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03 Oct 23

How is Technical Assistance Effectively Used in Blended Finance Transactions?

How is Technical Assistance Effectively Used in Blended Finance Transactions?

Figure 1: TA deals by investment stage and total funding

Technical assistance (TA) in blended finance transactions can be essential to capacity-building and de-risking potential investments in new or uncertain markets. It can be deployed at different stages throughout the lifecycle of an investment.

Pre-investment TA is most important in nascent markets with a lack of bankable projects. At this stage, TA can help a fund, business, or project become investment-ready and provide support during the feasibility or due diligence processes.

Post-investment TA, on the other hand, is often used to integrate environmental, social, and governance (ESG) principles (or other reporting frameworks) or to provide capacity building and training for operational efficiency.

A third form of TA involves subsidizing the cost of business (e.g. by funding product development or market research). Lastly, TA can be used in other circumstances to help create an enabling environment for an investment to succeed. This can include aiding governments in creating regulations to reduce barriers to investments, or funding awareness campaigns. The figure* above shows a breakdown of TA deals by stage as captured by Convergence’s Historical Deals Database (HDD), along with the total funding investors have provided for each.

This latest Data Brief analyzes how TA has been deployed in blended finance transactions to date. Convergence’s HDD has recorded 270 blended transactions with a TA component (26% of total transactions), with USD 1.7 billion spent on TA in total.

Key takeaways from the Brief

Energy, financial services & agriculture are the largest sectors for technical assistance

The three sectors with the highest rates of TA usage are energy (28%), financial services (27%), and agriculture (27%). In 2022, the International Energy Agency (IEA) estimated that 774 million people globally did not have access to electricity, with 85% of this population located in Africa. IEA further reported that to ensure global access, USD 30 billion would be required annually from now to 2030. TA can help close the financing gap in the energy sector by de-risking projects and creating a more appealing investment environment.

In the financial services sector, blended finance practitioners noted that TA is being seen less as an optional investment and more of an essential element of operations that can affect the risk perception of financial intermediaries and accompany them to develop new segments. Regarding the agriculture sector, TA can help to catalyze the availability of financing by developing the pipeline. There are, however, challenges specific to the agricultural sector in the use of TA, such as potential ineffective outcomes for TA programs that do not distinguish between food crops and cash crops.

fig2 ta brief Figure 2: Percentage of deals per sector with technical assistance

Over half of technical assistance transactions are structured through funds

51% of transactions in the HDD that have a TA component are funds. TA can be deployed in several ways within a fund. First, investors can provide TA directly to fund managers to help improve the development and operations of the fund. For example, the Food Securities Fund benefitted from a TA grant provided by the Global Environment Facility (GEF). The GEF grant was used to cover preparation costs and to set up a robust monitoring and reporting system to strengthen the viability of the fund’s activities. More commonly, TA is used as part of the fund’s investment strategy to increase the likelihood of success in its investees. For example, the AfricaGoGreen Fund is accompanied by a technical assistance facility (TAF) funded by the KfW Development Bank that supports project development and market studies, and provides transaction advisory and capacity-building services to investees in its portfolio.

fig3 ta brief Figure 3: Percentage of deals by type with technical assistance

There are challenges when deploying technical assistance in blended finance transactions

Throughout our interviews with technical assistance investors, several themes became apparent regarding challenges and opportunities for the use of TA in blended finance. One of the main challenges is knowing how much TA to use and when is the best time to deploy. There is no standardized formula; in each instance, the TA provider must decide whether TA is the most appropriate tool, what stage of the deal it is most effective, and what is the optimal amount. Additionally, it can be difficult to decipher whether TA would be effective in creating a bankable investment, or if there are other challenges that would cause an investment to fail.

A second challenge is a lack of available funds to implement the lessons learned through TA programs. For example, TA recipients may know they need to recruit strong executive leadership, but they may also not be able to afford it. A third challenge is how to ensure the additionality of investor funding. Because there is no central database of TA recipients, there are cases where TA is supplied multiple times within the same transaction. This can lead to an inefficient use of TA resources.

Looking ahead

Despite these challenges, there are opportunities to improve the effectiveness of TA in blended finance transactions. For example, with the challenge of potentially duplicating efforts comes the opportunity for sharing data and best practices. To ensure TA is being used where it is needed the most, TA providers should be transparent about the deals they are supporting. In this way, investees are not tempted to over-rely on TA grant funding by applying to multiple funding sources. There are also opportunities to increase the effectiveness of TA by pushing for innovative TA strategies. Creating responsive TA that is nimble enough to adapt to changing needs in the field, and that can serve a wide variety of stakeholders, is essential for TA to evolve into a more effective tool. Lastly, deploying more TA to support systemic changes through creating an enabling environment could create larger impacts on the investment environment than supporting individual companies or projects.

Overall, TA is used globally to bolster the impacts of blended finance transactions and help achieve the SDGs. Challenges remain in ensuring that funds are used responsibly and effectively, and that TA achieves a measurable and sustainable result. Its varied structure, however, leaves many opportunities for improvement, if providers are willing to share data and best practices, continue to seek innovative means of TA delivery, and focus on systemic changes that create ample investment opportunities.

*Approximately 32 deals in the HDD with a TA component provided funding to more than one stage in an investment. In Figure 1, these deals are represented in each relevant stage as a separate deal.

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About the Author
Robin Ivory

Robin serves as a Content Senior Associate, supporting the curation and presentation of Convergence’s living database of historical blended finance transactions and contributing to the creation of knowledge products. Prior to Convergence, Robin worked at the Treasury Board Secretariat of Ontario, managing the Economic Development Team and aiding senior government officials in making responsible fiscal decisions. She has experience working in non-profits including a prominent Canadian think tank, on an educational project in Guatemala, and for an organization that analyses accountability mechanisms in multi-lateral organizations. Robin holds a Master’s in International Economics and International Relations from the Johns Hopkins School of Advanced International Studies (SAIS) and a Bachelor’s in International Development and Economics from McGill University.