Strategic Regions Subcommittee Report on Draft EESR Framework for Action

Draft July 26, 2007

Economic Empowerment in Strategic Regions (EESR)

Subcommittee’s Response to the InterAgency/Department of State’s “A Framework for Action” Document

Subcommittee Overview

The subcommittee agrees with the fundamental premises of the “Framework for Action” that the private sector can play a key role in promoting peace and stability and overcoming poverty around the world. We also recognize the importance of building partnerships between the global business community, nongovernmental organizations (NGOs), and local enterprises to generate economic solutions to poverty and combat support and sympathy for extremism.

Before commenting on the individual sections of the Framework paper, the subcommittee would like to highlight four broad considerations that we feel are critical to the success of the Framework. First, the considerable differences between the regions - Iraq, the Afghanistan-Pakistan border region, and Mindanao in the southern Philippines – must be recognized and internalized. Each of these regions presents a unique set of challenges. The causes of the ongoing conflicts in each of these regions differ. So do the cultural, historical, political, and economic conditions facing each of these societies and the private business sector.

For example, the level of private business development, the available natural and human resources, the legal and regulatory environment, and the security conditions will affect the viability of development efforts in each region. While the development objectives for all three regions have much in common, the design of specific programs and their implementation will have to be tailored to the local environment. One way of ensuring that these differences are addressed, going forward, would be to create specific regional groupings within the State Department’s Advisory Committee on International Economic Policy (ACIEP) and other government structures related to the program.

Second, we recommend that the EESR strategy put greater emphasis on actively engaging local communities in the development process (as outlined in more detail below) to ensure the highest levels of private sector involvement.

Third and more broadly, a two track approach should be considered in structuring overaching strategies to achieve the goals of EESR. One track would focus on establishing business models that can operate in each region “as is.” Developing such business models will be inherently difficult, but nevertheless priority should be given to creating a sustained business model for doing business in unstable environments.

A second track would focus on improving the environment for doing business. This will help create opportunities for existing businesses and facilitate new business development. These two tracks should not be mutually exclusive – with proper implementation they can reinforce and strengthen each other.

Fourth, we believe strongly that to engage the global business community, EESR should capitalize on two key drivers long recognized as motivating investment in the developing world: corporate social responsibility (CSR) and new business opportunities. CSR is integral in addressing companies’ commitment to creating opportunities at the “base of the pyramid” and contributing to poverty alleviation in a sustainable manner. Similarly, companies can work with NGOs, women’s organizations, and local business communities to help address a region’s most pressing problems while not departing from their own business models. The involvement of the global business community can also create new opportunities for the local private sector. However, these business opportunities must be properly identified and communicated to the local business community.

Finally, the subcommittee recognizes that it is not just any business but a particular kind of ethical business that contributes to positive economic development in areas of conflict. Companies that will be most useful in building ties and boosting development are those that adhere to the rule of law, avoid corruption, recognize the critical role of women in society, don’t abuse their workers and cause environmental degradation, create a sense of community, and do their best not to disrupt traditional ways of life.

Challenges Highlighted by the Subcommittee

The subcommittee has identified several challenges that members also believe need to be addressed for the Framework to be effective. The challenge in the EESR regions is to prioritize the problems that need to be addressed and develop strategies to tackle these problems.

• Risk mitigation. The global business community will undoubtedly face business risks if it begins operating in the EESR regions. These risks, which include both security and legal challenges, have to be mitigated before companies will feel comfortable getting actively involved. For example, conflict areas are often rife with corruption, which means that proper procedures (both on the institutional level and company level) are needed to avoid violations of the Foreign Corrupt Practices Act as well as individual company’s own anti-corruption commitments.

Security risks also undermine stability and the predictability of an investment environment and, most importantly, make it difficult for local companies and foreign investors to effectively plan for the future. Companies also will look for steps by the U.S. government to help protect them from action under the Alien Tort Claims Act in cases where they need to hire or provide financial or material support to local military, paramilitary or police services to provide security in the area of the firm’s operations.

