Private resources are a key driver of domestic growth and job creation. However, the 2008 financial crisis showed the risks associated with some forms of private investment. A special concern in the context of sustainable development is that adequate resources be directed into appropriate long-term investment. This concern impacts not only planning traditional infrastructure investments, but financing capital formation more generally, requiring policy oversight to encourage investment that reduces poverty and social exclusion, provides decent work for the nation, raises real incomes, and ensures environmental sustainability.

The challenge for policy makers is to remove inappropriate policy distortions and introduce effective market incentives. An enabling environment is essential for reducing risks and encouraging private investment. In addition, this can entail selective, well-targeted “smart” subsidies to private actors, such as through national development banks. It will often involve combining public and private action in both traditional (e.g., selling bonds to private investors to finance public water works) and innovative ways (e.g., marketing securities backed by a diversified portfolio of “green” projects). However, it is important to learn from the successes and failures of the past – and in particular avoid transferring risk to the public sector while maintaining high returns for the private partner.

Governments can also work to develop local capital markets and financial systems for long-term investment, within a sound regulatory framework that is aimed at balancing stability with access to credit and other financial services. Such policies need to be based on an understanding of both the strengths and limitations of the private sector, and of the underlying mandates and incentives of different investors and financial intermediaries.