Attachment 9 - USAID PSE policy final.pdf

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PRIVATE-SECTOR ENGAGEMENT POLICY

A business owner in Uganda who received business support.

Photo credit: Bobby Neptune, USAID.

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Private-Sector Engagement Policy

Administrator’s Message

1. Vision and Purpose of this Policy

3. The Change We Seek

7. Identifying, Assessing, and Managing Risk

4. The Case for PSE

8. Putting PSE into Practice

5. Value Propositions: What USAID and the Private Sector Bring When We Work Together

9. PSE Evidence and Learning Agenda

Appendix A: Private-Sector Engagement Myths and Mythbusters

6. How We Engage

10. What’s Next?

Appendix B: Key Definitions

Appendix C: End Notes

2. What Is Private-Sector Engagement (PSE)?

Table of Contents

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Administrator’s Message

I am pleased to share with you our new policy on private-sector engagement. This policy comes at an exciting time in which leaders in both the public and private sectors are figuring out how to take the unique capabilities of each and apply them to problems that neither could address fully on their own. This engagement can make addressing challenges that once seemed insurmountable very real and achievable.

Private-sector engagement is fundamental to our goal to end the need for foreign assistance. This policy is a call to action for staff from the U.S. Agency for International Development (USAID) and our partners to embrace market-based approaches as a more-sustainable way to support communities in achieving development and humanitarian outcomes at scale. This is based on our premise that private enterprise is one of the most-powerful forces for lifting lives, strengthening communities, and accelerating countries to self-reliance.

I believe the future of international development is enterprise-driven. “Enterprise-driven development” means aligning with private enterprises as co-creators of market-oriented solutions, with shared risk and shared reward. It means recognizing the value of engaging the private sector in development and humanitarian assistance to help shape solutions that achieve sustained impact and can carry forward long after USAID’s support has ended, and reorienting our investments to open markets for U.S. firms.

Implementing this policy will require a major cultural and operational transformation in the way USAID and our partners work. We must commit to deepening our collaboration with the private sector in seeking market-based approaches across all areas of our work, from economic growth, power, agriculture, and global health to humanitarian assistance, women’s empowerment, education, and addressing crisis and conflict.

The approach will require us to adjust our role. In many ways, we will be steering, more than rowing, in an effort to create a force-multiplier that will allow us to work together with the private sector to achieve greater impact than either of us could achieve alone. With a focus on building a freer, more peaceful, and more prosperous world, true to our democratic values, this policy represents an important first part of a major transformation in the way we operate. Ultimately, increasing our collaboration with the private sector across all areas of our work will make us better development and humanitarian professionals, bring us closer to our purpose of ending the need for foreign assistance, and provide greater opportunities for American businesses.

Ambassador Mark Green Administrator, USAID

| Administrator’s Message

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1. Vision and Purpose of this Policy The private sector is an inextricable stakeholder in driving and sustaining outcomes capable of moving countries beyond the need for assistance. Today, the private sector is playing an unprecedented role in creating and shaping opportunities that improve the lives of the people and communities USAID supports. Private sources now represent nearly 90 percent of financial flows to developing countries.a The private sector creates nine out of ten jobs in the developing world, and provides an important pathway to self-reliance.b It is the driving force behind new innovations that solve problems. It brings expertise to building local markets that match local savings with investment opportunities, and provide countries with the tools to finance their own development. The private sector has the scale and resources to match the complexity of challenges countries face on their Journey to Self-Reliance.

Changes in the global development context have increased the alignment of interests between the private sector and development actors. On their own, donor agencies are unable to fulfill their goals for sustainable development. There is growing recognition within the private sector of the need for, and benefits of, investing in the developing world. At the same time, governments are expanding efforts to diversify their economies and connect with capital for investment. In addition, the increasing scale, length, and frequency of disasters and conflicts around the world means that humanitarian actors alone can no longer address the complex needs of crisis-affected people. The confluence of these trends provides a watershed opportunity for USAID, our partner governments, and civil society to increase collaboration with the private sector to support countries on their Journey to Self-Reliance.

To capitalize fully on this opportunity and reach our goal— ending the need for assistance—it is imperative that USAID increase and deepen our collaboration with the private sector.

Thus, this policy is an Agency-wide call to action, and a mandate to work hand-in-hand with the private sector to design and deliver our development and humanitarian programs across all sectors, and to harness our resources to open markets and provide opportunities for U.S. businesses.

