Privatising development successfully

Defining the ABIF log frame has made it clear to me that the M4P approach is all about privatising development, which in turn has important implications for the detailed design of ABIF. Maybe this is stating the obvious? However M4P writing tends to focus on changing markets and impacting beneficiaries, rather than on the significance and implications of the approach itself. A quick Google search didn't come up with anything linking M4P with privatising development or how this privatisation process should be managed, so here are some thoughts on this connection.

When designing the ABIF log frame one of the questions we have been debating is what belongs at the output and outcome level. The answer for an M4P programme is very different to a traditional development programme. I remember that at Katalyst we also discussed this for a long time (in fact the first 8 years of the project). Finally with external help, I think that we reached the right conclusion; outputs are all about the changes in the market (supply and demand side), and the outcome is about increasing the competitiveness of small enterprises.

This is also the right structure for our log frame because at the heart of M4P is the confluence of development objectives and commercial incentives. The roles of the project and the target client is not so much to be giver/receiver of development support (although this happens), as to be co-sponsors of a commercially viable project that will deliver development impact. From the project's point of view, we are increasing donor funds by mobilising private sector resources to achieve development objectives, and from the client's point of view, he is increasing private sector resources by attracting donor funds as additional investment capital.

Going back to the log frame, which after all is just a tool to capture the conceptual thinking behind the project design, the private sector co-investor's contribution belongs at the input level. It is as if we have teamed up with a donor funded partner (another project, an NGO or similar), but rather than pooling donor resources, we are co-investing with a private sector partner to achieve the project's objectives. Together (but motivated by different/complimentary objectives), we are working to bring sustainable change to the way that markets work, and this is the output of the project.

Once I made this conceptual leap (from thinking of the client's investment as an output of the project, rather than the project itself), it became clear that M4P is about privatising development. It seems that the development community is at an early stage of this transition, but it appears to be underway, at least for the time being.

Privatising development is an important route towards sustainable development. It is widely recognised that the private sector uses resources more efficiently than the public sector, and the private sector has this defining characteristic of being self-sustaining. The more that the private sector can be harnessed in development (in countries where every penny counts), the better. Logically, the rate of development will be faster the more that the private sector is involved in development.

However, there are two key considerations in following this path:

1. The recent global financial crisis has demonstrated yet again that there is a clear role for the state as regulator to prevent excess and abuse, so the M4P intervention must balance the respective roles of the private sector and the state in markets; and
2. The M4P programme must ensure that it is efficiently incentivising private sector investment, not wastefully subsidising private sector profits.

This second point is something which is a question I have over some of the M4P labelled interventions I have seen reported, so we are consciously addressing it through the ABIF design process in the hope of refining the approach. Why do challenge funds give matching grants, why do grant giving programmes have cost sharing agreements at a particular level? Whenever you ask these questions of specific interventions, there is never a rational or satisfactory answer, because the projects do not talk about the role of risk in business decision making.

As with other M4P programmes, ABIF will co-invest in private sector led projects that invest in pro-poor innovation. So how will we make sure that we incentivise to achieve our objectives, rather than subsidise private sector investment? There are three answers, one conceptual and the other two practical:

1. Conceptually, we focus on the risk part of the investment equation. We will only invest in projects that would be commercially viable in a less risky environment. Our investment is not designed to share project costs or to maximise leverage of private sector investment (a completely irrelevant metric from a development point of view), but to compensate for the high discount factor (the measure of risk in an investment project) applied to those future cashflows. We will therefore only invest in projects that would have a positive NPV elsewhere and we will only invest as much as it takes to turn a negative NPV in Afghanistan into a positive one. So investment project design and the potential impact (rather than financing and the potential leverage) is the key consideration.
2. Practically, we will invest based on competition between proposals. We will define the challenge and we will evaluate proposals received, the only assessment criteria being the impact that the project will achieve and the project sponsor's capacity to implement the project successfully. So we can reach a conclusion on the expected development returns of the project (the expected future impact "discounted" according to the risks arising from the capacity of the project sponsor).
3. We will give grants, not loans. By giving grants we achieve a number of goals: we avoid confusion with commercial finance providers, we are more efficient because we do not have the costs of managing repayments, we tie up less money for the same impact... but most importantly we impose development discipline on ourselves, because we have to keep going back to donors for funding, which means we have to show impact. We are not a pretend private sector investment fund with our own capital, we are a donor funded project entrusted with tax payers' money.

By adopting this approach, the hope is that we will use public money efficiently, to offset a public obstacle to investment and achieve our impact objectives. Inevitably, things will not be quite as simple as this sounds, but at least we have an approach that should minimise the risks of subsidy and allowing the private sector making super-profits from the privatisation of development.