Governments have a role in unleashing private capital

Private company Kalangala Infrastructure Services inaugurated an infrastructure project with the launch of a new ferry for Bugala Island in Uganda. Governments need to take the first step in making sure that there are strong enabling environments for the private sector to invest in development. Photo by: USAID / CC BY-NC

Businesses are gathering Tuesday at an international business forum in Addis Ababa, Ethiopia, to discuss how they can invest in the sustainable development goals, support economic growth, foster innovation and operate using responsible business practices. But they can’t do it alone and governments have a critical role to play to create strong enabling environments that make a business case for private capital in development.

What is the most important step to foster sustainable development commitments from private entities in a post-2015 world? Devex asked a group of business, government and academic leaders what they think needs to be done in this new era of development finance.

The private sector’s integral role is a virtually a foregone conclusion these days.

“Do you see the risk of this not happening?” Derk Bienen of BKP Development Research & Consulting, told Devex. “Public institutions and [official development assistance] have come under strain — they know that they don’t have the money and have to look for finance elsewhere.”

The process to shore up those commitments must still largely be underwritten by public entities. In other words, the onus is on governments to court private capital.

“The public sector really needs to take the first step,” said Peter Fanconi, chief executive of impact investment firm Blue Orchard Finance. “It’s an absolute must to create opportunities to buy into the industry, to make it very simple.”

Local regulations need to be strengthened and there needs to be increased financial transparency — when that happens it will open up pools of impact investment funds that are earmarked for development initiatives.

“We are still seeing a lot of countries who are not prepared yet to apply regulatory standards, so you basically have assets of funding waiting in front of the door but not entering,” Fanconi explained. “If aid and development banks are able to support and advise local governments on setting up regulations, establishing credit offices and measuring overindebtedness, then you will have assets and funding flowing in. This is not the role of the private sector.”

Indeed, strengthening financial regulations were a point of early debate in Addis, with civil society organizations advocating for the creation of an intergovernmental regulatory body to serve as watchdog for public finances.

This government-led buy-in process is a natural precursor to a business strategy rooted in shared value principles, a partnership of “consensual development.”

“What the private sector needs to do together with the governments of developing countries is come together in a genuine partnership to embrace a set of shared values,” said member of European Parliament Nirj Deva.

The idea, Deva explained, is for private companies to leverage consensual development as its primary interest for investing in sustainability, replacing traditional practices of corporate social responsibility.

“CSR, which has been driving private sector activity in developing countries, is not working,” he said, adding that social development investments become an afterthought that is secondary to core business operations. “If you can have this consensual development then developing countries will benefit from private sector inputs and the private sector will benefit because they are building core capacities.”

What does your organization believe is the most important step to foster sustainable development by the private sector? Join the discussion as the Financing for Development Conference unfolds.

Devex is in Addis to give you the inside track on #Fin4Dev. Check out our running blog, and follow @Devex, @richard_devex and @AlterIgoe to get the latest news and developments from #FFD3.

About the author

  • Naki mendoza 400x400

    Naki B. Mendoza

    Naki is a former reporter, he covered the intersection of business and international development. Prior to Devex he was a Latin America reporter for Energy Intelligence covering corporate investments and political risks in the region’s energy sector. His previous assignments abroad have posted him throughout Europe, South America, and Australia.