Expanding Enterprise, Lifting the Poor The Private Sector in the Fight against Global Poverty

Brookings Blum RoundtableAugust 2005

AUTHORS

Lael Brainard and Vinca LaFleur

CO CHAIRS

Richard C. Blum and Strobe Talbott

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The Global Economy and Development Center at theBrookings Institution seeks to advance research, dia-logue, and innovative solutions to address the challengesof global poverty and the forces of globalization. Itsgoal is to take the policy debate in new directions byproviding thought leadership on the road out of poverty,the drivers shaping the global economy, and the rise ofnew economic powers. Recognizing that the forces ofglobalization range across disciplinary boundaries, theGlobal Economy and Development Center draws onthe creative thinking of scholars from the fields of economics, development, and political science, buildingon Brookings’ worldwide reputation for high quality,independent policy research.

The Aspen Institute seeks to foster enlightened leadership, the appreciation of timeless ideas and values,and open-minded dialogue on contemporary issues.Through seminars, policy programs, conferences, andleadership development initiatives, the Institute and itsinternational partners seek to promote the pursuit ofcommon ground and deeper understanding in a non-partisan and non-ideological setting.

Realizing Rights: The Ethical Globalization Initiative(EGI) is a new project led by former President of Irelandand United Nations High Commissioner for HumanRights Mary Robinson. EGI brings key stakeholderstogether in new alliances to integrate concepts of humanrights, gender sensitivity, and enhanced accountabilityinto efforts to address global challenges and governanceshortcomings.

Global Economy

& Development

At The Brookings Institution

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Foreword

FROM AUGUST 3 TO 6, 2005, FIFTY PREEMINENT INTERNATIONAL LEADERSfrom the public, private, and nonprofit sectors came together at the Aspen Institute fora roundtable, “The Private Sector in the Fight against Global Poverty.”

The roundtable was hosted by Richard C. Blum of Blum Capital Partners andStrobe Talbott and Lael Brainard of the Brookings Institution, with the active supportof honorary cochairs Walter Isaacson of the Aspen Institute and Mary Robinson ofRealizing Rights: The Ethical Globalization Initiative. By highlighting the power ofthe market to help achieve social and economic progress in the world’s poorest nations,the roundtable’s organizers hoped to galvanize the private, public, and nonprofit sectorsto move beyond argument and analysis to action. Put simply, as Brookings presidentStrobe Talbott explained, the roundtable’s work was “brainstorming with a purpose.”

With experts hailing from around the world and representing diverse sectors andapproaches, the dialogue was as multilayered as the challenge of poverty itself. Ratherthan summarize the conference proceedings, this essay weaves together the thoughtfulobservations, fresh insights, and innovative ideas that characterized the discussion. Acompanion volume, Transforming the Development Landscape: The Role of the PrivateSector, contains papers by conference participants, providing in-depth analysis of eachconference topic.

AcknowledgmentsThe roundtable was made possible by a generous grant from Richard C. Blum,chairman of Blum Capital Partners, with additional support from the William andFlora Hewlett Foundation and the Ewing Marion Kauffman Foundation. The meeting’ssuccess was greatly due to superb research and planning support from Raji Jagadeesan,Zoë Konovalov, Emily McWithey, Nicholas Warren, and Molly Langer.

(from left to right) Strobe Talbott

(President, The Brookings Institution),

Smita Singh (Special Advisor for Global

Affairs, The William and Flora Hewlett

Foundation), Lael Brainard (Vice President

and Director of the Global Economy and

Development Center, The Brookings

Institution), and Mary Robinson

(Executive Director, Realizing Rights:

The Ethical Globalization Initiative)

Turning the Tide

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A TRIO OF KEY INTERNATIONALmeetings marked 2005 as a pivotal year forthe global antipoverty movement: theGleneagles Group of Eight (G-8) Summit inJuly, where British prime minister Tony Blairpledged to put Africa’s challenges front andcenter; the United Nations GeneralAssembly’s review of the MillenniumDevelopment Goals in September; and theWorld Trade Organization’s Ministerialmeeting in December, where the fate of theDoha Development Agenda hung in the bal-ance. Each meeting offered opportunities tohelp turn the tide on global poverty.

At the same time, civil society groups weremobilizing worldwide to prod political lead-ers toward action. From the ONE Campaignin the United States to the United Kingdom’s“Make Poverty History” movement, broad-based coalitions were pressuring nationalgovernments for vastly increased aid, fairtrade, and debt cancellation.

Meanwhile, prominent public figuresadded celebrity appeal to the cause. The rockgroup U2’s front man Bono’s tireless workagainst poverty earned him a Nobel PeacePrize nomination; Bob Geldof staged six“Live 8” rock-stravaganzas in advance of theG-8 summit; in Trafalgar Square, NelsonMandela urged young people to wear a whitearmband to demonstrate their commitmentto combating poverty; and Bill Clinton host-ed the high-profile Clinton Global Initiativein New York, which focused in large part onthe escape from poverty.

The media also trained its powerful spot-light on the world’s poorest people—fromTime magazine selecting Bono and Melindaand Bill Gates as its Persons of the Year toMTV broadcasting The Diary of AngelinaJolie and Dr. Jeffrey Sachs in Africa. And astring of natural disasters—the South Asiantsunami, the Niger drought, HurricaneKatrina, and the earthquake in Pakistan andKashmir—reminded the world’s people oftheir common humanity and galvanized anoutpouring of assistance.

This heightened public awareness of globalpoverty—and renewed spirit of generosity—are welcome advances in the work of devel-opment. So far, however, the public agendahas focused primarily on boosting officialassistance and canceling official debt. Eventhough the past two decades have witnessedan enormous shift in resources away from thepublic sector to private hands, and privateflows to developing countries are now morethan twice the level of public flows, scantattention has been directed at the mostdynamic engine of growth and poverty allevi-ation: the private sector. Indeed, the privatesector merits only two very narrow mentionsin the Millennium Development Goals.

Yet private enterprise belongs at the verycenter of the development enterprise. Bygenerating jobs, serving the underserved,promoting innovation, and spurring produc-tivity, indigenous private sector developmentcan raise living standards and promoteopportunity. The most dramatic example is

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The Private Sector’s Role in Development:We Cannot Afford to Wait

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China, where surging growth has raised 400 million people from poverty in the pasttwo decades.

Moreover, rich and poor consumers alikebenefit from the lower prices and greaterchoices that competition brings. Private firmsare also the main source of tax revenues forsocial services like health care and education.And given the right circumstances, the entre-preneurial spirit can be sparked within anysociety—bringing a spirit of internal empow-erment. No wonder, then, that leaders ofpoor nations have placed private sector devel-opment high on their own priority list—asshown, for instance, by the homegrown NewPartnership for African Development.

But just as an indigenous private sector canbe a powerful force for change, so too doesthe global private sector have a positive roleto play in development. As the HarvardUniversity scholar Jane Nelson notes, busi-ness leaders can make a difference through“the implementation of responsible businesspractices and standards, in areas such asethics, the environment, labor, and humanrights,… [by] harnessing the core competen-cies, resources, and problem-solving skills ofprivate enterprise to create new social andmarket value; and… [by] working in partner-ship with others to help establish the appro-priate enabling environment or conditions forgood governance and private sector develop-ment.”1 Whether by paying premium pricesfor coffee produced with sustainable prac-tices, donating resources to build schools and

hospitals, or championing improved marketaccess for developing country exports, amultinational firm can bring uniqueresources, leverage, and experience to thedevelopment table.

Moreover, the private sector can bring tothe fight against global poverty the same spiritof leadership, innovation, and initiative—andthe same skills in scaling size up, driving costsdown, and reaching out to new clients—thatare required for success in the global market-place. And in contrast to the slow and uncer-tain pace of the public sector in makingbudget appropriations or adopting reforms,the private sector has the power to takemeaningful steps against poverty right away.

For the world’s neediest people, such acommitment by the private sector cannotcome soon enough. Children are starving in an age of abundance, ailing in an era ofmedical miracles, and perishing in extremepoverty at a rate of 1,200 each hour. Theways and means exist to save these children,if the world can find the will. In the words ofRichard C. Blum, the chairman of BlumCapital Partners, “Some people say you can’tafford to invest in poor countries until gover-nance is right and corruption has beenreduced. I say that we can’t afford to wait.”