• Infrastructure development. For U.S. companies to invest, a supporting infrastructure – roads, electricity, ports – is critical. Without security and a functioning infrastructure, companies won’t invest. The problem is not the lack of money, but the lack of viable deals. In some of the regions discussed here, investors from the Gulf might be encouraged to help develop at least the minimum essential infrastructure. 
• Investment climate. Investors need mechanisms to protect property rights and government efforts to improve the legal and regulatory environment.
• Identifying business opportunities. As noted above, business opportunities are key drivers of the EESR process. These business opportunities must be identified and links (for example, web portals) must be developed between local counterparts and the global companies looking to engage in these regions. Trade Development Authority grants can play a significant role in helping to identify concrete business opportunities.
• Mobilizing international business interest. One of the key challenges in bringing global businesses to the EESR regions will be to register these regions on companies’ “radar screens.” The competition for foreign investment remains intense as countries with tremendous opportunities to offer and favorable business environments continue to seek private capital. Getting companies to engage in EESR regions without undermining their business model and responding to the pressures of global competition will be a central challenge.
• Locating local partners. Underlying all of these challenges is the need to create local capacity in EESR regions, so that programs are not driven solely from the “outside.” Local business associations can play an important role by engaging the local business community and urging the government to introduce reforms, enhance the investment climate, and develop incentives to attract international investors. In some cases, these associations may have to be created from scratch. In others, they may simply require technical and financial assistance to bolster their capacity. Guidelines for working with local partners include: 
  • Involve local communities quickly and intensively in development projects,
  • Use people whom locals trust and who speak their language,
  • Work with the local community to identify their priorities and ideas for generating economic development, including their hopes for investment.
  • Identify local entrepreneurs who can see the potential for investment.
  • Launch “due diligence” studies that examine the region’s economic, social, institutional, commercial, and technical capabilities.

There are two key ways to encourage communities to believe that their involvement with the government and legitimate livelihoods outweigh violent or illicit alternatives. One is for the government and/or outside players to make major investments that demonstrate that the environment is changing and that the future can be much better than the past. The second (not independent from the first) is for development agents to listen to the communities and respond to their needs quickly and help them generate sustainable streams of income.

Goals

Under “Goals” in the Framework paper, the subcommittee recommends that the point “create new jobs” be expanded to say “create new jobs and livelihood opportunities for local people.”

We suggest adding a goal to say something like “build trust and lasting relationships on the ground.”

The subcommittee also recommends including a point about working to create market institutions in the strategic regions. One of the biggest challenges facing domestic entrepreneurs and international companies is the lack of enabling legislation, weak property rights, limited access to courts, etc. This is a barrier to growth in each of these regions.

Creating Qualified Industrial Zones (QIZs) in each of these regions would be one way to start building market institutions. Some zones have already been started in Afghanistan by the U.S. Agency for International Development (USAID). Pakistan, with assistance from USAID, is exploring how to make its Special Economic Zones more effective. The QIZ concept essentially substitutes for the lack of market institutions by creating mini-governments in a fixed geographical area. While care has to be taken to ensure that these zones don’t just become enclave economies, such zones have proven to be effective at generating employment, creating a disciplined workforce, providing opportunities for women in safe environments, moving a region from subsistence to light manufacturing, mitigating risk for investors, and providing concrete signs of development in a community.

As a general point, in order to maximize the ability to meet the goals laid out in the Framework paper, there needs to be a timeline established for achieving the desired targets. These would not only maximize efforts of the various players involved in this effort, but also lend a sense of urgency to achieving the goals outlined in the Framework.

Structure

The Framework recommends setting up two advisory boards to mobilize information and ideas from the U.S. We concur with this approach. However, we also recommend creating a similar advisory body in each of the regions to help the program develop more quickly. Philosophically, the subcommittee believes it is essential to bring key local actors into the development process early. One idea would be to use carefully vetted business associations in each region and have the local governments join in as appropriate. In Iraq, for example, the Iraqi Business Council funded by the Center for International Private Enterprise could provide one avenue to reach out. Bottom line: What is needed is a very practical approach to engage local communities and identify short and medium term potential business opportunities that convince local people that “this time it will be different.”

We also suggest setting up some structure for undertaking actual “base of the pyramid” business initiatives on the ground. One way to do this might be to set up project review and implementation teams, including representation from NGOs and women’s business organizations in the relevant regions.

Finally, we believe that the structure of the private and public sector boards should be explained in detail. It is important that the criteria and selection process for the boards be transparent and public. A methodology for how the two boards will interact and an outline of their scope of work is necessary to ensure that that no overlap exists and that the relationship between the two is clearly spelled out. For example, will there be an annual report released by the public and private boards? To whom will the report be directed?