This policy is a first step within a larger cultural and operational transformation to expand our engagement with the private sector to achieve outcomes of shared interest Agency-wide. The purpose of the policy is to accomplish the following:

• Set forth the vision and operating principles that will guide and advance USAID’s engagement with the private sector, with an emphasis on promoting U.S. economic growth;

• Illustrate ways USAID can consistently and comprehensively integrate private-sector engagement into the Agency’s operating model and programming across sectors; and

• Clarify and harmonize concepts, terminology, and definitions. (See Appendix B.)

Through this policy, we begin the process of institutionalizing private-sector engagement as a core tenet of USAID’s operating model.

The Agency’s larger Transformation efforts, which include a new leadership philosophy for the Agency, partnering and procurement reforms, skill-building and talent-management, adapting and addressing performance incentives, evidence and learning, and other issues, will support the implementation of the policy. This policy is part of USAID’s overall Policy Framework, which articulates overarching policy goals for achieving our mission and guides the Agency’s policy, strategy, and programming.1

Successful implementation of this policy will result in an increase and deepening of our collaboration with the private sector in addressing the challenges countries face on the Journey to Self-Reliance; an embrace of market-based solutions, and support for market systems across sectors; expanded opportunities for American firms; and consistent leveraging of the private sector’s expertise, resources, and investment in addressing development challenges. In humanitarian contexts, its implementation will result in working with private-sector partners to drive increasingly effective humanitarian responses that incorporate innovative practices and systems to complement existing capacities during all phases of responding to disasters and crises.

Pr iv at e

Se ct or E ng ag em en t

1 Consistent with Automated Directive System (ADS) Chapter 200, this is a “policy” document as opposed to a “strategy.” As such, it sets a direction for a cross-cutting priority consistent with the Administrator’s directives, and does not set specific, time-bound targets.

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A Strong Foundation on Which to Build

The approaches defined in this policy are not all new. USAID has led the development community in engaging the private sector to support its mission since its inception. Our experience, including successes, lessons learned, expertise, and research, is the foundation upon which we have built this policy. A quantitative snapshot of USAID achievements in PSE through 2018 includes the following:

• Brought the private sector into 2,300 Global Development Alliances (GDA) and other partnerships, expected to leverage more than $43 billion in non-U.S. government funds towards U.S. objectives;

• Enabled $5.5 billion in credit in over 80 countries through more than 500 loan guarantees (42 percent of recipients were first-time borrowers) via the Development Credit Authority (DCA);

• Secured $54 billion in private- and public-sector commitments for energy infrastructure since 2013 through Power Africa;

• Unlocked $9.2 billion in investment from 200 companies for sustainable agricultural practices in Africa through the New Alliance for Food Security and Nutrition; and

• Facilitated over $4.5 billion in investments and loans into the agriculture and food sector through Feed the Future, which spurred $10.5 billion in agricultural sales for beneficiary farmers and SMEs.

This policy intends to build on and elevate our engagement of the private sector as a means for achieving our purpose—supporting countries in achieving sustained development and humanitarian outcomes. This requires adapting our culture and operations to work with the private sector in new ways, as a true partner to build countries’ self-reliance.

A local business owner supported by USAID in

Uganda. Photo credit: Bobby Neptune, USAID

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2. What is Private-Sector Engagement (PSE)?

PSE is a strategic approach to planning and programming through which USAID consults, strategizes, aligns, collaborates, and implements with the private sector for greater scale, sustainability, and effectiveness of development or humanitarian outcomes.

PSE is a pathway for countries to accelerate their Journey to Self-Reliance. Each country must lead its own Journey to Self-Reliance, defined as its ability to plan, finance, and implement solutions to its own development challenges. Engaging the private sector to address challenges, alongside host-country governments and civil society, can accelerate self-reliance.

Through PSE—and the market-based approaches it leverages— USAID and our partners can support countries in building the requisite skills, resources, knowledge, local institutions, and incentives that enable local systems and markets to become self-sustaining. With a vested interest in sustaining outcomes over the long term, a strong local private sector is an important pillar of countries’ self-reliance.

PSE is a means to an end. It has the potential to enable USAID to: mobilize market-based solutions for more-sustainable outcomes; mount a more-effective humanitarian response; and leverage private-sector expertise, innovation, and resources that build country-level capacities for self-reliance. PSE is neither an end unto itself, nor a replacement for working with government and civil-society stakeholders, including academia, as appropriate to the context. Instead, it is a more-deliberate alignment and collaboration with private-sector actors as pivotal stakeholders in increasing country and market capacities, driving inclusive economic growth, better meeting humanitarian needs, and achieving more-sustainable outcomes at scale.

