What does the evidence on blended finance tell us about its potential to fill the SDG funding gap?

By Harpinder Collacott, Executive Director, Development Initiatives

arrow-upSome argue that blended finance, or the use of public funds to de-risk or leverage private investments in development, has the potential to provide part, if not all, of the solution to the funding gap facing the Sustainable Development Goals (SDGs). This is no small undertaking since it is estimated that as much as an extra USD 3.1 trillion annually is needed until the 2030 deadline. No wonder the appetite is strong to look beyond traditional development co-operation and see how private finance can be better mobilised to eradicate poverty. But when it comes to blended finance, some fundamental issues need to be considered before scaling up official development assistance (ODA) investments in this area.

First, we need to be realistic about how much can be raised through blended finance and the role it can play. The evidence does not demonstrate that blending can take us from the billions to the trillions needed. Second, we need to be confident that investments in blending can meet adequate levels of transparency and accountability. This is crucial for assessing the developmental impact of blending and for empowering citizens, governments and donors to collaborate and optimise the use of such investments. We have seen huge progress on transparency in traditional development resource flows and can’t afford to become complacent as the financing landscape increasingly diversifies.

Consider first the issue of potential. At current annual growth rates, private capital mobilised via blending would total USD 42 billion by 2020 and USD 252 billion by 2030. Although significant, this is still well short of the gap in SDG funding. While investments could increase, what we also must consider is the role blended finance can actually play.

According to available data, we see that private investments mobilised through blended finance are currently higher in middle-income countries and developing countries with lower levels of poverty. Private capital mobilised through blending is also most likely to be invested in infrastructure and the productive sectors.

Twice as much blended finance goes to lower middle-income countries compared to foreign direct investment, but this is still significantly less than ODA

Source: Development Initiatives based on OECD and UNCTAD data

Infrastructure and productive sectors receive most private finance mobilised through blended finance

Source: Development Initiatives based on OECD survey “Amounts mobilised from the private sector by official development finance interventions”.

What this means is that using blending as a partial solution to the funding gap must be considered within the context of its comparative advantage in the overall mix of total available resources, rather than simply as a way to increase volume. If blended finance is significantly scaled up, traditional ODA – with its relative strength in poverty eradication – may increasingly need to be directed to the countries and sectors that will miss out on blended finance investments.

As for the second issue of transparency and accountability, the current evidence base is far too limited for concrete and detailed decision making on blended finance. The information is inadequate for donors and their partner countries to truly understand the impacts of blending, particularly on poverty. We also lack the data to understand the advantages of blending instruments compared to traditional grants and loans for poverty eradication.

We need to pause before scaling up a resource on which we have inadequate evidence. A number of areas need to be considered:

A common standard of reporting needs to be established for all providers using blended finance instruments. The standard should ensure that data is sufficiently timely, comparable, accessible and disaggregated to use for tracking blended finance to the destination country and receiving entity, and reporting its impact. The International Aid Transparency Initiative provides a robust starting point for such reporting since many actors involved in blending already are using it to report on their development spending.

It is important to agree on a way of reporting information on investee companies. This includes information on their jurisdiction and size to understand whether ODA used in blending is complying with established standards of untied aid and whether it is causing any distortions to local markets. Currently, commercial confidentiality limits the information that development finance institutions (DFIs) say they can report on investee companies, and this obstacle needs to be discussed and overcome. If companies are to receive public financing, they too should adhere to the standards expected of all recipients of ODA to drive transparency throughout the system.

Qualitative aspects of reporting need to improve. ODA donors, DFIs and partner countries need an open dialogue on improving qualitative measures. These range from better describing intended development outcomes to putting project evaluations in place.

Ultimately, donors must start from the premise that the role of ODA in blended finance should increase available resources for targeting poverty, rather than pursuing private investment as an end in itself. Crucially, before they can do this well, they must actively improve the data and evidence, without which we should be cautious about scaling up investments in blended finance.

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