Board seems to me it will directlyaddress one of the central saying that what they did was take risks; he issues here, how do you make a better climate for described it as a merchant bank with a social doing business? That fantastic report that the World conscience. The risk theytook basicallywas to back Bank produced on the business climate, taking all people and their ideas without security. Interestingly other countries, how long does it take to set up a enough, the outcome at the end of the daywas that business? How manyforms do youhave to sign? All the failure rate and the return on capital were almost of the factors in the end maylead people to choose exactlythe same as the current performance of the V to invest in this countryas opposed to that country commercial banks, the di erence being, however, or not invest at all, and those are things in the end that most of their customers were unable to get the which developing countries can have some control backing of the commercial banks. The anecdote is over. The most striking example, which I referred to that there is a role, is there not, for the public sector in one of the White Paper speeches, is that in sometimes to be prepared to take a risk that the Bangladesh it is six to seven days to get any goods private sector would not necessarilytake, but it does through the port and you need 38 signatures; in require an understanding of the business Singapore it is seven hours and it is two signatures. environment to do it. That is nothing to do with colonialism, the World Mr Boulter: Could I just saythat one could have a Trade Organisation, you name it, that is a choice debate about are there anyentrepreneurs in very that those two countries have made about how they large companies, and we know the answer is yes. The are going to regulate the movement of goods. same is true in DFID, we can attract people who are Surprise, surprise if people decide, if shifting goods entrepreneurial in their ideas and theyget a buzz out through the port quicklyis important to your of getting those ideas to fruition. From that point of business, you are going to go to the country where it view we are not restricted to bureaucrats, indeed I takes seven hours and not seven days. could give you an analysis of where the 25 enterprise developers have come from: a third of them have Q435 Mr Singh: We did leave behind the come from the private sector, so in some ways it is bureaucracythat theyhave in Bangladesh. much more interesting to know how manyof them Hilary Benn: We are responsible for lots of things. are as entrepreneurial in ideas as some entrepreneurs in some companies. Q436 John Battle: Another good initiative bythe Department and clear leadership was around the Q433 Mr Singh: Secretaryof State, youspoke with Extractive Industries TransparencyInitiative—in great enthusiasm there about the Investment mining basically—and getting people to sign up to it; Climate Facilitywhich is going to be launched some yet we have already got indications that the time later this year, but is it true to say that we are involvement of DFID in the future of that as the lead the onlyones who have put anymoneyin at the organisation is not clear, because DFID intends to moment and there is a $70 million shortfall as we withdraw the secretariat—“sooner rather than 3419381001 Page Type [O] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 113
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables later” is the phrase. The initiative is gathering some the interests of enabling us to continue its success, we support but there is an idea of having a rotating are not about trying to wash our hands of it, quite organisation now that involves Peru, Trinidad and the contrary. Tobago, Nigeria and East Timor. I just wondered V what e ort now is going into ensuring that more Q437 John Barrett: DFID has increasing budgets countries become signatories and that signatory going to health and education projects, but would it countries have a timetable set for payments be better to use that moneyto develop healthy, disclosure, and with the organisation itself, who will sustainable, job-creating economies so that the take it over? DFID got it going, but we cannot see recipient countries could eVectivelyfund their it collapse now, yet DFID is already saying “over to education programmes themselves, or is it a case of you”. How do we ensure that it is carried through getting the balance right just now so that in the long with maximum support and, dare I say, including term the eVective plan is that the economies will some of the big countries, because we are in a global grow, although in some countries this is obviously world when we are talking about mining? How are going to be more diYcult than others? The we going to run it if we leave it to poor—I use that Chancellor has estimated that it would cost $10 word deliberately—East Timor to try and take on billion to fund universal primaryeducation, but as Australia? We need the Australians, the Americans we sayin Scotland youcannot spend a pound twice and the Canadians to sign up as well; how can we so is it better to spend more of that moneyon private reallypush that initiative forward and who will give sector development? it leadership if you just let the fledgling as it were Hilary Benn: No, I do not think so because it is a leave the nest without being able to properlyfly? question of doing both. If you want the economy to Hilary Benn: We are not going to kick it out of the grow and develop, you need an educated workforce; nest unless it demonstrates its capacityto do that. It if children do not go to school you are not going to has been verysuccessful so far, but it is partlyabout have an educated workforce. The same is true for trying to widen the sense of ownership that there is health, because we know that girls going to school is of the EITI so that people do not just see this as a good for their health and the health of the children British-led, British documented initiative, because that theyhave; if youhave an unhealthyworkforce, there is great merit in people feeling this is ours. if you have a potential workforce that is dying of What we have been trying to do through the Aids, this is not just a human tragedyit is an International AdvisoryGroup is to ask the question economic catastrophe for countries because in some the productive generation is in the course of dying how do we support it in the future? It is yet to be out, and that includes civil servants, teachers, decided where the secretariat arrangements are farmers and shopkeepers. It is veryhard to see how going to be; theycould end up with the World Bank, you could have successful and sustainable economic but we do not know for sure yet. We are absolutely growth in order to lift people out of povertyif youdo not going to let that fall for want of somebodyelse not have children going to school—not just primary picking it up. That is the first point. The second thing school but moving on, because developing countries that we have been trying to do is to develop the of course are increasinglyinterested, once youhave initiative because having got the principles in place got through primaryschool, what is next? People and started it up and running, in the end you had to want to go to secondaryschool and then theywant take a decision about are you in the EITI or not and to get the chance to go to Further Education and what does it mean to be in or not? That is what the Higher Education. A healthypopulation is going to group that has been set up has been working on, how be in a much, much better position to support their do you validate so that you can say this is an EITI own families and to support economic development country, this is not? Once you do that, the incentive than one that is not, so I would saythat that was a and encouragement countries get for being a part false choice, the truth is you have to do both. will then be a disincentive for countries that cannot Mr Venables: There is plentyof statistical empirical actuallymeet the standard in those circumstances. evidence on the importance of education as an input The advisorygroup is going to report to the to growth and that is a robust result. It is a matter of conference that is taking place in Oslo in October, balance between these expenditures, but there is the and one of the objectives is to further increase the evidence that education provides growth. number of countries. How are we doing that? Quite Hilary Benn: I asserted it and Tonyprovided the frankly, everywhere certainly that I go—and I know economic evidence. it is the same for colleagues—to countries that are not part of it, thinking about it, showing some Q438 Chairman: If you go past primary education to interest, we are saying what about this? This is a secondaryeducation in manyof these poor countries reallygood idea. We begin to see the benefits for the it is being paid for mostly, and it is being paid for countries that have come through the earlystages of presumablybecause people one wayor another are EITI, accounts and information being published for benefiting from economic activity, even if it is other the first time, and of course the great merit of that is people in the family, their extended family. To take that is once people know how much moneythere is, John Barrett’s point, there is a point at which the then theyask that important question what have you developing economyfunds the education, whereas done with it? Then politics can get to work on how just funding the education is not actuallyof itself the fruits of that wealth are going to be distributed. going to develop the economy. Is there not a slight We are trying to widen the ownership, therefore, in contradiction there that if you do not have a 3419381001 Page Type [E] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
Ev 114 International Development Committee: Evidence
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables successful economyyoumaynot be able to sustain know there is a huge amount of micro finance viable education, yet you say education is the key to alreadyin Bangladesh so in a sense people like us do a successful economy? not have to paytoo much attention to that side, so Hilary Benn: I agree with both of those assertions, DFID Bangladesh is looking slightlyfurther up than and that is whyit has to be a balance. We do need micro and small enterprises: what can we do with both. them, how can we improve their access to finance, Mr Venables: Clearly, the ultimate objective is to for example. In China we are involved in a verylarge have countries self-financing their education and programme with the Chinese Government health and not being dependent on donors for it, but promoting a programme called Start and improve again we know from the evidence that as countries your own business, which originated about 20 or 30 get richer the amount of tax revenue theycan raise years ago in the UK. The Chinese find that this is themselves increases the proportion of their own verysuccessful, particularlylooking at people who education that theyfinance themselves and so there will employother people, so that in a sense is bigger is a complementaritybetween the two things: than micro. education promotes growth, growth builds the tax base and enables countries to self-finance the education. Obviously, in the early stages there is the Q441 Ann McKechin: The issue of youth gap for donors to finance. unemployment is one that has come up again quite regularlyin our evidence and how this is such a Q439 Ann McKechin: Donors are sometimes major problem in areas of conflict, we have accused of concentrating their eVorts on large-scale mentioned Sierra Leone, about young people in investments and there are also some other urban areas with nothing to do. I just wondered arguments that there is a concentration also on the whether there is anyspecific work that the micro level, but not verymuch on the SME sectors. Department is trying to focus on in terms of the I was reallyjust wondering what specificallyDFID particular problems? is doing to tryand engage the smaller scale domestic Hilary Benn: If you are talking about employment investment and how it can actuallyincorporate the generation schemes for young people in particular, other main donors. no, that has not been a focus of our work. It is a big Hilary Benn: The truth is that we do both. We have issue and will become an increasinglyimportant been talking about the EITI, the work on access to issue in a lot of developing countries given the age medicines, the Ethical Training Initiative, some of structure of the population, but as we discussed the challenge funds work with large companies, but alreadywhat we are tryingto do is create a climate the challenge funds also work with small ones, but in which there is the maximum chance that theywill the biggest group of small businesses we work with find job opportunities because of the wayin which are farmers, byfar and awaythe biggest group. If the economyis run, the business climate, the you think of all the work that our livelihood advisers governance and so on and so forth, rather than us as do, helping those agricultural markets to work, a development organisation coming into a particular maybe providing seeds and tools in certain place and saying we are going to run an employment circumstances to enable people to survive, that is the generation scheme for a group of young people. Yes, area in which we do most, the micro finance that we you could do that but trying to get the fundamental talked about: irrigation schemes, road schemes, things right is, in myview, the best thing to do to safetynets, propertyrights. All of those areas of maximise the chance that those young people in time work are in particular about supporting people are going to find a wayof earning a living and having earning a living, running verysmall businesses, i.e. something to contribute to society. looking out for themselves, growing crops, maybe Mr Venables: These youth employment issues doing some handicrafts, selling it on the side and so possiblyhave not been thought about enough bythe on, that is the work that we are engaged in. The truth development communityas a whole. It is interesting is, therefore, that I think we do both. to note that next year’s world development report that the World Bank will be doing is on youth, on Q440 Ann McKechin: I would saythat is reallyat the this topic, and we are initiating some labour market micro level but what I am talking about is something work as well, so it is an area that I think is attracting a bit bigger, medium size. There is one thing that increasing attention. John Barrett said about education which is lack of skills training, trying to identify the people who will be electricians, plumbers and ordinarytechnical Q442 Joan Ruddock: First of all, myapologies, I had skills seem to be in manyareas in veryshort supply, to go to Foreign OYce Questions, which is whyI yet they are really quite essential when you are trying have been absent for so long. I just wanted to turn to generate a sustainable local business your minds to corruption; as we know, the environment. There does not seem to be terribly Commission for Africa dealt quite heavilywith this much emphasis on that sector of the market. subject and proposed a whole load of Mr Boulter: Certainlyin Africa we used to talk a lot recommendations about legal structures, about about the missing middle, in other words not the transparency, repatriation of funds and signing up micro and not the large, and sayto what extent are to the UN Convention on Corruption. I wondered we working with them? Yes, we are beginning to and how DFID is going to deal with corruption or in some countries, for example in Bangladesh, we all implement, if it is, those recommendations. 3419381001 Page Type [O] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 115
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables
Hilary Benn: The UN Convention on Corruption we people in the countries aVected. That is about grand have now ratified, as you will know, in a very British corruption, but there is of course the whole question way: we put all the legislation in place and then we of pettycorruption, which youknow onlytoo well. ratified; some other people ratifyand then get round to doing the things that theyhad signed up to do a Q443 Joan Ruddock: Which other countries are little later on, and obviouslyencouraging other following our example? countries to do the same. Secondly, we provide Hilary Benn: On the repatriation of the moneyI support to anti-corruption commissions and anti- have to saySwitzerland which, if yougo back in corruption work in a number of countries, but I have time, had a rather diVerent reputation. Switzerland to say, based on my experience, thinking particularly has been verye Vective in returning funds that were about Sierra Leone which we touched on while you stolen from Nigeria during the period of military were out, where it remains a verybig issue that has dictatorship, and I think deserve great credit for not reallybeen properlyaddressed, or Nigeria where that. To be honest, I cannot remember the number we are seeing some progress—arrests, prosecutions of countries that have signed up to the UN and so on—or Kenya, where I was last week and Convention now and whether all of them have put in discussing this with President Kibaki and his place the legislation that is required, but it is really ministers where we are in the middle of this the progress in the countries themselves where extraordinaryprocess, the unprecedented corruption is the problem that is most important. resignation of three ministers following the Katongo dossier being published. Investigations continue, but what is quite clear to me is that you can have all Q444 Joan Ruddock: Of course. Finallyfor the of the mechanisms, you can have all the laws—all of Committee todayI want to turn to agriculture and the countries have laws saying corruption is illegal— infrastructure. One of the things that has come up so you can have anti-corruption commissions but you often during this inquiryhas been the comparison have to have the political will to use them. It comes between what has happened in Asia and what has back to mypoint about governance that we were happened in Africa, mainlyon the industrial front, discussing earlier, because if people do not see the but when we look at agriculture it is also the same, there is a huge contrast. In Asia you had the green law being enforced theydraw a conclusion, “I can revolution that helped povertyalleviation and so on carryon doing this” and that is whyit was so seismic and so forth; in Africa outputs have been declining, in one sense when the three ministers stood down in theycan hardlyfeed their people, as we know. I Kenya, because public opinion was pushing for this, would like to look at the extent to which the things the media was pushing for this and everyone is you have been describing today, Secretary of State, waiting to see how it is going to be followed through. are joined up in terms of your Department’s In the end you have to have evidence, but if there is approach to agriculture and the wayin which that, evidence then people ought to be held to account for which is whollythe private sector, can be advanced what theyhave done because there is no substitute in terms of development of the countryand poverty for people discovering theyare going to be caught, it reduction. You mentioned earlier when I was here is sending a message that it is reallynot a verygood certification of land; I think Ann McKechin may idea to go on doing this. That leadership, that have raised issues concerning the co-operatives, but political will, in the end can onlycome from within to what extent do the Department or oYcials in the countryitself; we can support and cajole and countrylook at needs in the round and tryto see how encourage and we maytake decisions about the way an economymaybe developed in a particular in which we give our aid on the basis of our location, whether co-operatives need to be assessment—we have in the case of Kenya because encouraged, whether it is infrastructure that is we do not give financial support in Kenya. Why? required et cetera et cetera. Because there is corruption, so we give our aid in a Hilary Benn: You are absolutelyright, this is—as I V di erent way. That is one thing that we can do to said in answer to Ms McKechin’s earlier question— send a message. The other area in which we still have working with people earning their living in the more work to do is playing our part to help countryside, farmers and so on and so forth, really repatriate the cash, if it is stolen. We strengthened an important part of the work that we do, and there our moneylaundering legislation two or three years are those who are much better placed to answer the ago—actuallywe thought it was good enough but it question, the green revolution in Asia, whynot in was not—and now there is a veryclear obligation on Africa, and there are a number of reasons whythat those who handle moneyto know whether the sum is the case. On infrastructure, one of the verystriking of moneybeing deposited is consistent with what things as we know about Africa is the paucityof the theyknow about the customer, and if it is not they transport infrastructure, and that aVects farmers in have an obligation to report that. We are doing some a number of ways—it makes it more diYcult for work to tryand enable countries that are tryingto them to get their goods to market and it makes, in get hold of the moneyto understand how our legal some countries, fertiliser phenomenallyexpensive, system works, mutual co-operation and so on and so as myconversation with a group of Ethiopian forth, but I am sure that there is still further that we farmers two or three years ago demonstrated. I need to do on that front, because if the cash is stolen remember them saying in the village that the cost of then it is veryimportant that we do everythingthat a 100 kilogram bag of fertiliser would be the we can to give it back to the people from whom it was equivalent to just under half a family’s annual nicked in the first place, which is in the end the poor income. I said whyis it so expensive, and it was 3419381001 Page Type [E] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
Ev 116 International Development Committee: Evidence
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables partlythat it had to be imported but particularly sure they are joined-up a nd looking across the because of transport costs. We went through a dimensions of agriculture, manufacturing activity, period in the Eighties and Nineties where it was identifying what we might perceive to be the gaps, rather fashionable to think the private sector will the policyfailures, the need for particular look after all investment in infrastructure, but it infrastructure investments or whatever it is across could not be more wrong. Some bits of their growth strategies and then, of course, possibly infrastructure, mobile telephones, as we know, are assisting, financiallyassisting in implementing those fine, great, it is working but roads, no, people do not strategies. So first it will be country-led, but DFID tend to invest in those. It was the same conversation would certainlylook a t the whole and see it at a on land certification because there it was DFID countrylevel. actuallywho initiated this. We had been reflecting in Ethiopia on people’s sense of insecuritywhen it Q446 Joan Ruddock: Do you accept that it has been came to land tenure and we funded a bit of research. reallydi Ycult to identifygood infrastructure We drew that to the attention of the Government projects in Africa and provide the funding for them? and, following that, theybegan to introduce land Hilary Benn: There has been diYcultyin identifying, V certification, in e ect long leases. If you feel that you but there has also been a diYcultyin spending the have got that and you can pass it on to your children moneythat is there already,and the big issue of the or sell it to someone if you move somewhere else, African Development Bank—that is whyI V you are more likely if you can a ord the fertiliser and welcomed Donald Kaberuka’s arrival—is that the the other inputs to stick it in the land to improve it African Development Bank has not been as good as because it is worth your while. People remembered it ought to have been in spending the cash that it has in Ethiopia there had been a land redistribution, I got, and if it shows it can do that—and sometimes it think it was in the mid 1990s, where land was taken is hard because if you have an infrastructure project from some people and given to somebodyelse, so if that cuts across two countries, getting them to agree you are not sure whether you are going to have it and about what it is theywant is a problem. That is why are the Government going to do it, it is not we have set up the Africa Infrastructure Consortium surprising that you are not going to invest. We Bank which is about trying to bring all of the initiated that piece of work and the point I would organisations that are interested in investing—the make is that we tryto respond to the circumstances EC, donors, the World Bank and the African of the individual countries in which we are working, Development Bank to saylook, how can we pool so in Andra Pradesh we are doing a lot on irrigation this resource given that we have all acknowledged because harnessing the water is reallyimportant to that infrastructure is a big problem, the moneyis improving agricultural productivity, we are doing going to have to come from somewhere for the bits work on bringing in new varieties of seeds. I that the private sector is not prepared to invest in, remember talking to a farmer who had the old seeds can we get our act together better than we have in the growing in a field over there and the new ones over past, and that is what the consortium is trying to do. there, and he was very, very pleased because it was a better variety, he was going to get a better crop and the water was coming out of the ground from the Q447 Joan Ruddock: We have given $20 million—or irrigation scheme that we had helped to fund in those DFID has. Where are the other partners, what have circumstances. So it is verymuch about looking at theygiven, do we know? Hilary Benn: I do not know, but I shall find out and the circumstances in individual countries and 7 playing our part in trying to help people who try to let you know if that is all right. earn a living out of the land to do so more eVectively. Joan Ruddock: Thank you.
Q448 Chairman: One particular comment on the Q445 Joan Ruddock: What I am reallytryingto infrastructure problem is that when we were in the press you upon is if you do land certification, that is Congo we understood that all of the donors had solving one problem, but what we see here is a whole agreed an infrastructure investment in roads after load of problems—it is getting products to market, the election, and the UK, I think, was delivering the even if you can grow successful products. There is programme in Equatoria. We had decided on the hardlyanyirrigation in Africa and on the visits that ground to do that bybuilding up capacitywithin the we have made it is extremelymessyin terms of Congolese authorities to actuallybuild their own irrigation. In working with all of those aspects does roads, with one external manager to train up the the Department saywe are doing this bit, we will team. Unfortunately, just as the project was about to look for other funders to do this bit, the government be launched the responsible minister decided to sack or whatever, but unless it is done holisticallyit seems the entire team and replace them with his family, so to me one ends up without solving the problems of that it is on hold at this present time. The point that that particular community. I am making is I commend what our team were Mr Venables: The first thing to sayis that countries seeking to do, but it perhaps just confronts you with do obviouslyformulate their growth and the scale of the task, if that is what happens at the development strategies, their povertyreduction end. The other donors simplybrought in X number strategies, and that is essentiallya country-led of tractors and said theywould build the roads using process, theywill formulate those strategies, but outside finance, which is regrettable in a wayI DFID will hope to assist with the formulation of those and, in particular, hope to assist with making 7 Ev 150 3419381001 Page Type [O] 19-07-06 03:27:57 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 117
23 May 2006 Rt Hon Hilary Benn MP, Mr William Kingsmill, Mr Richard Boulter and Mr Tony Venables suppose instead of building capacity. You said at the considerable interest at the White Paper to see the beginning that 90% of the economyin most of the extent to which there is a shift to getting that balance poorest countries is private sector, but that is partlyright in terms of th e deliveryof the policywhich will because of the weakness of the state, and clearly start to see private sector growth, reducing not just what we need is a developing private sector that can the povertyof the peopl e but the povertyof the state generate revenue to fund the state to actuallydo in which theylive, which are the two themes which those functions which create jobs, like digging roads, are undermining each other all the time. It is a big teaching and health care and so on. Thank you very challenge, but one that I hope that DFID will be able much for the work that you have done but what I to rise to. Thank you very much indeed. would sayhowever is that we will be looking with Hilary Benn: Thank you. 3425681001 Page Type [SE] 19-07-06 11:23:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 118 International Development Committee: Evidence
Thursday 15 June 2006
Members present:
Malcolm Bruce, in the Chair
John Barrett Mr JeremyHunt John Battle Ann McKechin Hugh Bayley Joan Ruddock Richard Burden
Witnesses: Ms Sumi Dhanarajan, Head of Private Sector Team, Oxfam, Mr Dominic Eagleton, Policy OYcer, ActionAid, and Dr Claire Melamed, Trade and Private Sector PolicyManager, Christian Aid, gave evidence.
Q449 Chairman: As you know, we are at the closing Chairman: I think that probablyleads into the next stages of our report on private sector development question. The two issues are: how do you make the and we are looking at the waywe can expand the private sector grow, and how do you ensure that, if private sector in ways that would reduce poverty. it does grow, it helps the poor. This is an opportunity for you to give us your views on the ups and downs of that. Perhaps we could start with a verysimple question which all of youcan Q450 Ann McKechin: What do you think donors can answer, and then pick up from there: How do you do to ensure that the private sector is a force for see the role of the private sector in developing good? A great deal of your written submission2 is countries in reducing poverty. What do you think about the issues with mandatorycodes, as opposed are the pluses and minuses? to voluntarycodes, vis-a`-vis the UK Government, Mr Eagleton: I would like to make it clear that but there is verylittle mention of the sovereigntyof ActionAid thinks a thriving private sector is donee nations and in determining what should be absolutelycrucial to povertyreduction and their priorities, and also the role of domestic legal economic growth. As the UNDP pointed out in its systems and trade unions making their own written submission,1 economic growth and private decisions or making their own voice heard. I would sector development on its own is necessaryfor like to have your thoughts about whether there has sustainable economic growth and human been too much emphasis on the donor countries Y development but on its own is not su cient. There trying to do everything and whether we need to leave needs to be quite intelligent and robust regulation in some of that to the donee nations themselves. order to make sure that it is equitable. Mr Eagleton: An issue that is crucial in this is trying Dr Melamed: Like Dominic, we think the role of the to include the voice of developing country, private sector is absolutelycrucial. The main thrust stakeholders, disadvantaged stakeholders, such as of our whole trade campaign over the last five years has been about creating the conditions for domestic trade unions, such as small producer associations, in private sector development in developing countries. the development of donor policyfor private sector That is what it is about. That analysis carries development. It is absolutelycrucial. Most of the through into other areas of policywe do where it is voluntarycodes and standards from private sector absolutelyfundamental. I think, however, the and also donor policies are coming from businesses Government have a role in two keyareas, first of all, themselves, and the people to whom theyare in creating the infrastructure and the environment addressed are generallydisadvantaged stakeholders for companies to function—and I am thinking here in developing countries, but, byand large, theyare about banks, regulation and some of the other things excluded from dialogue, the standard setting that I am sure we will come on to in a minute, and processes. There is much that the donor community secondly, obviously, in areas of social policy, health could do to make sure that disadvantaged groups and education and so on. In order to do both of are included in these debates. those, theyneed to harness some of those resources from the private sector for development through eVective systems of taxation and so on. Q451 Ann McKechin: Perhaps I could press you a Ms Dhanarajan: I would probablygive the same little on that, because you are asking for mandatory kind of answer. For Oxfam, the main concern is: codes for UK companies, for example. How can you grow a private sector that is going to Mr Eagleton: Yes. make that link between economic growth and povertyreduction? That is the critical thing. How can you create a private sector that is going to do Q452 Ann McKechin: Who would have the abilityto that? We feel there are a lot of automatic enforce the mandatorycode? It would not be foreign assumptions that, bythe mere fact that a private nationals, would it? sector does generate economic growth, that will lead Mr Eagleton: We think there has to be a mixture of to poor people being alleviated from poverty. What both voluntaryand mandatorycodes. It is not a can we do to make that link? question of there onlybeing mandatorycodes.
1 Ev 320 2 Ev 151 3425681001 Page Type [O] 19-07-06 11:23:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 119
15 June 2006 Ms Sumi Dhanarajan, Mr Dominic Eagleton, and Dr Claire Melamed
Q453 Ann McKechin: You appreciate the problem of is government policy. What would be your enforcement, because we are trying to create a proposals for ensuring that there is a sort of common system extrajudicial to the donee nations here in the standard across government for monitoring how UK bywhich the people who are directlya Vected by these agreements are formed? these decisions would have no direct involvement. I Dr Melamed: It is safe to saythat government policy am wondering where you strike a balance between could be much better coordinated in this area. I those two. think there is a cross-Whitehall group which is Mr Eagleton: That is the keypoint to make, striking supposed to deal with these issues which perhaps is a fair balance, but the one thing to remember is that less eVective than it might be. I think there are a lot of communities that are aVected negativelyby specific areas where you can see there is a private sector development that is not regulated particularlywoeful gap . One that comes to mind is properly, that has damaging eVects, often have no the Export Credit Guarantee Department, for avenue for redress in their own country, because example, where DFID needs to have a much, much either the laws are not enforced properlyor theyare stronger authorityto look at the kind of support that non-existent. For example, communities being able is being oVered to companies through those types of to bring cases in the UK is a reallyimportant area. programmes, through a corporate social Another example would be the supermarket code of responsibilitylens. Tha t is just one example and I practice. We are told there is no legal conceptual think there are a whole range. barrier to it applying to overseas suppliers and it actuallydoes applyto overseas suppliers, so, yes, Q456 Hugh Bayley: Give specific examples of there is so much that can be done in the developing particular businesses or companies that have not countries themselves but we also have a been properlyregulated. responsibilityin the UK. There is much the UK Ms Dhanarajan: Gosh, that is a big question to ask. policycommunitycould be doing; for example, strengthening the supermarket code of practice, Q457 Hugh Bayley: Who have not properly which does extend overseas. regulated themselves, I think is what we are saying. Ms Dhanarajan: It is a critical question to look at. Ms Dhanarajan: There are companies that will be Certainlywhen we have looked at the whole concept eVectivelyregulating themselves, just because they of developing an international law or convention to 3 are positioned as leaders within their sector and regulate TNCs for example, one of the questions reallyhave no choice but to behave in that manner that we have certainlyasked is: What will it do for within their sector, and similarlywe will have growing strong governance or domestic legal system laggards within each sector too. I think it is hard to in a country? For example, if a Nigerian was pull out one particular sector that has not regulated consistentlyhaving to take cases in the US or the UK itself well. You will find both in each. courts rather than in Nigeria, you may be in a situation where the Nigerian courts will never be able to develop precedence or jurisprudence to be Q458 Hugh Bayley: I mean some hard meat of: Is able to look at corporate accountabilitywithin the there a problem? context of Nigeria. I think it is a phase issue, where, Ms Dhanarajan: There are certain sectors—a phrase yes, the foremost thing in people’s minds must be that we have started to use—that lend themselves about how we get victims redress, and if the only more towards a tendencyof “exploiting for profit mechanism to do so now is to take it under the Alien rather than investing for profit”. If you look at the Tort Claims Act in the US or to develop a similar extractive industry, it is probably easier to move type of mechanism in the UK, then, fine, however, towards that, and it is also because the shareholders that does not mean taking your eye oV— at the top of the chain are pushing you to deliver a short-term profit-making business model that might suggest that in the current scheme of things the best Q454 Ann McKechin: Donors should spend more business model you can use is one that is going to be time in trying to assist in terms of legal structures exploitative. There are others—and I think you have and enforceabilitystructures within donee nations. heard from Unilever. The Unilever model is one of Ms Dhanarajan: For sure. Governance has to embedding in the country. Unilever is not Unilever remain an absolutelycritical part of the portfolios of in Indonesia; it is Unilever Indonesia. Theyhave an private sector development within countries. I used absolute interest in Indonesia prospering, which is to work in Hong Kong before I joined Oxfam here. whytheystayedthroughout the financial crisis. It was at the time of the transition, in 1995–97, and one of the keythings that the Hong Kong people Q459 Hugh Bayley: With respect, that is the same for were concerned about was: “When we move back to the extractive industry. In fact one of the complaints the Chinese we cannot lose our rule of law because that Shell UK have about the NGO complaining that is our absolute bastion for attracting the private about Shell in Nigeria is that theydo not control it sector into Hong Kong.” because it is Shell Nigeria and it is 51% government owned. Surely, with respect to Ann’s point, if you Q455 Hugh Bayley: Lots of these voluntarycodes of want to regulate a Nigerian company, then that the UK banks have relevance to quite a number of should surelybe done byNigerian law. government departments and how well coordinated Dr Melamed: This issue about the chains of command in companies is a diYcult one. In a sense, 3 Transnational Corporations part of the problem is the opaqueness of 3425681001 Page Type [E] 19-07-06 11:23:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 120 International Development Committee: Evidence
15 June 2006 Ms Sumi Dhanarajan, Mr Dominic Eagleton, and Dr Claire Melamed relationships between diVerent branches of the same business of wealth creation, theyall seem to all ow, in company: they say one thing; the Nigerians say the earlydays,massive inequalities to happen, something else. If you look at their accounts they because, for whatever reason, that is what gets the show diVerent kinds of transfer pricing, for example, entrepreneurs going, that is what gets the businesses, between those diVerent branches of Shell in Nigeria and that creates the wealth that you can then use to and in the UK, which indicates a verystrong deal with social justice. relationship. In a sense, exactlypart of the problem is a lack of transparency, so we do not know the right Q461 Hugh Bayley: Could I add to that question. answer to these questions. When Shell says they do Countries that have had higher growth, Jeremyis not have control, then we are professionallyinclined right, have tended to get greater inequality—the to be verysceptical about that, but we have no way coeYcient has gone in the wrong direction—but they of knowing because theyneed to make their have also been better at povertyalleviation, lifting strategies and their accounting procedures much people out of absolute poverty. Look at China. more transparent. One of the demands of Look at Vietnam at the moment. Surelyhigher organisations like ours is simplythat we have more growth leads to povertyreduction, but maybeit information about this as a start. leads to some other problems, like a greater disparity Mr Eagleton: The corporate veil. An Australian between rich and poor as well—which is happening judge recentlyruled that is quite often simplya legal in China. There is povertyreduction on a level which fiction. For Shell to saythat what is going on in would probablymean globallywe achieve the end Nigeria is nothing to do with the headquarters in the measures. UK sounds spurious. If theyare siphoning profits Dr Melamed: I think there are lots of diVerent ways from there, then you have to wonder. to look at this question.
Q460 Mr Hunt: I would like to ask you about the Q462 Hugh Bayley: Is it a question that growth is concept you raised, Dominic, about pro-poor good for povertyreduction? V V growth. Do you think the most important thing is to Dr Melamed: But growth has di erent e ects on V focus on the right kind of growth or do you think the povertyreduction in di erent countries. There are most important thing is to focus on growth and then countries which have a similar rate of growth but hope that through the increasing tax revenues, where the rate of povertyreduction is very,very V through the jobs that creates, that will strengthen the di erent. It is not simplya question of saying:let us government and therefore you can reduce inequality take growth as the thing which is fixed and then leave that way? I think you suggested you wanted the it and wait and see what happens to poverty latter, is that right? reduction. If one says, “Okay, let us compare Mr Eagleton: I would saythat the links between countries with the same rates of growth and see how good theyare at povertyreduction,” theyare very, economic growth and povertyreduction are not V necessarilyautomatic. If youtake Foreign Direct verydi erent. That is the interesting question: How Investment (FDI), for instance, a lot of the do you translate a given rate of growth into poverty discussion around private sector investment is to do reduction? with foreign direct investment. The debate seems to over-emphasise FDI over the development of Q463 Hugh Bayley: Who else has had a 13% growth smaller scale micro enterprises, in developing rate over the past 20 years, or whatever China has countries. We know that that kind of investment, had? Foreign Direct Investment, is much more poverty Dr Melamed: Tunisia and Senegal have had almost reducing when it is linked back into the local exactlythe same rates of growth but their poverty economy. It needs a strong state in order to make reduction diVered bya factor of two. China is sure those linkages are there. At the moment we are obviouslya verydramatic— seeing this over-emphasis on simplyattracting FDI rather than looking at the qualityof the FDI. The Q464 Hugh Bayley: But over 20 years it is a very, extent to which it fits into national development verylow rate of growth. goals, contributes to national development goals, is Dr Melamed: I am not holding up either as obvious a reallykeyissue. It seems that the debate over the examples of success. One can focus on China and last 20 years or so has focused on simply attracting just think about China, but the chances of any investment, with the hope, as you say, that the trickle countryin Africa having a 13% growth rate down eVects will simplyhappen bythemselves. tomorrow are fairlysmall. In a sense, another Mr Hunt: I personallyhappen to agree with you interesting set of questions as well as those posed by about FDI, but I want to probe on pro-poor growth. China, is also to look at countries which have The idea of pro-poor growth is something that smaller rates of growth and see how one can get everyone finds immensely attractive. We all like the povertyreduction in those countries. idea of this thing called growth that can be probed for. Can you name an example of a single country Q465 Hugh Bayley: This is not an argument just where significant economic growth has not been about China, but if you look at the East Asian or accompanied with massive inequalities? In fact, if even South Asian growth pattern, you have strong you look at Britain hundreds of years ago, if you private-led sustainable growth and substantial levels look at China, if you look at India, if you look at the of povertyalleviation. In areas of the world where countries which do seem to have cracked this you have much lower rates of growth, they do not 3425681001 Page Type [O] 19-07-06 11:23:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 121
15 June 2006 Ms Sumi Dhanarajan, Mr Dominic Eagleton, and Dr Claire Melamed even have the opportunityto remove people from that was part of the norms of society. Today it is not. poverty. Certainly, some countries convert more of What do we use to increase that threshold, both in their growth dividend into a povertydividend, but terms of attitudes and beliefs and then with surelythe first stage is to achieve a high level of regulation and law? growth without which you do not get any hassle. Mr Eagleton: The OECD Guidelines, the National Dr Melamed: I suppose I would not see the two as Contact Points, maywell be flawed but it is possible being separate. I would not see countries having to to have that kind of mechanism for redress in place. say, “Shall we choose either growth or poverty reduction?” I do not think that is the policychoice that countries are making. Of course theywant Q467 Richard Burden: How do you enforce it? higher growth, but theyalso want povertyreduction. Mr Eagleton: At the moment it seems as though it is The question is: How do you get both? What is the not eVective. Maybe that stems in part from the fact type of high rate of growth which is best going to that the OECD Guidelines are voluntarybasically. facilitate povertyreduction? There are lots of Maybe that has something to do with the fact that examples of countries that have had high rates of hardlyanycases are being brought to the National growth that have not had increases in inequality; like Contact Points, but at the veryleast it shows that it Taiwan, like Mauritius, and theyhave been very is possible to have that kind of mechanism in place. successful in both growth and povertyreduction. In For instance, if we did in the end have an a sense, let us learn from those countries and not international framework for business and human assume we have to choose between the two. rights, I think the OECD Guidelines, a system of Mr Eagleton: I would agree with Claire. I think it redress, is a good model on which to base systems would be a mistake to assume that the East Asian of redress. Tigers grew rapidlyand at the same time were massivelyinequitable. I do not think that is the case. Often theyare held up as examples of rapid growth that, relativelyspeaking, is equitable. A lot of it Q468 Chairman: Is the problem that we have only started in the smallholder economy: growth was gone halfwaydown the track? We have said that we generated in the agricultural economyon a fairly want to have development which is free from our equitable scale; savings were used to invest. There is own commercial antagonism, but, while we promote an assumption being made that you can only have our trade and our own investment, we certainlydo growth without equityand I think that is quite a not want to think about the development questionable assumption. implications of what we are doing and we are not Hugh Bayley: I am not saying that. I want to make joining them up. The DTI, for example, are not very that clear. involved in DFID policy. Dr Melamed: We have been involved in a very interesting process that has come about as a result of Q466 Richard Burden: I would like to go back a some research that we did into the OECD stage. You were talking about mandatoryand Guidelines which is under the auspices of the All- voluntarycodes of social responsibility.Assuming PartyParliamentaryGroup on the Great Lakes. As that there are cases for particular OECD corporates a result of some concerns about the waythat the that are engaged, at worst, in unethical or corrupt guidelines were being implemented in the UK and practices, or veryoften not quite at that level, but the role of the National Contact Point, a number of unacceptable practices, what mechanisms are you NGOs and companies and international lawyers suggesting for sanctioning them? Are we talking have come together in a group to tryto think about about some form of blacklist, whether it be bilateral a better process for implementing those donors, multilaterals like the IFC, or even export Guidelines—a process which would start with the credit? Are we talking about constructing approved lists and non-approved lists, or something else? information gathering and mediation between the Ms Dhanarajan: Going back to what I said earlier, I companies and the complainants in anyparticular think the first port of call has to be about the people case, and, onlyafter several stages, proceed to that are aVected bythat abuse. Certainlythe first legislation. It is veryinteresting in terms of thing you would want to achieve in anything like implementation. It is also veryinteresting that it was that is to look at some mechanism for redress—and the companies themselves which were reallypushing bythat I mean both in terms of competition but for this. Theyhad been veryactive and involved and more so about the victims of that abuse being able to interested participants in this because theycould see bring their case to some kind of arbitration, whether also the need for a better system of regulation to level that is the court at international level or at national the playing field for them, to guard them against the level. That would be where I would start, rather than kind of risk to their reputation that campaigners can creating a blacklist of companies as such. Certainly create and also to help them to see what to do. the law and the use of the law has been extremely Because, in a lot of cases, a complaint is made or a useful in this situation at setting precedent, and you campaign is run or something and companies do start to use the law as a wayof increasing that need to be told, “These are the things that you need threshold. A verysimplistic example which I use a to do.” I found the active and enthusiastic lot is to look at our ideas on slavery. If you go back participation of companies in that group to some point in time, our ancestors accepted that encouraging and quite illuminating for the kind of slaverywas fine: it was acceptable; it was something work that we do. 3425681001 Page Type [E] 19-07-06 11:23:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 122 International Development Committee: Evidence
15 June 2006 Ms Sumi Dhanarajan, Mr Dominic Eagleton, and Dr Claire Melamed
Q469 John Barrett: If I can turn to small and ideological block within the organisation—and medium-sized enterprises. We have mentioned Shell certainlyin some quarters remains so—that our job and Unilever already, but does there have to be more is about reducing poverty, it is not about creating concentration between donors in dealing with small wealth. But we have to realise in the 21st centurythat and medium-sized enterprises?—because there is a that cannot be the case anymore. The famous quote lot of potential there as well. from HilaryBenn, which everybodyis quoting, is Ms Dhanarajan: Absolutely. One of the questions that 90% of poor people are in the private sector and earlier was what kind of action should donors take, it aVects their dailylives in one form or the other. We and we would saythat it is almost a five-pronged can either take the view that this is not where we are approach. Firstly, there is the support to developing currentlyspecialist and therefore we do not grow it countries to be able to adopt industrial policies that at all, or that this is so central to povertyreduction are going to lead not just to economic growth but that we have to engage, and the question is more economic growth that then leads to poverty about which specific areas do we get into. One of the reduction. The second thing is to directlysupport things we are pushing is for our country poor people as entrepreneurs and in their programmes—when theyare developing their interactions with the private sector. The third thing strategic plans—when theyare addressing the would be to support a growing SME sector. One of Zambian Government on povertyreduction, to have the interesting things that we came across in some a strong enough analysis as a development agency to recent work that we were doing on SMEs—because be able to say, “This is what we think about private this is an area that Oxfam feels it has not done sector development in the context of being able to enough and would like to do more in the next five alleviate poverty.” If we do not do that, I do not years—was that there are a lot of assumptions made think we can progress on the povertyreduction that growth in the SME sector naturallyleads to economic growth and there was a studyrecently— agenda. It is something that we have to take on and which I am happyto send to the Chairman—that grow the skills at doing, but then being able to be showed that is not necessarilyalwaysthe case. I quite tactical and specific about exactlywhich areas think it would be good for DFID to take one step we go into and which we simplywill never have the back and look at that before forging forward and competence to go into. saying that is the place to go. Certainly it is our belief Dr Melamed: A lot of the things in which NGOs that SME growth is critical, but it would be good to have been involved for a long time is about support look at whythis evidence threw up a di Verent to the private sector. Micro credit/micro finance is finding. something which was started byNGOs and which the NGOs are still the leaders in providing and it is entirelyabout providing credit to small businesses. Q470 Mr Hunt: Private sector development, I think Look at most of the support that we give to we can take it, is something that we all agree is a vital agriculture, those 90% of poor people who, as Hilary part of povertyreduction. But could I ask, slightly Benn says, are the private sector. A lot of them are provocatively, whether you think this is an small farms that are eVectivelyfamilybusinesses. appropriate thing for DFID to get involved with, NGOs have been massivelyinvolved in providing all considering that I verymuch doubt there is a single kinds of support, both in terms of direct financial person in DFID who started their own business in support, through credit schemes and infrastructure their own life. And let me ask, even more support and so on, through seed banks and provocatively, whether it is something that, for improvements in infrastructure to those people. I example, Oxfam should be touching with a barge think NGOs have always been in the business of pole, because, whilst it maybe a veryimportant part of the equation, is this not reallysomething that is supporting the private sector. We have not always better left to people who understand what creates a called it that. good business environment and what that is about; Mr Eagleton: Do you need to be a businessman to for example, the last person we spoke to before you sayanythingabout business? How can we ignore the was Hernando de Soto, who obviouslyhas huge private sector when it is such an important issue for experience as a professional economist. DFID is development? spending $30 million on the Investment Climate Facility. Would it not be wiser for DFID and for yourselves to concentrate on what you know you do Q471 Mr Hunt: The interest that you have in the reallywell and specialise in that, rather than trying private sector is music to myears, because, I could to add yet another completely new area of expertise not agree with you more, I think it is absolutely about which you know very little and have very little fundamental. Let me just ask you to look at the personal experience in terms of your personnel, private sector itself. Whyis it that the private sector with respect. is so successful? It is essentiallybecause of lots of Ms Dhanarajan: Myteam over the last six months small organisations which choose to specialise. My has been tasked with drawing up a private sector question to you is: Would not the whole aid strategyfor Oxfam for the next 10 years,and, believe industry, the whole NGO community, be far more me, we have a lot of those questions that came to us. eVective if it chose activelyto specialise? If the NGO I think the attitude that we have had to move community did not say, “Okay, the latest thing—it towards is: “How do you reduce poverty? You have was agriculture, then education—is now private got to create wealth.” For a long time that was an sector, and so we all have to do all of it,” but rather 3425681001 Page Type [O] 19-07-06 11:23:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 123
15 June 2006 Ms Sumi Dhanarajan, Mr Dominic Eagleton, and Dr Claire Melamed said, “No, we are going to specialise”—like, governments making that arrangement which you perhaps, Me´decins Sans Frontie`res, which I imagine are outside, and I am interested in the advocacyrole does not have a private sector development strategy. you may have in all of this. Christian Aid said, Chairman: It gets most of its moneyfrom the private “Manyof the benefits [to FDI] are illusoryand are sector, though. outweighed bythe costs” 4. When we were in Mozambique, we wondered if that might be the case Q472 Mr Hunt: Yes, but I am saying is not with the Mozal aluminium smelter, which did not specialisation the heart of the success of the private seem to be contributing verysubstantiallyto the tax sector, and is that not something that you as NGOs revenues of that country. I wonder if you have a should consider before you charge into developing view, anyof you,on that, as to what governments, private sector development strategies? donors might do to ensure that there is a Dr Melamed: Perhaps we need another inquiry contribution to the tax revenues of such investment. about NGOs. All of the organisations represented Dr Melamed: I was going to mention Mozal as well, here wear manyhats and have manyprogrammes, but you got there first. I think tax is absolutely key. but, as you said—like Me´decins Sans Frontie`res This tendencyof countries to think that, if theyjust (MSF)—there are also a lot of specialised NGOs. reduce their tax rates enough, theywill get There is also WaterAid and there a number of others investment and getting investment is all that matters, which do specialise. Let us have some which are is quite a dangerous calculation for countries to specialised and some which are not. It depends on make. I was looking the other dayat an evaluation what theywant to do. Part of our role as of Mozal—I do not know if you have seen it—done organisations is also to raise awareness of bya Mozambiquan economist. One of the things, he development issues in this countryand to do was saying that Mozal like to say, is that they like to campaigning and public education and so on. I think hold up their corporate responsibilityprogramme, that role is more eVective if one has a wider the schools and hospitals and health centres and so experience of the kind of totalityof life in developing on that theyare providing in the area in which they countries. Perhaps we would be best eVective in that work, but this evaluation was saying that, if they role if we were simplyfocused on just providing onlypaid a fairlylow rate of tax, the Government micro credit or something. I think there are diVerent would have had enough revenues to be able to functions that we playand some lend themselves to provide all those things plus roll them out in 20 other specialisation and others perhaps do not. districts as well. We want to be veryaware of Ms Dhanarajan: Going back to what I was saying comparing the taxes that companies paywith what earlier, the critical question is where you choose to theysayabout the contribution that theymake to specialise. I do not think it is possible for a the countries in which theywork. It is a kind of development agencynot to engage, in some form or empirical question but I think we have to have some another, the private sector. How you chose to doubt about whether the policyof using low taxes to engage the private sector is something that you have attract investment actuallyworks. I saw a studyby to work out in terms of where your specialism is. It PricewaterhouseCoopers saying that in general they would be wrong to saythat MSF does not engage the felt, having looked at this issue and the question of V private sector at all. It does. It does from a di erent investment choices, that low tax rates was not really angle: it does on the campaigning front, when it is V V an issue and that all of the di ering strategies which asking for di erential pricing or less aggressive developing countries have to attract investment patenting, and it also comes in from the angle of basicallydo not work and the companies are going trying to push for local production of drugs in to invest where theyare going to invest. If it happens Africa. For us, again, it is about saying, “We cannot to be in a countrythat has low tax rates, then they take on the whole shiboleth of engaging the private get a free ride on the tax system, but it does not sector,” but simplybythe nature of the fact that we actuallyserve to attract investment. The companies’ work in 70 countries directlywith beneficiaries, of investment decisions are independent. whom 90% are involved in the private sector, of which Oxfam has a big programme around agriculture, we have to be engaged. There is no way Q474 Ann McKechin: I entirelyagree that this is a that we could go in and relate to someone as a veryserious problem, but perhaps I could playthe farmer, helping him bygiving him the skills to build devil’s advocate with you and your other two a well or focusing on his finance but not going colleagues. All of you have argued that we should further. We need also to look at what is his or her not make economic conditionalitya condition of access to market and who are the players along the aid, but the downside maybe that the donee waywho are going to be able to create that access to governments maythemselves decide to o Ver tax market. A lot of those players are more likely to be deals which in the long term are not very now within the private sector rather than the public advantageous to the populations. Would you, on the sector, so I think there is no wayof running away basis that you do not believe in economic from it. conditionality, support their right to do so? Or are you now arguing that donors such as our country Q473 Joan Ruddock: I verymuch concur with and DFID should be making some of their grants a everything you have just said, but there is another bit more conditional on the issue of tax? level: where you have direct foreign investment coming into a country, very much led by 4 Ev 165 3425681001 Page Type [E] 19-07-06 11:23:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 124 International Development Committee: Evidence
15 June 2006 Ms Sumi Dhanarajan, Mr Dominic Eagleton, and Dr Claire Melamed
Dr Melamed: Absolutelynot. I was not thinking Ms Dhanarajan: Just going back to whywe did it in about the aid relationship at all in myanswer. I the first instance, remember that Oxfam’s work with would take this right out of the aid relationship. But the private sector is verymuch still in its toddler I do think one of the roles of organisations like our stage: it onlystarted to brew about eight yearsago own, and to some extent DFID, would be, for and we have built on it ever since and continue to example, to support organisations in those countries build on it. We had started mainlywith campaigns, which are looking at these issues. We have a number and we had noticed with our work in the private of partners, for example, in Bolivia, who have been sector and campaigning in the private sector that we veryactive in campaigning the Government there were always addressing just one splice of it. When we over the whole verytopical and political issue of were looking at the retail sector, we looked at labour revenues from oil and gas exploration and tax rates standards. If someone asked us the question, “What in Bolivia. I think that is the correct channel to go is Nike’s impact in Vietnam on povertyreduction?” down, but it should be organisations in those we would be able to tell them a lot about its impact countries which are campaigning and lobbying their on labour standards in Vietnam but we would not be own Governments. able to answer the question on its overall impact on povertyreduction in Vietnam. The driver was trying Q475 Joan Ruddock: Do you think there are to develop a methodology, whereby we could give measures which should be taken to prevent the flight some kind of overall assessment on whether or not of capital from those countries? If so, do you have a particular trans-national in this case, when it was anyideas about that? investing, was either exacerbating povertyor Mr Eagleton: It is down to the particular enabling povertyreduction in the country.It was an government in question. One thing over the last 20 interesting study. We looked at four areas. Firstly, years or so is that the international community has the macro-economic impacts on Unilever Indonesia generallybeen advising governments to attract FDIs in Indonesia. There we discovered that, byand large, almost at all costs and not to think so much about most of the wealth that was created byUnilever its qualityor the extent to which it is linked into the Indonesia was being retained through dividends to national economy. If you want that to happen, if you local shareholders, because it is listed on the Jakarta want the benefits, if you want the capital to stay in stock exchange that their retained earnings were country, you have to ask a diVerent set of questions being reinvested in the Indonesian business and than simplyones aimed at how to attract FDI. That corporate taxes were being paid to governments. might mean using the same policies that rich There was some movement out, there was some countries use to maximise the benefits of foreign outflow, in terms of paying foreign shareholders direct investment, such as joint ventures, equity their dividends, but the net eVect was that earnings caps. Not veryfashionable, it is true, but there has V were being retained. We then looked at employment, to be a di erent set of questions asked and not just and, again, there were interesting findings there. We the ones aimed at attracting foreign capital. found that Unilever Indonesia, in terms of its direct Dr Melamed: I think there are specific things that relationship with its employees, was very good. They governments like the UK can do as well. There is a were paying way above the minimum wage; sender of money, for example, in capital flight and tax avoidance, and there is also a recipient, and a employees were treated very well. It generally had a large number of tax havens are British overseas verygood reputation in Indonesia as being an territories. There are veryclear and specific things employer par excellence. However, 40%, and which this Government could do, as well as growing, of its employees are contract workers. encouraging a kind of policyenvironment in which countries were not encouraged simplyto assume that if theydrop the floor low enough then Q478 John Battle: No trade unions? investment will come in and will benefit them. Ms Dhanarajan: Yes. That is a particular trend in Indonesia, where there has been an increased casualisation of the employment of labour. What Q476 John Battle: I am intrigued by you saying how was Unilever going to do to counter this trend? The NGOs engage reallywith private sector third area we looked at was this whole concept that development. Oxfam did a studywith Oxfam 5 being able to grow economicallyis about being able Netherlands, Novib . Was it with Unilever in to generate jobs. An interesting finding was that, if Indonesia? you looked at Unilever’s employment as a whole, Ms Dhanarajan: Yes. taking into account its verylarge distribution chain, it generates a heck of a lot of Indonesia’s Q477 John Battle: What were the keyfindings? That employment. More than 300,000 people make their was about whether companies could work towards livelihoods in Unilever Indonesia’s value chain, so povertyreduction. Would it happen? Did it happen? the impact of that on povertyreduction is pretty What, if anything, can you amplify from that? immense. The fourth area we looked at was its dealing with low income consumers. The proverbial 5 Exploringthe links between International Business and thing that you always talk about with Unilever is Poverty Reduction: A Case Study of Unilever in Indonesia, small sachets and their eVect on the environment: Is Principal author: Jason Clay, An Oxford GB, Novib, Unilever and Unilever Indonesia joint research programme, this a good thing and are people paying more for it? 2005. Copyplaced in the Library. That is where we had the most debate with Unilever. 3425681001 Page Type [O] 19-07-06 11:23:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 125
15 June 2006 Ms Sumi Dhanarajan, Mr Dominic Eagleton, and Dr Claire Melamed
Q479 Chairman: We have had evidence from farmers competing globallynow, plus increasing ly Unilever6, so theyhave explained their side of the atomised basically, so they are facing these huge story. concentrations, basically. You asked for a specific Ms Dhanarajan: I am sorry. Excuse me. Those are example with supermarkets and we are seeing that the four areas that we looked at. One thing we want some of their purchasing practices, like just-in-time to continue to do is to grow this concept of a supply, short lead-in times, demands for flexible “povertyfootprint”, as we are calling it. How do you seasonal production, are having veryserious knock- get companies to have this overall assessment— on eVects for workers—mainlywomen workers— not onlyon the farms from which supermarkets are Q480 John Battle: Will you do more projects with buying but also in the garments factories from which other companies and encourage others to do them theyare increasinglybuying.Tesco, Asda and as well? Marks & Spencer now sell about one-third of all the Ms Dhanarajan: We would like to. One of the big clothes bought in Britain, so theyhave been moving roll-outs of this report is simplyto take the into this market as well. That is just a specific methodologyout there, because it gives companies a example from one of those companies that you much, much better wayof being able to assess their mentioned of the pressure applied bybig retailers on povertyimpact and then being able to deal with it to their suppliers, and, in turn, those pressures are and also being able to see whether it has positive passed on to the more vulnerable actors in the chain. impacts as well as being able to deal with the I would like to point out that we do have a really negative impacts. good opportunityin front of us now to make a diVerence in the UK with the Competition Commission’s inquiryinto supermarkets, because Q481 Chairman: MayI pick up on that, with a last theycan have the power now to change the question to Dominic. In your Power Hungry7 report supermarket code of practice and strengthen it. It you state that other companies, Monsanto, Wal- was designed in part to curb some of these negative Mart and Nestle´, have grown too powerful and are purchasing practices. undermining povertyreduction bysqueezing out smaller companies and farmers, imposing tough standards that the farmers cannot meet and Q482 Chairman: We probablydo not have time to undermining workers’ rights. Theyare fairlyserious explore it now, but the diYcultywe sometimes have accusations about those companies. Do you have as individual consumers—and it is a point I have specifics about that? As with the Oxfam experience, made before—is knowing whether or not the £4 shirt instead of producing a report criticising them, in Tesco should be bought or not bought; in other perhaps you should say, “Let us work together to see words, whether the process of buying it is helping how we can take that forward in a constructive way” povertyor alleviating poverty.We do not have the because you are not going to persuade Montano, information. We just see periodic articles that say Wal-Mart and Nestle´ to pull out of those countries, Tesco is terrible or Wal-Mart is terrible. I am not so it is a question of how you work together. criticising, but, unless we have information it is very Mr Eagleton: We are not setting out to ask them to diYcult to know either what producers can do to do that. It is interesting that we mentioned Unilever, ensure theyget a fair deal or what consumers in this because Unilever has some reallypositive impacts, countrycould do; the danger is that youfinish up of course it does, wherever it goes. I think its boycotting products and you are making the sustainable agriculture programme is held up, even problem worse. No doubt the commissioners of the byanti-pesticides campaigners, as being exemplary, order in the Marks & Spencer or wherever will say, but, at the same time, this is a companythat we “We have given employment because we were able found has uprooted people’s tea plants oV their land to do it to a specific standard and get it just in time in India, and is paying farmers really low prices for and be competitive and if theydid not meet that tea in India. The same companyon the one hand can standard we would not be in the business and they have some reallypositive impacts and on the other would have not work at all.” That is the real hand negative impacts. You mentioned three or four dilemma. At the same time, we want to see a companies there, all from diVerent stages of the agri- situation where small businesses thrive, growth food chain, so it would be quite diYcult to go into happens and povertycomes down. For the moment detail in this space of time for the particular impacts. we are talking about it, but we would like to see it For example, let us sayWal-Mart, if we are looking happen. at retailers. If you look at what is happening in Ms Dhanarajan: There is leadership there. Marks & agriculture markets or agri-food markets, no one Spencer has shown that in some ways over the course disputes there are reallyhigh levels of concentration of this year. It has gone out there and branded itself. going on, but, at the production side of the supply If you walk into a Marks & Spencer shop you will chain, that is for the farmers, the trend is going the probablysee lots of banners up that are saying: other way, with trade liberalisation leading to lots of “This is our policyon sustainable fishing and this is what we do . . .” It is about a retailer giving a sense 6 Oral evidence heard from Walter Gibson, Head of Global of: If we are going to be in this business, we want our Health through Hygiene Programme, Unilever, on Tuesday customer to rest assured when theybuya product o V 9 May2006. Ev 80. Also written evidence Ev 205. 7 ActionAid International, Power hungry: Six reasons to our shelf that it comes with value, with good quality, regulate global food corporations http://www.actionaid.org/ but also that people have not been mistreated documents/power—hungry.pdf behind that. 3425681001 Page Type [E] 19-07-06 11:23:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 126 International Development Committee: Evidence
15 June 2006 Ms Sumi Dhanarajan, Mr Dominic Eagleton, and Dr Claire Melamed
Chairman: It is not just a marketing ploy; we also hope that when our report comes together, we might need to see the figures in the countries that show have something useful to sayabout where we will all povertyis coming down and people are getting jobs. work together further, because sometimes we are I think we have to work with you. We have had your still left unsure what behaviour is right to make that submissions and we have also had your views and we diVerence. Thank you to all three of you for have a regular dialogue with you. What you have coming today. had to sayis helpful and I guess it will continue. I 3312162001 Page Type [SO] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 127 Written evidence
Memorandum submitted by the Department for International Development (DFID)
Executive Summary The private sector contributes to economic growth through providing jobs and incomes, and products and services. Through these outputs the private sector provides opportunities to enhance the participation of poor people in improving their economic and social well-being. Governments and donors, working alongside civil societyand the private sector, have important roles to pl ayin reducing constraints that prevent the development of the private sector. In December 2005, DFID published a booklet on Workingwith the private sector to eliminate poverty 1, which illustrates in more detail the manywaysin which DFID is active in pri vate sector development. This booklet is an important complement to this Memorandum, as it provides a fuller picture of the range of DFID activities involving the private sector. This Memorandum looks more brieflyat keyareas of private sector developme nt (PSD) which the UK Government see as important for improving the development climate facing PSD and growth in developing countries. These areas include: the investment climate, the financial sector, agriculture, infrastructure, trade, and making markets work better for the poor. Examples of DFID activities are provided in each section. The Memorandum also notes the private sector’s own engagement in development activities across sectors such as health, education, utilities and finance. The private sector is also involved in development issues that cut across manysectors such as corruption, HIV and AIDS, envir onment, and international standards. The information provided in this section is additional to that in the DFID booklet. In the last five years, donor agencies such as DFID have searched out new aid instruments that can contribute to private sector development, and that can be relevant in diYcult environments, such as “fragile states”. Donors have also become much more interested in achieving coherence of approaches, and lesson learning, internationally. The Memorandum concludes with points on future priorities for DFID.
Introduction 1. At its broadest level, development is about achieving economic growth and povertyreduction. Economic growth oVers the best prospect for escaping poverty, and poor people want jobs or self- employment to enable them to have a better life and with less vulnerability to shocks. 2. Nine out of ten jobs in developing countries are in the private sector. Poor people are the private sector, whether farmers in agriculture, microentrepreneurs in informal markets, or employees in small businesses. Yet amongst some in the development community, and in some governments, there is a mistrust of the private sector. And there can be hostilityto the integration of business t o business regional and international trade. This is not in the interests of poor people. 3. The UK Government recognises the vital role of private sector development (PSD), and the part that governments, the private sector, and civil societycan playin ensuring th at the private sector contributes to economic growth, job creation, incomes, and the provision of goods and services. This Memorandum addresses the issues raised bythe terms of reference for the IDC Inquiryin to PSD, and has been produced byDFID, with contributions from the Treasury,DTI, DfES, and DWP. 4. This note is organised as follows. Section A brieflylooks at the links bet ween growth and private sector development. Section B outlines the main policyissues around keyelement s of private sector development: the investment climate, the financial sector, agriculture, infrastructure, trade and markets. Section C looks at how the private sector is engaging in development itself, and Section D looks at aid instruments that can be used bydonors to encourage PSD. Section E looks at coherence of PSD activ ities between and within donors.
A. Growth &The Private Sector
What can the private sector do to reduce poverty? 5. The term “private sector” often conjures up the image of large businesses engaged in commerce or manufacturing. This definition is too narrow. Instead, the term should be understood to encompass all private actors—individuals, partnerships, co-operatives and businesses—engaged in risk taking to earn profits and incomes. As such, it includes the smallholder farmer as well as the verylarge, multinational corporation.
1 DFID & The Private Sector: workingwith the private sector to eliminate pov erty, DFID 2005. 3312162001 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 128 International Development Committee: Evidence
6. The private sector has two roles to playin reducing povertythrough “pro -poor growth”. The first is to contribute to economic growth, which is usuallya prior requirement for sustained povertyreduction. Growth requires productive investment, a well-functioning financial sector, entrepreneurship, and a vibrant private sector. The second role is to facilitate poor people’s participation in growth. The private sector provides the vast majorityof jobs, creating opportunities for people to a pplytheir talents and improve their incomes. But these opportunities are not equallyspread. Decisions in the private sector determine whether, for example, these opportunities are open to women, and whether diVerent ethnic groups are treated equally. 7. “Pro-poor” growth is defined with reference to how fast on average the incomes of the poor are rising. The private sector can contribute to pro-poor growth through the development of opportunities and industries which employpoor people 2.
What are the constraints on the private sector in developingcountries and how can they be addressed? 8. Private enterprises face numerous constraints in developing countries. These are often the result of either inaction or misguided action bythe state. For example, government s maynot allow markets to develop, mayintroduce burdensome regulations, or mayfail to build suppo rt for necessaryreforms. Enterprises mayalso be negativelya Vected bypolitical or macroeconomic instability,weak propertyrights, poor infrastructure, an underdeveloped financial sector, or corruption. 9. Tackling these constraints requires a concerted eVort on the part of governments and development partners such as civil societyand international donors. Maximising the c ontribution of the private sector to growth and povertyreduction usuallyrequires action in the following five areas (OECD 20053): — providing incentives for entrepreneurship and investment; — increasing productivityvia competition and innovation; — harnessing international economic linkages; — improving market access and functioning; and — reducing risk and vulnerability. 10. Other sources classifyinfluences on growth and PSD as occurring at 3–4 d iVerent levels, typically “macro”, “meso”, and “micro” levels4. “Macro” level issues include political stability, sound macro- economic management, good governance conditions, and an enabling investment climate. “Meso” levels refer to the availabilityof underpinning resources for growth and PSD, in cluding a functioning financial sector, good infrastructure, education and health systems, and a functioning labour market. “Micro” levels refer to government and donor interventions to support PSD, with more recent recognition that this should be done in a non-distortionarymanner.
B. Changing the Development Climate towards Promoting PSD & Growth
Improvingthe Investment Climate 11. A good investment climate benefits everybody—firms of all sizes (both domestic and foreign), employees, consumers and users of infrastructure, finance and property (World Development Report 2005 (WDR 2005)). This is whyDFID places such priorityon working with developi ng countrygovernments, the private sector, civil society, and other donors to support investment climate reforms—getting the conditions right for PSD. The bulk of investment in developing countries—some 80%—is domestic investment, and hence the importance of an investment environment that is good for local large, medium, small and micro businesses. 12. The WDR 2005 is an up-to-date analysis of the importance of a good investment climate for growth and povertyreduction, of what constitutes a good investment climate, and of how developing country governments in partnership with donors and the private sector can build good investment climates. DFID worked closelywith the World Bank Team during preparation of the WDR2005— contributing case studies, running workshops with the World Bank and providing funding for global dissemination of the WDR key messages. 13. DFID is working to improve the investment climate in developing countries for domestic and foreign businesses, and to facilitate private sector development and entrepreneurship more generally. Much of our work is designed to respond to the major constraints that businesses face in such countries. Whilst our country-level responses are informed by best international practice, each programme is carefullydesigned to fit local circumstances: no “one size fits all”. 14. DFID is seen as a leading donor on investment climate reform. We work at both the countryand international levels, and our Investment Climate programmes span a wide range of interventions, covering all of the WDR “basics” and beyond. Often, we work with other donors and, where the work does not
2 DFID Pro-Poor Growth Briefing Notes. 3 AcceleratingPro-Poor Growth throughSupport for Private Sector Develop ment. OECD 2004. 4 Wealth of the Poor: EliminatingPoverty throughMarket and Private Sector Development: Sida studies No. 14 2005. 3312162001 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 129
engage directlywith the private sector, it is nevertheless informed byth e results of business surveys/ consultations—such as the World Bank’s in-depth countryInvestment Clim ate Assessments (ICAs) or the Commonwealth’s Business Environment Surveys (BES), both of which DFID supports. 15. The private sector is playing an increasingly significant role in helping governments reform their investment climates. Civil societytoo can playa positive role on investm ent climate reform—such as in advocacyfor the adoption of competition regimes that benefit consumers an d the poor. On the policyside, the private sector provides much of the “raw data” for serious surveys like the World Bank ICAs, and engages in constructive dialogue with governments to help prioritise reforms that will overcome the key impediments to investment and PSD. 16. Investment climate reform has significant impact. For example, on the regulatoryside: — DFID support for the Kenya deregulation programme led to annual savings to the economyof £64 million and reduced business transaction costs byup to 70% in 32 local a uthorities. — The Uganda Streamlined Business Registration pilot project in Entebbe resulted in 75% lower business compliance costs, reduction of business registration time from two days to 30 minutes, a quadrupling of business registrations, and 40% higher revenue collection for that municipality. — In Ukraine, simplification of procedures reduced business registration time in a regional pilot programme by50%, increased the numbers of businesses by250%, and increas ed revenue for the local government significantly. — In Mozambique, customs reform led to substantial increases in government revenues—from 49% (approx US$ 45 million) in year one to 175% three years later. Clearance of goods after the reforms was up to 40 times faster than the pre-reform rate.
Mobilizingthe Financial sector
17. The financial sector stimulates investment, underpins private sector development, promotes technological progress, and increases productivityand growth. Access t o finance is a crucial component of PSD for firms of all sizes, including potential microentrepreneurs looking for new livelihood opportunities. Yet, in African countries more than 90 percent of the population is financiallyexcluded. 18. In manycountries, semi-formal channels such as microfinance institut ions (MFIs), playa role in providing financial services to the poor. But MFIs generallycannot mobili se funds on a large scale in the waythat more traditional financial institutions can, and theyhave onlyli mited coverage. As a result, they are reaching onlya minorityof the bankable population. A widening of finan cial services provision by commercial banks is necessaryto tackle this problem on an adequate scale. 19. Banks are a principal source of domestic investment, providing credit to small and medium enterprises. Their previous reluctance to lend to small enterprises in developing countries is now changing, and some international and developing countrybanks are moving into micro finance—for example, Equity Bank in Kenya, which has received assistance from DFID, now serves half a million people. 20. Private sector investment vehicles such as the CDC Group plc have helped to boost private sector investment in developing countries. As a private equityfund-of-funds, C DC invests its capital in enterprises—serving as a pioneer, entering diYcult emerging markets where private capital is reluctant to invest, providing enterprises with much-needed access to capital, improving their management and, over a period of years, putting them onto a sound economic footing. DFID has supported other investment initiatives such as AfriCap, which provides funding for investment in microfinance intermediaries. 21. DFID and other donors are helping in manyways,including: — establishing country-level programmes to help improve the policy, legal, institutional and regulatoryframework for financial sector development. (DFID has “umbrel la” financial sector programmes in a number of African and Asian countries, in some cases managed jointlywith the World Bank and other donors); — stimulating innovation/use of technologythat results in improved acce ss to financial services for poor people. The proposed Africa Enterprise Challenge Fund, endorsed byt he Commission for Africa, would provide a significant stimulus to innovation. — supporting the collection of financial access indicators and data, in order to incentivise and benchmark policyreform. (DFID is working in partnership with the World Ba nk to agree headline indicators on financial access); and — encouraging improved mechanisms for diaspora to send moneyback to their home countries, and also to invest there. (DFID has initiated remittance countryprogrammes t o help do this, including the Bangladesh remittance countrypartnership launched bythe Secretary of State in 2005). 3312162001 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 130 International Development Committee: Evidence
Raising Agricultural productivity through PSD 22. In most developing countries, farming and other agri-businesses are small in scale and are vulnerable to a varietyof risks and investment policyconditions, yetcollectivelyt heyaccount for the biggest share of private sector activity. Some 70% of poor people are engaged in agriculture globally, as entrepreneurs and employees. The sector is often highly political, manipulated by vested interests. Dismantling of large parastatals in manycountries has left a void presentlyunfilled bythe priv ate sector. Productivityis hampered bypoor policyand legal and regulatorysystems(including over- protective legislation, insecure tenure, unpredictable and ad-hoc state interventions like input subsidies and export bans). 23. Domestic and regional markets for agricultural produce have untapped potential. And better private sector development in agricultural and agri-dependent enterprises has significant potential to alleviate poverty. So, donors help national governments improve the climate for agriculture byhelping them to create improved policyframeworks, regulatoryenvironments and associated spe nding plans (especiallyon basic rural infrastructure and agricultural research). Such improvements are made in dialogue with the private sector and other organisations that represent the voice of those engaged in agriculture. 24. DFID is supporting countries: — to reform agricultural regulations (eg in India), — to address agricultural product standards (eg in Ethiopia), — to build agricultural markets byimproving poor people’s access to agric ultural market information (eg in Bangladesh), agricultural inputs (eg advice and distribution networks in Malawi), and storage facilities (eg Kenya), and — to disseminate productivity-enhancing technologies held by the private sector under intellectual propertyrights (eg through PPPs brokered bythe African Agricultural Tec hnologyFoundation in Kenya). 25. DFID published its new Agricultural StrategyPaper in December 2005 5. This emphasises the need to increase agricultural productivity, particularly for labour-intensive, small-scale agriculture with its strong links to growth in other areas.
Supportingland and other property rights 26. Propertyrights have a major role to playin supporting the interests of poor people within a proper legal framework. In Peru around 90 per cent of businesses have no title to their property, making it diYcult to borrow and invest. In Vietnam, rural households received increased rights when land was de-collectivised, making it worthwhile for them to invest in their land, raising production and growth. 27. DFID recognises and endorses the need for propertyrights, and contrac ts more widelydefined, to be enforceable. For poor people the most important aspect of propertyrights is usuallyaccess to and security of tenure over land and living places. DFID provides support to develop or reform land, propertyand legal institutions to enable secure access to land. For example, in the case of Guyana, DFID has been the principal donor over a seven to eight year period supporting reform and change in the Guyana Lands and Survey Commission. 28. Internationally, DFID is providing support to the UN High Level Commission on Legal Empowerment of the Poor, which will target significant issues on legal rights to propertyand other assets. The Commission aims to promote the extension of the rule of law to ensure that poor people have formal titles to land and property, as well as the right to use it.
Re-emphasisingthe importance of Infrastructure: 29. Reliable infrastructure is a keyrequirement for PSD. Since its peak in 1997, infrastructure investments have dropped byhalf and private investors still remain cauti ous with regard to emerging markets. Transport costs in Africa are twice that of Asia. The cost of moving a container between Accra and Lagos is three times the cost of moving it to Europe. The role for donors such as DFID is to help address these problems byencouraging governments to increase public investment in infrastructure, and to tackle the constraints to private sector participation, with a focus on underserved markets and sectors. 30. Where properlyregulated, the provision of infrastructure bythe priv ate sector can lead to improvements in eYciency, innovation, and the expansion of aVordable services to the poor. However the real issue for donors is not public versus private infrastructure provision, but too little infrastructure provision. Some developing countries do not identifyinfrastructure as a priorityfor povertyreduction, partlydue to the bad experience of some privatisations in the 1990s and par tlybecause the donor shift towards budget support for povertyreduction has limited the opportuniti es for expanding support to PSI.
5 Growth and poverty reduction: the role of agriculture. DFID 2005. 3312162001 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 131
31. Donors, individuallyand collectively,could do more to encourage the private sector to develop infrastructure, by: resisting the proliferation of new PSI facilities and scaling up support to existing ones; increasing donor support to project development; increasing focus on the infrastructure priorities of poor people; increasing attention on the political economyof PSI; increasing assistance to address the specific needs of domestic small and medium scale service providers; and better evaluating the impact of PSI.
32. DFID supports several multi-donor facilities that help governments, where appropriate, to harness private sector investment and participation in infrastructure, including: — technical assistance to support policyreform, improve regulatorysyst ems and develop local capacity(eg the Public Private Infrastructure AdvisoryFacility); — the development of projects suitable to attract private sector investors and partners (eg DevCo and InfraCo); —eVorts to address credit and capital market failures including loans—both hard and local currency, and guarantees for high risk projects (eg the Emerging Africa Infrastructure Facility, and GuarantCo); and — performance-based subsidies to ensure commerciallyviable projects re ach the poor (Global Partnership on Output-Based Aid).
33. In terms of leverage, DFID has spent about £100 million over six years on these facilities, which has mobilised $1.5 billion of extra investment in poorer countries. DFID will do more to encourage private sector participation in infrastructure byscaling up support to existing facilities, especiallyin the area of project development where the intention is to treble our commitment over the next three years. DFID will also be doing more to help indigenous small and medium scale service providers through these existing facilities. These initiatives will increase employment opportunities and so have impact on poor people.
Improvingthe opportunities for PSD throughInternational Trade
34. Trade reform results in increased trading activitybythe private sect or. In East Asia, for example, trade reform has been one of the keyingredients of rapid economic growth an d povertyreduction during the past few decades. The 2004 DFID White Paper renewed the UK’s commitment to support reductions in barriers to trade and to building the capacityof the private sector in de veloping countries to take advantage of the new trade opportunities.
35. The Doha World Trade Organisation Ministerial Declaration in 2001 committed WTO members to oVer Trade Related Technical Assistance and CapacityBuilding (TRCB) to dev eloping countries to benefit from opportunities generated bythe multilateral trading system.TRCB as sists recipient countries to: — develop trade strategies and ICs which are conducive to their private sectors increasing exports; — stimulate trade bydomestic firms and encourage investment in trade-orie nted industries; and — participate in and benefit from the institutions, negotiations and processes that shape national trade policyand the rules and practices of international commerce.
Since 1998 DFID has committed £181 million to TRCB.
36. As well as being a beneficiary, the private sector has the potential to contribute to trade policyreform. Private business can playan important advocacyrole, assist in the policy design process byproviding expertise and, through facilities like the Investment Climate Facilityf or Africa, can even help finance expensive reforms (such as trade facilitation or complex regulatorychan ges). Dialogue between the private sector and government is desirable at all stages.
37. In our technical assistance and capacitybuilding work, DFID has been e ndeavouring to heighten private sector representation and participation. For example, in the context of our aid to enable trade facilitation, we are supporting meetings of the Boksburg Group of developing countries at which private firms and government oYcials discuss best options for multilateral reforms. Also, as follow-up to the Commission for Africa, the UK Government supported the creation of Business Action for improving Customs Administrations in Africa (BAFICA), a small informal business contact group on customs and trade facilitation reform.
38. In the context of our work with other donors around the Integrated Framework for trade assistance, DFID recognises that trade reform—while leading to large overall gains—also involves winners and losers. The UK Government has committed to provide £100 million per year in aid for trade by2010, whilst recognising that the Doha Development Round requires much more progress than achieved in Hong Kong. 3312162001 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 132 International Development Committee: Evidence
Makingmarkets work better for the poor (MMW) 39. The “making markets work” approach seeks to understand the impact of markets on poor people, and to advocate and promote systemic changes which will improve this impact. Markets aVect poor people as consumers of goods, as producers and employees, and for selling and buying goods and services. Markets mayfail the poor through market practices which denyor limit access to poo r people. In “making markets work” terms, markets work well for the poor when theyexpand the choices acc essible to poor people, and produce outcomes which benefit the poor. 40. For business support services, such as accountancy, training, marketing, information and technology advice, donors should work with developing countrygovernments to ensure programmes of support are focused as far as possible on facilitating and catalysing the private sector itself to provide business services on a commercial basis, rather than these being provided on a highlysubsidi sed, costlyand unsustainable basis bygovernment. 41. Making Markets Work approaches challenge donors to think about the systematic impact of their interventions in terms of market distortion rather than enhancement. The state has a vital role to play, especiallywhere there are undeveloped or missing markets. DFID is suppor ting market development programmes in a number of countries, including South Africa (ComMark programme), Nigeria (PropCom), Bangladesh (Katalyst), and Vietnam (Asian Development Bank lead with DFID support).
C. The Private Sector’s Engagement in Development 42. The private sector has a vital direct role to playin development. As wel l as the need for more enterprise to drive growth and povertyreduction, firms—through their goo ds, services, general expertise and ways of doing business—play a significant part in improving quality of life and supporting development. This section will look at the ways in which companies are working to support development bydeepening and widening markets, and byaddressing keydevelopment issues which are i nfluenced bythe ways businesses operate. 43. The private sector includes private economic actors of all sizes—domestic and international, small and large. Companies that are contributing to development in ways that go beyond core growth and enterprise areas are often larger businesses. However, companies of all sizes can contribute, and government action can help to facilitate this. Businesses can also contribute through joint approaches, both through national business associations like Chambers of Commerce, or through international initiatives, such as Business Action for Africa. DFID works with business membership organisations, such as BAA, to jointly facilitate the impact of the private sector on development.
Deepeningand wideningmarkets 44. Developing countrymarkets are beginning to be more attractive to smal l and larger companies, including business to business activities, and business to consumer activities such as so-called “bottom of the pyramid” approaches. These approaches refer to the potential at the “bottom of the pyramid”6 which comprises the 2 billion people worldwide living on less than $2 a day, compared to markets that service relativelywell o V people. 45. Bottom of the pyramid approaches argue that there are significant market opportunities for companies in providing the goods and services poor people need. Examples include household goods such as soap sold in small amounts, financial products such as cheap banking services, and potentiallyhigher value products such as low priced patented medicines. 46. Below we will look at a number of keysector development areas that the pr ivate sector is increasingly involved in: health; education; utilities; and financial services. There is much that is relevant in the “bottom of the pyramid” approach, as companies move to make products available to poorer consumers. Expanding the private sector’s role can be controversial, for example in water privatisation. DFID, in collaboration with other donors, supports governments reforming or privatising public enterprises (see section on Public Sector Reform in the DFID & Private Sector booklet). While DFID recognises that private sector involvement is not always appropriate, businesses can play an important part in the provision of basic services and achievement of the MDGs.
Health 47. The private sector plays a significant role in international health, including in the development and deliveryof medicines and other health products and provision of health se rvices. HMG has worked to encourage and support this involvement, for example to incentivise private investment in vaccine R & D and manufacturing capacityfor vaccines for diseases that disproportion atelya Vect developing countries.
6 C.K. Prahalad, The Fortune at the Bottom of the Pyramid, Universityof Michigan Business School, 2004. 3312162001 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 133
48. One keymechanism has been through global health public private partne rships. These have been set up to develop new medicines, drugs, vaccines or diagnostics relevant to the developing world, or to increase access to existing health treatments and diagnostics. The Global Fund to fight AIDS, TB and malaria (GFATM), the Global Alliance for Vaccines and Immunisation (GAVI), Stop TB and Roll Back Malaria all have significant private sector involvement from pharmaceutical, diagnostics and health commodity companies, as well as companies whose staV are aVected bydisease and ill-health. 49. HMG has provided direct financial and technical support to these partnerships. HMG has also developed innovative financing proposals, including the International Finance Facilityfor Immunisation that leverages finance from capital markets to develop underused vaccines and to support the roll-out of much needed vaccination programmes in developing countries through GAVI. 50. As well as involvement in health partnerships, the global research-based pharmaceutical industryis playing an important part in making its medicines available in developing countries. In March 2005 DFID jointlypublished with the Departments of Trade and Industryand of Health Increasingpeople’s access to essential medicines in developingcountries: a framework for goodpracti ce in the pharmaceutical industry,7 containing recommendations for the industry(and clear commitments byth e government) to help to increase access to medicines in developing countries. Since publication DFID has held a number of meetings with the pharmaceutical industryto take forward recommendations on incr easing investment in research and development for diseases disproportionatelya Vecting developing countries, making medicines more aVordable in developing countries, and working in partnership to support health delivery. 51. In developing countries the private sector—formal and informal—is often the major provider of health services. The public-private boundaryis increasinglyblurred an d there is great scope for greater private sector involvement in healthcare provision. For instance, the private sector is increasinglyinvolved through contracting out deliveryof district services and familyplannin g services. However, the private sector is often poorlyregulated and works outside government plans. DFID works with governments to build capacityto plan and provide healthcare and to work with and regulate the private sector.
Education 52. Governments have an essential role to ensure that people have the skills theyneed to enter work, and that there is an eYcient labour market. In addition to a priorityfocus on the primaryeducati on sector, DFID at countrylevel has supported vocational and other skills developme nt programmes, including in the area of youth employment. The DfES is also active in Ghana on entrepreneurial training. The Youth Employment Network, supported by the UK Government, brings together governments, youth, employers and workers to tackle the challenge of youth employment. This theme is also behind the DFID supported World Development Report 2007 under the leadership of the World Bank. 53. Private sector institutions, as well as charities and communitygroup s, are significant providers of education services in the poorest countries of the world. The private sector is playing an increasing role, particularlyin large urban areas in Asia, where research suggests that th eyhave often been able to provide comparative qualityeducation at a lower per student cost than the state. 54. DFID has indirectlysupported private sector institutions, charitie s and communitygroups through multilateral partners. Increased demand, particularlyfor secondaryan d tertiaryeducation in low income countries, which cannot be met bygovernment in the short to medium term, is being met with increased provision byboth for profit and not for profit organisations. In Pakistan, f or example, the World Bank encouraged sponsorship of community-supported skills in Sindh province, and in Africa has adopted a similar approach to supporting the African Virtual University. DFID has also worked with the British Council in the Council’s support for private sector involvement in vocational education and training.
Utilities (Water, Sanitation, Energy, Telecommunications) 55. Despite progress in some countries, public water and sanitation services are failing millions of poor people. Significant further investment is required to provide infrastructure and build capacity. In the main the public sector is in the lead here, but the private sector is an additional source of finance and technical expertise. The major constraint to the private sector doing more is the lack of an enabling environment to encourage investment. Manygovernments lack the capacityto negotiate ap propriate contract terms or to regulate the private sector in a transparent and predictable way. DFID helps to build capacityto manage and regulate the private sector where governments ask for our assistance. 56. High profile public failures of large water concessions have resulted in manyinternational companies regarding the risks as too high for limited returns. Whilst investment bym ultinational companies has been declining, the domestic private sector is proving of much greater importance, in particular small scale providers which tend to reach those unserved bylarge utilities (eg in urba n slums). DFID increasingly focuses on working with the domestic private sector, small scale and informal service providers to encourage private sector involvement that is pro-poor.
7 Increasingpeople’s access to essential medicines in developingcountri es: a framework for good practice in the pharmaceutical industry, DFID, DTI, and DH March 2005. 3312162001 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 134 International Development Committee: Evidence
57. Without reliable energy, economic growth is constrained and individual health and livelihoods compromised. As well as strengthening their own capacityto plan and opera te energyservices, many governments are interested in harnessing the resources and expertise of the private sector, including by creating the conditions for attracting foreign and local private enterprise. DFID is working with other donors, international financial institutions and the private sector to coordinate initiatives and pool resources to support large new investments. This includes working through international multi-donor facilities such as the Public Private Infrastructure AdvisoryFacility(PPIAF), which he lps governments to improve policies, laws, regulations and institutions to better harness private participation in energyand other infrastructure services. 58. Mobile telephonyhas been a great private sector success storyin devel opment. At the end of 2003 there were 6.1 mobile telephone subscribers for every100 inhabitants in A frica, compared with 3 fixed line subscribers per 1008. Research indicates a positive correlation between mobile phone penetration and economic growth as consumers access information on goods and services, and producers find better market information.
Finance 59. Financial exclusion is a major constraint on development. This is dealt with under Section B above, but it is important to note here that financial services companies, including international banks, are increasinglylooking at expanding provision of banking services and othe r financial products to poor communities, including in terms of microfinance. HMG has been working with financial services companies on a varietyof issues, including microfinance, improving the flow of remitt ances and provision of social Insurance. 60. The poor need to be insured against life events and shocks which trap them in poverty. Private insurance coverage in developing countries is verylimited and manyof the poorest are excluded by unaVordable premiums. Governments, donors and NGOs can subsidise the expansion of insurance to the poor. The financial sector can also facilitate social assistance programmes, such as cash transfers, where the private sector can be used in delivery.
Private firms supportingkey development issues 61. Private firms can have wider impact through contributing to keydevelop ment issues connected to their ways of doing business. These include, for example: promoting better public private dialogue; addressing corruption; working to tackle the eVects of HIV and AIDS; promoting environmental standards; working to international guidelines on human rights and sustainable development; and support for labour standards and protecting human rights. The sections below illustrate where HMG is involved in encouraging responsible ways of working in and with the private sector.
Public private dialogue 62. Public-private discussions can help governments design and implement reform strategies that lead to accelerated economic growth. Constraints to eVective dialogue include lack of trust between government and the private sector, limited government understanding of the private sector, and limited representative capacityof business associations. DFID and other donors have helped the p rivate sector to engage more eVectivelywith governments through, for example, support to private secto r membership forums.
Corruption 63. Companies can have a negative impact on development if theyengage in ir responsible practices, notablycorruption. The World Bank estimates that corruption costs aroun d 0.5% of global GDP each year. The UK Government encourages companies to commit to relevant leading codes and initiatives on transparencyand corruption, eg the Extractive Industries Transparency Initiative (see below), the UN Global Compact, and the OECD Guidelines on Multinational Enterprises. Companies should ensure they have robust anti-briberysystemsin their corporate governance structur es. Also misuse of revenues from the private sector—sometimes illegal— can fund conflicts and strengthen regional factions at the cost of central government capacityand state-level stability. 64. The Government has taken a number of steps to help fight corruption. The Anti-terrorism, Crime and SecurityAct 2001 gave UK courts jurisdiction over briberyand corrupt ion committed overseas byUK nationals or private sector bodies incorporated under UK law. The UK supports the UN Convention Against Corruption (UNCAC), the first global convention designed to tackle corruption. The necessary legislation to make the UK compliant with UNCAC is now in place. We expect to formallyratifyit early in 2006. DFID also provides a wide range of support to African countries working to tackle corruption. Both the Crown Prosecution Service and the Serious Fraud OYce provide assistance to foreign authorities.
8 Movingthe debate forward : Vodafone policypaper series, March 2005. 3312162001 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 135
65. The Extractive Industries TransparencyInitiative (EITI) was launch ed bythe Prime Minister in 2002. A DFID-led partnership of leading oil, gas and mining companies, NGOs and producing and consuming countries, it seeks to challenge some of the problems associated with natural resource exploitation, including corruption, byincreasing transparencyof paymentsfrom extractive comp anies to governments and government-linked bodies. Byincreasing public knowledge of revenue lev els, it aims to empower citizens and institutions to hold governments and companies to account. 20 countries have endorsed the principles of EITI and 11 are currentlyat various stages of implementation.
HIV and AIDS
66. AIDS is one of the greatest global threats to reducing poverty. The ILO has estimated that nine out of ten people infected with HIV worldwide are adults in their professionallyproductive prime. The work force is being severelydepleted in manycountries through death or illnes s, and as people care for sick relatives or attend funerals. The private sector has responded in a number of diVerent ways, led by large multinational companies. For instance, Diageo has pledged to provide all HIV-positive staV in Africa, and their dependants, with antiretroviral therapy(ART) for life, whilst Ang lo American has launched a partnership with the Global Fund to extend prevention and treatment programmes to local communities in South Africa. DFID is working with large and smaller companies and business coalitions to promote the spread of good practice.
Environment
67. The private sector can have a significant eVect on the environment. Responsible environmental and social performance underwrites sustained economic growth, development and povertyreduction, whereas poor environmental management can exacerbate conflicts, povertyand corr uption, and undermine development eVorts. 68. The poor are frequentlya Vected bycompanies’ poor environmental performance. DFID supports the development of public policythat encourages best practice and the saf eguarding of sustainable use of resources. The regulatoryenvironment should establish minimum perform ance standards, leaving market mechanisms and co-regulatorymeasures to encourage improved resource e Yciencyand environmental management. Engagement with World Bank-led guidance for the private sector, such as through the Extractive IndustryReview, and IFC safeguard revisions, has encouraged improved environmental performance. In addition, through its support for the World Bank-hosted Communities and Small Scale Mining (CASM) programme, DFID has helped develop environmental management guidance for small and medium-sized enterprises, for example on mercuryfree-gold processing. 69. Another example of DFID’s support for better environmental management is the Illegal Logging Programme. This works to challenge demand for illegallyharvested wood pr oducts, and supports industry’s eVorts to tackle the problem. Action includes the adoption of a responsible purchasing policybymembers of The Timber Trade Federation, which specifies procurement of legal timber, and a “trade roadshow” in West and Central African countries where companyto companydiscussions w ere facilitated.
International standards
70. There are a range of international guidelines promoting responsible business and new ways of working. The UN Global Compact was launched byKofi Annan in July2000. It is a voluntaryUN agreement where companies commit to uphold and promulgate a set of ten principles covering human rights, labour rights, environmental protection and combating corruption. There are currentlyover 1,700 signatories to the Compact. 71. The VoluntaryPrinciples on Securityand Human Rights (VPs) were devel oped bythe UK, US, extractives companies and NGOs and provide guidance to strengthen human rights in extractives company securityarrangements in manydeveloping countries. The OECD Guidelines for Multi-National Enterprises are designed as a baseline for corporate behaviour to help multinationals to design their own codes of conduct. The guidelines are voluntary, but include a mechanism which allows individuals or organisations to raise potential breaches of the guidelines with national governments. 72. The UK Government’s objective is to see UK businesses, operating at home and abroad, take account of their economic, social and environmental impacts, and act to address keysustainable development challenges wherever theyoperate. The UK recentlypublished an internati onal strategic framework to promote Corporate Social Responsibility(CSR), which aims to set out the o verall objectives and priorities for CSR internationally, including a focus on practical measures. 3312162001 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 136 International Development Committee: Evidence
Labour standards, decent work, and human rights 73. The UK Government supports the promotion of the ILO core labour standards, as set out in the 1998 ILO Declaration on Fundamental Principles and Rights at Work, which cover freedom of association and the right to collective bargaining; the elimination of forced and child labour; and the ending of discrimination in employment. DFID provides direct support to the ILO’s technical assistance programmes such as its Special Action Programme on Forced Labour. 74. Poor people should be able to participate in decisions that aVect their lives and it is important that theyhave the freedom to organise themselves in associations which promot e their interests. Trade Unions can be vital advocates in promoting human rights, core labour standards, and responsible business. DFID encourages collaboration with free and democratic labour organisations, and has recentlylaunched a guidance note for DFID countryteams entitled “How to work with Trade Union s”, oVering practical advice on working with local trade unions as partners in development. 75. Whilst the primaryresponsibilityfor enforcing international labou r standards rests with government, companies have a responsibilityto ensure compliance in their own operati ons and supplychains. Most poor people in developing countries work in the informal economy, but international businesses supplychains link with manysmall local enterprises, and this can be a powerful influence for wider change. DFID promotes a partnership approach to labour standards. DFID helped to establish, and continues to support, the Ethical Trading Initiative. This is an alliance of business, trade unions and NGOs, which works to improve the labour standards of the workers in supplychains of the corpora te members byimplementing a code of conduct incorporating the ILO core standards. 76. Companies have a wider responsibilityto conduct their business ethic ally, particularly in relation to human rights. Initiatives supported byHMG, which companies also support , include the UN’s Global Compact and the VoluntaryPrinciples (see above). The 2004 UN Commission o n Human Rights asked the OYce of the High Commissioner for Human Rights to compile a report on existing standards and initiatives, including the UN draft Norms on the Responsibilities of Transnational Corporations & Other Business Enterprises with Regard to Human Rights. HMG believes more work is needed to identifya wayforward and has supported the appointment of a Special Representative of the UN SecretaryGeneral to identifyand clarifystandards of corporate responsibilityand accountabilityfor bu siness with regard to human rights, as well as an elaboration of the role of States in eVectivelyregulating and adjudicating the role of business.
D. Aid Mechanisms to Support Private Sector Development 77. DFID has pioneered a number of mechanisms to encourage private sector investors to be more involved in low-income countries, and to stimulate the development of the private sector. PSD is critical as the private sector has far greater potential resources than donors such as DFID, in terms of finance, human resources, and regional and international networks and presence. Mechanisms used byDFID to promote private sector development that are highlighted in this section include: — Improving the policyand operating environment for enterprises: in Afri ca primarilythrough the Investment Climate Facility. — Encouraging private sector and financial sector innovation and investment in poor people in low income markets—in the “base of the pyramid”: through challenge funds and investment fund mechanisms. — Improving access to financial services, including credit, transaction banking, and payments: through the FIRST Initiative and country-level sector-wide programmes. — Funding development finance institutions specialised in PSD: for example the International Finance Corporation. 78. More could be done to incorporate the private sector into the deliveryo f development, including through building the capacityof domestic small enterprises. In fragile a nd crisis-aVected states, for example, where state deliverycapacitymaybe weak, private sector firms can be provi ders of services, and the jobs created bythe private sector are essential for the livelihoods of those a Vected bycrises. Mechanisms such as povertyreduction budget support maynot be appropriate in such situati ons due to lack of state capacity, lack of political will, or unacceptablyhigh fiduciaryrisk, and private se ctor-specific instruments maywell have a role to play.
Poverty Reduction Budget Support 79. An important primaryaid instrument for DFID is PovertyReduction Budg et Support (PRBS), including support through sector programmes such as in education and health. Budget support is well suited to supporting macro stability(keyfor the private sector to thrive), and p otentiallyalso to building the capacityof government agencies to support PSD. There is, though, a need to focus on the enabling environment rather than just public expenditure, and to ensure that relevant ministries are involved, eg Ministryof Trade as well as Education and Health. Clearlybudget support i s not appropriate as direct private sector support. 3312162001 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 137
80. The OECD Development Assistance Committee (DAC) joint evaluation of General Budget Support, which DFID leads, will report in March 2006 and is testing, amongst other things, the eVects of budget support on growth and income povertyreduction. PovertyReduction Strate gyProcesses (PRSPs) have often not emphasised the growth sector, but this is improving. “While only 60% of the earliest PRSPs (14 of 25) noted a prominent role for growth, this has increased to 80% (13 or 16) for the period July2003 to June 2004. Over the last year all six new PRSPs have incorporated growth as a central pillar in their strategies.” (2005 Review of the PovertyReduction StrategyApproach—pr esented to the World Bank Development Committee in September 2005) 81. A common feature of the growth strategyin PRSPs is the primacygiven to t he role of private sector development and improvements in the investment climate, including macroeconomic stability. Sixteen of 21 PRSPs reviewed (byODI) emphasized the need to support SMEs, and fourteen e mphasized the promotion of foreign direct investment. 82. With regard to DFID countryprogramming more broadly,DFID CountryAss istance Programme guidance does signal the need to include the private sector in analysis and dialogue to inform country strategies and programming choices. The private sector is also an important area of analysis in “Drivers of Change” studies. 83. DFID currentlyprovides PRBS in only16 countries. In most of DFID’s PSA countries therefore, other aid instruments will be more appropriate to encourage private sector development. Even in countries where DFID does provide PRBS, PSD can be promoted byother aid instruments t hat deal more directly with the private sector, and with the institutions and environment that supports its growth. This includes other financial aid instruments, such as global funds, sector programmes and projects, as well as non- financial aid instruments, such as technical cooperation and policydialo gue. Some of these instruments used byDFID are outlined below.
Investment Climate Facility 84. The Investment Climate Facility(ICF) aims to facilitate the removal o f real and perceived obstacles to doing business in Africa. This will involve encouraging support for change, working with governments to formulate business-friendlypolicies and regulation, working with th e institutions responsible for administering regulation to improve their capacityand capability,impr oving platforms for dialogue between government and business, and improving the information and services available to governments and investors. 85. The ICF is an independent trust with strong African representation on the Board of Trustees. It is managed according to business principles. The ICF will work with African governments, regional organisations, donors, companies and civil societyto prepare and finance initiatives to improve the investment climate at national, regional and at a continental level. 86. The ICF has eight priorityareas to focus on (propertyrights and contra ct enforcement, business registration and licensing, taxation and customs, financial markets, infrastructure facilitation, labour markets, competition, corruption and crime). In addition, a keypart of th e ICF’s remit is to support the recommendations that arise from the Africa Peer Review Mechanism (APRM) process in relation to the investment climate. Activities funded under the ICF are likelyto include : research and analysis; legislative review and reform; capacitybuilding of institutions such as land registr ies, companyregistries and commercial courts; pilot projects (such as streamlined business registration systems); and facilitation of better public-private dialogue.
Challenge Funds 87. Whilst improving the environment and investment climate for business is seen as crucial, there is still a vital role for a mechanism that can engage more directlywith the private s ector, and stimulate or catalyse businesses to act in a certain waythat is pro-poor. The review and evaluati on of existing challenge funds over the past year has found that challenge funds are an eVective mechanism for doing so. 88. Challenge funds provide grants on a competitive, transparent basis to the private sector, to stimulate private sector development and leading edge innovation. Their focus is to encourage pro-poor activityin sectors/products/markets that would not have taken place without the public funding. Challenge funds are particularlywell suited to addressing situations—common to much of Afri ca for example—in which the market is slow and/or fails to deliver without public sector assistance. 89. The Financial Deepening Challenge Fund (FDCF) is an example of a successful DFID challenge fund facility. Its purpose is to improve access to financial services for poor and previouslyexcluded groups in Africa and South Asia. The fund provided grants of £50,000—£1 million to private sector firms, in a competitive and transparent manner, for project proposals which met clearlydefined criteria reflected in DFID’s priorities to improve access to financial services. FDCF had a requirement for a leverage ratio of at least one, and in practice was able to stimulate about twice as much private sector investment as the amount of DFID grant funding. In Uganda, the FDCF supported a leasing companyto develop a new 3312162001 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 138 International Development Committee: Evidence
leasing product for small and medium-sized enterprises. In Tanzania, the FDCF has supported the development of a “smartcard” which enables customers, including those who had not used banks before, to increase their access to cash and to reduce their banking costs. 90. The Commission for Africa and the G8 (2005) deliberations highlighted that private enterprise is a prime engine of growth and development. A number of initiatives were recommended to boost economic growth, including an Africa Enterprise Challenge Fund (AECF). The AECF has a target capitalisation of $100 million over the seven years it is expected to be operational. It is likelyto focus on up to three sectors, for example financial sector, agribusiness, and possiblyone other. Based on the assumption that average grants will be around $800,000, this capitalisation should enable around 100 projects to be funded. The AECF will be multi-donor funded. The fund will begin operations when at least $50 million has been committed from donor funders. DFID has committed £12 million in principle to the AECF.
Investment funds and initiatives 91. A leading instrument to help private sector activityin poorer countri es is CDC. Created as a PLC (public limited company) from the former Commonwealth Development Corporation in 1999, it was then extensivelyreorganised, with the bulk of its operational capacitybeing de-merged into a new fund management companycalled Actis Capital in 2004. 92. Byinvesting in companies, Actis shows that these businesses can be pro fitable and worthwhile, and then private buyers can be attracted to acquire them. CDC’s capital is then released to reinvest elsewhere in a similar way. Through this “demonstration eVect”, CDC is not onlyproviding direct benefits, from use of its own capital, but is also attracting increasing flows of third-partyc apital to markets that desperately need it. This mobilisation of capital for poorer countries is arguablyCDC ’s most important function. 93. Since the 2004 reorganisation, CDC’s total net assets increased from £982 million in 2003 to £1,494 million by30 September 2005, and are forecast to reach £1,535 million byth e end of 2005, well ahead of their business plan budget. Over the period 2003–05, it is expected to have mobilised nearlyUS$490 million (some £275 million) in third-partyinvestment in developing countrymark ets. 94. DFID also supports a number of initiatives to harness the role of the private sector in the financing and deliveryof public services, examples being the International AIDS Va ccine Initiative and the African Agricultural TechnologyFoundation. 95. The diaspora from developing countries can be a significant source of financing, know-how and trade links for developing countryprivate sectors. Remittances to developing countries in 2004 were estimated by the World Bank to be $126 billion, which is about two and a half times as large as net oYcial aid flows. The UK’s outflow of remittances to developing countries is estimated byDFID to be at least £2.7 billion in 2004, which is not far short of the UK aid budget of £3.8 billion. DFID has an active agenda to encourage remittance flows to low income countries, and to make remittances more accessible and less costlyfor poorer recipients. 96. The diaspora also have a role as investors. The experience in countries as diVerent as India and Sierra Leone show that in certain circumstances, diaspora entrepreneurs can become earlyrisk-takers, because of their skills and resources, their networks in their countryof adoption an d countryof origin, and their special motivation, not onlydriven byshort term profit but also bya long term visio n mixing social and financial agendas. This is dependent in large part on there being an investment climate suYcientlyfavourable to allow for investment bydiaspora. DFID is exploring options for working in this e merging area.