PSE spans a spectrum of different types of relationships, in which the private sector has an increasingly important role to play. This spectrum runs from public- or donor-funded activities to activities in which private-sector entities take the lead, or primary role, in addressing challenges. The ways we engage along this spectrum can vary from leveraging the private sector’s resources, innovation, and capabilities to catalyzing private investment toward shared interests. Within the spectrum, engagement should include holding the private sector accountable for making inclusive business investments that have a positive social and environmental impact on communities. All along the spectrum, PSE could entail a strategic and dynamic mix of financial and non-financial approaches tailored to address specific development and humanitarian challenges at the country, project, and activity level. The ways we engage the private sector along this spectrum are not mutually exclusive, and the Agency could deploy these in tandem as appropriate. In humanitarian contexts, the private sector can play a vital role in filling gaps in responses, while supporting longer-term capacity-building of local actors and building resilience.

The private sector’s interest in engaging with USAID also spans a spectrum from corporate philanthropy and corporate social responsibility (CSR) to expanding their market share for a product or investment. Within this spectrum, there are other motivations for the private sector, including a commitment to industry standards and creating stable conditions for longer-term operations. While USAID welcomes all kinds of PSE for greater impact, this policy calls for prioritizing engagement with prospective partners’ core business for more-transformational outcomes at scale.

Who is the Private Sector?

This policy defines the “private sector” as the following:

• For-profit, commercial entities and their affiliated foundations;

• Financial institutions, investors and intermediaries;

• Business associations and cooperatives;

• Micro, small, medium and large enterprises that operate in the formal and informal sectors;

• American, local, regional, and multi-national businesses; and

• For-profit approaches that generate sustainable income (e.g., a venture fund run by a non-governmental organization (NGO) or a social enterprise).

The private sector is large and diverse, and encompasses the part of the economy run by individuals and companies for profit and is not state-controlled. Because of this diversity, USAID needs to tailor its approaches to private-sector engagement to specific contexts and private-sector actors (e.g., investors, multinational companies, entrepreneurs, local companies, or commercial banks). USAID must also take into consideration actors that can serve as potential multipliers, such as business associations, chambers of commerce, and business accelerators and incubators.

| What is Private Sector Engagement (PSE) ?

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Phil an thro py

I nnovation

Expertise Market Solutions

Investment

• USAID is the driver

• Activities and assistance leverage private-sector resources and expertise

• Might or might not be aligned with commercial interests or core business operations

• USAID is a co-creator

• Joint identification of challenges

• Joint design and programming that address shared interests, including through co-creation of market-based approaches

• USAID is the facilitator

• Activities and assistance address private-sector constraints or risks

• Engagements build on for-profit and market-based approaches to challenges

DONOR-LED CO-CREATION PRIVATE SECTOR-LED

PSE SPANS A SPECTRUM OF DIFFERENT TYPES OF ENGAGEMENT

Fundamental to this policy is the premise that market-based approaches can lead to greater scale and sustainability of outcomes.2

This is based on the assumption that as long as a business case or market system exists for a good or service, it has a greater likelihood of sustaining itself without external support. In this way, seeking market-based approaches will move us closer to our goal of ending the need for assistance.

PSE is relevant across many sectors. From improving health outcomes to providing access to commodities in complex emergencies, private-sector entities have a vital role in achieving development and humanitarian outcomes as a direct or indirect by-product of their businesses and investments. (See Appendix A: “PSE Myths and Mythbusting” for examples of PSE’s applicability across sectors, including education, health, water and sanitation, and democracy and governance.) The wide range of private-sector actors across industries, such as technology, financial services, the food supply, logistics, and natural resources, are critical partners in addressing the many complex challenges that countries and communities face. Across development sectors, private-sector actors generate jobs, influence policy, create innovative solutions, invest in supply-chains that underpin public services, and provide inputs that expand opportunities for better livelihoods.

PSE is important to all stages of a country’s Journey to Self-Reliance. PSE is relevant across country contexts from those plagued by conflict or recovering from disaster to those with burgeoning economies that are struggling with corruption and making growth more inclusive. As the examples in the graphic below illustrate, PSE can take many forms, and has a role to play in different contexts, and at all stages of the Journey to Self-Reliance. In countries where markets are thin and the private sector is weak, PSE could focus on working with key private-sector actors and host-country governments to address market systems and the constraints to commercial development; designing programs that create incentives for private-sector participation; or, piloting approaches to build the capacity of the local private sector and draw in new private-sector actors.

Crisis, conflict, and disaster can set countries back, and present roadblocks to self-reliance. In the humanitarian context, effective PSE means leveraging the private sector’s unique expertise and access—to people, technologies, distribution networks, and more—to save lives and build resilience. It means using approaches that enable people and populations to act for themselves with dignity.

