The Actors

Understanding the role that the private sector can play in achieving Canada’s international development objectives must begin with an understanding of what exactly constitutes the ‘private sector.’ As Carlo Dade argued during his presentation, the term “private” can be defined as “that which is not public.”[61]

In broad terms then, there are four key groups of private sector actors relevant to international development:

• Multinational small, medium and large enterprises;
• Locally based small, medium and large enterprises;
• Individuals, including the self-employed, diaspora groups, volunteers, experts, etc.; and
• Non-governmental organizations.

Witnesses testifying before the Committee discussed the role of these different types of actors and, in some cases, expressed varying opinions on the relative importance of each for the achievement of development objectives. While some witnesses focused on the role of large international companies, others stressed the importance of nurturing local private sector activity as a catalyst for national growth. For example, Fraser Reilly-King argued that "The local private sector is key."[62] Similarly, the central focus of the presentation given to the Committee by renowned Peruvian economist Hernando de Soto was on the legal system within developing countries (such as private property rights), and the linkages between that environment and opportunities for economic progress such that “the enterprising poor can take advantage of the global economy.” Mr. De Soto’s organization, the Institute for Liberty and Democracy, works to ensure that the necessary legal instruments are in place so that when foreign investment occurs, citizens in developing societies are in a position to take advantage of that investment, “hook into” it, and benefit from it.[63]

Some others pointed to the impact a small number of individuals can have in addressing development challenges. For example, David Tennant described the positive effect that his organization, Canadian Economic Development Assistance for Southern Sudan (made up entirely of volunteers), has had in South Sudan. They have brought technical expertise in the application of mechanized farming using Canadian methods and related training support. The mechanized farm in South Sudan which the volunteers facilitated produced a yield of two tonnes of corn per acre in 2011, which was “the highest yield of any farm in the country.”[64] In fact, Mr. Tennant’s organization is selling its output to the World Food Programme. He told the Committee:

We have developed a good relationship with the World Food Programme over the past several years. The World Food Programme purchases our harvest through its Purchase for Progress program. They will purchase all we can produce, and have approached us to jointly venture in the construction of a storage facility. This would not only assist us but would serve to protect the crops in the region of Jebel Lado, where we are located.[65]

As another example, the Honourable Jim Abbott, a former Canadian Member of Parliament, highlighted the contribution that retired Canadian parliamentarians and public servants could make with respect to capacity-building related to resource governance.[66]

Overall, while the Committee received testimony on the role played by a range of private sector actors in international development, the study and witness presentations focused to a large degree on the role of private for-profit enterprises — both multinational and locally based — an emphasis that is therefore reflected in this report. However, this emphasis is not intended to minimize the contribution that other types of private sector actors can make to development efforts. Indeed, one of the later sections of this report outlines the need for further Canadian research related to diaspora communities.

The Activities

As was noted previously, the overall role of the private sector in development, in terms of both local private sector activity and foreign investment, is to generate wealth and stimulate economic growth. The private sector does so by creating jobs, mobilizing resources, introducing creativity and innovative solutions, and fostering skills development and training. The centrality of the private sector to development was articulated in the 2005 World Development Report, which stated in one its key passages:

Private firms — from farmers and microentrepreneurs to local manufacturing companies and multinational enterprises — are at the heart of the development process. Driven by the quest for profits, they invest in new ideas and new facilities that strengthen the foundation of economic growth and prosperity. They provide more than 90 percent of jobs, creating opportunities for people to apply their talents and improve their situations. They provide the goods and services needed to sustain life and improve living standards. They are also the main source of tax revenues, contributing to public funding for health, education, and other services. Firms are thus critical actors in the quest for growth and poverty reduction.[67]

