By Rob Floyd
A recent report from ACET, the European Centre for Development Policy Management (ECDPM), the Organization for Economic Cooperation and Development (OECD) and Indiana University, titled: “Strengthening the Local Dimension of Blended Finance. A review of the local approaches and instruments employed by Development Finance Organizations (DFOs)”, made 16 recommendations on how DFIs could better adapt to local context in Africa. The recommendations were presented at the September 12 , and included the need for DFIs to align to national strategies, to build capacity of local financial institutions, and to support the crowding in of local currency in their investments.
At ACET, we strongly believe that one of the conditions for economic transformation is far higher investment. According to the UN, with current levels of investment at only about $1.4 trillion developing countries need to invest $3.1 trillion per year between 2015 and 2030 to attain the SDGs.
This is why we are addressing the local dimensions of blended finance. Although the OECD principle for blended finance states that, “All development finance interventions, including blended finance activities, are based on the mandate of development finance providers to support developing countries in achieving social, economic and environmentally sustainable development”, many DFI representatives will admit publicly that they have not given much thought to the local dimension. This is, in part, to be expected given that traditional DFIs are essentially banks using public monies for specific transactions. While they can understand the need to build capacity of local financial institutions or think about investing in regional projects, their institutions are not necessarily structured to support those needs.
There are exceptions. Some DFIs make local context an explicit part of their strategies. Others, like the African Development Bank or the World Bank Group, have offices in each African country, hence they have a natural footprint and a more natural ability to, for example, address the local investment climate. Working with our partners, ACET hopes to inform the blended finance debate and push development finance organizations to take local context into better account.
An important part of this agenda is development impact. As public institutions, the development finance institutions should of course be making prudent investments that protect their overall financial standing, but they should also be making investments that lead to the greatest development impact. Some – or many – development practitioners argue that DFIs could in most cases take on more risk and still retain their financial standing. The new notes, for example, that LDCs receive only a tiny fraction of global blended finance. It states, “Of all the private finance mobilized by official development finance interventions between 2012 and 2017, approximately US$9.3 billion, or 6 percent, went to LDCs, whereas over 70 percent went to middle-income countries.” Of course, it is easier and less risky to do deals in middle-income countries, which generally have more capacity, more stable economies, and a better regulatory environment. But it means that the poorest of the poor are not benefitting very much from blended finance.
ACET supports the G20 initiative, the Compact with Africa (CwA), which includes 12 countries from all parts of Africa. We hope that by emphasizing the local dimension of blended finance, we can gently “nudge” DFIs to adapt to local conditions and contexts, which may include investing in building capacity as well as investing in ports and bridges. It may mean stepping back and taking a holistic approach that aligns with a national strategy or the national budget. Or it may mean partnering with local pension funds, banks, and local or regional DFIs to crowd in local funding while also strengthening the transparency and efficiency of these organizations.
If we can use development finance to leverage significantly more private investment, African countries will be closer to the goal of economic transformation. But it will require development finance institutions to adapt to local conditions. I am confident they will do so.
Rob Floyd is Director and Senior Advisor at the African Center for Economic Transformation