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GENERATING PRIVATE INVESTMENT IN

Fragile and Conflict-Affected Areas

FEBRUARY 2019

About IFC
IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development institution
focused on the private sector in emerging markets. We work with more than 2,000 businesses worldwide, using our capital, expertise,and influence to create markets and opportunities in the toughest areas of the world. In fiscal year 2018, we delivered more than $23
billion in long-term financing for developing countries, leveraging the power of the private sector to end extreme poverty and boost
shared prosperity. For more information, visit www.ifc.org.
© International Finance Corporation 2019. All rights reserved.
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
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The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a
violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, orfor the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including,
without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.
The findings, interpretations, views, and conclusions expressed herein are those of the authors and do not necessarily reflect the viewsof the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and Development(the World Bank) or the governments they represent.

Photo Credits
Myanmar, Iwan Bagus/IFC; Wind power, Boris Balabanov/World Bank; Liberia, Nyani Quarmyne (Panos)/IFC;
Telecommunications, Chhor Sokunthea/World Bank; Afghanistan, Sofie Tesson/TAIMANI FILMS/World BankGENERATING PRIVATEINVESTMENT IN

Fragile andConflict-Affected
Areas

ACKNOWLEDGMENTS
This report was prepared by a team that included Betsy Alley, Abdullah Aswat, Michel Botzung, Frances W. Brennan,
Arthur Karlin, Joanna Kata-Blackman, Benjamin D. Mueller, Jordan Pace, Alexandros Ragoussis, Joseph Rebello, andJi Yeon Janice Ryu, supervised by Neil Gregory and Tracy K. Washington, under the guidance of Martin C. Spicer, Director,
and Hans Peter Lankes, Vice President, IFC. The team is grateful to Rahma Ahmed, Leo Bureau-Blouin, Mengxi Jin,
Kevin Matthees and Sandra Ofori for research assistance, as well as Ann Bishop, Rebecca R. Post, and David Storey foreditorial support. The figures and layout were designed by pixiedesign, Slidebrand, and Voilà.

CONTENTS
5 | EXECUTIVE SUMMARY
8 | INTRODUCTION
9 | The Private Sector’s Stabilizing Effects in Fragile and Conflict-Affected
Situations (FCS)
9 | Overview – Growth, Jobs, and Stability in FCS
9 | The Private Sector as an Engine of Growth and Job Creation
10 | Meeting the Population’s Needs for Essential Goods and Services
11 | Increasing Trust and Social Cohesion through Business Action and Interlinked Markets
12 | Intentional Harm, Intentional Good, and Spaces in Between

14 | What is Preventing Businesses from Fulfilling their Potential and
What are the Opportunities?
14 | Private Sector Characteristics in FCS
15 | Constraints to Investments
16 | The Impact – Low Investment in FCS, Lack of Inclusive Growth17 | How the FCS Challenges Shape Firm and Investor Strategies
17 | Patterns of Post-Conflict Investment and Potential for Returns

19 | DFIs as Catalysts for Private Sector Growth, IFC’s Experienceand Approach
19 | The Role of DFIs
20 | IFC’s FCS Focus and Results
23 | Key Methods and Tools Used by IFC to Engage in FCS
26 | IFC’s Investment Decision Process in FCS

28 | Principles for Engaging in Fragile and Conflict-affected Situations
28 | Be Conflict Sensitive Every Step of the Way
28 | Avoid the Dilemma of Choosing Between Short- and Long-Term Impacts
29 | Act Fast During Transitions but Remain Engaged During Setbacks
30 | Commit More than Money30 | Stick to Standards but Be Flexible on Timing
30 | Bring in New Players and Innovate
30 | Keep Markets Open for International Trade and Investment

33 | Future Directions
33 | Conflict Prevention
33 | Addressing the Forced Displacement Crisis
33 | Conflict-Sensitive Investing Practices
34 | Increasing Collaboration Among DFIs

35 | ANNEX: ADDITIONAL IFC DATA
38 | REFERENCES
40 | BIBLIOGRAPHY

4

EXECUTIVE SUMMARY
The private sector can help break the cycle of conflict, fragility, and poverty thatpersists in many fragile and conflict-affected situations (FCS). This study draws on
academic research and IFC’s experience with the private sector in FCS to derive lessons
on how to engage with the private sector to foster growth, job creation, and stability.
business opportunities, especially when countries are intransition after a war or decades of isolation.

Fragile and conflict-affected economies often exhibit
several common characteristics, such as social conflictand excluded groups, poor institutions and services,inadequate infrastructure and government and firm
capabilities, environmental and social issues, limited
and undiversified private sectors, and low levels of
trade and per capita income. While building trust,security, and strong institutions is critical to helping
these countries advance and gain stability, the role ofthe private sector throughout the development process
is increasingly seen as essential, as recognized in the g7+
New Deal for Engagement in Fragile States.1

Despite the investment opportunities, the challenges
private firms face in FCS are often too many toovercome on their own. In this regard, development
finance institutions (DFIs)2 can play a key role byproviding a broad range of investment and advisory
services that can help address the market andinstitutional failures that limit private sector growthand impact.

However, in some cases, individual elements of theprivate sector have been known to act in ways thatsustain, exacerbate, or even cause conflict. Accordingly,
investors in conflict-affected markets must makedeliberate efforts to identify how their investees canoperate with positive intent, and to understand thebusiness benefits of operating in ways that benefit allgroups in society.

IFC has an extensive track record of investing in a wide
range of sectors in FCS since its inception. These efforts
intensified over the past decade and IFC has invested in
sectors ranging from power and transport, to financeand agribusiness, in approximately three-quarters ofcountries it classifies as FCS. The largest investments
by dollar volume have been in financial services,energy, telecommunications, and manufacturing, while
the greatest number of investments have been in thefinancial services industry. Since 2014 IFC’s investments
in FCS have increased in number by the greatest
amount in the transportation, agriculture, and financesectors, with the latter two assisted in many cases by
blended finance (a combination of concessional funding
provided by development partners and commercial
funding provided by IFC and co-investors). IFC has also
provided a higher amount of advisory services in FCS
relative to its investment levels, than in non-FCS.

Private investors face many constraints in FCS. Sucheconomies tend to rank low on investment climate
indicators—especially quality of infrastructure, market
size, and institutional trust. As a result, the level ofprivate investment in FCS remains low, even if thesize of an economy and its geographic characteristics
are taken into consideration. Nevertheless, there areSome of the tools IFC is using to engage in FCS include
formulating comprehensive development strategies
that use a combination of public engagement, capacity
building, and investment to create markets; using
dedicated advisory programs; leveraging financial
intermediaries to reach smaller companies; using riskmitigation techniques such as guarantees and blended

Private firms can provide the jobs and services needed
to increase income levels and meet societal needs. They
can also contribute to trust and stability by building
functioning markets and trading relationships that areinclusive of different groups in society, sustainable,
and operate with integrity. In addition, firms often
contribute directly to local social programs, and workwith governments to enhance the investment climate.

53. Act fast during transitions but remain
engaged during setbacks. Development
institutions and other investors can take more risk
early on, identify and engage in those areas where
private operations are possible, signal the feasibilityof investments, and empower firms that can drivechange. In most contexts, development institutions
can engage, for example through a variety of
instruments, including advisory work, trade
guarantees, finance for micro, small, and medium
enterprises, and public-private dialogues, or theycan engage on the periphery of areas with active
conflictfinance; and engaging extensively on environmental
and social issues and due diligence with respect to theintegrity of investors and firms.
IFC’s investment process in FCS includes several
important approaches that are particularly pertinent
to the context, including: 1) early engagement on
critical fragility issues such as integrity due diligence;
environmental and social issues; conflict analysis; andgovernment, macroeconomic, and security assessments;
2) carrying out extensive project preparation work,
including addressing policy issues, and improving
private sector and government capacity; 3) identifying
viable sponsors and potentially bringing in new ones;
and 4) recognizing the greater need for blended finance.
IFC senior field country managers have identified
additional key issues to consider when investing infragile and conflict-affected countries, which include
being flexible and patient; developing deep, local
knowledge; identifying good local investors and firms;
developing knowledge about the political economy; andbeing ready to seize opportunities when they emerge.

4. Commit more than money. Investing in anddeveloping markets in FCS takes more thanmoney. Financial support must be accompanied
by advice, regulatory reforms, staff presence on
the ground, capable intermediary organizations,capacity building, management of complex
environmental and social issues, and recruitment ofstrong lead investors.
5. Stick to standards but be flexible on thetiming. Cutting corners on environmental andsocial risk management is likely to be shortsighted
as higher standards help reduce project risks in themedium term, minimize social harm, and help lower
the risk of future instability. However, adopting
good environmental and social standards in FCS
is likely to take longer than in other settings, andrequires flexible timing and additional resources.

Based on experience, IFC has identified seven key
principles for engaging with the private sector to achieve
growth, create jobs, and improve stability in FCS.
These ideas are relevant for all stakeholders—DFIs,
governments, impact investors, private companies, andothers—that have a desire to develop the private sector
in FCS in ways that have positive impacts on theirsocieties:
1. Be conflict sensitive every step of the way.
To ensure that engagements create inclusive growthand stability, use a “fragility lens” to identify the
conflict context, potential impacts of the conflict on
investments, and the impact that investments could
have on conflict.

6. Bring in new players and innovate. An
essential part of achieving stability involves
engaging new and innovative investors and firmsthat can create a dynamic and growing private
sector, while also rebalancing the local power
dynamics. Innovations such as new technologies
that reduce the need for fixed investments can help
as well in overcoming obstacles.

2. Avoid the dilemma of choosing between
short-term and long-term impact. Longterm and immediate development work are notmutually exclusive but must go hand-in-hand.
In the short term, development actors can help
mitigate immediate risks to help bring jobs andstability to communities at risk, while also working
on the long-term fixes to regulatory frameworks
and infrastructure that are necessary to realize thepotential of private firms.

7. Keep markets open for international tradeand investment. In fragile markets, seeking
opportunities abroad can often fill the vacuum indomestic economic activity. Strengthening tradefacilitation and related infrastructure, as well as
supporting investment climate reform can help
international trade and investment to achieve its

6investing in companies owned by, or employing,refugees; and supporting firms adapting their corebusiness to better serve refugees. 3) Developing
a common set of principles on conflict-sensitive
approaches to investment that could provide DFIs andother investors with a framework for operating inchallenging environments. 4) Working across DFIs toshare knowledge and develop joint solutions on how tocollectively address some of the biggest challenges tooperating in FCS. nstabilizing potential by helping markets to grow andstrengthening the environment for peace.
Looking ahead, while much has been learned about
generating private investment in FCS, there are several
areas where further work by development institutions
and other stakeholders could help improve outcomes.
These include: 1) Enhancing understanding of how theprivate sector can contribute to conflict prevention. 2)
Exploring ways to assist the private sector to address theneeds of displaced populations, e.g. via hiring refugees;

7INTRODUCTION
Conflict impoverishes communities, and poor communities are more vulnerable toconflict. This vicious cycle condemns over a billion people to ongoing fragility, conflict,and poverty.
Private enterprises can help break the cycle of fragility,
conflict, and poverty. By creating jobs and income,businesses support livelihoods, and can contribute tosocial cohesion and become a source of stability. The
private sector, and the promise it holds for stability anddevelopment, is an integral part of the mission of theInternational Finance Corporation (IFC) and the WorldBank Group’s Maximizing Finance for Development
approach.3 As a development finance institution (DFI),
IFC’s role is to direct its efforts toward countries where
financing and advisory needs have not yet been met byexisting market providers. Increasingly this involves
focusing on the most challenging investment contexts—those where the private sector is underdeveloped. As

the largest DFI with a global presence, IFC has gained
significant experience in supporting the private sector
in these challenging markets, and has been able todemonstrate the investment potential and viability of theprivate sector in difficult contexts.
This study takes stock of the latest discussions
regarding the private sector’s role in conflict-affected
countries, and highlights its impact, challenges, andopportunities. Drawing on available data and IFC’s
own experience and observations, this paper also
recommends approaches to addressing the impediments
to investing in and promoting broader private-sector
growth in FCS.4 n

BOX 1 What Types of Fragile and Conflict-affected Situations are Discussed in this Report?
Fragility is associated with governments’failure to fulfill the basic needs of theircitizens—whether through lack of capacity orlack of desire. The concept of fragility refers to
the potential for adverse outcomes due to theabsence of fundamental structures that ensurestability. Conflict is, by contrast, an actual
event: a collision between specific parties.
However, fragility and conflict are often
intertwined—fragile situations often evolve
into conflicts, and these conflicts bring about
protracted periods of instability and fragility.
Therefore, the dynamics of conflict andfragility tend to affect states simultaneously.

