Attachment_No._4_-_12-15-16_PSE_and_due_diligence_for_USAID_Honduras.pdf

USAID Honduras

Guidance on Private Sector Engagement and Due Diligence

August 29, 2016

Who is the private sector?

• Private for-profit entities such as a business, corporation or private firm

• Private equity or private financial institutions, including investment firms, mutual funds or insurance companies

• Private investors (individuals or groups)

• Private business or industry associations, including but not limited to chambers of commerce

• Private grant-making foundations or philanthropic entities

• Private individuals and philanthropists

Presenter Presentation Notes This is the GDA definition which was worth clarifying as our original version included universities and others that are not counted.

- Quasi-governmental associations do not satisfy the private sector requirement. A Chamber for example must be non-governmental.

- If an NGO receives awards and funding from external sources and then makes sub-grants to other organizations as part of implementing such awards, it does not thereby become defined as a grant making foundation or philanthropic entity. An organization must be formally constituted as such a foundation or entity; in fact, the vast majority of USAID’s NGO implementing partners do not fall within this category.

- The last point refers to individuals or philanthropists who, by virtue of their strategic position, working relationships, and/or technical expertise are able to enter into the sort of ongoing, collaborative working relationships that are fundamental to the design and implementation of a GDA.

What is the private sector’s role in development?

Fostering inclusive and sustained economic growth by:

• Generating employment and income

• Developing innovative products and services

• Mobilizing investment and other resources

• Helping solve challenges that affect business and development

• Increasing reach

• Improving effectiveness and efficiency

Presenter

We highlighted the purpose of private sector engagement to move away from only tracking the number of partnerships with little attention to what they were bringing to the table in terms in terms of development impact.

Corporate sustainability starts with a company’s value system

• Respects human rights

• Respects freedom of association and right to collective bargaining

• Eliminated forced and compulsory labor, including child labor

• Eliminated discrimination in the workplace

• Promotes greater environmental responsibility

• Works against corruption, including extortion and bribery

– Source: 10 Principals of the UN Global Compact

Presenter

We also wanted to reinforce that corporate sustainability is also about a company’s value system. These are aspirational statements as not all companies have eliminated discrimination but we should ask about their policies. We can do this by creating a short survey on these areas.

What is a partnership?

• An understanding between two or more entities to leverage resources to solve a development challenge and/or contribute to a development objective.

• Resources can take the form of:

– Business expertise and capabilities (advisory services, training, TA)

– Market access

– Networks and resources

– Equipment and technology

– Volunteerism (employees’ time)

– Cash

– In-kind contributions

Presenter

Our RLA added the term “understanding” because we wanted to make the point that it’s not necessarily something written like a MOU that defines a partnership. We may co-host an event without any MOU and that could impact our reputation.

The ADS definition is “An association between USAID, its partners and customers based on mutual respect, complementary strengths, and shared commitment to achieve mutually agreed upon objectives. (Chapter 101) This wouldn’t really help for due diligence.

The Center for Transformational Partnerships (Lab/CTP), headed by a Center Director, develops and scales global partnerships with a wide range of stakeholders – global and local businesses, universities and research institutions, donor institutions and private philanthropy – in order to extend the impact and sustainability of Lab-led and Agency-wide programs and to leverage the knowledge, expertise, resources, technologies, and innovations of diverse partner organizations. The Partnerships Center engages private sector partners in the Lab’s efforts to identify problem sets and to discover, test, and scale development innovations. It also builds the capacity of the entire Agency to pursue partnerships with private sector entities by providing partnerships training, advisory services, and tools to Missions and bureaus. In collaboration with Missions, the Partnerships Center works to inculcate scientific and innovation ecosystems in developing countries, enabling field-based discovery, application, and adaptation and partnering with governments and the private sector to create an enabling environment for catalyzing ideas and actions to assist developing countries to address their own problems.

What is due diligence?

• Actions taken to evaluate the risks and benefits of working with a potential private sector partner.

• Effective due diligence:

– Reduces the risk of unpleasant surprises, which would adversely impact our reputation.

– Reveals that a prospective partner is committed to principled business practices.

– Provides a structure to consider pros/cons

– Documents recommendation given available information at the time

• A recommendation is based on judgement, taking into consideration a variety of view points and weighing the pros and cons.

One of the things we’ve had to stress is that due diligence is about judgement. We can provide structure on what to look for, but ultimately we must all weigh the pros and cons. Sometimes, there’s very little risk and other times, there’s a lot but it’s worth it.

The point is to document what we find with the information available at the time. We are saying this is why we think the partnership is important.

Not only is this good development practice (to know our partners) it protects our and our partners’ reputation.

