Does channelling aid into private sector partnerships always lead to the best development outcomes?

Marc Cohen Aid, Economics, Private sector

Aid donors increasingly assume that private sector partnerships are crucial for global development. Marc Cohen, Senior Researcher at Oxfam America, outlines why we need to proceed with caution.  

Back in 2014, the UN estimated that achieving the Sustainable Development Goals (SDGs) will require an additional $2.5 trillion per year over planned investments between 2015 and 2030. Just to get a sense of what a trillion dollars looks like, it would take you 31,688 years to count one of them each second. 

There’s a broad consensus that traditional aid – about $150 billion per year – won’t begin to meet the SDG targets. So the world’s governments endorsed the Addis Ababa Action Agenda on development finance. Among other things, it calls for increasing the private sector’s role. 

Aid donors have embraced this with enthusiasm. The EU says that with every  euro of aid, it can lever as much as €30 more in private investment. The World Bank and other international financial institutions see the private sector as key to turning billions to trillions. And the US Agency for International Development (USAID) recently adopted a private sector first policy.  

There is a logic here. A vibrant, accountable and responsible private sector can do a lot to create sustainable development and economic growth that reduce poverty and inequality. Yet, some big  challenges remain. 

Donors’ claims about levering huge sums of public money don’t square with reality.  

recent report by the Overseas Development Institute found that for every $1 that multilateral development banks and development finance institutions like the UK’s CDC put into blended finance schemes, they generate just $0.75 in private money. The figure falls to $0.37 in low-income countries. Reasonable, but far less than the 30:1 claimed. 

Donors assume that it’s easy to create win-win outcomes. 

It is not a given that private sector partnerships will benefit both people living in poverty and the corporate bottom line. Private financers will always look for a profitable return – that’s what  they do – so all too often will bypass the poorest countries and people who don’t have the income to engage in the market. 

Perhaps most importantly, the evidence on development impacts is thin. 

The last point, as singer Don Henley says, is ‘tryin’ to get down to the heart of the matter.’ Donor-private sector partnerships need to show how they will reduce poverty and inequality, boost gender justice, and create greater environmental safeguards than either partner could achieve on  their own.  

We call this ‘development additionality,’ and it’s the main reason for partnering with the private sector. When the activity ends, evaluations need to demonstrate that there really was such impact. 

Aid donors must put checks and balances in place to ensure that their partnerships with the private sector result in tangible gains for people living in poverty.
In 2007, USAID gave a $4 million loan guarantee to reduce two Haitian banks’ risks in providing credit to local microenterprises. An evaluation found that the guarantee did not lead either bank to increase microlending to new borrowers. So, not a whole lot of development additionality.  

Aid donors must put checks and balances in place to ensure that their partnerships with the private sector result in tangible gains for people living in poverty. This is more than ‘do no harm’ — when donors provide aid, they must ‘do good’ by advancing human rights and supporting sustainable natural resource management. And let’s be clear: these partnerships frequently include public subsidies for private profit-making. So, it’s essential that the rules and standards governing the use of public money still apply. 

Oxfam’s new briefing paper, Faith is not Enough, examines what those checks and balances should look like. We advise aid donors to exercise caution before entering private sector partnerships. And when they do, donors must make the public case for why an alliance with the private sector means greater  impact, rather than just taking it on faith that the private sector offers a magic bullet for solving every development problem.  

Download Faith is not Enough: Ensuring that aid donor-private sector partnerships contribute to sustainable development.

Marc Cohen