Development investment not development aid, a new way forward.

Angelina Jolie and Brad Pitt are committed humanitarians and philanthropists as well as actors. They use their celebrity well in promoting good causes. They also ensure that they are not a burden when visiting humanitarian operations.

I saw this first hand in 2005 when, as Chief of Operations to the UN’s Emergency Coordination Centre for the Pakistan Earthquake, I saw how the two stars made sure their visit was both worthwhile and non-burdensome to the aid workers.

We hear a lot of their calls to double foreign aid. I have no doubt that their calls are well meaning, but are they right? Will doubling foreign aid help those in greatest need? Is the way the world looks at aid and philanthropy the right way?

Consider this: When one tracks capital flows from OECD to non-OECD economies one sees that around 53% of capital flows through the private sector, about 30% through remittances and around 17% through foreign aid and philanthropy.

So why then, when we look to bring the world out of poverty, do we think that aid and philanthropy are the major players when they have the smallest quantum? Why would we double aid, the smallest pool of cash, instead of better focussing private sector investment using aid and philanthropy money to help set the most investment friendly environment?

Consider also this: The end game of development should be people gaining sustainable employment with companies small and large that pay tax to a responsible government which in turn uses that tax to pay for hospitals and schools.

If we consider employment to be the ‘end game’, or ultimate objective of development, shouldn’t all development interventions be based on bringing developing economies and people closer to that end point?

Ask yourself this; which organisation is more likely to lead to long term sustainable employment, a private sector company investing in an economy or an aid organisation giving away resources in that economy?

Only employment can sustainably lift people out of poverty. Aid and philanthropy cannot. Aid and philanthropy can assist, if it is focused on helping improve the investment climate.

Spanning nearly two decades I have been part of the aid and development industry from the inside, as a worker with first the International Red Cross in Bosnia and Rwanda, and later with the UN in Pakistan, Philippines and other locations.

I have also more lately observed how multi-national corporations can impact the less developed economies when I acted as an adviser to major multi nationals like Rio Tinto.

I have seen with my own eyes the deep failings of aid and wrote about them in my book ‘A Life Half Lived’ published by New Holland Press in 2013. I have also seen the motivation behind how well focussed companies can have a major impact – not because they take a ‘be nice pill’, but because they see real value in doing the right thing over the long term.

But is that true? Can a private company do the right thing?

In my current work I advise mainly resource companies on how to understand the community risk discount rate in their net present value (NPV) calculations as follows:

Resource and other companies put a price in today’s terms on their assets by looking at the future revenue an asset will bring, discounting that future revenue for the cost of holding money, sovereign risk and community risk factors. They then deduct from that discounted future revenue the estimated future costs to earn that revenue.

Discounted future revenue less future cost equals net present value.

Community risk is one area of risk that can destroy 100% of an asset’s Net Present Value. If one can genuinely lower the community risk discount rate, then the net present value, that is the value of the asset declared to the stock exchange today and which impacts on managers’ remuneration today, will be raised.

Therefore a genuine community impact program that can measurably work, not a green-washing marketing-spin program, but a genuine program that really lowers risk and hence protects the value of assets.

Few financiers understand the power of this model, both for the long term good of the community but also for massive risk reduction for companies. Cornerstone Capital, a new New York based financial services firm that I sit on the management board of understands this opportunity for investors.

So am I arguing to end aid and philanthropy and hand everything over to the private sector? No. I argue for new and genuine partnerships between aid, philanthropy and the private sector.

To have true, long lasting and meaningful impact, aid and philanthropy should not be about how much money is spent, but how it is spent. Has the aid or philanthropy really helped to improve long term employment?

Rather than funding general education performance, perhaps partner with companies to improve specific education aimed at particular industries and job types with a company not only contributing to the spending but promising graduated students the jobs. Rio Tinto does something similar to this in Mongolia.

In Mozambique BHP Billiton, the world’s largest miner, ran an anti malaria campaign that dropped adult malaria infection from 92% to 5.6%. In the process the improved community health lowered absenteeism in the workforce and improved productivity by an amount higher than the cost of the program.

In other words the anti malaria program was profitable!

So wouldn’t philanthropic or aid money be better spent in a partnership program rather than a free standing one? Wouldn’t it be better if it was done with real measurable indicators linked to profit?

Wouldn’t we be better with development investment, not development aid?

Andrew Macleod is a Board member of Cornerstone Capital Inc (New York), advisor to Gane Energy (Australia), Critical Resource (UK) a former General Manager at global giant Rio Tinto and a former senior official of both the United Nations and the International Committee of the Red Cross. He is the author of ‘A Life Half Lived’ by New Holland Press and can be followed @andrewmmacleod

Advertisements

5 Replies to “Development investment not development aid, a new way forward.”

  1. Trickle-down is a farce and the purported jobs that the private sector are creating are doing nothing to stem the concentration of wealth in the hands of a few. So long as shareholder wealth maximisation and a system predicated upon avarice are the modus operandi, I will never put my faith in private-sector led development.

    Like

    1. So what would you alternative be? The only way to sustainably end poverty is through regulated reasonable employment. How do you provide employment without the private sector?

      Like

      1. Rather than seen as “the only way”, private sector is part of a multi-faceted approach. Infrastructure, environmental & human rights protection cannot be meaningfully protected by profit motives. We see that the world over. I agree with a regulated environment; but so long as enforcement mechanisms & governance institutions remain weak, do we honestly expect businesses to take the regulations seriously? Definitely something needs to be done about elite capture in aid, but we are fooling ourselves if we think that it doesn’t occur in the private sector. The worsening global lorenz curve is self evident.

        Like

  2. As Andrew mentioned, aid can only ever help in the short-term, or builds the foundation for investment. One issue I see with this is that charitable aid has always been the most accessible for the majority of people. It would certainly be foolish to ignore the benefits of charitable aid, but even more foolish not to increase awareness of the benefits of investment over aid. Aid provides the foundations, investment paves the way.

    Take Development Media International (for example). Their approach has been development through the provision of media outlets, aimed at educating populations (mainly in Burkina Faso) in terms of health and many social issues (such as the prevention of child abuse). This approach is similar to the approach Andrew mentioned in the sense that it looks for a way to improve the long-term wellbeing of a population rather than just focussing on the short-term.

    Interesting blog!

    Like

Your view is welcome. Please comment here.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s