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April 15, 2019

Stronger focus on investing in fragile environments

Ari Nironen

Did you know that it is estimated that more than half of the world’s poor will be living in fragile states by 2030? That is why fragile states are at the core of development financiers’ (DFIs) mission to alleviate poverty.

It is an important goal for us to provide sustainable, good jobs particularly for young populations. It is both a matter of their right to have better prospects for future and a matter of wider interest. High unemployment can often generate problems both locally and internationally.

However, investing in fragile environments is extremely difficult. States often are not able to perform the basic functions such as infrastructure, security, rule of law, and societies are exposed to shocks. Business environment is difficult; companies are of small size, informal sector is large, and the number of unskilled employees is particularly high. In addition, there often are many unpredictable events.

For investors it is hard to find bankable projects. I can see it in my everyday work; a lot of work is needed to turn pipeline to real projects, and project development and technical assistance are often needed.

However, despite many inherent risks – financial, environmental & social as well as reputational risks – opportunities for great development impacts are exceptionally high. And that is exactly why we are needed.

In order to pursue those positive impacts both ourselves and our shareholders and stakeholders would need to set reasonable expectations for DFIs and understand that it is inevitable and unavoidable that some projects will fail in these circumstances. Even though we do all with utmost care.

Perhaps the goal in fragile environments should be that DFIs reach out to a policy goal, such as generating good jobs, with lowest possible cost? It is anyhow cheaper and more effective to fund private sector through DFIs than governments.

This all was very clear also in the DFI Forum for Private Investment in Fragile Environments: last month, 27 multilateral and bilateral Development Finance Institutions (DFIs) met at the Blavatnik School of Government at the University of Oxford, to discuss how to address the practical difficulties of attracting local and international investment, the opportunities for encouraging a more supportive business environment, approaches to reducing perceived risk, the role of concessional finance, the importance of sensitivity to conflict, and ways in which DFIs could work together more effectively.

The forum built on the Escaping the Fragility Trap report, which had made the case for a stronger role for DFIs in supporting these economies.

These development financiers agreed the following:
1. To create a series of transformational pilot programmes to increase effective collaboration of such institutions in selected countries:
2. To work together to identify ways to streamline their processes for investments in the private sector of economies affected by fragility and conflict and
3. To continue their efforts to identify appropriate uses for concessionary capital that can be blended with commercial capital to achieve development impact.
This is not enough but it definitely is a good start. More actions and cooperation among different counterparties are needed. I am convinced that we can, and we will play an increasingly important role in supporting development in fragile environments.

Ari Nironen
Senior Investment Manager, Finnfund

Writer works at Finnfund’s investment team and is focused on investments in fragile states and environments. Finnfund’s new strategy for 2018-2025 highlights investments in the poorest countries and fragile environments.

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