Opinion
Humanitarian Action

5 ways to drive investment in the most challenging fragile places

Young African Xhosa Male in his greenhouse vegetable garden, sits on his haunches while referencing information on his tablet. Investment; fragile places.

Investment in fragile places can have a ripple effect beyond specific businesses, boosting the local economy. Image: iStockphoto/subman

Andrew Herscowitz
Executive Director for North America, ODI
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  • Fragile places range from areas affected by conflict to those at risk from climate events or experiencing bad harvest years.
  • The countries, regions, cities or even neighbourhoods classified as “fragile” need both investment and support to create more economic stability.
  • Research and on-the-ground work in such areas shows there are specific ways to help fragile places that can create significant ripple effects throughout a market or even a local economy.

The World Bank is hosting its Fragility Forum this week, which aims to “examine the success and failures of developmental interventions in countries affected by fragility, conflict and violence”. There will be plenty of broad, high-level discussions and announcements, including calls for more money and partnerships to help countries affected by such risks.

When we think of fragile places, we often think of countries on the verge of conflict, embroiled in conflict or emerging from conflict. But fragility isn’t just about conflict. Catastrophic climate events, natural disasters, or even bad harvest years also create fragility. And there aren’t just fragile countries either, there are fragile areas, as well as fragile contexts. When a catastrophic earthquake strikes, it kills people, destroys infrastructure and renders public institutions non-functional, but it doesn’t pay attention to borders.

What is a fragile place?

Still, not everyone agrees on what a fragile place is, and some don’t even like to use the term fragility. But one way of looking at this issue is that it’s about places that not many tourists visit and where foreign direct investment generally does not go.

Wealthy countries, humanitarian organizations, and philanthropists continue to scratch their heads about how to do more to drive investment to help these fragile places. Global leaders often hope to drive private investment into these areas as a less expensive and more sustainable solution than perpetually spending limited aid dollars.

For example, the US Congress passed the Global Fragility Act in 2019 “to seek to stabilize conflict-affected areas and prevent violence and fragility globally”. The White House even identified priority fragile countries.

Using such policies to promote blended financing to help just a few projects – even small ones – get across the finish line in fragile places can prime markets for growth. “A small number of investments may even have catalytic potential, enabling direct and indirect multipliers that ripple through the entire economy,” says a 2021 report by research centre the State Fragility Initiative.

Power Africa, for example, is a US government initiative to double access to electricity in sub-Saharan Africa by 2030. It brings together 12 US government agencies and 20 bilateral and multilateral partners to provide financing, technical assistance, training, policy advice and grants to local organisations.

The effort has helped more than 150 power transactions in some of the most challenging environments reach financial close. Since 2013, Power Africa has created or improved electricity connections for 172 million people across the continent.

Based on both research and on-the-ground experience of such projects, here are five ways to help increase investment in fragile places:

1. Work with the local private sector

The World Bank, the US government and others have policies that can require them to withhold assistance to countries where there’s a conflict, a coup, a de facto government or even a questionable election. It’s rarely the private sector’s fault, though, let alone the fault of a business – so why punish them?

Multilateral development banks (MDBs) and development finance institutions (DFIs) should be able to continue to work with the private sector, regardless of such political situations, to support projects that create jobs and reduce poverty. This helps promote a stronger civil society, increases stability and offers a counterweight to weak government institutions.

2. Put staff on the ground

Unfortunately, embassies and international institutions tend to have skeletal footprints, if any footprint at all, in fragile places. Development banks and agencies typically cluster staff in the capitals of large, stable countries with international schools and amenities. But effective development requires on-the-ground presence.

Having even a few staff on the ground – people who know local businesses, banks, the political context and so on – will help development institutions assess risks and understand how and where they can have impact. On-the-ground staff can also provide transaction advisory services and handholding to local businesses – demystifying the cumbersome and burdensome processes associated with securing financing from MDBs and DFIs.

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3. Don’t just work through intermediaries, make it worth their while

Most DFIs and MDBs do few deals in low-income countries. Many do no deals under $10 million and are reluctant to send staff to fragile areas to conduct due diligence and monitoring. It’s also difficult for a small business to deal directly with a DFI or MDB. The cost of doing business with them is high due to legal fees and the need to comply with their environmental, social, and governance requirements.

To reach small businesses, therefore, MDBs and DFIs typically lend money to other banks, who then lend that money to businesses. But that increases the cost of borrowing for the final beneficiary, as each entity takes its cut.

Intermediaries such as public development banks help MDBs and DFIs achieve their development goals, so they should be compensated accordingly. That means providing loan guarantees or low- or even below-cost loans to the intermediaries, so long as some of the savings get passed on to the small businesses that ultimately borrow the money. Free technical assistance can help intermediaries improve the quality of deal screening. Grants or fee discounts can encourage them to collect data on whether a project is achieving its intended development impact.

4. Establish a team dedicated to deals in fragile contexts

Most staff at DFIs and MDBs believe they are being judged by the dollar volume of their deals. They are. Their institutions constantly issue press releases about how many billions of dollars they have committed to various projects. Deals in fragile areas have lower ticket sizes and higher risk of default. So, unless staff are specifically assigned and incentivized to do this type of work, they won’t do it.

5. Work together

There are many good examples of MDBs and DFIs working together on the issue of fragility.

Under the UK’s G7 leadership, a DFI called the British International Investment (BII) launched the Africa Resilience Investment Accelerator. It brings MDBs and DFIs together to identify the constraints to and opportunities for investment in the continent’s fragile countries.

Despite Russia’s invasion of Ukraine, the US International Development Finance Corporation, another DFI, has continued to work with a local bank to provide financing to the country’s small businesses.

And the World Economic Forum has organized a Humanitarian and Resilience Investing Initiative, which brings together 40 partners to try to unlock $15 billion of investment in at-risk and crisis-hit communities.

When MDBs and DFIs launch joint plans to staff up in fragile areas, sometimes agreeing on which organization is in the best position to do more can help these organizations make even more of a difference in fragile areas.

Have you read?

Development institutions, civil society and the private sector are all trying to drive more investment into fragile places. The World Bank’s Fragility Forum presents an opportunity to bring everyone together to learn about what works – and what doesn’t. This will help organisations create specific strategies and execute on their promises to help fragile places regain some stability.

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Related topics:
Humanitarian ActionFairer EconomiesDevelopment Finance
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