54757 NOVEMBER 2009 DFID The Importance of Private Sector Development in Conflict-Affected Countries ABOUT THE AUTHOR CHRIS BOLD Paul Collier estimates that 73 percent of the poorest billion people Until August 2009, Chris Bold was DFID's Private Sector in the world live in countries affected by conflict.1 In his book "The Adviser in Afghanisan. He is currently on secondment to Bottom Billion," conflict is the first of the "traps" responsible for the World Bank in Washing- keeping the populations of some countries in poverty. He argues ton, DC. that low or negative economic growth in a country dramatically increases the chance of conflict. It is estimated that by the year 2011, 60 activity in parts of the south and east of the percent of the staff and resources of the U.K. country until the present day. Department for International Development (DFID) will be deployed in countries affected Throughout this entire period the private by conflict. But how can DFID work with the sector has continued to operate. private sector in conflict-affected countries Unsurprisingly, Afghanistan has seen a shift to break the link between conflict and low from formal to informal business and a growth? We know that the complex links corresponding shift from licit to illicit between growth, peace, and the private activities. Agriculture and livestock have sector are key to development and yet are declined in importance, with external often overlooked or poorly understood. We migration and the industrial base of the know that peace-building interventions economy eroded to almost nothing.2 Opium must be market-sensitive, and that market production and smuggling have risen development must be conflict-sensitive. It is dramatically, and the narcotics industry is also now widely accepted that addressing now estimated to account for a third of the the role of the private sector in building gross domestic product (GDP)3, with complex peace and growth must be tackled early. and well-integrated value chains stretching Beyond these key lessons, however, the across the country. Afghan experience offers further important insights. The impact of conflict on the government has been almost as dramatic. Years of under- The Afghan Context investment and low pay have led to a civil service with low capacity, strong links to There has been conflict of some form in warlords, and widespread patronage. Afghanistan for most of the past three Fourteen years of Communist rule fostered a decades. Beginning with an insurrection government bureaucracy that is at best against a revolutionary regime in the late suspicious of business and at worst openly 1970s, it evolved into a religious jihad against hostile. occupying Soviet forces in the 1980s. After their departure, the country descended It is, therefore, perhaps unsurprising that an again into civil war and factional fighting in estimated 90 percent of the Afghan economy the early 1990s until the Taliban took exists in the informal sector. Fewer than 200 effective control in 1996. Following the businesses with revenues of $5 million or defeat of the Taliban regime by coalition more paid any tax to large taxpayers' office forces in 2001, there has been insurgent 2 International Alert (2006); "Local Business, Local Peace: The peacebuilding potential of the domestic private sector." 1 Collier, Paul (2007); "The Bottom Billion"; Chapter 2, Oxford University Press. 3 UNODC (2008); "Afghanistan Opium Survey." IFC SMARTLESSONS -- NOVEMBER 2009 1 this year.4 And the likelihood of other businesses moving into the formal sector is low, when the government raids their bank accounts for disputed taxes without warning.5 Lessons Learned Despite the difficulties, several lessons are emerging from DFID's work to improve the enabling environment for business in Afghanistan: 1) Business does take place in conflict-affected environments. Despite the difficulties imposed on the private sector due to the security situation and the poor legal and regulatory en- vironment, businesses are operating profitably in Afghani- stan. One remarkable success has been the telecommunica- tions sector. There are now four mobile phone companies operating in the country. The leading mobile operator in Afghanistan, with over two million customers, is Roshan, a joint venture between the Aga Khan Fund and two private sector companies. Roshan has managed to extend its network to remote parts of the Women in Afghanistan make payments on the loans that they country using an innovative model where local tribes are have been given for their businesses. paid a bonus if booster stations that are located in their area remain operational for the whole year. Telephone masts make attractive targets for antigovernment forces, Through the Microfinance Investment Support Facility for and telecom companies faced high costs providing security Afghanistan (MISFA), DFID is addressing the constraint to protect remote infrastructure. Roshan saved over $1 mil- imposed on businesses by a lack of access to capital. MISFA lion by adopting this community-based model and better is an independent body that provides both loan capital and operational performance from their masts. They have re- technical assistance to private financial institutions. The cently rolled out their mobile money transfer service in Af- Afghan government, the private sector, and donors are all ghanistan, based on technology pioneered in collaboration represented on the Board. The governance structure has with DFID in Kenya. been carefully designed to protect the institution from falling prey to capture by any of the groups involved, by 2) Reforming the business environment is always political. ensuring that no group has sufficient weight to make decisions on its own. MISFA has been successful in increasing In a country where tribal loyalties often have more influence access to finance to nearly 500,000 micro-entrepreneurs than formal government systems, building a broad coalition and small businesses. for reform is crucial. Changes to the security situation or the business environment will often represent a threat to vested 3) Be prepared to work with unusual partners. interests. Many businesses, particularly those linked to the illicit narcotics industry, have a lot to lose from improvements In Afghanistan, DFID works alongside a number of actors in security or reforms that support licit businesses. Strong that are not typical development partners. In Helmand support from the private sector for enabling environment Province, the military presence dwarfs DFID's resources; reform is therefore vital. both human and financial. The military has over 8,000 personnel in Afghanistan, the majority of which are based DFID has recently launched the Afghanistan Investment in Helmand, and spends some £1.2 billion per year-- Climate Facility (AICF) a multidonor facility led by the private approximately 60 times the amount DFID spends in sector and resourced to address the problems this sector Helmand. faces in doing business in Afghanistan. Its structure ensures that it is the problems perceived by the private sector that One "quick win" is to increase the amount of produce get tackled. A proposal to support a telephone hotline for procured locally. Initial estimates suggest that increasing exporters who encounter problems in exporting their goods local procurement could provide over one thousand from Afghanistan has recently been approved by the Board, sustainable jobs, and that $10 million in extra income could who are all members of the private sector. Information be generated for local Helmandis at no extra cost to the from the call center will be made widely available to British taxpayer. In the longer term, DFID hopes to support government departments that can tackle problems such as a program to strengthen the market for local agricultural nuisance taxes on main transport arteries. produce, with the aim of supporting a viable alternative to poppy production for local farmers. In conflict areas, it is 4 Data from the Revenue office, supplied by Adam Smith Institute (01/28/09) ­ exact figure was 188 businesses with revenues >$5 million or >100 employees. particularly difficult to resist direct support in favor of market-based solutions, but our experience is arming us 5 FT; Jon Boone (April 2008): "Afghan tax raid sparks cash exodus." 2 IFC SMARTLESSONS -- NOVEMBER 2009 with new arguments and evidence to persuade our partners. Indeed, because we work with unconventional development partners, donor harmonization is more of a challenge, and more vital than ever. Looking Forward DFID Afghanistan's new Country Plan, which was approved this month, includes a renewed focus on growth and private sector development (PSD). While the instruments of PSD may not be that much different, the processes we follow will be heavily tailored to the conflict context. The office would welcome input from members of the PSD cadre in the design and evaluation of programs, and would be happy to share lessons with offices in other conflict-affected countries that are grappling with similar issues. DISCLAIMER IFC SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. IFC SMARTLESSONS -- NOVEMBER 2009 3