Through PSE, we can extend the reach of assistance, help overcome dependency on aid by working with private-sector actors and local systems, and advance early recovery. USAID can invest in innovations that share risk, overcome barriers, and build the business case for the private sector in complex emergencies.

2 USAID’s internal research on a limited sample of private-sector partnerships shows that market-oriented approaches have a higher likelihood of creating enduring results.

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Haitians urgently need decent, affordable housing, but financial institutions perceive high risk of non-payment.

Rampant corruption plagues the Afghan economy, undermining national security and development efforts.

100 million urban poor in India lack access to affordable health care. With over 70 percent of health care provided through the private sector, small and medium-sized enterprises offer affordable care, but lack access to financing and technical skills needed to go to scale.

Ghana’s robust economic growth and increased urbanization rates are exacerbating a long-standing power supply deficit. Power outages disrupt businesses and cost the country an estimated $2.1 million in production loss daily.

Tunisia suffers from high unemployment rates, particularly among its relatively well-educated youth.

Pharmacies are the front line for health care in underserved areas but face capacity gaps.

USAID and other donors created the HOME program, which provides performance-based incentive payments to financial institutions once they disburse housing loans to target beneficiaries.

USAID worked with the Afghan National Army and Police to adopt a market-based approach to fight corruption in salary pay, by switching from cash to digital payments.

This resulted in an increase of 30 percent in payments received, improved retention, and produced a more stable security force.

Partnerships for Affordable Healthcare Access and Longevity built a platform that expands access to credit for SMEs through technical assistance, DCA guarantees, and innovative financing. The platform works with partners to bring down the price of services by introducing new technologies, insurance products, and service delivery models.

Through Power Africa, USAID worked with the Overseas Private Investment Corporation (OPIC) and other U.S. agencies to advance the Amandi Energy Project – a $552 million, 200 MW power plant – to financial close. The USAID-funded advisor in Ghana’s Ministry of Energy convened public and private stakeholders while providing overall analysis of the sector.

USAID created opportunities for private firms to integrate into existing, high-value supply-chains.

USAID’s program support created or matched more than 23,000 new, full-time jobs at an average cost of $878 per job, and facilitated over $65 million in equity, credit, and foreign direct investment for Tunisian enterprises.

USAID worked with the private sector to create Lulama, which strengthens pharmacies, and provides them access to credit.

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HAITI AFGHANISTAN GHANA TUNISIAINDIA SOUTH AFRICA

PSE IS RELEVANT TO ALL STAGES OF THE JOURNEY TO SELF-RELIANCE

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Is there a role for USAID to help alleviate or eliminate these constraints?

Are there factors constraining the private sector from involvement and investment?

What are the roles and interests of the private sector in addressing this challenge?

Can the private sector solve this problem by itself?

Could there be a market-based approach to addressing this challenge?

PSE depends on trusted relationships that broaden collaboration over time. The goal of engagement should be to enable the identification of market-based solutions and create opportunities for collaboration that will increase self-reliance at the country level. However, USAID’s emphasis is on more deliberate, consistent, and frequent engagement with the private sector. Not every engagement will, or should, lead to a formal partnership or market-based solution; nor will all PSE lead to the allocation of financial resources. Engagement itself can be valuable in achieving better development and humanitarian outcomes. For example, integrating private-sector perspectives in country strategic planning and mapping of local systems can lead to better identification of market constraints and market-based approaches in the design and implementation of projects. Where USAID and commercial entities identify shared interests, aligning efforts and/or sharing information could be sufficient to address challenges or make more informed decisions in planning, design, and resource-allocation.

3. The Change We Seek The purpose of foreign aid is to end the need for its existence. To achieve this, USAID is building local capacities and systems that bolster countries’ self-reliance. Unless we develop sustainable, market-based solutions, mobilize private investment for scale, and deepen our collaboration with the private sector, achieving this goal will not be possible.

Topline Change We Seek: While PSE across the full spectrum is valuable in enhancing development and humanitarian outcomes, this policy signals an intentional shift to pursue market-based approaches and investment as a means to accelerate countries’ progress on the Journey to Self-Reliance. On this basis, the policy calls for USAID and our partners to ask and address the following questions every time we approach a development or humanitarian issue:

By asking these questions in this order, USAID will focus on seeking more-sustainable and enterprise-driven outcomes from the outset of our planning and programming. In addition, we will look for how and why the private sector might be interested in collaborating to address an issue, and what unique capabilities and resources different private-sector actors might bring. Finally, we will actively identify ways in which we can work with the private sector to understand and address barriers to investment and market-development, which is essential to building countries’ capacity for self-reliance.

