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What part will private funding play in the future of overseas development?

5 March 2012

LCID Executive Committee member Charlie Samuda reviews a recent event “The New Architecture of Aid: The Role of Private Capital” organised by Article 25.

Private funding and donations from governments to private companies forms an increasing percentage of the total flow of aid to developing economies. The consequence of this, and how to adapt to this new reality, was the theme of a recent debate hosted by Article 25. But it is clear that all political parties need to challenge their existing view of the role played by the public and private sector when it comes to international development.

Article 25 is an organisation that supports secure and safe housing in the developing world though architecture and construction expertise. The theme of the ‘Architecture of Aid’ was however, a broader debate on what part the ‘pro-poor private sector’ can play in an aid landscape previously dominated by government-to-government funding. Despite a broad topic and a diverse set of panelists (an architect, a philanthropic fund manager, an academic and an NGO policy manager) it was interesting to see consensus emerge around both the opportunities and limitations of privately funded aid.

The dynamic of development assistance is increasingly shaped by funding from private sources to communities instead of the post-Bretton Woods model of donations by states and their agencies to governments. Under the Coalition, for example, half of the UK’s aid to India is now channeled through private companies. But it is not accurate to talk about private funding displacing its state equivalent. The level of funding from remittances from overseas communities back to their families dwarfs that of funding from philanthropy according to the World Bank. According to the OECD’s estimate less than 20% of aid from their member countries is directed towards the private sector.

Nonetheless it is clearly the case that private sources of aid are growing rapidly and are in many cases adding real value to their recipients. To take just one example the Acumen Fund began supporting a small Tanzanian textiles firm that was looking to expand domestic production of anti-malarial bed nets – the company now has 15% of the global market. In cases such as this the private sector has two advantages over public agencies. First, because it is generally better funded than the state it can afford to fail, learn from mistakes then recover.

It is what the Acumen Fund calls ‘patient capital’ – it expects a return on investment eventually but not in the short term. Second, private sector organisations contribute skills and expertise that are often more valuable than the initial funding.
Examples cited by the panel included architecture charities sharing their construction techniques and ex-financial services professionals providing post-investment support to developing country start-ups.

It is, perhaps to be expected that the gains of funding and expertise can come at the expense of democratic accountability when the private sector is involved. But more surprising is the limited extent to which the effectiveness of private sector aid has been measured.

Governments often claim, for example, that directing overseas aid to private companies boosts local employment however according to Alison Holder at Save the Children the evidence for this is limited; the link between donations and employment is often assumed but rarely proven. The preponderance of large companies rather smaller enterprises (SMEs) as a source of private capital for aid can also present problems. On a global level over 80% of aid to pro-poor firms goes to large organisations rather than the smaller employers where possibilities of a trickle-down effect are greater.

The lesson for political parties from this is clear – lazy assumptions about ‘private sector efficiency vs. public sector sluggishness’ or ‘good government sponsored aid vs. bad private sector aid’ do not hold when it comes to funding development. Given the Coalition’s focus on ‘outcomes’ at DFID, their reliance on the untested nature of private sector funding looks as if they have taken this decision uncritically. There is a difference that should be recognised between the private sector as a source of aid and private sector as a deliverer of aid and care should be taken that the aid model is appropriate for the circumstances.

Labour needs to recognise the power of private funding to complement, rather than replace, government spending on international development. But this recognition should sit alongside a healthy scrutiny of what private agencies are delivering as a result of their government support – for example when we say they create jobs in developing countries the question needs to be asked what kind of employment and for who, and in what conditions?

It is equally clear, however, that private sources of aid can bring assistance that couldn’t be achieved through public channels alone not least because of the non-material benefits that these organisations bring (such as technical expertise). Automatically treating the private sector as an unwelcome partner in international development is therefore not a sensible strategy from any party.

In short the balance between supporting public and private aid can be achieved by recognising that private capital is at its most useful when it gets closest to grassroots organisations in the communities it is trying to help or when channeled through SMEs. Whilst there is work to be done on measuring the longer term sustainability of this new aspect to the international aid landscape it is clear that the trend can certainly be a positive one.

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