(FCS), with a focus on those with dimensionsof conflict—e.g., countries at a high risk of
conflict, an active subnational or interstate
conflict, or that are in post-conflict transition.
Where possible, the report attempts to focus
on the immediate post-conflict recovery
phase, where the need for development isgreatest and the challenges for investors
remain daunting.
To highlight empirical patterns in their data,
the authors of this report used the World Bank
Group’s Harmonized List of Fragile and Conflict
Situations. Data on IFC operations include as
FCS all those countries that have been on theWorld Bank Group Harmonized list within anyof the past three years.

This report discusses private enterprises
in fragile and conflict-affected situations

8THE PRIVATE SECTOR’S STABILIZINGEFFECTS IN FRAGILE AND
CONFLICT-AFFECTED SITUATIONS
Overview – Growth, Jobs, andStability in FCS

occurs with partners and the community), and theoverall context in which the private sector operates(e.g. strength of government institutions), appear to beimportant in realizing these potential benefits. Beyond
the impacts on stability, the important role of jobs andthe private sector in helping people to escape poverty
is well established. Thus, promoting an inclusive andsustainable private sector in conflict-affected countries
is essential for long-term prosperity and stability.

Although fragile and conflict-affected economies
exhibit a wide variety of characteristics, there are somewidely found elements, mostly related to weak andnon-inclusive institutions. There are often tensions andgrievances between ethnic or regional groups that drive
conflict. Government institutions may not be able toprovide adequate services, and informal institutions—
often non-inclusive, i.e. available to only certain
segments of society—may take a large role in managing
daily life and commerce. There is often a fundamental
lack of trust in institutions within the country.
Significant environmental and resource issues may
have played a part in driving conflict. Poverty is often
substantial, and people lack formal employment. The
private sector may be fragmented, operate in only a few
sectors, and have limited capacity and supply chains.

The rest of this section reviews the role of the private
sector in promoting critical needs in fragile andconflict-affected countries—employment, services, andbuilding trust and stability (Figure 1). Then the lastsection looks at the spectrum of potential impacts, andhow private sector firms can ensure their engagements
live up to the potential for positive impact.

The Private Sector as an Engine of
Growth and Job Creation

Efforts to improve the outlook for people in FCS
often focus on stabilizing immediate conflicts,
addressing grievances, and building trust andstronger institutions. But the private sector, jobs,
and growth are also important. The World Bank’s
World Development Report 2011, Conflict, Security
and Development, emphasizes the need for security,
justice, and jobs in FCS. The g7+5 and other partners’
New Deal for Engagement in Fragile States includes
the creation of economic foundations throughemployment and livelihoods as one of five peace andstate-building goals.6

The private sector can generate jobs in FCS, which isimportant for reaching the Sustainable Development
Goals, and especially Goal 8: Decent Work andEconomic Growth. Generating jobs is also closelyintertwined with the first SDG on ending poverty. Jobs
generate income for people living in FCS, can help
lift them out of poverty, and significantly reduce their
incentive to engage in conflict.
Even a single company can generate a high number ofjobs. For example, in Haiti in 2010, Grupo M invested
in textiles and apparel manufacturing, and nine years
later, the company employs over 10,000 people. In
2015, Cargill and its partners invested in Côte d’Ivoire’s
cocoa industry to strengthen its value chain. This
involved upgrading logistics for 43 cocoa cooperatives,and providing support for 70,000 farmers.

Research on the impact of jobs and growth in FCS
provides support for the role of economic activity inpromoting stability and poverty reduction in conflictaffected situations. However, the way the private sector
engages (e.g. the choice of sectors and how engagement

9PRIVATE SECTOR

Investors

Local firms

Contributing
to trust,
inclusion, andstability

Multinational
enterprises

International
standards

Trust
MARKET FOR
PRIVATE GOODS

SkillsConnectivity

PUBLIC GOODS
AND SERVICES

Wealth/Taxes

Infrastructure

Jobs

Investors

Contributing tostate building(e.g. investment
climate)Social services

GOVERNMENTLOCALCOMMUNITIESFIGURE 1 How do Private Enterprises Contribute to Development and Stability?

in the number of female-headed households, and adecrease in public services, security and, in manycases, a decline in resources tied to men such as land
and informal networks. As a result, female-headedhouseholds are more likely to suffer from extreme
poverty.10 Gender inequality is correlated with greaterlevels of violent conflict, and women’s participationin economic life is important for conflict prevention.11
Post-conflict situations can present opportunities toimprove the legal and social environment for women,
which in turn improves women’s job prospects. In
addition, the greater empowerment of women improvesdevelopment and stability.

Private enterprises can also create inclusive jobs,
another stabilizing effect. By creating livelihoods forall sectors of the population, including marginalized
and disenfranchised groups, the private sector cancontribute to economic development that reaches allparts of the population—moving the country towardshared prosperity. In Colombia, for example, thelocal subsidiary of General Motors, GM Colmotores,
partnered with a non-governmental organization to
train and employ former paramilitary fighters.7 In
the Mindanao region of the Philippines, which has
suffered from violent conflicts for generations, Paglas
Corporation and La Frutera, Inc. established a banana
plantation in the 1990s that has created jobs for both
Christians and Muslims, including ex-combatants.8
The economic opportunities created by this joint
venture have helped promote reconciliation between
the two religious communities.9

Meeting the Population’s Needs for
Essential Goods and Services
For countries to transition toward stability andprosperity, governments need to provide a wide
range of stabilizing functions for which they often

Ensuring women are included in employment
generation is essential. Conflict often brings an increase10

different levels of government, and host communities, aswell as provisions for risk management in areas such as
human rights and social and environmental standards.12
Similarly, a growing number of lending agreements fromcommercial banks and development finance institutions
require project operators to undertake environmental
and social impact assessments, and regularly report oncompliance. This is especially the case with large-scaleoil, gas, mining, and infrastructure projects, and thetime horizons for such agreements can span 20 years or
more. Use of these agreements is also becoming morecommon with foreign investments in agribusiness,
manufacturing, information technology, tourism,
healthcare, financial services, and professional services.

lack sufficient capacity. The private sector can help
close some of these critical gaps—by building basic
infrastructure, restoring connectivity, and paying taxes
for the government to use in providing healthcare,education, and other services.
Critical infrastructure—such as roads, electricity,
telecommunications, and sanitation—can be funded by
the private sector through public-private partnerships.
An example, of this is the Liberia Electricity
Corporation. In coordination with other development
partners, IFC structured a partnership between
the government of Liberia and a private partner,
which expanded the reach of affordable electricity
from 500 connections to ultimately serve 165,000
Liberians. In fragile and conflicted-affected countries,
telecommunications network improvements are also
often driven by private investment. In Afghanistan,for example, mobile cellular telephone subscriptions
increased from fewer than 1 per 100 citizens in 2003
to over 60 per 100 by 2015. In Sierra Leone, thesubscription rate improved from 2.4 per 100 citizens in2003 to 89.5 per 100 by 2015.

In addition, private businesses can provide financial
support for local security programs, social programs(education, health, and housing), and socio-cultural
programs (e.g. fostering non-violent methods of conflict
resolution).13 In some cases, businesses engage inthese activities to comply with standards set by theirstakeholders, or because the business owners want
to gain a “license to operate” in a new community.
Businesses have also collaborated proactively on
efforts to enhance social cohesion in their markets
of operation. In Sri Lanka, for example, businessassociations created initiatives to bring the businessesof different ethnic groups together.14 In Colombia,
businesses worked on urban employment programs andrelated education and social services.15

As already noted, in addition to delivering needed
services, formal businesses also provide the government
with the tax revenue necessary to fund social services
and reconstruction needs. In 2015, in Afghanistan, therevenue from the taxes on goods and services paid byprivate firms corresponded to four times the total net
assistance provided by development agencies. Thus, asa stronger formal private sector will result in a broader
tax base in FCS, the potential for tax revenue fromthe private sector is much greater than the amountcurrently realized.

More broadly, in the longer term, functioning markets
can help to build trust between segregated populations
by establishing contractual and economic relationships
not only through individual employers/enterprises but
through value chains that link entities together, andtrade that creates mutual dependencies. A variety ofexamples support the premise that businesses that bringdifferent groups together through employment or trade
can reduce social tensions.16 The earlier discussion inthis report on inclusive job creation (p. 10) gives specificexamples of how private companies have worked toincrease employment for different groups in society.

Increasing Trust and Social Cohesion
through Business Action andInterlinked Markets
Through carrying out their everyday operations, private
enterprises can increase trust among different entities/
players in the market and contribute to social stability.
One example of how this can be achieved is throughgovernance and standards such as those followed byforeign investors and foreign companies entering FCS
markets. Foreign investment agreements increasingly
include provisions on benefit sharing among investors,

Businesses can be directly involved in state-building
through public-private dialogues (PPDs). PPDs are
structured engagements that generate trust by bringing
different stakeholders together to discuss issues related11

to economic and political reforms. PPDs aim to improvetransparency and confidence among diverse groups
through collaboration on policy and regulatory reforms
to improve the business climate and prospects for
growth. There are many examples of PPDs in FCS. For
example, the Liberia Better Business Forum encourages
better quality employment, poverty alleviation, andeconomic development by improving the businessenvironment. So far reforms have helped to create
over 20,000 jobs, and increased business registrations
and private investment.17 The Myanmar Centre for
Responsible Business is another successful PPD.

In this transition, the private sector was able to act
as a “stabilizing agent” because it occupied the space
between the apartheid regime and the African National
Congress, and thus could credibly promote dialogue,
trust-building, and consensus-building.

Intentional Harm, Intentional Good,and the Spaces in Between
Although, for the most part, the private sector behaves
rationally in ways that reflect its interest in peace andstability, in some cases, individual entities have acted inways that sustain, exacerbate, or even cause conflict.

