ICAI have just released a report on private sector development, packed full of interesting nuggets and insights. It’s a great read, and we recommend that you go and read the report straight away. Just in case you don’t, we summarise some of the key conclusions, recommendations, and add our own thoughts below.

Three interesting conclusions from ICAI:

DFID’s ambition is ‘immense’, compared to what it can realistically achieve. DFID aims to transform economies and market systems, which are dependent on a load of factors which DFID can’t really do anything about. Instead, DFID “may need to adopt the role of a more modest partner, market convenor and intelligent customer”. It should be clearer about what value it can add as a development agency.

DFID is not fully considering the risks of private sector development. The authors applaud DFID for being prepared to take risks and innovate, but suggests that they need to better understand and manage these risks. Inadequate risk management may be related to DFID’s poor project management; existing processes (such as the business cases) ‘currently place too much emphasis on the initial project design and relatively little on supervision and learning’.

Simplistic targets can be counter-productive. The team note that current tools to monitor private sector development programmes are poor, as they do not account for the complex theories of change. In particular, targets can focus staff on ‘quick wins’ at the expense of longer-term changes.

ICAI’s Recommendations:

Recommendation 1: DFID should clearly define and articulate where it can add most value in PSD relative to other stakeholders. It should be more realistic in its ambitions and the impact it seeks to achieve.

Recommendation 2: DFID should provide clearer guidance to its staff on how to design a coherent and well-balanced PSD country portfolio that matches its goals for an end to extreme poverty through economic development and transformational change.

Recommendation 3: DFID needs better to calibrate and manage the risks associated with PSD and so innovate in a more informed fashion.

Recommendation 4: DFID needs to work harder to understand the barriers and business imperatives faced by the private sector in participating in development. Wherever it operates, DFID needs to be clear how and where its interventions can address these barriers

Our comments:

How much ambition is right? DFID is criticised throughout the report for being too ambitious, relative to what it realistically can achieve. But do we not want ambition? If DFID listed its ultimate goal as ‘slightly increasing income for a few people, probably’ would we criticise it for a lack of ambition? Obviously there’s a thin line between ambitious stretch targets and outright stupidity, but it’s not clear to me where the balance should lie.

How should results be measured? The potential negative effect of simplistic targets is an important finding, and we’ve discussed the ‘evidence agenda’ on this blog before. However, the report is less clear on what the solution could be – and the recommendations don’t directly address monitoring. There’s a tentative suggestion of an ‘assessment of the cumulative impact of a balanced PSD portfolio on the private sector’ in each country. I don’t really understand what such an exercise would look like, or whether it could realistically produce interesting findings given the huge problems of attribution and scale.

Easy, big spender. DFID’s rapid scale-up in private sector development is a concern, and one left largely untouched in the report. At its best, private sector development should require relatively little money. Flooding the private sector with money can have quite marked negative effects, as incentives are distorted and inclusive business suddenly becomes less profitable than chasing donor-driven initiatives. Is DFID’s spend in this area appropriate?