KAMPALA PRINCIPLE 5:DPs_SUBP 5.C

Sub-principle 5.C

Share risks proportionately to incentivise private sector contributions to leave no one behind

 

Why is it important?

 

Scaling up and leveraging additional private sector engagement and investment involves sharing risks proportionately among all project and programme partners. This requires open dialogue and continuous engagement among project and implementation partners. To benefit those furthest behind, development partners and partner country governments should extend suitable incentives to the private sector, which may have concerns about engaging in high-risk contexts. At the same time, development partners need to put in place adequate safeguards to ensure that any unintended negative impacts are addressed. All investments in partnerships with the private sector should yield benefits for those furthest behind that would not have been achieved without the intervention. Sharing risks enables both private and public partners to embark upon a project that they would otherwise not be able or willing to support entirely on their own. Development partners can also meet the needs of both the private sector and beneficiary communities by identifying suitable financial and non-financial instruments to offset risk and by sharing risk in an open, upfront and transparent matter. 

Self-reflection questions
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Policy Level Project Level
  • Does your government’s or organisation’s PSE strategy provide guidance on managing and sharing risk for PSE projects? If no such guidance exists, how might existing guidance on sharing risk in public-private partnerships, blended finance or private sector development programmes be adapted or serve as inspiration? 
  • Does your PSE strategy recognise the primary and secondary risks from PSE interventions for beneficiary communities? 
  • How do you ensure that local communities – particularly vulnerable groups – are protected from taking on undue risks?
  • Does your strategy provide risk frameworks for different country contexts (e.g. fragile and conflict-affected, small island developing states, low- and middle-income)? 
  • Have you considered how specific financial mechanisms require different approaches to risk-sharing and allocation?
  • For each project, have you – along with all project partners – assessed the potential risks for each stakeholder and given due consideration to the proportionality of risks being taken on by public and private actors vis-à-vis the benefits to local communities?
  • Is your project’s contract based on an ex ante risk assessment and feasibility study and does it specify the terms and conditions under which it can be terminated, recalibrated or arbitrated?
  • Does your project foresee dialogue to exchange and agree on risk-sharing among stakeholders with diverse risk-taking appetites, return expectations and operational/conceptual ways of working? What challenges do you foresee in developing a shared understanding of the risks and realistic ways to address them?
  • Does your project recognise the different incentives and risks for actors involved, including affected communities? Are those incentives and risks represented in your overall results framework?

Actions to consider
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Policy Level Project Level
  • Establish contracting periods that are long enough; private sector actors need longer periods to spread their risk and investments over time. Shorter term contracts, which are common in public development policies and projects, are not long enough to warrant upfront expenditure. 
  • Consider more direct financial mechanisms for offsetting risk for the private sector, such as guarantees, subsidies or conditional grants, but be wary of distorting the market when using these.
  • Provide tools and data to make risk assessments more reliable. This may draw in private investors who have great appetite for accurate data that inform their investment decisions.
  • Take time to understand how different actors understand and perceive risk, particularly given the diversity in capacity, philosophies and access to information. It is usually critical to have formalised stakeholder meetings to develop a shared terminology on risk and return sharing. 
  • Prioritise shielding vulnerable populations and sectors from risk. 
  • Seek mutually beneficial, “win-win” solutions to risk sharing. When considering incentives and alleviating risks, particularly between public and private counterparts, regard this as a two-way or multi-directional “win-win” exchange of comparative strengths.

Pitfalls to avoid
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Policy Level Project Level

      DON’T...

  • Assume risks are only linked to financial considerations while overlooking social and environmental impacts that cannot always be monetised or easily predicted.
  • Follow one-size-fits-all approaches for generating incentives and balancing risk-sharing irrespective of the nature of a proposed intervention. 
  • Offer incentives to businesses that encourage a “race to the bottom” in standards.

     DON’T...

  • Impose undue risk burdens on stakeholders with weaker capacity.
  • Overlook hidden risks that may emerge for vulnerable populations or sectors over the course of implementation. 

COUNTRY-LEVEL EXAMPLES

Agrifi is an initiative that increases investment in smallholder agricultural MSMEs micro, small and medium-sized enterprises in rural areas in Asia, Latin America and sub-Saharan Africa with the greatest needs for inclusive and sustainable growth. Agrifi seeks to address the lack of financing mechanisms adapted to farmers and agri-entrepreneurs, both of whom are regarded as high risk. With major European development banks and financing institutions as the lead public financier, Agrifi uses risk-sharing and incentive mechanisms (risk capital, interest subsidies and guarantees) as a means to encourage private investments that would not have happened otherwise. It thereby delivers on its mandate to reduce poverty and hunger while promoting inclusive growth for the most vulnerable populations.

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