Financial Sector Reform and Strengthening Initiative (FIRST) 97. FIRST is a US$66 million multi-donor programme, supporting capacityb uilding and policy development projects in the financial sectors in developing countries. More specifically, FIRST provides technical assistance grants for short and medium-term projects in the areas of financial sector regulation, supervision and development. 98. DFID has committed £20 million to FIRST over six years (2002–08) and is byfar the largest donor to the project; the other donors are the World Bank and the IMF; the Canadian International Development Agencyof Canada (CIDA), the State Secretariat for Economic A Vairs of Switzerland (SECO), the Ministry of Foreign AVairs of the Netherlands (MFA), and The Swedish International Development Cooperation Agency(Sida). DFID currentlychairs the FIRST Initiative. 99. FIRST has supported PSD in a number of areas, including: — helping develop domestic capital markets that can mobilise and transform local savings in productive assets; — encouraging risk management mechanisms such as insurance or capital markets that can help protect the livelihoods and assets of the poor; and — strengthening corporate governance of banks, to shore up investor confidence. 3312162001 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 139
Fundingto development finance institutions
100. DFID’s support to bilateral and multilateral Development Financial Institutions such as the International Finance Corporation, the Multilateral Investment and Guarantee Agency, the European Investment Bank and the European Development Finance Institutions (CDC for the UK), is also a central plank of its PSD strategy. These institutions provide equity finance, debt finance and guarantees to the private sector, and have a clear role to playin supporting earlystage inve stment phases, post-conflict countries and fragile states, infrastructure financing and projects that need patient capital.
PSD in Fragile States
101. Fragile states are an increasinglyprominent area of DFID engagement . The private sector can be both a cause of fragilityand a potential solution. For example, the misman agement of revenues from natural resource extraction can fuel conflicts and corruption, but the creation of jobs and trade links can underpin peace settlements and post-conflict reconstruction. DFID has an emerging workstream on the private sector in fragile and crisis-aVected states, which seeks to improve DFID understanding and programming 102. The following donor interventions have helped the private sector contribute to stabilityand development: large scale public works programmes in post-conflict situations; micro-finance; remittance initiatives; community-driven development projects; technical assistance to governments on legislation and customs and tax regimes; one-stop shops for investors (simplification of business regulation); financial sector restructuring; monetarypolicyadvice including currencyand Cen tral Bank reform; the Extractive Industries TransparencyInitiative (EITI). 103. DFID and other donors are exploring the potential for building on this positive experience through such aid instruments as: — extending EITI to other sectors; — including economic issues in peace-building agreements; — including the role of private and financial sector in aid frameworks like PRS’s; — political risk insurance for private investors (Multilateral Investment Guarantee Agency); — reducing policyand infrastructure barriers to remittances; — strengthening the capacityof regulators to introduce financial transpa rencyand clamp down on abuses such as moneylaundering; — local content requests for donor contractors (ie sub-contracting and capacity-building for local firms); — subsidisation of first investors who generate positive externalities for others (eg the challenge fund concept); and — surveyof investment constraints, for example the recent World Bank-led Investment Climate Assessment in Afghanistan. 104. DFID plans to produce a PolicyNote, building on lessons learned byDFI D countryo Yces and development partners in fragile and crisis-aVected states such as Afghanistan, Sierra Leone and Somalia.
E. Donor Coherence in Private Sector Development
105. At the international donor level, there are a number of existing initiatives that bring donors together in terms of policyand practice in PSD. At the microfinance level, the Consul tative Group for Assistance to the Poor (CGAP), is a multidonor organisation based at the World Bank. On enterprise development, there is the Committee of Donor Agencies for Enterprise Development. Within OECD for the past three years there has been a DAC group working under the title of PovNet, looking at private sector, agriculture, and infrastructure policyaround growth and PSD specifically. 106. In addition to these wide groupings, there are sector groups and various partner organisations in, for example, microinsurance, agricultural research, and urban infrastructure. 107. On the private sector side, a recent development has been the coming together of the Business Action in Africa group, arising from the private sector contributions to the Commission for Africa process. 108. Within DFID, at the level of policy, Policy Division’s (PD) Growth & Investment Group works through partnerships with other PD Groups, or sector-specific or geographical departments, such as the International Financial Institutions Department, and Africa PolicyDep artment. 3312162001 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 140 International Development Committee: Evidence
F. Concluding Points on DFID & PSD 109. “The primaryresponsibilityfor achieving growth and equitable deve lopment lies with developing countries .. and anyapproach to PSD should be grounded in the realization t hat the savings, investment and innovation that lead to development are undertaken largelybyprivate individuals, corporations, and communities”9. The UK Government agrees with this view, and is seeking increased opportunities to encourage the interface between governments and the development community, and the private sector itself. 110. DFID’s Workingwith the Private Sector to Eliminate Poverty highlights a series of guiding principles in designing and implementing its programmes with the private sector, so that DFID: — acts as a catalyst and facilitator, rather than intervening directly in market operations, — recognises that partnership is the best approach to development, — collaborates with private sector representatives in developing and implementing programmes, — recognises that strengthening the business environment impacts positivelyon all businesses, — aims to understand the characteristics of the countries in which we work, — identifies more eVective routes for increasing the access of the poor to essential services, and — holds to the underlying principle that markets must be made to work for the poor. 111. DFID is committed to building on current experience of working alongside the private sector through EITI (on governance and transparency), large and international banks (on remittances and access to finance), and in other sectors (infrastructure, health, and others). Through encouraging private-public sector partnerships at the domestic level, and co-operation at the international level, the UK will look to contribute to private-public sector initiatives such as Business Action for Africa and the Investment Climate Facilityfor Africa, in addition to international groupings active in pri vate sector development. 112. Progress here will require strong institutions and capable states. Strong institutions matter and their presence largelyexplains the di Verence in growth performance between diVerent states. But it also requires an eVective state to create the right environment for PSD. Hence promoting PSD is one part of the UK Government’s agenda to work on contributing to and achieving strong, stable, and successfullygrowing states. March 2006
Supplementary memorandum submitted by the Department for International Development
1. Background In its Evidence Session of 21 March, Committee Members requested additional information from DFID as follows: (a) timetable and process for appointing the Chief Executive for the Investment Climate Facility for Africa; (b) information on the impact of DFID’s private sector infrastructure programmes; and (c) details of DFID’s work at the countrylevel on propertyrights.
2. Investment Climate Facility for Africa (ICF): Appointment of Chief Executive The ICF Trustee meeting on 20 March focused on the agenda for securing investors and for arranging for investors to be appointed to the Board. Although not specificallyon the meeting’s tabled agenda, this meeting also discussed and agreed a process for recruitment and appointment of a Chief Executive OYcer (CEO). A selection sub-committee of the Board was set up to oversee this appointment process. As at 12 May, an executive search consultancy has been appointed to lead on this process. Specifications for the CEO have been agreed and the search process has commenced. An initial “long-list” of names has been provided bythe recruitment consultants, which has now been reduced t o a shorter long-list for discussion bythe selection sub-committee, with the aim of reaching a final short-list bythe next Board Meeting on 1 June. Candidates will be interviewed and selection made during June, with a target of having an appointment in place within three months of selection. This is a verytig ht schedule. The ICF Board considers this appointment as veryimportant for the future o f the ICF. However, all recognise that it is not an easytask to find the right, high-profile, prefera blybi-lingual, individual with both public and private sector experience, who is well networked in Africa and is passionate and knowledgeable on investment climate issues. The Board is also aware that until a suitable CEO is recruited and in post,
9 UN Commission on Private Sector & Development: UnleashingEntrepreneurship: MakingBusiness Work for the Poor 2004 . 3312162002 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 141
much of the role expected of the CEO will have to be jointlyshouldered bythe Trustees and the Executive Secretariat. Currently, HE Benjamin Mkapa and Dr Ken Kwaku (consultant to the ICF secretariat) are handling the keynetworking and promotional roles with African leaders an d African institutions.
3. Impact of DFID’s Private Sector Infrastructure (PSI) Programme The objective of this programme is to secure increased private sector participation in infrastructure in developing countries for economic growth and povertyalleviation. Three main problems are being addressed bythis PSI programme: the poor enabling environment including the limited capacities of the public and private sectors to deliver infrastructure services for the poor; the diYculties, risks and costs associated with infrastructure project development; and the shortage of suitable finance. DFID plays a leading role in 13 multi donor facilities that tackle these three problem areas. Annex 1 summarises in more detail aspects of the programme and its impact on development. As an example, the programme has levered in some US$1.5 billion private investment. This represented a donor/private sector leverage rate of 1:10 ie for everyone dollar of donor moneyspent the privat e sector has invested 10 dollars in infrastructure. Annex 1 also refers to targets on investment in energyand water services, w hich will have an impact access at household level. Several of the private sector infrastructure facilities are still quite new and, when in full implementation, impact on povertyreduction will come through both direc t programme eVorts and through demonstration eVects.
4. DFID Country Programmes on Property Rights DFID maintains a varietyof country,global and thematic programmes invol ved directlyor indirectlyin strengthening propertyrights, and also supports global initiatives tha t help propertyrights reform. In some countries (Rwanda, South Africa, Tanzania), DFID is a lead donor. In manyo thers, DFID is working closelywith other donors. Annex 2 provides details of DFID’s work in the ar ea of propertyrights in 16 countries, in addition to references to regional or thematic work. DFID response reflects countrycontext and demand: developing reform prop osals direct with government (Kenya); working simultaneously at diVerent levels (Access to Justice including on property rights, and on land records, in Pakistan); and maintaining a watching brief through donor co-ordination forums (Uganda). DFID can respond strategicallyat critical stages of countryland policyr eforms, and will continue to do so. DFID has just approved a land reform assistance programme in the highly political environment around this issue in South Africa. In Mozambique, DFID recentlyapproved support for helping people and civil societygroups to establish their rights under Mozambique’s progressive new land legislation. DFID expertise comes internallyfrom its di Verent groups of advisers applying technical expertise and political and institutional understanding, and externallyfrom working with partners including UN agencies, other donors, and international and local experts. In Ghana, with regard to Hernando de Soto’s idea for a $2 million pilot project on land titling in Accra, land policyexperts in th e land sector agencies, academic institutions, and NGOs do not agree that that this proposed intervention is appropriate, as the latter is an example where a potentiallysimplistic solution to complex land issues is unhelpful. The challenge facing DFID and its partners is that “propertyrights” and se curityof land tenure require both broad political consensus for reform, alongside manyof the wider gov ernance reforms needed to create eVective states. The context varies so much, such as in Rwanda where DFID’s lack of colonial baggage is perceived as an advantage, and in Ghana where DFID has brought in specific expertise from other African countries. Given existing institutional and capacityconstraints in man yof DFID partner countries, and the complexityof the political and technical factors involved, the current d iversified approach to meeting countryneeds on propertyrights reform seems broadlycorrect. We will do m ore in contexts where partner Governments emphasise that this is an area where theywelcome donor assist ance, and where theyare committed to support change.
Annex 1
DFID’S PRIVATE SECTOR INFRASTRUCTURE (PSI) PROGRAMME: A SUMMARY OF PERFORMANCE TO DATE, 31 MARCH 2006
Objective 1. The objective of the programme is to secure increased private sector participation in infrastructure in developing countries for economic growth and povertyalleviation. 3312162003 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 142 International Development Committee: Evidence
Programme Design
Diagram to show the infrastructure project cycle and the 3 main points of entry for DFID’s PSI programme
1. Build the capacity of the public and private sectors to 3. Address weaknesses in improve policies and regulatory 2, Help governments and the credit and capital markets systems, strengthen competition, private sector to develop needed to finance developed Implement promote greater transparency projects for private projects (loans, guarantees, and reduce anti competitive sector participation equity investment - hard practices for the benefit of and local currencies) consumers and investors.
2. DFID plays a leading role in thirteen multi donor facilities that deliver a PSI programme that is designed to address three main problems—the poor enabling environment including building the respective capacities of the public and private sectors to work in partnership to deliver infrastructure services for the poor; the diYculties, risks and costs associated with project development; and the shortage of suitable finance caused byweaknesses in capital and credit markets.
Aspects of Performance
3. At the aggregate level, we currentlymeasure the impact of the programme in terms of private investment generated and numbers of households getting access to infrastructure services for the first time. Individual programmes and projects have targets that feed into this aggregate measure as well as their own specific national performance targets. We recognise the need to develop lagging indicators to show the impact of improved infrastructure on national economic growth.
Figure one: Private investment by sector 2003/4 - 2005/6 (US$ millions)
1500
1000
500
0 Total Transport ConstructionTelecoms Energy Other
4. As we can see from Figure one, over the three year period 2003–04 to 2005–06, the programme levered in some US$1.5 billion private investment. This represented a donor/private sector leverage rate of 1:10 ie for everyone dollar of donor moneyspent the private sector invested 10 dol lars in infrastructure. This was a significant achievement and one that we intend to maintain or improve on as the PSI programme is scaled up over the next three years. Figure one also reveals that the most popular infrastructure sectors were transport (US$399 million), construction (US$328 million) and telecommunications (US$308 million). These are likelyto continue to be popular infrastructure sectors for priv ate sector participation over the next three years although we plan to do more on water and power distribution—areas which have direct impact on povertyalleviation. The great majority(98% or US$1,433 million) of th e private investment generated from the programme over the last three years has benefited Africa. We expect Africa to continue to be the main beneficiaryalthough a new facilityfor Asia—AsPIFF, will ensure that Asia also receives a greater volume. 3312162003 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 143
Figure two: Number of completed projects by sector 2003/4 - 2005/6
13
5
3 3
1 1
Total Transport Construction Telecoms Energy Other
5. Figure two shows that the impressive figure for private sector investment has been generated from just 13 completed large-scale projects. DFID supported facilities are new and in some cases have onlyrecently started to do business. With these facilities now beginning to hit their stride and a new facilityto come on stream, we expect the number of completed large-scale projects to treble over the next three years to forty. We can add to this 33 smaller scale output based aid projects that target subsidies to increase access to infrastructure services for the poor. 6. Over the next three years, we expect to have water and energy projects coming on stream that will focus on increasing the distribution of services to the poor. These include those identified alreadyunder the Global Partnership for Output Based Aid programme—estimated numbers for which are shown in Figure three.10 We also expect to “mainstream” access targets into projects developed byo ther supported facilities. On this basis, we have set provisional, minimum targets for giving 500,000 households access to energyand water services for the first time. As most of the access will be given through demonstration projects that we expect to be replicated, we are confident that the number of households to eventuallyget access to services for the first time as a result of the programme will be much greater.
Figure three: expected new GPOBA connections (thousands of households)
163 134
Energy 78 82 68 Water 49 17 4
Africa Asia Latin Eastern Total America Europe
10 The figures for GPOBA exclude an estimated 1,200,000 households expected to get access to energyservices in Egyptfor the first time from an exceptionallylarge demonstration project. 3312162003 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 144 International Development Committee: Evidence
Individual Facilities A snapshot of the aspects of performance for each of the thirteen facilities that make up the programme is provided in the table below.
A SNAPSHOT OF ASPECTS OF PERFORMANCE BY FACILITY
Facility and description Aspects of performance—2003–04—2005–06
Enablingenvironment Public Private Infrastructure Advisory Facility Since its inception in 1999 PPIAF has approved (PPIAF)—provides technical assistance to 412 activities valued at US$93.4 million including developing countrygovernments to improve the the strengthening of 47 reg ulatoryinstitutions; 48 enabling environment for private sector new pieces of legislation or regulation; 39 sector participation in the provision of infrastructure reform strategies and 176 training programmes and services. workshops. Local Capacity Technical Assistance Fund (TAF)— Established in 2003, so far thirteen projects have works with PIDG facilities to enhance the capacitybeen funded byTAF,two o f which have been of the public and private sectors to attract private completed—a communications outreach investment in infrastructure and related services. programme in Uganda and support for horticultural investments in Mozambique. Energy Sector Management Assistance Programme Supported byDFID since 2005, progress so far on (ESMAP)—provides technical assistance to PSI includes programme proposals for four governments on sector reform and restructuring; countries—Bangladesh, Cambodia, Cameroon and access to energy; and sustainable energy Kenya. production. Water and Sanitation Programme (WSP)— Supported byDFID since 2005, the PSI part of the provides support to national and local governments programme will support the enhancement of policy to help them to increase access to water and and regulatoryframeworks in si x focus countries. sanitation services for poor people in urban and rural areas. Project development Infrastructure Development Collaboration Launched in 2003, bythe end of 2005 it had bid out Partnership Fund (DevCo)—assists governments to five projects that will realise US$606 million private create major infrastructure deals for investment, generate new government income of implementation bythe private sector in partnership US$300 million and re alise government budget with government. savings of US$23 million. Over the next four years it will scale up to bid out six projects per annum in order to deliver US$1.5 billion private investment and 500,000 new connections. Infrastructure Development Company (InfraCo)— Began operating in 2005, currentlyhas five projects packages infrastructure projects for investment in under due diligence worth in excess of US$500 poorer countries; puts them out to the market for million. Over the next three years it expects to investment; and recovers costs and a margin complete six projects and generate around US$750 through a sale price. million private investment. Global Programme for Output Based Aid Launched in 2003, it has developed 33 projects for (GPOBA)—Supports the design and piloting of possible implementation from April 2006. These performance-based approaches for targeting public could realise up to US$90 million private funding and subsidies on the deliveryof basic investment and give over one million households services to the poor. access to services. Asia Private Investment Finance Facility Launched in early2006 as part of DFID’s Asia (AsPIFF)—develops and invests in green field 2015 initiative, its focus will be on projects in the infrastructure projects in the poorer countries of range $US5–75 million. DFID will provide seed Eastern Asia. It provides equityand quasi-equity corn funds. It is expect ed to close 25 deals in the investment products along side other private and first five years leveraging in US$750 million private public sector investors and lenders. investment. Slum Upgrading Facility (SUF)—leads and Supported since late 2004, it has recentlycompleted coordinates initiatives to develop bankable projects the design of outline programmes in four that promote aVordable housing for low income countries—Ghana, Indonesia, Sri Lanka and households; the upgrading of slums; and the Tanzania. Implementation of the programmes will provision of infrastructure services to slums in commence in 2006–07. poorer countries. Water and Sanitation for the Urban Poor Launched in 2005, it has two pilot projects in the (WSUP)—identifies, develops and delivers projects earlystages of implementati on—Bangalore, India that provide more eVective deliveryof water supply and Naivasha, Kenya.Scoping studies are and basic sanitation services to the urban poor. underwayin Madagascar, M ozambique, Indonesia, 3312162003 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 145
Facility and description Aspects of performance—2003–04—2005–06
Peru and Brazil. Credit and capital markets Emerging Africa Infrastructure Fund (EAIF)— Launched in 2001, it has financed six projects that provides long term loans for commerciallyviable have achieved significan t impact including and developmentallysound private sector ventures $US1,316 million priv ate investment, new in the poorer countries of sub Saharan Africa. The electricitycapacityof 83MW, 3.9 million new initial focus was on telecommunications, building, telephone subscribers and the creation of 3,600 new transport and energy. It expects to do more in the jobs. EAIF will double both the number of water sector over the next three years. financed projects over the next three years to six and the new private investment generated to US$ three billion. Local Currency Guarantee Facility for Infrastructure Established in late 2003 and reinvigorated in late (GuarantCo)—provides credit enhancement of 2005, it has implemented one project—Celtel bonds and other commercial paper as well as well Kenya, and another project is imminent—Ubongo structured municipal bond oVers. Also guarantees Power Plant, Tanzania. At least six implemented bank loans. projects are expected over the next three years. Community-Led Infrastructure Finance Facility Launched in 2002 and initiallypiloted in India, it (CLIFF)—Mobilises finance for organisations of supports 13 projects. Ten of these are housing the urban poor for infrastructure and housing developments, which will provide housing and projects to improve living conditions through secure tenure for over 5,000 households. The rest actions on the enabling environment, project are sanitation projects that will benefit some development and the provision of capital. 279,000 households.
Annex 2
DFID PROPERTY RIGHTS PROGRAMMES & PROJECTS: NOTES ON DFID REGIONAL AND GLOBAL PROGRAMMES
Africa
Angola The Angolan Parliament recentlyapproved the Law on Regional and Urban Pla nning. DFID is co- funding the Luanda Urban PovertyProject (LUPP2), the purpose of which is t o influence equitable, inclusive, pro-poor policies and best practices for Angola for povertyre duction in urban Luanda. The programme, through its implementing agent Development Workshop, has been involved with extensive advocacyon the land law with parliamentarians. In terms of outcomes of the project, and the introduction of the Law, these include: — Civil societyis taking a more active role in advocacyalongside the Gover nment of Angola. — The Land Law was published in Angolan newspapers, a new step in transparency, and land issues are now properlyon the agenda, which is essential for the continuation of p eace. — There are real changes in the level of public consultation on planning issues.
Ghana The National Land Policy(NLP) of 1999 stresses that land is to be considere d a common resource, held in trust for the people of Ghana. The new government in 2001 inherited a flawed land policyrevision process. The new minister of lands (who had been a land rights activist in opposition) sought DFID help in opening the debate. DFID brought in an expert consultant who had been involved in Ugandan and Tanzanian land policyreforms. This gave the minister the support he needed to break the de adlock. The NLP now aims to encourage the responsible use of land and to promote communityparticipat ion in land management at all levels. DFID and partners are working to support the government’s Land Administration Project (LAP). Recognising that access to land in 80% of Ghana is controlled bya diverse ra nge of customarytenure systems, this project aims to improve the eVectiveness, transparencyand accountabilityof CustomaryLand Secretariats (traditional authorities). This will benefit poor people by reducing the cost of registering land claims; cutting out excessive red tape and rent seeking; and making the land allocation process more transparent and land rights clearer and more secure. DFID has substantial current engagement (financial commitment $9,000,000 and Rural Livelihoods Advisoryinput) in the LAP. DFID engaged in policydevelopment 1973–99 res ulting in the 1999 National Land Policy. LAP Project Design 2000–03. LAP implementation 2003–08 (five year pilot phase of a 15–20 year process). DFID agreed to harmonise support to LAP under World Bank lead. 3312162004 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 146 International Development Committee: Evidence
LAP is being delivered bythe Government of Ghana and is dependent on the cap acityof government, traditional leadership and the private sector to deliver on this challenging reform programme. DFID expertise comes from advisers with consultancysupport. Problems associated with land/propertyrights are seen as the keyconstra int to povertyreduction, private sector development and growth in Ghana. Also a keysource of conflict in Ghan a (30–60,000 unresolved court cases over land/ Chieftaincyboundarydisputes).
Ethiopia DFID co-funded the Ethiopian Economics Association to surveysmall farme rs’ perceptions of the current land rights situation. This information was used to lobbye Vectivelyfor greater public dialogue on the issue. Certification and formalisation of leasehold markets were suggested. In the draft poverty reduction strategyprogramme (PASDEP), the need for continued reforms to improve land tenure security is specificallymentioned.
Kenya DFID is supporting the Ministryof Lands in the preparation of a national la nd policy, which would deal with a range of issues relating to propertyrights and securityof tenure. D FID plan to support implementation of the policy, and in particular, support the development of local level land administration bodies. DFID has oVered support to the implementation of a Presidential Commission report on the irregular and illegal allocation of land (land grabbing) which would provide a formal and legal mechanism to redress the massive grabbing of land which occurred under the former regime. DFID is engaged in work on the prevention of forced evictions, and are supporting the development of guidelines on prevention and management of evictions. DFID is also supporting with the World Bank, a Financial and Legal Sector Technical Assistance Programme (FLSTAP), under which DFID support capacitybuilding of variou s registries, including land registries. This is directlyaimed at strengthening the investment clima te. Most of DFID technical expertise is drawn from others in the donor group (UN Habitat Chief of Land Tenure), international consultants and local consultants. DFID have also funded civil society—in the case of evictions, through COHRE, which has a strong international legal capacityin relation to housing and propertyrights. DFID is implementing a five year Project Memorandum on the land sector—which will looks at changes in the political context and what DFID can do more. Major constraints are in the wider political context, with fall out from the referendum on the proposed new constitution, shifts in political coalitions, and entering a pre-election phase. There are sensitivities around DFID engagement in a politicallysensitiv e sector in which there have been colonial (and post) interests in land. This was one factor in DFID withdrawing from the provision of direct TA into Government. One strategyto counteract this has been to establish a nd work through a wider land sector development partner group, which is chaired byUN-Habitat. Whilst DFID playa keyrole in the group, this enables us to present views and dialogue with GoK as a donor group, rather than as DFID.
Malawi In December 2004 DFID commissioned a review of involvement of other donors and the Governments position on land to guide future involvement. The work was veryuseful. It h ighlighted the diVerent donor positions/investments eg formal titling of customaryland versus streng thening land markets for informal trade and leasing. The Government’s own position was around formal titling. DFID Malawi has a Safety, Security & Accessible Justice programme (MASSAJ). This focuses primarily on criminal justice but recognises the importance of commercial justice—particularlypropertyrights and contract enforcement. IFC estimates it costs 136% of a debt to recover a debt in Malawi so there are strong disincentives to investment. Commercial justice is flagged in the Malawi Economic Growth and Development Strategy(like PRSP2).
Mozambique The DFID countryo Yce discussed propertyrights with the IDC in their recent visit to Mozambiq ue and briefed them on the current CommunityLand Use Fund which DFID lead on behal f of five other donors. The summaryof the project from DFID CountryProgramme Summaryreads: “This is a CommunityLand Registration, Negotiations and Planning Suppor t Programme in the form of a Challenge Fund open to communities and civil societyorganisatio ns. The programme’s budget is estimated in about £4.1 million and is joint-funded with five other donors. It seeks to 3312162004 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 147
improve the enabling environment and capacityof government, private sec tor, and NGOs to provide appropriate services in assisting rural communities to register their land rights and negotiating economic benefits from land concessions. In parallel it aims to integrate land rights allocation with local development planning processes as well as linking national policywith practical pilots at provincial and district level. The fund will be piloted in the provinces of Gaza, Manica and Cabo Delgado for five years with a mid term review at the end of the second year. The project will be managed bya consortium comprising KPMG, NRI and CEPKA, hir ed through an international tender which will be supervised bya National Oversight Com mittee, led byDFID, comprising representatives from the Government of Mozambique, the Private Sector and Civil Society. DFID’s Contribution £2,000,000; Duration: April 2006 to March 2011. There is demand for work on propertyrights which DFID are responding to thr ough the Community Land Use Fund. Expertise is mainlyexternal to DFID. DFID are however build ing DFID internal expertise through structured training courses. The resources DFID use for intervention in this area is a combination of international and local external experts, and this works well. In general Mozambique faces the same issues as most other countries in Southern Africa in particular, but the problem is being tackled somehow more cautiously. DFID will use the Community Land Use Fund to gauge progress in the subject and mayscale up this project in future if demand increases.
Nigeria DFID Nigeria, through the British Council managed Security, Justice and Growth (SJG) Programme, is working on two aspects of propertyrights. (1) Land registration—working to improve the structures at state level to improve (streamline) the process of land registration at the sub-national (State) level. In line with the Land Use Act of 1987, it is the responsibilityof State Governments to manage this process. Interesting ly, Nigeria ranks 152 out of 155 in the World Bank cost of Doing Business Report on the ease of land registration/transfer. The work at State level is therefore more about improving process and structures at the state level to reduce the cost and time of the procedure. At the federal level, the programme is working with the Federal Ministryof Lands to define principles of best practice (based on earlyresults from state level worki ng) and put in place a system to oVer a more sustainable capacitybuilding programme to States who would like to work towards a best practice system. (2) Alternative dispute resolution through multi-door courts which are attempting to reduce the time it takes for land disputes to be settled through the courts. Linked to these activities are components looking at security(community policing) and more general justice related work on the courts system and training of judges etc, which will also support more eVective propertyrights. Other work on (financial sector) credit rights and insolv encylaws and mortgage legislation are just starting up. Much depends on how broad the definition of propertyri ghts is being interpreted. The substantial work DFID Nigeria is doing on corruption and EITI could also, under the broadest definition, be bundled under propertyrights. The greatest challenge to doing more work on this is that in a federal countrywith 36 States, and over 250 ethnic groups, land is a verydivisive issue and needs to be treated with caution—not just byDFID (ex colonial power) but also byState or Federal Governments. In addition ther e is the complexityof the “oYcial” procedures vs customaryones (especiallyan issue with pastoralist s in the north). Also as mentioned earlier, the fact that the Land Use Act is enshrined in the constitution, means that the support being provided is more about improving a bad system, rather than changing it completely.
Rwanda DFID Rwanda’s involvement in propertyrights is in the area of Land Reform, through support to Phase 1 of the Land Reform Process in Rwanda (two years from November 2005). DFID is the lead donor in land reform in Rwanda. DFID provided a Land PolicyS pecialist within the ministryresponsible for lands, from 2002–04, assisting with policyand l egislative development. USAID have also been providing assistance in legal drafting. DFID consultant Land PolicySpecialist had a background of experience in South Africa. DFID’s contracted support includes a three person full time team from Rwanda, Kenya and UK (the latter with experience on the earlier DFID land Reform programme in Guyana). They also have access to a wide pool of international, national and regional expertise. We also recognise the need for an enabling environment for enterprise as a necessarydriver of poverty reduction through economic growth. The second generation PRSP (Economic Development for Poverty Reduction Strategy—EDPRS) currently under development is expected to give more emphasis to the productive sectors, in common with other second generation PRSPs. UK’s lack of colonial baggage in regard to Rwanda is perceived as an advantage. The current RPF government seems inclined to favour Anglophone systems of administration, public financial management, etc over the current Belgian/French systems. 3312162004 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 148 International Development Committee: Evidence
South Africa/Southern Africa
DFID Southern Africa has approved two linked land programmes, which are currentlyin their inception phase, for a total of £2 million over two years. £1 million goes to the Urban LandMark programme, and £1 million to a rural land programme, that is being done in partnership with the Belgians. The Urban LandMark programme has a strong focus on propertyrights issues. It arose in part as a follow up to work done as part of the theme area of Finmark, called Looking at the Workings of Township Residential PropertyMarkets (TRPM). Further information on the researc h and consultations done bythe TRPM programme is available at www.finmarktrust.org, under “theme areas”. Urban LandMark is intended to build on and expand on this work, and forms part of the “Making Markets Work for the Poor” portfolio in DFID Southern Africa. It will focus on a range of inter-related institutional and regulatoryissues a Vecting urban land markets, and whytheycurrentlydo not work well for the poor. Although the programme “reference group” is still being finalised, the intention is to ensure that a range of diVerent stakeholders in urban land and propertymarkets are brought togethe r to engage further with this challenge. The rural component of the land programme is focused on ensuring the property(land) rights of farm dwellers are secured during the land reform restitution process byhelpin g farm dwellers gain secure access/ ownership of their land, and helping them to turn these rights into meaningful livelihoods through the provision of post-settlement support.
Tanzania
DFID Tanzania is lead donor for 2006 of the BEST programme. Development Partners have committed approximately$60 million to the Business Environment Strengthening in T anzania (BEST) Programme of which bi-laterals donors contribute $19 million along with $41 million of new IDA funds. $30 million of the new IDA funding will be spent on supporting Government to roll-out part of its $300 million Strategic Plan for the Implementation of the Land Laws (SPILL).
There is demand to do more as BEST onlyfunds 10% of SPILL with minimal Govern ment own resources into this area. Government sees land administration reform as important, but resources are scarce and usuallydeployedto more urgent issues (eg education and health). Non-tec hnical expertise has come from DFID and World Bank Private Sector Advisors. Technical expertise for SPILL has/will come from a combination of Tanzanian Government advisors and international consultants.
Uganda
DFID was the lead donor on land reform until 2002, when DFID withdrew from the sector in favour of other priorities. In 1997 Uganda faced a deadline to produce a new land policy(embodied in the Constitution), and the draft was seriouslydeficient on pastoralists’ and women’s rights. With a standoV between government and civil societylooming DFID o Vered to facilitate an open policydialogue; government accepted. Although the resulting land act contained deficiencies it was significantlybetter than had DFID not acted. DFID recognised it was highlypolitical and risky—butt he then head of oYce agreed to take a calculated risk. Since 2002 DFID have maintained a low keywatchin g brief. Elements of land reform and strengthening land administration fall within the purview of the Private Sector and other development partners groups.
2. There is a recognition that land rights, (land justice and better land administration) is a cross-cutting issue which runs across a number of diVerent sectors (Agriculture, Environment, Justice, Law and Order, and Private Sector Development). Land is also seen a potential area for further conflict in anypost-conflict resettlement of displaced populations in the north, as theytryto re-esta blish ownership of land. Across these sectors there are a number of uncoordinated and generallysmall scale acti vities bya wide range of agencies (donor, Government of Uganda, academic and Civil SocietyOrganisations) . There is now a demand for more eVective and coordinated action from various sectors, beginning with a stocktake of current activity, and leading to an analysis of sectoral interest and objectives and the development of some sort of coordination mechanism. From this exercise DFID hope to stimulate greater interest in land as an issue.
3. Through work in the donor group DFID have been instrumental in harmonising donor support, and DFID have been leading on initiatives to develop more coordinated and joined up approaches to land reform, this is a sector DFID consciouslywithdrew from four yearsago, DFI D don’t have the capacityfor further engagement beyond maintaining an overall coordinating role. 3312162004 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 149
Asia
Cambodia A new joint DFID-DANIDA livelihoods project will include a land management component that aims to reduce the vulnerabilityof poor rural people bysecuring title and acce ss rights to land and resources. Work will focus on policycoherence, better legal and regulatoryframewor ks, government institutional capacity, access of civil society to information, and investment support to implement land use planning and management.
Pakistan In Pakistan, DFID is working with the Asian Development Bank and the World Bank to improve the state of propertyrights. DFID have co-financed an Investment Climate Asse ssment bythe World Bank, and an Administrative Barriers to Investment studybyFIAS, which both indica ted propertyrights (especially land titling) and contract enforcement as major barriers to investment. DFID is co-financing a national level programme on Access to Justice with the Asian Development Bank that looks at the issue of propertyrights. DFID are also funding technical assistance in the Punjab province which is helping the Government to automate land records. There is an opportunityto scale up these initiatives but in a gradual manne r. The demand for improving propertyrights in increasing and the Government is looking at legislativ e changes as well. In this regard, there is a need for legal consultants and private sector specialists.
India DFID is working to (a) help improve access of tribal and other marginal groups to common property resources; (b) support land distribution and development programmes for the poor; (c) with FAO, distribute homestead plots to the landless; and (d) engage in policydiscussion on lan d issues with the government and other development agencies. A new project in Orissa will develop a new state land policyand land administration system (land titling & registration) to improve land use eYciency, reduce the cost of land transactions, protect the rights of the poor and improve livelihoods.
Indonesia DFID is supporting land and governance reforms in forestrybyhelping civi l societyto strengthen farmers’ voices, and encouraging local government to respond. Byhelping poor people to access unused state land for agro-forestryproduction, povertyand environmental decl ine are being reversed: conflict is being reduced, corruption exposed, markets are being opened, producer groups are being strengthened, local government regulations are being reformed, old mindsets are changing.
Vietnam DFID work on propertyrights has been through support to the Making Markets Work for the Poor project. Vietnam has made great progress in issuing land use right certificates to rural households. These formal land rights have given farmers the confidence to make long term investments in production. The issuing of land use certificates has also increased the economic utilityof land through farmers’ rights to mortgage, rent, exchange and transfer plots. The registration of land market transactions is relativelyquick and convenient. Whilst progress has been made, poor rural households still face obstacles which prevent them from participating fullyin the formal land market.
Thematic/Global Initiatives Fisheries: where DFID are working on fisheries management—which includes a regional programme covering 25 countries in West Africa, and evolving countryprogrammes in S ierra Leone and Cambodia— DFID are dealing with propertyrights and resource access issues. These ar e central to achieving sustainable and equitable fisheries development. Theyare intrinsicallydi Ycult issues, which mayat least partlyexplain the relativelylow profile of fisheries in bilateral programmes. The sector and those who depend on it are typically politically marginalised. The political will needed to address property/access issues is rarely present in suYcient strength. Where it is, major benefits from rational fisheries management can be realised—the most prominent example of this in the developing world is to be found in Namibia. The Global Rights and Resource Initiative (RRI): is supported byDFID. This initiative focuses on forestry, by highlighting rights-based approaches, ie, to turn rights into benefits bywayof improving markets, regulations and general business climate, making them work the poor. The basic rationale is that DFID witnessed a quadrupling of the degraded forest area under communityo wnership and administration over the last decade and feel that this is a new and promising trend. 3312162004 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 150 International Development Committee: Evidence
RRI also aims to secure propertyand user rights, and lobbyfor an expansion of this trend. The RRI works its waythrough regional programmes into countryprogrammes. Countrypro grammes would focus on three basic activities: (i) new strategic research; (ii) jointlyexploring eme rging policyoptions; and (iii) strengthening/catalysing local advocacy initiatives in support of reforms. Policy Division: work has included Studies that have overtlylooked at the challenges of broader issues about land, povertyand power. Support to the March 2006 AU/NEPAD/UNECA pan-Africa Consultative Workshop on Land Policy in Africa, in Addis, including producing a report on some of the associated risks and concerns. DFID PolicyDivision Team/World Bank programme on Land Policyand Adminis tration for Agricultural Growth for improving national land policyand administrati on that will produce new, practical options that will improve land records and tenure security, formalise rights and improve poor people’s access to land. This will unlock agricultural productivityand its links t o wider growth. Specific deliverables: PolicyDivision Teams will facilitate lesson learning across DFID o Yces currentlyrunning land programmes (Uganda, Mozambique, Kenya, Rwanda, South Africa, India, Ghana, Indonesia, Angola, and others). May 2006
Letter to the Chairman of the Committee from the Rt Hon Hilary Benn MP, Secretary of State for International Development During your Committee’s session on Private Sector Development on 23rd May, members asked for further information on three specific issues. With regard to our contacts with the European Commission on the Investment Climate Facility, the ICF team have been in contact with the EC over a period of six months. Most recently, on May 18th and 19th in Brussels, Chris Darroll from the ICF design team accompanied Pierre Guislain from the International Finance Corporation, to discussions with Bernard Petit (Director, Economic Cooperation/Private Sector Development), Damien Levie (Member of the Cabinet of EC Commissioner Louis Michel), and Gilles Hervio (Head of Unit, Economic Cooperation). The EC’s interest in the ICF has grown through, for example, the meeting between Louis Michel and Paul Wolfowitz at the IMF Spring Meetings, and as a result of the April 23rd meeting for donors on the ICF in the same week. You will be interested to hear that, at the formal launch of the ICF in Cape Town at the World Economic Forum on 1st June, the EC made a public statement of support for the ICF. Their press statement noted that the “EC pledges its support to the ICF and to its participation to the funding of the ICF. In the weeks to come we shall work out the details and modalities of this participation with the ICF Secretariat“”. With regard to your own enquiry on DFID employees’ secondments to the private sector, we have had one secondment in that direction (who worked for BP as an Analyst in their Shareholder Team for 12 months in 2004). We have also had six secondments into DFID from the private sector during the last 3 years. Two of these have included a financial sector expert from Rio Tinto Zinc, and an international lawyer working on private sector and water and sanitation programmes. Working on other issues we have had two public financial management experts from PwC, and another secondee from The Independent newspaper who worked with us on the Commission for Africa. These secondments are typicallyfor a year,and the latest is a secondee from Prudential working on human resources within DFID. Finallyon Joan Ruddock’s enquiryon other donors’ contributions to the Af rica Infrastructure Consortium, the Consortium was not planned as a funding organisation, but as a co-ordination and project preparation mechanism. Donor support is being provided in a number of ways. Japan has provided a secondee to the Consortium’s Secretariat oYce in Tunis, working alongside a DFID secondee, and the World Bank have oVered to provide another secondee. The African Development Bank has provided oYces, equipment, a co-ordinator and support staV for the Secretariat. Russia has formallyindicated that it will provide support, but is yetto co nfirm the level or nature of this support. Of DFID’s $20 million contribution, $15 million is allocated for infrastructure project preparation, $2 million for a studyon infrastructure investment, and $3 million direct lyfor the work of the Consortium. Other donors, such as the US, Germany, France and Canada will also be supporting co-ordination activities, alongside their direct support to infrastructure investment in Africa. I hope this is helpful. 8 June 2006 3312162005 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 151
Memorandum submitted by ActionAid UK
Summary
1. This document provides ActionAid UK’s response to the House of Commons International Development Committee (IDC) invitation for submissions on its inquiryin to private sector development. ActionAid is an international development organisation which works in over 40 countries in Latin America, Asia and Africa. The subject of the current inquiryis of direct in terest to ActionAid as it touches upon keyareas of our advocacyand programme work, namelyaid accountabili ty, trade policy and corporate accountability. 2. The private sector encompasses a broad categoryof economic actors enga ged in producing for the market. In its widest sense the term includes farmers, fisherfolk, livestock producers, small traders, craftsmen and women, self-employed entrepreneurs, small business owners, co-operative enterprises, larger domestic firms and multinational companies. 3. ActionAid believes that private sector investment has a positive role to playin international development if channelled correctly. However, we have concentrated in this submission on areas where we believe improvement in private sector practice and its operating environment are needed for this positive role to be fullyrealised. 4. In this submission, we have not attempted to capture the complete range of measures that can or should be undertaken bythe UK Government in promoting vibrant and sustain able private sector activity in developing countries. Instead, we have focused on i) the role of inward investment bymultinational companies, particularlythose in the agrifood sector, and the UK Governme nt’s responsibilityto ensure that such investments create the greatest benefit possible to poor people in developing countries and ii) the role that investment can playin boosting or dampening wider economic a ctivityin the domestic and local economy. 5. When operating in the right regulatoryand policyclimate, ActionAid be lieves that the private sector can act as a vital engine for development bygenerating employmentopportu nities, investment and foreign exchange earnings that can bring both micro and macro economic benefits, that in turn can enable people to realise their economic and social rights. 6. However, ActionAid has also directlywitnessed and documented cases wh ere the private sector— and particularlymultinational companies—have through the unrestraine d pursuit of shareholder returns undermined local economies, worker rights and human rights. 7. Such cases reflect a widely-recognised market failure to address the external social and environmental impacts of business activities. In advanced economies, these market failures have been partlyaddressed through policies and regulations that create legal and e conomic disincentives for companies to pollute, mistreat workers or violate people’s basic human rights. However in manypoor countries such measures are either insuYcientlydeveloped or lack e Vective monitoring and enforcement. 8. For this reason ActionAid believes stronglythat the UK Government has a vital role to playin ensuring that foreign investors entering developing countrymarkets ope rate to a set of high ethical, environmental and human rights standards. 9. Our keycontentions within this submission are that, in order for the pri vate sector to realise its potential to alleviate poverty, the UK Government should ensure the following: — UK registered companies investing overseas operate within a framework of UK companythat matches their rights as investors with concomitant duties to act in a sociallyresponsible manner; — it works with other governments to develop an internationallyrecognise d and applied set of ethical and human rights standards for business; — as a major donor (unilaterallyand through its contributions to other mul tilateral donor organisations) it implements and promotes screening of proposed private sector initiatives against a rigorous set of economic, social and environmental criteria. This includes a reassessment of bias towards support for large scale foreign investments over small-scale domestic enterprises; and — it does not push the privatisation of basic services such as water, education and health care in countries where these are likelyto lead to the exclusion of poor people fro m access to these services; and/or where the majorityof people in those countries oppose th e process.
10. These recommendations and the basis of the arguments behind them are explained in further detail over the following sections. 3312162005 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 152 International Development Committee: Evidence
Full text of ActionAid’s submission to Private Sector Development inquiry
(a) What can the private sector do to alleviate poverty?
The case of agribusiness supply chains 11. In January2004, ActionAid published the findings from a comprehensive piece of research relating to the role of multinational agribusiness companies in developing countryeconomies. The main findings of this report11 can be summarised as follows: — Rapid consolidation within the agrifood sector has led to a high level of concentration in agricultural and food markets; with a handful of companies occupying dominant market positions across the industry. — This over-concentration has resulted in a highlydistorted set of market conditions, which is helping to depress commodityprices; placing intense pressure on produce rs and leading to a perverse transfer of wealth from the poorest and most vulnerable actors in the supplychain (small farmers and farmworkers) to the wealthiest (multinational agribusiness). — In addition, that some companies with a dominant position in developing countryagrifood markets were directlyor indirectlyresponsible for labour and human righ ts abuses. — That whilst foreign investment should create more employment opportunities and wealth in local communities, the reverse is often true. As multinational corporations demand tougher product standards from farmers and suppliers, manylabourers have experienced in creasing job insecurity. — That people aVected negativelybycases of corporate abuse were not being su Ycientlyprotected bynational laws, generallylack access to justice, and are not in a positio n to defend their rights due to their position on the economic and political margins. — Finally, that the recent growth in activity around corporate social responsibilityinitiatives is proving to be inadequate to meet the challenge posed of addressing abuses bymultinational agribusiness; and that new regulatorymeasures are needed to internalise the external costs of agribusiness growth and ensure that companies operate in a responsible manner that contributes to povertyreduction. 12. Subsequent case work byActionAid on the failure of voluntarycorporat e responsibilitye Vorts to protect the rights of women workers in South Africa’s fruit farming sector12, and on the private sector’s role in the India tea crisis13, has supported the major contentions presented above [see Annex, Ev 155]. Both these case studies highlight the urgent need for Government intervention in agrifood markets and for tougher regulatorystandards governing the behaviour of UK investor companies op erating in developing countries.
(b) What types of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth? 13. In particular, ActionAid has highlighted the need for two critical parallel policystrategies that should be pursued bythe UK Government to ensure that multinational private secto r actors contribute eVectively to povertyeradication: — Take a leading role in eVorts to re-govern agrifood markets towards pro-poor development goals. — Introduce specific legal duties to ensure that UK multinational agrifood companies operate to a high set of standards with regards to their impacts on workers, communities, suppliers and the environment.
Makingmarkets work better for poor people 14. The long-term decline in tropical countrycommodityprices is a proble m that nobody, including the UK Department for International Development, has adequatelyaddressed. Yet it is a critical issue in the fight against rural poverty, and is only set to get worse as companies compete for ever-tighter profit margins and continue to consolidate. 15. The misuse of corporate buyer power is an increasingly important factor in the decline of prices for agricultural goods and the exclusion of small-scale producers from markets, as power in the food chain moves upwards towards food manufacturers and, increasingly, retailers. 16. ActionAid believes that the UK Government needs to show leadership in addressing cross-border abuses of buyer power. This could be done by extending a binding code of conduct for UK supermarkets to applyto overseas producers, and o Vering technical and legal assistance to national competition
11 Power Hungry: six reasons to regulate global food companies, ActionAid UK 2005 at: http://www.actionaid.org.uk/doc–lib/ 13–1–power–hungry.pdf 12 Rotten Fruit: Tesco profits as women workers pay a high price, ActionAid UK 2005 at: http://www.actionaid.org.uk/doc–lib/ 14–1–rotten–fruit.pdf 13 Tea Break: a crisis brewingin India, ActionAid UK 2005 at: http://www.actionaid.org.uk/doc–lib/15–1–tea–break.pdf 3312162005 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 153
authorities to address cases where the misuse of buyer power is distorting local agricultural market This could be done, for example, bybuilding on existing competition instrumen ts such as enforcement cooperation and investigatoryassistance. 17. The UK Government should take a lead in promoting these issues at the EU level, as well as in international fora such as the OECD and UNCTAD. This work should take place in parallel to wider initiatives to address the other factors that currentlycontribute to the long-term price decline of agricultural commodities. 18. It is also vital that the UK Government demonstrates coherent policyap proaches across other areas such as trade and investment; for instance where the aggressive promotion of trade liberalisation could distort local markets bysupplanting a diverse arrayof domestic agrifood firms with a small number of multinational companies.
Regulatory environment 19. As multinational corporations have increased their power and influence within developed and developing countries, we believe it is necessaryto develop a strong regul atoryenvironment to ensure they playan increasinglypositive role in environmental sustainabilityand p overtyreduction. 20. ActionAid has highlighted that while CSR has some important benefits, it has proved insuYcient to the task of protecting human rights and the environment and needs to be supported byminimum legal standards. The sheer number of companyand industry-widecodes is hinderi ng companies’ eVorts to tackle the issues, and is creating uncertaintyas to which standard theyshould us e. The selection—or indeed avoidance—of issues covered bya CSR code varies significantly,and most co des are general statements of principles rather than detailed instructions as to how these principles might be applied. Meanwhile, out of an estimated 64,000 TNCs operating today, only 1,500–2,000—3% at most—produce annual CSR reports. 21. The UK Government should demonstrate its leadership in promoting corporate responsibilityby introducing and implementing a suYcientlystrong and transparent regulatoryenvironment for UK business when it operates abroad. 22. In the UK: The CompanyLaw Reform Bill—as the UK Government introduces n ew legislation to cover the operations of all UK companies, we believe it should enshrine in law: — Requirements for companies to report on their social and environmental impacts: companies should report comprehensivelyon their impact on employees,communities and the environment both in the UK and overseas. The UK Treasury’s withdrawal of the requirement for the largest listed companies to produce an Operating and Financial Review (OFR) is a major step backwards. Companies will have to produce a “business review” instead, which would not cover social impacts. We would urge the UK government to re-introduce the reporting requirements of the OFR within the CompanyLaw Reform Bill. — Directors are legally obliged to minimise any damage their company does to local communities and the environment: the current duties on directors within the proposed CompanyLaw Reform Bil l requires directors to put profits first. We believe companylaw should enshr ine a “pluralist” approach that would require directors to balance the interests of shareholders and stakeholders, ensuring directors consider and take steps to minimise anynegative impac ts on employees, communities and the environment in the UK and overseas. — Communities overseas who are harmed by the activities of a UK company should have a right to redress in a UK court: the first avenue for redress should be in the home countryof the community aVected bythe operations of anycompany.However, our research has shown tha t there are often obstacles to redress in manydeveloping countries—such as lack of resourc es or risk of persecution. In these instances, aVected communities should have a right to redress in the home countryof the companyresponsible. 23. Internationally: human rights standards as applicable to business. In manyrespects, multinational companies have outgrown the reach of national law. Furthermore, manycorp orations are now more powerful and influential than manynational governments, particularlyin developing countries. We now need an adequate international system that ensures multinational corporations are held accountable for their impacts on human rights, development and the environment. We believe the UN Human Right Norms for business would have represented a significant step towards establishing a strong and transparent framework on human rights to guide the behaviour of multinational corporations. At the request of the UN Human Rights Commission, the UN SecretaryGeneral Kofi Annan appointed a Sp ecial Representative, John Ruggie, to conduct further research on areas of human rights as applicable to the private sector. We believe Mr Ruggie’s final recommendations should be stronglybased on the d raft UN Norms for Business. 24. We would urge the International Development Committee and the Department for International Development to ensure there is policycoherence across the UK government o n developing an eVective regulatoryenvironment in the UK and in international law that works for bo th UK businesses and communities in developing countries. 3312162005 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 154 International Development Committee: Evidence
(c) What aid instruments can be used by donors to encourage PSD? Private benefits versus benefits to society (public goods)—how much is this an issue? 25. ActionAid believes that aid should be used for the sole purpose of povertyreduction, in line with the International Development Act, and that where it’s used eVectivelyit can make a positive and lasting diVerence to people’s lives. Anyaid used to support private sector developme nt must be driven bythis underlying objective. Yet the record of donor-financed Private Sector Development is not a strong one. Two keyareas are identified here:
Private sector development financing 26. First, donor investment facilities and trust funds have tended to over-emphasise the role of large scale corporate investment over small and medium enterprises (SMEs), and Foreign Direct Investment (FDI) over domestic investment. The Investment Climate Facility(ICF) for Afri ca, launched in 2005 and worth $550 million from World Bank, oYcial donors, and private sector companies (including Shell and Anglo American) is a case in point.14 27. The ICF, which is dominated bymultinational corporations active in Af rica, is focusing on issues such as propertyrights, taxation and financial markets. Manyof these issu es urgentlyneed addressing, but the ways in which donors have pursued them raise serious concerns. 28. For example, donor-supported tax reform has eroded manylow income cou ntries’ revenue raising capacity, as a recent IMF research paper found.15 Financial market liberalisation has in manycases destroyed the domestic banking sector, and credit markets for SMEs.16 Propertyrights have often been established in a waythat has heightened inequalities and undulyfavoured foreign investors.17 Manyof these policychanges have been brought about through a combination of donor cond itionality, which has pushed countries further than donors believe theywould otherwise go, and Techni cal Assistance—of which the ICF is an example—which dictate the terms of the debate about reform and unpack the implementation details of donor conditions. These ongoing donor practices are inimical to the ownership and partnership principles increasinglyespoused bythe donor community. 29. This donor bias has developed partlybecause major corporations and th eir lobbyists are natural interlocutors for oYcial donors. In contrast, engaging with and responding to the needs of small and medium size enterprises is labour-intensive and time consuming. It is a problem because Private Sector Development is most povertyreducing where it leads to the rapid expansion of viable livelihoods and builds backward linkages through the domestic economy. The record of FDI, especiallyin Africa, is often very weak in this respect, and helps explain whygrowth in developing countries since the 1980s has become progressivelyless e Vective at reducing poverty. If donors want PSD to be poverty reducing, they need to redress the bias in favour of large scale and foreign investors, and recognise that in manysituations their interests are met at the expense of smaller domestic investors.
Infrastructure services 30. Second, PSD projects—especiallyin utilities—have been based on a set of untested assumptions, and have tended to neglect public interest issues, treating povertyas an afte rthought. Donor frustration with public sector ineYciencyand corruption in infrastructure has often led to private sector in volvement being treated as a proxyfor e Yciencygains, despite the lack of supporting evidence. 31. After 15 years of concerted eVort, led bythe World Bank, to leverage private finance into infrastructure in low income countries, capital investment from within poor countries remains much more important than FDI. Few private corporations have been willing to bring significant shareholder moneyto utilities, and a range of direct and indirect subsidies—from government guarantees, to the transfer of liabilities and profit guarantees—have been employed to address this problem. In the process, the apparent fiscal advantages of private sector involvement in utilities have tended to evaporate. The high costs of eVective regulation—some of it specific to private sector involvement—and the inevitable need for subsidy to provide water and electricityto poor households have also been widelyo verlooked within infrastructure projects.18 32. The donors’ own evaluations underscore the lack of povertyfocus: the W orld Bank Operations Evaluation Department (OED)’s most recent evaluation of electricitypri vatisation in 2003 reported systematic neglect of the impact on poor people across 154 projects. Likewise, a 2002 OED evaluation of World Bank activityin water found that it had “proved hard” to get the priva te sector to focus on poverty alleviation as an objective.19
14 The UK has made an initial commitment of $30 million over three years. 15 www.imf.org/external/pubs/ft/wp/2005/wp05112.pdf 16 eg http://www2.qeh.ox.ac.uk/pdf/qehwp/qehwps70.pdf 17 eg http://www.oxfam.org.uk/what–we–do/issues/livelihoods/landrights/downloads/kirkeng.rtf 18 see www.actionaid.org.uk/wps/ content/documents/money–talks.pdf 19 World Bank. 2002. Bridging Troubled Waters. World Bank: Washington, D.C; World Bank. 2003. Power for Development. World Bank: Washington, D.C. 3312162005 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 155
33. In part, this is because infrastructure projects are typically approached either as engineering challenges first, and institutional challenges second, or vice versa (and are managed byengineers or PSD specialists with often limited knowledge of social development issues). Donors need to step back from the current bias towards private sector solutions in infrastructure, and fullyintegrate povertyreduction and basic rights objectives into their approach to utilityreform.
(d) Conclusion and recommendations 34. In thinking about the future role of PSD in promoting international development objectives, it is vital to learn the lessons emerging out of the past thirtyyears.While PSD has bee n an engine of growth in some regions, it has also failed to make an impact on povertyreduction in other p arts of the world. 35. While the private sector has a keyrole in generating growth, private se ctor development does not by itself automaticallyreduce poverty.Research has shown that there is no direct correlation between private sector growth and poverty alleviation. For example, recent data from the new economics foundation (nef) has revealed that growth was less eVective at passing on benefits to the poorest in the 1990s than it was even in the 1980s—the so-called “lost decade for development”.20 36. What this experience teaches us is that for PSD to contribute to development and povertyreduction, the state has to playa full role in the regulation of markets to ensure that s ocial and environmental impacts are managed and that economic opportunities are evenlydistributed. 37. ActionAid believes that the onlywayto ensure private (or indeed, publ ic) sector investments will realise their potential to reduce povertyis byensuring that poor people a re operating within a legal and policyframework that sees their fundamental rights protected. These rig hts include the right to food and water, the right to education, the right to basic services and health care, and the right to be protected from harm byactors with greater political or economic power than theypossess. 38. Given the mixed record of private sector development in terms of its povertyimpact, donor governments, including the UK, must re-examine the assumptions that lie behind the ongoing promotion of market liberalisation and privatisation, particularlyregarding sen sitive public goods and services. 39. In sum, ActionAid believes that, in order for the private sector to realise its potential to alleviate poverty, the UK Government should ensure that: — UK registered companies investing overseas operate within a framework of UK companythat matches their rights as investors with concomitant duties to act in a sociallyresponsible manner; — it works with other governments to develop an internationallyrecognise d and applied set of ethical and human rights standards for business; — as a major donor (unilaterallyand through its contributions to other mul tilateral donor organisations) it implements and promotes screening of proposed private sector initiatives against a rigorous set of economic, social and environmental criteria. This includes a reassessment of bias towards support for large scale foreign investments over small-scale domestic enterprises; and — it does not push the privatisation of basic services such as water, education and health care in countries where these are likelyto lead to the exclusion of poor people fro m access to these services; and/or where the majorityof people in those countries oppose the process.
Annex—case studies on agri-food buyer-power and human rights problems
Women casual workers suVer rights abuses in South Africa: Our research in 2005 in South Africa showed that manycasual women workers o n apple and pear farms accredited byand supplyingTesco have su Vered a series of rights abuses. Women workers complained of exposure to hazardous pesticides, povertywages and increasing job insec urity. Tens of thousands of women are increasingly employed as a “reserve army” of part-time labourers to do contract and informal work in South Africa to pick and pack fruit for export. Tesco is the UK’s biggest buyer of fruit in South Africa and increasinglyloads manyof the costs and risks of its fresh produce busines s onto local producers. Global retailers such as Tesco are known to squeeze local suppliers on price, set tough technical standards and demand greater flexibilityunder “just-in-time” production schedule s and more uncertain and volatile trading conditions. Farmers then often pass these extra costs and risks onto workers in the form of low wages and precarious employment conditions. As a result, the most vulnerable in the global supplychain—poor women and migrant workers—often suVer. These problems persist even though Tesco has created voluntary codes of conduct and signed up to schemes such as the Ethical Trading Initiative (ETI). Although Tesco has started to work with civil societyand workers’ groups in South Africa to ad dress problems in the fruit sector,
20 http://www.neweconomics.org/gen/uploads/hrfu5w555mzd3f55m2vqwty502022006112929.pdf 3312162005 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 156 International Development Committee: Evidence
it has taken more than two years of NGO campaigning to encourage this. Unfortunately, our research leads us to conclude that this is just one example amongst manywhich demonstrate the negative consequences of the increasing buyer-power of multinational agrifood companies on farmers’ and workers’ rights. Rotten Fruit: Tesco profits as women workers pay a high price. ActionAid UK. 2005 at: http:// www.actionaid.org.uk/doc–lib/14–1–rotten–fruit.pdf
Low tea prices in India cause loss of livelihoods: Since the late 1990s, at least 60,000 workers have lost their jobs and thousands have suVered hunger and starvation as tea prices have fallen and plantations have closed down. On the plantations that remain open, workers have suVered wage cuts, tougher picking demands, increasing short-term and insecure contracts and appalling living and working conditions. Manyfactors have caused the recent crisis in the Indian tea sector with the drop in tea prices being a significant element. An oversupplyof tea on the Indian market is a keyreason for the drop in prices. But whilst prices paid for tea have fallen in recent years, retail prices for tea have continued to increase and the largest tea buying companies have continued to deliver good returns to shareholders. ActionAid believes the large tea buying companies, such as Unilever’s subsidiary Hindustan Lever, and Tata Tea, also have an important role to playin determining the price of tea at auction and in private sale and should be taking measures to address low prices and the subsequent problems.
Tea Break: a crisis brewingin India ActionAid UK. 2005 at: http://www.actionaid.org.uk/doc–lib/ 15–1–tea–break.pdf February 2006
Memorandum submitted by Business Action for Africa21
1. Business Action for Africa Business Action for Africa (BAA) is a rapidlygrowing network of businesse s and business organisations, active in Africa and from the continent, launched in July2005 to build on th e momentum of the Commission for Africa (CFA) and G8. An outline of BAA is included as Annex A (Ev 158). A selection of participant case studies is included in Annex B (Ev 159). A selection of useful resources is included in Annex C (Ev 160).
2. Business and Development Business has an important and direct contribution to the deliveryof posit ive change for Africa and its people. It is through the responsible and profitable operation of core business activities that business makes the most significant contribution to development: generating growth, creating jobs and economic opportunities that lift people out of poverty, and tax revenues needed to fund public spending on a sustainable basis. Of course, the waybusinesses do business has a powerfu l impact. It is important to keep in mind that the vast majorityof poor people derive their livelihoods from the private sector—in small scale enterprises, as employees or as customers of goods and services. The domestic private sector accounts for the major share of investment in most developing countries (some 80% in Africa). Business also has important role in maintaining collective pressure on international and national policymakers to pursue policies that promote growth and ensure poor people are able to participate in and benefit from growth.
3. Private Sector Development,Growth and Poverty Reduction The evidence shows that growth is necessary(though not su Ycient) for povertyreduction. In most African countries, the central problem is that growth rates have not been maintained at the levels needed for long enough. Yet, all too often inadequate attention is paid to growth and to the policies needed to ignite and sustain it. EVective policies for growth must recognise the centralityof the private se ctor as its engine. Unleashing the entrepreneurial energy(particularlyfor poor people and small enterprises) in developing countries must be made a priority, and the benchmark by which to test the eVectiveness of donor interventions.
21 This paper is submitted on behalf of the business members of the BAA Oversight Group. 3312162006 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 157
4. Priorities for Private Sector Development There are six priorityareas that businesses (in Africa and across the G8) h ave identified for catalysing private sector-led growth, and for deepening opportunities for poor people to escape poverty.
A. Governance and Transparency Good governance is the foundation of economic growth and povertyreductio n. Business Action for Africa believes that support should be given to the African Peer Review Mechanism as an innovative framework bywhich to plan, measure and assess reforms. In other regions, a similar drive must be given to initiatives to increase transparencyand improve governance. Corruptio n is a global problem, but it hits the poorest hardest. Business must playits full part in tackling corruption: companies must take a stance of zero tolerance to bribe giving. Under the banner of Business Action Against Corruption, work is being taken forward in Africa to strengthen the capacityof the public and private sect ors to tackle corruption. A number of the participating companies in Business Action for Africa are lead members of the Extractive Industries TransparencyInitiative (EITI). Business Action for Africa welcomes the increasing adoption of EITI within Africa and calls upon, and will aim to activelyencourage, more countries a nd companies to work together to increase transparencyacross other sectors.
B. Climate for Business African governments must continue to improve the “investment climate”: tackling the barriers to and reducing the costs of doing business. This is particularlyimportant for t he small-scale enterprises—who are hit hardest bya weak operating environment. As part of this, e Vorts have to be made to tackle Africa’s infrastructure weaknesses. Business Action for Africa welcomes the proposed AU/NEPAD “Investment Climate Facility” (ICF) as an important private sector-led initiative to address these issues. Three participating companies recentlyannounced their financial support for t he ICF.
C. Trade Trade has the potential to be a powerful engine for Africa’s development but onlyif action is taken on three areas—an end to agricultural subsidies, increased access to developed countrymarkets and support for improving Africa’s capacityto trade. Given the disappointing progre ss made at Hong Kong at the end of 2005, a concerted eVort is needed over this year. African governments, for their part, must workto enhance intra-African trade. Recognising the need for business to join the debate, Business Action for Africa will continue to campaign for a more favourable trade regime for Africa. At the same time, a number of members are driving forward work on a specific, critical area—improving customs administration to facilitate international and regional trade.
D. Enterprise and Employment A vibrant and successful private sector is keyto sustainable growth. Enco uraging Africa’s entrepreneurial spirit—from its familyfarms and small firms to its larger companies—is imp ortant for growth and job creation. Business can do more to help small enterprises access capital, skills and training, as well as opportunities to trade. There is a growing bodyof good-practice in suppor ting enterprises through company supplychains. Youth unemploymentis a particular issue in manyAfrican co untries, and must be tackled as a priority.
E. Human Development Strengthening education and health systems is central to enabling people to participate fullyin the economy, and is vital to long-term business growth. Specific attention must be paid to tackling HIV and AIDS and its devastating impact on people’s lives, on business and on the economy. Business has an important role to playto complement the e Vorts of African governments and donors.
F. Perceptions of Africa The language of intergovernmental debate—of debt, aid, povertyand confli ct—dominates the wayAfrica is discussed externally, reinforcing perceptions of a continent of problems. Africa often appears to be seen as one large risky country, with little understanding of its diversity. But Africa deserves increasinglyto be seen as a continent of opportunity. Africa’s new business leaders, and most investors in Africa, feel this growing sense of confidence. 3312162006 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 158 International Development Committee: Evidence
5. Concluding Remarks There is now greater acceptance that the private sector is the keyto prospe rityand povertyreduction— to more jobs, wealth and income—with government’s essential role to secure public safety, to provide core public services in education, health and infrastructure, and to regulate the economyin a waythat does not create obstacles to enterprise. Thus creating a good working partnership between business and government is fundamentallyimportant—to create a good business environment, to fre e up the energyand ideas of entrepreneurs, whether theybe farmers, traders or in companies. We know w hat works, what matters most is to ensure that no time is lost in delivering results to the hundreds of millions of citizens still marginalised from the global economy.
Annex A
OVERVIEW OF BUSINESS ACTION FOR AFRICA
History Business Action for Africa (BAA) is a rapidlygrowing network of businesse s and business organisations, from Africa and elsewhere, launched in July2005 to build on the momentum of the Commission for Africa (CFA) and G8. The founders of the network were closelyinvolved with the work of the CFA, s tarting with a business breakfast hosted bythe Chancellor of Exchequer, the Rt.Hon. Gordon Brown , MP, and Niall Fitzgerald (then Chair of Unilever) in July2004. The member companies also made a significant input to the work of the Commission and held a major business conference shortlybefore the Gleneagles Summit to urge the G8 to respond generouslyto Africa’s development needs but also to work for improvements in governance and in the investment climate in many parts of Africa.
Objectives Participants of BAA will showcase existing actions, and develop new ones, in support of three objectives: — To influence positivelypolicies needed for growth and povertyreduction . — To promote a more balanced view of Africa. — To develop and showcase good business practice.
Themes Participants have decided to focus on six themes—these are the basis of building partnerships, knowledge networking, advocacyand bringing in new participants: — Governance and Transparency. — Climate for Business. — Trade. — Enterprise and Employment. — Human Development. — Perceptions of Africa.
Participants Currently, BAA has around 80 participants including: — Around 50 businesses. — Around 20 business organisations. — Around 10 external partners (including DFID as a sponsor). An Oversight Group is made of BAA’s sponsers: Anglo American, De Beers, Diageo, GlaxoSmithKline, Merck Sharpe & Dohme, SABMiller, Shell, Unilever, International Business Leaders Forum, DFID, DWP/ DfES, UKTI. 3312162006 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 159
Annex B
CASE STUDIES
Business Action Against Corruption — Business Action Against Corruption (BAAC), one of the flagship governance programmes for Business Action for Africa, was established bythe Southern African Forum Against Corruption. This includes the region’s anti-corruption commissions, Crown Agents, the African Corporate SustainabilityForum, the Human Rights Trust of Southern African and the C ommonwealth Business Council. Corporate partners include Shell, Anglo American and Unilever. — BAAC, which has alreadysecured a high level of political interest within Africa, has set up joint working groups of business and the anti-corruption commissions in Botswana, Malawi and Zambia, and activities on codes of conduct, capacitybuilding and busines s leadership. The programme will be expanded over the coming months. For more information visit www.hokoyo.org
The Investment Climate Facility — The AU-NEPAD Investment Climate Facility(ICF) is a major initiative to s upport investment climate reform in Africa—tackling the issues highlighted bythe APRM and o ther processes. Support for the ICF was recommended bythe Commission for Africa and bybusi ness leaders at the 2005 G8 Business Action for Africa Summit. — Two unique features of the facilityare its strong high-level African pol itical backing (including from President Mkapa as one its co-chairs); and its emphasis on private sector leadership in the running of the facility. — Shell and Anglo-American, both Business Action for Africa participants, have announced US$2.5 million support each over five years. Unilever have confirmed that they will be committing US$1 million for an initial two-year period. The UK government has also committed US$30 million over the next three years. For more information visit www.investmentclimatefacility.org.
Business Action for ImprovingCustoms Administration in Africa — Africa cannot take full advantage of trading opportunities until its customs organisations work eYciently, fairly and eVectively. — Established under the umbrella of Business Action for Africa, Business Action for Improving — Customs Administration in Africa (BAFICAA) aims to: — Build the case for trade facilitation and customs reform. — Promote the role of the private sector to devise and implement practical proposals in partnership with governments and donors. — A questionnaire has been developed to build a picture of Africa’s needs and priorities. On the basis of this, participants will engage in specific capacitybuilding projects. — Current participants include British American Tobacco, Unilever, HM Customs & Excise and — SITPRO (the UK’s trade facilitation agency).
SABMiller—Nile Breweries, Uganda: Eagle Lager Project — The Eagle Lager project, undertaken bySABMiller’s Ugandan operation—N ile Breweries Ltd— was developed to provide Ugandans with an aVordable and healthyqualitybeer made from the locally-produced sorghum. The objectives were to stimulate agricultural research and development into the use of sorghum for brewing and create a permanent and stable market for local sorghum farmers. — Just over four years later, the beer is now Nile Brewery’s top brand with a market share of around 20%. 8,000 local Ugandan farmers are benefiting from contracts to grow the sorghum at guaranteed prices. The project has also resulted in knowledge and skills transfer in agronomic aspects of farming and crop husbandry. For more information visit www.sabmiller.com/ SABMiller/Our!responsibility/ 3312162006 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 160 International Development Committee: Evidence
Diamond Development Initiative — The Diamond Development Initiative (DDI) aims to tackle the underlying problems of Africa’s alluvial diamond operations and its estimated one million artisanal miners. It will aim to bring about change that could bring artisanal alluvial diamond mining into the formal sector, with major benefits for miners, governments and the diamond industryat large. — DDI began life at a meeting in January2005 co-hosted in London byDe Beers, Global Witness and Partnership Africa Canada. DDI will have an important role in convening, designing, facilitating, coordinating and disseminating information, best practices and lessons. — Potential areas of action include: enhanced education and information for diggers; advocacy (including for measures to promote human development of mining communities); sourcing of technical assistance; and research.
Anglo American—HIV/AIDS — Anglo American has played a leadership role in the private sector response to HIV/AIDS in Africa including implementing the largest directlydelivered, private sector A RT programme in the world. Their Chairman holds the Chair of the Global Business Coalition on HIV/AIDS. — Some 23% of Anglo American’s workforce in Southern Africa is HIV!. As a result of the Group’s HIV/AIDS policy, nearly 2,200 Anglo American employees are receiving antiretroviral therapy. A further 4,000 in the earlier stages of infection are on “wellness” programmes involving health monitoring and lifestyle and nutritional support. 94% of those on treatment are completelywell and are able to carryout their normal work and to continue to support their f amily. For more information visit www.angloamerican.co.uk/corporateresponsibilty/hivaids
Diageo Business Reporting Awards — Diageo Africa is the second largest Diageo market byvolume, providing th e third highest profit delivery. Nigeria is the third largest Guinness market in the world. — Other potential investors, who are unaware of the opportunities and discouraged byperceived risk, maybe overlooking Africa as an investment destination. The Diageo Africa Business Reporting Awards are a practical contribution towards addressing negative perceptions of Africa and stimulating more African business reporting in international media. — The Awards, launched in 2004, recognise and reward journalists and editors providing high. — qualitycoverage of the business environment in Africa. — A related initiative—Newsdesk: Business Africa, an interactive, capability-building tool for aspiring journalists—will be launched this year. — For more information visit www.diageoafricabusinessreportingawards.com
Annex C
EXAMPLES OF LITERATURE ON BUSINESS AND DEVELOPMENT Business and the Millenium Development Goals—UNDP and IBLF: http://www.undp.org/business/docs/mdg business.pdf Bridging the Gap: Business and Poverty—IBLF: http://www.iblf.org/docs/BridgingtheGap.pdf FT Business and Development supplement—sponsored byIBLF: http://www.iblf.org/docs/FTsupplementSept2005.pdf UN Commission on the Private Sector and Development: http://www.undp.org/cpsd/press/ Growing Sustainable Business for PovertyReduction—UNDP Growing Sustai nable Business Initiative: http://www.undp.org/business/gsb/docs/GSB%204-pager.pdf Exploring the Links Between International Business and PovertyReductio n: A Case Studyof Unilever in Indonesia: http://www.oxfam.org.uk/what we do/issues/livelihoods/unilever foreuni.htm Business for Development—Business solutions in support of the Millennium Development Goals—World Business Council for Sustainable Development: http://www.wbcsd.org/web/publications/biz4dev.pdf Doing business with the poor—a field guide—World Business Council for Sustainable Development: http://www.wbcsd.org/DocRoot/wddfPa1LhtP72aO68tsa/sl-field-guide.pdf 3312162006 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 161
International Business Cases at the World Business Council for Sustainable Development: http://www.wbcsd.org/templates/TemplateWBCSD2/layout.asp?type%p&Menuld%MTY3&doOpen%1 &ClickMenu%LeftMenu Overseas Development Institute Programme on Business and Development Performance: http://www.odi.org.uk/PPPG/activities/country–level/odpci/index.html Optimising the Development Performance of Corporate Investment—Overseas Development Institute: http://www.odi.org.uk/pppg/activities/country–level/odpci/brief1.pdf The Business of Poverty—Overseas Development Institute: http://www.odi.org.uk/publications/opinions/10–the–business–of–poverty–04.html February 2006
Memorandum submitted by CDC Group
Introduction This document sets out CDC’s observations on: — The role that the private sector can playin alleviating poverty. — The constraints that the private sector can face in developing countries. — Private sector development financing in: (a) risk finance; (b) SMEs; and (c) microfinance. — A number of specific examples are also provided from within CDC’s investment portfolio.
Brief CDC History 1. CDC was established in 1948 as the Colonial Development Corporation to develop the resources of Britain’s colonies. It was renamed the Commonwealth Development Corporation in 1963, and was given authorityto invest outside the Commonwealth in 1969. In 1997 CDC became a P PP and two years later transformed from a statutorycorporation to a plc. 2. Following re-structuring in 2004, two separate management companies were spun out of CDC, Actis and Aureos, leaving CDC as an emerging markets fund-of-funds investment company. 3. CDC now places its capital, currentlystanding at approximately£1.5 bi llion, with a growing number of emerging markets fund managers. CDC aims to put 50% of its capital to work in sub-Saharan Africa and South Asia. In addition, 70% of CDC capital is invested in countries where the per capita annual income is less than US$1,750. The remaining 30% is invested in countries where that figure is less than US$9,075. 4. Under the new structure, CDC is no longer entirelyreturns-driven. It is therefore able to direct capital where a specific need or market failure has been identified. Microfinance, SMEs and agribusiness are examples of this. This approach allows CDC to have an eVect beyond its balance sheet, adding value over and above the provision of capital alone.
What the Private Sector can do to Alleviate Poverty 5. In recent years, acceptance and understanding of the importance of the private sector in the developing world has grown. The expansion of the private sector in developing countries is critical to the long term alleviation of poverty. Without private sector growth generating economic activityand providing expanding employment opportunities, other development strategies will inevitablyfail. Private sector development must therefore be seen as a crucial strand of anysuccessful povertyallevi ation approach. 6. The literature on the importance of the private sector is large. For example, the United Nations Development Programme identified access to financing as one of the three “Pillars of Entrepreneurship” essential for private sector growth in its March 2004 Report “Unleashing Entrepreneurship—Making Business Work for the Poor”. This submission does not attempt to repeat the well rehearsed general arguments on the benefit of the private sector, but does outline CDC’s experience, with real examples. 3312162007 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 162 International Development Committee: Evidence
Capital 7. However, despite this growing recognition of what the private sector can help achieve in emerging markets, shortage of risk capital is holding back business growth in most areas of the developing world. CDC seeks to address this shortage, but much greater availabilityof risk c apital is necessaryif a step change in the eVectiveness of development is to be achieved.
Power 8. Emerging markets, especiallyin Africa and Asia, have an enormous need f or safe, clean and reliable energy. 9. If Africa is to stand anychance of achieving the Millennium Development Goals, it will need at least 60 new power plants in the next five years and, according to the World Energy Council, US$600 billion of investment over the next 25 years. 10. In Asia, the need is also on a massive scale. The World EnergyCouncil est imates over one billion people live without electricity, representing 60% of the population. 11. The private sector has an important role to playhere and approximately one third of CDC’s portfolio is in energy.
Case study: Songas power project, Tanzania 12. One example of how private sector investment is helping national governments and the supplyof clean, safe and reliable power is CDC’s US$125 million investment in Songas, a private power generation companyin Tanzania. Songas operates a power facilityin the suburbs of Dar es Salaam. The facilityis supplied bygas from the Songo Songo o Vshore field through a 225 kilometre pipeline. Tanzania now has the cheapest rate for thermal power in East Africa and has made savings estimated at US$50 million a year.
The Constraints on Private Sector Involvement in Developing Countries 13. Part of the challenge is to overcome investors’ perceptions of emerging markets as commercially unrewarding. The most eVective is to show it is possible to make acceptable and appropriate returns. The “demonstration eVect” is the most powerful wayof illustrating the potential of emerging mar kets to new investors. 14. CDC’s palm oil business in Indonesia and Papua New Guinea is an example of how equityinvestment adds value to the business. Over the last 15 years, investments were made in five palm oil estates in Papua New Guinea and Indonesia. These were developed and expanded with further capital injections and consolidated under a top qualitymanagement team, resulting in a world cla ss business. CDC’s investment was then sold to an industryplayerwho will take the business on to its next s tage. The returns from the sale are now being re-invested in other companies in emerging markets. 15. Nonetheless, the countries of the developing word are immature markets for private equity. More fund managers are emerging, but identifying firms to manage capital is still a challenge in most markets. 16. Finding deals and investment opportunities is often diYcult, mainlybecause there is a shortage of well trained and experienced business people. More aid is required for business training and education. 17. The general business environment overall is often unfavourable because of problems such as bureaucracyand corruption. More aid needs to be directed towards assisti ng governments in streamlining administrative and bureaucratic procedures. 18. The World Bank/IBRD report “Doing business in 2005” found that businesses in poor countries face much larger regulatoryburdens than those in rich countries. Theyface thr ee times the administrative costs, and nearlytwice as manybureaucratic procedures. The report also cited we ak propertyrights as a problem. 19. Poor infrastructure, too, is a barrier to business growth. In India, for example, Prime Minister, Dr Manmohan Singh, has estimated a requirement of US$150 billion for investment in infrastructure to achieve the quantum leap the countryneeds for future development. 20. It is for this reason that private sector investment in transportation, communications and energyis especiallytransformative.
Private Sector Development Financing:Risk Finance 21. There has been an increased interest in private equityin some parts of t he developing world in recent years. In India, for example, 2005 was a record year with private equity and venture capital investments reaching US$2.3 billion, which was almost double the figure for 2004. Fund managers have broadened the focus of their investments beyond the technology and service sector emphasis of three to four years ago and 3312162007 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 163
investments size has also grown over the period. Robust stock markets and more mergers and acquisitions have generated strong returns. Several fund managers have raised over-subscribed funds, but the market is still relativelysmall. 22. There were good levels of fundraising in Africa in 2005, driven byimpro vement in general economic performance in a number of countries plus some landmark transactions, such as Celtel.
Case study: Celtel, pan-Africa 23. CDC backed Celtel as a start-up in 1998 and subsequentlycontributed to three further rounds of funding. The companyprovides mainlycellular network services across Su b-Saharan Africa and manages 13 mobile and one fixed line telecoms operations in 13 countries. CDC has supported Celtel’s expansion by helping to win licence bids, to mobilise funding and to make acquisitions through leveraging its public and private sector contacts on behalf of Celtel. 24. Celtel has outperformed all expectations, growing revenue in excess of 115 per cent per annum, establishing the companyas the largest African mobile operator outside S outh Africa. Since its start-up it has moved from a standing start to providing coverage for 30% of Africa’s population and in so doing has transformed access to telephonyfor more than five million customers in a co ntinent characterised bypoor communications. 25. In March 2005 Celtel was acquired byMTC and CDC’s returns from the sale o f its 9.3% stake in the companyare now able to be re-invested in companies in emerging markets whe re risk capital is scarce.
Case study: The Palms ShoppingCentre, Lagos 26. A further example of the eVectiveness of provision of risk finance is The Palms Shopping Centre in Lagos. This is a joint venture with a Nigerian developer. Through its fund manager Actis, CDC has provided a significant proportion of the equityand has underwritten debt in the proj ect to provide a more attractive platform for bank finance. 27. Completed in December 2005, The Palms provides over 60 retail outlets and a multiscreen cinema. Formal retail facilities provide a much needed amenityin urban Africa. Ap art from direct and indirect employment, The Palms has an important development impact in professionalizing the supplychain by stimulating demand and raising qualitystandards. 28. However, examples like this are the exception and although interest in private equityis growing, Africa overall remains a relativelyimmature market.
Finance for SMEs 29. Access to capital for small and medium sized enterprises is scarce in emerging markets. Although China, for example, is the world’s largest recipient of foreign direct investment, the Chinese SME sector is starved of capital. The established private equityplayerstend to concen trate on major investments such as privatisations, leaving a large number of viable businesses with little access to the capital required to operate eYcientlyand to grow.
Case study: Pacific Green, Fiji 30. Pacific Green Industries in Fiji is an example of the kind of growth smaller companies can achieve when capital and business skills are made available through private equityinvestment. 31. Pacific Green Industries manufactures furniture and architectural products, using wood from senile coconut palms and sells its products worldwide. Managed byAureos, a fund m anager specialising in the SME sector, the US$15 million Kula Fund, to which CDC committed US$5m, made an investment of US$2 million in 1999 to assist the companyin its expansion. The business outstr ipped expectations and Kula was asked to provide second round financing to develop export markets in the United States and Europe. Sales and profits are six times higher than theywere when Kula first invested. 32. The coconut palms, which Pacific Green sources from the main islands of Fiji, were previouslyleft to decompose or to be used as fire wood. Theyare now converted into furniture , cutting the demand for healthytimber and reducing environmental degradation. The harvesting o f trees also represents an important source of income for wood-cutters and the transport sector. 33. Kula worked with Pacific Green to improve corporate governance so that it could list on the South Pacific Stock Exchange in Fiji, which it did successfullyin 2001. 3312162007 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 164 International Development Committee: Evidence
Case Study: BRAC Bank, Bangladesh 34. Investing capital in local financial institutions that provide small businesses acts as a catalyst for increased economic activity. Through its fund manager ShoreCap International, CDC has invested in BRAC Bank which provides loan and general banking facilities to SMEs in Bangladesh. This sector, comprising businesses such as grocers, corner shops, clothes retailers and some small manufacturers, had traditionallybeen under-served bythe established banking community.B RAC Bank is now the fastest growing bank in Bangladesh in both deposits and credit, making average SME loans of US$6,500, and also oVering loans and credit cards to consumers. It has around 400 regionally-placed loan processing units oVering services in the heart of rural and urban communities and employs over 700 business loan oYcers— around 60% of total staV.
Microfinance 35. Microfinance provides the working poor with access to more aVordable capital and is defined primarilyas the provision of unsecured, short-term loans (typicallyupt o $100 for new borrowers and up to $175 for experienced borrowers) primarilyto individual women or group s of mostlywomen borrowers and/or to micro enterprises. The term is also increasinglyapplied to the p rovision of other financial services to micro entrepreneurs (eg savings accounts and insurance). 36. Even though a number of non government organisations have ventured into microfinance, their reach and scale have been verylimited as compared to the estimated demand. 37. The keybarrier to growth and sustainabilityof microfinance instituti ons is that most intermediaries are government-owned financial institutions providing credit to low income households on a non-profit basis. This segment of their business operations is not veryprofitable, an d profits would further reduce if theywere to be burdened with the task of building up the MFI sector. The chal lenge is to attract for-profit financing sources to fund the deliveryof a Vordable financial services to the poor in a waythat is commerciallyviable, profitable and therefore sustainable. 38. The keytask is to bring microfinance into the regulated economy.This is the onlywayto ensure sustainabilityin the sector. 39. India, for example, has a large network of approximately66,500 banks a cross the countrywith almost half of them in rural areas. Despite this, the Indian financial system has failed to provide access to the poor, especiallythe rural poor. Almost 60% of households do not have access to a b ank account; only20% of rural households have access to credit from a formal source and 87% of marginal farmers do not have access to anyformal credit.
Case study: BSFL, India 40. BSFL in India is an example of CDC’s investments in microfinance, managed byShoreCap International. 41. BSFL is a non-bank finance companyregulated bythe Reserve Bank of India . 42. It is the flagship of the BASIX Group, an Indian livelihood promotion institution that leads the industryin product development, commercial operations, foreign invest ment, and mainstream financial sector linkages. 43. BSFL provides microfinance in rural areas, oVering individual and group-based microcredit and insurance products. 44. It makes agricultural loans to farmers for crops, livestock, irrigation and equipment, business loans for small-scale commerce or manufacturing and general purpose loans to self help groups, which deliver credit and other services to poor women. 45. BSFL is itself a profitable business. The management team has been developed and new hiring and training has strengthened the institution’s human resource capacity. BSFL remains well capitalized and has continued to find financing from local banks.
Case study: Micro Kenya 46. Micro Kenya, an investment within CDC’s portfolio managed by Aureos, is an example of how microfinance institutions can grow their business. 47. The companybegan its operations with low-risk payrollbased lending, oVering loans to companies’ employees with repayment deductions being made through the payroll. 48. The companyhas now grown its operations, setting up a distribution net work to oVer credit directly to borrowers in untapped markets which the banks have been reluctant to enter. 3312162007 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 165
Conclusions 49. Private sector development is a critical strand of development strategies and ultimatelythe only sustainable route to alleviating povertybydriving wealth creation and o verall economic growth. 50. However, growth in the private sector of developing economies is often constrained bylack of access to capital, a lack of well trained and experienced business managers, an over-regulatorystance bydeveloping countrygovernments and poor transport, energyand communications infra structure. 51. Aid programmes need to be directed towards business training, the streamlining of bureaucracy, and infrastructure. 52. Demonstrating to other investors, both public and private, that appropriate returns can be made in emerging markets is crucial in deepening capital markets. February 2006
Memorandum submitted by Christian Aid Introduction “Poor people are the private sector, theyare the farmers and small busines ses that we are trying to help.” HilaryBenn, “Growth and povertyreduction”, speech to the New Economics F oundation, 19 January2006 1. Christian Aid welcomes the International Development Select Committee’s enquiryinto the key subject of private-sector development in developing countries. We stronglyagree with HilaryBenn’s recent words about the importance of the private sector, and the need to create “more and better jobs” if we are serious about eradicating poverty. 2. Christian Aid’s experience in more than 50 developing countries has always underlined the crucial nature of private-sector development to anycountry’sdevelopment strat egy, and our lobbying and campaigning work on trade has sought to help create an environment where a strong, pro-poor private sector can exist. A thriving domestic private sector has been a keyfactor i n all countries that have experienced rapid rates of povertyreduction over the last 50 years. 3. However, there is a worrying tendency in policy debates to reduce discussions about the private sector to a series of policyproposals aimed at attracting foreign direct investm ent (FDI). This submission will argue that attracting FDI is not the only, or even the most important, government action to develop the private sector. If FDI is not handled carefully, it can, as we have seen, have serious costs for developing countries. 4. Successful development is more often associated with a strong domestic private sector, but this is often underplayed in current discussions. Our submission focuses on ways the UK can work with developing countries to maximise the benefits of FDI, as well as encouraging the domestic private sector in those countries to playits part in povertyreduction.
Mozambique and Bolivia—Two Stories of Private-Sector Development 5. The storyof investment in the sugar sector in Mozambique shows some of th e benefits that investment can deliver, and particularlyhow the right government policycan ensure t hat these benefits go directlyto poor people. The sector has attracted US$350 million in investment, mainlyfrom South African and Mauritian companies. Currentlythere are more than 20,000 people directl yemployedin the sugar mills, with wages guaranteed bythe government’s minimum wage policy.The impact on the local economies from increased demand for goods and services has been striking. This is particularlyimportant, as sugar factories tend to be located in rural areas which have suVered the most from weak markets and lack of business opportunities. Mozambique also earns nearlyUS$30 million a yearfrom sug ar exports. 6. As well as its wages policy, which ensures poor people get some of the benefits of increased sugar production, the government was prepared to intervene to compensate for international distortions in the sugar market. 7. A variable tariV on sugar imports protects local producers from unfair competition in domestic markets with subsidised producers in Europe. This was one of the factors attracting investment in Mozambique’s sugar sector. When the IMF threatened to insist that the Mozambican government remove this tariV, investors joined with the government in lobbying the IMF to allow it to remain. One investor described the threat of removal as the “sword of Damocles” hanging over their heads, and asked, “What do you do? Do you turn to them [the factory workers] and say, sorry, because of the IMF there are no more jobs?”22
22 P de Robillard in Poor People, Free Trade and Trade Justice, Christian Aid, 2004. 3312162008 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 166 International Development Committee: Evidence
8. In Bolivia the storyis significantlydi Verent, raising the question whether investment has brought any substantial benefits to the local population. Bolivia is the poorest countryin Latin America, yetis sitting on gas and oil reserves worth billions. In 1996 the national gas and oil industrywas privatised under heavy pressure from the IMF.23 The government negotiated a deal with a consortium of companies from the US and Europe, oVering them generous financial incentives to invest. The state oil and gas company, Bolivian Fiscal Petroleum Resources (YPFB), was sold oV for US$835 million.24 9. The companies paid verylittle tax on the value of the gas and oil extracte d at the wellhead, only18% of the market price for the new reserves (which represented 95% of Bolivia’s reserves) and 25% on the rest. The government hoped these low rates would increase investment in gas and therebyboost production. However, while production did increase dramatically, Bolivia’s earnings barelyrose. The companies involved, including British Gas, BP and others, continued to enjoyhealth yprofits, while rapidlydepleting Bolivia’s main non-renewable resource. Unlike the example of Mozambique, where the ration of jobs to investment is high, in total only8,737 people were employedin the sector. 25 In addition, despite having very low local production costs,26 Bolivians were paying US$1.60 per gallon for petrol, almost as much as US consumers. 10. These two stories show that investment, and private-sector development in general, can be an important part of a strategyto reduce poverty,but can also damage a countr y’s prospects if managed badly. Attempts to attract FDI at anycost will not necessarilylead to the kind of i nvestment and private-sector activitythat benefit poor people.
Getting Investment Policy Right “The single most important thing a developing countrycan do to benefit from the trade and investment opportunities thrown up byglobalisation is to get their inves tment climate right.” HilaryBenn, “Growth and povertyreduction”, speech to New Economics Foun dation, 19 January2006 “The idea that FDI responds to rather than creates success has met with resistance and the notion that it maycarrycosts as well as benefits almost completelyignored.” —UNCTAD, 2005b
Incentives to attract investment 11. In manycountries, attracting investment has become the sum total of in dustrial policy. Under the original Washington consensus and its subsequent variations, foreign investment is regarded as the central engine for economic growth. Foreign companies can provide innovation and stimulate domestic economies through technologyand skills transfer, as well as providing a crucial sou rce of jobs and additional foreign exchange. The implication of Washington consensus policies is that governments simplyneed to put in place policies that attract these companies, and the market will do the rest. 12. Given the insistence of keydonors such as the US, the IMF and the World Ba nk on the Washington consensus approach, attracting FDI is now at the top of the economic policy agenda for most developing countries. For years developing countries have been told that to get more FDI theyhave to liberalise their investment regimes and deregulate. 13. In the global competition for FDI, the majorityof countries have now op ened up most of their economies to foreign investors. This has been accompanied bya number of me asures to activelyattract FDI, usuallyinvolving incentives such as subsidies, cheap land, tax holidays and breaks, and exemptions from regulations, including environmental and labour standards. Between 1991 and 2002, 95% of changes to investment regimes globallywere designed to attract FDI. 27 14. These incentives maybe an expensive mistake according to research byt he global consulting firm McKinsey. It concludes that incentives are often ineVective, and argues that while FDI brings significant benefits, such as employment and technology, “popular incentives, such as tax holidays, subsidised financing or free land, serve onlyto detract value from those investments t hat would likelybe made in anycase.” 28 15. Setting low tax rates or oVering tax holidays in order to attract investors eVectivelyrobs poor countries of vital capital. Subsidies and tax competition, as well as the existence of tax havens, all drain moneywhich should be available for public finances and maysignificantlyha rm prospects for economic growth.
23 D Hindery, “Social and Environmental Impacts of World Bank/IMF Funded economic restructuring in Bolivia, in Singapore”, Journal of Tropical Geography, 25 (3), 2004, pp 281–303. 24 C Vilegas Quiroga, Privatizacion de la Industria Petrolera en Bolivia, 2002, CIDES-UMESA/CEDLA/FOBOMADE/ DIAKONIA. 25 SE de Pabon and T Kruse, La Industria Manufacturera Boliviana en los Noventa, Serie: Avances de Investigacion, No 25, CEDLA. 26 J Shultz, “The curse of wealth under the ground”, ZNet, 1 August 2004. 27 UNCTAD, FDI Policies for Development: National and International Perspectives, UN, 2003. 28 McKinsey Quarterly, 2004–1. 3312162008 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 167
Investment and government revenue 16. Developing-countrygovernments believe that FDI brings significant b enefits—so much so that they are prepared to paya heftyprice in the form of subsidies to attract it. But o n closer inspection, manyof these benefits are illusoryand outweighed bythe costs. 17. One of the keyassumed benefits of FDI is its abilityto generate revenues through taxation. However, tax competition between countries means that, in an eVort to attract investment, developing countries have been forced to dramaticallylower their corporate tax rates, detracting f rom the value of the investment. As the Bolivian example shows, oVering tax incentives is often likelyto carryan immediate opportunitycos tin terms of lost government revenue, and “could be considered equivalent to a (hidden) subsidythat developing countries are providing to TNCs.”29 18. Capital flight, facilitated bythe existence of o Vshore tax havens, also drains the benefits of FDI. For example, embezzlement and the transfer of illicit funds from Africa amounted to an estimated US$400 billion, US$100 billion of which came from Nigeria alone.30 Byclosing down o Vshore tax havens, the UK could dramaticallyslow the flow of moneyfrom countries such as Nigeria.
Investment and the local economy—the case of extractives 19. A fundamental expectation of FDI is that it will have a positive impact on the host economy. For example, stimulating the domestic private sector bycreating jobs, buyin g inputs, and giving less-developed economies access to technological know-how and skills. However, evidence shows that these benefits cannot be guaranteed. 20. The impact of foreign investment on local economies and companies generallydepends upon the characteristics of the capital coming in, and on the government policies that influence private-sector activity. The case of the extractives sector in Africa—a sector that dominates FDI in the continent—illustrate some of the pitfalls of relying on investment to deliver growth and poverty reduction. 21. While the overall flows of FDI to Africa have been decreasing over the last 30 years (2% of total global flows 2002–04, compared with four per cent in the 1970s), the majorityof thi s is concentrated in the extractive sector. Twenty-four African countries classified by the World Bank as mineral or oil dependent have received almost three-quarters of the investment in developing countries over the last two decades. 22. In addition, the demand for natural resources, such as minerals and oil, is expected to grow, given the rise of new economic giants China, Brazil, India and Russia, and their increasing energyneeds. However, manyof the countries richest in oil and minerals are also still the world’s poorest—for example, Nigeria, Chad, the Democratic Republic of Congo (DRC), Sudan and Angola. 23. For countries such as these, investment in natural-resource extraction has not brought poverty reduction. Instead theyhave been a Zicted with a “resource curse” in which mineral dependence has been shown to slow and even reduce economic growth.31 The incidence of povertyhas been increasing for a number of mineral-dependent exporters in sub-Saharan Africa (SSA),32 as has the tendencyof FDI to crowd out local investment.33 24. Investment in natural resources tends to be concentrated in enclaves. This can limit the wider benefits to the local economy, with very little sharing of technology, a good deal of imported technology, and few local jobs being generated. Mineral wealth can also distort economies bya ttracting the lion’s share of support and investment, stifling economic diversification and making it almost impossible for basic manufacturing industries to develop. 25. Natural-resource extraction can also bring direct costs to poor people. In manycases the extraction of minerals such as oil and diamonds has been responsible for sustaining conflicts (for example Angola, the DRC, Sierra Leone, Sudan). These industries are also often associated with environmental degradation, which bears heavilyon poor people. In Nigeria, Shell, one of the worst o Venders, is associated with oil spills and gas flaring, as well as local conflicts around oil fields. 26. Attempts to resolve these problems have often had little or no success, a reflection of the lack of international controls of the behaviour of multinational companies. For example, in 2002 the UN presented a dossier listing 85 companies investing in the DRC, 18 of which were UK-based, accused of perpetuating the conflict. The majorityof these companies are based in OECD countries wh ere governments are obliged to adopt OECD guidelines for multinational enterprises, Voluntarystand ards such as these have so far failed to significantlycurtail corporate malpractice. Such costs could b e avoided byregulation. 27. The high returns on investments in resource extraction make Africa appear a desirable destination for capital. However, the potential negative aVect of foreign investment must be suYcientlyfactored into anyapproach to attract FDI, so that poor people can benefit.
29 UNCTAD, 2005b, p46. 30 Transparency International, Global Corruption report, 2005. 31 J Sachs and A Warner, Natural Resource Abundance and Economic Growth, 2003. www.cid.harvard.edu/hiid/517.pdf 32 UNCTAD, The Least Developed Countries, UN report, 2002. 33 A Ghosh, Capital Inflows and Investment in DevelopingCountries, ILO, 2004. 3312162008 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 168 International Development Committee: Evidence
Trade Policy,Industrial Policy and Private-sector Development 28. As with investment policy, until recently a relatively simplistic attitude to trade policyand private- sector development has prevailed in the poorest countries, largelydue to the influence of the IMF and the World Bank. In too manycountries, attempts to develop the domestic privat e sector have been undermined bytrade policies that amounted to little more than a programme of across-t he-board liberalisation. 29. Rather than encourage the domestic private sector, these policies have often caused serious problems for established companies, and stopped governments from providing the right environment to develop new businesses. In other countries, successful private-sector development has been associated with a more interventionist approach to trade policy, as in the example of Mozambique’s sugar sector.
Deindustrialisation 30. A combination of trade liberalisation, increasing competition for local firms, withdrawal of state supports, and privatisation programmes that did not lead to new resources or technologytransfer have been disastrous for the domestic private sector in developing countries. For example, in SSA between 1980 and 1990, manufacturing output’s contribution to GDP dropped sharplybefore reaching a level in the 1990s below that reached in 1960.34 31. In Zambia this process led to a fall in manufacturing employment of 40% in five years; in Ghana this figure fell bymore than half. Both countries were enthusiastic liberalise rs—a strategythat was a failure as far as domestic private-sector development was concerned. 32. In most cases, these policies were imposed as the condition for receiving aid and loans from the international community. It is clear that the wrong policies can be disastrous for private-sector development. What constitute the right policies to foster growth in this area is highlyc ontroversial, and the answer will inevitablyvaryfrom countryto country.However, strong local companies will almost certainlynot develop without some form of infant industryprotection, currentlydenied to many developing countries.
