Privatisation of aid?

I was asked to speak this week at an event on ‘A New Architecture of Aid:  The Role of Private Capital’, organised by Article 25 (an NGO that designs, builds, and manages projects to provide better shelter wherever there is disaster, poverty, or need) andthe Royal Institute of British Architects.

More aid money goes to and through the private sector

I argued that despite the fact that governments are devoting more of their development spending to private sector development (eg, Andrew Mitchell said on the Andrew Marr show last week that half of the UK’s development budget for India now goes into pro-poor private sector investment), we still know very little about the impact of these projects and investments on poverty and inequality.

Pro-poor private sector investment?

There has been increasing attention in recent years directed towards the aid that goes towards long-term financing for private sector enterprises in developing countries.

In 2011, for example, the World Bank was under fire for investing through tax havens, reducing the taxes developing country governments have to invest in development.

And the CDC, the UK’s development finance institution, was under scrutiny in 2010 with questions about whether its investments were ‘pro-poor’ enough to meet DFID’s poverty reduction mandate (including in a submission by Save the Children to the International Development Committee). 

CDC’s investment in The Palms, a luxury shopping mall in Nigeria, and the £1 million salary of its former CEO became emblematic.

Measuring development impact of private sector investment

The CDC and most of the development finance institutions that invest in private sector development projects have fairly rudimentary ways of measuring their ‘development impact’.  The metrics used are generally:

• employment (numbers of jobs created, expenditure on training, wages, etc.)
• access to services (eg, phone lines)
• taxes paid
• yes/no question about whether the fund manager has a system for managing ‘social, environmental and governance issues’.

For me, these impact evaluations raise more questions than they answer.

• What kinds of jobs?
• For whom?
• Where?
• Were they decent jobs?
• How much did local small and medium enterprises (SMEs) benefit?
• Who has improved access to services and who hasn’t?
• Were taxes paid fair?
• What were the tax structures around the investment?
• Were local communities consulted about the project?
• What was the social and environmental impact?
• What was the impact on women and other marginalised groups?

The World Bank’s own evaluation found that “more than half (57%) of the International Finance Corporation’s [IFC, the World Bank’s development finance institution] projects fail to reach the poor”.

We need better ways of measuring the impact of the private sector investment activities of development agencies (like DFID), multilateral development banks (like the World Bank) and development finance institutions (like the IFC) because the impact of their investments on poverty and inequality cannot be assumed or taken for granted.

Maximising the positive potential of private sector investment

In order to maximise the positive potential of private sector approaches to development, we need to improve the way we measure development impact.

This is a good time to be having debates about the role of private capital in aid.

There are many signs that development finance institutions are open to changing the way they measure development impact.

The World Bank has a new policy on the use of tax havens; the IFC is in the process of reforming its Development Outcomes Tracking System (DOTS); and the CDC has a new business plan and renewed focus on development impact.

This is an area that Save the Children will be continuing to explore.

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