At the same time, many witnesses stressed that the private sector should not be viewed as a panacea that can solve all development challenges, or that one approach works in all countries and contexts. As Khalil Shariff reminded the Committee, "there are very few silver bullets in development."[68] Similarly, Dr. John Sullivan, Executive Director of the Center for International Private Enterprise, said that if he could leave one message with the Committee, it would be "that there's no model out there that's going to fit every different environment. You have to design it according to what's going on in the particular country."[69] Alex Counts, the President and Chief Executive Officer of the Grameen Foundation, also emphasized the need for flexible thinking when considering development, cautioning against a one-size-fits-all approach:

...how the private sector can interface with the public sector and international development efforts really defies easy categorization along the lines of 'it should be this way' or 'it should be that way'. Every sector, every country, and every moment in time is different, and those relationships, we think, should be recalibrated over time as times and sectors change.[70]

In other words, as he noted, the exact role the private sector should play in development is "very context-specific."

While no list of private sector activities will be exhaustive, those that can have a significant positive impact on development, particularly from the perspective of sustainability, are listed next.

Core business operations and inclusive business models

Private sector enterprises can contribute to development through their core (i.e. normal) business operations. The poor can benefit from core business activity as employees, entrepreneurs, suppliers, distributing partners, and consumers. Some firms have also adopted “inclusive business models,” which are the subject of a growing body of research that focuses on the links between business activities and development objectives. The idea is that certain types of operations can be deliberately designed to achieve commercial and development objectives. There are instances when a company’s business operations can, for example, help reduce poverty through job creation and the transmission of enhanced skills and training (development objectives), while also leading to outcomes like “increased market share” and enhanced competitiveness for the company (commercial objectives).[71]

In her appearance before the Committee, Wendy Hannam of Scotiabank described inclusive business models as follows: “An inclusive business is one that seeks to alleviate poverty by including lower-income communities within its value chain, while not losing sight of the ultimate goal of business, which is to generate a profit.”[72] In her assessment, “A real impact can be made by leveraging these for-profit businesses.”[73] As Jane Nelson, Eriko Ishikawa and Alexis Geaneotes argued in a 2009 report on Coca-Cola,

...there is growing recognition in both the corporate and international development communities that the most sustainable contribution that any company can make to poverty alleviation is to carry out its core business activities and investments in a profitable, responsible and inclusive manner.[74]

As one practical example of such an activity, the banking giant Citigroup has identified an inclusive business practice pertaining to the costs associated with migrant workers sending remittances. Their “Remit as You Earn” program, which is part of the Business Call to Action,

...takes advantage of Citigroup’s global foreign exchange and cash transfer technology to allow employees to send remittances via salary deductions to home countries. In 2008, Citigroup joined the Business Call to Action with its commitment to make Remit as You Earn available to employees of the UK’s National Health Service (NGS), which employs an estimated 250,000 members of Diaspora communities. The service will enhance Citigroup’s exposure and reputation as an international payments provider while decreasing costs to remittance senders by an estimated 50 percent.[75]

The Committee heard of various other examples of inclusive businesses, including from John Guarino, President of Coca-Cola Refreshments Canada. The concept of overlapping commercial and development interests was captured in his comment that “the health of our business depends on a healthy agricultural supply chain.”[76] That supply chain can be designed to incorporate local farmers and distribution networks, who can themselves be assisted by training and other skills development initiatives in conjunction with the company. He described various projects and company goals, including the aim of Coca-Cola (international) to incorporate five million women entrepreneurs worldwide across its value chain by 2020. Another initiative, which was the subject of the 2009 study cited above, saw Coca-Cola’s micro distribution centres in Kenya, Tanzania, Uganda, Ethiopia, and Mozambique provide a number of “business ownership opportunities for women….”[77] Mr. Guarino noted that “In Nigeria and Ghana, over 70% of the micro distributors are owned by women.”[78]

Other examples were provided to the Committee by Khalil Shariff. He outlined the business practices of the chain of luxury Serena Hotels, which are operated by the Aga Khan Fund for Economic Development (AKFED) in various low-income countries in East Africa and Southern Asia. According to Mr. Shariff, the Serena hotels “have an explicit policy of minimizing environmental impacts while maximizing the socio-economic fallout benefits to the region.” He added:

