With global political stability facing significant setbacks in recent years, private sector development will be critical to improving development outcomes and increasing social impact in fragile and conflict-affected situations (FCS). An increase in private investment can help create jobs, foster economic growth, and produce tax revenues to help governments provide essential services to their citizens. Nevertheless, socio-economic, political, and institutional challenges associated with FCS heighten the risks, costs, and complexities of doing business in these contexts.

According to the World Bank, FCS is defined as two related but distinct concepts. Fragility refers to a condition where a region has extremely low institutional and governance capacity, impeding its ability to function, maintain peace, and promote economic and social development. Meanwhile, conflict represents a condition where acute insecurity arises from the use of deadly force by organized groups–whether state forces, non-state actors, or irregular entities–with a political agenda.

Blended finance has emerged as a method to support responsible private sector development in FCS, complementing reforms to improve the business environment. The value of blended finance is its ability to unlock private investment in new markets or sectors perceived as too risky by private investors. The use of blended finance remains limited within FCS. Using the to select jurisdictions that have appeared consistently from 2019-2023, according to Convergence's Historical Deals Database (HDD), there have been 54 blended finance transactions across 19 jurisdictions, totalling approximately $4.5 billion in aggregate financing. World Bank’s FCS list to select jurisdictions that have appeared consistently from 2019-2023, according to Convergence's Historical Deals Database (HDD), there have been 54 blended finance transactions across 19 jurisdictions, totalling approximately $4.5 billion in aggregate financing.

This article provides a snapshot of our latest member-only data brief on blended finance for FCS, including opportunities and challenges related to increasing the use of blended finance in these regions.

Click here for the Blended Finance in Fragile and Conflict-Affected Situations data brief (paywall).

Highlights from the brief:

31% of blended transactions in FCS are in the energy sector

Most blended finance transactions in FCS target the energy sector, mirroring the broader blended finance market, as this sector tends to be the most commercially viable. In FCS, most energy sector deals take place within the renewable energy sector.

The ability of blended finance to broaden investments in sectors that would not otherwise attract funding is crucial for FCS, where economies often depend heavily on extractive industries and agriculture. Blended finance can help overcome challenges associated with an overreliance on these industries by directing private capital to sectors that promote economic diversification, resilience, and stability. However, its deployment must be strategic rather than indiscriminate.

One example of an energy sector transaction was Nuru, a company improving electricity access and affordability in the Democratic Republic of the Congo, where less than 20% of the population has access to reliable energy. In 2023, Nuru secured $50 million to provide up to 15 MW of generation capacity across three cities through solar hybrid mini-grid projects, reaching 28,000 households. To improve the company’s commercial viability, the transaction leveraged a mix of concessional instruments, including concessional equity from the Blended Finance for Climate Program, a collaboration between Finland and the International Finance Corporation (IFC), and concessional capital from the Global Energy Alliance for People and Planet and the Renewable Energy Performance Platform. This mobilized additional investments from IFC, and a range of other private and philanthropic investors. The company also secured a full guarantee from the Multilateral Investment Guarantee Agency to cover expropriation, transfer, and war and civil disturbances risks, alongside a results-based financing grant from Clean Energy and Energy Inclusion for Africa for the projects in Goma.

Figure 1: FCS transactions vs. the overall blended market by sector

Concessional debt/equity is the most common archetype, followed by technical assistance (TA) and guarantees/risk insurance

The blending archetypes deployed in FCS follow trends similar to those in the overall market. The primary purpose of TA is to improve the operational capacity of investees and stakeholders throughout the value chain, lower transaction costs, and foster a more supportive environment for investors. In the specific context of FCS, the role of TA is further refined and can be used to support investees' compliance with investment requirements, create sector fundamentals and capabilities, assist government programs, and improve the conflict sensitivity of investments.

Figure 2: FCS transactions vs. the overall blended market by archetype

Challenges and opportunities for blending in FCS:

To reduce structural, financial, and security barriers in attracting private investment in FCS, increase focus on awareness, pipeline development, and de-risking strategies

Numerous barriers impede private investment into FCS, including limited existing local markets, a small pipeline of bankable projects, structural complexity of formal and informal institutional arrangements, and lower risk-adjusted returns. Blended finance can reduce these challenges by leveraging different forms of concessional capital to address specific barriers. For example, design-stage grants can provide the funding needed to align investment decisions with local contexts and promote collaboration among capital providers to reduce costs and allow for risk sharing. Ultimately, for blended finance projects in FCS to be sustainable in the long-term it is important to continuously engage with local communities and development actors to ensure alignment with local efforts.

To ensure that investments do not exacerbate fragility, use TA for conflict sensitivity analysis and select investment opportunities

To avoid exacerbating the conflict, investing in FCS requires careful design and conflict sensitivity to avoid reinforcing existing grievances and disruptions to local systems. Despite their importance, conflict-sensitive strategy implementation often fails or is applied post-investment, rather than being an integrated and important criterion throughout the investment selection process. According to Dr. Josie Lianna Kaye, Chief Executive Officer of TrustWorks Global, blended finance can reduce these investment risks by using TA to conduct conflict-sensitivity analysis, which can help companies better deal with the risks and challenges associated with the conflict context in which they operate. Moreover, using TA in this way ensures that the transaction prioritizes conflict sensitivity and can help establish a more stable investment environment. For investors, conflict-sensitivity analysis can help identify and design interventions that foster stability and development and provide a clearer understanding of conflict dynamics. These insights can help investors determine if their support can create meaningful change at the individual, sectoral, or broader community level in the FCS.