In some cases, private enterprises have played adirect role in peace processes. While this is notcommon practice, under the right conditions, thedirect participation of private sector entities can havea stabilizing effect. In a variety of locations (South
Africa, Nepal, Kenya, the Philippines, Rwanda, theSouth Caucasus region, Sri Lanka, and Uganda) thebusiness community’s participation in peace mediationand conflict prevention has reaped rewards.18 In South
Africa, for example, business leaders helped facilitate
the country’s transition from apartheid to a multiracialstate. The Consultative Business Movement held
broad-based consultations with political parties, civilsociety, and the media, and convened a process that
led up to the 1991 National Peace Accord, which put
into motion South Africa’s transition to democracy.

In situations where law and order has collapsed, thepotential for harm is magnified. Since money is so often
a source of power, those who seek to advance their own
interests at the expense of others (intentionally or not)can exploit their position within, or closely connected
to, the business community. Still other actors in theprivate sector may cause harm due to negligence, as
they consider stability and good environmental andsocial practices secondary to, or separate from, their
responsibility to maximize company profit.
Multinational firms managed from outside FCS areparticularly vulnerable to the latter risk. There are many
examples of business practices that unintentionallycontribute to exclusion. In post-conflict Serbia andBosnia-Herzegovina, for example, workers who comeINTENTIONAL HARM VS. INTENTIONAL GOOD

HARMFUL

HARM THROUGH
NEGLIGENCE

DO NO HARM

ADDED GOOD
‘ON THE SIDE’ACTIVELYPEACE-POSITIVE

Delivering positivesocial impact is corebusiness objective
or fundamental to its
operating strategy

Proactively engages
in activities that
increase/sustain
conflict

Harm throughnegligence

Follows “Do No
Harm” principles

Directs some businessresources to beneficial(non-core business)initiatives

Example:Trafficker of illicit
goods

Example:Extractive firm pays
insufficient attention
to detrimental impact
on local people

Example:Agribusiness
operation creating
and adhering to an
E&S mitigation plan

Examples:Example:Offering youth
Company investing for
apprenticeships; using identified social good
CSR/grants to build
local schools

FIGURE 2 Intentional Harm vs. Intentional Good

12

from rural and/or minority communities, as well asothers, have had disproportionally fewer opportunities
for employment in multinational ventures.19

country government. 20 One example is the Niger
Delta Partnership Initiative (NDPI) Foundation.
This was established in 2010 by Chevron, a firm thathas since then committed millions of dollars to thefoundation and leveraged additional funds from donor
agencies. After six years, an evaluation showed that
NDPI programs were helping to achieve widespreadchange by bringing international attention and private
investment to the region. 21 The partnership’s greatest
impact has been through economic development andpeace-building, creating a positive environment foreconomic growth and peace to take hold.

Local firms can also be constrained by the legal
or institutional context in which they operate.
For example, they can be compelled to contribute
financially to military operations. Or discriminatory
laws, which they had no role in shaping, can obligate
them to avoid certain regions and/or exclude certain
segments of the population from their operations.
As shown in Figure 2, there are a variety of ways thatfirms can intentionally generate positive and negative
impact. A single firm can engage simultaneously at
multiple points on this spectrum—and particularly inthe middle ground where separate business activities may
have impacts in different areas. For example, a social
enterprise may seek to employ excluded individuals
and alleviate ethnic grievances, but at the same it has a
production line that causes pollution that harms local
livelihoods and people’s health. Similarly, a large-scale
multinational may donate resources to improve a local
village’s health clinic but may be engaged with (andsupport) individuals or organizations that use their publicconnections to derive inappropriate fees for their work.
In recent decades in fragile and conflict-affected markets,
there have been numerous examples of internationalfirms, as well as local firms that source capital frominternational investors, shifting toward the right endof the spectrum in Figure 2. This has come about, forexample, through greater awareness of environmental,social, and governance (ESG) risks, and through therise of international organizations and campaigns
that promote more responsible business practices indeveloping markets. Additionally, many companies now
recognize that socially-responsible business practices canbenefit both the company and the community.
There are encouraging examples too of companies
making substantial long-term commitments towork with host-country governments throughsocial investments or corporate foundations. These
partnerships are important, since research shows thatmultinational firms make the biggest contribution
to peace-building when they work with partners,
and especially with local communities and the host-To ensure that business operations realize the potential
for positive impact in FCS, investors must makedeliberate efforts to identify how their investees
can operate with positive intent and understandthe business benefits of operating inclusively. Tools
such as ESG plans, inclusive business strategies, andconflict-sensitive investing frameworks, which are
discussed in sections five and six of this report, can not
only alleviate risks to businesses and their operating
environment, but can also open new avenues forbusiness growth that provide a virtuous cycle for thecompany, its investors, and the local environment. n“We may be tempted sometimes,
just because we want to reachour targets, to get a projectapproved without paying too
much attention to the strengthof sponsors. But when we’regoing through crisis, the strong
sponsors tend to be most able tomanage and address the crisis.”—BABACAR FAYE, IFC’S RESIDENTREPRESENTATIVE IN DEMOCRATIC
REPUBLIC OF CONGO

13

WHAT PREVENTS BUSINESSES FROMFULFILLING THEIR POTENTIAL AND
WHAT ARE THE OPPORTUNITIES?
Private Sector Characteristics
in FCS

local capacity is diminished. Regional players may
be particularly important investors because of their
combination of local knowledge and greater access toresources. In some cases, informal institutions, which
are often non-inclusive as they are associated withtraditional, ethnic, or other groups, may be importantin regulating business activity. In other cases, businesses,
and particularly large companies, may have arrangementswith government to carve out their own businessenvironment. Local businesses are often controlled bypolitical elites. Overall, the potential for non-transparent
rules, exclusion, and rent-seeking is high.

Countries affected by fragility and conflict are
not simply at different levels of development; theirbusiness sectors tend to have significantly different
characteristics. Compared to other countries at thesame income level, on average, firms in FCS differ
in their size and growth as they operate in small
fragmented markets, where little investment takes
place. Informal businesses are pervasive, particularly insectors such as agriculture and services.
Economic activity also differs in terms of sectoraland market focus. Conflict-affected countries tend
to have a greater concentration of businesses in the
agricultural and services sectors, as industries such as
manufacturing and construction tend to contract faster
during periods of tension, and agriculture and services
support the immediate needs of the local population.
Also, on average, levels of trade as a share of GDP
tend to be lower. Foreign sources of income such as
remittances and foreign aid frequently sustain a largepart of economic activity. Foreign investors may findopportunities in industries such as telecoms, mining,and banking which are characterized by low domestic
competition, large investment requirements, and/or sustained by foreign demand. These broad trends
mask the significant variations across regions andconflict situations. For example, for the first year after
a conflict, there is often a construction boom, driven
by foreign aid, and the level of trade as a share of GDP
increases sharply. 22“You have to get the person
you’re doing business withright. If you get that right, ninetimes out of ten, it will workout. I identified six or sevenpeople I thought were goodpeople, with good businesses, ingrowth sectors. Once you build
relationships—it’s not wining
and dining, it’s saying you’ll dosomething and delivering on it.”

Actors and business relationships are also different.
Markets may rely heavily on foreign and regional
investors for income, know-how, and stability, as— VIKRAM KUMAR, IFC’S COUNTRY
MANAGER FOR MYANMAR

14

Constraints to Investments

rated most of them as problematic—and many as very
problematic—as shown by the predominance of data
points in the right half of the chart. Businesses regard
conditions related to their suppliers and markets—suchas reliable energy supply, the quality of transportation
infrastructure, the availability of finance, and low
demand for their products—as their most difficult
challenges. Not surprisingly, many of these challenges
were also seen as more constraining in FCS than inother countries, as indicated by the vertical axis in
Figure 3, which illustrates the extent to which the
FCS responses differed from their counterparts in
low income and lower-middle income countries. For
some market challenges, such as investor protection,
electricity supply, and access to loans, the difference isparticularly pronounced.

Doing business—starting, operating, and expanding afirm—is difficult amid fragility and conflict. More than70 percent of fragile and conflict-affected countries arefound in the bottom quartile of the World Bank Group’s
Doing Business rankings. Market challenges are often
similar to those in other emerging markets, exceptthat they are made worse by the conflict: shortages oflabor, skills, and capital are compounded by a lack ofmodern infrastructure, regulatory inadequacies, andlow demand. In addition, FCS face business risks thatare much greater than those in other emerging markets.
These include the destruction of physical capital, as
well as deaths and injuries, weak state control, lack of
security, and supply-chain disruptions.
Figure 3 below highlights these realities in moredetail. When business executives in FCS were asked toevaluate aspects of their operating environment, they5
Infrastructure
Financial Markets

Severity in FCS (lower is more severe)
4
3.5
3

4.5
LESS SEVEREBUT SPECIFICTO FCS

2.5-1.2

Quality ofElectricity Supply

SEVEREAND SPECIFICTO FCSStrength ofinvestor protection

2-1Market Size andEfficiency
Other

Ease of accessto loans

Regulationof Securities
Exchanges
Strength of auditing andreporting standards
Soundness of banks

Judicial independence
Financial services
meeting business needs

Reliability ofpolice services

Property rights
Business impact of rules on FDI

Transpar of gov policy

Prevalence of trade barriers
Intensity of local competition

Prevalence of
foreign ownership

Degree of customer orientation
Efficacy of corporate boards
Business costsof terrorism

Organized
crime

-0.8

Foreign market size index

Ag policy costs

BribesBurden of customs
procedures

Domestic market size index
Quality of infra
Local equity markets
Buyer sophistication

Diversion of public funds
Affordability of financial services

Extent of market dominanceVenture capital
Quality of roads
availability

Quality of airtransport infra
Effect of
taxation on
incentives
Business costs of
to invest
crime and violence
Protection ofminorityshareholders’interests-0.6

Quality of rail infra

Burden of gov reg-0.4

Efficiency of legal frameworkin challenging regs

Favoritism in decisionsof government
Effectiveness olf anti-monopoly policy
Efficiency of legal framework in settling disputes

FCS-Specificity (lower is more specific)

Institutions

These survey data align well with the findings of theWorld Bank’s Enterprise Surveys, which ask local-0.2

Quality of port infrastructure
Public trust in politicians0

FIGURE 3 Perceptions on Severity and FCS-Specificity of Challenges (2018)
Notes: The World Economic Forum (WEF) Executive Opinion Survey tracks perceptions of the market challenges that firms face acrosscountries. The horizontal axis shows aggregate scores across FCS on variables that indicate how severe a problem is in countries classified
as FCS. The vertical axis shows the difference in averages across FCS and non-FCS low-income and lower middle -income countries, whichshows the extent to which a problem is FCS-specific. Source: IFC calculations, based on WEF, 2018.

15

business owners to rate their top business challenges.
The surveys especially highlight the severity of thechallenges that poor infrastructure poses for businesses
operating in FCS: frequent and prolonged power
outages and water supply shortages. 23 For example, inthe most recent Enterprise Survey for West Bank andGaza, firms reported that their losses due to electricaloutages average over one fifth of their annual sales; aresult of nearly 29 outages per month on average. In
South Sudan, because of similar power grid failures,
two-thirds of all power consumed by firms in 2014 wasproduced by privately owned generators, which added
to firms’ operating costs, limited their size, and reduced
their returns on investment. 24of regulations matter more than the actual constraints
that the rules impose. However, for the success of longterm growth, regulations do matter. Infrastructure
projects, for example, require a minimum government
capacity to operate, but also basic regulations andenforcement to protect property rights.
Another common business challenge in FCS is
the volatility and unpredictably of the operating
environment. For example, in the 2010 WorldBank Enterprise Survey for Mali, only 2 percent ofrespondents identified political instability as a top
obstacle to doing business, while access to finance was
the top concern (44 percent). But by 2016, 23 percent
of respondents in Mali identified political instability
as their biggest obstacle, while access to finance had
become the second most frequently cited obstacle (20percent). It is not likely that financing had become lessscarce between 2010 and 2016, but rather that thedeteriorating political situation had become a muchgreater concern. When political instability causes sucha pronounced decline in market conditions, it is nowonder that conflict and fragility are so damaging to
the health of the private sector.

