This week the European Fund for Sustainable Development, which seeks to promote private sector growth in Africa and the European Neighbourhood, officially goes into force. When the EFSD Strategic and Operational Boards meet, they should remember to tailor the Fund’s investment windows to support investment in the poorest and most fragile environments.
This week, the European Fund for Sustainable Development (EFSD) officially goes into force, a significant achievement after a year of negotiations between civil society, the European Parliament, the European Commission, and the Member States. The EFSD, while not perfect, is the EU’s largest initiative yet to mobilise private investment and foster economic growth in Africa and the European Neighbourhood.
The EFSD aims to boost private sector interest by using EUR 3.35 billion to pay for a mix of guarantees and public-private blending, which will reduce the level of risk that discourages investors from pursuing projects in developing countries. It is no secret that investors and banks shy away from riskier environments. The rate of return on investment is almost certain to be lower, and regulatory systems can be unpredictable.
Already, foreign direct investment in Africa is the lowest of any region. For every dollar of global foreign direct investment in 2016, just three cents went to Africa. Inflows to the continent are also volatile and unevenly distributed. Except for a few mostly resource-rich countries, such as Angola, the vast majority of fragile states and least developed countries (LDCs) struggle to attract investment. Of foreign direct investment to developing countries, fragile states receive just 6%.
This is why it is essential that the guarantees under the new EFSD allocate a significant quantity of funds to the riskiest environments, like fragile states and LDCs. Just as global investors flock to Asia and not Africa, investors taking advantage of the EFSD will naturally look to Tunisia and Morocco, and not Mali and Chad. If the EFSD is to fulfil its stated objective of promoting inclusive sustainable development, it needs an extra push to ensure true additionality and drive the funds to the poorest and most fragile communities that need it most.
When the EFSD Strategic and Operational Boards meet, they will be responsible for deliberating the Fund’s overarching vision and investment windows. They should ensure that fragile states are a strategic priority and that each investment window puts aside a certain amount for the riskiest environments. With input from ONE and civil society, the approved EFSD regulation mandates that a “significant allocation” of the Fund is directed to fragile states and LDCs, but it will be up to the Boards to deliver an effective and appropriate implementation.
The approved EFSD regulation also includes a number of safeguards and principles to protect against legitimate concerns of private sector exploitation in developing countries. If corruption and bad oversight are not addressed, massive private sector growth can easily deteriorate the quality of governance and do more harm than good. This is why it is essential for the Boards to ensure companies meet the highest possible social, environmental and transparency standards to protect local actors and encourage inclusive growth. It will also be important to integrate the Second and Third pillar of the External Investment Plan to improve technical cooperation and regulatory environments.
Africa’s population is set to double by 2050, and there is a narrow and closing opportunity for the continent to harness the growing population for a “demographic dividend,” and use targeted investments to drive a surge in economic growth. Private sector development is a key component to unlocking this potential, but if most investment in the region remains concentrated in stable, high-performing countries, we risk leaving those who need the assistance most behind.