Unclassified Unclassified Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 07-Oct-2015 English text only Development Co-operation Directorate Directorate for Financial and Enterprise Affairs Development Assistance Committee Investment Committee DONOR SUPPORT TO LOCAL PRIVATE SECTOR DEVELOPMENT Concept Paper and Methodology for Research Advisory Group on Investment and Development (AGID) 14-15 October 2015 This document is for comment and discussion in Item 3.b of the draft Agenda [COM/DAF/INV/DCD/DAC/A(2015)2/REV1]. Emilio Chiofalo, Tel: +33 (0)1 45 24 78 60 email.emilio.chiofalo@oecd.org Kaori Myamoto, Tel: +33 (0)1 45 24 90 09, email: kaori.myamoto@oecd.org JT03383338 English text only Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
DONOR SUPPORT TO LOCAL PRIVATE SECTOR DEVELOPMENT I. Introduction 1. Since the Monterrey Consensus, the private sector has increasingly been highlighted as a major driver of economic growth, human development, and poverty reduction in developing countries. The prominence of the private sector in development discussions suggests that market-based approaches are gaining significant traction, reshaping the traditional role of governments and donors in promoting development. This is all the more evident as the current global development framework arising from the Financing for Development Conference in Addis Ababa and the new Sustainable Development Goals agreed in New York extensively recognise the private sector as a dynamic force in delivering sustainable development. 2. In this context, the Development Assistance Committee (DAC) has increasingly been working on understanding the modalities to leverage and promote private-led sustainable growth 1. These activities build on earlier work, such us the 2006 POVNET s report on Promoting Pro-Poor Growth: Private Sector Development as well as Promoting Private Investment for Development: The Role of Official Development Assistance with the Investment Committee. DAC s efforts on the private sector have recently intensified after the creation of the Advisory Group on Investment and Development (AGID), particularly around the Policy Framework for Investment (PFI), which obtained a Council Recommendation at the Ministerial Council Meeting of June 2015. Current activities also include a peer learning exercise on donors working with and through the private sector. As part of the deliverables for the DAC s Programme of Work and Budget 5.1.3.3.1, this paper presents a proposal on examining donor support for local private sector development, a topic that has drawn significant attention in numerous DAC discussions. II. Analytical Framework 3. Despite the wide-ranging interest in market-based approaches in development co-operation, there is a lack of clarity in understanding the different approaches that donors can take towards the private sector, particularly because the latter can be regarded as both a means and an end in itself. In the first case, donors work with the private sector to leverage financial resources and to harness its expertise and innovation, mostly from foreign companies. Here, the private sector is an instrument for more and better development and not an objective in itself. In the second case, however, support is provided to promote the development of the local private sector of developing countries themselves. This support is based on the rationale that a functional local private sector can result in inclusive job creation, poverty reduction, production of goods and services for the poor, tax revenues for the government, while reducing the reliance on foreign investment and aid. 1 Report on most recent activities are included in Pages 30-31 of 2015-16 Programme of Work and Budget January to June 2015 Committee Progress Report [DCD/DAC(2015)24] for PWB 5.1.3.3.1. The document that was used as a basis for discussion at the 6 July DAC discussion was Leveraging Private-Led Sustainable Growth: Draft for Consultation with Members [DCD/DAC(2015)20/REV1]. 2
4. The proposed research will examine the policies and activities of donors in the second case above, namely supporting private sector as an end, or to promote local private sector development (PSD). This implies that there will be less focus on support to the private sector as a means to development, i.e. facilitate private companies to provide additional financial resources and expertise for development. To clarify, PSD is defined in this report as development co-operation that concern the improvement of policies and institutions, market functioning and enterprise resources that facilitate the participation of indigenous companies particularly micro, small and medium enterprises (MSMEs) in the economy of a developing country. 5. Along these lines, donor support to PSD is categorised at the following three levels (also see Figure): Upstream Level Public Policy and Institutions Upstream support focuses on activities related to the creation and implementation of the appropriate rules of the game to promote a sound and competitive economy conducive to private sector-led growth. Here the recipients of donor programmes are exclusively the public sector. Activities covered are technical assistance to policy-making or reforms in areas such as financial stability, competition, labour markets, trade policy and specific industrial sectors, as well as capacity building of public institutions in order to enhance the business environment. Midstream Level Market Functioning Development co-operation at the midstream level aims to strengthen the functioning of the market. In particular, support provided at this level concentrates on addressing the causes of market failures that hinder the inclusive and pro-poor development of the local private sector. These activities include: expanding access to financial services; developing appropriate economic infrastructure; enhancing human resources and; reinforcing commercial linkages to local clusters as well as