The COVID-19 pandemic presents an unprecedented challenge to the global community, requiring businesses, governments, and the donor community, to work together in the face of human tragedy. In the immediate term, traditional aid will be crucial in responding to the global health crisis, and to the economic upheaval engendered by the pandemic.
Blended finance, however, can play an important role in the medium-to-long term response to the pandemic, in two ways; first, in accelerating economic reconstruction, improving pandemic resiliency and responding to the global health crisis (where possible), and secondly, in turbocharging our collective efforts towards achieving the Sustainable Development Goals (SDGs).
As the UN Secretary-General has pointed out, “Had we been further advanced in meeting the Sustainable Development Goals and the Paris Agreement on Climate Change, we could better face this challenge - with stronger health systems, fewer people living in extreme poverty, less gender inequality, a healthier natural environment, and more resilient societies.” More challenges will come, and we need to do more, go faster, and build stronger systemic preparedness.
The world now needs a whole-of-humanity approach, requiring every financial actor to get into the game. We believe that the time for blended finance at scale has arrived. Much has already been said and written about the fall-out of this global crisis. Suffice it to say here, that it will be in the developing economies of the world where the human toll and economic damage will be deepest, causing lasting human suffering without swift collective action.
How do we intend to live up to Convergence’s role as the global network for blended finance in this sudden new era? One of our major responsibilities is to facilitate learning from each other by broadcasting the lessons of what has worked to the field as a whole. So, let us suggest where we would want donors to lean in. In each of these areas, Convergence stands ready to share knowledge and best practices, while connecting organizations.
Address the issue of risk. In any shock, investment shuts down not just because of risk, but because of the inability of investors to size up and price the new level of risk. Development impact and risk reduction for investors are different sides of the same coin. Addressing risk will be hugely catalytic in getting abundant private sector capital back into circulation. Guarantees, first-loss protection, offtake commitments, advance market commitments; all of these will be ever more important.
Scale up quickly and recycle what works. This is not a time for time-consuming innovation, nor for fine-tuning. Convergence has long argued for repeating past successes and for standardizing approaches in blended finance. We urge donors and philanthropic organizations to double down on anything they have done with the private sector that has worked, to resist the urge to tailor it, and to go to market quickly.
Bolster the domestic financial sector. Capital and liquidity are as scarce as they are critical in a crisis such as this. While central banks and governments in developed countries have taken quick steps in this direction, their counterparts in developing countries do not have the requisite funding. Blended finance should support financial intermediaries though wholesale funding (preferably in local currency), risk sharing on loan portfolios and trade finance, and subscribing equity where possible.
And, here are some places where private sector firms and investors should consider reaching across the aisle to donors as a matter of enlightened self-interest:
Get people back to work, while understanding that the way we work will need to evolve. Where you would normally not engage with government parties or charities, this is a moment when missions align. Approaching a donor with a plan that will restore jobs more quickly may find a receptive audience. This is particularly true where it might speed women’s reentry into the economy, given the alarming connection between crisis, isolation and gender-based violence.
Offer solutions to jumpstart the economy. We can expect increased trade friction, supply chain issues, working capital shortages, and other short-fuse issues with known solutions. Financial institutions have an immediate role in structuring liquidity facilities, revolving credit lines, and short-term trade finance. In lower income countries where the financial sector may lack depth, getting these wholesale solutions into the market may require not only the support of the development banks, but also a layer of first loss cushion that donor agencies could step forward to provide. A small amount of that catalytic capital may greatly increase the quantum of capital that can be made available quickly.
And, finally, while beyond the remit of blended finance, reconstruction will require every government’s best leadership to set out regulations and policies that encourage investment, both domestic and foreign. After all, blended finance is a transitional tool in many (but not all) countries that falls away as risk perception drops and business models prove out. Governments have a huge role in speeding up the emergence of fully commercial, dynamic, and resilient unblended business models.
We intend to follow up this message to the field with practical, concrete actions over the next six months, including focused knowledge pieces, increased engagement with members and donors on existing blended finance transactions that address the global health and economic crises in some way, and intensified market acceleration work.
On the latter topic, we have already begun to explore a market acceleration program in the form of a design funding grant window for financial vehicles, which (i) use blended finance to improve resiliency in the medium term, and (ii) enable projects aligned to the SDGs in developing economies that have been disrupted by COVID-19, now needing a financial nudge to keep going. We are also working with donors, led by UK DFID, who have formed a Scale Working Group to re-examine what it means to use blended finance to catalyze investment at scale in the face of this new challenge.
In closing, we should all seek to forge extraordinary partnerships with a great sense of urgency to address the present extraordinary challenge to humankind, while maintaining collective course toward the SDGs. Convergence is here to help our partners, donors and members, and our markets-at-large with our intelligence, data, deal flow, and grant-making expertise, wherever we can.