Executives responding to the WEF Surveys also regarded
institutional failings as important obstacles, including
weak intellectual property rights, lack of judicial
independence, and weaknesses in the legal frameworkfor settling disputes. The quality of public governance
was also seen as a major obstacle, including demands
for irregular payments/bribes, untrustworthy politicalleaders, and favoritism in government decision making.

All these challenges in FCS impose constraints on
businesses such as raising the cost of doing business,
limiting access to the things that businesses need togrow, and imposing hurdles that make growth harderto achieve. These constraints also reinforce each otherin negative ways. 25

Business executives in FCS are
twice as likely as executives in
low-income countries, which are
not fragile or conflict-affected toperceive security, property rights,
and the predatory behavior ofcompetitors as problematicwhen doing business.

The Impact – Low Investment in FCS,
Lack of Inclusive Growth
The net result of business activity constraints in FCS islower prospects for the kinds of growth and dynamismthat the private sector needs to rapidly lift people out ofpoverty, and do so in a way that creates trust, inclusion,and stability. IFC’s analysis brings this into sharp focus.
Although the potential for foreign investment in FCS
was generally lower due to small markets and low levelsof trade, actual foreign investment was even lower,
which suggests that in 2014, alone, FCS were deprivedof foreign direct investment (FDI) of at least $13 billion.
Under conditions of peace and stability, FDI flows
into these areas would be at least twice as much as iscurrently the case.26

WEF SURVEYS

In general, executives in FCS perceive regulations as
relatively less burdensome than market and supply
conditions and risks. Often this is due to widespread
belief that regulations will not be enforced, or they will
only be applied selectively. This highlights the extent
to which, for many companies currently operating infragile territories, the predictability and enforcement16• Employing conflict-sensitive analyses and conflictsensitive business practices (see Chapter 3) andadopting international environmental standards tomitigate reputational risk in international markets.

“We are working in a very
difficult environment in the
Democratic Republic of Congo,
but when it comes to investment
transactions, we’ve used prettymuch the same standards that
we use in a country like Kenya.
We can’t copy—we need to be
more thoughtful and innovative.
How can we keep doing businesswithout taking into account theeconomic situation?”• Investing in stages—starting small, and only
expanding when greater knowledge has been gained.
• Engaging with governments and development
institutions to shape the business environment,
including complementing government functions
that may be missing, e.g. developing government
officials’ knowledge and capacity related to theinvestor’s industry.
• Leveraging the systems and resources of othercountries, e.g. securing loans in fragile states
based on assets in countries with more stable legal
systems; flying specialized equipment to othercountries for repair and maintenance.
While many of these approaches can drive positivechange, the way firms adapt to market conditions andthe complex political economy can become part of the
problem, rather than the solution. Firms may not invest
adequately in their plant and people, they may pursue
short-term strategies that do not build for the future,and they may adopt operating strategies and footprints
for security that reinforce exclusion. Local firms may
develop operations in the informal economy or rely
on non-inclusive informal institutions and networks.
They may also diversify their operations with illicit
conflict-related activities. Multinational firms may
find themselves supporting functions such as building
government capacity, which are beyond their legitimate
role, drain resources that are required for productive
investment, and result in complex conflicts of interest.

—BABACAR FAYE, IFC’S RESIDENTREPRESENTATIVE IN DEMOCRATIC
REPUBLIC OF CONGOHow FCS Challenges Shape Firm andInvestor Strategies
Despite the large number of constraints in FCS,
business operations do go on. Both local andinternational firms use several common strategies todeal with the challenges of doing business in FCS.
These include avoiding geographic areas where active
conflict is possible, strengthening ties with local
communities to build trust, operating flexibly in order
to be prepared for sudden shocks, hiring security, andfollowing safe business practices, such as operating in
daylight, or using secure enclaves.

Patterns of Post-Conflict Investment
and Potential for Returns
Although there may be special difficulties to overcome, it
is possible to find good investment opportunities in FCS.
Trade, aid flows, and remittances can create demandthat helps sustain economic activity. While areas forpotential investment are very country specific, there aresome historic patterns that suggest where post-conflictinvestment opportunities may lie. As noted previously,
the potential for economic transformation is greatest

Other strategies used by firms (especially foreign firms)
to address challenges in FCS include:• Using key staff with experience and understandingof FCS and hiring local staff as quickly as possible
to provide access to local intelligence that can help
mitigate security risks.

17during transition periods. Recent evidence shows that
only a year after the end of conflict, foreign investment
inflows increase dramatically, and within three years,
inflows have about doubled, relative to levels during thefinal years of conflict. After peace has been established,both the construction and services sectors pull laborout of agriculture to a significant extent. In the medium
term, the telecommunications and transport sectors
tend to show higher rates of growth. Mining and othersectors that rely on natural resources remain stablethroughout the post conflict years.27“The first wins, the firstinvestments are going to be thelocal investments. You reallyneed to know the region and thesponsors. You need to put a lotof effort up front. You also haveto be very realistic about firms’
capabilities and make sure yourrequirements are aligned.”

The period of post-conflict transition also represents
an opportunity to implement broad-based economic
reforms, as governments are often eager to change thestatus quo, as they want to signal to investors that theircountry is open for business. Over time, manufacturing
and financial intermediation, which tend to be low justafter conflict ends, begin to revive. In the immediate
aftermath of conflicts, economies often turn tointernational trade to fill the vacuum in domestic
economic activity. Also, in comparison to other typesof investment, regional investment often takes place ona relatively larger scale.

—DALIA ABDEL AZIM MOHAMED
WAHBA, IFC COUNTRY MANAGER FOR
LEBANON“You have to wait it out. By
definition, frontier markets are
not going to improve immediately.
These are eight or 10-year plays.
It’s not as though there is a race
to the top. I’m very comfortablewith that.”

FCS investments can not only be commercially viable,
but can also produce steady returns. Multilateral
Investment Guarantee Agency research shows thatover the period 2006 to 2011, the average rate of
return on FDI in FCS (14.5 percent) exceeded that of
all low-income countries (9.7 percent), and the global
average (6.2 percent). 28 However, the amount of viable
investments like these can be limited by the constraints
discussed above. The next section discusses how
development institutions can help further expand theprivate sector potential in FCS. n—VIKRAM KUMAR, IFC COUNTRY
MANAGER FOR MYANMARFAST FACT ON CONFLICT-AFFECTED STATES

On average, the construction sector doubles its share in total
value-added five years after conflict ends.
Source: World Bank (2017) Global Competitiveness Report

18

DFIs AS CATALYSTS FOR PRIVATESECTOR GROWTH – IFC’S EXPERIENCEAND APPROACH
The Role of DFIs

Development institutions have a key role to play inthis environment, as they can provide a broad range
of investment and advisory services that can help
address the many market and institutional failuresthat limit private sector growth and impact in fragile
and conflict-affected countries. Many development
institutions have a part of their organization that
focuses on public sector development, and works
directly with government on critical governance andinstitutional issues. Most also have private sector arms
(development finance institutions), with mandates toinvest directly in private enterprises, and provide funds,
risk mitigation, and advice. DFIs’ mandates requirethat they serve in difficult markets, where private
capital cannot be obtained on reasonable terms. 29
While DFIs seek to invest on commercial terms, theirunique government relationships and operating models
enable them to take higher risks than institutions
that are strictly commercial, while also pursuingdevelopment objectives.

Ultimately, despite the many coping strategies andinvestment opportunities, the challenges facing theprivate sector in FCS are often beyond the capacity ofprivate firms alone. These challenges include addressing
grievances, building government capacity and humanresources, developing appropriate regulations andcapable institutions, managing natural resources
effectively, coordinating the supply of inputs, building
adequate infrastructure, and much more. Effectively
managing these challenges requires collaboration
with other actors, including other private companies,
government, the international community, anddevelopment finance institutions.

“In an institution like IFC,
if you’re not pushing theboundaries, you’re underperforming. There is limited
downside. By staying in
a comfortable space in a
comfortable market, you’re
not adding value Who else
will take this kind of risk?”

DFIs invest a significant amount in the private sectorin fragile and conflict-affected states. The most recent
available data indicate that in 2016, alone, 15 of
the largest DFIs invested a total of $1.3 billion. Of
this amount, IFC accounted for approximately onethird.30 As a result of a strategic priority to increase
investments in FCS, IFC has more than doubled
investments in these countries over the last 10 years,
and has ambitious plans to further increase investments
over the coming 10 years. IFC has also mobilized
significant investments from partner banks, at a
rate in many cases higher than IFC’s mobilizationof investments in lower and lower middle-income
countries that are not FCS (Figure 4).31—VIKRAM KUMAR, IFC COUNTRY
MANAGER FOR MYANMAR

Despite the growing role and importance of DFI
commitments in FCS, other financial flows such as

19

4

3500
Non-FCS Low/Lower Middle Income Countries (LHS)

3000

FCS (LHS)

3

2500
2000

2
1500
1000

1

500
0

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Mobilization FCS (US$ million)

Mobilization
per dollar of own commitment

FCS Volume Mobilized (RHS)0

FIGURE 4 IFC Mobilization, FCS and Non-FCS Low and Lower-Middle Income Countries

crafting new laws and regulations governing joint
ventures with foreign companies and then invested inearly precedent-setting examples.

official development assistance, foreign direct investment,
and remittances are often much larger. However, DFIs
play a crucial role in pioneering investment that createsmarkets and catalyzes other investments, and this role
may grow as more DFIs focus on the private sector inchallenging environments. DFI engagement also tends tobe greater in post-conflict situations rather than during
active violent conflicts, when private investment is mostoften from local investors.

The focus on FCS countries deepened in the late 1990s
and early 2000s, following the conflict in the Balkans.
One of IFC’s first investments in the region came in1996, when IFC helped the German development
company IPC launch Bosnia and Herzegovina’s micro
and SME finance pioneer, now ProCredit Bank, lessthan a year after the signing of the Dayton Accords.32

The remaining sections in this chapter will review IFC’s
experience in FCS to draw out key lessons for further
developing the private sector.

IFC’s focus on FCS further intensified over the past
decade. In 2008, IFC created the Conflict-AffectedStates in Africa (CASA) Program, a donor-supported
initiative focused on creating enabling conditions
for private sector in the Africa region. In 2010,
IFC added FCS to its strategic priority areas, andin 2012 established the FCS Coordination Unitfollowing the publication of the World Development
Report 2011 on Security, Justice and Development.
IFC’s commitment to this group of countries was
reemphasized in 2018 through the ambitious goals toincrease the share of IFC’s investments in FCS and
IDA to 40 percent by 2030.

