Strategy for Norwegian support of private sector development in developing countries

Published under: Bondevik's 1st Government

Publisher Utenriksdepartementet

Strategy for Norwegian support of private sector development in developing countries

Contents

Foreword

The Government has aimed from the outset to present a new approach in its efforts for supporting private sector development in developing countries. The point of departure for the strategy has been the needs of the developing countries themselves. The aim of the strategy has been to forge a basis for cooperation on the developing countries’ own terms and with the most efficient use of resources.

The current strategy reflects the Government’s priority to support private sector development in developing countries. This will help both to increase income and provide jobs for poor groups, and create the necessary economic basis for the countries’ own investments in health and education. A vigorous private sector is also a major precondition for reducing aid dependence and preventing an increased debt burden.

Within Norwegian development assistance, much has been done to support private sector development, but the efforts so far have lacked a strategic and integrated perspective. This document embrace efforts from support for more active participation in the global economy via stimulation of improved macroeconomic and legal conditions to incentive schemes at the micro level. An integrated approach implies regarding efforts at these levels in relation to one another, and achieving better integration of bilateral and multilateral efforts.

This imposes considerable requirements on the authorities, on Norwegian commerce and industry and on other players, but also offers good prospects of a more efficient and less fragmented policy. With this strategy, we have therefore acquired the instrument that has been lacking. The challenge will now be to translate words into practical actions, remembering that what counts is the results in the developing countries.

Hilde F. Johnson

Minister of International Development and Human Rights

Executive summary

With this document, the Government presents for the first time an overall strategy for Norway’s support for private sector development in developing countries. The main objective is to promote economic growth and profitable production in developing countries. This helps reducing poverty in these countries by creating jobs and income for the population. It also creates tax revenues that provide a basis for countries’ own efforts within areas such as health and education. The purpose is also to prevent further aid dependence and reduce the danger of an increased burden of debt. The strategy will serve as a guideline for Norwegian efforts to promote private sector development in developing countries.

The strategy should ensure that development cooperation in this area is rooted in the Government’s overall development policy goals and priorities, such as poverty orientation and recipient responsibility. At the same time, changes in global and national framework conditions require new approaches to supporting private sector development in developing countries

The point of departure for the strategy should be the needs of developing countries. Success will therefore be measured in terms of the results in the developing countries. The approach chosen reflects a recognition of the fact that the goal of contributing to private sector development in the developing countries demands a broad approach ranging from global measures for improvement of the situation of developing countries in relation to international trade via measures to improve framework conditions for commerce and industry at national and local levels to direct incentives for investments through institutions such as NORFUND. An integrated perspective that regards the different allocations and budget chapters in relation to one another will therefore be important. This applies to country programmes, regional allocations and global schemes as well as to the relationship between bilateral and multilateral assistance. Globalization also implies closer integration of trade policy and development cooperation policy. Improvement of the developing countries’ potential for exploiting the WTO system in relation to globalization is another important objective of the new strategy.

The strategy emphasises close cooperation with other donors and more efficient donor coordination. It is of decisive importance that increased Norwegian efforts for private sector development in developing countries are rooted in plans and priorities of the government in recipient countries. Incentive schemes for investments must be adapted to local conditions and be well coordinated with the range of instruments for business development in individual countries. Stimulation of long-term investments that generate income and jobs in developing countries will be given higher priority at the expense of export-oriented schemes. The strategy will reflect the fact that agriculture and primary industries still dominate the structure of industry in many of the poorest developing countries.

Improvement of legal, institutional and political framework conditions for private sector development plays a central role in the strategy. Neither national initiatives nor foreign assistance will function efficiently unless a minimum of such framework conditions is in place. In many developing countries, inadequate framework conditions are perhaps the greatest barrier to sustainable economic development, and cause foreign capital to flow to other, more predictable markets. Frequent characteristics are inadequate and insecure legal guidelines, an undue degree of bureaucracy that hinders private initiative, corruption and inadequate financial policies. In many countries , poor physical infrastructure is still a great problem: potential investors fear that goods and services will not reach the market in time. The new strategy places considerable emphasis on surmounting this kind of barrier to successful commercial and industrial activity.

Projects and programmes under the auspices of bilateral and not least multilateral development assistance will help to build capacity and strengthen institutions, among other ways, by exchanging experience with countries that have more robust and open framework conditions for investments.

The strategy involves plans for continued active international efforts to make incentive schemes for export and investments as efficient as possible, and to enable the developing countries’ own commerce and industry to succeed in winning contracts,including contracts in the aid market. The Government will therefore intensify its efforts in the OECD towards untying development assistance, and will at the same time untie Norwegian schemes for private sector development in parallel with other donor countries active in taking initiatives in this process.

The strategy establishes principles and guidelines for future Norwegian support for private sector development in developing countries and presents recommendations for making the strategy operational with an emphasis on efforts and measures to:

  • Promote investments in developing countries and encourage Norwegian commerce and industry to invest and establish a long-term involvement in developing countries.
  • Reduce export subsidy schemes in parallel with other donor countries active in international untying initiatives.
  • Improve national framework conditions associated with macroeconomic conditions, development of good governance and improvement of institutional conditions, for example through a well functioning financial sector.
  • Help to reduce marginalization of the poorest countries and strengthen their capacity to exploit the potential of globalization, while limiting its disadvantages.
  • Help to strengthen South-South trade and regional economic cooperation between developing countries.
  • Promote trade with developing countries by strengthening current arrangements for import from developing countries to Norway and by giving increased priority to general measures for increasing trade with the developing countries.
  • Reinforce support of small and medium-sized enterprises, especially within technical assistance and microfinance.
  • Make active and targeted use of the Norwegian knowledge base, including Norwegian commerce and industry, where this matches identified and expressed needs in developing countries.

As in the case of other development work, the implementation of the strategy for private sector development will imply using the Norwegian resource base, including Norwegian commerce and industry, public institutions and NGOs, again based on the needs of the developing countries. Norwegian commerce and industry has a great deal of expertise that can be utilized in the work on promoting productive activity and developing the private sector in developing countries. Arenas will therefore be established for cooperation on private sector development and investment possibilities in developing countries. This will enable the strengthening of the dialogue between Norwegian development cooperation authorities and Norwegian commerce and industry, and with appropriate players in recipient countries.

At country level, Norwegian embassies will play a central role in ensuring that these efforts are made on the national authorities’ own terms, and that they are coordinated with the efforts of other donors, including multilateral institutions. In order to “test” the recommendations of the strategy and rapidly gain experience, implementation of the strategy will first be given priority in selected pilot countries. The strategy entails that private sector development will to a greater extent than previously be an integrated part of Norway’s total development cooperation. This will be reflected in the organization and priorities within the cooperation. Quality assurance of the entire process, from the planning of sector programmes and projects to implementation, reporting and evaluation, will emphasize continuous assessment of performance and necessary correction of the use of instruments. This must be carried out in close coordination with other donor countries

and multilateral institutions.

1. Introduction and premises

1.1 Background

In the present document, the Norwegian Government for the first time presents a comprehensive strategy for Norway’s support for private sector development in developing countries, following the Storting’s Recommendation S. no. 229 (1995-96) in response to Report no. 19 (1995-96) to the Storting “A Changing World”. In preparing the new strategy, it has also been natural to take into consideration recommendations regarding private sector development in developing countries contained in the report from the Commission on North-South and Aid Policies, Official Norwegian Report (NOU) 1995:5.

The Commission on North-South and Aid Policies and the Storting have emphasized the importance of increasing the focus in development cooperation on private sector development in developing countries . At the same time, there have been a number of proposals concerning changes to current schemes as well as proposals for new measures of importance for private sector development. An increased focus on the needs of the developing countries has recurred as an important premise for further support in this area. In this connection, it is referred to guidance from the Storting related to untying of Norwegian development assistance, increased local procurements and the wish to support microfinance schemes. The preparation of a comprehensive strategy for Norwegian support for private sector development in developing countries has provided an opportunity to deal with such measures in a broader perspective.

The purpose of the strategy is to bring about greater coherence in Norwegian efforts to stimulate private sector development in the developing countries. The strategy is intended to ensure that development cooperation in this area is rooted in the Government’s development policy objectives and priorities, such as the focus on poverty and recipient responsibility. The strategy defines the framework for future development work in this area by setting out priorities and guidelines for such efforts. The strategy also includes specific recommendations for implementation of the strategy.

In annex 3 to Proposition No. 1 (1998-99) to the Storting (i.e the 1999 aid budget proposal), the Government outlined general guidelines and premises that should form the basis of such a strategy, and specified some main elements. Consideration by the Storting, cf. Budget Recommendation S. no. 3 (1998-99), demonstrated that there is support for the main features of the Government’s approach. The present strategy document therefore pursues further and consolidates the proposals presented in the budget.

1.2 Changes globally and in the developing countries

The international community is characterized by conflicts of interest and by rapid change. Never have so many people climbed out of absolute poverty as during the last 20–30 years. At the same time, the number of poor people is greater than ever. The poorest 20 per cent in the world have witnessed a fall in their share of the world’s total income from 2.3 per cent to 1.4 per cent during the last 30 years.

An increasing number of developing countries liberalize their trade and the financial sector, and thereby become more closely integrated into the global economy. In the 1990s, we have witnessed a dramatic increase in private transfers of capital to the developing countries. This has contributed to economic growth in many countries, while others have been marginalized. For example, Africa, apart from South Africa, has received only very limited benefit from the increased flow of private capital. The recent financial and economic turbulence in Southeast Asia has illustrated the considerable challenges that are also involved in closer economic integration. Although the effects of the turbulence in the financial market are serious in the short term, Southeast Asia has built up a formidable developmental lead in relation to Africa.

Illiteracy among women, infant mortality and population growth are at a level half of that in Sub-Saharan Africa. At the same time, the gross national product per inhabitant in Southeast Asia is almost double that of Sub-Saharan Africa.

Owing to the crisis in Asia, it is now expected that the annual growth rate for the developing countries taken as a whole during the period 1998–2000 will be approximately 3 per cent, the same level as in the period

1991-1997, while, a year ago, the forecasts for the same period were 4.6 per cent.

We see from this that the basis for growth is fragile, a fact that has been illustrated by the crisis in Asia. Moreover, in many of the world’s poorest countries, population growth is still greater than economic growth. The only way of ensuring a significant and permanent reduction of poverty is to bring about a level of economic growth markedly greater than the population growth, while ensuring that all parts of the population benefit from this development. Many developing countries are also encumbered with serious debt problems that prevent them from concentrating their resources on development and improvement of the living conditions of the population. In this connection, the Government has presented a separate debt relief plan for the poorest and most indebted developing countries. In the case of these countries, private investments are also a scarcity factor. Moreover, in large areas of Africa, the development of HIV/AIDS represents a special challenge which already results in increases in the cost of health services and training measures. The solution of all these problems will require a joint effort by the international community. At the same time, the developing countries themselves must pursue a policy of establishing favourable conditions for economic growth, responsible management, reduced corruption and increased respect for fundamental human rights.

Considerable changes have taken place during the last 10–20 years both globally and internally in developing countries as regards framework conditions for development and views on strategies for development and poverty reduction. The globalization and increased integration of the world economy, coupled with the implementation of economic reforms in individual developing countries, has led to a general improvement of the framework conditions for economic development and private sector development. Deregulation, currency reforms, market orientation, privatization and trade liberalization are keywords for the changes that have taken place. These developments have presented the developing countries with major challenges, while at the same time providing them with new opportunities for economic development and poverty reduction. However, the challenges, opportunities and problems are not equally distributed among developing countries. The poorest countries have the least favourable point of departure, and have benefited only to a limited extent from private capital flows. It is therefore a particular challenge for these countries to take advantage of the development potential and to avoid being marginalized in an increasingly globalized world economy.

