The Future of Public-Private Partnerships: Strengthening a Powerful Instrument for Global Development
October 25, 2013
In November 2011, the Center for Strategic and International Studies (CSIS) published a report on Seizing the Opportunity in Public-Private Partnerships: Strengthening Capacity at the State Department, USAID, and MCC. This report represented the beginnings of a long-term commitment to understand and shape policy and approaches with respect to public-private partnerships (PPPs) and global development within a broader initiative to help strengthen the U.S. government’s development capabilities. As part of these efforts, CSIS has in the past two years convened a number of events with NGOs and for-profits in both public and off-the-record sessions. In December 2011, CSIS released the report Sharing Risk in a World of Dangers and Opportunities: U.S. Development Finance Tools, followed by Our Shared Opportunity: A Vision for Global Prosperityin March 2013.
Currently, the term “public-private partnership” is used to describe a broad and varied spectrum of arrangements, many of which are perhaps incorrectly placed in this category. In its 2011 Seizing the Opportunity report, CSIS defined partnerships as “an approach to solving development problems through a coordinated and concerted effort between government and nongovernment actors, including companies and civil society, leveraging the resources, expertise, or market efforts to achieve greater impact and sustainability in development outcomes.” In addition, it identified three models of partnerships: financial partnerships, partnerships based on expertise, and partnerships based on market.
Public-private partnerships offer official donors, private sector actors, and recipient governments an approach to development solutions at a time when traditional sources of funding and energy for development are under strain, while also offering synergies among partners leveraging their talents, technologies, expertise, and convening power. The idea of tri-sector partnerships, for the most part, connotes an alliance among an international NGO, a for-profit company or private foundation, and a bilateral donor. Partnerships, however, do not have to conform to this model; consulting firms, universities, the World Bank Group, and the United Nations system, among other actors, are often attractive and capable partners as well.
PPPs have been a growing part of the toolkit for development practitioners, non-profits, the private sector, and governments. There is still imperfect coordination among all these actors, but the process is improving. Partnership-based approaches offer a significant upside, but many development systems are still designed for an earlier era, and measuring impact and managing risk within partnerships continue to be challenging.
At the same time, PPPs should be viewed as one possible approach, not a ready-made substitute for indiscriminate application. In short, partnerships are not the solution to every development question. Partnerships are likewise not necessarily the answer to donor fatigue, although they certainly offer the possibility to think differently about a problem, within the context of an open and balanced approach to development.
In some cases corporate partners provide funding; in others, they provide market access and/or intangible benefits. Private sector actors, particularly multinational corporations, offer access to technology, reach, and extensive supply chain power, among other comparative advantages. USAID’s approach through the Global Development Alliance, for one, captures the broad offerings of the private sector; it recognizes that whereas “PPPs are sometimes characterized by the private sector making a simple financial contribution to a public sector initiative, public‐private alliances combine the assets and experience of strategic partners (such as corporations and foundations), leveraging their capital and investments, creativity and access to markets.”
On the other hand, the public sector (including the U.S. government) offers a broad set of its own comparative advantages, including: development-specific expertise, unmatched reach with other governments (e.g., insight on which ministries are more effective than others), and unique experience on the ground regarding what works and what does not. In addition, donors often have a valuable brand, which makes them attractive partners for private actors.
The typical kind of PPPs that multilateral development institutions undertake is generally very specific to large infrastructure projects. What NGOs, foundations, corporate philanthropy, remittances, and bilateral donors touch is different, whether that be access to finance for small and medium-size enterprises (SMEs), entrepreneurship, impact investing, socially responsible investing, combining investment with technical assistance, implicit or explicit subsidies in investments, first loss guarantees, or credit guarantee instruments like USAID’s Development Credit Authority.
A Changed Landscape and a Changing Role for ODA
Private actors and globalization have changed the nature of development and development assistance world in the three decades. In the 1960s, the United States engaged developing countries through official development assistance (ODA); now, almost all of its engagement with the developing world is through trade, foreign direct investment, private philanthropy, and remittances. Official development assistance is no longer the force it was decades ago as a funder of development. Although the U.S. tripled ODA in the last ten years, and there were similarly broad increases by other traditional donors in that time, the immense role of the private sector in development now reduces reliance on public spending on foreign aid.
However, ODA does have an important role to play as a catalytic force, as a risk mitigant, as a convener, and as a provider of unique expertise. Traditional donors and multilaterals are only now starting to make significant changes to how they plan, organize themselves, incentivize their staff, and work with others. The changed global reality also has implications for NGOs, investors, diasporas, and other development stakeholders. The conclusion is that development is not something that any one actor can undertake on its own, if that ever was the case in the first place.