IFC’s FCS Focus and Results
IFC, in partnership with the World Bank and MIGA,
development partners, and clients, has a long historyof supporting private investment and growth in FCS– both through investment and advisory services. Oneof the early IFC engagements in a post-conflict setting
was in Indonesia in the late 1960s, when the country
was emerging from a traumatic period of prolonged
conflict. In an effort to help bring much-needed foreign
investment to the country, IFC supported work on

20

IFC Investment Trends: Sectors and Geographies

years, IFC has increased the number of its FCS
investments the most in transportation, agriculture,and finance34 —all growing faster for IFC in FCS thanin other low and lower middle-income countries. IFC’s
growth in FCS in agriculture and finance has been
assisted by the use of blended finance (a combinationof concessional funding provided by development
partners and commercial funding provided by IFC
and co-investors).

The sectoral breakdown of IFC’s long-term
investments in FCS over the past 5 years is illustrated
in Figure 5.33 With regard to IFC’s dollar volume
in FCS, the four largest sectors have been financial
services, energy (electricity/gas/steam), informationand communications technology (but largely
telecommunications), and manufacturing. (Figure 5A).
IFC’s greatest number of investments have been in thefinancial services industry (Figure 5B), reflecting IFC’s
corporate-wide focus on strengthening the banking
sectors in developing markets, including facilitating thefinancing of MSMEs. This is particularly significant
in FCS markets where there is a higher proportionof smaller firms. IFC has made fewer investments by
number in the telecommunications and energy sectors
in FCS as the greater size of such projects mean thatthey are less likely to be implemented frequently inindividual countries. Also, due to their complexity andthe involvement of multiple partners, energy projects
have a particularly long gestation period.

“The focus on SMEs has provenvery efficient. When we provide
financing, we’re helping withcapacity building, facilitating
access to markets, and improving
the investment climate.”

Figure 5B also illustrates that IFC’s financing has
been significant in several other sectors—particularly
agriculture, forestry, and fishing. In the last five

—BABACAR FAYE, IFC’S RESIDENTREPRESENTATIVE IN DEMOCRATIC
REPUBLIC OF CONGO

A. IFC COMMITMENTS IN FCS (2014–18, MILLION USD)
Other

Financial andinsurance
activities
32%

B. IFC PROJECT COUNTS IN FCS (2014–18)
Other

Agriculture,
forestry andfishing
3%
4%

Accommodationand food service

5%

Transportationand storage

Financialandinsurance
activities

Professional,
scientific andtechnical
2%Agriculture,
forestry and
10%

4%

48%
11%

5%
Manufacturing

Accommodationand food service
Transportationand storage

12%
22%
Electricity,gas, steam

Manufacturing

13%
9%

Information andcommunication

Electricity,gas, steam

FIGURE 5 IFC’s Investments in FCS, 2014–2018, by Sector
Source: IFC calculations based on project data aggregated by ISIC Rev.4 Industrial Classification.

21

2%
Information andcommunication

Overall, the investment data show IFC’s engagement
in a wide range of sectors, including infrastructure,
finance, and services, and strong growth in both thecapital intensive and labor-intensive sectors. In some
sectors such as construction, where there has beensignificant investment from external sources, IFC
has not been very active. This is generally due to thefragmented nature of the construction industry, which
involves many local players, making it challenging for
IFC to invest with the necessary scale. However, IFC
does facilitate growth of the construction industry by
investing in companies that supply building materials,
lease equipment, invest in real estate, and build
infrastructure.35

2) high IFC expenses per dollar invested. The latterreflects many of the constraints of working in FCS. As
discussed above, higher costs result from the extra timerequired to develop and structure projects, develop
the capacity of government staff, evaluate and advise
sponsors, address environmental and social issues,ensure the security of staff, and assess the potential
impact of projects on the country’s development andstability. Lower profitability also reflects the small sizeof many FCS investments, which means that the costs
cannot be amortized over a large volume of revenue.

IFC Trade FinanceIn addition to making long-term investments, IFC has
supported trade finance in conflict-affected countries
through its Global Trade Finance Program (GTFP).
The GTFP enables businesses to trade in international
markets while also increasing the availability ofsupplies locally. In many cases, the provision of tradefinance is IFC’s first point of entry in FCS markets, andamong IFC’s earliest engagements with the financial
sector. As shown in Figure 6, IFC’s support for trade in
FCS as a share of a country’s total merchandise trade
is approaching levels of IFC trade support in low andlower middle-income countries that are not FCS.

Over the last 10 years, IFC made investments inapproximately three-quarters of all countries classified
as FCS during that time. In the remaining FCS, IFC did
not invest where there was a lack of viable investment
opportunities because of: 1) widespread conflict and/or the absence of rule of law; 2) an inhospitable
investment climate; or 3) very small economies where
the investment sizes were too small for a large investor
such as IFC.
Where IFC has been able to invest, the larger
investment amounts have tended to be in countries
with larger populations, although many other factors
affect the level of IFC financing, including the scale ofrecent conflict, the state of the investment climate, andthe state of infrastructure development. In 20 percentof countries that are FCS, the average IFC investment
has been over $40 million per year, in another 30
percent, the average IFC investment has been between$10 million and $40 million per year, while in half thecountries, IFC’s average investment has been below $10
million per year.

IFC Advisory Services to Firms and Governments
In addition to finance, IFC has provided a significant
amount of advisory services in countries that are FCS,
both to firms and to governments. In the last few years,
20 percent of IFC’s advisory program expenditure has
been in FCS, a significantly higher amount than thecorresponding percentage of IFC investments in FCS,
and a higher level per dollar of investment than in low
and lower middle-income countries that are not FCS.
This is because FCS markets require relatively moreadvisory services in order to build capacity and forother activities that strengthen the private sector. The
largest advisory programs include investment climate
work with governments, advice on infrastructure
privatization, and advice to financial institutions.
Other programs include advice for the manufacturing,agribusiness, and services sectors, and activities related
to improving environmental, social, and governancestandards. IFC sees significant opportunities in FCS todeepen its support for private enterprises by providing

IFC’s FCS Portfolio Performance
A recent review of IFC’s FCS portfolio shows generallysound project and loan performance, with the levelof non-performing loans and write-offs comparable
to the rest of IFC’s portfolio. In many cases, IFC’s
FCS projects have also achieved satisfactory project
financial success, overall. However, on average, IFC’s
own profitability in FCS projects has been below IFC’s
overall average. This has been the result of two main
factors: 1) higher levels of undisbursed balances, and

22

300

FCS Trade Mobilized (RHS)
Non-FCS Low and Lower Middle Income Countries Share (LHS)250

FCS Share (LHS)

0.8

200
0.6
150
0.4
100
0.2

0

50

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Mobilization FCS (US$ million)

Share of Total Merchandise Trade ‰1.00

FIGURE 6 IFC Trade Mobilization Complement Investments
Source: IFC Calculations; World Development Indicators.

additional advisory support. For example, supporting
financial institutions with non-financial risk mitigation
could increase banks’ performance and improve theircontributions to surrounding communities throughenvironmental, social, and governance programs, aswell as supply chain development.

IFC’s Fragile and Conflict Situations (FCS) Africa
program, 36 which was established in 2014, provides
advisory resources for the investment teams who workon early-stage opportunities in FCS in Africa. The
program has built on the CASA initiative, which, since2008, has advised on legal and regulatory reforms,
built the capacity of SMEs, and improved SMEs’ accessto finance. CASA has put people on the ground in mostof the countries in which it operates and pioneered
the use of a “fragility lens” for its projects (see Box 2).
IFC also has several project development facilities such
as InfraVentures, which supports the development of
infrastructure projects, including those in fragile andconflict-affected countries.

Key Methods and Tools Used by IFC toEngage in FCS
IFC has developed several methods and tools to use
in its engagements in fragile and conflict-affected
countries. These can help target investments to achieve
impact and address many of the constraints identified
earlier in this report.

Special Advisory Facilities

Mobilizing Other Actors and Sharing Risk throughBlended FinanceAs extensive advisory services are needed in FCS, IFC
has developed two special advisory facilities that focus
on conflict-affected and lower-income countries. The
Creating Markets Advisory Window funds advisory
services in FCS and IDA countries to improve theviability of IFC’s investments. This includes providing
advice to firms and building their operational capacity.

Blended finance is designed to address the issues ofhigh risk and potential low profitability found inmany private sector projects in FCS by offering belowmarket terms for finance and risk-mitigation products.
This is accomplished through a mix of concessional
funds from development partners such as the WorldBank and bilateral development agencies, as well as

23

commercial finance from IFC, other DFIs, and theprivate sector. The objective is to launch projects thatare likely to have strong social and development impact
and potential to become commercially viable, but are
initially unable to obtain commercial finance.

BOX 2 How does IFC implement
the Fragility Lens in its Projects?
The CASA Initiative.
Improving the impact of a project onfragility is at the core of CASA, IFC’s
special advisory program to develop
investment opportunities in FCS in
Africa (see text above on “Special
Advisory Facilities”). The program has
adopted a “Fragility Lens” to analyzeboth the political risks associated with
implementing an advisory project in a
fragile state, and any harmful effects
a project might have upon the overallfragile situation on the ground. For eachproject where the fragility lens is applied,the following questions must be answered
during the project’s implementation,
supervision, and completion stages:

Blended finance is an important part of IFC’s strategy
in FCS. Blended finance targets projects that aresmaller and riskier—two features that are typicalof firms in FCS. In 2018, blended finance supported
over 40 percent of IFC’s FCS/Low Income IDA
commitments, and over the last five years, nearly
half of investments in the financial and agribusinesssectors of FCS. A risk-sharing agreement between
IFC, the European Investment Bank, and Ecobank(a pan-African commercial and investment group)illustrates the potential for blended finance. The project
was supported by the Global SME Finance Facility, ablended finance facility, and was designed to overcome
the challenges of lending to smaller businesses withhigh risk profiles in very poor countries in West andCentral Africa. The project also included advisory
services to help affiliated banks scale up their lending
to SMEs.

1. What is the conflict context in which the
project operates?

Another example of using blended finance is the Global
Agriculture and Food Security Program (GAFSP). This
provides investment and advisory services to private
agribusiness companies, with the aim of improving
opportunities for the smallholders and subsistence
farmers that are part of the agribusiness value chain.
For example, in Afghanistan, GAFSP helped createa state-of-the-art raisin processing plant that will
improve the livelihoods of about 3,000 farmers.37

2. What is the two-way interaction between
the project and its context?
• What possible negative effects could theconflict have on the project (political risk)?
• What are the project’s expected positiveeffects on the conflict (outcomes, impact)?
• What possible negative effects could the
project have on the conflict (do-no-harm)?

IFC is expanding the resources available for blended
finance in fragile and conflict-affected countries,
including through the IDA Private Sector Window(PSW), a $2.5 billion blended finance facility thatwas designed to mitigate the risks of private sector
investment in IDA-eligible FCS and low-income
countries. In West Africa, the IDA PSW local-currency
facility, which protects against currency fluctuations,enabled IFC to source local currency and purchasebonds to support the development of the housing
market in countries including Burkina Faso, Côte
d’Ivoire, Guinea-Bissau, Mali, Niger, and Togo. As aresult, 50,000 families and businesses are expected to

3. What are the best ways for the projectto minimize its negative effects andmaximize its positive impacts on conflict?
The fragility lens, for example, has helped
IFC to consider engaging in the cottonand cashew nut sectors in the north ofCôte d’Ivoire, where the ethnic divisions
and regional disparities that drive conflictneed to be understood.

24many cases, IFC expends extensive resources to help its
clients address E&S issues.

obtain new mortgage loans; 200,000 people will havea new roof over their heads; and about 250,000 new
housing-sector jobs will be created.

