Business and Aid, Partners against Poverty

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Jeremy Lefroy, Director, African Speciality Products Ltd and Trustee, Equity for Africa

The goal of the UK Government’s Department for International Development (DFID) is the halving of the numbers of people living in absolute poverty by 2020.

Seventeen years spent working in business with African countries, including eleven living in East Africa, have convinced me that the way that many people will do this is through their own enterprise.

Successful businesses will not only create jobs and income, they will also pay the taxes to fund education and health care.

So it is encouraging that DFID and other aid agencies are devoting more of their funds towards enterprise, in particular technical and commercial advice and skills training for private companies.

But when you ask people what are the greatest obstacles to succeeding in business, lack of working and fixed capital finance is almost always first or second on the list. Small family businesses, which is where many of the best entrepreneurs are found,
usually find it difficult to secure finance from the banks who are very risk adverse. Venture capital funds do exist, but they require rates of return of 30-40% which most young businesses will not generate.

DFID and comparable bodies have an opportunity to help with this shortage of capital. Instead of making all their grants directly to the recipients, whether Governments or NGO’s, they could first lend them through a respected local financial institution to small and medium businesses. As the money was repaid, it would be
paid over to the aid programmes which DFID was supporting in that country.

The money would therefore be used twice over – by the business as a loan and then by the programme as a grant. To coin a dreadful phrase, we could call it ‘aid precycling’.

As grants would be delayed by being used first as loans, sometimes for a period of years, the scheme would be phased in so as not to disrupt ongoing programmes. There would also inevitably be some bad debts, but these would be kept to the minimum through using financial institutions with good records for recovering loans. Their costs would be covered by an agreed interest rate paid by the borrower.

I have seen such a scheme in action. Funds were lent to a flower farm which was able to expand employment and production. When they were repaid, they were donated to a number of organisations including a very effective women’s group which was
educating people about AIDS.

DFID alone gives £5 billion per annum on our behalf to low-income countries. If just 10% of this were first loaned to small and medium enterprises in those countries, at
£5,000 of investment per job, that would mean 100,000 more people in work. They in turn would support several members of their family and pay taxes.

Of course, there is always the risk that some of the enterprises which were helped by such a scheme would be so successful that they would begin to compete with our own companies in world markets. But that is a risk we should be prepared to take if we
really are committed to helping people to lift themselves out of poverty. Besides, when people have put poverty behind them, they also become potential customers and no longer require our aid.

Business and aid have not always had an easy relationship in the past. But that is changing, helped not least by that successful hybrid, Fair Trade, which has flourished in the last 10 years. Mutual suspicion is being replaced in many places by an
understanding of the value of work of the other.

It is time to be bold and entrust far more of our aid to businesses in low-income countries. Let’s be the first country to precycle substantial sums.

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