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Guiding Principles for Integrating the Private Sector in Democracy and Governance

| 5 Minute Read
Economic Growth and Trade | Public Private Partnerships and Investment | Business Enabling Environment | Democracy and Governance | Local Governance and Decentralization
Private Sector Engagement

The private sector plays a critical role in advocating for better governance and strengthening democratic systems. So why are they often overlooked?

The intractable challenges associated with effective, sustainable, fully financed service delivery and community improvement require a more comprehensive approach to financing. Budget shortfalls, misused public funds, and the absence of innovative and responsive policies also erode trust in democratic systems in a world increasingly contending with nondemocratic movements. This blog post examines the merits of more strategically integrating private sector engagement (PSE) into traditional democracy and governance (DG) approaches to help fill the government financing gaps and reinforce democratic systems to show citizens that democracy works.

While it’s important to acknowledge the unique and diverse drivers and motivations of the public and private sectors, neither are monolithic entities, and often share harmonious objectives such as increasing transparency to build community trust and reducing economic vulnerability. Building a relationship between the two sectors can lead to more symbiotic objectives, such as the public sector increasingly recognizing the need to leverage the innovations, expertise, and capital that the private sector can bring. This overlap is even more prominent with the increasing influx of corporate social responsibility, Environmental, Social and Governance (ESG), and other public good initiatives increasingly championed by the private sector. While the “G” in ESG represents good corporate governance practices, this hasn’t necessarily translated into the private sector playing a critical role in democratic governance systems writ large. As USAID’s PSE Policy highlights, the private sector can be critical in advocating for better governance to improve the efficiency, transparency, and streamlining of government procedures, as well as important roles in supporting fair-trade certification and promoting human rights.

Despite those areas of overlap, development practitioners often fail to fully appreciate, and sufficiently incorporate, the role of the private sector into DG projects. Additionally, development project implementers often struggle to adeptly structure transparency, accountability, and anti-corruption initiatives that focus on maximizing mutual benefit. These missed opportunities not only hamper the full potential of PSE’s contribution to DG progress, but they can also undermine the tenuous trust between the public and private sectors. As such, development practitioners should consider three tactics to reap the full positive potential of integrating PSE into DG projects.

Guiding Principle 1: Aligning and Maximizing Incentives

The inherent country and sectoral complexities omnipresent in all development efforts only compound the complicated nature of understanding the drivers and roles of both public and private actors. Private sector actions in support of, or undermining, strong democratic systems can have significant influence over the success of these efforts, just as on the flip side, DG can have a significant impact on the productivity and success of businesses. In fact, studies suggest that in the long-term, democracy increases GDP,  and democratic governments pursue more economic reforms, reduce social unrest, and see higher business investment than non-democracies. By systematically analyzing and adapting to relevant market systems dynamics, development practitioners can unlock the potential for understanding and strategically aligning public-private incentives that maximize mutually beneficial development outcomes. There are numerous tools to undertake these analyses: from applied political economy analysis (APEA), to co-creation, to problem-driven iterative adaptation. Tools such as these that are designed to uncover latent dynamics-defining opportunities and pitfalls and then deconstruct complex challenges to methodically and collaboratively co-design solutions are particularly salient for integrating PSE into DG approaches. This facilitates an opportunity for public and private actors alike to not only have a seat at the table, but also be empowered by varying degrees of shared power and decision-making.

The USAID Fiscal Reform for a Strong Tunisia (FIRST) project focused on laying the fiscal foundation for Tunisia’s economic growth, operationalized APEA to engage various stakeholders (private sector, professional associations, civil society organizations, youth) in investigating preferences, agendas, and entry points to strategically support Tunisia’s Ministry of Finance in sound, fair, and transparent tax reform. In support of Tunisia’s COVID-19 response and economic strengthening efforts, FIRST engaged with private sector stakeholders through focus groups to solicit their inputs in fiscal policy design and formulation. This process allowed FIRST to provide a comprehensive summary to the Ministry of Finance, highlighting incentives of both public and private stakeholders, focused on removing barriers to tax policy formulations and making budgetary procedures more transparent and participatory.