Operational Systems

Using Capable Financial Intermediary Organizations

Operating effectively and efficiently in FCS requires
several changes to IFC’s normal procedures. These
include: 1) a special, limited, FCS Risk Envelopethat allows certain high-impact projects to proceed,
despite being outside IFC’s normal risk profile; 2)adjustment of policies and procedures so they more
readily facilitate engagement in the FCS context; 3) a
dedicated unit to provide an FCS strategy, operations
support, and promote learning; and 4) the special early
application of IFC’s integrity due diligence process,which screens companies for integrity risks. This
speeds up project processing and avoids dropping
projects later due to sponsor integrity issues.

This, as mentioned earlier, is also part of IFC’s strategy
to multiply its impact in FCS. By supporting local
financial intermediaries (FIs) such as microcredit
banks, and venture capital and private equity
funds, IFC can assist a greater number of smaller
enterprises than it could on its own.38 Local FIs havecomprehensive local knowledge, and can provide IFC
with well-informed advice.39 In return, IFC can provide
some level of financial security for FIs operating inunderserved regions that are affected by conflict, orthat provide finance to underserved segments such as
businesses owned by women.40
Afghanistan offers a good example of the use offinancial intermediaries in FCS. An estimated three
million households in the country lack access tofinance, with political, economic, and, security
disturbances exacerbating the vulnerability ofhouseholds and businesses. Since its inception, First
Microfinance Bank Afghanistan, has disbursed morethan $760 million in loans to more than 540,000
Afghan businesses. The bank, which is an IFC client, isthe country’s leading microfinance institution, lending
to about half of the country’s active borrowers, ofwhom 20 percent are women. Another example ofusing financial intermediaries is Rawbank, the secondlargest bank in the Democratic Republic of Congo, andan IFC client, which launched its “Lady’s First” WINprogram in March 2010, becoming the only bank in
the country with a program specifically dedicated to
women in business.

IFC Strategies
IFC’s current overall approach to development is called
Creating Markets. Under this recent initiative, IFC andother members of the World Bank Group work closely
together on comprehensive approaches to development,that link policy reform, advice, investment, and themobilizing of additional finance. This is also closely
associated with the World Bank Group’s Maximizing
Finance for Development (MFD) program, whichprioritizes private sector solutions, where possible, inorder to conserve scarce public resources.

Performance Standards

The Creating Markets approach is especially importantin FCS, where extensive efforts are required to improvepolicy, build capacity, address environmental issues,
and mitigate risks to enable the private sector to thrive.
The strategy development process can identify the mostappropriate focus areas for engaging the private sector,
as well as the instruments needed to foster private
sector growth and economic development.

IFC has a comprehensive set of environmental andsocial (E&S) performance standards that are appliedin all of its projects, and these have also influenced theEquator Principles, which are the standards followedby most global banks. In the FCS context, IFC’s
E&S standards are particularly important because
substantial social and natural resource issues areoften associated with conflicts, and governments in
FCS often lack the capacity to address these issues. In

IFC has developed several strategy development tools as
part of its Creating Markets approach. The first is thecountry private sector diagnostic, which IFC and theWorld Bank undertake to rapidly assess a country’s key
constraints and opportunities for market creation. The
diagnostic can provide a shared basis for governments,
DFIs, and donors to pursue complementary actions tocreate markets, focusing on the markets with the bestprospects. A second important tool is the Anticipated25Impact Measurement and Monitoring Framework(AIMM), which provides metrics at both the projectand market levels for assessing the likely development
and financial impact of projects.

IFC’s Investment Decision Process in FCS
The tools and approaches discussed above can together
make important contributions to effective investingin FCS. Figure 7 below illustrates the overall processthat IFC follows in its approach to investing in FCS.
In practice, the steps are far from linear, with several
iterations involved at different investment stages, which
include preliminary engagement with investors andfirms, an early look at projects, detailed field appraisal,
and a formal review before decisions are made.
Nevertheless, Figure 7 captures some important aspectsof IFC’s investment process in FCS which are:• early engagement on critical fragility issues such as
integrity due diligence, E&S issues, conflict analysis;
and carrying out governance, macro, and security
assessments;“It’s really a lot of upstream
work—what we call creating
markets. But you have to bepatient. Can I say that we’regoing to sign the agreementsin the next 12 months? No.
You have to be realistic. If you
approach it with the same
mindset, you might have inother places— ‘I want to finish
this in six or 12 months’—
you’re going to drop it.”—DALIA ABDEL AZIM MOHAMED
WAHBA, IFC COUNTRY MANAGER
IN LEBANON• extensive project preparation work, including
addressing policy issues, and building government
and private sector capacity;• special efforts to identify viable sponsors (investors
and firms) and bring in new ones; and• recognizing the greater need to use blended
finance. n

26Can IFC Engage in this Country?
• Macroeconomic analysis• Security situation• Governance

NOT
OK:
EXIT

OK

Are there Viable Market Opportunities for Private Enterprise?
• Input from IFC networks, local offices, and client relationships• Country Private Sector Diagnostics (CPSDs)

Creating Markets Approach: Upstream
project development, policy reform andcapacity building to create viable markets

OK

ESG Performance• Are ESG and conflictissues manageable?

NOT
OK

Work with investor/firm to
identify ways to manage or
mitigate the risks.

NOT
OK

Integrity Due Diligence• Are there investors/firms
we can work with?

Market creation: Advice for
upstream project development,
capacity building.

Impact (for DFI/Impact Investors)• AIMM framework results –is the impact assessment
satisfactory

Can the Project be Financed on
Commercial Terms, with IFC Participation?
• Given the risk/return profile

FIGURE 7

NOT
OK

Improve impact: linkages,
gender interventions, CSR
for non DFIs

OK

Invest and implement with project
development and risk mitigation
instruments, as needed.

NOT
OK

Encourage FDI, venture capital forstart-ups, and capacity building
for clean but weak sponsors.

OK

Commercial Viability• Viable investment plan
• Qualified investor/firm• Financial, operational risks

NOT
OK

NOT
OK

Structuring, guarantees, blended financeto improve the risk/reward balance if
there are important external benefits(e.g. climate resilience, poverty reduction)

OK

IFC’s Investment Decision-making Process in FCS27

PRINCIPLES FOR ENGAGING IN FRAGILE
AND CONFLICT-AFFECTED SITUATIONS
sector interventions. Unanticipated reactions from local
communities and adverse impacts would either drive
initiatives to failure, or mute their impact on stability.
Only in the last decade have multinational companies,
and especially those in the extractive and agribusinesssectors, begun to manage perceived and actual conflict
impacts proactively by using the “fragility lens”. The
European Investment Bank was one of the first DFIs toincorporate a similar conflict-sensitive approach in its
investment analysis, and IFC’s CASA initiative uses a“fragility lens” in its advisory assignments (see Box 2).

Until recently, international efforts to stabilize
conditions in developing countries seldom included
promoting private enterprise, but that is changing.
Today, there is growing recognition that sustainable
development in FCS cannot occur without private
sector activity. In this chapter, the authors havetaken stock of all the preceding discussions on therole of the private sector in FCS, the constraints andopportunities, and IFC’s experience, and synthesized
seven key principles for engaging with the private
sector. The following recommendations are targeted at
all stakeholders—DFIs, governments, impact investors,
private companies, and others—that have a desire to
expand the private sector in FCS in ways that have apositive impact on their societies.

Going forward, analyzing conflict dynamics will be
important to ensure that private sector investments
yield their potential benefits to society. While muchhas been learned about how to analyze a conflictaffected environment, much more needs to beunderstood, and it will be important for investors,
DFIs, and others to continue to build on theirexperience and share best practices.

Enabling private enterprise to bring growth andstability requires different ways of working thanin other low-income settings. The following sevenprinciples apply, each of which reflects very specificdilemmas in FCS:

Avoid the Dilemma of Choosing
Between Short and Long-term Impact

1. Be conflict sensitive every step of the way.
2. Avoid the dilemma of choosing between short- andlong-term impacts.

In territories at immediate risk of relapsing into
conflict, with significant humanitarian needs, andwhere the economy is not functioning, development
agencies tend to focus on quick wins. This includes
boosting incomes through job programs, fixing
regulations, and setting up ad-hoc institutional
structures that could make an immediate difference.
State building, developing legal frameworks, improving
government capacity, and undertaking major
infrastructure projects all take time to materialize—
which is time that fragile markets often cannot afford.

3. Act fast during transitions, but remain engaged
during setbacks.
4. Commit more than money.
5. Stick to standards, but be flexible with timing.
6. Bring in new players and innovate.
7. Keep markets open for international trade andinvestment.

Be Conflict Sensitive Every Stepof the Way

IFC’s experience has shown that long-term andimmediate development work is not mutually exclusive.
Development interventions that reduce immediate risks
so that jobs can be created for communities should beaccompanied by parallel efforts focused on improving

Until recently, few development finance institutions
or other investors would systematically take into
account conflict dynamics when designing private

28

can drive change (see Box 4 on the Seven Principles in
Action). In most contexts, development institutions can“There has been so much focus
now on the urgent situation that
there hasn’t been enough effort
in building for the long term.
You cannot wait for the situation
to be perfect, certainly fromthe private sector development
perspective. But we have to keep
our minds open. When favorable
situations occur, you have tojump and try to do something
because we have a very shortwindow for these opportunities.”

engage. Working with a variety of instruments such asadvisory services, trade guarantees, MSME finance,
public-private dialogue, or engagement at the peripheryof areas of active conflict can go a long way towardsupporting solutions (Box 3).

BOX 3 Customizing Solutions: States
Emerging from Conflict
Along the conflict continuum, countries
exhibit different levels of uncertainty,
government capacity, and availabilityof public goods such as infrastructure,
education, and healthcare. An effective
mix of solutions needs to take thesefactors into account. While each caseis unique, there are some basic things
to consider in choosing solutions forcountries at different stages of conflict.
For example, states emerging from conflict
suffer from weakened institutions andturbulent power dynamics. Nevertheless,transition periods can offer significant
opportunities for business development,
reforms, and economic transformation.
It is essential to act fast and work inparallel tracks. First, target achieving
immediate results for conflict-affected
communities—for example, by creatingjobs (e.g. via financing labor-intensive
industries or including private firms ingovernment and donor procurement);
improving basic power and transportation
infrastructure; restoring access to finance;and strengthening targeted regulatory andenforcement mechanisms (e.g. via publicprivate dialogues). Second, build long-termfoundations for growth—including laws toprotect property and government capacity
for enforcement. All these actions can help
prevent relapse into conflict.

—BABACAR FAYE, IFC’S RESIDENTREPRESENTATIVE IN DEMOCRATIC
REPUBLIC OF CONGO

regulatory systems and the infrastructure necessary
to release the longer-term potential of private firms.
Every situation is a learning experience and will need
to be tailored to the unique circumstances of theenvironment.

Act Fast During Transitions but Remain
Engaged During Setbacks
For a long time, the development community has
rejected calls to engage in FCS: instead, stabilization
was a prerequisite for development work. Yet,
unstable situations such as those in the immediate
aftermath of conflicts are where development efforts
are needed most. IFC has been leading the way for
finance institutions to take more risks early on, go to
the limits of what is possible in every situation, signal
the feasibility of investments, and empower firms that

29

Commit More Than Money
Assuming that funding alone will drive change
is another long-standing misconception in thedevelopment community. Creating markets in FCS
involves a lot more than finance—advisory services,
staff presence on the ground, capable intermediaryorganizations, and tailored solutions are all necessary.
Additional work will likely be needed to develop
regulations; build government and private sector
capacity; address complex environmental and social
issues; identify and recruit strong sponsors; anddevelop holistic sectoral solutions, in partnership withgovernment and other stakeholders. While all agree
on the value of such complementary actions, few scale
them up to the extent necessary to create markets.

