The role of the private sector

The private sector is a key stakeholder in both urban and economic development, being a major contributor to national income and the principal job creator and employer. The private sector provides around 90% of employment in the developing world (including formal and informal jobs), delivers critical goods and services and contributes to tax revenues and the efficient flow of capital. Further, it will undertake the majority of future development in urban areas (Venables, 2015: 5). It is increasingly being encouraged to help leverage the opportunities, and mitigate the challenges, of rapid urbanisation (see Topic Guides on State Business Relations, Sen 2015; and Inclusive Growth, Alexander, 2015). Private sector actors are perceived as playing a role in urban governance: they influence whether urban areas develop in inclusive and sustainable ways, and they affect poverty reduction and drivers of fragility and conflict such as unemployment, exclusion and instability (Mac Sweeney, 2008; Hameed & Mixon, 2013; Haider, 2014).

Interactive planning and decision-making processes are needed to support private sector participation in urban governance, and to co-ordinate this participation with municipalities. Pieterse (2000: 30-33) comments that municipalities can strengthen urban governance in co-operation with the private sector by fostering partnerships and local economic development (LED) strategies that combine local skills, resources and ideas to stimulate the local economy, enabling it to respond innovatively to national and global economic changes. For example, effective LED strategies detail how the municipality will (ibid.):

  • develop and maintain infrastructure and services;
  • promote and expand existing businesses;
  • address inefficiencies in the local economy;
  • promote human capital development, to help vulnerable groups especially to participate in the labour market;
  • encourage community development by promoting community business and co-operatives, local exchange systems and informal credit etc.;
  • promote small, micro and medium enterprises (SMME) through supply-side measures (training, provision of space and facilities for commercial activity etc.) and demand-side measures (reforms to procurement policy to ensure access for SMMEs to contracts);
  • attract investment in the city.

An explicit LED strategy links long-term economic growth issues with short-term concerns about joblessness, inequality and the role of the private sector in a sustainable development strategy.

In fostering partnerships, municipalities need to build relations with local and foreign private sector interests by involving associations and companies in city-wide strategic planning processes. This can build commitment to a broader vision for the city that goes beyond short-term interests. This might involve a formalised partnership with organised business (e.g. PPPs) based on the municipality’s strategic vision. Other innovative collaborations include private sector provision of managerial and technical training and support to help municipalities improve the strategic management of urban areas (ibid.).

In many countries the informal sector is the main provider of goods and services to the poor. City-wide development initiatives need to assist businesses with potential to mature by eliminating punitive regulations that discourage the informal sector (UN-Habitat, 2015a). But programmes need to balance two objectives: maximising the potential of informal enterprises to create jobs and alleviate poverty, while ensuring that necessary social protections and regulations are in place (ibid.). Pieterse (2000: 32) suggests a comprehensive strategy to respond to informal enterprises should include:

  • supportive policies on finance and credit that involve the formal banking sector, government and NGOs;
  • support for local exchange trading and barter systems where these can equitably be sustained;
  • supply-side measures such as the creation of incubators where informal entrepreneurs can grow businesses with some measure of protection, alongside the development of markets;
  • consideration of home-based enterprises in planning and infrastructure development initiatives;
  • reform of procurement policies to promote links between established and emerging businesses.

As noted, a common approach to engaging with the formal private sector is through PPPs. They can be defined as contracts between a private enterprise and government, providing a public asset or service in which the private enterprise bears the risk and management responsibility and remuneration is linked to performance (Muwonge & Ebel, 2014: 18). Involving the private sector in the design, construction and maintenance of infrastructure and the provision of services has been highlighted as an area where PPPs can be particularly influential. The rationale for PPPs is that they provide a mechanism for governments to procure and implement public infrastructure including services, using the resources and expertise of the private sector (World Bank, ADB & IDB, 2014).

Building more and better infrastructure is an important goal for many economies with limited public revenues (UNDESA, 2013a). Castells-Quintana (2015) shows that the quality of urban infrastructure determines the growth-enhancing benefits of urban concentration. Countries with good urban infrastructure can accommodate rapid population increases in urban areas and sustain high economic growth (Alm, 2010). The quality of a city’s infrastructure (housing, electricity, roads, airports, public transport, water, sanitation, waste management, telecommunications, hospitals, schools, etc.) also influences social inclusion, economic opportunity and quality of life (UNU, 2013).

The OECD (2007b) notes the scale of the challenge: global infrastructure investment is forecast to cost $71 trillion by 2030 (about 3.5% of forecasted global GDP). Much of this investment is required in emerging economies. The Programme for Infrastructure Development in Africa estimates that $93 billion is needed annually in capital investment and maintenance until 2020. Currently, there is a shortfall of $48 billion. PPPs have been identified as one possible solution (WEF, 2014: 32).

