Janine Grant Issue Brief No. 1/2020 April 2020 By: Fakri Karim
1. Private Sector Engagement in the Sustainable Development
As promoted by Addis Ababa Action Agenda*, partnership and collaboration between public and private investments is critical to support the achievement of the Sustainable Development Goals (SDGs). Public finance alone is not enough to achieve the SDGs, and private investment should play a major role to complement publicly financed efforts. The challenge is how public and private investment should work together in an integrated framework, given that they have different investment goals and approaches. Public finance aims to improve social welfare while private investment focuses on increasing profits and benefits for the private sector. When it comes to local development, however, the objectives of public and private investments are rather more compatible and can be mutually reinforcing. Public finance should facilitate the improvement of the local economy by supporting infrastructure, while private finance can bring the necessary capital to boost the local economy through a variety of local economic activities, such as increasing local production and value chains, which in turn increase local revenue.
2. Moving Away from Parallel Investment to Integrated Economic Development
Frequently, industry and other private sector actors claim that their investments in the local economy result in development benefits for the local community, as many local jobs were created and new infrastructure developed. The reality is that public and private investments emerge from different planning processes, driven by different needs and monitored using different mechanisms and tools. This means that public and private investments in the local economy are implemented in parallel with different targets. When investments are not mutually supporting they can more easily undermine the impact and sustainability of individual investments, bringing little to no impact on the local economy and the community. The challenges are even bigger when non-governmental organizations, as a key development partner, come with grant finance, mostly from Official Development Assistance (ODA), which has its own goals and targets parallel to the public and private investments mentioned above. It is not uncommon for grant finance to compete with public finance to target the same local development issue, instead of playing an important role to use its resources to leverage public finance capacity to improve the local development strategies, systems and mechanisms and facilitate private investment for growth. For effective development, the three types of resources mentioned above should be implemented in an integrated way to achieve the SDGs, particularly at the local level, based on a harmonized strategy and approach.
3. Challenges: Policy and Planning Processes
While the Addis Ababa Action Agenda and the theory behind private sector engagement in order to achieve the SDGs makes sense, there are several practical challenges that need to be overcome in order for theory to become actionable and feasible. The first challenge that needs to be addressed is the capacity of local government to coordinate three separate streams of financial resources in a single, integrated planning process in order to identify common development targets. Currently, local government will set local economic developments targets based on the limited public resources available, while the private actor will define its own investment priorities based on its needs and, potentially, its corporate social responsibility strategy, without due consideration of whether or not these investments can leverage the programmes identified by government or vice versa. Finding the right level of coordination is the key, whether at the national or subnational level. The second challenge is to harmonize local economic planning and investment around real economic potential – infrastructure and businesses that leverage community strengths (local natural resources, geography and population) so that the investments are not superfluous. A major turn off for most private sector engagement with government is the lack of strategic planning at the local level – more wish list, less targeted investment. Facilitating understanding of the needs and mandates of local government and local industry is a critical challenge in order to find common ground for cooperation. The third challenge is understanding how to use the resources (financial and knowledge) of non-governmental actors present in the community. The financial resources of non-governmental actors (national and international NGOs, international organizations and bi-lateral development partners/ODA) are discrete and are not sustainable sources of local development financing. However, over many years, and in some cases decades, non-governmental finance and in particular ODA in local development, expectations and dependencies have developed. Financial resources that do not integrate with local government budgets often implement activities in parallel with local government development plans, either overlapping or filling gaps, relieving local government of some of the pressures of its mandate. In the rare cases where this kind of finance is integrated into local development plans for major investments such as infrastructure or education, longer-term planning for operations and maintenance, or salaries, tend to come as a shock to local governments when programs come to an end. Thus, in an environment where there is increased investment from the private sector for local economic development – a more stable and sustainable financing resource – what is the role for civil society and ODA? Local government, and industry, should capitalise on the seed funding and knowledge resources that civil society and ODA brings, supporting the piloting of new models of investment (approaches, systems, mechanisms) that can be scaled up using public and private financing. In this scenario, non-governmental funding takes on the risk of testing new/innovative models, the results of which help to de-risk the private investment necessary to scale-up the initiative. Non-governmental resources can also be used to increase the capacity of both government and the private sector for joint planning, monitoring and evaluation for local economic development, helping both actors to better understand how these investments contribute to wider improvements in community welfare and resilience.
4. What’s Next: In Pursuit of Shared Goals
The concept of ‘shared goals’ aims to move the relationship between the public and private sectors away from the mind set of ‘what can you do for me’ towards the idea of ‘what can we do together’ in order to have mutually beneficial outcomes. How does this happen? Focus on local value chains. Local economic development activities need to focus investment in value chains, and where industry is a major actor in the local economy, development planning should target the value chains that connect with those industries. For example, in the agricultural sector (wheat, rice, palm oil, sugar, etc.), local businesses provide trucking services, catering, and indirect services such as local shops, restaurants and other trading services that increase local business opportunities. This approach provides incentives for both the public and private sector to work together towards common goals: secure supply and value chains for the private sector, job security and increased revenue for the local government. For local businesses, it is important that they have a clear understanding of the market based on industrial needs. Non-government programs to increase capacity of local businesses to assess local markets and link into existing value chains, or fill existing gaps in the chain are an important component of the shift towards sustainable local economies. Further, with a strong business case and a secure place in the local value chain, small businesses can approach domestic banks to inject capital to allow them to expand their operations. This is another form of private investment for economic growth and increased revenue for local government. This also resolves the issues of how to reinvest local capital back into the local economy when there is an absence of a stand-alone local economic investment mechanism. Identify common local economic development targets. Figure out how public and private investment can meet the priorities of both stakeholders. Planning and implementing activities that align with respective mandates and leverage strengths but contribute to common local development targets is essential. Where issues of planning, monitoring and evaluation processes differ, non-governmental programs can provide facilitation, capacity building and support to help harmonise these systems. This will allow local development activities to be measured against the common targets. Reduce investment risks for the private sector. When investment in local economic developed is deemed too risky for the private sector, it is critical to use non-governmental grants and public finance to test models and mechanisms that can promote sustainable growth. Proven models and mechanisms for investment reduce the risk to the private sector, which can incentivize their participation and allow for opportunities to scale-up models that provide mutually beneficial outcomes for both the public and private sector. Use non-government grants and public finance to identify and test models and improve the supporting infrastructure for local economic development. Once proven, the risk to private finance is reduced, creating more incentives for investment and scale-up, whether it be in infrastructure or value-chain sustainability, for example. The overarching goal of engaging the private sector in local economic development is to use local resources more efficiently and effectively to overcome local development challenges. Leveraging private investment in pursuit of local economic development has many advantages: a thriving local economy brings growth an opportunity for the private sector; public finance is freed up to improve the quality of services such as education, health care and environment; a combination of economic growth and improved services, if targeted appropriately, can reduce inequalities in the community and increase opportunities for livelihoods, furthering education and local resilience to environmental, social and economic shocks. When the public and private sector have shared goals for economic development, the benefits can be exponential and create sustainable opportunities for growth.
* For more information, please see here.