“You need a different way ofoperating in FCS to be able todeliver more; to be able to deliverat all. It’s a mental shift you
must develop. When you assume
no one expects you to deliver
anyway, you accept defeat.”—IFC COUNTRY MANAGER FOR
LEBANON, DALIA ABDEL AZIMMOHAMED WAHBA

Stick to Standards but be Flexible
on Timing

Investing in conflict-affected countries can also beenhanced through innovations. Examples cited earlier
include equity funds and blended finance. Other
approaches include investments with lower fixed asset
requirements, utilizing special economic zones, andharnessing new technologies. An example of the latteris the use of debit cards such as OneCard in Lebanon,
which is supported by IFC. This is an instrument for
cash transfers to refugees which was first developed by
the United Nations in Lebanon in 2013, and extended
to Jordan a year later. It is a re-loadable prepaid cardwith a magnetic strip that has several “wallets” for theassistance that different humanitarian groups provide.

To scale up quickly, practitioners often question theneed to strictly apply ESG standards.41 Implementing
these standards can be difficult because of thecomplexity of many issues, the lack of necessary
technology, and institutional shortcomings—all ofwhich potentially slow job and income generation
opportunities for populations at risk of conflict. But
cutting corners on standards is likely to be shortsighted
as these help to reduce project risks in the medium
term, and minimize social harm, all of which lower
the risk of future instability. However, meeting
environmental, social, and governance standards in
FCS is likely to take longer than in other settings, andrequires flexibility with timing and additional support.

Keep Markets Open for International
Trade and Investment

Bring in New Players and Innovate

Thinking global and keeping markets open is not obvious
in conflict situations as borders are often closed because
of international sanctions, financial transactions are hardto carry out, and essential transport connections may
no longer exist. Yet fragile countries often turn abroad
to fill the vacuum in domestic economic activity. Thus,
improving trade facilitation and related infrastructure,and supporting investment climate reform can encourageinternational trade and investment, which are allnecessary for markets to grow and help maintain stability.

An essential part of achieving stability involves people:
entrepreneurs and investors who can create a dynamic
and growing private sector and improve the local power
dynamics. Working with those already active in fragile
markets requires caution and extensive due diligence
to avoid reputational risks. IFC’s experience has shown
this to be one of the hardest parts of creating markets
in fragile contexts. Newcomers, regional, and diaspora
investors who are not associated with toxic political
dynamics can drive change, and development partners
should support them.

Box 4 discusses some examples of how IFC has applied
the seven key principles just discussed. n

30

BOX 4 The Seven Principles in Action: IFC’s Solutions in FCS
1. Be conflict sensitive every step of the way.

more than $250 million, and mobilized an
additional $535 million to expand and upgrade
two key gas-fired power plants—Azito and
CIPREL—but without using more natural gas
or generating additional greenhouse gas.
Today, the two plants account for two-thirdsof Côte d’Ivoire’s power-generation capacity.
Now blackouts and brownouts are much lessfrequent, and about 2 million43 more people are
expected to gain access to power.

The fragility lens developed by the ConflictAffected States in Africa (CASA) program
has helped IFC consider how best to engage
in the cotton and cashew nut sub-sectors
in the north of Côte d’Ivoire, a relatively
fragile area that would greatly benefit from
economic support. The fragility lens allowed
the project team to articulate more clearly
how the project could address two pertinent
conflict drivers: ethnic divisions and regional
disparities. These disparities are particularly
linked to the country’s established agriculture
sector, notably cash crops such as cocoa
and coffee, which historically have been
concentrated in the southern part of thecountry. This unbalanced regional agriculturaldevelopment has created grievances andintense competition for resources. By applying
the fragility lens and analyzing two-way
interactions between the project and conflict,the project team emphasized bringing
different ethnic groups together for training,
and focusing on the project’s contribution tojob creation in the north.

3. Act fast during conflict-to-peacetransitions and remain engaged during
setbacks.
Bosnia’s civil war—the most devastating
conflict in Europe since World War II—ended in
December 1995. It left 100,000 people dead, 2.2
million displaced, and the economy in ruins.
Within months IFC placed staff on the groundto revive the local private sector. This early
action helped IFC prepare local companies
for subsequent investment—particularly inthe manufacturing sector. One was Akova
Impex, a meat-processing company whose
main factory had been reduced to rubble
during the war. Rebuilding the plant required
the equivalent of $4.6 million. IFC helped thecompany to develop a detailed feasibility
study. When the results proved favorable, IFC
provided a $2.2 million loan, supplementing
what the company was able to obtain fromother lenders. By early 1999, Akova Impex
was thriving—selling its meat products tomore than 2,700 grocery stores across Bosnia
and employing an integrated work force ofMuslims, Serbs, and Croats.

2. Avoid the dilemma of choosing between
short and long-term impacts.
Immediately post conflict, IFC has engaged
quickly to build companies and restore jobs
(see an example in principle 3 below). But
concurrently investing for the long term is also
possible. In 2012, Côte d’Ivoire was emerging
from a decade of civil war and instability, andbusiness activity was resuming, but a longterm obstacle loomed: power shortages.
Working with the World Bank and otherdevelopment partners, IFC moved to address
the challenge. Years of underinvestment 42
had degraded the country’s electricity
infrastructure. To reverse this, IFC invested

4. Commit more than financial resources.
Sub-Saharan Africa is home to roughly halfof all the countries classified by the WorldBank as fragile or conflict-affected. In 2008,
continued on next page31

continued from previous page

providing clients with greater understanding,and taking a structured approach to a hydropower benefit-sharing scheme. 44

IFC recognized that these countries needed
knowledge, skills, and good ideas almost as
urgently as they needed finance. To attract
investment, they needed to strengthen
domestic institutions, improve the investment
climate, and build local business capacity.
IFC launched the CASA program to provide
training for smaller businesses, while advisinglarger ones on how to develop more inclusive
supply chains. It also advised governments on
legal and regulatory reforms and attracting
private finance for infrastructure projects.
By the end of June 2018, the CASA program
had advised almost 3,000 private and public
entities; helped to enact 78 laws, regulations,or amendments to improve the businessclimate; facilitated more than $176 million
in loans to SMEs from financial institutions;and trained more than 60,000 individuals,
including at least 10,400 women.

6. Support new players and innovate.
Obtaining finance is a major challenge fornewcomers. IFC’s innovative SME Ventures
Program helps address the gap in equity
finance by providing technical assistanceto, and investing in, funds run by locally or
regionally-based managers. It also works withother parts of the World Bank Group to assess
the regulatory environment for private equity
investment and provides recommendations
for improving that environment. IFC used the
SME Ventures Program to expand its workin some of the world’s most fragile markets,
including the Democratic Republic of Congo,
the Central African Republic, Liberia, Sierra
Leone, and Nepal.

5. Stick to standards, but be flexible on thetiming.

7. Keep markets open to international tradeand investment.

In Nepal, in the hydropower sector, IFC has
combined its investments with E & S advisory
services to help clients find solutions tocomplex risks, and improve the sector overall.
The expectation is that having a better
regulatory framework for environmental
impact assessments (launched in July 2018),
coupled with a basin-wide cumulative
impact assessment will result in physically,
economically, socially, and environmentally
sustainable and resilient hydropower projects.
The approach includes initiatives to gain
better understanding of the environmental
and social values of the people living aroundthe Upper Trishuli 1 hydropower projectin a way that rebuilds the social fabric of
the neighboring communities. IFC is also
supporting hydropower developers byleading ongoing bilateral and multilateralengagements with Nepali stakeholders,

Conflict hinders the ability of businesses totrade or attract investment—especially tradeand investment from abroad. IFC’s Trade andCommodity Finance programs help address
the problem by offering guarantees, risksharing facilities, loans, and other structured
products to support trade in these markets.
Through these products, IFC has enabled over
$4.6 billion45 in trade, despite the challenging
conditions in FCS. Working with other WorldBank Group institutions, IFC also designs andsupports regulatory reforms to expand tradeand investment. In Sierra Leone, for example,
the Removing Administrative Barriers to
Investment program helped reduce the timeand cost of registering a business. Between
2004 and 2010, the program helped create
nearly 6,000 new businesses, and generate
15,000 jobs. 46

32

FUTURE DIRECTIONS
While much has been learned about conflict-affected
countries and the private sector in recent years, there
are many areas where further work could help improveoutcomes. These include:

systematically leverage the private sector to address thecrisis is relatively new. For the formal private sector,
viable investment opportunities to support refugees
have been scarce due to policy barriers that frequently
prevent refugees from working or owning a business,and their extreme poverty and insecurity. As a result,most private sector initiatives that develop livelihoods
have been limited to corporate social responsibility,
philanthropy, and other grant-funded initiatives.

Conflict Prevention
The 2018 United Nations-World Bank report, Pathwaysfor Peace, highlighted the shift of the development
community away from responding to crises and theaftermath of conflict, toward preventing conflict. At
the center of these efforts is addressing the grievancesof exclusion from access to power, opportunities,
and security. The report stresses that states hold theprimary responsibility for prevention, but that otheractors, including the private sector and internationalorganizations, must also play a critical role. While
there is knowledge about the impacts of specific private
sector projects at the micro level, less is known about
how the private sector can contribute to conflict
prevention at the macro level. More analytical workneeds to be done to articulate how the private sector
can best contribute to conflict prevention, and how
policy makers and the development community can
support private sector interventions that provide
economic opportunities, mitigate grievances, andaddress the drivers of conflict. To that end, IFC is
working with the World Bank on new approaches toconflict prevention, including joint work in selectedpilot countries, aiming to leverage private sector
projects and initiatives to support this agenda.

Going forward, more policy and advocacy work needs
to be undertaken to enable displaced populations
to fulfill their potential as economic actors. It isalso critical to connect enterprises affected by the
refugee crisis with global supply chain actors andinvestors. Assistance may take the form of hiring
or training refugees, investing in companies owned
by, or employing refugees, or supporting firms that
adapt their core business to better serve refugees.
Another promising area for support is the use ofblended concessional finance to encourage private
investment that delivers impact both to forcibly
displaced populations, and to the communities thathost them. Progress in this area requires new andinnovative partnerships between the private sector,
DFIs, philanthropic actors, and the humanitariancommunity.

Conflict-Sensitive Investing Practices
A growing number of investors agree that conflict andfragility need to be considered in the projects that they
undertake. This attention to conflict and fragility fromthe investor’s perspective is twofold. First, investors
need to adapt the way they assess project risks in FCS
and consider contextual risks beyond the standard
ESG, due diligence, and reputational assessments.
Second, investors need to bring greater attention to1) identifying and mitigating the potential impact ofprojects on fragility and conflict, and 2) monitoringand management of potentially negative processes.
Many private investors and some DFIs, with the helpof non-governmental organizations and research

Addressing the Forced
Displacement Crisis
The world is experiencing the largest forced
displacement crisis since World War II, with 68.5
million refugees and internally displaced people.
Forced displacement is often a symptom of conflict,but may also be driven by various other factors, suchas climate change. While the private sector frequently
generates livelihoods and meets the basic needs offorcibly displaced populations, the focus on how to33organizations, are exploring the development ofconflict-sensitive approaches to investments, although
to date these efforts have been fragmented and limitedin scope. Going forward, the DFIs are well placed toadvance this agenda, and develop a set of principles
for use by both DFIs and private investors on conflictsensitive approaches to investment that could provide aframework for operating in challenging environments.

states. DFIs are best placed to help catalyze private
investment in FCS, and leverage aid to support
pioneering firms entering these challenging markets.
Yet to date, beyond joint cofinancing of projects in
FCS, DFIs have rarely focused on how to collectively
address some of the biggest challenges to operatingin FCS, and jointly develop solutions. Promising
opportunities in this regard include developing
integrated sector strategies, leveraging each other’s
due diligence and market knowledge, joint upstream
project development, agreement to consistently apply
blended finance principles, and collaborating todevelop principles for conflict-sensitive approaches toinvestment.

