The parliamentary inquiry into the role of the private sector in development received 142 submissions, including our own. Among the submissions were a number of examples of private sector initiatives which could potentially receive some funding under the government’s $140 million allocation for innovative development solutions. I recently spoke to Ernst & Young partner, Mark Nixon, about his company’s submission to the inquiry. This submission outlined a model that involves E&Y working with governments, investors and local enterprises to promote investment and growth in a number of target economies. You can read the full E&Y submission [pdf] but in case you’re short of time, the following summarises the key features of the E&Y model and some issues I think it raises.
E&Y’s approach to job creation and inclusive growth
E&Y has job creation and inclusive growth as one of it core business areas. Clients for this business are frequently state, provincial and local governments in developing and emerging economies. The E&Y submission described a job creation and inclusive growth project that started in 2010, in which E&Y was contracted to provide services to the Madhya Pradesh State, India, with the project financed by the UK aid program (DFID).
E&Y’s job creation and inclusive growth model has six components:
- reform and streamline business processes
- identify and target potential foreign and domestic investors
- develop a market-based livelihood framework
- support micro, small and medium enterprises including through access to finance
- build robust skills development programs
- estimate infrastructure needs and develop implementation plans for key infrastructure projects.
The E&Y submission cites the following evidence of the success of the Madhya Pradesh project: changes to legislation for investment approvals, simplified investment application processes, improved quality and quantity of horticultural products as a result of technical and skills training, policies in place for improved technical education, improved credit disbursement to (micro, small and medium) enterprises, and a substantial investment pipeline with some investments implemented within three months of an E&Y-organised investment expo for prospective investors.
While DFID has not done an effectiveness review of the project to date, E&Y reported that it was favourably received by the Madhya Pradesh authorities and E&Y’s investor clients, so the company had no intention of undertaking further evaluation work itself.
Some issues to explore
The six components of E&Y’s job creation and inclusive growth business appear to represent a comprehensive approach to private sector development for a regional or local economy. However, they are not substantially different from approaches the International Finance Corporation (IFC) has taken over many years, frequently with Australian government aid funding. Indeed, E&Y said that they have undertaken other work in this business area under contract to the IFC, including elsewhere India. Why might E&Y be successful where others have been less so?
According to E&Y, the necessary pre-conditions for the success of its model for job creation and inclusive growth in Madhya Pradesh or anywhere else are the rule of law, and trust in the commitment of local authorities to implement changes recommended as a result of E&Y’s analysis of the local investment environment.
E&Y also identified the following as critical to its success in Madhya Pradesh: the company’s long-term presence in India, strong network of local offices, expert staff and large client base. With these behind it, E&Y was confident in its assessment of the commitment of local authorities, the market potential of the agriculture products produced in Madhya Pradesh, and the interest among its client base in investing in new businesses in Madhya Pradesh.
It is this last point that seems to me to give a private sector global business a real advantage compared with a development agency such as the IFC in projects to promote private sector development in developing economies. E&Y had skin in this game – its reputation and future business from other state or local authorities would have suffered if it wasn’t successful in mobilising new investment in Madhya Pradesh, and its reputation among its client base would have suffered if it had not provided them with profitable investment opportunities.
So perhaps one criteria for decisions about giving the private sector a larger role in aid program activities to support private sector development could be that the private sector partner has a strong business and reputational interest in the success of the activity. Before considering replicating the E&Y model in the Australian aid program, however, it would be prudent to seek advice from DFID on planned evaluations of the Madhya Pradesh project, in particular to test for value-for-money and sustainability of the private sector development outcomes.
Margaret Callan is a Visiting Fellow at the Development Policy Centre.
Hi Margaret – interesting post. But doesn’t IFC have skin in the game as well? As a lender to the private sector in developing countries, IFC has an incentive to get a return on that investment. If donors fund IFC (through IFC advisory services) to improve the investment climate (for instance), IFC increases its chances of getting a return on its investment. Although it’s a different kind of skin in the game, IFC would also face some reputational and business incentives to generate positive outcomes.
EA, you make some reasonable points. But it seems to me that for many IFC technical assistance programs that are donor-funded, the organisation’s main focus is on satisfying donors rather than its local government or business clients. IFC’s status as a multi-lateral agency also gives it some prestige and, I suspect, immunity from the more immediate consequences a private consulting firm might suffer if it failed to deliver reasonable outcomes for its clients. Nonetheless I agree with your point that IFC may have a different kind of skin in the game than a private sector organisation.
Really interesting post Margaret. I’ll be a bit sceptical of the long-term positive results of E&Y’s engagement, at least until I see an independent evaluation – the IFC has no shortage of positive stories.
We’ve written a couple of posts arguing that contractors (such as E&Y in this case) have poorly aligned incentives with donors. (See http://aidleap.wordpress.com/2014/07/16/can-contractors-deliver-change-in-complex-systems-2/ and http://aidleap.wordpress.com/2013/11/12/why-the-private-sector-shouldnt-deliver-aid/). In this kind of large-scale private sector development, however, you make a good point that incentives are better aligned, due to the business and reputational risk. At the same time, so are opportunities for the contractor to promote their own interests, so it would need careful management.
Thanks Margaret for this post and I agree that the ‘skin in the game’ test is a useful one for establishing if and to what extent aid funding should be provided to multi-national companies. It also reinforces the importance of DFAT, ADB and others investing in understanding the contexts in which they seek to work in Pacific private sector development to ensure that the partners that are selected are the ones best place to contribute to sustainable growth in small and often fragile communities.