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Unlocking the power of the private sector for development

The private sector's role in providing jobs and creating opportunities is increasingly accepted by the development community as one of the most powerful forces to achieve sustainable poverty reduction.

According to the OECD Development Cooperation Directorate, “The private sector already provides, on average, 60 percent of gross domestic product, 80 percent of capital flows and 90 percent of jobs in developing countries.” For many development practitioners, the question is no longer if we should be working with the private sector, but how.

In 2015, Foreign Minister Julie Bishop set Australia’s overseas development policy on a new path, launching a private sector engagement strategy that put delivering social impact while achieving commercial returns at the heart of the aid program. One practical outcome of this strategy is the Business Partnerships Platform (BPP), an innovative program that has allowed the Australian Department of Foreign Affairs and Trade (DFAT) to partner directly with businesses and CSOs, leveraging over AUD $13.8 million in private sector co-investment through nineteen shared value partnerships to date.

The BPP uses a challenge fund approach to select and partner with established firms with a large enough footprint to achieve impact at scale. These shared value partnerships are built around commercially viable business models that have positive social or environmental outcomes. Essilor for example, is trying to expand the market for affordable spectacles in Bangladesh. The worlds’ largest eyeglasses manufacturer was not attracted to the BPP for the relatively small amounts of grant funding available, but because the BPP enabled Essilor to benefit from DFAT’s knowledge and access to the Bangladeshi political and regulatory environment.

While challenge funds target specific outcomes with a select few business partners, another method in the donor’s toolbox to effectively engage the private sector is through market systems development, or the ‘Making Markets work for the Poor’ (M4P) approach. M4P programs seek to understand all the actors in a market system and then intervene selectively in ways that lead to improved livelihoods for poor women and men at the largest possible scale.

Dancing with the System
By making deals with partners of all shapes and sizes, from small businesses to multinationals with a global reach, market systems programs try to find ways to encourage firms to try out new business models, which if successful, will last and grow. The art of finding the right partners and making the right deals – disrupting rather than distorting markets – is sometimes referred to as dancing with the system.

Globally, Palladium’s private sector development programs have been at the forefront of thinking and practice in how to effectively engage with the private sector. Economic Growth practices based in the US, UK, and Australia oversee a current portfolio of 26 programs, through which we have partnered with over 5,400 enterprises, reaching 18.2 million poor people with improved economic opportunities and livelihoods.

A fundamental principle underlying successful, commercially sustainable partnerships is ensuring that risks are shared through mutual commitment to the proposed model. A typical deal requires a minimum of 50% co-investment for every donor dollar, and this contribution can increase dramatically if the proposed model proves to be successful. At the end of 2016, Palladium’s programs leveraged upwards of AUD $677.5 million in private sector co-investment – in many cases securing investments that exceeded the total value of donor funds.

The Cambodia Investing in Infrastructure (3i) program, for example, works with private operators to expand access to water and electricity in parts of the country where there is no scope for public provision. Striking a deal means determining just the right quantity of grant funding required to incentivise operators to invest building infrastructure in a new area, which we believe has commercially sustainable rates of return. To date, 3i’s partners have co-invested more than AUD $25 million building new electricity and water connections, achieving a 236% leverage ratio on average for each DFAT dollar spent.

In Nigeria, the Propcom Mai Karfi program has generated AUD $30.2 million additional income for over 479,000 poor farmers through interventions in selected rural markets, forming partnerships with 27 private sector partners and two CSOs which have co-invested AUD $43.8 million on new business models.

Market systems programs can play an important role at the poorer end of developing economies by growing and linking businesses to global markets, catalysing additional investment, and proving the way in areas where large institutions cannot go. With overseas development assistance budgets under increasing pressure, and an estimated funding gap of USD $2.5 trillion a year in order to meet the Sustainable Development Goals, these innovation-driven programs can be an effective means of unlocking the vast resources held by the private sector to achieve sustainable, lasting change.

Click the DOWNLOAD button to see Palladium's Market Systems Development Programmes globally.

Additional reading: AIP-Rural Deal-making guidelines