How USAID will apply these questions will vary according to the context, sector, and scope of the challenge. For example, where markets are thin and largely informal, viable market-based options might not exist. In these cases, USAID should focus on the development of market systems, institutions, and an enabling environment that supports commercial approaches. This focus should also include a deliberate engagement of local and international private-sector actors, civil society, and host-country governments to identify and remove barriers to investment.

Key Concepts and Definitions

• Market-based approaches use business models and catalyze markets to solve development and humanitarian challenges more efficiently and sustainably (e.g., by engaging USAID beneficiaries as customers, offering them socially beneficial products at prices they can afford, or as business associates—suppliers, agents, or distributors— providing them with improved incomes and opportunities).

• Enterprise-driven development means aligning with the private sector as co-creators of market-oriented solutions. Together, this drives shared interests and shared risk, while working toward results that create shared value.

• Sustainability refers to the ability of a local system to produce desired outcomes over time by obtaining the resources necessary to produce those outcomes. Programs contribute to sustainability when they strengthen the system’s ability to produce valued results, to generate or attract needed resources, and be both resilient and adaptive in the face of changing circumstances.

| The Change We Seek

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Alternatively, in other situations, market-based solutions might not be able to reach intended beneficiaries—for example, the poorest and most-vulnerable populations in a country. In these cases, the focus should be on examining the role and comparative advantages different local and international private-sector actors can play in filling critical gaps, sparking innovation, offering expertise, providing vital infrastructure and supply-chains, shaping investment, and building the resilience of communities.

With this policy, USAID remains committed to our humanitarian mandate for saving lives and meeting the immediate needs of people adversely affected by disaster, crisis, and conflict. In these circumstances and when appropriate, USAID will engage with relevant private-sector actors before, during, and after a disaster strikes, or conflict erupts, for stronger alignment, readiness, and response. USAID will also ensure conflict sensitivities influence strategies for private-sector engagement, especially in environments affected by crises and violence.

PSE Operational Principles: To integrate PSE effectively into our operating model, this policy commits USAID to adopting the following principles.

Principle 1: Engage early and often. USAID will emphasize engagement, collaboration, and partnership with a range of private-sector actors and other partners in designing and implementing strategies and projects of shared interest and shared value.

Principle 2: Incentivize and value PSE throughout planning and programming. Integrating PSE at every stage of USAID’s Program Cycle better positions us to understand the private sector’s interests and capabilities and adapt continuously to new evidence, opportunities, or circumstances. To institutionalize and incentivize PSE effectively, USAID will adapt operational and performance measurements of success in support of both financial and non-financial approaches.

Principle 3: Expand the use of USAID’s approaches and tools that unlock the potential of the private sector.

This policy calls for consideration of the full breadth of USAID’s financial and non-financial resources, procurement mechanisms and core competencies in PSE. From leveraging our convening power to connect investors and businesses to providing a grant as a first-loss guarantee to extend affordable health care to the poor, the Agency has many ways to engage the private sector to achieve our intended outcomes and catalyze market-based approaches.

Principle 4: Build and act on the evidence of what works, and what does not, in PSE. Fundamental to the success of putting PSE into practice, USAID will work with partners to establish metrics that measure, value, and incentivize engagement that builds self-reliance and delivers increased sustainability and deeper impact.

This policy acknowledges that engaging the private sector is not a panacea for addressing the myriad of development and humanitarian challenges that countries and communities face. Rather, USAID’s engagement with international and local private-sector actors—along with host-country governments, local communities, civil society and academia—is important to increase countries’ capacities for self-reliance, and move us closer to ending the need for assistance.

A Focus on More-Sustainable Outcomes

In pursuing market-based approaches, USAID seeks more-sustainable development impact over time.

Examples: A market-based approach could support the private sector to develop a pay-per-use model that expands sanitation infrastructure and services that underserved customers would previously not be able to access. Another market-based approach could build the healthcare ecosystem through technical assistance and access to finance that allows for better provision of care through small and medium enterprises. When a market-based solution becomes commercially viable, the private sector has a financial incentive to continue and operate it at scale, which will decrease the need for donor support over time.

Trade-offs: We acknowledge this approach could result in a trade-off over short-term gains. In working more collaboratively with the private sector, USAID’s assistance could reach fewer beneficiaries over the immediate term, while market systems and supply chains capable of providing and sustaining quality services expand over the long term.

