Sida aims to increase subsidies for companies involved in aid

Aid cooperation with companies should be as natural as it is with governments or NGOs. Sida is looking to soften the rules on aid subsidies to the private sector.


Anna Rosendahl, Sida.  Photo: Development Today

The Swedish aid agency Sida is embracing commercial firms as a crucial force for change in poor countries after testing new methods of cooperation with the private sector.

“Private sector actors should be as relevant partners [for Sida] as the civil society or governments,” says Anna Rosendahl, Head of Private Sector Collaboration at Sida, to Development Today.

Three years ago the former Swedish Development Minister Gunilla Carlsson gave Sida the task of developing new ways to cooperate with companies.

UNTIED AID REGIME     

Over the last decade, the role of the private sector in aid has diminished, following agreement among the OECD donors to untie aid schemes and establish a system with international bidding. Prior to that, firms were largely seen as suppliers in the aid market. Now Sida is exploring options for co-financing projects with corporations that are investing in developing countries.

Rosendahl says that while overall development assistance is at a standstill or shrinking in many poor countries, investments are increasing fast, and they are a driving force for development in many of Sweden’s cooperation countries.

“If we can influence some of these investments so that they contribute more to solving poor peoples’ problems, it could have an enormous impact that we might not be able to achieve with aid money alone,” she says.

Starting with this idea, Sida has explored ways of working with private companies. The two most striking examples are perhaps Sida’s cooperation with Volvo and Scania.

In Ethiopia, Sida has joined forces with the Swedish truck and bus manufacturer Volvo to establish education for car mechanics. The project aims to improve the training and school facilities. The curriculum is adjusted to reflect better the firms operating in the country to make the education more relevant.  Volvo offers the students practical training and equipment for their education. Initial support from Volvo and Sida amounts to about SEK 35 million.

“The project will increase the number of trained mechanics in our African markets, which benefits Volvo as well as other local [companies],” Jonas Rönnebratt, a director at Volvo, said when the project was launched in the summer of 2012.

Rosendahl points out that the lack of a skilled work force is often a huge obstacle for large companies considering expansion in Africa. However, Sida will not allow direct tying with the firm. In Sida’s work with Volvo on this project, it is a pre-condition that the students are not obliged to take a job with Volvo.

“What we can fund is public goods, which means that those who finish their education receive a certificate and can apply for a job wherever they want,” says Rosendahl. Sida now plans similar cooperation projects with Volvo in about ten countries.

Next in line is a project for the education of technicians in the mining industry in Zambia. USAID is coming onboard as a partner in this programme.

Sida has a similar project in Iraq with Scania, another Swedish truck and bus manufacturer.

Rosendahl says the first step in such a project is often that a company identifies a problem in a country it wants to invest in where it believes Sida can help with the solution. The projects are implementated by a neutral actor like a ministry, a UN agency or an organisation.

“The rule of thumb is a fifty-fifty split of costs between Sida and the company, but part of the company’s contribution might be expertise,” she says.

She emphasises that when working with large private companies like Volvo, no support is given directly to the company. Rather, Sida co-finances projects with the firms.

LONG-TERM COMMITMENT

Rosendahl says some aid actors are skeptical about Sida joining forces with private companies. She often hears the argument that the companies do not operate in a sustainable way. She counters: “No firm will invest millions in Ethiopia unless it plans to stay there for 20 or 30 years. That is much more sustainable than aid,” she says.

Rosendahl says Sida will continue to develop new ideas for private sector cooperation. Another initiative Rosendahl’s unit is trying out is a group of funding mechanisms referred to as the Challenge Funds, which had a SEK 150 million budget in 2013. (See Table Below)

One scheme under this umbrella is Innovations Against Poverty (IAP) implemented in cooperation with PWC, where PWC makes recommendations on applications, while Sida makes the decisions, manages the agreements and disburses funds.

Sida can provide a EUR 200,000 grant for business projects in developing countries. Companies, NGOs and other actors can apply to the funds for a grant that covers up to 50 per cent of expenses related to testing a product or a service.