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Bringing Prosperity

THE DYNAMIC GROWTH OF THEprivate sector in poor countries is indispen-sable if the international community is tomeet its pledge in the MillenniumDevelopment Goals to halve extreme pover-ty by 2015. As UN secretary general KofiAnnan has said, “We cannot reach thesegoals without the support of the private sec-tor. Most of all, we cannot reach them with-out a strong private sector in the developingcountries themselves, to create jobs andbring prosperity.”

Indeed, because top-down approaches todevelopment have failed to produce consis-tent results, appreciation for the role of pri-vate enterprise in generating durable growthis increasing. International agencies like theUnited Nations Development Program areassigning a higher priority to the issue; theprogram’s influential Commission on thePrivate Sector and Development produced areport titled “Unleashing Entrepreneurship,”which the G-8 leaders endorsed at their 2004summit. Meanwhile, the World Bank isstrengthening its traditional commitment toprivate sector development; its WorldDevelopment Report 2005 drew on surveys ofnearly 30,000 firms in fifty-three developingcountries to explain and measure the forcesshaping their investment climates.

At the same time, civil society groups areshowing a greater interest in working withprivate partners on poverty reduction, andvice versa. Gone are the days when non-governmental organizations (NGOs) demo-

nized big business as the enemy and corporations caricatured activists as tree-hugging idealists. After all, private enterpriseis the greatest source of self-employmentand jobs—the two factors poor people them-selves rank highest as means to improvetheir own lives.2 Together, business and civilsociety are devising creative alliances toadvance shared development goals in areas such as microfinance and resourcetransparency.

Yet despite a growing recognition of theimportance of entrepreneurship in defeatingpoverty and spurring growth, private enter-prise still is not thriving uniformly across thedeveloping world. Why does it flourish insome societies while suffocating in others?What can be done to unleash entrepreneur-ship’s contribution to development?

Among the many avenues to explore arethree fundamental questions: How can theclimate be improved for private enterprise indeveloping countries? Do certain sizes ortypes of enterprises contribute more power-fully than others to productivity growth,innovation, and employment? And how canmore private capital investment be channeledto poor countries?

Improving the Climate for Private EnterpriseIn the words of Warrick Smith of the WorldBank Group’s Vice Presidency for PrivateSector Development, “Firms and entrepreneursinvest and make productivity improvements

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Empowering Business to Do Business in theDeveloping World

not out of any sense of philanthropy but tomake profits. Their decisions are thus influ-enced by the expected risks and rewards asso-ciated with alternative courses of action.Those risks and rewards are in turn shapedby the investment climate—but what shapesthe investment climate?”3

Some of the factors shaping the climate for private enterprise are difficult to change.A geographically remote or rugged countrywill inherently face transportation challenges,just as a small or sparsely populated countrywill have a limited market size. Social atti-tudes toward risk and failure can constituteserious barriers to entrepreneurial growth; insome countries, creativity and innovation arenot adequately rewarded or valued. Culturalbarriers and norms may disproportionatelyimpede certain groups such as women and minorities.

But research shows that government policies and behaviors have a critical role to play. If governments can put the rightmarket-friendly framework in place, the private sector’s ability to spark growth andalleviate poverty can be markedly improved.

Several policy and regulatory levers canprove especially significant: ensuring effectivefinancial intermediation; assigning propertyrights—including those of poor people, asHernando de Soto has persuasively argued;enforcing contracts; and fostering predictablepolicies and a sound macroeconomic envi-ronment. In fact, World Bank research showsthat “improving policy certainty alone could

increase the likelihood of new investment byover 30 percent.”4 Where the rule of law isweak, transactions must rely on personal rela-tionships, which greatly undermines the effi-ciency of financial intermediation andreduces productive investment.

Regulations facilitating firm entry andexit—along with relatively open trade poli-cies—can contribute to a greater degree ofcompetition, lower prices, and more con-sumer choices. World Bank research showsthat the number of days required to open abusiness tends to be significantly higher inlow-income countries; it ranges from 2 inAustralia to 203 in Haiti. In an unprecedent-ed move, the U.S. Millennium ChallengeCorporation has adopted this competitive-ness indicator as a criterion for eligibility. Butother procedures can exact a huge toll on theprivate sector in poor countries as well; forexample, enforcing a simple contract takes1,459 days in Guatemala, according to theWorld Bank, as compared with only 48 inthe Netherlands.

Of course, while identifying key driversand constraints to private investment is relatively straightforward, actually makinglasting policy reforms is not. For one thing,those who benefit from the status quo mayhave significant political clout to resistchange, and incentives may not be sufficientor appropriately aligned to achieve results.In addition, conditions for private enterprisemay vary not only among countries but within them, as different sectors or different

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“We need to remember that the private

sector is a lot of individual people; every

SME is built from one entrepreneur.”

Jo’ Schwenke Managing Director, Business PartnersLimited

classes of enterprise face different hurdles.And complex unknowns surround thesequencing of reform efforts and the interac-tion of different policy and regulatorychanges. Setting priorities is difficult when so much is crying out to be done.

Although the necessary political will mustcome from within developing countriesthemselves, the international community doeshave some useful points of leverage—such as supporting the development of pro-reformpolitical forces, small business associations,and influential diaspora communities, all ofwhich can create demand-side pressure forotherwise unpopular reforms. And tradeagreements can help developing country governments lock in a reform agenda, rein-forcing investor confidence that reforms will be sustained.

Similarly, though legitimate debates persistover how to prioritize reforms, the challengesof sequencing should not become a smokescreen for complacency. Creating a good climate for private enterprise is a long-termprocess. The full set of necessary reformscannot and need not be attained simultane-ously. What counts is sustained progress.

A corollary is that adopting appropriatelaws and policies is necessary—but will notbe enough on its own. Often, deeper chal-lenges inhibit private sector growth—such as a lack of policy credibility and poor publictrust. Corruption is a particularly corrosiveforce that undermines vibrant private sectorsand helps to perpetuate poverty. In the words

of the Tanzanian entrepreneur Ali Mufuruki,“The biggest problem in Africa today is notpoverty caused by historical conditions but bypeople themselves. We have good examplesof countries built and wrecked again by theirown people. People need to take responsibilityto make their governments deliver.”

And of course, private enterprise dependsas well on important enabling factors, rang-ing from a skilled workforce and adequateinfrastructure to contact with potential cus-tomers, connections to suppliers, access toknow-how and technology, and, crucially,access to capital—a problem that is especiallyacute with regard to seed funding for early-stage enterprises and risk capital for expansion.

Liberating entrepreneurship in developingcountries is not as simple as “If we build abusiness-friendly policy environment, theywill come.” Instead, it involves meeting themanifold challenges sketched in this report,which in turn requires commitment and cre-ativity from a range of stakeholders. It alsorequires a clear understanding of ultimategoals and objectives; there may be a trade-offbetween those measures that will help thevery poorest citizens of a country and thosethat will spark the long-term growth of itswhole economy.

But most immediately, unleashing entre-preneurship requires the courage to act—recognizing that while a vigorous private sector is not enough by itself to end poverty,poverty will never be eradicated as long asthe private sector is stifled.

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Does Size Matter?Even with growing agreement that vibrantprivate enterprise is essential for vibranteconomies, the question remains: Shouldparticular sizes and classes of enterprises betargeted? If the development goals are jobcreation, poverty reduction, and productivitygrowth, are equally important roles played by a seamstress making clothes on a sewingmachine financed through a microcredit loan,a farmer with fifty employees expanding hisbusiness to reach both local and export markets, and hundreds of workers at an automobile plant churning out componentsfor foreign cars?

Rigorous empirical research provides littlesupport for the notion that business sizematters for advancing economic growth;instead, the academic literature finds that anenabling environment is critical for healthyenterprises of all sizes.5 But many practitionersnonetheless see important differences in theimportance of enterprises of various sizes inreducing poverty and promoting innovationand employment. Broadly speaking, practi-tioners divide enterprises into four classes:microenterprises, small- and medium-sizeenterprises (SMEs), large-scale nationalenterprises, and huge multinational firms.Microenterprise, while probably not anengine for overall growth, is invaluable forimproving the lives of the poorest membersof society. SMEs can provide bottom-upgrowth and innovation, while large nationals

and multinationals can link local markets tobroader, global opportunities. (For moredetails on these four enterprise classes, seethe box on the facing page.)