USAID’s Shifting Role: This shift in focus requires USAID increasingly to prioritize outcomes over outputs. It also means USAID must move toward playing a more-catalytic role in achieving results, rather than fully funding and managing projects. This is in alignment with USAID’s larger Transformation to support countries on their Journey to Self-Reliance.

| The Change We Seek

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4. The Case for PSE Changes in financial flows and an intensely economically integrated world have rendered the private sector an increasingly important actor and stakeholder in global development. The domestic and international private sectors are engines of economic growth, and key enablers of development progress. In times of crisis, businesses are often among the first responders after a natural disaster, and remain engaged through recovery efforts to build important capacities for resilience. Businesses and investors create jobs; develop and fund technologies and innovation; and provide critical goods and services demanded by households, communities, other private-sector entities, and the government. For USAID and its partner countries, this means that the private sector is more than just an important stakeholder; domestic and international businesses and investors represent indispensable partners on the Journey to Self-Reliance.

Specific global trends that contextualize and support USAID’s commitment to expanded PSE include the following:

Financial flows to, and within, developing countries have changed dramatically in recent years, as private resources far outpace Official Development Assistance (ODA). In the 1960s, when USAID was formed, private capital accounted for only 29 percent of financial flows to developing countries;c by 2016, private sources accounted for 84 percent of these flows.d Figure 1 illustrates this transformation of external financial flows over the last 12 years. Foreign direct investment (FDI) has remained the largest, and one of the least volatile, sources of external financial flows to developing economies, on average.3 In aggregate, domestic resources have also experienced accelerated growth, driven by increases in Gross Domestic Product (GDP) and tax revenue in the public domain, and the maturation of local capital markets in the private sector.e We must acknowledge, however, the wide disparities within these trends across countries, as fragile states and the world’s least developed countries often lag far below the average, and remain much more donor-dependent.

-200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Foreign direct investment

Portfolio investment

Other investment

Official development assistance

Remittances

FIGURE 1: EXTERNAL SOURCES OF FINANCE FOR DEVELOPING ECONOMIES, 2007–2016

(BILLIONS OF DOLLARS)

Source: UNCTAD, based on World Bank World Development Indicators (for remittances), UNCTAD (for FDI), IMF World Economic Dataset (for portfolio investment and other investment) and OECD (for ODA and other official flows).

For investors and companies, developing-country markets represent an opportunity for expanding their businesses.

From 2010 to 2015, developing and emerging economies accounted for close to 70 percent of global output growth, and just over 70 percent of global consumption growth.f From 2015 to 2030, forecasts estimate that growth in consumer spending in emerging and developing markets will be three-times faster than in developed markets.g This includes the roughly 4.5 billion low-income people in developing countries who collectively spend more than $5 trillion a year.h It also includes spending by women, who drive 75-80 percent of all consumer purchasing worldwide.i

3 China is the largest FDI recipient among developing countries and the second largest in the world, behind the United States. China is also the third largest investor in the world. World Investment Report 2018, The United Nations Conference on Trade and Development (UNCTAD), p. 4-6.

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There is a growing alignment of interests among the private sector, governments of developing countries, and donor agencies. Looking to diversify their economies, upgrade infrastructure and deliver critical services, governments are expanding their efforts to leverage private capital for investment.

At the same time, companies are seeking new markets; and increasingly embracing sustainable, environmentally friendly, and responsible business practices as sound investments for increased competitiveness. As more businesses shift their strategies to account for their long-term impact on the communities in which they operate, they are looking for new ways to collaborate with the public sector. More than one quarter of assets under management globally are now being invested according to the premise that environmental, social, and governance (ESG) factors can materially affect a company’s performance and market value.j Donors, including USAID, have an interest in connecting this demand for investment from host-country governments with the supply of capital and expertise from the private sector.

The increasing rate of humanitarian crises, which affect the private sector’s operations and revenue, also contributes to a shared interest in preparedness and risk-management for crises and disasters. Studies indicate the ability of local economies to cope, recover, and reconstruct is an important parameter to estimate the overall vulnerability of a population to, disaster or crisis.k

This landscape presents USAID with an unprecedented opportunity to combine, and align, with private resources and efforts that can help countries advance on their Journey to Self-Reliance. Key points of evidence to support the case for PSE are the following:

Private-sector resources and capabilities are required to address the scale and complexity of humanitarian and development challenges effectively and sustainably. Public finance alone will not be sufficient to achieve the global development agenda.l A thriving private sector invested in the overlapping agendas of both business and development is integral to achieve and scale development outcomes in ways that help communities advance their self-reliance and resilience.

The private sector has a vital role to play across all sectors. Even for basic social services, such as health and education, the private sector provides an underlying supply-chain that is critical for the effective and inclusive delivery of goods and services. The private sector also provides products and services that underpin all aspects of development. For instance, a wide body of evidence demonstrates how access to financial products and services produces a range of economic and social benefits for firms and households, including by building financial buffers, smoothing consumption, protecting assets, expanding businesses, and promoting equality between men and women, and women’s economic empowerment.