Increasing Collaboration among DFIs
The 2018 report, “Escaping the Fragility Trap”,
published by the Commission on State Fragility,
Growth, and Development highlighted the role thatprivate sector focused-DFIs need to play in fragile

34

ANNEX: ADDITIONAL IFC DATAIFC COMMITMENTS IN NON-FCS LOW AND
LOWER MIDDLE-INCOME COUNTRIES(2014–18, MILLION USD)IFC COMMITMENTS IN FCS (2014–18, MILLION USD)
Other

Other

Agriculture,
forestry andfishing

Financial andinsurance
activities
32%

3%
4%

Real estate activities
3%

Accommodationand food service

5%

11%

Transportationand storage
Financialandinsurance
activities

Manufacturing

5%

12%

Financialandinsurance
activities

Electricity,gas, steam

IFC PROJECT COUNTS IN NON-FCS LOW AND
LOWER MIDDLE INCOME COUNTRIES(2014–18)

Professional,
scientific andtechnical
2%Agriculture,
forestry and
10%

4%

48%

5%

Other
Real estate activities
Mining andquarrying
4%
Transportation
3% and storage

3%
Financialandinsurance 48%
activities

Accommodationand food service
Transportationand storage

6%

Manufacturing

Manufacturing
2%Electricity,gas, steam

Agriculture,
forestry andfishing

11%

12%

9%

Manufacturing

14%

IFC PROJECT COUNTS IN FCS (2014–18)
Other

Agriculture,
forestry andfishing50%

Information andcommunication

Electricity,gas, steam

Transportationand storage

5%

13%

22%

Mining and quarrying
5%

13%

Information andcommunication

Electricity,gas, steam

Education

Accommodation and food service

Transportation and storage

Professional, scientific and technical

Human health and social work activities

Financial and insurance activities

Water

Mining and quarrying

Administrative and support service

Construction

Wholesale and retail trade

Agriculture, forestry and fishing

Information and communication

Electricity, gas, steam

Public administration and defence

Real estate activities

Manufacturing

Other

35

COMMITMENT GROWTH IN FCS BY INDUSTRY (MILLION USD, %, 2014-2018 COMPARED TO 2009-2013)+547%

Agriculture, forestry and fishing
Administrative and support service

+108%
+131%

Financial and insurance activities
Transportation and storage-33%

Manufacturing+33%

Electricity, gas, steam+135%+1900%

Wholesale and retail trade
Mining and quarrying
Human health and social work activities

-65%
-69%

Accommodation and food service+122%

Real estate activities

+724%
-44%

Information and communication
Construction
Water

2009-2013

Professional, scientific and technical2014-2018

Education

0

100

200

300

400

500

600

700

800

900

COMMITMENT GROWTH IN NON-FCS LOW AND LOWER MIDDLE-INCOME COUNTRIES BY INDUSTRY(MILLION USD, %, 2014-2018 COMPARED TO 2009-2013)

Human health and social work activities+10%

Wholesale and retail trade+117%

Real estate activities+124%

Education-12%

Electricity, gas, steam+83%

Accommodation and food service+65%

Financial and insurance activities+77%

Agriculture, forestry and fishing+19%

Transportation and storage+37%

Manufacturing
Administrative and support service

-17%
-10%

Mining and quarrying-3%

Information and communication-56%

Professional, scientific and technicalConstruction

-40%
25%

Water

2009-20132014-2018-30%

Public administration and defence

0

2000

4000

36

6000

8000

10000

PROJECT GROWTH IN FCS BY INDUSTRY (COUNTS, %, 2014-2018 COMPARED TO 2009-2013)

Agriculture, forestry and fishing+800%

Administrative and support service+200%

Financial and insurance activities+62%

Transportation and storage+60%

Manufacturing+24%

Electricity, gas, steam+15%

Wholesale and retail trade
Mining and quarrying+0%

Human health and social work activities+0%

Accommodation and food service-13%

Real estate activities-50% +724%

Information and communication-71%

Construction
Water

2009-2013

Professional, scientific and technical2014-2018

Education

0

20

40

60

80

100

PROJECT GROWTH IN NON-FCS LOW AND LOWER MIDDLE-INCOME COUNTRIES BY INDUSTRY(MILLION USD, %, 2014-2018 COMPARED TO 2009-2013)

Human health and social work activities+167%

Wholesale and retail trade+157%

Real estate activities+92%

Education+56%

Electricity, gas, steam+35%

Accommodation and food service+33%

Financial and insurance activities+31%

Agriculture, forestry and fishing+20%

Transportation and storage-23%

Manufacturing-25%

Administrative and support service

-29%
-34%

Mining and quarrying-41%

Information and communication
Professional, scientific and technical-44%

Construction

-50%

Water

2009-20132014-2018-82%

Public administration and defence

0

50

100

150

37

200

250

300

350

400

REFERENCES
1

The New Deal is a key agreement between fragile and conflict-affected states, development partners, and civil society to improve the current
development policy and practice in fragile and conflict-affected states. It was developed through the forum of the International Dialogue andsigned by more than 40 countries and organizations at the 4th High Level Forum on Aid Effectiveness on November 30th, 2011 at Busan,
Korea. For more information, see International Dialogue on Peacebuilding & Statebuilding website at http://www.pbsbdialogue.org/media/
filer_public/07/69/07692de0-3557-494e-918e-18df00e9ef73/the_new_deal.pdf.

2

Development finance institutions (DFIs) are development institutions that finance the private sector.

3

The World Bank Group’s Maximizing Finance for Development (MFD) approach helps countries maximize their development resources bydrawing on private financing and sustainable private sector solutions in order to enable governments to reserve their scarce public finance forareas where private sector engagement is not optimal or available.

4

Countries and regions can be affected by dimensions of fragility and conflict that are beyond the scope of this report, including fragility thathas been heightened by natural disasters and epidemics. The authors acknowledge that it is important to consider the private sector’s role insuch types of fragility, but a separate analysis is required for this.

5

The g7+ is a voluntary association of countries that are or have been affected by conflict and are now in transition to the next stage ofdevelopment. For more information, see g7+ website at https://g7plus.org/who-we-are/6

For more information on Peacebuilding and Statebuilding Goals (PSGs), see International Dialogue on Peacebuilding & Statebuilding website
at http://www.pbsbdialogue.org/media/filer_public/07/69/07692de0-3557-494e-918e-18df00e9ef73/the_new_deal.pdf

7

Oetzel et al. 2010, p. 356.

8

Porter Peschka 2011, p. 10.

9

It is important not to overstate the magnitude of inclusive job creation that occurs in FCS, however. Firms may have little incentive to makeproactive efforts to seek out employees from marginalized groups, and low employment levels overall mean that many groups remain largely
excluded from jobs.

10

World Bank Group 2015.

11

United Nations and World Bank, 2018, p. xxiii.

12

Nelson 2014.

13

Guáqueta 2006; Datzberger and Denison 2013, pp. 21-22; Goldberg, Kim, and Ariano 2014; Blattman and Ralston 2015, pp. iii, 11, and 12.

14

Porter Peschka 2011, p. 10.

15

Guáqueta 2006.

16

Goldberg, Kim and Ariano 2014, pp. 3-4.

17

Utterwulghe and Gjerloeff 2014.

18

For more information, see United Nations and World Bank 2018.

19

Martin and Bojicic-Dzelilovic 2017.

20

Nelson 2014.

21

Gifford et al. 2016.

22

World Bank 2017.

23

Speakman and Rysova 2015.

24

Speakman and Rysova 2015.

25

Low local demand, for example, can be attributed to widespread poverty, which limits the volume of business activity that the local population
can sustain. Foreign markets often remain out of reach because of the poor quality of transport infrastructure.

26

This analysis is based on a model of the potential for foreign investment in a country based on economic fundamentals such as population,
GDP, accessibility, natural resources, and trade. See World Bank Group (2017) GIC.

27

The analysis of investment opportunities post conflict are based on the first twelve years after conflict, WBG (2017) GIC.

28

Barbour and Alsuhaibani 2014.

29

For more information about the IFC Articles of Agreement, see IFC website at https://www.ifc.org/wps/wcm/connect/CORP_EXT_Content/
IFC_External_Corporat_Site/About+IFC_New/IFC+Governance/Articles/30

IFC analysis (conducted July 2018) of 2016 commitments, the most recent year for which data is available. DFIs included in the research
represent those with the largest overall investment volumes.

31

Note the high mobilization in 2018 was due to a large transport investment.

32

World Bank. 2016. IFC the first six decades: leading the way in private sector development - a history (English). Washington, D.C. : WorldBank Group. http://documents.worldbank.org/curated/en/668851478627391927/IFC-the-first-six-decades-leading-the-way-inprivate-sectordevelopment-a-history

38

33

This section refers to IFC’s track record in long-term financing; short-term financing investments are discussed later in this section. “Volume”
includes investments made from IFC’s own account. Years indicated refer to IFC’s fiscal year. For reporting of long-term finance commitments
in FCS from 2015 onwards, IFC considers as FCS all those countries that have been on the World Bank Group Harmonized List of Fragile andConflict Situations within any of the past 3 years.

34

Excluding administrative and support services, which had few projects in either period.

35

Additional information on IFC’s sector focus and growth is contained in the annex.

36

For more information on IFC’s FCS Africa Program, see IFC website at https://www.ifc.org/wps/wcm/connect/REGION__EXT_Content/
IFC_External_Corporate_Site/Sub-Saharan+Africa/Priorities/Fragile+and+Conflict+Affected+Situations/37

Mustafa and Kanchi 2018.

38

IFC 2015.

39

Mac Sweeney 2008.

40

IFC 2017.

41

For more information, see Collier, Besley and Khan 2018, p. 35ff.

42

https://www.imf.org/xternal/pubs/ft/scr/2016/cr16383.pdf

43https://www.ifc.org/wps/wcm/connect/ddd28249-abd5-48c0-a24b-6306810e5326/EMCompass+Azura_Azito+9-30+Final.pdf?MOD=AJPERES

44

https://www.ifc.org/wps/wcm/connect/14a602d4-080e-4a4c-b200-c57e8d87bb5c/Local+Shares+Report+-+final.pdf?MOD=AJPERES

45

http://www.ifc.org/wps/wcm/connect/Industry_EXT_Content/IFC_External_Corporate_Site/Financial+Institutions/Priorities/Global+Trade46

http://blogs.worldbank.org/psd/how-the-rabi-program-transformed-sierra-leone

39

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40

About IFC
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GENERATING PRIVATE INVESTMENT IN

Fragile and Conflict-Affected Areas

FEBRUARY 2019