Successful private-sector development 33. A number of countries have been successful in developing indigenous private-sector enterprises with positive impacts for their poorer populations. Everydecade has had its st ar performers. In the 1970s, east Asian countries showed that active governments could deliberatelyencou rage the development of local firms, and build up a private sector that could compete internationally. Taiwan, for example, used rates of protection of up to 55% together with policies to encourage linkages between firms, technological upgrading and export promotion. Other countries, such as South Korea and Malaysia, adopted diVerent but equally interventionist policies to boost domestic companies with equal success. 34. In the 1980s, as the rest of Africa liberalised under structural adjustment regimes, Mauritius was almost alone in the continent in retaining significant levels of protection, and providing strategic industrial policyfor domestic firms. Bythe 1990s, its industrywas almost twice as pro tected as that of the rest of Africa. Local producers were treated preferentiallyto foreign producers, and ce rtain sectors were targeted for particularlyfavourable treatment. The result was a growth rate per head o f 4.2% in the 1980s and 1990s, and an increase in life expectancyof ten years.The domestic private sector ha s been keyin developing Mauritius’ economy—around half of the equity in firms producing for export is owned by Mauritian nationals. 35. In all these cases, governments, directlyor indirectly,sought to infl uence and encourage private- sector development, and to ensure that poor people were able to benefit from resulting growth. 36. Other examples, such as the cases of the extractive industries described above, show that, as far as povertyreduction is concerned, attention to the typeand qualityof priva te-sector development is more important than emphasising volumes of investment or rates of growth.
What’s Needed? 37. The development of the private sector is fundamental to successful growth and povertyreduction in developing countries. However, it is clear that, if private- sector development is to have positive outcomes for poor people, governments must design appropriate incentives for new investors and existing companies. Yet the trend in recent years has been for international institutions and agreements to constrain national governments’ abilityto make appropriate policies, and to push a model of l iberalised investment. 38. FDI has an important role to playin development and the alleviation of p overty. However, in order to ensure that poor people can participate in a growing economyand not get l eft behind, a clear policy framework of government intervention is needed. Developing countries must be allowed to design and develop targeted industrial policies that will nurture the growth of a competitive domestic private sector.
34 UNCTAD, FDI Policies for Development: National and International Perspectives, UN, 2003. 3312162008 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 169
39. Crucially, all measures to promote FDI must be in line with the objectives of sustainable development; FDI should not be pursued at anycost. Sensible investment po licywill carefullyand seriously weigh up costs and benefits.
Recommendations 40. The World Bank, the IMF, the regional development banks and bilateral donors must drop economic policyconditionality.The UK government has alreadycommitted itself to doing so in relation to UK bilateral aid. It must now ensure that other donors do the same. 41. The UK government must push for trade and investment agreements that grant developing countries the flexibilityto design and implement appropriate investment and indust rial policies. This will ensure that private sector development supports national development goals. 42. Regulation is needed to address the negative impacts of capital flight and tax competition in order to maximise revenue generation from investment. The UK government must support measures to end banking secrecy, which would help eliminate tax havens and capital flight. It must also support the introduction of an international minimum rate on tax. 43. The UK government must support the development of stronger legal frameworks for corporate accountabilityto ensure standards relating to TNC activities overseas a re upheld. It cannot relyon the good will of companies, nor on the voluntarystandards of the OECD guidelines fo r multinationals to address the issue.35 February 2006
Bibliography M Agosin and R Mayer, Foreign investment in developing Countries: Does it crowd out Domestic Investment?, UNCTAD discussion paper 146, 2000. G Benneh et al, (eds) Sustainingthe Future: Economic, Social and Environmental Changein Sub S aharan Africa, New York, United Nations UniversityPress, 1996. M Blomstrom and A Kokko, “The Economics of Foreign Direct Investment Incentives”, working paper 168, the European Institute of Japanese Studies, Stockholm School of Economics, Stockholm, 2003. OECD (2005) RegulatoryEnvironment for Foreign Direct Investment, paper for NEPAD/OECD Investment PolicyRoundtable on Investment for African Development: Makingit Happen, Uganda, 25–27 May, 2005. UNCTAD, The Shift Towards Services, World Investment report, UN , 2004. UNCTAD a, Report of the Expert Meetingon Positive Corporate Contributions to the Ec onomic and Social Development of Host Development Countries, TD/B/COM.2/EM.17/3, UN, 1 December 2005. UNCTAD b, Economic Development in Africa: Rethinkingthe Role of ForeignDirect Inv estment, UN, 2005.
Memorandum submitted by the Co-operative College
The Co-operative College 1. The Co-operative College works to support the education and research needs of the co-operative movement in the UK and internationally. It is the lead agency in a consortium of co-operative enterprises and agencies working with DFID under a Strategic Grant Agreement (SGA). The aims are twofold: to work within the UK co-operative sector to promote awareness of the MDGs and to build the capacityof the co operative sector to deliver appropriate and eVective help to co-operatives in the south. 2. Our evidence draws on the work done under the SGA and our enhanced understanding of the role co- operatives can playin international development. It is based on two main c ontentions: — That co-operative enterprises and the co-operative movement should be perceived as being situated within the private sector. — Co-operatives have a proven track record in povertyalleviation and, if p roperlysupported, have the potential to make a more significant contribution in the future.
35 Flagship or Failure? The UK’s Implementation of the OECD Guidelines and Approach to Corporate Accountability, Christian Aid, 2005. 3312162009 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 170 International Development Committee: Evidence
Co-operatives—a global presence 3. Globallyco-operatives provide employmentfor more people than multin ationals—providing over 100 million jobs. At the same time it is estimated that the livelihood of three billion people is made more secure byco-operatives. Over 800 million people worldwide are members of co-ope ratives of which 140 million can be found within the European Union. 4. Co-operatives can be anykind of business and operate in most sectors of e conomic activity. They can deliver services and products at anysize. The growth of the private sector , and co-operatives as an important element in this, provide one of the important motors for growth and development. 5. It is generallyacknowledged that co-operatives generallyhave strong local roots. This has not prevented them from expanding their activities beyond national borders. UK consumer co-operatives, for example, source their products from globalised supplychains and even sma ller worker co-operatives (eg Delta T) will supplyproducts for global markets. Co-operatives can also h ave strong social and environmental practices. 6. It is important to note that while co-operatives operate as individual enterprises, theyalso benefit from being part of a wider movement with membership of sectoral, regional, national, and international co operative institutions. We agree with the International Labour Organisation (ILO) that: “the promotion of co-operatives should be considered one of the main pillars of economic and social development.”
Defining the Private Sector 7. It is our keysubmission that co-operatives should be perceived as belon ging to the private sector. The globallyagreed definition of a co operative states this unambiguously: “A co-operative is an autonomous association of persons united voluntarilyto meet their common economic, social and cultural needs and aspirations through a jointlyown ed and democratically controlled enterprise.” 8. This has important implications for development policies and practices. Governments and donor agencies need to recognise co-operatives as a form of collective entrepreneurship in their work to promote SMEs for example. There has been an assumption in business advice services aimed at SMEs, that the archetypal SME is the individual entrepreneur. The concept of collective entrepreneurship has not been grasped bymost donor agencies. 9. Support and guidance for enterprise development needs to make adequate provision for the specific developmental needs of co-operatives. 10. When planning for public sector reform, a role for co-operative enterprise should be accorded similar levels of support and scrutinyas the traditional PLC models normallyutil ised. Co-operatives, for example, can provide an eVective vehicle for the large-scale provision of electricityand water. Th is is beginning to be recognised byDFID with its support for rural electricityco-operatives i n Bangladesh but much more could be done. When options are being considered for privatisation policies, it is important to include co-operative enterprises among the private sector options. 11. A common misconception about the role of co-operative enterprise is that it is best suited to the establishment of smaller rural enterprises but not for the development of globallycompetitive and large scale enterprises. It is often argued that co-operatives should be seen as a “stepping stone” and playing a temporaryrole preceding larger scale enterprise growth and development . This is veryfar from the truth. Ongoing research into the global top 300 co-operative enterprises reveals a combined annual turnover of $750 billion pounds with manyover 50 yearsold (preliminaryestimates).
An Enabling Environment 12. In the past, governments and development agencies have promoted co-operatives that were not member owned and controlled and which were subject to distorting state supervisoryregimes. A legacyof state control and supervision in manydeveloping countries has resulted i n a disabling environment where co-operatives are still used as vehicles for political initiatives and hence vulnerable to distorted incentives, capture byelites and corruption. 13. Getting the enabling environment right for co-operatives to flourish needs to be a keypriorityfor DFID. This matches with the co-operative sector’s own desire to obtain a level playing field, without government favour or interference, so as to succeed as businesses that benefit the wider community. 14. The ILO is the lead agencyin the UN systemfor co-operatives and its 2002 Recommendation 193 on the Promotion of Co-operatives provides a revised and eVective policyframework. It rejects state sponsored and managed co-operatives and emphasises that theyare enterprises. More support to governments to enable them to adopt and implement Recommendation 193 is needed. 3312162009 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 171
Co-operating out of Poverty 15. Co-operatives are set up to meet their members’ needs and like other businesses are not framed around an agenda for povertyalleviation. However theyhave contributed, and continue to do so, to meeting the MDGs. We have listed some of the keyexamples. 16. In manycountries co-operatives provide a mechanism enabling small pr oducers to access markets and capture more of the value chain. Theyhave playedthis vital role for the vast majorityof small producers who now benefit from access to Fair Trade markets. 17. Financial co-operatives in the form of Savings and Credit Unions have proven successful in enabling poor people to access financial services. Micro-insurance provision, essential for reducing vulnerability, is best served byco-operatives. The role of micro-insurance in encouraging risk taking, which is essential in the development of vibrant small scale enterprises has been little understood, and often ignored, as it is technicallymore di Ycult than micro-credit. A particularlyimportant point is that for strict Muslim communities, conventional profit taking financial services are haram, but co-operative and Takaful (a form of co operative) institutions are halal. 18. Co-operatives also provide schools for democracyand waysof enabling local leaders to emerge while remaining accountable to democratic institutions. Their ownership and accountabilitystructures provide proven ways for ensuring increased equity. 19. Co-operatives provide an eVective wayof enabling informal sector workers to organise for self help and sustainability. For poor women co operatives can provide a vital mechanism for self help and sustainable solutions. 20. A recent research programme exploring the contribution of the co operative sector in four European countries has explored its vital contribution to the development of Fairtrade markets in Europe. Consumer co-operatives in both the UK and Italyhave led the wayin ensuring minimum l abour standards are operational throughout their supplychains. Ethical trading practices c an provide eVective business led responses to povertyalleviation and as member based organisations, co-o peratives can bring a dimension to the CSR agenda that is absent from other private sector business approaches.
Aid instruments 21. While DFID has provided some challenge funds for the private sector, these have lacked the long- term consistencyof schemes such as the Civil SocietyChallenge Fund. A wel l-funded Private Sector Challenge Fund should be established and run for at least five years. The private sector needs to be involved in drawing up funding criteria. We would prefer such a scheme to be managed in-house. If the management of these schemes were to be out sourced as has happened in the past, organisations should be selected that have a proven understanding of the wide varietyof forms the private sector can take, including co-operatives and other forms of social enterprise. There should be proper consultation on such a scheme. 22. DFID makes no specific arrangements to support co-operatives. In May20 05, DFID did prepare a policystatement in its How To series, How to leverage the co-operative movement for poverty reduction. By wayof contrast, we would point out that in the US Congress has made provisio n in the Foreign Aid Bill for a US$10 million annual programme—the Cooperative Development Programme. 23. DFID has a partnership agreement with the ILO, the lead UN agencyfor co- operatives, which is currentlyunder review. The Co-operative SGA consortium has submitted a m emorandum urging that DFID budgetarysupport should include funds allocated specificallyfor co -operative development. We would submit that DFID could promote this co-operative focus in its work with other partners and donors including the European Union and World Bank. In addition, a co-operative perspective could also be included within DFID funded research programmes which would help to develop further the evidential base on co-operatives and their contribution to private sector development. February 2006
Memorandum from Debswana (Presentation given during the Committee’s visit to Botswana, March 2006)
Objective To inform Members of the International Development Committee, House of Commons on: — The role Debswana plays in the economic development of Botswana. — Debswana’s contribution to the communities it operates in. — Debswana is an equal partnership between the Government of Botswana and De Beers. — Formed in 1969 after negotiations led bySir Seretse Khama, then Presiden t and Harry Oppenheimer, then chairman of De Beers. 3312162010 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 172 International Development Committee: Evidence
Debswana is: — The worlds largest diamonds producer byvalue at 29% followed byRussia at 19% and South Africa at 15%. — Debswana is Botswana’s main revenue source. — Debswana is the largest employer after government (6,500) employees). — It operates four mines namely: — Jwaneng Mine, the worlds richest (1982 started production); — Orapa Mine, worlds second largest diamond pipe (started production 1971); and — Letlhakane and Damtashaa, satellite mines of Orapa (started production 1976 and 2002 respectively).
Botswana before diamonds At the time of Independence, September 1966: — Botswana was one of the least developed and poorest nation in the world. — The majorityof the population was dependent on subsistence agriculture and beef production. — The literacyrate was low. — There was virtuallyno infustructure, apart from Cecil Rhodes railwayli ne completed in 1897. — There was less that 10 kilometres of tarred road. — Availabilityof skilled and professional human resources was no better w ith the countryhaving less then 50 universitygraduates.
Debswana—Humble Beginnings
Botswana today — Botswana is considered the richest non-oil producing countryin Africa. — The discoveryof diamonds in 1967, after a protracted search of 12 years,d ramaticallychanged the pace of development in Botswana.
Debswana’s contribution — The welfare and economic success of Botswana is inextricablylinked to di amonds. — Diamonds account for: — 80% of Botswana’s total exports; — 45% of Gross Domestic Product (GDP); and — more than 50% of government revenue. — Thanks to diamonds and Debswana Botswana now has: — More than 7,529 kilometres of tarred road. — Botswana boasts the highest per capita income in Africa. — Once there were just three secondaryschools, now there are more than 300. — For many years the country has been enjoying free education for all.
Employment — Total number of employees—6,500. — 98% of current Debswana employees are Botswana citizens. — 21% are women. — Main source of skilled human resources are scholarships and apprenticeship schemes.
Contribution to the community — Housing—over 2,000 accommodation units for employees and their families. — Encouraging home ownership in surrounding villages. — Airports and aircrafts. — Sports facilities open to the community(Golf, rugby,soccer, squash, te nnis, cycling, bowling, pool, snooker, gymnasium etc). 3312162010 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 173
— Game parks at both Orapa and Jwaneng Mines (20 species, over 1,500 animals). Hospital services: — Debswana employees, spouses, dependants and public. — Referral hospital for the District beyond 100 km radius. — International COHSASA accreditation. — IDCC (Infectious Disease Care Centre) launched in 2003 and has seen over 1,400 people.
Examples of Debswana 2005 Projects True to its value of citizenship Debswana takes active part in communityde velopment. Debswana spent: — Scholarships P24 million — Letlhakane Road P20.5 million — ART Program P2.3 million — Donations fund P3 million
Corporate citizenship — Peo Holdings: — Small/medium business development initiative established byDebswana and De Beers. — Peo has helped start 45 businesses. To date, 1,000 jobs have been created and the current total investment is P16 million. — Some of the beneficiary’s of the Debswana Donations Fund include: — 12 Sports organisations P710 000 — three Environmental organisations P325 000 — 30 Centres for the disabled P1,249,392 — Other communityprojects P551 528
Company’s Response to HIV/AIDS
Debswana approach to HIV/AIDS Management — Debswana was the first companyin the world to provide free anti-retrovira l treatment to employees and their spouses. An early and innovative program. — The ART program has now been extended to employees children. — Companypolicyin place. — No discrimination. — Employment depends on ability to work, not diagnosis. — Various support structures in place. — ART fund established to extend productive lives.
Safety Health and Environment (SHE) Debswana is committed to SHE, and requires compliance from everyemployee and contractor. International accreditations: — COHSASA accreditation (health). — ISO 14001 accreditation (environment). — Debswana Operations are preparing for OHSAS 18001 certification (safety).
Major Environment Aspects Diamond mining is an essentiallyclean, non-toxic activity,but we also ha ve in place an environment management programme and internationallyaccredited standards to manag e: — Water conservation, — Dust, — Hazardous substances (acid used to clean diamonds—a closed system), — Waste disposal, 3312162010 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 174 International Development Committee: Evidence
— Energy(electricity)used, and — Closure Plan. March 2006
Memorandum submitted by GAIN—the Global Alliance for Improved Nutrition 1. GAIN’s vision is for all people, everywhere, to have the vitamins and minerals theyneed to live healthy and productive lives. More than two billion people worldwide lack the vitamins and minerals theyneed to live healthyand productive lives. Lack of vitamin A, iron, iodine, folic a cid and zinc in the bodycan cause a range of problems, including increased child mortality, birth defects, poor cognitive development and reduced productivity. 2. Yet it is quite easyand cheap to correct micronutrient deficiencies byad ding vitamins and minerals to the foods that most people eat everyday. Which food to fortify depends on the context and culture—flour and bread in some parts of the world, corn meal in another, soysauce or fish sa uce elsewhere. In 2004, the Copenhagen Consensus of leading international economists deemed the provision of essential vitamins and minerals the second most cost-eVective solution to meeting development challenges after the control of HIV/ AIDS. Food fortification is a reliable and powerful tool in advancing keyMi llennium Development Goals (MDGs) 3. GAIN was established in 2002 as an innovative public private partnership to promote food fortification aimed at reaching those populations most at risk of vitamin and mineral deficiencies. At the global level, members of the GAIN alliance include UNICEF, the World Bank, World Health Organization, World Food Program, USAID/A2Z Micronutrient Program, the Micronutrient Initiative, Helen Keller International, US Centre for Disease Control and Prevention. GAIN received its initial funding support from the Bill and Melinda Gates Foundation and it alreadyhas major project s which are fortifying products such as wheat flour, soysauce, fish sauce, and vegetable oil in fifteen develo ping countries.
The Role of the Private Sector 4. The GAIN global partnership model is an innovative one—building programmes with the private sector. The Business Alliance for Food Fortification (BAFF) is a keypart of the GAIN strategyand provides a partnership between the private sector and governments. Private sector members at the global level include Heinz, Danone, DSM, BASF, Tetra Pak, Unilever and Coke and the BAFF is supported by the Prince of Wales International Business Leaders Forum (IBLF). 5. The BAFF structure was launched in Beijing in November, as a platform to extend the production and distribution of aVordable fortified foods around the world, in particular to poor and at-risk populations. The projects aim to eVect regulatorychange to improve diets working with governments, consume rs and the food industry. They are highly innovative because once set up they are sustainable and financed by consumers and producers, not aid.
How GAIN Works 6. At the national level all GAIN projects are coordinated byNational Fort ification Alliances, which involve government, food manufacturers and retailers, and consumer groups or health groups. These national alliances are currentlyactive in 15 countries. 7. GAIN provides moneyand technical advice to national and sub national pr ogrammes targeted to achieve the maximum benefits for public health. Food fortification programs are selected through both competitive and non competitive processes and GAIN’s philosophyis to est ablish self-sustaining, market- driven programs. Priorityis given to developing countries, especiallyt hose in Asia and Africa where there are the greatest numbers of people suVering for vitamin and mineral deficiencies. Which mix of vitamins and minerals to add will depend on the needs of the population.
Ten Year Strategy 8. During 2006, GAIN is coordinating the development of a ten year strategy to eliminate vitamin and mineral deficiencies. This work is being undertaken on behalf of a range of UN and other alliance members and will provide a framework for action for the manygroups working in the ar ea. GAIN has set clear targets: 8.1. To reduce the prevalence of vitamin and mineral deficiencies by30% in t he areas where GAIN is active. 8.2. To reach one billion people with food that has been fortified with vitamins and minerals. 3312162011 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 175
8.3. To ensure that 500 million of the people most in need, such as children and pregnant women, are regularlyconsuming fortified foods. 8.4. To achieve these results at a cost of less than 25 US cents per person, per year.
Relevance of the GAIN Programme to Enquiry on PSD 9. The GAIN programme is an innovative example of how to make markets work better for poor people byengaging the private sector and government in regulatoryreform to mark ets—in this case a good example of how the donors can leverage big development dividends from facilitating a more active partnership between governments, consumers and business in the area of health and nutrition. February 2006
Memorandum submitted by the Institution of Civil Engineers (ICE)
Executive Summary Unlocking the skills and resources of the private sector represents one of the single greatest opportunities to step up the fight against poverty, promote sustainable development and achieve the Millennium Development Goals. We therefore welcome the inquiryof the International Development Committee into Private Sector Development and submit these summarypoints for its consid eration.
Summary 1 The private sector (at all scales, including local SMEs) is the engine of economic growth and wealth creation and is a primaryroute out of povertyfor poor people. For growth to be pro-poor, it must be economicallyand environmentallysustainable, sociallyresponsible an d appropriate to local context. Poor people must have a sayin the critical decisions that a Vect their lives.
Summary 2 Private sector development policymust promote pro-poor growth at all lev els from the global to the local. Policy-makers must recognise the linkages between these levels and coordinate their eVorts to achieve policy coherence. We urge the UK Government to use its influence with its G8 partners to create conclude a genuinelydevelopmental trade round in the WTO and win their support for Ky oto and other multilateral commitments that will produce pro-poor outcomes.
Summary 3 Attracting foreign investment is a necessaryalthough not su Ycient condition for reducing poverty. Government has a vital role in creating an enabling environment through regulatoryreform, fighting corruption and improving institutions. This will produce a climate which will encourage investment at all levels—macro, meso and micro. But it is vital that investment has a pro-poor outcome reaching out to all people. Markets need to work for the poor, their priorities reflected in national planning and policywith greater transparency, participation and accountability built in.
Summary 4 Investment that ignores propertyrights is likelylead to social and econo mic exclusion. Investment without improving the procurement process will not provide economic eYciencyor transparencyand will not encourage Private Sector Development. Private Sector Development, in turn, must produce long-term outcomes.
Summary 5 The keyto sustainable pro-poor development is the participation and empo werment of the poor. Schemes fail because theybadlyfit with grass-roots priorities, capabilities and willingness to pay. Sustainable development must also link with investment improvements in health and education. 3312162012 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 176 International Development Committee: Evidence
Summary 6 There is now clear evidence that the private sector consultants and contractors are keen to get more involved, but need the procurement processes to be improved first. But it is recognised that a balance must be obtained which will also ensure transparencyand anti-corruption meas ures, whilst generating sustainable and ethical growth.
Note This summarymake up recommendations, which are enshrined in the Institut ion of Civil Engineers’ “Principles of Engineering for Development and PovertyReduction” and th ese are attached for reference.36
1. Introduction 1.1 The Institution of Civil Engineers (ICE) is a UK-based international organisation with over 75,000 members ranging from professional civil engineers to students. It is an educational and qualifying body and has charitable status under UK law. Founded in 1818, the ICE has become recognised worldwide for its excellence as a centre of learning, as a qualifying body and as a public voice for the profession. The following is the evidence of the Institution of Civil Engineers (ICE) prepared byits Appropriate Development Panel and its associated group members including Engineers Against Poverty, FSC Development Services, Intech Associates and Dr SallySutton at SWL Consultants, and also the Presidenti al Commission of the ICE, “Engineering without Frontiers”. Further details about the organisations contributing to this submission can be found on the organisational websites listed below.37 1.2 This submission concentrates mainlyon PSD in sectors relevant to engi neering activities in poor countries including the provision of economic and social infrastructure services, stimulating pro-poor growth, the extractive industries (oil, gas and mining) and sourcing construction materials from low income countries. 1.3 In promoting the role of growth and private sector development to reduce poverty, it should be recognised that as a major political, economic and financial power, the UK is well placed to influence and build support for pro-poor reform in the wider international communityan d to influence reform in sectors and communities not traditionallyengaged in international development policy. To DFID’s credit, the need to engage with non-traditional actors and the need for policycoherence ac ross government is recognised. Sadlythere are still manyareas of UK policythat are not coherent with DFID ’s goals of promoting sustainability, equity and justice.
2. What can the private sector do to alleviate poverty?
What are the diVerent types of pro-poor growth?
What are the connections between growth and PSD? 2.1 We recognise that the private sector is an engine of economic growth and wealth creation and can be the primaryroute out of povertyfor poor people. We recognise that trade an d private sector capital flows dwarf overseas development assistance and that closer alignment of business activities and market mechanisms with povertyreduction policy,plans and mechanisms can great lyenhance the private sector’s incentive and contribution to povertyreduction and ensure growth serves the poor. 2.2 In order for growth to be characterised as pro-poor, it essentiallynee ds to be economicallyand environmentallysustainable, sociallyinclusive and responsible and ap propriate to local contexts and capacityof the host society. 2.3 Regulatoryand business environments must strike a balance between re moving unnecessarily cumbersome and costlybarriers to growth and trade, strengthening approp riate levels of social, employment and environmental protection, especially to vulnerable groups. It is the responsibilityof governments to strike this balance and in doing so theyneed to listen to the needs of both producers and consumers, but particularlythe latter. 2.4 Similarlypro-poor growth also needs to balance enhancing livelihood s and opportunities of the poor with the need to manage the environmental impacts of growth. We share the Secretaryof State’s assessment, in the first of his Development White Paper speeches on Growth and PovertyRe duction,38 that growth and sustainabilityis above all about equityand fairness both at the national and global levels.
36 Not printed. 37 The Institution of Civil Engineers presidential commission: “Engineering without frontiers” (http://www.ice.org.uk/knowledge/document–details.asp?Docu–id%786&intPage%1&faculty%) Appropriate Development Panel of The Institution of Civil Engineers; http://www.ice.org.uk/about–ice/icenearyou–adp.asp Engineers against Poverty: http://www.engineersagainstpoverty.org/ FSC development services: http://www.fscdev.com/ 38 http://www.dfid.gov.uk/news/files/Speeches/wp2006-speeches/growth190106.asp 3312162012 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 177
2.5 At the national level, equityrequires greater voice and participatio n of the poor and tackling existing power structures that prevent poor people having a greater sayin decision s that aVect their lives. At the global level, climate change, above all other issues, requires that the rich world reduces its environmental impact and embraces DFID’s stated agenda of promoting equity, fairness, sustainabilityand giving voice to the poor. 2.6 At the local level, the growth must be sustainable. This is where the investment enables a community to develop improvements to its infrastructure, say, at a rate with which it can cope. This, in turn, depends on its own skill base for future maintenance and operation. In some case this could mean the growth is slow, but growth is the result nevertheless.
3. What are the constraints on the private sector in developingcountries and how can they be addressed? The Macro (Global)Level—Institutions,Laws,Governance,Macro-Economic Policy 3.1 When exploring private sector development policyat di Verent levels (global to the local) it is essential to recognise the linkages between levels and the need for policycoherence . Rich countries continue to have a huge influence over poor countries: in part through the conditions theyap plyto aid and debt relief, and through the structure of trade and the global economy. We recognise that conditions that encourage greater transparencyand empower citizens to hold their government to account can be helpful in eradicating poverty. However, in the past, conditionality has been used to promote policies: such as inappropriate privatisation of public services, forcing open of markets to international competition and cut backs in spending on health and education; that have increased povertyand undermi ned the democratic independence of poor countries. 3.2 Poor countries must be able to choose their trade, regulatoryand econo mic policies independently. In his recent White Paper speech on growth and povertyreduction, HilaryBe nn welcomed, as we do, the passing of the “Washington Consensus” characterised, as it is, bya “one si ze fits all” approach. Mr Benn also acknowledges that if the goal of povertyreduction through (sustaina ble) growth is accepted, the process for this goal is controversial. He rightlycalls for greater support to hel p poor countries to weigh up their policychoices and help them take their own decisions about their future di rection. 3.3 Whilst welcoming the policyto develop the capacityof poor countrygov ernments to control their own destiny(for example, in economic and trade policynegotiations), we b elieve such policyfails to suYcientlyrecognise the power and influence of rich countrygovernments, int ernational development, financial and trade institutions and multi-national companies on the global stage. The imbalance of power at the global level often reduces poor countrygovernments’ abilityto sha pe global frameworks such as the WTO and Kyoto as well as their ability to set their own domestic pro-poor growth framework and policies. Reform to the institutions whose decisions and processes shape global trade, economics and politics to make them more accountable and democratic would increase opportunities. As the Make PovertyHistory campaign has stated a “sea change” and a “fundamental rethink of the rules of the relationship” between the poor and the rich world is needed. 3.4 Whilst we welcome the call byMr Benn for greater debate on the role of gro wth in povertyreduction, this debate must include those policies of the rich countries that increase povertyor inhibit justice, accountabilityand opportunityfor the world’s poor. 3.5 Mr Benn welcomed the Make PovertyHistorycampaign and acknowledged it s importance in building the political will to drive through pro-poor change at the global level. 2005 resulted in some significant progress. However, given the scale of the challenge, rich countrygovernments can and must do more. We support the campaign’s call for justice: for the governments of the richest countries to make the political decisions that deliver justice for the world’s poorest people. We welcome the drive for greater coherence within the UK government and within the international communityon povertyreduction, but reiterate the belief of the campaign coalition that the abilityand respon sibilityfor ending global povertylies first and foremost with the richest countries. 3.6 The growth in “fair trade” markets and international and national safeguard mechanisms (such as FTSE4Good or the Equator Principles) demonstrates the huge potential of making markets work for the poor at global level. However fair trade still represents a verysmall sect or of the global economyand voluntaryinitiatives such as the Equator Principles are still in their in fancyand their impact remains unproven. 3.7 Corruption is acknowledged to be a significant barrier to development of stable and transparent markets, as well as directlyadding to the cost of doing business and underm ining business confidence. This is especiallytrue in resource-rich countries. Tackling corruption is th erefore essential if the private sector is to lead the drive to the MDGs. DFID’s support and involvement in a range of anti-corruption and transparencyinitiatives, especiallyin extractive and construction se ctors, is much welcomed and needed. 3.8 However the recent impasse in high-level discussions for improving Export Credit Agencyprocedures on briberysuggests that not all G8 countries are taking their commitments seriouslyenough. 39 In some key areas of international negotiation on anti-corruption and transparency measures there has been slow
39 http://www.thecornerhouse.org.uk/item.shtml?x%471570 3312162012 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 178 International Development Committee: Evidence
progress. Promises made byseveral governments, including the UK Governm ent, to ratifythe UN Convention on Corruption have been slow to materialise, although the UK is still promising to do so. We hope DFID continues to place the eradication of corruption high on the donor agenda and lobbyat the global level for greater accountabilityand transparencyand more robust safeguards. The work of the Anti Corruption Forum co-ordinated bythe British Consultants and Constructi on Board is particularly important and should be supported at a global level. 3.9 The recent announcement to reverse plans to implement the so-called operating and financial review (OFR)—a requirement on stock market-listed companies to provide much more information to the public about the impact of their businesses on the environment and societyat larg e—is regrettable, since such reporting obligations can act as powerful drivers to improved social performance byUK plcs operating in poor countries. Such reporting could include measures of the contribution to povertyreduction, the contribution to domestic private sector development in countryof operat ion and the contribution to tax revenues and economic and political stability. 3.10 Attracting foreign investment is usuallya necessary,although not a suYcient, condition for reducing poverty. Companies create jobs, pay taxes, source goods and services from local suppliers and transfer technology. The role of governments in creating an investor friendly environment is therefore vital. Bureaucracy, corruption and weak institutions are barriers to investment. A recent World Bank report pointed out that it takes just two days to incorporate a business in Canada, 153 days in Mozambique and 203 in Haiti.40 The same report pointed out that regulatoryreform, far from being costly, usuallyachieves benefit to cost ratios of 25:1.
4. The meso (national) level—resources and infrastructure
4.1 At the meso level, poor and expensive infrastructure; high levels of corruption; lack of government transparency, poor controls on the illegal plundering of local natural resources and ineYcient and inappropriate regulation have all been identified as significant barriers to establishing a conducive investment climate and facilitating the development of the private sector (be it international or domestic). 4.2 We welcome the lead of DFID amongst international donors to increase investment in social infrastructure services (water, sanitation, electricity, schools, clinics, etc). Direct budgetarysupport to poor countrygovernments and multi-donor mechanisms such as Public-Private I nfrastructure AdvisoryFacility (PPIAF), Private Infrastructure Development Group (PIDG) and Community Led Infrastructure Finance Facility(CLIFF) are to be welcomed. As well as directlycontributing to he alth and education development goals, such investment also promotes a healthyinvestment climate and the capacityof the poor to contribute to the economy. (There are related issues such as property rights and land tenure—see section 6.1). However, as research byWaterAid notes, the poor consistentlyprioritise water and sanitation more highlythan poor countrygovernments in their national planning. 4.3 The on-going process of decentralising government responsibilityfo r public services, from central to local government authorities in manypoor countries, needs to be accompan ied bythe funding and revenue raising powers needed to continue to deliver public services, invest in and operate public infrastructure. Where funding is insuYcient, priorityshould be given to providing universal access to a minimum standard. In the case of water, achieving a minimum standard of universal access to 15 litres/person/dayis a Vordable, achievable and sustainable. Achieving this standard and maintaining it for all should take priorityover moving to the next level, such as private connections to households. 4.4 Wider investment in economic infrastructure (such as roads, dams, airports, ports, telecommunications, energy) promotes the investment climate, reduces the risks and costs of investing in povertystricken regions and opens up new domestic, regional and internat ional markets. A studybyIntech Associates with TRL in Vietnam, 2002, shows the direct link between poor access, higher business costs and poverty. 4.5 However, experience shows that such investments are not necessarilyp ro-poor41. Large capital projects are often more prone to corruption and market distortions than small projects. Large infrastructure projects frequentlybenefit international and large national contractor s rather than local and smaller contractors. The resulting infrastructure services often relyon contin ued public subsidyand the benefits are disproportionatelyreceived bymulti-national companies and local busi ness elites. The result is that the poor often receive few tangible benefits from the investment whilst burdened with servicing loan repayments and public subsidy. That said, the web of costs and benefits around investment in infrastructure is complex, diYcult to quantifyand project-specific. Large projects can be pro-poor 42 and small projects can be anti- poor.
40 World Bank (2005) Doing Business in 2005: Removing Obstacles to Growth. 41 Further case studies available on request. 42 “Transport Infrastructure and its Contribution to PovertyReduction in B angladesh”—paper byTim Khan (ICE Bangladesh Rep) ICE Asia/Pacific Conference Jan 06. 3312162012 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 179
4.6 As DFID (amongst others) recognises, agricultural development is an essential precursor that sets the stage for wider economic development. Poor rural and agricultural infrastructure (roads, markets, irrigation) in part explains the failure of manyagricultural economies t o grow, especiallyin Africa. The recognition of the importance of agricultural development and the infrastructure and services that support the rural economyis welcomed. 4.7 At the national level, poor countrygovernments have been increasingl ychallenged to be more open and transparent and there has been a marked increase in the qualityof debat e around governance and business conduct issues in the UK and beyond. The UK government recognises that corruption is a significant problem especiallyin the construction and extractive indust ries. 4.8 In Africa, nine out of 10 people work in the private sector, the majority of the poor in the informal or agricultural sectors. PSD in the informal sector can bring people out of extreme poverty. However, in order for governments to be able to provide better infrastructure, health, education and public services, the informal private sector must be encouraged to grow and join the formal sector. Keyto this is appropriate business support tailored to the needs of micro and small enterprises and appropriate regulation to remove unnecessaryover-burdensome red tape. 4.9 At the other end of scale, research shows that legal tax avoidance strategies byinternational business, and illegal activities such as corruption and moneylaundering, seriousl ydamage povertyreduction initiatives43. Collusion between corrupt government and business oYcials further reinforces corrupt practices and policies and disenfranchises the poor. This tax avoidance is unacceptable. The links between corruption, conflict and poor revenue management have been well catalogued in the extractives sector. DFID’s work through the Extractive Industries TransparencyInitiative r ecognises these links and is making encouraging progress but there is much work to do. 4.10 The UK international engineering sector has stepped up its support and engagement in measures to reduce corruption including support of the EITI, the Engineering principles and similar codes of conduct, the Ethical Edinburgh Initiative and the anti-corruption forum. The support and engagement of DFID with these initiatives is to be welcomed. 4.11 A fundamental danger of existing development practice is that the pace of reform and change is often defined bydonors or governments, and bears little relation to what is appro priate and sustainable. This stems particularlyfrom two aspects of practice. One is a lack of power and i nformation for end-users to choose a level of technologyappropriate to their capabilities. The secon d is that government reforms are slow to take hold and previous roles of provider diYcult to abandon. 4.12 Design and technologychoices must be appropriate and realistically aligned with the local capacity to operate and maintain them. A recent surveyfound that 40% of handpumps in 16 African countries are not working due to inadequate capacityto maintain services and which is often also associated with equipment procurement not being accompanied bythe establishment of sustainable su pplychains for spare parts. Lack of institutional capacityand su Ycient government revenue hinders investment in infrastructure (eg poor road maintenance) and in its on-going maintenance. Technologytransfer a nd capacitybuilding of southern based institutions is essential to support the eVective implementation of increased investment in infrastructure and in supporting private sector development in the south44. 4.13 Pro-poor voices must be heard during the planning, policyand project design phases of infrastructure development, as a means to reduce corruption and avoid inappropriate or unsustainable choices. The DFID supported CLIFF (CommunityLed Infrastructure Finance Facility) seeks to increase the role and voice of end users and communitysupport organisations in the p lanning and deliveryof infrastructure, including the involvement of the informal private sector and micro enterprises. 4.14 Improved procurement systems allow social objectives, such as povertyreduction and development bydomestic SMEs, to be met. Joint research byEngineers Against Povertyan d the ICE has identified a wide range of amendments to public procedures for infrastructure procurement that promote: — The consultation of project aVected communities. — Alignment to strategic national development plans. — Sustainable design of infrastructure asset. — Transparencyand accountabilityand reduced corruption. — Supplychain and national contractor development. — Multi-sector and public private partnerships. — Increased social development benefits derived from use of asset. — Improved operation and maintenance of asset. — Improved social, environmental, labour, and human rights safeguards during design, build and operate.
43 http://www.christian-aid.org.uk/indepth/509tax/Tax per cent20Briefing per cent20Report per cent20(2).pdf http://www.thecornerhouse.org.uk/item.shtml?x%51975 44 South refers to non OECD countries. 3312162012 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 180 International Development Committee: Evidence
The findings of this work are supported bythe outcomes of related work under taken in Africa bythe South African Institution of Civil Engineers. 4.15 Closer alignment between the agendas of business and international development organisations is often hampered bymutual suspicion and misunderstanding. However there i s growing recognition of the benefits to be gained from closer engagement and alignment between the two agendas. Public, private and civil societysectors all have di Verent strengths (or core competencies) to oVer. DFID, working through the multi-donor PPIAF, has been seeking to break down barriers and build closer alignment and co-operation, through dialogue and consensus building programmes and strengthening institutional capacity.
5. The micro (project or business level)—direct support to businesses, microfinance 5.1 At the grass roots level there is a need for more support to existing entrepreneurs’ companies to improve their business and build sustained, well-managed growth, such as business planning, technical & management assistance and increased eYciency. As an example the work of Traidcraft is to be commended and should be supported in this respect45. 5.2 In promoting local artisan level contractors responding to household level demand, government policies are seldom facilitatory. For instance in water supply, some governments will subsidise per capita at a rate of around $40 per head for a communal supply, with all the problems that go with communal management. However few if anygovernments will provide anysubsidyfor a h ouseholder who wishes to improve his own supplyand who shares that supplywith all his neighbours, o ften at no cost to them. With or without payment these systems are eVectivelya communal service with private management and as such have a much higher rate of functioning than communallymanaged supplies, b ut government policy precludes their accessing similar funds to those available to communities. These systems are also almost all constructed with local private enterprise, and oVer an enormous market for new and up-graded systems. 5.3 Schemes to create more linkages/partnerships/capacitybetween comp anies, especiallySMEs in developing countries and the UK/EU need to be expanded. AVordable financing including micro-finance, but also realistic levels of Venture Capital investment must also be supported. However, donors and governments recognise the dangers of directlysupporting individual bus inesses with public funds since such support can distort markets, promote unfair competition and fuel corruption. But through enterprise support agencies such as the DFID owned Commonwealth Development Corporation and multi donor PPIDG programmes, donors oVer business development support and finance on a commercial basis. 5.4 With the success in the 1990s of the Grameen Bank in India, manydevelopm ent agencies moved into micro-finance and business support providing the poor with small loans unavailable from commercial banks. However evaluations have found mixed results with common examples of unreasonablyhigh management and interest charges and support agencies often lacking in necessarycapacityand know-how in business development. One notable positive example of genuine business know-how working with the enterprise support agencies is Accenture Development Partnerships46. 5.5 At the moment the emphasis is more on creating an “enabling environment” for PSD, but there is also a need for small project and SME assistance. However few governments are prepared to be involved in aspects which maybe seen to be benefiting individuals or small businesse s, as theycould be too open to corruption, or at least, accusation of corruption. It is important that this climate is changed, because it is not widelyrecognised that there would be enormous benefit if greater gover nment support could be given to the SME rural roadworks sector. At the moment, SMEs are disadvantaged by inappropriate contract documentation for small scale works and improved access to capital or credit for equipment purchase or hire would greatlyimprove their sustainability. 5.6 Studies estimate that two thirds of global trade takes place between and within major trans-national companies (TNCs). TNCs have a major opportunityto contribute to PSD throu gh investment and development of micro, small and medium enterprises (MSMEs), using their supplychains within low income countries and procurement from them. It is in the economic interests of TNCs to develop strong local economies and businesses in low income countries. Business to business support oVers the greatest single opportunityfor TNCs to support PSD in poor countries. There is a growing bo dyof good practice providing practical examples of how this can be achieved to the benefit of both the TNC and the domestic private sector: joint ventures, capacitybuilding and business support, access t o finance and social venture capital, enterprise development centres47 and business incubators. 5.7 Extractive industries could oVer one of the best opportunities for TNCs to positivelycontribute to povertyreduction through enterprise development. Over the next 10 years , hundreds of billions of pounds will be invested byextractive projects in poor countries, especiallyAfr ica. Studies of BP and Shell show that oil companies spend up to 500 times more through their local supplychain th an theyspend through their social investment programmes. Engineers Against Povertyis amongst a gro wing number of development organisations that is working with extractive companies and their contractors to realise the private sector
45 http://www.traidcraft.co.uk/template2.asp?pageID%1685&fromID%1275 46 http://careers3.accenture.com/Careers/Global/AboutAccenture/Community/adp–intro.htm 47 http://www.ecbaku.com/bp/bpaz/ec/ 3312162012 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 181
development potential of the sector. It is vital that the culture of these companies towards supporting pro- poor initiatives is reflected in their major investment projects taking full regard for local impact and is not merely“conscience cleansing”.
6. What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth?
Creatingan enablingenvironment by providingtechnical assistance on:
Property Rights 6.1 On major infrastructure projects, the prior, informed and free consentofaVected communities should be a pre-requisite to project approval. However, this consent is rarelyre quired or obtained and indigenous communities are vulnerable to resettlement or negative development impacts, especiallyif theylack voice, influence and formal propertyrights and secure land tenure. There have bee n too manyinstances where development has caused the relocation of indigenous people even though theyhave lived and farmed the area for generations. It is vital that a process is established that respects existing land use/tenure. Working directlywith the communityis fundamental in agreeing the scale and locat ion of development. 6.2 Rapid urbanisation has resulted in the concentration of urban poor in unplanned, poorlyserviced and regulated urban slums. Slum development programmes, such as the highlyregarded slum networking programmes in India48, found that granting propertyrights in informal settlements can act as a c atalyst for communityengagement and investment in infrastructure and for wider slum upgrading and city-wide urban development. Lack of propertyrights acts as a major barrier to the poor acc essing finance and contributes to social and economic exclusion.
Investment Promotion 6.3 The business risks in low income countries are diVerent and higher than in developed countries. However risks are often perceived byforeign investors to be higher than th eyactuallyare. Investment promotion, both in terms of raising awareness of viable business opportunities and practical business support and incentives, is an important requirement for attracting inward investment. Initiatives in reducing corruption, insecurityand disruption, together with improved infrastr ucture and resources, would have a beneficial impact.
Regulatory Environment 6.4 As alreadynoted, there is a need for appropriate regulatoryreform. Th ere is naturallya need to consult and listen to the needs of unions, civil societyand business in thi s regard. There is a danger that if reform is onlyguided bythe needs of business (especiallybig business), t hat in attempting to create a business friendlyinvestment climate, governments of LDCs mayintroduce a tax and regulatory environment that undermines their own authority, capacity and revenue base and weakens important social, environmental and ethical safeguards. The “rules of the game” can either fuel a “race to the bottom” or drive improved business conduct.
Competition Policy 6.5 WTO agreements such as General Agreement on Trade and Services (GATS) have understandably been stronglyresisted bymanydevelopment organisations as theyare seen to impose competition policies on poor countries that are inappropriate to their stage of development and economy. It is welcome that DFID supports the right of poor countries to determine their own competition policies and works to strengthen their capacityto do so.
Public Procurement 6.6 This is a critical area. Donors funding infrastructure development in poor countries have significant leverage to improve the social development benefits from civil works through its management procedures. Donors need to address this challenge. What follows below are recommendations gathered from research undertaken byEAP and ICE aimed at improving public procurement procedure s of infrastructure to enhance operational, asset and social development performance. These are now being developed into guidelines.
48 http://www.sanicon.net/titles/title.php3?titleno%564 3312162012 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 182 International Development Committee: Evidence
6.7 To improve public procurement, a recommended starting point is to clarify“who is the client” and to clarifyand define the relationship and objectives/obligations betwee n the Client and the donor. Stakeholders state this relationship is often not clear nor are the procedures to serve client and donor objectives. Donors’ performance should be assessed on project performance and not fund disbursement quantity.
6.8 Donors should prioritise and invest in infrastructure projects that achieve maximum socio-economic benefit. Donors should tie loans/grants to standard and eYcient public procurement procedures. They should support capacitybuilding of public institutions and awareness am ongst industryand markets. Donors should develop more standardised options within their procurement and harmonisation strategies catering for local project context. There is a need to simplifylanguage in procurement documents and reduce the use of specialist terms to improve understanding and use there is a need for communication and education. Independent and qualified communityrepresentation should be incorporated in the management team over the project life cycle. Donors should realign their lowest price culture to weigh technical and social objectives to improve asset qualityas a lowest price culture often leads t o short cuts that negativelya Vect social development objectives.
6.9 There is a need for donors and clients to expand the generallyaccepted d efinition of procurement procedures to include project planning and design. This ensures social objectives are properlyunderstood and are part of upstream decision making, and the deliverymechanisms and b udgets are put in place. Donors should support project aVected communities through environmental and social impact assessments (ESIAs) and link project identification to national, local and sector strategic plans with long-term vision that are detailed and disclosed locallywith clear implementation and coordin ation strategies. Theyshould also support clear build, operate and maintenance strategies based on an assessment of project size, location, resources, finance and technical skills. ESIAs findings, risks and objectives should be incorporated in design, budget, tender, management, contract documents and auditing procedures.
6.10 Donors need to integrate their economic and social appraisal/auditing systems. Increase local content and “preferencing” of local contractors, consultants, suppliers and/or labour. Community participation in projects needs to be structured—including the consideration of engaging NGOs with expertise in communityengagement. The client and donor need to assess and improve the two envelope bidding system. The same skilled evaluation team for all bid scoring should be encouraged with independent qualified authoritative representation and increased budget. On-site monitoring and monthlyproject meetings should include communityrepresentation and review of social pe rformance. Authorities charged with ensuring transparent and honest procurement mechanisms should be independent and have the necessaryauthorityand capacityto tackle corruption, including the use of site visits. Transparencycan be enhanced through the full disclosure of auditing and performance reports. The capacityof regulatorybodies to eYcientlyenforce and guide standards requires strengthening.
6.11 Most governments and donors seek to buyat the cheapest price and have t he strength to negotiate internationally, and many government contracts give some room for “negotiation” with manufacturers including a “consideration” for those allocating the contract. Public procurement needs to take consideration not just of short term costs but long term cost implications. Something bought today20% cheaper direct from India (or through Copenhagen) mayfall into disrepair through lack of permanent supporting supplychains, while the same item bought for 20% more from a loc al supplier will have a built- in support system accessible at minimum cost.
6.12 This is illustrated byone case studyfrom Inhambane province in Mozam bique, where a small local trader started supplying spares (on a fairly altruistic basis, financed partlythrough a CARE programme). The government and NGOs buyat least a proportion of all new pumps through th e trader, and 25% of his turnover now comes from hand-pumps and spares. As a result he is prepared to provide spares to smaller village shops on a basis of credit till sold, providing a sustainable system accessible to the poor, even where densityof pumps is low. Previous systemsusing public and private sector h ad failed, and in no case had the government proved able to provide a sustainable system for spare parts (partlythrough lack of understanding of forward pricing, inflation etc). In Inhambane 97% of pumps are working where, on average elsewhere in sub-Saharan Africa only62% remain in use. So almost 4 0% of investment is being lost, and benefit to the targeted poor is verysignificantlyreduced.
6.13 Transparencyin procurement needs to be increased, including integr itypacts and whistle blower protection. ICE is developing a form of international procurement contract that will greatlysafeguard donors and clients against corrupt practices. Transparencyin procureme nt will also encourage the adoption of ethical practices which will better serve the local communities, who are expected to benefit from the development and increase the voice and decision making influence of the poor. 3312162012 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 183
7. Private sector development financing
Risk Finance 7.1 Risk and perceived risk act as major barriers to foreign investment in poor countries. Risk finance reduces these barriers. Risk finance and export credit agencies playa sign ificant role in assessing risk and setting the minimum social, ethical and environmental standards as a pre-requisite to issuing risk insurance and export credit guarantees. This finance is especiallyinfluential in maj or infrastructure and extractive projects where commercial finance is conditional upon adequate risk finance and where social, ethical and environmental risks can be significant (see 3.8). 7.2 Engineers Against Poverty’s work in these sectors has found that the need to manage risk, especially social risks is an important commercial driver and that byaligning busine ss competencies, such as supply chain development and enterprise support with the development agenda of host communities, social risks can be better reduced and managed49. 7.3 International companies mayassess the risk of partnering with nation al small companies too great given the financial liabilityinternational companies mayincur if nation al partners lacked financial backing. This can be addressed byimproving loans and insurance for national small b usiness. There are some emerging loan and insurance schemes tailored for SMEs; such schemes should be further encouraged
Finance for Small-Medium Enterprises 7.4 More finance is needed at realistic levels both through external investment and bypromoting access to loans at aVordable rates of interest. Paragraphs 5.6 and 5.7 describe how alliances between TNCs and SMEs in their supplychain can help increase access to finance bySMEs. The ge neral reluctance of commercial finance to engage with the SME sector in poor countries is a major barrier to business growth. The domestic banking sector is often dwarfed byinternational banks, whic h are typically risk averse especiallywhen engaging the domestic SME sector. To overcome this barrie r, international donors (see 5.3) and foundations, such as the Shell Foundation, have established commerciallybased finance arms to support the domestic SME sector. Support from international donors can often act as a catalyst to leverage in additional commercial funding. 7.5 Another wayto ensure local SMEs benefit from development finance is to en sure local contractors are employed on infrastructure projects. In this way donor funds remain within a (rural) area and so can enrich the local economy. Usually donor funds go to national or even international contractors, resulting in most funds leaving the area, and the onlybenefit is the facilityitself. C ontracts should promote local content and labour based methods to increase the wider local economic benefits. One of the benefits of preferencing the use of local contractors is that these services remain accessible in the future. For example, local well-diggers would be available for re-deepening work, whereas if larger contractors had been employed, they would only be available for such work at great expense. The use of local contractors helps to keep donor funds within the communityand therefore enriches the local e conomy.
Micro-Finance 7.6 Micro finance enables people to lift themselves to another economic level, and to gain increased income from the resources at their disposal. It does not always require dependence on outside funds, nor assume experience or expertise in organising finance. 7.7 However donors tend to work on the basis that theyare starting from scra tch rather than building on what alreadyexists. For example, a programme byCARE in Mozambique is be ing taken up byothers. Byharnessing local traditional savings schemes (xtique, equivalent to t he tontine systems found throughout Africa at all levels of society) agricultural and water supply development and maintenance are being financed. These are now being organised on a bigger and longer term scale, so that theyaccumulate more funds and include a social safetynet systemto help the poorest and most vul nerable. In theorytheynow reach a scale which means a communitycan replace a pump or invest in small sc ale irrigation. Building up these savings schemes among the poor requires a level of technical and communications skills, but shows that investment capacitycan be built up within communities, not necessar ilyalwaysrequiring dependence on those outside. 7.8 Over 1.5 million households in sub Saharan Africa have invested an average of $100 in their own simple traditional water supplies. This is cumulativelya large investme nt and indicates a capacityfor more. A further $50 could significantlyimprove supplyprotection, and $100 woul d provide a low cost pump and a system little more at risk than supplies costing 40 times as much. DFID funded action-research programmes in Zambia and Zimbabwe show the feasibilityfor this approach. Mali has 180,000 such wells and in West Africa as a whole some 80 million people are using such private supplies in which investment could be encouraged, linked to technical support in source protection and water lifting devices.
49 http://www.engineersagainstpoverty.org/index.asp?PageID%106 3312162012 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 184 International Development Committee: Evidence
8. Makingmarkets work better for poor people
Transforming Traditional Markets 8.1 As the above examples demonstrate there is tremendous potential to combine micro-finance programmes with wider development programmes to develop poor owned businesses that also provide pro- poor goods and services and Make Markets Work For the Poor (MMW4P). It is widelyagreed that the key to sustainable pro-poor development is the participation and empowerment of the poor. The examples given above are mirrored in other sectors and show the potential for market mechanisms to promote self-reliance and for the poor to be their own agents of change. 8.2 However, interventions in markets are never neutral and can create losers as well as winners. Traditional markets bydefinition have evolved over a considerable time an d the subtleties and safeguards that are built in to them maynot be apparent to external actors. Hence great care needs to be exercised when seeking to use market mechanisms to create new opportunities for the poor, especiallyin traditional agricultural and artisan markets. 8.3 For instance introducing low level irrigation technologies such as shaduf or treadle pumps allows development at an appropriate pace and scale to the local context. More ambitious interventions, experience shows, can have unforeseen problems and actuallydisempower and marginal ise the poorest farmers. Steps to bring more people into the formal sector and formalise markets and businesses require appropriate incentives and are best achieved through “pull” rather than “push” mechanisms.
Business Goods and Services (Products,Training,Advice) 8.4 The poor, because of their lack of purchasing power, are often inadequatelyserved bymarkets and consequentlyoften paydisproportionatelymore for goods and services. T here are considerable opportunities to repackage goods and services in ways that are appropriate to poor people and which oVer business opportunities both to small sole traders from poor communities, and national and international business. There is a need for more business support that can identifyand gr ow markets, which would benefit poorer people involving a fusion of business and communitydevelopment ac umen. Through partnerships with overseas companies and training, goods and services can be improved both to meet the needs of overseas buyers and match imports (import substitution).
Infrastructure Services (Water,Sanitation) 8.5 Private/public partnerships (operating at the right level and in the interests of the local community) can greatlyincrease the levels of available water and sanitation. It has b een shown that people, even in the villages, have greater trust in water and other utilities if theyare payin g for it. In one example from South Africa, the introduction of water meters in the townships was so successful, the communityasked for the same for waste50. Equally, however, there are examples of private/public partnerships that have failed or faced considerable opposition from user groups (Dar-es-Salam, Cochabamba, Soweto51). 8.6 The number of people without safe water and sanitation has actuallyinc reased in sub-Saharan Africa in the past decade, and as mentioned the functioning of systems is still poor, despite endless theories of why this should be. Water and sanitation have suVered particularlyfrom a continued set of policies which seem to fit badlywith grassroots priorities and willingness to pay. 8.7 This partlyarises from the common linking in global/donor thinking of water and sanitation to health alone and not to productive use which could both increase the perceived value of water and provide the means to payfor it. This would in turn give people the resources to improve h ealth and nutrition in a much broader and more eVective fashion, and make the economic benefits of such small enterprise greater and more directlyidentifiable. 8.8 If the solutions for water and sanitation provision and maintenance were those for which communities and households would willinglypay,the private sector would have grown up to cater for such a demand, as it has for bicycles, hammer mills, radios and even the few televisions. So there is a need to look at how the private sector is engaged but also at the options that users are given. This does not dismiss existing solutions but suggests that more alternatives need to be considered with communityconsultation. 8.9 The danger is that to change attitudes to what is sustainable from the big steps defined bydonors, to steps appropriate to end-user capacity, will take time to achieve. A frantic push to reach MDGs will increase the risk of hastilyand ill conceived projects being implemented that lack the support or engagement of end users. That said these dangers appear to be accepted byDFID and it is encour aging to see DFID supported infrastructure funds such as CLIFF and PPIAF supporting communityleader ship in project design, funding municipal and national level capacitybuilding in the design and procurem ent of eVective projects and a range of public-private or public-community/local private sector partnership arrangements driven locally.
50 BIS—DFID mid term review 1999 untaken byRural Investment Overseas. 51 http://www.wdm.org.uk/campaigns/aid/ 3312162012 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 185
Other Services (Health,Education) 8.10 If the health and education sectors do not improve in the poorest countries there is little prospect for significant investment and private sector growth. Aids and malaria are having a particularlydevastating impact in sub-Saharan Africa resulting in skills shortages and reduced productivityamongst productive adults. The need to respond to this crisis and to invest (in partnership with government) is recognised by business. Large companies, such as Anglo American have been playing a vital role of addressing Aids not just in its workforce but the wider community. Poor rural infrastructure is one of the contributing factors accounting for poor services and recruitment problems in the rural health and education sectors, which in turn undermines the rural economyand fuels urban migration. Migration to the UK (and other OECD markets) also plays an important role in skills shortages in the health and education sectors of poor countries and needs to be addressed.
9. How is the private sector engaging in development?
Dialogue Between Public and Private Sectors in Developing Countries 9.1 Dialogue at all levels and across all sectors (private, public and civil society) and across diVerent sectors of the economyis much required. More companies are beginning to se e that rather than merelyusing pro-poor development as something “to improve their image”, some are now realising that commercial advantage and ethical policies can proceed hand in hand to mutual benefit. Increasingly, they are seeking ways to become more involved in this sector, and moving away from the out dated agenda of exploitation and corruption.
Business Forums 9.2 There is concern that manyof the business forums initiated bydonors an d overseas organisations spend too much time debating the problems without focussing on their resolution and providing workable solutions. Whilst high level forums have value, their work needs to be related to development outcomes. Cross-sector dialogue and networks are to be encouraged and forums should promote a wide range of perspectives and voices being brought together and “outside the box” thinking to challenge “business as usual” consensus. More time and moneyshould be spent facilitating practi cal programmes and events, targeting practitioners and building partnerships with industryand tra ining providers, with the funds needed to follow up with technical assistance and training.
Industry Groups (EITI, Pharmaceutical Industry,Others ...) 9.3 There is a wealth of evidence supporting the proposition that resource-rich countries suVer a resource “curse” of corruption, conflict and environmental and social deprivation. Promoting transparencyand disclosure of revenue payments and flows represents a significant intervention byDFID and its EITI partners. This information will form an important lever to allow host communities and other stakeholders to hold extractive companies and government partners accountable and promote the sound management of extractive revenues. The recent rises in prices of oil and other minerals, if sustained, will significantlyboost government revenue streams in resource rich countries and represent a huge opportunityto finance poverty reduction measures and to align extractive projects with wider development agendas. EAP’s work with extractive majors and their engineering contractors (Shell, BP, AMEC, Conoco-Philips) demonstrates that significant unrealised opportunities exist to enhance the private sector’s contribution to povertyreduction byaligning business activities with the host country’sdevelopment agen da.
Joint Working with the Public Sector on New Approaches to Encourage Growth in Incomes and Employment 9.4 There is considerable untapped potential to promote the alignment of agendas and competencies for mutuallybeneficial partnerships between public and private sectors. Thi s potential is often not recognised byboth sides. Greater dialogue between the sectors, partnership explora tion exercises plus a proven body of experience will further promote wider adoption of this approach. Better understanding, measurement and reporting of the wider economic benefits brought to local and national economies byprivate sector investment will strengthen this case
10. What aid instruments can be used by donors to encourage PSD? Private benefits versus benefits to society (public goods)—how much is this an issue? 10.1 There is a real role for donors, government and business support agencypartners to playin helping get the private enterprises established, for example, through seed or business incubator programmes. Much support has been targeted at micro enterprises largelyoperating in the in formal sector, however it is necessaryto extend business support to small businesses in the formal sec tor, including business planning, marketing, exposure and investment in modern technology, development of business partnerships and 3312162012 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 186 International Development Committee: Evidence
relevant investment and loan finance. Donors should balance the need to create an enabling environment and support the provision of direct business development support, since there is little benefit in having an enabling environment when the domestic enterprises lack the capacityto r ealise the opportunities
Investment Climate Facility and Other Trust Funds 10.2 Still in its infancy, it is too early to assess the ICF, however the vision of the ICF is shared byus.
Challenge Funds 10.3 Past experience of members shows challenge funds require careful design and marketing. Theyhave previouslysu Vered from lower than anticipated uptake, possiblydue to the lengthyburea ucracyrequired when applying.
Public Private Partnerships in Infrastructure 10.4 There are manydi Verent forms of public-private partnerships and diVerent configurations of responsibilitybetween partners. Private sector partners can range from international corporations or communitybased enterprises. This diversity,the relative infancyof thi s approach and various degrees of success means that it is diYcult to generalise. We welcome DFID’s approach of supporting a diverse range of diVerent approaches as well as investing in capacitybuilding programmes.
Ethical Funds 10.5 Sociallyresponsible investment (SRI) or ethical funds is a small but rapidlygrowing sector. Within this sector, there is considerable potential to promote social outcomes and influence corporate social responsibility. However SRI criteria are criticised for the lack of rigour and its focus on “doing no harm” rather than “doing good”.
11. Corporate Social Responsibility and beyond 11.1 More companies are recognising that rather than merelyusing CSR as so mething to improve their image, that commercial advantage and high ethical standards can proceed hand in hand for mutual benefit of business and society. Increasingly, international companies are seeking ways to become involved in the povertyreduction agenda and recognising the commercial and reputationa l risks of business based on exploitation and corruption do not fit with this agenda. 11.2 CSR is evolving and as Gordon Brown recentlystated, it has moved far be yond traditional philanthropytowards the heart of business management. This is one area wh ere the UK government has given a lead, with a minister for CSR and CSR academy. One of the most promising areas is through the development of improved business management processes that embed global perspectives and social, environmental and ethical considerations within core business decision making. Increased understanding of how this is achieved will give engineers the tools and know-how to respond and continue this trend from the peripheryto the heart of business. 11.3 Numerous examples of guidance and best practice now exist. One such example is International Alert’s Conflict Sensitive Business Practice manual for extractive industries52. These tools address all stages of the business cycle from project design, impact assessments and stakeholder engagement to procurement, risk management and reporting. 11.4 There is evidence that there have been some significant strides forward bysome firms taking Corporate Social Responsibilityveryseriouslyand thus being able to mak e a positive if for a moment small impact. Equally, however, there are examples where individual projects are little more than a “green” or ethical conscience cleaner and have made little or no impact on overall unethical corporate practices—this has to change. Multi-Sector partnerships have the abilityto bring partne rs together on the basis of their “core competencies”. DiVerences between the sectors are becoming blurred as language, methods and approaches cross-fertilise. Despite this trend, organisations retain distinctive core competencies—ie the things that theydo best and which are integral to their business operation s—that when combined with those in other sectors, can help solve complex problems more eVectivelythan theycould on their own. Business can add value to the work of NGOs and vice versa. 11.5 However the uptake of CSR and its application to core business practice is greatest in industries with a high public profile and considerable social risks. The challenge is to build on this and promote the wider awareness and uptake to all sectors of the economyand to all scales of busin ess. A balance is also required between voluntaryand regulatoryapproaches. Voluntaryapproaches rely on there being a business as well
52 http://www.international-alert.org/publications/234.php 3312162012 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 187
as ethical case to drive greater social performance. These two approaches can come together through the strengthening of regulatoryand market mechanisms which in turn drive gre ater voluntaryaction. 11.6 UltimatelyCSR is based on integrityand ethics. ICE’s presidential c ommission on the role of engineering in povertyreduction, “Engineering without Frontiers” has h eld a series of evidentiaryhearings and consultations out of which has emerged much of the evidence presented here as well as a set of principles to guide the engineering profession. 53 February 2006
Memorandum submitted by Professor Keith Palmer54
Summary Over the past 20 years per capita incomes in Africa have fallen and poverty has increased substantially. On current trends there is no prospect of the MDG povertyreduction target b eing met. GDP growth rates sustained at about 6–7% per annum until 2015 are needed if the povertyreduc tion target is to be met. The national private sector must be the engine of growth. Agriculture, agribusiness and agriculture-supporting infrastructure are the keyto achieving rapid growth with povertyreduction in Africa. Theyare the sectors in which SSA has a dyn amic comparative advantage and in which rapid growth can be expected to benefit the great majorityof the population currentlyliving on verylow incomes. Pessimism about agriculture in Africa is misplaced. T here is great under-exploited potential to grow incomes rapidlyin both agricultural production and in r elated industrial and services businesses along the agricultural value chain. Good government policies at the macro-economic and sector level are essential but, on their own, not suYcient to stimulate private investment. If the economies of the region are to launch onto a higher growth trajectoryand reverse the trend of increasing povertythen—in addition t o better macro- and sector policies—new targeted initiatives are needed to overcome market and government failures and to stimulate a major broad based improvement in private incomes in the agricultural and agribusiness sectors. The PIDG initiatives to support infrastructure investment in low income developing countries have demonstrated the success of new and innovative approaches to addressing market failures. In particular Infraco has shown how it is possible to act “on the ground” in partnership with the national private sector and local and national governments to overcome coordination failures and accelerate investment in viable and sustainable infrastructure investment. Guarantco has shown how a well designed credit enhancement initiative can overcome failure in the domestic financial markets and therebymobilise national savings for productive and sociallybeneficial investment. Similar initiatives in the agriculture and agri-business sectors hold the promise of major improvements in growth and povertyreduction in Africa. A strategic programme of linked an d mutuallysupportive initiatives—drawing on the successful experience of PIDG in infrastructure—is proposed. The initiatives are: (i) expanded resources to support the transfer, adaptation and uptake of new improved agricultural technologies particularlybysmallholders, building on such existing in itiatives as the AATF and GALV; (ii) creation of a partial credit guarantee facility(similar to Guarantco) th at would share in the front-end risks of new investment in agriculture and agribusiness. It would have a special “window” to enable smallholders to access guarantees on preferential (subsidised) terms; (iii) creation of an agricultural development company, Agdevco, to help national private investors to structure and finance complex agriculture/agri- business investment packages, therebyreducing transactions costs and r isks for private investors. It would draw on the lessons learned from Infraco.
What can the private sector do to alleviate poverty? 1. Per capita incomes in Sub-Saharan Africa over the past 40 years have been static and over the past 20 years they have fallen. Average incomes in 2000 were about 10% lower than in 1980 (UNCTAD 2001). Povertyover the period increased in absolute terms byabout 60 million peo ple and in relative terms from about 48% of the population in 1974 to about 60% in 1995 (Artadi and Sala-i-Martin). In contrast in most of Asia rapid economic growth has been accompanied bysharp reductions in p overty(DFID 2005). 2. Without major sustained increases in per capita GDP growth rates there is no prospect of reducing povertysignificantly.To achieve the Millennium Development Goal (MDG) o f halving extreme povertyby 2015, GDP growth will need to average 6–7% per annum from now until 2015 (IMF 2004, Artadi and Sala- i-Martin).There is nothing to suggest—on current trends—that growth rates even close to these levels will be achieved in SSA.
53 http://www.commissionforafrica.org/french/consultation/submissions/ro/sb-nov-dec04-115.pdf 54 Keith Palmer is Chairman of Emerging Africa Investment Fund and Infraco Ltd and a non-executive Director of Guarantco, all of which are donor supported PPPs focussed on infrastructure investment in low income developing countries. 3312162013 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 188 International Development Committee: Evidence
The national private sector must be the engine of growth 3. The much higher rate of economic growth necessaryto achieve the MDGs can onlybe achieved if there is a major increase in profitable investment bythe private sector (UNIDO 20 04). This will generate jobs and higher wage income, boost national savings and induce greater domestic demand, which in turn will stimulate more private investment. It will also boost the national tax base permitting higher public spending on social services and therebyfaster progress towards achieving the MDGs . Further it will strengthen civil societyand participation bythe public in national development. 4. Higher private investment and more rapid growth will occur onlyif there are suYcient profitable opportunities. Equallygrowth will tend to have greater povertyreducing impact when it is focussed in sectors where the poorest people are currentlyengaged. In Sub-Saharan Af rica that means a poverty reduction strategythat focuses on profitable investment and growth of agr iculture and value adding agri- business. 5. The national private sector is the keyto growth and development. The nat ional private sector in agriculture in SSA is made up of three groups: established larger businesses, small and medium size enterprises (SMEs) and smallholders (familyfarmers). Growth and povert yreduction require that all three groups contribute to, and benefit from, national development. Generallyt here will be a need to stimulate modern intensive agriculture and competitivelyscaled agribusiness ven tures around support for larger national farmers and SMEs. Extending the benefits of growth to the manytens of millions of smallholders is often best achieved byusing modern agribusinesses as hubs around which smallholder outgrower operations can be further developed. 6. Foreign corporate investors also have an important role to playalongsi de the national private sector in agriculture and even more so in agri-business. Companies based in the OECD countries and in Asia and South America have important expertise to contribute to SSA in agriculture and agri-business as well as access to, and knowledge of, foreign markets. Companies based in Asia and South America in particular have recent experience of successfullydeveloping profitable tropical an d sub-tropical agri-enterprises. Some of them are alreadyengaged in African agri-enterprise although, as yet,o n a limited scale. 7. The challenge in SSA is to support all three groups of the national private sector and to create eVective and mutuallybeneficial partnerships between national and foreign privat e investors and with the international development community.
Agriculture, agribusiness and related infrastructure are key 8. It is increasinglywell understood that agriculture and value adding ag ri-business55 are keyto achieving rapid growth of incomes and povertyreduction in SSA (eg UNIDO 2004). Agric ulture and agribusiness are sectors in which SSA has a dynamic comparative advantage in a globalising world (Wood and Mayer (2001), Wood (2002))56. Theyare also the sectors in which the great majorityof the population are engaged, and will continue to be engaged for at least the next 25 years. Agriculture is the sector in which almost all the extremelypoor are engaged. Without rapid growth in agricultural and agri -business incomes, the MDG povertyreduction target cannot be met (Fafchamps, Teal and Toye). 9. Pessimism about the prospects for agricultural productivityin large p arts of Africa are not justified (Sanchez 2001). Soil and climate conditions in manyareas of SSA are no wors e, and in some cases better, than the conditions encountered in other tropical and sub-tropical regions of the developing world, where yield per hectare and yield per capita are much higher and where growth in incomes of farmers has been sustained at a high rate and povertyhas fallen sharply(Conway1997, IFPRI 2001). It is true that in current circumstances there are few profitable agricultural opportunities to be exploited. However this is because there has been verylittle investment in agriculture with the adoption of i mproved agricultural technologies and modern intensive agricultural production methods, access to agricultural inputs at lower cost and more investment in improved cost-eVective infrastructure, rapid growth in agricultural incomes is achievable (CEPA 2002–1). 10. Nor is pessimism about access to agricultural markets justified. Most primaryagricultural output in SSA is supplyconstrained, not demand constrained. SSA alreadyhas prefer ential access to OECD markets but this access is not being suYcientlyexploited (Page 2004) 57. Demand for agricultural products, notably cereals and meat, is growing rapidlyin Asia but SSA is not meeting that grow ing demand. In SSA itself dependence on food imports has increased as the supplyof food products fro m within the region has
55 The term agribusiness is used here to include all industrial and service businesses that provide inputs to agriculture along the entire value chain. It includes production and/or distribution of eg seeds, fertiliser, pesticide, herbicide; primaryproduct processing eg canning, milling; and post-harvest services eg bulk storage, packaging, export services. 56 These are not the onlysectors in which SSA has a comparative advantage. Oth ers include tourism in certain locations and the extractive industries. These other sectors can make an important contribution to growth and povertyreduction in some countries. However agriculture and agribusiness are the onlysectors whe re a large proportion of the population can expect to benefit from sector growth over the next 25 years. 57 This does not mean that improvements in OECD agricultural trade policies are not important, but theyare not the critical constraint in the short term in most SSA countries. The immediate problem is on the supplyside. The main access constraint to the OECD markets is in processed foods where tariV structures act to deter value added processing in Africa. However there is a small number of products important for Africa where demand constraints are currentlybinding eg cotton. 3312162013 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 189
stagnated. If output from the region can be increased and transport costs reduced then regional and international markets can easilyabsorb sustained rapid growth in output from the region for the foreseeable future.58 Moreover even producers of demand constrained products such as coVee and cocoa can enjoyvery large increases in on-farm incomes if production, transport and marketing costs can be reduced. 11. The argument about whether agriculture or industryis the keysource of economic growth in Africa is a false dichotomy. There are many opportunities to grow output from both agriculture and value-adding agribusiness (UNIDO 2004). Often, to be profitable, agribusiness opportunities require simultaneous growth in agricultural output and complementaryinvestments in infrastr ucture. The demand for agricultural inputs such as fertiliser and pesticides is a function of the volume of agricultural production and agricultural incomes. Agricultural processing businesses such as canning and milling need reasonable certaintyabout the quantity,qualityand cost of agricultural inputs tha t will be available. This is a function of the volume and qualityof local agricultural production which itself de pends in part on the use that is made of agricultural inputs eg fertiliser and pesticides. Investments in input and output storage, packaging, distribution and marketing can improve access to, and reduce the cost of, agricultural services for farmers and therebyboost on-farm productivityand incomes. These investments no t onlyincrease on-farm incomes but also generate growth in employment and incomes in oV-farm agriculture-related activities. 12. Numerous unexploited potentially-profitable opportunities for investment in agri-business exist in East, West and Southern Africa along the entire value chain. Some of these opportunities are being exploited (Technoserve 2004) but manyare not. Often the reason these investments ar e not undertaken, or are unprofitable when undertaken, is a failure of coordination of investments along the value chain, each of which is dependent for success on complementaryactions byothers. In West Africa potentiallyviable fertiliser production capacityis currentlymothballed while locallypr oduced natural gas (the feedstock for the plant) is being flared and local farmers payhigh prices for imported fer tiliser. In several countries in the region product processing facilities have been built and then closed for want of reliable supplies of agricultural inputs of adequate qualityand because of the poor reliabili tyand high cost of intermediate inputs such as electricityand water. In East Africa in recent yearsincrea sed food production bysmallholders rotted in the fields for want of adequate modern post-harvest facilities such as bulk storage, transport and marketing services, while urban consumers ate expensive imported food. 13. Figure 1 sets out the requirements for profitable investment along the agricultural value chain. The development challenge is to find eVective mechanisms for coordinating essential complementary investments, therebyreducing the risks of coordination failure.
Fig 1
REQUIREMENTS FOR INCREASING AGRICULTURAL AND AGRIBUSINESS INCOMES Simultaneouslyto: — Access improved agricultural technologies. — Access reliable and less expensive agricultural inputs eg fertiliser, pesticides. — Access improved reasonablypriced post-harvest services eg bulk storag e, marketing services. — Access improved reasonablypriced infrastructure services eg roads, ir rigation, electricityetc. — Increase national value added byinvestment in profitable processing eg m illing, canning etc.
14. Currentlysmallholders in SSA have particularlypoor access to agricu ltural inputs and their on-farm costs are veryhigh. Improving their access to better seeds, more fertilis er and pesticides and reducing their costs of production can make a direct and significant impact on poverty. 15. Investment in aVordable agriculture supporting infrastructure is also crucial. If investors in agriculture and agribusiness have to absorb the full front-end costs of providing improved infrastructure then manyinvestments will become unprofitable. Yet their investment will onlybe profitable if improved infrastructure (eg irrigation, electricity, port and road transport) is available as and when needed—and at a cost that allows the investment in agriculture and/or agribusiness to be profitable. The challenge is to find ways to provide and finance this infrastructure and make it available to farmers at reasonable cost, thereby making profitable investments in agriculture and agribusiness possible. 16. The challenge of providing cost-eVective infrastructure services for smallholders is particularlyacute. The unit cost of infrastructure supplied to small rural communities is high. Smallholders have low purchasing power. User charges set to recover the full cost of the services will usuallybe una Vordable. However, if the services are not provided to smallholders then theywill no t be able to benefit significantly from growth in national agricultural production. The challenge is to find ways to eYcientlydeliver and finance aVordable infrastructure services for smallholders.
58 Because SSA agricultural output is currentlyso small, large percentage g rowth in output from the region adds onlymarginally to total world supply. 3312162013 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 190 International Development Committee: Evidence
17. An agriculture and agribusiness focussed strategyfor povertyreduct ion must be based around investment in commercial farming and processing bylarger national busin esses and bySMEs. This is necessarybecause of the strong links between scale of production, produc tivityand competitiveness. Many of the production, infrastructure and marketing costs in agriculture and agri-business are highlyscale dependent. If production is to be competitive in world markets (and in competition with imports into local markets) then fixed costs must be spread across a sizeable volume and value of production. 18. One proven wayto ensure that SMEs and smallholders benefit from investm ent in modern commercial agriculture is to create strong links between commercial farmers and rural smallholders and SMEs through development of outgrower schemes. Around the modern farm ‘hub’, smallholder support services and rural infrastructure services can be built. Technoserve (2004) highlights the potential of this approach and identifies a number of interesting success stories in Africa.
Good government policies are essential but not suYcient
19. It is now widelyaccepted that without appropriate government policie s there can be no growth in private investment or in povertyreduction: — There must be law and order, reasonablyrobust institutions of governmen t and respected rules of business. — There must be sound macro-economic management. In the past, poor macro-management has often resulted in maintenance of an uncompetitive exchange rate, in high domestic inflation and high domestic real interest rates. These policies have inevitablydeterr ed private investment. — There must be appropriate micro-economic policies that encourage and facilitate private investment. Over the past 40 years, bad government policies in agriculture in SSA have been the prime cause of poor performance in manycountries (Fafchamps et al). State marketing boards were often used to excessivelytax agricultural producers, destroyingin centives to invest. Excessive regulation has bred corruption, increased costs and further harmed incentives to invest. Although manyimprovements have been made in manycountries in recent years,there r emain manyunduly burdensome sector policies that continue to deter investment in modern agriculture (Tripp 2002). 20. Although good government policies are necessary, they are not suYcient. As UNIDO observes, “The incipient [national] private sector can hardlybe expected to engage in pr oductivitycatch-up with international competition [if] the policyenvironment does not go beyond good macroeconomic management, improved governance and a healthyinvestment climate” (UNID O 2004). 21. There are three reasons for arguing that good policies alone are not suYcient: — The immature nature of the agriculture and agribusiness sectors in SSA is such that theyrequire sustained public good investment. In the OECD countries it has long been recognised that the agricultural sector in its earlystage of development required heavypubl ic funding in such areas as extension and information services, credit support for farmers and anticipatorydevelopment of agriculture-supporting infrastructure eg irrigation, roads, electricity. In SSA comparable support for agriculture and agribusiness is needed over the short and medium term if strong competitive businesses are to emerge. However over the past 40 years direct government involvement in agriculture in SSA has done far more harm than good. Most governments in the region have now withdrawn or de-emphasised involvement in agriculture. Yet the need for support to these important sectors remains. The challenge is to find new ways of providing eVective support to build a competitive private sector in agriculture and agribusiness. — In SSA there are pervasive market failures. Unless theyare addressed e Vectivelytheywill deter private investment. There are four important failures: (i) coordination failures which arise when complementaryinvestments in related activities along the value chain do not take place as and when expected, with adverse implications for the return on investment at other points along the value chain; (ii) increasing returns to scale and barriers to entrywhich a re widespread at various points along the agricultural value chain. As is well known, the consequence is capture of monopolyrents byintermediaries and large buyersat the expense of small f armers that lack bargaining power; (iii) failures in risk markets. Even when governments have taken appropriate action to reverse the poor policies of the past, there is a legacyof high per ceived countryrisk for national and foreign private investors. This reduces the availabilityan d increases the cost of finance, which in turn reduces the amount of profitable investment and reduces producer incomes. Manypotentiallyprofitable investments are rendered uneconomic and do no t proceed because of these market failures (CEPA 2002–1)59.
59 Extensive discussion of the market failures and transactions costs in agriculture and agribusiness is contained in CEPA 2002–1. 3312162013 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 191
— Several governments in SSA in recent years have revamped their macro- and micro-policy environments to stimulate private investment. The response byprivate in vestors has generallybeen disappointing. The evidence indicates that in addition to continuing eVorts to improve the macro- and micro- policyenvironment, host governments supported bydonors need in addition to develop new eVective interventions targeted to overcome these government and market failures. 22. Even if rapid growth in agricultural and agribusiness incomes can be achieved there remains the question of whether the verypoor will participate su Ycientlyin the benefits of growth. Historysuggests that the low purchasing power and risk aversion of smallholders combined with their limited access to credit and information about new technologies and limited access to infrastructure at a reasonable cost maywell act to limit the benefits that accrue to them as large and medium size enterprises grow. 23. Significant expenditures on agricultural extension and information services, access to infrastructure on aVordable (subsidised) terms, expanded access to credit and possibly“intr oductory” price discounts on keyagricultural inputs eg new seed varieties and farmer credit are likely to be needed if risk averse smallholders are to be persuaded to adopt new technologies and approaches that will benefit them in the longer term.
Constraints on investment in agriculture and agri-business in Africa 24. The keyconstraint on investment in agriculture and agri-business is n ot availabilityof finance. In fact the commercial banks in Africa are opportunityconstrained and the DFIs ar e veryliquid. The key constraint is absence of suYcient profitable investment opportunities, itself caused bythree things : (i) absence of the complementaryinfrastructure that is needed to deliver inp uts and market outputs, cost eVectively. A particularly critical “gap” in southern Africa is the almost total absence of irrigation—this is a major contributoryfactor to the problems of famine in large parts of Afri ca at the present time; (ii) absence of parties able and willing to take the coordination risks, ie the risk that required complementary investments along the value chain are not made and therefore that all investments are rendered unprofitable; and (iii) scarcityof experienced commercial farmers which raises costs a nd causes providers of finance to limit exposure to the sector. Small farmers are particularlybadlya Vected bytheir inabilityto finance agricultural inputs such as improved seeds and fertiliser. Theyhave no ac cess to irrigation (therefore are veryexposed to drought), usuallyhave verypoor post-harvest storage fac ilities and receive poor prices for their outputs, which reduces on-farm incomes drastically(CEPA 2004)60.
PIDG Initiatives to stimulate infrastructure investment in low income developingcountries 25. It is a far from a simple matter to design and implement eVective interventions to overcome market failure in low income developing countries. There are some interesting and relevant lessons to be learned from the successful and innovative initiatives supported bythe Private I nfrastructure Development Group (PIDG). PIDG is a grouping of four European donors (Holland, Sweden, Switzerland and UK) and the World Bank which has provided support for a range of new approaches to stimulate infrastructure investment in low income developing countries. The initiatives described here are: — Infraco is a donor-funded, privatelymanaged infrastructure developme nt companywhose mandate is to work with the national private sector and government in low income developing countries to create profitable infrastructure investment opportunities. Once Infraco has created a profitable opportunityit seeks to attract private investors and debt prov iders to invest in the opportunity. Infraco has proven to be highly eVective in identifying and implementing infrastructure opportunities in Africa with high povertyreduction pote ntial. Infraco achieves very high leverage (a small Infraco investment stimulates a large investment bythe private sector and DFIs), it is catalytic (stimulating private investment that otherwise would not take place) and it never substitutes for the private sector (because it is not allowed to remain a majoritypartner once the investment is up and running). Moreover, although Infraco is grant funded it expects to be able to recover its costs from incoming investors and will re-invest its capital to fund further development activities. Further information about Infraco is set out in Annex 1 and on the website www.infracolimited.com . — Guarantco is a credit guarantee companywhose mission is to stimulate gre ater local currency lending to infrastructure investments. It does this byproviding partial credit guarantees to local currencylenders (eg pension funds) making loans to infrastructure inves tments in low income developing countries. It mayprovide “credit enhancement” to investment s bythe public and/or private sector. Guarantco was set up to provide a targeted intervention to overcome failure in the local currencyfinancial markets. It will reduce risks facing national sav ers and therebyincrease the flow of national savings into national infrastructure investment and improve the qualityof the institutions’ portfolios. It will also stimulate greater investment in infrastructure byreducing the exchange rate risks inherent in financing domestic infrastructure with foreign currency denominated debt.
60 The constraints on agricultural and agribusiness investment were the subject of extensive consultation in work done for DFID in 2004—“Agricultural Investment in Africa—An Overview”, CEPA 2005. 3312162013 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 192 International Development Committee: Evidence
— The Emerging Africa Infrastructure Fund (EAIF) is a public private partnership debt fund that lends to support infrastructure investment in Sub-Saharan Africa. An equityinvestment in the fund bythe PIDG donors enabled a multiple of the value of the equityto be rai sed from commercial banks and Development Finance Institutions (DFIs) for on-lending to investors in Africa on terms more advantageous than would otherwise have been possible.
Targeted interventions in agriculture and agribusiness 26. Errors in the design of interventions designed to address market failures in agriculture in some developing countries in the past have made matters worse, not better! A key question is whether it is possible to design and implement new initiatives that can be expected to be eVective. The success of the PIDG initiatives in addressing market failures in infrastructure suggests that similar approaches in agriculture and agri-business—where the challenges are similar—are worthyof detailed c onsideration. 27. Certain keyprinciples should inform the design of interventions in ma rkets: — Theyshould correct market failures, not distort markets. — Theyshould lever-in private sector risk capital, not crowd it out. Priva te sector parties should always share in the business risks. — Theyshould focus on investments that are expected to be viable and sustai nable without ongoing support over the medium term and that will stimulate additional productive investment growth and povertyreduction. — Charges for services provided to large and SME beneficiaries should be set such that initiatives can be expected to be self-financing over the long term. — Grant-funded subsidies to stimulate smallholder participation in the modern agricultural and agribusiness economyshould be targeted on those that are poorest, and the yshould be limited in amount per person or household.
Proposed initiatives to support agriculture and agribusiness in Africa 28. There are three initiatives proposed here—each of which would address specific constraints on investment in agriculture and agri-business. The ideas draw directlyon t he experience of the PIDG initiatives in the infrastructure sector described above and on work undertaken on agricultural development for DFID (CEPA 2002–1, CEPA 2002–2, Tripp 2002). 29. Adaptation and Uptake of Improved Agricultural Technologies. There are alreadya number of valuable initiatives to support access byAfrican farmers to agricultura l technologies from the OECD and to support their adaptation, consenting and use in SSA. One such initiative is the Africa-led Africa Agricultural TechnologyFoundation (AATF), a Rockefeller Foundation sponsored initi ative supported byDFID. AATF is a PPP between private sector companies in the OECD, private sector agribusinesses and farmers in SSA and governments. It provides royalty free access to technologies owned byOECD companies for adaptation and use in SSA61. Another is the Global Alliance for Livestock Vaccines (GALV), a partnership between OECD-based private sector animal health companies and local animal health stakeholders including livestock keepers in low income developing countries. The distinctive feature of these initiatives is that theyprovide African farmers and livestock keepers with access on f avourable terms to existing agricultural technologies held bythe private and public sector in OECD co untries that can be adapted for use in African conditions; and a mechanism for reducing the cost, and speeding the process, of adaptation and uptake byAfrican farmers. An expansion in the resources available to t hese sorts of initiatives focused in particular on uptake bysmallholders would address one keyarea of marke t failure and contribute directly to povertyreduction. 30. Partial Credit Guarantees. A major constraint on agricultural investment in low income countries is failure in the market for risk capital. Despite the fact that commercial banks and DFIs have plentyof finance available in principle for agriculture and agribusiness, in practice there are veryfew investments taking place. One keyreason for this is that there are no parties able and willing t o take the coordination risks referred to above. Another is the absence of loan collateral from small farmers. An eYcient and eVective wayto address this failure is through the provision to agricultural produ cers—and providers of credit to the agricultural and agribusiness industries—of partial credit guarantees. For a guarantee scheme to be eVective it must be well designed. One or more private sector intermediaries should be appointed to administer the scheme and fees to the intermediarywould be performance related 62. Partial credit guarantees would be granted onlywhen theywould lever in private sector equityand/or debt—no t crowd it out. The guarantor would onlyever assume a portion of the investment risks. Guarantee fees wo uld be set, for large and medium
61 Further details about AATF can be found at www.aftechfound.org and about GALV at www.galv.org. Other comparable technologytransfer initiatives also exist, details of which are contain ed in CEPA 2002–1. 62 A successful model for contracting private sector intermediaries on a performance-linked basis has been implemented bythe Emerging Africa Infrastructure Fund. 3312162013 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 193
size beneficiaries, at a level that broadlyreflected the cost of risk transf er. Bysharing front-end risks such a scheme would stimulate private investment bynational companies that ot herwise would not take place. This concept draws directlyon the PIDG experience with Guarantco. 31. It is unlikelythat smallholders would be able to a Vord cost-reflective guarantee charges. Therefore the charges for such farmers should be subsidised at least for period of time, until productivityand incomes have risen. 32. Agricultural Development Company(Agdevco). Agdevco would be a donor funded agri-business development company. It would work with the national private sector, national and local governments, the foreign private sector and development finance institutions to structure a coordinated financeable agri- business investment package. Like Infraco, it would act as “principal” to structure commercial agreements with the aim of reducing transactions costs and risks. It would seek commitments in principle to provide finance to these investments from private sector and lenders and DFIs. Agdevco would be donor funded but managed byexperienced private sector professionals. The management wou ld be remunerated byreference to achievement of pre-agreed measures of success in stimulating new agricultural and agri-business investment. The concept of—and rationale for—Agdevco is described in detail in CEPA (2002–01) and in CEPA (2003)63. The concept is verysimilar in manyrespects to Infraco, the successful PI DG- funded infrastructure development company.
Conclusions and Recommendations 33. The conclusions and recommendations of this memorandum are: — Over the past 20 years per capita incomes in SSA have fallen and poverty has increased substantially. On current trends there is no prospect of the MDG poverty reduction target being met. GDP growth rates sustained at about 6–7% per annum until 2015 are needed if the poverty reduction target is to be met. — The national private sector must be the engine of growth. Established larger national private sector companies, SMEs and smallholders must all contribute to national development if both rapid growth and povertyreduction are to be achieved. The national private sect or must create eVective, mutuallybeneficial partnerships with foreign private sector companies. Considerable relevant business experience and expertise can be found in Asia and South America as well as in the OECD countries. — Agriculture, agribusiness and agriculture-supporting infrastructure are keyto achieving rapid growth with povertyreduction in SSA. Agriculture and agribusiness are th e sectors in which SSA has a dynamic comparative advantage and in which rapid growth can be expected to benefit the great majorityof the population currentlyliving on verylow incomes. Pes simism about agriculture in SSA and about demand side constraints are misplaced. The argument about “either agriculture or industry” is misconceived. There is great under-exploited potential to grow incomes rapidlyin both agricultural production and in related industrial and services businesses along the agricultural value chain. — Good government policies at the macro-economic and sector level are essential but, on their own, not suYcient to stimulate private investment either on the scale required or in a waythat suYcientlybenefits the majorityof smallholders. Sustained investment in in frastructure to support agriculture and agri-business is needed. Important market failures aVecting all producers increase transactions costs and risks and therefore deter private investment. Smallholders face special problems that need to be addressed if theyare to participate fullyin the be nefits of economic growth. If the economies of the region are to launch onto a higher growth trajectoryand reverse the trend of increasing povertythen—in addition to better macro- and sector p olicies—new targeted initiatives are needed to overcome the market failures and stimulate a major broad-based increase in private investment in the agricultural and agribusiness sectors. — It is no easymatter to intervene in markets and end up making them better, r ather than worse. Certain keyprinciples must be complied with: (i) interventions should le ver-in private sector risk capital, not crowd it out; (ii) interventions should focus on creating viable and sustainable businesses without the need for ongoing support in the medium term; (iii) charges for services provided to large and SME beneficiaries should be set such that theycan be ex pected to be self- financing over the medium term; and (iv) donor-funded grants to stimulate smallholder participation in the modern agricultural and agri-business economyshou ld be temporarysubsidies deployed where sustainable businesses are expected to result once technologies and farming practices have changed. — The PIDG initiatives to support infrastructure investment in low income developing countries have demonstrated the success of new and innovative approaches to addressing government and market failures. In particular Infraco has shown how it is possible to act ‘on the ground’ in partnership with the national private sector and local and national governments to overcome
63 CEPA “Justification and Possible Modus Operandi for Public Sector/Donor Support for Generation of Business Opportunities in Developing Countries” produced for DFID, 2003 built on the ideas discussed in CEPA (2002–01). 3312162013 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 194 International Development Committee: Evidence
coordination failures and accelerate viable and sustainable infrastructure investment. Guarantco has shown how a well designed credit enhancement initiative can overcome failure in the domestic financial markets and therebymobilise national savings for productive in vestment and improve the qualityof the investment portfolio of local financial institutions eg pension funds. — Similar initiatives in the agriculture and agri-business sectors hold the promise of major improvements in growth and povertyreduction in Africa. A strategic progr amme of linked and mutuallysupportive initiatives—drawing on the successful experience o f PIDG in infrastructure— is proposed. The initiatives are: (i) expanded resources to support the transfer, adaptation and uptake of new improved agricultural technologies particularlybysmallh olders, building on such existing initiatives as the AATF and GALV; (ii) creation of a partial credit guarantee facilitythat would share in the front-end risks of new investment in agriculture and agribusiness. It would have a special “window” to enable smallholders to access guarantees on preferential (subsidised) terms; (iii) creation of an agricultural development company, Agdevco, to help national private investors to structure and finance complex agriculture/agri-business investment packages, therebyreducing transactions costs and risks for private investors. — Adopting these strategic initiatives does not necessarilyrequire crea tion of anynew institutions. Theycan be delivered using existing development institutions and/or byc ontracting-out services provision to the private sector with service providers paid on a performance-linked risk-sharing basis. — The required additional donor funding would not be great. There would be verysignificant financial leverage—Infraco expects its funding to leverage new investment as much as 50 times. Total new investment and finance from the private sector would be a verylarg e multiple of donors’ contributions.
References Artadi & Sala-i-Martin “The Economic Tragedyof the 20th Century:Growth i n Africa”, National Bureau of Economic Research Working Paper 9865, 2003. Bouton & Sumlinski, “Trends in Private Investment in Developing Countries: Statistics for 1970–98” Discussion Paper 21, International Finance Corporation, 2000. Cambridge Economic PolicyAssociates (CEPA), Overseas Development Inst itute (ODI) & Natural Resources Institute (NRI) “Supporting Pro-Poor Private Sector Rural Enterprise Scoping Study” produced for Department for International Development UK, March 2002. CEPA “Mechanisms to Support Uptake and Use of Pro-Poor Agricultural Technologies” produced for DFID, Nov 2002. CEPA “Justification and Possible Modus Operandi for Public Sector/Donor Support for Generation of Business Opportunities in Developing Countries” produced for DFID, 2003. CEPA “Agricultural Investment in Africa: An Overview” (unpublished) for DFID, Jan 2005. Conway“The DoublyGreen Revolution” Penguin, 1997. DFID, “DFID & the Private Sector: Working with the private sector to eliminate poverty”, 2005. Fafchamps, Teal and Toye “A Growth Strategy for Africa” produced for DFID, 2001. International Finance Corporation “Building the Private Sector in Africa: To Reduce Povertyand Improve People’s Lives”, 2000. International Finance Corporation “Trends in Private Investment in Developing Countries: Statistics for 1970–98”, 2000. International Finance Corporation “Sub-Saharan Africa: Seeking Sustainable Economic Growth”, 2003. International Food PolicyResearch Institute “2020 Global Food Outlook” , 2001. International MonetaryFund “World Economic Outlook”, 2004. Page “Making Doha a Better Deal for Poor Countries’ Financial Times”, 2004. Palmer “Promoting Private Investment in Developing Countries: Overcoming Market Failures”, 2003. Sanchez “Tropical Soils, Climate and Agriculture: an Ecological Divide?” 2001. SIDA “Making Markets Work for the Poor” 2003 Technoserve “Partnerships for Agribusiness Development, Agricultural Trade, and Market Access; A Concept Note for NEPAD”, Nov 2004. Tripp “Strengthening the Enabling Environment for Agricultural TechnologyDevelopment” ODI, 2002. UNCTAD “Economic Development in Africa: Performance, Prospects and PolicyIssues”, 2001. UNIDO “Industrialisation, Environment and the Millennium Development Goals in Sub-Saharan Africa”, 2004. Wood & Mayer “Africa’s export structure in a comparative perspective” Cambridge Journal of 3312162013 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 195
Economics, 2001. Wood “Could Africa be Like America?” DFID 2002. World Bank, “Private Sector Development Strategy: Directions for the World Bank Group” 2002. World Bank, “World Development Report 2004: Making Services Work for Poor People” 2003. World Bank, World Development Indicators 2004.
Annex 1
FURTHER INFORMATION ABOUT INFRACO
Rationale,Objectives and Business Plan The rationale for Infraco is that there are few international private investors willing to invest in earlystage infrastructure project development activityin low income developing co untries; and few national private investors with the requisite expertise and resources. Infraco has been created to act as principal—ie co- owner—with the objective of developing projects to the point where private sector expertise and funding can be secured to take the projects forward. Projects will be sold on to the “true” private sector at or prior to financial close with Infraco as appropriate remaining as a minoritypart ner in the ventures. In this way Infraco will be trulycatalytic—witha small but high risk investment leve raging in large amounts of private sector capital into projects which either would not have proceeded at all, or not as quicklyhad Infraco not been involved. Infraco has clear guidelines for prioritising its activities set out in the approved Operating Policies. These prescribe the countries where it mayoperate (low income developing count ries), the prioritythat must be given to pro-poor activities and establishing the requirement that prioritybe given to projects where the national government is supportive and where Infraco’s involvement is likelyto catalysenew investment.
Infraco Strategy Infraco’s strategyhas been formulated to conform to the objectives and Op erating Policies agreed by PIDG. A number of innovative features of the strategyhave been identified, each designed to enhance the povertyreducing impact of Infraco. Theyinclude: (i) innovative mechani sms for accessing private sector expertise and finance for publicly-owned water and sanitation developments; (ii) leveraging existing infrastructure assets currentlyused solelybymining companies for the b enefit of poor people living in the region; (iii) new approaches to stimulating infrastructure investment to support agribusiness investment— centred on creation of infrastructure service companies that would own and lease infrastructure eg small dams for irrigation bysmall farmers; and (iv) the creation of renewable en ergyservices companies. Several of these ideas have alreadybeen progressed byInfraco.
Progress to Date The manydiscussions that have taken place in-countrywith national gover nments, local governments, State-owned infrastructure enterprises (SOIEs) and national private sector companies have strongly confirmed the need for Infraco. In almost all visits there has been great enthusiasm for what Infraco intends to do and a definite view that it will address an urgent currently-unmet need. This is particularlythe case in countries such as Ghana, Uganda, Mozambique etc where there is a strong commitment bynational governments to expanding the role of the private sector in infrastructure combined with a real sense of frustration about the verylimited private investment currentlytaking p lace. As a result, for example, the Privatization Unit of the Ministryof Finance of Uganda has alreadyinvite d InfraCo to assist in the development of two additional infrastructure projects (in addition to the Bidco agricultural infrastructure project), namelythe expansion of the Kampala Sanitation Systemand the re habilitation of the rail line from Kampala to Kasese (at the border of the DRC) which ceased operations in 1998. An MOU for the development of the Kampala Water System has been concluded with the National Water & Sewerage Corporation of Uganda and is currentlybeing reviewed bythe Ministryof Ju stice (Solicitor General’s OYce). InfraCo is currentlyinvestigating the viabilityof reopening the Ka sese line before concluding an MOU with the Government of Uganda. Similarlya visit to Zambia led to an urge nt request from the Minister of Finance for Infraco to shortlist for development three projects—one in the power sector and two in agribusiness. This positive response has not been limited to Africa eg in Vietnam there is strong interest in Infraco involvement in a hydro-power project and in other infrastructure development activities. There has been an equallystrong positive response from manyof the DFIs wit h whom Infraco has been engaged. The IFC and ADB in particular are veryenthusiastic about the pote ntial for Infraco to get things moving on the ground and as a result the IFC has signed a cooperation agreement and the ADB is expected to do so as well in the near future.The EIB is also enthusiastic about the contribution Infraco can make to accelerating financial close of infrastructure projects. 3312162013 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 196 International Development Committee: Evidence
Discussions have also taken place with ECOWAS and NEPAD about a possible role for Infraco in helping accelerate development of their major infrastructure investment plans, a large part of which are intended to be PPPs. Infraco has indicated a willingness in principle to become involved, subject to the availabilityof additional resources. Infraco Projects Table 1 summarises the projects that Infraco has been asked to consider working on after the first nine months of activity. Key features are: — There are 18 projects of which 15 are in Africa (six in West Africa, five in East Africa, four in Central/Southern Africa) and three in Asia. — The sector breakdown is: four in power, five in agribusiness infrastructure, four in water and sanitation, two in housing development, two in transport and one in gas distribution. — At least eight of them clearlyfall within Infraco’s definition of particu larlyHigh Development Value projects. — Three of the water and sanitation projects are in DAC three countries. — If all projects were to proceed the total additional investment would be in excess of $1,000 million, a veryhigh leverage of the small investment in Infraco. — Most of the projects create new potential for lending, inter alia, byEAIF and DFIs and the private sector and several oVer new opportunities for Guarantco to mobilise additional domestic savings for investment in national infrastructure.
