Financing solution that will unlock financial opportunities in a Post Conflict State

This blog post is written as a project work to fulfil the partial requirement of the MOOC: Financing for Development: Unlocking Investment Opportunities on edX platform offered by World Bank Group.

Assignment: Propose a financing solution that will unlock financial opportunities in a Fragile or Conflict (State) country integrating the International Development Association (IDA) Private Sector Window in your solution.

Target audience: General public; public engagement  and improving their awareness in development (financing) issues

Summary: A post conflict state has been chosen as an object.
Proposal of three solutions for financing for development which enable us to reach three (social, political and economic) outcomes… 

Let’s get started…

We will talk about not financing for development, instead our focus will be on financing to increase and/or generate available funds for development. Every dollar contribution to be invested to generate $3-5 to spend for development.

Sounds good! So where…? Why…? And how…?

         © Sierra Leone 2010 blog

Where…? In Sierra Leone

       © Ontheworldmap.com

Why…? Many reasons…

• Population 6,5 million (2015)
• Recovering after 11-year civil war (ended in 2002) and Ebola shock in 2014
• 70% of population live in rural areas
• 70% of population below poverty line
• 60% of youth (15-35 years old) either unemployed or under-employed
• Life expectancy 51 years (2014)
• Adult literacy 38.1% (female literacy 26.8%)
• Economy: mainly agriculture and mining

There could be more attention grabbing statistics, photos of fragility and all the facts are far away from what we call norms in developed countries… And indeed it is impossible to overcome all this at once…

Therefore, let’s get specific and see just a real life example in order to better imagine how worse the situation is.

For instance, it can take you longer to get from Freetown (capital city) to Freetown airport than to get from London to the Freetown airport, which means the connectivity is very poor. So you simply cannot travel freely in so called “Freetown”.  As it was mentioned above Sierra Leone is a post conflict country and during those years nothing were built, even to make the things worse more people flooded to the capital. Freetown was designed for about 35 000 people, that is the road infrastructure. It’s now getting something over 1 million making the city ultimate congested place
(Paul Collier, professor of Economics at Oxford University, recalls during one of his lectures).

      © Alamy stock photo

So far we have covered the country overview and specific issue of infrastructure (poor connectivity), and now it is time to think about the solutions….

How infrastructure of Sierra Leone can be improved? Of course, by implementing infrastructure projects…

Who finances? IDA

Will the funds of IDA be enough? No, additional financing required

Then how it will be financed? The answer is common fancy answer of development financiers: “by financing innovatively”.

 Well, we are here not to give a speech for development top specialists or policy makers and do not really have to stick to those fancy words, we are here as it was mentioned in the beginning to look at the issue closely by public eye and yet find simple and achievable solutions.

 So again let’s get specific….

     © Building an African Infrastructure, Paul Collier

Solutions…:

1. IDA funds should be spent on encouraging pioneer investments from private sector in infrastructure projects via Private Sector Window Programme and address the needs of de-risking those projects. Indeed, infrastructure projects are long term and riskier than others. Therefore, MDBs such as IDA should step in here and encourage private sector to invest in these projects by funding the projects partially and/or issuing guaranties.

From ideas to policies…

Now we have got the idea of what to do and let’s see how to implement it…

We need four components: proper rules, strong institutions with motivated staff, informed citizens and authorising environment in  order to able to attract private investors. Furthermore, investment attractive environment means less corruption and bureaucracy. By establishing above mentioned four key components we can overcome the issues of corruption which is very high in the country and also reduce the illiteracy rate of population enabling citizen engagement in development issues…

      © Transparency International

2. Illicit financial flows are critical issue in Sierra Leone. It mainly exports diamond, however, the exports might not be formal and the country revenue do not benefit from them. On the contrary, the natural resources are referred as public wealth and spending them on building proper infrastructure is vital. Therefore, proper management of natural resources to be set by the officials.

3. As infrastructure grows, the connectivity improves, which creates environment for manufacturers to create industry clusters. Meanwhile SME sector will also develop creating jobs for the population. As a result, the revenue will levy corporate taxes more than it currently does and also the number of individual income tax payers will grow too. That what we call Domestic Recourse Mobilisation. In 2014 tax to GDP ratio of country was 8.6% which is considerably low among even developing world where the same rate is above 15%.  In OECD countries it is somewhere over 30%.

     © Africa’s urbanisation makes it the prospering continent, Riante Naidoo

Outcomes:

1. Social: By building better infrastructure urbanisation and industrialisation become smoother process offering citizen prosperous life with better quality.
2. Political: as infrastructure improves, current firms/companies expand their business and new ones will get established. The unemployment rate will fall considerably. The busier and richer is the nation the less time and reasons they have to get involved in conflict or in other criminal situations making country politically stable and peaceful.
3. Economic: The country has great potential since it has access to the ocean, by building better ports and airports as well as inner roads together with urbanisation and industrialisation will help the economy grow gradually, and Sierra Leone will recover itself from its loss after Ebola outbreak.

The exact references were not presented since it is a blog post not an academic paper. However, I would like to note some of the sources I have referred while preparing: a) Financing for Development: Unlocking Investment Opportunities course materials; b) World Bank data for Sierra Leone; c) Transparency International; d) Smallholder Commercialisation Program of IFC; e) From Poverty to Prosperity: Understanding Economic Development course materials offered by Oxford University. Sources of photos are given under each photo.

Thank you very much for your time and interest in this blog post.