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ECONOMY: Looking for Development Leverage

BRUSSELS, May 9 2011 (IPS) - Given a few incentives, private companies can be attracted to invest in poor countries that before were not on their radar. Donor countries are betting on this new avenue of public-private-partnerships (PPPs) to channel funds, technology and business knowledge to the 48 Least Developed Countries (LDCs) – the impact can be huge, but many challenges remain.

“Investing in LDCs is not charity. It’s an opportunity for all,” U.N. Secretary-General Ban Ki-moon said Monday to ministers from donor and recipient countries gathered at the U.N. LDC Summit in Istanbul.

The Dutch Ministry of Foreign Affairs and Philips Lighting, a division of the Netherlands-based multinational Philips Electronics, both contributed 3 million Euros (4.3 million dollars) to ‘Green Light for Africa’, an initiative to develop sustainable distribution chains for solar-powered lamps in Africa. Following the launch of a pilot project in northern Ghana in 2008, the partnership is currently active in Kenya, Tanzania, Mali and Rwanda.

The example, one of many, comes from ‘Partners in Development’, a report published by the German Bertelsmann Foundation, the U.N. Global Compact and the U.N. Development Program (UNDP). The study explores how donor countries are cooperating with companies to attract investment and address development challenges in LDCs.

“Over the past 15 years, we have seen a rising number of initiatives by donor agencies to engage the private sector in developing countries,” says Anna Peters of the Bertelsmann Foundation, lead author of the report. “The budgets are increasing accordingly. Between 1999 and 2009, the German Ministry for Development Cooperation BMZ has invested 500 million Euros (719 million dollars) in its DeveloPPP programme. It has currently more than 1,200 development projects under way with European companies in developing countries, including LDCs. In the United States, the official development agency USAID had more than 1,000 alliances in its Global Development Alliance Programme at the end of 2009. USAID’s own funding has been matched by more than 12 billion dollars from public and private resources.”

Donor countries are supporting companies with grants, loans or guarantees if they start ventures contributing to societal development and growth in developing countries. In return, companies not only provide funds, but also expertise, training and support in kind. They help developing countries and donors to implement and bring projects to scale, and advise governments on the creation of enabling environments.

But often, many investments in Least Developed Countries are not very attractive. “The private sector isn’t investing in the infrastructure sector in LDCs because of market and government failures,” says Gavin McGillivray, head of the private sector department at the UK Department for International Development (DFID). “They are put off by the outdated legal framework, a lack of enforcement, a lack of long-term lending possibilities and the absence of projects that are well structured.”

The solution is obvious, said McGillivray at the 4th Stakeholders Meeting of the Belgian Development Cooperation in Brussels: donor countries should help LDCs to correct these failures.

Apart from advice and capacity building, this also involves actual investment to attract private investors and share the risks. “Together with the aid agencies of the Netherlands, Sweden and Switzerland and the International Finance Corporation of the World Bank, we created the Private Infrastructure Development Group (PIDG),” said McGillivray. “With investments worth 500 million dollars, we have secured private sector investment commitments of 9.4 billion dollars. The projects that were initiated are now already delivering services to 10 million people.”

PIDG facilitated projects include the construction of container ports and hydro and geothermal power plants but also the Seacom fibre optic cable off the East African coast.

Still, not all LDCs profit from such initiatives. “We see that most projects are concentrated in countries like Mozambique or Tanzania, that enjoy political stability, offer a promising domestic market, or have a flourishing agricultural sector,” says Peters.

According to the report, attractive features can be found in countries such as Bangladesh or Cambodia that provide industrial production for developed and emerging markets, particularly in the textile sector. “Public-private projects in these countries aim at improving labour and quality standards throughout supply chains,” says the report. Other countries that offer raw materials such as oil (Angola), crops such as cocoa (Liberia) or cotton (Mali), fish (Uganda), or ingredients for medical products (Madagascar) also appear on donor’s project lists.

The report lists many shortcomings with current PPPs in LDCs. Funding is too prominent, project timelines are too short, donors do not coordinate well, business and development priorities are not aligned well, and performance measurement is weak, according to the study. “It is also striking that donor countries are mainly working with foreign companies,” says Peters. “The German DeveloPPP program is only open for European companies, and I would not know why. There are many LDC companies that could be included.”

Foreign Direct Investment (FDI) to the 48 LDCs has grown rapidly over last decade, with their share of global foreign investment flows having effectively doubled between 2001 and 2010, says the United Nations Conference on Trade and Development (UNCTAD). But according to its report ‘Foreign Direct Investment in Least Developed Countries: Lessons Learned from the Decade 2001-2010 and the Way Forward’, which was published on 2 May, most of this investment was dedicated to natural-resource extraction, with relatively few jobs created.

“Such investment has not tended to ‘fertilise’ LDCs’ economies by forging greater links between foreign businesses and local firms,” says the UNCTAD report. “In addition, it has not succeeded in facilitating the spreading of know-how and technology and helping spur broad-based and sustained economic growth.”