Table 1
SUMMARY OF SHORTLISTED PROJECTS
Region Sector Description Development Value of Impact Investment
East/South Africa
Bidco, Uganda Agribusiness Essential Substantial Total investment infrastructure infrastructure to beneficial impact on >$100m, Infra- support major livelihoods of poor structure >$20m palm oil farmers outgrowers scheme
Manica, Agribusiness Irrigation dams to 5000 hectares of Infraco project Mozambique infrastructure support growth of irrigated land in c $10 million agriculture very poor part of country, major poverty reduction impact
Maputo, Agribusiness Citrus fruit Expansion of c $20 million Mozambique infrastructure terminal expansion agricultural export capacity in Maputo will allow rapid growth in export incomes Kampala, Water & Construction of Strong c $30 million Uganda sewerage wastewater environmental treatment plant in benefits, Kampala. Improved access Partnership with NWSC
Kampala, Housing & Affordable housing Helps address crisis c $6 million Uganda related in Kampala in affordable infrastructure accommodation
West Africa
Volta Lake, Lake transport Strengthens Major direct c $10 million Ghana transport benefits for poorer infrastructure communities in internally + from Ghana and indirect Ghana to benefits (reduced Burkina Faso, transport costs) in Niger and Mali landlocked countries
Kumasi-Sunyani, Electricity Extension of Low cost access to c $27 million Ghana transmission/ electricity supplies electricity supply distribution to poorer leveraging use of communities existing assets for currently not mine served Kumasi, Housing & Low cost housing Low marginal cost c $7 million Ghana related + related access for local (phase 1 only) infrastructure community people leveraging services mine infrastructure 3312162013 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 197
Region Sector Description Development Value of Impact Investment
Cenpower, Power 300MW gas fired Exploiting arrival of $200 – 300 million Ghana Generation power generation gas will reduce costs project using gas of energy for all from Trans-W Africa consumers with direct pipeline and indirect benefits (stimulating new productive investment)
Aba, Power Independent power Improving supply and c $100 million Nigeria Generation project in Delta reducing cost of region power will stimulate more rapid growth
Gas project, Gas distribution Gathering and liquids Prevention of flaring tbd Nigeria extraction of flared of gas and provision gas of LPG to local market
Asia
Vinh Son, Hydro power 120 MW hydro power Improving supply and c $50 million Vietnam development reducing cost of power will support sustained rapid growth
Malubog, Water supply 100mld water supply Improving access to c $60 million Philippines to Malubog water supply for City leveraging assets of Cebu at low developed for copper marginal cost mine
Pathum Thani Regional water 1st private sector Facilitate funding of c $20 million (phase Thailand supply water concession in major expansion of 1) Thailand water services
Central/ Southern Africa
Zambia Lusaka water/ Development of Request from $50-70 million Sewerage improved clean water government to supplies to Lusaka consider arranging build, operate and financing of the investment Zambia rail Lusaka low income Adaptation of existing Request from tbd light railway freight rail line to government to provide improved consider developing access to low cost this project that will housing projects benefit low income people primarily
Zambia/Mkushi Infrastructure/ Irrigation and Infrastructure tbd Farm block related services company Infrastructure infrastructure providing development in irrigation/other Mkushi infrastructure to commercial and small farmers
Zambia/sugar Irrigation/other Improvement of Request to consider tbd infrastructure sugar irrigation project scheme to benefit development role commercial and working with small small farmers farmers groups and commercial farmers
February 2006
Memorandum submitted by PricewaterhouseCoopers
Building capacity for national ownership of aid programmes—The role of global service providers. For the last 50 years, in which input-based international development aid has failed to lift the poorest countries out of poverty, private sector firms have worked consistently alongside the donor communityas implementing agents. As service providers to donor institutions, engineering, accounting and business advisoryfirms headquartered in developed countries, have helped to compl ete thousands of projects and programmes in developing countries, with mixed results. In the last ten years, the relationship between multinational service providers and their donor clients has changed dramatically. While the transfer of skills and technology from North to South countries is recognised byall parties as important to sustainable development, the co sts (and fees) of the multinationals have risen sharplyand donors and recipient governments have become incre asinglyreluctant to contract 3312162014 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 198 International Development Committee: Evidence
teams entirelyconstituted from developed countryconsultants. At the sa me time, the perceived low level of fees oVered bythe donors and the high transaction costs of engaging in developmen t work, has caused the exodus of some multinationals from the aid market. These inhibitors of the “export” mode of development have been compounded as recipient governments have sought more control over their own development programmes, supported byanti-globalisation campaigns and the donor agencies themselves. Underpinned bya series of international agreements, a new model of intern ational development started to take shape. The 2000 Millennium Declaration and the Millennium Development Goals, the 2002 Monterrey Consensus on Financing for Development, the 2003 Rome Convention on Harmonisation and the 2005 Paris Declaration on Aid EVectiveness, provided the momentum to improve the eVectiveness of aid through national ownership, harmonisation, results orientation and mutual accountability. In the new paradigm, governments, bilateral and multilateral agencies, civil societyorgani sations and the private sector will work in partnership to attain development goals that directlyimpact povertyi n a sustainable and quantifiable manner. Some of the features of the new framework are routine for the private sector. Managing for results and accountability, are the stock in trade of accounting and business advisoryfirms. The presence of the trans- national firms, deeplyembedded in recipient countries, is a massive oppor tunityfor a nationallyled public- private development compact. The problem with the existing new partnership model is that the private sector is hardlyto be seen in the grand design. Traces of a private sector role in development can be found in the Millennium Development Goals, but theyare verymuch a reflection of the constituencyof developmen t economists that put them together. In Goal Eight: “Develop a Global Partnership for Development”, the role of the private sector in the development enterprise, is to donate products and technology. If you are a pharmaceutical company you should: “provide access to aVordable drugs in developing countries” (Target 17) Generally, global business should: “make available the benefits of new technologies, especiallyinformation and communications technologies.” (Target 18). The private sector is thus characterised as a conglomeration of multinational corporations with a circumscribed role in the global development enterprise. In our own experience, some donor and UN agencies see us more as a source of philanthropic support than as true partners in development Missing in all this, is the recognition that the same communication technologythat is driving globalisation, is transforming the waysome trans-national enterprises organise themselves and that new- style companies, firmly rooted in programme countries, can become strong drivers of development in emerging markets countries byjust doing what theydo best: good business. Our own companycan serve as an illustration. In all, PricewaterhouseCoop ers employs three hundred and fiftyinternational development specialists in 55 developing and 20 de veloped countries, who contract with most of the development banks and donor agencies and their government partners. Our work is in assurance and fund management, financial services, public sector management and private sector investment in infrastructure. We are a global organisation, but we have no outside shareholders to whom we have to repatriate profits. Almost all our countryfirms are locallyowned which guarantees our commitm ent to the development of the people and economies of the emerging market countries in which we operate. Consistencyand high qualityof work in the developing world derives from a common global strate gy, brand values, ethical and policyframework and globallymonitored qualityassurance and risk manag ement standards and procedures. Apart from the project and programme work we undertake on behalf of the donor agencies and governments, our contribution to povertyreduction takes the following f orms:
Enriching national talent pools EveryyearPricewaterhouseCoopers takes on and trains thousands of the be st young accountants and business advisors in emerging markets countries. Some stayin the firm whil e others leave and are absorbed into the local economy, enriching the national talent pool and pulling up the private sector at all levels, an alumni list to be proud of.
Recycling development funds Over 80% of our international donor-funded work is contracted byour emerg ing markets countryo Yces and performed bynationals of those countries. This means that 80% of our ID A fees are earned and redistributed in developing economies, creating opportunities and markets for the lower income echelons of society. 3312162014 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 199
Sharing global technology A powerful intranet development portal links all our developed and developing countrypractices and technologyplatforms and is regularlyused as a shared resource for writin g International Development Assistance proposals from Washington to Ouagadougou and from Cairo to Caracas.
Leveraging good practice and knowledge transfer Specialist teams bringing together developing and developed countrymem bers, create toolkits for forensic investigations, cross-regional surveys, models for privatising infrastructure and tax and budget administration systems, that are used all over the world.
Crowding in the Private Sector In the last year, Input from our developing country practices has informed our discussions on the role of the private sector in development with the business outreach unit of UNDP, NEPAD, the Commission for Africa (later Business Action in Africa) and JeVreySachs at the Earth Institute at Columbia University. Apart from this wider debate, we catalyse private sector development and activityin specific regions and countries in the course of our dailyactivities. The East Africa “Most Resp ected Company” awards that we co-sponsor, is an eagerlyawaited, annual event. Our in-house HIV/AIDS pr evention programme in Uganda has been adopted byseveral other companies in the country.
Objectively appraising privatisation options Trans-national business advisors are sometimes criticised for enriching themselves through brokering privatisation projects of dubious value to the local community, with foreign investors. Where the companies are trulyembedded in the country,their advisors can work with local inves tors, communityworkers and environment specialists to present a full range of options to the Government, that will make a positive contribution to the public good.
Earning the trust of governments and donors as fund monitors One of the most telling roles in the new development paradigm for multi-competency“local transnational” business advisors, is monitoring large, multi-donor, special purpose funds. The Global Fund to fight HIV/AIDS Malaria and Tuberculosis was the first cross-regional fund to appoint Local Fund Agents (LFA) to assess recipients at all levels including their financial management systems, programmatic arrangements, procurement and supplysystemsand monitoring and evaluat ion regimes. Manyof the recipients are government agencies who might find it diYcult to tolerate such intrusive monitoring from a totallyforeign entity.The success of the Global Fund, which has made disb ursements of $4 billion in 131 countries in the five years since its foundation, is largely based on the LFA model. PricewaterhouseCoopers is LFA in 67 of the Global Fund countries. In a more local context, this principle of globallyregulated local monito ring, resurfaced in the case of the basket fund for health in Tanzania, in which a number of bilateral and multilateral funding agencies pooled their funds in order to channel them directlyto the Ministryof Health. The mode of auditing the funds was a central issue for a few months before all parties selected PricewaterhouseCoopers as the fund auditor, a worldwide brand with a local face.
Conclusion Pools of skilled, national accounting and monitoring specialists employed in the programme countries, bound byglobal qualityassurance and risk management regimes, could well be the missing link in the shift from project lending to sectoral and general budget support. What better wayto promote mutual accountabilitythan to have a firm with a worldwide reputation and local kno wledge and expertise, monitoring fund flows and aid eVectiveness across the entire development partnership? How better to promote countryownership of programmes than byintroducing monitoring t eams that will work strictly to international standards but speak the language and share the culture of the government with which they are working? February 2006 3312162015 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 200 International Development Committee: Evidence
Letter to the Chairman from Ann Grant, Vice Chairman, Standard Chartered Capital Markets Ltd Manythanks for the opportunityto give evidence at the International Deve lopment Select Committee on 9 May2006. I promised to follow up on the subject of the Wolsfberg Principles, their relevance to Standard Chartered and transactions such as the oil-backed financing to Sonangol. As I have now discovered, the Wolfsberg Group is an industrygroup formed in 2000 by11 International Banks involved in private banking. In 2000, Standard Chartered was not significantlyinvolved in private banking, and were not part of the Group. Since the original Wolfsberg Principles were drafted in 2000, Wolfsberg Group consultations have been expanded to a wider group of international banks, including Standard Chartered, however the Wolfsberg Group has chosen not to expand its membership outside the original 11 banks. Standard Chartered is an active participant in Wolfsberg consultations and is fully committed to the Wolfsberg Principles. The Principles were drawn up to give guidance to financial institutions on how theycan ensure the legitimacyof funds received with a view to preventing the moneylaunderin g linked to the proceeds of crime. Standard Chartered has fullyembedded the Wolfsberg Principles into our i nternal governance and operational procedures aimed at tackling moneylaundering. The Wolfsberg Principles do not provide guidance on the monitoring or transparencyof funds lent to customers. Therefore, in relation to the Bank’s approach to the evaluation of oil-backed-financing, the Principles are not relevant. If I can be of further assistance on anymatter, please do not hesitate to con tact me. May 2006
Memorandum submitted by Syngenta AG
1. Introduction 1.1. Syngenta is delighted to have the opportunity to submit evidence to the Committee on the subject of Private Sector Development. 1.2. Syngenta took the initiative during 2005 of launching the Goingfor Growth project—a collection of essays published by the Smith Institute, edited by Professor Calestous Juma of Harvard University—and sponsored bySyngenta. 64 1.3. In publishing this collection of thought-provoking essays from a number of senior figures central to the development debate, Syngenta and Professor Juma aimed to take forward the excellent work of the Commission for Africa byexploring the keyissues surrounding developmen t and economic growth in Africa and recommending actions for governments, financial institutions and businesses alike. 1.4. Goingfor Growth places particular weight on the role of science, technologyand innovatio nin advancing development in Africa. The role of the private sector is a central tenet of Syngenta’s CEO Michael Pragnell’s own contribution to the publication—which focuses on agriculture, business and development. Improving the productivityand performance of the agriculture and food se ctors in Africa will be essential in anystrategyaimed at sustaining growth and the attainment of the Millen nium Development Goals. 1.5. This submission therefore draws on the issues raised in Goingfor Growth and seeks to look at steps the private sector can take to promote support for R&D and economic growth byfinding new and innovative ways of working with governments and setting the highest standards in business, management and training, working both with multinationals and local businesses. We believe that there is a need for better partnerships between the public and business sectors, particularlyin agriculture.
2. Background Information 2.1. Syngenta is a world leading agribusiness committed to sustainable agriculture through innovative research and technology. The company is a leader in crop protection and ranks third in the high-value commercial seeds market. 2.2. Syngenta’s primary business areas are Crop Protection and Seeds. Crop Protection involves the production and sale of herbicides, fungicides and insecticides. Seeds comprise high value seeds, field crop seeds, vegetables and flower seeds, and these are developed for individual geographic regions to produce higher yields and greater reliability. Crop Protection represents approximately85% of the company’ssales and seeds constitute roughly15% of overall sales (GM seeds equate to 17% of total Seeds sales—less than 3% of overall turnover).
64 See http://www.smith–institute.org.uk/pdfs/Going–for–Growth.pdf 3312162016 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 201
2.3. In 2003–04, Syngenta’s investment expenditure on research and development totalled $727 million worldwide, including $150 million in the UK, making it seventh in the top 10 foreign companies investing in UK R&D (DTI 2004 ranking). 2.4. Syngenta’s goal is to be the leading provider of innovative solutions and brands to growers and to the food and feed chain.
3. What can the private sector do to alleviate poverty? 3.1. Syngenta believes that the Commission for Africa’s report was right to focus stronglyon the role of business, trade and economic growth in its chapters on “Going for Growth and PovertyReduction” and “More Trade and Fair Trade”; and that byhighlighting the importance of bus iness as an engine of economic change, the report eVectivelychallenged governments, companies and organisations around th e world to identifyreal and achievable solutions and strategies. 3.2. The Committee will be well versed in the broad arguments as to how a healthybusiness environment could contribute to alleviating povertyin developing countries. Syngen ta’s particular perspective on this issue focuses upon the role of the private sector in aiding and encouraging the transfer of knowledge, education and business skills from developed countries and companies. This needs to be done in a manner which leads to greater knowledge, investment and business development in Africa in order to achieve the following benefits: 3.2.1. Developing local businesses in the form of small and medium enterprises (SMEs); 3.2.2. The availabilityof quality,but a Vordable, goods and services; 3.2.3. Employment and job creation—and the promotion of broad-based economic and social development as well as reinforced commitment to best practice in industrial relations; 3.2.4. A knock-on impact on the provision of social services as business works towards and encourages improved housing, health facilities and public spending on those who need it most; 3.2.5. The development of an entrepreneurial spirit—as local employers develop their skills and networks, theywill develop their own companies and markets and healthyco mpetition will emerge; 3.2.6. The development and growth of indigenous knowledge resources—providing future generations of teachers and business leaders. 3.3. All of these issues are particularlypertinent in the area of agricult ure and food production/processing because agriculture is a crucial stepping stone to prosperityand sustain ability. As successful examples in Kenya show, partnership between agribusiness companies, local farmers and entrepreneurs has built up a thriving horticultural industry, because even the smallest of inputs to local farmers can move quicklyup the value chain into food production and marketing. 3.4. To take this forward more broadlya framework is needed. In Going for Gr owth, Syngenta proposed an “Enterprise for Africa” forum in which all stakeholders—companies, governments, donors, NGOs— could be brought together to focus on agriculture and food production as a means of development and building businesses. 3.5. A similar template could be used in other sectors, and we are delighted that as Syngenta was working on Going for Growth, Business Action for Africa (BAA) was born out of the Commission for Africa’s report. Syngenta is now working closely with BAA on the agricultural focus of their work and look forward to updating the Committee on the progress we make.
4. What are the constraints on the private sector in developing countries and how can they be addressed? 4.1. The biggest constraint on the private sector in terms of taking forward business in developing countries is veryoften concern about political and economic instability and hence investment predictability, poor physical investment, weak institutions and a lack of trust. Companies are simplynot able to take the substantial investment risks involved: SMEs find it hard to get up and running—this issue needs to be addressed byradical action from local governments, not onlyto alter nega tive perceptions, but to make fundamental changes to the social, economic, legal and regulatorystruct ures of their countries as set out below.
Financial initiatives 4.2. EVective and transparent financial support is essential to encourage not onlyinternational investment, but also to foster national investment and the growth of new businesses locally. Essential indirect financial support needs to be provided bygovernments working thr ough the following initiatives: 4.3. Improved investment laws which enable both a dynamic micro-finance sector and the provision of venture capital support for new start-ups; 3312162016 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 202 International Development Committee: Evidence
4.4. Tax incentives for public/private partnerships, research institutions, private enterprises and business incubators; 4.5. Reform of land tenure laws in order to allow land to be used as collateral for credit; 4.6. Support for entrepreneurial projects formed around the research outputs of public institutions.
Legislative and regulatory environments 4.7. In addition to the financial resources set out above a sound and consistent legal and regulatory environment is also essential to reduce bureaucratic processes, support markets and maintain a stable infrastructure. Bycreating fair, transparent and predictable systemsa nd the institutions to manage them, local businesses will have more opportunities to thrive and international companies will have more incentive to invest. Factors to be considered include: 4.7.1. Globallyaligned legal standards, 4.7.2. Intellectual propertyrights, 4.7.3. Anti-corruption laws, 4.7.4. Incentives for international firms, 4.7.5. All of the above need to be strictlysupported and upheld. 4.8. Working within such a framework will enable businesses and legal systems to develop a sense of mutual respect, but it is also essential that the public sector is simultaneouslystrengthened in order to ward against the persistent problems of corruption. 4.9. In Goingfor Growth , Syngenta cited an example of its work in Burkina Faso in this context and it demonstrates aptlyhow private companies can work with governments to str engthen their regulatory structure. Syngenta assisted the Burkina Faso authorities with drawing up and putting in place regulation for field trials of new seeds and provided support and training for the regulatoryteam who were able to maintain the legislative framework and monitoring the trials.
Encouraging SME growth 4.10. Up to 90% of businesses worldwide are SMEs, which are responsible for creating the great majority of new jobs. Therefore it is essential that the development of this sector—as well as investment by multinationals—is encouraged, especiallyin the spheres of science and t echnologyand the deliveryof benefits to farmers and consumers. This is because small technologystart- ups in developing countries oVer a huge opportunityfor entrepreneurship and employmentand have knock-on eVects as drivers of structural change and economic growth. 4.11. To encourage such entrepreneurship, budding businessmen need incentives and support. Current challenges include limited local demand, financial problems such as lack of credit, a lack of business/ management support (as well as a lack of a skilled workforce), and problems accessing information such as market intelligence and intellectual propertyrights. Then of course the re are also regulatoryand market barriers and inconsistent government policies, together with corruption issues, as set out above. 4.12. In order to address these issues, Governments, donors and companies need to consider remedies for the market failures that aVected previous attempts at entrepreneurship and institute measures that promote the use of intellectual capital, for example: 4.12.1. Promoting business and technologyincubators and business parks ; 4.12.2. Creating production networks and providing access to skills, educated labour and business services and fair markets; 4.12.3. Develop special economic zones in which firms can import goods duty free if theyare also obliged to export. 4.12.4. Improve physical and institutional infrastructure.
Encouraging science, technology and innovation 4.13. Availabilityof funding for science and technologyis an increasing lyglobal concern. The dramatic reduction in public sector funding for R&D means that the role of the private sector is more important than ever. Bywayof example, as the largest global investor in agricultural res earch, Syngenta invests around £450 million in R&D each year. Inevitably though, much of this must be targeted at the major existing markets where it will be possible to recoup the investment and R&D costs. 4.14. Therefore it is essential that development strategies factor in policymeasures to promote and endorse R&D innovation. Keyissues that need to be considered include: 4.14.1. Better co-ordination between education systems and institutions; 3312162016 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 203
4.14.2. The role of existing R&D institutions and options to establish new ones—and of course their funding; 4.14.3. EVective public-private co-operation on research programmes; 4.14.4. Technologydi Vusion programmes and mechanisms; 4.14.5. Encouragement of private investment.
5. How is the private sector engaging in development? 5.1. Joint ventures are one of the key ways in which Syngenta has worked in developing countries. A good example is a joint seeds venture in southern Africa where Syngenta brought the technologyand o Vered its partner, a Zimbabwean seed company, the scope to widen the market for its products. This was a synergistic collaboration where the partner companybenefited from the support and gui dance provided; Syngenta also gained through access to a new market and seed varieties it had previouslyl acked. 5.2. Such partnerships are, however, limited and often fail because a lack of capacitystops local businesses becoming valid partners for large companies, while funding or lending agencies who might support them are constrained bya lack of suitable financial partners domes tically. 5.3. Syngenta has therefore tried a number of its own partnerships, experimenting with the partnership arrangements used in other countries, by, for example, bringing together Syngenta’s distributors with the traders and financiers of the products produced. Byintegrating the produc tion chain in this wayfarmers are able to receive pre-payment for their goods and thereby pay for the inputs to achieve increased productivity.
6. Conclusion 6.1. In conclusion, Syngenta believes that agriculture in African countries is under-performing. It could and must playa greater role in growth, in the reduction of povertyand the er adication of hunger. This will mean reducing constraints and increasing incentives and opportunities for enterprise. It will need new and purposeful partnerships between the public sector, business and civil society. It will also require building trust and leadership. 6.2. We believe an initiative along the lines of an “Enterprise for Africa Forum” could help byidentifying opportunities, building partnerships and trust, promoting good practice and byproviding a new focus for solving these keyproblems. This would lead to real progress for all the maj or stakeholders involved. March 2006
Memorandum submitted by the Syngenta Foundation for Sustainable Agriculture
1. Summary The Syngenta Foundation welcomes this opportunity to submit evidence to the Committee. Acceptance that agriculture must playan essential role in sustainable de velopment and must modernise is a challenge which will onlybe met through building a consensus and e Vective partnerships between the public and private sectors and with civil societyon the role and practice o f agriculture. It will require new technologies and revised policies, but above all it will need strong and innovative small and medium-sized enterprises (SMEs). The Syngenta Foundation feels it is uniquely placed to help in this new agenda.
2. Background 2.1 The Syngenta Foundation for Sustainable Agriculture (SFSA) was established bySyngentaAG, with the mission to increase opportunities and choice for poor rural communities in the semi-arid areas to improve their livelihoods through sustainable innovation in agriculture. We work with a range of partners in the public and private sectors to support projects, research, training, dialogues and information activities in Mali, Eritrea, Kenya, Cameroon, Uganda, Brazil and India. We work to promote and to better understand the criteria for success in public-private partnerships in development, how to foster SMEs and to support international organisations such as the Consultative Group on International Agricultural Research. 2.2 The Foundation is funded solelybySyngentaAG, but is an independent le gal entityregistered as a charityunder Swiss law. More information can be found on the Foundation website—www.syngentafoundation.org and our Annual Review. 3312162017 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 204 International Development Committee: Evidence
3. What can the Private Sector do to Reduce Poverty? 3.1 There is an increasing recognition of the importance of agriculture in sustainable development, and that agriculture has a central role to playnot onlyin the reduction of pove rtyand hunger, but in supporting economic growth and environmental conservation—and indeed the attainment of the Millennium Development Goals. Sustained economic growth that increases job opportunities is the onlywayto reduce and eliminate poverty. 3.2 Agriculture is essentiallya private sector activity;it remains the s ector on which most poor people depend, and where state intervention has been least successful. Farmers need a reliable income to payfor a multitude of taxes, social services eg health and education, housing, transport, equipment etc. Theyneed fair and undistorted markets. There is evidence that young people do not see subsistence agriculture as an occupation of choice and leave for the cities. Rural communities are getting older and in some cases, sicker eg HIV/AIDS 3.3 The Millennium Ecosystem Assessment, published last year, recognised that agriculture had been highlysuccessful in meeting the needs of societyfor food and other commod ities and that it had succeeded in doubling production over the current generation. However in doing so it has damaged and degraded 60 percent of the world’s ecosystems. The assessment, based on a four year study, involving over 1,500 leading scientists, concluded that in meeting future needs agricultural practices must change. 3.4 It is time to modernise the agricultural sector if it is to meet the challenges of growing and diversifying demands from growing populations for food, commodities and energyand for a wider range of eco-system services. There is a need to develop an agricultural sector which is not onlymore profitable but more e Ycient in its use of scarce resources eg water and less damaging to the environment. Societyis looking to the agricultural sector as a potential source of renewable energyand as a mean s to combat or cope with climate change. 3.5 SMEs playa vital role in the agricultural sector through input supplys ystems, micro-credit, communications, marketing, processing and job creation. Theyface manyc hallenges; poor infrastructure, over burdening regulations, lack of access to credit and business support services, unfair competition from state owned, subsidised rural services, and often donor-funded civil societyorganisations, which give rather than charge for services. Current trends in donor support for national budgets have tended to encourage the public sector to re-enter activities best left to the private sector and to neglect the higher education and national research institutions, where innovation and enterprise are fostered. 3.6 Our experience has been that the manyinnovations do not reach farmers b ecause of the absence of SMEs. We believe also that SMEs can provide advice and support to rural communities in the place of many rural extension services. 3.7 There is considerable fragmentation in the farm to consumer value chain, which often works to the detriment of small farmers and SMEs. Market-based solutions, such as “fair-trade” and other forms of sourcing eg Max Havelaar, not onlyassure qualityfor consumers but also be tter prices and surer markets for farmers. These are examples of how the business sector can promote both sustainable production and better livelihoods. There are also examples of where “big” business works with “smaller” businesses to mutual advantage eg local distributors and retailers. 3.8 The challenges are huge and will onlybe meet through better partnershi ps between the public and private sectors and with civil society. There is a need to develop a consensus around what sort of agricultural practices will meet these challenges, where and the roles that could be played by these parties. At the moment a series of unnecessarilydivisive debates on technologyoptions, intell ectual property, trade barriers, subsidies, ethics and philosophies are preventing both consensus and constructive partnerships. The debates are often promoted byorganisations which campaign on specific issues with apparentlylittle interest to the longer-term or wider issues. 3.9 We believe that the commercial agricultural sector could have a greater impact on the reduction of poverty, but only if there are more eVective partnerships and a greater consensus on action. 3.10 Our experience with building partnerships shows that successful partnerships are based on their being voluntaryand purposeful; having clear leadership, shared goals an d a preparedness to take risks. There must be some incentives and an acceptance of cultural diVerences. Each partymust contribute something constructive and playto their strengths and comparative advan tages. There is a need to identify and take reasonable risks and for the parties to communicate and to build considerable trust. Partnerships take time to build and to maintain, continuityis also important. 3.11 Based on our experience in Kenya over the past six years, in helping to build a public-private partnership to develop insect resistant maize through both transgenic and conventional means, the roles of the partners change over time. It has been necessaryto blend expertise fro m both the public and private sectors to make progress. The initial focus was on research partnerships but overtime private sector knowledge and experience of building regulatorycapacityand in taking ne w products to farmers has become increasinglyimportant. The engagement of stakeholders—particularlyf armers and consumers—at all stages has played an essential role in helping to guide the direction and priorities of the endeavour. 3312162017 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 205
3.12 We hope that Business Action for Africa can create an “Enterprise Forum for African Agriculture” with the purpose of building a consensus and eVective partnerships for helping to modernize Africa agriculture, so that the sector can playits role in economic growth, the re duction of povertyand hunger and the conservation of eco-system services.
4. Conclusion 4.1 The private sector at national and international levels has an essential role to playin modernising agriculture to meet the needs of society. SMEs are particularly important and need encouragement and support. But in manycountries, the challenges of poverty,hunger and envi ronmental stress will onlybe addressed through and better collaboration between to public and private sectors and civil society. 4.2 We believe that “corporate foundations” are uniquelyplaced to identi fyopportunities and to build purposeful and povertyreducing partnerships. 4.3 However it is first necessaryto build a consensus on the typesof agricul ture to be developed and the roles the diVerent parties might play. We hope it will be possible to build both consensus and partnerships, through such bodies as Business Action for Agriculture. February 2006
Memorandum submitted by Unilever
EXPLORING THE LINKS BETWEEN INTERNATIONAL BUSINESS AND POVERTY REDUCTION
A Case Study of Unilever in Indonesia
An Oxfam GB, Novib, Unilever, and Unilever Indonesia joint research project
Introduction 1. The Millennium Development Goals and Johannesburg Summit Declaration committed governments, civil societyorganisations and the private sector to work t ogether pro-activelytowards developing solutions to the first development goal—halving income poverty. Unilever, Oxfam GB and Novib (Oxfam Netherlands) want to contribute to the search for sustainable solutions to povertyreduction. 2. In 2005 Oxfam GB, Novib and Unilever published a joint research project report: Exploringthe links between international business and poverty reduction: a case study of Unilever in Indonesia. The work was published with the objective of providing new insights into business impacts from which companies, civil societyorganisations (CSOs), governments and international organisat ions can learn. The aim was to inspire further exploration of the opportunities for business to contribute positivelyto sustainable poverty reduction so that more people, particularlypoor people, can benefit from i nvolvement in business networks. The scope of the report is limited to the operations of Unilever Indonesia (UI), not those of Unilever the multinational company. It is based on information from Unilever Indonesia and independent research commissioned byOxfam and Unilever, and covers the time period from 2002–4 . 3. A hard copyof the full report: Exploringthe links between international business and poverty reductio n: a case study of Unilever in Indonesia: An Oxfam GB, Novib, Unilever, and Unilever Indonesia joint research project, has been submitted with this evidence. It is also available on the Unilever and Oxfam websites.65
Context 4. Despite abundant natural resources and great wealth among some of its population, half the population of Indonesia (213m in 2002) lives on US$2 or less a day. More than 25% of children under the age of five are malnourished, and some 15% of the population do not live to the age of 40. Povertylevels in Indonesia rose after the 1997-8 economic crisis and have fallen again in recent years, but still remain above pre-crisis levels. 5. Unilever is one of the world’s largest consumer goods companies producing foods and home and personal care products. Over 150 million people buyUnilever products eve ryday,including brands such as Flora, Lipton, Knorr, Hellmann’s, Domestos, Dove, Sunsilk and Surf. In 2004 the companyemployedover 200,000 people in 100 countries, and spent ƒ15 billion a year on raw materials through thousands of suppliers. Unilever Indonesia (UI) was founded in 1933, and todayis liste d on the Jakarta stock exchange. 15% of shares are locallyheld. 95% of Indonesians choose a Unilever produc t everyweek. In 2004 the companyhad about 5,000 employees(including 2,000 contractors), and an e xtensive network of local production units, and local supplyand distribution chains.
65 http://www.unilever.com/ourvalues/environmentandsociety/casestudies/economicDev/unileverindonesia.asp and http://www.oxfam.org.uk/what–we–do/issues/livelihoods/unilever.htm. Copyplaced in the Library. 3312162017 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 206 International Development Committee: Evidence
6. Oxfam GB and Novib are sister organisations within Oxfam International. Oxfam GB is a development, relief and campaigning organisation which works with others to overcome povertyand suVering around the world. Oxfam GB has been working in Indonesia since 1972. Novib (Oxfam Netherlands) supports the fight for the rights of people throughout the world who do not have access to basic rights, including working closelywith 22 local organisations in In donesia.
Business and Development 7. The business activities of multinational companies have an important contribution to make to economic development in developing countries. This contribution is particularlysignificant because the volume of private capital flows exceeds that of development assistance. International business activities and investments in developing countries have the potential to create positive or negative impacts at several levels for people living in poverty. 8. The extent to which the wealth created bybusiness can reduce povertyis d etermined bymanyfactors. An industry’s operating structure—and the values and strategies of individual companies within it—are critical factors. Likewise, the opportunities open to people living in poverty, and their negotiating power— as citizens, workers, producers, consumers, and communitymembers—are k eydeterminants in the local context. 9. The Exploringthe links report explores to what extent, and how, the activities and wealth generated by the local operating companyof a multinational companyin a developing cou ntryare translated into reduced poverty. It provides an overview of the links between the Unilever Indonesia (UI) business model and povertyreduction, based on research in four areas: — Mapping the impacts of UI at the ‘macro-economic’ level — Exploring UI’s policies and practices — Analysing supply-chain (and wider value chain) relationships and issues — Understanding the implications of UI in the marketplace. 10. This evidence provides a summaryof our findings in each of these four are as, followed bya summary of the conclusions reached bythe project group. The research does not purp ort to be comprehensive, and its scope is the operations of Unilever Indonesia (UI), not those of Unilever the multinational company.
Impacts at the Macro-Economic Level 11. While it is diYcult to use macro-economic indicators to measure the direct impact of Unilever Indonesia’s activities on people living below the povertyline, the resea rch considered the indirect impacts of this local business of a multinational companyon the Indonesian econom y. UI, as a part of a multinational but embedded in the local economyof a developing country,h as significant forward and backward linkages into the local economy. The majority of revenues generated byUI remain in Indonesia, through its local sourcing, wages, margins, and dividends to local shareholders (15% of total dividends). Following an earlier period of investment bythe parent company,inward in vestment flows from outside Indonesia were nil in recent years: a result of the profitability of the local business. 12. For the five-year period beginning in 1999, 25% (US$ 182 million) of Unilever Indonesia’s total pre- tax profits were retained and reinvested bythe companyin its local busines s activities. These funds represent an investment in UI’s long-term future, as well as an investment in Indonesia’s long-term development, particularlyin the manufacturing and distribution sectors. Of the remai ning 1999–2003 pre-tax profits, 30% (US$ 215 million) went to the Indonesian government as corporation tax, and 45% was paid out as dividends to shareholders, the majorityof whom are overseas investors. 13. Excluding exports of tea and palm oil purchased from Indonesia byUnile ver centrally, Unilever Indonesia contributed to Indonesia’s balance-of-payments deficit in this period. Because UI imports raw materials and purchases foreign currencyfor its business operations, an d remits dividends to shareholders outside the country(85%), there is a net outflow of funds, showing that even a locallybased companylike UI with onlymodest exports can have a negative foreign-exchange impact on the country. 14. Total taxes paid to the Indonesian government average about US$ 130 million per year, or about 19% of companyrevenues between 1999-2003. While the ultimate impacts of tax r evenues on development and povertyin Indonesia depend on the policychoices of the Indonesian govern ment, it is clear that a company such as Unilever Indonesia can represent a substantial source of public revenue, (and so be an early contributor to the development of the formal economy.)
Employment Impacts 15. Manydeveloping countries, including Indonesia, face significant rat es of under-employment and unemployment. Multinational companies can have an impact on employment because of their size and their reach into the local economy. This study aimed to understand Unilever Indonesia’s employment impact in Indonesia. However, assessing the impact of employment on poverty is more than a matter of numerical 3312162017 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 207
quantification. Although that is an important first step, it is also necessaryto consider whether people, through their employment gain skills and confidence that empower them to build economic security, accumulate assets, and make sustainable improvements in their lives. 16. Unilever Indonesia’s business structure consists of a core workforce of about 5,000 people, of whom about 60% are employees, most of them permanent, and just under 40% are contract workers, employed directlyor through contracting agencies. Beyondthis is a well-establis hed network of suppliers, distributors, and retailers. 17. Unilever Indonesia sets high standards for the treatment of its permanent employees. It adheres to the Unilever global Code of Business Principles.66 Payand benefits are above what is required bylaw, positioning UI in the top quartile of Indonesian companies. In terms of policyand practice, there are high health and safetystandards, good retirement and maternitybenefits and wo rkplace facilities, and a strong emphasis on training. All UI employees have a written contract, and there are clear procedures for negotiations between workers and management. 18. Our research found that the closer and more formallyworkers are linked with Unilever Indonesia’s operations, the more theybenefit directlyfrom the company.In the period s tudied (2003/2004), the number of contract workers engaged byUI grew as a proportion of employees,becaus e more workers were needed to cover periods of change at two UI sites. While future trends in contract employment at UI are unclear, Oxfam is concerned that the number of contract workers functioning within UI is significant, at around 40% of the workforce in 2003. Although contract employment is recognised as an integral part of UI’s business strategy, the research indicated two respects in which the application of standards needs improvement, on which UI is committed to take action. One of these is the need to ensure that UI’s labour-supplycompanies observe legal requirements concerning the transfer of temporaryemploye es to permanent employment contracts; the other is the need to respond to the concerns raised bya femal e contract worker that illness or pregnancycould result in loss of employment.These cases illustrated how contracting out employment may reduce a company’s ability to monitor the situation of contract workers or suppliers’ employees, and thus result in gaps between corporate policyand practice in respect of these wo rkers.
The Value Chain from Supply Through Distribution 19. The business operations of a large companylike Unilever Indonesia are at the centre of a long and complex value chain with both forward and backward linkages. The research aimed to assess the extent to which the producers and suppliers (backward linkages) and distributors and retailers (forward linkages) who are linked to UI through its value chain are able to participate in the benefits of UI’s success. The creation of value, income, assets, and employment in itself is not necessarilyan indicator of positive impacts for people living in poverty: this depends on how the benefits of the value chain are distributed, which depends in turn on other factors, an important one being their bargaining power within dynamic markets for raw materials and labour. 20. Overall, the research estimates that while Unilever Indonesia onlyem ploys about 5,000 people, the full-time equivalent of about 300,000 people make their livelihoods from UI’s value chain. Strikingly, more than half of this employment is found in UI’s distribution and retail chain, with about one third in the supplychain. 21. Job creation is onlyone wayto assess the economic impacts of the value c hain. Another is to seek a monetaryindicator, in this case gross margins along the value chain, as a p roxyfor the financial value created byeach group of participants in the chain. The total value generat ed along the Unilever Indonesia value chain is conservativelyestimated at US$ 633 million. Of this, UI ear ns about US$ 212 million on the value that it creates as a keyplayerin the value chain; the remaining US$ 42 1 million is distributed among other actors in the chain. The value added within the value chain is even more dispersed than the benefits of employment within the chain. Direct UI operations account for about 34% of the total value generated throughout the supplychain, while taxes paid to government byUI represen t 26%, retail operations about 18%, suppliers about 9%, distributors 6%, farmers about 4%, and advertising and other expenses 3%. 22. The total value captured declines towards either end of the value chain. Participants at either end of the value chain are predominantlylarge numbers of small-scale producers and retailers. The value captured bypoorer people working at either end of the value chain, especiallyprima ryproducers at the supplyend, is much lower than the value captured bythose who are in direct interaction with Unilever Indonesia and closer to the centre of UI’s value chain. The value captured bythose people working at the ends of the value chain increases where such people have a stronger negotiating position in relation to their product or service; where value chains are restructured to change the distribution of benefits; or where theycan increase the value of their products or services, for example through innovation. Participation in such value chains does not automaticallyguarantee improvements in the lives of people living in poverty. The challenge is to consider how the benefits can be shared further along the value chain, particularlyto the poorest people who are working at the ends.
66 http://www.unilever.com/ourvalues/purposeandprinciples/ourprinciples/ 3312162017 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 208 International Development Committee: Evidence
Supplier Companies 23. Unilever Indonesia purchases the majorityof goods and services for it s business operations through a local supplychain: 80% of supplier companies are domestic (20% are intern ational), and domestic suppliers provide 84% of goods and services bought in byUI. In 2003 these goods and ser vices were valued at more than US$ 254 million. Manyof the local Indonesian supplier companies were originallyset up byUI, and (while direct ties are reduced over time) relationships between them tend to last for manyyears.UI has boosted the qualityand standards of local manufacturing, through techni cal assistance programmes and the extension of UI’s quality-management systems throughout the supply chain. UI’s investment in local suppliers ensures a steadysupplyof high-qualityinputs for the company, while creating local jobs, assets, profits, and tax revenues. This represents both an ingredient of UI’s success and a major economic-multiplier eVect of UI’s investment. 24. All Unilever Indonesia suppliers are required to observe Unilever’s globally-applicable Code of Business Principles. UI maintains basic standards through negotiations, ongoing dialogue, and a rolling three-year audit programme. The major benefit for companies of being in UI’s value chain is a predictable market with high volume sales, and UI’s reliabilityin payingthem. Yet neg otiating prices with UI, and the need to complywith stringent qualityrequirements, maybe challenging fo r local supplier companies. The research showed that supplier companies exceed legal regulations governing wages and benefits in Indonesia, but the pay and employment conditions for suppliers’ employees and contract workers were lower than the levels among UI’s direct workforce. Like UI, supplier companies employcontract workers within their workforce, and this raises some of the same issues that relate to contract workers within UI.
Producers of Raw Materials 25. The home and personal care and food products that Unilever Indonesia sells (84% of sales) are made from a wide range of industrial and agricultural raw materials, sourced from manydi Verent producers, traders, and processors. The small-scale agricultural producers who grow crops such as coconut, sugar, and black soybeans are among the poorest people in UI’s value chain. The value generated bythe goods that theyproduce must be shared among a large number of supply-chainactors, of whom theyare usuallythe least powerful. The indirect relationship also makes it diYcult for a purchasing companylike UI to influence producer conditions. 26. This research included a case studyof an alternative supplychain that Unilever Indonesia has supported in a newly-acquired brand: Kecap Bango, a sweet soysauce made from black soybeansand coconut sugar. As sales of Kecap Bango are growing rapidly, UI needed to find a steadyand consistent supplyof high-qualityblack soybeans.In partnership with researchers a t a local university, Unilever Indonesia started to work with a small group of producers, oVering them three things that theyvalued: securityof market for their product; credit; and technical assistance. I n good harvest years the producers also get a better return on investment and labour than theydo from other cro ps that theymight grow. Both UI and the producers have benefited from this arrangement, and the number of farmers wanting to participate has grown steadily. While there are some problems with the black soybean pilot scheme, such as continuing financial risk for farmers, concerns around farmers’ negotiating power, the case is veryuseful in increasing understanding of diVerent perspectives and impacts within UI’s value chain. Such an understanding, if combined with a search for more business cases that also increase the value-adding potential and hence power of poor producers, could enhance the longer-term trading partnerships between agricultural producers and large companies.
Distributors 27. To an even greater extent than the supplychain, the local multiplier im pact of the distribution chain is little understood. The research found that more people are employed, and more value is generated, on the distribution side of the Unilever Indonesia value chain than on the supply side. UI has a complex distribution chain consisting of a mixture of wholesalers and ‘modern’ retailers (self-service stores and supermarkets) and ‘traditional’ or ‘general’ retailers and vendors, including small and family-owned shops and outlets. It is estimated that up to 1.8 million small stores and street vendors sell UI products informally in rural markets and poor urban areas. Employment generation in distribution is often overlooked as having a potential contribution to make to economic development.
Low-Income Consumers in the Marketplace 28. International consumer goods companies are increasinglyreaching ou t to people living on low incomes around the world. The result is an increase in the worldwide consumer base for MNCs, and an increased use of branded products bypeople on low incomes. People on low in comes tend to spend a larger portion of their income on fast-moving consumer goods than those with higher incomes. According to UI data, 95% of Indonesians use at least one Unilever product, across all socio-economic groups. Manyof Unilever’s products have become more aVordable for people living in povertyin recent years,in part because theyare sold in smaller packages. Table 1 below shows a range of Unilever In donesia products and their 3312162017 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 209
equivalent cost in US dollars. While the unit cost of small packages is higher, owing to packaging and distribution costs that are reflected in the sale price, this marketing strategyresponds to the realitythat people on low incomes have limited cash in hand.
Table 1
UNILEVER INDONESIA PRODUCTS: PRICE OF SMALLEST AVAILABLE UNITS, COMPARED WITH SOME HOUSEHOLD STAPLES AND POPULAR PRODUCTS
Product/brand Recommended Recommended retail price (RRP) retail price (RRP) (Rupiah, 2004) (US$ equivalent, 2004)
Household staples Rice (1 kg) 2,900 0.34 Cooking oil (branded 250 ml bottle) 1,900 0.22 Unilever Indonesia products Seasoning (Royco, 3.5g) 200 0.03 House-cleaning liquid (Super Pell, 25 ml sachet) 250 0.03 Shampoo (Sunsilk, 6 ml) 350 0.04 Fabric wash (Surf, 45g) 500 0.06 Tea (Sariwangi, 5x1.85g teabags in a pack) 500 0.06 Toothpaste (Pepsodent, 25g) 1,000 0.12 Soap (Lux 100g) 1,400 0.16 Soysauce (Bango, 110 ml) 1,500 0.18 Ice cream (Paddle Pop, 65 ml) 1,700 0.20
29. Unilever Indonesia’s success and expansion as a companyraises questi ons for Oxfam about whether UI is displacing smaller-scale local producers, ultimatelyconstrainin g competition in the marketplace, rather than stimulating it. Oxfam also questions whether companies like UI maybe creating rather than meeting needs for poor consumers, and over time turning luxuries into necessities through advertising and promotion. Responsible standards of advertising and good communication links with people at all socio- economic levels—both of them important aims of UI—are at least two benchmarks for social responsibility.
Conclusions 30. The project achieved its objective of helping Oxfam GB, Novib and Unilever understand better the impacts of business—albeit one business in one country—on poverty reduction. Real learning came through Oxfam GB/Novib–Unilever dialogues. There were often verysignificant di Verences in interpretation of the same set of data. Manyof the issues debated were defined byprior assumption s, core values and beliefs. However both organisations came to realise that, despite their verydi Verent missions and goals, theyshare a common commitment to contributing to povertyreduction and development . Bythe end of the project both Oxfam and Unilever were much closer to understanding the limitations and opportunities that determine what companies can and cannot be expected to do to contribute to povertyreduction. 31. Oxfam recognized that highlyembedded multinational companies and la rge domestic companies might in future provide a focus for useful work on private sector povertyim pacts and povertyreduction strategies. Oxfam gained a better understanding of the potential of distribution chains to generate employment and income—but recognizes that participation in value chains does not guarantee improvements for poor people. Oxfam believes the project points to a diVerent approach to corporate social responsibilitywork, which goes beyonddata collection to a more intensiv e and rigorous dialogue, ideally as a step towards action. 32. Unilever found that the scrutinyof Unilever Indonesia’s relationshi p with low-income consumers and its contractor review processes suggested ways in which the company could improve its interactions with people living in poverty. Unilever also found that the independent research carried out for this report gave new insights and information in a number of areas, including new perspectives and ways of looking at social issues, and was a valuable example of direct engagement on a verywide range of social and economic issues. Note: The scope of the report is limited to the operations of Unilever Indonesia (UI), not those of Unilever the multinational company. It is based on information from Unilever Indonesia and independent research commissioned byOxfam and Unilever, and covers the time period fr om 2002–04. February 2006 3312162018 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 210 International Development Committee: Evidence
Memorandum submitted by AfricaRecruit
1. Overview There is an increasing belief and acknowledgment based on experience and observations that the private sector are a veryvaluable resource and powerful force or tool for rebuildi ng of Africa, what is fundamentally crucial in mobilizing the financial flows or mechanism that supports the private sector. A vibrant private sector seeks to economicallyintegrate its citizens fro m consumer’s to investor thereby leading to job/wealth creation, income opportunities and povertyallevi ation. The economic impact of the private sector on employment creation, poverty alleviation, skill and technologytransfer, access to international markets can be quite significant if theyare given the needed encouragement and support by African and International governments and the private sector. A framework that will attract investment and create “attractive jobs” is critical to Africa’s development.
2. Constraints on the private sector in developing countries and how can they be addressed? Banks or the formal financial system for a number of reasons do not serve many of Africa’s potentially active sectors. Financial access could provides opportunities, allowing small and micro business as well as people to participate more fullyin economic activity.Research suggests access to finance is important in povertyreduction and improving income inequalities. Against this backd rop, access to a more elaborate financial market should be seen as a critical aspect of development in Africa.
Challenges: — Due to high level of literacythere is limited capacityto develop a robust survey/feasibility which will enable access to finance in cases where its is available or accessible. — Managing immediate local family/community survival needs. — Political issues. — Lack of clear investment laws and the weakness of the legal system to enforce. — Propertyrights, judiciaryand legislation weak and ine Vective. — Overregulation. — Lack of qualityskills therebylimiting the abilityto build a qualitywor k force. — Marketing of products. — Widening the deliverynetwork. — Breaking into world and increasing the value added. — Building and maintaining market credibility.
Weakness: — Lack of updated information required for drawing up a business plan (market information gap). — Lack of collaboration within government resulting in poor public management. — Poor infrastructure such as transport, electricityand water increasin g the overhead cost with resulting instability. — Lack of strategywhich is based on strategic alliance and linked to develo pment and resources. — Lack of technologyand qualified and competent human resources. — Lack of political will to implement government policies eVectively. — Accessibilityand slow processing of disbursements, financial packages or grants from the funders. — Lack of support and monitoring of applications for financial loans/grants bythe government. — Verylow uptake of banking services in Africa maybe only25% of the populat ion, compared with the 90% in the developed world. — The use of informal systems with additional risks. — The absence of a reliable and integrated credit information database.
Opportunities: — Much stronger investment climate and prioritising private enterprise as the primaryengine of growth. — Removing constraints to accessing finance. 3312162018 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 211
— Building an enterprise culture with flexible supporting structures eg One stop shop business support centres. — Building capacityof the Investment Promotion centres and setting up Non -Resident Secretariat within the centre to capitalise on the Diaspora Investors. — To create a nation of competent investors byunlocking untapped investme nt opportunities in a accessible and non intimidating way. — Developing qualityskills for the labour market. — Developing the skills to upgrade the confidence to take on the risk of equity/money market by encouraging shareholder activism & other investments as viable vehicles for savings, wealth creation and increased corporate accountability. — Countrywide presence of the private sector particularly outside major metropolitan areas. — Closer working and collaboration between the Developmental Partners, Private sector and African governments therebypooling resources and reducing risks. — Developing various fit for purposes models. — Developing the framework for a vibrant and transparent competitive market.
3. What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth?
Areas of interventions
Increase the capacityof Africa to increase its foreign direct investment flows in areas such as: (i) Increasing the formal flows of remittance bydeveloping structures tha t facilitate, incentivise and enable a reduction in cost of transfer eg Send MoneyHome is one area. Other a venues to be explored are matching grants and funds of recipients of remittances. This increases the credibility of manyof the recipients and acts as a systemto capture manyof the unbanked members of the population. An online surveyon remittances was conducted as part of the bu ild up to Africa Diaspora Investment Forum in September 2005; the event was attended byove r 20 private sector operators from Africa from areas such as Capital Market, Tourism, Telecommunications, ICT, Transportation, Small-medium size business and Real Estate operators. One of the main aims of the event was to explore how and what can be done bythe Diaspora and the Inter national communityto increase the investment flows into Africa as well as understan d the challenges and solutions. 879 Diaspora completed the survey. This can be viewed online at www.africadiaspora.com. Fifty-eight per cent of the respondents remit on average $200 US dollars a month for sustenance reasons of this 52% also remit for investment this compares to 33% of the respondents that remit on average $300 US dollars a month for investment reasons alone. Over half of the respondents’ investment options pointed to familyand friends business and real estate as areas of investment with approximatelyone fifth investing in the capita l market. Other options included telecommunication, franchising and private equity. (ii) Building the capacityof investment promotion centres in and out of co untry( embassies). (iii) Increasing the capacityof countries to develop and maintain a favou rable climate for investors in areas such as: — Technical and financial diagnostic surveyof enterprises. — Market surveys. — Complete feasibilitystudies. — Lobbying. — Partner search. — Project financial planning. — Assistance in project implementation, including product marketing, staV & management training. (iv) Support to keysectors eg sector partnership meetings, mentorship, t winning and support for the supplychain down to grass root levels. (v) Increasing the capacityof regional systemsto encourage joint procur ement in areas of critical needs eg Health resources. (vi) Facilitate integrated actions inside and outside Africa. 3312162018 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 212 International Development Committee: Evidence
4. Case Study Information Communication Technologies (ICT) is a verye Vective and enabling tool that bridges the Investment gap and dramaticallycuts cost of doing business. It increases the capacityof the business to market beyond their immediate local environment. Telecommunications is an instrument of change in bringing a diVerent perspective to commerce. ICT is among the fastest growing retail data markets in Africa. In Nigeria it has had a cumulative investment of over $4 billion since 1999; positive secondarye Vects on economy(over $1 billion in licensing revenue); Over 5,000 direct and 400, 000 indirect jobs created. ICT/ Telecomm provides up to date information on business and investment options, update information on the financial market. The use of internet banking to conduct business in Africa has reduced considerablythe time taken to conclude business and reduces the time and cost byeliminatin g unnecessaryoverheads.
5. Recommendations
Investments and Business Options — Removing constraints eg ensuring political stability, improving access to banking and finance (including lowering the cost of finance), managing credit risk through the provision of appropriate mitigants, lowering information asymmetries and boosting incentives for local populations, businesses and banks. — African Angel Network and mentorship initiatives encouraged. Entrepreneurs should be encouraged and enabled to develop business plans in order to start their business. — Creation of “Knowledge for sale centres” which is regulated to protect the intellectual property rights of the vulnerable. — Companies should be encouraged to publicize their Venture Capital arm and collaborate with more African oriented enterprises. — Veryattractive incentives for business that support grassroots’ start up that address areas of development. — Increased collaboration between public and private sector in the consultative process of policy formulation bycreating e Vective government and corporate partnership. — Supporting the dynamic transition from strategies to actual implementation of programmes for sustainable development. — Compatibility—Knowledge on tariVs and costs involved in taking goods to Africa. — Promoting sustainable financing mechanisms for long and short-term programmes and projects using innovative strategies. — Setting up capital market foundations to educate the masses on stakeholder investment as a tool to invest and hold organisations to account. — Setting up Non-Resident Secretariat within the Investment Promotion centres eg Non-Resident Ghanaians Secretariat that coordinates all activities and serves as the centre for all projects, programmes and issues involving Ghanaians living abroad. The secretariat also builds, promotes and maintains active communication with the Diaspora providing updated information and advises in areas such as the re-entryback home (Customs, Immigration), co ordinating international networks of the Diaspora and recommending members of the Diaspora for national awards and recognition. — Federal government bonds to enable stock markets address the issue of debt instruments.
ICT — Developing ICT strategies that are in line with the UN Millennium Development goals. — Increasing the relevance of institutions, policies and regulatoryfram eworks with stakeholders. — Increasing the capacityof business in Africa to engage in e- business. — Careful consideration to encourage Diaspora communities to set up African Diaspora Co- operative Banks here in the UK. — Diaspora should mobilise themselves in order to become powerful economic participants and partner with regular banks. — NEPAD should create the institution to enable Diaspora to pool their financial resources together. — Train the locals to become more competent in e-commerce. — Using eBaytype/modelto enable a one to one micro financing on the web. Must be verifiable to ensure no scams. Cutting oV the manyintermediaries impacting on the amount of moneythat actuallygets to the recipients. 3312162018 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 213
Developingand BuildingKey Skills and Competencies — Moving from a theoretical to practical based training to encourage entrepreneurship. — Improved strategic thinking to enhance the synergy between skills and economic policybylinking skills strategywith trade and industryproviding opportunities for inno vation. — Africa’s abilityto trade in the global market place is linked to its capac ityto use skills to add value to domestic produce and ensure the products meet qualitystandards for exp ort, and, more importantly, move up the value chain—less raw materials, more finished goods. — Development of Skills Development Agencywith stakeholders such as indu stry, private sector, government and educational bodies to ensure that skills development is linked to keysectors of growth and development and content relevant eg South Africa Skills Development Agencyas a model.
Regulatory Frameworks — Lean and eVective regulatoryenvironment that protects the rights of individuals (c rime, property rights) and business byeducating citizens on their rights and increasing the capacityof the security and judiciarysystemto e Vectivelyimplement the law. — The creation of regulatorybodies in countryand networked to global regu lators in manyof the unregulated areas eg estate agents, surveyors to address the issue of propertyrights and protection. — Tighter corporate governance with monitoring mechanism. — Increasing the capacityof civil societyand the media.
Infrastructure — Cost-eYcient and secure public transport system. — System that negates the impact of increased overheads eg harsh grants.
Tourism
Policy
Most African destination countries have evolved their tourism policies around conservation of wildlife, employment creation and generation of foreign exchange. Noble as they are, these parameters tend largely to ignore the local communities who carrythe burdens of conservation, whi ch are manifested byconflicts in land use. The Diaspora is challenged to influence the policyframework in countries o f heritage to embrace the cultural heritage and to reflect demand for domestic tourism. Byso doing th e tourism policies of African destination countries will add more value to the visitor satisfaction regardless of visitor origin.
Investment
African cultural heritage aVords a distinctive sector and opportunityfor investment bythe African in Diaspora because of their inherent aYnitywith the countries of heritage. Furthermore the capital outlayto invest in cultural ventures is relativelymodest yetwith big spatial impa ct on the ground. In addition cultural circuits if well developed and established would open doors and justification for Small and Medium scale enterprise (SME) accommodation establishments. Despite the flaws associated with “Time Share” it could be a viable mechanism to promote and sell such accommodation to the prospective Diaspora investor and tourist. Investing in culture will help open up hitherto marginal areas and improve the living standards of many rural communities. The accent here is on the topical buzz phrase “Think global act local”. It maytake the form of partnership between local and Diaspora investors. This in itself breeds the spirit of success at both supplyand consumer levels of the investment equation. January 2006 3312162019 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 214 International Development Committee: Evidence
Supplementary memorandum submitted by AfricaRecruit, in response to written questions from the International Development Committee
1 Which strategies regarding skills are most eVective in enablingpoor people to participate in growthand private sector development? Strategies should increase the capacityof people to move from consumptiv e to productive citizen becoming economic participants in the societybyincreasing their skills base using through: (a) EVective policies and incentives to stimulate the private sector to work with citizens at micro/small business levels eg aYrmative action. (b) Developing programmes to build the skills capabilities of citizens in specific target industries with low capital entrypoints such as the service industryeg hairdressing, buy ing and selling fast moveable consumer goods eg crafts. (c) Developing infrastructure to enable increased capacityat the micro- small business enterprise level eg access to credit; land for agriculture; communitysavings schemes; a Vordable housing; access to health and storage facilities for goods and commodities, and where applicable reliable power supply. (d) Empowerment through the development of capacitybuilding and enhanci ng skills programmes, which are tailored and targeted “fit for purpose” and accessible, examples include: — Vocational training. — Entrepreneurial and management—diversification rather than duplication. — Apprentice training. — Knowledge Centres. — Business support and advisorycentres. — Mentoring.
2 What are DFID’s strengths in supporting skills and technology development in developingcountries? What are their weaknesses?
Strength: Increasing recognition that skills and technologyplaya keyrole in devel opment and providing support in training.
Weakness: Lack of coordination and joined up action bydonors with national prioriti es and core competencies of developing countries
Addressing the weaknesses (a) Lack of sustainability: Many projects are short term focused in particular in developing countries where programmes are developed around the public sector and prone to changes with new governments. Engaging with the private sector increases the opportunities for long-term development. (b) Using skills and technologyto enhance the productive capacityof the r aw products developed in Africa enabling the products to move up the value chain in a verycost e Vective manner. (c) Lack of technological capacityand development to improve e Yciencyand e Vectiveness of producing and delivering goods and services reducing the overheads in business leading to increased competitiveness. (d) EVective Labour policies—implemented, monitor, review and regularlyupda ted. (e) Integration—technological advancement based on national socio-economic projects. (f) Monitor, benchmarking global trends in commerce and industry. (g) Using IT to collate and integrate information—knowledge management eg local, national and regional labour forecast.
3 How can donors work with the private sector to incentivise professionals from Diaspora communities to remain workingin Africa? (a) Creating transparent private sector through eVective governance structures backed bylegislation, regular training for executives and board members. 3312162019 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 215
(b) Increase the capacityof the private sector to streamline their human r esources management process therebyincreasing its e Yciencyand e Vectiveness as well as turnaround the time taken to complete the recruitment process. (c) Promote reforms that will make it attractive to pursue careers in Africa. (d) Reducing unemployment by training in line with identified source of growth. (e) Access to timelyinformation on job opportunities bythe Diaspora. (f) Work with Governments and private sector “industry” and the educational institutions to develop Regional Centres of Excellence for specific industries “IvyLeague School s of Africa”. This will provide opportunities for career professional development retaining skills in Africa as well as attracting the Diaspora. (g) Increasing trade and investment between hosting and sending countries translates into Diaspora from the host countryof the new investor attracting skilled nationals bac k home- increased support bydonors to private sector investment in the developing countrie s. (h) Work with national governments and private sector to create financial and non-financial measures that will enable attraction and retention of the Diaspora. (i) Donors can work with the private sector to develop the capacityto devel op: — Volunteering. — Internship. — Mentorship for new executives. — Sabbaticals. — Secondment. — Leadership and succession programme. — Job placement.
4 One of the primary aims of the AfricaRecruit initiative is developingan Af rican-wide skills strategy that brings governments and employers together. Has such as strategy been successfully developed? Over the last three years six forums have been held and was attended by over 1,500 employers and approximately20 representatives from government. The outcomes from the event have resulted in identification of best practices, which has been widelydisseminated, and some of the recommendations taken up bygovernments. Specific examples include: (a) EVective labour policies interlinked with education, life long training and labour market needs by conducting skills audit (a recommendation from strategic skills seminar that took place in Kenya March 2004) as mirrored bythe skills audit conducted bythe South African G overnment which identified the need for engineering and project management skills. (b) The adoption of an eVective human resource strategybymanymore employersin Africa looking at processes such as development of job description based on identified needs, recruitment based on core competencies and skills and performance management of the workforce. (c) The growing recognition of skills development as an instrumental tool in development and competitiveness of a nation byall stakeholders resulting in an increase i n the number of employers specificallytargeting the Diaspora for job opportunities in areas of crit ical shortage. An increasing number of employers from both private and public sector embarking on recruitment drives in the Diaspora. (d) Dual nationalitygranted bymanyAfrican countries as an incentive to m obilise national abroad. (e) Identified areas of challenges: — The need for public sector reform and training programmes aimed at creating an eYcient, eVective and performance orientated public service — High level of unemployment or underemployment in particular with the youth in part due to manyof the graduates being unemployable. — The need to development of training and diversityprogramme. — The lack of a transparent recruitment process dogged bylegislative chal lenges such as recruitment based on cultural or ethnic tribe vs. recruitment based on core competencies. Moving from reactive to strategic recruitment. — Poor succession planning or clear career professional path at mid-executive level — Free labour movement within Africa. — Lack of knowledge of where the appropriate skills are and how to theycan be tapped into. 3312162019 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 216 International Development Committee: Evidence
5 Accordingto AfricaRecruit’s research, what are the key barriers to remit tance flows and how can they be overcome?
Barriers: — Unstable and weak or lack of transparent remittances corridors. — Lack of incentives to use the formal channels at both policyand private se ctor levels. — Poor/lack of integrative structures between the sending moneytransfer /financial organization and the recipients in another country. — Lack of regulatoryframework that mayprovide incentives to the flows from the Diaspora into the formal channels. — Administrative and regulatorybarriers in both host and sending countri es.
Ideas to overcome the barriers: — Creation of private sector packages linked into the Diaspora host countries to enable the seamless use and transfer of funds eg Health insurance schemes for extended familyi n Africa, mortgage packages etc as an example it is estimated that over 500 million US dollars per annum has been invested in the Nigeria Stock Exchange bythe Nigerians in the Diaspora. — Tax free or matching grants in the sending and or developing countries for regular remitters who use a formal channel eg more recipients become users of the banks as result increasing the capacity to micro-credit facilities. — Creation of “Remittance Bank” driven bytechnologyto reduce overheads. June 2006
Memorandum submitted by Amnesty International UK
Introduction
1. AmnestyInternational is a worldwide membership movement. Our vision i s of a world in which every person enjoys all of the human rights enshrined in the Universal Declaration of Human Rights. We promote all human rights and undertake research and action focussed on preventing grave abuses of the rights to physical and mental integrity, freedom of conscience and expression and freedom from discrimination. 2. AmnestyInternational welcomes the International Development Commit tee’s inquiryon Private Sector Development (PSD). We share the presumption behind the inquirytha t PSD requires a changed perspective and practice in what donors are alreadydoing. We also support the implication that there are aspects of business operations in developing countries that donors traditionallyhave little experience of. 3. Our submission addresses two issues, both of which have considerable influence on the impacts of Foreign Direct Investment (FDI) in developing countries. 4. The first issue is that of Host Government Agreements. This relates to the legal vehicle adopted by governments to create “a favourable investment climate” and bycompanies to ensure the stabilityof their investment. This vehicle, in the form of a private investment agreement, has far-reaching implications for the abilityof states hosting the investment to respect and protect human r ights in furtherance of international treaties of which theyare signatories. While AmnestyInte rnational acknowledges that governments and investing companies need to address the issue of how to create a stable environment for business, we believe that anymeasures taken should not increase the risk t o human rights of individuals and communities in the host state. 5. The second issue is that of regulatorymechanisms to hold companies acco untable. This relates to the need for donor governments to promote mechanisms to eVectivelytackle the adverse impacts of companies on human rights, especiallyin situations where the host government is unw illing or unable to take administrative and regulatorymeasures to hold companies accountable, o r when individuals damaged by the operations of companies are unable to obtain an eVective remedyin the countrywhere the damage occurs. 3312162020 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 217
Host Government Agreements: the need to create a favourable investment climate without compromising human rights
Background 6. Since the beginning of 2003, AmnestyInternational has been looking int o the private investment agreements that companies sign with host states with poor human rights records. These contracts can be known byvarious names, including host government agreements, transnati onal investment agreements, concession agreements or state-investor agreements. Theycreate the leg al framework that structures relationships between the investing company, the host state and aVected communities throughout the lifetime of the project. 7. AmnestyInternational has published two reports on the risks to human ri ghts posed bythe state- investor agreements underpinning FDI projects. The first report, Human rights on the line: The Baku-Tbilisi- Ceyhan Pipeline Project, was published in May2003. The second report, Contractingout of human rights: The Chad-Cameroon pipeline project, was published in September 2005. Both reports are attached.67 8. The main findings of these two reports are that human rights are placed at risk bycertain aspects of the legal structure of the investment agreements underpinning these projects, in particular a) “stabilisation- of-law” clauses; and b) international arbitration provisions. 9. Stabilisation-of-law clauses and international arbitration provisions are viewed bycompanies, lenders and governments as acceptable means of creating a “favourable investment climate”. It is not Amnesty International’s position that stabilisation-of-law clauses and international arbitration provisions should be eliminated. However, the challenge Amnestyposes to companies, lenders a nd the UK government is to approach the need for “a favourable investment climate” for investors in a manner that is consistent with encouraging improvements in good governance, protecting human rights and the international human rights legal framework.
(a) Stabilisation clauses 10. Legal agreements underpinning FDI projects in poor countries with poor human rights records usuallyinclude stabilisation-of-law clauses. These clauses are common lyviewed as giving extra protection from political risk to investing companies. However, AmnestyInternatio nal is concerned that stabilisation- of-law clauses undermine the international human rights framework and provide disincentives to improvements in good governance and human rights protections. 11. Stabilisation-of-law clauses generallyprovide a restriction on the applicabilityof new law or regulations to FDI projects. Theyalso provide for compensation to be paid to investing companies bythe host state if new laws or regulations are applied and impose direct or indirect costs on the FDI project. 12. States are bound under international human rights law as defined in international and regional treaties theyratify,bycustomaryinternational law and bygeneral princ iples of international law. States are obligated under international law to promote, protect and fulfil human rights by: — Refraining from interfering directlyor indirectlywith the enjoymento f a right. — Taking measures to prevent third parties, including companies, from interfering with the right in question. — Adopting appropriate legislative, administrative, budgetary, judicial, promotional and other measures towards the full realisation of rights. 13. The stabilisation-of-law clauses create risks to human rights protection by: — Limiting state power to impose environmental, labour, health, safetyan d other standards on FDI projects. — Placing a price tag on human rights protection for the host state. — Undermining the abilityof host state authorities to hold the private com panyaccountable in domestic law for breaches of standards or involvement in abuses of rights. Therefore, the abilityand willingness of states to fulfil their duties und er international law in the context of FDI projects are compromised bystabilisation-of-law clauses. 14. Limiting state power to impose environmental, labour, health, safety and other human rights standards. AmnestyInternational’s research has found that the state-in vestor agreements in both the Baku- Tbilisi-Ceyhan pipeline project and the Chad-Cameroon pipeline project freeze the application of new regulation or standards to the FDI project even when these are imposed byth e host government in an eVort to fulfil its international human rights obligations.
67 Not printed. See http://web.amnesty.org/library/pdf/POL340122005ENGLISH/$File/POL3401205.pdf and http:// www.amnesty.org.uk/uploads/documents/doc–14538.pdf 3312162020 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 218 International Development Committee: Evidence
15. Placing a price tag on human rights. AmnestyInternational’s research has found that the stabilisation-of-law clauses obligate host states to compensate companies, in the context of FDI projects, for anyregulation that directlyor indirectlycreates costs for the proje ct or reduces revenue streams. These clauses therefore impose a price tag on human rights protection because the host state has to paythe companyeven when the regulation imposed is for the purpose of protecting h uman rights such as labour rights, the right to health and a healthyenvironment or the like. In e Vect, especiallyfor poor states, these financial penalties can have a chilling eVect on a state’s willingness to regulate the company’s behaviour under circumstances where it has a dutyto do so under international law.
(b) International arbitration 16. International arbitration clauses, along with stabilisation-of-law clauses, lessen the host state’s authorityto use domestic law to protect rights. AmnestyInternational’s research has found that the common practice in FDI projects is to use international arbitration as the sole venue for resolving disputes in the context of these projects. We are concerned that the international arbitration provisions, along with the stabilisation-of-law clauses, have the eVect of largelyeliminating domestic legal accountabilityfor the private investor for failures to live up to contractual standards. Domestic agencies and authorities are unable to impose new regulations on companies without risking international arbitration claims for compensation. In eVect, international arbitrators are put in the position of determining under what circumstances host states are able to take legislative and administrative actions to protect rights.
Recommendation: 17. In this context, AmnestyInternational calls on donor states to take st eps to minimise the adverse impacts on human rights of the extra-territorial operations of their transnational corporations. The UK Government should require companies listed in the UK, as well as the UK Export Credits Guarantee Agency, to ensure that their investment policies and practices are consistent with the host government’s obligations to respect and protect human rights. This requirement should be applied, inter alia, to the framework of investment contracts underpinning an FDI project.
Better regulation to effectively tackle the adverse impacts of companies on human rights
(a) The need for National and International regulation 18. AmnestyInternational recognises that national law remains the most i mportant means of ensuring legal accountabilityin relation to companies’ impacts. We also take the v iew on the basis of our research, that systems of regulation are inadequate in many countries, either because the legal framework itself is weak, or because there is an absence of eVective enforcement mechanisms. Manynational governments, especiallythose of developing countries, are unwilling, constrained (e g bylack of resources or byinvestment agreements as outlined above) or simplyunable to hold companies operatin g in their countryaccountable for their adverse impacts.
Recommendation: 19. AmnestyInternational believes that the UK government should promote an international human rights framework that can be applied to companies directly, acting as a catalyst for national legal reform and serving as a benchmark for national law and regulations. We view the UN Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights as the most credible attempt yet to establish a set of global human rights standards that will be applicable to companies wherever theyoperate.
(b) Appraisingthe e Vectiveness of voluntary initiatives 20. AmnestyInternational’s participation in voluntaryinitiatives suc h as the UN Global Compact, and the VoluntaryPrinciples on Securityand Human Rights (for the extractive sector) has led us to believe that it takes manyyearsfor commitments from companies to be reflected in change s in policyand practice. There is huge variation between companies in their capacityand will to operatio nalise standards that they subscribe to. In our view, the UK Government places too much emphasis on initiatives that do not have anyobvious e Vect in improving the human rights impacts of business in developing countries. We would like to see the UK Government combine its role in encouraging and stimulating corporate social responsibilitywith action to address the adverse impacts of companies; i e a “carrot and stick” approach. 3312162020 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 219
Recommendation: 21. AmnestyInternational believes that the UK government should critica llyappraise such voluntary commitments on the part of business and not use them as a justification for opposing regulatoryframeworks to hold companies to account for their behaviour.
(c) Improvingthe OECD Guidelines implementation mechanism 22. The OECD Guidelines for Multinational Enterprises have been referred to bythe UK government in its international strategic framework for CSR, issued in March 2005, as a benchmark for its expectations of corporate conduct. AmnestyInternational is concerned about the e Vectiveness of the Guidelines and has questioned the government’s commitment to make them work in a joint studyw ith Christian Aid and Friends of the Earth published in January2006 (“Flagship or failure”). 68 While the Guidelines are often cited as an integral part of the UK government’s policytowards CSR, it appears to exercise careful control over their application, unwilling to declare companies in breach of the Guidelines and lacking the political will to implement them eVectively. A main focus of the NGO study is on the failings of the mechanism for handling complaints known as the National Contact Point.
Recommendation: 23. AmnestyInternational believes that the UK government should strengt hen the OECD Guidelines National Contact Point’s complaints process by, inter alia: — ensuring that adequate expertise is available to undertake thorough investigations into alleged breaches of the OECD Guidelines, including, where appropriate fact-finding missions; and — declaring companies in breach of the Guidelines in cases where breaches have occurred. February 2006
Memorandum submitted by Anglo American plc
Introduction 1. Anglo American plc, with its subsidiaries, joint ventures and associates, is a UK-based, global leader in the mining and natural resource sectors. It has significant interests in gold, platinum, diamonds, coal, base and ferrous metals, industrial minerals and paper and packaging. The Group has operations in Africa, Europe, South America, Australia and China. Of its 209,000 employees, 149,000 are resident in Africa, where the companyhas operated for almost 90 years.Anglo American is one of the largest private sector employers and investors in the continent. 2. This submission focuses on how Anglo American seeks to contribute to povertyalleviation and sustainable development, based on its belief that the depletion of natural capital should be balanced byan enhancement of social and human capital. The submission considers core business operations and social investments, partnerships with public sector and civil societyorganisa tions and advocacyand public policy initiatives conducted directlyand through associations such as the Inte rnational Council on Mining and Metals or the World Business Council on Sustainable Development.
What can the private sector do to alleviate poverty? 3. Recent increases in aid, proposed bythe Commission for Africa and promi sed bythe G8 Gleneagles Summit, are necessaryand welcome. However, private sector-led wealth cr eation is necessaryfor these aid flows to translate into sustainable growth. In a recent report,69 the United Nations makes this point clear when it states that “anyapproach to private sector development should be g rounded in the realization that the savings, investment and innovation that lead to development are undertaken largelybyprivate individuals, corporations and communities.” This is not a point confined to the role of international companies; poor countries need properlyfunctioning market economies th at allow scope for indigenous enterprises, including farmers. The growth of manysuch companies is seve relyconstrained bylack of access to capital; poorlydefined propertyrights; stultifyingregulation and li censing requirements; the diYcultyof moving from the informal economyinto the mainstream; poor infrastructur e; and trade barriers especially in relation to regional markets.
68 Flagship or failure? The UK’s implementation of the OECD guidelines and approach to corporate accountability is jointly published byFriends of the Earth, Christian Aid and AmnestyInternationa l UK: http//www.foe.co.uk/resource/reports/ flagship–or–failure.pdf 69 Unleashingentrepreneurship: makingbusiness work for the poor, United Nations Commission on the private sector and development, March 2004. 3312162021 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 220 International Development Committee: Evidence
4. As the experience of China has shown over the last decade, Foreign Direct Investment (FDI) is an important element in the private sector contribution to development. FDI tends to bring above average incomes, knowledge transfer, training, jobs, access to capital, and access to markets. In addition the private sector contributes to development through such core business activities as supplychain development, prompt payment to suppliers, tax payments,70, local recruitment,71, and maycontribute to overall capacity building, the promotion of international standards of safety, health and environmental performance and infrastructure development.
A “resource curse”? 5. The “resource curse” theoryremains in currencyin parts of the developm ent communityand has particular relevance to the leading oil, gas and mining companies that are headquartered in the United Kingdom and which are also amongst this country’s biggest overseas investors. The theory, put forward originallybyJe VreySachs and Andrew Warner, suggests that there is a link between mineral e ndowments and levels of conflict and corruption. However the conclusions of the theoryare verydependent upon the particular time period selected for analysis; for the relevant time period a correlation could equallybe made with accumulated debt levels; and that there are manycontrary“good pract ice” examples—including Chile, Botswana, South Africa, Malaysia, Oman and Peru—where the role of natural resources has been either pivotal or at least benign.. The keyfactor in development is much more like lyto be the presence or absence of good governance rather than a deterministic model which sees a country’s development prospects as being dictated primarilybyits mineral endowment. Having said this, resource d ependence does present specific developmental challenges including revenue management in the light of the volatilitywhich typifiesmany commoditymarkets, the danger of a relativelyconcentrated source of reve nue acting as a catalyst for conflict or aiding corruption, the inflation of exporting countries’ currencies and the “crowding out” of other economic activities. 6. In order to find a new approach to addressing the challenges posed byresou rce dependence, the International Council on Mineral and Mining (ICMM)—of which Anglo American is a member—is currentlyundertaking, with other stakeholders, a “resource endowment” project. This aims to develop tools to assist mineral-rich developing countries to use their resources to achieve wider socio-economic development. It is expected too that the tools will help to inform companies’ future investment decisions and capacitybuilding e Vorts in order to enhance the contribution of the mining and metals sector in developing countries. 7. The current boom in commoditymarkets, principallydriven byburgeonin g demand from China and India, provides a window of opportunityfor reducing povertyand triggeri ng wider economic activityin resource-dependent economies. This will onlybe achieved if past lessons can be learned and if governance standards can be improved. Big extractive operations have not always been good at recognising the extent of their impacts, and especiallytheir indirect impacts on social structu res and alternative livelihoods. There has, however, been a significant improvement in the understanding and management of these impacts and there is a bodyof emerging “best practice” on the means of improving local d evelopment impacts. Anglo American, for example, has evolved policies and practices to alleviate HIV/AIDS, to work in partnerships with the public sector and civil societyorganizations to tackle social ch allenges beyond the “perimeter fence”, to assess the socio-economic priorities and the needs of the communities where we operate, to combat corruption, and to minimise adverse environmental impacts.
What are the constraints on the private sector in developingcountries and how can they be addressed? 8. The same constraining factors—governance failures, a weak or misdirected regulatoryframework, and the preponderance of activityin the informal economy—inhibitboth pover tyalleviation e Vorts and private sector development. However, initiatives to address these factors often “fail to probe suYcientlydeeplyinto the nature of governance and, more importantly, into the underlying conditioning factors and rules of the game that aVect social and economic interactions”.72 9. As noted above, there are manyfactors at work that constrain the ability of would-be entrepreneurs to start or to grow companies. Some of these constraints have been highlighted through the World Bank’s work in this area and were underlined bythe Report of the Commission for Afr ica. Donors have a major role to playin the sphere of enterprise development. DfID, with additiona l funding from Anglo American, Unilever and Shell, has recentlyannounced support for the establishment of the NEPAD “Investment Climate Facility” (ICF). To date some $37.5 million has been raised towards an initial target of $120 million over three years. The Facility will help to support business development in Africa by“streamlining regimes
70 In 2004 Anglo American paid $2,309 million in taxes to governments around the world, including $823 million to the South African government. 71 After an intensive training programme at a new zinc mine in Namibia Anglo American recruited over 90% Namibian employees. 72 UsingMineral Resource Endowments to Foster Sustainable Development: Sy nthesis Report of Four Country Case-Studies, ICMM, ERM, Oxford PolicyManagement, October 2005. 3312162021 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 221
for business registration and licensing; improving customs procedures and facilitating trade; removing barriers to competition; reducing red-tape; and promoting a more positive image of Africa as a place to do business”.73 10. Public-sector corruption poses a range of obstacles for the private sector and can significantlyadd to the cost of doing business, especiallyfor indigenous businesses. It “i mpedes economic growth, distorts competition and represents serious legal and reputational risks”.74 This is not to saythat such corruption is unique to developing countries but, where it is a problem it tends to be more pervasive and to impose a heavier burden than in some developed countrycontexts because of the shee r lack of resilience of many poorer economies. “Supply-side” initiatives such as the OECD Convention against corruption are to be welcomed and within countrythere are a growing number of multi-stakehold er anti-corruption initiatives taking root in which business is involved.
What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth? 11. Donors can playa crucial facilitating role in helping developing coun trygovernments to create the conditions for PSD bystrengthening public governance frameworks and byb uilding capacityamong public oYcials, for example byencouraging partnerships between public inspector s and private auditing, monitoring and certification schemes. DfID-supported work bythe Crown Ag ents on the streamlining customs procedures is a useful example of how donors can support work which facilitates the more eYcient working of markets and build capacityaround better regulation and the und erstanding of regulatory impacts. 12. International Financial Institutions (IFIs) such as the World Bank, the International Finance Corporation (IFC) and regional development banks have helped to raise performance standards in a number of industries through the conditions attached to their lending as set-out in the IFC’s social and environmental Safeguard Policies. This is particularlytrue in the metal s and mining industry. The leverage available to promulgate such standards has been significantlyincreased t hrough the creation of the Equator Principles initiative through which project finance availabilityin deve loping countries is increasinglytied to observance of IFC safeguard and disclosure policies.
How is the private sector engaging in development? 13. The debate within the international business communityaround its rol e in development has been transformed in recent years; reflecting much of the debate about the nature and implications of “globalisation”. This is evident from reading the sustainable development reports emanating from manyof the leading UK international companies or from initiatives such as the recentlypublished Oxfam-Unilever analysis of the impact of the latter’s business in Indonesia. Major companies are increasinglyaccepting that theyhave a role in addressing the indirect impacts of their activities and in seeking to promote good governance. Partnerships between public and private organisations, and with civil societyorganisations, provide a mechanism for the private sector to engage in development. These bi- or tri-sectoral arrangements are rarelystraightforward or free from risk to the participants but, when successful, open up a new range of skills and expertise on issues such as combating corruption, fighting HIV/AIDS, upholding human rights and encouraging enterprise development. Theyhelp to ensure that compani es do not become detached from the areas surrounding their operations on one hand, or to avoid creating an unhealthyculture of dependence, while also helping to ensure that host governments remain engaged in their proper roles and responsibilities. 14. Anglo American, for example, is involved in a range of international, national and local partnerships. The companyis a signatoryto the Extractive Industries TransparencyInit iative, which is seeking, through greater transparency about tax and royalty payments and receipts, to reduce the potential for wholesale embezzlement bygovernments of revenues generated byextractive industr ies and to increase accountability around how theyare spent. We believe that in its next phase of development t he EITI would benefit from being underpinned bya UNGA resolution—as was done for the KimberleyProce ss—to increase its perceived legitimacyin some parts of the developing world. We would also l ike to see the principle of transparencyextended to sub-national distribution of revenues. Simila rly, the Voluntary Principles on Securityand Human Rights seek to provide a framework within which extract ive companies can broaden their security-risk assessments and minimise the chance that their securityrequirements—whether met by the public or private sectors—impact negativelyupon the human rights of l ocal communities. Internationallyit has provided a valuable forum for engagement around “b est practice” between governments, leading human rights NGOs and companies supported bya numbe r of national level dialogues. These initiatives essentiallyinvolve international compan ies in debate around governance
73 Anglo American announces $2.5 million investment to promote enterprise in Africa, news release, 17 November 2005. 74 Business against corruption: a framework for action IBLF, TransparencyInternational and the UN Global Compact, December 2005. 3312162021 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 222 International Development Committee: Evidence
issues—this requires care since advocacyis not the primarypurpose of com panies but we recognise that, as international actors with a degree of influence, we should seek to use it to the good in association with other stakeholders. 15. Leading companies are becoming more adept at understanding their supplychain needs and at becoming involved in building capacityin manydeveloping countries to me et those needs. This is not always easilyachieved given the counter trends in manycompanies to consolidate procurement spend globally. Nevertheless, making suitable tenders accessible to competition from indigenous companies and the pursuit of enterprise development programmes are significant factors in increasing linkages between FDI and building local economic capacity. Anglo American, for example, has active enterprise development programmes in South Africa and parts of Latin America. The South African initiative, Anglo Zimele, works on the basis of taking an equitystake in business start-ups, making loans a vailable and providing mentoring. Companies remain in the “incubator” for an average of three years. On average the unit supports about 30 companies at a time, between them employing some 2,000–2,500 people. The central unit is supported bya network of local business development oYcers. The oYcers’ responsibilities include understanding the capabilities of the regional supplychain; talent-spotting and mentorin g among local entrepreneurs; and ensuring that procurement tenders are not so large and inflexible as to cut smaller firms out of the picture. Within our individual business units we are also pursuing a range of multiple resource use and sustainable livelihoods projects. 16. Anglo American has developed a Socio-Economic Assessment Toolbox (SEAT) to further improve our local development impacts. Based on a set of 22 tools, the SEAT process equips managers to understand the totalityof their economic and social impacts, on issues including job s, training, local procurement, tax payment, informal settlements, and disruption of traditional livelihoods and social structures. Working with local stakeholders, SEAT helps managers to develop an action plan to improve their operation’s impacts. Bymaking its commitments publicly,the companyis held accountable to loc al stakeholders. The process has been implemented in some 15 countries to date with a number of beneficial local development outcomes. 17. Amongst the SEAT tools is one which helps business managers to understand where theymaybe able to access donor funding on behalf of a local communityor a partnership. USA ID appear to have pioneered a number of verysuccessful public-private partnerships of this type.Mor eover Anglo American has worked through the DfID Business Linkages Challenge Fund to support the development of new small-scale mining enterprises and to establish a network of charcoal manufacturing businesses associated with our Southern African forestryplantations. These “black gold” projects—bywayof illu stration—have created some 550 jobs in KwaZulu Natal. The increased aid flows that are envisaged for Africa over the coming years may create a challenge in terms of maintaining the qualityof expenditure. We b elieve that partnerships with companies maybe a dimension of this. Companies can, after all, o Ver project management capabilities, robust financial controls and can oVer communities the capacities that theyneed to chart their waythrough grant application processes. 18. Business can take a leading or innovative role in addressing social issues in advance of the development of a political consensus. An example of this has been Anglo American’s position on HIV/AIDS in Africa. We announced in 2002 that we would make anti-retroviral therapies available free of charge to our employees and we have sought to extend access to care and treatment programmes in communities. This was in advance of a decision bymost of our host governments on the provision of treatment and has been widelycredited with creating greater momentum in the corporate sector be hind testing and treatment strategies. We have been able to partner with the Global Fund to extend treatment in Zimbabwe and are looking at schemes involving PEPFAR. Anglo American’s Chairman, Sir Mark Moody-Stuart, is currently serving as Chair of the Global Business Coalition on HIV/AIDS, which seeks to ‘harness the power of the global business communityto end the HIV/AIDS pandemic. 75 The GBC is intended to spread best practice within the corporate sector and to playan advocacyrole in encouraging gov ernments to adopt enlightened and eVective policies in relation to the management of the pandemic. In addition to the work which it does in Africa, the GBC has been active in engaging with the Governments of China and India on their approach to AIDS.
What aid instruments can be used by donors to encourage PSD? Private benefits versus benefits to society (public goods)—how much is this an issue?
19. In parts of some developing countries, large private companies are one of a relativelysmall number of institutions with the capacityto contribute to development. This is pa rticularlythe case for the extractive sector, as natural resources tend increasinglyto be found in remote, and s ometimes poorly-governed areas of the world. Companies such as Anglo American oVer skills and resources, as well as a secure method of channeling aid funding, through cross-sector partnerships. The international development communityhas often been suspicious of the private sector and yet there should be many synergies between the public and private sectors in relation to issues like the investment climate and infrastructure development and development objectives are unlikelyto be met without a properlyfunction ing wealth-creation sector of the
75 www.businessfightsaids.org 3312162021 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 223
economy. Many international companies have, in turn changed the ways in which theylook at their interactions with the societies where theywork. From this basis there sho uld be a more structured and regular dialogue and co-operation. February 2006
Memorandum submitted by Professor Andrew Atherton, Professor of Enterprise and Entrepreneurship, Lincoln Business School, University of Lincoln
1. The Contribution of Private Sector Development to Economic Growth 1.1 It is axiomatic that povertyis a function of a lack of economic opportun ityand that the private sector creates the wealth that makes nations wealthy. The growth and dynamism of the private sector therefore is both essential to and the primarymeans of povertyreduction. 1.2 And yet private sector development can lead to both greater overall wealth and increasing diVerences in income and prosperitywithin a country,particularlywhen propertyrig hts and institutional arrangements exclude parts of society. 1.3 The challenge of private sector development, as a result, is to find ways and means that are “pro-poor” and that increase the competitiveness of businesses and the economy. For donors, there is a need to deploy mechanisms that can achieve these two objectives. 1.4 So, what do we know about the private sector and its contribution to and role in economic development and povertyreduction? 1.5 Firstly, micro, small and medium enterprises dominate both developing and developed economies. Typically, they create most of the wealth and most jobs. Micro, small and medium businesses are key to private sector development
1.6 Most studies find a clear and strong correlation between levels of business start-up and local or regional prosperity. Prosperous areas have high levels of business start-up, and poorer areas have lower levels. 1.7 Start-ups and new businesses create most or a significant proportion of new jobs, but are most vulnerable to closure, exit and failure. Crucial as theyare to addressing unemployment or under- employment, these jobs are vulnerable, at least in the early years of new firm establishment. Start-ups create new economic opportunity and future growth
1.8 Rates of survival of new firms can varysignificantly,and the “net” start rate is likelyto be as important an indicator of economic growth as the overall, or “gross”, start rate. When the survival rate is low or unstable, this can lead to net reductions in economic activity. Survival of new firms is key to the overall eVects of private sector development on the economy
1.9 Onlya small number of firms grow and generate most growth over anyperiod . Growth amongst small firms, as a result, is limited to a small minorityof all businesses. However , growth is interrupted and periodic. Businesses typically cannot sustain growth, and so their development is interspersed with periods of retrenchment, stabilisation and reconsolidation. We cannot “pick winners” over anythingbut the short-term
1.10 Manydeveloping countries have unbalanced business structures. A ty pical structure for a developing economy, such as those in South Asia and Sub-Saharan Africa would be broadlyas follows: (i) large self-employed population, both formal and informal; (ii) relativelysmall number of internationally competitive, ie growing and exporting, small firms; (iii) a “missing middle”, ie few medium-sized competitive indigenous businesses; (iv) an “unbalanced” large companystructure, ty picallymade up of companies, often operating as loose or complex conglomerates, close to and often influenced bygovernment; and (v) dependence on multi-national companies with headquarters and decision-making control elsewhere. 1.11 Manytransition economies have an under-developed or relativelyimm ature private sector, typically with the following characteristics: (i) few nationallyand internationa llycompetitive large privately-owned businesses; (ii) over-reliance on large companies in basic extractive and processing industries, and other commodity-type industries; (iii) predominance of private businesses in lower rather than higher value-added 3312162022 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 224 International Development Committee: Evidence
ventures; (iv) high levels of churn and closure of new and small businesses; (v) a need for greater clarityabout and protection of propertyrights to create incentives for people to start and develop viable and profitable businesses. The business structures in many emerging and transition economies display structural problems that require consideration and are likely to need addressingas one aspect of a private s ector development strategy
1.12 There are manyreasons whyprivate sector development maybe constrai ned or maybe occurring in (spite of) adverse conditions. Start-up, survival and growth in new and small businesses is undermined particularlyby:(i) macro-economic uncertaintyand turbulence; (ii) in stitutional weaknesses in market exchange mechanisms, for example contract law and legislation, insurance, band credit regimes; (iii) weaknesses in market mechanisms; (iv) resource “constraints” and shortages that limit access to finance, employable people, and other inputs necessary for business growth and survival; (v) lack of or need to enhance entrepreneurial and managerial know-how and capabilityneeded t o establish and develop a business. 1.13 Development of a thriving large companysector is undermined by:(i) a mbiguous or weak governance mechanisms and structures, particularlyfor enterprises tha t controlled and owned by government; (ii) under-developed financial markets and systems that constrain access to expansion funding; (iii) under-developed local R&D and IPR production capabilitythat restr ict the scope for innovation and technologydevelopment. There are multiple constraints that can prevent or slow the development of the private sector. These constraints are likely to need addressingas one aspect of a private sector development strategy
1.14 In conclusion, the private sector is the wealth creator that oVers an endogenous route to economic development and emergence out of lower income status for nations. 1.15 However, developing a thriving private sector represents a major challenge in anydeveloping and transition economy, and there are many examples where this challenge has not been resolved or worked through in ways that create a conducive environment for private sector development.
2. Private Sector Development and Poverty Alleviation and Reduction 2.1 Section 1 argues that the private sector is the keyto economic developm ent and growth that in turn reduces povertyin lower income countries. Private sector development is therefore integral to, and indeed should be placed at the heart of, international development eVorts to address poverty. 2.2 The private sector represents a viable form of development, in that viable profitable businesses are sustainable through the profits theygenerate. And entrepreneurs, who cre ate and renew the private sector, establish and develop their own businesses, so providing a source of future wealth creation in an economy. The impacts of creating, ensuring the survival of and working with or through private businesses will therefore be sustainable beyond donor intervention. Private sector development has the potential to generate genuinely sustainable economic impacts beyond the period and scale of donor involvement
2.3 Indirect benefits are as likelyto be important in povertyreduction as d irect impacts. Indirect benefits, such as the expansion of services, and service-based industries, in response to increasing demand from growing firms and their employees, can have major beneficial eVects for disadvantaged groups that have little access to or are precluded from “mainstream” economic opportunities. This can be through employment in firms servicing these needs or by starting a new business in response to new opportunities. Such opportunities are likelyto require proactive stimulation and inter vention to be exploited. The indirect eVects of private sector development are generally overlooked, and may represent a powerful means of engaging with disadvantaged groups and poorer communities
2.4 “Trickle down” eVects from private sector development are likelyto a Vect more advantaged groups initially, in that they will be more disposed and better resourced to exploit them. Where trickle down eVects have a substantial impact on poorer people, it is likelythat this will be be cause of local eVects, such as inward investment into a poor area. 2.5 “Trickle down” is most likelyto produce “pro poor” outcomes when it occ urs at local levels, and in economicallydisadvantaged areas. 3312162022 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 225
3. Private Sector Development as a Mechanism for International Development
3.1 The private sector operates in diVerent ways to more established local channels of donor engagement, specificallythe public sector and NGOs. In particular, the following prin ciples are likelyto inform approaches to and parameters for private sector development: (i) Profit maximisation and the commercial priorities of firms create agendas and interests within the firm and through its transactional networks that need to be recognised. (ii) The private sector works through established market mechanisms and so will aVect social aspects of development indirectly, although potentially in important ways. (iii) Direct impacts on povertyare likelyto stem from new employmentoppo rtunities, which maybe constrained for individuals that are not employable, thus pointing to the need for “supply-side” skills and knowledge development amongst poorer and disadvantaged groups experiencing personal disadvantage that reduces their employability. (iv) The procurement practices of firms can provide new economic activities for poorer people, but onlyif productive capacityexists or can be developed within these groups . 3.2 This suggests that although the private sector can be a useful mechanism for addressing povertytwo conditions mean that it is appropriate onlyin particular and clearlydefin ed circumstances: (i) Private sector interests need to align or coincide with international donor and national development objectives and ethos. (ii) Private sector solutions designed to alleviate povertyare mainly(b ut not exclusively) market-based and-driven. “Pro poor” private sector development needs to be “pro private sector” as well
3.3 Private sector development therefore requires careful consideration of the likely(and unexpected) eVects on povertyand on disadvantaged people and communities when used to pu rsue povertyreduction objectives.
4. Strategies for PSD: Commentary on the Press Notice
4.1 The InquiryPress Notice identifies four broad dimensions to private se ctor development: (1) Creating an eVective institutional framework for market exchange. (2) Developing a conducive policyand regulatoryregime and framework. (3) Funding the private sector and its development, where there are market failures and barriers to access to finance. (4) “Making markets work for poor people”: bydeveloping proactive means o f gaining access to markets and market opportunities. 4.2 This is not, however, a complete picture of private sector development requirements and scope. What appears to be missing is: (1) Enhancing the competitiveness and capabilityof private enterprises through “soft” inputs. ie BDS, training and related “knowledge-based” inputs. (2) Creating an institutional framework that stimulates and works with the private sectors, and especiallyMSMEs, to enhance their performance and impact on pro-poor gro wth. (3) Using enterprise and entrepreneurship as a means of enabling poor people to develop their own mechanisms and means to escape poverty. (4) Developing the “supply-side” by producing more skilled and more enterprising labour, that helps to address cycles of deprivation and disadvantage. (5) Mobilisation of assets and resources through social means, such as communitymobilisation to invest in wealth creation through the private sector. (6) DiVusion of appropriate technologies to make the private sector more competitive. EVective private sector development is focused, pro-private sector as well as pro-poor and consists of multiple mutually reinforcingactivities. February 2006 3312162023 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 226 International Development Committee: Evidence
Memorandum submitted by CARE and CASHE76
About CARE and CASHE 1. Cooperative for Assistance and Relief Everywhere, Inc. (CARE) is one of the world’s largest independent non-profit, non-sectarian international relief and development organisations. CARE has a significant presence in India that dates back 55 years. CARE works in 11 states of India in diverse development areas including health, nutrition, education, HIV/AIDS, disaster response and mitigation and socio-economic development. CARE, through its collaborative approach has partnered with over 200 NGOs, the government and other keystakeholders to reach out to over two mil lion of India’s poorest. Credit and Savings for Household Enterprise (CASHE) is CARE India’s large initiative in microfinance funded byDFID. CASHE has nurtured and supported 33 NGO-MFIs 77 in the states of Andhra Pradesh, Orissa, West Bengal and Madhya Pradesh. These MFIs and the groups and federations supported bythem represent some of the best qualityMFIs and federations in the country.CAS HE reaches over 350,000 poor women in four states through these NGO-MFI partners.
CASHE and the Private Sector 2. CASHE is a seven-year, fixed-duration project that is due to end in December 2006. The fixed duration mandate under which CASHE has operated has made the fostering of sustainabilitya cornerstone of the CASHE operating model. The definition of sustainabilityin the CASHE unive rse is holistic and encompasses the creation of the sustainable access to financial resources for clients, strengthening institutional capacities of NGO-MFI partners and creation of an enabling environment. This will allow the process of building both financial capital as well as social capital that will sustain beyond CARE’s operational support. This focus on creating sustainabilitybeyondits ow n involvement has required CARE’s to reach out and involve institutions who can be enduring partners in the development of the underlying community. Private sector partners are a critical component of the spectrum of collaborators since they possess global capabilities that would otherwise be unavailable to the CASHE’s customer base. 3. Through microfinance, CASHE has been able to provide its clients with developed capabilities, sustenance securityand the abilityto absorb shocks. However, CASHE reco gnizes that microcredit alone is not suYcient to bring people out of poverty. The capability created by microcredit need to be linked with market-based choices that the private sector is capable of providing. 4. The focus of CASHE’s engagement with the communityhas been on identifyi ng and developing the capabilities of existing and promising micro-finance institutions. This approach has had the consequence of aggregating the best-of-breed micro-finance institutions under the CASHE banner. CASHE therefore has mind-share with a large number of verywell trained and disciplined micro- lenders and intermediate federating organizations. This represents a powerful aggregation of the poor that is robust in volume and capability. The private sector sees this aggregation as a natural market that dramaticallyreduces their cost of outreach to otherwise dispersed and ill-connected customers at the bottom of the economic pyramid. 5. This natural confluence of interests has led to CASHE piloting several engagements that connect the poorest of India with global markets. Some of CASHE’s private sector engagements have been showcased here: 6. ICICI Bank is the second largest commercial Bank in India engaged in a range of financial services oVerings. CARE and ICICI vision for partnership is to work towards building the capacities of the poorest of the poor to participate in the larger economy. The partnership seeks to significantlyimpact the lives and livelihoods of the poor, especiallythe most vulnerable, across the count rythrough provision of a range of need based and appropriatelydesigned financial products and services. Th e collaboration entails onlending through CASHE partners, develop new rural and urban customer for micro-banking and market developing through research in products, governance and policy. 7. Hindustan Lever Ltd. (HLL), part of the Unilever group of the UK, is the biggest “fast moving consumer good” FMCG Companyin India in terms of its annual revenues and mar ket capitalization. Over the past 50 years HLL has supported a variety of initiatives that look to benefit communities across rural India. Project Shakti is an innovative long haul project of HLL to build a rural distribution network providing opportunities for rural women to act as rural entrepreneurs, selling HLL products. Given the extensive presence of CARE in a large number of villages and its network of partner NGOs and community organizations, CARE would partner with HLL in Shakti project through the CASHE project. A modest beginning has alreadybeen made in this direction and as a first step, about 2 00 rural women SHG members who are part of CARE’s CASHE program have been identified in Orissa who would become HLL Shakti entrepreneurs in the next one year.