Jobs and businesses provide vital pathways to self-reliance. The private sector creates nine out of ten jobs in the developing world, which makes it a powerful force for raising living standards.m Micro and small enterprises account for the bulk of employment-generation in developing countries, even in middle-income ones.4 In fact, the creation of millions of new, more productive jobs from 1981-2008 was a key driver behind halving the share of the population in the developing world that lives on less than $1.25 per day.5

USAID has a role to play in facilitating job creation led by the private sector, including by advocating for reforms that make it easier to start new companies; supporting a first-of-its-kind business or industry, so others will follow suit; or helping shape investments that lay the foundation for an inclusive, robust private sector (e.g., gender-lens investing, through which investors consider financial returns and addressing disparities between men and women).

PSE provides the opportunity for USAID to shape and influence private-sector investments for greater development and humanitarian impact. Businesses are increasingly embracing the framework of the “triple bottom line” (social, environmental, and financial) to evaluate their performance in a broader perspective to create greater business value. USAID can play a valuable role in incentivizing and shaping the investments businesses make to encourage more inclusive, environmentally friendly, and broad-based social impacts. USAID can help ensure that private-sector actors do not contribute to, or exacerbate, existing vulnerabilities to conflict, which can impede growth and stability.

The private sector is a driving force in innovation and the adoption of new technologies in developing countries.

Technological progress improves productivity, expands the possibilities for countries to create jobs in higher-skilled production

“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.

Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

Excerpt from a 2018 letter to CEOs by Larry Fink, Chief Executive Officer of BlackRock

4 Defined as firms with fewer than ten employees. (WB WDR 2013 Jobs, p. 105-106.)

5 The share of the population that lives on $1.25 dropped from 52 to 22 percent from 1981-2008. This reduction is the result of multiple factors, but the creation of millions of new, more-productive jobs, mostly in Asia, but also in other parts of the developing world, has been the main driving force. (World Bank WDR 2013, Jobs, p.7.)

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activities, and increases their ability to link to international value chains in services and manufacturing. A recent study found that the increased application of digital technologies could add $1.36 trillion to total global economic output by 2020.n As an example of the role of government in collaboration with the private sector, in 2015, 54 international organizations followed USAID’s leadership and endorsed the Principles for Digital Development, which provide guidance for development and humanitarian professionals on how to responsibly integrate technology advances developed by the private sector in the context of our work in emerging markets and fragile states.o

The private sector can help provide in a sustainable way the goods and services populations need in both development and humanitarian contexts. The private sector directly invests in critical infrastructure and basic social services, including energy, water and sanitation, information and communication technology, transportation, education, and healthcare. It also helps governments create the institutions needed to make markets work better, such as a banking-supervision agency, a quality-inspection program, or transparent regulatory and permitting processes. In addition, it strengthens the systems that provide goods and services.

In humanitarian contexts, the private sector is a pivotal actor in the implementation of strategies to reduce and manage the risk of disasters.

A vibrant and diversified domestic private sector is an important pillar of self-reliance. Local private-sector actors generate revenue, jobs, innovation, services, and opportunities within every economy and community with which we work. A vibrant local private sector stimulates entrepreneurship, replication of successful business models, and the growth of small and medium-sized enterprises (SMEs). A growing local private sector broadens the tax base, not only with direct tax revenue, but by creating formalized, tax-paying jobs and increasing wages. This potential increase in the tax base makes countries less reliant on external assistance and increases their ability to finance public infrastructure and services sustainably.

Empowering women through enterprise-driven development helps ensure that families, economies, and societies can reach their fullest potential. Recent estimates suggest that closing the global gender gap in workforce participation by 25 percent by the year 2025 could grow the world’s Gross Domestic Product (GDP) by $5.3 trillion and generate increased tax revenues of up to $1.4 trillion.p

On average, women spend more of the income they control on food, healthcare, home improvement, and schooling for their families, which can improve outcomes for children and contribute to long-term economic growth.q Research published by USAID in 2018 indicated that women-led businesses may significantly outperform their male peers, with the subset of female entrepreneurs in this study shown to grow revenues 1.5 times faster and create jobs twice as fast. Addressing the unmet financial needs of women-led businesses – a gap estimated at $260-$320 billion a year – represents an opportunity for women entrepreneurs, financial investors, families and communities, and the global economy.r

The expansion of economic opportunities improves security and stability by creating the conditions for communities to thrive. Inclusive economic growth increases economic opportunity and enhances access to everything from energy and financial services to health and education. While inclusive growth promotes prosperity, poverty and the lack of opportunity can exacerbate political instability and make populations more susceptible to insecurity.

