How development finance can enhance the impact of market systems approaches

Successful private sector development (PSD) is fundamental to the achievement of all of the UN’s Sustainable Development Goals (SDGs), and has three elements:

1. the creation and expansion of competitive firms that provide quality jobs and affordable goods and services
2. the fostering of supply chains to link these firms with smaller providers and larger buyers
3. the creation of an institutional framework within which such firms and value chains can emerge and thrive

Donor resources being deployed in these areas have grown significantly over the last decade, and this is likely to continue. Development finance institutions (DFIs) provide finance to help firms become more competitive and to grow. Market systems development (MSD) approaches work on the linkages between these firms, supporting functions (e.g. finance and infrastructure), and the ‘rules of the game’. A range of other donor interventions such as technical assistance (TA) and policy advice also aim to address the wider institutional framework within which firms operate.

A key question is whether the resources being devoted to these activities will be sufficient to help trigger self-sustaining PSD? While it may not be possible to answer this definitively, it is clear that the more effectively resources are used, both individually and in combination, the more likely the answer will be yes.

This thinkpiece sketches a framework to think through and begin to operationalise this. It starts by setting out a ‘spectrum’ of different forms of donor finance, and examining donor experience relevant to two fundamental questions:

• what type of donor finance is likely to achieve the greatest level of PSD in a particular context?
• how should donor resources be combined to maximise impact and value for money?

The concept of ‘market failures’ is used as a framework to show how different PSD interventions could be complementary, particularly how commercial and concessional forms of finance might complement market systems activities.

Finally, the paper suggests the appropriate mix of finance could begin to be assessed, as well as who should make the interventions.