Trade Forum Features

Development investment, not development aid, is the way forward

23 December 2014
ITC News

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 distraction when visiting humanitarian operations.
I saw this at first hand in 2005 when, as Chief of Operations for the UN’s Emergency Coordination Centre for the Pakistan Earthquake, the two stars made sure their visit was both worthwhile and non-burdensome to the aid workers.
We hear a lot of calls to double foreign aid. I have no doubt that such 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 members of the Organisation for Economic Cooperation and Development (OECD) to non-OECD economies, one sees that around 53% of capital flows through the private sector, about 30% through remittances and some 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 focusing 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, should not all development interventions be based on bringing developing economies and people closer to that end point?

Which organization is more likely to lead to long-term sustainable employment, a private sector company investing in an economy or an aid organization 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 focused on helping improve the investment climate. I have been part of the aid and development industry for nearly two decades, as a worker with the International Red Cross in Bosnia and Rwanda and with the UN in Pakistan, Philippines and other locations. I have also more lately observed how multinational corporations can impact the less developed economies, such as when I acted as an adviser to the British-Australian materials firm Rio Tinto Group.
I have seen with my own eyes the deep failings of aid and I have seen how well-focused 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.

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. Those calculations are made as follows: Companies put a price in today’s terms on their assets by looking at the future revenue an asset is expected to 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 NPV.
Community risk can destroy 100% of an asset’s NPV. If one can genuinely lower the community risk discount rate, the NPV – 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 programme that can measurably work is needed. Not a green-washing marketing-spin program, but a genuine programme 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, as well as for the massive risk reduction for companies, this is what is needed. 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 sector really helped improve long-term employment prospects?

Rather than funding general education performance, perhaps partnering with companies to improve specific education would be better. Such a programme could be aimed at particular industries and job types, with a company not only contributing to the spending but promising graduates jobs as well. In Mozambique, BHP Billiton, the world’s largest mining company, ran an anti-malaria campaign that helped reduce adult malaria infection from 92% to 5.6%. In the process the improved community health lowered absenteeism in the workforce and improved productivity. In other words, the anti-malaria programme was profitable.
So would philanthropic or aid money not be better spent in a partnership programme rather than a free-standing one? Would it not be better if it was done with real measurable indicators linked to profit?

Would we not be better off with development investment, not development aid?