Global development realities over the past 10-15 years have changed more rapidly than the U.S. government has been willing or able to adjust its capabilities to match. Although it has made progress, the U.S. government needs to continue to think differently and improve its capabilities to match current realities. Over the last decade, its development capabilities have improved in many ways, notably in the area of public-private partnerships.
Part of this positive change can be attributed to a new generation of civil servants with significant private sector experience under their belt. Some have even joined the U.S. government after working on the other side of the public-private partnerships that USAID has built over the last ten years. Their outside-the-box thinking and diverse backgrounds have helped spark institutional innovation among the U.S. government’s development professionals.
A changed perception of values among companies, an increased appetite on the part of private philanthropy, and steady growth in global remittances are also contributing to a new landscape for development partnerships. For business, its relationship with emerging markets and developing countries has changed significantly over the last two decades. Economic growth, rising living standards, and private investment in developing countries all go hand in hand, realities that have influenced new business strategies and approaches by development NGOs. Multinational corporations are more committed than ever to investing in the developing world, where there is now a sizable middle class, and NGOs are keen to partner with those businesses. Another contributing factor to increased global prosperity is the vast flow of remittances into the developing world. The World Bank estimates that in 2014, remittances to developing countries will exceed $440 billion, a figure that far surpasses total ODA to those countries.
Perhaps no sector straddles the private and public sectors quite as thoroughly as civil society—the critical component of PPPs. Instead of being regarded as an isolated third sector, civil society should be the glue binding the private and public sectors together. Some international development NGOs have worked with the private sector for many years now, but there has been a tremendous change among others in the last decade or so. Because of their 501(3)(c) status and their international reputation, these development NGOs are often the implementing partners of choice for large bilateral donors such as the U.S. government.
Many development NGOs have dramatically shifted the mix of funding on which they rely. Major NGOs, for instance, often own for-profit subsidiaries, a change from a decade ago. One notable example highlights this trend well. Mercy Corps, a major global non-profit development organization based in Portland, founded Bank Andara in Indonesia in 2008. The bank was established as a separate for-profit commercial entity under the umbrella of Mercy Corps in order to help finance Indonesian small businesses through its offerings of loans and financial services. This model is being replicated by Mercy Corps in surrounding South Asian countries and an innovation other development organizations are investing in as part of their strategies.
The U.S. Government Response
One way the U.S. government has responded to this changed context is by building its own capacity for public-private partnerships. For example, within the last decade, USAID has inked more than 1600 partnerships with over 3000 different partners, amounting to almost $20 billion in total lifetime investment. USAID’s progress on this front was acknowledged by a favorable 2011 report by the Organization for Economic Cooperation and Development (OECD), which identified the United States as “a leader in creating public-private partnerships.”
In order to make full use of public-private partnerships, the U.S. government and other official donors need to come to terms with the true extent of resources at their disposal. The rules and conventions for how the U.S. government operates must undergo a corresponding change to reflect these new circumstances. Yet the way in which the U.S. government makes plans and policies is rooted in inaccurate assumptions of the size of its actual contribution to development.
To be clear, what the U.S. government commits to foreign assistance in terms of dollars, human resources, and in-kind disbursements is still very large compared to other donors’ contributions. But the stark reality is that—compared to foreign direct investment, remittances, and even domestic tax revenues—the U.S. government is a very small actor in the grand scheme of things. Therefore the U.S. government needs to be much cleverer in how it catalyzes development; instead of relying on a big-spending development model grounded in outdated assumptions, it should leverage its comparative advantages. The U.S. government, for instance, remains a global leader in terms of convening power, expertise in agriculture, global health, democracy promotion, and emergency response to name a few of the many areas of strength. To this end, it has the ability to partner with not only other countries’ donor agencies, but also private funders, the corporate sector, government ministries, and NGOs, among other actors.
Within the current administration, there has been an increased interest in formal public-private partnerships in the sphere of development finance. This interest has manifested itself in the form of increased use of USAID’s Development Credit Authority (DCA), a greater role for the Overseas Private Investment Corporation (OPIC), as well as the establishment of the Global Partnership Initiative within the State Department and the Private Capital Group for Africa within USAID.
Ongoing Challenges and Successes in Partnerships
The future of public-private partnerships looks bright, but a number of difficult challenges loom. Some of these challenges are the same persistent questions that are often asked at the intersection of private investment and development. Part of the challenge lies in overcoming a lingering concern about the “privatization of development”, namely a perceived fear that developed countries and bilateral donors are shirking their fiduciary duties to poor countries by completely outsourcing these duties to private actors.
