Private sector a catalyst for sustainable development

Private sector a catalyst for sustainable development

Lars Thunell, WASHINGTON, DC | Thu, 12/01/2011 8:50 AM

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It may come as news to some, but multilateral and bilateral development banks have increased their financing of the private sector fourfold over the last decade, boosting their annual combined investment from US$10 billion to over $40 billion.

This has been welcomed by most of the development community, although the debate on the balance between traditional development assistance to the public sector and donor support of the private sector continues.

At IFC, the largest multilateral development bank focused on the private sector, we have been at the center of this discussion, promoting the important role of the private sector in sustainable development. Recently we coordinated with 30 other multilateral and bilateral development finance institutions on a study — International Finance Institutions and Development through the Private Sector — which highlights the “virtuous circle” of public and private sector cooperation for development.

As experts gather these days in Busan, South Korea, for the Fourth High Level Forum on Aid Effectiveness, the private sector will have a seat at the table for the first time. This could be a turning-point, where we move from aid effectiveness to development effectiveness, while recognizing the mutually supportive roles of the private and public sectors.

There is no question that governments continue to be essential for development. They provide critical services for their populations, such as healthcare, education, infrastructure, and social safety nets. They also create the enabling environment for the private sector by ensuring property rights and contract enforcement, security, and macroeconomic stability, as well as the proper regulatory framework.

Governments’ role is to provide leadership for economic development and to ensure that it is shared by all segments of society. Grants, multilateral and bilateral finance, and technical assistance can help those countries that do not have adequate resources or expertise in this critical task. But governments can’t do the job alone — they are only part of the recipe for development and poverty reduction.

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

So where do development institutions come in? As the IFI report points out, they play a critical role in supporting the private sector. Firms in developing countries need financing to expand their operations, as well as better infrastructure, improved business regulations and skilled employees.

Without these, they are not able to grow, especially in the more difficult environments where poor people live and work. Development institutions have experience working in these environments and are willing to provide capital where private markets may be risk averse. They provide advice to improve markets and make projects bankable and sustainable, attracting other investors by providing comfort and risk assurance.

Moreover, they can help make private sector development more inclusive, and promote the high environmental, social, and corporate governance standards that allow projects to be sustainable.

To name just a few examples highlighted in the report — development institution funding has extended mobile phones to rural areas of Papua New Guinea, with all the benefits that improved communications can provide. In Senegal, public-private partnerships are putting in place the essential infrastructure for growth, and in India they are providing improved housing for slum dwellers. And at a crucial time in Egypt, equity investments have created jobs, while in Brazil microloans and training have improved the lives of street vendors.

Of course, at a time of scarce resources, some ask: Can donor governments afford to support the private sector as well as the public sector? The answer is yes, since in large part development institutions are self-funded, using repayments from their investments to support new projects. In fact, as a result of their success, they have had limited capital needs.

While substantially increasing their investments, most have not had significant capital contributions for decades. By contrast, aid to governments usually needs to be funded every year. Furthermore, since the enterprises supported by development institutions provide substantial tax revenues to their host countries, the need for development assistance to the public sector is reduced.

In summary, supporting the private sector with judicious investment is a win-win proposition for donor governments and developing countries. A small amount of initial capital, with some well targeted advisory services, can marshal the talents and finance of private sector investors to create economic activity that ultimately is self-financing. This should not be surprising — it is one of the historic paths to development.

The writer is executive vice president and CEO of the International Finance Corporation.

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