In general, increasing emphasis is now placed on market solutions and private sector development in developing countries, partly as a result of a recognition that private sector development and economic growth are decisive for lasting poverty reduction, and, on given conditions, that the private sector is capable of making a significant contribution to this. This recognition is to a great extent based on experience of different development models and strategies over the years. An increasing number of developing countries have chosen a market-oriented development strategy placing greater emphasis on private sector development and a dynamic private sector. These changes determine the conditions for development cooperation, which Norway as donor must take into consideration. Simultaneously with the increased emphasis on private sector development, changes have occurred in the view of the role and involvement of the State in relation to private sector development. Instead of participating actively in economic activities, the State now concentrates more on establishing favourable framework conditions for private sector development, development of human resources and establishment of a social safety net.

However, the State still plays a major role as the only party capable of ensuring the existence of a framework for democracy, good governance, human rights and a functioning rule of law that creates confidence in state institutions and ensures social stability. As well as establishing favourable conditions for private sector development, the State must intervene and correct the markets when desirable. In most developing countries today, the State wishes to promote a dynamic private sector and attract foreign investments. The changed role of the State also reduces the need for aid transfers to government and parastatal enterprises. There is instead an increased focus on setting up private industrial and commercial activities, and on mobilizing national and international capital for this purpose. A comprehensive strategy for private sector development must take the developments into consideration.

The clearly stated wish of the developing countries for long-term investment and involvement by for-eign commerce and industry, coupled with gradual changes in the investment climate, has improved the investment potential for foreign investors. However, in the poorest developing countries, the flow of foreign investments does not match the level and scope desired by the countries them-selves. This is because foreign investors, including Norwegian investors, still regard the risk as being too great. This may also be a result of the lack of information and knowledge of business opportunities in the developing countries. Norwegian efforts in this area must take such matters into consideration in developing measures and instruments.

1.3 Private sector development and poverty reduction

There is broad agreement today that the creation of jobs and incomes is a necessary condition for lasting poverty reduction, and that economic growth over time must be larger than the population growth. Moreover, profitable industrial and commercial activities strengthen the economic basis for public expenditure on health and education by contributing to increased tax revenues. Investments in health and education are important objectives in themselves, and play a major role in Norwegian and international development cooperation. However, private sector development and economic growth in developing countries will be absolutely essential if they are eventually to be able to finance the ambitious level of investments in health and education currently planned by the countries themselves and by donors. The absence of economic growth is almost certain to result in large public budget deficits, a reduction in the basis for investment in health and education and increased dependence on development assistance.

Supporting private sector development involves supporting measures that help to strengthen profitable production, whether within primary industries, services or manufacturing. It is not of decisive importance in which of these sectors production takes place, but that the activity is profitable and yields more than the resources input, in other words that it represents economic growth. Whether this activity takes place in the private or public sector is not important in itself, but developments in the developing countries (as described in chapter 1.2 above), make it natural to place an increased emphasis on the role of the private sector in this connection1). Private sector development includes activities in both formal and informal sectors2).

Private sector development and economic growth are necessary for lasting poverty reduction, but are not sufficient conditions for ensuring actual reduction of poverty. The degree of poverty reduction and development that result from private sector development and economic growth depend on the type of private sector development and growth that takes place. The degree of poverty reduction also depends on factors such as the share of profits that remains in the developing country, how public funds are used, income distribution, rights, and social and environmental conditions. Such factors must therefore be included in an assessment of the total developmental effect of private sector development. It is nevertheless necessary to point out that in the poorest countries, including Norway’s partner countries, where such large parts of the population are poor, strong and lasting economic growth is absolutely essential for putting an end to poverty. Poverty reduction by means of increased tax revenues and public support for health and education is also completely dependent on private sector development resulting in taxable profits, on the existence of a functioning system of taxation, and on taxes actually being collected.

The strategy must take into consideration the decisive importance for poverty reduction of developing the agricultural sector in the poorest countries. Efforts for private sector development must therefore reflect the key role of agriculture as a provider of employment and income and as a supplier to agro industries. The emphasis in the strategy on satisfactory framework conditions for economic activity in general is also highly relevant for this sector. It is important to associate agriculture more closely with other parts of the economy and to ensure better coherence between our actions as donors in different areas. Poverty alleviation, for example, is closely associated with improved food security. Since food security is associated with access to land, credit and means of production, this cannot be separated from general conditions for economic and social development.

1.4 Premises of development cooperation policy

The strategy for support for private sector development defines the frameworks both for supporting authorities in establishing satisfactory framework conditions for economic development, and for more direct support for the activities of various players in promoting productive activities in developing countries. However, it must be borne in mind that Norway and other donors can play only a limited role in relation to achieving private sector development in developing countries. The most decisive factors for the potential for private sector development in developing countries are the policies of the countries themselves, the framework conditions for local commercial and industrial activities, and international framework conditions for private sector development.

The strategy for development cooperation in this area has been prepared in accordance with Norwegian development policy objectives and priorities (cf. Proposition No. 1 (1998–99) to the Storting, the aid budget). This entails a strong emphasis on the poorest African countries, a clear recipient orientation based as far as possible on the plans and priorities of the recipient and a reduced emphasis on tied arrangements 3). At the same time, support for private sector development is to be promoted while paying due regard to issues concerning human rights, environmental issues, women and gender equality, in accordance with the general requirements regarding development projects that receive Norwegian support.

Income potential for women plays an important part in poverty reduction of. In many developing countries, the low social and economic status of women makes it particularly difficult for them to participate in economic activities. At the same time, measures within private sector development must reflect the fact that in many developing countries women are responsible for considerable economic activity within agriculture, small-scale industry and trade. This must be given special consideration. A fundamental assumption of the strategy is that this is best taken care of by improving the general framework conditions for economic activity even though there may in some cases be a need for more targeted schemes for women. The potential for increasing the number of jobs for women is particularly great in small-scale industry and crafts. This form of activity often employs simpler technology than large industrial enterprises, and involves low establishment costs. The question of whether or not it is appropriate to support special schemes or financing mechanisms for female entrepreneurs has to be decided on the basis of country-specific circumstances. These circumstances must be taken into consideration in the planning of small-scale industry measures.

As regards environment, the same guidelines that apply to Norwegian development cooperation in general apply to measures implemented in accordance with the strategy for private sector development. This applies to the whole production process from extraction and transport of raw materials to the finished product, including the use of energy and chemicals. Successful effectuation of a sustainable production cycle is dependent on taking these aspects into consideration when planning production. It is easier to satisfy the growing international demands for environmentally correct goods and services if one begins by planning environmentally benign production and products. The Norwegian government’s Asia plan includes a special priority in the environmental area involving the financing of projects that prevent damage to the environment and promote sustainable production processes. It is possible to combine different objectives within industrial and commercial cooperation in areas with indirect relevance for private sector development. An assessment of the Asia plan will be available in the spring of 1999.

The strategy includes measures to safeguard considerations regarding trade union rights and other human rights issues, among other ways, by complying with adopted international conventions and following these national efforts. This also involves raising awareness of the importance of combating child labour and ensuring that partners and suppliers do not make use of child labour. In relation to more general human rights considerations, KOMpakt (the consultative body for human rights and Norwegian economic involvement abroad) is an appropriate forum for raising relevant issues for discussion between authorities, commerce and industry and other players.

Norwegian development assistance is mainly untied, i.e. Norway does not impose conditions that goods and services should be purchased from Norway. Industrial and commercial cooperation, technical development assistance and support via Norwegian NGOs have represented exceptions to this principle. The principle of not tying development assistance must be viewed in relation to the principle of recipient responsibility. The general objective of untying development assistance motivated by the wish to increase the effectiveness of the assistance is a major premise of development cooperation policy. On several occasions, the Storting has affirmed that Norwegian development assistance shall be untied and shall be based on competition. Both in view of this and in view of the efforts of the OECD to untie all development assistance to the least developed countries, the strategy prepares for a future range of instruments with no emphasis on tied schemes. The strategy is therefore also founded on the principle that current Norwegian tied schemes should be phased out. However, this should be carried out at the same pace as progress is achieved internationally through changes in the practice followed by other countries.

1.5 The role of Norwegian commerce and industry as a part of the Norwegian resource base

Increased emphasis on private sector development in Norwegian development cooperation reflects the developing countries’ own priorities and their clearly stated wish to cooperate with other countries in promoting private sector development. The developing countries welcome contributions to this through contact with foreign commerce and industry and through access to technology, capital and markets.

Norwegian commerce and industry constitutes a natural part of the Norwegian resource base on a par with other parts of Norwegian society, such as research institutions and NGOs. In view of the priority given by developing countries to private sector development, the expertise and experience of Norwegian commerce and industry is especially relevant.

There are moreover areas of development cooperation where the involvement of Norwegian partners results in positive ties and involvement by the Norwegian society, which is of value in itself. Such co-operative relations enable the dissemination through practical work of Norwegian values, Norwegian working environment standards and the Norwegian social model. This will also be the case in the area of private sector development in developing countries. Through their presence and through their contribution to local economic growth, Norwegian companies will stimulate an economic development which in the long term may lead to independence of development assistance. At the same time, such activities will broaden the range of contacts between Norwegian society and the developing countries. Moreover, through involvement of the private sector in recipient countries and in Norway we wish to exploit the advantages of this sector to think in terms of profitability and to develop viable commercial activities. Such considerations make Norwegian commerce and industry a natural partner in the efforts to achieve the overall objectives of development cooperation.

The fundamental premise represented by the needs of the developing countries must play a decisive role. All procurements in connection with development assistance projects must be made at competitive prices. Competition in the private sector and the wish for future contracts ensures a reasonable relationship between price, quality and professional expertise. As explained in Proposition No. 1 to the Storting (1998–99), the Norwegian follow-up of international initiatives for untying shall be carried out in such a way as not to weaken the total range of development cooperation instruments. Untying is not an objective in itself and will be assessed in relation to the total achievement of objectives.

In some cases, one has to be realistic and accept that corruption and malfunctioning of markets still create a competitive situation that precludes the correct management of Norwegian funds by means of normal international competitive tendering. At the same time, improvement of such framework conditions is a primary objective of the new strategy.

Investment in developing countries is an area where cooperation with Norwegian commerce and industry is of especial interest. The developing countries clearly state a wish for foreign investments, and are positive to involvement by serious foreign investors, including Norwegian. Experience shows that the bottleneck lies not only in the investment potential in the developing countries, but that there are limitations to the willingness of foreign investors to gamble on something they perceive as being too hazardous in relation to the yield that can be expected. If we are to deal with this problem through Norwegian development cooperation, in addition to working to improve framework conditions in the developing countries, we must encourage and motivate foreign investors, not least Norwegian, to invest in developing countries. In consistency with the principle of untying, incentive schemes for investments should be open for international competition. At the same time, factors such as proximity and knowledge of the range of instruments provide Norwegian commerce and industry with a good potential for benefiting from such schemes. The dialogue between Norwegian development cooperation authorities and the Norwegian business community should be strengthened to ensure appropriate structuring and application of the appropriate instruments. Moreover, increased trade between Norwegian companies and companies in developing countries may open the eyes of Norwegian commerce and industry to the investment potential that exists in these countries.

