Why partnering with the private sector is key to inclusive growth

Over the past couple of decades, no one can deny that the Asia and the Pacific region has represented a remarkable success story. Absolute poverty levels have fallen significantly and the region is on course to achieve a number of Millennium Development Goals (MDGs).

But more than 1.6 billion people in the region continue to live on less than USD 2 a day and remain vulnerable to shocks — whether economic or environmental. The region is also confronting widening inequalities and the challenge of enabling a decent quality of life.

A strong need remains for both dedicated knowledge support and for financing to address the region’s social and infrastructure gaps, including urgent measures to address climate change.

Over the past few years, policymakers and development finance institutions (DFIs) have increasingly looked to the private sector to help meet these financing needs. In the right investment climate, the private sector can support the inclusive and environmentally sustainable growth that is at the heart of the global development agenda.

A key contribution of the private sector is in promoting economic growth, which it does through investments, knowledge transfer, and enhanced productivity. By creating new markets, fostering competition, and making investments, the private sector helps allocate resources productively and efficiently, improving prospects for economic growth. Economic growth generates resources that can be used for future investment as well as social development.

According to the World Bank, the private sector is the source of nearly 90% of the world’s jobs. So by providing direct employment, as well as finance to the sectors and geographic regions where it is most needed, the private sector promotes not just growth — it promotes inclusive growth.

The private sector also helps to boost living standards. This extends beyond extreme poverty as captured in the MDGs to areas such as the availability and quality of goods and services such as housing, infrastructure, health, and education. In this context, the private sector also plays a critical role in improving service delivery through public-private partnerships. These are particularly relevant in the case of infrastructure, as they allow for risk sharing, and are benefitting from improved institutional capacity and clearer legal and regulatory frameworks.

The private sector can also promote the adoption and/or retrofitting of environment-friendly technologies. This is valuable in the face of climate change, which can adversely impact many critical development goals such as food security, health, and water. The largest mitigation opportunities, especially for energy efficiency, remain in middle income countries.

Lastly, the private sector is a reliable source of revenue for government operations through its contributions to taxes and duties.

Given these advantages, it is not surprising that DFIs have come together relatively quickly to agree on a core set of principles that would guide support for private sector initiatives. These include commercial sustainability, promotion of high standards and additionality – that is, the extent to which a new input or action can add to already existing ones. More importantly, the private sector itself, not least due to the fall-out from the global financial crisis, has begun to reexamine its role in promoting economic growth as well as its responsibility to society. It is therefore increasingly open to engagement on these issues, particularly with DFIs.

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Asia and the Pacific’s financing needs are indeed daunting. We, the multilateral development banks, need to engage the private sector on all fronts to an even greater extent than we currently do, to leverage both finance and knowledge.

The Asian Development Bank (ADB) has long recognised the private sector as a key driver of change in attaining its three long-term strategic agendas of inclusive growth, environmentally sustainable growth, and regional integration. In line with our commitment to transparency, ADB publishes the annual Development Effectiveness Review, with 89 performance indicators to assess progress in implementing these priorities. The dedicated 2013 private sector operations Development Effectiveness Report was published on July 25th.

With $1.8 billion approved in 2013, our Private Sector Operations Department provides comprehensive financial assistance including loans, equity investments, guarantees, cofinancing and technical assistance. Our clients are private companies, banks and financial institutions, investment funds and state-owned enterprises. All our private sector interventions are aimed at maximising development impact. In doing so, our aim is to supplement or complement commercial finance, particularly in areas where perceived or persistent market gaps are inhibiting private investments.

What can ADB contribute to effective development co-operation with the private sector? Firstly, we are an Asian institution with a long and stable relationship with developing countries in the region. Based on the foundation of our strong infrastructure and financial sector exposure, we are increasingly entering sectors where we see promising potential for sustainable inclusive business models, such as agribusiness, education and health. Our strength lies in the synergies we derive from our sovereign operations in the core areas of policy and regulatory support.

Our private sector portfolio has more than doubled since 2006, totaling $6,219 million in 2013, comprising 155 accounts and 140 projects in 20 countries. Aligned with ADB’s core specialisations and sector priorities across individual member countries, 96% of the portfolio supports infrastructure, environment, and finance sector development.

Asia and the Pacific’s financing needs are indeed daunting. We, the multilateral development banks, need to engage the private sector on all fronts to an even greater extent than we currently do, to leverage both finance and knowledge.


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Lakshmi Venkatachalam is the Vice-President (Private Sector and Cofinancing Operations) of Asian Development Bank since June 2010, leading ADB’s private sector initiatives and cofinancing activities. Based on the Midterm Review of its Strategy 2020, ADB’s activities in private sector development and private sector operations are targeted to reach 50% of its annual operations by 2020.

Philanthropy and development – A new paradigm?  

Philanthropy is changing. Not in any radical or revolutionary way, but slowly, oil-tanker style. It is moving at a slow but steady pace, creating new structural trends, a new appreciation of learning through failure and a healthy opening up to the idea of collaboration. Some might call it a paradigm shift.

Previously, foundations generally implemented time-bound, short-term projects, limited to a 12, 18 or 24 month timeframe, but today’s philanthropists are thinking much more systemically. The lexicon is changing as talk of long-term social investment programmes and inter-generational change gains traction. The difficulty of creating sustainable social value through short-term interventions is being recognised.

