Unlocking private sector investment in fragile states

Private investment is essential for the development of fragile states, but in order to attract foreign investors and encourage domestic one, governments must work to create the right environment. That was one of the main messages from two Friends of Europe events on 31 January, when experts discussed how best to attract investments and the private sector in to difficult environments.

Private-sector finance is considered essential for meeting the Sustainable Development Goals adopted in 2015 by the United Nations General Assembly. This “Agenda 2030” calls for the promotion of development in a way that protects the environment and respects human rights, and their scale means they will need trillions of euros in financing. Governments cannot provide these amounts through official development assistance (ODA). Moreover, to grow beyond aid dependency, fragile states need a strong private sector to provide goods and services, generate tax revenues and create employment.

However, fragile states often suffer from damaged infrastructure, weakened institutions, an inadequate regulatory framework and political uncertainty. In the poorest countries, much of the population lacks access to clean water and primary education. These challenges mean that only 6 percent of the foreign direct investment that went to developing countries in 2012 went to countries on the fragile states list.

Mobilising the private sector in conflict-ridden countries or so-called frontier markets must therefore be a key priority. The Policy Insight “Unlocking private sector investment in fragile states” explored ways to do this. The event was organised in partnership with the International Finance Corporation (IFC) on the occasion of its 60th anniversary.

However, marrying aid and private investment sounds like a tricky balancing act, as the private sector needs to turn a profit. Fortunately, businesses are increasingly aware that only sustainable economic activities will be profitable in the long term, a theme taken up in the dinner debate, “Innovative financing tools for development – From theory to practice”.

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