1.6 Current development assistance for private sector development

The experience of Norwegian development assistance for private sector development is described in more detail in a background report for this strategy. It shows that direct and indirect support for private sector development has constituted a considerable part of Norwegian development assistance. However, it is difficult to give a precise estimate of the proportion of the development assistance that has been used for private sector development, since both budgeting and reporting have placed this type of measure in the category ‘economic development’, which is somewhat broader than private sector development 4). It is also difficult to determine the extent to which this support has actually resulted in the desired developmental effect. The efforts so far have been too fragmentary and too little poverty-oriented. Nor is there any certainty regarding the extent to which these efforts have resulted in establishments in the form of jobs and economic growth.

During recent years, approximately one-third of Norwegian bilateral development assistance has been used for economic development. As illustrated by table 1, the proportion used for economic development was 33 per cent in 1997, whereas the figure for the two previous years was 36 per cent.

However, the proportion of Norwegian development assistance used for economic development varies considerably between different channels. While approximately half the assistance over country and regional allocations is applied to economic development, the corresponding proportion for commercial and industrial cooperation is 78 per cent and for assistance via NGOs, 27 per cent.

Support for economic development is distributed between several sectors and types of activity. In 1997, the largest proportion of the total development assistance in this area, 51 per cent, was for public utility functions (e.g. infrastructure), 22 per cent was for agriculture and fisheries, 10 per cent for regional development and 10 per cent for manufacturing, mining and craft enterprises.

The proportion of Norwegian multilateral development assistance which is used for economic development, including private sector development, is more difficult to estimate, since the major part of this assistance consists of general grants to these organizations. The proportion that is applied to economic development varies considerably between different multilateral institutions dependent on their mandate and priorities. Moreover, classification of measures varies from organization to organization. While the proportion of the World Bank’s loans for economic development constitutes 60–70 per cent, the corresponding figure for the UNDP is 30 per cent. In the case of most other UN organizations, neither economic development nor private sector development is used as a separate category and, in several cases; the actual proportion is probably close to zero.

However, it is possible to estimate the proportion of the Norwegian earmarked contributions, i.e. the Norwegian cofinancing with multilateral institutions (the World Bank, the regional development banks and the UN system) that is applied to economic development. The definitions differ somewhat in relation to those of NORAD, but, in 1997, the proportion of cofinancing that was applied to economic activity and infrastructure was 24 per cent. As shown in table 3, this proportion has fallen markedly in recent years. This is partly because of the increased priority given to support for health and education in Norwegian development cooperation in general as well as in the distribution of cofinancing funds.

1) Neither in the context of the OECD nor in our own definition, it is of decisive importance whether the activities, which OECD documents refer to as “Private Sector Development” and which Report no. 19 to the Storting (1995–96) refers to as “productive sector”, are privately or publicly owned. It is however important that the activities are financed by the sale of own production and not over public budgets. In practice however, they consist chiefly of private sector activities. In order to avoid misunderstandings, the term “Strategy for the Norwegian support of Private Sector Development in developing countries” is used as the English translation of the strategy’s Norwegian title of “Strategi for støtte til næringsutvikling i Sør”.

2) Cf. the definition of ‘Private sector development’ in the report from the Commission on North-South and Aid Policies, Official Norwegian Report (NOU 1995:5) p. 33.

3) Tied schemes are financing schemes where the procurement of goods and services is tied to procurement from a specific country or region, in this case from Norway.

Agriculture and private sector development in Zambia.

Like a number of African countries, Zambia has a great potential for agricultural production. As well as enjoying favourable natural conditions, the sector has clear economic and social advantages, since it provides jobs and income potential for many people while at the same time contributing to increased food security. However, the development of agriculture in Zambia has been adversely affected by the economic framework conditions, which favoured the production of maize. Other agricultural production stagnated because of extremely unfavourable policies and a greatly overvalued currency. The State supported maize production by subsidizing chemical fertilizers and by purchasing produce at regulated prices far higher than the market prices. Following economic reforms in 1991, the Zambian authorities made efforts to bring about a positive development of the agricultural sector, and implemented a number of structural reforms. However, these reforms have shown limited results. It has proved very difficult to phase out the extensive public intervention in the market for maize and chemical fertilizers, which has hindered the emergence of private players in such areas as distribution of chemical fertilizers.

Norway has supported agricultural development in Zambia for a long time, particularly in the northern province, a sparsely populated area with a great potential for agriculture. The Norwegian assistance has given priority to the development of expertise, cultivation methods and fundamental infrastructure. Evaluations of the support have indicated that fundamental economic and market conditions have not been in place in the province, and this has played a major role in limiting the effects of the Norwegian programme on agricultural production and on the incomes of small farmers.

The Zambian authorities intend to make agriculture a key sector for attracting investments, both from repatriated Zambians and from other sources. The development of a viable commercial agricultural sector is one of the most important means available for further development of the Zambian economy and for combating poverty. In Zambia, agricultural development is therefore the best private sector development. If this could be successful, the future for Zambia would be, if not rosy, at least green.

2. Stimulating private sector development in developing countries

2.1 The need for a comprehensive approach

The slow progress towards a dynamic commercial and industrial sector, in spite of considerable efforts on the part of the countries themselves and the donors, is due to a number of factors, some of which are beyond the control of the countries and the donors. Moreover, expectations regarding development cooperation in this area have often been unrealistically high. Factors such as international trade, macroeconomics, good governance, legislation, sectoral policy, market conditions, technology, capital and competence – and not least the inter-action between them – all make important contributions to deciding whether a given enterprise or project will be economically viable and provide permanent jobs for its employees.

A comprehensive approach is therefore necessary if external assistance is to contribute effectively to stimulating private sector development in developing countries. Well founded establishments of, for example, financing schemes or programmes for transfer of technology often fail to provide the desired results as long as other critical factors and conditions are not satisfactory. The acknowledgement that major efforts are necessary does not necessarily imply that Norway is to do something in all areas in all countries, but rather that the efforts made in individual countries should be directed towards a selection of the areas mentioned and that this selection should be based on country-specific analyses and assessments. Likewise, the efforts should be coordinated with other donors and multilateral institutions, thereby ensuring an integrated approach.

2.2 Factors at several levels decisive for private sector development

The various factors that are decisive for the potential for private sector development in a country are often grouped on four levels7):

  • International framework conditions in the form of access to international markets, regulations for international trade, debt, ODA levels, etc.
  • Macroeconomic conditions in the individual country.
  • Physical and institutional infrastructure and good governance, which, broadly speaking, comprise both the physical infrastructure and the institutional and legal framework.
  • Factors at the micro level (enterprise level) such as access to technology, expertise, capital, manpower,, guidance, etc.

A more thorough discussion and analysis of these topics were presented in a background report for the strategy for private sector development, October 1998 (Norwegian only). However, there is reason to emphasize certain factors as especially important in this connection.

International framework conditions in the form of access to international markets, regulations and standards for international trade, international debt relief schemes and the levels of assistance provided by rich countries are of major importance for the sales prospects of products marketed by the develop-ing countries and for access to foreign capital and technology. Globalization gives rise to opportunities as well as to challenges and problems. The great challenges associated with globalized and integrated markets have been demonstrated by the recent turbulence in international capital markets and economic tremors in a number of developing countries.

The challenges apply mainly to the poorest developing countries, which have not been able to benefit sufficiently from the welfare enhancements that other countries have derived from increased trade. It is also important to ensure that the developing countries have the necessary knowledge of the potential that lies in international trade agreements and the resources to be able to make use of this. Furthermore, a regional perspective on private sector development is gaining increasing relevance, not least in view of the development of more powerful regional organizations for economic cooperation. Strengthened regional trade relations and increased South–South trade are important for improvement of the external framework conditions for promoting private sector development in developing countries. This is of major importance for all regions where Norway provides assistance; in Africa, Asia and Latin America. Where Norway is concerned, the potential for assisting in such a development is especially relevant in southern Africa, since several of our most important partner countries are located in this region, and this is a region where Norway has a major economic and political involvement.

Macroeconomic conditions in individual countries in the form of balanced public budgets, satisfactory external balance and acceptable rates of inflation and interest are factors of decisive importance for whether or not domestic and foreign investors regard the investment climate as favourable. Satisfactory macroeconomic framework conditions are essential to sustainable private sector development and to ensuring that other support for private sector development has a positive effect. The World Bank’s study “Assessing Aid” from 1998 emphasizes the importance of a satisfactory macroeconomic framework and sensible economic policies for the efficient functioning of foreign assistance. In countries where the macroeconomic conditions for economic activity are a major problem, efforts must be directed towards improving these. Al-though much has been done to improve the macroeconomic conditions in many developing countries, continued implementation of economic reforms is still necessary in most developing countries.

The physical and institutional infrastructure and the degree of good governance in a country are of major importance for private sector development. Satisfactory and stable conditions for investments are dependent on the way markets function, including the capital market, and the existence of a functioning legal framework. Other decisive factors are the degree of corruption, the level of physical infrastructure in the country, and whether or not there are functioning organizations able to strengthen the dialogue between the business community and the authorities as well as between the social partners.

In many countries, weak physical and institutional frameworks are the greatest barriers to private sector development. The financial crisis in Asia in 1997–1998 can partly be explained by weak institutions, especially in the financial sector, and has illustrated the dramatic consequences that may result from poorly functioning institutions, the lack of “transparency” and corruption problems. Increasing importance is therefore attached to the need for good governance and the improvement of institutional conditions in a broad sense. Physical infrastructure, such as energy supplies, transport systems and telecommunications are still poorly developed in many countries, and therefore represent obstacles to private sector development. There is also a need for regulations and government institutions to be adapted to the needs of a dynamic private sector development. Stable and predictable legal frameworks for commercial activities and the necessary confidence in the legal system are still lacking in a number of developing countries. Donors have probably underestimated the importance of institutions in the financial sector for the development of a viable and sound commercial and industrial sector. Support for the development of physical infrastructure has constituted a major part of Norway’s bilateral support for private sector development. In future Norwegian development cooperation in this area, considerably greater importance should be attached to support for institutional and legal infrastructure.

At the micro-level, it is of decisive importance for individual enterprises and investors in developing countries that they have access to necessary technology, expertise, capital and manpower. Measures at the micro-level in relation to individual enterprises and investors are the most direct way of supporting private sector development. These are the kind of measures usually associated with support for private sector development. Particularly in the case of small-scale producers, which form the backbone of the economies of many developing countries, poor access to the above factors constitutes a significant restriction on investments, market entry and expansion. Support schemes for small-scale producers have often proved to have positive developmental effects. Various microfinance schemes have also made commercial activities possible for many people for whom this would otherwise not have been possible. However, experience shows that the potential developmental effect of such measures alone is limited. It is necessary to view them in relation to other measures for the benefit of small enterprises, including measures for promoting a well functioning financial sector.

Factors at all these levels are of decisive importance for the success of individual investments and projects and thereby for the possibility of achieving a dynamic private sector development in a country. In order to strengthen the possibilities for private sector development, efforts are therefore in most cases necessary at several levels. If certain factors particularly hinder private sector development in the country concerned, efforts should be concentrated on these. Decisions concerning the selection of concrete measures to be implemented must be based on analyses of the main obstacles for private sector development in any given country and on how other countries and multilateral institutions organize their assistance. Decisions must then be taken as to what channels are most appropriate for dealing with the challenges and problems given priority.

2.3 Channels for supporting private sector development

Support for private sector development in developing countries can be provided in several ways and via different channels. The main channels for Norwegian development assistance are multilateral institutions, bilateral channels (including NORFUND) and NGOs:

Multilateral organizations such as the UN system, the WTO, the World Bank and the regional development banks are major channels and partners for Norwegian development assistance, also in relation to private sector development. Cooperation with these organizations takes a number of different forms, e.g.

