A whole-of-government approach to engage the European private sector for investment and development
Authors
Regardless of the EU election outcomes, stronger engagement of Europe’s private sector for external investment and development will likely remain a top priority for the EU. In this commentary for our series ‘To the new leaders of Europe’, Karim Karaki explains how the EU and its member states can achieve this, drawing from practical examples from several EU countries.
As my colleague San Bilal argues, the extent to which the EU and its member states will achieve their economic and geostrategic objectives and increase their development impact will depend on whether the new EU leadership manages to connect its internal policies to its external action more effectively.
A key component of realising this goal is engaging the European private sector in external investment and development, as the EU's Global Gateway strategy emphasises. Regardless of the EU election outcomes, this issue is expected to remain a top priority at the EU level. Yet, more than two years after the Global Gateway strategy was introduced, several member states – especially those with a high share of SMEs and a limited export finance landscape – have raised questions on involving their domestic private sector in EU external investment ambitions.
If the EU and its member states want to improve their set of tools for development and geostrategic external investment, it could look at the innovative experiences of countries like the Netherlands, which have pioneered the engagement of their domestic private sector in development and integrated economic and geostrategic objectives into their development objectives. Exploring several of these innovative experiences, three key recommendations emerge.
1. Differentiate and target your private sector engagement
Too often, policymakers talk about the private sector as if it were a homogenous group with similar incentives, interests and constraints. Instead, a more nuanced understanding of the European private sector is required to know who should be targeted and what policy measures or incentives would be most effective in supporting their engagement in development.
Too often, policymakers talk about the private sector as if it were a homogenous group with similar incentives, interests and constraints.
As a starting point, policymakers should distinguish between engaging with institutional investors (such as pension funds and insurance companies), impact investors and industrial actors. Targeting institutional investors is key to mobilise private finance at scale; focusing on impact investors can help direct private finance towards more challenging contexts, including fragile countries; and engaging industrial actors can promote the internationalisation of businesses, thereby strengthening the domestic economy.
Mobilising institutional investors is crucial to deliver the €300 billion worth of investments under the Global Gateway strategy. But most member states are yet to engage their pension funds and insurance sector, with only a few examples to date. Danish development finance institution IFU for instance administers the sustainable development goal investment fund, which manages Danish pension funds’ investments in emerging markets, while the example of the Amsterdam-based ILX Fund shows that such an approach can be scaled up at the European level.
Other member states, independently of their size, should replicate such efforts or join forces by encouraging their own pension funds to invest in these investment funds, which would allow them to achieve a higher level of efficiency and scale. In doing so, they should pay attention to standardising models, focusing on a portfolio instead of project-by-project approach and using risk-sharing mechanisms.
Impact investing in Europe is growing rapidly, and member states should lean into its potential to achieve development and geostrategic objectives. The experience of Luxembourg shows that member states – even those without a development finance institution – can mobilise impact investors by using blended finance vehicles such as the recently launched Female Entrepreneurship Fund overseen by LuxDev. They could adopt the fund of funds structure applied by LuxDev and leverage LuxDev's experience and network to jointly set up additional funds. In turn, this could help incentivise collaboration between impact investors, development finance institutions and implementing agencies, which is crucial to operating in more challenging contexts.
When it comes to engaging industrial actors in development, member states should adopt a sectoral approach, which helps identify countries’ added value and competitive advantage. The Netherlands, for instance, focuses on a few sectors, such as water and agriculture, for a number of reasons:
- the presence of competitive domestic companies, with a strong knowledge/technology component,
- the strategic importance of these sectors in the domestic economy, and
- the sectoral relevance from the perspective of partner countries (the Netherlands does target specific partner countries where market conditions are fit and where it aims to be more visible).
This mapping exercise should be done with private sector representatives and organisations as well as partner countries to ensure buy-in and ownership. Member states should pay attention to public procurement at the national and EU levels and its role in supporting the European private sector – particularly SMEs – by encouraging partnerships and the implementation of stronger environmental, social and governance (ESG) standards.
While this approach should be supply-driven, it is important that the EU and its member states engage the private sector in areas where it contributes to geostrategic objectives, for instance, on critical materials, green energy and digital instructure, and health.
2. Implement a whole-of-government approach
Engaging the European private sector in development needs to go beyond using development cooperation instruments and should include public support to commercial endeavours in a complementary manner. Development instruments have clear guiding principles and rules, including the principle of untied aid, and public procurement and state aid rules, which limit opportunities for the EU and its member states to directly engage the European private sector in development and pursue geopolitical and economic objectives. Policymakers should seek systemic complementarity with other (commercial/economic) approaches and organisations (trade promotion agencies and export credit agencies) supporting the internationalisation of the European private sector.
Building synergies between these different instruments should follow a whole-of-government approach. This requires incentives for ministries to work better together. In the case of the Netherlands, ministries in charge of aid and trade committed to financing joint activities (€84 million in 2023 and €190 million in the coming years) to ensure better coordination.
A whole-of-government approach also means a better coordination of the overall financial architecture (including national promotional banks, national development banks, expert credit agencies, development finance institutions and public development banks) that can support both the internationalisation of the private sector as well as responsible investments. Dutch development finance institution FMO, for instance, has worked with export credit agency Atradius and Climate Fund Managers (a private equity fund partly owned by the state), and partly owns Invest International (a state-owned private company supporting Dutch businesses internationally).
This is a challenging endeavour given the respective mandates, objectives and interests of these institutions, but it does happen – though too often following an ad-hoc approach. But initiatives in the Netherlands, Finland and Denmark suggest that effective steps towards a whole-of-government approach to private sector internationalisation can be taken in a developmentally impactful manner when clear ESG criteria and Sustainable Development Goal targets are adopted.
3. Optimise EU support for European private sector engagement
Implementing a whole-of-government approach at the EU and member state level requires an in-depth understanding of incentives and interests – and where these can converge. This means that a strategic and gradual approach to domestic private sector engagement should be prioritised over highly ambitious, broad and overly complex approaches. It may be wise to start with low-hanging fruits with limited transaction costs and gradually move towards more sophisticated approaches as experience in engaging the domestic private sector grows.
Implementing a whole-of-government approach at the EU and member state level requires an in-depth understanding of incentives and interests – and where these can converge.
Whatever the approach used, it should factor in some of the risks associated with private sector engagement. These include limited partner country ownership, tied aid leading to inefficiency and business practices inconsistent with EU standards and values. The approach used should ensure that economic and geostrategic objectives are combined with, and supportive of, a strong development approach. In doing so, promoting European private sector trade and investment in developing countries can become truly mutually beneficial.
The views are those of the author and not necessarily those of ECDPM.
Thank you to San Bilal for his useful suggestions and review.