Partnering with the private sector could: extend services into poorer or informal communities, provide safer work places, promote adoption of non-discriminatory employment policies, help the poor access credit, and boost investment in low-cost housing. Examples such as the slum networking project in Ahmedabad and the privatisation of Manila’s water authority highlight that partnerships among urban stakeholders need to be based on a thorough understanding of community needs and pursued in tandem with other initiatives. In both contexts, the private sector actively sought out partnerships with residents of informal settlements, NGOs and municipal government. These collaborative ventures involved information, education and community campaigns to ensure that residents of informal settlements were involved and had some ownership of programmes. They also sought to provide assistance to the poorest families through the provision of micro-finance (Franceys & Wietz, 2003).

The requirements for successful partnerships include a buoyant private sector alongside a capable and authoritative local government motivated by a common economic interest (Devas et al., 2004). Policymakers need a clear vision of PPP objectives and a sound understanding of the local context to appreciate advantages and limitations (Phang, 2009). A thorough analysis of the long-term development objectives and risk allocation is essential. However, in many regions the legal frameworks dealing with tendering, contracts and oversight are weak or unimplemented, and this lack of clarity discourages domestic and foreign business investment. At the same time, PPPs have proved complex to implement, involving pre-feasibility studies and requiring high technical expertise and negotiation capacities (UN-Habitat, 2016). National and local governments often lack the information and expertise necessary to negotiate on an equal footing with companies that have extensive experience in public service delivery.

To enable the private sector to engage in urban planning, public policy and development objectives, the public sector needs to (UN, 2008; Khan et al., 2016: 40):

  • Consider incentives that encourage private sector participation. World Bank research (2005) suggests legal and regulatory reform is necessary to support more sustainable economic growth and enhance the private sector’s impact (see Box 3 below).
  • Consider arrangements beyond PPPs to meet its financial needs (e.g. fiscal decentralisation, issuing municipal bonds, etc.) and non-financial obligations (improving service provision through better management of operating systems, reducing distribution and transmission costs, reducing water and electricity theft by informal network providers, combating corruption, promoting e-governance, etc.).
  • Implement specific policy instruments and interventions that complement, coordinate and collaborate with the private sector rather than compete against it.

Whilst the emergence of the private sector as a key player in delivering large-scale land development and infrastructure has been beneficial to many financially challenged cities, when poorly managed, PPPs and privatisation can lead to a weakening of public regulation, and contribute to urban fragmentation and increasing inequality – particularly in access to land and services (UNESCAP & UN-Habitat, 2015: 161). Fox and Goodfellow (2016: 157) caution that privatisation has often failed to improve services for the majority of urban dwellers and been accompanied by price increases that have led to disillusionment. They note that where privatisation has led to improvements, it has usually been at the expense of universal coverage, with low-income areas excluded.

Box 3: Kigali (Rwanda): from conflict to global success

Rwanda’s national plans include strategies for the development of targeted sectors such as tourism, ICT, financial and professional services, mining, and agriculture. In the mid-2000s, a national land tenure regularisation programme improved Rwanda’s land registration process. This enabled the functioning of land markets based on private ownership, facilitating a real estate and construction boom and contributing to GDP growth and job creation.

Kigali has benefited from economic development efforts. Its employment and income growth has outpaced Rwanda’s national average. The capital has attracted skilled workers from around the country, while international talent attraction campaigns have targeted the Rwandan diaspora, encouraging their return.

Effective city-level initiatives have complemented national policies. After years of conflict, some prerequisites for economic growth have included improved public safety, stronger governance and an improved business climate, more effective public services and better overall ‘liveability’. Transparency and accountability have been improved through the award of performance-based contracts and adoption of a zero-tolerance corruption policy. Institutional capacity within city-government agencies has been strengthened through the successful attraction of high-quality professional staff, as well as through effective partnerships with foreign institutions, supporting the adoption of global best practices. Tax collection rates have improved, accompanied by the provision of better basic services. The establishment of a ‘One Stop Shop’ that combined all public agencies involved in approving construction permits removed a key impediment to business growth, ensuring the receipt of permits within 30 days of application.

Goodfellow (2014) notes that aspects of the government’s urban agenda have been disadvantageous to the poor, and it is unclear whether it is furthering or hindering Rwanda’s economic growth, structural transformation and political stability. In particular, the expropriation of urban land and the political–economic interests embedded in the real estate sector have critical impacts on Rwanda’s and Kigali’s development.

Sources: Kulenovic & Cech (2015); Goodfellow (2014)