  • Participation in international negotiations
  • Active participation in the governing bodies of individual organizations to influence the organizations’ general policies and strategies, e.g. the World Bank’s private sector strategy and its policy on support for economic reforms and good governance
  • Participation in and support for special programmes and coordinating mechanisms under the auspices of multilateral organizations
  • Assistance to developing countries to enable them to participate actively in relevant international organizations themselves
  • Support for the activities of the organizations in individual countries:

- at the overall policy level, by providing support for economic reform programmes, development of good governance and planning of sectoral policy in different areas

  • in relation to improvement of the framework conditions for commercial activities;
  • through support of the organizations’ individual projects within capacity building, infrastructure, microfinance, etc.

Bilateral channels, which in practice means Norway’s assistance via NORAD, can be used for:

  • Dialogue concerning priorities and policy of indi-vidual recipient countries in areas of major importance for private sector development
  • Support for individual projects or programmes within infrastructure, capacity building and support for small and medium-sized enterprises, including microfinance and business counselling.

The role of NORFUND is to supply capital directly to individual projects in developing countries through joint ventures between enterprises in

Norway and enterprises in developing countries, and indirectly through contributions to local investment funds in developing countries, which then invest in individual projects.

NGOs can for example be used to carry out income-generating projects at the micro-level in developing countries and as a channel for support to microfinance schemes.

2.4 Criteria for selection of aid channels

A number of factors must be taken into consideration when selecting channels for assistance for private sector development.

The following types of effort clearly belong in specific channels:

  • Efforts to improve international framework conditions and standards are primarily appropriate within the framework of the WTO, the Bretton Woods Institutions and different parts of the UN system.
  • Efforts to motivate and stimulate Norwegian enterprises to involve themselves in developing countries belong mainly in NORAD and NORFUND. The guarantee scheme of the Norwegian Guarantee Institute for Export Credits (GIEK) for export to and investment in developing countries will also be an important instrument for reducing the risk involved for Norwegian enterprises.

With respect to other types of measures covered by the strategy, the choice of channel is more open:

  • Investments in local investment funds that parti-cipate with risk capital in investment projects can, for example, be made via NORFUND, the Inter-national Finance Corporation of the World Bank (IFC) or the regional development banks’ private sector initiatives.
  • Capital transfers, technical assistance and other support for small and medium-sized enterprises can be given under the auspices of the IFC, the World Bank, the regional development banks, the UN organizations and via NORAD’s various schemes.
  • Support for capacity building and institutional development that is important for private sector development may be provided via the World Bank, the WTO, the UNDP, NORAD or NGOs.

In the latter cases, selection of channels and mechanisms should be based on assessments of the comparative advantages of the various channels and mechanisms used to determine where the greatest effect can be attained. However, it is often difficult to determine whether an organization in one of these fields is preferable to others. Furthermore, there may be good reasons for providing some types of assistance through several channels, for example investment support, microfinance, etc. In such cases, efforts must be made to attain the greatest possible synergy effect between the efforts via various channels.

Support for private sector development can be provided related to the different levels described in 2.2, above, and via the channels described in 2.3. Possible measures and mechanisms for support of private sector development can therefore be classified and illustrated in relation to the four levels and the various channels described above. The figure on page 17 illustrates the relationship between the selection of level and channel. The figure is greatly simplified and in no sense gives a complete picture of the mechanisms that exist, but provides examples of mechanisms and measures for support of private sector development in relation to the various levels and channels.

The strategy is largely concerned with the choice of levels and channels appropriate for the bulk of Norwegian investments, and the types of investment and support that shall be given priority at each of the levels.

3. Norwegian efforts to strengthen private sector development in developing countries

3.1 Main priorities

Norwegian development cooperation for private sector development has previously taken the various channels within Norwegian aid as its principal point of departure before considering what can be done within each channel. The new strategy is based on considering the needs of the developing countries before selecting appropriate channels and instruments. Within bilateral development cooperation, a country-specific analysis of the most important obstacles to private sector development will form the starting point for considering where development assistance can and should be provided. At the various levels, an assessment must then be made of what Norwegian development assistance must do more or less of and what must be done differently. This applies to content, as well as to the selection of channels and support mechanisms. Strong emphasis must be placed on the priorities of the recipient countries, on other countries’ development assistance and on the wish to strengthen donor coordination.

The approach adopted in the strategy reflects a recognition of the fact that effective support of private sector development in the developing countries requires a broad approach and is not a matter of isolated initiatives in relation to specific chapters of the budget. It is important to make use of relevant multilateral institutions and to cooperate with these in order to achieve objectives at both global and national levels. However, Norway cannot do everything in all countries. The limited funds that Norway is able to contribute should go to selected priority areas. The strategy has the following main priorities:

  • Reduce marginalization: Help to improve international framework conditions and reduce the marginalization of the poorest countries, thereby reducing the risk they run of failing to benefit from the development potential that lies in globalization.
  • Strengthen South–South trade: Strengthen the regional perspective and trade between developing countries, which is an underexploited potential.
  • Make comprehensive efforts at country level: Estab-lish a comprehensive country-specific perspective for support of private sector development based on identification of bottlenecks, needs and priorities in individual countries. Improve the consistency and synergy between efforts at different levels and through different channels.
  • Improve framework conditions: Continue to support macroeconomic reforms, while placing greater emphasis on supporting the development of good governance and improving institutional conditions, such as a well functioning financial sector as well as organizations and trade unions.
  • Promote investments: Actively promote investments in developing countries, particularly in the poorest countries. Stimulate long-term investment and involvement by Norwegian and international commerce and industry.
  • Promote trade with developing countries: Strengthen current arrangements for import from developing countries to Norway and increase the priority of general measures to increase the export and trade of developing countries.
  • Support untying: Continue active Norwegian support for untying of development assistance, both in the OECD/DAC and through the gradual untying of Norwegian development assistance schemes in step with other donor countries active in this process.
  • Increase the use of local procurement: Promote local procurement in aid-financed projects.
  • Make active and targeted use of Norwegian expertise: Actively utilize the Norwegian resource base, including Norwegian commerce and industry, when this meets identified and expressed needs in developing countries. Strengthen the dialogue between Norwegian development cooperation authorities and Norwegian commerce and industry concerning private sector development and investment opportunities in developing countries.

To follow up these overall priorities, choices and priorities are made at different levels as part of the strategy concerning the kinds of measures that should be given priority and the criteria that the selection of channels shall be based on. The strate-gy is not intended to present a detailed list of measures within specific mechanisms and channels. To the extent that this is mentioned, it is intended as examples of what the new strategy will entail in practice.

3.2 Priorities in different areas

3.2.1 Reducing marginalization and improving international framework conditions

Factors outside the borders of the individual development country are of decisive importance for the potential for private sector development. Norway will therefore give high priority to efforts to improve external framework conditions within the strategy for private sector development both at global and at regional levels. The improvement of international framework conditions must primarily take place via the multilateral system, with an emphasis on improvements in regulations that apply to trade, investments and financing, paying particular attention to the interest of the poorest countries. Norway will increase its support of the poorest countries’ interests in international negotiations concerning these issues in appropriate fora.

The developing countries still have a disproportion-ately small share of the world’s trade in goods and services. Improvement of this situation is dependent on access to markets, provision of development assistance and implementation of the WTO’s provisions concerning special and differential treatment. As far as market access is concerned, there is still a need for reductions in tariffs and non-tariff barriers, via the GSP systems of individual countries and/or via WTO-committed schemes. Particularly within the agricultural sector, the poorest developing countries see a consider-able export potential that can constitute a valuable contribution to private sector development in developing countries.

However, the developing countries must also improve their ability to exploit the export potential that exists, which will require coordination of national reforms, development of the necessary infrastructure, training of manpower and targeted development assistance. Both Norway and different international fora place increasing emphasis on directing technical assistance in this area towards the factors that prevent the exploitation of export potentials.

The WTO’s agreements include a number of provisions concerning special and differentiated treatment of the developing countries. There are also special provisions concerning the least developed countries. Within the WTO, requirements thus vary concerning what shall be implemented and how rapidly the implementation shall be carried out. There is currently a debate going on the implementation of WTO agreements. As part of this work, it is natural to consider the need for a clarification of the WTO’s references to the need for special and differentiated treatment of the developing countries, so that the agreed positive special treatment can be implemented as effectively as possible. In addition, Norway is making efforts to bring about a discussion in the WTO on the relations between fundamental labour standards and trade.

As well as working to improve the general framework conditions, it is necessary to support more direct measures in the form of trade-related technical assistance to the poorest countries so that they can make full use of current schemes. In this connection, six international organizations have established what is known as the “integrated frame-work” for trade-related technical assistance to the least developed countries (LDCs). Norway has given its support to the joint integrated technical assistance programme for selected Sub-Saharan African countries, which is part of the integrated framework. It would be natural to continue and extend this type of measures. Norway has announced in its development aid budget for 1999 that it will support the establishment of an independent legal advisory centre to assist the poorest develop-ing countries and others in trade disputes, so that that they can better utilize the WTO dispute settlement mechanism.

An important part of the efforts to integrate the poorest developing countries into the world economy is the continued work to enable these countries to achieve real and increased shares of the Norwegian market. The Norwegian GSP system plays a major role in this respect. Tariff reductions or exemption granted by the GSP scheme are used to stimulate increased imports from the developing countries, and particularly from the least developed countries.

As regards foreign direct investments in develop-ing countries, these have so far been regulated via Bilateral Investment Treaties (BITs). Approximately 1,800 such agreements have been concluded, mainly between an OECD country and countries outside the OECD area. More uniform international regulations for investments would create increased transparency for investors and provide more stable and predictable conditions. In this connection, it would be important to look more closely at how the interests of the developing countries, particularly the poorest countries, could be attended to within a framework of multilateral regulations in the investment area. The WTO has commenced work on trade and investments, where the issue of whether investments should be covered by WTO agreements is a topic for discussion.

3.2.2 Strengthening the regional perspective and South–South trade

Increased trade and closer economic cooperation between developing countries represent a considerable potential for development, but realizing this potential represents a major challenge. Support for regional measures that create a common frame of reference across national borders would establish favourable conditions for regional trade and integration, and should therefore be given priority. Institutional and political reforms in individual countries will also play a significant part in reducing the barriers to economic relations between poor countries and regions. Positive developments in this direction have already taken place in many regions. It is moreover important that efforts for private sector development in individual countries are assessed also in a regional perspective. This applies for example in connection with the implementation of economic reform processes in these countries.

Support for such measures is recommended first of all in southern Africa, where measures to strengthen the economic and industrial policy should be given priority. This may involve measures within the development of infrastructure as well as measures to reduce trade barriers and increase competitiveness through standardization and quality assurance. On the basis of experiences gained in this region, Norway should consider how to support the region’s own initiatives, for example within the framework of SADC, which may help to bring about more balanced development. One of the priority areas for future cooperation between Norway and South Africa is regional cooperation, and this work can function as one approach for supporting such initiatives. Measures within the framework of SADC’s cooperation in the area of finance and investment and in other relevant areas should also be considered in this connection.