76 Credit and Savings for Household Enterprise. 77 NGO program partners of CASHE developed into micro finance institutions (MFIs). 3312162023 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 227
8. CASHE has entered a number of partnerships with private insurance providers to create a range of innovative oVerings for the poor. Life-insurance is being provided to 15,000 individuals through a partnership with Royal Sundaram. A premium of Rs. 35/annum provides coverage of up to Rs. 25,000. In partnership with the Healing Fields Foundation, CASHE has provided 10,000 individuals medical coverage of up Rs 20,000 for an annual premium of Rs 365.
Lessons from Private Sector Engagement
What can the private sector do to alleviate poverty? 9. CASHE’s experience suggests that the financial, technological, managerial and intellectual expertise of private enterprises can be deployed to create new products and services vital to povertyalleviation. Such engagement can contribute to povertyalleviation in several ways. 10. Access to finance—Through its partnership with ICICI, CASHE is able to bring to its poorest clients funds that theywould otherwise have no access to. These funds, provided at significantlylower rates of interest than the informal moneymarkets represent a fundamental input to the poor entrepreneurs journey out of poverty. 11. Access to Risk Mitigation—A large proportion of CASHE’s customers exist at the margins of subsistence. Untoward life occurrences can have a dramatic negative impact upon their financial position. Events such as the death of the primarywage earner, the loss of the producti ve assets such as cattle or the cost of treating illness can push a familythat has made significant progres s back below the povertyline. Pooling the risk of these Private sector enterprises engaged in insurance have the sophistication to construct products that transfer these risks in a cost eVective manner. Theyalso have large existing customer-bases into which the risks of the poor can be pooled at little incremental costs. Products such as the life-insurance policydeveloped with RoyalSundaram and the health insurance policydeve loped byHealing Fields have protected CASHE customers from reverting to poverty. 12. EYcient intermediation—Exploitative intermediation is endemic in India’s poor societies. A combination of infrastructure hurdles and institutionalized subjugation of the poor has created an environment where the commercial channels to and from the poor are the monopolistic purview of a few traditionallyexploitative traders. As a result, a poor producers invari ablygets less for their produce and pay more for their purchases. Private enterprises have the capabilities required to create more eYcient channels of distribution that can deliver better products to the poor customers at cheaper costs. CASHE’s partnership with HLL has created two such channels. The Shakti channel brings the full range of HLL products to the poor through an entrepreneur from their own community. Navajyothi is a new channel that CASHE is setting up with the help of HLL to bring other essential consumption items such as food and consumables to the poorest at prices that are fairer than the local traders. 13. Increase in asset productivity—Private sector companies also have the resources and innovative capabilities to create solutions that can enhance the productivityof the activities that the poorest are involved in. CASHE’s partnership with Pioneer Hybrid, a subsidiary of Dupont, is an example of this principle at work. Agriculture is a staple occupation of a large number of CASHE’s customers. Pioneer Hybrid has deployed its significant research capabilities to create varieties of crops such as maize that have significantlyimproved yieldsand therefore incomes in the fields of CASHE’ s customers.
SeekingConvergencewith Private Sector Companies for collaboration at t he BOP 14. In CASHE’s experience with private sector engagement, an approach that involves the private sector purelythrough CSR considerations mayachieve some outcomes, but will not deliver the full potential of social development possible through private participation. For this to happen, private participants must see a waybywhich such engagement furthers their objective of creating shareh older wealth. CASHE’s philosophyhas been based upon seeking convergence between its social dev elopment objectives and the long-term profit objectives of its private sector partners. Thus engagements maybegin with the CSR objective, but eventually, they must find an avenue for the private partner to make an adequate return.
InvestingTogetherto Create Markets 15. Creating opportunities for economic value is essential to ensure private engagement in the interest of creating social value. But it must be recognized byboth the facilitating a gencyand the private participant that all concerned must be willing to work to develop the market, not just service and exploit it. CASHE’s partnerships with ICICI, HLL and others have a significant recognition of this idea and commitments from both sides to conduct market development work through education, research, policyadvocacyand investment in common infrastructure. The challenge to this approach is that private partners will have to accept the idea that manyof their initial investments will be on “common go ods” that their competitors could use and yet the market cannot function without the investment. 3312162023 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 228 International Development Committee: Evidence
The FacilitatingOrganization
16. The CASHE model provides an insight into one means of fostering private sector engagement in a manner that maximizes the povertyalleviation impact. As the facilitatin g organization, CASHE aggregates dispersed collections of the poorest, develops their capabilityto trans act commerce, prioritizes interventions in their journeyout of povertyand connects these needs with the capabilit ies of the private sector. In the absence of such a facilitating institution the opportunitywould either b e unknown to the private sector or prohibitive to pursue. Identification of the Shakti Amma’s for HLL, cost of disseminating product information for Pioneer Seeds, the knowledge of the products required byI CICI’s banking customers. The facilitating organization has to maintain a fine balance between fostering the service and fostering a company. Ideally, the facilitator will work with a basket of providers and oVerings from which the BOP customer base can pick rather than crate a monopolyfor a single private sec tor provider.
In Conclusion—The implications for the donor agenda
17. Engaging the private sector as a stakeholder in development is the natural next frontier in poverty alleviation. However, CASHE’s experience suggests that there are significant hurdles to overcome to create the framework for engagement with the private sector. Overcoming these obstacles is a natural target for donor funding. Some specific ideas based upon the CASHE experience are as follows: 18. Funding of Common Goods—The common goods problem remains an important one to resolve in attracting private investment into developmental work. An example in the CASHE context is customer education with respect to insurance products. Informing customers of the value of insurance is an essential step in creating a market for insurance product, however, once a companyha s invested in creating customer knowledge, the customer is free to procure a competitors product. This issue discourages private investors in investing in assets that theycannot control. Donor aid can be directed t o creating shared infrastructure such as customer education, credit-rating mechanisms and distribution channels. 19. Product Design Assistance—Since private enterprises are usuallyine xperienced in the markets of the poor, innovating for these markets becomes a daunting task. While designing products for these markets, often has to start from first principles and companies have veryfew benchma rks bywhich to reliablyassess the returns of the investments theyare making in product development. CAS HE has observed that this constraint and uncertaintyof return has limited the level of innovation a nd investment private companies are able to make in the development of products for the poor. Insurance is again a good example of vast markets in crop, health and livelihood insurance that are untapped because of inadequate product design. Donor aid could playa vital role in the subsidization of the product develo pment cost so as to allow innovations and breakthroughs to emerge in these fields. 20. Economic ViabilityAssistance—CASHE also recognizes that while mark ets can oVer choices, they cannot always create the ability of the poor to aVord these choices. Competition in the markets will drive down the prices for the poor, but there will still be some products that the poor will not be able to aVord. Donor funding should continue bridging this gap between the market price and the poor persons purchasing power. February 2006
Memorandum submitted by Clydebuilt International, USA In myexperience studyingthe levers available to stimulating private sec tor development in Africa, I have witnessed an encouraging donor emphasis on helping deepen a country’s and local community’s commitment to a pro business environment. Myfamiliaritywith microenter prise and small and medium enterprise (SME) activityin Africa and elsewhere convinces me that an unh ealthybusiness climate burdened with corruption, overegulation, and taxation, etc. hits smaller and informal firms the hardest. Consequently, because these sectors are so large in economic scope, millions of vulnerable people and families struggle that much more. In the United States and in the United Kingdom (and in manyother countries) if an entrepreneur has an imaginative and practical idea to develop or grow an existing business theyhave access to credit and outside financing. In Africa this is not always the case. It is not that Africans lack entrepreneurial flair, imagination, and commitment to making an SME or microenterprise succeed, quite the contrary, it has traditionally been their lack of access to credit and technical expertise. This hurdle has bred discouragement—small firms and microfirms feeling disempowered and more susceptible to the shadow of larger and well connected and politicallysavvybusinesses thus perpetuating a widening and dispropor tiate gap between these sectors of the economy. 3312162024 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 229
Manysuggested public donors such as the United States Agencyfor Internat ional Development, DFID, the United Nations Development Programme (UNDP), International Finance Corporation (IFC), the new Millennium Challenge Corporation (MCC) in the US and manyothers have take n concrete steps over the last several years to enhance the overall business climate in specific countries. Avenues are being pursued through dialogue with governments, donors, and private sector actors to reduce regulatoryand administrative burdens and barriers, encourage competition, and lower taxes.
A consequence of this activityand dialogue has bred a dynamicand vibrant g rowth sector of private equityinvestment in Africa whose seed funds sometimes come from public do nors such as the British and Canadians. The Canadian Government last year set up the Canadian Investment Fund for Africa (CIFA), which consisted of an anchor commitment of roughly$100 million. The equiv alent contribution is being raised from third parties. The UK’s CDC is directlyengaged in this activit yand has committed an investment of roughly$25 million with more likelyto follow. The fund will provide risk capital for private investment in companies in Africa to generate economic growth. Two Canadian firms, Actis and Cordiant, were selected to manage the fund. Actis in particular is quite impressive with a team that has considerable financial and economic experience in Africa. And so more broad-based private investment will make a clear diVerence in creating long-term sustainable businesses in Africa with potentiallyenhanced trade and o Vering investors verycompetitive returns.
Further, I have been impressed and encouraged with an British initiative that has now taken form. It is called the Investment Climate Facility(ICF). The ICF is dedicated to enha ncing overall investment conditions across the African continent. While in its infancyit has great immediate potential because it has backing from indigenous African groups and institutions, donors, and entities in the private sector that daily work in the trenches of the market. What is particularlyattractive about I CF is its practicalityor in other words it oVers a fundamental solution to reducing regulatorybarriers for investmen t. It also addresses head on a growing consensus over the last several years that favorable investment and pro-business atmosphere is imperative. While the stated longevityfor ICF is seven yearsbeginning this month, it could quite easily go beyond that due to its performance in meeting objectives and if future funding streams are identified.
The African storyis increasinglyexciting as economic and political refo rms sweep across the continent. In particular, the language of development has altered. What is becoming clear is that entrepreneurs are the bellwether of wealth creation. And their successes will continue to dispense with the notion that government is the predominant agent of successful development and growth. Bynature, government can become an impediment to growth through policies that create disincentives. The role of government should be to help set the conditions for growth and enhance entrepreneurial trends both in the rural and urban areas of Africa. A healthy, confident, and vibrant entrepreneurial class will dramaticallyreduce African poverty.
I recentlyspoke with a President and CEO of a firm called ENO International b ased in Accra, Ghana that invests in plantation agriculture, financial services, among other sectors. His name is Roland Akosah. Roland is a respected and well-educated businessman and he typifies entrepreneurship and risk-taking and has an excellent grasp of the local marketplace. He notes that optimism is in the air. We both believe that a business-friendlygovernment in Ghana has labored to stabilize the loca l currencysince 2001. It has managed to add to the country’s foreign exchange reserves even as unprecedented increases in crude oil prices threaten Ghana’s long-term growth. The ten-year old stock exchange continues to yield impressive returns to investors. From housing construction, telecommunications, pharmaceuticals and to plastics, there are impressive private sector stories to tell from Ghana. Perhaps, the most impressive untold African storyis that of ECOBANK, a pan-African financial services firm, operating i n over ten African countries. ECOBANK has built $2 billion equityfrom $32 million in 15 years.
Mr Chairman, the picture of achievement and potential in Africa is captivating and uplifting, but still fraught with clear challenges. Over-crowding and old farming practices have decimated the countryside. Thus, a rural-urban drift has set in across Africa. Consequently, the business air qualityis such that it leaves manyentrepreneurs, while focused and anxious at the starting line, gaspi ng for breath even before the gun goes oV.
Directlyaddressing the climate in which African entrepreneurs operate a nd do business is key. Governments and international donors must make increased investments that bolster emerging and promising enterprises and create the economic conditions for an emergent, dynamic entrepreneurial class in Africa to flourish. Byso doing, we will loosen the grip of poverty,and pro vide more hope, resources, and choices to the manywho live and die with so little.
I thank the Committee for the opportunityto o Ver mythoughts during this inquiry. Ian Houston January 2006 3312162025 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 230 International Development Committee: Evidence
Memorandum submitted by the ComMark Trust
A. ComMark:An Introduction
1. ComMark: ComMark stands for MakingCommodity Markets Work for the Poor in Southern Africa. ComMark was established in 2003 as an independent trust with funding from the UK’s Department for International Development (DFID) and is managed byECI Africa, a South African economic development consultancy. ComMark’s objective is to further the development of commodityand service markets in Southern African so as to strengthen their impact on the lives of poor and unemployed people. This entails improving the legal, regulatory, policy and business service frameworks that underpin commoditymarkets sot that theywork more inclusivelyand e Vectivelyfor the benefit of poor people. ComMark focuses on three core sectors of the Southern African economy: textiles and apparel, agribusiness, and tourism. These sectors were chosen because the oVer high pro-poor growth potential.
2. ComMark’s Approach: At the heart of ComMark’s approach to development lies the conviction that inclusive, well-functioning markets oVer the onlylong-term basis for povertyreduction. This contrasts with the populist view that markets work onlyfor the rich and that poor people ne ed to be protected or insulated from them. How markets work is especiallyimportant for poor people, wheth er theyare consumers, employees or producers. Where markets work inclusively and competitivelytheyo Ver jobs and access to products and services. Where markets work exclusively, or are dominated byspecial interests or distorted bybad policies or inappropriate regulation, poor people have fewer chanc es to participate and benefit from the fruits of economic growth.
3. ComMark’s Methodology: ComMark was set up to demonstrate practically how markets can be strengthened to make them more inclusive and pro-poor. ComMark’s multi-sector and multi-country approach allows us to test this methodologyin a varietyof contexts. Much o f ComMark’s work concentrates on working with government and the private sector rather than setting up specific development projects. Where ComMark does engage in specific markets it works through established partners, providing funding and technical assistance. The aim is to avoid creating aid-dependence by playing a catalytic role in markets so that ComMark’s inevitable exit as a funder will not cause these initiatives to collapse.
4. ComMark’s Submission to the PSD Inquiry: This submission draws on our experience in Lesotho where ComMark supports two sub-sector MMW4P interventions.78 The first of these is ComMark’s Lesotho Textile and Apparel Project. This aims to improve the level of investment and competitiveness of that country’s garment sector so that it benefits the poor by creating formal job opportunities. Our second intervention is aimed at bringing small-scale traditional wool and mohair farmers into the formal marketing system so they can access business services such as extension support and animal health products and thus increase their returns from livestock. ComMark will highlight in these two case studies a number of the issues being reviewed bythe Inquiryon Private Sector Development. More specific allywe will tryto provide insight into the types of donor interventions ComMark believes can change the business climate and deliver pro-poor growth.
B. Lesotho
5. Background Lesotho: Lesotho is a small, land-locked countrywith a popu lation of just over two- million people, completelyencircled bySouth Africa. With a Gross Nation al Income of US$402.8 per capita (2004), it ranks as one of the countries on the United Nations’ Least Developed Countries list. The UNDP Human Development Report Index ranked it 149 out of 177 countries. Lesotho’s economyis mainlybased on subsistence agriculture, livestock, remittances from migrant miners working in South Africa and a garment assemblysector. The Lesotho economyhas been stagnating for the p ast decade as the most important sources of income have been shrinking. South African mines shed more than 33.3% of their workforce during the 1990s and the agricultural sector also contracted over the same period.
6. Agriculture is extremelyimportant to the Lesotho economy;80% of the po pulation lives in the rural areas and more than half the population derive their primarylivelihood fr om crop and livestock production. Agriculture’s share of the country’s Gross Domestic Product has declined from 26.8% in 1981 to 16.3% in 2001. This trend is attributed to declining productivityas a result of soi l erosion, lack of plant fertilisation, and poor husbandrypractices and farm management. Inadequate credit and s hortcomings in the agricultural policyframework have also been cited as contributing facto rs.
78 Aside from the project interventions described here ComMark is also involved in a range of other initiatives. Details of these can be found on ComMark’s website, http://www.commark.org 3312162025 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 231
7. The Lesotho garment sector, stimulated byAGOA (African Growth and Oppo rtunityAct) preferences, grew from 20,000 jobs in 2000 to 54,000 in 2004. The advantages of AGOA have been eroded over the past year by an appreciating exchange rate and the end of the Multi-Fiber Agreement (MFA). The net eVect of these changes was to cut employment in the garment sector to 45,000 jobs bythe end of 2005. However, surge protection against Chinese apparel imports to the US has brought temporaryrelief. Buyers are returning to Lesotho and order books at some of the larger factories are starting to reach satisfactory levels. Another encouraging sign that the business environment is improving is that four new factories are set to open, once again boosting employment. 8. The Donor Response to Lesotho. For more than three decades Lesotho has been a recipient of OYcial Development Assistance (ODA). Due to Lesotho’s position as a frontline state in the struggle against apartheid South Africa, total ODA to Lesotho was relativelyhigh in the ear ly1990s, amounting to 23% of GDP. This has plummeted over the past decade, with a net ODA level of US$79 million being reported in 2003. This equates to 6% of Gross National Income and thus Lesotho is not overlyaid dependent. 9. In support of the PovertyReduction Strategy(PRS) adopted bythe Lesoth o government, donors are increasinglymoving awayfrom stand-alone projects towards more program matic support. Despite this move, in 2005 the Ministryof Finance was quoted as stating, “The bulk of [th is] development assistance remains in the form of unharmonised ‘project aid’ which has a multiplicity of conditions, reporting requirements and numerous supervision missions including workshops and stakeholders”.79 ComMark was set up to deliver donor support to Lesotho in such a wayto by-passsuch imple mentation hurdles and support the PRS without compromising DFID’s governance arrangements. Using organisations such as ComMark to absorb the administrative burden associated with donor funding bears consideration. Using organizations such as ComMark to absorb the administrative burden of donor funding has been successful and should be replicated. 10. In the PRS strategydocument the government of Lesotho unequivocallys tates its belief that poverty reduction can onlyoccur in the context of rapid and sustainable growth eco nomic growth. Furthermore, its top two priorities include creating employment and improving agricultural productivityand food security. ComMark’s two Lesotho projects thus fit squarelyinto the Government of Les otho’s development strategy.
C. Making Markets Work for the Poor in Lesotho:The LNDC/ComMark Apparel Project 11. Background on the garments industry: The formal garment industry started in Lesotho in the early 1980s. This was primarilyas a response bySouth African-based clothing co mpanies to avoid the sanctions imposed on South African manufactured goods bythe USA and Europe. Also, th e Lesotho National Development Corporation (LNDC) oVered incentives to the South African industrialists who set up in Lesotho. The main incentives were favourable rentals on pre-constructed factoryshells, relativelycheap and well-educated labour, a five-year tax holiday, which could be extended through further expansion, and subsidised wages during a designated training period. 12. During the 1980s Lesotho enjoyed a number of advantages over South Africa because of trade agreements with the Western world. Under the General System of Preference (GSP), manufactured goods from Lesotho enjoyed preferential duty regimes into such important markets as the USA, Canada and other non-EU European countries. In addition Lesotho was a signatoryto the Lome Convention, which allowed dutyfree access of clothing into the European Union. 13. This favourable export environment assisted the LNDC in attracting a second wave of investment in the late 1980s. While some new South African industries did commence operations in Lesotho during this period, the majorityof the investment was bySoutheast Asian entrepreneu rs, principallyTaiwanese. The Southeast Asian industrialists in Lesotho found a degree of comfort in operating in this country. The business environment was such that theycould successfullyoperate their businesses without onerous regulatoryinterference. This led to further growth through word of mouth testimonywith additional industrialists moving in to attempt to emulate the successes of their acquaintances and competitors. 14. With the introduction of the African Growth and OpportunityAct of 2000 (AGOA), Lesotho, as a Least Developed Country, gained significant advantage over its competitor countries in the developing world. It could now export its clothing both duty-free and quota-free into the USA. AGOA thus drove the unprecedented growth in the industrial garment subsector in Lesotho during the period from 2001–04. At the industry’s its peak workers in the industry were earning US$70 million a year, with the money moving through the economystimulating a plethora of micro businesses selling go ods and services as diverse as food, transport, housing, communications, hair styling, and shoe repair to workers. 15. While AGOA had helped stimulate export opportunities, the strong appreciation of the rand (against which the Lesotho Loti is pegged) relative to a weakening US dollar, tempered this export growth. As US exports dominate the Lesotho garments industrythis has a pronounced, e Vect making Lesotho apparel relativelyuncompetitive.
79 Gayfer, J Flint, M and A Fourie, 2005. Evaluation of DFID’s Country Programmes: CountryStudyLesotho 2000–04. DFID Evaluation Report EV657. 3312162025 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 232 International Development Committee: Evidence
16. Private sector industrialists are the main drivers of the Lesotho textile industry. Some had been active in the countrybefore AGOA. Others came in once AGOA had increased the likel ihood that Lesotho textiles could be internationallycompetitive. Most of these industrialists came from Southeast Asia, but some were originallybased in Bloemfontein, South Africa. These entrepreneurs bro ught valuable capital, skills, and knowledge of the international textile market. At the same time their lack of familiaritywith conditions in Lesotho has created problems, but these are being reduced byvarious initi atives and bythe pressure of competition.
17. ComMark’s Project in Lesotho. During the design phase of ComMark (2002–03), one of the identified problems facing the Lesotho apparel industrywas lack of indust ryexpertise within the Lesotho Government and its agencies. This lack of expertise meant that manyof the r ecommendations made in an earlier DFID-funded studyon the Lesotho garment industrycould not be imp lemented. The Ministryof Trade and Industryapproached ComMark to help fill this gap. ComMark formed a strategic partnership the LNDC and an oYce for the LNDC/ComMark Apparel Project was established. StaV was recruited and ComMark set about dealing with two distinct sets of issues, namelyforging a partnership between government and industryand improving competitiveness.
18. Forging partnerships: Other factors behind the expansion of the textile industryhave been the absence of barriers to hiring workers and the generallypositive manner in which the Lesotho government has worked with private sector industrialists. ComMark has been instrumental in establishing this relationship. The Government’s proactive engagement with industrystak eholders is highlyrated by industrialists and buyers alike. Joint visits by the minister and leading industrialists to the USA has helped to cement relationships with some major buyers. This is a key to the future success of the industry. The Minister of Trade and Industryengages with industrialists and works proa ctivelyto address their problems. He recentlyestablished the Inter-Ministerial Task Team on Attracting an d Maintaining FDI in Lesotho’s Textile and Apparel Industryto tackle the concerns of industrialists. In itiallythe team, made up of industrialists and representatives from concerned ministries and parastatal bodies, was mandated to look into specific problems and report back promptly. This consultative forum meets fortnightlyand deals with issues as theyarise.
19. Building Competitiveness: There are grave concerns that the Lesotho apparel producers will not be able to survive in a more competitive global market when AGOA ends. However, labour costs alone do not determine competitiveness. Competitiveness has manyaspects and, Lesot ho producers have been able to make critical improvements through their involvement in the market. Price is important but response time and response reliabilityalso matter. Some competitors with verylow labo ur costs, such as Bangladesh, have not always been able to meet these requirements. Quality of merchandise is also crucial for buyers. Meeting these requirements often depends on eVective management systems. Strengthening management systems can therefore do much to enhance competitiveness.
20. Becoming more price competitive does not necessarilyimplyreducing t he wages of workers. A more eVective wayto achieve this is to increase productivity.This can mean wages rise while the price of the good comes down. To increase competitiveness, the LNDC/ComMark Apparel Project launched a US$1m training co-funding scheme designed to stimulate the business service market for training and improve productivity. To date more than 33 firms have registered along with 16 service providers. These providers oVer training in supervisor skills, management, health and safety, operator training and communication skills. Positive results have alreadybegun to emerge. Some firms have foun d that instituting training programmes has boosted their sewing production line outputs byup to 25%. I t has also been argued that employees selected for training often view this as an aYrmation of their value to the companyand this itself increases motivation. A further benefit of these training programmes has been a change in the mindset of managers, which can significantlyreduce costs. Manyof the Southeast Asia n industrialists have convinced themselves that the Basotho population do not have the skills to reach supervisor and management levels. The training programmes are eroding this belief. This could lead to more cost-eVective management structures as well as the emergence of managers who better understand their subordinates.
21. Case-studyLessons: This case studydemonstrates that opportunities exist in the global economyfor less developed countries. What is important for those who want to benefit is to understand the nature of the opportunity, and to then devote both public and private resources to taking advantage of it. This example from Lesotho also shows that it is not simplya case of leaving the private se ctor to discover global opportunities. Making markets work for the poor requires the construction of a growth alliance between the state and development agencies to enable them to respond to the concerns of the private sector and provide various forms of assistance. This is essentiallythe situation in Lesotho. The state supports the textile industryin international negotiations, encourages investment in impro ved productivityand seeks to reduce the costs of its regulations. The state must be eager for investment, must monitor global developments, and must react speedilyand decisivelyto facilitate the processes through wh ich the private sector can access opportunities. Donors must be poised to support this process. 3312162025 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 233
C. Making Markets Work for the Poor in Lesotho:The ComMark Trust’s Wool and Mohair Project
22. Wool and Mohair IndustryBackground: After garments, the wool and moha ir industryis the second- largest export sector of the Lesotho economy—an estimated 40% of all Basotho households own some form of small stock. The countryhas around two million sheep and goats, produci ng 2-million kgs of wool and 1-million kgs of mohair. This production is, however, 40% of what was produced byLesotho in 1984. A subsector analysis of the industry, undertaken by ComMark in 2002–03, found that although the industry had potential to expand, overgrazing, limited investment in livestock improvement, low reproduction rates, high mortalityand an ine Ycient marketing structure had thwarted this potential.
23. The Lesotho wool and mohair sector has not received the same level of government support as that enjoyed by the garment and textile sector. The marketing of wool and mohair remains regulated and this has inhibited the development of the private sector wool trade. More than 60% of Lesotho’s wool and mohair clip is marketed through the 98 shearing sheds owned and operated by the government. Larger farmers, who are well organised into farmers’ associations, typically use these facilities. The main challenge faced bythese farmers is that all their interaction with the market (both p roduct and business services) is mediated through the Lesotho Government’s Livestock Product Marketing Service (LPMS), whose quality of service has been falling over the past five years because of budget constraints.
24. LPMS was originallyestablished bythe Ministryof Agriculture 80 to manage and support the marketing of livestock products through the government woolsheds. LPMS helps formal wool producers from shearing until theyreceive their paymentfrom South African-based b rokers. Although the government and producers recognise that this arrangement is no longer sustainable and that the privatisation of the government sheds is needed, this process has stalled.
25. Government sheds do not easilycater for small-scale traditional farm ers as theyoften need access to the proceeds from their wool immediatelyand cannot wait the requisite six months for payment. This group of farmers can either sell their wool through private, licensed traders who operate 34 shearing sheds around Lesotho, or use informal traders, referred to as smugglers in Lesotho.
26. To maintain their licences, private traders have to provide farmers with shearing and grading facilities, submit statistics and payover a dipping levyto government. W ool traded through this channel has dropped oV significantlyover the past few years.The reduction of livestock numbers t hrough stock theft is one reason for the decline, poor service and uncompetitive prices these traders have oVered being another. The standard business model these private traders have adopted is that of paying farmers low prices and minimising their shearing-shed operating costs. The result is that manys mall-scale farmers, who have suYcient stock to warrant shearing their animals at a shed, choose to shear their sheep at home and sell their wool through the informal sector.
27. Informal traders have flourished over the past few years at the expense of the licensed traders because theydo not maintain shearing sheds, ask for proof of ownership or paystatu torylevies. Typicallytheybuy home-shorn wool from farmers in plastic bags and then sort, grade and market this product in South Africa. Consequently, the Lesotho wool and mohair industry loses out on all local value addition and this has discouraged investment.
28. ComMark’s Wool and Mohair Project in Lesotho: Based on the structure and performance of the Lesotho wool and mohair industry, ComMark identified two points of intervention needed to make wool markets work more eVectivelyfor the poor. The first was the need to deregulate the industryand p rivatise the government woolsheds so as to strengthen the overall wool and mohair business climate. The second point of leverage was the need to assist private licensed traders to modify their business model to broaden their service oVering and oVer producers higher, market-related prices for their wool, therebyencou raging them to invest in their livestock.
29. Strengthening the private sector: One of the primaryreasons the priva te traders lost market share was that theypaid farmers uncompetitive prices for their wool. The traders cl aim theydid this because theywere not profitable. Scratching below the surface shows that the reason theywer e unprofitable was their high per- unit cost structure, coupled with the low prices theyachieved for the wool theyon-sold through brokers.
30. To break this cycle, in April 2004 ComMark extended a three-year grant to Teba (a market development facilitator) to work with two of the three private traders and to deploymentors to four of their sheds. These mentors were responsible for working with traders to initiate a fee-for-service animal health programme. Improving the availabilityand a Vordabilityof animal health products is one of the main measures to increase wool yield per animal. This in turn leads to an increase in the volume of wool through a shed and reduces the average unit handling cost.
80 It now resorts under the Ministryof Trade, Industry,Marketing and Cooper atives. 3312162025 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 234 International Development Committee: Evidence
31. Byextending a field service to farmers, the mentors and field workers wer e also able to inform farmers of the prices theycould expect to receive for their wool and encourage them to bring their stock to be shorn at the shed. Furthermore, the mentors were responsible for working with shearing shed staV to ensure that qualitycontrol measures were implemented and that the wool marketed from a shed was correctlyclassed and baled. 32. The two traders participating in the project had to agree to payhigher p rices to farmers (the target being 60–75% of the final wool price). In addition theyhad to agree to follow certain woolshed management policies and procedures. This intervention was designed so that, for the first year, the participating traders did not have to bear anycosts for the services of the mentors. However, once a volume baseline (Year 1) has been established, anyadditional increases in profits will have to be sh ared (10%) with the project. 33. As a result of this project, private licensed traders who were on the verge of closing down their operations are now handling unprecedented quantities of wool. Prices received byfarmers were 60–65% of the corresponding final auction price. Bycontrast, the smugglers paid far mers the equivalent of 30% of the auction value, while the larger farmers, who sheared at government sheds netted 85% of the final price. However, these larger farmers had to wait six months before receiving their money. 34. Finally, many of the management, training and control services the mentors are providing around clip preparation for final sale are typically embedded services wool-marketing brokers oVer their clients. The regulated nature of the Lesotho industryhas led to a lack of competition am ong brokers and reduced their need to oVer such services to gain market share in Lesotho. Aside from budgetaryissu es, this missing broker business service oVering strengthens the case for industryderegulation. 35. Enhancing the investment climate through improving the regulatoryfr amework: While the government of Lesotho has committed itself to deregulation and privatisation of the wool industryfor the past two years, it has been unsure how to proceed with implementation. Issues around possible staV retrenchments, asset transfer and service reach have emerged as key. To accelerate this process and introduce certaintyinto the market, ComMark has set aside funds to develo p the institutional capacityof the industry, and together with the Lesotho government and the private sector is hosting a series of sector workshops to chart the future of the industry. 36. While the need for such support was identified in 2004, this component of the interventions is only being implemented 18 months later. Unlike in the garments sector, where government’s support was unequivocal, in the wool industryComMark has had to work with the private s ector to bring the challenges faced bythe industryto the attention of government. This strategyexempl ifies ComMark’s view that to contribute to regulatoryreform, a MMW4P change-agent must first establis h credibilitythrough project- level, private-sector interventions. To be heard, you must build your voice from within the sector. 37. Case-studyLessons: This case studydemonstrates how it is possible, a t a smaller, project level, to work within the logic of the market to benefit poor people and how this experience can be used to inform and build support for sector-wide restructuring. While the informal sector has a role to play, transforming traditional agriculture requires incorporating the manysmall-scale fa rmers working at the peripheryof the formal market into established value chains. These chains are able to deliver a range of business services such as extension, animal health and ultimatelyo Ver better prices, which encourages investment and reduces poverty. February 2006
Memorandum submitted by James Copestake and Susan Johnson, Department of Economics and International Development, University of Bath
1. Our credentials This submission addresses the role of donors and the private sector in reducing povertythrough investment in microfinance. The experience of the authors in this field includes: (a) commissioned impact assessment research of DFID investments in microfinance in India, Kenya, Uganda, Malawi and Zambia; (b) academic leadership of Imp-Act: a five year international program of research into the social performance of microfinance sponsored bythe Ford Foundation and involving microfinanc e providers in more than twentycountries; (c) membership of various other groups involved in thes e issues, including DFID’s Enterprise Development Innovation Fund and the CGAP81 advisorypanel on impact assessment. A selection of relevant publications of the authors is provided in the appendix (Ev 236), along with summaries of relevant findings.
81 CGAP is the Consultative Group to Assist the Poorest, a multi-donor initiative focussed on microfinance and the key policyleader and knowledge bank in the field. 3312162026 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 235
2. Scope of submission: microfinance for poverty reduction Microfinance is defined as credit, savings, insurance and moneytransfer se rvices for relativelypoor people. This definition goes beyond traditional banking services to include self-provision—eg self-help group savings, and electronic transfer of mobile phone credits as a payment mechanism. The central goal of donor intervention in the field is taken to be sustainable povertyreduct ion achieved through actions to improve financial services to relativelypoor people hitherto excluded fr om the financial system and/or incorporated into it onlyon adverse terms. While social benefits depend on the quantity of financial services supplied to poor people theyalso depend criticallyon their quality.This includes both direct impact (value- added) on the lives and livelihoods of customers, and indirect impact—on familyrelationships, employment, social capital and gender norms, for example. At the core of this submission is: (a) a concern that quality of impact is being neglected in the rush to improve quantity of commercial supply; (b) a belief that DFID can help to address this problem bypromoting qualitymeasurement and enha ncement.
3. Potential for a more commercial approach The last decade has seen a remarkable growth in the number and sophistication of non-profit private sector institutions specialised in delivering financial services to poor people—microfinance institutions (MFIs). However, a relativelysmall proportion of these have achieved ful l financial self-sustainability. We welcome the eVorts of DFID (through multilateral agencies and CGAP as well as directly) to increase the role of private for-profit financial institutions in microfinance, alongside non-profit and cooperative institutions, in order to enhance the resources and expertise available to reduce financial exclusion. An important benefit of a more commercial approach is a strong emphasis on responding flexiblyto the needs of users. Likewise we welcome moves towards a sector-wide approach in which the overall abilityof the financial sector to reduce poverty(byreaching poor people and serving the m well) joins macroeconomic stabilityand economic growth as an explicit policygoal.
4. Dangers of commercialisation (1): upscaling However, we are concerned about mission drift arising from the use of donor funds to promote commercialisation. With respect to upscaling of MFIs, nearly10 yearsof r esearch has taught us that growth and financial performance indicators are no substitute for evidence of povertyimpact o r social performance. — It produces a bias towards geographical areas that are more easilyaccess ible and where economic activityis greater. The core microfinance methodologies have been relati velysuccessful in these contexts but less so in more rural contexts (see reference 11) in particular there has been relatively little experimentation with agricultural lending and related insurance mechanisms. — Emphasis on achieving financial sustainabilityoften results in high rat es of client turnover because poorer people are less able to cope with demands to increase their use of services or to bear more of the costs of doing so. While those able to stayexperience modest increas es in income, there is also a bias towards better oV groups, and hence an overall risk of increasing diVerentiation (see references 7,8,9). — Targeting women has often been seen as a means of correcting their past exclusion from financial services, but their abilityto absorb increasing volumes of credit and dev elop enterprises is constrained bymanyother gender norms that a Vect their market activities. A focus on financial services alone that is not related to building other capacities and addressing these constraints cannot be a panacea for women’s economic empowerment. Financial services need to be carefully tailored to meet their gendered needs, and need to be supplied to meet the gendered needs of men also (see reference 9,11,12). Emphasis on women’s empowerment has overshadowed development of the tools for eVective gender analysis of the financial market. — Investment in more cost-eVective monitoring of who is being reached byMFIs and to what e Vect (hence capacityto manage social performance) has been inadequate relative to the emphasis on measuring and managing financial performance (see references 1–6)
5. Dangers of commercialisation (2): downscaling and a sector-wide approach We also have concerns about initiatives to downscale for-profit financial institutions. Initiatives of for- profit partners should be appraised and reviewed against social as well as financial goals in the same wayas upscaling initiatives. However the abilityof donors to require and imple ment reporting of this kind is often limited because their financial leverage and influence is small. Improving access and qualityof financial services is generallybetter served through spontaneous moves down marke t spurred byincreased competition (see reference 2). The risk is that British aid is subsidising banks (large and small) in a vague hope that financial exclusion will be reduced and employment created as a result. 3312162026 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 236 International Development Committee: Evidence
6. The need for social and financial performance management Given these fears, we argue that investment in financial institutions should onlybe made alongside strong and sustainable mechanisms for assessing whether there are commensurate social returns. Without these there is no evidence on which to judge whether DFID’s aim to have an impact on povertyis in fact being achieved. Incentives for wishful and even opportunistic thinking about the extent to which microfinance can reduce poverty, build social capital, empower women and yield a profit simultaneouslyis large. The only counter to this tendencyis to invest in an evidence-based approach and a cu lture of learning through evaluation. Such evidence must of course be reliable. But it should also be timely, cost-eVective and contribute where possible to cumulative and institutionallysustainabl e processes of learning (see references 1,3,4,10). This entails identifying and working only with financial institutions (and organisations that support them through consultancyand networking) that demonstrate willi ngness and capacityto collect and use social and financial performance data as a core aspect of what theydo. Th ere are a number of initiatives underwayto promote these approaches. USAID is evaluating indicators to more easilyand e Vectivelyassess povertyoutreach (see www.povertytools.org) and to strengthen private sector development evaluation methods (www.microlinks.org). Imp-Act is working with a range of MFIs to spread good practice in social performance management (www.Imp-Act.org). DFID has funded Finscope in South Africa to produce data on financial service use and monitor the social objective of increasing financial service outreach in South Africa (www.finscope.co.za). But we believe DFID can go much further in ensuring that social performance assessment is a core feature of its work with the financial sector.
Relevant studies carried out by the authors.82 1 Imp-Act (2005). Cost-eVective social Reports on how MFIs in three countries (Honduras, performance management. Meeting the Bosnia-Herzegovinia & South Africa) found routine social and financial goals of microfinance. assessment of client satisfaction and impact Policynote 1. www.imp-act.org. (8 pages) improved their financial perfor mance. Also reports on how formal impact assessment of MFIs in Bolivia was made more cost-eVective bydelegating the task to a microfinance network. Draws lessons for other MFIs. 2 Imp-Act (2005) Working with formal Sets out the promise and pitfalls of donor support financial institutions: expanding access for large regulated financial institutions. and achieving social performance. Policy Note 2. www.imp-act.org. (6 pages) 3 Imp-Act (2005). Social Performance Step-by-step for MFIs into setting up a social management in microfinance: guidelines. performance management system. Also includes a Brighton: IDS Publications with the CD and practice notes, including (No.8) on how Microfinance Centre, Warsaw. (48 pages) donors can conduct reviews into the social performance of MFIs in a waythat strengthens internal systems. 4 Copestake, J. G., M. Greeley, S. Johnson, Synthesis of the experience of thirtywith social N. Kabeer, A. Simanowitz (2005a). performance management of more than 30 MFIs in Moneywith a mission. Microfinance and 20 countries, including detailed fin dings on poverty povertyreduction. ITDG Publications. outreach, impact assessment, wid er social impact, (253 pages) impact on local financial markets and internal management issues. 5 Copestake, J. G., P. Dawson, J-P. Compares empirical findings from two studies into Fanning, A. McKay& K. Wright- povertyoutreach, and two studies of impact o n Revolledo (2005b). Monitoring diversitypovertyofa consortium of Peruv ian MFIs using of povertyoutreach and impact of village banking methodology.Argues tha t cost- microfinance: a comparison of methods eVective social performance management is possible using data from Peru. Development (a) using proxyindicators to monitor po verty(b) a PolicyReview, 23(5), 703–24. qualitative individual interview protoco l (QUIP) to monitor impact. 6 Copestake, J.G. (2006) Mainstreaming A summaryof the main argument in Re ference 4. microfinance: social performance Sets out a general framework for assessing the management or mission drift? Paper double bottom line of microfinance, drawing upon submitted to World Development (28 summaryfindings from Imp-Act. It also d iscusses pages) http://staV.bath.ac.uk/hssjgc/ scope for extending it to commercial banks and a sector wide approach, with reference to Mexico and South Africa.
82 Copies have been placed in the Library. 3312162026 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 237
7 Copestake, J. G. (2002). Poverty, Reports on impact of CETZAM, a DFID sponsored inequalityand the polarising impact of MFI. Finds evidence of short-term improvements in microcredit: evidence from Zambia’s average household income, but no significant eVect Copperbelt, Journal of International on employment creation. Also provides qualitative Development 14. evidence to suggest participation increases inequality among clients. 8 Copestake, J.G., Bhalotra, S., & Johnson, Reports on impact of PULSE, a DFID supported S., (2001) Assessing the impact of MFI working in Lusaka. Finds modest positive microcredit: A Zambian case studyimpact on average household income. Arg ues in Journal of Development Studies 37(4). favour of internalising outreach monitoring and impact assessment within MFIs, rather than relying on expensive external donor-funded impact studies. 9 Johnson, S. (2005). Gender relations, Reports on an impact assessment of FINCA- empowerment and microcredit: moving Malawi, a DFID supported programme. Finds very forward from a lost decade. European high drop out rates and modest impact on income. Journal of Development Research, 17(2), These are explained bythe gender relations 224–248. operating in the Malawi context. Women’s priority is for small incomes rather than business development, and gender constrains their business options. 10 Copestake, J.G. (2004). Social A more detailed report on research summarised in performance assessment of microfinance: Imp-Act PolicyNote No.1 (refere nce 1 above). cost-eVective or costlyindulgence? Small Enterprise Development, 15(3). 11 Johnson, S., Malkamaki, M., & Wanjau, Reviews diVerent types of financial institutions K., (2006) Tackling the ‘frontiers’ of operating in the Kenyan rural context and argues microfinance in Kenya: the role for that those with more decentralized approaches are decentralized services. Forthcoming in more capable of extending deeper into more rural Small Enterprise Development. Available and poorer areas. Argues that donor policyhas not at: www.microsave.org/dfs prioritised such initiatives. 12 Johnson, S., (2004) Gender norms in Shows how gender relations at intra-household level financial markets: evidence from Kenya and reflected in social norms have an impact on World Development 32(8) patterns of demand and supplyof financial service s within the financial market.
January 2006
Memorandum submitted by Dr Valerie Curtis, Director, The Hygiene Centre, London School of Hygiene and Tropical Medicine The evidence below is based on manyyears’experience of working with the pr ivate sector to develop hygiene promotion programmes, as well as sanitation and household water treatment solutions for developing countries.
1. What can the private sector do to alleviate poverty? 1.1 The private sector provides the keyto sustainable povertyalleviatio n. There should be little argument that the private sector provides the economic growth that brings the poor into the wage economyand allows them a route out of poverty. Further, taxes paid by private industry provide for public spending. However, the development sector tends to be suspicious of the private sector, and some actors lump all companies together as exploitative and unethical, when this mayonlyfairlyapplyto a few MNCs. 1.2 Private sector development is the onlysustainable means of povertyre duction because it is driven by profit. External support is unsustainable, and often used to support undemocratic governments. In a properlyregulated economyprivate sector development is under democrat ic control. 1.3 The Oxfam/Unilever Indonesia studywhich can be found at: http://www. oxfam.org.uk/what—we— do/issues/livelihoods/downloads/unilever.pdf is an excellent example of a start being made at tracing the footprint of an MNC’s impact on povertyboth upstream and downstream. 1.4 I submit that DFID and donors should support much more work of this type to: — Develop the methodologyfor studies of the impact of business on poverty — Provide evidence for the impact of the private sector on povertyin develo ping countries 3312162027 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 238 International Development Committee: Evidence
— Encourage companies to evaluate their own impact on poverty — Raise the level of the debate from its current simplistic and polarized state. 1.5 I submit that DFID and donors should carryout a review of the potential of ‘Business Models for Doing Good’ across all sectors of investment and disseminate the results widely.
2. What can donors do to facilitate the private sector in alleviatingpoverty ? 2.1 Reduce suspicion. Ill-informed and ideological hostilitydisplayedbymanyin the donor an d NGO sector towards the private sector is unhelpful. Whilst healthyskepticis m is appropriate, simplistic blanket rejection of the profit motive is not. It maybe helpful to make a distinction between industries that produce goods that provide for real human needs and those that encourage wasteful consumption through the promotion of goods that serve onlyas badges of status. For a discussion of t his see Wilkinson (4). 2.2 I submit that Donors need to change the attitudes of their staV towards working with the private sector. More staV who have experience of industryand speak its language should be recruited . The results of further studies as suggested above should be shared with staV. 2.3 Support level playingfields. Corruption and lack of enforcement of regulations makes the environment for doing business in poor countries too riskyfor substantia l investment. Often onlylarge companies such as MNCs have the clout to ensure that theyare given fair trea tment bythe legal system. This skews the balance of investment awayfrom indigenous medium and small scale business. 2.4 I submit that it should be a priorityfor donors in everysector to find everyopportun ityto enhance the functioning of the legal and regulatoryinstitutions, and the enforce ment of propertyrights, including intellectual property. 2.5 Invest in R&D for merit goods. Consumers in developing countries can be oVered the chance to lead better lives byacquiring products and services that can enhance their hea lth or wellbeing. Such merit goods might include products to enable handwashing with less water, cheaper soap formulations, cheap means of water purification, ultra-aVordable sanitation solutions, hygiene solutions for hospitals, primary health care facilities, schools and oYces. Products have to be aVordable, desirable, eVective and capable of being profitablycommercialized. This requires investment and skills, both in s hort supplyin developing countries. 2.6 I submit that donors should develop and make widelyavailable the means to support R &D for merit goods. Inputs could include prize oVers, establishment of, and investment in, social venture capital funds, innovation skills training, business skill training, oVers to guarantee sales, oVers to assist in marketing such products, assistance in dealing with the public sector, filing patents, meeting legislative requirements, etc. Support to the banking sector to enhance confidence in lending to new business and in microfinance can improve the business environment. 2.7 Invest in global public private partnerships. In some cases there is a compelling win-win collaboration where both the private and the public sector stand to gain byworking togeth er. The box below sets out the example of the global PPP for handwashing. 2.8 I submit that donors should invest further in such promising initiatives, scaling up and out to more countries. 2.9 I submit that donors need to revise their attitudes to supporting activities that involve industryand recognize that the profit motive can be a force for good. 2.10 I submit that donors should look for more opportunities where public and private interests coincide, for example in the provision of goods and services for sanitation and household water treatment. 3312162027 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 239
Box Handwashing with soap could save a million lives a year. Evidence suggests that handwashing with soap could prevent the two major killers of children in developing countries—reducing the risk of diarrhoeal disease byhalf and respiratoryinfections by a quarter (1, 2). Yet handwashing with soap around the world is still veryra re, in the order of 5-15% of occasions when it should be practiced (3). Research suggests that there are no major obstacles to handwashing—soap and water are present in most households—yet handwashing with soap is simplynot a habit, not a social norm. It was with the intention of making a ma jor diVerence to national handwashing rates and so contribute to the MDGs that we set up the Global Public Private Partnership for handwashing with soap in 2003. With a secretariat housed in the water and sanitation programme at the World Bank, the three major soap companies, Unilever, Procter and Gamble and Colgate-Palmolive as well as Unicef, WHO, the CDC in Atlanta and the London School of Tropical Medicine and manyothers work together to develop, implement and rigorous lyevaluate large scale high impact handwash programmes. The programme has activities in over 13 countries of Asia, Africa and Latin America. Innovations include a professional and creative approach to communications based on sound consumer research, industrial scale marketing of handwash messages using mass media, district marketing events and government channels, and the use of a scientific approach to behaviour change. Keyto the approach is being able t o tap into the marketing skills of industry. Indeed one soap company is now providing marketing masterclasses to teach professional approaches to behaviour change to those involved in handwash programmes. The most advanced country, Ghana, showed reported rates of handwashing rising by over 40% in mothers and 60% in children following the first year of a concerted national programme. More details can be found at www.globalhandwashing.org Private sector investment in this work began veryslowly,but the business case has now been made to Industry. They now see in handwashing an opportunity to move soap sales into lower levels of the market pyramid. Industry is increasingly promoting handwashing on their own in branded campaigns, and in generic handwash campaigns in concertation with Governments and donors. Manydi Yculties have been encountered: — First of all, the mutual suspicion and lack of a common culture and language between the sectors slowed progress. The public sector was suspicious of the motives of industryand the private sector found it hard to deal with governments and donors. — Second, the initial expectation was that funding would come through CSR sources, however this was a misapprehension, the large sources of funding and support are in the core business and often associated with brands. — Third, the branding issue was a continual sources of division, soap companies were slow to realize that donors would find it hard to swallow campaigns too closelyasso ciated with one companyor another. — Fourth, the big soap companies have long histories of rivalryand found it diYcult to collaborate in countryprogrammes. — Fifth, we found that hygiene promotion was often not regarded as the purview of any one ministry. — Finally, it was often hard to get donor support for national campaigns, most preferred working at regional or local level, and few were keen to invest in mass media, however convincing were are arguments that this was cost-eVective and essential to creating a national handwash movement. However, solutions are being found to these problems, as the programme grows and the country experience builds. Most encouraging is the fact that soap companies are now making handwashing with soap central to their positioning in the soap market in developing countries.
April 2006
References: 1. Curtis V, Cairncross S. EVect of washing hands with soap on diarrhoea risk in the community: a systematic review. Lancet Infectious Diseases 2003;3:275-281. 2. Rabie T, Curtis V. Evidence that handwashing prevents respiratorytrac t infection: a systematic review. Tropical Medicine and International Health 2006;11(3):1-10. 3. Scott B, Curtis V, Rabie T. Protecting children from diarrhoea and acute respiratoryinfections: the role of handwashing promotion in water and sanitation programmes. WHO Regional Health Forum 2003;7(1):42-47. 4. Wilkinson RG. The impact of inequality: how to make sick societies healthier. London: Routledge; 2005. 3312162028 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 240 International Development Committee: Evidence
Memorandum submitted by The De Beers Group
1. Background and Reason for the Submission
1.1 The De Beers Group is the largest diamond producer in the world. We produce over 40% of global gem diamonds from our mines in South Africa, and in partnership with the governments of Botswana, Namibia and Tanzania. The De Beers Group’s Diamond Trading Company(DTC) b ased in London sorts, values and currentlysells around half of the world’s annual supplyof roug h diamonds. As a companywe employaround 22,000 employeesin 19 countries, of whom roughly17,000 are based in our southern African operations. 1.2 De Beers welcomes this inquiryinto Private Sector Development (PSD). As a private sector company we have extensive first hand experience of operating at the sharp end in developing countries. In Africa, one can witness first hand the transformative capabilities of the private sector. Countries like Botswana and Mozambique, which are experiencing high levels of growth, owe it not primarilyto aid, but to a booming private sector which works alongside responsible and responsive governments. Indeed, South Africa could not have developed to its current position as the giant of Africa without the contribution made byprivate investors. 1.3 Of course not all companies operate in the same wayand there is much deba te about what constitutes a “good company”. On the one hand there are those who maintain that the primaryobjective of business is to maximise profits. On the other, there are those who insist that business must earn the right to profit from its activities. At De Beers, we don’t see it in such extreme terms. We follow the maxim “The purpose of the Companyis to make profits for its shareholders, but to do so in a waythat makes a real and lasting contribution to the countries and communities in which it operates”. 1.4 We do not see our corporate social engagement as a philanthropic pursuit but rather as a business imperative. As a company, De Beers has proven that it is possible to maintain sound business principles whilst also making a lasting contribution to the communities within which we work. Through the development and deployment of sound policies in terms of employment and labour practices, health & safety, non-discrimination and environmental best practice, we believe that we stand to gain significant advantage in terms of reputation, recruitment and investment. When coupled with the impact of our core business activities, we feel we can make a real diVerence on the ground. 1.5 However, at present there are constraints on the opportunities for private sector development. These constraints operate at all levels. Firstly, the issue of failed or failing states where governance is either non- existent or weak is a major deterrent to investing in an area. Companies committed to long term sustainable development cannot build their business in an area devoid of securityand s tability. We believe that not only human securityshould exist in these countries but securityof tenure must also be enshrined in law. Once a critical mass in this area has been achieved business can begin to develop the medium to long term plans that are essential for scaled industrial development. Governments intent on developing their economies can onlydo so when su Ycient funds are generated from a range of profitable businesses thus avoiding the dependence on aid. We believe that there is a role for donors in addressing the root causes of these problems, so that the benefits of private sector development can be achieved. On a more local level, the issue of HIV/ AIDS continues to be a fundamental problem for the business community. HIV/AIDS places an unbearable strain on the health, education and welfare provision of even the most sophisticated countries in Africa. With HIV infection rates of one in four of the economicallyactive populati on, this pandemic will destroy capacityand with it the potential economic growth which remains Africa’s onlyreal hope of poverty alleviation. The scale of this problem requires massive intervention byt he donor community.
2. Our Engagement in Poverty Alleviation
At De Beers we work directlywith communities to assist in the fight against p overtybyreinvesting profits generated back into these operations, thus creating and protecting jobs and the services that are needed to sustain them. We have a proactive programme to encourage local suppliers to our operations, with particular reference to local SME’s where possible. We have been working in collaboration with manyIGOs and NGOs in capacitybuilding exercises helping to develop the necessarys kills that will enable governments to accuratelyvalue their diamond exports. We have recentlyembarked on a n ew business initiative whereby manymore of De Beers diamonds that we sell to our clients will be cut and poli shed in their countryof origin, rather than exported to outside cutting centres, creating sustainable skills and businesses. 2.1 At De Beers we have a large percentage of employees in sub-Saharan Africa and other business interests in manycountries threatened bythe next wave of HIV infection. F or us, like most companies, tackling HIV/AIDS becomes a commercial consideration as well as one of concern for our employees. Currentlyour workplace programme takes a four-pronged approach: 3312162028 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 241
(a) Saving Lives—our objective is to prevent new infections through communication and the mobilisation of employees towards changing behaviour patterns. (b) Living with HIV/Aids—our objective is to provide treatment, care and support for employees who are infected with and aVected byHIV, enabling them to continue a productive life. (c) Minimising the economic impact of HIV/Aids—our objective is to developaneVective, integrated management control system that measures and records the economic impact of HIV/Aids on the organisation, enabling timelyresponses. (d) Communications and stakeholder engagement—stronglyunderpinning t he above, our objective here is to establish mutuallybeneficial relationships with keystakehold ers in HIV/Aids management.—(See Appendix i).83 2.2 We contribute substantiallyto the transfer of knowledge to local comm unities. We believe it is imperative to reflect the diversityof the communities in which we operate t hrough our workforce. To this end we invest in training that will transfer skills and knowledge to the local population. As well as the transfer of skills, the host countrybenefits from moneytransfers to the su rrounding community, not only through employment, but through purchasing policies that favour local communities and bystimulating small and medium enterprises, thus nurturing the entrepreneurial spirit essential to anycountry’seconomic well being; an attitude that we call, “a hand up, not a hand out”. (See Appendix ii).84 2.3 In addition to the clear benefits of engaging in local level projects, we would argue that for a company like De Beers the opportunityto e Vect long-lasting change lies at the macro-level. That is, through engagement with governments and international agencies, on specific issues, we have the abilityto e Vect positive changes in the socio-economic landscape and therebycontribute towards the long-term goal of povertyalleviation. It is our view that this shift in knowledge and unders tanding is what will achieve long- lasting sustainable development. Throughout the past decade, De Beers has made a significant impact to the international mining regulatoryenvironment which has clear implica tions for development. The next sections will explore both the formal and informal ways in which De Beers has been engaged in this process.
3. Our Engagement in Development
3.1.1 The Kimberley Process The issue of conflict diamonds came to the fore in the late 1990s primarilyfo cusing on Angola and later on Sierra Leone. In 2000, the international communitybecame aware of the a trocities perpetrated in those countries which were fuelled byillicit diamond activities. The reason fo r our action on this was twofold. Firstlythere was a moral imperative to do whatever was in our power to end th ese atrocities. Secondlyfrom a commercial perspective, there was rightlyconsumer concern about the fe ar that their purchases could be used to fuel a bloodyconflict. 3.1.2 The KimberleyProcess Certification Scheme (KPCS) came into e Vect in January2003, following a convening meeting in South Africa in 2000. It is an oYcial mechanism that controls the flow of rough diamonds to, and within international markets. The initial target was to stop the sale of diamonds controlled byrebel armies, but it also serves to reduce smuggled diamonds as well. Sig natories are required to ensure that shipments of rough diamonds are free from conflict diamonds. Therefore, a KimberleyProcess certificate must accompanyall shipments of rough diamonds. Participants can onlytrade with other Participants who have met the minimum requirements of the certification scheme. The 45 participants of the process account for approximately99.8% of global production of rough diamonds. In a remarkably short period of time, the KimberleyProcess was able to articulate a system for managing and certifying the internal and international trade in rough diamonds. There is of course still work to be done. It has, however, been credited with huge increases in oYcial diamond exports from Sierra Leone and the DRC, and with the ending of all oYcial diamond trade with manycountries accused of involvement in conflict d iamonds. 3.1.3 The KimberleyProcess is an extremelygood example of an e Vective cross-sectoral co-operation in action. The private sector was instrumental in eliciting change which could not have been achieved solely bygovernments and the donor community.De Beers was one of the front runner s in orchestrating the KimberlyProcess and in tandem with NGOs pressed governments to agree to it s implementation. It is highly likelythat had it not been for the actions of the diamond industryin crafti ng the provisions of the KP and uniting in common cause, diamonds would still be used to fuel conflict and destruction on a large scale.
3.2.1 Diamond Development Initiative (DDI) Controlling the trade in rough diamonds, however, covers onlyone aspect o f the problems associated with diamonds. The KimberleyProcess, which operates from the point of first exp ort, has addressed the symptoms, but not the root causes. The diYculties begin at the mining stage, where a huge proportion of mining in alluvial producer countries is of an illicit nature. Even where it is legitimate, however, artisanal
83 Not printed. Copyplaced in the Library. 84 ibid 3312162028 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 242 International Development Committee: Evidence
alluvial mining is problematic. Artisanal miners are largelyunregulate d and unregistered, and theyoperate in conditions that make them vulnerable to a varietyof predators. In addit ion to poor remuneration, they work in conditions where health and safetyare virtuallyabsent. (See Appe ndix iii85). 3.2.2 Like conflict diamonds, unregulated artisanal-mining can negativelyimpact on a host of issues pertaining to development. Unregulated diamonds that are smuggled across borders means that the government looses much needed revenue. Unregulated mining also has implications for human rights, labour rights and livelihood issues. As noted in the Accra document, we believe that in fragile and poor African countries where much artisinal mining prevails, these issues can best be approached through a concerted international eVort. Regulation of this sort has the potential to supplymajor benefits for m iners, the communities within which theywork, governments and the diamond indus try. 3.2.3 The DDI is an attempt byinternational stakeholders to provide a mult i-faceted framework that addresses issues of mismanagement in the artisanal-mining sector. It was launched in January2005 byDe Beers, Global Witness and Partnership Africa Canada (PAC) and the convening meeting was held in London in January2005. A Plenarymeeting was held in Accra in October 2005. The DDI calls for socially responsible corporate and government behaviour in the alluvial diamond-mining sector. Its intention is to encourage and develop cooperation between governments, NGOs, and business, on a policylevel. The focus of the DDI will be the creation of a multilateral partnership framework that will allow interested parties to pool their resources, experience and knowledge, and to integrate various initiatives that are being developed in this field. 3.2.4 The mission statement of the DDI notes that its purpose is “To gather all interested parties into a process that will address, in a comprehensive way, the political, social and economic challenges facing the artisanal diamond mining sector in order to optimize the beneficial development impact of artisanal diamond mining to miners and their communities within the countries in which the diamonds are mined.” 3.2.5 In the artisanal-mining sector, production is carried out using simple tools and equipment, with no safetyregulations. Due to the informal nature of the work, living conditi ons are insecure and wages low and unpredictable thus perpetuating the cycles of poverty. Even though workers produce diamonds to the value of hundreds of millions of dollars each year, most subsist on less than a dollar a day. Within this environment there are also incidents for child labour to be exploited. As can be seen for the mission statement, the DDI could have a potentiallylarge impact on povertyalleviation as it is attem pting to directlyengage in improving the living and working conditions of one million alluvial artisinal diamond diggers in Africa. 3.2.6 Not onlydoes the DDI address the working conditions of the alluvial m iners, it also has the potential to address issues of peace and security. The wars in countries like Sierra Leone and Angola left artisinal miners derelict and destitute, thus it was no surprise to see people co-opted into violence and crime. Brining artisinal miners into the formal sector helps to eradicate some of the insecurities that lead to engagement in criminal activity.
4. Informal Methods of Engagement
4.1 The examples of the KimberleyProcess and the DDI highlight the possibi lityof engaging in development through formalised processes at an international level. There are other ways in which the private sector can and does playa role in development projects. In a more in formal context for example, De Beers has worked with the Government of Sierra Leone in post-conflict reconstruction. In a countrywhere diamond revenues are the keyto its growth potential, De Beers has transfer red knowledge and expertise to the government in order to assist in the re-building of the country. For the last two years De Beers has been in constant contact with the Government of Sierra Leone with regard to assisting in post conflict reconstruction bycapacitybuilding of the Government Gold and Diamond O Yce in Freetown. De Beers employees have been to Freetown to help train government oYcials. (See Appendix 5) The oYcials have also visited the DTC London and Antwerp to further their technical ability. We are also a member of the Peace Diamond Alliance in Sierra Leone. 4.2 We have also been working closelywith the UK Department for Internatio nal Development (DFID) in an advisorycapacity.DFID have a contractor working with the Departmen t of Mines advising on reform of the Mining and Fiscal laws. We continue to work with these initiatives in order to assist the government and the people of Sierra Leone in benefiting from their diamonds. 4.3 It is important to stress that De Beers is not currentlycommerciallyac tive in Sierra Leone and has not been since 1985. Clearly, however, the future of this diamond producing countryis of strategic importance to both us and to the diamond industryas a whole. We felt it was necessaryto eng age for reasons that are best described as “enlightened self-interest”. Despite not being active in this country, we felt it was part of our wider responsibilityto the diamond industryand its reputation to assist in providing the government of the countrywith sound advice on how to strengthen its capacityand make the mos t of its resources. This will
85 ibid 3312162028 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 243
help to ensure that Sierra Leone’s diamond resources will have a major impact on the country’s socio- economic development. From our perspective, a well developed, free, fair and properlyregulated industry and market place secures the legitimate supplychain and provides consume rs with the assurance that their diamond jewellerypurchases are free of taint.
5. Recommendations 5.1 We propose that the donor community, governments, NGOs, academia and the private sector need to harmonise their eVorts in order to strengthen outcomes. We need to align donor, government, NGO, academia and private sector actions and work together in partnership to gain maximum leverage. When it comes to the issues of development, despite genuine commitments to the ideals of povertyalleviation, the private sector cannot be expected to engage on a scale likelyto make a di Verence, if these ideals cannot be reconciled with sound business sense. As the examples above have shown, the business communityneeds the assurance of stabilityfor long-term sustainable growth. The private sector needs legislative framework and assistance from donor organisations. Donors can assist in helping to create an enabling environment byworking closelywith governments on their political and socio-economi c programmes. Establishing the rule of law is essential to create the conditions in which companies will choose to operate, to generate good returns for shareholders as well as revenues and other benefits for the host communities. The research and intellectual capacityof our academic institutions could be more concent rated on providing practical and realistic solutions to the issues of sustainable development working in collaboration with industry, government and NGOs. 5.2 We believe that development assistance must be prioritised and directed towards what can make the most diVerence particularlyin the area of institution and capacitybuilding and s trengthening democracy. As our examples have shown, De Beers believes stronglyin capacitybuildin g. We have placed our expertise and knowledge at the disposal of governments. We have been training oYcials from several countries in the appraisal and valuation of diamonds to allow them better to assess the proper revenues due, so critical for post-conflict reconstruction. There is onlyso much we can do. Business in g eneral does not have the developmental skill sets that are embedded in donor agencies, IGO, NGOs and academia. There is a strong case to saythat the co-ordination and pooling of knowledge will lead to bet ter outcomes. Donor organisations and NGOs have much to gain from the experiences and knowledge held bythe private sector and visa versa. It is the donor community, working with developing country governments that has the resources, both financial and human to co-ordinate and scale-up our combined eVorts. There are many examples across the globe where manyagencies and governments are followi ng parallel paths on development thinking, possiblyduplicating e Vorts and thus wasting valuable resources. The time has come to draw these parallels into focus and create a convergence zone where the thinkers and implementers gather in the same place and move forward together in a more aligned fashion. 5.3 HIV/AIDS is a fundamental issue aVecting interests in both the private and public sector and is an issue that could benefit immenselyfrom better co-ordination with donors. Assisting African governments in the battle against the AIDS pandemic and other endemic diseases such as malaria and TB must playa central role in donor policy. 5.4 Finally, the international community and civil society should continue to call for both companies and governments to sign up to the Extractive Industries TransparencyInitiat ive, (EITI) the UN Global Compact and the World Economic Forum’s Partnering Against Corruption Initiative (PACI). Moreover, all stakeholders should begin to think of ways to strengthen and bind commitments to these initiatives so that theycan be more e Vective. 5.5 What permeates these examples is the belief that partnerships are the keyto success. Alliances, or partnerships, are at the heart of De Beers’ business philosophy. We believe that partnerships between governments, international institutions, business, academia and civil societyare central to the success of post conflict reconstruction, conflict prevention and development in “weak government zones”, De Beers has, seeks and aspires to partnerships in all it does. February 2006
Memorandum submitted by the Donetsk Chamber of Commerce (DCCI), Ukraine Donetsk Region is situated in the south-east of Ukraine, an hour byplane fr om the capital, Kiev. It represents about 5% of Ukraine’s landmass, with a population of almost five million—over 10% of Ukraine’s population. Donetsk city, with a population of one million, is one of the largest industrial cities of Ukraine (and was predominant in the former Soviet Union), based on traditional heavyindustries of coal and steel, although the region has plentyof rich black agricultural soil. (The citywas founded bya Welshman, John Hughes, some 150 years ago, and was originally called Hughesovka). The cityis twinned with, among others, SheYeld in the UK. The private sector, and SMEs in particular, are emerging as a force in the region, although progress is slow. DCCI is one of the leading advocates for the development of this sector. 3312162029 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 244 International Development Committee: Evidence
1. What Can Private Sector do for Poverty Elimination?
1.1 International experience demonstrates that on the whole private sector and small business playan important, and more often than not a critical role in economic and social development, in coming-to-be of civil society. This sector has proved to be of great significance especiallyin crisis situations, related to deep structural changes in economyof individual regions and whole countries. It is small business that during structural restructuring and transition period—in Ukraine in particular—compensates for job losses, provides citizens with the principal and additional income, and oVers financial resources to the state and local self-governance bodies. As small business grows stronger and stronger, this sector of the economy becomes the testing area for new technologies and an active guide of innovative economic growth.
1.2 One of the indicators, enabling us to compare small business expansion from international and interregional point of view is the number of small businesses per ten thousand people. As is shown in the Table below, the number of small businesses in Ukraine and in Donetsk Region (per capita) is definitelyless than in the European Union and in some developed countries—EU members.
Number of Small Businesses per 10, 000 people Countries, regions:
EU countries (on average) 450 Germany370 France 350 Ukraine 57 The Autonomous Republic of Crimea 69 Nikolayev Region 62 Lvov Region 59 Kharkov Region 59 Donetsk Region 55
In this rating of the Regions of Ukraine Donetsk Region ranks No. 8.
1.3 The other indicator that more preciselyillustrates the role of small b usiness in local economyis the share of people engaged in small business in the total number of the employed population (or the number of able-bodied population). If we relyon the o Ycial statistics about the level of employment in small business in Donetsk Region, we should acknowledge that theyare su Ycientlylower than similar data not onlyin the economicallydeveloped countries, but in Central and Eastern European co untries. The Table below compares the level of employment in small business in Donetsk Region with some countries. This comparison proves, that in Donetsk Region there is a great potential for increasing the level of employment in small business.
Country, region Share of people engaged in small business in the total number of the employed population, %
France 54 Germany46 Poland 39 Bulgaria 37 Donetsk region 14
1.4 At the same time private sector in business, though more flexible and adaptive than large business, is nevertheless more vulnerable and easilya Vected bythe environment. Weak points of small businesses, of individual and familybusinesses (for start-ups in particular) are di Yculties in entering markets (including resource markets), relativelyinexperienced managerial and economic ba ckground, lack of considerable financial assets with suYcient (for crediting institutions) collateral value. This situation requires a thought- through systematic small business support from the central authorities and local self-governance bodies. The exigencyof Ukraine as a whole and of its largest industrial region (Donbas s) in particular for such a support is imminent, and some measures have been and are being taken. But an absence of results points out the key drawback—a deficit of an integral and eYcient small business development strategyboth at the national, regional and local levels.
1.5 The implementation of a joint project of Donetsk Chamber of Commerce and Industry(DCCI) and the UK Department for International Development (DFID) enabled us to carryout an in-depth analysis of the private sector conditions and entrepreneurship development in Donetsk Region. 3312162029 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 245
2. What Hinders Private Sector Development in Developing Countries and at what level? 2.1 Implementation of DFID ‘Improving the Enabling Environment in Ukraine’ Project in Donetsk Region as a pilot provided an opportunityto carryout several analyticals urveys and to monitor business activity, and objective analysis of them helped identify the key problems and causes that hinder and impede development of the private sector and small business at the territoryof an individual region. Additional dissemination of the Project outcomes to other regions of Ukraine showed the same problems are faced by business in the whole of the country.
3. Macro-Level:Establishments,Legislation,Management,Macro-Policy 3.1 Analysis carried out during the Project implementation defined that the macro-level mostlyincludes barriers related to obtaining permissions and agreements, business registration, numerous check-outs and inspections, imperfect taxation.
3.1 Complexity and Expensiveness of the Procedure of ObtainingPermits 3.1.1 Todaymost of the private sector representatives in the whole of Ukra ine emphasize that the problem of obtaining permits and agreements is the most complicated one. For example, to construct a building (a shop, an oYce, etc.), requires not less than 23 agreements and permits from diVerent institutions (21 agreements and permits to start up a farm), and takes not less than three months and not less than $600 to achieve it. Those problems can be resolved onlybyintroducing changes t o active legislation and putting defining documents of ministries and departments in good order and often revoking them. 3.1.2 The design of the Law of Ukraine “About Permit-Issuing System in the Economic Activity” and its coming into force is the result of a large analytical and practical work with the private sector. The purpose of the Law is to significantlysimplifypermit-obtaining and agreeing proc edures in economic activity. According to it “Unified Permit-Issuing OYces” (One Stop Shops) will be established on the basis of local councils in all towns/cities and Rayons (districts) of the Region—namely, in 45 territorial units—and those OYces will issue permits and agreements in one place, thus considerablyredu cing the time required for following the procedure and financial expenses of economic entities. The Law came into force on 6 January2006. 3.1.3 As far as problems with state registration of economic entities are concerned, the situation in Donetsk Region changed dramaticallydue to the Law of Ukraine “About State Registration of Legal Entities and Natural Persons—Entrepreneurs” coming into force. Since the 1 July2004 the registration was significantlysimplified. In pursuance of the Law, 45 “Unified Registration Centres” have been established in the Region. There are virtuallyno registration problems in Donetsk Reg ion at the moment. 3.1.4 It should be noted that a year prior to the Law coming into force the first “Unified Registration OYce” was opened in one of the administrative districts of Donetsk Citywithi n the framework of the DFID/ DCCI Project. Opening of the OYce was practical implementation of the initiatives that later laid the foundation of the aforementioned Law of Ukraine. 3.1.5 As of today, after 11 months of 2005–06 the State Registration Board in Donetsk 1,600 legal entities and 5,400 natural persons—entrepreneurs (2,300 and 7,400 correspondingly—since it has been opened). The “Unified Registration Centre” activitylet the time spent on such process b e reduced to two to three days, simplified the registration procedures and documents circulation. Moreover, now it is possible not onlyto go through registration procedures, but to get registered with the statistics board, tax administration, and social funds. 3.1.6 Such registration procedures have become a reallysignificant suppo rt, provided bylegislative and executive authoritybodies, local self-governance bodies, internation al donors and non-governmental associations of entrepreneurs.
3.2 Large number of inspections from controlling bodies 3.2.1 During the surveyentrepreneurs also drew attention to this problem . Nowadays inspections of controlling bodies in the Region are often illegal and chaotic. Defining documents and regulatoryacts describe authorities of inspectors in minute detail, but oVer no protection to the inspected. None of the regulatoryacts describes the procedure of an inspection, thus the situat ion: there is no procedure, but lots of authorities, so the inspector can do what he pleases. 3.2.2 The Council of Entrepreneurs at the Cabinet of Ministers of Ukraine has drafted and submitted under the Supreme Council consideration the Law “About Control Inspections”. This Law will take into account which rights and procedure possibilities an inspection presupposes, and it should cover all controlling bodies. 3312162029 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 246 International Development Committee: Evidence
3.3. Flaws of Taxation Policy 3.3.1 Current taxation system of Ukraine practically does not take into account activityof the private sector. During the surveythe majorityof the entrepreneurs pointed out co mplexityof existing taxation system, though the state oVered the possibilityto use the simplified systemof taxation and accountin g, and it is one element of no small importance of its small business support policy. Two thirds of the total number of small businesses in the Region paid their taxes, but their share in the total sum of taxes, collected from enterprises of the Region, fell from 8.5% in 2002 to 6.4% in 2003, including the single tax (from 93.4% to 74.7%). The single tax system has been chosen by over a half of the small businesses and the overwhelming majorityof entrepreneurs-natural persons. But even this simplified syst em is not always the most optimal one for economic business management. That is whymanyprivate sector repr esentatives advocate reviewing of the existing system and implementation of taxation reform in Ukraine in the near future. Tax reform should comprise several parameters, and not onlychange the taxes patters and their sums, but modify administration, make taxation understandable and well-defined. First of all legislation should become transparent and understandable, because it is not the sums of taxes that result in huge problems, but their ambiguous treatise. Such taxation leads to manyproblems and troubles. 3.3.2 Taxation reform is not a momentaryprocess; it requires proper analy tical work both at the national and regional levels. Business Associations that have good practical knowledge and skills and consolidate interests of entrepreneurs at the regional level should participate in the process. Unfortunately, issues of taxation reform depend mainlyon the state passing relevant regulatoryre solutions and decisions, and not on willingness and abilities of entrepreneurs.
4. Meso-Level:Access to Resources and Infrastructure
4.1 Complicated Access to Information, Technologies and Knowledge 4.1.1 Dealing with those problems in the region is first of all related to setting up an eYcient entrepreneurship support and development infrastructure. DiYcultyof private sector development in transition countries is intensified bythe fact that its mutual help skills here are not developed, and private businesses are poorlycoordinated unlike similar enterprises in develop ed countries that have their own organizations, banks, established system of co-operation. From this point of view, establishment and development of network of associations and other forms of unions of entrepreneurs diVerent public, non- governmental and not-for-profit organizations that could defend and implement rights of entrepreneurs and businessmen, become rather significant. 4.1.2 The establishment of the SMEs Development Centre bythe DCCI togethe r with DFID within the framework of the “Improving the Enabling Environment in Ukraine” Project is a graphic example of successful activityin this sphere. The purpose of the Centre is to provide a wide range of qualitybusiness services to entrepreneurs that cover the following issues: starting up a business and business activity, development of up-to-date organizational and financial management skills, marketing, IT, provision of legal, informational, consulting and educational support to businesses. Todaythe Centre is the leading element of the infrastructure that works with private sector and small business in Donetsk Region. Over 5,000 people used the Centre’s services last year.
5. Micro-Level:Direct Business Support,Micro-Financing
5.1 Hindered Access to Financial Resources 5.1.1 The existing crediting practice in Ukraine is such that the bulk of credits is usuallya short-term and target financing of concrete projects. Long-term loans require substantial collateral. The majorityof small businesses and entrepreneurs can guarantee reimbursement of a large investment credit neither bytheir own assets nor bythe systemof guarantees or guaranties from small business su pport funds or organizations due to insuYcient development of such support in the Region and the city. To gain greater understanding of the possibilities which international technical assistance can oVer the private sector, DCCI were involved into a workshop, run byPolish experts with significant practical experience of project design/applications for project support, organized byDFID “Action Donbass” Project. 5.1.2 In 2002–04 about $200K was allocated from the Regional budget to support small businesses. In 2004 it was $40K. Eight business projects—$150K—were target-financed from that sum and from means of the Regional Entrepreneurship Support Fund. It should be noted that the moneywas allocated mainly for developing public transport system in rural areas and only one project was about setting up a small business in the services sector. Thus, onlyone of eleven priorityspheres of small business activity, included in the Regional Programme of Small Business Support for 2003-2004, was properlysupported—transport. 5.1.3 Bybeginning of 2004, 205 businesses received credits for business d evelopment ($400K), residents of rural areas received 198 credits ($70K). Financial assistance to farmers came up to $310K. 3312162029 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 247
5.2 Shortcomings (absence) of eYcient regional and national business support and development policy 5.2.1 Unfortunately, it should be stated that regional policy of small business development is mostly declarative and populist. The regional policyis mainlyabout approving s ome programmes of entrepreneurship development, the majorityof which are rather ine Vective. 5.2.2 Regional and national Programmes of small business development re aimed at increasing the number of small enterprises and small businesses employees by setting up a proper support infrastructure, developing mechanisms of financial assistance for small businesses. 5.2.3 But the Programme is designed as some kind of a regional summarytable of the events, planned by various state structures, local self-governance bodies, NGOs, foreign technical assistance projects, etc. aimed at development of entrepreneurship on the Region. Each of these organizations has its own goals and concrete tasks for the planned period, ie theymight have di Verent vision of small business development strategy. Of course, those diVerences in the vision are not diametricallyopposite, but still from pract ical point of view it is impossible to concentrate their eVorts and means to stage bystage take certain key measures, agreed in accordance with the time limits and strategic goals of small entrepreneurship development in the Region. 5.2.4 There is an objective need for designing a long-term strategyof SMEs development in the Region (at least for five years), which will act as a basis, used for designing medium-term Programmes. It will help diVerent organizations agree the design of planned events and coordinate their further implementation. Design of such strategypresupposes, first of all, SWOT-analysisof SMEs de velopment in the Region. A limited number of prioritydirections of SMEs development should be ident ified on the basis of the analysis (no more than four to five, and not 11 like in the Programmes), and determine cause-and-eVect relations between those directions. Those priorities can be supported bycorrespon ding operational objectives and tasks to be implemented in the short-term period. Improving management of small business development at the Regional level also requires that an institutional structure with clear tasks of implementing the programmes and coordinating activityof di Verent executors should be developed. 5.2.5 Implementation of DFID “Action Donbass” Project at the macro-level enabled DCCI to start active work on designing a sustainable Strategyof Small Business Develop ment for Donetsk Region. The Working Group has been established at the Donetsk State Regional Administration, which is working on designing a long-term Small Business Development Strategyfor 10 years. 5.2.6 One of the positive elements of implementation of the Ten Years Small Business Development Strategyis establishment of Donetsk Investment Promotion Agencyat the D CCI, but with technical support from DFID. Its goal is to create capacityin Donetsk Region for inve stment promotion. Though the Agencyhas just started its activity,it has alreadyparticipated in ev ents, targeted at attracting foreign direct investments. As of today, a new short-term marketing strategy of the Agencyhas been completed, which will help design methods of attracting new investments to the Region to provide assistance to existing companies, searching for business partners, and attract new mobile international investments to Donetsk Region.
6. Which Type of Donor Intervention Influences Changes in Business Climate (In Partner Countries) in Relation to Private Sector Development? 6.1 Implementation of donor programmes in developing countries contributes a lot to poverty elimination and private sector and small business support. Successful example of donor activityin Ukraine is DCCI/DFID “Improving the Enabling Environment in Ukraine” Project. It was a three year initiative, funded bythe UK Department for International Development and aimed at cre ating business enabling environment. The DFID acknowledged the importance of the role the DCCI plays in business support in a large industrial and entrepreneurial region. 6.2 It stands to reason that Donetsk Region was selected for the Project implementation. Just a brief statistic illustration of private sector and small business development as of 2004: in 1999–2004 the number of small businesses in Donetsk Region has grown from 17,800–26,002, that is one and half times (145.9% ). 6.3 In the Region as a whole small businesses are operating in the following spheres: commerce (41% ), real estate activities (18.4%), industrial production (13.6%), construction (9.5% ), transport (4.2%), agriculture (3.3%), personal and collective services (3.2%), hotels and restaurants (3.2%), others (3%). 6.4 As of 2004, 161,975 people were engaged in small business. Donetsk Region is leading in entrepreneurship development. 6.5 Implementation of the Project in the Region oVered large opportunities of improving private sector development in the Region byactive work in manyspheres. 6.6 Within the framework of the Project the DCCI designed a three-year business plan, comprising all issues, starting from marketing to financial planning and action plan. Implementation of the business plan provided for development and provision of local market orientated services, especiallyin the context of growing importance of private sector and SMEs in Ukrainian economy. It also helped ensure that actual needs of local entrepreneurs are met and organizations are assisted in eVective financial management. 3312162029 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 248 International Development Committee: Evidence
6.7 Having provided assistance in drafting the corresponding strategyan d interrelated action plan, the Project helped the Donetsk CCI in developing its role as an eVective representative of its members. In particular, using in-depth understanding of the local market, the Chamber cooperates with local administrations in designing regulatoryframeworks, which correspondi nglycounterbalance needs of the government and entrepreneurs, thus contributing to economic development. This work also facilitates the process of rules and regulations acknowledging special characteristics of SMEs. 6.8 The results of the Project were widelydisseminated among the CCIs of Uk raine in order to help all Chambers of Commerce to develop their skills of eVective members’ representation, to carryout e Vective measures on creating business enabling environment. 6.9 On the whole results of the Project helped identifymain prioritydirec tions of donor intervention for private sector development in the near future: 1. creating enabling environment bymeans of providing technical assista nce in the sphere of investment promotion, regulatoryenvironment and transparent competit ion; 2. funding private sector development. All three positions need donor intervention: financing of risks, financing of SMEs, business micro-financing; and 3. changing markets in favour of the needypresupposes reorganizing tradi tional markets, forming a market of business products and services and establishing a professional market of infrastructure services.
7. How is the Sector Involved in Development? 7.1 Implementation of DCCI/DFID “Improving the Enabling Environment in Ukraine” Project helped identifykeyprioritydirections in organizing an e Vective dialogue between the private sector and state authorities and local self-governance bodies. 7.2 There are positive examples of it: — Large business forums—“Development of Small Business in Donbass” regional and national conferences—have been organized for the last three years. Over 300 private sector representatives participated in each of them. — Business meetings with senior oYcials from state authorities and local self-governance bodies. — Activityof specialized Small Business, Construction, Light Industrya nd EcologyCommittees at the Chamber of Commerce. — Regular organization of business lunches. — Organization of business receptions for representatives of private sector on various business directions. — Provision of specialized training, workshops and seminars. 7.3 On the whole, anyform of private sector and business environment suppo rt and development with the help of international donor agencies should be strategic—both at the national and regional levels. A long-term strategy, determining key directions of private sector and small business development and taking specifics of the territoryinto account, should be used as a basis. Such stra tegyshould be designed on a thorough SWOT analysis of small business development in the Region as a whole and on individual territories. This veryapproach will enable us to create competitive adva ntages for business that is developing in the region. February 2006
Memorandum submitted by Alaric Fairbanks, Policy and International Development Team, Durham Business School, Durham University
1. Introduction 1.1 This evidence is submitted in response to an invitation bye-mail on 19 D ecember 2005. Durham Business School is part of Durham Universityand has been active in researc h, teaching and consultancyin the area of private sector development, particularlySmall and Medium Ent erprises, since 1971. The School has been involved in applied research and consultancyprojects in develop ing and transition economies around policyadvice and support services for Small and Medium Enterprise s (SMEs). 1.2 Alaric Fairbanks is International Projects Director in the Policyand International Development Team. His main areas of interest are Business Development Services and support institutions, particularly in China. 3312162030 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 249
1.3 This memorandum responds to some of the specific points raised bythe com mittee in its call for evidence, with particular reference to what the private sector development can do to alleviate poverty; the constraints on the private sector in developing countries, particularly at the level of the enterprise itself; the provision of business services, mainlyadvice and training, as a donor int ervention towards PSD and pro- poor growth; and the encouragement of corporate social responsibilityam ong enterprises in developing countries. This is not intended as exhaustive coverage, but rather how one facet of private sector development, services to SMEs can contribute to PSD and Pro-Poor Growth.
2. What can the Private Sector do to Alleviate Poverty? At a simplistic level private sector growth contributes to a rise in national income and a growth in wage earning opportunities. The development of SMEs can oVer employment opportunities for surplus labour, and in the case of transition economies such as China and the former Soviet Union, employment opportunities for retrenched workers from State Owned Enterprises. SMEs can provide the opportunityto gain and use new skills, contributing to economic productivity. In many rural areas where SMEs are based around processing or marketing local agricultural products there can be immediate eVects on poverty reduction both through increased non-agricultural employment and an expanded market for local products. At a government level growth in the private sector can result in the strengthening and broadening of the tax base, with a potential impact on the welfare of the poor. For example, in 2006 in China the national threshold for income tax has been raised and direct agricultural tax on peasants removed. There are, however, potential dangers in private sector growth, for example, environmental degradation can have a negative impact on the living conditions of the poor, and working conditions in the worst cases mayhave a negative impact on the health of workers.
3. Constraints on the Private Sector in Developing Countries at the Level of the Enterprise The challenges faced at the level of the enterprise itself in terms of its dayto dayoperations and long term survival are taken here as a starting point. In manycases access to finance i s often taken as the main constraint facing small businesses, but it is onlyone of a number of import ant issues. Analyses of the challenges faced bySMEs in China, for example, have tended to focus on “cre dit constraints.” These mainly refer to the low level of finance provided bythe banking sector to the non-st ate and especiallyprivate sector. SMEs in particular in less developed areas, face additional challenges, including: (1) diYculties in recruiting and retaining appropriate staV, and in particular managers; (2) logistical and distribution constraints and “bottlenecks”, related both to infrastructure and to distribution systems; (3) the availabilityand qualityof market and customer intelligence and data; (4) the overall management qualityand capabilitywithin the business, (5) access to appropriate premises; (6) under-developed local economic and business environments, particularlyin less developed areas; (7) a lack of busines s development services and related inputs to enhance SME performance.
4. Donor Interventions—Business Services 4.1 Business Development services in the form of advice, consultancy, training, provision of information, development of business linkages and networks are one aspect of improving private sector performance. A major donor rationale behind the development and provision of such services is to improve the performance of SMEs in order to contribute to economic growth and employment. Quality services can have a positive impact towards overcoming some of the constraints outlined above, for example in staV recruitment and retention, management capacity, market and customer intelligence. 4.2 Aspects of support to Business Development Services. These can be divided into seven complementarytypes: — Demand Side Interventions: this can include awareness-raising of benefits of services, particularly among selected target groups; incentives to enterprises to tryservices. — SupplySide Interventions: this includes training, capacitybuilding a nd service development of BDS providers. — Deliverymechanisms: development of deliverymechanisms to reach enter prises, particularlythe smallest and those in vulnerable groups can significantlyincrease the imp acts of BDS. — Payment mechanisms: approaches to reducing the immediate costs and risks can be developed where appropriate, for example indirect payment risk sharing with the provider. — Dealing with Market Failures: possibilities and precedents exist in the provision of services directly to SMEs but funded whollyor partlybylocal government where enterprises a re unable to payrates needed byproviders. — Selection of partner institutions: building on existing or potential providers. — BDS Facilitation: the role of government bodies and self-regulating organisations. 3312162030 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 250 International Development Committee: Evidence
4.3 Specific donor interventions in provision of services for business As mentioned above, services can be developed that are saleable within local markets, and these can have an impact on business performance, services (and their providers) that are not perceived as having positive business impact fail. Donor interventions in this area on the supplyside to promote private sector dev elopment include — Technical assistance to providers in developing services. — Technical assistance to develop capacityof the sta V of providers to deliver services to local businesses. — Technical assistance to providers on their management, marketing and business development of services. This can also have an impact on the demand side through awareness raising among businesses. — Funding to support “down-time” of providers whilst new services are developed and gain acceptance in the market. — Promotion of linkages between providers themselves and between providers and stakeholders including government, businesses and trade and communityorganisations . On the demand side specific interventions can include: — Awareness raising activities. — Support or funding to incentives for use of services, for example payment or part payment for acquisition of services. 4.4 Conflicts between sustainabilityof service provision and pro-poor gr owth. Integration and co- ordination between these seven areas (see paragraph 7 above) are essential in maximising the input of any intervention and all have a bearing on the sustainabilityof intervention s. Sustainabilitycan be defined as the capacityto ensure that benefits continue after donor intervention has ceased. In financial terms sustainabilityis dependent on the market, ie SMEs being willing and able t o payfor services. There is strong evidence, for example from DFID’s China State Owned Enterprise Restructuring and Enterprise Development Project (SOERED) that this is possible where enterprises feel a direct business benefit from services. This, however, can lead to a potential conflict with povertyalle viation objectives in that BDS providers will seek to deliver services to those enterprises willing to payrather than targeting the most vulnerable groups. There are a number of approaches to this issue of the tension between sustainabilityand pro-poor growth. 4.5 In the case of enterprises that mayhave a significant benefit to society, such as through employment creation, but are not able to paymarket rates of providers there is the poss ibilityof third partyfunding from local government or donors for provision of services. This situation particularlyapplies in the area of start- up support to members of vulnerable groups. Drawbacks to this approach are that it potentiallycrowds out other suppliers and that there are often verylimited funding opportuniti es. Another approach here is for providers to oVer such services free with the aim of raising awareness for commercial services and with the prospect of continuing provision of services to new enterprises when they are in the position to payfor services in the future. 4.6 Another issue is around targeting vulnerable groups for the direct receipt of services. This means that, for example, start-up support, is targeted directlyat the most vulnerabl e groups. This raises transaction costs for the provider (or donor) above those of a more general oVer, thus having an impact on cost eVectiveness. Additionallythere is insu Ycient evidence as to whether such targeting of groups has a greater impact on those groups than service provision to the more general business population in the area. Experience from SOERED in China suggests that employment creation among laid-oV workers was greater in businesses started byself-selected entrepreneurs in receipt of services rather tha n from businesses started bythe disadvantaged group. This was probablydue in some respects to other facto rs including access to finance and level of education. At present it is diYcult to saywhether maximum benefits in terms of employment creation and economic growth are generated through interventions in private sector development support directlyto the most vulnerable (ie as recipients) or to the general busine ss population through self-selection bythe market. 4.7 Enterprises are naturallyusuallyonlywilling to payfor services tha t will have an easilyidentifiable impact on their business performance. This can lead to a conflict between the needs of the poor and the provision of services. An example here is in the areas of health safetyand e nvironment, where it could be perceived that following advice on compliance or best practice can actuallylead to increased costs for the business in the short term. Thus while there maybe benefits for societyor th e workforce it is diYcult provide this type of service to many enterprises. Two Durham University projects in China have approached this byo Vering free HSE checks bundled with commerciallyprovided services, raisi ng awareness amongst client customers. A similar approach was taken with services to develop Corporate Responsibility. 4.8 Corporate Social Responsibilityand Private Sector Development in ge neral is still widelyseen as a large business issue. In terms of International Development there is an increasing emphasis on the role of the corporate sector in implementing CSR through its supplychain in devel oping countries. So far less emphasis has been placed on the development of CSR in indigenous enterprises, particularlySMEs that are not part of these linkages. Similarlysupport services in the form of consu ltancyand training, where available, are largelyfocussed on such businesses with little emphasis o n business services to SMEs. This is 3312162030 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 251
increasinglymarked in developing and transition economies where there i s little historyof SME support services and generallyless public funding of services. A keychallenge is to resolve the tension between sustainabilityof service providers whilst delivering CSR compatible se rvices to SMEs. 4.9 There are a number of challenges in promoting CSR through business services to the private sector in developing countries. The first of these is what constitutes a CSR related service to SMEs? This has implications where there is little awareness, or possiblyinterest, from the target market and where businesses often have little awareness of the benefits of obtaining business advice in general. Linked to this is whether CSR services can be oVered as a discreet service in the same wayas, for example, business plannin g, or whether elements of CSR can be bundled with other services. Experience gathered byDurham Business School suggests the latter maybe more appropriate in the conditions that p revail in this context. 4.10 The issue of whether provision of CSR linked services to SMEs is compatible with institutional sustainabilityis of prime importance to providers of BDS. This hinges on w hether businesses are willing to take up and are prepared to payfor such services. Approaches adopted here h ave included seeking external funding or subsidyfrom government to fund service provision and providin g elements of CSR in the commercial service oVering. 4.11 Overcoming the tension between the commercial provision of BDS and povertyalleviation objectives. Provision of services developed or promoted through donor intervention has a positive impact on private sector development through bycontributing to the performance of businesses in receipt of these services, and thus contributing to overall private sector development, with the impacts on overall economic growth and enlarged employment opportunities. Maximising leverage from inputs is dependent on the sustainabilityof services and providers after donor intervention cease s, which is dependent on take up in the market. This situation is fine if one takes private sector, growth per se, as a desirable objective. This, though maylead to conflicts with donor objectives, for example, if there is a clash with environmental results having an impact on the poor. A solution is to develop services that address these issues and can be bundled with fee earning services or over time be developed as fee earning services. February 2006
Memorandum submitted by FinMark Trust
1. Introduction This submission describes one aspect of DFID’s engagement with the private sector, and specificallythe financial services industry, through its experience as primary funder to Johannesburg-based FinMark Trust. The paper suggests that FinMark Trust oVers a possible model—that of a “market catalyst”—that DFID could replicate to support pro-poor private sector development in other countries. It has pioneered certain approaches involving the use of information and information-based tools that have been warmlyreceived byprivate sector organizations and policymakersengaged in the developm ent of financial markets in Africa. FinMark Trust believes these approaches could be beneficial in other geographies and market sectors. Through its exclusive focus on financial markets, FinMark Trust has also been able to build specialist knowledge of keyissues that have a global resonance. This has enabled it to influence international policy around the development of financial markets. Local experience has therefore found a global outlet. Overall there seems to be a strong coherence in DFID’s support of FinMark Trust and other initiatives it has promoted—notablythe Financial Deepening Challenge Fund (FDCF), the Investment Climate Facility (ICF), the growth-oriented aspects to the Report of the Commission for Africa and perhaps even the Extractive Industries TransparencyInitiative (EITI)—including its su pport for various financial sector deepening trusts in Africa.
2. “Making Markets Work” In terms of DFID policy, FinMark Trust sits at the intersection of two DFID policystrands—first, the Making Markets Work (M4P) approach to policymaking, supported byDFID in v arious ways and across diVerent sectors,86 which holds that markets can and should work for the poor and, secondly, a financial sector policybased on the idea that financial sector development contribu tes to economic growth and povertyreduction. The opportunityand the risk in market development is summarised byformer World Bank Chief Economist Joseph Stiglitz: “I see the market as a powerful instrument for doing good—but one which has not onlynot lived up to its potential, but has, in the process, left some beh ind, and actuallysome worse o V87”. The three insights here are that:
86 “Making Market Work for the Poor” (Gibson, Scott & Ferrand)—available through www.commark.org.za. Commark Trust is another DFID-funded M4P entityaimed at enhancing the growth and develo pment of selected commodityand service markets. 87 The Roaring Nineties (Stiglitz). 3312162031 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 252 International Development Committee: Evidence
1. markets have the abilityto raise incomes and reduce povertyon a huge sca le. Improving the way markets work gives the poor the opportunityto participate in markets and t hus improve their economic circumstances; protecting the poor from markets is likelyto per petuate poverty; 2. markets should be made to function more eVectively. Too often, a kind of glass ceiling exists in a market which artificiallyconstrains its natural growth and therefore exc ludes people who would otherwise be willing participants in it. Market obstructions come in many forms including: the “crowding out” of market activitybywell-meaning but misplaced governme nt or donor intervention; an inappropriate statutoryor regulatoryenvironment; po or standards of consumer education; a lack of quality, freely available information, and so on; 3. market failure not onlyexcludes; it is also distributes the benefits of m arket activityunequally, often grotesquelyso, and the poor will be the biggest losers. The causes of market failure should therefore be identified, researched and tackled. In short, markets should be encouraged “to function better and with greater fairness88”. In the context of financial markets, allowing markets to function with “greater fairness”, or to “work for the poor”, means allowing more people to benefit from the use of financial services—in other words, enabling greater access to financial services.
3. Financial Sector Development (FSD) The role of FSD in promoting economic growth should not need much explanation and the link between the two and, indeed, between economic growth and povertyreduction are exp lored succinctlyin a DFID PolicyDivision working paper 89 (Ellis et al). In summary, FSD contributes to poverty reduction in both an indirect way (through its positive impact on growth which tends to lead to opportunities for the poor) and directly, to the extent that FSD widens access to financial services for the poor. Financial markets cannot work for the poor unless the poor have eVective access to the products and services supplied bybanks, insurance co mpanies, pensions providers and moneytransmission agents so theycan store their savings in a safe place, i nsure their possessions against theft or their crops against weather damage, send moneyhome safelyand cos t-eVectivelyand borrow to invest in small businesses or education. The DFID paper makes the point that where the poor are not using informal mechanisms (which, although widespread, are often expensive and risky) they typically use semi-formal channels such as microfinance institutions or other types of institution such as postal banks, development banks and credit unions. In reality, whilst these may have a role to play, they still reach onlya minorityof the bankable population. The DFID paper is explicit in stating that the problem of low levels of access in developing countries can onlybe adequatelyaddressed byan extension of service provision byforma l private sector institutions. Whilst specialist microfinance institutions (MFIs), which are typically donor-funded, can playan important role in the localities where theyoperate, their impact on the po pulation as a whole is extremely modest. In only8 countries across the world have MFIs succeeded in serving more than 2% of the population; in 35 of 55 developing countries surveyed recently90 MFIs reached less than 1% of the population. As policyemphasis needs to reflect potential impact in terms of povertyred uction, these figures would suggest that the policypriorityshould be on bringing about systemicchan ge in the wayfinancial markets operate—as a whole—rather than on the support of one fairlysmall aspect of financial sector activity, namelymicrofinance.
4. A Fortune at the Bottom of the (Financial)Pyramid91? There is of course a tension between the requirement of formal private sector institutions to make profits for their shareholders and their support of a social objective such as extending access to finance. Banks may have a social function, as intermediaries between savers and borrowers, but it is more diYcult to argue that theyhave a social responsibility(beyondconducting their business lega llyand ethically)unless their constitutions specificallyrequire it, as is typicallythe case with the “p roximitybanks”, savings banks, Postbanks and so on.
88 Development as Freedom (Amartya Sen). 89 The Importance of Financial Sector Development for Growth and PovertyRed uction—DFID PolicyDivision Working Paper (Ellis et al.)—August 2004. 90 Based on Daley-Harris (2003); quoted in Financial Sector and Policy and the Poor (World Bank Working Paper 43)(Honohan 2004); see also Consultative Group to Assist the Poor (CGAP) research. 91 CK Prahalad’s book The Fortune at the Bottom of the Pyramid (2004) oVers some insights into how some large private sector organisations have successfullyserved poorer consumers through the ado ption of innovative distribution techniques. 3312162031 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 253
Reconciling these apparentlyconflicting objectives depends on the exten t to which it can be demonstrated that a viable market exists in new market segments that have not been explored to date. In Africa there is a “push” and a “pull” behind the incentive for financial institutions to explore new markets. The “pull” is that the vast majorityof Africa’s adult population is outsid e formal financial services provision. While in South Africa the number of people with bank accounts is around 46.5% of the adult population92, in countries such as Zambia or Malawi bank account penetration maybe arou nd 5% or less. The opportunityin terms of the sheer numbers of people is huge. Technology advances, such as cellphone banking and card-based technologies, are tilting the economic equation in favour of formal service provision. The “push” has two aspects to it. First, traditional markets are mature and increasinglycompetitive. Secondly, an improving macroeconomic environment in many countries in Africa has brought about a sharp decline in government bond rates and banks are being forced to replace the loss of bond interest with income from mainstream lending activities. Even if formal financial sector penetration is relativelylow at this stage there is little doubt that it will increase quite rapidly. Certainly non-financial sector barriers will impede progress (for example, lack of infrastructure, especiallyelectricityand telecommunications, and ge neral business climate issues such as red tape and corruption) but there are alreadynumerous examples in Africa of f ormal financial institutions successfullyseeking out a fortune at the bottom of the financial pyramid. The challenge and the opportunityin financial markets in manydeveloping c ountries is that whilst the numbers of people outside the financial system vastly outnumber those within it, the needs of those consumers are also verydi Verent and so, veryoften, there is a requirement for products to be redesign ed and repriced and for distribution strategies to be completelyrethought. Innovation is required and DFID’s Financial Deepening Challenge Fund has supported innovation in a sector which is notorious for “upwards innovation” (aimed at serving existing clients better) rather than the “disruptive innovation” that new markets demand. Why, if the tide is already turning, should this be an area of focus for donors? What can donors bring that is genuinelyadditional to the market’s own contribution?
