Business and government: agents of change?

This post reflects on a somewhat neglected issue in debates on private sector contributions to governance and development.

In settings of low governmental capacity and resources, much of the attention is on corporate social investment in 'hard' and 'soft' infrastructure -- from roads, bridges and generators to clinics and schools. 'Senior' firms in longer-timeframe, sunk-cost sectors such as mining and energy need little 'business case' persuasion about the risk-mitigation and reputation-building importance of such contributions: establishing and maintaining their local social 'license-to-operate' (whatever regulations require), ensuring good relations and bargaining power with provincial and national governments, developing the local skills-pool, and so on.

(The question on such issues is seldom now 'why?' contribute to social development but rather 'how?' -- especially in terms of where to draw an appropriate and sustainable line, generally and in particular settings, on private sector contributions to social infrastructure; after all, it is (and should be) mainly the responsibility of public authorities to provide such services. This 'how' question raises significant issues for firms of expectation management with both governments and communities. It also raises principled issues, for instance to ensure governments remain responsive to constituents and incentivised to provide public goods; ripe for a blog post of its own - watch this space!).

The relatively neglected issue is not about corporate investment in communities or their services, but 'investment' -- beyond simply paying taxes -- in government and its capacity. This includes officials' capacity to plan, deliver and maintain the sorts of social services mentioned above, but I am more interested here in thinking innovatively about private sector contributions to building officials' capacity to regulate investors in a responsive and responsible manner; that is, ensuring capable civil service counterparts for purposes of negotiating investment terms and regulating these over time.

Counter-intuitive?

I'm challenging the assumption that firms detest regulation and that the last thing they would think sensible is to help produce more pro-active, informed and capable government officials. Whatever the case in developed settings, I think in weak governance zones the contrary is true, at least for serious firms: no-one likes red tape, but firms often prefer more-demanding-but-predictable regulation to anything-goes-today regulation, or regulatory vacuums; neglected regulatory duties can become sources of reputational or operational risk.

This week I participated in the occasional 'Diamond Dialogues' series (see here), this one in London, reflecting on natural resources and national development. One theme was weak policy- and decision-making capacity in some host governments. Even if they have well-meaning and well-designed social development policies, firms often struggle to get government officials to understand or act on what investors need to flourish in ways that benefit all 'stakeholders'.

Infrastructure analogy

Fragile but resource-rich settings like Guinea, Sierra Leone and Liberia are to some extent 'laboratories' for a more flexible approach to what the private sector can do to help government help the private sector. (Hideous historical examples of social engineering and experimentation or condescending connotations mean that I use the word 'laboratories' cautiously).

Decades of conflict and maladministration have meant huge deficits in physical infrastructure in Mano River Union countries in West Africa, especially rail-to-port and power generation. Big resources projects might not be a development panacea, and private delivery of public goods is hardly uncontroversial; but if traditional expectations of public provision of infrastructure are adhered to in such places, little is likely to happen. So the sub-region may prove interesting in generating new models of public-private projects to ensure production and export capabilities.

If firms in such places see the sense (or imperative) in providing physical infrastructure, it may often make sense for firms to help the local public service develop its internal administrative capacity. It may be short-sighted of extractive firms with a longer-term country footprint to relish the prospect of out-manoeuvring local negotiators and regulators, for example in countries set potentially to become oil & gas producers for the first time but which lack any institutional experience of administering such sectors.

Ways and means

Firms might consider seconding their staff to government training or implementation teams, or vice-versa.(*) More appropriately -- to reduce the risk of firms 'capturing' state officials and exercising undue influence -- firms in the exceptional settings of weak governance zones can help fund third parties to advise and assist government officials, for example during contract negotiations / reviews, or mining code revision. US lawyers and academics helped the post-conflict Liberian government re-negotiate contract terms with major iron ore and rubber investors; but if these firms had helped ensure a strong Liberian negotiating team to begin with, its not unreasonable to think that they might have secured a more durable deal which withstood political demands for review.(**)

Transnational foundations and NGOs have helped Guinea review its outdated mining code, arguably helping mitigate public anger with perceived historical exploitation by foreign mining interests where local officials did not push the national interest effectively, for whatever reason...; would it really be inappropriate, in an age of donor austerity, if firms paid for this kind of public interest work to be done?

I will try list some downsides:

* There are issues with secondments quite apart from risk of regulatory capture or whether such placements actually help build indigenous state regulatory capacity; the problem is a wider one of state-building and appropriate use of tax revenues and local human resources.
* Also, the recent enthusiasm of Tony Blair and others for placing short-term foreign experts inside African government departments carries some obvious colonial-era ramifications. One is hesitant to talk in terms of 'educating' government officials on how a sector works, even if that is often what is at stake.
* Firms looking to boost government capacity would have to negotiate tricky politics in another sense: for example, strong administrative support to one government might lead to perceptions of political partisanship, unduly exposing firms should elections lead to change of government.

Still, if a major challenge for investors in weak governance zones is getting government to respond, there is scope to think more flexibly on how to generate a cadre of officials with greater negotiating and regulatory capacity.

Firms that help boost counterparts' capacity in this way may experience more robust government encounters; but I think many firms operating amid weak state capacity would prefer dealing with a 'worthy adversary' (consistent and capable officials whose decisions are more likely to endure) than the uncertainty that comes with negotiating with far weaker counterparts. Robust but predictable regulation may be preferable to regulatory volatility or neglect. Also, publics and officials who feel that their interests were not pressed with sufficient skill and vigour during contract-making are probably more likely to turn around sometime soon and insist that all these things be reviewed.

Jo

As with all these posts, you can leave comments by clicking on the title to this post and scrolling down.

* Note last week's article in The Economist p. 31-2 (April 21-27, 2012) on the place for private sector experience in overhauling the UK civil service. There are myths about the relative efficiency and effectiveness of private sector personnel, but the point stands.

** The Liberia example is complicated because the initial contract negotiations involving Firestone (re-negotiation) and ArcelorMittal (first-time contract) were conducted with an unelected transitional administration during a highly uncertain post-conflict period. That in itself raises major issues on which I've written in my doctoral work, and with Kyla Tienhaara -- here.