Up to two-thirds of the world’s extreme poor will live in conflict-affected situations (FCS) by 2030, according to World Bank Group (WBG) estimates. Advancing development outcomes in FCS is therefore central to the WBG’s mission, and the private sector is key to increasing economic growth and breaking the cycles of violence and fragility.
The 2011 World Development Report: Conflict Security and Development, and the WBG’s first Fragility, Conflict, and Violence (FCV) strategy (2020-2025) have both highlighted the critical role of the private sector in its approach to FCS. The private sector can create jobs, provide livelihoods and services, and contribute to sustainable development across multiple sectors. However, despite its potential for impact, the private sector in FCS is often informal, constrained, distorted, and may involve actors that are part of the conflict.
With a focus on unlocking this potential, supporting private investments in FCS has been a strategic priority for both the Bank Group’s International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) for over a decade. Both institutions have committed to scaling up their activities in FCS significantly. IFC has committed to delivering 40% of its business volume in International Development Association (IDA) and FCS countries, and 15–20% in low-income IDA and IDA FCS countries by 2030. MIGA has committed to increasing the share of the volume of guarantees issued to projects in FCS and IDA countries to 30– 33% by fiscal year 2023.
What has been learned from past support for private investments in FCS?
A recent IEG evaluation assesses IFC’s and MIGA’s support for private investments and their development impact on FCS and identifies key constraining factors and possible trade-offs that investors, practitioners, and policymakers should consider. The evaluation finds that while both IFC and MIGA have gradually deployed new approaches and instruments in FCS, they have not exhibited an upward trend sufficient to achieve the targets.
This is in part the result of private businesses often being limited by insecurity, the lack of basic infrastructure—such as electricity—, weak governance and corruption, and lack of access to finance and land. These factors translate into financial and non-financial risks that deter private investors away from FCS and constrain the pipeline of bankable projects for IFC and MIGA to support.
Evidence shows that many private investments supported by IFC and MIGA in FCS have been effective, despite the heightened risks in fragile contexts. Evaluated IFC-supported private sector investments during the 2010-2021 period performed just below investments in non-FCS environments, driven by the strong performance of projects in infrastructure, larger FCS economies, and with repeat IFC clients. And, in many instances, successful investments showed effects well beyond the projects, such as the development of local markets.
Concentrated in traditionally well performing sectors, such as infrastructure, evaluated MIGA guarantees in FCS environments outperformed those in non-FCS. Another factor contributing to the high ratings was working with sophisticated international companies that tend to be better capitalized and have more diversified revenue sources compared to local firms (which MIGA cannot generally support).
Leveraging this performance with increasing activities in FCS remains a challenge. Under the IFC 3.0 strategy, IFC has deployed tools to support its engagement in FCS and tackle constraints to private investments in FCS. These include the blending of private and public funds to mitigate financial risks in high-risk environments, efforts to scale up upstream market creation activities to develop bankable projects, instruments to strengthen country diagnostics to better understand the intrinsic market characteristics of every country to address them more effectively, and adjusting its measuring and monitoring framework to better account for development impacts. While some of these recent instruments could bear fruit in the future, it is yet too early to assess their impact.
Early assessment of a new tool: the IDA Private Sector Window
The World Bank Group’s fund for the world’s poorest countries, IDA, launched the Private Sector Window (PSW), now the WBG’s most prominent blended finance instrument. The PSW uses non-commercial, development funds to mobilize private investments in underserved sectors and markets in FCS countries. An early IEG assessment shows that while the PSW allowed IFC and MIGA to support some projects in new markets and sectors, its usage was below expectations as the financial risk mitigation offered by the PSW is only one of the factors deterring private investments in high-risk countries.
A shortage of bankable projects that meet the IFC’s and MIGA’s standards, more so than the availability of finance, limits scaling up business in fragile contexts. Addressing this constraint warrants further shifts towards efforts to develop projects and warrants changes in the institutions’ business models.
Factors and Trade-Offs to Consider in Scaling Up Investments in FCS
This is where efforts to scale up upstream market creation activities come into play and where trade-offs need to be considered. Recognizing the difficult landscape in FCS, IFC and MIGA should continue to review their financial risk and implications in their portfolio approach to ensure that their risk tolerance, acceptance of higher costs, and longer project gestation periods align with their strategic intentions.
IFC and MIGA should also recalibrate further their approaches, client engagements and instruments in FCS to enhance the pipeline of bankable projects. They should take full advantage of their toolboxes to build capacity among less experienced clients and seek to expand their client base beyond those meeting IFC and MIGA standards and policies to include smaller, local, and regional firms.
Close coordination between IFC, MIGA, and the World Bank could enhance their effectiveness in addressing weak governance, uncertainty, underdeveloped regulatory regimes, poorly functioning institutions, and other non-financial risks limiting private investments.
It is also important to recognize the heterogeneity in country characteristics and pursue differentiated strategies based on country-specific conflict analyses and diagnostics of opportunities and constraints for private investments. Furthermore, IFC and MIGA should identify metrics and targets specifically for FCS countries to focus their efforts and track progress in implementing the Bank Group’s FCV strategy.
These lessons emerging from IEG’s evaluation can guide the institutions as they advance in their commitments and unlock the full potential of the private sector.