5. FinMark Trust—a “Market Catalyst” FinMark Trust was set up in 2002 as an independent South African trust with the mission of “making financial markets work for the poor” in the countries of the Southern African Customs Union (SACU)— South Africa, Botswana, Lesotho, Namibia, Swaziland. DFID provided £5 million in grant funding from DFID in 2002 for a five year period ending in 2007. The positive impact it has had has encouraged its trustees, with DFID support, to change its mandate to allow it operate across the African continent. Central to FinMark Trust’s mission is the idea that it should function as a market catalyst, an agent of change, with a temporarylife, whose job is to identify,research and tackl e the causes of financial market failure. It is therefore a kind of think tank or policycentre, commissioni ng research from others, lobbying government for policychange and supporting private sector innovation th rough the provision of information (especiallyinto underserved market segments) and discreti onarygrant funding. Its primaryaudiences are (i) government (policymakers and regulators) a nd (ii) the private sector and it has therefore been essential for FinMark Trust to engage with the private sector. It does this in a number of ways: — it seeks sponsorship or co-funding from the private sector for research (it has mobilised around £750,000 as at end 2005); — it provides advice to the private sector on emerging market issues, either directlyor through industrybodies; — it facilitates dialogue (through regular forums, and through ad hoc introduction) between the private sector, government, academics, consultants and so on; and — it supports innovators with grant funding. Even though the private sector is now engaging with “the bottom of the pyramid” FinMark Trust’s experience shows that the right kind of donor intervention: — can accelerate market change (which is worthwhile in itself) and enhance its quality, especially through informed debate; — can contribute to developing the building blocks of markets (eg supporting governmental capacity in keyareas, making information available to the market to allow for bette r policyand research, stimulating local research and consulting capacity, supporting innovation) that will lead to greater access and more sustainable markets in future; and
92 FinScope SA 2005 (www.finscope.co.za). 3312162031 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 254 International Development Committee: Evidence
— facilitate purposeful discussion, as an independent voice, especially where stakeholder positions have been entrenched or where a lack of local experience has called for access to, and engagement with, international best practice. FinMark Trust commissioned an independent impact assessment in late 2005 which concluded that, while its positive impact was byno means uniform across the various market segme nts, it had succeeded in bringing about real and measurable change in its markets that was additional to the change processes alreadyunderway. This success was attributed partlyto its legitimacy(its independent voi ce supported bya board of locally appointed trustees) and to its low cost management structure (five full time staV) which has allowed it to respond flexiblyto market developments where its influence could be put to b est use. Although bound byits mandate to Africa (and until recentlyto the Southern Africa), FinMark Trust has been able to contribute positivelyto the change in international thinkin g around the financial sector—the move towards thinking systemically about the financial sector rather than about microfinance in isolation. Global policyon financial markets has a huge impact on how FSD takes shape at a local level and so it is essential to be able to influence policyformation at the level of the Worl d Bank, IMF, UNDP etc. Mostly the impact is positive for the private sector (for example, through the various financial sector restructuring programmes led bythe World Bank); sometimes it is negative. The implement ation of international anti- moneylaundering legislation in manydeveloping countries is impossible so it is necessaryto be able to voice these concerns. Developing financial markets are also part of the global financial system and therefore knowledge gleaned locallyneeds to be put to use at a global level.
6. Information In FinMark Trust’s experience the support of financial sector development through the provision of market information has been highlye Vective in helping processes of change and welcomed bythose institutions able to access it. As we have seen, whilst private sector financial institutions are actively seeking out new markets, theyare often hampered bya lack of information. Even in relativelywell-develope d South Africa, information on the financial behaviour of emerging consumers is patchyand typicallynot i n a format that can be used by the private sector for commercial purposes. In countries such as Zambia or Ghana there is a general lack of information on financial markets as a whole even if statistical capacity in the countryis quite strong. Market research can help to build a picture of consumer, or small business, demand and it therefore follows that public funding of this kind of research mayultimatelyhave a s ocial benefit if commercial providers are encouraged to innovate and develop new strategies that enable them to bring their products and services to new market segments. FinScope, a surveyinstrument developed byFinMark Trust, is both a public good (it is a national study giving a comprehensive picture of financial market behaviour from a consumer perspective) and a private benefit whose commercial value has been demonstrated bythe funding it has a ttracted from private sector organisations. FinMark Trust funded a pilot studyin 2002 but each of the su bsequent years private sector funding has grown such that in 2005 the surveywas fullyfunded bythe privat e sector. The studyis being taken across Africa now with the hope that the public/private funding model can be replicated even if the surveycosts are met bydonors initially. Through its work on FinScope, FinMark Trust has been especiallyengaged wi th the World Bank in the development of financial access indicators and common surveymethodologi es which will allow countries’ progress in the implementation of financial access policyto be compared an d monitored. The peer pressure that this will engender is thought likelyto speed up processes of financial market reform that will ultimately benefit private sector development. It should also be noted that comparable cross-border information is essential if regional reform processes are to be carried out eVectively. These processes, aimed at creating viable economic blocs out of some very small individual markets, are considered to be a keypart of improving Afri ca’s attractiveness for private sector investment. Finally, supporting the development of an information infrastructure has the veryimportant spin-o V benefit of creating a societythat values information, that uses informati on as the basis for objective policy formation and that understands the importance of disclosure and transparency. Freely available information encourages the development of knowledge-based professional services and civil society.
7. Conclusion FinMark Trust oVers a model of donor intervention that can and should be replicated elsewhere byDFID in support of private sector development. The approach—that of a market catalyst, a think tank or policy centre designed to have a short term positive impact on the market before withdrawing from it—has not onlyhad measurable impact in its geographic mandate area but has also been eVective in creating the opportunityfor global policyinfluencing. 3312162031 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 255
The positioning of FinMark Trust as an independent entity, yet leaning towards the private sector as it tries to discern the opportunities at the bottom of the pyramid, has allowed it to develop valuable relationships with private sector financial institutions, based on the sharing of knowledge. In turn, this has enabled FinMark Trust to develop a number of innovative approaches towards pro-poor financial sector development which it is now seeking to share more widelywith like-minded o rganisations. February 2006
Memorandum submitted by the Foundation for Innovative New Diagnostics
ENGAGING THE DIAGNOSTIC INDUSTRY IN DEVELOPMENT: EXPERIENCES FROM THE FOUNDATION FOR INNOVATIVE NEW DIAGNOSTICS (FIND)
Background New technologies have revolutionized the simplicity, speed, and accuracyof diagnostics for diseases in the developed world. The developing world is yet to benefit from this technological revolution. A mechanism that can link industryto the diagnostic needs of patients and healthcare p roviders in developing countries is needed. The Foundation for Innovative New Diagnostics (FIND) provides this bridge, enabling industry to engage in the development and evaluation of new diagnostics for poverty related diseases through a public-private partnership arrangement. FIND is a product development, public/private partnership established bythe World Health Assembly in 2003 as non-profit foundation. FIND is based in Geneva, Switzerland. Its mission is to develop, evaluate, and facilitate the deployment of simple, accurate, and aVordable point-of-care diagnostic tests for poverty- related diseases into national disease control programs. To achieve this mission, FIND: (1) Chooses technical approaches with performance characteristics that can maximize benefits to underprivileged populations. (2) Builds partnership with keystakeholders—industry,national diseas e control programs and diagnostic research facilities in endemic countries, the World Health Organization, donors, academia, and civil society. (3) Pursues intellectual property(IP) strategies that will result in the greatest accessibilityof its inventions in high endemic countries.
Nature of the Bridge FIND provides a bridge between industryand public health needs of develop ing countries bydefining and providing to the industrypartners specifications suitable for patien ts and care providers in developing countries; facilitating access byindustryto well characterized and sta ndardized clinical materials and specimens for validation of new tests; providing access and logistical support for field evaluation of new tools through a network of laboratories in developing countries; introducing tests that have passed the evaluation phase into selected national disease control programs of the developing countries to demonstrate impact and usefulness of the tests in a real life situation; assuring protection of intellectual propertyrights; and financing the evaluation and demonstration studies. In pursuing this, FIND keeps in focus its goal of creating common technological approaches for diagnosis of several povertyrelated diseases, and strengthening the public health systems. FIND currentlycollaborates with a number of leading diagnostic manufact urers, small biotechnology companies, academia, and public institutions to develop new diagnostic tests, and recentlycompleted the evaluation of a simplified test to detect multidrug-resistant tuberculosis. This collaboration with Biotec Ltd., a UK company, has resulted in the development of a breakthrough diagnostic test which gives results within two days rather than the many weeks it takes to diagnose multidrug-resistant tuberculosis using existing tests. For more information on FIND’s tuberculosis portfolio, please visit www.finddiagnostics.org Collaborating with industryand academic researchers enables FIND to adv ance promising reagents and platforms, for which there exists proof of principle, into optimized diagnostic products. FIND contracts and provides funds to public health laboratories to evaluate the performance characteristics of market-ready tests in regulatory-quality laboratory and field trials. Through collaboration with public health authorities FIND is able to demonstrate the feasibilityand programmatic impact on pat ients and control programs of new tests and thus generate objective evidence for the broader uptake of new diagnostic tests in the public health sector. 3312162032 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 256 International Development Committee: Evidence
Protecting Both Industry and Patients’Interests In all of FIND’s contractual agreements with industrypartners, methods a re clearlydefined to ensure that each dollar invested byFIND results in a return for the public sector in the form of aVordabilityand access. This is achieved in a varietyof ways,depending on the nature of the project , maturityof the technology, size of the company, and size of FIND’s total investment. When there is significant intellectual property(IP) involved, FIND typically seeks an irrevocable, royalty free license to the IP for the public sector in developing countries. Where necessary, FIND may purchase the IP outright to ensure access. In other cases, when IP is either irrelevant or not negotiable, negotiated product pricing maybe the primarymechanism to ensure aVordabilityand access. On the question of predictable supplyof qualityassured diagnostic tools , FIND’s strategyof involving both WHO and industryin the development, evaluation and demonstration ph ase of selected tools ensures that well-performing tools are readilymanufactured in a quality-assure d manner. FIND is also exploring innovative mechanisms for ensuring that the tools introduced into national policydo indeed reach populations that access health care through both the public and private health sectors and at all levels of the health systems, including the most peripheral point of care facilities.
Donor Partners The original project, funded byBill and Melinda Gates Foundation, target s the development and evaluation of improved tuberculosis diagnostic tests. Tuberculosis, which claims two million lives a year, is now compounded byco-infection with HIV/AIDS. Around 95% of new tuberculo sis cases each year originate in the developing world where diagnosis still relies on time-consuming and frequentlyinaccurate microscopydeveloped over a centuryago. Bill and Melinda Foundation is al so financing FIND’s recently launched program to develop better point-of-care tests for diagnosis of human African trypanosomiasis (HAT), or sleeping sickness, one of the world’s most neglected public health problem, with an estimated 50 million people at risk. With additional resources currentlybeing sought from DFID and other dono rs, FIND will be able to expand its portfolio to include malaria and other neglected diseases since common diagnostic platforms can be used to develop new tools. In manyregions of the world most malaria episo des are misdiagnosed. Treating everyfever as malaria is wasteful of resources, and is costlyto c hildren, as other common causes of fever in children, such as bacterial meningitis, urinarytract infecti ons and pneumonia maybe overlooked with disastrous health consequences.
FIND’s Business Model FIND conducts its business in a start-up venture mode. For each disease, both existing and new diagnostic tools with characteristics convergent with FIND’s mission and strategya re recruited into evaluation in high- qualityclinical trials for registration purposes and in large-scale dem onstration projects to provide information on cost, ease of use and public health impact. Each project portfolio is managed in a business unit with product lines and defined targets and timing at each stage of the R&D process, from development, through evaluation and demonstration of impact of well-performing technologies, to policy implementation. All the critical steps of the business model are subject to policyanalysisto assure conformityto FIND’s mission. Vinand M Nantulya May 2006
Memorandum submitted by Fund Their Future
Following the debate in the House between Annette Brooke and Gareth Thomas on the government’s role in microfinance, I would like to make the following comments: 1. Microfinance is a proven, eVective, sustainable and accountable method of delivering aid to the poor. 2. It provides an alternative channel other than the often weak governments in the developing world. 3. As more funds are pumped into developing economies to achieve the Millennium Development Goals such alternative channels for aid will become vital if, as is inevitable, some of the recipient governments fail to fulfil their promises. 4. The government, through DFID, should not be cutting back support to microfinance but increasing it. It should give people pause for thought that in Ghana, one of the better democratic governments, TransparencyInternational estimate the average Ghanaian spends 20% of h is income on bribes. 3312162033 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 257
I am a businessman based in Bristol who also invests in microfinance and has set up a charityto support microfinance. Andrew Robb April 2006
Memorandum submitted by The George Institute for International Health, London Unit
1. Summary 1.1 The UK Government has pledged its commitment to the UN Millennium Goal to increase access to essential medicines for poor people in developing countries; all part of the overarching strategyto reduce global poverty.93 94 A significant part of the access problem is a desperate shortage of new drugs for diseases endemic in developing countries. The G8 acknowledged this in 2005, committing to “increasing direct investment . . . through such mechanisms as Public Private Partnerships ...toencourage the development of . . . drugs for AIDS, malaria, TB and other neglected diseases.”95 1.2 Until the Millennium there was a paucityof Research and Development (R &D) into new drugs for neglected diseases byboth the private and public sector. Since 2000, the a dvent of Public Private Partnerships (PPPs), predominantlysupported byphilanthropic organis ations, have rapidlyestablished a new landscape for neglected disease R&D, with 3 new drugs registered since 2000 and 8—9 more drug registrations for neglected diseases expected by2010. These partnershi ps however are at great risk of failure due to a lack of public funds. New government policies are needed to support the work of PPPs, and ensure much needed drugs become available. 1.3 This submission is a summaryof research conducted in 2005 bythe Pharma ceutical Research Policy Project (PRPP) based at the London School of Economics96 sponsored bythe Welcome Trust. It focuses on how private sector pharmaceutical companies through PPPs, in developing and developed countries, are engaging in R&D for neglected diseases. 1.4 This document examines: — The importance of addressing ill health as part of a povertyalleviation s trategy; — The current R&D landscape and the post-Millennium evolution of the field with the advent of Public Private Partnerships focussing on neglected diseases; — The role of private sector pharmaceutical companies in developed and developing countries in developing new drugs for neglected diseases; — The merits and shortfalls of PPPs as a mechanism for drug development; — And recommends possible financing and policyconsiderations for Governm ent that are vital to ensure MDG commitments are honoured.
2. Recommendations for Action by the Government 2.1 We recommend that the UK Government amend its perspective and policypr actice to reflect the changed role of the pharmaceutical industryin neglected disease drug R&D since 2000, in particular by: 2.1.1 Recognising the new industrybusiness model of neglected disease dr ug R&D, under which companies participate via Public-Private Partnerships (PPPs); 2.1.2 Encouraging further involvement bythe private sector (in both deve loping and developed countries) in neglected disease R&D with PPPs, through the set up of the IndustryR&D Facilitation Fund, a mechanism designed to finance industryinput into PPP s; 2.1.3 Encouraging other donor governments to understand and support neglected disease drug development PPPs.
93 WHO (2005), Health and the Millennium Development Goals, http://www.who.int/mdg/publications/MDG Report 08 2005.pdf, p28. 94 DFID, DoH, DTI, Increasing people’s access to essential medicines in developing countries: a framework for good practice in the pharmaceutical industry, A UK Government policy paper, March 2005, p1. 95 UK Government (2005), The Commission for Africa Report vs. the Gleneagles Communique´ on Africa http://www.number-10.gov.uk/files/pdf/g8-vs-cfa-final.pdf 96 Since completion of this studyin September 2005, the PRPP is now based at th e George Institute for International Health aYliated to the University of Sydney, Australia. 3312162034 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 258 International Development Committee: Evidence
3. Organisation Submitting Evidence 3.1 The Pharmaceutical R&D PolicyProject’s (PRPP) remit is to develop new pharmaceutical R&D policytools that could be implemented byWestern governments and donors. It is an independent policy unit, set up in May2004 at the London School of Economics. The project is ini tiallysponsored bythe Wellcome Trust and subsequentlybythe Global Forum for Health Research th rough contributions from the World Bank. In January2006, the PRPP transferred to The George Institu te for International Health, aYliated with Sydney University, while continuing to maintain a London oYce.
4. Supporting Factual Information 4.1 Evidence in this submission is drawn from the research report, The New Landscape of Neglected Disease DrugDevelopment , produced bythe Pharmaceutical R&D PolicyProject, London School of Economics, September 2005. A copyof this report can also be downloaded at: http://www.thegeorgeinstitute.org/shadomx/apps/fms/fmsdownload.cfm?file uuid%8106F17F-DB8D- D70E-90F7-B3FB8FB0F0E4&siteName%iih
5. What can the Private Sector do to Alleviate Poverty?
Ill health is a major cause of poverty 5.1 Both the scale of the global health divide and the intrinsic links between ill health and povertyare well documented. In 2001, the Commission on Macroeconomics and Health, created bythe World Health Organization (WHO) demonstrated that good population health was a critical input into povertyreduction and economic growth. In sub-Saharan Africa for example the total cost of malaria is estimated to be nearly 17.4% of GNP.97 5.2 Reducing the burden of these communicable diseases is complex, involving improvements to water quality, education and infrastructure, as well as the longer-term development of preventative vaccines. However, during the decades needed to achieve these goals, reducing the disease burden will cruciallyrely on access to eVective and aVordable curative treatments for those who are infected now. We note that this means hundreds of millions of malaria and TB cases each year, which—human suVering aside—greatly reduce the economic productivityof those a Vected. 5.3 A further complexityin addressing this current and ongoing disease bu rden is the emergence and growing dominance of drug resistant strains, diminishing the eYcacyof front line treatments for neglected diseases—TB, malaria, pneumonia, diarrhoea, cholera, HIV, gonorrhoea, and other sexuallytransmitted infections. Chloroquine, previouslythe first-line treatment for malari a, is now ineVective in 80 of the 92 countries where malaria is endemic.98 5.4 The impact of eVective and aVordable treatment, particularlyon eradicable diseases, is clear. For example, within 10 years the introduction of a new treatment for onchocerciasis has halved the global disease burden; and a new treatment eradicated schistosomiasis from major parts of the world (including China and Brazil). 5.5 It is here that the private sector role is crucial. R&D of new drugs still remains largelythe preserve of Western pharmaceutical companies although companies based in developing countries are playing an increasing part. Without private sector input and assistance, it is unlikelythat new neglected disease drugs are delivered that will address the needs of the world’s poor and successfullymanage and overcome drug resistance in the developing world. 5.6 The remainder of this paper examines how the private sector can and does engage in this area, and what donors need to do to support these companies.
6. The Neglected Disease Drug R&D Landscape before 2000: A General Disengagement from the Pharmaceutical Industry 6.1 Until veryrecently,there has been a failure of investment bygovernme nts and the pharmaceutical industryin R&D for new drugs to address diseases a Vecting developing countries (neglected diseases.99 In 1990, The Global Forum for Health Research estimated that only10% of R&D sp ending was directed at the health problems of 90% of the world’s population.100 This disequilibrium became known as the “10/90 gap”; a gap that still persists despite increased investment byboth the pu blic and private sectors.
97 World Health Organization (2001), Macroeconomics and health: investing in health for economic development. Report of the commission on macroeconomics and health, Geneva: WHO. 98 Oxfam Briefing Paper on Pfizer (2001), Formula for Fairness: patient rights before patent rights, Oxfam. 99 The 10 neglected diseases listed bythe World Health Organization Special Programme for Research and Training in Tropical Diseases (WHO/TDR) are leishmaniasis, schistosomiasis, onchocerciasis, lymphatic filariasis, Chagas disease, malaria, leprosy, African trypanosomiasis, tuberculosis and dengue. 100 Global Forum for Health Research (1999), “The 10/90 Report on Health Research.”Geneva: Global Forum for Health Research. 3312162034 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 259
6.2 Investment has been limited in part due to widelyheld misconceptions w hich have for decades pervaded government policyand incentives. Policyhas been based on the pr emise that public groups and academics would work “upstream” to develop promising new drug leads, while the pharmaceutical industry would conduct the “downstream” development of trialling these drug leads in developing countries, followed bylarge-scale manufacture and distribution. 6.3 The expense, high liabilityand complex logistics of downstream devel opment have meant that pharmaceutical companies have been extremelyreluctant to undertake neg lected disease drug development. Before 2000, manycompanies left the infectious disease field and others ad apted bysubstantiallydownsizing their neglected disease research and byfocussing on cheaper, easier (but far less valuable from a health perspective) low-innovation products, such as reformulations of existing drugs. For instance, of the 1,393 new chemical entities marketed between 1975 and 1999,101 only16 were for tropical diseases and tuberculosis.102 The overwhelming majoritybeing lower innovation products (new formulat ions or uses of existing drugs) rather than much needed “breakthrough” therapies aimed at overcoming growing parasite and microbial resistance. 6.4 Policy-makers have responded to this problem by focussing their thinking on the veryconsiderable financial incentives needed to encourage private sector back into “downstream” investment. However, our research shows that a far more productive approach—from both the financial and health perspective—is instead to support a new industrybusiness model that has appeared since 20 00, and which allows companies to re-engage in neglected disease drug R&D at far lower cost and risk. This model is Public Private Partnerships.
7. Public Private Partnerships—The New Model of Private Sector Engagement in Neglected Disease R&D 7.1 Since 2000, the landscape has radicallyaltered. Eight or nine new drug s are now expected by2010 (at standard attrition rates). Over 60 neglected disease drug development projects are underway, including 20 products currentlyin the later stages of development—clinical trials an d/or registration. The four drug development PPPs,103 which were all created around 2000, and the quasi-PPP WHO/TDR (the WHO drug development arm) , are together responsible for three-quarters of this activity.
Figure 1
THE NUMBER OF DRUG R&D PROJECTS CARRIED OUT BY DRUG DEVELOPMENT PPPs SINCE THEIR CREATION*
45
40
35
30
Preclinical 25 Clinical
projects 20 Total 15 Number of drug R&D
10
5
0 2000 2001 2002 2003 2004
*WHO/TDR figures are excluded 7.2 PPPs have succeeded where traditional incentives have failed. Theyha ve managed to attract drug companies back into the neglected disease field byallowing them to partici pate in neglected disease R&D at far lower cost and risk than the traditional “do-it alone” approach. GSK, Novartis, Sanofi-Aventis are all examples of companies that are currentlycarryingout R&D within partn ership agreements.
101 Trouiller P et al. (2002), Drug development for neglected diseases: a deficient market and a public-health policyfailure, Lancet, 359: 2188–94. 102 These include four drugs for TB and 13 for other neglected diseases. 103 The four PPPs are: Medicines for Malaria Ventures (MMV), created in 1999; Institute for OneWorld Health (iOWH), created in 2000; The TB Alliance, created in 2000, Drugs for Neglected Diseases Initiative (DNDi), created in 2003. 3312162034 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 260 International Development Committee: Evidence
7.3 Under this new model, multinational drug companies have increasingly moved their neglected disease activities upstream to focus on cheaper, high innovation early-pipeline R&D i.e. drug discovery. In turn, the PPP partner provides the bulk of the neglected disease expertise, networks and funds needed to trial these drug leads at developing countrysites. Once successfullytrialled, the c ompanycan manufacture and distribute the resulting drugs at cost price (a crucial point for final aVordability), since it has not had to bear the costs and risks of the full drug development process and, in particular, of clinical trials. 7.4 This new model has delivered major breakthroughs: 7.4.1 Companyactivityand innovation in drug development have increased dramatically. Eight multinationals now conduct over 30 neglected disease drug development projects (commonlyin partnerships), with 63% of these projects being “breakthrou gh” drugs aimed at new disease areas or overcoming growing parasite and microbial resistance. 7.4.2 PPPs are also using the model to eVectivelydevelop academic leads or shelved compounds that companies are not commerciallyinterested in, for example bycontrac ting out R&D to small companies, or byputting together consortia of development partn ers (industry contractors, academics and developing countrymanufacturers). 7.5 We also wish to highlight the potential role that PPPs can playin encour aging small company involvement in neglected disease R&D. Small firms involved with PPPs are universallydriven bycommercial motivations i.e. bythe expectation of shorter-term profit. Some see negle cted disease markets themselves, particularlylarger markets such as Malaria and TB, as su Ycientlyattractive to warrant investment, and the help of PPPs in the form of funding and technical support in the clinical phases lowers the barriers to entry to these markets. For example Zentaris, a small German company, recently developed a new drug for leishmaniasis with the help of WHO/TDR. 7.6 A second—and potentiallymuch larger—categoryis that of small firms wh o engage into “add-on” neglected disease R&D if theyreceive full funding for it from PPPs, and if t he research also supports their primaryWestern commercial focus. For instance, these firms mayuse neglec ted disease R&D to expand their information on core commercial compounds, or to establish proof-of-concept for a technologythat can then be transferred to commercial markets. We note that in the absence of PPP support and funding, manyof these small companies will not pursue an overlapping potential neg lected disease drug. PPPs can also provide “enabling funding”, supporting the creation of small companies with platform technologies or drug candidates that can have an impact in both the Western world and developing countries. An example of this is the US-based firm Amyris, which was able to start as a company thanks to funding from the Gates foundation through the PPP institute for One World Health. Under its funding agreement it is working on establishing a proof of concept for its drug biosynthesis technology, which will have great commercial potential, for a malaria drug. 7.7 The catalytic role that PPPs play in facilitating industry neglected disease drug development is witnessed byanalysisof their funding streams. Two-thirds of PPP R&D fund s now go directlyto drug companies (almost equallydivided between large and small firms).
Figure 2
THE DISTRIBUTION OF PPP FUNDS
34.8% One-third Academics translation of research into PPP drug leads 30.2% cumulative direct R&D Spend SMEs/CROs/ DC firms Two-thirds US $76m* to industry 35% Big pharma
* Covers period 2000-2004 PPP R&D spend only (total PPP spend was US$112 million) TDR figures are excluded SMEs: Small and Medium-sized Enterprises, CROs: Contract Research Organisations, DC: Developing Country 3312162034 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 261
8. PPPs Work for Companies, but are they Good for Public Health and Finances? 8.1 A recent submission bythe Biomedical IndustryAdvisoryGroup (BIAG) a nd the International Federation of Pharmaceutical Manufacturers & Associations (IFPMA) noted: “Industrysupports PPPs for neglected diseases because theylink up most relevant skills and capaciti es of diVerent players and there is a clear division of labour between public and private sectors. Governments might consider fiscal incentives to encourage a larger number of companies to collaborate with [these] PPPs.104” 8.2 These views on comparative advantage are substantiated byour researc h, which shows that PPPs outperform either industryworking alone or public working alone in negle cted disease R&D. In other words—and perhaps unsurprisingly—neglected disease drug development requires both neglected disease knowledge (a public strength) and drug development expertise (a private strength). Either alone is a recipe for lower productivity. 8.3 This is clearlydemonstrated when PPPs are measured against the follow ing four criteria essential for successful neglected disease drug development:
Health value for developingcountry patients 8.4 38% (3 of 8) of products developed byindustry-publicpartnerships bet ween 1975 and 2004 have contributed significantlyto reducing global health burdens (i.e. Iverme ctin halved the global burden of onchocerciasis between 1990 and 2000). In contrast, only8% (1 of 13) of neg lected disease drugs developed byindustry-alonehad high health value to developing countrypatients.
Levels of breakthrough innovation 8.5 The share of innovative products developed byindustrybefore 2000 (pr eviously8% of finished products) has increased to 63% in the current R&D project portfolio carried out under the new “partnered” approach; while nearlyhalf of all PPP projects (49%) are breakthrough dru gs aimed at overcoming growing parasite and microbial resistance.
Drugdevelopment timelines 8.6 Overall, PPP R&D timelines match or exceed industrystandards for deve lopment of commercial New Chemical Entities (NCEs) and are substantiallyfaster than industryNCE t imelines for neglected disease projects (onlya small number of products). The exception is WHO/TDR, whic h has significantlyslower timelines than other partnered approaches.
Costs 8.7 The PPP approach is significantlymore cost e Vective than industry-alone approaches for many reasons, including elimination of costs of capital (estimated to double R&D costs) and the abilityto leverage in-kind inputs from industryand public groups. However, even with no in-k ind component, PPP costs are low. For example, development of new Fixed Dose Combinations is in the range of $20 million; while MMV’s malaria drug, synthetic peroxide, has cost $11.5 million from the laboratorythrough drug discovery and preclinical and into Phase I trials.
9. The Pharmaceutical Industry’s Direct Role in Developing Countries
Developingcountry pharmaceutical firms and the new R&D landscape 9.1 Research has highlighted nearlyone-quarter of the documented PPP neg lected disease projects involved developing countryfirms as either the main or subsidiarypartner . 9.2 Most developing countrypharmaceutical companies are not R&D-based, instead focusing on large- scale manufacture and distribution of generic versions of existing drugs for both national and international markets. As a result, manyhave a comparative advantage in drug production at the end of the pipeline; the abilityto o Ver low-cost scale-up and good manufacturing practices; and the abilityto distribute in disease endemic countries. 9.3 This skills base means that, within PPP projects, developing countryfi rms generallyplaythe role of manufacturing and distribution partner for a small companyor PPP lead, in the same waythat multinational companies act as end-pipeline partners for small companies in Western markets.
104 IFPMA, Submissions byBIAG and IFPMA to the WHO Commission on Intellectual PropertyRights and Innovation in Health, May2005. 3312162034 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 262 International Development Committee: Evidence
9.4 However, developing countryindustryactivityis now beginning to cha nge, both generallyand within PPP projects. Several large developing countrycompanies are now moving i nto R&D either alone or in partnerships with Western multinationals (eg Lupin and Ranbaxyin India) . PPPs are accelerating this process byfacilitating technologytransfer to these firms, giving them an opportunityto learn, and providing them support with the clinical stages and regulatoryprocess. 9.5 In four of the 10 PPP projects listed in Figure 3 below, the developing countryfirm is the main industrypartner and is participating in clinical development as well as m anufacture and/or distribution. For instance, MMV paid a Western Contract Research Organisation to support the Indian pharmaceutical firm Ranbaxyas part of one of its R&D projects for malaria, as it was the first time Ranbaxywas involved in the clinical development of a new chemical entity. That same PPP facilitated as part of another project a joint-venture between an Italian pharmaceutical company, Sigma Tau, which was looking for an entryto the Chinese market, and a Chinese pharmaceutical company, Holleykin Pharmaceutical. As a result, Sigma Tau and Holleykin jointly managed the Controls, Manufacturing and Chemistryaspects of the drug development process and Holleykin upgraded its manufacturing process to meet Western regulatory requirements.
Figure 3
ACTIVITY OF DEVELOPING COUNTRY FIRMS IN PPP R&D PROJECTS
Project Disease Western DC firm Country Role partner
DB-289* Malaria Immtech Discussion China Small company MMV in progress manufacturing partner
Dicatonic back- Malaria MMV Discussion China Small company up compounds in progress manufacturing partner Artekin ® (DHA/ Malaria Sigma-Tau Chongquin China Small company piperaquine FDC) MMV Holley manufacturing partner
Artemisinin- Malaria Amyris Planned - Small company production iOWH manufacturing and technology distribution partner (not yet secured)
Gatifloxacin* TB WHO/TDR Lupin India PPP manufacturing FDC EC OFLOTUB partner Consortium Possible development partner
Paromomycin* Leishmaniasis iOWH/IDA Company name India PPP manufacturing WHO/TDR not known partner
Impavido ® Leishmaniasis Zentaris German India Small company WHO/TDR Remedies development and distribution partner
Synthetic Malaria MMV Ranbaxy India Main industry partner: peroxide* development, trial manufacture, and likely final manufacture and distribution
Pyronaridine- Malaria MMV Shin Poong South Main industry, partner: artesunate* FDC Korea development, manufacture and distribution
Artesunate- Malaria DNDi Far Manguinhos Brazil Main industry partner: mefloquine FDC WHO/TDR development and manufacture
* Clinical Trial Stage 3312162034 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 263
10. The funding shortfall of PPPs 10.1 Despite their central role in stimulating and facilitating neglected disease R&D, particularly companyR&D, PPPs receive verylimited public support. There are no public policies in place to specifically encourage or reward industryparticipation in PPPs. Public policyis sole lyfounded on principles based on old understandings which focus on large incentives that seek to make neglected disease markets more commerciallyattractive and bring companies into the end-pipeline, wher e theyare less skilled (at least for neglected diseases) and do not want to go. 10.2 As a result, PPPs are currentlysubstantiallyunder-funded. Our rese arch showed that as of March 2005 there was a 40% funding shortfall, in part due to a deficit of public funds: 80% of PPPs’ total funding came from grants from philanthropic organisations with OECD governments collectivelyproviding only 16%.
Figure 4
PPP FUNDING SOURCES AND FORWARD PROJECTIONS OF GUARANTEED FUNDING STREAMS AND BUDGET NEEDS AS OF MARCH 2005
3% 2% Philantropic organizations UN Agencies 16%
Private sector
Public sector
79%
250
200
150
100 US$ Millions US$
50
0 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total PPP funding Total PPP budgets 10.3 In 2005, the G8 committed to “increasing direct investment and taking forward work on market incentives, as a complement to basic research, through such mechanisms as PPPs and APCs to encourage the development of . . . drugs for AIDS, malaria, TB and other neglected diseases.” The Government’s recent financial pledges to PPPs are a welcome statement of its intent to honour the G8 commitment. However, the eVorts of the UK Government need to be augmented and consolidated byother G8 m embers as a matter of urgency; otherwise the sterling progress being made by PPPs to develop new drugs for neglected diseases will fail.
11. What Aid Instruments can be used by Donors to Encourage PSD? 11.1 Drug development often spans more than a decade and requires considerable logistical and financial planning. Without guaranteed funding streams at least in the medium term, planning is diYcult and can lead to delays in drug development, a constrained ability to take up new projects, and reluctance byprivate sector partners to engage into collaborative R&D with PPPs. 11.2 On the basis of our research findings, it is recommended policymakers e stablish secure funding streams that are specificallyaimed at supporting industryneglected dise ase drug R&D within PPPs, to ensure their sterling work is continued and the drugs urgentlyneeded to al leviate the health burden of developing countries are delivered. 11.3 One simple, cost-eVective mechanism to achieve this is the proposed IndustryR&D Facilitatio n Fund (IRFF). 3312162034 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 264 International Development Committee: Evidence
Industry R&D Facilitation Fund (IRFF)
11.4 It is recommended that a new public fund is established, an IndustryR& D Facilitation Fund (IRFF), which would be a long-term single central mechanism to subsidise industryinput across all neglected disease drug development PPPs. The proposed IRFF is a simple, cost-eVective financing facility alreadyendorsed byall PPPs and recommended for further consideration an d development byIndustry. 11.5 The benefits of a centralised fund are manifold. For donors, the principal benefits include: 11.5.1 Minimising risk and simplifying policy choices—the IRFF would provide a single mechanism to fund a global portfolio of R&D projects, eliminating the responsibilityon governments of having to “pick winners” and spreading the risk of investment across projects; 11.5.2 Maximising value for money, by financing and thereby further encouraging Industry involvement with PPPs—the most cost-eYcient R&D approach—PPPs are strengthened and neglected disease drug development is optimised; 11.5.3 Providing a single central point of information on global neglected disease drug R&D funding bycompany,organisation and disease—a recommendation of the DFI D 2005 review of MMV. 11.6 It is estimated, based on the combined budget forecasts of current PPPs, that $200 million per annum is needed to finance Industry’s vital input into the current portfolio of PPP neglected disease R&D projects, and ensure deliveryover the next 10 yearsof current drugs in the developme nt pipeline. This represents an average cost of only$7 million per annum per OECD countryto facilitate the development of much needed new drugs for patients in developing countries who desperatelyneed them. 11.7 PPPs are a critical catalyst of private sector engagement in neglected disease drug R&D and provide a proven optimal package for ensuring much needed new drugs are developed quicklyand e Yciently. It is important that the G8 commitments are not reneged on. The UK Government must seize the initiative and catalyse discussions with OECD partners about possible financing mechanisms to ensure the good work of industryfor neglected diseases, catalysedPPPs is further encouraged. T he IRFF is one such possible mechanism. 11.8 A copyof our report elaborating on the research findings mentioned abo ve and detailing further the potential of the IndustryR&D Facilitation Fund can be downloaded at: http ://www.thegeorgeinstitute.org/ shadomx/apps/fms/fmsdownload.cfm?file uuid%8106F17F-DB8D-D70E-90F7- B3FB8FB0F0E4&siteName%iih April 2006
Memorandum submitted by Alan Gibson, The Springfield Centre
Alan Gibson is a partner in the Springfield Centre for Business in Development, a UK-based consultancy, training and research organisation. Working with a number of international development agencies, Springfield’s focus is private sector development. At the heart of all their work is the market development approach—or makingmarkets work for the poor . Theyhave been involved in the design and review of a number of market development interventions (some supported byDFID) in Af rica and Asia, have written extensivelyon the subject and o Ver training programmes on this theme for development agencysta V.
1. Introduction 1.1 While the Committee’s remit in relation to this inquiryis broad the foc us of this brief submission is more limited. The starting point here is that growth is essential for povertyreduction and that, in turn, private sector development is critical for growth.105 The question to which this submission addresses itself is, given this, what should be the role of agencies such as DFID in promoting private sector development that is both eVective and inclusive? In other words, what should DFID do? 1.2 The submission first recognises the widespread failings of manydevelo pment experiences and then, learning from this, focuses on the market development approach106 as a means of bringing greater coherence and eYcacyto development agency(and government) endeavours. It presents the e ssence of this approach, highlights current, positive examples of the approach in action and outlines its advantages. Finally, the broad implications for DFID are highlighted.
105 Clearly, there are many issues pertaining to the nature of growth and povertyreduction but while these are important they have been the subject of other submissions and discussions and are not considered here. 106 The terms market development approach and makingmarkets work for the poor are used interchangeably. 3312162035 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 265
2. Recognise the Big Picture:Acknowledge General Weaknesses ... 2.1 Development, as an activityand “sector”, is characteristicallypron e to its own emperor’s new clothes syndrome. Good intentions are mistaken with achievements. Causes are confused with symptoms. The possibilityof doing damage is not acknowledged. Debate can slide to a defa ult option of comfortable superficiality and easy myths—the “more-is-always-better” school of aid-giving, the “answer-is-money” response to the big challenges and so on. Incentives, as has been mentioned byother contributors to this inquiry, often encourage not candid examination of performance but presentation of the best possible interpretation of reality.
3. … and the Specific Failings in Private Sector Development 3.1 These general traits applyto private sector development but here ther e are more specific failings— and recognising and learning from these is a prerequisite to acting more eVectivelyin the future. Broadly, these can be categorised into two blocks: — Remote reform: the essence of this approach has been to reform the overall environment of policies and regulations so that the costs of business are reduced and the allocative power of the price mechanism restored so that the supply-side of the economy, unencumbered, will respond. The experience here is mixed. Often, despite apparentlyfollowing the correc t script, countries’ private sectors have not developed well and growth has remained sluggish (eg Ghana). The reasons for this are various but, crucially, processes of institutional reform have not reflected local realities and the other constraints to development—information, networks, knowledge—have not been addressed.107 — Impulsive intervention: in contrast, this swathe of development activities has sought to “get things done” directly. The ethos here is, if the market isn’t delivering, we should replace it and provide finance, advice, contacts and materials ourselves. After manyyearsof exp erience, major reviews108 of these all point to disappointing outreach, sustainabilityand impact, and markets that are distorted and weakened. Whyhas this happened? Most obviously,agencies a re not businesses— theydon’t have the culture, orientation and skills to deliver. More funda mentally, they haven’t asked the right question. The interveners’ instinct has been to ask: “What problems do businesses have and how can I solve these?” and not to ask the more relevant systemic questions—“What problems do businesses have, whyisn’t the market environment providing s olutions to these and how can I address these”. Development interventions have been about addressing business problems (symptoms) and not those of the wider market system around business (causes). 3.2 What both of these experiences share is a failure to engage with the underlying systemic constraints that prevent market systems from working eVectively. Market development has emerged from these experiences.
4. Market Development: the Approach and the Practice 4.1 The essence of a making markets work approach to private sector development is: — Understand market systems: identify the key reasons for the underdevelopment of the market system. Why isn’t the market working, especially from the perspective of the poor—as consumers, employees or producers? — Develop a vision of the future: build a transparent view of the future in relation to who undertakes and pays from key market functions. — Intervene to build the market system: on the basis of key principles of good practice and using a varietyof potential tools, take actions to address keyconstraints and de velop the market system. 4.2 There is now a growing bodyof experience of how, using this approach, su stainable and eVective private sector development can be stimulated. Three examples illustrate the potential of the approach (all of which have been DFID-supported to some degree):
(a) Financial services in South Africa The problem: low reach of financial services, especiallyamong low-income groups exclu des them from the mainstream economy. The solution: developing enhanced information services for financial providers, supporting innovation in services and contributing to improved regulatoryprocesse s. The result: contributed to major increase (several million people) in coverage and usage of financial services and a growing momentum of positive change.
107 The ascendance of institutional economics in development thinking is a response to these past failings. 108 For example, the Committee of Donor Agencies for Small Enterprise Development in the 1990s. 3312162035 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 266 International Development Committee: Evidence
(b) Radio services for SMEs in Uganda The problem: poor qualityof SME-related programming in commercial radio services res tricts information flow in the economyand limits accountability. The solution: work with small number of radio stations directlyto improve programme inn ovation and quality, support “crowding in” of others and strengthen wider market functions (regulation, journalism qualityetc). The result: up to 20 radio stations, serving around 8m listeners, competing on the basisof programming and services aimed at an SME audience.
(c) Information services for farmers in Bangladesh The problem: productivityamong small-scale vegetable farmers is low. One keyreason f or this is lack of information on cultivation practices and application of inputs. The solution: in the context of dysfunctional state agriculture extension services, introduce new training for input retailers in the supplychain to enhance their role as in formation providers to and problem solvers for farmers. The result: after successful introduction, major input companies plan to expand training to reach up to 14,000 retailers, potentiallycovering one-quarter of the country’ s vegetable farmers.
5. The Advantages of the Market Development Approach 5.1 Although verydi Verent, all cases have achieved success that is sustainable (market players have a strong incentive to continue), significant and discernible (millions of people have been aVected) and additional (it’s unlikelythat these benefits would have been achieved wit hout intervention—or certainlynot with the same scale and speed). These also highlight a number of advantages and characteristics of the approach: — A uniting framework: although diVerent markets, each uses the same framework to guide their actions. The messy nature of so much diverse private sector promotion activitycan be brought into a coherent framework for implementation and a potential common platform for inter-agency collaboration established. — Clarityof agencies’ role: in each case, development agencies have acted as temporaryfacilitators of market systems (rather than—as conventional approaches would emphasise—direct players within them) — Operational flexibilitywithin a strategic framework: each case has used a varietyof inputs—cost- sharing grants, technical assistance, new ideas. However, while there is clearlyno mechanical formula here and flexibilityis required, these are all within a coherent st rategic context. — Transparencyof organisation’s role in markets: the role of di Verent players—government, membership associations, the private sector—is set out clearly.
6. What Does this Mean for DFID? 6.1 DFID, like all development agencies, is not one tight-knit entitybut r ather a series of smaller communities—and sometimes at odds with each other. Notwithstanding this inherent diversity, there are general trends in evidence. In the context of these, what are the implications of market development thinking and practice for DFID policies and organisation?
(a) Marking the limits of budget support—recognise the need for other interventions 6.2 While there are strong arguments in favour of focusing aid eVorts on budget support (not least promoting cohesion and reducing coordination costs), there are also serious concerns. When manyof the fundamental constraints to private sector development are related to information, incentives and knowledge it is not clear how budget support can address these. There is an unfortunate sense of deja` vu here; tweak the big levers of government policyand regulation and supply-siderespon se will happen. But an environment that is trulyenabling is more than simplyhaving the right reg ulations in place (even if that’s a big part of it). The kind of tangible, systemic changes mentioned above simplywould not happen were budget support the onlyinstrument that DFID could call upon. Budget suppo rt maywell allow DFID to shift large amounts of moneyin a relativelyeasymanner but—byitself—has limited eYcacyin relation to private sector development outcomes. 6.3 The first implication therefore must be that DFID needs to restore greater balance to its work and complement its budget support focus with other interventions related to market development. A growing bodyof experience is emerging on the di Verent mechanisms and approaches available to design and 3312162035 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 267
implement these. It would be ironic if, just as we’re learning more about how to intervene eVectively, DFID’s support began to wane. Indeed, budget support collaboration with governments is likelyto be enhanced by a market development framework and when it is informed bymarket developme nt interventions.
(b) Put makingmarkets work thinkingat the centre of private sector developme nt 6.4 There are (still incipient) signs within DFID that market development is emerging as a unifying theme for diVerent disciplines (enterprise development, livelihoods, agriculture etc). Development is an endeavour characterised bydi Verent technical specialisms—boxes stuVed with diVerent methods, perspectives and jargon, often jealouslyguarded. Market development potentiallyo Vers one means of bringing greater cohesion to these disparate boxes.
(c) Re-establish DFID’s technical capacity in private sector development 6.5 The DFID brand in the world of development agencies has, historically, stood for technical insight and innovation. Making markets work for the poor is an example of DFID leading international practice. Yet, as more emphasis appears to be placed on shifting funds and DFID simply as a conduit for these, its technical edge is declining—much to the surprise of other agencies. The implication is clear: there are ways in which thoughtful and intelligent interventions can promote eVective and inclusive private sector development. If DFID wishes to engage meaningfullywith private sector de velopment issues it needs to have people of the right calibre in place.
(d) Give private sector development a champion 6.6 Amidst the plethora of structural changes that have taken place within DFID in recent years, private sector development appears to have missed out. Yet (and this inquiryis evi dence of this) there is no doubt that pro-poor growth (and the range of wider benefits stemming from it) will depend criticallyon the extent to which private sector development is achieved. Given this, the absence of a strong commitment from DFID to private sector development—manifested perhaps in an in-house champion—is a striking omission. March 2006
Memorandum submitted by Barbara Vitoria, Managing Director, ICC Zimbabwe
Thank you for your invitation to submit ideas to the enquiry into Private Sector Development in the developing world. I have selected two areas in which to respond.
(a) What are the constraints on the private sector in developingcountries and how can they be addressed? The main constraints are at the international level, rather than at countrylevel. Tari V and non-tariV barriers significantlyprevent manyAfrican private sector playersfrom c ompeting in developed world markets and gaining market share. Farm and other subsidies, popular amongst developed world governments, make competing in manyproduct sectors in which Africa excel sdiYcult, if not impossible. These, in myexperience as a consultant living and working in Africa, are th e main constraints to PSD in Africa. Of course, the macro, meso and micro level issues playtheir part, but theya re small in comparison to the international level constraints described above.
(b) What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth? The most useful interventions, which do not appear as yet to be part of current donor thinking, should in myview, be focussed on phasing out tari V barriers and product subsidies in developed countries to allow the African private sector, wider and genuinelycompetitive access to dev eloped world markets. This would make the African private sector the national hubs of wealth generation, rather than the donor community. Currently, donor budgets in Africa are often larger than the wealth generated bythe private sector on the continent. An unfortunate consequence of this is that African governments often paymore attention to what donors want than to what the African private sector wants to generate wealth locally. This undermines PSD and diminishes the pressure on African governments to be accountable to their private sectors, and to their electorates, for creating the macroeconomic and regulatoryframeworks n eeded to support private sector growth. 3312162036 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 268 International Development Committee: Evidence
Making it diYcult for the African private sector to access developed world markets often creates the povertythat donor aid and e Vorts seek to address. This is a situation that makes no sense and, in myview, suggests that the motivation and objectives of donors need to be criticallyreviewed in the light of this conundrum, and new ways explored to address how donors can meaningfully and appropriatelysupport the private sector in reducing povertyin the developing world. Supporting good governance is also important to creating private sector growth in Africa as it provides the securitythat local and foreign investors need. Levelling the playing field in the manner described above would, I believe, go a long wayto improving governance, transparencyand a ccountabilityat countrylevels, and in addition would make initiatives in these areas locally-driven, rather than donor-driven, as African governments and the private sector see the advantages that good governance has in attracting local and foreign investment.
(c) Other One last area is the area of the distribution of wealth, which touches on the pro-poor issues mentioned in this enquiry. Whilst I am aware of several bodies of knowledge that describe wealth creation, I am not aware of significant studies that explore and recommend practical and workable approaches to the distribution of wealth in ways that protect the social good. Studies of this nature would be veryuseful in rethinking approaches to how wealth creation can benefit the poor. January 2006
Memorandum submitted by the International Institute for Environment and Development (IIED) IIED seeks to help shape a future that ends global povertyand delivers and s ustains eYcient and equitable management of the world’s natural resources. The organisation has an extensive track record in assessing the positive and negative impacts of the private sector on eVorts to achieve social and environmental improvements. This has included major initiatives on the paper cycle and the mining and minerals sector, as well as ongoing work on investment agreements, markets for environmental services, market concentration in the agri-food sector, associations of small- and medium-sized producers in the forestry sector and changes in propertyrights regimes in manyAfrican countries. S pecific points drawn from this work are made below; links to relevant documents are given in the text and further information is available on request. (Copies of several IIED publications have been placed in the Library). The following uses the format requested bythe Committee, addressing only the issues on which IIED has a particular interest. One central point to make at the outset is that interventions designed to stimulate private sector activityshould support, rather than undermine, the UK Gov ernment’s wider commitment to sustainable development. Not all growth is pro-poor—and not all private sector development supports sustainable development.
What can the private sector do to alleviate poverty?
What are the diVerent types of pro-poor growth? Povertyis caused bymore than a lack of money:it is also evident in various f orms of deprivation and marginalisation, manyof which are locally-drivenand need to be tackled a t local level. For the poorest people, access to environmental resources often constitutes a critical element of their assets and security, while environmental hazards (floods, droughts, climatic change) have a disproportionatelyhigh impact on the poorest people. Once this broader notion of povertyis accepted the imp ortance of the form and structure of business becomes more apparent. There are private sector models that provide benefits for poor people, including democratic member organisations such as co-operatives and non-profit companies. Small and medium scale enterprises are generallymore beneficial, especiallywhen t heyhave democratic structures. There is also a vast range of ways in which poor people demonstrate entrepreneurial skills in pursuit of collective, civic benefits rather than for profit maximisation (see in particular work bythe Ring network on “civic entrepreneurship”). Private sector development is especiallyim portant in the agricultural sector, in which manymillions of smallholder farmers are seeking to secure their rig hts in land, invest in raising yields and gain access to markets.
What are the connections between growth and PSD? The notion of “pro-poor growth” needs to be used carefully. Mainstream economic growth hardlyever preferentiallyfavours the poor: profits accrue predominantlyto shareho lders, employees and directors, who are alreadywell-o V, while accentuating gaps between richer and poorer. 3312162037 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 269
What are the constraints on the private sector in developingcountries and how can they be addressed?
The question implies that the removal of constraints on the private sector will be beneficial for the poorest people in developing countries. As above, IIED would question this generalisation and point to the need for greater rigour in assessing the benefits accruing to poor people from economic growth and private sector activity, and conditions under which such benefits are achieved.
The macro level—institutions, laws, governance, macro-economic policy
There are manychallenges, such as the need to strengthen the administrati on of land and propertyrights as a means to encourage long-term investment bylocal and foreign entrepre neurs. In manyparts of Africa, most land rights remain undocumented, bringing risks of conflict and dispossession of poorer groups, especiallywhere land values are rising rapidly,such as peri-urban areas and high value farm land. A focus is also needed on the lack of coherence between the UK’s commitment to sustainability, and current practice in developing investment agreements. Sustainable development and povertyreduction considerations need to be integrated into negotiation of the UK’s bilateral and regional investment arrangements. Often, these bilateral and regional investment arrangements provide the overall governance environment from which foreign investment contracts are negotiated between UK-based multinationals and the governments of middle and low income countries.109
Together with a group of partners in Chile, Mali, Pakistan, Ghana and Belize, IIED has been working to analyse the relationship between the terms of these foreign investment contracts and sustainable development. We have identified a range of concerns about how foreign investment contracts are negotiated, the terms of the deals, and their wider implications for sustainable development. The concerns include: — Lack of transparencyin the process of developing foreign investment con tracts with significant public policyimplications. — Substantive provisions (eg “stabilisation clauses”) that have the potential to undermine environmental protection or respect for human rights. — Dispute settlement provisions that take resolution of public policy-related issues to the private processes of international arbitration. — A range of indirect impacts on sustainable development (eg when legislation specificallydesigned to facilitate a project precedes contract negotiations).
The UK Government can playa role in addressing these concerns byencouragi ng transparencyin investment contract negotiations, and publication of concluded contracts. Contracts should not erode the domestic policyspace for povertyreduction and sustainable development . The UK’s bilateral and regional investment arrangements also need to be reviewed for their role in encouraging UK-headquartered companies to conclude contracts that maximise the contribution of foreign investment to sustainable development. If this is to be achieved, HMG (including DFID) should playa s ignificant role in the design, review and monitoring of government-to-government investment arrangements.
The micro level—direct support to businesses, microfinance
Most reallypoor entrepreneurial groups tend to help themselves through l ocal institutions such as producer associations or co-operatives. There are manyexamples of credi t unions, and micro-finance initiatives. But their potential is often undermined bylack of formal rec ognition. While successful development is intenselylocal, most development actions and investment s are planned, implemented and evaluated centrally—by national governments and international agencies. The whole development business and the Millennium Development Goals (MDGs) are based on meeting the needs of poor people, yet poor people themselves have no role in design and implementation of “development”. Most of the discussions and documents about what should be done are not accessible to them and are conducted in foreign languages. Most decisions about what is funded and how the funds are used are made without consulting them, and provide no accountabilityto them. Addressing this failing on th e part of national and international agencies should be the central challenge in assessing ways to tackle povertyat local level.
109 By“foreign investment contracts”, we mean negotiated agreements betwee n a business enterprise and a state for the purposes of an investment project in that state. The agreement sets out terms and conditions applicable to the investment project. It is “foreign” for these purposes when it is associated with a foreign business with capacityto control important management decisions or associated impacts. 3312162037 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 270 International Development Committee: Evidence
What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth?
Creating an enabling environment and favourable climate for investment for poor and rich alike by providing technical assistance on: — Propertyrights, through support to register rights to land and property , especiallyvital in regions where most propertyrights are undocumented. Registration of land and pro pertyrights is keybut must be designed in ways which strengthen, rather than weaken the rights of poorer more vulnerable groups who have frequentlylost out in previous titling progra mmes. — Investment promotion is of little help to the verypoor who do not tend to ma ke attractive investments (often because theyare informal). A better approach is to bui ld up the capacityof communityand enterprise groups to negotiate workable partnerships on a c ollective basis with larger business. — Public procurement can be a veryuseful strategyif directed to processes such as Fair Trade or communityproduce. Standards and ecolabels of other sorts tend to discrim inate against the poor, because of significant transaction costs. — Micro-finance is a critical element but it is frustrating to see how few donors pursue working examples such as the Grameen Bank—or build on locallydeveloped models of c redit unions etc. — Making markets work better for poor people—UK retailers are now major procurers from and investors in mid- and low-income countries. Both forms of investment oVer opportunities to “make markets work for the poor”. The UK Government (DFID) is aware that it must start engaging with the private sector in order to maximise the development impact of these investments.
1. Export Markets to the UK Consumers in the UK now expect high qualityfood from around the world, prod uced according to high ethical, environmental and safetystandards, at an a Vordable price and in all seasons. This opens up new market opportunities for agricultural producers in developing countries. But the waythese private sector supplychains are managed—through rationalisation and through standard s and certification processes— is also a potential barrier for smaller scale producers, who form the backbone of the African rural economy. This is a Commission for Africa priority: developing countries stress that “private standards can be even more exacting than oYcial ones, leading to the exclusion of small farmers and concentrating business in the hands of large firms.” Market access in agriculture is the most contentious issue in the Doha Development Agenda but private standards are outside the WTO mandate. The issue of fairness in trade continues to be high on the public agenda. However, although sales in fairlytraded products are growing the yare a verysmall component of total supermarket sales. The issue is therefore about how to mainstream fairness, equityand the development agenda into supermarket supplychains. DFID is engaged in a joint project with IIED and NRI to explore these issues. Forming close partnerships with food retailers, manufacturers, standard-setting bodies, traders and producers, this project aims to create opportunities and identifyfavourable outcomes for producers in d eveloping countries to participate in international supplychains, given the rise of private standards. More information can be found at www.agrifoodstandards.org.
2. Supermarket Expansion into Mid- and Low-income Countries Conventional thinking has been that the position of smallholders, processors and agribusinesses in their national markets is stable and that the keyissue is therefore how to gain ac cess to the more profitable niche markets, mainlyfor export. Yet a growing bodyof evidence shows that regio nal, national and local markets are themselves being transformed byimports and re-structuring. Penetra tion bytrans-national and domestic supermarket chains is proceeding at a rapid pace in emerging markets, where more than 50% of the growth in global food retail markets is expected to occur. This is having a major impact on market structure; domestic markets increasinglyhave more in common with export markets in t erms of standards required, business practices, prices, and ownership, so theyare less of a refuge for the small players. Small-scale agriculture, which supports the livelihoods of the majorityof rural poor , is poorlyprepared for the rapid changes that are taking place in the structure and governance of national and regional agri-food markets. There is thus an urgent requirement for policyto focus on waysto include sm all-scale producers in these markets undergoing dynamic change. DFID is a major participant in a consortium of donors supporting research and policydevelopment to prepare producer organisations, governments, businesses and donors for these changes. See www.restructuringmarkets.org. 3312162037 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 271
Infrastructure services (water, sanitation) Experience shows that the lowest-income groups, with the least access to water and sanitation services, receive the fewest benefits from private provision. This is not because of some inherent contradiction between private profits and the public good. It is because, as theyare curre ntlyregulated, neither publicly nor privatelyoperated utilities are well suited to serving the majorityo f low-income households who currentlylack adequate water and sanitation. If local governments choos e to involve private companies in water and sanitation provision, theyneed to set the terms in favour of poor groups. Privatization should not be promoted unconditionallyas the keyto achieving the water and sanit ation targets within the MDGs.
What aid instruments can be used by donors to encourage PSD? Private benefits versus benefits to society (public goods)—how much is this an issue?
Corporate Social Responsibilityand beyond There is continued uncertaintyover the meaning of “corporate social resp onsibility”. For some actors, including the European Commission, the term “CSR” refers onlyto activiti es that go beyond compliance with legal requirements: [CSR is] a concept wherebycompanies integrate social and environmental c oncerns in their business operations and in their interaction with their stakeholders on a voluntarybasis. (European Commission, 2002) This is sometimes contrasted with calls to strengthen “corporate accountability” through law. Voluntary and regulatoryapproaches have too often been treated as mutuallyexclusi ve. Indeed, CSR or “corporate responsibility” practice is often embedded within the legal and regulatoryenvironment. For example, in South Africa, new laws promote black economic empowerment. And in manymid dle and low income countries, implementation and enforcement of environmental or social legislation remains a major challenge. At IIED, we have found that it is more helpful to understand CSR as being about the overall contribution of business to sustainable development. IIED has worked on the role of donors in encouraging responsible business practice. This oVers insights into how donors could stimulate private sector-led growth which also favours sustainable development. In March 2004, the Swedish Ministryfor Foreign A Vairs, in collaboration with the Swedish International Development Co-operation Agency(Sida), the International Business Lea ders Forum, IIED and the World Bank, convened an international conference to examine how bilateral and multilateral development co- operation agencies could create an enabling environment for responsible business practices in middle and low income countries. The conference report (Fox and Prescott, 2004) notes that significant work is already being carried out bydonors, even if it is not specificallylabelled “corpor ate responsibility” or “corporate social responsibility”. The conference identified a range of areas where donors could playan even greater role, including: — Setting an example byintegrating “responsible business practices” int o donor agencies’ own activities; for example byintegrating corporate responsibilityissues into lending or procurement; ensuring that keypolicydocuments reach the business community;and main taining corporate responsibilityexpertise. — Helping public sector actors in middle and low income countries to create the conditions for responsible business behaviour, for example bystrengthening public gov ernance frameworks for implementation and enforcement of minimum social or environmental requirements. — Support the development of non-governmental organisations in middle and low income countries whose activities could help to create locallyrooted drivers of responsib le business practices. — Relating the “corporate responsibility” or “CSR” agendas to local businesses and to small and medium-sized enterprises in middle and low income countries. (This is considered further below). — Investment in leadership development to stimulate the emergence of individual corporate responsibilityleaders from middle and low income countries. There is currentlyconsiderable appetite among both policy-makersand so me businesses in revisiting the relationship between “business and development”. For example, the so-called “fortune at the bottom of the pyramid” approach pioneered by CK Prahalad and Stuart Hart and the World Business Council for Sustainable Development’s work on “doing business with the poor”. Equally, UNDP’s programme on Growing Sustainable Business oVers an expanding set of activities of considerable promise. But much of this interest focuses on the opportunities for large, multinational enterprises. It is not designed to deliver broader sustainable development outcomes, as distinct from for example, increased access to consumer goods for the world’s poorest consumers. Evaluation of the relationship between private sector development and povertyreduction in middle and low income countries needs to consider the role of small and medium sized enterprises (SMEs) in the economies and social fabric of those countries. SMEs are a major economic force, upon which large numbers of people in developing countries depend for their livelihoods. And theya re often stronglyembedded in the social fabric of the communities where theyoperate. 3312162037 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 272 International Development Committee: Evidence
One of the most challenging critiques of CSR tools, particularlycodes of c onduct and supplychain standards, is that theycan exclude SMEs in developing countries from lucr ative markets, thus harming livelihoods. This might suggest that corporate social responsibilitypr actices should be shaped in a waythat does not adverselya Vect the economic viabilityof SMEs in developing countries. Yet the cumula tive social and environmental impacts of SMEs are also highlysignificant, even though their individual impacts are small. SMEs are often over-represented in industrial sectors with high environmental impacts, and theymay not be subject to the same regulatoryand enforcement processes that can mi tigate the negative impacts of large companies. There is therefore potential for significant progress towards sustainable development if SMEs’ social and environmental performance could be ratcheted up. This implies the need for sensitive engagement with existing SME associations, based on a realistic discussion of the benefits and the costs of CSR. The “business linkages” theme is also evolving as an element of the CSR agenda for large companies operating within developing countries. The aim is to use local suppliers and outsourcing where possible, in order to maximize the transfer of assets and skills to local communities, and to create a multiplier eVect that increases local business activity, employment and income. Business linkages are generallymade through procurement, outsourcing or subcontracting of activities between large and smaller firms. Three promising avenues for future development cooperation eVorts that can stimulate both SME-based private sector development and responsible business practices in support of sustainable development are therefore: —EVorts to ensure that “bottom of the pyramid” business models reach SMEs. — Ensuring that the “business linkages” agenda pays more attention to the capacityneeds of SMEs and makes the most of their endowments of human and social capital. — Integrating CSR considerations into existing enterprise development and business support services for SMEs. February 2006
Memorandum submitted by Professor Calestous Juma, Kennedy School of Government, Harvard University
About Calestous Juma Myname is Calestous Juma. I am a Professor of the Practice of International Development at Harvard University’s Kennedy School of Government. My work focuses on the role of technological innovation in development with emphasis on Africa. I have recentlyreflected this thinki ng in two reports I helped to produce. The first, Innovation: ApplyingKnowledgein Development was prepared bythe Task Force on Science, Technologyand Innovation of the Millennium Project commission ed bythe UN Secretary-General Kofi Annan. I co-coordinated the task force. The second, Goingfor Growth: Science, Technologyand Innovation in Africa, was launched in London in November 2005 and seeks to advance the implementation of sections of Our Common Interest, the report of the Commission for Africa chaired byPrime Minister TonyBlair. I hold the view that the private sector represents the most e Ycient wayto transform scientific and technical knowledge into goods and services.
1. Introduction 1.1 The private sector is being increasinglyrecognized as a driving force in economic development in general, and welfare improvement, in particular. However, much of the focus on development cooperation still focuses on the role of the public sector as the central organizing principle. This model relies on public agencies and non-governmental organizations as providers of critical services to local communities. An alternative approach is to shift the locus of responsibilityfor improvin g human welfare to the entrepreneurial capabilities of the people. The goal should be to enable individuals to solve their own problems bytransforming knowledge into goods and services. This entrepr eneurial function should help guide the reinvention of UK development cooperation philosophy. 1.2 The emphasis on entrepreneurship will alter the role of the state from being a provider of services to being an enabler and promoter of business development. In other words, developing countries should become “entrepreneurial states” whose main function is to promote human welfare through emphasis on the role of the private sector, especiallysmall and medium-sized enterpr ises. This is not to rule out the role of the public sector in development, but to argue that the main function of an entrepreneurial state is to create a viable environment and oVer the support needed to empower the people to meet their needs by finding creative solutions to local problems. 3312162038 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 273
2. The Private Sector and Welfare Improvement 2.1 Economic change is largelya process wherebyknowledge is transformed into goods and services. In this respect, creating links between knowledge generation and business development is the most important challenge facing developing countries, especiallyAfrica. For these cou ntries to promote the development of local technology, it needs to review the incentive structures already in place. There is a range of structures suitable for creating and sustaining enterprises, from taxation regimes and market-based instruments to consumption policies and sources of change in the national system of innovation. 2.2 Small and medium-sized enterprises (SMEs) should playleading roles i n the development of new opportunities and the use of technology. Policy makers need to develop, applyand emphasise the important role of engineering, technologyand SME growth as source of development. T heyneed to support business and technologyincubators and production networks as well as sharpening t he associated skills through business education. A leading example of this approach is the work of the Japanese International Cooperation Agency(JICA) in helping to upgrade industrial clusters in In donesia and other Asian countries. 2.3 Banks and financial institutions also need to playkeyroles in fosterin g technological innovation in developing countries. But their record in this field has been poor in developing countries. Reforming some banking and financial institutions would allow them to help promote technological innovation. Specific credits and tax breaks could be provided for businesses that seek to upgrade their technologies. Institutions such as the African Development Bank (ADB) could playa keyrole in expandin g business opportunities bylending to infrastructure investments that help to extend regional mar kets. 2.4 Infrastructure projects could also serve as a foundation for diVusing technical skills in society. New infrastructure projects such as railways, roads, ports, telecommunications and waterways should be directly linked to technical training and business incubation institutes. Current discussions to extend and expand telecommunications connectivityand rail networks in Africa provide a un ique opportunityto create allied technical training institutes as well as foster the development of SMEs. Institutions such as the Royal Society of London and the Royal Society of Engineering could play key roles in helping to bring UK technical competence to the service of development. 2.5 Capital markets have played a critical role in creating SMEs in developed countries. Venture capitalists and angel investors do not just bring moneyto the table; theyh elp groom SME start-ups into international players. Bringing venture capital into developing countries could create new businesses and improve their sustainability.
3. Critical Constraints on the Private Sector 3.1 The dominant approach to the role of the government has been to focus on its size and its negative impacts. As a result, most of the attention has gone to how to reduce the size of the government rather than redefine its role. One of the most critical constraints on the private sector is the low level of competence and knowledge in government agencies and their donor partners on how to improve the environment for the eVective functioning of government. 3.2 Despite extensive debate on corruption in Africa, little attention has been provided to leadership training for public servants and development practitioners on governance issues. There are hardlyanymajor governance schools in Africa and other developing countries, and the few programmes that exist tend to training leaders in administrative routines that often stand in the wayof creativityand entrepreneurship. 3.3 Knowledge of the role of business in improving human welfare should become part of the criteria for presidential and executive leadership in regions such as Africa. The business communityshould ensure that this criterion is reflected in their contributions to the formation of political partyplatforms in developing countries. 3.4 One wayto improve the situation is to focus on “leadership training” wi th the purpose of creating a new generation of public servants whose main focus is to promote entrepreneurial activities. This can either be done through schools of governance or schools of business, management and entrepreneurship. Such schools will be charged with the mandate of building competence based on experiences from around the world. The Jamaican Ministryof Commerce, Science and Technologyhas reco gnized the value of such a facilityand is in the process of creating an international institute that will promote learning on the linkages between science, innovation and business. Similar facilities need to be created in other regions of the world, especiallyin Africa. 3.5 In addition, developing countrypresidents need to create o Yces of science and innovation advice that can complement their economic advisors. These oYces can be supported bya network of think tanks and academies of science, technologyand engineering which can help to provid e advice on how to use existing and new technologies to support business development. Malaysia, for example, provides an example of how such advisoryactivities can work in a cost-e Vective way. Such a network of think tanks could provide insight and advice to governments on new and inspirational approaches to linking science, business and human 3312162038 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 274 International Development Committee: Evidence
welfare. A pioneering example is the Netherlands Development Research Council, a government-sponsored think tank that focuses on how research for development funded bythe Dutch Government can be aligned with the needs of developing countries. 3.6 Another neglected instrument for promoting the role of the private sector in development is prizes. There is a general assumption that the private sector is onlyconcerned wit h making profit. But enterprises that seek to complement this imperative with other social needs are hardly recognized and heralded as role models. Prizes such as the Right Livelihood Award need to be accompanied by counterpart honours for those who lead the wayin promoting business development as an instrument f or welfare improvement. 3.7 With such competence and support systems in place, the new leaders will be in a position to generate ideas on how to overcome the various constraints on the private sector at all levels. In other words, the state will enter a period of transition from being a mechanism for arresting growth to facilitating creativity, problem-solving and genuine empowerment.
4. Donor Interventions
4.1 There are two approaches that donors can adopt to improve the contributions of the private sector to human welfare. The first is to work directlywith governments and other ac tors to promote the creation of space for the development of private enterprises and their alignment with human welfare goals. This of course presupposes considerable knowledge on these matters on the part of the donor community. It is our view that a large part of the donor communityneeds to upgrade its knowledge on the role of business in development. 4.2 A complementaryapproach would involve mutual learning about the role of business in human welfare improvement. One of the ways to promote this is to support the reforms in higher education and the creation of new institutions that train leaders in good governance and entrepreneurship. Donors can facilitate this process bysupporting international collaboration betw een UK and developing country universities on these issues. 4.3 An unfolding example that could serve as an inspirational model is the Dubai School of Government. The school seeks to: (a) provide leading executive education programs for regional decision makers; (b) advance public management through comprehensive research and analysis; (c) facilitate knowledge exchange on current public policyissues through forums and conferences; (d) share expertise of world leaders at policyforums; and (e) o Ver a masters program in public administration and public policy. It is being developed in cooperation with Harvard University’s Kennedy School of Government. Africa needs such schools but with a strong entrepreneurial orientation. 4.4 The current food crisis in Africa underscores the importance of rethinking the role of universities as agents of communitydevelopment. This is particularlycritical for Afric a where universities were created largelyto produce functionaries for the civil service. Not onlydo theyne ed to create linkages with the private sector, but theyneed to serve as incubators of enterprises. There are alre adya number of inspiring examples. The Universityof Zambia, for example, was the midwife of Zamnet, the count ry’s largest Internet provider. In fact, donor agencies played a critical role in the creation and development of Zamnet. 4.5 Another inspiring model is the Genesis Institute at the Pontifical Catholic Universityof Rio de Janeiro whose main function is to upgrading local human welfare bytransfe rring knowledge from the universityto the communityand improving local socio-economic conditio ns. The Genesis Institute incubates enterprises which “graduate” from universityand move into the world as corporate agents of change. Its core values include the constant search for innovation and commitment to community development. 4.6 Equallycritical is the urgencyto create mentoring programmes that wo uld enable developing country entrepreneurs to learn from role models and benefit from practical advice. There is no shortage of corporate leaders willing to share their experiences directlyor electronicallywi th young entrepreneurs in developing countries. The US, for example, has used the Digital Freedom Initiative (DFI) to help mentor information and communication technology(ICT) entrepreneurs and small businesses i n Senegal, Peru, Indonesia and Jordan. 4.7 Donor agencies themselves will need to provide internal leadership on knowledge on business and human welfare improvement. Most donor agencies are led bypeople with exte nsive background on relief and humanitarian activities. The time has come to increase the level of knowledge and experience on business activities at the highest levels in donor agencies. In fact, countries such as Canada have taken this step bybringing corporate executives into the leadership of development cooperation agencies as illustrated bythe appointment of Mr. Robert Greenhill, former President and Chief Ope rating OYcer of Bombardier International to head the Canadian International Development Agency(CI DA). This is not to argue for the superiorityof one model over the other; it is to provide additional expert ise that will make donor agencies more adaptive to the tasks at hand and therefore more eVective in their missions. 3312162038 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 275
5. Private Sector Engagement 5.1 The private sector can playan important role in promoting human welfar e through a diversityof social enterprise programmes, the most critical of which is skill development. One approach is for private companies, individuallyor collectively,to commit to creating skill dev elopment programmes in the communities where theyoperate. Such programmes can range from short-ter m training courses on a variety of issues to fully-fledged institutions such as colleges, universities and other institutes of higher learning and skill development. 5.2 For example, mining firms could create mining or earth sciences colleges that could help to promote technical business schools. Ideas such as the proposal bythe South Africa n mining industryfor a mining school should be supported and implemented without delay. Similar institutions could be created byother enterprises operating in fields such as agriculture, tourism, manufacturing and construction. Philanthropic arms of existing enterprises could also be converted into educational institutions to achieve similar goals. Such institutions would not onlybenefit from companyresources, but theyw ould bring relevance into curricula development as well as pedagogy. 5.3 Institutions created bythe private sector would bring practical lear ning through the involvement of technical staV in teaching. Such schools would also serve as inspiration models that restore confidence in the relevance of higher education in development. The Pohang Science and TechnologyUniversitycreated in South Korea byPohang and Steel and Iron Companyrepresents an example of how business and government can work together to improve technical competence for development. 5.4 But the eVective functioning of such institutions would require forward-looking government policies and management practices. For example, governments would need to leverage the private sector by providing incentives such as tax rebates as well as critical infrastructure support for the eVective functioning of the institutions. One approach would be to invite bids from governments that can oVer the best possible incentives and infrastructure support for the eVective functioning of such an institution. This process would also help improve incentive systems for social enterprises in general. 5.5 In addition to the incentives, private sector engagement will need to be promoted through forums that promote continuous engagement between government, industryand academi a. High level executive leadership and trust are needed to make this happen. In addition, such forums must be conducted in the most ethical way. Such forums would also help private enterprises to build the trust as well as contribute to the identification of mutually-beneficial incentives and activities.
6. Aid Instruments 6.1 Most of the rules, procedures and routines used bymost donor agencies w ere designed to reflect the public sector model. Theyare therefore ill-equipped to deal with the dyna mic, uncertain, riskyand experimental world of business evolution. The world needs a new generation of development cooperation instruments that reward creativityrather than bureaucratic routine; en courage risk-taking rather than glorifycomplacency;manage uncertaintyinstead of making false appeals to predictability; appreciate the value of learning through trial-and-error instead of looking for mythical blueprints. Finally, development is a long-term process and therefore new aid instruments will need to accommodate time as a critical element. 6.2 These criteria would lead to a new generation of aid instruments such as endowments and trust funds as well as innovations in the waybusinesses function. Some of the most inno vative educational institutions in Latin America were established as endowments with donor support. EARTH Universityin Costa Rica, for example, is funded through an endowment with initial funding from the US Agencyfor International Development (USAID) and Kellogg Foundation. But such funds will not onlyn eed local matching assets, but theywill also require incentives and laws that promote the emergence o f new social enterprises. 6.3 Finally, the question of scale is often taken for granted. It is common practice for donors and their partners to argue for “starting small” and then scaling up. This commonlyh eld view ignores the fact that often the act of scaling up is in a new beginning and lessons at one scale mayn ot be transferable to other levels. It is therefore critical to identifydonor investments at the righ t scale. For example, infrastructure projects might yield maximum impact at regional rather than national levels. Donor agencies could focus on such projects rather than small-scale activities which can be undertaken easilybylocal actors.
7. Conclusion 7.1 The central role of the entrepreneurial state in a developing countryi s to unlock the potential to turn science, technology, and innovation into business opportunities. Such a state would need to undertake a number of core activities. These include providing broader incentive structures to all firms while creating an institutional environment that encourages entrepreneurship, rewards innovation, fosters start-ups, and sustains existing firms with injections of capital. Creating links between knowledge generation and enterprise development is one of the most important challenges developing countries face. 7.2 A range of structures can be used to create and sustain enterprises, from taxation regimes and market- based instruments to consumption policies and sources of change within the innovation system. International cooperation aimed at leveraging these activities is a critical element in the success of such 3312162038 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 276 International Development Committee: Evidence
eVorts. In other words, leaders in development cooperation agencies will need to be equallyentrepreneurial and seek to use their resources and influence to promote rather than suppress local initiatives. The real challenge for the UK is therefore undertaking fundamental reform in international cooperation bydefining entrepreneurship as driving force in development. February 2006
References Commission for Africa. 2005. Our Common Interest: Report of the Commission for Africa. Commission for Africa, London. Dossani, R 2003. “Reforming Venture Capital in India: Creating the Enabling Environment for Information Technology,” International Journal of Technology Management, 25(1/2): 151–164. Etzkowitz, H 2003. “The Evolution of the Entrepreneurial University,” International Journal of Technology and Globalisation, 1(1): 64–77. Gibson, D E 2004. “Role Models in Career Development: New Directions for Theoryand Research,” Journal of Vocational Behavior, 65(1): 134–156. Grimaldi, R and Grandi, A 2005. “Business Incubators and New Venture Creation: An Assessment of Incubation Models,” Technovation, 25: 111–121. Juma, C ed. 2005. Goingfor Growth: Science, Technologyand Innovation in Africa . The Smith Institute, London. Juma, C, Gitta, C, DiSenso, A and Bruce, A 2005. “Forging New Technological Alliances: The Role of South-South Cooperation,” The Cooperation South Journal, 59–71. Konde, V 2004. “Internet Development in Zambia: A Triple Helix of Government-University-Partners,” International Journal of Technology Management, 27(5): 440–451. Lalkaka, R 2003. “Business Incubators in Developing Countries: Characteristics and Performance,” International Journal of Entrepreneurship and Innovation Management, Vol. 3(1/2), pp. 31–55. Longenecker, C O and Neubert, M J 2005. “The Practices of EVective Managerial Coaches,” Business Horizons, 48(6): 493–500. Schulpen, L and Gibbon, P 2002. “Private Sector Development: Policies, Practices and Problems,” World Development, 30(1): 1–15. Sharma, S and Dayaratna, V 2005. “Creating Conditions for Greater Private Sector Participation in Achieving Contraceptive Security,” Health Policy, 71(3): 347–357 Stern, N, Dethier, J-J and Rogers, H F 2005. Growth & Empowerment: MakingDevelopment Happen . MIT Press, Cambridge, USA. UN Millennium Project. 2005. Innovation: ApplyingKnowledgein Development . Task Force on Science, Technologyand Innovation. Earthscan, London. United Nations Development Programme. 2004. UnleashingEntrepreneurship: MakingBusiness Work for the Poor, Report to the United Nations Secretary-General. New York.
Memorandum submitted by Valentine Chitalu, Lomax Investments Ltd Myname is Valentine Chitalu a businessman in Zambia and Southern Africa I s it on the board of INFRACO, a DFID initiative and have previouslyworked for the Commonwealt h Development Corporation (CDC). I herebysubmit written evidence as per the inquiryreq uest.
1 What can the private sector do to alleviate poverty? Particularlyin the agricultural sector, there are a number of examples of how pro-poor growth has been achieved. — In the cotton/sugar sector the model of growth has mainlybeen via small ho lder contract agriculture with well established marketing companies providing inputs, input finance, agricultural equipment, extension services, storage facilities and markets. This type of agriculture needs to be expanded so that more peasants are involved in meaningful economic activitythereby lowering poverty. — In the agricultural services sector, investment in common infrastructure such as central storage/ silos, dams and input stores can allow the stabilisation of grain markets (bypreventing the dumping of product at harvest time bysmall scale farmers), the advent of wa rehouse receipts (by creating the confidence to the small scale farmer that he/she can discount the receipts as and when cash is needed) and the timelyprovision of inputs such as seeds, chemicals and fertilizers (thereby ensuring these are supplied on time for the agricultural season, one of the reasons small scale 3312162039 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 277
agriculture has not been successful is the late deliveryof inputs at a time the farmers have already spent their moneyfrom the last harvest). Stabilisation of the agricultur al markets is essential in alleviating povertybypreventing price increases as a result of market im perfections. — Governments in Africa have manytimes tried to create growth through gove rnment led economic activity. It has become increasingly clear that unless the private sector is at the centre of development eVorts, there is unlikelyto be growth. The private sector and Donors need to d ialogue continuouslyso as to clearlydefine the roles of all playersand promote pri vate sector investment that can promote growth. — To the extent that the private sector has been involved in infrastructure particularlyin areas such as telecoms, agricultural services and low cost housing development, these investments have gone a long wayin creating opportunities that can alleviate poverty.
2. What are the constraints on the private sector in developingcountries and how can they be addressed? — Lack of macro-economic stabilityand the uncertaintythis brings whilst fostering short-termism. Governments should be encouraged to work more closelywith IMF and World Ba nk whilst at the same time having a significant focus on driving supplyside responses th rough PSD, PPP’s and privatisations. — Labour and Credit laws are normallythe last to be addressed in the restruc turing of developing economies. These should be put at the top of the agenda if the private sector and the banking sector are to respond to the economic growth challenge. — A significant shortage of infrastructure to enable the private sector to trulyflourish. The solutions to this are: (a) An abilityneeds to be created to structure infrastructure projects eg INFRACO. The mandate of INFRACO fills a specific gap in the infrastructure development process and the provision of more resources to do more of the same would enable a higher impact (b) An Infrastructure fund needs to be created specificallytargeted at Afr ica eg EAIF but funded at much higher levels with more longer term finance (10–15 years). A shortage of local long term finance. The solutions to this include:— (a) Reform of the Insurance and Pension Fund sectors, in particular eVorts to help clear out government debt to local pension funds. (b) The management of such fullyfunded pension funds bythe private sector . This would create a vibrant fund management sector that is essential in the development process. (c) Creation of local private equity, venture capital and agricultural funds managed bythe private sector. (d) Recapitalisation of Local Development banks and managing such banks through technical assistance. (e) Deepening of the financial sector bycreating incentives for banks to pr ovide a wider arrayof products.
Government debt Whilst there have been international eVorts to clear external debt, the local government debts continue to be a huge problem therebyinhibiting the private sector as theyare reluc tant to supplyto governments. Governments print money(via issue of TreasuryBills) to paythe debts ther ebycrowding out the private sector from the banking system The Donors should consider a package to eliminate local government debts to sustainable levels.
The lack of well defined propertyrights It is clear that in manypropertydeveloping countries, financial institut ions have to go to extra ordinary lengths to ensure that theycan secure their lending. This is mainlyas a res ult of a poorlyfunctioning and non-decentralised Deed Registry. This is then makes it hard to enforce security. The solutions are clear; technical assistance to the Deed Registryand a properlyfunctioning comm ercial court to quicklyresolve securityenforcement (again technical assistance would be essential her e).
3. What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth? It is keyfor donors to realise that not all programs should be run through th e government system. Capacityconstraints and bureaucracymake the Donor intervention painfu llyslow and subject to over politicisation. 3312162039 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 278 International Development Committee: Evidence
Risk finance (CDC) The restructuring of CDC recentlycompleted will achieve certain objecti ves and will be positive in the development of private equityin Africa but: — There needs to be the establishment of an Agricultural Fund to invest in new ventures This Fund needs to have return targets that are set low enough to ensure that the peculiarities of agriculture are taken into account. Most Africans are involved in agriculture and anyi nvestment in this sector has the potential to pull manypeople out of poverty.Agriculture and parti cularlynew ventures are not a priorityof CDC. — There is need for financing the start up of new businesses. The current CDC model is more of a buy- out and expansions focused. There are not enough businesses in which to eVect change of control transactions (except in South Africa). Africa needs new businesses and a venture fund targeted at this needs to be established from some of CDC’s resources. — The development of local entrepreneurs and joint ventures with FDI is key to ensuring an accelerated acceptance of the free flow of capital—a keyingredient to Afri can development. Again here technical assistance to teach entrepreneurship coupled with sustained investment promotion would be key.
Infrastructure Donor intervention in infrastructure development will be highlye Vective particularlybyremoving the obstacles that prevent investment in the sector. The PIDG initiatives are keyin this regards. More importantlythough is to realise that the most important infrastructure i s that which allows markets to function as well as is supportive of general economic growth.
Transforming traditional markets The Agricultural markets need to be significantlytransformed in order to h elp the rural poor. The key lies in donor provisions of common infrastructure facilities such as storage, dams etc coupled with a warehouse receipt financing mechanism. lnvestor promotion can then be targeted at industries that add value to agricultural produce.
Mortgage Finance It has become clear that the lack of mortgage finance particularlyfor low to medium cost housing is preventing the establishment of a middle class and means of accumulating wealth so well established in developed countries. It is extremelyimportant that donors support initi atives (similar to recent initiatives byOverseas Private Investment Corporation (OPIC)) to enable this to happ en. Both Technical Assistance (to structure a mechanism for pension funds to lend long term) and actual seed funds from donors would be necessaryto kickstart this developmental process.
4. What aid instruments an be used by donors to encourage PSD?
Bureaucracy Streamlining the licensing process would go a long wayin PSD. Would be busi nesses avoid the whole set up process and go informal therebycreating other problems. Technical Ass istance and the Investment Climate Facilitycan help streamline these procedures.
Complex Tax Systems Again this is an area that needs to be tackled if foreign direct investment is to flow. The example of simpIe taxation as now being implemented in Eastern Europe provides an example of the route to go in Africa. Donors can playa helpful role in this byassisting in this area.
Challenge funds These can be used to support the localisation of supplychains that exist in large investments made by multinational companies. For example, muItinational investors in the mining, tourism and agricultural sectors can be assisted with the necessarypackage of incentives to help de velop local suppliers for most of their supplyneeds. This is a verygood example of PSD. 3312162039 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 279
Public Private Partnerships in infrastructure Donors can assist through Technical Assistance in establishing a legal framework that can allow a much faster implementation of infrastructure PPPs. The building up of the activities of the PSD would go a long wayin this. This is a submission on onlysome of the issues raise byPress Notice 13. February 2006
Memorandum submitted by Marks & Spencer
1. Introduction 1.1 We welcome the opportunityto input to this enquiryon Private Sector De velopment. As a major UK retailer we have supplychains which are spread across manydeveloping cou ntries and we see their growth and stabilityas crucial to our future business strategy.Trust and respon sibilityhave alwaysbeen core brand values for us and as our supplychains have moved across the world we have con tinued to promote ethical and sustainable business which benefits all members of the supplychain. Th is presents significant challenges, some of which we shall share in the submission below along with our thoughts on how theycan be overcome. 1.2 As well as ensuring our core supplychain is run responsibly,we have als o begun to recognise the potential for retailers to make a positive impact byo Vering customers products from new types of supply chains, set up to directlybenefit the poor. We are pleased to be able to share some of our earlysuccesses and learning from setting up these supplychains. We hope this mayshape the way DFID interacts with both business and funding bodies to encourage them to become positivelyengage d in development which genuinelybenefits the poor whilst also delivering business benefits.
2. The impact of core business on development 2.1 It is worth noting first that, as a 100% own brand retailer we are able to trace each product to the farm or factoryit came from. This traceabilitymeans we are able to influenc e the wayour suppliers operate, without this basic traceabilitythere is little that a business in the West can do to drive development. 2.2 We are working with suppliers of finished products and raw materials in developing countries in Africa, Asia and South America. Africa is of particular importance to us as our third biggest source of food raw material supplyafter UK and Europe. We have alwaysworked to build long -term, sustainable partnerships with suppliers and those in Africa are no exception. This has enabled the development of good standards in production, health and safetyand labour rights in collabora tion with suppliers. For example our produce suppliers in Kenya have pioneered the use of Integrated Pest Management (IPM) to reduce the amount of pesticide used on their crops, which is better for the environment and for the workers as well as being important in re-assuring our customers. Wider impacts of our business include the empowerment of workers through their access to employment opportunities which allow them to earn competitive wages and learn new skills, as well as the development of infrastructure, amenities and services in local communities. Examples include the provision of hospitals, schools and water amenities byour suppliers. For small, independent farmers, involvement in our supplychains allows them access to advice and technical expertise; the sharing of good agricultural practice enhances yield and quality both for subsistence and cash crops, assisting farmers in gaining access to new markets. 2.3 Marks & Spencer’s business model is one based on qualityand value for mo ney, rather than lowest cost. As such, we are continuallyworking with suppliers to add value to the ir products—innovating and driving qualityimprovements. We pioneered packing at source to give our c ustomers best qualityand value with the important benefit of creating wealth at the point of production. This type of innovation is something which could be encouraged further. 2.4 However, to achieve trulysustainable development, we realise that de veloping countries need more than just our business. We believe that business can be conducted in ways which promotes wider well-being and not just economic growth: this is particularlyimportant for povertye radication in the least developed countries. In all of our business relationships we require minimum labour standards eg minimum age, wage and health and safetyin the supplychain and work with our suppliers to find w ays to improve their standards. This has an impact on our suppliers and we hope it also raises awareness and ‘the bar’ on labour standards within the source country. 2.5 We are aware of the importance of smallholders in the agricultural supplychains, particularlyfor delivering sustainable livelihood strategies, but working with smallholders and small producers can present manychallenges. We alwaysstrive to deliver high qualityproducts for the consumer as well as consistent standards for social and environmental management in the supplychain. Sm allholder systems often require significant co-ordination and can be time consuming and costlyto manage. S mall producers need better support, information and infrastructure mechanisms to help them to supplythe major retailers. 3312162040 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 280 International Development Committee: Evidence
2.6 For this reason, we have been activelyinvolved with the Ethical Tradin g Initiative (ETI) to develop a “needs based approach” to supporting, managing and auditing smallholders in our supplychains. Working with smallholders has given us a better idea of their needs, and has encouraged better communication and processes bywhich we can work together to develop their capacity. The ETI oVers considerable potential to develop best practice on how business can address development issues as part of their core commercial activities.
3. Government acting as an enabler. 3.1 Our approach to managing labour standards in the supplychain and the de velopment of the smallholder guidelines mentioned above have been guided byour membershi p of the Ethical trading Initiative (ETI). We would like to highlight the ETI as an example of an eVective Government-sponsored response to a complex issue. In response to a series of reports about conditions in clothing factories in the developing world, the Government’s financial support for the Ethical Trading Initiative has helped develop a consensus between manyretailers, trade unions and NGOs on the managemen t of labour standards in global supplychains. This has proved an e Vective response, driving up standards in factories around the world. 3.2 Marks & Spencer has been an active member of the Ethical Trading Initiative since 1999 and a board member since 2003. Through collaboration with other ETI member organisations, including our suppliers and partner NGO’s and Trade Unions in sourcing countries we have been able to drive substantial steps forward in manycountries and product sectors including labour condition s on Kenyan Flower farms and smallholders and home workers through application of practical guidelines developed bythe ETI. DFID’s ongoing support for the ETI is veryimportant. We would encourage DF ID to continue its support as well as exploring how the ETI can playa more active role in addres sing development issues.
4. Going further—products which directly contribute to development 4.1 We believe that there is also an opportunityto grow a sustainable busin ess byo Vering a unique proposition to our customers: products which directlycontribute to soci al development. 4.2 Firstlywe would like to provide details of our partnership with the She ll Foundation as a good example of a donor intervention which is targeted in a business friendlyan d innovative way. 4.3 The Shell Foundation recognised that many“development” projects foc ussed on delivering better market access to small producers fail to deliver benefits to a substantial number of people because theydo not have earlyagreement on access to a su Ycientlymainstream market to provide scale up opportunities. Marks & Spencer supplychains impact directlyand indirectlyon communiti es in over 100 countries. The Shell Foundation partnership aims to target funding and skills at SMEs in developing countries to facilitate their entryinto the competitive mainstream UK market, enabling them to re ap the benefits of trade. Our project aims to demonstrate that benefits can be delivered at both the retail and the producer end of the supplychain bya combination of targeted investment and development of su stainable purchasing practices which build the capacityfor enterprise, innovation and growth at the raw m aterial end of our supplychains. 4.4 Our first pilot project harvesting wild flowers in the Fynbos region in South Africa, has already demonstrated successes. Byvisiting this small supplier and providing su pplychain advice and expertise we have alreadymanaged to more than double sales of the product and in doing so provide more job opportunities for harvesters and packers in an area of high unemployment. Existing employees are also benefiting from more stable, year round employment. Continued investment in particular targeted at new personnel within the companymanagement will ensure that the business is a ble to continue to grow and develop its products for sale within domestic and export markets. 4.5 Forming a partnership between a developmental charityand the busines s gave the project a broad understanding and skill base to draw from. We encourage DFID to promote this partnership model with other businesses that need advice and encouragement to unlock the potential of their supplychains to deliver development. Our experiences in South Africa illustrate that smaller suppliers who are not set up to supply big retailers need more information and more flexibility. Very basic supplychain consultancycan make a huge diVerence to product quality/supply/consistency and ultimately profits for all involved. This support mayalso give us more confidence to source in areas where povertyis high and c ommunities are particularly vulnerable to inequitable trading relationships. 4.6 The mechanism of setting up and securing the funding within the partnership was flexible and innovative and the Shell Foundation was willing to look at a range of supply chain models. Shell Foundation employpeople with private sector expertise, a valuable asset in setting u p projects with the necessary business focus. We encourage DFID to direct eVorts towards strengthen the capacityof funding bodies and NGOs to deliver projects in a business focussed manner in order to encourage more private sector engagement. This capacitybuilding itself could be an area in which the pri vate sector is engaged. 3312162040 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 281
4.7 This project is demonstrating that business can be directlyinvolved i n povertyeradication measures which also have a positive commercial impacts. We therefore believe that DFID and DTI have an important role to playin disseminating good practice and further encouraging such w in-win partnerships. We believe that there is currentlya big knowledge gap for retailers and other busines ses in understanding how theycan get involved in development and what resources are available to them.
5. A fair deal for producers 5.1 Another wayto promote growth for good is through the selling of Fairtra de products—those which have a specific social message attached to them, ensuring that producers get a fair price for the products they sell. We are verysupportive of the Fairtrade model and believe that the Fai rtrade Foundation deserve and require continued support to strengthen their organisation both in the UK and particularlyin the producer countries as theymove into the more mainstream market. In this vein our co Vee shop chain Cafe´ Revive, the third largest in the UK, sells only100% Fairtrade tea and co Vee and we have recentlyannounced that we will be the first major high street retailer to sell clothes made from Fairtrade cotton. The cotton is sourced from a group of producers in India who have been supported bythe Shell Found ation for a number of years and demonstrates how properlydirected investment can help small produce rs link with mainstream markets. This positive link between small producers and the final consumer can be enhanced byFairtrade which oVers a unique wayfor the consumer to get involved with sustaining investmen t in producer livelihoods. 5.2 We believe the Government can playa role here too in raising awareness. Information provided by business should be complemented byGovernment talking about the importan ce of Fairtrade, encouraging UK consumers to look for products carrying the mark. 5.3 We thought it mayalso be useful to provide an innovative example of how o ur long-term relationships with suppliers has enabled us to work together to develop a solution to a market issue within the UK. The UK milk industryis under considerable pressure at the moment. A lthough we are regularly benchmarked as paying the best price to farmers they told us that what they reallyneeded was a stable price structure to make it easier for them to plan and manage their budget and future investment. We worked together with our suppliers to devise a new wayof buyingmilk—the M&S Milk P ledge—that guarantees farmers a fixed price for their milk, based on cost of production, on a six month rolling basis. The cost model is based on published indices which the working group agreed track cost of production eg feed price. Greater securitylets farmers focus on delivering innovation and qualityto mutua l benefit. We are considering applying this fair and stable pricing model to other areas of farming.
6. M&S community programmes—benefits of encouraging development 6.1 Finally, we wanted to mention our direct community development work. The two main strands of this are the extension of our UK work experience scheme (Marks & Start) and our Tsunami reconstruction programme. The work is underpinned byour close relationships with suppli ers and partnerships with experts on the ground. 6.2 Marks & Start International: In the UK our flagship communityprogramme , Marks & Start provides work experience for disadvantaged groups who mayfind it di Ycult to secure employment; the homeless, disabled, young unemployed and lone parents in our stores. We have extended this programme in partnership with our supplybase in Sri Lanka and Turkey.The Sri Lankan pro gramme enables disabled women to gain skills relevant to the garment industry, in particular machinist jobs. The UK charity Motivation helped us find Rehab Lanka, a Colombo based disabilityNGO who tr ain the women to industry standard before their placements commence with our suppliers. 6.3 This eight-week training programme is audited bythe Marks & Spencer bu ying oYce in Colombo. Participants must achieve the required standard before theycan commence their six-month probation period within the factory. 30 women have successfully completed this programme and together we have achieved 100 per cent conversion into work. 6.4 The programme has also been in action in Turkeyfor the last yearand we pl an to extend to more countries where we have a presence in the near future. The scheme is driven byour long-term relationships with suppliers and working in partnership with charities that help deliver the project on the ground. It has helped suppliers see the business benefits (recruitment, retention, motivation) of working with marginalised groups. 6.5 We believe that business can become more involved in development bylin king community programmes to supplychains. Business benefits can also be demonstrated su ch as motivating suppliers, encouraging ethical trade and “adding value” to traditional philanthropic giving. 6.6 Tsunami reconstruction programme: In response to the devastating Tsunami in 2004 Marks & Spencer pledged £250k towards relief work. Traditionally, we would probablyhave stopped there. However, we decided to form a partnership with CARE International to spend this moneybyrebuilding homes in 3312162040 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 282 International Development Committee: Evidence
three villages in the badlya Vected Galle and Kalutara districts. We wanted to ensure that the moneywe donated was spent directlyin o Vering practical help to our Sri Lankan employees and suppliers who were aVected bythe tsunami. 6.7 Working through two diVerent local partners in the districts of Kalutara and Galle, residents of three villages are being assisted to rebuild their homes and livelihoods. Marks & Spencer employee has been seconded from our Colombo oYce to CARE Sri Lanka for the duration of the project. The agreement is an active partnership with learning and skills transfer opportunities for both parties. 6.8 CARE International has been working in Sri Lanka for 50 years so were ideallypositioned to respond to the December 2004 tsunami. CARE Sri Lanka is working in nine districts of the countrythat were a Vected bythe tsunami providing emergencyrelief, transitional and permanent sh elter and helping restore survivor’s livelihoods as part of a five year rehabilitation and development plan. 6.9 We believe that this partnership approach provides a good example for how the private sector can add value to the moneytheydonate in disaster relief. 6.10 Finallywe are members of Business Action for Africa an initiative whi ch came out of the commission for Africa report. This is a verywell run, actions orientated g roup which is currentlyproving a valuable forum to share best practice and knowledge regarding trade in Africa.
7. Summary 7.1 In summary, the key ways in which we believe a retailer can engage with DFID in development both directlyand indirectlyare: — DFID can encourage retailers to applygood standards across their core su pplychains to promote large scale sustainable development in LDCs. — Retailers can be used more to provide valuable guidance to DFID’s producer support programmes around appropriate production standards required to acess mainstream UK markets. — We encourage DFID to maintain its valuable support of the Ethical Trading Initiative to continue raising the standards on labour rights in supplychains across the world. — DFID could engage more directlywith consumers to raise awareness of the w ays that they can contribute to development for instance bybuyingFairtrade products. — DFID could engage more directlywith retailers and funders to develop mar ket access projects with mainstream market channels. — DFID could seek to engage the private sector more directlyto add value to d isaster relief contributions. — DFID could help to educate companies on the benefits of linking communityp rogrammes to supplychain development eg Marks & Start International. 7.2 We hope that this note contributes to DFID’s thinking on engagement with the private sector. We welcome a focus on this issue and believe that it is in the interests of ours and other businesses to become more engaged in this debate. February 2006
Memorandum submitted by Jonathan Mitchelli, Dirk Willem te Veldeii and Michael Warneriii, Overseas Development Instituteiv Views expressed are individual and not institutional.
Highlights: — The current emphasis in donor support for private sector development (incl. bythe UK) is either targeting individual firms or funds, or on improving the investment climate and enabling (regulatoryand policy)environment. Less attention is being paid to supp orting PSD at the “meso” level, However, the evidence on pro-poor growth has not yet shown that either micro or macro support are the only, or the most eVective, eYcient and urgent ways of supporting PSD. Instead, there are examples where strategic interventions at the meso (sectoral/provincial) level maybe particularlyhelpful, not least in enabling co-ordination of support for business infrastructure, local financial markets and clusters of businesses. — There is a need for a coherent approach bydonors towards involving the pri vate sector in pro- poor growth. And while this needs to avoid the creation of an “escalator” of donor-assisted instruments at the micro level, resulting in a dependencyof local busines s on subsidy, there does need to be a co-ordinated approach bydonors across various areas (infrast ructure, human resources, credit) at a strategic level. 3312162041 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 283
— It is important that aid is targeted in such a wayas to help the needs of PSD. — An important step is to establish a good public-private dialogue to understand what the private sector thinks is appropriate and good qualitysupport, and what are the bot tlenecks. — The political risks of private sector participation in infrastructure development for PSD can be facilitated bypublic sector procurement rules and development finance th at promote collaboration between private and civil societyorganisations.
