Official development assistance (ODA) and public sector solutions alone are insufficient to achieve the Sustainable Development Goals (SDGs). ODA providers are therefore increasingly looking at ways to engage with the private sector to leverage additional resources, expertise and innovation potential to support development objectives.
Private sector engagement
Abstract
Official development assistance (ODA) and public sector solutions alone are insufficient to achieve the SDGs.
The 2015 Addis Ababa Action Agenda, 2030 Agenda, and the Paris Climate Agreement all recognise the essential role of private sector engagement (PSE) in ensuring sustainable social, economic and environmental outcomes.
The Kampala Principles of the Global Partnership for Effective Development Co-operation promote parter country ownership of PSE and alignment with national sustainable development priorities.
The Multinational Enterprises and Social Policy Declaration is the International Labour Organization’s guidance for multinational and national enterprises on social policy and inclusive, responsible and sustainable workplace practices.
When engaging the private sector, governments should ensure businesses meet expectations the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct and the UN Guiding Principles on Business and Human Rights.
The OECD Development Assistance Committee (DAC) Blended Finance Principles for unlocking commercial finance for the SDGs help development providers design and implement blended finance effectively. They build on commitments to ODA targets, leaving no one behind, development effectiveness and untying aid.
Inclusive development partnerships, including the private sector, are one pillar of the OECD DAC Peer Review Methodology.
While engaging with the domestic private sector to achieve development results can be beneficial, DAC Members have agreed to untie ODA in the DAC Recommendation on Untying Official Development Assistance.
Effective private sector engagement requires:
1. Having an adequate strategy, skills and systems in place. PSE objectives and modalities should align with the overall development co-operation strategy and partner country priorities. Staff need capacity to engage with the private sector and results should be tracked to help decision making and learning.
The Swiss Agency for Development and Cooperation (SDC) has adopted a Handbook on Private Sector Engagement that defines objectives for PSE as well as the principles and modalities for engaging.
Belgium’s Development Finance Institution (BIO) has also a theory of change focused on specific sectors and aligned with the SDGs.
Italy’s partnership-based approach to strengthening Ethiopia’s coffee value chain leverages Italian private sector expertise and combines technical assistance with blended finance. It supports local actors, promotes long-term sustainability and aligns with Ethiopia’s national priorities.
Canada's development finance institution FinDev has an impact framework focusing on market development, gender and climate.
The U.S. International Development Finance Corporation (DFC) created the Impact Quotient (IQ), a tool that provides an objective, systematic assessment of current and potential projects including environmental, social or development risk.
2. Using the most suitable instruments, grounded in partner country’s development priorities. Providers can use financial instruments to close financing gaps and non-financial support to address knowledge and capacity constraints. Specific sectors (e.g. agriculture, green energy) can be targeted depending on partner country’s priorities.
2.1. Financial instruments
Grants: non-reimbursable transfers in cash or in kind, such as Korea's Inclusive Business Solution Programme and the Czech B2B programme.
Debt instruments: transfers in cash or in kind for which recipients incur legal debt. For instance, the Development Bank of Austria (OeEB) provides long-term loans.
Equity investments: purchase of stock in a company, typically associated with voting rights, or buy shares in collective investment funds. The Investment Fund Denmark provides equity investments.
Guarantees: risk-sharing agreements under which the guarantor agrees to pay part or the entire amount due on a loan, equity or other instrument to the lender/investor in the event of non-payment by the borrower. Sweden’s guarantee instrument mobilise capital through risk-sharing.
2.2. Non-financial instruments (technical assistance and capacity building)
For the public sector, the European Commission’s Technical Assistance and Information Exchange (TAIEX) supports public administrations on a wide range of topics (e.g. competition policy, financial services, SMEs and industry). The Czech Ministry of Finance supports developing countries in public finance and financial regulation, and Expertise France assists partner countries in improving the business climate and innovation ecosystems, which can in turn support local private sector development. JICA’s technical co-operation project with Bangladesh Economic Zones Authority (BEZA) facilitates private sector investments in the country.
For the private sector, the British International Investment (BII) provides technical assistance to support its pipeline and portfolio companies. The EU and the International Labour Organization’s Responsible Supply Chains in Asia programme helps companies take action to respect human and labour rights and environmental standards.
3. Engaging with partners to leverage their expertise and achieve scale. Providers can work with multilaterals, other development partners, civil society organisations, and business associations through multi-stakeholder partnerships to draw on complementary strengths and expand reach.
Through the Dutch Diamond Approach, the Netherlands combines private sector efficiency with local knowledge of CSOs.