Process

A typical investment promotion effort includes at least the following components:

1. Review the investment climate to identify barriers.
2. Overcome the key barriers to market access (for example, set up an investment zone).
3. Identify potential deals in each region, not only for multinationals but for indigenous companies as well.
4. Package the deals with incentives and risk mitigation measures (for example, Overseas Private Investment Corporation guarantees).
5. Identify potential investors.
6. Market the business ideas.

The process described in the Framework follows this model fairly closely. The subcommittee notes that the missing pieces are numbers 1 and 2 above and would like to recommend including these two points.

The QIZs discussed above could be one approach to overcoming investment barriers. Another could be to create model cities by concentrating resources and assistance to the most prospective prospects in each region.

Much of the emphasis in the Framework is on the idea that U.S. business will find reasons to invest or form partnerships with the local private business sector in the three regions. This potential could be increased by focusing on a supplier/vendor development plan. This could include these central elements:

1. Identify what capacity exists among local firms to enter into global supply chains. (Get the local community involved, including people educated outside of the community)
2. Find or create (perhaps through USAID) methods through which to build the capacity of local vendors.
3. Work with the purchasing agents of U.S. and other companies involved in corporate supply chains (for example, Philippine or Pakistani firms in the national capital) to identify product needs.

A possible model for this is the National Minority Supplier Development Council, an organization that links corporate American with the nation’s minority firms and is supported by the Department of Commerce. More information can be found at http://www.nmsdcus.org.

The subcommittee also believes that some type of coordinating structure will be needed to undertake the type of activities proposed in the Framework. Setting up an action or implementation team will be critical. Perhaps a new office could be established in one of the government agencies or a new NGO could be set up. But we believe it is critical that a process be put in place under which companies and NGOs can become involved in creating opportunities on the ground with local people. That is the only way to build the trust to make the Framework work.

Measures

Some of the measures of success outlined in the Framework will take some time to achieve. In addition to those measures, the subcommittee recommends including some short-term measures to show quick impact. Some suggestions include:

• Market opportunities. These would identify investment opportunities for multinationals to enter the market (for example, business feasibility studies) and other potential business deals (including imports and exports).
• Vendor development. Local firms that could serve as reliable vendors for multinationals would be identified. This might involve providing some training.
• Measurement of deals done. The value of investments, imports, and exports would be published regularly.

We also suggest that these measures reflect the goal of building human relationships, shared understanding, and trust. These three elements are crucial in addressing the root causes of extremist movements and terrorism.

Additional Concerns

The subcommittee has a few additional concerns that don’t fit neatly into any of the categories in the Framework. These include:

• Companies and business associations attempting to work in some of the EESR countries often perceive a lack of inter-agency coordination among different U.S. government bodies. For example, the departments of Defense, Commerce, and State all have initiatives to encourage U.S. business to engage in Iraq. Often, however, it appears that these different initiatives are uncoordinated and even working at cross purposes.
• There is a need in each of these regions to create a “feedback loop” between investors and government ministries, investment authorities, and parliamentarians. For example, for U.S. energy companies to invest in Iraq’s energy sector, the government needs to pass a hydrocarbons law. The content of the law is up to the Iraqis. But the creation of a law that provides clarity and contractual integrity could significantly boost the interest of U.S. energy companies in Iraq.
• We also note that the State Department’s Travel Warnings frequently discourage U.S. citizens from traveling to the regions discussed in the Framework. Since the EESR Framework paper covers regions that have potential security problems, the State Department should consider a separate advisory process for these areas that focuses on the particular needs of the business community. For example, beyond providing cautionary information, it could give advice on how to operate as safely as possible and information on how to share information between government bodies and participating firms.

Appendix B

We suggest adding the following bodies under the U.S. government:

• Advisory Committee on Voluntary Foreign Aid, a USAID advisory committee http://www.usaid.gov/about_usaid/acvfa
• Special Operations Command (SOCOM), Department of Defense
• Bureau of Diplomatic Security, Department of State

We recommend that the group below be included under non-governmental organizations:

• Center for International Private Enterprise http://www.cipe.org

Advisory Committee on International Economic Policy Subcommittee on Strategic Regions: