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03 Jul 19

The role of multilaterals in donor and government blending

The role of multilaterals in donor and government blending

Blended finance is a growing practice among donor governments, with only around half of OECD DAC members currently identifying in-house practices or programs. However, the role of donor governments in blended finance is multi-faceted and complex to map because they have provided capital to blended finance transactions both ‘directly’ (i.e., in-house) as well as ‘indirectly’ (e.g., through contributions to multilateral organizations, funds and programs).

Naturally, foreign aid ministries (e.g., Global Affairs Canada) have been the primary in-house entity for donor government for deploying ‘direct’ commitments to blended finance transactions. To lesser degrees, other government ministries (e.g., ministries of finance) as well as specialized government funds / programmes (e.g., Dutch Good Growth Fund) have also committed capital to blended finance transactions.

Many donor governments have more systematically deployed capital for blended finance transactions ‘indirectly’ through their contributions to a variety of multilateral vehicles that use blended finance approaches for some or all of their activities, including (i) multilateral development banks (MDBs), (ii) multilateral organizations, and (iii) multilateral funds and programs. For example, the Private Infrastructure Development Group (PIDG) is a multilateral entity funded by multiple donor governments, which has developed a series of blended companies (e.g., the Emerging Africa Infrastructure Fund) that have raised commercial capital alongside donor capital, as well as blending facilities (e.g., GuarantCo) that deploy concessional capital to be blended at the project level.

The largest proportion of blended finance commitments that are ‘indirectly’ financed by donor governments are through development finance institutions (DFIs) and multilateral development banks (MDBs). These institutions have played a pivotal role in fostering blended finance to date as an arranger, an investor, and even, at times, a deal sponsor, and for blended finance to scale they will need to play an even larger role going forward. As shareholders, donor governments are critical in influencing MDBs and DFIs to deploy blended finance approaches more efficiently and effectively to achieve greater development impact and mobilize greater volumes of private sector capital.

The role of multilateral funds and programs

Multilateral organizations, funds and programs - commonly funded through grants from donor governments - are important tools for deploying concessional capital to blended finance transactions. Some multilateral funds and programs are public-private partnerships that have received contributions from the private sector or other non-government partners (e.g., private and corporate foundations). These multilateral vehicles are important to blended finance because they allow multiple organizations that may have varying levels of financial resources and organizational capacity – including but not limited to donor governments – to pool their efforts where it is more efficient and effective.

It is important to note that not all multilateral organizations, funds and programs are mandated to engage the private sector and the majority have not – and many cannot – deploy blended finance approaches. But for those that do, a variety of instruments can be deployed to engage the private sector, from traditional grants to more sophisticated financial instruments like guarantees. For many of these multilateral vehicles, blended finance is just one ‘tool’ in their toolbox and one piece of a broader strategy to address a specific development issue.

The top multilateral organizations, funds and programs that provide primarily concessional capital to blended finance transactions on behalf of their donor governments are GuarantCo (33 commitments to blended finance transactions), the Green Climate Fund (GCF), and the IDB Lab (formerly the Multilateral Investment Fund). Figure 2 highlights the diversity of multilateral organizations, funds and programs active in blended finance – from specialized vehicles that exclusively do blended finance (e.g., GuarantCo) to thematically-driven vehicles (e.g., Green Climate Fund), and more traditional multilateral entities (e.g., European Commission) that use blended finance as just one tool in their toolkits.

Top multilateral funds

The largest concentration of multilateral organizations, funds and programs engaged in blended finance is in the climate space, and includes the Green Climate Fund (GCF), Climate Investment Funds (CIF, including the Climate Technology Fund (CTF)), and Global Environment Facility (GEF). This is likely because the private sector has a key role to play in the transition to a low-carbon economy and there is considerable momentum behind climate finance, with major financial investments seen from both the public and private sectors. While blended finance is not a panacea for achieving all 17 Sustainable Development Goals (SDGs), the use of multilateral organizations, funds and programs as blended finance instruments for Goal 13 (Climate Action) may be a model for other SDGs.

Becoming greater than the sum of their parts

Naturally, there are both pros and cons to this ‘indirect’ approach to blending that must be taken into consideration. According to DFID, the best multilateral organizations, funds and programs are able to mobilize resources from diverse sources, achieve economies of scale through specialization, and provide a global platform that can coordinate and accelerate action on specific development issues. These vehicles may also help to establish clearer standards around the effectiveness and efficiency of blended finance approaches for a specific sector or development theme. On the other hand, multilateral organizations, funds and programs can be fragmented – with overlapping mandates and co-ordination problems – and, at times, ineffective – with slow reaction times, a lack of focus on the lowest-income populations, and resource inefficiency.

Donor governments have an important role in scaling blended finance solutions with proven development impact and the ability to mobilize additional private sector financing. This includes understanding and tracking how multilateral organizations, funds and programs are engaging in blended finance to ensure that all organizations and vehicles deploying blended finance approaches are aligned and complementary.

This blog is based on findings from Convergence’s recent Data Brief, which looked at how donor governments have participated in blended finance to date. Become a member to read the full brief.

¹This analysis reviews commitments from (i.e., not to) multilateral entities to blended finance transactions. Each commitment by a multilateral entity or fund to a blended finance transaction is marked as a commitment from each of the donor governments, recognizing that this overstates the scope of activities.

By Justice Johnston, former Manager at Convergence

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