26.05.2014 | Eurodad

The European Commission's Private Sector Plan in Development Cooperation

The European Commission’s new private sector plan reveals an attempt to redraw European development cooperation to promote policy change in developing countries. There is a strong likelihood that this will mean pushing an agenda that is friendly to European companies, while failing to tackle the fact that the main European impacts on the private sector in developing countries are driven by European policies in other areas such as trade, investment, agriculture, and tax.

On Tuesday 13 May the European Commission (EC) released its promised communication on ‘a stronger role of the private sector in achieving inclusive and sustainable growth in developing countries.” It sets out a strategic framework that contains seven principles, six criteria and 12 actions, aimed at “harnessing the potential of the private sector as a financing partner, implementing agent, advisor or intermediary to achieve more effective and efficient delivery of EU support”. While it is widely stated that the private sector has a role to play in development, as both creator of decent jobs and driver or economic growth, its contribution to poverty reduction and the fight against inequality should not be seen as a given.

High level principles and criteria
The principles of the Communcation are relatively uncontroversial statements, such as “ensure a strong orientation on results”, “follow clear criteria in the provision of direct support to private sector actors,” “account for different local contexts and fragile situations” and “observe policy coherence in areas affecting private sector in partner countries” - the latter being a key point in support of development objectives. However, these are presented as high-level statements which makes it difficult to identify how the EC is planning to put them into practice or make private sector companies comply with them.

The six criteria included are similarly high level. There are some good points made on “measurable development impact” which also include the need for “transparency as regards objectives and results”, as well as “appropriate monitoring, reporting and evaluation arrangements.” There is also an important reference to “adherence to social, environmental and fiscal standards,” including respect for the need for transparency and for private enterprise to comply with social and environmental standards and to respect human rights. As part of these criteria the EC recognises the importance of additionality – not crowding out existing private investment - which previous Eurodad analysis has shown is notoriously difficult to prove.

The most notable absence in the criteria is any recognition of the importance of ownership – that developing countries must lead their own development, and attempts to ignore or bypass governments in developing countries only lead to failed projects. This might be regarded as surprising, given that the EU has spent the last decade making and repeating commitments – in Rome, Paris, Accra and Busan - to make this the centerpiece of development cooperation.

A controversial approach
The real meat of the communication comes in the 12 actions that set out the way forward. One theme that is hard to ignore is the willingness to explicitly state that the EC hopes to “harness” its “political weight” to influence the policies of developing countries, and to promote private sector influence on those policies. The EC notes that “effectiveness of [its] operations will be further enhanced … through engagement of the private sector in action-oriented public- private dialogue at the level of policy formulation.” They promise “support for the creation of an appropriate financial infrastructure and regulatory frameworks for the financial sector”. Eurodad has long tried to persuade donors to drop their attempts to interfere in policy-making in developing countries – which can undermine democratic decision-making and open the likelihood that donor company friendly policies will be the winners.

This conflict of interest emerges at the heart of the EC’s controversial approach to try to incentivise private investments using aid money through ‘blending’. The Communication proposes a “...larger share of the EU blending facilities could be allocated to financial instruments such as loans, guarantees, equity investments, quasi-equity investment and risk-sharing instruments.” An ulterior motive for this is revealed in the same paragraph, which notes that “access to finance and risk-sharing instruments in developing countries are also an important prerequisite for EU investors to venture into these markets.” In the same vein, the EC proposes new “private sector windows” in regional blending facilities, which have hitherto been almost entirely focused on blending different sources of public finance. Worryingly, the EC promises to “expand the scope of blending into new areas such as agriculture and social sectors,” which might be extremely problematic since it is not clear that blending mechanisms are suitable for social sectors in poor countries that should not be driven by profit motives.

The EC also includes in the communication a strong push for public-private partnerships, claiming that these “can be an effective means for increasing reliable and affordable supply of public goods and services to poor people”. This is flatly contradicted by the evidence supplied by a recent European Parliament study – co-written by Eurodad – that shows that PPPs have proven to be by far the most costly form of financing for developing countries. Equally important, this cost is often nontransparent and not accountable to auditors, parliaments or civil society organisations and can imply high risk of contingent liabilities for the public side (see for example, a recent Oxfam case study on the Lesotho health public–private partnership). The study calls for a recognition that private investment rarely flows to social sectors, or to the poorest people and countries, meaning that expecting it to replace public funding in these areas is a mistaken and dangerous proposition. It is worth noting that a study published by the Dutch government’s Policy and Operations Evaluation Department in April last year already noted that “empirical evidence of the effectiveness and efficiency of PPPs is notably scarce.”
Finally, the EC rightly highlights the importance of ensuring that companies “mitigate potential human rights-, labour-, and environmental-related risks of their operations, as well as policies that prevent bribery and tax evasion.”

However, although it recognises issues such as improving trade and investment treaties, its actions are almost entirely devoid of any that involve changing European policies in other areas. There is no mention of important measures to, for example, crack down on tax dodging and the tax havens that facilitate it, or to reform European agricultural and trade policies. The only action related to such ‘policy coherence for development’ issues is a promise to “enhance market reward for [Corporate Social Responsibility] CSR in public procurement and through promotion of sustainable consumption and production”. The recognition of the impact of European procurement on development is welcome, particularly as Eurodad and allies fought hard to ensure developing countries would not be adversely affected in the EU’s most recent revision of its procurement directive. However, there are no detailed proposals in the Communication.

The way forward
As the EC gears up to implement the controversial approach set out in this communication, EU member states will have their opportunity to mitigate the problematic aspects of this communication in the next Foreign Affairs Council meeting to be held on next Monday 19 May. Eurodad strongly suggests taking into account the following recommendations:

• The EC should produce an implementation plan which takes lessons from a full and independent review of the effectiveness of PPPs and EU blending mechanisms taking into account financial and development additionality. This review should also include whether these mechanisms are in line with development effectiveness principles.

• The EC should make clear how private sector finance will be aligned to development priorities of national and local governments and should be accountable for this. All investments should give the highest priority to country owned development strategies, including national industrial and agricultural policies and strategic priorities for private sector development.

• The EC should establish clear mechanisms to pre-assess, monitor and evaluate private sector projects with a clear focus on development objectives. The pre-assessment phase should include mandatory ex-ante poverty and social impact assessments (PSIA), assuring informed consent by intended beneficiaries and affected populations. The monitoring and evaluation phase should also include the views of people directly or indirectly impacted by the projects.

• The EC should make clear how it will pursue policy coherence for development, specifically in relation to adopting regulation to curb financial opacity, tax avoidance and evasion to ensure EU companies pay their taxes in partner countries.