Leveraging aid to boost poverty eradication through private sector. A good idea but not that easy.

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Following up a communication from the European Commission (in practice a strategy framework) on how to involve private sector in the overall EU approach towards developing countries, on 12th of December, the Development Affairs European Council, has endorsed a new strategic focus aimed at  leveraging the power of the private sector to harness international development  cooperation to fight poverty.

The final conclusion of the Council makes clear that the overarching of any enhanced cooperation with the private sector must remain focused exclusively on poverty eradication through sustainable development.

It is very important that the member states are emphasizing the fact that private sector role must be instrumental towards the overall objective of fighting poverty and social inclusion but concerns remain.

The European Commission in its paper published in May had proposed a very comprehensive approach to make sure that the private sector can maximize its contributions towards poverty eradication.

The European Commission says “the strategic use of grants allow the Commission to leverage additional development finance for infrastructure development and support for micro and small enterprises”. Focus is also been given on ensuring that women and youth can benefit the most from this new approach but the devil is always in the details.

The EU is trying also to offset criticism by offering principles and criteria on how and when aid can be used for private sector development.

The Commission set out clear principles and criteria on how and when is possible to mobilize public aid money to boost private investment for poverty reduction including a focus on employment creation, inclusiveness and poverty reduction, respect for a market based solutions and a comprehensive  policy coherence in matters of private sector support and other dimensions of aid policies.

Additionally the criteria laid out focused on ensuring measurable development impact, enforcing the principle of additionality that means that without public support (public aid) the private sector won’t mobilize its own resources, neutrality (no distortions of the market), shared interest that means a equal co-founding from the private sector and very importantly adherence to social, environment and fiscal standards.  Principles and criteria are key but how to implement and enforce them?

Certainly the move of the EU to start a serious engagement with private sector is undoubtedly a very positive note but at the same time there are also concerns, primarily regarding the effectiveness of using aid to boost poverty reduction interventions through the scaling up of private sector funding.

Blending, the foundation of this approach is quite controversial by itself. By blending we imply complimentary use of grants and loans, in short combining EU grants with loans or equity.

Eurodad, a civil society umbrella organization, argues that private finance cannot be seen as a substitute of public finance. The point is very valid as any additional investments to strengthen the private sector, either to expand it or consolidate its “social dimensions”, cannot be a replacement of the role of the government.

In its analysis of new EU policies, Eurodad also states that private sector must meet development effectiveness principles also by “establishing clear, transparent mechanisms to pre-assess and monitor and evaluate the private sector projects”.

It also stresses the importance that “there should be due consideration to the opportunity cost of using public money to support private sector”.

Again from Eurodad “placing private finance at the center of the development agenda is a major cause of concerns without an equal focus on building strong and effective regulatory environment”.

The EU recognizes the challenges “such as how to identify the best approaches and models for cooperation with private sector in development cooperation. The needs are huge, certainly the private sector, through multiple initiatives including CSR, can play a much bigger role to fight poverty.

While there is wide recognition that private sector’s involvement in the fight against poverty eradication is more and more relevant and to some extents it is even more effective than traditional aid, public interventions remain indispensible.

Certainly the governments in the developing countries can do much more to involve and engage the private sector to create spread out prosperity among the masses.

In particular the governments should pay particular attention to the so called “social businesses” that are for profit entities that, while pursuing profits, also attach great considerations to social dimension of their activities. In Nepal the sector is still small but slowly growing.

While allowing the private sector to do its work ethically, the governments can step up their social protections instruments that do not bring prosperity (this is market’s primarily job) but at least ensure a certain level of minimum standards in matter of welfare.

Welfare society is better than market forces because it offers everybody the same chances to succeed in life. Market is equally important but welfare policies create a level playing field to overcome inequalities.

Nepal recently hosted an international ethical business conference. We could start from the basics ensuring that companies are, first of all, ethical by not cheating, by treating their employees fairly and by paying taxes. CSR is for me just like the ice on the cake.

We see in Europe how many big corporations, while doing CSR, have been exploiting legal loopholes to pay ridiculous taxes. Finally the EU leaders have agreed to put an end to these practices that though legal are certainly not ethical.

Finance instruments can also be of great help provided that legislations, regulations are in place and most importantly provided that leaders from finance and business sectors are really serious about doing their job to make the world a better place for all. Up to the governments to have the strength and the will to ensure this happens.





Position: Co -Founder of ENGAGE,a new social venture for the promotion of volunteerism and service and Ideator of Sharing4Good

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