29-06-2015

Mobilising private finance for development: the peace connection

In April this year the OECD made a big call. It essentially said we will fail to meet the Sustainable Development Goals (SDGs) by 2030. In particular, we will not achieve SDG 1 on eradicating extreme poverty. Worrisome, given we have not yet even finalised the SDGs, but not a revelation to those working on fragile and conflict-affected states – those states that were left behind by the Millennium Development Goals (MDGs).

The headline message from the above-mentioned OECD report, “States of Fragility”, is that we need to adapt the way we finance in fragile and conflict-affected situations to ensure that the many millions of people that live in such contexts benefit from the new global development architecture, i.e. that the SDGs are truly universal. Operationalising this will mean taking a conflict-sensitive approach to finance – an effort that both mitigates the risk of inadvertently exacerbating conflict while also seeking to promote factors that contribute to peace. The latter half of this approach is what both public and private financiers often find most challenging. This is particularly the case for private finance – business – where there is a growing body of guidance around conflict risk management, but few frameworks that facilitate active contributions to peace.

This is one reason why there has been a tendency in Financing for Development negotiations so far, to acknowledge and focus upon how public finance, particularly official development assistance (ODA), can be made conflict-sensitive, but with little attention to how private finance can be mobilised for peace. The second reason is that conflict-affected situations continue to be conflated with least developed countries (LDCs) where there is relatively limited private finance and where it will take time to create the conditions to attract such investment.

This is a mistake. We overlook such states as Pakistan, Nigeria, the Philippines, Thailand, Mexico and Colombia where subnational conflict persists – often with regional consequences – but where private finance is nevertheless a major player and needs to be equally adapted. It also overlooks the fact that the majority of the world’s poor will be living in middle income countries (MICs) within the next ten years. Continued conflict in such emerging markets not only hampers poverty alleviation goals, but also has economic consequences further afield with respect to their contribution to global economic growth and trade.

What makes this approach even more pressing is that the majority of finance needed to meet the SDGs will need to come from the private sector. Conflict acts as an extreme disincentive to private investment, eroding human and financial capital and infrastructure whereas peaceful societies represent more attractive destinations for the kind of long-term investments needed to drive forward the post-2015 agenda. So, as a domestic or international private financier or a government seeking to harness private finance, how do I go about making a contribution to peace?

International Alert is in the process of doing two things to answer this question. The first is updating its Conflict Sensitive Business Practice guide – taking business beyond risk management to peace promotion. The second is the development of a framework to promote peace economies.

This later work, which is still in progress, focuses on what factors promote peace-conducive economies. Broadly speaking these include: the diversity of the economy; relations between groups and communities; human capital; the rule of law; security; infrastructure; and the availability of land and capital. National governments, domestic and international private financiers can shape and contribute to each of these. But what does it look like in practice?

National finance strategies can seek to diversify economies to promote greater economic resilience and deepen value chains. For example, economic dependence on small farms, poor soils and limited consumer markets provided insufficient resilience to the demographic and social pressures which had contributed to instability in Rwanda. The country has since joined the East African Community (EAC) to enlarge its markets, is modernising the agricultural sector, and is developing the information technology sector through specialised training and infrastructure. National finance strategies can also help foster inclusive economic growth between, for instance, regions. The following brief examples illustrate what the contribution to peace by domestic as well as international private financiers can look like.

The study “Local Business, Local Peace” gives examples of employers consciously integrating staff from different ethnic or religious identities at work. In contexts of mutual mistrust outside work, this serves as a contribution to improved harmony and economic success.

In Nepal, Sri Lanka and Kyrgyzstan the Asian Development Bank has integrated peace objectives into their infrastructure projects typically aiming to improve local participation in decision-making and governance, as important factors in sustainable peace.

In Peru some lending institutions require social impact studies before business loans are made while all business can contribute to improved security by ensuring contractors or government security forces work with and operate in line with agreed-upon voluntary principles and human rights standards. Recent research described how a mining company supported the establishment of a multi-stakeholder forum to explore alternative livelihoods for land-poor communities in its area of operation. This was a contribution to local stability through wider economic participation and social inclusion.

In the Democratic Republic of Congo and Rwanda cross-border traders who had been in conflict came to view each other as clients through common associations. They had a vested interest in reducing conflict while increasing cooperation on issues of mutual interest that helped facilitate more trade. Furthermore, they worked to improve border governance.

Non-governmental organisations in the Philippines have supported indigenous communities, settler communities, the government and mining companies to map and plan fairer and clearer access to land in areas where it has been a source of conflict around economic development.

As the influence of ODA declines, business networks in many countries will have increasing potential to shape national policies, economic and otherwise, that contribute to the type of peace-conducive economy described here. Indeed, there are already instances where business has lobbied for improved relationships across conflict divisions, or better local justice and security provision.

Pension funds, insurance companies and similar institutional investors are more inclined than other categories of investors to think about the long-term sustainability of financial markets and the economy, as they are contracted to deliver long-term returns for their beneficiaries. Therefore, it is in their interest to consider issues such as conflict in the investment decision-making process. Such institutions have the power to influence the practice of the companies they invest in to promote peace-conducive practice.

So there is a range of practical ways for private finance to actively contribute to peace outcomes and more broadly and over time, peaceful and inclusive economies. Recognising this as part of the Addis process will create a platform to increasingly capitalise on a relatively un-tapped means to promote peace. This would critically reinforce the conditions necessary for finance mobilisation and ultimately achieve the goals we have set for ourselves in the form of the SDGs.

To this end the following mechanisms could be recognised in the Addis Ababa accord:

  • Recognising the role that private finance can play in promoting peaceful societies;
  • Integrating peace considerations into national finance and development strategies;
  • Ensuring that enabling legislation, which is designed to promote private investment, is conflict-sensitive and seeks to reinforce peace factors;
  • Developing and strengthening global standards and guidance for business at all levels;
  • Encouraging the integration of peace objectives into individual investments in the real economy;
  • Encouraging the integration of peace objectives into investments in the finance economy, including investment funds strategies;
  • Leveraging ODA to promote conflict-sensitive business investment;
  • Promoting inter-regional, cross-border trade that is peace-conducive;
  • Encouraging global platforms such as the Global Compact, the World Economic Forum and others to champion such an approach.

Since January the discussion around finance and fragile and conflict-affected states has strengthened. With the issues outlined above in mind, now is the time to take this dialogue a step further and ensure that we maximise the full potential of all forms of finance.

Julian Egan is Head of Advocacy at International Alert.

Links und Literatur:

Website of the Third International Conference on Financing for Development

Financing for development
g7+ information note

Taking fragility seriously in financing the SDGs
Frauke de Weijer | ECDPM | Mai 2015

Conflict-sensitive business practice: Guidance for extractive industries
International Alert | März 2005

Local Business Local Peace: The Peacebuilding Potential of the Domestic Private Sector
Jessica Banfield, Canan Gündüz, Nick Killick | International Alert | Juli 2006

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