Cotton being wound onto spools in a factory in Mahalla, Egypt Photo: Getty

Aiding business

By Eleanor Whitehead | Published:  05 January, 2012

The private sector’s role in development has seen a renaissance, with donors reassessing their strategies and development finance institutions positioned increasingly as central actors. But stakeholders need to increase coordination to maximise their impact

In 2004, the UK’s Department for International Development granted Vodafone’s Kenyan subsidiary, Safaricom, $1.5m to develop mobile phone based services to extend microfinance provision to the country’s fast growing population. By 2007, Vodafone and Safaricom had jointly rolled out M-Pesa – a money transfer service which allows users to send cash via their mobile handsets, without the need for a bank account.

Today, M-Pesa’s green advertisements plaster Nairobi’s streets. Its unprecedented success has defined East Africa’s ICT industry and shown the potential of smart technology to transform the continent. With 13 million subscribers, it handles about a million transactions and $16m in person-to-person transfers every day. That is equivalent to just under 20 percent of the country’s annualised GDP.

Nick Hughes, global head of international mobile payment solutions at Vodafone, went on record saying that without Dfid’s support he would not have persuaded Vodafone to invest in the venture, and M-Pesa became the UK’s go-to example for the transformative role of donor-private sector funding.

Across the world, business is a leading driver of development, and in Africa the story is no different. Here, the private sector faces myriad constraints – from financing, bureaucracy and corruption, to low skill sets and poor infrastructure – but it is a key generator of jobs, income and crucial tax revenue. It is not a homogeneous faction – the needs of the continent’s farmers, urban entrepreneurs and traders are very different from those of larger companies, which are often harder to engage on development agendas. But growth requires the inclusion of small and big, domestic and international business; and donors and development finance institutions are increasingly active in the region, honing their support of private enterprise.

Looking to build on M-Pesa-type successes, last May Dfid realigned its strategy to focus on the private sector. The UK’s development agency is by no means alone. Business and development agendas have been converging within the European Union, with increasing focus on “aid for trade” – an approach which aims to create a sustainable African private sector that can be plugged into the global economy. The European Commission, together with its member states, invests $5.3bn annually in this initiative, and officials are pushing to up the allocation.

Running parallel has been an exponential increase in private sector investments made by DFIs. According to a report produced by the Overseas Development Institute, their annual global commitments rose from $15.4bn in 2003 to $33bn in 2009. DFI support is now equivalent to a quarter of official development assistance, although much of this is categorised separately, positioning the institutions as central development actors.

Mandated to invest where market distortions and failures are existent, these institutions aim to create both financial and developmental additionality. While they do not invest solely in the least developed countries, pressure has risen for more focus on these regions, with some institutions, such as Britain’s CDC Group, overhauling their strategies. Their investment crowds in commercial capital, research suggests, with CDC indicating that in 2010 for each £1 ($1.56) invested, a further £2.70 ($4.21) was leveraged from commercial investors.

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