DFID: Private Sector Holds Key to Tackling Global Poverty
October 12, 2010
As part of the battle against poverty in the poorest countries, heralding a new era of private sector-led development work, International Development Secretary Andrew Mitchell announced in a major speech on October 12 that the UK will step-up and intensify its work with business and enterprise.
The International Development Secretary will recast DFID as a government department that understands the private sector and brings the wealth, knowledge and creativity of the world of business to support the UK's development efforts.
The new direction is aimed at stimulating the private sector to become a much bigger engine of growth in the poorer countries of the developing world, bringing new enterprise and more investment.
The new measures will include:
More private investment. A new Private Sector Department will be established in DFID to boost the role of private enterprise in the poorest developing countries, with business experts seconded in to advise the Government on how best to do this.
Reduced barriers to growth. UK development work will do more to support growth, helping countries to develop a level playing field for all investors in the poorest countries, with a fairer and more open trading regime, reduced barriers to market entry and streamlined regulation to speed up the process of doing business.
CDC reform. The development finance institution owned by the UK Government will be radically reformed and revitalised to drive more effectively investment in countries where businesses cannot usually find investment partners.
Trade negotiations. A renewed push for a successful conclusion to the Doha trade talks, global reforms that could bring gains three times the volume of global aid.
These reforms will herald a new era of private sector-led development work in DFID to create wealth and mobilise more private investment into and within developing countries.
The new department will be built to comprise around 20 specialist staff with private sector and economic expertise. In addition to developing new approaches to invest in the legal, financial and physical infrastructure in the poorest countries, it will work with international companies to develop new business models that contribute to development and bring commercial returns.
As an early initiative of the new private sector department, business executives will be invited in on short-term secondments to work with DFID to help develop new and creative approaches to stimulating wealth creation and providing jobs for poor people.
At the heart of the new approach will be investment from a reformed CDC into the poorest countries and markets.
Criticised for being inflexible, too risk averse and investing capital in opportunities which could have attracted private investment, CDC's Fund of Funds private equity structure has prevented it from maximising its development impact.
Under these proposed reforms, CDC would regain its power to make investments directly in countries and sectors where the development need is greatest. At the same time, it will make fewer new commitments to third party fund managers, who sometimes lack the flexibility that government wants CDC to have.
CDC could also make use of a new range of tools, such as debt, direct investments and guarantees to enable CDC to work more flexibly and creatively, becoming a more useful partner to the providers of equity in the poorest countries.
DFID will set up an external consultation to hear views about how CDC's capital should be targeted in order to generate the highest wealth creation impact for the poor. The results of the review will be announced early next year.
As part of the consultation, DFID will consider what that remuneration structure should be to ensure it is fair and appropriate, but not excessive.
Secretary of State Andrew Mitchell said:
I want this department to be the place that lives and breathes the new DFID culture of private sector-led development, an example for other development bodies to follow.
Aid is a means to an end, not an end in itself. It is the private sector that creates the jobs, goods and services that the world's poorest people so desperately need to lift themselves out of poverty. We will help them achieve this.
I want DFID to learn from business. I want to explore how we might enrich DFID's own talent pool with a series of short-term secondments from the private sector in order to inject new, business-savvy DNA into the department, devising bold and creative solutions to development challenges. That is, after all, what business does so very well.
CDC has the potential to be the jewel in the crown of the UK's support to the private sector in developing countries. But it has lost its way.
These reforms will allow CDC to put more investment in businesses which would never otherwise have been considered; more capital unlocked to boost the potential of hundreds of new enterprises employing thousands of people; enterprises that are profitable and sustainable; paying their fair share of revenues to their local exchequers.