“A positive aspect about this fund is that it has been successful in reaching a segment of companies with few alternatives. They do not get loans and there are few funds or instruments available for this kind of firm,” says Rosendahl.

On the other hand, the scheme is very broad; it is global and it covers all sectors. The quality of applications varies and it requires a lot of work for Sida to process them.

Sweden currently follows strictly EU regulations on the maximum size of grants that Sida can provide under IAP.  The rules state that a company (and the group of which it is part) cannot receive state subsidies exceeding EUR 200,000 over three years. These regulations have been put in place to avoid large-scale state subsidies to companies, though some donors question whether they are valid for aid activities.

FINLAND SOFTENED THE RULES

Finland softened its interpretation of the rules a year ago for its Finnpartnership scheme, which is similar to but much smaller than the Swedish Challenge Fund. Finland argued that the EU rules are not valid for “projects where the target market as a whole is outside the European Economic Area”.

For these projects, Finland doubled the maximum allowable level of support to a project to EUR 400,000. In principle, this means a project that is replicated in another developing country can1 receive support there as well.

When Finland announced its new rules in December 2012, Oskar Kass at the Finnish Foreign Ministry told  DT that both Sweden and Finland had up to that point followed the EU rules for their aid schemes, while other donors had ignored them. (See DT 19-20/2012)

Rosendahl confirms that Sida may follow Finland’s example. “We want to soften our rules and have asked the Foreign Ministry to consider this,” she says.

Sida has already disregarded the rules when supporting the Africa Enterprise Challenge Fund (AECF), which provides grants and interest-free loans for innovative, “high impact projects” in Africa.

Sida’s judgment is that the support does not distort the market and the activities are outside Europe. Rosendahl says the issue of market distortion is not that simple. “If you are working with markets that are not healthy, you want to stir things up to kick it off.”

She notes that if grants could be increased it would become more interesting for larger companies. For us, it takes the same amount of time to review an application for a small amount as for a larger amount,” she says.

According to Rosendahl, Sweden now aims to integrate private sector aid into all its strategies. As Sida expands its private sector support it becomes open to the criticism that it could end up funding the narrow interests of Swedish companies. Where does Sida draw the line?

“I think it is no different from working with states or NGOs. It is a consideration we always have to make. But do you believe the risk is bigger when we work with companies? I do not think we have experienced that,” she says.  

SIDA-FUNDED CHALLENGE FUNDS:

Programme

Sector

Sida partners

Region, country

SEKm

Period

Description

Innovations Against Povert (IAP)

Development

Pricewaterhouse-Coopers, Njord Consulting, ORGUT

Global, North Africa and the Middle East.

SEK 51m

2011-2013

 

Bottom of the Pyramid market. Risk-sharing.

Demo Environment

 

Environment

Tillväxtverket, Sida

Botswana, Namibia, S Africa, India, Indonesia, China, Vietnam

SEK 48m

2012-2013

Promotes  stronger business sector for greenl technology.

The Africa Enterprise Challenge Fund (AECF)

Agriculture, financial, energy and climate

AusAid, Danida, DFID, Netherlands; AGRA Fund Manager; KPMG

Sub-Saharan Africa

SEK 200m.

Total:

USD 190m

 

2012-2017

Grants and loans for businesses with commercially viable, high impact projects.

Seed Alliance Challenge Fund

 

ICT

APNIC

Asia/Pacific, Africa, Latin America

SEK 10m

2012-2014

 

Three regional funds for small grants to both not-for-profit and private sector.

Innovations for Peace - Emprender Paz

Open

GIZ, KAS, Fundacion Social

Colombia

 

SEK 12m

2012-2015

 

Supports private sector contributions to peace building

Innovations Against Poverty

Open

Price Waterhouse Coopers

MENA

SEK 20m

2011-2013

 

Supports pro-poor green growth projects.

Water Innovation Challenge

Energy, water

Not decided yet

Global

Not decided

2013-2017

 

Cooperation with USAID. Innovative water efficiency technologies.

Source: Sida