Regardless of whether looking at differentsizes of firms constitutes a useful frameworkfor thinking about growth and development,size definitely matters when it comes to evaluating enterprise needs and constraints.Financial constraints remain paramount inmany poor countries, hitting microenterprisesand SMEs particularly hard.

More than two decades of experience haveyielded a number of successful models forovercoming the acute constraints thatmicroenterprises initially face. Today, NGOssuch as ACCION, FINCA, Unitas, and theGrameen Bank operate effective microlend-ing programs on a large scale with the sup-port of private philanthropy, official donors,and multinational businesses. FromBangladesh to Zambia, their work hasdemonstrated that poor people are bank-able—indeed, poor clients, especially women,have repayment rates that exceed the formalfinancial sector in many industrial coun-tries—and that microfinance institutions canbe profitable and self-sustaining.

Such efforts have provided a much-neededimpetus for the development of financialintermediaries and other complementaryinstitutions in support of the microfinancesector. One of the goals for 2005, theInternational Year of Microcredit, was to encourage innovation and strategic

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MicroenterprisesMicroenterprises are on the front lines of poverty alleviation.Supported by microfinance loans ranging from as little as fifty to asmuch as ten thousand dollars, millions of enterprising poor peopleworldwide are launching and expanding small restaurants, craftsshops, market stands and more—and empowering themselves tomove from struggling for survival to saving for the future. Accordingto the Consultative Group to Assist the Poor (CGAP), microfinanceinstitutions served more than 80 million clients in 2003. And micro-finance’s impact on development extends beyond the immediatewage earner, especially when the loan recipient is a woman;indeed, studies show women are most likely to invest in betternutrition, education, and health care for their families.

While microenterprises are individually unlikely to become globallycompetitive, they are an important means for those at the bottom toclimb the rungs of the economic ladder. Success stories abound,like that of FINCA client Luz Diamantina Càceres and her husband,whose shoe business grew from a two-person operation that madesix dozen pairs of shoes per week to one that employs ten full-timeworkers and whose output has grown tenfold—thanks to fivecycles of microfinance loans totaling $1650.6 Thus, while microen-terprise may not be the best engine for innovation or capital invest-ment, it is a vital tool for self-employment and lifting the lives andprospects of the poor.

Small- and Medium-Size EnterprisesSMEs (defined here as enterprises with between ten and 100employees) offer a promising channel for employment, investment,innovation, and growth. In the United States, for example, smallbusinesses provide roughly three out of four of the net new jobsadded to the economy.7 Within SMEs, some enterprises’ size andscope may be inherently limited, such as those engaged in the pro-vision of local services (for example, a local construction business).But a potentially critical group pursues opportunities for high yielding investment and innovation that could have a clear multipliereffect on employment, productivity, and growth (for example, a cellphone provider).

Large Enterprises and MultinationalsLarge national enterprises and multinationals are critical contribu-tors to capital investment, productivity, and growth. The UN esti-mates there are more than 60,000 multinational corporations in theworld, with hundreds of thousands more foreign affiliates, suppliers,and distributors. Because of their extensive linkages to internationaltrade and capital markets, large firms may offer higher quality jobs,better pay, and more stability than SMEs, as well as be able to sup-ply foreign markets directly, import technology, and undertakeresearch and development that lead to innovation and productivityimprovements. They are also critical conduits linking SMEs andmicroentrepreneurs to broader market opportunities.

partnerships to expand the reach of microfi-nance to the hundreds of millions of poorpeople with no bank resources at the bottomof the economic pyramid. One such partner-ship has been developed between Hewlett-Packard and seven leading microfinanceinstitutions, which have worked together todevelop a remote transaction system thateffectively turns a microfinance loan officerinto a human automated teller machine—thereby reducing cost barriers to microfinancein far-flung rural areas. In some cases,microfinance intermediaries are being transformed from nonprofits to commercialenterprises, although the high transactioncosts associated with direct contact withclients suggest a continuing role for philan-thropy and public support.

With scalable models for microfinanceincreasingly well established, attention isshifting to the SME sector, where enterpriseneeds are more complex and there are fewersuccessful models. Although SMEs have cor-respondingly higher needs for capital thanmicrofinance, the problem is not so much theamount as the type of capital needed.

The class of SMEs with the greatestpotential for high-yielding investment andinnovation is too small and unproven todepend on commercial loans or internal cashflow, and simultaneously too large and riskyto rely on modest short-term microcreditloans. In sophisticated markets like theUnited States, a promising business couldattract patient risk capital from venture funds

or angel investors, as well as strategic over-sight and management know-how. This sortof financing and support remains virtuallynonexistent in most poor countries in partbecause of investor concerns about exit risks.

As a result, developing country entrepre-neurs must often struggle to build a businessbased entirely on their scant personal assets.Or they may be forced to borrow capital and then must pay to service their loan, wip-ing out any opportunity to invest, take risks,and grow. As the financial practitioners Alan Patricof of Apax Partners and JulieSunderland have observed, if iconic Americanfirms like Apple Computer, Microsoft, andFedEx had been obliged to finance their earlygrowth with “the short-term, collateralized,high-interest loans currently available indeveloping countries, they would not evenhave gotten off the ground.”8

Promising initiatives are beginning toemerge. Organizations such as Technoservein Africa and Latin America, BusinessPartners Limited in South Africa, ShoreBankin the United States, and Enablis in SouthAfrica are pioneering programs to addresscritical SME needs for financing togetherwith marketing and management advisoryservices, while the Self-Employed Women’sAssociation in India has launched a GlobalTrading Network to help microentrepreneursand SMEs seize global market opportunities.Nourishing this dynamic class of businessescan have a self-reinforcing effect because successful entrepreneurs serve as employers,

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“So far the biggest challenge to bringing

microfinance to scale is not credit risk

but high operating costs. The two types

of people who meet most frequently

with their bankers are the world’s rich-

est—whose bankers don’t leave them

alone—and the world’s poorest—think

of Maria in Latin America meeting her

investor every month under the tree to

talk about her goats.”

Robert AnnibaleGlobal Director of Microfinance,Citigroup

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Tax19%

Regulation10%

Corruption10%

Policy Uncertainty28%

MicroeconomicInstability

23%

Finance 4%Electricity 2%

Skills 2%Crime 2%

Major Risk Concerns of Firms in Developing CountriesSource: World Bank Enterprise Survey Database 2005.

trainers, and role models for others.Clearly, there is no single path to private

sector development, and targeting support to one class of enterprise should not meanneglecting the others. That said, SMEs indeveloping countries are a starved segmentwith unique potential, and the next few yearsshould see great emphasis on their role asengines of growth and employment.

Strengthening PrivateInvestment in Poor CountriesBut how can the capital that indigenous private sectors need to grow be unlocked?And from where will the money come?

Although official aid flows may remain avital source of financing for a considerabletime (particularly for countries with heavydebt burdens), private capital flows alreadyoutstrip aid flows for many developing coun-tries and have far greater potential over themedium term. Today, more than $19 trillionis invested in the U.S. securities marketsalone. If little more than half of one percentof that private capital shifted to investmentsin developing countries, the increase wouldradically alter the development landscape.As the social investor Tim Freundlich of theCalvert Social Investment Foundation pointsout, $100 billion in private capital investedfor ten years “could finance 1.14 billionmicroenterprise jobs, 160 million affordablehousing units, and 70 million cooperatives or nonprofit facilities.” 9

Yet getting private investors to bet on poorcountry markets is a difficult proposition,largely because of perceptions of unacceptablyhigh risk. These perceptions are partlygrounded in the reality of political instability,expropriation risk, currency and commodityprice swings, and the insufficient legal pro-tections often associated with developingcountry markets. And such negative percep-tions are compounded by a lack of familiaritywith developing country environments andinadequate information, financial and other-wise, available to investors who reside on theother side of the world. Capital is notoriouslycautious about taking risks—perceived orreal. According to some estimates, to offsetthe perceived risk differential, the expectedprofitability of a typical SME in a developingcountry would need to be 50 to 100 percentgreater than that of a similar business in amore developed economy.10

Diaspora communities can be mobilized to support development in their ancestralhomelands, as Ireland, China, and India haveshown. Some African countries are attempt-ing to learn from these successes by identify-ing and tapping into their far-flung diasporas.

