Private sector as catalyst for development

When experts gathered in Busan, South Korea, from Nov 29 to Dec 1, for the Fourth High Level Forum on Aid Effectiveness, the private sector, for the first time, had a seat at the table. This could be the turning point where we recognize the mutually supportive roles of the private and public sectors in promoting development.

Although the debate on the balance between traditional development assistance to the public sector and donor support of the private sector continues, multilateral and bilateral development banks have increased their financing of the private sector fourfold over the last decade, boosting their annual combined investment from $10 billion to over $40 billion.

Recently the International Finance Corporation, the largest multilateral development bank focusing on the private sector, coordinated with 30 other multilateral and bilateral development finance institutions on a study- International Finance Institutions and Development through the Private Sector - which found that public and private sector cooperation for development is a "virtuous circle".

Governments are essential for development. They provide critical services for their populations, such as healthcare, education, infrastructure, and social safety nets. They also create an enabling environment for the private sector by establishing a proper regulatory framework and macroeconomic stability, and they ensure intellectual property rights, contract enforcement and security.

Governments provide leadership for economic development and ensure that the fruits of development are shared by all segments of society. But governments cannot do the job alone; they are only part of the recipe for development and poverty reduction.

The private sector also has an important role to play in sustainable development, as it generates jobs, helps improve public services, and is ultimately the source of most of the tax revenues that the public sector needs.

So where do development institutions come in?

They play a critical role in supporting the private sector. Firms in developing countries need financing to expand their operations, as well as better infrastructure, improved business regulations, and skilled employees. Without these, they are unable to grow. Development institutions are willing to provide capital where other sources may be initially risk averse, attracting other investors by providing comfort and risk assurance. They also provide advice on how to make projects bankable and sustainable. Moreover, they can help make private sector development more inclusive, and promote the high environmental, social, and corporate governance standards that allow projects to be sustainable.

Since in large part development institutions are self-funded and use repayments from their investments to support new projects, they have limited capital needs. While substantially increasing their investments most have not required significant capital contributions for decades. In contrast, aid to governments usually needs to be funded every year. Furthermore, since the enterprises supported by development institutions provide substantial tax revenues to their host countries, the need for development assistance to the public sector is reduced.

Supporting the private sector with judicious investment is a win-win proposition for donor governments and developing countries. A small amount of initial capital, with some well-targeted advisory services, can marshal the talents and finance of private sector investors to create economic activity that ultimately is self-financing. But this should come as no surprise as it is one of the historic paths to development.

The author is executive vice-president and CEO, International Finance Corporation.