regional and global value chains. Development co-operation at the market-level is about capacity building, technical assistance, and financial support directed to both the public and private sectors, depending on the nature of the institution concerned. Downstream Level Enterprise Resources The support offered by donors at the downstream level targets directly indigenous companies in developing countries. The objective is to either help increase the competitiveness of indigenous companies, predominantly MSMEs, or to promote competitive and innovative business models for development. The first objective is pursued by reinforcing the productive and managerial capacity of indigenous companies. Specifically, donors work to provide technical assistance and financial support to address issues such as formalisation and improving human and financial capital. In terms of business innovation for development, the main instruments are challenge funds, i.e. facilities providing financial resources on a competitive basis to innovative business models that bring about social and environmental outcomes. 6. As a note, it is important to clarify that, despite the explicit focus of this research on the indigenous private sector, the support provided at the upstream and midstream levels inevitably affects foreign companies. Firstly, the impact of policy and institutional reforms, such as improving business registration and licensing, or the provision of infrastructure and financial services, could benefit all firms, both foreign and indigenous. Secondly, support to strengthen the functioning of the market, which is crucial to PSD, can be carried out through assisting foreign companies. In fact, support to foreign companies is often instrumental in providing know-how and technology, infrastructure, financial and business development services to the benefit of indigenous companies. In view of this, the research will be focused on activities that have clearly targeted local PSD as well as other activities that have demonstratively benefitted PSD. 3
Figure: Analytical Framework for Donor Support to Local Private Sector Development Enterprise Development Productive Capacity Business Management Innovation Market Functioning Financial Services Infrastructure Skills and Human Development Commercial Linkages Business Development Services Downstream Midstream Upstream Public Policy and Governance Policy Framework Macroeconomic and Financial Stability Competition Trade Labor Markets Industrial Sectors Public Governance Rule of Law Business Registration and Licensing III. Research Rationale and Methodology 7. The objective of this research is to build on DAC s work on understanding the role and activities of donors in promoting PSD in developing countries, including drawing out good practices, lessons learned and policy recommendations. For this reason, the analytical framework provided above was developed, which was based on an extensive literature review of empirical research on PSD undertaken by international organisations, (e.g. World Bank, IFC, ILO, UNCTAD, UNIDO, UNDP, etc.); bilateral donors (e.g. DFID, SIDA, DANIDA, USAID, etc.); think tanks (e.g. DCED, ODI, etc.) and; other research institutions. The framework has been designed to generate synergies with research work done by other organisations while avoiding overlaps. This involved contacting PSD specialists from research organisations, such as DCED. 8. Furthermore, the analytical framework allows using OECD Creditor Reporting System (CRS) to quantify the support provided by donors for local PSD, which is missing in available research on PSD. Data from donors reporting at the activity level to the CRS will be used, according to the different levels of intervention. The CRS data is classified in Purpose Categories, i.e. categories indicating the main objective of the projects reported within them 2. In particular, relevant CRS Purpose Categories will be matched with the policy areas under the analytical framework provided above (see Table). In this regard, projects reported under each CRS Purpose Categories that are not relevant will be filtered out, as appropriate. 2 For instance, if a project is about building the capacity of a government institution, it will be classified under the Purpose Category Public sector policy and administrative management. Likewise, if a project is related to improving the technical skills of local workers it will fall under the Purpose Category Vocational Training, and so on. 4
9. Agencies and institutions may also be contacted to obtain clarity and further information on their activities on PSD as well as to confirm the appropriateness of the project selection for quantitative analysis. Table: CRS Categorisation of donors support for local PSD POLICY AREAS CRS PURPOSE OR SECTOR CODE Policies and Institutions (Upstream) Policy Framework Financial policy and administrative Management (Purpose Code 24010) Industrial policy and administrative management (Purpose Code 32110) Trade policy and administrative management (Purpose Code 33110) Regional trade agreements (RTAs) (Purpose Code 33130) Employment policy and administrative management (Purpose Code 16020) Policy Framework Macroeconomic and Financial Stability Competition Trade Labour Markets Public Governance Rule of law Business Registration and Licensing Financial Services Economic Infrastructure Skills and Human Development Business Development Services Commercial Linkages Productive Capacity Business Management Innovation Market Functioning (Midstream) Enterprise Resources (Downstream) Public Governance Public sector policy and administrative management (Purpose Code 15110) Public finance management (Purpose Code 15111) Decentralisation and support to subnational government (Purpose Code 15112) Legal and Judicial Development (Purpose Code 15130) Anti-corruption organisations and institutions (Purpose Code 15113) Formal sector financial intermediaries (Purpose Code 