Leaders of poor countries can and mustmake a difference by implementing effectivepolicies. But achieving an attractive environ-ment for private enterprise is a long-termendeavor that requires sustained political will,patience, and not inconsiderable luck.

In the meantime, changing risk perceptionsand reward expectations for investments in

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“People go to an official finance institution

for investment guarantees, and they’re

two years older by the time they’re done.

The difficulty of the process is a disincen-

tive to potential investors. Official finance

institutions need to develop easy to

understand programs and guidelines.

They have to move from the tailor-made

to the ready-made business.”

Richard BlumChairman, Blum Capital Partners

“Many small- and medium-sized enter-

prises are not being well served by the

financing options currently available in

most developing countries. I visited a

farm equipment producer in

Mozambique that used 19th century

equipment for metal bending and

wanted to buy new equipment—it

employed 40 to 50 people. Then there

is the printing company that does

$600,000 of business a year. In order

to invest in new equipment, they are

about to take a 2-year loan from a donor

organization at a 12% interest rate.

That’s an invitation for restructuring.”

Alan PatricofCo-Founder, Apax Partners

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Changing PerceptionsThe difficulty of turning around misinformed perceptions isillustrated starkly by Dr. Mohamed Ibrahim, Chairman of CeltelInternational B.V. “I remember the first guy I talked to… whodesigned a number of the networks in Europe and in Asia. Isaid, ‘Let’s go and build a telecom network in Uganda.’ And he said, ‘Mo, are you crazy? There’s a guy called Idi Amin inUganda. Do you want me to drag my company to work in acountry run by a crazy guy called Idi Amin?’ I said, ‘Listen,Idi Amin left 15 years ago.’”11

Despite these obstacles, Dr. Ibrahim went on to found CeltelInternational, B.V., which now operates cellular networks in 14 countries, and serves 6.5 million customers with revenues of $1 billion.

development will require official donors andlenders, NGOs, and private investors to exer-cise greater creativity in designing or adaptingmechanisms to mitigate risk, building on thewide variety of tools and techniques availablein the most sophisticated financial markets.In considering what kinds of new financingoptions to develop, the place to begin is withthe problem to be addressed and the goal tobe achieved, as Brookings scholar David deFerranti points out.12

There is already considerable experiencewith different forms of official guaranteesprovided by organizations such as the WorldBank Group’s International FinanceCorporation and the U.S. Overseas PrivateInvestment Corporation on a case-by-casebasis. But these approaches have oftenproven laborious and time consuming forwilling investors to use; a goal for these insti-tutions should be to move from “tailor-made”to “off-the-shelf ” products wherever possible.

The public sector has also helped to estab-lish and subsidize venture funds focused oninvestments in transitional and developingeconomies. The Polish-American EnterpriseFund was an early success, and the EuropeanBank for Reconstruction and Developmenthas subsequently launched a variety of fundsfor the former Soviet Union. But these ven-ture funds usually have not met expectations,and many funds originally intended to sup-port SMEs have drifted toward bigger deals,in the face of high SME transaction costs andthe pressure to produce commercial returns.

Inevitably, there will be tough challengesand trade-offs in setting up these new efforts.Some experts question whether using publicfunds to support the private sector is the bestuse of limited resources for poverty alleviation.How do we measure whether a dollar is bet-ter invested in a girl’s education or in buildingthe business that will provide that girl with alivelihood as an entrepreneur or an employee?

Others point to the danger of distortingthe market with too much cheap capital orsupport for uncompetitive businesses. Willgovernment guarantees lead to lax projectassessments and poor investment decisions?Will funders have the courage to cut offunderperforming clients?

In addition, there is tension between thedesire to reduce transaction costs for develop-ing country investments and the recognitionthat technical assistance can be as important,if not more important, than finance for manyventures. Many organizations provide finan-cial support in combination with strategicadvice and business skills development to helppromising entrepreneurs reach their fullestpotential. Yet the more features that are addedto a program, the more costly it becomes toreplicate and scale. Recognizing this, someare devising creative approaches to providingtechnical assistance on a not-for-profit basiswhile offering financial support at closer tomarket terms.

Finally, some experts believe these effortsare misguided, noting that history is litteredwith failed attempts to finance the private

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“Let me give you a personal example

of the importance of equity capital. Six

years ago, a friend and I wanted to

start a franchise of stores. The banks

didn’t want to lend because we had no

track record. We found a venture capi-

tal fund with investors and angels. The

business culture they instilled in us

was almost as important as the dollars.

This business discipline is not common

in our country, and we argued about

whether to accept it. But I think that it

saved our business in the long run;

today we’re employing 100 people in

two countries.”

Ali MufurukiChairman and Chief Executive Officer,Infotech Investment Group Tanzania

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Global Development Bonds (GDBs)Magnifying aggregate private flows into poor countries by attractingcommercial and institutional investors remains achievable. Onepromising approach might be to satisfy these investors’ fiduciaryresponsibility to invest conservatively through the adaptation ofsophisticated financial techniques originally developed for richcountry capital markets. A group of experienced business execu-tives, economists, and government experts is currently developing a promising concept called “Global Development Bonds,” whichseeks to boost development capital abroad much as the municipalbond market has done for states and localities in the United States.While some official support would be required, the GDB architectsunderscore that the goal is to have a market product supported bythe government, not the other way around.

SME Financing: Equity or Debt?Another objective is to direct patient investment capital to the hungry SME sector. While accepting the need for lower returns orsubsidies due to high transaction costs, there is still considerabledebate on whether long-term loans or equity are better suited toaddress SME financing needs.

Alan Patricof and Julie Sunderland have proposed a venture capitalfund to invest equity or equity-like instruments in growth-orientedSMEs in poor countries. The fund would combine resources fromdevelopment financial institutions, local governments, and privatelocal investors. Most of the investors would accept a below marketrate of return in the hopes of leveraging and building the indige-nous commercial risk capital market.13

In contrast, Jo’ Schwenke of Business Partners Limited has pio-neered a model built around long-term loans. In his words, “It’s notabout equity, it’s about attitude. If a business is in trouble and youforeclose, that’s thinking like a banker. If you stick it out, that’sthinking like an entrepreneur. The problem with an equity deal isthat if you take the fair share you need, your entrepreneur will start thinking like an employee.”

So far, the lending approach is getting more of a test run. The Shell Foundation recently teamed up with African-based specialistfinancier, GroFin, to launch a $100 million loan fund for small business investments in Africa, funded mainly by the U.K. andDutch governments and two African banks. But going forward,both equity and lending approaches should be put to the test.

sector in developing countries—from directedcredit to development banks. They believethat maximum development impact is morelikely to be gained by supporting macroeco-nomic policy change than by trying to providefinancial support directly to private enter-prises. However, most earlier efforts failedbecause the government tried to play the role of the capital market without enforcing market discipline or demanding returns.The new generation of innovative financing approaches aims to put market discipline at thecore, with an emphasis on performance andaccountability. Far from supplanting marketmechanisms, the goal of new risk-sharingtools is to create appropriate incentives forprivate investors to venture into markets they would otherwise write off as hopeless.

The time has come to turn more of theseideas into reality and give them a test run—with close collaboration among officialdonors, NGOs, and experienced financialmarket players. Rather than seeking a silverbullet, those committed to spurring develop-ment should pursue a range of promisingendeavors. In the words of former U.S. vicepresident Al Gore, “Because we’re facing anemergency, this is not a question of either/or;it’s a question of and.”

18

“Risk mitigation is only part of the

service we provide; people come to us

for our stamp of approval, as well as

more open access to government and

help if those governments misbehave.

For us it’s very important the

risk/reward ratio be acceptable; our

shareholders are very concerned about

moral hazard.”

Assaad J. JabreActing Executive Vice President,International Finance Corporation

“There is still mutual mistrust on both

sides. The public sector is terrified that

the private sector will divert the money

to investments with poor social value.

The private sector is terrified that their

fund will be full of poorly performing

socially responsible stocks.”