Guiding Principle 2: Orienting to Localization and Mutuality

In line with USAID’s forthcoming Local Capacity Development (LCD) policy and USAID Administrator Samantha Power’s recent announcement committing 25% of USAID funding to local partners within the next four years, it is more important than ever to build the capacity and buy-in of local partners to support transformational and sustained progress. Powers further suggests that by the end of the decade, 50% of USAID programming will need to place local communities in the lead, highlighting co-designing programs, setting mutual priorities, and implementing and evaluating them will be key to achieving these goals. This is particularly relevant for DG programming given that local private sector actors often have the strongest pulse on the local political context, as well as strong incentives for engaging in improving DG practices that they may feel the strongest impacts of. Adopting this mentality also reinforces the local ownership of economic diversity, health, and growth that the private sector is especially well positioned to lead. In the Philippines, the USAID Delivering Effective Government for Competitiveness and Inclusive Growth (DELIVER) Project, implemented by Chemonics, has been providing technical support to local small and medium enterprises (SMEs) to increase not only their capacity for more growth but also to reinforce their ability to and interest in partnering with the government to accomplish mutually beneficial policies and governance outcomes such as infrastructure improvements. The government of the Philippines’ ambition and the associated price tag of projects like “Build, Build, Build” necessitate mutuality between the public and private sectors to accomplish the plan’s objectives and to share in the economic and political benefits of these large-scale projects.

Guiding Principle 3: Build on and Move to Trust

The pandemic has only further amplified global mistrust in government. This mistrust stems from rising economic inequalitypopulations failing to see democracy delivering concrete results, abuse of power amid COVID-19, and general skepticism and lack of transparency. Compounding this mistrust are concerns from the private sector that engaging politically could harm public perception and negatively impact business. One strategy for building trust could be to consider partnering with civil society groups, like trade associations, consumer advocacy groups, coalitions, or industry associations rather than individual businesses. This can serve as an approach for incentivizing risk-averse private sector actors and as an entry point to further strengthen and build relationships with multiple entities. USAID’s Peru Transparent Program Investment Project (TPI) is building trust by improving transparency in public procurement. TPI is bringing public and private sector actors together into regional accountability networks to improve public investment processes and ultimately curb corruption in Peru. TPI engages with the private sector in the project’s accountability ecosystems approach to ensure system-wide approaches to promoting adoption and implementation of anti-corruption activities. TPI focuses on vertical, horizontal, and diagonal integration, meaning it builds links between public sector actors, civil society, and the private sector.

Given the importance of more thoughtfully integrating PSE approaches into DG programming, it is critical that development practitioners use the tactics outlined above and share their experiences with the broader development community. In doing so, development implementers can not only maximize development outcomes but also ensure greater local ownership of the approaches and benefits that well-integrated PSE principles offer in governance-strengthening work. This systemic approach can produce numerous benefits; however, few are more vital to the health of local economic development and representative governance than increased trust between government and nongovernment actors. By pooling expertise and experience, development practitioners can optimize PSE integration into DG work resulting in viable, locally owned, sustained progress.

Banner image caption: An image of two men talking in front of the Palace of Justice in Justice, in Jordan.

Posts on the blog represent the views of the authors and do not necessarily represent the views of Chemonics.

About Kerry Dittmeier

Kerry Dittmeier is a development professional with expertise in private sector engagement, development finance, gender lens investing, and climate finance. She is currently serving as a technical director on the USAID Climate Finance for Development Accelerator (CFDA), where she leads the Climate Gender Equity Fund (CGEF), an innovative public-private partnership for catalyzing gender equity in…

About Luke Waggoner

Luke Waggoner is a former senior democracy and governance specialist at Chemonics.