3.2.3 Promoting integrated efforts at country level

The process of formulating the strategy has illustrated the need for a broad range of instruments to deal with the challenges and prospects faced by each individual country. An integrated perspective on efforts at different levels and through different channels is of decisive importance for the results attained. At country level, the strategy must be implemented on the basis of country-specific needs and in response to the wishes expressed by the developing countries themselves. This will be achieved by:

  • analysing the weaknesses and bottlenecks that hinder the development of a dynamic private sector in the country concerned,
  • agreeing with the country’s authorities, the private sector and other bilateral and multilateral donors on the measures that shall be given priority in order to stimulate private sector development and, on this basis,
  • selecting priority areas, mechanisms and channels for Norwegian support of private sector development.

These activities will be fundamental in the preparation of integrated private sector development programmes in those of our partner countries where this is appropriate. The programmes will form an integral part of NORAD’s activities in individual countries, and will primarily be concerned with the most serious obstacles to private sector development in these countries. This does not imply large independent Norwegian programmes, but activities that are coordinated with the efforts of the authorities themselves and with other donors in the area. In some countries, it may be appropriate to channel funds via other bilateral donors and multilateral institutions. What is essential is that Norway is realistic in selecting functions and tasks to embark on, and that Norwegian efforts form part of an integrated approach, which will ensure better coordination of the efforts in individual countries through different channels and mechanisms, while strengthening the synergy effect of the measures that are carried out.

This approach does not automatically imply an increased emphasis on private sector development in all Norwegian development cooperation programmes, but is rather intended to form the basis for a more integrated approach.

In connection with the aid budget for 1999, it was proposed to start pilot programmes to implement the new strategy in selected countries where circumstances are favourable. This activity will enable the immediate testing of some models for implementation of the strategy and involvement of the authorities of the partner countries as well as commerce and industry. Integration of the main elements of the strategy into development cooperation in general is planned to take place during the course of two to three years.

Pilot programmes may also provide a basis for testing the possibility of achieving better integration between productivity-promoting activities, for example within agricultural production and mea-sures for export and market access for such products. At the same time, it will be important to stimulate Norwegian commerce and industry to involve itself actively in the planning as well as the implementation of pilot programmes.

3.2.4 Improving macroeconomic framework conditions

Macroeconomic framework conditions still need to be improved in many developing countries. Priority will therefore still be given to supporting the implementation of economic reform programmes. Donors can support reform processes, but without ownership by recipient governments and without a willingness on their part to implement reforms, the efforts of external players will be of little use. The implementation of the Norwegian debt relief strategy makes an important contribution to the improvement of the investment climate in indebted developing countries by improving the balance of payments and reducing the debt overhang. In this way, Norway will help to improve the framework conditions for private sector development in indebted countries.

In order to ensure private sector development as a result of economic reform programmes, it is important that they are more explicitly focused on establishing favourable framework conditions for private sector development. In a number of cases, the programmes have focused too much on stabilization, resulting in too rapid liberalization of imports. This has often failed to enable local enterprises to adjust gradually to new framework conditions. The sequencing and timing of economic reforms may therefore be of decisive importance for the potential for private sector development in many countries. At the same time, it is important to be aware that economic reforms may also have considerable regional effects in the area of trade.

Such issues must therefore be followed up in discussions of individual countries’ Policy Framework Papers in the World Bank and the IMF (PFP) and country strategies in the Bank’s board and, on a more general level, in fora such as the World Bank’s Special Programme for Africa (SPA), a donor forum for economic reform programmes in African countries. In its continued support for the implementation of economic reform programmes in developing countries, Norway will assist in safeguarding and reinforcing the focus of these programmes on favourable framework conditions for private sector development.

3.2.5 Improving institutional and physical infrastructure and good governance

At the institutional level, development cooperation may help to promote good governance and support institutional reforms and capacity building in areas important for private sector development.

In this connection, an important role is played by measures that promote good governance, a well functioning legal system, necessary transparency in decisions and transactions and reduced corruption. Well functioning industrial and labour organizations form a significant part of a country’s institutional infrastructure. In this connection, experience from Norway should be put to good use. Norwegian industrial and labour organizations are a valuable resource base for strengthening corresponding organizations in developing countries.

In Norwegian development cooperation there has traditionally been a strong focus on “physical” infrastructure and less focus on the institutional framework that must be in place around infrastructure investments for them to be able to contribute to private sector development. Norwegian support for infrastructure development should therefore focus more on the essential institutional framework around the physical infrastructure investments, such as the country’s sectoral policy , payment systems for infrastructure services, maintenance systems, etc. However, development assistance still has a role in the financing of necessary physical infrastructure investments.

In countries where poorly functioning capital markets constitute a considerable bottleneck, Norway will support measures and programmes for reforms within the financial sector. Here the World Bank plays a very important role. A significant element of this involves viewing support to micro-finance institutions as part of more coherent efforts to strengthen a country’s financial sector for the benefit of small and medium-sized enterprises.

In the continued follow-up, it will be important for Norway to give increased priority to measures for improving the institutional infrastructure of Norway’s partner countries, including a well functioning financial sector and industrial and labour organizations.

3.2.6 Strengthening and focusing efforts at the micro level

The selection of activities and programmes at the micro level must be based on surveys of enter-

prises and potential investors to identify the main barriers to increased activity from their viewpoint. Such surveys are often carried out by local industrial and trade organizations or by institutions within the UN system and the World Bank. The main points from such surveys must be included in the country-specific analyses that are to form the basis of the Norwegian private sector development activities in individual countries.

On the basis of such analyses of the most important barriers for private sector development, several types of activity are possible at the micro level. It will often not be necessary or desirable to establish separate Norwegian programmes, but more appropriate to support existing national programmes or measures under the auspices of other donors and multilateral institutions. The main emphasis shall be placed on what is most effective and not on making Norwegian efforts as visible as possible.

Support for small and medium-sized enterprises often has a favourable developmental effect. On the basis of current measures and “best practices”, the ground shall therefore be prepared for broader and more effective support in this area. Appropriate priority areas are support for the transfer of technology, training and competence building, financing, and supervision, for example, in relation to marketing and export training. In this area, a distinction is often made between ‘financial’ and ‘non-financial’ instruments. International experience shows that the lack of necessary competence and vocational training to represent serious constraints for private sector development. These are issues that will be emphasized in the educational focus that is planned. Insufficient knowledge at enterprise level of different aspects of business operations is a major limitation for private sector development in poor African countries. Efforts in such areas must therefore be reinforced. It is often a risk that too much attention is given to financial instruments, while there is often a lack of satisfactory measures in other areas.

However, access to adequate and appropriate financing is also necessary for market entry or extension of activities. Examples of financing mechanisms are microfinance, risk capital, loan schemes and guarantee schemes. Microfinance schemes have proved successful in many connections, but the impact on private sector development varies considerably. Such schemes must be viewed as part of the broad support given to small and medium-sized enterprises and as a stage in the development of the financial sector to cover such needs as well. This type of scheme must also make use of the considerable experience that has so far been gained in this area and which is, for example, exchanged within the framework of the CGAP (Consultative Group to Assist the Poorest). Support for local investment funds (venture capital funds), where financing is also contributed by others, is given high priority by NORFUND. The introduction of an untied loan scheme is among the measures that will be given immediate consideration as a follow-up of the strategy.

The use of guarantees to reduce risk is an important supplement to loan schemes, and may in some cases serve as a replacement for public loan schemes. Well functioning guarantee schemes will enable the securing of capital access for projects many times greater than the need for allocations. The use of guarantees – within given risk limits – is therefore probably a cost-effective instrument for stimulating trade with and investments in developing countries. A review is to be made of investment support schemes. In this connection, an assessment will be made of how the guarantee scheme for export to and investments in developing countries of the Norwegian Guarantee Institute for Export Credits (GIEK) should be developed in order to function as the most appropriate instrument.

Norwegian industry produces a number of goods of interest to the developing countries. These consist of both finished goods and material inputs for further processing. Further development of trade between Norway and the developing countries is desirable for the broadening of economic relations. Trade between countries normally results in increased insight for both countries into the potential and limitations of the trading partner. This sometimes creates the basis for long-term economic relations, for example investments. Furthermore, trade and potential future investments in developing countries normally result in the transfer of technology and expertise, which thereby gives rise to new growth opportunities in these countries.

Since the introduction of the “Helsinki Package” of 1992, the scope and content of tied loan financing have changed considerably. In international terms, the proportion of this type of financing schemes has been greatly reduced. The schemes have gradually been adjusted in the direction of closer compliance with the main priorities of Norwegian development cooperation policy, for example the focus on poverty. In the light of this, an evaluation is planned of Norwegian mixed credit arrangements. The evaluation will review a number of aspects of the effectiveness of this form of assistance, at both micro and macro levels. An investigation will also be made of whether the use of export support schemes results in a gradual increase in long-term investments by Norwegian enterprises in poor developing countries. A main concern will be the assessment of the developmental effect in relation to the poorest countries.

There is often a need for marketing and export training. It will therefore be appropriate to support schemes that promote sales and exports by enterprises in developing countries in general and import to Norway in particular. Such support for increased exports may include production assistance, product development, measures to improve quality, etc. Norwegian expertise may be particularly relevant here, since our experience as a small player in a global market has many features in common with the current situation of developing countries. In this connection, it will be appropriate to make use of the Norwegian Trade Council as a national resource centre for exports and internationalization.

Norwegian development assistance via country programmes and regional allocations has only to a limited extent been explicitly directed towards private sector development in Norway’s partner countries. At the same time, commercial and industrial schemes have essentially been subject to ties with Norway. Local private sector development measures with no Norwegian ties have therefore been difficult for Norway to support. It may therefore be necessary to reserve funds within regional allocations for private sector development purposes. The mechanisms selected as channels for Norwegian assistance in these areas may be under the auspices of national institutions or other donors, including multilateral institutions, but will primarily consist of flexible arrangements that may be used to finance measures that would otherwise easily fall between two stools.

Norwegian development assistance at the micro level for private sector development must reflect the continued domination by the agricultural sector of the production structure in a number of poor developing countries. Partly owing to the desire for improved standards of living for the poorest, development and increased production in the agricultural sector will be important. In order to be competitive at the international market, the agricultural products must be produced in compliance with international environmental requirements. Increasing demands are placed on environmental factors at all stages of the production process. An attempt will therefore be made to strengthen the agricultural sector in partner countries within both primary production and further processing so as to meet these new challenges. In this connection, an assessment should be made of how agriculturally based private sector development can be strengthened.

3.2.7 Promoting investments in developing countries

The developing countries attach high priority to attracting increased investments from Nordic countries, and foreign investments play an important role in the generation of incomes and jobs. The most important factor for attracting investments is a generally favourable investment climate in the country. It may also be necessary to adopt investment stimulating measures both in recipient countries and in investor countries. The strategy’s emphasis on improving the framework conditions for commercial activities in the developing countries will be a positive move in this connection. More direct support for investment promotion measures in our partner countries will also be given consideration. Through NORAD’s private sector schemes and the establishment of

NORFUND, Norway has a number of mechanisms aimed at stimulating Norwegian enterprises to invest in developing countries.

The strategy emphasizes the need for an increased focus on investment promotion in developing countries. A review will therefore be made of the different investment schemes. The intention of the review will be to identify the most important barriers to Norwegian investments in developing countries, suggest improvements in current schemes and new measures to promote Norwegian investments in developing countries. In this connection, exchange of information and experience has been indicated as an area where a strengthened focus is needed. Long-term developmental effects in the developing countries will be a key criterion for assessing new measures. At the same time, the review will prepare the ground for better coordination of the efforts of the different institutions in this area. Norwegian commerce and industry will be involved in this work. A number of Norwegian institutions outside the development cooperation authorities, including the Norwegian Trade Council, can play a role in the task of providing Norwegian enterprises with information on the business and investment potential in the developing countries.