For USAID and our partners, PSE has the potential to accelerate countries on their Journey to Self-Reliance by embracing the market-based approaches, resources, and expertise the private sector offers to address key challenges. Integrating PSE throughout USAID’s work reflects an explicit recognition of the private sector’s central role in scaling and sustaining development progress.

An increasing number of private-sector actors want to use their expertise to meet the demand of underserved customers, build local supply-chains, improve community and workplace safety, collaborate with host-country governments, and use blended-finance approaches to mitigate risks for investments they would not be able to otherwise make on their own.6 Within this context, the potential of PSE is evolving from ad-hoc and opportunistic efforts toward strategic and transformational collaboration that enhances the competitiveness of companies, while also improving the economic and social conditions within communities.

Engaging the Local Private Sector to Expand Markets In Bangladesh, through USAID’s Feed the Future assistance, USAID partnered with local oil and wheat flour milling company, Northern Consumer Products Limited, to produce sunflower oil from sunflower grown in Bangladesh for the first time.

Over 750 farmers, nearly 30 percent of which were women, produced the sunflower in coastal Bangladesh, where soil salinity is a problem.

This partnership increased the average value of sunflower sales by four times compared to the previous year. Over the coming years, the company plans to expand a contract grower scheme to more farmers. These schemes provide farmers with much needed access to new crop production technology, high quality inputs, markets, and greater economic opportunities to support their family. The local company benefits from higher quality and quantity of products for processing. USAID’s support has created and fostered these win-win private sector partnerships.

6 “Blended finance” is the strategic mobilization of additional capital to match public funds to increase sustainable development in developing countries.

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While the private sector is not a monolith, and agendas might not always align, the increasing potential for collaboration presents a significant opportunity for USAID to increase the scale and sustainability of our work. More important, governments and civil society cannot afford to overlook engagement with the private sector as they build their capacities to plan, finance, and implement sustainable solutions to their own challenges.

A USAID-supported project connects 5,000 Indonesian spice farmers with major global businesses, like Maryland-based McCormick & Company. Farmers earn higher wages as a result of the partnership, and the spices contribute to McCormick’s growth and expansion. Here, Indonesian women sort vanilla beans.

Photo credit: Bobby Neptune, USAID

| The Case for PSE

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USAID Offers Private Sector Offers

Strong In-Country Networks and Relationships USAID has relationships with national and local governments, businesses, faith-based organizations, local community leaders, and civil society that are useful to the private sector in making locally informed plans for market-entry, collaboration, and co-investment.

Scale, Sustainability, and Reach The private sector’s vast financial resources and expertise in market-based solutions have the potential for achieving scale and sustainability in tackling systemic societal challenges.8 The private sector’s extensive networks and operations provide distribution channels to reach, and communicate with, underserved populations and individuals.

Support to Strengthen Enabling Environments Working with host-country governments, USAID can help create a stronger enabling environment that fosters transparent, inclusive economic growth. USAID supports policy and regulatory reform that encourages fair and open competition, institutional reforms and the adoption of standards, and government capacity-building.

Ability to Influence Policy The private sector’s ability to deliver what host-country governments seek to achieve—such as improved service-delivery, investment, tax revenues, jobs, and life-saving interventions—gives businesses and investors a strong, knowledgeable voice to inform policy that supports transparent, inclusive economic growth.

Sectoral Expertise and Knowledge USAID has wide-ranging technical expertise across development and humanitarian sectors. USAID offers deep economic, political, conflict, and gender-sensitive understanding of developing markets, market intelligence that can inform and shape private-sector investment, and robust, evidence-based monitoring and evaluation.

Innovation, Expertise, and Capabilities Businesses and investors can bring innovation and technologies; entrepreneurship; industry expertise;

market-based solutions; distribution networks;

investment capacity; and managerial and operational expertise, including risk-management.

Risk-Mitigation and Flexible Authorities USAID can use our funds, authorities, and technical expertise to mitigate the risks of investments and “crowd in” public and private resources that further humanitarian and development goals. USAID‘s technical assistance can ready smaller companies for financing, or help expand their markets.

Flexibility and Pace The private sector is often inherently more flexible than the public sector, as it has a financial incentive to respond quickly to opportunities and develop new markets.

Reputation and Credible Convening Power USAID has strong capabilities in convening actors around business opportunities that address development challenges. USAID offers a neutral platform for actors to collaborate in addressing larger challenges.

Efficiency and Effectiveness With improved systems, processes, and logistics, the private sector can bring more efficiency and…