Paul ApplegarthFormer Chief Executive Officer,Millennium Challenge Corporation

19

Firms’ Perceptions of Financial Obstacles in Developing Nations*

Source: World Bank.* Percentage of firms identifying the following indicators as major or very severe obstacles to business

operation and growth

0%

10%

20%

30%

40%

50%

60%

70%

Sub-

Saha

ran

Afr

ica

Sout

h As

ia

Mid

dle

East

&No

rth

Afric

a

Latin

Am

eric

a&

Carib

bean

Euro

pe &

Cent

ral A

sia

East

Asi

a&

Paci

fic

Access to Financing Cost of Financing Microeconomic Instability

20

Greater Awareness

FROM THE CLASSROOM TO THEboardroom, debates have long been underway about the appropriate role for businessand its responsibility to society. One schoolof thought follows Milton Friedman’s viewthat corporate executives, provided they staywithin the law, have no business responsibili-ties beyond making as much money for theirshareholders as they can. Another schoolargues that corporations are social institu-tions and have an obligation to lift lives andlivelihoods in the places in which they dobusiness—or, at a minimum, to do no harm.That obligation increasingly has globaldimensions.

The issue has moved well beyond abstractdiscussion, as greater awareness on the partof consumers, investors, and workers—alongwith the increased presence of transnationalNGOs and the interest of the media—haveput corporate practices under the microscope.In an age when civic activists are quick topoint out that the annual revenues of manyglobal firms dwarf the gross domestic prod-ucts of the world’s poorest nations, modernbusinesses find themselves scrutinized notjust on their profitability but also on theirbroader social, environmental, and humanrights impact. Moreover, the same tools ofglobalization that have enabled companies togrow have been used by corporate critics tolaunch sophisticated campaigns against firmsperceived as falling short on the social front.Today more than ever, good corporate citi-zenship is tied to the bottom line.

In response, many companies have adoptedcorporate social responsibility approachesthat seek to mitigate negative social andenvironmental consequences through adher-ence to minimum standards. Many multina-tionals have agreed to comply with voluntarystandards and corporate codes of conduct inareas such as labor protection, transparencyof resource flows, and environmental stew-ardship in poor countries.

Increasingly, these codes are being negoti-ated in international forums, such as theUN’s Global Compact, which now involvesalmost 2,000 companies worldwide. Someare being made operational through multilat-eral institutions. For instance, the WorldBank’s Equator Principles encourage theworld’s leading financial institutions to incor-porate social and environmental considera-tions into large infrastructure projects.

Pressure is mounting to give these codesteeth through regular audits and third-partymonitoring in industries such as apparel andfootwear. Although some corporations havebeen reluctant to embrace these enhancedapproaches, a few industry leaders such asNike have progressed well beyond basic com-pliance to develop an elaborate and nowtransparent set of supply chain managementpractices to ensure robust implementation.

Indeed, some top executives themselveswould argue that the scope of corporatesocial responsibility is too narrow—to thedetriment of business and society alike. AsIan Davis, the worldwide managing director

21

The Business of Poverty Reduction:The Global Private Sector’s Role

“We need to create conditions that will

bring social values into the equation.

Businesses can and do play construc-

tive roles, but you have to induce them

by showing that socially responsible

managers do better. The extractive

industries are a case in point—some

management, such as at British

Petroleum, is at the forefront, while

Exxon has made it a point to disregard

these issues. We must ensure that

investors—not just civil society and

consumers—view the BP management

more favorably.”

George SorosChairman, Open Society Institute

of McKinsey & Company, has written, thesekinds of commitments are “too limited, toodefensive and too disconnected from corpo-rate strategy.”14 Visionary corporate leadersare revising the definition of business valuebeyond pure shareholder value—or are look-ing beyond the horizon where the two converge—and seeking to proactively managetheir corporations’ social footprint as a fundamental part of strategic planning.

This growing movement to build socialvalues into core business strategies can have atransformative impact on development andpoverty. At the same time, it can bring realbenefits to companies—including improvingcustomer loyalty and employee morale andhelping to refine brand identity. It is not simply a matter of responsibility but alsomore and more of opportunity.

Three angles in particular merit explo-ration: how to think about the private sector’scontribution to development, what can bedone to maximize the effectiveness of pub-lic–private partnerships, and what can belearned from the private sector’s mobilizationin the global health arena.

The Private Sector’sDevelopment FootprintThe development footprint of corporationsranges from their core business activities totheir philanthropic activities to their policyand advocacy activities, and it increasingly isreaching into a realm where social value andmarket value converge.

Core Business ActivitiesPerhaps the most important and still leastrecognized potential opportunity for businessto influence development is through theircore business activities—from what and howthey sell to how they operate.

For example, many businesses are engagedin creating social value by addressing theunderserved needs of poor consumers withinthe traditional for-profit model. Indeed, thebusiness scholar C. K. Prahalad has drawnattention to “the fortune at the bottom of the pyramid”—the vast market potentialassociated with the billions of consumerswho survive on less than $2 a day.15 AsPrahalad argues, poor consumers have bothchoice and dignity—something that is easyto forget when they are viewed solelythrough the lens of charity. Indeed, poor people are some of the most value-consciousconsumers in the world.

Pioneering firms from Brazil to India arefinding new ways to address this huge market’sunderserved needs—from selling individualsachets of shampoo to creating a system-atized and standardized eye-care process thatallows a doctor and two technician teams toperform more than fifty cataract surgeries aday. The challenge for businesses attemptingto serve this market is to develop appropriateproducts, marketing, and distribution—meaning “small unit packages, low marginper unit, high volume, and high return oncapital employed.”16

Other corporations are delivering important

22

“We are exploring the ways that long-run socio-cultural forces

affect a company’s long-run strategic options, such as the enor-

mous impact of HIV/AIDs on the productivity of the work forces

of our South African clients. The societal influence on business

decisions include the formal contract (laws governing business

practice), the semi-formal contract (such as labor standards),

and frontier issues, which some businesses are only now

starting to take into account.”

Judy WadePartner, McKinsey & Company

23

development benefits through their corebusiness activities in poor countries by devel-oping human resources, building infrastruc-ture, and introducing new technologies. Inthe words of former Overseas PrivateInvestment Corporation chairman PeterWatson, “The most valuable contribution offoreign investment does not come from theaddition to the domestic pool of capital andthe creation of jobs per se, but from thetransfer of globally competitive technologiesand business practices”—such as quality con-trol procedures, time management, projectmanagement skills, and experience in han-dling external relationships.17

The next frontier may be for businesses todeploy their core competencies against toughdevelopment challenges—as will be discussedbelow in the context of partnerships and ofhealth. Enterprises that have passed the mar-ket test on a global scale often have world-class capabilities in areas that are of greatimportance and short supply in the develop-ment field. These include capabilities in fos-tering research and development, marketinggoods and services, successfully adaptingbusiness models to vastly differing markets,and driving down costs.

Corporate PhilanthropyCorporations have traditionally viewed theirpositive development impact primarilythrough the lens of philanthropic activities inlocal communities—such as supporting edu-cation and youth development projects,

building community leaders’ capacity, traininglocal specialists in environmental manage-ment, and establishing microcredit programs.Companies may give financial resources, offeremployee volunteers, donate materials andequipment, or even provide space. Theseefforts can often be leveraged through part-nerships with local NGOs and businesses, thehost government, and official donors.

The potential reach of corporate philan-thropy is huge. In Jane Nelson’s estimation,the philanthropic resources of the top fiftycompanies equal the United NationsDevelopment Program’s annual operatingbudget of $4 billion. Visionary companies arestarting to think about philanthropy instrategic terms—making longer-term, holisticcommitments to communities rather than aseries of individual, one-time donations. Forinstance, Chevron has undertaken a compre-hensive approach to development in Angolain partnership with the national governmentand official donors, recognizing that it has along-term strategic interest in the region’ssuccessful development. At the same time,there are challenges involved in fully leverag-ing corporate philanthropy’s developmentpromise; big firms may be reluctant to poolresources with competitors or to work with partners if it means sharing the publicrelations credit.

Policy Dialogue and AdvocacyAnother important channel for leveragingbusiness influence is through policy dialogue

24

“In Central America I was part of an initiative that brought together 70

companies to work with the government to find long-term solutions for

social issues, especially issues that directly affected the future of their

business such as raising educational standards to promote innovation

and creativity, which are so essential today in the global marketplace. Of

these 70 companies, only three were international—Proctor & Gamble,

Abbot, and Intel—but they brought knowledge and best practices to the

table that were invaluable.”