What can the private sector do to alleviate poverty? 1. The private sector drives growth and povertyreduction, but the sources of and level of activitybythe private sector development (defined as the performance of the private sector) will depend in part on the public sector providing appropriate and good qualityinputs. This can be s upported bydonors if done in an intelligent way. 2. DiVerent types of private sector development have diVerent implications for patterns of growth (across individuals, space, etc.) and thus povertyreduction. It is di Ycult to saywhich typeis most e Vective in reducing poverty a priori. This is because the eVects are direct as well as indirect. One could saythat support for agriculture growth is an appropriate, direct wayfor reducing poverty , because of the number of poor involved in agriculture. But it remains to be seen whether this is the most eVective in the long-run if indirect eVects are taken into account. For instance, services activities (tourism) mayalso be relevant in a number of low-income countries (eg Tanzania), and this can benefit a lot of poor. Services can also constitute a useful diversification strategyfor developing countries including those facin g preference erosion in banana and sugar sectors (eg Windward Islands). Industrialisation can also be useful, when done correctly. Garment assemblyoperations generate a lot of jobs and have provided a useful platf orm for further upgrading into higher value added activities in countries such as Mauritius and Costa Rica. The wayin which natural resources industries a Vect the pro-poor growth will for a great deal depend on how the government distributes the revenues these industries generate. Currently, such revenues are high due to high raw material prices (oil, gas, metal and mineral commoditypric es are high in part due to the emergence of China), with some estimates of approximately$60 billion/an num for the eight main oil exports in Sub-Saharan Africav. This oVers opportunities for debt repayment and productive public investments to support other sectors such as agriculture and tourism, as therefore for contributions to pro-poor growth. Countries in receipt of new additional resources include Nigeria, Angola, Chad, Cameroon, Gabon, Congo (Brazzaville), Indonesia and Papua New Guinea, and others mayinclu de Timor Leste, Sao Tome Principe, Cambodia and Sierra Leone. Establishing the right investment conditions to ensure linkage between these revenues and national development goals through revenue management and appropriate economic policyand transparency mechanisms, will be critical. Direct employment creation in natural resources sectors is sometimes limited, but not insignificant, and more could be done than is often the case at present to promote backward and forward linkages between foreign and local companies.
What are the constraints on the private sector in developingcountries and how can they be addressed? 3. There are a host of factors constraining private sector development in developing countries. These range from inadequate macro level conditions (absence of appropriate institutions, weak regulatory framework, political an economic instability, small markets), weak economic fundamentals (lack of appropriate and good qualityinfrastructure and human resources), to mic ro level factors (eg weak entrepreneurship, lack of finance). Statistical work indicates that many of these factors are important for investment and growth and there might be interactions amongst these, but what it fails to show is what is most important, and thus what needs to be done first. It is likelyto be countr yand case specific and requires an understanding of the bottlenecks, and connections amongst them. In practice, governments can conduct needs assessments, relyon surveys,but often (bydefault) respond to pres sures without a clear strategy. 4. Traditionally, supporting PSD has focused upon the extreme ends of the spatial scale, the national and the micro with little attention paid to the meso level. National interventions have dealt with issues such as getting the investment climate right. These interventions are justified in terms of the potential impact across the national economy, often at quite modest financial cost, that is, if useful macro changes are made. The diYcultyof course is selecting the typeof investment climate support and get ting the required changes actuallyimplemented. In addition, national initiatives maynot be e Vective at benefiting “lagging regions or sectors” and often disproportionatelybenefit the alreadyadvantaged. Th e reason for this is that the constraints on the private sector are often multiple and complex and, for instance, simplyremoving a regulatoryobstacle is often not su Ycient to stimulate PSD. 5. Micro interventions have preciselythe opposite weaknesses. It is comp arativelyeasyto provide support to a single firm, which results in the enterprise running more eYcientlyand e Vectively. What is more, “ownership” issues tend to be overcome when interventions are directlyin the self-interest of enterprise owners and managers. The major drawback of working at the micro level is that it tends to be an expensive wayof helping a small numbers of beneficiaries. Working at the micro level o ften encourages development 3312162041 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 284 International Development Committee: Evidence
practitioners to, in their enthusiasm to support apparentlyneedycauses , draw the lines defining “public goods” and “market failures” rather generouslyto justifythe provision o f development assistance. The danger with this is that, historically, significant PSD funds have been spent providing cheap finance for private good expenditure that has distorted—rather than supported the development—of indigenous capital and service provision markets. There is a danger that the current Challenge Funds fall into this category, since theyfocus often on a small number of firms, with onlylimited attentio n paid to the replicability, sustainability, scalability or public good aspects of the business activity“after” the grant period is over. In addition, there is a trade-oV between the costs of facilitating enterprise development and the capabilities of the beneficiaries (ie it is quicker and easier to help people who do not need much help) which can result in questionable povertyreduction impacts from micro level interventions. 6. Interventions at the regional or sectoral level (meso) are becoming more frequent—often under the heading of “local economic development” or “clusters” or “lagging regions” (and generallynot resource or infrastructure focused). As an entrypoint to PSD the meso level has the pot ential to avoid some of the pitfalls of macro or micro analysis. Unlike macro analysis, a regional approach can focus interventions where support is reallyneeded and where it is expected to have the greatest impact and can encourage a much more practical approach byidentifyingreal constraints to PSD byworking with a range of stakeholders at ground level. For example, rather than working onlywith a handle of firms of one financial intermediary, a more integrated approach can be taken, aimed at “closing the gap” between the practices of the local business sector and regional (market driven) financial institutions. This might mean raising the attractiveness of business to local banks, eg through business support or equityinvestment, whilst concurrentlystrengthening the capacityof local banks to properlyasses s risk and develop new financial products better adapted to the market.vii 7. Unlike micro analysis, interventions at the meso level can have regional impact and operate at a scale where genuine public good investments (ie economic infrastructure, information, etc) benefit the locality, and poor people within it, rather than individual entrepreneurs. The important issue, and the contribution of PSD to interventions at this scale, is to ensure that these meso level interventions are based upon market development principles. To date, GTZ have been market leaders in this area—most notablywith the ParticipatoryAppraisal of Competitive Advantage (PACA) methodologies applied to LED (local economic development) and DFID have—at least in Southern Africa—been less active at the meso level, although the COMMARK Programme—supporting poor people to participate in value chains on more favourable terms—seems to have been has proved to be an important, and successful, exception to this tendency.
What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth? 8. This question can be addressed on the basis of 1) discussing the rationale behind intervening in PSD, and 2) examining in more detail the scope and limitations of public interventions in practice, and 3) how donors can support governments and the private sector.
Rationale 9. The existence of market and co-ordination failures justifies public involvement in PSD. The scope of intervention is potentiallylarge, ranging from support for the adoption of technologyin individual firms to improving the market for credit and co-ordinating the direction of firms, clusters and whole sectors. But there are risks attached to government interventions because theycan go w rong (government failures). Selective policies (those at meso level for instance) are more riskythan t hose that are more neutral, such as those that tryto make markets work through improving the regulatoryframe work. On the other hand, an enabling environment alone is not suYcient to get out of a low-level equilibrium, for which meso level intervention mayalso be needed. The experience in various Asian countrie s shows that intervention did work but under certain circumstances.
Scope and limitations 10. Then, what exactlycan donors do to support PSD beyondsupport for the en abling environment, and under what circumstances is this eVective? In practice donors have not (yet) converged onto one single approach. While donor agencies have an active interests in providing support for the business environment (governance issues, such as and policy, legal and regulatory frameworks), there are diVering views amongst donors on other issues that are equallyif not more important for growth: ho w support is framed in the bigger picture, how entrepreneurship is supported, how innovation and industrial and technological development is included, and how support for the enabling framework is consistent with social norms and attitudes and economic, social and political institutions. The result is that there is a wide varietyof donor interventions in the area of PSD (as discussed above). 11. While support for the investment climate has not been proven to be systematicallyine Vective, it is also not clear whether the emphasis is right, and theoryleaves open the way for other types of support as well, such as: 3312162041 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 285
— Support at the micro and meso level: eg appropriate and good qualitytechn ologyinstitutions with suYcient interaction with the private sector form an important part of national innovation systems. Or targeted financial support using risk capital. Or clustering. Such support can also inform support at the level of the regulatoryframework. — Support for addressing co-ordination failures: co-ordinated and adequate approaches (eg involving infrastructure, technologypolicyand vocational training) t hat tryto get a countryout of a low-level equilibrium based on an improved dialogue amongst the private and public sectors.
Donor support for private sector 12. The main challenge with limited donor resources (and those of national governments) is that choices will need to be made where to put donor money, how to decide this, and to decide an appropriate role for donors such as DFID. Both investment climate and more specific support (eg at meso level) mayhave important eVects on pro-poor growth through PSD, but the second of these is not included in manyof the recent international policystatements on PSD, or donor strategies (they tend not to mention support for industrial or service policies). This clearlyindicates a certain prefer ence towards investment climate support, a preference not shared byall. Recently,there has been more attention to a id to infrastructure, after a collapse in aid to this sector, and human resource development has been boosted as well.viii The keyfor organisations such as DFID that want to take PSD seriouslyis how to that ens ure that aid for infrastructure and human resources is targeted in such as waythat it helps PSD, and how meso level activities fit in a PSD strategy.
How is the private sector engaging in development? 13. Evidence suggests that close consultation with the private sector is required to ensure that interventions bythe government are appropriate and of good quality.Amon gst others, this requires attention to the needs of the private sector in support for physical infrastructure and human resources. Thus, sustainable dialogue and co-ordination mechanisms need to be put in place, in part to overcome the distrust between the public and private sectors that can lead to lack of discussion on what is appropriate and good quality. The specific example of the South African automotive industry, the main bright spot on the African manufacturing map, provides a useful view on the importance of knowledge and skills to investment decisions.ix The industryhas sought to move from a strategylocated within the context o f import substitution, where qualityand costs were not comparable with internati onal benchmarks, to a strategy designed to take advantage of globalisation and “global value chains”, and where some South African produced vehicles can be viewed as “world class”. Although skills were in abundance, bythe late 1970s it was evident that theywere in need of upgrading, and the industryplayeda us eful role to ensure that skills development was broadlysu Ycient for the industry’s needs. The government put in place sectoral institutions to match supplyand demand for training. The South African po licystrategies for skills and for industrial development are still relativelyrecent but do appear to point to the scope that a developing countrywith comparative economic strength and state capacityhas for pos itive interventions to support international competitiveness. There are a number of similar examples for East Asian countries where the government consulted with the private sector on their development strategies.
What aid instruments can be used by donors to encourage PSD? Private benefits versus benefits to society (public goods)—how much is this an issue? 14. Support for PSD does not end with support for the investment climate. Instead, support PSD needs to be part of all donor activities, including human resource, health and infrastructure programmes. Within this range of action favourable for private sector development, there is scope to support an Investment Climate Facility(horizontal measures) if this fits in with national devel opment strategies, or other specific instruments. 15. At the an operational level and under the UK Business for Africa initiative, a “practitioners roundtable” in June 2005 voiced some concern over a potential misinterpretation of the idea of a “Coherent Package” of aid for PSD promoted in the Going for Growth chapter in the Commission for Africa report. It has been argued bysome that a more coherent “mixing” and “sequencing” of donor-supported PSD instruments would be beneficial. But some practitioners advise caution, pointing out the danger of creating an “escalator” of donor-assisted instruments, resulting in a dependency on subsidyand distortion of local financial markets. Upgrading from, saya grant-based challenge fund to a de velopment-backed private equityfund, mayhelp grow a single enterprise and can create more jobs. But this seems unlikelyto be the solution for unleashing enterprise in Africa at a sustainable scale. Coherence between donor-assisted and market-based PSD instruments (rather than between donor-assisted instruments alone) mayprovide more impetus to enterprise development, eg in ensuring a clear exist strategya fter the period of the grant-period. Thus a coherent package towards PSD is important at the strategic level, rather than the operational, firm level. 3312162041 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 286 International Development Committee: Evidence
Challenge Funds 16. There is a danger that aid support for private sector development is not always relevant to the specific needs of a particular business. To avoid this mismatch, the provision of aid in the form of (impure) public goods might in some case be better passed through the private sector. Elsewhere we have argued for a “global linkage fund” with global co-ordination, but local implementation. The fund should be consistent with private sector development programmes in developing countries and involve local institutions (eg Investment Promotion Agencies in the case of linkages between local firms—multinationals).x
Public procurement 17. Procurement from public authorities can have an important impact upon demand for goods and services within a specific locality. This has led to initiatives to facilitate procurement linkages with the local economysuch as reducing the size of supplycontracts, changing condition s that are a barrier to small enterprise (ie dropping provision of performance/bank guarantees, changing payment schedules to reduce the cash-flow suppliers have to carry, aYrmative action for local suppliers in contract evaluation). The advantage of donor interventions such as these is that the impact is generallysustainable as most public procurement takes place on a repeat basis. Of course eYciencyshould not be compromised. 18. In making the link between investment in physical infrastructure and support for meso level PSD, one option could be to assist government procurement authorities to modifytendering terms to reduce certain risks. A recent surveyof public-private partnerships (PPPs) for water supply, education and health care projects in developing countries found that the keyobstacle to succe ss was a lack of political will and public support for private sector participationxi. However, where civil societyorganisations—NGOs, communitybased organisations etc—were involved with the private sector in bidding for the infrastructure procurement work, these political risks could be reduced. The PPP Unit in the National Treasuryof South Africa requires evidence of collaboration between the private and civil societysectors as part of bid appraisals for PPP infrastructure contracts. Such collaboration mayhel p to reduce the political risks of developing infrastructure for PSD and involving the private sector in this work, it can also strengthen the public good component of the infrastructure, making it more pro-poor, eg introducing new low-cost technologyfor house-hold connections, and making education and health c are more aVordable and accessible.
Joint working between private and civil societysectors 19. The European Commission has experience of using development finance to incentivise pro-poor partnerships between communities and private sector groups to implement local economic development projects. The advantage of these interventions is that theycan be run on an open Call for Proposal (CfP) basis—so theyare demand-led and can be assessed on transparent criteria t hat balance financial viability with pro-poor impact. These can be a productive wayof harnessing the creat ivityof the private sector— rather than adopting a supply-led and top-down approach of development agencies themselves trying to “pick winners”. Finance can be provided on a grant or loan basis with significant co-finance requirements from the private sector. The critical issue is to use public funds judiciouslyto leverage in private sector finance, so that the local capital market is engaged rather than undermined. 20. This mechanism of delivering development funds to beneficiaries can be used in the context of PSD. There is no reason, however, whyit cannot also be used to deliver public goo ds in the health or education field and this deliverymechanism can overcome some of the misallocation an d ownership problems inherent in traditional top-down deliveryof development finance in these sectors. 21. A drawback of this approach is that it can be administrativelycumberso me to administer these Funds where a CfP can generate a huge response—often the result of a Call that is not drafted in a suYciently focused way. However, the fundamental concern with this approach is to ensure that the poor are not excluded preciselybecause of their disadvantage. In other words, mechan isms have to be put in place to support the poor to compete with the advantaged on a level playing field. This is entirelypossible and can be achieved, for instance, byproviding technical support to potential be neficiaries who have sound ideas but insuYcient capabilities to articulate them in response to an open Call. February 2006
References i Mr Mitchell has been a Research Fellow at ODI since 2005. Before that he was managing the Local Economic Development project portfolio for the European Commission in South Africa for 4.5 years and before that he was workin as a DFID Technical Cooperation OYcer in the role of Development Economist for Mpumalanga Province in South Africa 1996–2000. ii Dr Dirk Willem te Velde has been a Research Fellow at ODI since 2000 working on trade and investment policy. 3312162041 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 287
iii Dr Michael Warner has been a Research Fellow at ODI since 1997 working on the role of business in international development. iv There are several programmes at the Overseas Development Institute that have generated relevant insights into private sector development. — Investment and Growth Programme: understanding the sources of growth, the relationships between investment and patterns of growth, the role of government policies in support growth and investment, and the role of donors in supporting this. See eg http://www.odi.org.uk/iedg/ Research–areas/Investment–growth.html — Pro-Poor Tourism Programme, see http://www.odi.org.uk/rpeg/research/pro-poor–tourism/ index.html — Business and Development Performance Programme, see http://www.odi.org.uk/pppg/activities/ country–level/odpci/index.html v Warner, M and Alexander, K (2005) Does the Sustained Global Demand for Oil, Gas and Minerals mean that Africa can now fund its own MDG Financing Gap? BriefingNote £6 , London, Overseas Development Institute, Business and Development Performance. vi World Bank’s World Development Report 2005. vii Ashley, C, Warner, M, and Romano, J (2005) Strategic Directions for Private Sector Development Instruments in Africa: Eight Tips for PolicyMakers, London: Overseas Dev elopment Institute. viii UK (bilateral) aid as reported to the OECD database 1973–79 1980–89 1990–96 1997–2002 Aid related to private sector 18 25 33 30 development Infrastructure 10 13 13 6 Macroeconomic stability0 8 6 7 Legal and policyframeworks 0 0 2 3 Private sector support 2 3 4 3 Human resource 6 1 9 11 development Other aid 82 75 67 70
Source: Velde, D W te (2004), Case Study: OECD (UK & EU) Home Country Measures and FDI in Developing Countries: A PreliminaryAnalysis, case study for DFID and World Development Report 2005: Investment Climate, Growth and Poverty. ix D W te Velde and S McGrath (2005), “Globalisation and Education”, ODI BriefingPaper . x Velde, te D W (2002), “Promoting TNC-SME linkages” presented during ODI lunch time seminar at ODI, 5 December 2002. xi WEF (2005) Building on the MonterreyConsensus: The Growing Role of Public -Private Partnerships in Mobilizing Resources for Development, United Nations High-level PlenaryMeeting on Financing for Development, September 2005, Geneva: World Economic Forum.
Memorandum submitted by Mung’omba Associates Myname is Wila Mung’omba, a businessman in Zambia. I am a past President of t he African Development Bank and Executive Director of the International MonetaryFu nd. I currentlysit on a number of boards including the Emerging Africa Infrastructure Fund, a DFID initiative. I herebysubmit written evidence on some aspects of the Inquiry.
1. What type of donor interventions have strong leverage in changing the business climate (in partner countries) toward PSD and pro-poor growth? The creation of an enabling environment for private sector development is key.
Regulatoryenvironment Although most developing countries have established regulatoryauthori ties for various sectors, such as Power, Water, Banking, Telecommunications etc. there appears to be diYcultyin these regulators operating independentlyespeciallywhere there are still State owned enterprises c ompeting with privatelyowned business. More Donor intervention is needed for improvement to the entire regulatorylandscape. 3312162042 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 288 International Development Committee: Evidence
Investment promotion To date most investment promotion has been focused on the macro-level issues. It is important for Donors to assist through technical assistance for the developing countries to do some basic studies on target sectors such Agriculture, Tourism, Mining etc to enable the investment promotion to have meaning to potential investors. Additionallya more professional investment promo tion program could help attract more FDI into the developing countries.
Competition Policy One of the big issues in the developing world is the lack of well articulated Competition Policyparticularly with regard to state owned companies that compete with the private sector. The existence of such companies makes the private sector nervous as policyis normallyskewed against them . Technical assistance is keyto ensure that not onlyis there clear policybut the role of State owned enterp rises in a competitive landscape is clearlydefined.
Regional Integration There has been verylittle donor focus on Regional Integration. Most of the se countries Infrastructure, Trade and Investment if propertyintegrated can unleash significant growt h opportunities. Southern Africa for example could easilybecome an integrated economyover the next two dec ades. Donors need to direct Aid/Technical Assistance to SADC, COMESA, ECOWAS in order to build regional institutions capable of accelerating development.
Risk Finance As a result of poor macro-economic management in the past, there is a shortage of long term finance and short term finance is generallyexpensive. It is keythat local savings thro ugh Pension Fund and Insurance reform are harnessed and that donors provide long term resources for intermediation through established Commercial. Banks and also via the establishment of new entities such as Private Equity and Agricultural Funds followed bya recapitalisation of the local development banks.
PropertyRights In order to develop a middle class, the laws relating to land tenure, Deed Registryand securityperfection and realisation need to be clear. In addition, propertyrights will unleas h the necessarycredit and promote investment. Again Technical Assistance would be needed in this regard.
2. What aid instruments can be used to encourage PSD? Private benefits versus benefits to society (public goods)—how much is this an issue? The NGO’s have moved this debate a more than should be the case. Continued non sustainable aid will not help the developing world. Anypackage of incentives that is targeted a t the private sector will always have entrepreneurs benefiting. This, so long it is not excessive nor abused, is keyto encouraging the private sector to take the necessaryrisks for development. The keyis significant d evelopment that creates jobs and opportunities. To do this the Donors must focus on:- — Encouraging the establishment of Public Private Partnerships (PPPs) in Infrastructure. Most developing countries do not yet have the legal framework to make PPPs viable. It is important therefore that Technical Assistance is targeted at this keyarea. The shor tage of infrastructure puts developing countries at a significant disadvantage when theycompete for F DI. Donors should expand significantlyinitiatives such as Emerging Africa Infrastructure Fund, INFRACO and TAF if we are to see significant improvements in infrastructure. — Localised Technical Assistance funds to help private sector companies formalise more quicklyas well as to enable them prepare project plans, marketing for exports and training of local personnel. — Corporate Social Responsibility(CSR)—The standards of Corporate Gove rnance in the developing world need to be improved if we are to get CSR working at levels we have seen in the developed world. Targeted Technical Assistance would be veryuseful in th is regard. For Corporate Social Responsibilityto work properlythere must be proper political governance hence initiatives like the Investment Climate Facilitywhich aims to improve po litical governance as well should be encouraged. 3312162042 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 289
3. How is the private sector engaging in development? — Dialogue between the public and private sectors is keybut this should ext end to the Donor Communityas well. Such a tripartite dialogue is more likelyto assist in th eeVective deliveryof donor help. In addition, the Donor Communitywill get confident in sometime s using the private sector to deliver some of their aid programmes. — Dialogue between the government and members of the International private sector that are not yet investors in the developing countries will more clearlydefine what the dev eloping countries have to do to attract investment. — In areas such as small holder agriculture linked to large marketing organisations, central storage and irrigation facilities, warehouse receipts and input supplies, it is essential for the donors, governments and investors in the agricultural sector to be in constant dialogue so that theycan come up with a set of policies, the overarching regulation, technical assistance and donor financing to eVect genuine pro-poor growth that is anchored on common infrastructure. The response is onlyto part of the Inquirythat I felt able to respond to. Wila Mumgomba February 2006
Memorandum submitted by the Natural Resources Institute, University of Greenwich In this submission, we address a selection of the keyquestions posed and dr aw attention to specific experiences and lessons learnt from our own and our developing countrypar tners’ practical experience at countrylevel. The focus of our submission is, although not exclusively,o n the renewable natural resources and agriculture sectors.
Summary
Donors committed to povertyreduction and to equitable growth should plac e agriculture, agri-business and related services at the heart of PSD policyand practice and ensure that PSD addresses the needs of the diVerent groups of private sector players in particular the small-scale farmer and enterprise (1–3). Rural economic and enterprise development needs a policyand institutional env ironment conducive to fostering investment and increased eVectiveness of existing public and private sector institutions. Such approaches and strategies should be linked to the povertyreduction activities of don ors and national and local governments (10–11). Donors playa keyrole in supporting countries to secure a favourable busin ess environment (4). Donors should increase funding to deepen the understanding of keyfactors within a business environment which act as barriers to broad-based private sector development in particular in keysectors relevant to the poor. Better practice is required to harmonise and standardise current business climate surveymethods in order that findings can guide public policyand practice (5-6). Donors playa keyr ole in guiding privatisation yet there remains an imperative for a deeper understanding of the implications of, and the country’s readiness for, privatisation in terms of the regulatoryand institutional environm ent and of the unintended consequences (7–9). Donors can playa keyrole in helping developing countries put in place the n ecessarysupport services to enable the private sector overcome technical, regulatory, institutional and organisational barriers to accessing local, regional and international agri-food and input markets (12–16). Donors can support developing countries in putting in place the legal, regulatoryand institutional framework to support private sector driven risk management and mitigation initiatives and to foster private sector managed commoditymarket systemsincluding commodityexchanges ( 17–20). The current donor trend to move towards privatisation of agricultural services needs monitoring and for remedial action to be taken where necessaryto ensure that private sector u ptake is realised, that the appropriate regulatoryand support institutions are in place, and that th e services meet the needs of the poor and less advantaged. Pluralistic systems should be fostered (21–24). Donors can playa keyrole in helping to bridge the science and technologygap between the developed and the deve loping world and foster the environment within which the private sector as a keyservice provider can o perate and meet the needs of the poor. There is a clear need to continue to use public resources to ensure that the needs of the poor are addressed (25–26). Lessons need to be drawn from sound working models of agricultural sector public- private partnerships to guide future public sector including donor intervention. EVective models can play a critical role in the development and uptake of technology(32). 3312162043 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 290 International Development Committee: Evidence
Donors could explore new models of knowledge transfer partnerships between north-south and south- south building on models tested in the north (27–28). Private sector business associations can playa keyrole in support of the local business communityand linking the public and priva te sectors. Donors can playa keyrole in the support to and the establishment of, such organisations and the services theyprovide (29–31). The public sector and donors could become more engaged in the process of development and application of CSR codes of practice (33–35) and in support of more equitable access to fair trade opportunities (36).
Q1. What can the private sector do to alleviate poverty? 1. Agriculture is the most important private sector activityin developin g countries and in manytransition economies. Agriculture contributes to employment and significantly to national income and export earnings. It will remain a primarysource of growth and means of povertyred uction for some time to come. The agriculture sector reduces povertythrough harnessing poor people’s keyassets of land and labour, by lowering and stabilising food prices, byproviding labour intensive empl oyment for the poor, and by stimulating growth in the rural economy. 2. Widespread liberalisation of the agricultural sector over the past 15 years throughout most of the developing world and transition economies has changed dramaticallythe p ublic sector’s (including donor agencies) role and function and placed new demands and expectations on the private sector. The weak response bythe private sector including small and medium size enterprise to take up the anticipated functions of input and output market provision following liberalisation of for example commodity marketing boards is a keyfactor hampering the growth of the agricultural s ector in manycountries. Trade liberalisation alone cannot ensure equityof opportunities and sustaina bilityof livelihoods and new models which deepen the participation in the local, regional and national markets bythe poor need to be developed. 3. Changes in trade policy, the dynamic and aggressive business concentration within agricultural input and output markets, and the globalisation of the agri-business sector means that donors and national governments need to keep abreast of these changes and their impact on public policyand strategyand on future development outcomes. Much private sector change is taking place out of sight of, and understanding by, the public sector including donors and International Financial Institutions (IFIs). A more open relationship between the public and private sector could be desirable to enable understanding of the implications of private sector change on development. This applies to the agri-business sectors in both the north and the south and includes their vertical and horizontal linkages.
Donors committed to poverty reduction and to equitable growth should place agriculture, agri-business and related services at the heart of PSD policy and practice and ensure that PSD addresses the particular needs of the diVerent groups of private sector players in particular the small-scale farmer and enterprise.
Q2. What are the constraints on the private sector in developingcountries and how can they be addressed? 4. These are multiple and complex. Some keypoints are noted in particular i n relation to the business environment. Institutional aspects of the business environment in developing countries has shown that if the rule of law can be enhanced, regulation lightened but enforced more rigorously, tax revenue collection improved and corruption reduced, all within a favourable macroeconomic environment (low inflation and public deficits, openness to trade), new business entryand growth would be encouraged. Private sector investment levels and enterprise development can be either facilitated or hindered bythe business environment, depending on how the latter impacts upon investment risks, entrybarriers (including start-up costs) to economic activity, and/or production and marketing costs. Important dimensions of the business environment include the macro-economic situation, the degree of policyc onsistencyand stability,direct and indirect taxation regimes, investment and licensing regulations, levels of bureaucracy, labour laws, corruption levels, securitysituation, and e Vectiveness of the judicial system, state of economic infrastructure, and availabilityand qualityof enterprise support serv ices. In some cases, public policy restricts enterprise activitybynegativelya Vecting the business environment; examples include restrictions on artisanal fishing and shrimp capture, and regulations applying to the cooking and serving of food and drink.
Donors play a key role in supportingcountries to secure a favourable busin ess environment: helpingto ensure that the rule of law can be enhanced, regulation lightened but enforced more rigorously, tax revenue collection improved, corruption reduced, and in fosteringa favourable m acroeconomic environment.
5. There is a proliferation of diVerent business environment surveys110. These applydi Verent sets of indicators and models to reflect the institutional and pro-poor growth aspects of the business environment.
110 World Bank Doingbusiness in 2005 and 2006 surveys ; the World Bank and the EBRD Business Environment and Economic Performance Survey (BEEPS) and the more subjective surveys of for example the Index of Economic Freedom published by the Wall Street Journal and the Heritage Foundation. 3312162043 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 291
The methods applied and use of the findings from such reviews raise questions that need to be further understood if felt “good practice” is to guide public investment. For example the index of economic freedom does not establish a strong correlation between economic freedom and growth eg three of the fastest- growing countries in the world are mostly“unfree” in terms of trade polici es and regulations namelyChina, India and Vietnam. 6. There are veryfew estimates of the costs of compliance of business regul ation in developing countries but a recent study111 suggests that theymaybe substantivelylarger as a percentage of GDP than i n industrial countries.
Donors should increase the fundingto deepen the understandingof key fact ors within a business environment which act as barriers to broad based private sector development in particular in key sectors relevant to the poor. Better practice is required to harmonise and standardise current business climate survey methods in order that findings can guide public policy and practice.
7. Literature on economics of generic business privatization is characterised bytwo approaches: normative and positive. The normative view, as postulated bythe World Ban k and most donor agencies, is that privatization is necessaryto curb waste, raise economic e Yciencyand develop the activities of the private sector via increased domestic and foreign ownership. Manygovern ments in developing countries are far from altruistic when abandoning a discretionarysystemfor one where m arket forces determine performance; maximising aggregate welfare is usuallya minor considerat ion. As the benefits of privatization take time to realise, the normative view provides a long-term rationale for private sector divestment. 8. The positive view of privatization, when placed in a developing country context, is a politicallycharged subject. Emphasis is placed on agencyand credibilityproblems that are un leashed (in often weak states with poor institutional structures) and the income distribution implications of privatization. From the positive theoryperspective, privatization onlygoes ahead when politicians see i n it clear-cut economic and political benefits. 9. There is relativelylittle literature which directlysets out the waysi n which privatization aVects poverty in developing countries.
Donors and IFIs play a key role in privatisation in many countries. There is an imperative for a deeper understandingof the implications of, and the country’s readiness for, pr ivatisation in terms of the regulatory and institutional environment and of the unintended consequences.
10. Most donor intervention to support the business sector including the understanding of the business environment and small and medium scale enterprise development, has given limited attention to the agriculture sector and enterprise development needs in rural areas. Business climate surveys for example have tended to focus on business activities in urban centres and given no or little attention to the particular characteristics and requirements of the rural entrepreneur. 11. Further, inadequate attention is given to the needs of the informal sector and the linkages between the informal and the formal enterprise sectors. Informal and micro-entrepreneurs represent the majorityof economic actors (in both agriculture and non-farm enterprise) and their business activityrepresent the main source of livelihood in rural areas. There are clusters of success factors that can support rural enterprise and economic development which need to be understood including their linkages and interdependencies ie: the policyand institutional framework; infrastructure, markets and servic es; entrepreneurial competence; and stakeholder engagement. Such a framework is equallyrelevant to the agend a of making markets work for the poor.
Rural economic and enterprise development needs a policy and institutional environment conducive to fosteringinvestment and increased e Vectiveness of existingpublic and private sector institutions. Such approaches and strategies should be linked to the poverty reduction activities of donors and national and local governments.
Q3. What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth? Creating an enabling environment byproviding technical assistance on: Private Sector and Trade Regulations in Agri-Business 12. International trade in high-value food products has expanded enormouslyover the last two decades, fuelled bychanging consumer tastes and advances in production, transpor t, and other supply-chain technologies. For a number of poorest countries, the potential for export development from agriculture is seen as the best impetus for stimulating economic growth. However, while the trade in these agricultural
111 Bannock G (2001) Can small scale surveys of compliance cost work? In (eds) Evans, C, Hasseldine, J and Pope, J (2001) Taxation compliance costs. Sydney: Prospect. 3312162043 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 292 International Development Committee: Evidence
products continues to expand, producer countries are faced with increasinglycomplex requirements for food safety, quality assurance and traceability set by major markets, particularlyin the EU and North America, which represent a threat to existing exporters and a “barrier” to new entrants. Increasingly, these stringent regulations create a bias in favour of countries with a highlydeveloped in frastructure and large, well- resourced suppliers. 13. In high-value markets, there has been an increased emphasis on legislation and regulations, standards, codes of practice, traceabilityand di Verentiation byproduct quality.Statutoryregulatorybodies are increasing their requirements in food safetyand qualitystandards an d for greater inspection of produce byrecognised competent authorities at points of entryor exit to ensure co mpliance with qualityand sanitary and phytosanitary regulations. Industry has also responded to consumer and governments concerns bythe development and implementation of their own voluntaryqualitycontrol, m anagement, and assurance schemes. 14. In order to enter these highlyregulated export markets, the private se ctor in the producing countries require the public sector to have comprehensive food control, inspection and certification systems to manage qualityand food safety.However, manycountries have poorlydeveloped na tional food control systems which are characterised byoutdated legislation and regulation, under-r esourced competent authorities and surveillance and inspection services, and lack of competent staV and facilities in contaminant monitoring laboratories. This means that conformityassessments are either not unde rtaken and market opportunities are lost or are completed byexternal international companies with result ant high costs. Onlywell organised and resourced private sector players, invariably those relatively larger producers and exporters vertically integrated into the supplychain, are able to fullyunderstand and meet reg ulatorydemands. Therefore, the lack of eVective public sector regulatorybodies and infrastructure inhibits the p articipation of small and medium enterprises in regional and international markets. 15. Whilst most developing countries have basic public and private institutional structures necessaryto undertake food control and certification, theylack the resources and up-t o-date knowledge to fullyperform the tasks for which theyare mandated. Donor support to develop a more co-or dinated approach, often through a rationalisation of services, is required in the following areas to deliver more eVective support to the private sector: institutional and legal reform to develop and implement standards and technical regulations; capacitybuilding of national competent authorities in con formityassessment, inspection and certification systems; support for public and private sector representation in the international fora for standards setting, trade negotiations and dispute settlement; and strengthen the monitoring and research capacityof keynational and regional organisations responsible for risk analysis and pest surveillance.
The Regulatory Environment
16. The following presents a case studyof the role of donor funding in suppo rting change in the regulatoryenvironment to allow the adoption of poverty-reducingagricu ltural technologies.
Case study: Establishingthe regulatoryenvironment for the commercial d evelopment and use of biological control agents in Africa. Technical support from NRI and other UK research bodies was central to the recent development of regulations allowing for the registration of biological control agent (BCA) products in East and West Africa. UK and southern base partners developed new biological control technologies for horticultural crops in East Africa (DFID funded). Kenya had identified the need for such technologies to replace the use of chemical pesticides due to be banned on export crops under new EU residue regulations. This was a major threat to the international export industryin Kenyathat provides a livel ihood for an estimated two million people. A lack of coherent regulation governing the registration and commercial sale of BCAs was a major stumbling block to their adoption bylocal farmers. Local regul atoryagencies had no experience with these new types of products and lacked the technical capacityto frame appropriate registration guidelines. Without such guidelines companies could not produce or sell BCA products nor could farmers legallyuse them. UK research institutions provided technical assistance to Kenyan counterparts to prepare guidelines covering the registration of commercial BCAs (2003). This model system is now in the process of being adopted bya number of other countries including Tanzania, Ghana and Benin .
Donors can play a key role in helpingdevelopingcountries put in place the n ecessary support services to enable the private sector overcome technical, regulatory, institutional and organisational barriers to accessing local, regional and international agri-food and input markets. 3312162043 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 293
Reducing Risk and Vulnerability for Private Sector Development Financing
17. Managing risk and reducing vulnerabilities are essential elements in sustainable pro-poor growth through agriculture. In the industrialized countries, farmers benefit from an arrayof arrangements to isolate or cushion them from various shocks. There are two broad approaches, namely: Market-management solutions ie policies to better organize markets so that supplyand demand is kept in balance; and Market- compensation solutions ie policies to compensate for the eVects of market instabilityand unremunerative prices 18. “Market-management measures” collapsed in the late 1980s under the costlyburden of managing surplus stocks and the liberalisation process started. At the national level, prior to the 1980s, supply management systems at national level were used by many countries. These were undertaken through price stabilisation mechanisms put in place in order to protect farmers from world market fluctuations and ensure stable, remunerative price for farmers eg case of EU Common Agricultural Policywith the market intervention price. These systems aimed to move the market risk from farmers to national governments. Owing to the costs of administering these systems, and to the diYculties of managing national supplyin a context of WTO trade liberalisation, manyhave been dismantled. One notab le exception is in Canada where national supplymanagement systemsare managed byproducers themselves. 19. With the phasing out of producer price support schemes, and marketing boards, governments are now giving more attention to “market-compensation solutions” or income safetynet programmes. Theyare looking at schemes that are cost-eVective and do not distort trade. 20. Manydi Verent approaches exist in agriculture to manage risk, and each has its own context. For example, the World Bank’s International Task Force on CommodityRisk Mana gement112 is focusing on market-based instruments to manage risk. In particular, it seeks to bring “price insurance” to farmers in developing countries through hedging schemes. The “insurance” is delivered through rural banks however it is doubtful if small-scale farmers will derive significant benefit. This Task Force is also looking at “yield insurance” byusing weather derivatives. Opportunities to broaden the re ach of such work requires to be explored further.
Case study: Linkinga financial product combiningweather-indexed insura nce with crop finance with a Warehouse Receipt System—Zambia NRI is collaborating with the World Bank and DFID in Zambia in piloting an innovative, all-inclusive financial product combining weather-indexed insurance with crop finance interlocked with commodity marketing using the warehouse receipt system. The product allows smallholder farmers access to formal finance byreducing the associated credit risks and transaction costs. It c onsists of insurance, primarily covering weather risk; production credit and collateralisation of produce to improve crop marketing as well as ease access to commodityfinance. The product will be o Vered byfinancing banks, with the insurance cover provided byinsurance companies. Farmers will ultimatel ypaythe insurance premium, but it maybe financed initiallybythe banks. Loan covenants will require fa rmers to deposit and market their produce using the warehouse receipt system.
Warehouse receipts systems: settingthe institutional context for e Vective risk management systems113
Warehouse receipts systems allow producers to manage better the marketing of durable crops for both domestic and export markets, byfacilitating more remunerative trade wit h parties further down the marketing chain (eg processors and exporters) as well as making it possible for them to delaysale when prices bottom out during the immediate post-harvest period. In the case of sub-Saharan Africa, a broad consensus is emerging that in manycontexts a strong warehouse receipts systemis a vi tal precondition to the establishment of commodityexchanges and other price risk management sys tems.
Further analysis is needed in order to present the advantages and disadvantages of the diVerent instruments to face the commodity market crisis at national and international levels and to manage other risks at producer and country levels. Donors can support developingcountries in p utting in place the legal, regulatory and institutional framework to support private sector driven risk management and mitigation initiatives and to foster private sector managed commodity market systems including commodity exchanges.
112 The International Task Force on CommodityRisk Management in Developing C ountries (ITF) http://www.itf- commrisk.org/) was formed in 2000 to carryout investigation and, more spe cifically, look at the use of derivative products to manage risk. 113 Coulter, J P (2006) Making Transition to a Market Based Grain Marketing System. Submitted for publication. Natural Resources Institute, UK. 3312162043 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 294 International Development Committee: Evidence
The Private Sector as a Service Provider of Agricultural Advisory Services 21. Research, extension and training in agriculture receive a low percentage of public funds in lower income countries. 85% of resources on research worldwide are invested in high-income countries, 10% in India, China and East Asia, leaving only4–5% for the rest of the world—and m ost of this through northern agencies undertaking research in the south114. 22. There is a current trend of development agencies and countries alike to seek to privatise or semi- privatise the provision of these services. Whilst privatisation or semi-privatisation can bring in additional funding (through client cost recovery) and be a more client driven agenda, it mayalso bring disadvantages, including problems of ensuring provision of adequate services to the poor, cherrypicking of topics yielding the best returns to investment, and the need for eVective qualitycontrol and regulation of products (eg the supplyof veterinarydrugs) and services. 23. There is increasing division of funding between private and public goods in the developed and developing worlds; eg in the UK public funding for research and extension focuses on topics of policy concern (eg animal welfare, conversion to organic farming, global warming and the social impacts of rural policies), while farmers have to seek advice on crop and livestock production and marketing from private sources at full economic rates. In the developing world, some aspects of farming are seen as private goods— eg veterinarycare in Tanzania, where the government stopped providing fu nding of public services to individual farmers. However, the private sector has proved too weak, and the returns in remote areas too unattractive for the vacuum to be filled byprivate providers, leaving farm ers without cover—except in those areas where NGOs are promoting Community-Based Animal Health Workers (eg Babati Rural Development Project, run byFARM-Africa). This demonstrates the need for support for local private sector organisations (farmer-based or external) in developing countries to start up and establish good working practices. It cannot be assumed however that capacity(human, fina ncial, infrastructural) is present. 24. There are four main models of extension/advisoryservice provision: — Public funded, public provision, epitomised bythe centralised Trainin g and Visit extension system and the monolithic national research institutes that were often “welfare” organisations with very high fixed costs and few running costs. While there have been strong moves awayfrom this model, often with encouragement from the IMF/WB, there are good reasons for the retention of public funding and provision for public goods research and extension (eg major epizootic diseases of livestock, locusts and armyworms beyond the control of individual farmers, aspects of rural livelihoods that particularlya Vect the poor, such as subsistence crops, and public goods such as soil and water conservation that have implications beyond individual farms). — Public money, private delivery, such as in Chile or Uganda where funds are channelled to sub- countylevel, and farmer groups define their priorities and (together with local government) and contract private providers for extension services. In this model there is supposed to be increasing contribution from farmer groups. This model still requires public coordination and regulation. Problems include equitable provision of services, ensuring competition between private service providers (especiallyin remote or di Ycult areas), ensuring qualityof service provision, and the need for dependable and relevant funding flows. — Private funding, private delivery, such as tobacco, coVee, cocoa, tea and some other commodities in some countries—where research, extension and training can be provided out of a trade cess/levy. Also for input products such as seeds and agrochemicals. Distribution of these services is a problem, with access often being confined to peri-urban and other areas with a high densityof purchasers. — Mixtures of the above: The “pluralistic” system where services respond to needs, and there is a mix of government, NGO and private provision. This model is favoured bythe mul ti donor think-tank on agricultural advisoryservices 115.
The current donor trend to move towards privatisation of agricultural services needs monitoringand for remedial action to be taken where necessary to ensure that private sector uptake is realised, that the appropriate regulatory and support institution are in place, and that the services meet the needs of the poor and less advantaged. Pluralistic systems should be fostered.
Private Sector Investment in Agricultural Research 25. There are considerable diVerences between the patterns of agricultural research investment in the developed and developing world. In OECD countries, investment bythe priv ate sector grew at around 5% each year from 1981–93. By the mid-1990s, just over half of the research (51%) was privatelyfunded, and totalled US$10 billion. In stark contrast, the share of private funding for agricultural research, development
114 KFPE (2001) Enhancing research capacityin developing and transition cou ntries. Berne: Geographica Bernensia; ISBN 3- 906151-49-2. 115 http://www.neuchatelinitiative.net 3312162043 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 295
and technologytransfer (ARDTT) in developing countries averaged 5.5% du ring this period—this was equivalent to about US$0.6 billion. It should be recognised that almost half of the developing country investment can be attributed to large multinationals operating through associated national companies. Similarlyin the OECD countries, these same multinationals spend almost U S$7 billion. The companies are Monsanto, Syngenta, Bayer/Aventis, Dow Agro and Du Pont, and collectivelytheyown the intellectual propertyrights (IPR) on most of the world’s agricultural innovations in t he so-called post-genomics era. 26. Keydeterminants of the level of private investment include: (a) signi ficant demand for agricultural inputs and outputs; that is, market size; (b) good domestic and/or export markets; (c) suYcient opportunities to appropriate returns on investments made or to retain IPR; and (d) conducive environment for conducting business in terms of regulations, taxes etc—low transaction /market entrycosts. There is ample evidence in manydeveloping countries to show that relativelyfew of these incentives are in place. This is accentuated where there is also a need to support pro-poor ARDTT, and as a consequence the poorer regions of the developing world fail to capture the investments of the private sector. There is thus a clear need to continue to use the public sector to ensure that the ARDTT needs of these regions are addressed.
Donors can play a key role in helping to bridge the science and technology gap between the developed and the developingworld and foster the environment within which the private s ector as a key service provider can operate and meet the needs of the poor. There is a clear need to continue to use public resources to ensure that the ARDTT needs of the poor in many developingcountries are addressed .
Build New Knowledge Transfer Partnerships 27. Government support to the private sector is often through cross-sector assistance in areas such as business goods and services, research, appropriate regulatoryand inspe ction services. These normallyare seen as areas of pre-competitive support. However, lack of direct company-level support can often prove a major barrier to companydevelopment. 28. The UK Knowledge Transfer Partnership scheme helps UK companies access the knowledge and skills within the UK’s “Knowledge Base” (universities, colleges, independent research and technology organisations, and Government-funded research institutions). In the scheme graduates work on projects central to the needs of participating companies. Knowledge Transfer Partnerships are supported byfunding from DTI covering up to 60% of costs to small and medium sized enterprises. Donor support to a similar type of scheme could be used to foster north-south and south-south public-private sector partnerships in order to: — facilitate the transfer of technologyand the spread of technical and man agement skills; — provide industry-based training; and — enhance the levels of research and training relevant to business bystimu lating collaborative projects that forge partnerships between the science and business.
Donors explore new models of knowledge transfer partnerships between the north and the south and south— south partners buildingon models tested in the north.
Q4. How is the private sector engaging in development?
Building Voice and Capacity through Business and Trade Associations 29. The formation of organisations, such as farmer or exporter associations, has proved to be an eVective approach to facilitating private sector development, especiallyin the e xport sector. Thus private sector led and managed organisations (eg UFEA—Ugandan Flower Exporters Association; EHPEA—Ethiopian Horticulture Producers and Exporters Association; FPEAK—Fresh Product Export Association of Kenya) have greatlyassisted in the creation of an e Vective enabling environment for their respective sector’s development. Successful organisations have become widelyrecognised by governments, donors and other sector stakeholders as the representative voice of their sectors. Besides their advocacyrole, theyhave undertaken a range of sector supporting activities including developing a sector strategy, organising study tours, training, facilitating standards certification, trade fair participation, promotion activities, freight coordination, the provision of data on markets, and inputs services. 30. Invariablydonor support has playeda vital role in supporting the rapi d development of such associations, especiallyin the earlystages. However, donor support is o ften short term and inadequate to support sustained outcomes and impact. For example, DFID support for the EHPEA played a vital role in assisting the horticulture sector’s development but DFID shown reluctance to continue. In contrast, the Dutch Government has shown keen interest and now provides most support to the sector and to Dutch companies directlyinvolved in the flower sector. 3312162043 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 296 International Development Committee: Evidence
31. Meanwhile, the private sector calls for continued donor support in the following areas—training: establishment of in-countrytraining capacity;research: eg support for collaborative trials between private companies and research organisations to help evaluate new varieties; market development, investment promotion and diversification: resources needed for a range of activities relating to support market analysis and development; input supply: develop the capacity to advise and support easyaccess and registration of various inputs (especiallyagrochemicals); qualityand technical stand ards: vital to increase in-country private and government capacityto complywith various standards; smallh older production: eg compliance and marketing issues.
Private sector business associations can play a key role in support of the local business community and linkingthe public and private sectors. Donors can play a key role in the sup port to the establishment of such organisations and the services they provide.
Q5. What aid instruments can be used by donors to encourage PSD? Private benefits versus benefits to society (public goods)—how much is this an issue?
Role of Public-private Partnerships in the Development and Uptake of Technical Innovation for Poor Farmers in Asia and Africa 32. Small-scale farmers in developing countries represent a limited or diYcult market opportunityfor the multinational private sector to develop and deliver the new technologies. Private companies in developing countrymaybe better placed to deliver new products to poor farmers but lac k the technical expertise to develop, produce, register or market new technologies. Developing viable public-private partnerships can be a keyto making the benefits of research and new technologyaccessible to t he poor.
Case Study: Public-private Partnerships Address the Crop Production Needs of the Poor “Collaboration in Insect Management for Brassicas in Asia and Africa” is a consortium of a private multinational seed company, an International Research Centre, and Universities in UK, USA and Australia. Its purpose is to harness the latest biotechnologyto produce n ew pest resistant vegetables for poor farmers in Asia and Africa. The public funding of studies on the social, safetyand environmental issues has leveraged the private sector to applyits technologies to poor f armer crops that would otherwise not have been a target for commercial development. New safe crop protection for aubergine and rice in India and Bangladesh. Production of aubergine an important poor farmer crop was under threat as the growing resistance of pests to insecticides was making production unprofitable and reliant on heavychemical use. Funded t hrough DFID researchers from NRI and India developed a safe pheromone technologyas an alternative control. Working with local companies in India and Bangladesh, the team provided the technical assistance to commercialise the technology. The work led to the creation of a regional body representing the private sector and built links to the public sector with the aim of speeding the flow and uptake of technical innovation. This approach has now been used to develop safer rice production technologyfor Bangladesh. A UK research institute, the local subsidiaryof a multinational agro-input p roducer, local entrepreneurs, local pesticide dealer networks and the national advisoryservice collaborate to develop safe products and to train farmers in their use.
Lessons need to be drawn from sound workingmodels of agriculturalsector p ublic-private partnerships to guide future public sector including donor intervention. EVective models can play a critical role in the development and uptake of technology.
Corporate Social Responsibility 33. Corporate social responsibility(CSR) is not an aid instrument per se though CSR is sometimes promoted for social benefits rather than because assurance that good social and environmental practice or standards will lead to increased competitiveness and therefore investment. In some business cultures an important part of CSR is philanthropy(ranging from the United States to In dia). Some commentators dismiss this as “self-interested giving” and it should be noted that some projects fostered bywell-meaning business often become “white elephants” and implementation does not always follow best practice, eg with respect to participation, as built up within the international development profession. 34. The business case for adopting CSR standards can varyaccording to the s ize of the firm, its location, the industrysector and importantlythe nature of the links buyershave wit h suppliers. There are a wide range of CSR codes of practice operating in agricultural value chains. However, even in chains where codes, which draw increasinglyfrom ILO labour standards, are activelyimplemented th eydo not alwaysreach upstream to small-scale producers. Implementation of CSR bythe private sector cou ld be improved bythe public 3312162043 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 297
sector ensuring that standards and legislation are mutuallyreinforcing . This would increase incentives for business to complyand contribute to development for example through impr oved working conditions and proper remuneration.116 35. Ethical sourcing and use of CSR codes of practice can contribute to development where theyare eVectivelyimplemented, ie according to the spirit of the texts rather than j ust ensuring successful passage through an audit. Engagement in locally-owned processes to develop and audit codes and share experience of best practice to ensure that worker rights are improved is increasingly recognised as a significant part of the wayforward.
The public sector could become more engaged in the process of development and application of CSR codes of practice. There is a public goods case to ensure that growers maintain standards, whether quality, food safety or labour standards as for example fresh produce is rarely labelled with a particular company but with the country of origin.
Fair Trade 36. Fair trade is an approach to trade that has commercial as well as development objectives. Fair trade labels and standards have a distinctive focus on economic as well as social and environmental criteria. Empowering disadvantaged producers through better terms of trade, including a fair price is a central tenet. However there is a constant, but potentiallycreative, tension between de velopment and trade objectives. This is likelyto increase as attempts to mainstream fair trade continue. B yand large, fair trade as practised bymainstream companies, including the main supermarket chains, however this tends not to eVect their core business operations and is often used as a marketing tool to attract consumers willing to paymore for a product.117 The danger of an exclusivelymainstream approach is that onlythose produc ers that have reached a certain level of organisation, export capabilityand qualitywi ll be able to enter a fair trade market. Fair trade could become a path for onlyan elite set of producers. It is impor tant that the trade development, market access, advocacyand lobbyingelements of fair trade are not lost. 118 Donors could support these aims byencouraging mainstream companies to be more engaged in the development al process including assistance to would-be fair trade supplier groups and to fund impact studies of benefits to existing groups.
Donors could support more equitable access to fair trade opportunities for a wider range of producers by encouraging mainstream companies to be more engaged in the developmental process includingassistance to would-be fair trade supplier groups and to support the longer term monitoringand impact assessment of the evolution of this segment of the industry.
February 2006
Memorandum submitted by Plan B
Summary This submission focuses on the particular problems and concerns of development aid supporting oil and gas extraction in developing countries. We would like to bring the oil and gas sector to the attention of the IDC in their review of their PSD policy, and to urge further investigation of the cross-cutting problems which oil and gas extraction brings. Evidence is oVered to show how development and the achievement of the Millennium Development Goals (MDGs) has been compromised, and DFID’s mandate of povertyalleviation un dermined, bythe financial support of oil extraction projects. The evidence refers to case studies published in a recentlyproduced repor t: PumpingPoverty: Britain’s Department for International Development and the oil industry, a copy of which has been sent to the clerk.119 This report, published byPlatform Research in March 2005, has the endorse ment of groups in the Global South and oil extracting countries, including: Sobrevivencia (Paraguay), Environmental Rights Action (Nigeria), Centre Pour l’Environnement et le Developpement (Cameroon), Green Alternative (Georgia), and Sakhalin Environment Watch (Russia).
116 Tallontire, A and Greenhalgh, P (2005) Establishing CSR Drivers in Agribusiness, report for Foreign Investment Advisory Service, International Finance Corporation and World Bank. 117 There are now over 1,000 Fairtrade products available in the UK, obtained from 58 developing countries. UK sales totalled £140 million in 2004. 118 Tallontire, A (forthcoming) “The development of alternative and fair trade—moving into the mainstream” in Barrientos, A and Dolan C Ethical sourcingin the globalfood system . Earthscan. 119 Not printed. See http//www.planb.org/resources/pumpingpoverty/download. 3312162044 Page Type [E] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
Ev 298 International Development Committee: Evidence
The submission examines the points below, and makes conclusions and recommendations based upon these points. 1. The constraints on the private sector in developing countries: Governance and the Resource Curse 2. How oil extraction contributes to conflict, pollution and climate change, and undermines sustainable growth 3. Donor interventions and leverage—bi-lateral and multi-lateral aid for oil extraction 4. The Extractive Industries TransparencyInitiative: the private secto r and development
1. Constraints on the Private Sector in Developing Countries:Governance and the Resource Curse
The Resource Curse
1.1 The negative economic and political consequences for developing countries’ dependence on oil extraction has been well documented and termed “the resource curse”. The resource curse demonstrates that the more dependent an economyis on natural resource exports, the worse its economic performance will be over the long term.120 The recent Extractive Industries Review (EIR) of the World Bank, noted that between 1970 and 2000 the number of petroleum-rich states with disappointing outcomes in terms of economic growth and povertyalleviation far outweighed the number of successful ou tcomes.121 1.2 Nigeria is perhaps the most emblematic example of the resource curse. According to the World Bank, “oil accounts for 40% of GDP, 70% of government revenues, and 95% of foreign exchange earnings in Nigeria”.122 Nigeria is among the 15 poorest countries in the world with 70% of its people living below the povertyline. An increase in GDP has not resulted in a corresponding increa se in incomes for the poor in Nigeria, and the heavyreliance on oil for foreign exchange earnings has no t delivered pro-poor growth.
Governance
1.3 The dominance of natural resource exports in a developing countrycan l ead to persistent poor governance.123 There is strong evidence to show how oil export impedes democracyand indir ectlypromotes authoritarian rule in manydeveloping countries. This is well documented byMichael Ross, who concluded that oil does greater damage to democracyin poor states than in rich ones. 124
“Dutch Disease”
1.4 Even under a government with strong institutions, the dominance of oil presents major macro- economic challenges, which maycause rising exchange rates and inflation, and spark recession in other economic sectors such as manufacturing and agriculture. These knock-on eVects curtail the wider “trickle down” of oil wealth to the rest of the population, and are often described as “Dutch Disease”. This can prevent the micro-economic level from flourishing, and can undermine the agricultural and informal sectors. 1.5 In Nigeria, Ecuador and Mexico, decades of oil extraction has decimated the non-oil economy,125 and has demonstrated how the dominance of oil extraction and export for the national economyhas undermined, instead of positivelytransformed, the agricultural and inf ormal sector. In these cases, increases of GDP has not been reflected in increases in incomes for the poor.
120 Sachs, J and Warner, A. (1997) Natural Resources and Economic Growth. Revised version. Harvard Institute for International Development Discussion Paper. 121 The World Bank (2003) Extractive Industries and Sustainable Development: An Evaluation of World Bank Experience. Washington DC. 122 McPherson C.P. 2002, Petroleum Resource Management in Developing Countries, Washington DC: The World Bank. 123 See Karl, T.L. (1997) The Paradox of Plenty: Oil booms and Petro-States. Berkeleyand London:Universityof California Press. 124 See Ross, M. (2001) Does Oil Hinder Democracy? In World Politics. Vol 53, pp.325—61. Web ref: http:// www.polisci.ucla.edu/faculty/ross/doesoil.pdf 125 See: — Okonta I. And Douglas, O. (2001) Where Vultures Feast: Shell, Human Rights and Oil in the Niger Delta. San Francisco:Sierra Club Books. — Kimerling J. (1996) Oil, Lawlessness and Indigenous Struggles in Ecuador’s Oriente. In Collinson, H. (1996) Green Guerillas:Environmental Conflicts and Initiatives in Latin America and the Caribbean. London: Latin America Bureau. — Human Rights and Environment in Tabasco available from Global Exchange, 2017 Mission St £ 303, San Francisco, CA 94110. 3312162044 Page Type [O] 19-07-06 12:28:36 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 299
Sequencinggovernanceand investment 1.6 The Extractive Industries Review (EIR) of the World Bank recommended the principle of “sequencing” governance and investment. Good governance is a necessaryp recondition for the achievement of positive outcomes in both private and public sector development. The recommendation of the EIR stated that the WBG should focus first on supporting the development of such governance mechanisms, and only support extractive industries once those structures are in place. 1.7 For the poor to receive the benefits of private sector development, clear regulatoryframeworks need to be in place at the macro and meso levels, backed up bye Vective democratic governance. This crucial relationship has been overlooked in the past, and large private sector oil and gas extraction projects have proceeded, to the detriment of the local population. This submission refers to evidence demonstrating how this has eVected communities in Nigeria (paragraphs 1.2 and 2.1), Chad and Cameroon (paragraph 3.3) and along the route of the Baku-T’bilisi-Ceyhan pipeline (paragraph 3.4).
2. How Oil Extraction Contributes to Conflict,Pollution and Climate Change, and Undermines Sustainable Growth
Conflict and pollution 2.1 The persistent problems of conflict and pollution undermine development for communities on the front line of oil extraction. Nigeria provides an example where oil is fuelling a protracted low-level conflict with huge costs to the country’s development objectives.126 The roots of conflict in the Niger Delta begin with the widespread pollution caused bythe oil industry,and the spectre o f underdevelopment in the face of massive oil revenues. Povertyhas been exacerbated byan increasinglyi nsecure environment in which thousands of people have lost their lives and thousands of families have been displaced. 2.2 The proximityof communities to oil and gas extraction and processing p resents further barriers to the achievement of the Millennium Development Goals. Contaminated and polluted water, soil and air destroys the livelihoods of those relying on farming and fishing nearby, thus undermining the agriculture and informal sector, posing severe health hazards, and undermining sustainable growth.
Climate Change 2.3 The impacts of climate change resulting from oil and gas development are alreadybeing felt bythe poorest and most vulnerable people worldwide, and will undo decades of development. Providing development aid support for oil and gas projects, without a coherent policystructure for measuring the impact of such developments against agreed development baselines such as the Millennium Development Goals,127 has undermined the goal of working for long-term sustainable development, including PSD projects.
3. Donor Interventions and Leverage—Bi-lateral and Multi-lateral Aid for Oil Extraction 3.1 A major lever which can help the private sector work for the poor is the insistence on sequencing the institutional and governance capacitywhich can allow the markets to work for the poor, prior to granting aid and support for Private Sector Development in the extractive industries. 3.2 DFID’s support, via International Financial Institutions such as the World Bank Group and International Financial Corporation, for projects such as the Baku-T’bilisi-Ceyhan Pipeline and the Chad- Cameroon pipeline has demonstrated the lack of a much needed policyon the fi nancing of oil and gas developments. These projects provide evidence of the detrimental impacts resulting from the failure to sequence governance before the provision of finance. In the cases outlined below, it has been large European and US-based private sector companies that have benefited from the projects, instead of the poor in the countries for whom the aid was intended. 3.3 The Chad-Cameroon pipeline was meant to be a model for how oil projects can be eVectively developed, with the World Bank claiming that the project “is designed to carryoil wealth not to a few, but directlyto the poor”. 128 Despite high levels of corruption, weak institutions and recent conflict, the WB believed that the project could go ahead byintroducing governance measur es in parallel with the oil development. The Bank has recentlyadmitted that this approach has not wor ked.129
126 See Human Rights Watch (February2005) Violence in Nigeria’s Oil Rich Rive rs State in 2004. A Human Rights Watch Briefing Paper. 127 For an analysis, see Table 3: The local impacts of oil production on achievement of the Millennium Development Goals, p.27, PumpingPoverty . 128 World Bank press release, 10 October 2003, “Chad-Cameroon Pipeline Represents New Approach” an interview with CountryDirector Ali Khadr on the start of oil production in Chad. 129 Further information on the Chad-Cameroon Pipeline project is available on p 10 and 25 of PumpingPoverty . 3312162044 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 300 International Development Committee: Evidence
3.4 The Baku-T’bilisi-Ceyhan Pipeline has presented many problems for the host communities. Oil revenue has served to keep the undemocratic Aliyev family in power in Azerbaijan. It has locked the Georgian government into a restrictive transit contract; and has placed defense of the Turkish section of the pipeline into the hands of the Turkish Gendarmerie, a militarypolice orga nisation which has been repeatedlycriticised bythe European Court of Human Rights. 130
Direct support for oil extraction
3.5 If revenues from oil-extraction are to directlybenefit national econo mies and the poor, anytraining or recommendations to governments in developing countries needs to help them provide the framework in which the private sector can work to aid the sustainable development of the national economy. On a global scale, private sector companies are keen to position themselves to benefit from extractive industries in resource-rich countries. In the case of the former Soviet Republics such as Azerbaijan and Georgia, there is concern that development aid moneyhas been used to advise economic chan ges that will benefit the interests of foreign private sectors to the detriment of the national economyin the recipient country. 3.6 For example, from 2000–2003, DFID provided a grant of £0.6million for a project entitled “Assistance with Oil Taxation Reform”131. The report recommended to the Russian government that it slash its taxes on oil extraction, which, if accepted, would mean that the Russian government would lose considerable potential for revenue.132 3.7 In 1998 DFID gave a £95,000 grant to “develop the enabling framework for renewed investment in the Russian oil sector through well-focused training and advice on Russia’s new Production Sharing Legislation”.133 Production Sharing Agreements (PSAs) are extremelycontroversial. One P SA, for the Shell- led Sakhalin II project, is estimated bythe Russian Audit Chamber to have c ost the Russian state $19 billion compared to the old system of taxation.134 3.8 In a separate case, DFID advised Georgia on its oil and gas pipeline legislation, prior to Georgia signing the restrictive Host Government Agreement with the BP-led Baku-T’bilisi-Ceyhan pipeline consortium.135
4. How the Private Sector Engages in Development:The Extractive Industries Transparency Initiative (EITI) 4.1 The clear need to sequence governance before investment has been demonstrated in the case of Chad Cameroon pipeline project. The EITI is a welcome initiative, and is one step towards the goal of good governance in resource rich countries. Its scope however is limited, and is a poor substitute for insisting on the sequencing of good governance prior to granting aid/loans for extractive projects, both bi-laterallyand via the IFIs. Transparencyis further compromised bythe principle of aggr egation, wherebycompanies are not required to publiclydisclose their individual payments.
Conclusions — Supporting oil and gas development for export undermines the Millennium Development Goals in the countries and communities on the front line of oil and gas extraction, processing and transportation. — Support for oil and gas undermines commitments to climate change mitigation and adaptation. — Funding oil and gas extraction in developing economies neither provides the preconditions of good governance and regulation, nor the securityfor the private sector to flour ish. Furthermore it undermines the agricultural, informal and subsistence sectors . — Continued support for oil and gas extraction threatens to undermine the existing PSD policyof promoting “a coherent approach to achieving the MDGs”.136 — DFID needs to resolve the issues of how sequencing and governance are going to influence funding decisions for oil and gas in the future.
130 Further information and case studies, see p.12 of PumpingPoverty . 131 National Economic Research Associates, AUPEC Ltd, Independent Fuel and EnergyInstitute/Vanguard, 2002, Russia: Oil Tax Reform—Phase 2 Extension Final Report, Summary. 132 For further information, see page 7 of PumpingPoverty . 133 AIDA Development Gatewaydatabase, project ID 292518038. 134 Auditing Chamber of the Russian Federation (2000), Report on the Sakhalin II PSA, p.58. 135 Further details of both projects are on p 7 and 8 of Pumping Poverty. 136 P.11 DFID and the Private Sector. 3312162044 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 301
Recommendations — Oil and gas development should not be supported as part of DFID’s PSD policy. — Private sector development should involve proactive promotion of a low-carbon development model. — DFID should take active responsibilityfor its votes in MDBs, requiring a rigorous assessment of the positive and negative povertyand sustainable development impacts of PSD projects, and only vote in favour of projects that have a significant and demonstrable poverty alleviation benefit. February 2006
Memorandum submitted by the “Publish What You Pay” coalition 1. Publish What You Pay(PWYP) campaigns for transparencyover the payment , receipt and management of revenues from oil, gas and mining industries. PWYP is supported in the UK byCAFOD, Care International UK, Global Witness, Save the Children UK and TransparencyInternational UK and around the world by300 non-governmental organisations from over 50 count ries. The coalition calls for oil, gas and mining companies to be required to disclose payments (taxes, fees, royalties etc) made to governments for the extraction of natural resources for everycountryof o peration, and for governments to “publish what you earn”. Revenue transparency is essential to curb corruption, to enhance accountability of extractive companies, and to improve governance so that natural resources serve as a blessing rather than a curse for the millions of citizens in resource-dependent developing countries around the world living in poverty. 2. Some of the largest private sector companies in the UK and around the world are from the extractive industries. Extractive companies generate substantial amounts of revenue for shareholders (indeed Shell has just announced the largest annual profit for a UK-listed company, £13.12 billion in 2005) and for the countries in which theyoperate through their investments. Investment in the natural resource industries of Africa is increasing drastically—hundreds of billions of pounds in revenues will flow into poor African countries coVers bythe end of decade. The Overseas Development Institute has calculate d that due to high global oil prices, the yearly surpluses of around $35 billion received by the eight largest producer countries in Africa will significantlydwarf the total amount of aid promised byG8 gov ernments to the whole of the continent in the coming years. Transparent and accountable management of this income is vital to ensure good development outcomes. Thus, because of the significant impact of natural resources on international development and the tremendous potential to use oil revenues to alleviate the crushing povertyin developing countries, this is whyit is important to consider the private sector’s rol e in improving transparencyand the international processes set up to address the issue.
3. The Extractive Industries TransparencyInitiative (EITI) was launche d byPrime Minister TonyBlair in response to PWYP’s demands. EITI is an international multi-stakeholder process that has brought together stakeholders from the private sector, governments from the North and the South, civil society, international financial institutions and investors to develop a framework for the publication of payments and revenues from oil, gas and mining sectors. EITI’s aims are similar to PWYP’s: to increase accountability in developing countries dependent on natural resource revenues where lack of transparencyis associated with higher levels of conflict, corruption and poverty. The Department for International Development (DFID) has convened the EITI process since its inception and now jointlyho sts the international EITI secretariat with the World Bank.
4. DFID has shown great leadership in convening the EITI process thus far. The commitment of Secretaryof State HilaryBenn, Minister Gareth Thomas and the EITI sta V in DFID has been highly commendable in laying the foundations of EITI and in supporting implementing countries. DFID has hosted several successful international EITI conferences, contributed to the EITI Trust Fund to provide financial and technical assistance to participating countries, and raised EITI’s profile on an international level to bring on board more countries and companies. DFID now considers up to 20 countries to be committed to implementing EITI’s reporting guidelines.
5. However, when DFID was first assigned EITI following Blair’s announcement, it took quite a significant amount of time to get up and running fullyand lacked su Ycient resources and staV. As a result, EITI got oV to a verysluggish start and thus several prominent stakeholders remained unconvinced of its eVectiveness. However, due to demands from stakeholders and the growing interest expressed byhost- governments of natural resource-rich countries, the EITI team was boosted in numbers and granted additional financial resources to eVectivelyplaythe Secretariat function. The lesson to be learned from this is that it is critical for the Government to invest earlyin such multi-stak eholder initiatives with suYcient financial and human resources. 3312162045 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 302 International Development Committee: Evidence
6. Manywould alreadyconsider the EITI a success. However, implementatio n remains limited to a small number of countries and it is likelythat progress will continue to be slow i n others (eg despite being one of the first EITI “pilots” in 2003, Ghana has yet to report on its mining revenues). Keyoil-producing regions (North Africa, Middle East, Latin America) are underrepresented. EITI eVectiveness in the long-term is by no means guaranteed byrelyingon a voluntaryapproach at an international level. 7. The standard of implementation is also an issue of great concern. In many countries, governments and companies propose aggregating payments and revenue data, thereby undermining accountabilityof each operating companyin that country.Civil societycan also be veryweak in de veloping countries, with little capacityto be able to serve fullyin a watchdog role. In some cases, civil so cietyhas no political space in which to engage openlyin such processes. Given that civil societyconsult ation is one of the EITI’s six criteria, until all participating host governments open up a clear line of dialogue with local—and independent—civil societybodies and capacities are reinforced, implem entation will not be comprehensive. 8. The UK’s—and therefore DFID’s—involvement in EITI is not forever: DFID plans withdraw from playing the secretariat function in the near future. Discussions are underwayamong members of the EITI’s International AdvisoryGroup regarding its future governance and instit utional arrangements. It has been proposed that the secretariat be absorbed into an existing international organisation or passed onto another EITI participating country(possiblyon a rotating basis). The role of the UK Government in promoting transparencydoes not end there. How will the UK ensure transparencyrefor ms continue with EITI outside its bounds? 9. Support for EITI should be supplemented byadditional actions bythe UK G overnment to safeguard transparencyreforms in the longer-term. PWYP calls on the UK Parliament t o take firm action beyond EITI bymaking transparencymandatoryof companies and incorporating reporti ng requirements into the policies of all financial, lending and export credit agencies that provide assistance to extractive companies or resource-dependent countries. Mandatorymechanisms are complementa ryto EITI and the only comprehensive wayto integrate revenue transparencyinto international norms and standards. 10. Extractive sector companies are dominant on the London Stock Exchange and on other financial markets in the EU. In 2004, the EU adopted the “TransparencyObligations Di rective” to harmonise EU member states’ reporting requirements for listed companies. It included a provision stipulating that EU member states should encourage disclosure of extractive companypayment s to governments. The deadline for implementation bymember states is January2007. The Government and re gulatoryagencies should take concerted action to implement the Directive’s recommendations as a bare minimum for listed companies in the UK. 11. A requirement for country-by-country reporting of payments to governments should be incorporated into relevant national and international accounting standards. The International Accounting Standards Board has initiated research into a proposed International Financial Reporting Standard for Extractive Industries, providing an unprecedented opportunityto do so. A global, un iform standard for reporting by extractive companies on financial payments and commercial performance for all countries where companies are active, would bring about a level-playing field and provide vital data to shareholders and investor firms. 12. The Export Credits Guarantee Department (ECGD), which has backed several natural resource projects abroad including the Baku-Tbilisi-Ceyhan pipeline, should incorporate revenue transparencyinto all future export credit agreements with extractive sector clients. Transparencyshould be a minimum requirement to prevent corruption and to ensure accountabilityover inve stments backed bytax payers’ money. The ECGD should conform to the IFC and MIGA’s standards as they have alreadycommitted to transparencyrequirements for all natural resource project finance. The U K Government should also work through the OECD Export Credit Working Group to ensure consistencyin all E CA policies for extractive industryinsurance and guarantees. Commercial banks, and particularlys ignatories to the Equator Principles, should equallyfollow suit; the Government should encourage such steps to be taken. 13. Regarding international financial institutions and regional development banks, the policyof the Government should be that anyproject-level or country-levelfinancial as sistance can onlybe extended if revenues from extractive sector are published and audited. This would be consistent with the US Government’s position, set out in legislation passed in 2004 and 2005 concerning the re-authorisation of US funding for international financial institutions. 14. Promoting natural resource revenue transparencywill go a long wayto e nsure that the private sector contributes to sustainable development and economic growth in developing countries. To this end, a coherent and joined-up approach bythe Government that looks beyondjust E ITI is required. The International Development Committee should call for such action byall re levant parliamentarycommittees, Cabinet and their government departments. February 2006 3312162046 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 303
Memorandum submitted by SBP
1. Introduction 1.1. SBP is an independent, not-for-profit, private sector development and research company, based in Johannesburg, South Africa. We work with the private and public sectors to promote a policy, regulatory and operating environment conducive to business growth in Africa. Our core work streams involve research and policyadvocacy,the promotion of strategic partnerships for busines s growth in Africa, and the facilitation of practical business development programmes. DFID has supported a number of SBP initiatives, in areas such as building business linkages, cutting red tape, and improving the investment climate in Africa.
2. What Can the Private Sector do to Alleviate Poverty? 2.1 In developing countries, opportunities for job creation and povertyr eduction are heavilydependent on economic growth. Economic growth can provide opportunities for small enterprises to expand and extend their workforce. Given the right regulatoryconditions and suppor t, it can also facilitate the migration of informal operations to the formal sector, enabling them to expand their markets and access the benefits of a more secure operating environment. Cross-countryeviden ce shows that while growth in itself is good for the poor, much greater benefits for the lowest income groups can be achieved with the right policyenvironment. 137 2.2. In order to harness private sector energyand resources for the purpos es of economic growth, job creation and povertyreduction, it is crucial to find the right mechanisms f or engagement. SBP strongly advocates the need to find synergy and alignment between “doing the right thing” and doing what makes good business sense. Through evidence-based practice, we have been able to demonstrate to large businesses that, byre-examining their value chains and identifyingopportunities t o work with and outsource to local small enterprises and entrepreneurs, theyare able to reduce costs, incre ase market access, reduce vulnerabilityand improve qualityof supply,boost compliance with gover nment and environmental regulations, achieve branding benefits, and, of course, contribute to a more vibrant and diverse local economy. 2.3 Dialogue and cooperation between keyplayers—governmentand busines s, large corporates and small enterprises—is crucial. Our experience demonstrates that the initiatives that provide the most scope for positive impact are designed from the outset to generate systemic change, therebybecoming embedded in the workings and interactions of the relevant players. Thus our role is often one of catalyst—developing the right conditions and momentum to begin a process of change; and facilitator—providing technical expertise and setting up networks to keep the momentum going and enable an initiative to become self- sustaining. An initiative’s success is closelyaligned to the extent to wh ich stakeholders assert ownership over it, from big business to individual entrepreneurs.
3. What are the Constraints on the Private Sector in Developing Countries?How Can they be Addressed? 3.1 The four major constraints on the private sector in developing countries are: — Macro-economic management—Economic growth is highlydependent on an ap propriate macro- economic policy. Monetary policy, together with levels of public spending and taxation, exerts a huge influence on the willingness of domestic and foreign firms to invest. Weak macroeconomic policygives rise to unemploymentand inflation, reduced foreign investme nt, and constrained economic growth. — Investment climate—Countries wishing to attract foreign investment must be seen to have appropriate laws, regulations and institutions in place. Firms need to feel certain that their investments will be protected bystrong governance and the rule of law, and will benefit from business-friendlypolicies and regulations that facilitate competitio n, trade and innovation. Developing countries often have a reputation for excessive bureaucracy, red tape, ineYciencyand corruption. Large-scale and sustained eVorts are needed to change this image of the developing world, and Africa in particular, and to attract investment—byremoving re al and perceived obstacles to domestic and foreign investment and promoting the continent as an attractive investment destination. — Market access and trade are crucial components of sustainable growth and povertyreduction. Developing countries face significant obstacles in their eVorts to integrate into the world economy. These include trade-distorting policies that favour well-established economies and create barriers to entryfor the developing world. Where reform of trade policydoes occur, poorer countries often require additional support to exploit market access opportunities.
137 Growth is Good for the Poor, Dollar and Kraay. 3312162046 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 304 International Development Committee: Evidence
— Infrastructure—Inadequate infrastructure, from roads and water to telecommunications and electricity, constrain access to markets, limit productivity and retard economic growth. NEPAD Chief Executive Firmino Mucavele made the point at Davos—overcoming a lack of infrastructure and post-harvest losses are crucial to fighting hunger in Africa. A weak transportation system pushes up transaction costs, while inadequate telecommunications places serious constraints on the abilityof firms to access both customers and markets. 3.2 Comprehensive, systemic changes are needed to create incentives for the private sector to invest and expand in developing countries. This requires reform in respect of institutions and policies, and strengthening mechanisms for their development, application and enforcement. 3.3 The public and private sectors need to work together to identifythe nec essaryreforms and give e Vect to their implementation. A core part of SBP’s mandate is to identifyconstr aints to business activityand, on the basis of sound evidence, to advocate for legal and regulatoryreform. 3.4 Our objective is to improve the environment for doing business, especiallyfor small, domestic firms— therebyenhancing the prospects of economic growth and povertyalleviati on. EVective engagement is crucial. Government and business will often find mutual advantage in exploring options for reform if presented with clear evidence of where the problems lie. SBP is pleased to note that DFID has provided us with support in facilitating the dialogue and activities integral to achieving our mandate.
4. What Type of Donor Interventions has Strong Leverage in Changing the Business Climate Towards PSD and Pro-poor Growth? 4.1 Public awareness and media profile can create a powerful leverage mechanism. This is clearly illustrated bySBP’s e Vorts to highlight the costs of red tape in Africa. 4.2 With DFID’s support SBP undertook a series of studies examining business regulation and the business environment across Africa. Countries studied included Ghana, Kenya, Malawi, Nigeria, South Africa, Tanzania, Uganda and Zambia. The work, undertaken in 2003–2005, clearlyillustrated that red tape, and specificallyine Ycient and inappropriate regulations, are widelyperceived as a significan t constraint on economic growth in Africa. The findings generated bythe stud ywere discussed in various regional forums and received considerable attention. Theyalso sparked t he interest of the World Bank. The eVect was to raise awareness, often from verylow levels, of regulatorybest p ractice among public and private sector stakeholders. 4.3 SBP also undertook a comprehensive RegulatoryCompliance Cost Survey in South Africa.138 The findings are repeatedlycited in media reports and have enhanced general aw areness and understanding of the costs of compliance. Government and business welcomed the report as a keyresource to inform discussion. Regulatoryreform has since been prioritised bygovernment. The President’s 2005 State of the Nation address as well as the Minister of Finance’s Budget Speech emphasised the need to improve the regulatoryenvironment for small business. 4.4. Furthermore, on the basis of a DFID funded studyundertaken bySBP for t he Presidencyand National Treasury, the South African government is currently consulting on options for the introduction of regulatoryimpact analysis(RIA), aimed at improving the regulatorypr ocess. 4.5 While SBP welcomes the South African government’s commitment to reducing the regulatory burden, we are aware that capacitybuilding, at all levels of government, w ill be needed to put policychanges into practice. 4.6 As noted, SBP’s focus is primarilyon improving the business environme nt and promoting a legal and regulatoryenvironment conducive to economic growth. In this context, we recognise the importance of private sector development financing as an important element of pro-poor growth. SBP commends DFID’s progress in its eVorts to make financial markets work for the poor, primarilythrough the Finm ark Trust. Finmark’s research continues to inform both banking policyand the practi ce of southern Africa’s major commercial banks. Its eVorts to increase access to financial markets for un-banked and under-banked Southern Africans has begun to make a real diVerence for people historicallyexcluded from the benefits of financial services.
5. How is the Private Sector Engaging in Development? 5.1 EVorts to promote reform need to be approached in the context of structured, inclusive and eVective public private dialogue. Dialogue of this sort needs to be facilitated and supported with objective and reliable information. If institutional reform is to be eVective, the dialogue needs to take place at—and across—national, sub national and local levels.
138 Countingthe Cost of Red Tape for Business in South Africa —Headline Report November 2004, Main Report June 2005: The reports maybe downloaded from www.sbp.org.za 3312162046 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 305
5.2 To achieve regulatoryreform that will reallymake a di Verence for economic growth, the private sector needs to work with government to identifyissues and present an evid ence-based case for change. Mechanisms such as RIA potentiallyprovide a powerful tool in terms of enab ling this type of dialogue and collaboration. 5.3 As noted in 4.4., the South African Presidencyand Treasuryare keenlyi nterested in introducing RIA in the country, and organised business has strongly welcomed the possibility. An investigation carried out in 2005 byan SBP-led consortium incorporated analysisof the experience o f other countries, discussion with a wide range of senior government oYcials, piloting of a custom-made RIA tool in two national government departments and development of recommendations to the project steering committee. 5.4 The project has proved instrumental in building a partnership between the South African private sector and keygovernment departments in pursuit of a more rigorous and e Vective regulatoryprocess. Both organised business and organised labour were represented on the project reference group, together with senior government oYcials from a range of departments. Robust dialogue and debate throughout the seven months of the project helped to shape the process itself and fed directlyin to the recommendations contained in the final report. 5.5 A wide varietyof business representatives provided expert input duri ng the pilot process—a role that would be replicated on a regular basis if RIA is introduced. This input was central to exploring possible unintended consequences arising from the proposals, and developing an understanding of likely compliance costs. 5.6 The recommendations are currentlyunder consultation within governm ent. Organised labour has recognised the potential benefits of the system, while organised business is a strong proponent and will continue to lobbyfor progress.
6. What Aid Instruments can be used by Donors to Encourage PSD? 6.1 Donor interventions should aim to strike a balance between budget support to governments, and direct intervention in programmes and projects. EVorts to influence high-level policyand regulatoryreforms for PSD need to be accompanied bysupport for capacitybuilding, often at a v erylocal level. 6.2 A varietyof aid instruments have been successfullyused in di Verent contexts to encourage PSD. We will focus on two aid instruments that are particularlyinnovative and e Vective in encouraging pro-poor economic growth:
6.3 Public-private partnership and the enablingenvironment 6.3.1 Private sector investment depends on an enabling environment for business growth. A good investment climate means more transparent government; less red tape; consistencyacross the regulatory framework; quicker and more reliable settlement of commercial disputes; more eYcient and competitive revenue systems; better regulated and more competitive financial and ICT markets; and a more productive and stable labour force. 6.3.2 Improving a country’s investment climate presents an enormous scope of work. Given the scale of the challenge, we would argue that the appropriate instrument is one which enables the government, the private sector and development agencies to come together as a collective communityto make real improvements to the conditions under which businesses in Africa operate. 6.3.3 SBP, in partnership with DFID, NEPAD and a number of international advisors, have conceived the investment climate facility(ICF) as an innovative, flexible instrume nt to facilitate changes in policy, practice and perception across Africa. It is designed to operate both regionallyand at countrylevel, addressing issues relating to the political economy, while simultaneouslyproviding support for capacity building and training, generating relevant and accurate information and helping to improve Africa’s image. 6.3.4 The ICF provides an excellent model for development agencies to engage in real partnerships with the private and public sectors. It is an African-led initiative, and as such has a unique abilityto deal with the challenges of the political economy. Real change in Africa cannot take place without the commitment of African leaders—this is what the ICF brings to the table. Furthermore, the ICF is committed to actively and regularlyseek strategic advice and input from business people workin g in Africa; to operate along business lines with a defined life-span; and to work for the benefit of all firms operating in Africa, from the smallest local enterprise to the largest multi-national. 6.3.5 Keystakeholders, from African governments to local business organ isations and multi-nationals, are encouraged to identifytheir priorities and challenges, and to propos e mechanisms and programmes for reform. The approach is one of evidence-based action, hearing from the people on the ground, who know what needs to change, and working flexiblywith stakeholders to make those c hanges happen.139
139 Further information about the ICF is available at www.investmentclimatefacility.org 3312162046 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 306 International Development Committee: Evidence
6.3.6 A collaborative approach is central. African governments, donor agencies and private sector representatives will be tasked with identifying issues and gaps, working together to identifyand facilitate appropriate initiatives to address these.
Private benefits v benefits to society
6.3.7 A public private partnership is in itself a strong mechanism for guarding against the risk of private benefits crowding out public good. Stakeholders with diVerent priorities and modes of working must work in partnership and find common ground. The potential for anyone agenda to be advanced above shared objectives is thus greatlyreduced. 6.3.8 In the case of the ICF, the private sector has a significant influence in shaping priorities for intervention. However, this influence is expresslydirected toward the pu blic, rather than the private, good. The ICF’s mandate prohibits the funding of anyproject that is to the benefit of anyparticular companyor small group of companies. All projects must be seen to be for the benefit of the business communityas a whole, or broad sectors of business, or parts of the business community, such as small business. We believe that a transparent and documented decision making process will ensure that problems of distinguishing private from public interests will not arise.
6.4 Linkage programmes
6.4.1 Lack of access to services and markets creates a critical constraint on the development of business, limiting growth and employment and income generation. Business linkages mobilise and leverage the resources of the private sector to achieve development outcomes. 6.4.2 Creating linkages involves working with large firms to re-examine their value chains and identify opportunities to connect with other businesses, both large and small, to mutual advantage. This involves investment of resources byall those involved, from skills, technologyan d information to facilities, supplies and access to markets. 6.4.3 DFID’s Business Linkages Challenge Fund (BLCF) provides a proactive instrument for this purpose. It is a cost-sharing grant scheme aimed at developing commerciallysustainable business linkages that bring benefits to the poor. The BLCF provides the flexibilityto engage d irectlywith the private sector to help businesses develop their supplychains. The objective is to experi ment and innovate within individual businesses, in order to expand the possibilities to develop linkages among them. 6.4.4 The role of catalyst and facilitator is central to creating successful business linkages. This is about laying the groundwork and getting corporations and local firms involved in the initiative, providing technical capacity, facilitating ongoing dialogue and networking, and identifying opportunities to move SMEs up the corporate value chain. The keyto success is to grow commitment a nd ownership at the local level, allowing the facilitator to step back as the relationships between firms are embedded and champions within the local economytake responsibilityfor sustaining the initiati ve. 6.4.5 The value of this approach has been demonstrated through SBP’s private sector initiative (Psi) in South Africa and Tanzania. BLCF money, secured through a process of competitive tender, enabled SBP to develop the Psi. It provides a flexible and eVective model and vehicle for large corporates to collaborate with each other, with donor agencies and with governments, to promote a more joined-up economy. The Psi aims to increase corporate support for small business development, by highlighting the commercial benefits for large companies. Corporates work collectivelyto expand oppo rtunities for both small businesses and one another, through supply-chain and local content development, cost management, outsourcing, sub- contracting, procurement, lobbying and the sharing of information and experience. This collaborative process opens and expands markets for small firms, facilitating economic growth and job creation. 6.4.6 In its first five years, Psi South Africa generated contract value of over R1 billion to the SMEs involved, leading to the creation of over 3,000 new sustainable jobs. The model proved equallysuccessful in Tanzania, where it was implemented with sponsorship byBP Tanzania. Sev en large corporations signed up at the start of the project in 2002, demonstrating the appetite of the private sector to get involved. By late 2004, the number of participating corporates had risen to seventeen. The Psi is currentlybeing implemented in Malawi. SBP is working with BP Malawi and has secured buy-in from eight other corporate partners to date. February 2006 3312162047 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 307
Memorandum submitted by Tearfund
1. Tearfund is an evangelical Christian relief and development charitywo rking with local partners in 70 countries to bring help and hope to poor communities. Tearfund is a member of the Disasters Emergency Committee (DEC) and a founder member of the Make PovertyHistorycampaign.
2. Tearfund has been engaged in advocacywork on water and sanitation for ov er five years. Our submission to the International Development Select Committee enquiryon private sector development is based on our research and policywork on private sector involvement in wate r and sanitation services.
Introduction
3. A staggering 2.6 billion people lack access to basic sanitation and 1.1 billion lack access to safe water. The Millennium Development Goal 7, Target 10 aims to reduce byhalf the prop ortion of people without access to safe water and basic sanitation by2015. However, based on curren t trends most developing countries are not going to meet the sanitation target and Africa will miss the water target. The provision of these services is the primaryresponsibilityof government 140 and for a long time the prime mode of delivery has been via government-owned companies. However, most southern governments have consistentlyfailed to deliver aVordable and sustainable water and sanitation to poor people. Moreover, there is a question mark over the sustainabilityof existing water points and alreadymanyhav e fallen into disrepair.141
4. It is diYcult to summarise the causes for this failure, as each situation is diVerent and complex. However, some broad problems cut across manypublic utilities and municip al services: bad financial management, low funding priority, lack of staV experience and qualifications, absent or weak customer service orientation, political interference, little or no independent regulation and an absence of civil society consultation. Manyof these problems have been described as attributable to weak government capacity— equallyacute in urban and rural contexts.
5. The private sector is involved in responding to the lack of access to water and sanitation in many diVerent ways, ranging from the involvement of multi-national soap manufacturers in hand-washing initiatives to a boyon a bike selling water in the slums of Nairobi. However , in this submission we will focus on three areas: — Small-scale, independent private sector providing informal services to the poor in urban areas; — Large, multi-national companies and national small-scale companies contracted bythe state to provide services to the poor in urban and rural areas; — Manufacturing of hardware and spare parts.
Small-scale, independent private sector providing informal and formal services to the poor in urban areas
6. In urban areas the informal local private sector has sprung up in response to the failure of the public sector to provide water services. Manyof these private sector groups are r un bypoor people themselves, but theycharge extortionate prices. Studies show that these enterprises cha rge between 3 and 10 times the amount the middle classes payin the same cityfor their water from public co mpanies. Shutting down these providers is not an option, because theyare meeting an important need. Yet governments do need to regulate and incorporate them into a more formal operating system.
Recommendation
— Donors should support the eVorts of developing countrygovernments to establish independent regulatorybodies that set standards and monitor the activities of inform al service providers
140 As agreed at the 13th meeting of the UN Commission on Sustainable Development, 2005. 141 For example, in Uganda a studyinto Operation and Maintenance found that on ly71% of water facilities were fully functional and 38% had been broken down for over two years (Directorate of Water Development, Government of Uganda. 2001). 3312162047 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 308 International Development Committee: Evidence
Table 1: Types of small scale private sector involvement in water and sanitation services
Large, multi-national companies and domestic companies contracted by the state to provide services to the poor in urban and rural areas 7. Formalised private sector involvement in water and sanitation services is not controversial per se. It becomes controversial the more control governments give private companies in the provision or management of water supplyand sanitation services, as compared to buildi ng a sewage treatment works or providing consultancyservices, for example. In this section, Tearfun d is focusing on the former, more controversial forms of private sector involvement. 3312162047 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 309
Table 2: Types of large scale private sector involvement in water and sanitation services
CONTRACT EXPLANATION EXAMPLES
Consultancy The government contracts with the private sector to give advice on different aspects of running/reforming a water utility.
Service The government contracts out operational or adminis- trative activities. Payments to the service provider are generally related to imputs such as time and money, or outputs such as length of mains repaired. Under this model, the government is responsible for financing of operations and infrastructure upgrade and expansion.
The government is also responsible for commercial INCREASED CONTROL BY THE PRIVATE SECTOR risk. Average duration: 1 to 3 years
Management The operator delivers complete and self-contained Trinidad and service, eg:runs a wastewater treatment plant. The Tobago private sector has responsibility for operation and Puerto Rico maintenance. The government has responsibility for Israel capital investment and risk. Average duration: 3 to 5 years
BOT Building financing and operating is done by the private Scotland (Build, sector with the aim of transferring back to the public Malaysia Operate, sector. Cyprus Transfer) Panama Average duration: 20 to 30 years
Lease The private sector is responsible for management, Spain maintenance and operation of existing infrastructure France but not for new investment. The company pays a Guinea government fee for the use of assets, and in return Czech Republic keeps any profits made.
Average duration: 10 to 20 years
Concession Assets remain in government ownership. The company Jakarta, is responsible for all aspects of operating, managing Indonesia and maintaining the existing system - and they may Manila, also be responsible for new investments, eg: connect- Phillippines ing new users. Buenos Aires, Argentina Average duration: 15 to 30 years
Divestiture All assets are sold to the private sector. Responsibility England and is also handed over for operations, management and Wales investment 3312162047 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 310 International Development Committee: Evidence
8. Private sector involvement is even more contentious when it is a condition of aid, trade or debt relief. The failure of developing countries to deliver basic water services has led donors to promote exclusively, and in some cases impose, private sector participation (PSP). However, Tearfund and WaterAid research142 shows that the policyof private sector participation does not comprehens ivelytackle the underlyingcauses of the failure of government services to serve poor people. There are major problems in four keyareas: capacitybuilding, communityparticipation, finance and institutional r eform.143 9. All stakeholders agree that private companies need comprehensive regulation especiallywhen providing services to poor customers. Yet, regulation is a complex business. Even in England and Wales, regulation has failed to protect poorer customers from steep price increases.144 It is unlikelythat low capacity developing countrygovernments will be able to properlyregulate service providers. PSP is not a solution to poor governance; the problems still need to be tackled if service provision is to be pro-poor. Donors should not promote a ‘one-size fits all’ approach; instead theyshould support con text driven development that seeks to address the underlying causes of public service failure. 10. Following recent high-profile PSP failures in Manila and Dar Es Salaam, most international water companies are not looking to do business in poorer countries (apart from providing consultancyservices). Taking all these factors into account, it is doubtful whether the international private sector will playany significant role in achieving the water and sanitation target in the poorest countries. 11. The willingness of domestic and small-scale private sector to serve the poor means theydo have a more significant role to play, especially in manufacturing (see below) and even in service deliveryin urban and rural areas. Again, though this should not be the result of donor pressure. Governments should ensure pro-poor outcomes through regulation that requires companies to be transparent and accountable to local communities and sets standards for qualitycontrol. 12. The public sector is likelyto remain the largest provider of water and s anitation. In terms of improving governance with the aim of meeting the MDG water and sanitation target, the international communityneeds to prioritise: implementation focused capacitybuildin g, collection of basic data and development of indicators, the full integration of sanitation and hygiene promotion, scaling up community driven approaches and measures to ensure long term sustainability.
Recommendations — Donors should not pressurise developing countries to accept PSP in water services as a condition of aid or debt relief. The enforcement or promotion of PSP as the central policyreform limits the options available to governments and civil societyto improvise and innov ate using the best possible arrangements and maydivert attention from underlyingproblems of poor governance. Rather, donor conditions should be used to ensure that in anyreform proces s the rights of poor people are protected, their access to services increased and that the process itself is transparent and governments are activelyconsulting communities. — The UK government should insist that the European Union should withdraw its attempt to include water services in the GATS negotiations — Governments should support the proposed global multi-stakeholder dialogue on private sector involvement in water services.
Manufacturing hardware and spare parts 13. Sustainabilityof water supplyhardware has become a major problem wit hin the water sector because of the diYcultyof accessing spare parts when repairs are needed, especiallyin rura l areas. Most water hardware (eg pumps) is manufactured outside of developing countries.
Recommendation — Developing countrygovernments should consider providing the necessar yincentives and right environment for domestic companies to begin manufacturing spare parts, especiallyfast-wearing spare parts. January 2006
142 See Gutierrez et al “New Rules, New Roles. Does PSP benefit the poor?” Case studies of private sector participation in 10 countries. Tearfund and WaterAid, 2003. 143 See “Executive Summaryof the SynthesisReport” included in the aforement ioned Tearfund and WaterAid report. 144 See “Regulation and the Balancing of Competing Interests in England and Wales” included in the aforementioned Tearfund and WaterAid report. 3312162048 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 311
Memorandum submitted by Professor James Tooley, School of Education, University of Newcastle upon Tyne
1. The Impact of Free Primary Education (FPE) in Kenya 1.1 In his speech to UNISON on 16 February2006 , HilaryBenn, Secretaryof St ate for International Development, said “In Kenya, the abolition of school fees in 2002 [actually2003] helped an additional 1.5 million children into a classroom. Abolishing primaryschool fees has had a huge impact in Zambia, where enrolment of girls has increased from around two thirds in 2002 to over 80% in just two years later.” The problem with these assertions is that theyfail to take into account the contribution alreadyplayedby non-state providers. Myresearch teams explored this contribution in a de tailed international study, funded bythe John Templeton Foundation, USA, in Kenya,Ghana, Nigeria, India and China. The work in Kenya was particularlyrelevant to the issues raised byHilaryBenn, as the study first took place in the informal settlements, or slums, of Nairobi in October 2003, some 10 months after the introduction of free primary education. But the other research is also relevant, as will be discussed below. 1.2 In the slum of Kibera alone, our research team found 76 private (non-state) primaryand secondary schools, enrolling 12,132 pupils, made up of nearlyequal number of boysan d girls—6,212 boys (51%) and 5,920 girls (49%). In the five government primaryschools that were reporte d to be serving the Kibera community, the reported enrolment was 9,126. 1.3 OYcial literature reported that FPE led to an increased enrolment of 1.3 million primaryschool children in Kenya, with a reported increase of 48.1% in Nairobi. However, these figures onlytake into account enrolment in government and registered private schools; not what was happening in unregistered private schools in the informal settlements. Myteams explored this byask ing school managers of schools with primarysections how FPE had a Vected their primaryschool enrolment (ie, excluding secondaryand nurserystudents for schools that catered for these streams as well). It wa s certainlytrue that FPE had dramaticallyincreased the number of students enrolled in all five governm ent primaryschools reportedly serving Kibera, with a reported increase of 3,296 students, an increase of 57% on the earlier enrolment of 5,830. This is a dramatic increase, part of the reported increase in enrolment of 1.3 million nationwide. 1.4 However, taking into account what was happening in private schools, a diVerent picture emerges. Of the 70 private schools serving (or previouslyserving) primarystudents, it was reported that FPE had led to a net decline in enrolment of 6,571 students. In addition, we also found the school managers of 35 private schools that had closed since January2003; of these, 25 of them had closed s pecificallybecause of FPE, losing 4,600 children. 1.5 In other words, pulling this information together, we estimate that FPE, far from bringing about a net increase in student enrolment, as the headline figures suggest, had actuallyled to net decrease in enrolment of primaryschool children of 7,875. That is it was reported that there maybe a bout 8,000 fewer students from Kibera enrolled in primaryschools than before FPE was introduced. 1.6 Although these figures maybe inaccurate for several reasons—eg, theyr elied on the memoryof the manager, and maybe incorrect, or maybe exaggerated possiblybecause scho ol managers felt this would lead to financial or other assistance—theyclearlypoint to the need for a mo re sober assessment of the net impact of FPE on enrolment, taking into account enrolment in private schools for the poor as well as the more customaryexercise in examining onlyo Ycial enrolment figures. Even if we have over-estimated the number of children dropping out of private schools bya factor of four, our e stimates would still mean a “best case scenario” that the net impact of FPE was preciselythe same numbe r of children enrolled in primaryschool—onlythat some had transferred from private to government . 1.7 In other words, our research suggests that free primaryeducation mayn ot be the panacea that Hilary Benn believes it to be. OYcial figures that support his claim do not take into account enrolment in schools run bynon-state providers. We believe that the answer to the Supplementar yQuestion in particular is that the proposal for introducing free primaryeducation in countries maybe th e wrong one, if increased enrolment for the poor is what is required. We come to alternative solutions below.
2. Extent of Private (Non-state)Providers in Other Countries 2.1 The research in Kenya was not alone in finding a large proportion of school children enrolled in private (non-state) schools. It is particularlypertinent to note that we found the same in Nigeria and India, both countries that introduced free primaryeducation some time ago—so it is not simplythe case that the situation in Kenya was the result of “teething problems” that could easily be overcome. Researching low- income areas in India, Nigeria, and Ghana, revealed a large majorityof sch oolchildren attending private schools. Poor parents are apparentlyexpressing their dissatisfaction w ith government schools and voting with their feet for this alternative—surelysomething that development a gencies should take into account when theyconsider the most e Vective ways of reaching the poor. 2.2 For instance, in the “notified slums” of three zones of Hyderabad’s Old City, we found 918 schools, of which only35% were government schools, fewer than the 37% of unrecogniz ed private schools. In total 65% of schoolchildren in these low-income areas attended private unaided school. In the Ga District of 3312162048 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 312 International Development Committee: Evidence
Ghana (the low-income peri-urban area surrounding the capital city, Accra) we investigated 779 schools in the same way, finding that only 25% of these were government schools, and 64% of schoolchildren attended private school. In the “poor” areas of three local government districts (one rural, two urban) of Lagos State, Nigeria, we found 540 schools, of which 34% were government and the largest proportion (43%) private unregistered. An estimated 75% of schoolchildren were enrolled in the private school. 2.3 We also found significant numbers of children attending private school in rural Mahbubnagar (Andhra Pradesh, India) and in the villages of Gansu Province, China. In the latter, our researchers found 586 private schools, enrolling 59,958 pupils—even though it was reported byo Ycials and those conducting work for DfID (Gansu Basic Education Project) that there were no private schools in these villages. The private schools were reportedlyestablished because public schools were too far awayfor children, who would have to walk for up to five hours to attend. This was particularlyundes irable for parents of girls.
