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With a growing track record of blended finance transactions, an increasingly sophisticated financial sector, and strategic commitments towards the Sustainable Development Goals (SDGs) at the national level, Latin America and the Caribbean (LAC) has strong potential to scale up blended finance for development, with Colombia emerging as a hub in the Andean region. This was apparent during several convenings for blended finance in Bogotá recently.
On November 16th, the UN in Colombia (ONU Colombia) hosted the event “Blended Finance para la Agenda 2030” to explore challenges and opportunities for blended finance to advance the SDGs in Colombia. On November 17th and 18th, Convergence partnered with UNDP-Colombia and the Universidad de Los Andes’ Center for Sustainable Finance to present “Blended Finance & Impact Investment: Latin America & Colombia”, an academic program attended by 35 blended finance and impact investing professionals in the region, from a variety of UN agencies, government bodies, and private sector investors.
“In a place like Colombia, many of you are already part of the solution, but we do not have the scale to reach global markets,” said Mireia Villar, United Nations Resident Coordinator, Colombia, in her.
LAC has been consistently building its blended finance track record, representing almost one-fifth of transactions in the Convergence database to date. Convergence has recorded 148 blended transactions targeting South America, Central America, and the Caribbean in part or in full, representing aggregate committed financing of US $21 billion. Colombia’s role in the aggregate activity is significant, representing close to a quarter of the transactions in the region. LAC remains a popular area of interest for blended finance practitioners, it is targeted by 48% of the transactions currently fundraising on Convergence’s deal-matchmaking platform, with Colombia the focus of 60% of the regional transactions.
Blended finance transactions in Colombia are heavily inclined towards climate action, clean energy, and financial inclusion. Opportunities are likely to increase, as Colombia has pledged 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.
Below are three reasons Colombia is developing as a hub for blended finance:
Colombian Government Supports Private Sector Mobilization
Since the Colombian presidential elections of June 2022, new President Gustavo Petro’s administration’s priorities are consolidating peace, social justice, environmental justice, and change for women. Petro’s administration is increasing collaboration with the private sector to mobilize investments into these priorities. “The Colombian government sees blended finance as an important tool to achieve its goal of bringing development to vulnerable communities. It’s already mentioned in this government’s national development plan,” states Diego Javier Penagos, Senior Investment Specialist at PROCOLOMBIA, the Colombian Government Trade Commission.
Deputy Minister Gonzalo Hernández recently announced the country’s support for Climate Finance Leadership Initiative (CFLI) Colombia, an initiative that convenes the private finance sector to support transformational climate action in Colombia. “We celebrate initiatives such as CFLI Colombia that help close the financing gap for climate change by mobilizing private investment towards sustainable projects that will help achieve Colombia’s NDCs,” said José Antonio Ocampo Gaviria, Colombian Minister of Finance.
“One of the main barriers to bridging the climate finance gap is to have large, well-structured climate projects with a profitable business model for the private sector,” said Jorge Iván González, General Director of the National Planning Department of Colombia. “[CFLI Colombia] will allow the financial sector to find investment opportunities in Colombia to finance high-impact projects that will help us meet the country’s climate goals, generating large-scale and sustainable investment.”
UN Agencies in Colombia Prioritize Blended Finance
While UN themes and sectors of priority will not change, Villar elaborates, “What has to change is the posture with which the resources of cooperation may leverage, combine, and become more impactful with other resources that exist in the market, in the state, and at the global level.”
The UN Multi-Partner Trust Fund for Sustaining Peace (UNMPTF) is an example of this change that is already occurring. It is a tripartite mechanism, between the Colombian Government, donors, and the UN to support the implementation of the 2016 peace agreement. In 2019, the Fund together with the Peace Building Fund (PBF) financed a Blended Finance Call for Proposals to leverage private sector funding to regions most affected by conflict. Through seven selected investments UN MPTF Colombia was able to mobilize an additional $12.9 million with a leverage ratio of 1:6 from private sector partners, building the track record of blended finance in Colombia.
International Donors Apply Mandates Strategically
International donors in Colombia are also deepening their participation in blended finance. “Since 2015 Colombia has demonstrated important leadership by a middle-income county in moving the climate agenda forward. Colombia has demonstrated a commitment to biodiversity protection and addressing climate change at a level beyond the political cycle. This is the reason why the United Kingdom’s flagship climate finance program UK PACT has prioritized Colombia among its partner countries to receive the most resources through its program,” said Santiago Briceño, Head of Clean Growth Programmes - International Climate Finance at the British Embassy in Colombia.
The strategic use of limited donor resources is a recurring theme, as Caroline Albert, Head of Cooperation at the Embassy of Canada in Colombia describes, “We cannot continue doing what we have done for the past 50 years and expect different results. Donor resources are inadequate to respond to the size of the need, but not irrelevant, indeed we must use donor resources much more strategically to see how these resources can become an instrument to mobilize other sources of finance (public, private, national and international). This is even more important in a middle-income country like Colombia, where ODA is quite small, but there is significant potential for private investment.”
Organizations such as Financiera de Desarrollo Nacional (FDN), the Colombian infrastructure-focused development finance institution (DFI), and IDB Invest, the private sector arm of the IDB Group, are building a robust track record of blended finance activity at the sub-national, national, and regional level.
Private Sector Participation Builds Track Record
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 collection of middle-income countries close to or above investment grade compared to other regions of the world.
Although recent geopolitical changes in Colombia may have caused concern for private investors, and “some newcomers are easily spooked by overall conditions and political circumstances,” says Sergio Guzman, Director at Colombia Risk Analysis, in an interview with Finance Colombia Guzman remarks on the potential for the long-term. “Colombia is for investors with a long-term perspective (usually decades) who will be well aware that the country has markedly, and positively, made strides to becoming a more prosperous society."
Almost 40% of LAC region investors have participated in blended transactions in Colombia, as per Convergence’s database. However, the average size and frequency of investor participation in Colombia remains lower than at the regional level, indicating there is room to scale up transactions in Colombia.
A well-known private sector-led blended finance transaction is the Acumen Early Growth Fund (ALEG) by Acumen LatAm Impact Ventures (ALIVE). The ALEG I private equity fund invested equity and mezzanine finance in SMEs in Latin America, with a particular focus on Colombia, Peru, Honduras, El Salvador and Guatemala, across the energy, agribusiness, and education sectors. ALEG received $5 million in concessional capital from the John D. and Catherine T. MacArthur Foundation to catalyze private participation. The remaining funds were provided by public and private institutional investors, and a commercial bank, including IDB Lab, Dutch Good Growth Fund, WWB Colombia, and Bancóldex. The Fund was also accompanied by a $1 million technical assistance facility which funded business support services and impact and gender assessments among investees.
Another initiative is the Coffee Smallholder Livelihoods Facility. Led by Neumann Kaffee Gruppe (NKG), the $25 million revolving facility received financing from leading European banks including ADB AMRO, Rabobank, and BNP Paribas. IDH Sustainable Trade Initiative along with NKG provided a first-loss guarantee of up to $2.5 million, while USAID provided a second-loss concessional guarantee to further cover the senior investors.
Numerous other initiatives are currently underway or launching in the country. USAID Colombia’s Renewable Energy team is launching a blended Energy for Peace project in Territorial Focused Development Plans (PDET) zones across the country, while structuring the transaction to attract both energy partners and private investors. ALIVE is building on their success through the launch of ALEG II. FDN is also working on large-scale irrigation projects in Ranchería and San Juan del Cesar.
With the gathering momentum across the public, philanthropic, and private sectors indicated above, Colombia is poised to become the next hub of blended finance in the Andean region.