Each hotel seeks to work with the community in a variety of ways, such as investing massively in training for local residents for employment, the reinvigoration of local designs and craft industries, locally sourcing goods and services, and cooperating with the community to recycle waste.[79]

Mr. Shariff also articulated the hope that the presence of a Serena hotel in a fragile area like Kabul, Afghanistan could help to encourage other investors. He emphasized, however, that investment in fragile environments such as that one requires long-term thinking and acceptance of “a certain level of volatility.”[80]

Another example of an inclusive AKFED project is a company, Frigoken, which operates in Kenya. This company has worked to help small-scale farmers by addressing the obstacles they face in marketing and exporting their products. Mr. Shariff explained that,

...Frigoken provides a range of services to Kenyan bean farmers — price guarantees, the provision of seeds, quality control, processing, transportation, and marketing. Today, Frigoken is the largest exporter of processed green beans from Kenya, most of which are sold on European markets. The impact is that not only does the company provide direct employment to 2,700 people, most of whom are women, it also now supports over 45,000 small-scale farmers in rural Kenya.[81]

Throughout his presentation to the Committee, Mr. Shariff emphasized the need for private sector activity that addresses the needs of, and provides opportunities for, what is known as the ‘base of the pyramid’ — the large number of poor people in a given developing country. He argued that, in the end, real poverty reduction in low-income countries requires private sector activity that can create “some kind of economic dynamic for marginalized communities,” so that they can have “the resources they need to be able to invest in their own futures.”[82]

As noted, core business activities can also contribute to development when they specifically involve skills development and training opportunities. For example, Brent Bergeron, the Vice-President of Corporate Affairs at Goldcorp Inc., told the Committee of the impact of his company's operation at the Peñasquito mine in Mexico. There, some 43% of the drivers of large machinery hired by the company have been women because of their driving skills, which benefits the company's operation because the machinery lasts longer. Mr. Bergeron said that his company has "extensive training programs” where these women are “able to come in and not feel any type of peer pressure from working in a non-traditional type of employment."[83]

These compelling examples should not be taken as an indication that the commercial and development gains will be equal in all inclusive businesses, or that the inclusive element of a company’s operations will represent the majority of its activities. In addition, not all private sector activity offers opportunities to address development needs explicitly. The overall idea is to maximize the benefits accrued from the private sector investment that occurs in countries around the world every day.

 ‘Inclusive business’ is still a relatively new concept in development theory and practice.[84] Work remains to be done to identify the inclusive business opportunities that

are out there, to understand how to bring them to scale and replicate them across countries and regions,[85] and to measure their impact in terms of the degree to which they are helping people emerge from poverty. The testimony the Committee received undoubtedly represents only the tip of the iceberg on this subject; a broader range of inclusive business models and opportunities could be identified, particularly by the Canadian private sector. It will also be important to identify the synergies between inclusive businesses and viable and scalable public-private partnerships. Public sector expertise as part of such partnerships can help to incorporate a development perspective in private sector operations, and to emphasize the development potential of commercial operations. Indeed, a team evaluating the public-private partnerships (alliances) that had been undertaken by USAID commented that, “From the business perspective, alliances with a strong business case are more likely to be high-impact and sustainable versus the more passive philanthropic contributions.”[86]

Tax revenues

One of the most obvious private sector contributions to national development is company payments of tax revenues and royalties. This is true not only from the perspective of investment by multinational corporations, but also in terms of countries building their tax base through the proliferation of locally based businesses. Tax revenues are a critical aspect of a country’s ability to build governance capacity and deliver services to their citizens. Private sector investment that can lead to higher tax revenues for developing countries is therefore intimately linked to development objectives.

