Figure 1: Market size and growth of blended finance in LAC
Latin America and the Caribbean (LAC) has historically enjoyed higher volumes of local and cross-border private investment compared to other developing markets, due to its relative geographic proximity to the USA and its many middle-income countries that are close to or above investment grade. However, LAC is the region most affected socioeconomically by COVID-19, with foreign direct investment (FDI) flows plummeting by 45% in 2020. The pandemic has exacerbated pre-existing socioeconomic issues like low productivity, high inequality and informality, and deficient public services and institutions. Despite a strong rebound in regional GDP of 6.9% in 2021, growth projections in 2022 (2.3%) and 2023 (2.2%) put LAC’s regional performance amongst the lowest globally.
What role can blended finance play in addressing the challenges LAC faces? The region remains a popular area of interest for blended finance practitioners, with 47% of the transactions currently fundraising on Convergence’s deal-matchmaking platform targeting LAC and blended flows to the region remaining constant even amidst the COVID-19 pandemic. Blended finance can therefore play a pioneering role, working alongside local governments by deploying catalytic capital into emerging segments and pockets of competitiveness – paving a road for private capital to follow. Convergence’s latest Data Brief analyzes the 138 blended transactions, recorded by the Convergence database, targeting South America, Central America, and the Caribbean in part or in full, representing aggregate committed financing of $19.7 billion. The brief also presents insights from interviews with key stakeholders.
Here are some key takeaways from the Brief:
Renewable energy is the leading sub-sector amongst LAC-focused transactions: 25% of Latin America’s energy is being sourced from renewables (mainly hydropower and biofuels), twice the global average. With ten countries in the LAC region pledging to generate 70% of their total energy consumption from renewables by 2030 as part of the Renewable Energy for Latin America and the Caribbean (RELAC) initiative (compared to the EU’s current target of 40%), renewable energy (28%) has been a favored sector by a plurality of blended transactions in LAC. Some examples include Uruguay’s La Jacinta, Natelu Yarnel, and Casablanca Giacote solar PV projects. IDB Invest, the private sector arm of the Inter-American Development Bank (IDB), oversaw the construction phase financing and refinancing and deployed concessional funds from the Canadian Climate Fund for the Private Sector in the Americas (C2F) to mitigate construction risk, attract institutional investors, and develop the commercial track record for the solar energy market in Uruguay.
Figure 2: LAC transactions by sub-sector
Concessional debt or equity and technical assistance are the key blending archetypes in LAC: Concessional debt or equity has appeared in LAC-focused transactions at a much higher rate than the overall market (83% vs 69% of all), as has technical assistance (35% vs 29%). Meanwhile, alongside design-stage grants (7% vs 11%), guarantees (14% vs 29%) have appeared in LAC-focused transactions less frequently than in the overall market. The fund and project guarantees constituting the bulk of the LAC-focused guarantees in our database are most often joined by another archetype (e.g., concessional debt/equity or technical assistance) within the transaction. Examples include the Itelecom Energy Efficient Street Lighting project, which looks to upgrade public street lighting in Chile with high-efficiency LED technology. The project was funded by loans from IDB, C2F, and the Clean Technology Fund (CTF), alongside technical assistance and a first loss guarantee of $2.5 million from CTF’s Chile PEEERA Program.
Figure 3: LAC transactions by blending archetype(s)
IDB Invest, IFC, & FMO are the top commercial investors in LAC: Every blended transaction mobilizes capital from at least one private sector investor. Most commercial commitments to LAC-focused transactions have come from Development Finance Institutions and Multilateral Development Banks (DFIs/MDBs) (37%) and commercial investors (36%), predominantly commercial banks, diversified financial institutions, and large corporations. IDB Invest (the private sector arm of IDB), the International Finance Corporation (IFC), and the Dutch Development Bank FMO have provided the highest number of commercial commitments to LAC-focused blended finance transactions to date. IDB Invest is currently undergoing a capital increase as part of its new “IDB Invest 2.0” business model, which will enable it to originate higher-impact projects, de-risk private-sector investment, and use new financial tools to help crowd-in investment into LAC.
Figure 4: Top providers of commercial finance to LAC transactions
There are significant synergies for foreign and local investors to explore through blended finance: Our interview respondents note that there are significant opportunities in LAC for foreign investors (with experience investing within specific sectors) to align their capabilities alongside local actors within investor-friendly environments, ultimately boosting the presence of foreign investors within LAC-domiciled investment vehicles and helping to achieve scale.