Using private sector funding to improve economics in developing countries
A talk by Michael Levett, former senior director and vice chairman of the board of directors at CDC Development Solutions
In today’s environment, when the budgets of public aid agencies are mostly being cut, how can NGOs raise funds? Why and how does the private sector support NGO projects? Michael Levett discussed these questions when he addressed students in Johnson's Leaders in Sustainable Global Enterprise Colloquium, Sept. 25. Now a senior advisor at the Center for Strategic and International Studies in Washington, D.C., and a Senior Fellow in Social Innovation at Babson College, Levett was formerly senior director and vice chairman of the board of directors at CDC Development Solutions (CDS), where he served for 16 years.
During Levett’s early days at CDS, almost everything was funded by public sector agencies such as the United States Agency for International Development (USAID), a U.S. government agency responsible for administering aid to foreign countries. "The money was not easy to work with," said Levett. "Everything was donor-driven." Agencies wanted NGOs to go to specific countries and promote specific aspects of economic development, primarily through training. "It was training for training's sake," said Levett.
Later, CDS started to move away from public funding and to seek private funding. It got involved with a gas company in Los Angeles that was looking to contract with a number of small- and mid-size companies. CDS took the opportunity, trained people in companies across the globe to qualify for the gas company’s contract, and obtained payment from the gas company for that training.
"Twenty years ago, 95 percent of our funding came from the public sector," said Levett. “Today, 70 to 80 percent of our funding comes from the private sector. What motivates businesses to fund projects in developing countries? Some companies have a hard time making a profit in the U.S. and Europe. So they target developing countries as future markets and help those countries to improve their economies and thereby create more market demand.
For CDS, private sector funding offers two key advantages over public funding. First, no public organization can match the funding available from the private sectors, Levett says. Second, as the gas company example shows, working with the private sector forces organizations in developing markets to raise their financial, management, and technical standards to qualify for contracts. Another example of a success is CDS's activity in Angola. Within four years, CDS qualified close to a thousand companies and created about 140 contracts for local companies, together worth a total of 250 million dollars. After that, CDS left. Whether those companies got more contracts or not, CDS drove up the quality of local businesses in Angola, said Levett.
Another important issue that CDS has to deal with is corruption. Levett challenged the audience with the following question: Should NGOs pay the “price of doing good” by bribing the government? This is a practical question that CDS encountered in Africa, where governments ask for "fees" that are in fact bribes. Fortunately, CDS was able to avoid paying bribes. "Companies should not be benefiting from bribing. By paying bribes you are also making a negative impact on local government," Levett pointed out.
Near the end of his speech, Levett said: "It's very possible that the business unit director in almost any country is going to have much more impact on the economic development in that country than the head of USAID." The big questions will be: Who sets development policy? How much are businesses willing to fund countries? And how do they want to direct the use of those funds? “That's where the rub is going to come in," said Levett.
To find out more, check out Levett's report: Maximizing Development of Local Content across Industry Sectors in Emerging Markets.
Yuezhou Huo ’15 is an intern in Marketing and Communications at Johnson.