However, neither the payment of adequate taxes by companies, nor their use for national development ends by recipient governments, is automatic. As some witnesses argued, there are a variety of reasons why this could be the case, including unbalanced or unfair royalty regimes, corruption, weak institutional capacity, and the use of the global financial system by certain multinational corporations to hide profits in some cases or to avoid the payment of significant taxes in local jurisdictions. During the Committee’s hearings, issues were primarily raised in the context of natural resource development, and are therefore dealt with in this report’s case study on that sector. However, one witness, Raymond Baker, the Director of Global Financial Integrity, argued that the need for increased transparency goes beyond payments made by the extractive industry. His organization estimates that in terms of illicit transfers, “approximately $1 trillion a year comes out of developing countries and moves into the richer countries.”[87] Regarding the latter figure, he explained that,

This money moves through three different means. Some of it is corrupt, that is, it is the proceeds of bribery and theft by government officials. Some is criminal — the proceeds of drug trafficking, racketeering, counterfeiting, and so forth — and some of it is commercial tax evasion.

Many people, particularly in the western press, think this problem is all about corruption in those countries over there. In our analysis, in the cross-border flow of illicit money, the corrupt component is about 3% of the global total. The criminal component is about 30% to 35% of the global total. The commercial tax-evading component, in which we are certainly involved, is about 60% to 65% of the global total.[88]

While the initiatives outlined in this report’s case study, including the Extractive Industries Transparency Initiative, are important, they are not designed to address the general issue of illicit flows from developing countries. In addition to the publication of extractive industry contracts, Baker advocates for “greater transparency in the accounting by [all] multinational corporations for their sales, profits, and taxes paid in developing countries.”[89] As noted, many witnesses also underscored the importance of institutional capacity-building in developing countries as a means to enhance the likelihood that tax revenues generated by them from private sector activity are used to address societal needs such as health, justice and education.

Delivery and manufacturing

In some cases, the private sector can help with the delivery of development assistance and humanitarian relief, bringing efficiencies in the process. Stephen Brown, an associate professor at the University of Ottawa, noted that the Canadian International Development Agency (CIDA) has long used private sector contractors, including, for example, an engineering firm to implement its project to rebuild the Dahla Dam in Afghanistan.[90] Maura O'Neill told the Committee of USAID's utilization of the private sector to assist with relief during the 2011 drought in East Africa. During the drought response, personnel from USAID were not allowed into the hard-hit area of Southern Somalia due to safety concerns. However, in that very region "people were dying in the tens of thousands." Therefore, USAID "worked with private sector partners and others." As Dr. O'Neill explained, "They were able to get into the supply chains and the traders, and we know that we saved tens of thousands of lives."[91] As a final example, Dr. Christoph Benn told the Committee that the Global Fund to Fight AIDS, Tuberculosis and Malaria uses the private sector in various instances to implement programs and grants at the country level. He said that this system can be "very helpful, particularly in situations where the governments...are particularly weak."[92]

In other cases, the private sector can manufacture or source products that are vital to development initiatives. One key example is the production of vaccines. The Global Alliance for Vaccines and Immunization (GAVI) was launched in 2000, bringing together governments, international organizations (e.g. the World Health Organization), the Bill and Melinda Gates Foundation, civil society and the private sector (the pharmaceutical industry). GAVI aims to ensure that cost-effective vaccinations are available for children in the developing world. As one part of this initiative, the pneumococcal Advance Market Commitment (AMC) was also launched to protect children against pneumococcal disease. Jean-François Tardif, Executive Director of Results Canada, explained to the Committee that the Government of Canada and other donors "provided a guarantee [a market] to those pharmaceutical companies that were willing to provide vaccines at a cheap cost around the world. That drove the cost of the pneumococcal vaccine to 5% of its original U.S. market price."[93] The AMC registered manufacturers — pharmaceutical companies in industrialized and developing countries — are a critical component of this process.

