The objective of this report is to provide an analytical framework of development co-operation for private sector development (PSD) and a measurement to capture relevant Official Development Finance (ODF). This paper considers PSD as development co-operation that addresses the improvement of policies and institutions, market functioning and enterprise capacity in order to increase the participation of the local private sector – particularly SMEs – in the economy of a developing country.

In general, PSD is considered as an effective means to achieve the overall objective of boosting inclusive and sustainable growth. Here, PSD activities can be broadly categorised into those that address the investment climate or those that address productive capacity. While development partners emphasise the importance of both the investment climate and productive capacity, multilaterals tend to stress the former and bilaterals the latter. Another way of providing an analytical framework is to categorise PSD activities into upstream (public policy and institutions), midstream (market functioning), and downstream (enterprise development) levels.

Within the bilateral development partners, PSD is carried out by one or more ministries, a development agency, a Development Finance Institution, embassies and/or country missions. Multilaterals usually have several specialised departments working on different aspects of PSD, including business environment, trade, and infrastructure. The multi-faceted nature of PSD and implementation by various departments and institutions can be challenging for strategic coherence and internal and cross-agency co-ordination. In addition, most development partners support the private sector directly, including to promote their domestic companies, which could lead to market distortions and compromise development objectives if it is not prioritised over commercial objectives.

Based on the analytical framework provided in this paper, ODF for PSD amounted to USD 96 billion in 2013, which was equivalent to 54% of ODF to all sectors. All development partners extensively supported the investment climate, of which infrastructure took up a significant portion. In fact, half of ODF to PSD went to infrastructure. Disaggregating development partners, multilaterals allocated proportionally more to the investment climate than the bilaterals, while bilaterals supported the productive capacity more than the multilaterals. Furthermore, excluding infrastructure, development partners collectively supported the upstream, midstream, and downstream levels rather evenly.

Introduction

The private sector plays an essential role in development as one of the main drivers for economic growth, poverty reduction and human development. It accounts for 60% of Gross Domestic Product and provides 90% of all jobs in developing countries, constituting a key source of livelihood, productivity and social cohesion. Furthermore, the private sector produces goods and services – including for the poor – and generates tax revenues that could be used to provide health and education services. For these reasons, the importance of the private has recently been underlined in the 2030 Agenda, which calls for inclusive and sustainable growth and industrialisation.

By recognising its important role, development partners are increasingly promoting private sector development (PSD). While the goal of PSD is to ultimately enhance economic growth and poverty reduction, development partners adopt a variety of approaches, which makes cross-cutting assessments challenging. This is particularly the case from a quantitative perspective as the lack of a common understanding on the scope of PSD makes it difficult to obtain an overarching picture of financial resources allocated to this area. In fact, comprehensive quantitative analyses of Official Development Finance (ODF) to PSD are rare.

To fill this gap and shed light on the diversity of PSD approaches, the report provides a qualitative and quantitative assessment on the support by development partners to this area. In particular, it highlights the theoretical underpinnings of PSD and describes the relevant strategic and institutional arrangements of development partners. It also schematises PSD components around an analytical framework that captures the universe of PSD activities which further allows quantification of ODF to PSD. By doing so, the report advances the last major work of the Development Assistance Committee (DAC) on PSD, i.e. the POVNET guidance “Promoting Pro-Poor Growth: Private Sector Development” published in 2006.

The report represents an initial exercise that can be developed throughout and beyond 2016 in line with the upcoming 2016 OECD Ministerial Council Meeting’s priority on productivity and inclusive growth. In particular, the work on development co-operation to PSD could be deepened through surveys, specific quantitative assessments and in-depth analyses at the country, development partner, sector and thematic levels. Research outcomes, findings and policy recommendations can be developed on an iterative basis and consolidated at a later stage.