Aid and the private sector, JDI ≠ PPP ≠ PSD

The importance of the private sector for economic development is undisputable. Private actors – whether we talk about firms or other organisations – are an essential part of the web that forms a well-functioning society. In the process of development this is probably most clearly manifested in the rate of job creation and the formalisation of the labour market following the structural transformation of economies.

The private sector has been part of the development agenda since long, as a collaborating partner or as the objective for reform. Measures aimed at strengthening the private sector, for example by addressing market imperfections or by facilitating access to finance are referred to as private sector development (PSD). A subset of these activities concerns collaborations between the private and the public sector (private-public partnerships, PPP), for example, where the private sector provides services normally under the responsibility of the public sector, or where companies bid for donor funding for projects within their core business. As a further subset of these, a recent EBA report, launched at a seminar at Sida, uses the term Joint Development Initiatives (JDI) for partnerships that link business interests in areas of particular importance for development and poverty reduction with corporate behaviour and impact. JDIs concern partnerships in development cooperation that involve the private sector as an active partner contributing to development objectives, and not primarily as a deliverer of goods and services. This involves a shared engagement or responsibility for development benefits (and, thus, PPPs in infrastructure and public services delivery are not part of this definition).

In the report, the authors Sara Johansson de Silva, Ari Kokko, and Hanna Norberg map out JDI in Swedish development cooperation. They also analyse whether the potential development gains from these initiatives can be expected to be realized. It is not obvious that the interest (or incentives) of private and public partners are aligned, there are more or less inherent conflicts between commercial objectives and development objectives such as local ownership, harmonization, spill overs and improved market efficiency. “We need to be aware of the tension between the principles of aid and the objectives of development cooperation and the drivers of commercial operations”, Kokko said at the presentation, and “JDIs will not be the instruments that create development everywhere”.

In the comments to the report, Shannon Kindornay, Carleton University, pointed at the challenge in capturing these flows. Reporting systems do not contain markers for these partnerships and hence make it hard to get a picture of these types of instruments. This also affects results reporting. Non-shared metrics lead to problems of aggregation and comparison. This is further complicated by the fact that much of the results in terms of development additionality stem from intangibles, such as the convening power of development agencies.

Naeeda Crishna Morgado, Policy Analyst at the OECD, emphasised the particular important role that private sector cooperation has for green growth, given the immense financing gap for climate finance and other environment related development cooperation. From this perspective, there are scope for increases and scaling up of these instruments, in particular for forestry and biodiversity.

Donor agencies have a role to play in addressing missing markets, Sida chief economist Annika Sundén, stated. Guarantees and challenge funds are suitable instruments for this. The promotion of local business is crucial from a job creation perspective, also in more difficult environments such as conflict-struck countries.

As shown in the report, a small share of Swedish aid is directed to JDIs. While acknowledging the difficulties in defining and identifying JDIs, the share is estimated to about two per cent of Sweden’s aid budget. Given the promise but also the risks with JDIs, decisions to change this share substantially should be preceded by further analysis and discussion.

The seminar can be heard in full at our podrAIDio, here!