Japan supports the Persistent Africa Climate Venture Builder Fund through JICA’s Private Capital Mobilisation Financing scheme, part of its Blended Finance Window. JICA co-invests with junior equity alongside other development providers, including the African Development Bank (AfDB), Nordic Development Fund (NDF), FSD Africa Investments (FSDAi), and Impact Fund Denmark (IFDK). By taking on the riskier junior and catalytic tranches of the fund structure, Japan facilitates access to finance for climate tech start-ups in Sub-Sahara Africa Region.
The International Mobilisation for Climate Action (IMCA) is a collaborative partnership led by Denmark, Finland, Norway, Sweden and the United States, mobilising private capital for climate mitigation and adaptation, biodiversity and nature in emerging markets and developing countries.
4. Focusing on additionality and impact. Private sector engagement is ODA-eligible if it conveys development additionality alongside financial or value additionality (Figure 3). These forms of additionality are interconnected and not mutually exclusive. Clear frameworks to ensure and assess additionality can improve development results.
The Huruma fund, a partnership between Spain, the European Union and private investors, uses public resources to attract private investment in high-risk areas while convening both financial and development additionality (e.g. supporting smallholder agriculture to reduce poverty).
The German Investment and Development Corporation (DEG) and the KfW Group developed the Development Effectiveness Rating (DERa) to assess additionality and expected development outcomes as part of investment decisions and monitoring.
Norway’s development finance institution (Norfund) has defined an approach to additionality that targets the poorest, most capital-constrained and riskiest markets while improving social and environmental performance.
5. Recognising the private sector's need for financial sustainability. It’s important for the private sector to have a financial return to ensure sustainability and avoid market distortions.
When the International Finance Corporation (IFC) finances local banks that lend to small and medium size enterprises in developing countries, it designs its support to ensure that local banks remain financially sustainable. The IFC does not require them to lend at rates that would cause losses.
The Slovak Agency for International Development Co-operation (SAIDC) provides grants for feasibility studies which can help assess both the financial sustainability and development impact of private sector projects.
One of Swedfund's investment pillars is financial viability, and ensuring that companies are profitable in the long- term.
6. Partnering with domestic firms without tying investment-related ODA.
Technical co-operation, it is not considered as tied aid under the DAC recommendation on Untying ODA. Geberit, a Swiss sanitary technology company, and the Swiss Agency for Development and Cooperation (SDC) co-financed vocational training for plumbers in Ukraine to increase young people’s employability and income, while helping Geberit access skilled workers.
Public-private partnerships: The SDG Impact Finance Initiative is a partnership between Swiss public and private actors to mobilise over USD 1 billion in private capital for development impact. ODA helps de-risk and leverage investments of Swiss banks.
Strengthening the business climate in partner countries: The Dutch Theory of Change for Private Sector Development identifies strengthening the business climate as one of its priorities. Stronger enabling business environments in partner countries can help both domestic and foreign firms operate in partner countries.
Investing in Responsible Business Conduct (RBC): Companies may lack knowledge and capacity to manage sustainability risks in developing countries and respond to RBC regulatory developments. To disseminate standards, raise awareness, level the playing field and improve business practice, the Swedish Workplace Programme helps reduce risks in Swedish value chains while raising labour standards in partner countries and the Dutch government has supported multi-stakeholder sectoral agreements.
How do we know if DAC Members are moving in the right direction?
DAC Members have systems in place to monitor and evaluate the impact of PSE. They report their PSE activities to the DAC which increases transparency on additionality and impact.
Increased PSE does not lead to increased tied aid, as measured by the tying status of ODA by DAC Members.
Private financing mobilised for development increases.
Companies increasingly see the SDGs as part of their core business and use the impact standards for financing sustainable development.
The business climate in developing countries improves, and small and medium enterprises in developing countries flourish and hire more employees.
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OECD DAC Blended Finance Guidance 2025, Best Practices in Development Co-operation, OECD Publishing, Paris.
Mobilising private finance for development, OECD [webpage].
Foreign direct investment - FDI Qualities Guide for Development Co‑operation, OECD Development Policy Tools, OECD Publishing, Paris.
OECD‑UNDP Impact Standards for Financing Sustainable Development, Best Practices in Development Co-operation, OECD Publishing, Paris.
Private Sector Engagement for Sustainable Development, OECD Publishing, Paris.
Methodological notes, OECD [webpage].
OECD Data Explorer, OECD [database].
More Framework principles are available on Development Co-operation TIPs • Tools Insights Practices.