Luis Javier CastroManaging Director, Mesoamerica Investments

2525

Business Advocacy for DevelopmentIn 2003, a group of business leaders in Seattle joined forces toadvocate on behalf of the world’s poor. Bill Gates Sr., Daniel J. Evans,William Ruckelshaus, Bill Clapp, and John Shalikashvili founded theInitiative for Global Development (IGD) as an alliance of businessand civic leaders dedicated to reducing extreme global poverty.Starting from its roots in Seattle, IGD has expanded to ten citiesacross the U.S., with plans for further national outreach.

and advocacy—such as business pressure toimprove the climate for private firms in poorcountries and corporate lobbying in supportof more development aid or enhanced marketaccess for poor countries.

Increasingly, private, public, and nonprofitpartners are joining forces on behalf of sharedgoals. For instance, business and civil societyare natural allies in the fight against corrup-tion, which, by strangling trust, hindersinvestment and enterprise no less than effec-tive government. BP and Shell have teamedup with NGOs such as the Open SocietyInstitute, Global Witness, and TransparencyInternational in partnerships such as PublishWhat You Pay and the Extractive IndustriesTransparency Initiative that use the power oftransparency to lift the “resource curse” ofdysfunctional governments and predatoryelites that too often afflict countries rich innatural resources.

Marrying Social Value and Market ValueOn a parallel track, innovative ventures suchas the Acumen Fund are marrying philan-thropy with commercial savvy to invest venture capital in developing country enter-prises that can provide health, housing, water,and other basic services to poor people in asustainable, scalable way. These hybridapproaches place a premium on generatingsocial value, but they have the potential togenerate profits over the longer term.Promising areas for hybrid ventures includeagribio, health, and clean energy.

Another cutting-edge approach is “blend-ed-value investing,” which argues for a redef-inition of market returns to incorporate socialand environmental value. This type of invest-ing is still at a relatively early stage of evolu-tion and will require advances in social andenvironmental accounting, as well as the cre-ation of supporting institutions to achievescale. But growing numbers of investorsalready are expressing the desire to createsocial value when allocating their portfo-lios—whether through strategies to limitinvestment in companies that pollute theenvironment or exploit their workers, orthrough proactive investments that acceptbelow-market returns in exchange forenhanced social value.

In sum, numerous avenues exist for theglobal private sector to help create socialvalue. But the path ahead is neither clear nor easy. There is often a difficult tensionbetween long-term development goals forpoor people and corporations’ short-termpressures to deliver shareholder profits.

What then will it take to channel thepower of private enterprise in these direc-tions? How can society create conditionsfor the private sector to do the right thing?

Given that business continues, appropri-ately, to be motivated by financial returns,one key requirement is to demonstrate thatfailure to focus adequately on social impactcan ultimately reduce a corporation’s strategic options, or, conversely, that socialvalue and market value converge over

26

“We are publishing the oil revenues by

each tier of government in the newspa-

pers every month. Believe me, it’s the

most popular reform because people

can say to their local government

chairman or their state governor, ‘You

got X amount of Naira, 20 billion, why

are our roads not fixed?’” 18

Her Excellency Ngozi Okonjo-IwealaMinister of Finance of Nigeria

“We must find a way to convince fidu-

ciaries to monetize values that are

currently excluded from consideration.

If the only thing we use to assign value

is a price tag, then everything that

doesn’t have a price tag starts to seem

like it has no value.”

Al Gore45th Vice President of the United States

time—as Starbucks is doing by demonstrat-ing that consumers are willing to pay pre-mium prices for a business system thatinvests in its suppliers and employees.

Perceived public relations benefits or costsalso influence corporate decisionmaking. Themore that the media, NGOs, civil society,and shareholders reward the reputations ofsocially responsible corporations and theirleaders—and tarnish those of offenders—themore incentives firms will have to burnishtheir corporate citizenship credentials.

Similarly, companies value the connectionsemerging between doing good in the com-munity and building employee satisfaction.For example, the executives of Voxiva, a for-profit data solutions provider that uses tech-nology to address public health needs in poorcountries, believe their emphasis on doinggood and doing well at the same time hasbeen an asset in attracting and retaininghighly motivated employees.19 And somejewelers who were targets of the “CleanDiamonds” campaign reported that they feltthe biggest loss not on their bottom line butin employee morale.20 With more MBA pro-grams focusing attention on social enterpriseand corporate citizenship, tomorrow’s toprecruits may hold out for jobs that offermeaning as well as money.

Realizing the Full Potentialof Public–Private PartnershipsAs multinationals and large-scale nationalenterprises embrace a broader mission, many

are seeking ways to leverage their resourcesthrough partnerships with local NGOs andbusinesses, host governments, and officialdonors. For many large companies, workingwith official donors bestows a range ofadvantages. Donor involvement can oftenconfer legitimacy on corporate social respon-sibility efforts such as product trademarks ornatural resource transparency programs. Whencorporations work to promote social value inareas related to their core business proposi-tion, such as on social marketing efforts, theymay enter into partnership with governmentto support marketing and distribution targetedat the poorest consumers. And when corpo-rations seek to contribute to social welfare inthe poor communities where they do busi-ness, partnerships with host governments andofficial donors ensure synergy with broaderdevelopment plans and programs.

Moreover, public sector partners can helpcorporations gain policy access to govern-ments, provide convening authority, mitigaterisk, and share significant accumulatedexpertise in developing countries. Often,firms investing in developing countries seekthe involvement of the official, multilateralInternational Finance Corporation—not primarily for financial reasons, but ratherbecause it conveys an official stamp ofapproval with regard to environmental andsocial standards.

Likewise, official donors increasingly valuepublic–private joint ventures. During the pastfew decades, as aid agencies have shifted

27

“Some companies make it their liveli-

hood to make strategic partnerships

work. Many of the same principles are

transferable to partnerships with the

public sector. These include time upfront

to structure the partnership, exit strate-

gies, establishing common interests,

and understanding shared goals, with

periodic review to make sure that people

are on the same page. Often these dry

issues, if ignored, are what make part-

nerships break up.”

William RuckelshausStrategic Director,Madrona Ventures Fund

from viewing the local private sector as a tar-get for development to looking to the privatesector for social service delivery and infra-structure provision, governments have grownto rely on the private sector’s significant proj-ect management expertise, established localpresence, and valuable political support.

Although many assume that the publicsector is seeking to leverage financing fromcorporations, in reality governments oftenserve as the “resource” partner, seeking to usethe private sector’s know-how and commit-ment. Thus, for instance, when Hewlett-Packard collaborated with the U.S. Agencyfor International Development and severalleading NGOs to develop technology formicrofinance operations, it was the govern-ment—not the private sector—that suppliedthe money, while Hewlett-Packard providedproject management skills, personnel, andtechnology.

The United States has long been promi-nent in these efforts, in keeping with thedominant domestic role of its private sectorand the abundance of American-based cor-porations with global reach. But Europeanbusiness leaders, such as the global bankinggroup ABN AMRO, have been taking thelead on partnerships with governments andcivil society organizations to advance socialresponsibility—an area from which the U.S.government has mostly remained aloof.Among international institutions, the WorldBank has traditionally had an outsized role inprivate sector development, with the United

Nations Development Program making bigstrides in recent years.

Yet for all this activity, challenges remain inmaximizing these partnerships’ potential. Inthe corporate world, it has been estimatedthat roughly half of strategic alliances under-perform or fail. The public–private partner-ship arena faces similar hurdles.

At the most basic level, public–privatepartnerships must overcome cultural clashes.Corporations may feel that government col-laboration weighs down their agility andmakes projects hard to scale, while officialdonors may feel that their reliance on publicfunds, and procedural concerns about fairnessand due process, make it difficult to grantshared responsibility to a corporate partner.Multilateral institutions are further hamstrungby national rivalries among member states,which may lead one country to resist anoth-er’s firms receiving public sector support.

In addition, many donor agencies viewpublic–private partnerships “almost exclusivelyin terms of corporate social responsibilityand/or as a marginal supplement to theirother programs for promoting private sectorgrowth,” according to Larry Cooley, the pres-ident of Management Systems International.21

As a result, their partnership offices are oftenunderstaffed and lack bureaucratic clout. TheU.S. Agency for International Development,however, has integrated public–private part-nerships across its development efforts—andhas taken commensurate measures to fundand train staff, as well as change relevant

28

“On goal alignment, it’s often hard for

companies to admit there is a profit

opportunity, so they speak in disingen-

uous, veiled language that makes it hard

to communicate. This causes mistrust.”

