The growing role of the private sector in development co-operation: challenges for global governance

By André de Mello e Souza, Researcher, Institute for Applied Economic Research (IPEA), Brazil

Global development is increasingly being seen as reliant on the private sector, both for its financing and project implementation1. As Development Assistance Committee (DAC) members attempt to redistribute the burden of sponsoring initiatives abroad, they tend to shift this burden to profit-seeking corporations, while counting the funds provided to trigger investments by such corporations as part of their conceded Official Development Assistance (ODA)2. In so doing, they are also responding to the perceived dearth of resources from multilateral sources, especially the UN. Additionally, by engaging the private sector they enable and incentivise their own corporations to compete with those from China in developing countries where Chinese economic presence is deeply felt. 

However, the engagement of the private sector in development co-operation efforts and its treatment as an integral sponsor of such co-operation overseas is not limited to traditional donors, but can also be seen among Southern providers, especially those from Asia. Most notably, the concept of ‘Development Compact’, championed by India, grants the private sector a privileged position in international development co-operation across five different levels, namely, trade and investment; technology; skills upgrade; lines of credit and grants.

Today, the COVID-19 pandemic and climate change both illustrate a growing and urgent need for the provision of global public goods. As these public goods expand in number but become relatively more affordable, they can be provided by certain private corporations that enjoy enhanced market power. Development partnerships and governance structures which include the private sector may also become demonstrably both more legitimate and more efficient than those set-up solely between governments, which are seen as less inclusive, highly bureaucratised and slow-moving.

Yet, the rise of the private sector in the international development co-operation landscape also faces challenges and shortcomings. The first and most acknowledged of these is that private companies are primarily driven by profits, not by development needs. The risks of capture of public goods and resources by these companies, either by means of privatisation or subsidisation, or by looser regulations, is worrisome, particularly in developing countries where institutional mechanisms to govern and monitor private sector projects are oftentimes weak or non-existent.  Crucially, most financing for private-public partnerships (PPPs) tends to come from public, taxpayer resources, primarily through national development banks. Brazil’s National Economic and Social Development Bank (BNDES) is a case in point, accounting for over 27% of PPP financing in the country. As a result, in practice the bulk of the financing risk is taken on by the public sector and borne by taxpayers.  

Large private companies also often lack the skills and experience to engage with partner country stakeholders; yet their impact in development may depend precisely on such engagement.  Contextual knowledge is usually wanting, and there is much misunderstanding of local challenges and needs. For instance, multinational corporations may crowd out local and regional producers, as was the case in a public-private initiative in Kenya’s potato sector.

Finally, concerning norms, standards and indicators of international development co-operation, the incorporation of the private sector tends to undermine an essential and distinctive element of such co-operation, namely, concessionality. Indeed, as providers increasingly adopt metrics such as Private Sector Instruments (PSI), Total Official Support for Sustainable Development (TOSSD) and concepts such as the Development Compact, the risk is that the boundaries between development co-operation and self-serving economic activities may be blurred. In other words, development co-operation may become indistinguishable from profit-seeking activities such as trade and investment in all their various dimensions, and, as such, lose its primary meaning and purpose.

In light of these challenges and shortcomings, what can be done to render the contribution of the private sector to international development co-operation more effective? In general, it is necessary to create incentives for profit seeking companies to engage in development or, put differently, for the profit and developmental incentives to coincide. Some kind of global governance institution, even if not binding and non-enforceable, will be necessary for such purpose. It is noteworthy that, while foreign direct investments represent significant and longstanding development resource flows, and globalisation has made multinational corporations increasingly important stakeholders in international development, there is still no strong and functional global governance structure to regulate them3.

On the bright side, the normative content of any institution governing private sector engagement in global development does not need to be built from the ground. The UN’s Global Compact, the OECD Guidelines for Multinational Enterprises as well as Corporate Social Responsibility (CSR) or Corporate Citizenship norms and principles can and should be incorporated or adapted as necessary. Given the current lack of global regulation, the only option in the short-term may be to rely on self-regulation. Compliance with CSR principles and norms may help to boost brands as well as generate reputational gains for companies.

In the longer term, however, the elaboration of new and expanded global governance norms for effective private sector participation in development co-operation initiatives is paramount. This can be done by building on and bringing existing efforts to the same table, to ensure that they also rely on the input and compliance of Southern providers as well as, crucially, of partner countries. In fact, norms with a particular focus on development co-operation, agreed to in the ambit of the UN or the OECD already exist, such as the Kampala Principles on Effective Private Sector Engagement in Development Co-operation, adopted by members of the Global Partnership for Effective Development Co-operation (GPEDC). Although they may face fierce resistance from the Southern providers that have explicitly rejected the GPEDC, many of these principles are closely related to and overlap with the central principles of South-South co-operation; and some even make explicit reference to ‘mutual benefits’ or ‘local ownership’.4 To move forward, discussions need to be held around an inclusive table to reach mutual understanding and common ground on what these global governance norms could be.

Finally, the principle of concessionality may be also rescued and reconciled with private sector participation in development co-operation. As Gerardo Bracho has suggested5, concessionality does not need to apply solely to financial flows, as in the ODA definition, but may also apply to other kinds of flows, including trade, investment, and technology. Policies typically adopted by Southern providers that offer an advantage or concession to partners in economic transactions – e.g. lower tariffs, other preferential market access measures and less protectionist intellectual property rights – should serve to engage the private sector while also complying with the principle of concessionality, thus qualifying as development co-operation.      

The international system’s governance and frameworks have yet to catch up with new economic realities of shared challenges, new development priorities, and the emergence of new major international development players. This series offers insights from a group of experts on Development in Transition, from Asia, Africa and Latin America, on why and how the international community should empower a broader variety of actors, be guided by a wider range of voices, and employ new development narratives and indicators, and a larger set of modalities, to achieve shared global goals.

1. Evidence of this is found in the discussions that took place in many international events and their respective outcome documents, including the Monterrey Consensus (2002), the Busan Declaration (2011), Rio+20 (2012), and the Addis Ababa Action Agenda (2015).  Most importantly, the private sector has come to play a prominent role in the achievement of the 17 goals of the 2030 Sustainable Development Agenda agreed by United Nations members in 2015. 

2. This happens because ODA has been reformed to incorporate so-called ‘Private Sector Instruments’ (PSI) –  which are subsidies that come from donor countries to private actors through loans, equity investments or guarantees.

3. The international governance of foreign direct investments and multinational corporations is limited to the ones found in the OECD, to regional and bilateral trade and investment agreements and to the Agreement on Trade-Related Investment Measures (TRIMS) reached in the ambit of the Uruguay Round of the World Trade Organization. Surprisingly, there is nothing comparable in foreign direct investments to the global governance of trade, for instance.

4. This is not surprising given that the Kampala Principles build upon the Busan principles for effective development co-operation, which benefited from the input of major Southern providers.

5. Gerardo C. Bracho, “Towards a Common Definition of South-South Cooperation: Bringing Together the Spirit of Bandung and the Spirit of Buenos Aires”. Development Cooperation Review. (September 2018, 1(6)): 9-13.