There has been no shortage of new research on blended finance over the past two months, ranging from evaluating impact and innovative guarantees, to new forms of concessional capital. At Convergence, we’re constantly on the lookout for new literature to add to our Resources page, where we’ve curated the most up to date blended finance knowledge, both by Convergence and by organizations in our network.
Here, we’ve highlighted some key takeaways from the new research produced on blended finance this autumn:
1) Evaluating Impact
Comprehensive impact measurement has increasingly been recognized as a central priority for many in the blended finance community. Yet, data and transparency in impact performance continue to be a key challenge.
In Evaluating Impact Performance, the Global Impact Investing Network (GIIN) emphasizes the need for standardized metrics for measuring and comparing impact within sectors, and focuses on impact in two specific development areas: clean energy and access to housing. The GIIN finds that context and nuance is critical to comparing impact results in a meaningful way, and emphasizes the importance of sector-specific metrics. For example, many of the metrics used in the housing report (e.g., number of units of new housing) were entirely different than those in the energy report (e.g., energy savings per product sold). Convergence has similarly found that the majority of metrics used in blended finance transactions are specific to the underlying activity(ies) financed.
Meanwhile, Development Initiatives’ report, How blended finance reaches the poorest people, looks at the impact of blended finance in aggregate and seeks to understand whether blended finance is reaching the hardest to reach populations. The report highlights that while the blended finance market is growing, only a small proportion takes place in the poorest and most vulnerable countries. Convergence (“The State of Blended Finance 2019”), the United Nations Capital Development Fund ( “Blended Finance and the Least Developed Countries”), and the OECD (“Blended Finance Funds and Facilities 2018 Survey Results”) have all reported similar findings. Development Initiatives ultimately concludes that more data is needed to adequately assess the anticipated and actual impact of blended finance on these populations, including on (i) the quality of investments, (ii) key intended and actual beneficiaries, (iii) and the systematic, long-term effects of blended finance.
2) Innovative guarantees
There has been growing attention on the strategic use of guarantees in blended finance to mobilize additional sources of commercial finance. Although not a new instrument, guarantees have increasingly been recognized for their ability to efficiently leverage private sector capital as well as facilitate local currency investments.
As highlighted by the CSIS report, Innovations in Guarantees for Development, guarantees offer several benefits to investors and project sponsors, including i) reducing the cost of capital by transferring project risks, ii) facilitating project implementation, and iii) helping to develop local capital markets. While MDBs and DFIs have been the most common provider of guarantees, a central recommendation of the report is the need to create and support specialized guarantee providers to help develop local capital markets and scale up investments.
Our latest case study focuses on one such example. The case study on Quantum Terminals’ Credit-Enhanced Corporate Bond showcases how GuarantCo, a specialized guarantee provider, can support companies in emerging markets to raise local currency financing. GuarantCo supported Quantum Terminals, a local fuel and energy infrastructure developer in Ghana, to raise local currency financing from domestic institutional investors through the provision of a partial (75%) guarantee. The case study demonstrates how guarantees can play a role in strengthening domestic markets by displacing the need for hard currency financing and increasing the pipeline of bankable projects.
3) New forms of concessional capital
Finally, we are also seeing a proliferation in the types of concessional capital used in blended finance transactions. While concessional capital providers have traditionally deployed grants, we are increasingly seeing the public and philanthropic sectors turn towards more nuanced instruments to better leverage private financing.
In the State of Blended Finance 2019, we noted that concessional capital providers are becoming more sophisticated in their strategies to engage the private sector in sustainable development. The IFC’s latest report on blended concessional finance investigates the rise of one of these strategic approaches: the use of “returnable capital” from donor governments. This new model departs from traditional grant models in that the principal and interest, if any, are repaid. This gives donor governments the potential to redeploy funds, thereby increasing the total resources available for development activities.
Ultimately, concessional capital comes in many forms, and varies depending on the type of provider. For example, while returnable capital is increasingly used by donor governments, DFIs use a variety of different instruments to provide concessional capital to private sector clients. This is examined by the DFI Working Group in its October publication, which finds that DFIs most commonly deploy senior debt, equity, and grants amongst other instruments.
Check out our Resources page
This blog summarizes just a few publications that have come from the blended finance community in the last few months. For more of the latest research on blended finance, check out our Resources page.