Strong opportunity in ‘fragile’ investment

The Jabaliya refugee camp, Gaza Strip. Warrick Page / Getty Images

Across the world, more than 1.5 billion people live in fragile and conflict-affected states and territories. The OECD and the American aid agency USAid expect that by 2030, global poverty will have become increasingly concentrated in such places.
Because the private sector is so underdeveloped in these places, the opportunities for investment are great — if the markets are penetrated.
In most cases, the acute challenges to private sector development in fragile and conflict-affected states and territories (FCS) have been made worse by asset destruction, business disruption, political instability and low government capacity. The World Bank's 2011 World Development Report identified access to electricity as the No 1 constraint facing businesses.
That same report identified unemployment as a major driver of conflict. According to surveys featured in the report that were conducted in six countries and territories affected by violence, unemployment was the main reason cited for why young people became rebels or gang members. The report concluded that the private sector plays a key role in long-term development and peace.
The Middle East and North Africa (Mena) region has a number of such countries and territories, including Yemen, the West Bank and Gaza, Syria, Libya and Iraq. While these places all have fragility in common, and possible security-related issues, their differences need to be recognised and taken into account when formulating programmes of engagement.
In the West Bank and Gaza, checkpoints and barriers hinder movement and access, creating physical and operational constraints to efficient private sector participation and growth.
In Libya, 40 years of economic dependence on the public sector has led to severely limited capacity, unwieldy institutions, a poor regulatory framework and the need to develop a private sector almost from scratch.
Yemen has the twin problems of being both low-income and an FCS. Thus, the country is faced with challenges of poverty and human development, along with limited capacity, institutional constraints and a weak local private sector.
Public-private partnerships are especially viable in infrastructure, such as the power and the telecoms sectors. And if financial infrastructure is built up it could provide opportunities for investment in banks, small and medium enterprises (SMEs) and microfinance institutions. This would provide more entrepreneurs with access to finance. Trade finance is another important source of financing, especially for SMEs, which otherwise would have very limited trading opportunities.
Essentially, the scope for opening markets and fuelling private sector investments in these countries is tremendous. As always, investments in unstable locations carry certain risks, but the potential rewards are high in terms of economic development, improved living standards and profitability.
It is true that each country requires a tailor-made action plan. But there are a few rules for FCS investment success:
• Having a strong, dedicated team on the ground or in a neighbouring country, with good local knowledge and contacts, often helps to jump-start the process.
• Capitalising on the demonstration effects of engaging in FCS is key. Once one or two investments have been made, investor confidence starts to pick up and it becomes increasingly clear that these deals are viable and do have an effect. This helps to catalyse additional investment into the country.
• Despite political hurdles and possible instability, governments must play a role in building both institutional and human resource capacity and creating an environment more conducive to private investment. The important role of the state in attracting private investments is becoming apparent for many domestic stakeholders, and developing institutional capacity and better regulatory frameworks has become a priority for governments and donors in many FCS countries.
Fragile states might represent the greatest opportunities for investors. These are the markets in which the private sector can make a development impact and gain sizeable profits. But it is urgent that the international development community works with national governments to make the necessary reforms and reduce risks for investors.
The public sector, even in middle-income FCS countries, often does not have the capacity or the financial resources to emerge from fragile situations on its own. The private sector is an integral player in pushing for change and revitalising the economy. Even countries with viable domestic private-sector players need foreign partners and investors to open up new areas of business and to share knowledge, financing and innovation.
This will take time and considerable effort, but engaging urgently is imperative to helping these countries achieve greater stability. Communities need private enterprises to help rebuild infrastructure, spark entrepreneurship and deliver services. Countries emerging from years of conflict and fragility deserve a chance to re-enter global markets and catch up with their neighbours and peers.
To realise that dream, we all need to engage and work together to make a difference.
Dimitris Tsitsiragos is vice president for Europe, Central Asia, Middle East and North Africa at International Finance Corp, a branch of the World Bank