Expertise, ideas and innovation

Several witnesses argued that the private sector can make important contributions to development efforts through its expertise and innovative approaches and applications. Christoph Benn told the Committee of instances where the private sector has provided valuable input of this form to the Global Fund to Fight AIDS, Tuberculosis and Malaria. As one such example, he described how "The largest bank in Africa is providing free services for many of [the Global Fund's] implementers and is training them in financial management, helping them to manage currency exchange risks, and so on." As another example, Dr. Benn told the Committee that the Global Fund is working with the Coca-Cola Company to improve the Fund's supply chain management and logistics. He said that no company knows better than Coca-Cola how to get drugs and bed nets from the point of entry in a country to remote villages.[94] Dr. Benn emphasized that such companies do not provide the Global Fund with money; they provide expertise and training support. Another example that was brought to the Committee’s attention involved a smaller-scale project, Brandaid, where major law firms in Canada and in the UK have provided their expertise in copyright and trademark law to artisans in Haiti to help them protect and obtain value for their work. The project also involved major advertising firms.[95]

Carlo Dade argued that in the context of development, ideas may in fact be the most important asset that the private sector offers. He stated that private sector actors in general bring “creativity, dynamism, entrepreneurialism, and new ideas.” He also discussed the role of diaspora communities and remittances at length, arriving at a similar conclusion: “We found that the money being remitted was only one thing that was being transferred; ideas, knowledge, skills, and markets were also being transferred.”[96] Khalil Shariff emphasized the potential contribution of the Canadian private sector in this area, noting the capacity of Canadian companies in sectors ranging from agribusiness to financial services, including with respect to their “management approaches, knowledge, and technology, that we would consider simply standard forms of competent practice here but are simply not available in the developing world.”[97] To Mr. Shariff, knowledge transfer of best practices and techniques from leading companies holds significant potential for development impact given that “One of the severest forms of marginalization is marginalization from the global knowledge society, where your knowledge horizon is simply what you’ve inherited, not what is known in the world.” He argued that “…where Canada has gold standard practices that can be brought to bear, they should be, with a development mindset involved.”[98]

The private sector is also the source of technological innovation that is critical to development. An important example is the growing use of mobile phones, both with respect to increasing access to financial services and in disseminating information. The opportunities generated by ‘mobile money’ will be addressed in this report’s case study on financial services. Mobile technology has also shown its relevance in responses to humanitarian crises. Ushahidi, “an open-source crisis-mapping software” that was first used to map post-election violence in Kenya in 2008, has more recently demonstrated the potential of crowd sourcing technology, which “draws on mobile phone communications and social media,” to help with disaster response in countries like Haiti.[99] Another example of technological advancement can be found in the health sector. A new, faster, simpler and more effective test for tuberculosis infection (known as the Xpert MTB/RIF assay) was developed by the medical device manufacturer Cepheid, the first major advancement in tuberculosis screening in developing countries since the 1880s. Perhaps most importantly, this new method is able to detect “drug-resistant forms of the disease.” A partnership involving the U.S. President’s Emergency Plan for AIDS Relief, USAID, UNITAID, and the Bill and Melinda Gates Foundation is now working to “significantly reduce the cost” of this new test “in 145 high-burden and developing countries.”[100] A series of innovations have also been introduced in the agricultural sector, including new and improved seed types, agricultural equipment and methodology.

Concluding Remarks on the Role of the Private Sector

While the private sector was traditionally seen more narrowly as a source of additional financing for development projects, the preceding section has underlined that its role in development is a much broader and more fundamental one. Beyond another resource for development assistance, the private sector can also make many important contributions to long-term development through day-to-day activities such as core business operations that include the poor, the payment of tax revenues and the design, manufacturing and even delivery of key products and services. More generally, the expertise, ideas and innovation that the private sector brings to the table means that it can contribute to the understanding of development problems and the framing of optimal strategies to overcome them. As Daniel Runde argued in his appearance before the Committee: "The private sector are development actors."[101]

At the same time, development practitioners and businesses have been, and will continue to, test and seek to improve upon the best practices and modalities of private sector involvement in development efforts. This ongoing process reflects the complex and multi-faceted nature of the private sector’s role in development, a fact which was evident in the diverse presentations made to the Committee by witnesses. That testimony also made it clear that a full understanding of this topic requires recognition of the fact that private sector activity occurs within broader governance and institutional frameworks, an idea which will be elaborated upon next.