On the governmental side, ongoing challenges include planning, how to actually move money, and how to manage partnerships. For the corporate sector, challenges include building and governing multi-company, multi-sector arrangements of networks, how to manage the risk(s) of something going awry in the partnership (the issue of risk is elaborated below), and how to measure the impact of working together through partnerships versus working alone.
One example of the power of partnerships is the case of M-Pesa, which leveraged technology for a successful development partnership. In Kenya, a technology company and a government development agency created a tremendously successful program to offer easy accessibility to financial banking services to Kenyan citizens. This famous venture brought together the United Kingdom’s Department for International Development (DfID) and Vodafone, along with the latter’s subsidiary, Safaricom. Before this partnership was launched in 2007, fully three of five Kenyans could not access financial services. But DfID and Safaricom’s program, called M-Pesa, provides Kenyans with a mobile phone banking system, allowing users to make withdrawals, deposits, or money transfers via text message. DfID took on the financial risk of the project, opening the door for Vodafone to safety invest and provide the services. Today, 70 percent of adult Kenyans use M-Pesa for smoother business transactions and management of personal finances. This collaboration between the private and public sectors in Kenya ranks as one of the finest examples of PPPs that have made a tangible and positive development impact.
Success stories such as the one above can be particularly compelling arguments for development during leaner times. In the current context of constraints to development, there need to be better ways of delivering resources to people, and this requires changing the development mindset toward benefiting “customers” rather than just recipients or participants. In fact, there are an ever growing number of approaches that use markets or market-like approaches to solve challenges in the developing world. This trend has been helping contribute to a different mindset in the broader development community.
Partnerships bring together disparate actors, so it is important to segment and understand the motivations of all partners in the context of that project. Effective partnerships strike a balance between means and ends, safeguarding both the public-private nature of the collaboration as well as the ultimate development outcome identified at the outset by all stakeholders. Therefore, managing expectations and risk is critical for successful partnerships.
There are different kinds of risk involved in carrying out public-private partnerships, including reputational, financial, strategic, operational, and compliance risks. But the risk of zero impact is often just as important as the risk of a bad outcome. Sometimes the need for a political deliverable can push a partnership forward without the institutional backing needed to sustain such a project. Similarly, poorly-conceived or nonexistent business cases of large transnational corporations present a significant risk to development projects. In either case, all companies, agencies, and other organizations involved in a proposed partnership must not only do their due diligence on the viability and sustainability of that partnership, but also to ensure that the information from that due diligence process travels through the proper channels to influence decision makers accordingly.
Risk is present in all public-private partnerships and for all partners involved. Partnerships can no longer be described as new and untested, and are in fact broadly accepted today (some might even say partnerships have become “politically correct” for leaders, even if their actions do not follow their words). They need to therefore be approached with an eye on managing risk, not trying to avoid it altogether. Utilizing comprehensive memoranda of understanding, conducting due diligence, and agreeing explicitly on intended outcomes and metrics are a few ways of managing and mitigating risk without compromising impact.
Metrics and Measuring for Impact
Metrics are often excluded from the development conversation, but feedback from metrics is needed to improve the impact of development projects. Measurement is a way to define the meaning and value of a partnership and the expected outcome of its work. Measurement should be an integral part of the initial planning process because partnerships have collapsed from poorly-conceived roles. But it is also a vital tool throughout the duration of a partnership because it establishes a common definition and goal, allowing the partners to move away from pure activity and focus on impact and return on investment as well.
Two key questions to be kept in mind are: a) have the objectives of all stakeholders been successful? and b) to what extent does working in a partnership framework add value or contribute to development goals?
Measurement is a relatively broad notion that can cover a variety of important ideas: reach, impact, sustainability, cost-efficiency, behavior change, and activity and output level monitoring. Partnerships must be examined to see what value was added in the form of leveraging resources, how much the scope of the money is being extended (in terms of flexibility and expertise), and to what extent markets can be catalyzed to sustain the operation. These are just a few ways to analyze whether a PPP has actually resulted in a development impact that would have been unfeasible had the partnership not been formed in the first place.
Although certainly not the answer to every development question, partnerships represent an important instrument in the modern era of development. Partnerships are not meant to supplant traditional aid, but rather to complement the necessary role that ODA still plays; as official donors undergo an ongoing process of adjustment to new development realities, their relationship with and adoption of public-private partnerships will further improve. Most importantly perhaps, partnerships concurrently recognize and potentially address not only the recent financial constraints on public spending on foreign assistance, but also the expanded role of the private sector in global development.
Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington D.C. Amasia Zargarian is a research associate with the Project on Prosperity and Development at CSIS.
With the generous support of KPMG’s International Development Assistance Services, CSIS convened a high-level public conference called “The Future of Development Partnerships” on May 1, 2013. This paper draws considerably from that conversation.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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