Jacqueline NovogratzCEO, Acumen Fund

“With private/NGO partnerships, com-

munication is an important issue. The

first point of contact is usually a human

rights activist talking to a PR manager;

that’s not the right place to talk about

a shared value proposition because

neither of those people has the appro-

priate authority. If you want to do a

serious deal, you have to legitimize it

at the top of the pyramid.”

Ray OffenheiserPresident, Oxfam America

29

operational and procurement procedures tofoster the use of this business model.Similarly, corporations that strongly valuestrategic alliances place a premium on desig-nating and retaining good people to managethese relationships over time.

Another key challenge is misaligned expec-tations among various parties to a partner-ship—from the motives for undertaking apartnership in the first place to expectationsabout the pace of decisionmaking andresource allocation. To avoid this problem,both sides need to agree early in the projectdesign process on what each side hopes togain from the endeavor and who will bringwhat to the table. Open communication,transparency, clarity of roles and groundrules, and regular opportunities for reviewcan help get a partnership going and keep itmoving forward. Just as important is mutualagreement on an appropriate exit strategy incase the alliance outlives its utility. Timeinvested in the planning stages of a partner-ship can pay important dividends, and savedisappointment, down the line.

In the coming years, a well-tested set ofbest practices should help guide public–privatepartnerships in achieving their full poten-tial—including ways to scale good programs,replicate successful configurations, and exitgracefully from bad ones. It already seemsclear that certain sectors are better suited forthese partnerships than others—among them,health, water, natural resources industries, andinformation technology education.

And as forward-looking business leadersincreasingly broaden their definitions of valuecreation, and government executives grow toappreciate the operational savvy and localpresence that private partners can bring, pub-lic–private partnerships are bound to grow inreach and impact. Though development andpoverty reduction primarily remain chal-lenges for governments, effective partnershipsare proving every day that corporations canbe capable, creative allies.

Learning from Success:Advances in HealthNowhere is the proof of public–private part-nerships’ potential more compelling than inthe health arena. Defying development pes-simists, global health has witnessed somedramatic successes in recent decades. Unlikeeconomic interventions, which are highlydependent on context for their success, manyhealth interventions have been effectivelyimplemented—even in countries with dys-functional governments, poor public healthsystems, and civil conflict.

Improved sanitation, combined with inex-pensive oral rehydration therapy, helped toachieve a two-thirds drop in deaths fromdiarrheal disease between 1980 and 1999.And in one of the biggest triumphs of scienceand political will, smallpox has been com-pletely eradicated—and polio is well on itsway to disappearing. Today, the World HealthOrganization estimates that it is possible toeradicate measles—the single leading cause of

Public Private Partnerships: Lessons Learned

1. A private entity has surprisingly great

power to bring together people who

often have never met before.

2. There’s always a lost year; these

projects take a while to structure

and set up.

3. Success poses its own challenges,

especially when it bumps up against

capacity constraints.

4. Money talks.

Sylvia MathewsChief Operating Officer and Executive Director, Bill and Melinda Gates Foundation

30

0–24%25–49%50–74%75–89%90% or more

Percent of Children Immunized by Country, (DTP 3 coverage) Diphtheria Vaccine 1999

Source: UNICEF/WHO 2001; Gates Foundation.

Partnering to Deploy Vaccines for Poor ChildrenThe dynamic public-private Global Alliance for Vaccines andImmunizations (GAVI) is pioneering important innovations in boththe financing and delivery of public health in poor countries.Established to bring new vaccines to and improve immunizationsystems in the poorest countries, GAVI secured in September 2005a $4 billion International Finance Facility for Immunization (IFFIm)that will leverage long-term donor funding commitments throughborrowing in private capital markets. Initial pledges have comefrom the United Kingdom, France, Italy, Spain, Sweden, and theGates Foundation. The large scale of financing and its predictabilitywill enable GAVI and its poor country partners to engage in longer-term immunization systems improvements and purchasing con-tracts. GAVI estimates the IFFIm resources will save the lives ofmore than five million children over the next decade.22

Partnering to Eradicate PolioAn innovative partnership between the Gates Foundation, the WorldBank, Rotary International, and the UN Foundation deploys perform-ance-based buy-downs of World Bank loans to encourage poorcountries to pursue the final stages of polio eradication. Nigeria andPakistan have already taken advantage of this program; India and anumber of African countries are interested as well. The initiativecould help close the gap between the enormous social value ofcomplete global polio eradication and the unattractive cost-benefitcalculation faced by poor country governments, which incur steepcosts and only modest benefits from addressing the very last cases.

31

death among Africa’s children—through vaccinations costing only 26 cents a child.

The successes with polio and smallpox areinstructive in other ways as well. In bothcases, the immunizations already existed,pulled along by rich country demand. In con-trast, encouraging spending on research anddevelopment and expensive clinical trials forpoor country disease treatments that are notlikely to ever be profitable presents a singularpredicament for policymakers. According tothe Global Forum for Health Research, only10 percent of global medical research isdevoted to diseases that cause 90 percent ofthe world’s health burden. And of the morethan 1,200 drugs that reached the marketbetween 1975 and 1997, a scant 13 wereintended for treatment of tropical infectiousdiseases in developing countries.

Public–private partnerships are beginningto turn those statistics around. A report fromthe London School of Economics andPolitical Science found that between 2000and 2004, public–private partnerships invest-ed $112 million to stimulate research on tenneglected diseases, including malaria, tuber-culosis, and leprosy. As a result, more thansixty new drug research projects are underway, with the potential for half a dozen newdrugs being registered by 2010. In the wordsof Chris Hentschel, the chief executive of theMedicines for Malaria Venture, “In ourPublic Private Partnership for Health thereare 80 products in the pipeline. We aim tohave drugs become instantly generic, while

companies retain the rights to a small prof-itable market. This is mostly dependent onphilanthropy—however, the tsunami showedthat people don’t mind having their moneyspent on these things.”

There is simply no substitute for the privatesector’s research and development capacity inmedicines, but it will not be deployed forpoor country diseases on the basis of antici-pated profits. Brookings and Harvard scholarMichael Kremer has put forth the powerfulproposal that public and philanthropic fundingshould provide incentives to pharmaceuticaland biotechnology companies by mimickingthe market, offering guaranteed purchasecommitments for successfully tested vaccinesand disease treatments. The Bill and MelindaGates Foundation has helped turn this ideainto an actionable policy proposal, AdvancePurchase Commitments.

For diseases where rich country demandhas already created profitable investmentopportunities, the challenge is to make theresulting drugs available in poor countries ataffordable prices. The late Brookings andUniversity of California, Berkeley, scholarJenny Lanjouw proposed that pharmaceuticalcompanies allow generic versions of theirdrugs to be produced for the poorest coun-tries without requiring royalties. Under herproposal, pharmaceutical companies wouldlose nothing because these markets areunprofitable anyway, while the poorest coun-tries would gain access to life-saving drugs atclose to cost. Turning this proposal into reali-

32

ty, however, will require not only securing theactive support of pharmaceutical companiesconcerned about the erosion of intellectualproperty rights but also enlisting generic producers in developing countries, recipientgovernments, and official and philanthropicdonors.

The growing list of innovative globalhealth initiatives demonstrates the power ofthe private sector to address social challengeswhen it teams up with private philanthropy,official donors, NGOs, and local authorities.These initiatives also provide a fascinatingcase study of how the strategies of pharma-ceutical companies have evolved as they havefound themselves on the front lines of theglobal poverty debate. Though some compa-nies remain wedded to a narrow shareholder-value approach, others have embraced socialresponsibility and employed philanthropyand partnerships to advance social welfare.

33

“It is immoral to live in a world where

the life expectancy in developed coun-

tries is 80 years while it’s 40 years in

poor countries.”

Mary RobinsonExecutive Director, Realizing Rights:Ethical Globalization Initiative

Life Expectancy at Birth, 1962–2002Source: World Development Indicators 2005.

Zambia United States United Kingdom

South AfricaIndia Brazil

YEAR

S

30

40

50

60

70

80

200219971992198719821977197219671962

Cause for Hope

IN MANY RESPECTS, THE WORLD’Strack record on development is disheartening.Someone born in Zambia today has less likelihood of reaching the age of thirty thansomeone born in England in 1840. Eighteencountries have seen declines in the quality ofhuman development since 1990.