3. Quality of Private Provision 3.1 It is argued bysome that the position we found in Kenya—whereat best the re was a simple transfer of students from private to public schools—is still to be celebrated, because the qualityof education in the private unregistered schools is low. These voices would also argue that the situation found in other countries is undesirable for the same reason. 3.2 Whilst it is certainlytrue that the school buildings are inadequate, a nd teachers often untrained and paid lower than in the government schools, it seems that critics of private education provision for the poor have not anysubstantial evidence to show low quality.We took the issue of q ualityseriouslyin our research, through conducting parental focus groups, surveying inputs to schools, and bytesting up to 4,000 children in each location in keycurriculum areas and controlling for background va riables. 3.3 In Kibera, Kenya, we interviewed parents who had previously moved their children to government school, but had since returned them to private school, and found universal dissatisfaction with the public schools. Parents were dismayed by the large class sizes in the government schools (our research suggested the average pupil-teacher ratio was 21:1 in the private schools, but 60:1 in the government, nearlythree times higher), the lack of teacher attention and accountability, and the fact that there were hidden fees, in the form of school uniform requirements in particular, that made the private schools much more desirable to them. Theyalso remarked that, if theyhad been the Minister of Education, theywo uld have provided funds to the private schools to help them improve, or scholarships to parents to help them use the private schools, rather than simplygive more moneyto the government schools. 3.4 In the other countries, we sent our researchers to call unannounced on classrooms, to see if teachers were teaching, and also to surveyclassroom inputs. In everysingle case ap art from China (we didn’t do this comparison in Kenya, because there were too few cases to make it statisticallysignificant in the government schools), we found that in the private schools, teachers were more often teaching than their government counterparts, and less often absent. In Gansu, China, there was no significant diVerence in teacher activity between public and private schools. 3.5 Finally, and most significantly, we compared pupil achievement in government and private schools bytesting 2,000–4,000 children in a stratified random sample of primarysc hools at a single class or grade (either class/grade 4, 5 or 6), using tests in English, (or Chinese) mathematics and one other subject, depending on context, together with other cross-sectional data collected from the school and family. In India (three studies: Delhi, Hyderabad and Mahbubnagar), Ghana (Ga) and Nigeria (Lagos), pupil achievement was always in the same rank order—private registered schools highest, followed byprivate unregistered, with government schools trailing. These results held even after controlling for a range of background variables. In China and Kenya, the results showed no significant diVerence between private and public schools. Furthermore, in all cases, private schools were achieving the better (or similar) results for a fraction of the per pupil teacher cost. That is, it does not seem as though critics are right—the qualityof provision is not low in the private unregistered schools, at least not when compared with government provision.
4. Suggested Alternative Ways Forward for DfID 4.1 What we suggest is that, if the DfID wishes to reach the poor, there is an obvious alternative way forward—byassisting private schools that serve the poor to improve, and e xtend access to them. If increasing access to education is the aim of the MDG and EFA goals, then rather than assuming that free public education is the onlywayforward, harnessing the “harambee” (self -help) spirit that already apparentlyexists in poor areas maybe a more viable alternative for servin g the educational needs of the poor. Such an approach would see the existing private schools as potential partners in achieving “education for all”, rather than something to be replaced entirelybyfree public educ ation. 4.2 Of course, there are immediate objections to embracing private education as a wayforward. First, private schools charge fees, thus making them out of reach of the poorest. But per se this might not be an insurmountable obstacle for private schools assisting in meeting “education for all” goals. Private school fees maybe less than 5%–10% of the “absolute poverty”income figure, sugges ting that theyare within reach of manyof the poor. Moreover, the private schools themselves engage in o Vering informal scholarships (free or concessionaryplaces) for some of the poorest children to attend, up to 2 0% in some of our studies. One 3312162048 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 313
approach would be to extend this principle to create state and/or donor funded targeted vouchers for the poorest, or for girls, to use at private schools, which could potentiallyo vercome this objection. Some programmes have alreadybeen successfullytrialled in Colombia and Pakis tan, and would seem to be no a priori reasons whysuch programmes could not be introduced into other contexts, w hich could potentially overcome this first objection to private schools. 4.3 The second concern is of the qualityof provision in private schools—im plying that extending access to such schools would not be desirable because of the low qualityof educati on within them. Their quality is currentlybetter, or at least as good, as public schools. But again, assi stance could be given to the private schools to help them improve their qualityeven more, to o Ver a better deal to the poor. Such assistance could take the form of providing grants and/or loans to allow schools to provide in-service teacher training and improve their infrastructure. DfID involvement in such facilities would be a major step to help improving what appears to be the preferred educational option of the majorityof poor parents. Please find attached a copyof the following: 145 — Tooley& Dixon (2005) Private Education is Good for the Poor—A Study of Private Schools Serving the Poor in Low-Income Countries, Cato Institute. — A DVD featuring Professor Tooley’s appearance on Newsnight and his BBC World film “School’s Out” which examines the growth of private schools for the poor in Lagos, Nigeria. A more detailed report of the research findings in Kenya is also available on request, and I would be delighted to discuss some of these findings and explore their possible implications with you further. March 2006
Memorandum submitted by UK Money Transmitters Association
EVIDENCE TO THE SCRUTINY ON PRIVATE SECTOR DEVELOPMENT IN RELATION TO THE IMPORTANCE OF PERSON TO PERSON REMITTANCES AS AN IMPORTANT BUT STILL UNDER-RECOGNISED SOURCE OF FUNDS FOR THIRD WORLD DEVELOPMENT
Introduction The UK remittances market place is one of the most dynamic UK financial sectors todayand the UK Government has been seeking to encourage its growth. Reference is made in this regard to the Chancellor’s Pre-Budget Report 2005 which makes explicit reference (para 5.148) to the importance of remittances for development purposes. Moneytransfer services are typicallyo Vered both bythe UK high street banks and also bya discrete, and rapidlygrowing number, of registered moneytransfer operators (MTO’s). There are 1,950 registered MTO’s in the UK with nearly24,600 registered premises. These include well know n ames such as Western Union, Moneygram and Chequepoint, which oVer global (or near global) coverage as well as small community based moneytransmitters which mayonlyprovide services on one corridor ( eg India or Nigeria). The UKMTA represents smaller and medium sized moneytransmitters registered with HM Revenue and Customs. The UKMTA presentlyhas around 400 MTO’s in its network. According to research carried out bythe UKMTA, the vast majority(85%) of U K moneytransfer companies oVer moneyremittance services, processing moneytransfers on behalf of con sumers (often migrant workers) wishing to send remittances back to friends and familyin their countryof origin. Most of these transactions are for small sums of a few hundred pounds. Moneytransfers sent from one familymember to another represent the safes t and most secure wayof directing financial support into the hands of those who most need them in developing countries. Theyare then being used for all sorts of development purposes, including payments for education and health services. The UKMTA recognises that DFID is alreadysupporting the development of th e UK remittances market, and we applaud and support the initiatives which are alreadybeing taken; however, we believe that there is scope for the UK Government to go much further to recognise, harness and utilise remittances sent from the UK as a tool for the funding of local infra-structural projects around health and education at grassroots level in developing countries.
Remittances—the largest single source of private sector development aid According to the DFID UK Remittance market report (published November 2005), the number of people living outside their home countrygloballyis 175 million. These people fo rm the core sending group for the remittances which theysend back to their home country.Global remittance flows to developing markets was estimated at US$ 125.8 billion in 2004 (£73 billion), this value has grown byat 13% annuallysince 2000.
145 Not printed. Copies placed in the library. 3312162049 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 314 International Development Committee: Evidence
Moreover, migration and remittance experts argue that the unoYcial transfers could be as large as formal flows. This could represent to a total flow to developing countries of US$ 251.8 billion (£146 billion). These international statistics are replicated in the UK. According to the UK remittances report (DFID, November 2005), total volume of remittances sent from the UK totals £2.3 billion. The UKMTA believes that this figure can reasonablybe increased byat least 100% to take account of remittances sent through unoYcial mechanisms—this gives a total annual volume for remittances sent from the UK of £4.6 billion. The remittance funds sent byindividuals can be usefullycompared with the grant funding made available bygovernment to developing countries. In 2004–2005, DFID gave £3.8 billi on (DFID statistics). It is alreadyclear that, byvolume, moneyremittances mayrepresent a larger po tential source of funding for overseas development than oYcial aid. We believe the UK Government should be examining in a much more pro-active wayhow these remittances funds are being used on the ground now in developing countries and what potential there may be to further harness them in the future.
What impact are remittances having on global poverty? Research published bythe World Bank’s International Migration and Devel opment Research Programme in 2005 shows that international remittances reduce the level of povertyin developing countries. In a nutshell, and quite obviously, the greater the volume of remittances sent, the greater the impact in reducing the levels of poverty. The World Bank research demonstrated that a 10% increase in international remittances from each individual migrant will lead to a 3.5% decline in the share of people living in poverty.
Impact of remittances—lessons from the USA/Latin American corridor
At present, there is no firm data relating to some of the major corridors for migrant remittances (eg the Europe/Africa corridor or the Gulf States/India corridor), but possible indications maybe extrapolated from research alreadydone on another corridor, for example, the USA/Lati n America corridor. The Inter-American Development Bank (IADB) estimates that remittance flows to Latin American and Caribbean countries at over US$ 45 billion in 2004. In 2005 theywill have re ached $55 billion—higher than foreign direct investment and overseas development assistance to the region. The magnitude of such transfers raises important questions about their development impact and how national governments and the international communitycan maximise their potential. Examining the impact of remittances separatelyfrom other e Vects of migration is diYcult. However, an increasing number of studies show that the overall eVect of remittances on education and health services in developing countries is positive. Evidence indicates that children from recipient households stayin schoo l longer: — In El Salvador, US$ 100 of remittance income lowers the probabilityof chi ldren leaving school by 54% in urban areas. — In the Philippines, a 10% rise in household income through remittances leads to a proportional increase in enrolment rates among children aged 17 to 21. — Across Mexican rural municipalities, illiteracyamong children aged 6 t o 14 falls by3% when the number of households receiving remittances rises by1%. Remittances playan important role if the public health care systemis unab le to provide universal health insurance or adequate treatment and preventative care. Studies in Mexico show that: — An additional peso in remittance transfers raises households’ health care expenditure bybetween six and nine centavos. — Infant mortalityfalls and birth weight among Mexican children improves with remittances. A 1% rise in the portion of households receiving remittances reduces by1.2 liv es the number of children who die in their first year. — Remittances mayreduce infant mortalitybyimproving housing condition s, allowing mothers to stayhome and care for the newborn baby,or byimproving access to public ser vices such as drinking water. A consensus is emerging among international organisations and national governments that work in these areas. Facilitating remittance flows should allow recipient families worldwide to oVer their children a brighter future. 3312162049 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 315
Remittance Flows to sub-Saharan Africa One of the major focuses of UK Government policyin recent yearshas been to i ncrease the flows of funds to Sub Saharan Africa. Based on World Bank figures (see appendix A, Ev 318), more than US$ 13.5 billion flowed through oYciallyrecognised channels to Sub Saharan Africa in 2005. However, bearin g in mind the flows of remittances through informal channels, the total figure maybe as mu ch as US$ 27 billion. The question for UK policymakers is (taking account of what has happened in Latin America/Caribbean) how can the significant flows of remittances from the UK be most usefullyutil ised for development purposes?
What role can the UK Government play in increasing the flows of remittances? It is suggested that there are two major areas where the UK Government can have a role to increase both the volume and the impact of remittances (to sub-Saharan Africa and elsewhere). — Encourage more policydevelopment (in the UK and in receiving countries) to maximise the impact of remittances — Reduce the barriers and obstacles in the UK remittance market to increase remittance flows
UK Government—Existing policy initiatives on remittances Within the EU, DFID has proved to be a pioneer in its work on remittances—certainlyno other European national government appears to have recognised the importance of the remittance moneyin development terms. It is noted however that a report on Workers Remittances to be published shortlybythe European Investment Bank maybegin to stimulate the policydiscussion at European l evel. At the moment, the policysection within Department for International Dev elopment is to be highly commended for the work which it has alreadydone to encourage the moneytran sfer market place in the UK to develop. The UKMTA would comment as follows on the two major UK Government initiatives we know about: (i) Remittances Taskforce—a private sector led initiative which is being funded byDFID. It will aim to implement the nine recommendations in the UK remittance market report. The taskforce is still in process of being formed/work programme agreed. It is too earlyto know wh at its impact will be but it will onlybe e Vective if it has eVective buyin from all stakeholders on the steering group (moneytransfer companies and the UK banks). (ii) Sending MoneyHome website—Provided byProfile Business Intelligenc e, funded byDFID. Includes market data/price comparisons for companies sending remittances from the UK on approximately12 corridors (eg UK-Nigeria, UK-China). Some doubts remai n as to whether moneytransfer customers (as oppose to industryspecialists) are finding t he website useful. For example, currencyexchange rate information is updated relativelyinfre quently, making the website ineVective in providing the up to the minute pricing information which customers might naturallywant.
What more can the UK Government do? There are a range of initiatives which the government can take which will increase the flow of remittance funds to developing countries.
(i) Increase competition in the UK money transfer market to drive down transaction costs Costs to UK consumers for sending moneytransfers are higher than theyshou ld be. One of the major weaknesses of the UK moneyremittance arena is that the market is not fullyc ompetitive. The attitude of the banks to the remittance market is ambivalent at best and potentiallyma lign at worst. It is a reasonable question to ask whether the banks welcome the competition from moneytrans fer companies in the remittance market place. All the evidence is that UK clearing banks do not welcome the accounts of ethnic minorities and migrant workers. If a migrant does manage to open an account, charges for a bank to bank transfer are extremely high (£25 basic charge is standard), exchange rates are poor and the transfer maytake up to three weeks to arrive. Contrast this with the independent moneytransfer sector, which c an usuallydeliver a cash payment in the destination countrycheaplyand quickly(often within a few hours). Furthermore, the UK moneytransfer market is dominated bytwo large moneyt ransfer companies creating, in eVect, an oligopoly. On small send amounts, for example, the eVects of market domination by two large players is particularly marked. For sums up to £100, a charge of 14% is not uncommon. By contrast, smaller independent operators, charge 5%. The foreign exchange rates of independent money transfer companies are generally10 to 20% more favourable to the consumer than those of the oligopolistic large company. 3312162049 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 316 International Development Committee: Evidence
In passing, we point out that the UK Government has scope, relativelyeasil y, to recognize and take action to reduce the monopolyelement in one area where the government has a contro lling interest, namelythe Post OYce, which, at present, has an exclusive agreement with one large moneytran sfer company. We hope the UK Government might like to consider whether this exclusive agreement is in the interests of moneytransfer consumers more generallyor whether it would be better if the Post OYce cash handling facilities could be available to the wider communityof moneytransfer com panies.
(ii) Prevent the banks withholdingbank facilities from smaller money transfe r companies The UKMTA is concerned about the wayin which the moneytransfer sector is be ing treated bythe UK high street banks. Put simply, the banks are denying bank accounts to money transfer companies. All these MTO’s are registered with HMRC and all have anti-moneylaundering control s in place. The attitude of the banks represents a major impediment to the growth of the moneytransfer sec tor since it is not possible for a moneytransfer companyto o Ver a moneytransfer service without a bank account. Evidence gathered byUKMTA suggests that as manyas 75% of moneytransmitte rs have experienced problems obtaining or retaining a bank account. 67% of banks have responded to moneytransfer companies seeking accounts that theydo not provide services for moneyservice busin esses. 37% of banks have given no reason for not oVering account services to the moneytransfer companies theyhave refused. The UKMTA has recentlysubmitted evidence on the banks attitude to smaller mon eytransfer companies to the TreasurySelect Committee looking at the issue of Financial Exclusion. There is no prospect of the UK remittances market place reaching its full potential if banks continue to act unreasonablyto denymoneytransfer companies access to banking facil ities. The big risk arising from all of this is that, if moneytransfer companies ar e prevented from operating legallythrough lack of a bank account, theywill then exit the formal secto r but continue to trade in the black market. The predominant concern of the government and law enforcement agencies must surelybe to keep as manymoneytransmitters as possible operating in an open and regulated e nvironment. Indeed, the importance of this approach has alreadybeen emphasised to the UKMTA bythe Metropolitan police.
(iii) Get the regulatory burden right There needs to be a level playing field for regulation which should then be equallyapplied across those in the remittances market place (both moneytransfer companies and banks) . Given the diVerent regulators operating in the remittances arena (both FSA and HMRC are involved), this has not been achieved as yet. Regulatorymeasures that have an impact on senders in deterring him/her fr om sending will obviously reduce the volume of remittances received in overseas countries for development purposes. Typically, those sending moneyremittances are onlysending a few hundred pounds. Sending c ustomer ID requirements should not be set at a reasonable level and should not be set in such a wayas to be prohibitive for the sending customer. The registration regime which moneytransfer companies are required to fo llow (with HM Revenue and Customs) does not help them obtain banking facilities. We recognise that HM Treasurywill shortlybe launching a review in this area in April 2006 and the UKMTA hopes to be activelyengaged with this. We believe there needs to be greater dialogue within government between the Treasuryand DFID as to what should be the right level of regulation to enable the maximum volume of remittances to be sent.
(iv) Improve UK Government policy towards Diaspora communities livingin UK so as to better harness remittance flows The huge number of migrants worldwide and their engagement with the home countrymeans that the UK Government needs to promote an outreach policyto the Diaspora living in the UK. This would enhance and strengthen links between the two and ensure joint development strategies so that the impact of remittances in developing countries can be maximised. Greater contact with the Diaspora would encourage deeper understanding as to whyremittance flows often pass through unoYcial channels and what can be done to address this. It is recognised that formal services are often unavailable in remote areas or remitters send moneythr ough trusted familyand friends to avoid formal interventions or government corruption.
(v) UK Government should think more strategically about the role of remittances in reachingdevelopment targets (for example, Millennium Development Goals) At the G8 meeting at Sea Island Georgia in June 2004, leaders of the developed world came to together to agree an ambitious programme to maximise the potential of remittances as a source of funds to reduce povertyin developing countries. Since June 2004, the UK Government has be en taking steps to implement this agenda and has made some progress. 3312162049 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 317
The present government position, as expressed in the Pre-Budget Report 2005 is as follows: “Remittances have a significant positive economic impact in developing countries, although theyshould be seen as a complement to aid, not a replacement.”
The UKMTA is pleased that remittances are being recognized, but believes that there is scope to go much further to maximise the potential of remittances as a source of funds for development. Remittances represent an investment bya migrant in his countryof origin which he/she has left, bu t has not forgotten.
Remittances have within them the potential to assist expatriate workers who feel a commitment to the future of their homeland, and beyond that, a commitment to their specific province and to their village of origin. The UKMTA would like to see the UK Government explore more actively an agenda to encourage the use of remittances in developing countries for structural development at a local level.
The UKMTA believes it would be possible to enable migrant workers sending moneywith registered UK moneytransmitters to earmark a portion of an individual transaction to a s peciallydesignated countryfund (eg Nigeria, Ghana) and even to a specific project in a particular geographic location.
One of the keyfundamentals for the success of this initiative will be to ide ntifysuitable projects in the target countries and also to ensure that these were promoted to migrant workers in the contributing countries. We are certain that DFID and its voluntarysector partners coul d help us to identifysuitable projects in developing countries.
The projects would be local enough for the migrant to identifywith the bene fits generated for the local communityand might include schools, irrigation systems,health clinics , etc.
And, of course, this initiative has the potential to go much further. It would be a step in the right direction if the UK Government would be willing to match-fund, in some way, the contributions made byexpatriates. It would be even more advantageous if HM Treasurycould be persuaded to see p erson to person money remittances as a sort of donation and could be encouraged to make them tax-deductible. To date, the Treasuryhas adopted no kind of view on this, but have suggested that theyar e open to suggestions.
The UKMTA recognizes that the government has a Millennium Goal target to reach by2013 such that 0.7% of GDP should be made available for Overseas Development Aid. It seems likely, that, if agreed, the Private Members bill being promoted byTom Clarke MP (International Devel opment—reporting and transparency) will lead to more on going scrutiny of progress towards this target.
The UKMTA points out that it is inevitable that a percentage, maybe even a large percentage, of the remittances which are sent bymigrants each yearare contributing in some w aytowards Millennium Goal targets. Yet, at present, this contribution is being ignored. At the same time, we recognize also remittances also represent a private transaction within families, and this should be acknowledged too. In policyterms, it is a question of getting the balance right.
We suggest that a detailed debate needs to take place in Parliament as to what extent remittances can and should be included in the progress of the UK towards it Millennium Goal targets.
There is obviouslyone opinion that saysthat onlythe UK Government can con tribute towards Millennium Goal targets and that achieving Millennium Goals can onlybe ac hieved from the oYcial grant aid budget. However, there must be another view which recognizes as important and profound the financial contribution that migrants make through their labour and through the funds theyrepatriate.
There is a real risk that migrant diasporas, those who have most personal attachment to development in their countries of origin and those who those are alreadycontributing sub stantiallythrough their remittances, are being left out of the equation. Their contribution, in development terms, is eVectively being ignored.
We believe this is a philosophical point which the Committee might like to consider so that the contribution that migrants are making through their remittances can be acknowledged and harnessed in the most eVective ways possible.
In summary, the UKMTA believes that the UK Government (and governments worldwide) should pay more attention to integrating ‘migration policy’ within the larger global dialogue on economic development and povertyreduction. In the past much attention has been paid to the movem ent of goods and finance between countries. It is now time to paymore attention to the movement of pe ople between labour- importing and labour-exporting countries. The development impact of remittances theysend home is an inevitable and welcome corollaryof this. March 2006 3312162049 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 318 International Development Committee: Evidence
APPENDIX A
Estimated workers’ remittances to developing country by region in 2005 (US$ billions)
Sub-Saharan Africa 8.1 Europe and Central Asia 19.9 Latin America and the Caribbean 42.4
Middle East and North Africa 21.3
South Asia 32 East Asia and the Pacific 43.1
Source: Global Economic Prospects 2006: Economic Implications of Remittances and Migration, page 88, World Bank: Washington, DC, 2006
Memorandum submitted by the UK Social Investment Forum (UKSIF)
1. UK Social Investment Forum 1.1 The UK Social Investment Forum (UKSIF) is the UK’s membership network for sociallyresponsible investment (SRI). UKSIF’s primarypurpose is to promote and encourage the development and positive impact of SRI amongst UK based investors. UKSIF believes that all material social, environmental and ethical (SEE) issues should be integrated into standard investment practice and that individual investors should be able to reflect their values in their investments. 1.2 The Forum was launched in 1991 to bring together the diVerent strands of SRI nationallyand to act as a focus and a voice for the industry. UKSIF’s 200! members and aYliates include retail and institutional fund managers, financial advisers, SRI research providers, consultants, trade unions, banks, building societies, communitydevelopment finance institutions, NGOs and individ uals interested in SRI. Information on the UK Social Investment Forum is available at www.uksif.org.
2. UKSIF Financial Services Members and International Development 2.1 UKSIF members provide and use financial services, and related services, which support international development in a range of ways. Examples include:
2.2 Investment in the shares of international companies operatingin develop ingcountries 2.2.1 These investments maybe held in segregated mandates or in pooled inv estment vehicles such as ethically-screened funds. In some cases, social responsibility criteria are used to select the investments held. In others, the investment institution engages with these companies as responsible owners in order to monitor and, where necessary, improve their policies and practices in relation to developing countries. Screening and engagement maybe used to deliver long-term shareholder value, for exampl e byreducing potentially material social, environmental and ethical risks (see 3.3 below), and/or to address the personal values of investors. 2.2.2 The Just Pensions programme (described below) addressed the important but challenging agenda of influencing corporate behaviour bymeans of working with institutional in vestors on international development and sociallyresponsible investment. 3312162050 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 319
2.3 Providingfinance for microcredit, fair trade and similar purposes 2.3.1 For example, Barclays has recently launched its Microbanking Service in Ghana; the Co-operative Bank and Standard Life were members of the $75 million Global Commercial Microfinance Consortium launched in November 2005; Shared Interest provides trade finance for fair trade as well as raising £5 million in a series of micro-credit bonds to support micro-credit lending; the International Development Investment Unit of Triodos Bank finances fair trade and microcredit in developing countries. 2.3.2 Shared Interest will shortlybe publishing their first Social Accoun ts. Conclusions from the draft version of these accounts include: — Ethical Funds which finance trade achieve a multiplier eVect. Even though some of Shared Interest’s members’ capital is invested in the UK for liquiditypurposes, the value of trade flows financed was 110% of the value of members’ capital invested. In addition, providing finance in this wayto 364 fair trade exporters (producers) facilitates their trade with 3 8 importers (buyers) potentiallybenefited the lives of some half a million artisans, workers an d growers. — Fair trade finance does impact the lives of the poor—if not so much the poorest. Plotting trade finance payments against UNDP’s Human Development Index (HDI), Shared Interest found that most payments (c.66%) went to medium HDI countries. Low HDI countries received c.16-18% with the balance going to the poorer parts of HDI countries or to processors or wholesalers in developed countries. This lower percentage to low HDI countries was to be expected because the poorest lack the infrastructure to engage competitivelyin internationa l trade. 2.3.3 It is likelythat there would be investor appetite for appropriate op portunities to channel further finance into microcredit, fair trade and similar purposes. Such opportunities include further major investments such as November’s consortium fund.
2.4 Takingaccount of social and environmental issues in project finance 2.4.1 UKSIF members such as Barclays and HSBC are among the financial institutions that have adopted the Equator Principles, the voluntaryguidelines for managing so cial and environmental issues in project financing.
2.5 Providingother support 2.5.1 For example, Triodos Bank is helping six developing countrybanks in which theyhave an investment to introduce sustainable reporting under the Global Reporting Initiative (GRI) guidelines. This enables these banks to communicate performance results and impacts with regard to the social, economic and environmental aspects of their agenda as well as the financial.
3. UKSIF Evidence from the Just Pensions Programme
3.1 One of the principal aims of Just Pensions was to educate and influence UK pension funds and other institutional investors about the importance of international development issues in their practice of socially responsible investment, with the aim of therebyinfluencing the behaviour of companies investing in or trading with less developed countries. 3.2 Just Pensions was initiated in autumn 2000 bythe development charitie s Traidcraft and War on Want as a two-year project funded by the Community Fund. It became a programme of the UK Social Investment Forum in 2002. The 2002-2005 Just Pensions programme received core funding from the Department for International Development (DFID). 3.3 Just Pensions produced a range of material about pension investment and international development. These are available at www.justpensions.org. Materials include: — A series of independent surveys on responsible investment by UK pension funds. — Eleven “sector notes”, compiled with asset managers, to help trustees to understand potentially material social, ethical and environmental risks in keyFTSE industrysec tors. Each includes an international development focus. — “An Assessment of SRI Engagement: A Studyon SupplyChain Labour Standard s” (December 2005). The studyoutlines the circumstances in which SRI engagement is mos t likelyto be e Vective in contributing to corporate change, both generallyand specificallyon su pplychain labour standards issues. It concludes byhighlighting keybest practice recomme ndations for asset management houses. — Policysubmission to the Department for International Development “Mak ing Socially Responsible Investment work for the Poor” (January2002). This paper sets out the kinds of issues that need to be addressed in answering the central question: ‘How can the SRI trend be made to work most eVectivelyto achieve povertyreduction in developing countries?’ 3312162050 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 320 International Development Committee: Evidence
3.4 An independent evaluation of the Just Pensions programme was carried out byAshridge in the second half of 2005. Its report will be available on www.justpensions.org from late February2006. The evaluation concluded that — Trustees believe that there is a strong need for organisations to raise awareness and understanding on integrating international development and social/environmental issues into investment practice. — Trustees believe that change in investment practice is occurring, although this is diYcult to achieve, takes time and requires influencing a broad range of groups. — Given the challenges involved, Just Pensions has been an eVective programme. — A sustained commitment will be required for a further five to ten years, working across the investment community, to deliver the changes needed. This needs to place raising awareness and understanding about international development issues within the context of raising awareness and understanding of the importance of integrating social/environmental issues more generallyinto investment practice. 3.5 Responding to this requirement for a sustained commitment addressing a broad range of social/ environmental issues, UKSIF plans to launch a follow-up programme in Spring 2006 to continue to influence pension funds and institutional investors. This will use and build on the materials and learning from Just Pensions. February 2006
Memorandum submitted by the United Nations Development Programme (UNDP)
1. What can the private sector do to alleviate poverty? 1.1 Development is bynature multi-dimensional and the development proce ss is a holistic course of action that requires strategic and integrated interventions to ensure that the eventual solutions address the causes rather than recommend ad hoc cures. 1.2 Economic growth and sound macroeconomic policies are necessarybut no tsuYcient conditions for sustainable human development and meeting the Millennium Development Goals (MDGs). To make a real diVerence in the qualityof the life of the people at the base of the pyramid,the economic growth has to be eYcient, sustainable and most importantly, equitable146. Accordingly, quality of growth147 is as important as the quantum and pace of growth. High qualitygrowth is grounded in human r ights and justice (including for future generations) and builds upon participation, transparencyand human empowerment. 1.3 There is a consensus in the development communityon the important role of the private sector in economic growth, job creation and contribution to poor people’s incomes. The MonterreyConsensus highlights the necessityto engage the private sector as a prerequisite fo r povertyalleviation. The UN Millennium Project Report urges the private sector to playa central role in reducing income povertyt hrough inclusive and sustainable economic growth, while encouraging governments to provide the enabling environment for them to do so. In highlighting the need for new partnerships to tackle global challenges and achieve globallyagreed priorities, the Report of the Panel of Eminent Per sons on United Nations-Civil Societyrelations, underscores the need to connect the local with the Glob al and the critical role of non state actors as partners in policymaking and decision making. Accordingly,the report points out the need for the UN to strengthen its relationship with the private sector. 1.4 While a vibrant domestic private sector is a sine qua non for achieving the MDGs and ensuring equitable development, with increasing globalization, the traditional role of the State is changing significantly. Since the poor interact with the private sector both as consumers and as entrepreneurs, private sector is progressivelyplayingan important role in delivering goods and services for development including in undertaking activities for povertyalleviation. The UN’s Commission o n the Private Sector and Development in its Report148 asserts that the “savings, investment and innovation that lead to development are undertaken largelybyprivate individuals, corporations and communi ties.” Simultaneously, civil society organizations are vital to bring about participatoryand accountable app roaches to meet the MDGs and improve the qualityof life of the poor. Recognizing the critical role of go vernments in creating foundations for a healthyand dynamicprivate sector, the Commission advocates the nee d to develop innovative partnerships models (between government, multinational companies, local companies and civil society) to
146 The use of equitycompared to pro poor endorses lack of dichotomybetween pr o poor and pro rich growth. Sustainable growth bydefinition must be equitable and therefore “pro poor.” Please als o refer to UNDP PolicyNote: The Role of Economic Policies in Poverty Reduction. 2002. 147 For instance, redirecting resources to the sectors in which the poor work, the areas in which theylive and/or the factors of production that theypossess, the emphasis being on raising the productiv ityof the poor. 148 UnleashingEntrepreneurship—MakingBusiness Work for the Poor . 3312162051 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 321
harness resources and capacityof the private sector to benefit national de velopment. Also emphasized is the need to develop capacityand skills at local and national levels including those for entrepreneurs working for the bottom of the pyramid. 1.5 An eYcient private sector requires sound domestic macro environment including trade policies and institutional foundations and adequate capacitythat maximize the benefi ts from the macro global environment as well as distributional equity. This is the basis for public private partnerships (PPP) as a preferred instrument for domestic private sector development. The central role of the private sector does not in anywaydiminish the role of public governance. An enlightened and st rong State is not onlya prerequisite for a vibrant domestic private sector but also for harnessing its strength for equitable development. 1.6 An eVective approach envisions a strategic partnership of the government with the private sector as well as the civil societywith each sector activelyparticipating in deliv ering national priorities bybringing proportional resources to the process and sharing relative responsibilities for equitable and eYcient development of the domestic private sector149. Also, partnership with the private sector is no longer simply about mobilization of resources; it is also about learning from its wealth of knowledge about entrepreneurship, management skills and global networking. 1.7 The private sector is keen to harmonize private interest with public interest. Increasingly, the private sector is promoting new approaches to “convert the povertyinto an opportu nityfor all concerned,” including the poor people and the private sector companies. In partnership with “the poor” the private sector can motivate win-win entrepreneurial scenarios that while being profitable improve the conditions of the people living at the margin150. It is the inclusive partnerships and a shared agenda between small and large firms, governments at all levels, civil societyand the development a gencies that will unlock such opportunities. At the same time it is to be ensured that state and public policies work, and that necessary regulation for creating greater equityis in place and it works.
2. Constraints on the private sector in developing countries—Removal of barriers to make domestic private sector development work
2.1 UNDP’s experience151 informs us that lack of adequate capacityand the absence of innovative partnerships and business models, of a policyenvironment to facilitate c ooperation and partnerships between public and private actors and access to financing, of safetynet mec hanisms and basic services are barriers to private sector development. Also, while a high internal rate of return is necessary, it is not a suYcient condition for the success of domestic business. Non-economic barriers, consisting of inadequate policies, institutions, legal frameworks, insuYcient knowledge among developers and lack of innovative and development oriented financial institutions are major constraints to attracting and sustaining private sector investment. Economic development stalls when governments do not uphold the rule of law which provides a solid foundation for a robust private sector. 2.2 The conditions vary—depending on the composition of the existing private sector, annual economic growth and institutional capacities. Accordingly, while the conceptual approach for developing the domestic private sector to contribute towards meeting the MDGs is common, specific interventions have to be tailored to the needs of individual countries. In addition, the private sector needs significant substantive support from the development communityto define win-win interventions. P ublic investments are crucial for “private based economy” to allow the private sector to create employment and sustain long term economic growth. In the absence of adequate infrastructure, health services, education, market forces alone can accomplish little. 2.3 An absence of eYcient, transparent and participatorypolicies, mechanisms, and institu tions in the developing countries can increase transaction costs and present major barriers to the implementation of public private partnerships. Furthermore, access to finance and skills and knowledge is an imperative for entrepreneurship and the private sector to flourish in an economy152. In addition to having strong financial institutions, adequate skills and capacity—with an emphasis on women and youth—are critical for sustained economic growth, and central to the start-up, growth and productivityof firms. The policy environment therefore must permit access to finance, risk management tools, and knowledge base, and provide opportunities for capacitydevelopment and strengthening skill s. 2.4 Micro, small and medium enterprises define the local private sector in poorer communities. These enterprises employa large portion of the labor force, often as “survivali st” employment and in the informal economy. In several of these countries 40% of the economy is informal. And women constitute the majority
149 For the developing countries, the PPP model must address the needs of the poor and the disadvantaged, reduce their vulnerabilities and generate equitable economic growth and development. The Millennium Project’s analysis has found that small amounts of moneywell targeted to improve basics like water access; i nfrastructure education, etc. can help to reduce the extreme poverty. 150 The world’s fastest growing market now, it argues, is at the “bottom of the pyramid.” With nearly four billion people living on less than US$1,500/year, the opportunities for the private sector are sizeable. 151 UNDP PSD Tool Kit (Draft, First Phase); also refer to www.results.undp.org 152 UnleashingEntrepreneurship: MakingBusiness Work for the Poor , UNDP, 2004, pp10–12. 3312162051 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 322 International Development Committee: Evidence
of micro-entrepreneurs in these informal economies153. These enterprises operate outside the legal system with weak capacityand limited market information that not onlycontribut es to their low productivitybut also act as barriers to growth. Also, theylack access to financing and long- term capital leading to uncertainty and lack of sustainability154. A combination of heavyregulation and weak propertyrights further const rains the poor from doing business in their countries. In order to create business opportunities for the people at the bottom of the pyramid and to “do greater business with the poor”, governments have to create enabling conditions and reforms for the formal economyand to level the playingfield to reduce informalityin the economy155. Also, the poor people have to be empowered to take advantage of their currently“dead capital”156. 2.5 The policyreforms and capacitydevelopment issues relating to inform al economies cover a broad set of issues ranging from land titling and propertyrights, common propertyr esources and management, labor markets, social safetynet mechanisms and security,access to credits and women’s legal rights. Critical to addressing the issue of informalityis defining innovative approaches tha t would lead to creation of entrepreneurs while generating long term assets and institutions to enforce them. 2.6 However, reducing informalityin the private sector should be managed with caution and diligence. In the absence of a well developed rule of law, mechanisms that ensure accountability, transparent enforcement institutions and other enabling conditions that are able to translate the benefits to the private entrepreneurs of being in the formal sector, the transition process should be handled incrementally, creatively and strategicallyto mitigate the risks and harm to the livelihoods of the new e ntrepreneurs it set out to help. 2.7 Policyreforms accompanied bycapacityand skills building can lead to significant benefits. The payoVs from reform in these areas are significant. Macroeconomic reforms can also assist in providing greater market access to the people who require it. A hypothetical improvement to the top quartile of countries on the ease of doing business can provide up to 2% points more annual economic growth157.
3. Donor Interventions that leverage changing the business climate towards PSD: Strategy for PSD and Equitable Growth
3.1 A significant amount of work is required to be undertaken at the countryl evel and bythe private sector to ensure that partnership eVorts are translated eYcientlyin to livelihoods creation, fulfilling the MDGs and sustaining development beyond. The challenge of domestic private sector development has to be addressed from the perspective of capacitydevelopment (human, institut ional and system-wide), enabling environment and good governance. Additionally, the interventions should address issues relating to reducing informality, access to financing and risk management (viz, microfinance, micro-insurance158, remittances159, etc), providing access to skills and training for facilitating roles for the contribution of the international and domestic private sectors in helping countries to realize the MDGs160, catalyzing and brokering public private partnerships (PPPs) for deliveryof basic servi ces161, and mobilizing PPPs for creation of micro-entrepreneurs162, including in post disaster recoveryand rehabilitation processes 163. 3.2 Private sector development through public private partnerships should catalyze access to basic goods and services bythe poor people and communities and strengthen livelihood s while promoting gender equity. There is a compelling need for reforms aimed at the smaller scale indigenous enterprises, viz, micro and small enterprises that in most developing countries are the primaryengine of jo b creation and domestic commerce164. These demand based participatoryinterventions should be grounded in pa rtnerships with the private sector and civil society, aim to facilitate economic and governance reforms, and develop capacity, skills and knowledge to provide policyanalysisand networking tools.
153 In the Philippines, women own 44% of the micro enterprises, more than 80% in rural areas. In Zimbabwe women run the majority(67%) of enterprises and small enterprises. UnleashingEntrepreneurship . P9. 154 Richer countries see far less informal and much more small and medium enterprise activity. 155 The policyreforms and capacitydevelopment issues relating to informal e conomies cover a broad set of issues ranging from land titling and propertyrights, common propertyresources and manageme nt, labor markets, social safetynet mechanisms and security, access to credits and women’s legal rights. Concept Note. High Level Commission on Legal Empowerment of the Poor. Launched byNordic Countries. Olav Kjorven. 156 It refers to informal assets that even though being significant, cannot be used as collateral to obtain loans. De Soto, Hernando. The Mystery of Capital. Black Swan. 2000. UK. 157 DoingBusiness in 2005: RemovingObstacles to Growth . The World Bank. 2004. 158 UNDP, Allianz and GTZ. Terms of Reference. Microinsurance: Demand & Market Prospects: India, Indonesia, and Laos. January2005. 159 UNDP. Remittances Roundtable Summary: next Steps. January 2006. 160 http://www.undp.org/business/docs/mdg–business.pdf 161 Public Private Partnerships for Urban Environment (PPPUE); http://pppue.undp.org/ 162 Empoweringthe Poor ThroughMarkets: UNDP Experiences . BRSP and BDP. 2004. New York. www.undp.org/business/ docs/empowering–markets.pdf 163 UNDP: Empowering communities to meet water and sanitation needs sustainablyin the recoveryof selected Tsunami aVected countries. Partnership with UNF and the Coca Cola Company. 2006. 164 Launching the Millennium Project Report & priorities for 2005. Mark Malloch Brown. 17 January2005. 3312162051 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 323
3.3 Based on the Outcome Document of the 2005 Summit in September, the governments have committed to develop comprehensive frameworks to achieve the MDGs before the end of 2006. It provides an outstanding opportunityto build the necessarylinks between private s ector development and the PRS process and ensure that PSD is an integral component of the national planning and critical to overall eVectiveness of development policies and aid resources. Based on a forward looking analysis of global development trend and a preliminaryassessment of the main lessons learne d and results of UNDP’s ongoing activities and demand from the developing countries, the activities can be classified as follow:
3.A. Improving the environment for private sector development and private investment 3.A.1 Interventions under this categorycould encompass the state of gove rnance, macroeconomic and microeconomic policies, public finances, financial systems including social securityand other basic elements of the policyenvironment that are largelydetermined bythe domestic deci sion makers. It is anticipated that good governance structure, enabling environment, and directed capacity development with and emphasis on women and youth, achieved in a participatory manner will lead to reforms that bring about institutional strengthening and frameworks to unleash and foster the private sector. 3.A.2 Accordingly, the interventions would build upon knowledge base and experience in areas relating to democratic governance, enhancing equity, decentralization and local governance including transparency, accountability, access to justice, and public administration and civil service reform. The eVorts would focus on strengthening the enabling environment including transformation of the informal sector, supported by transparent rules and legislation, incentives, accountabilitymechani sms and simplified access to financial and other resources. 3.A.3 The experience of the Special Unit for South-South Partnerships (SUSSP) of UNDP indicates that access to financial services is the keyfor the development of small and medi um enterprises (SMEs). The strategies and approaches are countrybased as well as region specific; for instance, while diVerent strategies have been used in Africa and Asia to make financial resources and services available for the development of SMEs, there is significant opportunityfor the countries in the regions t o learn from each other.
3.B. Innovative PPP models for supporting entrepreneurs and small enterprise development 3.B.1 Domestic private sector development is based on unleashing the potential of the private sector and entrepreneurship in developing countries as well as engaging the existing private sector nationallyand internationallyin meeting that challenge. It is through PPP that the deve loping countries can create employment and income growth as well as improve the quality of life for the poor. The PPP is based on sharing of resources, and rewards for potential deliveryof the service an d/or facility. It is therefore critical to look far beyond the contributions of the private sector that take the form of Corporate Social Responsibility(CSR) alone—however important and welcome that alwayswi ll be. In fact the CSR contributions must lead to outcomes that provide tangible and sustainable basis for strengthening the domestic private sector. 3.B.2 Development partnerships, like PPPs represent a new model in development cooperation165. There is growing evidence from the developed countries, where PPP mechanisms have been used for government procurement and finance, that theyactuallydo deliver better value. Howev er, the scope of what can be done in PPP in developing countries is much wider and it is expected that such partnerships will be an enduring feature of domestic private sector development as well as government procurement. Given the diverse interpretations and definitions of PPP it is important to develop a coherent demand based framework for meeting the MDGs while complying with the recommendations of UN Reforms exercise. 3.B.3 However the importance of this kind of development partnerships is not yet matched by capacity at the national levels to develop and successfullymanage them. In part, th is is because such partnerships will be determined after assessment of the types of partnerships that will work best in diVerent circumstances166. Also, such development partnerships will work best if the national planning processes are interdisciplinaryand cross-sectoral. Interventions under this compon ent could therefore seek to build upon successful models that can be replicated and/or taken to scale, validate new models and explore out-of-the- box opportunities that will provide business opportunities in bottom-of-the-pyramid markets. It is anticipated that the activities will lead to sustainable deliveryof basi c services, facilitate access to broader financing and market based safetynet options, and assist in building skill s and knowledge development. Such interventions could lead to creation of demand based PPP Development Facilities (PDF) at national and/or local levels and ensure equitable, viable and sustainable partnerships for PSD at the bottom of the pyramid.
165 PPP Spectrum of Options, Annex I, Ev 325. 166 As Dani Rodrik points out, open economies and “best practice institutions are seldom keyfactors at the outset in promoting economic growth in developing countries. Each successful country’s domestic investors are motivated byverycountry- specific and government led strategies “requiring local knowledge and experimentation for successful implementation.” 3312162051 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 324 International Development Committee: Evidence
3.C. Creation of knowledge products and Networking systems 3.C.1 There is a critical need for a coherent structure and provision of real time information and knowledge for private sector development. Knowledge sharing and networking including learning are intrinsic to an eVective and credible private sector development strategy. Interventions could aim to provide a knowledge sharing and networking platform to regularlyprovide global i nventoryof lessons, good practices, new information, and cutting edge knowledge, and guidance to advance private sector development as an integrated planning strategyfor national planning pri orities. Information could be shared through mail-groups, workshops and other initiatives to promote peer interaction and mutual support as well as build upon, complement and partner ongoing activities and actors. 3.C.2 It would also include guidance manuals, diagnostic tools and user-friendlyimplementation toolkits that can catalyze, at the national level, public private partnerships for pursuing business opportunities at the bottom of the pyramid markets as well as for sustainable delivery of basic services. The toolkits would provide concrete demand driven program frameworks for PPP and private sector development. 3.C.3 While promoting advocacyand communication strategies to engage di verse stakeholders in the partnerships would be an important component, the knowledge management platform would also promote peer to peer learning and facilitate South-South transfer of knowledge, skills and relevant resources for PSD and PPPs. South-South Cooperation has taken on a special importance over the last few years, especially within the context of the increasing weight manydeveloping countries are gaining in the global economy and the benefits accrued bythe sharing of experiences and peer review.
4. How is the Private Sector engaging in development? As a follow up to the “Unleashing Entrepreneurship”, nearly50 UNDP countr yoYces are engaged in activities relating to private sector development. Selected Examples from UNDP’s Engagement, include — Creation of new Products and Markets: UNDP, Allianz and GTZ partnership for creation of demand based micro-insurance products; — Provision of goods and services for creation of micro-entrepreneurship as a part of the recovery process following a natural disaster: UNDP, UNF and The Coca Cola Companyp artnership to provides communitybased sustainable water and sanitation services to se lected Tsunami aVected countries; — Partnership with business to help address entrepreneurial solutions to povertybyaddressing challenges at relevant points in the investment cycle to reduce the risks and associated investment costs: UNDP’s Growing Sustainable Business Initiative — Alleviating povertythrough public-private partnerships in poor citie s throughout the developing world byenhancing access of the urban poor to basic services such as water, sanitation, solid waste management and energythrough inclusive partnerships between local gove rnment, business and communities. UNDP’s initiative on Public-Private Partnerships for the Urban Environment (PPPUE). — Facilitating the creation of a “Private Sector AdvisoryBoard” under the aegis of the High Level Commission on Legal Empowerment of the Poor. The private sector representatives from the developed and developing countries and spanning the spectrum of private sector constituents will assist in translating the Commission’s recommendations in to field based activities. UNDP and UNECE. — Promotion of entrepreneurship, assistance and linkages between businesses (micro, small , medium and large firms) and both, domestic and international markets through business development services and access to finance, viz., Enterprises Africa, African Management Services Company(AMSCO), Mongolia Enterprise, Business Incubator Initiative (B ulgaria). UNDP Regional Bureaux, UNDP CountryO Yces and local private sector in respective regions and countries. — CSR Related: Working with Global Compact and its members to set up national platforms for public policydialogue and partnerships building. UNDP HQ and UNDP Countr yoYces. February 2006 3312162052 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 325
Annex I PPP Spectrum of Options
Broadest Definition of “Public-Private Partnerships”
Agreeing Traditional Joint Passive Public Frameworks Public Ventures Investment Local Agenda 21 Contracting Co-ownership Equity Community Design Co-responsibility Debt Guarentees Fully Visioning Build Grants Fully Public Private Sector Passive Service Build Agreeing Sector Private Contracts Operate Frameworks Investment Operate and Invest Regulatory Government Maintain BOT Dialogue Bonds Lease Concession Covenants
Public Investment Responsibility Private
Provider Government Role Enabler and Regulator
Memorandum submitted by WaterAid
1. Universal access WaterAid’s interest in the IDSC hearing on the role of the Private Sector in Infrastructure Development is in pursuit of our goal of universal access to water supply, sanitation and hygiene education.
2. Government responsibility for public good Fulfilling the water and sanitation MDGs and achieving the goal of universal access will require the public sector to carrythe primaryresponsibilityfor service delivery.There is now a suYcient bodyof evidence that casts serious doubt on the capacityof multinational corporations to prov ide aVordable access to water and sanitation in developing countries. The experience of the private sector’s role thus far is of higher user fees and a failure to secure aVordable access to services for those in absolute povertyand the, so-calle d, “near poor”. Public utilities currentlyprovide as much as 95% of coverage for up to 35–4 5% of urban residents served bypiped networks supply. While we welcome this hearing bythe IDSC we believe that there is a compelli ng case for understanding and supporting reforms of public utilities to improve the eYciencyof their service deliveryto the poor. WaterAid believes that anyrole for the private sector in the provision of t he public goods of water and sanitation should not substitute for pro-poor reforms in the public sector.
3. Local Private Sector Non state providers (NSPs) or small scale independent providers (SSIPs) have become the dominant providers for the poor, sometimes serving between 30–60% of urban residents through a varietyof informal arrangements. The NSPs role is crucial in the deliveryof services to the urban poor but thi s sector currentlylacks adequate governance and regulatorystructures that would help to secure t he necessarystandards of water cleanliness at aVordable prices. There are successful models of public-private contractual relationships in developing countries, for example, the public utility, DMAE in Porto Alegre, Brazil, serves 99.9% of the population and does this by contracting out up to 70% of its operation to the private sector. DFID and the oYcial donor communityshould be assisting governments to improve the regul atory environment and to create opportunities for local private sector providers to graduate into a comprehensive formal deliverysystem. And to avoid regulatoryregimes developing rent-seeking practices we wou ld urge some learning from successful models such as Porto Alegre in Brazil. Donor programmes and aid conditionalities should support the identification of local fit-for-purpose solutions, rather than serving to leverage multi-national corporate interests. 3312162052 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 326 International Development Committee: Evidence
4. Publicly Accountable Social “Audit” The participation of citizens in pro-poor service deliveryhas proved val uable for capturing of hitherto ignored approaches that target the poor and marginalised. The establishment of social audit mechanisms in the governance of the water and sanitation sector has enabled eVective monitoring of the performance of utilities, including the private sector, and helped to inform choices over further investment options for achieving universal access. There are successful models of “social control mechanisms” in Recife and Port Alegre in Brazil and Caracas, Venezuela. DFID and the oYcial donor communityshould be assisting governments and civil societyto establish publiclyaccountable social “audit“” mechanisms that can hold both publi c and private service providers to account.
Questions we request the Select Committee to pursue with the Minister: 1. What is DFID’s current research and policyinterest in the development o f alternative pro-poor public utilityreforms. And what is the commitment of the Department to support lo cal Small Scale Independent Providers in delivering water and sanitation services? 2. How does DFID intend to ensure that aligning its financial support behind World Bank and IMF conditionalities will not continue to promote inadequate, inappropriate and anti-poor models of private sector participation? 3. How does DFID intend to ensure that a multi-stakeholder approach is one of the policyoptions instituted to enable transparent and inclusive decision-making in eVorts to improve services to the poor? February 2006
Memorandum submitted by the World Business Council for Sustainable Development (WBCSD)
1. What can the private sector do to alleviate poverty? The concept of a desirable and tradable commodity, be it a raw material or the provision of a service, is a concept that is several thousand years old. The “market” then was normallythe bazaar or the village where individuals and/or groups carried out the transaction. Todaythe world is a much more complex place where large multi-national corporations buyand sell goods and services in a glo bal market place where the transaction maynever involve a face to face interaction. The principle ho wever has not changed, the innovative and entrepreneurial spirit that drove individuals then to discover new products for established markets, as well as search for new and ever more remote markets to conduct the trade, is still keyto economic growth and wealth creation today. The methods however, then as now, were not always seen as fair and responsible—but globalisation todaydoes not have to be the new form of col onisation. Globalisation can be all about making the World’s markets inclusive and accessible for all. In today’s world it is important to remember that the private sector represents everyone from the street trader in New Delhi to large multi-national corporations. The common factor when it comes to poverty elimination is the nimbleness and innovative approaches these diVerent entities take to grow and penetrate the markets in the developing world. For larger entities this includes how theybehave in localizing their supplychains and service provision to maximize the benefit to the local com munities in which theyoperate. The bigger the entity, the more potential benefit it can drive if the growth is done in a responsible and sustainable way. This is not just about providing direct employment, it also creates local purchasing power that then drives the growth of other Small and Medium sized Enterprises (SMEs). This benefits both the wage earners and their families such that theycan a Vord health care and education for their children, thereby also benefiting future generations.
2. What are the different types of pro-poor growth? There are manytypesof pro-poor business models and these are described in the attached “Business for Development” publication. The keyhowever is doing business with the poor in ways that simultaneously benefit low-income communities and also benefit the companyengaged in the i nitiative. This creates a virtuous circle and an enterprise that is sustainable for the long term because it is not dependent on donations to keep it alive. It also stimulates demand for the same product or service and hence a market for other SMEs to take advantage of. 3312162053 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 327
3. What are the connections between growth and PSD?
The two are joined at the hip, economic growth cannot be maintained without a private sector driving and growing the market place.
4. What are the constraints on the private sector in developing countries and how can they be addressed?
This is covered extensivelyin the attached “Business for Development” pu blication167. Basicallythe contribution of the private sector to development can be accelerated BUT onlyif there is an enabling environment. This is as true for SMEs as it is for large multi-national corporations. The members of the WBCSD have three broad priorities: —EVective legal and regulatoryframeworks; — A supportive environment for SMEs including access to training and finance; and — Investments in core infrastruture The members of the WBCSD urge policymakers to do the following: — Leverage Overseas Development Assistance to attract more Foreign Direct Investment to developing nations. This investment in building supportive framework conditions will pay dividends as it has a significant multiplier eVect on economic growth and local development. — Focus on incentive-driven aid. Aid should be targeted at developing nation governments that are demonstrating commitment to, and progress on, good governance. For countries gripped by serious turmoil, aid should be directed at bottom-up initiatives carried out in partnership with relief NGOs and/or the private sector. — Involve the private sector in development strategies. For instance, when governments identify development priorities at the countrylevel and formulate povertyreduct ion strategies, the private sector should be systematically involved early in the process. — Make energyprovision a priority.The adequate provision of energyin dev eloping nations is crucial to underpinning the achievement of all the Millennium Development Goals. — Open up international markets to goods from developing nations, enabling developing nations to strengthen their international trade, stimulate growth and so create wealth. — Individual host governments in developing nations should work to improve the framework conditions within their countries to provide a ‘safe space’ that inspires confidence to both local and overseas investors. This favors innovation, entrepreneurship, investment and sustained economic growth. These improvements will benefit foreign investors, local entrepreneurs and most importantly, people at all levels of society, especially the very poorest.
Key areas for collaborative action to improve framework conditions:
Business can take a lead in improving framework conditions through: — Transparencyinitiatives to strengthen governance; — Active contribution to policydesign. Sound government leads by: — Upholding and promoting the rule of law; — Protecting human rights and equalitybefore the law; — Protecting clear tradable propertyrights; — Rooting out corruption at all levels; — Paying adequate salaries to public servants. Government, business and civil societycan work together to: — Root out corruption across the board; — Raise capabilities of public servants.
167 Not printed. See http://www.wbcsd.org/DOCroot/C4AgOxDIGvjcgRDo2e24/biz4dev.pdf 3312162053 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 328 International Development Committee: Evidence
5. What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth? See answer to question 4 above and comments to question 7 below
6. How is the private sector engaging in development? Several case studies presenting what WBCSD member companies are actually doing toward achieving the Millennium Development Goals are included in the Business for Development publication that is attached. The WBCSD is also working activelywith its Network of Regional Partners in the Developing world to find ways to accelerate this contribution and create a more enabling framework. The private sector is recognised more and more as a potential partner byNat ional and International Government organisations as well as development agencies. However there is still not enough trust between parties. This can get in the wayof progressive dialogues leading to action .
7. What aid instruments can be used by donors to encourage PSD? Private benefits versus benefits to society (public goods)—how much is this an issue? See answer to question 4 above but aid needs to be focused and incentive driven. Corporate Social responsibilityand philanthropyo Ver a source of funding but this will not have the same materialityas a real business venture with the capacityto grow. Specific a ctions to improve infrastructure and SME capacitybuilding are given overleaf.
Key areas for collaborative action in Infrastructure: Business leads in infrastructure development through: — Providing the capacityto operate and maintain infrastructure in a cost- eVective way. Sound government leads by: — Setting and maintaining sound economic policies; — Increased targeted investment; — Upholding the rule of law and protecting propertyrights; — Seeing projects through to eVective completion; — Renewing and maintaining existing infrastructure; — Ensuring new projects benefit all people, including the verypoorest. Government, business and civil societycan work together to achieve: — Appropriate public-private partnerships, electrification, safe drinking water and sanitation, telecommunications and other basic infrastructure.
Key areas for collaborative action in SME capacity building: Business leads in local SME capacitybuilding through: — Technologytransfers; — Direct investments in equipment and technical assistance; — IT; — Marketing; — Workplace organization; — Qualitycontrol; — Health and safety; — Management and employee training; — Training in financial management; — Enhanced access to information; — Compliance with technical requirements; — Identification of foreign partners; — Training in tender process participation; — Facilitating access to finance. 3312162053 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 329
Sound government leads by: — Provision of primaryand secondaryeducation; — Provision of vocational training; — Providing incentives for foreign investors to work with local suppliers. Government, business and civil societycan work together to: — Creating partnerships to promote the training of skilled workers; — Facilitate access to finance. February 2006
Memorandum submitted by the World Development Movement
WATER, SANITATION AND PRIVATE SECTOR DEVELOPMENT
Summary of Submission
Overarchingprinciples — The World Development Movement (WDM) is not anti-private sector. There are manylegitimate roles for the private sector in an economyalthough whether and how such pri vate sector activity benefits societyis dependent on how governments regulate. There are also r oles that the private sector should not be expected to fulfil. — It is critical that governments understand and promote an appropriate role for the private sector in development. International development policyshould not be based on t he assumption that the private sector is always more eYcient and eVective than the public sector or that private sector investment can substitute for government funding. — The water and sanitation sector provides an important case studyof the li mit to which the private sector can be expected to provide a keypublic service (or “infrastructure service” as the World Bank calls it) and contribute to achieving several of the keyMillennium De velopment Goals. WDM’s contribution to the IDC inquiryfocuses on this sector.
The theory behind water privatisation — There is a global water crisis which needs tackling, especiallyin terms o f connecting new communities to the water network. — There are manyexpectations and assumptions about what the private secto r can contribute towards tackling this global water crisis.
How water is diVerent from other sectors — Water is a natural monopolyso arguments about competition and markets, w hich mayapplyto private sector development in other sectors, are not relevant. — The private water sector is not necessarilymore e Ycient than the public sector. — The water and sanitation sector is verycapital intensive and billions of dollars of investment in the sector is required. — Access to water is a human right.
The reality of water privatisation — Private companies have not delivered the better capital on better terms that has been expected. — In parts of the world where tackling the lack of access to water is an imperative, few people have been connected due to private investment. — Private companies have also not reduced government risk and the burden of borrowing. — Instead, privatisations have been dependent upon public or donor funding when making new connections. — Investment activityhas not been concentrated in the area of most need but rather where companies feel theycan maximise their profits. — Private companies have resorted to unacceptable tactics to maintain profits. 3312162054 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 330 International Development Committee: Evidence
The role of donors — Conditions set bydonors have pressured developing countries to privati se water. — Donors have also contributed aid funds to public relations work aimed at promoting privatisation. — As a result of misplaced expectations on the private sector, donors and governments have substantiallyreduced the amount of moneytheydevote to water and sanitat ion.
Where next for the water sector — Water utilities which keep water in public hands have had success in boosting the number of connections. — The private sector does have a role in the water and sanitation sector but this must be restricted to activities which do not require their control or management of utilities.
Introduction 1. The World Development Movement (WDM) campaigns to tackle the root causes of poverty. With our partners around the world, we win positive change for the world’s poorest people. We believe that charity is not enough. We lobbygovernments and companies to change polices that ke ep people poor. WDM is a democratic membership organisation of individuals and local groups. 2. This submission concerns the issue of the private sector’s role within the water and sanitation sector. It is based, at least in part, on the findings of a studyshortlyto be publishe d byWDM and Public Services International.168 3. This studywill look at the claims made by,and on behalf of, the private se ctor, in terms of the contribution it could make towards tackling the global water crisis. It will look at the structural reasons why these claims were never likelyto be realised, as well as the evidence that d emonstrates this to be the case. In particular, there will be a number of case studies to demonstrate the failure of the private sector to deliver investment as was promised. It will also assess the knock-on implications of this failure, especiallyfor donors.
The theory behind water privatisation 4. Over one billion people need to gain access to clean water supplyand over two billion need to gain access to adequate sanitation. Over 80% of those needing connections are in the regions of Sub-Saharan Africa, South Asia, and East Asia and Pacific. Meanwhile, the Millennium Development Goal (MDG) requires, by2015, a reduction byhalf of the proportion of people without s ustainable access to clean water and adequate sanitation.169 Achieving other MDGs, such as reducing disease and cutting child mortality rates, will also require improvements to water and sanitation. 5. There are manymisplaced hopes and expectations surrounding the abilit yof the private sector to make a contribution towards the MDGs in water. If a public utilityis failing—an d there are many, especially in developing countries, which are—there is often an assumption that inevitablythe private sector will be able to do a better job. It is assumed that the private sector will be able to bring in a higher level of finance than is otherwise possible. It is expected that cash-strapped governments will be able to oV-load risk and the burden of borrowing and investing themselves if theybring in the private s ector. There is also the assumption that the private sector will extract better value from a given sum than the public sector byspending more wiselyand streamlining procedures and structures. 6. The assumptions outlined above are similar to the justifications for the private sector’s involvement in other sectors: eYciency, injections of cash and relieving the public sector burden. As Clare Short, former UK Secretaryof State for International Development, told the House of Com mons in 2002: “Privatisation is the onlywayto get the investment that [poor] countries need in things li ke banking, tourism, telecommunications and services such as water under good regulatoryarra ngements.”170 But water is diVerent from almost anyother sector, for a number of important reasons.
How water is different from other sectors 7. Firstly, water is a natural monopoly meaning that competition—and any resulting eYciencies—is impossible. As the European Commission’s Directorate General (DG) for Competition which, amongst other things, has been working on how to organise the water sector within the European Union, stated, “the liberalisation of water is unlikelyto result in the same benefits as other n etwork industries because a large
168 This report will be published in March 2006 and will sent to the Committee. 169 Vandemoortele, J (2003). Are the MDGs feasible?. New York. United Nations Development Programme. July2003. http:// www.undp.org/mdg/Are%20the%20MDGs%20feasible.doc 170 Rt Hon. Clare Short MP (2002). Debate on International Trade. House of Commons Hansard. 19/06/02: Column 297. 3312162054 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 331
proportion of the cost of supplyof residential customers is incurred byth e distribution network (which would remain a monopoly) and there is little scope for supply from distant sources.”171 It is hard to see how a privatised water system would lead to a market where competition could lead to benefits for poor people. 8. Secondly, the evidence does not indicate that it is possible to make assumptions about the relative eYciencyof the public and private sector. In the water sector specifically,r esearch suggests that the private sector is no more eYcient or eVective than the public sector. As one research article on water provision in Asia concludes, “The results show that eYciencyis not significantlydi Verent in private companies than in public ones.”172 Another report concluded that the studies it analysed “reveal that there is no compelling evidence to date of private utilities outperforming public utilities or that privatising water utilities leads to unambiguous improvements in performance”.173 9. In a studyof the Thames Water concession in Jakarta, Thames PAM Jaya,it h as been noted that “The overall achievement of the private companymust be considered verylow. Th is mayimplythat the status of water supplysystemin Jakarta is verymuch the same as it was before the invo lvement of the private sector OYcials admit that [the previous] public operation should have been able to attain the targets even better than the private company’s performance”.174 10. Thirdly, the water and sanitation sectors are incredibly capital intensive and investment on a massive scale is required. There have been a wide varietyof estimates of the extent of investment needed to tackle the global water crisis: these range from US$51 billion to US$102 billion for water supply, and from US$24 billion to US$42 billion for sanitation.175 11. It is diYcult to see how the requirement to inject such sums can be reconciled with a private company’s profit motive. Companies need to generate profits which theythen transfer t o shareholders, and theyare on the record as stating how this dutycan conflict with the need to invest. For e xample, after negotiations for a water concession in Zimbabwe broke down in 1999, an executive from UK water companyBiwater explained that, “from a social point of view these kind of projects are viable, but unfortunately, from a private sector point of view, theyare not”. 176 12. Finally, access to clean water is widely recognised to be a human right and as such onlydeliverable bypublic authorities and governments. Indeed there are a number of campai gns being run around the world to get this demand entrenched within the United Nations system, which would enable people to hold their governments to account on this issue.177 At the root of each of these campaigns is a belief that water is a fundamentallyimportant resource that should not be treated as if it were s olelyan economic commodity.
The reality of water privatisation 13. The realityof water privatisation, and especiallythe amount of inves tment it has levered in to connect new customers in developing countries, has been disappointing to saythe l east. Overall, there is little evidence that private companies have brought in extra capital on better terms to boost the number of connections. 14. Some types of privatisation contracts contain no private investment requirements at all. Management contracts never involve the private sector investing in the water system while lease/aVermage contracts involve private investment in renewing the existing system but not in extending the system. Only concession contracts have requirements on private companies to bring investment in to extend the system.178 15. But the record of concession contracts has been verypoor. Onlyfive conc essions for water services have been implemented in sub-Saharan Africa. Three of these covered water and electricityin Cape Verde, Gabon and Mali. The onlytwo concessions for water and sanitation services alone are both in South Africa and both have cut their investment plans—by60% at Dolphin Coast, and bya co mplete halt to all investments in Nelspruit since 2001 (see later). Meanwhile, Mali has terminated the concession and renationalised the electricityand water services, and Cape Verde is thre atening to do the same, in both cases
171 Gee, A. (2004). Competition and the Water Sector. EC Competition PolicyNewsletter No.2. Brussels. Summer 2004. http:// europa.eu.int/comm/competition/publications/cpn/cpn2004–2.pdf 172 Estache, A. and Rossi, M. (2002). How diVerent is the eYciencyof public and private water companies in Asia? The World Bank Economic Review Vol. 16 No. 1. Oxford UniversityPress. Oxford. June 2002. 173 Renzetti, S. & Dupont, D. (2004). Ownership and Performance of Water Utilities. SheYeld. Greenleaf Publishing http:// www.greenleaf-publishing.com/ 174 Shofiani, NE (2003). Reconstruction of Indonesia’s DrinkingWater Utilities—Assessment and stakeholders’ perspective of private sector participation in the capital province of Jakarta. TRITA-LWR Master Thesis LWR-EX-03-30. 175 Hall, D and Lobina, E (2006). Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 176 Zimbabwe Independent 10/12/99. Taken from Hall, D, Bayliss, K, Lobina, E (2002). Water Privatisation in Africa. Public Services International Research Unit. London. June 2002. 177 The Right to Water Campaign, Council of Canadians, http://www.blueplanetproject.net/cms–publications/ RTW%20handbill.pdf 178 Hall, D and Lobina, E (2006). Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 3312162054 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 332 International Development Committee: Evidence
on the grounds of failure to make the necessaryinvestments. In Gabon, as of 2005, the new investment programme of the privately-controlled utility is being financed by an international public sector bank, and the savings of the residents of Gabon.179
16. In the entire South Asia region, including India, Pakistan, Bangladesh and Sri Lanka, there has not been a single concession or lease contract for the private sector operation of water or sanitation services. In a region with 1,400 million people (23% of the world’s population) no investments have been made byprivate operators of water services in extending the water distribution systems.180
17. Once a privatisation contract is in place, a companymight seek to re-ne gotiate itself out of some of its commitments. Eight months after starting operations in Buenos Aires in 1993, Aguas Argentinas a subsidiaryof Suez, requested an “extraordinaryreview” of tari Vs, due to unexpected operational losses. Despite tariV increases, 45% of projected investments were not implemented in the first three years of the concession. The concession agreement was subsequentlyrenegotiated so t hat little remained of the initial covenant. In September 2005 Aguas Argentinas’ private shareholders decided to terminate the 30-year contract.181
18. The onlyform of finance uniquelyavailable to the private sector is equi tyfinance from private shareholders. All the other funding sources such as finance from donors, development banks, commercial bank loans, bonds and operating surpluses are, in principle, equallyavai lable to public and private sector operators.182
19. Meanwhile, it costs the private sector more than the public sector to borrow the same amount. Companies have to payhigher interest rates than the public sector when the yborrow from the markets, because their credit ratings are worse than governments—and even low income developing country governments can access finance at favourable terms from development banks.183
20. Private companies have not helped reduce government borrowing and risk bytaking on the burden of making investments to connect new communities to the water network. Privatisations that do deliver investment to connect new communities depend upon public finance, donor finance or government guarantees.
21. In Senegal, the privatisation (lease) contract is frequentlyquoted a s a success story, with a substantial increase in the number of connections—35% from 1996 to 2001. However, these new connections were not financed byor through the private company,but largelythrough the public w ater authority. The leap in new connections came after 1999, when a new injection of public finance—including a World Bank loan— was provided through the public water authority.184
22. As the Head of SAUR, one of the major French water multinationals, said in 2002, “Substantial grants and soft loans are unavoidable to meet required investment levels [This entails] the considerable dependence of the growth of the water sector in the developing world on soft funding and subsidies. If it does not happen the international water companies will be forced to stayat home.”185
23. All of this evidence illustrates that it is an illusion to think that private companies either have in the past, or will in the future, be able to finance the massive investment required to connect new communities to water networks.
24. This emphasis on the private sector has had negative impacts on poor people without water around the world. Putting private companies in the driving seat in recent years has allowed them to set the agenda in terms of prioritising the continents, regions and cities where investment in the water sector should go. Because of their need to make a profit, companies and donor-funded investment have not concentrated on the areas of greatest need: cities where the poorest live and rural areas.186
179 Hall, D and Lobina, E (2006). Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 180 Hall, D and Lobina, E (2006). Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 181 Hall, D and Lobina, E. (2006) Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 182 Hall, D and Lobina, E (2006). Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 183 Klein, M (1996). Risk, taxpayers, and the role of government in project finance. World Bank PolicyResearch Working Paper No.1688. New York, World Bank. Note: the author recognises that government borrowing is cheaper but argues that, in an ideal world, it should not be because taxpayers should be compensated for the risk theyare being forced to take. As far as WDM is aware, the realityremains that government borrowing is cheaper. 184 Tremolet, S (2002). Rural Water Service. Public Policyfor the Private Sector. Note Number 249. 185 Talbot, JF (2002). Is the International Water Business Really a Business? World Bank Water and Sanitation Lecture Series. 13/02/02. http://www.worldbank.org/wbi/B-SPAN/docs/SAUR.pdf 186 WDM. (2005). Dirty Aid, Dirty Water: The UK Government’s push to privatise water and sanitation in poor countries. World Development Movement. London. February2005. 3312162054 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 333
25. For example, Latin America includes a number of middle income countries, and contains a relatively small proportion of the population who need to be connected in order to achieve the MDGs (9%). The region has nevertheless been the target of most of the investment bythe wat er multinationals, clearlybecause of its relative profitability. Many of these concessions are now terminated or in crisis, either as a result of popular opposition, or as a result of economic crisis (as in Argentina) or both.187 26. Meanwhile, the zero new connections in South Asia from private investment is the most dramatic illustration of how corporate decisions on where to operate are based on commercial judgments which may bear no relation to the relative needs of populations.188 27. Companies themselves have admitted this trend too. For example, in a water policymeeting in Uganda in 2001, staV from the French multinational Vivendi (now called Veolia) stated that the need to make reasonable profit means theyonlyinvest in the larger, richer cities. 189 28. In order to meet their profit needs, private companies operating privatisation contracts have resorted to tactics in developing countries which are no longer acceptable in the UK such as pre-paywater meters, massive price rises and disconnections for failure to pay. In South Africa, UK water companyBiwater’s Nelspruit concession depended heavilyon generating a surplus through in creased water charges, based on (non pre-pay) metering of households and full cost recovery. Many households could not aVord the new tariVs, and payment levels were considerably lower than the company expected. Strict enforcement was attempted: “After warnings, water was cut oV, but restored if payment (or part payment) was made. Persistent non-payment led to the removal of pipe work” and disconnections for non-payment continued even during the cholera epidemic of 2000.190
The role of donors in pushing water privatisation
29. Donors such as the World Bank and International MonetaryFund have been instrumental in pushing the concept of water privatisation in developing countries. To receive cheap loans and debt relief, demands are made that poor countries reduce their public sector expenditure, while loans and aid to the water sector specifythat theywill onlybe given if a privatisation occurs. 30. In March 2005, the UK Government’s Department for International Development (DFID) published a new policyon conditionalitywhich stated that economic polic yconditions would no longer be attached to its aid programme.191 WDM and others welcomed this new policy; it was something that we had been calling for, for years. However, in and of itself, this policy has not put a complete stop to the UK government pushing water privatisation in developing countries. 31. 12% of UK aid is channelled through the World Bank which continues to attach economic policy conditions, such as water privatisation, to its lending. In addition, the UK aid budget continues to payfor policyadvice and technical assistance on water privatisations in develo ping countries, even where that policy had emerged after the World Bank or IMF had attached it as a condition for support. 32. This is the case in Sierra Leone where in June 2005, DFID started to recruit consultants to work with the Sierra Leonean National Commission for Privatisation to privatise 24 state-owned enterprises (including Freetown’s water provider). While the civil war was still being fought in that countryin 1999, the IMF was first recommending privatisation: “In the area of public enterprises a program for future reforms, including privatization, in the sector will be elaborated in collaboration with the World Bank”.192 33. The UK government (and the World Bank) also have a historyof funding pub lic relations initiatives to pacifysceptical populations in developing countries, who are often un willing to see their water services privatised. The consultancyfirm Adam Smith International (ASI) received £270,000 of UK aid moneyin 1999 to produce a PR campaign in Tanzania involving the use of a national comedian in a series of TV adverts as well as a pop video—all promoting the country’s privatisation programme.193 The pop video had the following lyrics: “Young plants need rain, businesses need investment. Our old industries are like dry crops and privatisation brings the rain. When the harvest comes, there is plentyfor everyone.”
187 Hall, D and Lobina, E (2006). Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 188 Hall, D and Lobina, E (2006). Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 189 Kessler, T (2004). Who’s takingrisks: How the World Bank pushes private infrastructure—and finds resistance in some surprisingplaces . Citizens Network on Essential Services. July2004. 190 Water Service Subsidies and the Poor: a Case Studyof Greater Nelspruit Uti lity Company, Mbombela Municipality, South Africa. Julia Brown. 2005 http://www.competition-regulation.org.uk/conferences/mcr05/brownwoodhouse.pdf 191 DFID (2005). Partnerships for poverty reduction: rethinkingconditionality . A UK government policypaper. London. March 2005. 192 WDM. (2005). Sierra Leone’s privatisation timeline http://www.wdm.org.uk/campaigns/aid/sierraleone/timeline.htm 193 Watt, P (2004). Whose reform is it anyway? How development aid is drivingwater privatisat ion in the world’s poorest countries. Tribune. London. 30 January2004. 3312162054 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 334 International Development Committee: Evidence
34. More generally, ASI notes that it has the ability to “help muster the critical political support necessary to carrypolicies through to their successful conclusion”. 194 It has built up a reputation as the consultant that “sells” privatisation to an unwilling population. In Ghana, DfID funded a “public awareness raising programme” about the benefits of privatisation.195 In India ASI was given aid moneyto produce a film about the benefits of privatisation.196 35. The expectation of private sector investment has not onlyfailed to del iver what was claimed. Coupled with IMF demands for reductions in state spending and borrowing, and policies of development banks and donors to insist on attracting private finance, it also has had the eVect of reducing public sector investment in infrastructure, including water. This has happened because manycount ries have chosen to cut investment to meet the targets for lower spending and borrowing, in the expectation that the private sector would replace it.197 36. The international financial institutions and donors have also cut their own expenditure, with similar expectations that the private sector would take over. The total invested byall the development banks and donors in infrastructure (including water) fell byone third between 1996 and 2002.198 A World Bank paper concludes: “Ultimately, many of the adjustments in public financing and overseas development assistance largelyreflect the fact that the expectations of private sector participa tion in the financing of infrastructure needs were overoptimistic.”199 37. The World Bank, according to its infrastructure review paper in 2003 cut its infrastructure investment (in all sectors including water) lending by50% between 1993 and 2002, from about US$9.5 billion to US$4.8 billion.200 The report notes that the reasons for this include: “a lack of clarityon the roles of the private and public sector in infrastructure service provision and under-investment in country-level infrastructure diagnostic work”. It noted that, contraryto the World Bank’s expectation s, the private sector’s investment (in all infrastructure, not onlywater) also declined byover 50% between 1 997 and 2002, and concluded that “the recent decreases in private sector interest in infrastructure show that reliance on the private sector alone will not be suYcient to guarantee a scaling-up of infrastructure service provision”.201 38. The same eVect can be seen in the donor policies of the EU, which in 2002 set up a new EU Water Initiative, and proposed a new EU water fund, to support the MDGs. Bythe end of 2005, a WaterAid/ Tearfund review concluded that “Not a single extra person has received safe water or sanitation through the Initiative. Separate but linked eVorts to increase funding for water and sanitation through the EU Water Facility(EUWF) have similarlyfailed”. The review also identified as one k eyreason whythese initiatives had failed was because of an “ideological bias to private finance”, seeing the main function of aid as ‘leveraging’ private finance.202 39. The focus on private sector development has contributed to a reduction in the level of aid and development finance from donors for the water and sanitation sector which is far greater than the actual investments made bythe private sector. It is not possible to produce a sing le figure for this, but it is possible to saythat the net contribution of 15 yearsof privatisation has been to sig nificantlyreduce the finance available to developing countries for investment in water.
Where Next for the Water Sector? 40. Where does all this evidence about the failure of water privatisations to make significant progress towards the MDG leave us? Surelythe question that needs to be asked is not “h ow to get the private sector into the water sector” but instead “what is the best wayto improve water ser vices”. 41. There are a number of successful models of water utilities in developing countries which are in public hands but which are successfullyconnecting new communities to the water n etwork. Perhaps one of the most well-known examples is that of Porto Alegre in Brazil. In 1961, the citycou ncil created a water and sanitation provider that, while remaining whollyowned bythe municipali ty, had a separate legal
194 http://www.adamsmithinternational.com/services–eur–psp.html (Viewed on 14 January2005). 195 Martey, E (2001). The Ghana Experience: Initiatingand managingthe reform process in the wa ter sector. Vol II, Papers and Presentations, Reform of the Water Supply& Sanitation Sector in Africa. C ountyReport: The Political Economyof Water Sector Reform study. http://www.wsp.org/events–archive/v2–ghana.pdf 196 DfID. (2004). Procurement contracts 1997–2004. Obtained byWDM from DfID through the Code of Practice on Access to Government Information. Received 19 October 2004. 197 Hall, D and Lobina, E (2006). Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 198 Hall, D and Lobina, E (2006). Pipe dreams: The failure of the private sector to invest in water services in developingcountries . WDM, PSIRU and Public Services International. London. Forthcoming March 2006. 199 Bricen˜o-Garmendia, Estache, Shafik: Infrastructure Services in Developing Countries: Access, Quality, Costs and Policy Reform. World Bank PolicyResearch Working Paper 3468, December 2004. 200 World Bank: Infrastructure Action Plan. 2003. http://siteresources.worldbank.org/INTTRM/Resources/ InfrastructureActionPlan.pdf 201 IBRD and IDA lending: finance through the IFC and MIGA increased. 202 An EmptyGlass: The EU Water Initiative’s contribution to the water and san itation Millennium targets. WaterAid and Tearfund. December 2005. 3312162054 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 335
personality, operational autonomy and financial independence.203 It is subject to the municipality’s ‘participatorybudgeting’ process—where citizens playan active role in taking decisions on how local finances are used—and also subject to public scrutinythrough a “deliberat ive council”.204 42. Even though Porto Alegre nearlydoubled in size from some 700,000 inhab itants in 1961 to 1,360,000 in 2001, the water provider has managed to extend service coverage and improve quality. By 2001, it provided water supplyto 99.5% of the population, an increase from the 95% s upplied in 1990. Similarly, by 2001, sewerage services had been extended to 84% of households, up from 70% in 1990.205 Now Porto Alegre has an infant death rate of 14 per thousand in comparison with a national average of 65. And by1999 the city’s ‘human development index’ was 0.79, comparable with a typical 0.80 for cities in the industrialised world.206 43. Porto Alegre is a fine example of a successful public provider which responds to the needs of the people and which has been able to extend the number of connections. Interestingly, it also illustrates the role that the private sector can usefullyplayin water and sanitation provisio n. Porto Alegre’s water operation uses subcontracting, including employing Suez subsidiaries on specific construction jobs when theyhave won competitive tenders.207 44. Indeed, there is a long tradition of public utilities subcontracting to the private sector in many countries and the private sector can be tapped for building up the management, financial and operational capacityof public services, especiallyin urban areas. Procurement cont racts in other countries have included computer services, engineering works and repair, maintenance and rehabilitation of a network. However, in such cases, the control remains outside of the private sector’s hands—and the arguments against privatisation do not apply.208
Conclusions 45. To conclude, as this submission has demonstrated, there is a role for the private sector in the delivery of water and sanitation services. However, it is a limited one and it should not involve private sector control or management of water services. Indeed, there has been a wholesale failure of water privatisations to extend water and sanitation networks to those who currentlylack access in the are as where the need is greatest. 46. Moreover, the expectation that the private sector could deliver has led donors and governments to substantiallyreduce their overall funding for the sector. There is a mass ive funding gap in the sector which donors and governments must urgentlyaddress if we are to meet the MDG on wat er, with its knock on impacts on achieving other MDGs. Critically, there is a need to dispel the myth that the private sector will deliver the MDG for us and there must be a complete halt to economic policyco nditions which demand water privatisations. The UK government should stop supporting water privatisations that stem from such conditions, stop funding pro-privatisation PR campaigns, and work with international donors to make up the funding gap which results from years of misplaced faith in the private sector. 47. As former British Environment Minister Michael Meacher has noted: “Private sector finance will certainlybe important, but it will generallynot be used for basic service s private sector investment is at present insignificant at providing basic water and sanitation services to the verypeople who most need it.” 209 February 2006
203 Hall, D Lobina, E, Viero O-M, Maltz, H (2002). Water in Porto Alegre, Brazil—accountable, eVective, sustainable and democratic. London. Public Services International Research Unit. 204 Maltz, H (2005). Porto Alegre’s Water: Public and for All. In Hoedman, O (ed) (2005). 205 Hall, D, Lobina, E, Viero O-M, Maltz, H. (2002). Water in Porto Alegre, Brazil—accountable, eVective, sustainable and democratic. London. Public Services International Research Unit. 206 Hall, D Lobina, E, Viero O-M, Maltz, H. (2002). Water in Porto Alegre, Brazil—accountable, eVective, sustainable and democratic. London. Public Services International Research Unit. 207 World Development Movement (2005). Dirty Aid, Dirty Water. A policyreport. London. February2005. 208 World Development Movement (2005). Dirty Aid, Dirty Water. A policyreport. London. February2005. 209 Meacher, M (2001). Keynote speech delivered at International Conference on Freshwater, Bonn, Germany. 04 December 2001. 3312162055 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 336 International Development Committee: Evidence
Memorandum submitted by the WWF
Executive Summary The following submission covers a range of concerns and recommendations for making private sector more pro-poor and pro-environment, and which should make private sector financing more accountable.
Investment in private sector development WWF believes DFID should require MDBs to demonstrate the povertyalleviat ion and sustainable development benefits of private sector project finance. For example, DFID should not support public finance lending to carbon intensive projects inconsistent with international policycommitments. DFID’s support of funding large oil and gas projects led byUK multinationals is no t consistent with its own objectives on povertyalleviation or environmental protection. WWF believes DFID should ensure that all use of Financial Intermediaries is subject to the same rigour of assessment of social and environmental impacts as other investments. DFID should require this for significant projects funded byall MDB’s it has an interest in, so that it is a ble to better demonstrate the povertyalleviation e Vects of its investment approach. DFID is well positioned to expand its work on transparencyto consider disclosure of investment contracts in order to p romote sustainable development and enhance governance. A necessarycomponent of this transparencywill b e allowing civil societyto hold government accountable for the agreements with private sector.
Small Scale Enterprise There is strong evidence that Small and Medium Enterprises (SME) are capable of reaching greater numbers of people within the poorer communities in developing countries. SMEs also have a number of advantages in terms of local level economics, social and environmental impact. It is clear that directing funding through larger institutions and budget support, with emphasis on macro growth will not provide incentives for the kind of policyinterventions th at will ensure the SME sector develops appropriatelyfor social and environment benefits. To make the mo st of this potential a far more interventionist approach bygovernment/aid agencies is required to crea te an appropriate policyand support environment.
Joined-up UK Policy Encouraging the Development of Sustainable Pro-Poor Enterprise A number of practical cross-department measures should be considered to foster and encourage sustainable pro-poor enterprise in developing countries. For example: (1) Joined up thinking on the cycle of aid-development-trade back to the UK. (2) UK government procurement policy. (3) Ensuring corporate responsibilityof UK parent companies with intere sts overseas. (4) The on-going FCO Sustainable Development Dialogues with the BRICS countries. (5) Work with the ex-pat business communities in the UK.
1. Introduction 1.1 WWF welcome the opportunityto submit to this veryimportant inquiryon the role of DFID in promoting private sector development in developing countries. WWF work internationally, at a local, national and global level, in a number of sectors which have direct private sector engagement. The following submission covers a range of concerns and recommendations for making private sector more pro-poor and pro-environment, and which should make private sector financing more accountable.
2. Section 1: Investment in Private Sector Development WWF would question whythe IDC has decided to review issues around PSD with r egard exclusivelyto pro-povertygrowth whilst ignoring the hugelyimportant issues around en vironmental issues. A keypart of DFID’s missions is to “make sure the environment is protected” and yet DFID has continuallypaid no more than lip service to this aspect of its mission. As the world’s leading environmental NGO WWF is well placed to comment on such issues and feels it a huge missed opportunityon the part of the IDC to review these crucial fail ures in DFID’s work and PSD in particular. 3312162055 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 337
What are the connections between pro-poor growth and private sector development? 2.1 The example of the extractives industryhighlights the need for better co-ordination of DFID investments, both directlyand through MDGs, and its povertyalleviation objectives. 2.2 For the extractives sector which can bring sudden influxes of revenues to low income countries, there is a danger that more moneycan onlyexacerbate poverty.This “resource cur se” has been seen in many resource rich countries. Despite eVorts to direct expenditure of oil revenues, manycountries still see natur al resources fuelling conflict and corruption. The most recent high profile example is the World Bank’s attempts to restrict the Chadian government’s use of oil revenues from the Chad-Cameroon pipeline on arms. When the Chadian president amended the Petroleum Revenue Management law, reducing the amount of moneythat would be ring-fenced for sustainable development, th e WB was forced to suspend all loans to the Chadian government.210 The huge social and environmental problems associated with extractives projects demonstrate the need for development institutions to develop eVective governance structures, rather than become involved in controversial projects. DFID’s support of funding large oil and gas projects led byUK multinationals is not consistent with its own object ives on povertyalleviation or environmental protection. 2.2 The activities of companies based in emerging economies—China and India, for example, will be of increasing influence in the extractive sectors in developing countries. Patterns of investment from emerging economies in sub-Saharan Africa, for example, will be of increasing importance in determining the trajectories that povertyalleviation programmes take. DFID can engage t hese concerns in several ways: 1. DFID can work across government departments to examine the eVects of UK private-sector financial support for the business activities of Chinese and other companies in developing countries. Working with banks to develop lending guidelines would help to address these concerns, and there are opportunities open to DFID to do so. For example, the IFC, on the board of which DFID sits, are instrumental in uptake of the Equator Principles byprivate financial institutions. The IFC and EBRD are also engaged in capacity-building projects, training bankers in emerging economies on sustainable investment. 2. DFID and the IDC should review the recent report byWWF on this subject. Th e report, Shaping the Future of Sustainable Finance: Moving the Banking Sector from Promises to Performance, ranked the financing policies of 39 international banks across 13 issue areas, from climate change to human rights. The studyalso benchmarked the banks’ policies against in ternational norms, and found that banks are failing to uphold environmental and social standards developed byUN agencies and other international bodies. Paul Q. Watchman. Partner at international law firm Freshfields Bruckhaus Deringer and recognised expert on banking stated about the report—“The report marks a new maturityand objectivityin the work of the NGO community . This is an important report and WWF and BankTrack are to be congratulated for methodicallypeeling away the rhetoric and collective epiphanyof the banking communityand focusin g on the realityof what is being done bythe banks to discharge their new found social and environme ntal responsibilities. For some banks it makes surprising, and I suspect for Chairmen and CEOs of a number of leading banks, unpalatable reading.” 3. DFID can work with other government departments to ensure that public sector procurement of goods originating in developing countries are produced in a waythat suppo rts povertyalleviation. 4. DFID can ensure that UK government policysupports the emergence of more sustainable businesses in the emerging economies—recognising that this will have indirect impact upon their investment in developing countries. This can be encouraged through bilateral trade and investment initiatives. 5. DFID should work with UK government departments to ensure that where appropriate the policies outlined above (1–3) are reflected in EU policy.
Creatingan enablingenvironment by providingtechnical assistance on th e regulatory environment 2.3 DFID has historicallybeen involved in producing investment-friendl yregimes for hydrocarbon extraction, through funding projects such as reforming Russia’s tax regime, advising Georgia on oil and gas pipeline legislation. A full analysis of DFID’s relationship with the oil sector is available in the report “Pumping Poverty—Britain’s DFID and the oil industry”211. This report highlights the incongruence between supporting projects such as BP’s Baku-Tblisi-Ceyhan pipeline in the Caucasus through the International Finance Corporation and the European Bank for Reconstruction and Development (EBRD) and DFID’s commitments to achieving the Millennium Development Goals. 2.4 DFID has been involved in more positive initiatives, such as hosting the Extractive Industries TransparencyInitiative (EITI), and chairing the OECD taskforce on Strat egic Environmental Assessment. WWF supports both of these initiatives, which need greater impetus from DFID to increase uptake and
210 http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/ 0,,contentMDK:20778928–pagePK:64257043–piPK:437376–theSitePK:4607,00.html 211 http://www.carbonweb.org/documents/pumping–poverty–web.pdf 3312162055 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 338 International Development Committee: Evidence
implementation of the tools available. In the meantime however DFID continues to be faced with decisions regarding projects that are seeking Multilateral Development Bank lending purelyas political risk insurance. The next in line is the Sakhalin II project led byShell in far eas t Russia, which is seeking funding from the EBRD, as well as the UK Export Credit Guarantee Department.212 The US$20 billion project has alreadyimpacted the remote Russian island’s fishing industry,with catch es down 70% close to the construction. This is critical, as fishing generates 30% of the island’s economy. In addition, the project threatens the 100 remaining criticallyendangered western greywhales. T he project is designed to produce gas for export to Japan and oil for export, whilst local communities have severelylimited energyoptions. Shell was forced to recognise indigenous communities in 2005 to attempt to complywith EBRD policies, but anyplan developed now the project is half built is of limited value. The project was not subject to a Strategic Environmental Assessment, which could have improved the design at an earlystage. 2.5 This was proposed in the EBRD’s Natural Resources Policy, but DFID has not sought to enforce this as a requirement. The project is also not subject to the EITI. DFID should not support public finance lending to carbon intensive projects inconsistent with international policycommitments. 2.6 WWF believes DFID should require MDBs to demonstrate the povertyallev iation and sustainable development benefits of private sector project finance. This was one of the recommendations of the World Bank’s Extractive Industries Review—that lenders should develop indicators to report at the project level on the impacts (positive and negative) on povertyalleviation. WWF believ es DFID should require this for significant projects funded byall MDB’s it has an interest in, so that it is a ble to better demonstrate the povertyalleviation e Vects of its investment approach.
Private sector development financing
2.7 MDBs are increasinglyusing Financial Intermediaries (FIs) such as lo cal banks in developing countries to deliver financial support at a local level. The situation is outlined in the WRI report MDB “Lending through FIs—Environmental and Social Challenges”213. For example the IFC’s portfolio consisted of 50% support to IFIs in 2003. As a result MDBs can be indirectlys upporting high impact activities such as mining, forestryor tanneries, without the mainstream safeguards being applied. This loophole means that a significant and growing proportion of MDB distribution of funds, especiallyaimed at micro-finance or SMEs has minimal or no oversight. WWF believes DFID should ensure that all use of Financial Intermediaries is subject to the same rigour of assessment of social and environmental impacts as other investments. This would require enhanced disclosure of requirements, reporting on implementation and interaction with local stakeholders. At present the limited disclosure on the projects supported throught FIs makes it impossible to demonstrate how successful theymayor maynot be . Even where there are environmental and social requirements for financial intermediaries, there is often verylimited capacity within local banks to make such assessments. DFID should also playa role in building capacityin FIs to align their investments with sustainable development.
Private benefits versus benefits to society: Public private partnerships/corporate social responsibilities
2.8 The blurring of public and private sector leads to particular challenges in regulating corporate behaviour. In order to operate in areas previouslythe exclusive domain of the public sector, the private sector is receiving certain rights and powers to enable its activities. However the responsibilities to citizens that the state mayhave are not transferred with the rights to multinationa ls, leading to concerns over the abuse of such powers, and the abilityof stakeholders to hold corporate act ors to account. This situation is further complicated bythe involvement of state enterprises, which mayha ve conflicting interests with those of government departments responsible for applying and enforcing environmental law or upholding human rights. This area has been the subject of recent studies byWWF, AmnestyInt ernational and IIED,214 who are concerned that the contracts between multinationals and host states maybypassthe environmental, human rights and sustainable development frameworks we have been working to put in place. DFID is well positioned to expand its work on transparencyto consider disclosure of in vestment contracts in order to promote sustainable development and enhance governance. 2.9 A necessarycomponent of this transparencywill be allowing civil soci etyto hold government accountable for the agreements with private sector. This will require strengthening of expertise and capacity within civil societygroups to respond. 2.10 One tool which DFID has been championing with the World Bank is Poverty and Social Impact Analysis (PSIA). PSIA is the analysis of the distributional impact of policyreforms on the well-being or
212 http://www.panda.org/sakhalin 213 http://pdf.wri.org/iVe–mdb–lending.pdf 214 http://www.iied.org/SM/CR/documents/Liftingthelid–000.pdf 3312162055 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 339
welfare of diVerent stakeholder groups, with particular focus on the poor and vulnerable. PSIA has an important role in the elaboration and implementation of povertyreductio n strategies in developing countries. It promotes evidence-based policychoices and fosters debate on policyreform options.
3. Section 2: Small Scale Enterprise
Pro-poor growth, how to act at a local level to encourage sustainable pro-poor enterprise
What can the SME do to alleviate poverty?215
3.1 There is strong evidence that Small and Medium Enterprises (SME) are capable of reaching greater numbers of people within the poorer communities in developing countries. SMEs maybe less e Ycient in terms of delivering economic growth at national level, but can have significant advantage in terms of local level economics (equity), social and environmental impact. 3.2 With the majorityof private sector organisations in developing count ries in the categoryof small and medium scale enterprise (SME), it is essential to support the development and profitabilityof this sector. The livelihoods of tens of millions of women and men in developing countries depend at least partlyon gaining an income from small scale manufacturing and processing activities. 3.3 Although apparentlyverylocal in scale and operating in an informal, u nregulated sector, such enterprises mayin fact be tied into regional, national or even internatio nal markets as part of supplychains. The reality, however, is that it is the small scale enterprises that are the most vulnerable to rapid change, and the least well positioned to benefit, since theyhave verylittle market power, and maynot have ready access to the information, knowledge and skills required to identifyand e xploit new opportunities. 3.4 Supporting SMEs must involve strengthening their market position and their abilitytoadapt to market changes.
What are the diVerent types of pro-poor growth?
3.5 At a purelyeconomic level SMEs have disadvantages to large scale enter prises, in terms of increased transition costs, salaries and opportunities for workers and contribution to national economies. Theyare also harder to pull in to regulatoryframeworks. 3.6 However, also SMEs also have a number of advantages in terms of local level economics, social and environmental impact: — SMEs can provide opportunities for poor people that are more flexible eg in transitions from rural to urban and from familylabour to share cropping to waged labour. Profits ac crue and are re- invested locally, are more resilient to external influence (eg global market fluctuations) and are more likelyto be locallyaccountable. — SMEs can provide more flexible working conditions, be more sensitive to local culture and provide greater levels of social equity — Environmental impacts are more local and thus more likelyto be quicklyid entified and dealt with, transport distances are shorter and use of local natural resources more likely, increasing the incentive to manage sustainably.
Creatingan enablingenvironment for supportingSMEs
3.7 There are a number of critical elements in creating an enabling environment for SMEs: — Market Access—for local, regional and international markets. This requires improved access to market information, market surveys and improved links to purchasers — Improved enterprise skills development. Enterprise skills are traditionallylow in this sector, in particular the abilityto adapt to market changes. — Access to appropriate credit 3.8 There is evidence to show that support for SMEs will require an intermediarybodywhich can provide skills training, market knowledge and support regulation and qualitycon trol. In the earlystages, these intermediaries will require significant aid or government support to become established enterprise support bodies.
215 D Macqueen, IIED, 2005. 3312162055 Page Type [E] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
Ev 340 International Development Committee: Evidence
3.9 The policyenvironment has a big impact on development of SMEs. Encoura gement of SMEs requires a more interventionist approach to respond to policychanges than large sc ale enterprise. Where standards are imposed (either regulation or voluntary) and act as “entry tickets” into a market place, it is important to intervene and ensure that SMEs are provided with an opportunityto take a dvantage, otherwise a very large opportunityto create change maybe lost.
Aid Instruments to encourage SME development 3.10 It is clear that directing funding through larger institutions and budget support, with emphasis on macro growth will not provide incentives for the kind of policyinterventi ons that will ensure the SME sector develops appropriatelyfor social and environment benefits. To make the mo st of this potential a far more interventionist approach bygovernment/aid agencies is required to crea te an appropriate policyand support environment.
Example of the Goodwoods programme in East Africa216 3.11 The Goodwoods project in Kenya is an example of how strong intervention can allow small scale enterprise to grow in a waythat promotes social equityand environmental s ustainability. The programme in East Africa was supported byWWF and Oxfam to support market entryfor woodc arvers using sustainably harvested wood. 3.12 With severelydiminished hardwood stocks, Kenyancarvers have predo minantlyused illegally logged hardwoods from Kenyan forest reserves or from Tanzania. The practice has been highly unsustainable, threatening the livelihoods of carvers and their families, as well as significantlycontributing to the loss of East African forests of global biodiversityimportance. 3.13 This project focused on working with various partners to encourage carvers to shift to carving neem “Good Wood”, which is sustainablygrown and harvested bycoastal farmers. 3.14 To guarantee the environmental sustainabilityof the “Good Wood” car vings to the consumer and to have the abilityto access ethical crafts markets, a major aim of the proj ect has been to achieve Forest Stewardship Council (FSC) certification. The prospect of new markets and re-invigorating export markets has been an incentive for carvers to switch to Good Woods and participate in the certification scheme. 3.15 The “Good Woods” project is an innovative project in manyways.It has b een a veryholistic project that has been able to combine work from field to policylevel and private sect or to government involvement. It has also been judged as a rather successful attempt of a true integration of livelihood and conservation approaches. This has been achieved using a market based approach. It was one of the first projects attempting to applycertification to woodcarving and farm forestry.
4. Section 3: Joined-up UK Policy Encouraging the Development of Sustainable Pro-poor Enterprise 4.1 A number of practical cross-department measures should be considered to foster and encourage sustainable pro-poor enterprise in developing countries. For example: (6) Joined up thinking on the cycle of aid-development-trade back to the UK. Closing the loop between aid going out from DFID and measures to support trade back to the UK and Europe from developing countries. A current example comes form the EU sugar regime. The EU will open its markets for importing sugar to all countries in 2009. It will be important to provide aid now to the sugar producing least developed countries to assist them to produce sugar in a sustainable and competitive way, so they can take maximum advantage of this new market. Therefore aid can directlysupport povertyalleviation in the poorest countries, bytaking advantage of new trade measures. (7) UK government procurement policy. There has been much success to date in the debate over UK public procurement policy. This has hitherto focused on environmental public procurement, but has not embraced a development agenda. The UK government could aim for preferential access for the same “green” goods and services, but from developing countries—supporting sustainable private sector enterprise development. (8) Ensuring corporate responsibilityof UK parent companies with intere sts overseas. The removal of the Operating and Financial Review (OFR) has reduced the reporting requirements of UK companies on the social and environmental impacts of their overseas business interests. It is essential that the CompanyReform Bill re-instates the reporting require ments, to ensure that UK companies are accountable for their impacts on workers, communities and the environment overseas.
216 Kenya “Good woods” Project Lessons Learnt Report, Susanne F. Schmitt and Deborah HeaneyWWF-UK October 2005. 3312162055 Page Type [O] 19-07-06 12:28:37 Pag Table: COENEW PPSysB Unit: PAG1
International Development Committee: Evidence Ev 341
(9) The on-going FCO Sustainable Development Dialogues with the BRICS countries (Brazil, Russia, India, China and South Africa) could playa critical role in supporting pri vate sector in these rapidlyexpanding economies to develop in a more sustainable manner. (10) It will be important to work with the ex-pat communities in the UK who have significant business interests overseas, for example the Indian Business Council. These groups collectivelyhave considerable economic strengths which can be built on. February 2006
Printed in the United Kingdom byThe StationeryO Yce Limited 7/2006 331216 19585