Working Paper
Bilateral Official Finance for Private Sector Development and the Role of Non-Government Organizations

The study examines the official bilateral donors’ current aid practice for private sector development (PSD). In particular, it reviews the donors’ major instruments and channels for aid delivery and the extent to which official flows have catalytic effects on private direct foreign capital flows. The major donor instruments for PSD are investment support, an enabling-environment support, privatization and commercialization, and business partnership programmes, while the major participants in the alternative channels are NGOs, governments of poor countries, firms in the recipient countries and donors’ own firms. The paper concludes that despite the prominent position occupied by NGOs in aid delivery, there is still a pertinent role for the governments of poor countries in the delivery of PSD aid, especially when the provision of public services (or social goods) is involved and the free-rider problems major. Also, as a result of the decentralized nature of the private sector, the paper highlights the urgent need for the coordination of donor efforts, requiring either the involvement of recipient governments or/and the creation of a specialized multilateral institution for PSD aid delivery. The study also identifies a number of factors that have limited the effectiveness of PSD aid. These include the gap between donor design and local conditions. Further, the paper finds that official investment-related aid flows are yet to have a catalytic effect on private direct foreign capital flows. Based on these findings, it recommends, among others, that donors should consider new approaches to their investment and partnership programmes so as to encourage technology and knowledge transfers. These alternative approaches include the propagation of the technology of the relatively more advanced poor countries into poorer countries. This would require donors to promote south-south business partnerships rather than the traditional north-south alliances. Finally, the study recommends measures that could enhance the catalytic and additionality effects of official development finance.