There is also room for increased support via multilateral institutions. Plans in this area include the strengthening of cooperation with the IFC and the private sector initiatives of the regional development banks. In connection with the development aid budget for 1999, it has been proposed thaT Norway shall become a member of the IDB’s institution for this purpose, the Inter-American Investment Corporation (IIC).

As reflected in Proposition No. 1 to the Storting (1998–99), NORFUND plays a major role in the work of promoting Norwegian investments in developing countries. A gradual strengthening of NORFUND’s capital base therefore represents an important part of the strategy’s focus on investment-related measures. As in the case of other countries’ funds, e.g. the Commonwealth Development Fund, the long-term objective will be untying of NORFUND’s activities as well. However, it is important to note that, since most other OECD member countries already have their own funds for this purpose and NORFUND is small compared with corresponding funds, NORFUND’s strength will initially lie in mobilizing Norwegian investors. It has moreover been registered that a considerable part of NORFUND’s resources (46 per cent on 31.12.98) are in reality already untied via loans to local financing institutions. It should be noted that NORFUND’s financial participation and representation on the boards of such local investment funds may provide Norwegian enterprises with new partners and investment opportunities in these countries.

3.3 Increased use of local and regional procurement

Goods and services from developing countries are still only used to a limited extent as inputs in development projects. This is often because the developing countries do not produce the goods and services that are in demand, but the donors’ tying of development assistance is also an important reason why developing countries are losing in the aid market. This is a major argument for the untying of official development assistance..

Increased local and regional procurement will constitute a valuable measure in the promotion of private sector development in developing countries, a fact which was strongly emphasized and required to be followed up in connection with the Storting’s deliberations concerning Report No. 19 (1995–96) to the Storting, cf. Recommendation S No. 229 (1995–96), spring 1996. It is an aim of the strategy to follow this up and thereby promote South–South trade. As regards bilateral assistance, with the exception of tied schemes, a gradual transfer of the responsibility for procurement to the recipient countries has in practice eliminated direct procurement from NORAD. At the same time, it is clear that efforts must be made to achieve greater openness. As far as the support via NGOs is concerned, the organizations themselves are responsible for procurement. In this connection, the emergency preparedness system NOREPS should be mentioned which is based on cooperation between Norwegian authorities, commerce and industry and NGOs on international emergency relief and humanitarian assistance. The scheme is under review and, in this connection, an assessment is made of how the potential for increased local and regional procurement of input may be better exploited.

Procurement of goods and services financed through the United Nations and the multilateral financing institutions is carried out in compliance with the regulations of these institutions, whereby procurement is generally carried out under the auspices of the recipient country. However, the situation in this area is not particularly well documented and there is a need for clarification. In this connection, a survey will be made of the procurement practices of multilateral institutions and of NGOs that receive Norwegian support. It is also necessary to establish the proportion of total Norwegian development assistance that is currently de facto handled by the authorities of the recipient countries, the type of regulations that underlie the recipient countries’ procurement practices and what may be done to strengthen the potential for increased local and regional procurement.

In this area, much has been achieved by placing the responsibility for procurements in the recipient country. The fact that a significant share of procurements is handled outside the recipient countries arises from a number of factors. One reason is that, as long as other donors continue to practice a considerable degree of tying, recipient countries have difficulties relating to Norway in a different way than to other donors. We must therefore make more conscious efforts on this issue vis-à-vis the authorities of the recipient countries. Of vital importance in this connection is the OECD’s work on untying all development assistance to the least developed countries, where procurement policy and training/consciousness raising are among the issues addressed. These issues will also be followed up on the bilateral side. Another factor is the need for a commercial and industrial sector more capable of producing goods and services of a competitive quality and at competitive prices. The general approach of the strategy is to work towards the realization of this in the longer term.

3.4 Use of Norwegian resources and Norwegian commerce and industry

The measures proposed in this strategy represent major challenges for Norwegian commerce and industry. In the future, private sector development in the developing countries will be a more prominent area of Norwegian development cooperation. At the same time, it is proposed in the strategy that considerable changes be made in the application of instruments affecting schemes used by parts of Norwegian commerce and industry. The emphasis on tied schemes associated with the export of goods and services is now being reduced, while the emphasis is increased on schemes that stimulate investments in developing countries.

In the work on developing country-specific private sector development programmes, Norwegian commerce and industry can contribute expertise and experience that will help in identifying bottlenecks and concrete obstacles to private sector development. Norwegian companies will also be able to provide insights gained from their experience of internationalization and export orientation. Within the framework of this work, the recipient countries’ authorities and private sectors will be able to use the help of Norwegian commerce and industry and other relevant institutions in meeting challenges within private sector development. The basis for this is that Norwegian commerce and industry as well as Norwegian institutions possess relevant private sector competence of interest to the authorities and commerce and industry of the developing countries. In this connection, a survey should be made of Norwegian experience within private sector development that may be directly relevant for private sector development in developing countries.

It is important to stress the increased potential for Norwegian commerce and industry that will result from the increased general emphasis on the private sector in the developing countries. It is not unreasonable to forecast an increase in the volume of Norwegian commercial involvement in the developing countries during the years to come. However, the combination of activities will be different, and will involve different enterprises and different parts of Norwegian commerce and industry than is the case today. Gradual untying by other donor countries will also increase the potential to compete for other countries’ development assistance credits. We acknowledge that this cooperation will have to take place within long-term and predictable frameworks, and the strategy provides a basis for establishing such frameworks. However, the driving force behind the involvement of commerce and industry must be straightforward commercial motives, and not access to development assistance funds.

With a view to developing a partnership with Norwegian commerce and industry and establishing arenas for cooperation, the development cooperation authorities are open to input and advice from commerce and industry in devising strategies for future Norwegian assistance. Consultation mechanisms will be established for involving commerce and industry and for regular exchange of information. In this connection, activities in pilot countries are planned to provide opportunities for trying out different models for cooperation. At the same time, involvement by commerce and industry entails a commitment to show a responsible attitude and to apply the same ethical and commercial principles and view of human rights as at home. In this way, Norwegian enterprises can positively influence developments in the developing countries through practical work in local enterprises. The checklist for enterprises planning international activities issued by the Confederation of Norwegian Business and Industry in November 1997 is a useful tool for enterprises facing the challenges associated with human rights in developing countries.

Assistance for stimulating trade with poor countries

In order to strengthen the trade-related technical assistance to the poorest countries, six multilateral institutions, the WTO, the ITC, UNCTAD, the UNDP, the IMF and the World Bank have established the so-called “Integrated framework” for trade-related technical assistance to LDCs. The purpose of the integrated framework is to coordinate the six institutions’ measures for increasing LDC trade. Via this framework, the poorest countries will be given individual assistance to enhance their trade opportunities, to respond to market developments and to integrate in the multilateral trade system. The integrated technical assistance programme for Africa is part of this framework. Within this programme, Norway has supported trade-related measures in Uganda and Burkina Faso. The measures in these countries include assistance at government level to implement WTO agreements, and export promotion measures at enterprise level.

Support for private sector development in Tanzania – room for a more integrated approach?

In recent years, the Norwegian bilateral aid programme for Tanzania has supported a number of projects that have directly and indirectly fostered private sector development in the country. However, these measures have not been developed within the framework of an integrated program.

The majority of such measures have been financed via NORAD’s private sector schemes. This applies to a number of enterprises in Tanzania with Norwegian ownership interests, which have benefited from various credit and grant schemes. NORAD has also supported the project “Computerisation of Trade Finance Operations” at the National Bank of Commerce. The Norwegian support for PRIDE Tanzania has directly helped a large number of enterprises in the informal sector, while a SADC project has supported quality improvements in a number of private enterprises in Tanzania. Furthermore, NORFUND has become share-holder of the investment fund, Fedha Fund Limited.

In addition to this, several Norwegian-financed measures within the state-to-state cooperation have helped to improve the framework conditions for private sector development. These include the support for maritime safety and development of the petroleum sector. Rural development programmes have also played a part in improving framework conditions for private sector development. Norway has also supported Tanzania’s investment centre which is working to increase investments in the country. Considerable funds have also been given as import support to

Tanzania and this was a particularly important form of development assistance up to the beginning of the 1990s, since there was a considerable shortage of foreign currency in the country. The support to the Regional Enterprise Development Institute was given to promote better services within microfinance, and may therefore improve the framework conditions for this subsector. Support for coordination, for railway services and for training in forestry have also helped to improve the framework conditions for private sector development.

As illustrated above, the Norwegian aid programme in Tanzania has supported a number of projects and activities of great relevance for private sector development. However, the measures have been characterized by considerable diversity, they have not been chosen on the basis of a clear private sector development perspective and Norwegian commercial interests have influenced the priorities. The present strategy will give NORAD and the embassy the opportunity to focus efforts for private sector development on areas prioritized on the basis of a country-specific analysis and which give the best possible results.

Regional cooperation on quality: Increased trade and strengthened competitiveness

Regional projects have traditionally consisted of development and rehabilitation of infrastructure such as energy, telecommunications and transport. The “SADC Training Programme on Quality Management and Assurance” stands out as being a regional project directed towards trade and industry.

The project aims to strengthen competitiveness while promoting trade and export for countries in the region, by

  • increasing general awareness concerning quality management and the setting up of quality systems
  • building up local resources so that competence can be maintained and further developed by involving national standards associations, and increasing the competence of key personnel.

An evaluation showed that the following positive results have been achieved by a majority of the enterprises in the project:

  • Increased understanding and awareness of the importance of quality and quality management
  • The established quality systems function in the enterprises and there has been an improvement in.communication and cooperation within the enterprises
  • Considerable reduction in production errors, resulting in increased productivity
  • A number of individuals have been given expertise in quality management

Economic results are underlined by many enterprises. Ten per cent of the approximately 100 enterprises have received ISO 9001/9002 certification for their quality systems. This confirms that the quality systems that have been developed and implemented are of international standard. In the case of many of the enterprises, this has ensured access to new markets, both regional and international, increased their general competitiveness and attracted foreign investors. After completion of the project, enterprises have continued to purchase such services on a commercial basis.

The contribution of the Norwegian debt relief strategy to private sector development in developing countries

Many developing countries are struggling with a considerable debt burden that hinders economic development and poverty reduction. Debt service binds up resources that might otherwise be used for development purposes and for improving framework conditions for private sector development. A country’s debt burden often prevents investments and private sector development from taking place, since investors regard the investment climate as insecure if the authorities have difficulties servicing the country’s debt. The Norwegian debt relief strategy helps to reduce the debt problems of the developing countries by writing off developing country debt to Norway, by making financial contributions to international debt relief operations and by working to improve the international debt relief mechanisms. By means of these measures, the implementation of the debt relief strategy helps to improve the investment climate and the general conditions for private sector development in the developing countries. (See also the brochure Towards the year 2000 and beyond: the Norwegian debt relief strategy issued by the Norwegian Ministry of Foreign Affairs)

More comprehensive and coordinated efforts in the energy sector through ESMAP

The “Energy Sector Management Program” (ESMAP) of the UNDP and the World Bank was established in 1983 to assist the developing countries in carrying out feasibility studies for high-priority investment projects in the energy sector. Here, as in other sectors, it has become increasingly apparent that a lack of well functioning national institutions in the sector, rational sectoral policy and adequate public administration capacity reduces the effect of individual investments in physical infrastructure. ESMAP has an important role in strengthening the competence and capacity of recipient countries to utilize energy and new technology effectively by providing them with the necessary financial resources and expertise. ESMAP also plays an important role in the development of policy and overall plans for the energy sector. Initiatives such as ESMAP help to strengthen the synergy between bilateral and multilateral activities, since both parties participate in the programme.