Yet there is cause for hope. With visionaryleadership, the world community can turnthe tide. The Human Development Report2005 challenges governments to “show thatthey mean business.”23 The private sector, too,must step up to the plate—not just as a mat-ter of conscience, but also because businesscannot hope to thrive in countries and com-munities that fail. A clear call to actionemerges from the yawning gulf betweentoday’s heartrending reality and the promiseinherent in our unprecedented resources andscientific and technological capacities.

Private enterprise is a powerful engine fortransforming the development landscape.Forward-looking executives are weavingsocial and environmental goals into their corebusiness strategies. Top corporations arebanding together in groups like theInternational Business Leaders Foundationand the Business Leaders Initiative forHuman Rights, joined by an explicit com-mitment to build a better, more equitableworld. World-class business schools areincreasing the prominence of corporatesocial responsibility in their curriculums.Development experts in government, civilsociety, and the philanthropic arena are

devising new ways to join forces andresources with private sector partners.

Helping poor people is a smart investmentin the future all people are destined to share.In this interconnected world, no society canadvance as long as most of humanity is leftbehind. That is simply common sense—andmore than ever, business sense as well.

Today’s dynamic, value-driven private sec-tor has the ability, incentive, and duty to act.The dream of development is within reach.

35

Answering the Call to Action

“Look at the contrast between the popular

response to the ‘noisy’ real life tsunami

and the ‘silent tsunami’ of poor children

dying of preventable causes every week.

How do we deal with these problems

when it seems to take a catastrophe to

make people pay attention?”

Strobe TalbottPresident, The Brookings Institution

36

Participant List

Co-chairsRichard C. Blum: Chairman and President,Blum Capital Partners, LP

Strobe Talbott: President, BrookingsInstitution

Lael Brainard: Vice President and Director,Global Economy and Development Center,Brookings Institution

Honorary Co-chairsWalter Isaacson: President and ChiefExecutive Officer, The Aspen Institute

Mary Robinson: Executive Director,Realizing Rights: The Ethical GlobalizationInitiative

ParticipantsSherburne B. Abbott: AAAS ChiefInternational Officer; Director, Center forScience, Innovation and Sustainability

Alice Albright: Vice President and CFO,Vaccine Fund

Madeleine K. Albright: 64th Secretary ofState; Principle, The Albright Group LLC

Robert Annibale: Director of Microfinance,Citigroup

Paul Applegarth: Chief Executive Officer,Millennium Challenge Corporation

Zoe Baird: President, John and Mary R.Markle Foundation, Inc.

Elizabeth Becker: Correspondent,New York Times

Luis Javier Castro: Managing Director,Mesoamerica Investments

Peggy Clark: Managing Director, RealizingRights: The Ethical Globalization Initiative

Larry Cooley: President, ManagementSystems International

Richard Cooper: Professor of InternationalEconomics, Harvard University

Kenneth Dam: Senior Fellow, BrookingsInstitution

David de Ferranti: Distinguished VisitingFellow, Brookings Institution

Dianne Feinstein: Senator,United States Senate

Timothy Freundlich: Director, StrategicDevelopment, Calvert Social Investments

Michael Froman: Managing Director,Citigroup Alternative Investments

Al Gore: 45th Vice President of the United States

Chris Hentschel: Chief Executive Officer,Medicines for Malaria Venture

Assaad J. Jabre: Acting Executive VicePresident, International Finance Corporation

Mickey Kantor: Partner, Mayer, Brown,Rowe, and Maw LLP

Ross Levine: Carlson School of Management

David Lipton: Managing Director, Citigroup

Sylvia Mathews: Chief Operating Officer andExecutive Director, Bill and Melinda GatesFoundation

Bruce McNamer: President and ChiefExecutive Officer, Technoserve

M. Peter McPherson: President, MichiganState University

Ali Mufuruki: Chairman and Chief ExecutiveOfficer, Infotech Investment Group Tanzania

Jane Nelson: Director, Corporate SocialResponsibility Initiative, Harvard University

Her Majesty Queen Noor

Jacqueline Novogratz: Chief ExecutiveOfficer, Acumen Fund, Inc.

Raymond Offenheiser: President,Oxfam America

Jan Piercy: Executive Vice President,ShoreBank Corporation

John Podesta: President and Chief ExecutiveOfficer, Center for American Progress

Jennifer Potter: Managing Director, Initiativefor Global Development

Peter Reiling: Executive Vice President for International and Policy Programs,Aspen Institute

Susan Rice: Senior Fellow, BrookingsInstitution

William Ruckelshaus: Strategic Director,Madrona Venture Fund

Jo’ Schwenke: Managing Director, BusinessPartners Limited

Brooke Shearer: International Partnership for Microbicides

Smita Singh: Special Advisor for GlobalAffairs, The William and Flora HewlettFoundation

Charles Sirois: Chairman and CEO,Enablis Entrepreneurial Network

Warrick Smith: Director, WorldDevelopment Report 2005, World Bank

George Soros: Chairman, Open SocietyInstitute

James Steinberg: Vice President, ForeignPolicy Studies, Brookings Institution

Erica Stone: President, American HimalayanFoundation

Julie Sunderland: Oriane Consulting

Peter Tarnoff: President, InternationalAdvisory Corporation

Norbu Tenzing: Assistant Director,American Himalayan Foundation

Judy Wade: Partner, McKinsey & Co.

RapporteurVinca LaFleur: President, Vinca LaFleurCommunications

37

1. Jane Nelson, “Leveraging the DevelopmentImpact of Business in the Fight AgainstGlobal Poverty,” in Transforming theDevelopment Landscape: The Role of thePrivate Sector, edited by Lael Brainard(Brookings, forthcoming).

2. United Nations Commission on the PrivateSector & Development, “UnleashingEntrepreneurship: Making Business Workfor the Poor” (2004).

3. Warrick Smith, “UnleashingEntrepreneurship,” in Transforming theDevelopment Landscape,edited by Lael Brainard.

4. Ibid.

5. Ross Levine, “Does Firm Size Matter forGrowth and Poverty Alleviation?” inTransforming the Development Landscape,edited by Lael Brainard.

6. FINCA, “Client Stories, Latin America:The Shoemakers,” October 2005 (www.villagebanking.org).

7. U.S. Small Business Administration website.

8. Alan Patricof and Julie Sunderland,“Venture Capital for Development,” inTransforming the Development Landscape,edited by Lael Brainard.

9. Timothy Freundlich, “Blended ValueInvestment and a Living Return,” inTransforming the Development Landscape,edited by Lael Brainard.

10. Commonwealth Secretariat, “Lowering theThreshold: Changing Private Investors’Perceptions by Reducing the Cost and Riskof Investment in Least-Developed, Smalland Vulnerable Economies” (London, 2001).

11. Remarks at Clinton Global Initiative,September 17, 2005.

12. David de Ferranti, “Innovative FinancingOptions: What’s New and What’s Next,”in Transforming the Development Landscape,edited by Lael Brainard.

13. Patricof and Sunderland, “Venture Capitalfor Development.”

14. Ian Davis, “The Biggest Contract,” TheEconomist, May 28, 2005, p. 88.

15. C. K. Prahalad, The Fortune at the Bottom ofthe Pyramid (Philadelphia: Wharton SchoolPublishing, 2005), p. 24.

16. Ibid.

17. Peter Watson, “Private Sector Investmentin Development,” Brookings BlumRoundtable, July 2004.

18. Remarks at the Clinton Global Initiative,September 17, 2005.

19. C. K. Prahalad, The Fortune at the Bottom ofthe Pyramid (Philadelphia: Wharton SchoolPublishing, 2005).

20. Irwin Rosen, “Corporate Social Investmentand Branding in the New South Africa,”Journal of Brand Management 10, nos. 4–5(May 2003): 45–6.

21. Larry Cooley, “2 + 2 = 5: A PragmaticView of Partnerships between Officialdonors and Multinational Corporations,”in Transforming the Development Landscape,edited by Lael Brainard.

22. Sylvia Mathews, “Financing for GlobalHealth,” in Transforming the DevelopmentLandscape, edited by Lael Brainard.

23. “Human Development Report 2005:International cooperation at a crossroads;aid, trade and security in an unequalworld,” United Nations DevelopmentProgramme Report, 2005.

Notes

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