Five steps of Due Diligence for IPs

Step 1: Plan Step 2: Gather information Step 3: Analyze the information for “Red Flags” Step 4: Draft Due Diligence Memorandum Step 5: Ongoing Due Diligence

Presenter

People have asked about the level of effort. It really depends on whether it’s a new actor or if there is some pending lawsuit or something that would take longer to evaluate. In many cases, this can be done rather quickly. Ideally, if a project has a big private sector component to it, they would have already allocated resources to due diligence --- in the form of a CSR advisor or Alliance Builder for example. We’re also requiring this in our solicitations now.

Step 1: Plan

Inform AOR/COR of intent to partner with company X Define scope of inquiry considering “screens”-- past partnership history, sector sensitivity, type of contribution, nature of association

Develop due diligence plan that lists sources, stakeholder consultations, and timeline for completion

Tailor questions appropriately Consider pertinent search words

First step for implementing partner (IP) is to inform AOR/COR as he/she should have a broader understanding of the political environment and particular USG foreign policy concerns.

If not, AOR/COR could also tap the expertise in the Mission (Democracy and Governance Office, Program Office, Alliance Builder) to get a better understanding of certain sensitivities.

By informing the AOR/COR from the start, the IP will not waste time pursuing a partnership that may have already been discussed within the Mission. At the same time, we are not compiling a ‘black list’ as what might be sensitive for one partner/sector, might not be for another or the benefit in that instance may outweigh the risk.

Step 2: Gather information

Google searches Local and international news articles Subscriptions such as Lexis-Nexis, Dun & Bradstreet, Factiva USAID Partnership Database https://partnerships.usaid.gov/ International and local human rights/environmental/transparency groups (reports and interviews) Consultations with community groups, including federations, associations, coalitions, platforms that range the political spectrum Company reports, CEO, and board of directors Potential partners’ customers, suppliers Certification in Corporate Social Responsibility (CSR)

In LAC, suggest looking at WOLA, Latin American Working Group, Witness for Peace, the Transparency International local chapter, Open Society Institute, Freedom House, Insight Crime, etc . Could also look at human rights and labor reports.

https://partnerships.usaid.gov/

Step 3: Analyze the information for “Red Flags”

Corporate Image Negative media Corruption scandals Pending lawsuits

Social Responsibility Involved in protested projects CSR certification was revoked or not pursued Labor disputes

Environmental Accountability Lack of community consultation Work negatively impacts environment/workplace safety Populations forcibly displaced from lands Award Compatability Partnership doesn’t advance award objectives Unsustainable impact Other entities could leverage funds with less risk

On award compatability, we want to know that our IPs are searching for companies that will really help advance development objectives or help to solve a shared challenge. It shouldn’t be a ‘check the box’ exercise where they assume risk for a partnership that isn’t that meaningful.

Step 4: Draft due diligence memorandum

IP COP/Director drafts memo for AOR/COR with recommendation (or informs AOR/COR if decides not to move forward)

Summary memo no longer than 3 pages with sources footnoted.

Relevant supporting documentation in an Annex IP discusses findings with AOR/COR AOR/COR sends copy of memo to Program Office for files and PO follows up with EMB, only as appropriate

ANNEX 1: TEMPLATE DUE DILIGENCE MEMORANDUM (3 pages maximum)

FROM: [USAID Implementing Partner’s (IP) Chief of Party/Director]

TO: [Project AOR/COR]

SUBJECT: Due Diligence Review of [Company/Organization Name]

Recommendation(s)

In light of the due diligence findings discussed below relating to [Company/Organization Name], I recommend that you concur pursuing a partnership with [Company/Organization Name]. [CHANGE LANGUAGE IF A DIFFERENT RECOMMENDATION IS GIVEN.]

Concur______________ Do Not Concur______________

Introduction

• IPs’ history with the potential private sector partner including current discussions

• The type of partnership IP is exploring (length, overall amount)

• The USAID development objective that the partnership would further with summary of proposed benefits

Key Issues for Consideration

• Identify any issue of concern

• Discuss potential risks to USAID and the IP, including reputational risks

• Describe why proposed partner might be uniquely attractive

Summary of due diligence findings

• Summarize pros and cons by category: corporate image, social responsibility, environmental accountability, and award compatibility. Footnote sources.

Conclusion

• Summarize the most relevant issues for the IP and implications for USAID and the USG more broadly

• Provide recommendation of whether or not to proceed with the partnership

• Include any conditions that should be placed on a partnership to mitigate risk, or issues to monitor during the lifetime of the partnership.

Step 5: Ongoing Due Diligence

Monitor partnerships on an ongoing basis Set up a daily news search on private sector partner Complete an annual update to the due diligence Notify AOR/COR of any new issues that arise