ATTRACTING private investment in developing countries remains a significant challenge due to a range of structural and systemic issues. One of the foremost barriers is political and regulatory volatility.
Frequent policy shifts, coupled with weak institutions and inconsistent regulatory frameworks, create a climate of uncertainty that undermines investor confidence. This unpredictability hampers long-term planning and complicates risk assessments. Addressing this requires a concerted effort to build institutional capacity, ensure greater policy coherence, and establish independent regulatory authorities supported by robust investment protection laws.
Another critical challenge is macroeconomic fragility, characterised by high inflation, currency instability, and unsustainable debt burdens. These conditions limit governments’ ability to offer the kinds of incentives or guarantees that could help attract private investment.
Restoring macroeconomic stability through prudent fiscal and monetary policy is essential. Additionally, improving debt management and collaborating with development finance institutions (DFIs) to share risk and provide guarantees can significantly enhance investor confidence.
In many developing economies, underdeveloped financial markets pose another significant obstacle. The scarcity of long-term local financing, limited risk mitigation instruments, and high borrowing costs constrain both domestic and foreign investment.
Expanding and deepening local capital markets through regulatory reforms and infrastructure improvements is essential. Governments and development institutions should also promote financial inclusion, foster fintech innovation, and support instruments like blended finance and credit enhancements to make financing more accessible and affordable.
Persistent infrastructure gaps and operational inefficiencies present additional deterrents. Inadequate transport, energy, water, and digital infrastructure increase operational costs and reduce the profitability of investments.
Addressing these challenges requires strategic infrastructure planning informed by private sector insights, as well as the use of public-private partnerships (PPPs) and concession models to mobilise private capital. The development of credible project pipelines, supported by feasibility studies and technical assistance, is equally critical to ensure readiness and bankability.
The Investment Readiness Gap
The scarcity of investment-ready opportunities is a recurring issue. Many projects fall short due to weak design, unclear commercial models, or lack of detailed feasibility assessments. Limited government capacity to structure PPPs or leverage blended finance mechanisms further constrains progress.
Building technical capacity within the public sector, establishing dedicated project preparation facilities, and utilising blended finance tools can significantly improve the quality and attractiveness of investment opportunities.
Creating an Enabling Environment
To foster greater private investment for sustainable development, governments and development institutions must focus on improving governance and regulatory certainty. This includes simplifying investment-related regulations, minimising bureaucratic obstacles, and ensuring long-term policy consistency to enhance investor confidence.
Alongside this, strengthening legal and institutional frameworks is essential for protecting property rights, ensuring contract enforcement, and establishing transparent, predictable dispute resolution mechanisms.
Furthermore, national sustainable finance strategies should be developed and implemented to align financial flows with environmental, social, and governance (ESG) criteria and the Sustainable Development Goals (SDGs).
These strategies can be reinforced by promoting robust, sustainable finance taxonomies and disclosure standards that clearly define what constitutes a sustainable investment, thereby enhancing transparency, comparability, and credibility in the market. At the same time, building the capacity of private sector actors to measure and report on development impact is crucial.
Standardised frameworks and reporting tools can help track and communicate the social and environmental outcomes of investments more effectively.
Scaling Up Through Innovation
Mobilising capital at scale will also require expanding blended finance solutions and risk-sharing mechanisms. Instruments such as guarantees, insurance products, concessional finance, and first-loss capital can reduce the perceived risks for private investors and attract their participation in high-impact sectors.
Multilateral Development Banks (MDBs) have a critical role to play in this space by offering credit enhancements, supporting project preparation, and co-financing alongside private capital. This can significantly increase the viability of investments in emerging markets.
Public-private partnerships (PPPs) also present a valuable mechanism for infrastructure and service delivery. Strengthening PPP frameworks and building the necessary technical expertise will help governments structure and manage these partnerships effectively.
Finally, global partnerships and knowledge-sharing networks should be leveraged to facilitate the transfer of skills, innovation, and best practices across borders, ensuring that countries, particularly developing ones, can build the foundations for sustainable investment ecosystems.
The Path Forward
Creating an enabling environment for sustainable development investing is not a one-off effort—it requires sustained political will, institutional reform, capacity building, and financial innovation.
When these elements align, they unlock significant opportunities to scale up private sector investment in areas that drive inclusive, resilient, and low-carbon growth.
The public sector, particularly development banks and international development institutions, plays a vital role in mobilising private investment for development impact. One of the most effective ways they can support this is by mitigating the risks that often deter private capital from entering emerging and developing markets. Through instruments such as credit guarantees, political risk insurance, and concessional finance, public institutions can improve the risk-return profile of projects and encourage private sector participation.
Acting as anchor investors in projects or funds helps signal confidence and reduces perceived risk, which attracts private partners.
Overall, by de-risking investment, improving project readiness, supporting regulatory reform, and promoting partnership and transparency, the public sector can serve as a powerful catalyst for private capital aligned with development goals.
Their role is not to replace private finance, but to create the conditions under which it can flow more confidently and contribute meaningfully to sustainable development.
This is an edited version of remarks by Ronald Lamola, the Minister of International Relations and Cooperation in South Africa, at the Multi-Stakeholder Round Table, under the theme “Revitalising International Development Cooperation”, in Seville, Spain, 30 June 2025.