24030) Informal/semi-informal financial intermediaries (Purpose Code 24040) Education/training in banking and financial services (Purpose Code 24081) Economic Infrastructure (Sector codes 140, 210, 220, 230) Business support services and institutions (Purpose Code 25010) Vocational training (Purpose Code 11330) Advanced technical and managerial training (Purpose Code 11430) Trade facilitation (Purpose Code 33120) Trade education/training (Purpose Code 33181) Small and medium-sized enterprises development (Purpose Code 32130) IV. Examples of Relevant Activities 10. The Box below is an initial list of examples of donor projects categorised under the three levels of the framework, i.e. upstream, midstream and downstream. This list has been compiled only to illustrate the elements of the analytical framework presented above. In the research, these types of projects will be examined more in depth to draw out lessons and to inform policy recommendations. 5
Box: Examples of Projects Upstream level IFC s Tax Reform Project in Latin America and the Caribbean The IFC has been running a Tax Reform Project in Latin America and the Caribbean since 2013. This advisory service project promotes PSD through assisting governments in streamlining taxation procedures to reduce compliance burdens for business taxpayers. In Colombia, this involved assisting participants at the national and subnational levels, including the Ministry of Finance, the National Tax Administration, the Chamber of Commerce of Bogota and the Bogota Secretary of Finance. With a USD 2.3 million grant funding, the project aims at making it easier for private sector actors to adhere to regulations, which promote formalisation of informal enterprises, private sector growth, as well as increase in tax revenues. Australia and UNDP supporting the New Enterprise Law in Vietnam Backed with funding by Australia, the UNDP provided technical and other support to the Vietnamese Parliament in drafting a new enterprise law in 2000. The law eased many of the key difficulties related to starting and operating a business in the country, reducing the amount of paperwork required. Already by 2003, the new law had resulted in the registration of 55,000 new businesses an increase of more than 350% from 2000 and the creation of more than one million jobs. Midstream level Funding a private equity fund through Development Finance Institutions (DFI) in Angola In 2009, the Norwegian DFI Norfund committed USD 11 million to the Fundo de Investimento Privado Angola, the first private equity fund in Angola. The investment aimed at strengthening the financial sector in Angola, providing long-term funding that was previously unavailable. The fund provides individual investments via equity or other long term financing instruments in SMEs in Angola, including expansion of projects, management buyouts, management buy-in, privatisations and startup investments. To date, the fund has USD 39 million of committed capital, with other investors including the European Investment Bank, the Spanish Ministry of Foreign Affairs and Co-operation, and the Danish Investment Fund for Developing Countries. Norfund also holds a 50% ownership share of the management company together with a local bank. ILO and Sida Enterprise for Pro-Poor Growth (Enter-Growth) in Sri Lanka The Enter-Growth project, running from 2005-2009, sought to tackle obstacles facing SMEs such as market access, lack of business services and enterprise culture. With a USD 5 million funding, the project facilitated system-wide changes in sectors such as fish farming and floriculture. Among other things, Enter-Growth provided training to service providers and established the Tropical Floriculture Association, which represents small-scale growers vis-á-vis the government. Over five years, Enter-Growth has tripled the income of 16,400 enterprises and increased employment by 15% in targeted divisions. Downstream level USAID s Women s Leadership in Small and Medium Enterprises (WLSME) in Kyrgyzstan The objective of the WLSME project run by USAID between 2010 and 2015 is to reduce the barriers to human capital, social capital, and information that limit the growth of women s enterprises. With a budget of USD 2 million, the project has already provided training to over 600 women entrepreneurs by offering training directly, particularly in the garment production, tourism and agribusiness sectors. Competitions are also run, where 100 women with high growth potential have been awarded access to tailored technical advice, technical training, exchange visits, mentorship, and micro-grants to buy down the costs of implementing upgrades to their businesses. The multi-donor Africa Enterprise Challenge Fund (AECF) The AECF is a USD 244 million challenge fund operated by Alliance for a Green Revolution in Africa (AGRA) and funded by several bilateral donors including UKAid, Sida, Danida, Netherlands and Australia. The fund promotes innovation and growth among African companies by awarding grants and repayable grants to private sector companies to support innovative business ideas in agriculture, agribusiness, renewable energy, adaptation to climate change and access to information and financial services. Since the launch in 2008, 20 competitions have been held, funding 218 projects all over the continent, creating almost 4,000 jobs and benefitting over 650,000 households. This reflects the fact that most of the impacts come from changes in the market system, for example through replication by other companies. 6
V. Timing 11. Preliminary research results will be presented at the next AGID conference scheduled for 9-10 December 2015. Based on the comments received at this meeting, a revised version will be issued towards the subsequent AGID of March 2016. VI. Questions for Discussion Delegates are invited to give comments on the conceptual framework and methodology as well as to provide guidance in developing this work stream. 7