Business linkages in Zimbabwe

Through a project for small and medium-sized enterprises in Zimbabwe, NORAD has supported the efforts of the Confederation of Zimbabwe Industries to establish commercial ties between small and large producers (“business linkages”). In Zimbabwe, economic reforms have given rise to increased competition, which has resulted in a wish by previously vertically integrated companies to outsource activities outside their core business areas. Hotels outsource their laundry activities, forestry companies outsource small-scale harvesting , etc. This has created major opportunities for small and medium-sized enterprises and entrepreneurs, which have low fixed costs, are more flexible and often have more efficient operations. However, these enterprises meet many new challenges in the initial phase, and face requirements making it difficult for them to succeed. With limited technical assistance, many of them can be helped to succeed, among other ways through ‘buyer-mentoring’ and/or through the involvement of local finance institutions. This project places an emphasis on promoting commercial connections based on ‘win-win’ situations and on developing commercial and sustainable relations. Manicaland Business Linkages Project (MBLP) is a subproject run by the local branch of the Confederation of Zimbabwe Industries, which over the last two years has resulted in the establishment of 139 new companies representing over 1000 new jobs in the Mutare area. Work is now under way to develop similar projects in other regions of Zimbabwe.

The microfinance institution PRIDE in Tanzania

Norway supports many microfinance institutions, among them PRIDE (Promotion of Rural Initiatives and Development Enterprises) in Tanzania. The purpose of PRIDE is to create jobs and incomes in the informal sector by giving loans to individuals and small enterprises that do not have access to traditional finance institutions, generally due to lack of collateral. The loans are relatively short-term and the interest rate is roughly the same as the market rate. At the end of August 1998, PRIDE had 22 branches over the whole of Tanzania and had provided more than 50 000 loans to commercial projects. Approximately 70 per cent of the borrowers are women, and the rate of repayment has been 100 per cent throughout the project’s lifetime. The PRIDE concept has many characteristics in common with

Grameen Bank in Bangladesh. In spite of the high repayment percentage, it is a challenge to make the activity sustainable over time and independent on aid transfers to subsidize administrative costs. Moreover, it is necessary to consider the real and long-term effects on private sector development that can be attained through such programmes. Such assessments must be made in a broader perspective and microfinance schemes must be viewed in relation to other measures of importance to the informal sector and to small and medium-sized enterprises.

Joint venture for rose production in Uganda

A NORAD-supported joint venture in Uganda is an example of a successful business cooperation between Norwegian and African investors that has had positive indirect effects. With the support of NORAD, a Norwegian chain of flower shops has in cooperation with a local investor invested in a farm in Uganda for production of roses for the Norwegian market. The support from NORAD has been given in the form of a loan, support for basic investments, training support and advisory assistance. The project was started in 1995, production started in December 1996, and as early as 1998, the company began making a profit. The production has created 140 jobs, of which 85 per cent are for women, in an area with unemployment. The activity has not been at the expense of food production and has resulted in a more effective utilization of the agricultural land in the area. The project has contributed to the establishment of a private school and a health centre. The support from NORAD has also resulted in electric power lines to the district, roads have been built, and considerable economic activity has been generated in a poor area that was previously characterized by unemployment. The company plans an extension, which will create more jobs. However, before finally assessing the developmental effect of such a project, it is necessary to consider whether operations will continue to be profitable without the provision of further subsidized aid funding, and whether the assistance has been applied in a socially profitable way. However, the project illustrates the opportunities that lie in the developing countries given an effective and profitable utilization of agricultural areas for purposes other than food production. In this connection, Uganda is a good example of a country with great underexploited agricultural potential.

Joint venture in Sri Lanka with positive indirect effects

A NORAD-supported joint venture in Sri Lanka shows that projects based on Norwegian expertise supplemented with technical advice can be beneficial for commercial interests in both countries. The project manufactures furniture for the local and regional market. The design is inspired by Norwegian design and experience. The project has provided employment opportunities for women, reduced local environmental degradation and resulted in a number of positive indirect effects. The project was started as a joint venture between a local company and three Norwegian partners. The Norwegian Institute of Technology (TI) has assisted the project in project development and training since the start of the project. Since the cooperation started, production has tripled at the same time as the staff has doubled to a total of 60 employees. Other indirect effects are that the forestry workers are now better paid because the rubber trees that are used in the furniture production have increased in value. The company’s activities have also created a basis for approximately 20 jobs at other suppliers and, with NORAD’s help, improvements have been made in the road standard connecting the area together. Women in Sri Lanka have traditionally found work in the public sector. The obstacles to other forms of employment are both cultural and practical. This project has demonstrated that women have an aptitude for precision work that is especially valuable in furniture production. Inadequate transport between home and work was also a problem, but the employees of the Norwegian company helped out by collecting bicycles in Norway, which the employees of the company in Sri Lanka now use to travel to and from work.

Opportunities for Norwegian commerce and industry

The new strategy involves many new opportunities for Norwegian commerce and industry, which can be summed up as follows:

The general conditions for commercial activities in developing countries will be improved:

  • Private sector development in developing countries is given higher priority in Norwegian development cooperation.
  • Private sector development programmes will reduce the main barriers against private sector development in Norwegian partner countries.

Active use will be made of the expertise of Norwegian commerce and industry:

  • Commerce and industry will be involved in the prepara tion of private sector development programmes in selected partner countries.
  • An increased emphasis on infrastructure and on institutional aspects decisive for the success of infrastructure investments. These are areas where Norway has expertise.
  • Focus on support for reforms in the financial sector where it is possible to draw on Norwegian expertise.
  • Development of industrial and labour institutions, where it is particularly appropriate to draw on Norwegian co-operation models.

Schemes aimed directly at Norwegian commerce and industry:

  • A review will identify the most important barriers to Norwegian investments in developing countries and propose ways of stimulating investments in these countries..
  • Maintenance and extension of current investment support schemes is planned
  • NORFUND’s capital base is to be strengthened.
  • NORFUND’s investments and participation on the boards of local capital funds provide Norwegian commerce and industry with contacts and increased investment opportunities in developing countries.
  • The guarantee scheme for export to and investment in developing countries of the Norwegian Guarantee Institute for Export Credits will be continued, and an extension of the framework will be considered.

Fora for cooperation and information will be developed: Fora concerning private sector development in develop-ing countries will be established between the development cooperation administration and Norwegian commerce and industry on:

  • Policy issues and general information activities
  • Development of private sector development programmes in individual countries.

4 . Implementation of the strategy

The strategy implies that the approach taken within Norwegian development cooperation to promote private sector development in developing countries is changed in the direction of more strategic efforts integrated with other development cooperation activities. Efforts through various channels must be supported to this effect, and the traditional distinctions between bilateral and multilateral development work must be reduced. This enables the achievement of the greatest possible synergy between efforts made via different channels. In implementing the strategy, emphasis will be placed on close cooperation with other donors and on the wish to provide opportunities for increased donor coordination.

The follow-up can be divided into two main phases:

  • short-term and immediate follow-up; and
  • long-term follow-up.

4.1 Immediate follow-up

The immediate follow-up will concentrate on:

· Work on the budget for 2000, particularly on instruments and changes in the layout of the budget

In the current budget layout, the instruments for private sector development are concentrated in chapter 0157 and the budget items referred to as commercial and industrial cooperation. These include tied schemes, which have functioned as a financing mechanism for projects within infrastructure development and within the social sectors, and for schemes for institutional cooperation and transfer of Norwegian expertise. The change of emphasis from export support schemes to a greater focus on investment schemes and a more integrated approach has resulted in a need for changes in the layout of the development aid budget. The Ministry will therefore in cooperation with NORAD initiate a process to clarify these issues during the course of 1999.

· Continuation of Norway’s active support in international fora for untying of development assistance.

In close cooperation with like-minded countries, the Government will continue its active efforts in international fora such as the OECD and the World Bank to bring about further untying of official development assistance.

· Implementation of measures in pilot countries and continuous assessment of the experience gained from these activities

During the course of 1999, the Norwegian Ministry of Foreign Affairs and NORAD intend to establish a broad dialogue with the authorities and with commerce and industry in pilot countries, concerning how a pilot phase is to be implemented. In this connection, efforts shall be made to foster cooperation with other donors and to ensure that activities are in line with the priorities and plans of the recipients.

· Multilateral initiatives

Immediate consideration will be given to the continuation and extension of measures that encourage more active participation by the developing countries in the global economy. This includes Norwegian support for an independent legal centre to assist the poorest developing countries in trade disputes. During 1999, various initiatives will also be considered within the framework of Norwegian support for the development banks’ private sector initiatives and the IFC’s work on promoting project

· Dialogue with Norwegian commerce and industry concerning their role in the implementation of the strategy

The strategy places new demands on the development cooperation authorities’ dialogue with and involvement of Norwegian commerce and industry. A priority task will involve establishing suitable fora for exchange of information and cooperation in a way that supports the main approach adopted in the strategy.

· Evaluation of mixed credits

As part of a critical assessment of tied schemes, an evaluation of mixed credits will be undertaken.

· Studies and reviews on issues of particular importance

It is recommended in the strategy that increased emphasis be given to efforts in some selected areas. Prior to completion of this strategy document, it has been neither desirable nor possible to make thorough investigations of the development of measures and specific recommendations within these areas. It is therefore necessary that the Norwegian Ministry of Foreign Affairs takes the initiative in cooperation with the affected agencies to undertake studies of the following areas:

  • Review of investment support schemes with a view to establish well targeted and strengthened range of instruments (see 3.2.7)
  • Study of an untied credit scheme (see 3.2.6)
  • Review of experience and frameworks for further support of small and medium-sized enterprises, including the need for various microfinance schemes (see 3.2.6)
  • Regional cooperation and South–South trade (see 3.2.2)
  • Measures to encourage increased local and regional procurement (see 3.3).

The review of investment support schemes will be led by the Norwegian Ministry of Foreign Affairs with participation by the Ministry of Trade and Industry, NORAD, NORFUND, the Norwegian

Guarantee Institute for Export Credits and representatives from commerce and industry. In this connection, consideration should be given to increasing the limits for guarantees under the Norwegian Guarantee Institute for Export Credits’ special scheme for export to and investments in developing countries.

The implementation of the strategy will involve a need for increased cooperation between the Norwegian Ministry of Foreign Affairs and NORAD.

A working group will be appointed with responsibility for coordinating the follow-up of the strategy between the Norwegian Ministry of Foreign Affairs and NORAD, and this working group will appoint subgroups as needed. An appropriate area for a subgroup is trade-related assistance, an area where work on the strategy has already created a need for increased coordination. In the future, it would be appropriate to make use of this group in connection with the preparations for UNCTAD X and in further follow-up of the work on support of the poorest developing countries within WTO.

4.2 Long-term follow-up

On the basis of the experience gained, among other ways, in pilot countries, a foundation will be laid for implementing the recommendations of the strategy within different areas and agencies.

On the bilateral side, this will be carried out by integrating private sector development aspects into the work on aid strategies in priority countries. On this basis, private sector development programmes can be developed in partner countries.

Based on the recommendations of the strategy, the Norwegian Ministry of Foreign Affairs will draw up new guidelines for private sector development measures in developing countries, cf. current Guide-lines for private sector-related schemes under the aid budget, dated 19.08.97. Based on this, NORAD will review its instruments and schemes.

