Blended finance is a new buzzword in the development finance discourse. While some key definitions and modalities are still under debate, the OECD Development Assistance Committee (DAC) has set out the “rules of the game” alongside publication of a flagship report.
Under the title “Making Blended Finance Work for the Sustainable Development Goals, the report provides a comprehensive treatment of rationales, definitions and instruments as well as implementation issues such as pooling, project level case studies, tracking systems and monitoring and evaluation.
The new thing is rarely that new of course. So what is different this time?
Using official development finance in association with other types of flows, such as export credits, bonds, guaranties and equities, is a longstanding practice. Both multilateral institutions, such as the International Finance Corporation of the World Bank Group, and bilateral Development Finance Institutions have worked to bring official and commercial finance together to promote the enterprise sectors of developing countries. These flows have been registered, under the rubric of “Other Official Finance” in the DAC Statistics, as non-concessional finance, as distinct from “Official Development Aid” (ODA), which registers concessional finance.
But the general DAC approach is to set rules that constrain the use of concessional finance to “soften” financing terms or underwrite risks, with the objectives of preserving scarce official development aid for meeting core development needs, avoiding trade competition among OECD countries via aid-subsidised trade finance and refraining from subsidising entrepreneurial investment.
Thus much time was spent by the DAC in the late 1980s in setting rules for the use of ODA in export credits and for “associated financing” packages joining official development finance with other kinds of finance. These constraining rules remain part of the new Blended Finance Rules.
What has changed now is that with the blended finance initiative the approach to engaging commercial finance is strikingly pro-active. Bringing in large volumes of commercial finance is seen as the only way of raising the huge additional estimated funding requirements for reaching the Sustainable Development Goals by 2030 (from “Billions to Trillions”), in line with the Addis Ababa Action Agenda on financing for development. Blended finance modalities, to be within the new rules of the game, have to be aimed at development objectives, such as green energy packages or development impact bonds and sustainable infrastructure bonds.
Controversies remain. But five principles for Blended Finance have been laid out in the policy published by the DAC. They are:
- Anchoring the use of blended finance to a development rationale.
- Ensuring blended finance increases the mobilisation of commercial finance.
- Tailoring blended finance to local contexts.
- Effective partnerships between public and private actors.
- Monitoring blended finance to improve transparency and ensure results.
The OECD sees new channels and business models emerging within development finance to address a triple challenge:
- Scaling up and mobilising resources to close the estimated USD 2.5 trillion per year investment gap in developing countries for the SDGs;
• Effective support for the transformation of developing countries’ economies towards cleaner, more inclusive and climate-compatible pathways;
• A sharpened focus on delivering impact with these resources, particularly for the most vulnerable people and communities.
An inaugural OECD Conference on Private Finance for Sustainable Development (PF4SD) brought together the main actors from policy and practice on Blended Finance, Social Impact Investing and Green Finance earlier this year. “How can we make sure private mobilisation leads to transformative impact?” was the central question of the 29 January meeting in the French capital, Paris. Discussions tackled both government efforts to scale up innovative private finance models, and how private financiers can bring greater transformation and impact to development cooperation.
I was privileged to attend the meeting alongside the African Center for Economic Transformation’s (ACET’s) Director of Policy Advisory Services, Ed Brown, who spoke on one of the panels, and Director and Senior Advisor, Rob Floyd. A striking feature of this first PF4SD conference was the number of private finance suppliers across the range of private finance institutions, impact investors and green investors. Indeed, a new industry of agents ready to put blended finance packages together seems to be burgeoning.
On the other side, developing country finance people were hardly to be seen at the conference. The challenge identified by an ACET six-country study on managing external development finance, funded by the Bill & Melinda Gates Foundation, was precisely that in an age of multiplying sources of external finance, African countries would need to put in place capacities, people and systems able to navigate this new financial landscape.
Here is a frontier issue in the Pan-African Coalition for Transformation chapter on resource mobilisation and management, serviced by ACET. Watch this space!
Richard Carey is a Senior Fellow at ACET and a former OECD Director of Development Cooperation.