Private Sector Engagement
The private sector is increasingly cooperating with the public sector in development cooperation (DC) measures in order to mobilise additional funds for the implementation of the UN Sustainable Development Agenda 2030. A number of positive effects are expected from the engagement of private companies, such as an increase in entrepreneurial innovation and creativity as well as the increased implementation of social and ecological standards in private companies in partner countries. However, the approach is also controversial. Critical voices raise concerns that mainly companies from the Global North are the ones that mainly benefit from the cooperation whilst development policy goals would be pushed to the background. An overview of the conceptual approaches and instruments in the area of Private Sector Engagement (PSE) as developed and implemented by the German DC is provided below.
Key Challenges for Development Policy
Why is DC increasingly engaging the private sector in the Global North, as well as in partner countries? Which core problems and current global challenges to development are being addressed hereby? Literature and practice provide several answers. In particular, the accelerated process of globalisation poses challenges for DC, but also offers new opportunities. For example, there is a growing awareness that developmental hindrances in partner countries can be effectively addressed in the Global North.
Categories
There are many ways in which development cooperation projects with private companies address wider economic and developmental challenges. Depending on the underlying challenge, different PSE activities pursue different objectives. In general, the following five categories can be distinguished:
Examples from (evaluated) Practice
Private Sector Engagement (PSE) in German DC was defined as one of DEval’s focus topics in 2016. Since then, a number of PSE-related instruments and measures have been evaluated (publications). In the following, selected project examples from published evaluations are shared, drawing individual findings on 'good practice' as well as 'lessons learned'.
Capacity Development (develoPPP Evaluation, 2017)
Good practice example of a develoPPP project in which innovative production methods and services were introduced to the target groups through successful capacity development.
In the develoPPP funded project, smallholder farmers participate in training and multiplication activities. The aim is to increase productivity while respecting social and environmental standards and to improve their access to the export market. The innovation lies in the introduction of new production methods via a large-scale multiplier approach in combination with high-quality and broad-based training.
The project added value as no comparable training courses are available in the region. Furthermore, the production methods taught are – in sum- very positively assessed by the smallholders. Some participants raised concerns as the new methods taught are more labour intensive than traditional methods. Nevertheless, any additional effort is offset by guaranteed sales and higher profits generated by crops produced in this way. What is more, preparation of the training content, which is relatively simple and target-group-oriented, and the use of the multiplier approach have helped to comprehensively disseminate the methods among about 12,000 farmers within just under three years.
Financing with Ccompanies (Evaluation of Interventions for Climate Change Adaptation:, Instruments for managing residual climate risks, 2021)
KfW's InsuResilience Investment Fund (IIF) aims to reduce the vulnerability of MSMEs and low-income households in developing and emerging countries to extreme weather events.
The InsuResilience Investment Fund (IIF) consists of two sub-funds, an equity fund and a debt fund. These are intended to finance institutions that provide climate risk insurance (CRI) or support its development. To this end, the two sub-funds were filled with public and private funds as well as funds from development finance institutions (DFIs), which are then invested in companies along the KRV value chain. The IIF is considered a structured fund in which risks are shared differently among investors. Technical assistance and premium reduction measures complement the IIF and are financed separately by the BMZ through grants. The debt fund is used primarily to support microfinance institutions that offer CRV, e.g. for microenterprises that take out loans. The equity fund is primarily used to finance companies involved in the development of microfinance for developing countries and emerging markets. As a global fund, the IIF can make a significant contribution to the financing of climate risk insurance and has a very broad reach. However, one challenge of the instrument is to also meet national objectives. Moreover, the institutions financed and their products do not always focus on the development needs of the target group.
Policy Dialogue (Evaluation of the Promotion of Sustainable Supply Chains, 2023)
The DEval evaluation of the promotion of sustainable supply chains analyses the development cooperation measures undertaken with the private sector in the partner country and in Germany using the example of the textile sector whilst the impact on socially and ecologically sustainable global supply chains was in the centre of attention. The portfolio analysed includes policy dialogue projects such as the Partnership for Sustainable Textiles. One result of the evaluation is that purchasing companies are becoming more active through development cooperation activities in order to meet their corporate due diligence obligations (i.e. respecting human rights, for example) along their supply chain. Furthermore, the adoption of the German Supply Chain Act in 2022 has improved the legal framework. Impacts are also aimed for in the partner country, particularly in textile factories. However, the evaluation shows, using Bangladesh as an example, that impacts are less pronounced. The evaluation concludes that the changes identified are not sufficient to ensure a significant contribution to protecting workers against the risk of occupational accidents, reducing resource consumption and environmental pollution as well as improving the representation of employee interests.
Target Sectors for Private Sector Engagement
Private sector engagement takes place in many different sectors and areas. Prominent areas of activity are agriculture, healthcare, education, environmental protection, private sector services, finance, and energy and environmental protection. Many of the activities have an ecological or sustainable character and are aimed at improving the environment, biodiversity, infrastructure, raw material extraction and waste management. The energy industry has a special focus on renewable energies with measures for climate protection and adaptation to climate change. Furthermore, the private sector is involved in social fields for development policy goals, for example in health care, vocational training or social housing. The following tag cloud provides an overview.
Theory of Change
DEval has developed a Theory of Change (ToC) as a theoretical foundation for evaluating the impact of instruments and measures engaging the private sector in development cooperation. The ToC is oriented towards economic and development policy theories and depicts the results (effects and impact) within the five dimensions of Private Sector Engagement. This includes sketching the main causal pathways to impact: i.e. instruments and measures (referred to here as inputs) are expected to provide certain products and services (outputs), altogether leading to short and medium-term effects (outcomes), which then contribute to overarching and long-term changes in development policy (impact).
While the impact level is usually structured by the 17 Sustainable Development Goals of the United Nations (UN SDGs), the outcomes of the DEval ToC follow a different logic. This distinguishes the effects according to their specific impact level in the categories 'intermediary', 'target group' or 'partner country'. The category of intermediaries comprises the individual economic actors supported by German DC, e.g. banks or funds as capital providers (financial intermediaries) or manufacturing companies. The target group category examines the effects that an instrument or measure is intended to bring about in a specific population group. Finally, the category partner country refers to structural changes, for example in the market or the legal framework in the respective partner country.
Example 1. Financing with Companies
In this example, public funds are used to finance the junior tranche in a structured fund. This leads to a lower risk for investors from the Global North and provides a subsidy for their investment activities in the Global South (output). This in turn leads to improved access to capital for financial institutions in the Global South (outcome at intermediary level), which is expected in the long term to contribute to the development of local financial markets at impact level, e.g. in terms of SDG 9 Industry, innovation and infrastructure and SDG 12 Sustainable consumption and production.
Example 2. Capacity Development
Capacity development measures undertaken by German, European and international companies in the Global South are subsidised by the DC (input) result in trained and further educated employees (output), who are expected to secure/increase their income (outcome on household level) and thus also increase consumption demand in the partner country (outcome on partner country level). Overall, at impact level, this contributes to the achievement of e.g. SDG 4, quality education, and SDG 10, reduced inequalities.
Publications
Evaluations and Projects
Amélie Gräfin zu Eulenburg
Head of Department: Sustainable Economic and Social Development, Integrity Officer