Where once foundations took a ‘spray and pray’ or ‘scatter-gun’ approach disbursing multiple short-term grants to multiple third parties in multiple different sectors, today they increasingly focus. Historically, when the remit of foundations grew, too often it diluted their impact. Today, foundations are much more targeted and in some cases focusing on just a single issue with a view to eradicating it permanently, rather than simply mitigating it temporarily.

Our model at Emirates Foundation is a case in point. From working with multiple different categories of beneficiaries and multiple themes with a large grant making portfolio, we now work on only one area – youth development. Moreover, rather than issue hundreds of grants each year to multiple third parties, we now run and manage our own programmes in-house.

While grant making is still the norm, new financial instruments and new operational models are emerging. Social impact bonds are being watched closely by governments, social investors and even conventional ones. These performance-based investments pay out when successful social outcomes result in public sector savings. They are driving a new way of thinking about how social finance should be structured.

Emirates2jpgWith our new operational Venture Philanthropy model, where we focus on only one area, we are already seeing a difference in terms of measurable outputs – over 40,000 youth in the UAE have been impacted by our programmes.

While often rightly reiterating the criticality of grants, foundations are now also looking at loan guarantees, debt and equity. As the world’s ‘wicked problems’ persist in their intractability, new financial instruments are needed to help scale up solutions. Community-specific innovation is not enough. The world needs large-scale initiatives to address large-scale problems. Extreme poverty still affects over one billion people on the planet despite over ten years of Millennium Development Goals (MDGs).

Measurement is also coming to the fore. In the past, foundations tended to track inputs – the number of grants processed, the number of projects completed and the total spend. Today, they increasingly look at outputs and outcomes. What was the real impact of their efforts and did it last? Impact investors go further, demanding a tangible social (and often financial) return on their investments, forcing philanthropists to focus on real value creation rather than simply delivery and execution.

New entrepreneurial ways of thinking are giving rise to new mechanisms of delivery with social enterprises at the fore. This hybrid model combines business principles such as efficiency, accountability and value creation with the traditional focus of social organisations. Social enterprise is also capturing the imagination of younger philanthropists disillusioned with the pure profit mantra of big business but convinced that philanthropy should be more results-driven and more transparent.

Where once money was a key component, philanthropists now look to combine financial resources with technical ones. Many foundations are now very ‘hands-on’ in terms of delivery and much less comfortable with a transactional ‘cheque-writing’ model. Traditional dependence on single donors is being replaced by a drive for financial viability as a critical component of achieving long-term sustainable results.

Where previously foundations may have kept their internal learning a closely guarded secret, today they are more inclined to share knowledge and insights. Logical frameworks and ongoing comprehensive evaluation are now seen as critical tools of improving internal learning and performance management. Foundations once averse to sharing ‘failure’ are now embracing it as a means of building capacity and credibility among investors, as a sign of track record and experience.

These trends have not yet been institutionalised across the sector but are more and more prevalent in its literature, networks and events. Emirates Foundation’s annual philanthropy summit was dedicated entirely to this topic last year, themed ‘Philanthropy in Transition’. The OECD-hosted foundation network, NetFWD recently published a report reiterating these points. Entitled Venture Philanthropy In Development: Dynamics, Challenges And Lessons In The Search For Greater Impact,the report documents the transition of four global foundations (Rockefeller, Shell, Lundin and Emirates) from traditional philanthropy to Venture Philanthropy (also known as Strategic, Catalytic, or Enterprise-based Philanthropy). All four changed their business model with a view to deploying philanthropic capital more efficiently and creating more measureable social value.

Not all are convinced of the new direction. Some traditionalists still challenge the idea of applying business acumen to creating social value. Even Boards are sometimes averse to applying the same principles of effectiveness and efficiency to a foundation that they would to a commercial entity. Such reticence continues to stymie the performance of the sector, allowing foundations to continue to report input rather than output and to gloss over things that didn’t work. However, the tide is turning as more and more philanthropists look for new models and new ways of delivering more impact and recognise that learning through failure is a powerful tool for driving greater accountability.

At Emirates Foundation we publicly acknowledge that the sheer size and diversity of our earlier portfolio was significantly diluting our impact and ability to create sustainable outcomes. With our new operational Venture Philanthropy model, where we focus on only one area, we are already seeing a difference in terms of measurable outputs – over 40,000 youth in the UAE have been impacted by our programmes.

Accountability and transparency lie at the heart of this new sectoral change. A step-change in both is moving philanthropy very much in line with global trends and the global demands of a twenty-first century where connectivity and a digital revolution kill opacity. It could also render the social impact of philanthropy much greater and more sustainable. Ultimately, foundations have a significant and growing potential to make a very strong contribution to some of the world’s most pressing social challenges. The sheer size of the philanthropic capital market means it can’t be ignored. With a new philanthropic paradigm that embraces efficiency and openness, perhaps emulated to some extent by the formal development sector itself, the MDGs and their reinvention, the Sustainable Development Goals that will replace them in 2015, might seem much easier to achieve.


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Clare Woodcraft-Scott is CEO of Emirates Foundation and oversaw its transition from grant-making to venture philanthropy. She has 20 years’ experience in sustainable socio-economic development as a practitioner, journalist and corporate executive. She was formerly Deputy Director of Shell Foundation which invests in social enterprises and earlier ran Shell’s social investment portfolio in the Middle East and North Africa. She previously headed Visa International’s public affairs in emerging markets and worked in Palestine for various development agencies.

 

Images used courtesy of the Emirates Foundation.