Work carried out through international organizations provides excellent opportunities to increase the influence of the strategy on private sector development in developing countries beyond what can be achieved via bilateral programmes. This can be done both by influencing their policies and by providing support for the organizations’ projects and programmes. A number of United Nations specialized agencies and international financing institutions are engaged in issues of direct relevance for the strategy, and policy and project work in relation to these issues must be continued and developed along the lines drawn up in relation to the strategy.

Cooperation on private sector development in developing countries with international organizat-ions and with other donors will contribute to increased donor coordination and open up possibilities for channelling Norwegian support via other donors. An example of work that will be continued is the coordination within the CGAP, including the challenge of communicating international experience to Norwegian NGOs and other Norwegian participants in the work of promoting microfinance and small-scale industries.

The strategy indicates a number of areas where efforts must be reinforced. This particularly applies to the stimulation of Norwegian investments in developing countries where a broader foundation must be developed for Norwegian investments. The review of schemes and measures in this area will lay the basis for new measures and distribution of responsibilities.

In Proposition No.1 to the Storting (1998–99), where further allocations are made to NORFUND, emphasis is also placed on allowing the fund to increase its staff to ensure proper management of the fund’s resources and active efforts vis-à-vis Norwegian investors. In connection with the above-mentioned review of investment schemes, we will return to the issue of further assessment of the role to be played by the fund in the implementation of the strategy.

4.3 Administrative consequences for the Norwegian Ministry of Foreign Affairs

The approach outlined in the strategy will require increased competence and capacity within this area in the aid administration both at home and at the embassies. Much can be achieved through the best possible utilization of current personnel resources, reinforced by an active and prudent use of external competence. Further needs must be assessed continuously as the strategy is put into operation. The Norwegian Ministry of Foreign Affairs must have the necessary competence at the strategic level to ensure follow-up of the full breadth of the development cooperation strategy and to have the capacity to follow up and safeguard the interests of the poorest countries in international negotiations. The strategy and its approach also require the necessary capacity to conduct an active and targeted dialogue with commerce and industry concerning its role in the implementation of the strategy.

On the multilateral side, the Department for Global Issues and the Trade Policy Department will share the responsibility for implementing the strategy.

It is important here to ensure the necessary competence on private sector development issues for use within the multilateral system, both in connection with negotiations concerning the international frame-work and in relation to the technical and financial cooperation of these institutions. This necessitates a review of Norwegian policy and support towards multilaterals with a view to ensuring the best possible compliance with the recommendations of the strategy. It will moreover be especially important to take into consideration the strategy’s approach in relation to international negotiations within multi-lateral organizations and to ensure better coordination of Norway’s conduct in different connections. This particularly applies in connection with negotiations concerning replenishments and capital increases in the World Bank and the regional development banks and activities within the sphere of responsi-bility of the Bilateral Affairs Department, which attends meetings in consultative groups (CG meet-ings), the World Banks Special Programme for Africa (SPA) and country programme negotiations.

4.4 Administrative consequences for NORAD

A major element of the strategy is the positioning of private sector development as an integral part of Norway’s total development activity. An issue that must be discussed is therefore whether the current models for organization and planning create favourable conditions for such an approach, or whether other models ought to be considered. NORAD should prepare proposals for how best to respond to these considerations, including organizational structure and the situation with regard to staffing.

4.5 Administrative consequences for the embassies

In the recipient countries where Norway wishes to place greater emphasis on private sector development, this must be discussed with the country’s authorities and private sector, and be incorporated into the development cooperation plans. The strategy does not automatically imply an increased emphasis on private sector development in all country programmes, but is intended rather to lay the basis for an integrated approach to all our greater and lesser efforts.

This will result in an increased need for competence and capacity in this area at the embassies in the form of:

  • resources and competence for dialogue with the authorities concerning the identification of bottlenecks and needs in relation the strengthening of private sector development in the individual country
  • capacity for the preparation of private sector development programmes as integral parts of country programmes

In the case of pilot countries, the Norwegian Ministry of Foreign Affairs and NORAD, in cooperation with the affected embassies, will consider temporary staff reinforcements to set the work in motion and assign responsibility for duties concern-ing private sector development.

Coordination of support formicrofinance: CGAP

Microfinance has proved an effective instrument in the fight against poverty. Poor population groups are given better opportunities to involve themselves in income generating activities. A large number of institutions are now engaged in microfinance, and Norway supports various microfinance schemes both via multilateral organizations and via bilateral channels, including NGOs. However, the sharp increase that we have seen in support for microfinance may give rise to the danger of an uncritical flow of capital to microfinance institutions that have neither the necessary capacity nor competence in this area. The large number of different organizations that finance and operate microfinance institutions and the challenges involved in making this form of assistance as effective as possible have created a need for coordinating fora. The Consultative Group to Assist the Poorest (CGAP) was established in 1995 to strengthen and increase the efficiency of microfinance as an instrument of international development assistance. Today CGAP consists of 27 multilateral and bilateral donors, and the World Bank holds the chairmanship. There is broad agreement that the success of CGAP has been due to improved donor coordination, dissemination of information, exchange of experience and increased knowledge of microfinance. CGAP has also created guide-lines for good microfinance programmes. As well as improving coordination between donors, CGAP has helped to improve internal coordination within donor countries since a number of bodies are often involved in microfinance projects. Norway has been inspired by CGAP to improve the exchange of information and to carry out a review of the Norwegian microfinance portfolio, including an assessment of how poverty-oriented and financially sustainable the various schemes have been. CGAP is therefore a good example of successful coordination that has improved the quality of the donors’ efforts and has helped to bring about more comprehensive and coordinated assistance.

5. Quality assurance, performance reporting and evaluation

As in all areas of development cooperation, private sector development must be subject to continuous quality assurance, assessment of the extent to which the strategy has been implemented and evaluation of whether objectives have been achieved. The preparation of the strategy for private sector development has clarified both the overall and the more immediate objectives that must be followed up when evaluating the results of such measures.

The results of implementing the strategy for private sector development can only to a limited extent be assessed on the basis of statistics concerning consumption or by aggregating results from the project level. Priority must therefore be given to systematizing assessments of the policy and the strategy by means of active and regular reviews, evaluations, studies and research. In the following, a brief description is given of criteria that should be applied when assessing the achievement of objectives in this area, and of the procedures that must be followed within quality assurance, performance reporting and evaluation.

5.1 Assessment criteria for support for private sector development

Support for private sector development is defined in the strategy as support for measures that help to strengthen profitable production, whether in primary industries, service industries or manufacturing industries. The following overall objectives for support for private sector development in develop-ing countries are defined in the strategy, and are thereby the main criteria to be applied in assessing the success of such support:

  • Strengthening of profitable production and activities in developing countries
  • Safeguarding and increasing jobs and incomes, particularly for underprivileged groups (the poorest population groups in rural areas, women)
  • Ensuring that measures within the strategy comply with the general principles for Norwegian development cooperation, including the environment, women and human rights.

A number of selected areas are given priority in the strategy (cf. chapter 3.1). These areas may serve as immediate objectives when considering and/or evaluating measures and performance:

  • Reducing marginalization of the poorest countries
  • Improving economic relations and trade between developing countries
  • Working to achieve more integrated support of private sector development at country level based on surveys of the main obstacles and prioritized needs.
  • Ensuring better coherence and synergy between activities carried out in different areas and via different channels
  • Improving framework conditions for private sector development in developing countries
  • Promoting increased investments of both domestic and foreign capital, including Norwegian capital
  • Promoting trade with developing countries and stimulating their exports
  • Working to promote untying of development assistance
  • Increasing local procurement within aid-financed projects
  • Making active and targeted use of the Norwegian competence base, including Norwegian commerce and industry.

5.2 Quality assurance

The Ministry is preparing procedures for quality assurance of development assistance. This work is being carried out in cooperation with NORAD.

By quality assurance of procedures: from prioritizing of projects via planning, implementation, reporting, reviewing and evaluation, indications will be made as to which tasks in these procedures that need to be improved and altered in order to ensure satisfactory performance and a high quality of performance reporting. Reviews and evaluations will be implemented in relation to a standard method for reporting. The basis for reporting is to be established in the planning phase of the individual projects. Development cooperation will be based on previous experience. Improved performance reporting is a major priority, and NORAD has established a special unit for this purpose. An assessment of the experience gained will form the basis for planning and implementation of projects. After careful assessment, measurement parameters will be defined for use in later reporting. The quality of the reviews and evaluations will be decisive for quality assurance and evaluation of projects in the future.

5.3 Evaluation

An important basis for future evaluation of Norwegian support for private sector development has been laid through the preparation of this strategy. Precise specification of objectives and expected results is an important precondition for later evaluation. The overall objectives and priorities set out in the strategy will therefore serve as a basis for defining objectives and expected results, and thereby for later evaluations. Consideration of the needs associated with future evaluations is also important when planning the different measures and schemes in the implementation of the strategy.

Before implementing the various measures, realistic descriptions of the current status should be made available.

It may be appropriate to carry out evaluations at several levels, e.g. at the strategy level (i.e. evalu-ation of the results of the total Norwegian assistance based on the strategy), at the organizational level (e.g. support via the WTO), or at country level (e.g. programmes for Norwegian support to private sector development in pilot countries).

It will also be appropriate to consider specific private sector support schemes for inclusion in the new strategy. Evaluation of these will normally attempt to answer questions about performance, relevance, effectiveness, impact and sustainability.

An evaluation at strategy level would be a large-scale task that would have to be based primarily on reviews, reports, etc. and on evaluations carried out by other organizations. Over time one would also carry out separate evaluations of individual measures included in the strategy. This would allow systematic coverage of the most important elements of the strategy during a period of three to four years.

Reviews and evaluations may also indicate areas where there is a need for further knowledge and analysis. This may involve both relatively brief studies of concrete issues and more long-term research aimed at addressing relevant issues within a broader context. The Norwegian Ministry of Foreign Affairs is, for example, currently contributing funds to a research programme entitled Globalisation and marginalisation: Multi- and interdisciplinary research on development paths in the South. One of a number of thematic aims within this programme is to acquire more knowledge of economic policy and private sector development in developing countries. In cooperation with the Research Council of Norway, the Ministry will facilitate the publication of information by this programme and by other programmes with the aim of drawing on relevant researchers and research institutions when needed in connection with further work on private sector development.

Abbreviations

IT Bilateral Investment Treaty

CGAP Consultative Group to Assist the Poorest

DAC Development Assistance Committee (of OECD)

ESMAP Energy Sector and Management Assistance Programme

FIAS Foreign Investment Advisory Services (of IFC)

GIEK Norwegian Guarantee Institute for Export Credits

GSP Generalised System of Preferences

IBRD International Bank for Reconstruction and Development/World Bank

IDA International Development Association (of the World Bank)

IDB Inter-American Development Bank

IFC International Finance Corporation (of the World Bank)

IIC Inter-American Investment Corporation (of IDB)

ILO International Labour Organisation

IMF International Monetary Fund

ITC International Trade Centre

KOMpakt The consultative body for human rights and Norwegian economic involvement abroad

NORAD Norwegian Agency for Development Cooperation

NOREPS Norwegian Emergency Preparedness System

NORFUND Norwegian Risk Capital Fund for Developing Countries

OECD Organisation for Economic Co-operation and Development

PRIDE Promotion of Rural Initiatives and Development Enterprises

SADC Southern Africa Development Community

SPA Special Programme of Assistance for African Countries

UNCTAD United Nations Conference on Trade and Development

UNDP United Nations Development Programme

UNIDO United Nations Industrial Development Organisation

WTO World Trade Organisation

This page was last May 3. 1999 updated by the editors