Catalog

Private Sector and Development Go Together

Private sector flows to developing countries have increased dramatically in recent years. From about US$50 billion in the early eighties, developing countries are now receiving some US$300 billion from private sources. However, just 12 countries—and only 5 in Asia—receive more than 80 percent of this amount. Power and telecommunications make up the lion's share.

“The challenge is, therefore, to catalyze funds to those developing countries and sectors that are not yet benefiting from these resource flows," said Christine Wallich, Director of ADB's Infrastructure, Energy and Financial Sectors Department and Head of ADB's Private Sector Group. She emphasized that the private sector can make investment returns, and at the same time contribute to development. She told delegates that the private sector plays a key role in development and poverty reduction through the following.

Sustainable job creation. The private sector contributes to poverty reduction through growth, employment, and income generation. Growth creates jobs using labor—the main asset of the poor. More importantly, the path out of poverty, for virtually all who emerge out of poverty, is via earning opportunities in the private sector.

Freeing up the budget for social expenditure. Public infrastructure is often inefficient and costly; subsidies due to inefficient pricing consume as much as 10 percent of all government revenues, and yet services rarely reach the poor. Private sector provision of power, water, roads, and telecommunications, allows public budgets to retarget resources to social spending and other priorities. And, the private sector in many countries has a better track record of reaching the poor than public utility monopolies.

Public-private partnerships and creative concession designs. Designing infrastructure concessions to include "public service obligations," is an increasingly common way to make infrastructure services available to the poor, usually at lower prices. The winning bidder in Manila's water supply privatization is providing water connections to some 68,000 low-income families in slum areas, previously reliant on costly and unsafe supply. Such public service obligations typically reduce the government's concession revenues but ensure the services provided. In some cases, concessions have even been designed so that the concessionaire is asked to bid for the smallest subsidy to be paid by government, to induce the service to be provided.

Private companies as responsible corporate citizens. Private companies can directly affect low-income communities and workers through the way they do business, and how they deal with social and environmental issues, health and safety, including labor safety, corruption, and, the local economy. AES, a US power company and ADB's partner in several projects, allocates 5 percent of its annual profits to support community and social projects that benefit the poor in countries where it operates. In many countries, private mining and energy corporations sponsor and finance schools and health care centers that reach communities in the remote areas where they operate and that are unserved by government.

Pro-poor privatization. Privatization and divestment of state-owned assets is being approached in increasingly novel and "inclusive" ways, recognizing that privatization has major distributional implications. More and more attention is also being given to how privatization revenues are used. Some countries have used privatization proceeds to reduce their costly public debt or to fund social expenditures; or support public pensions, and in one case even shared revenues with the population at large via a cash grant. To support more equitable outcomes, some countries have reserved shares for workers or for local communities impacted by the divestiture. In one other case, all employees of the newly privatized company were given stock options—even the maintenance personnel became stockholders.

The challenge for ADB and other like-minded institutions is to encourage maximum "development impact" from the private funds flowing into developing countries. Private investments can deliver this "development impact" by creating sustainable jobs through growth, employment, and income generation; freeing up government budgets to fund social development; participating in creative concession design; acting as responsible corporate citizens; and being part of a divestment program that is distributionally equitable.

The fight against poverty requires "soft hearts and hard heads." The private sector has a key role to play in helping to create prosperity and jobs, and to provide services that better people's lives.

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