The Organization for Economic Co-operation and Development (OECD)'s recent report, Making Blended Finance Work for the Sustainable Development Goals, is a comprehensive assessment of the state and priorities of blended finance, with the aim to improve its implementation and move development practitioners towards 'blended finance 2.0'. This report is the most recent demonstration of OECD's commitment to innovative finance and specifically blended finance. Back in October 2017, the OECD Development Assistance Committee (DAC) adopted a set of Blended Finance Principles to guide donors hoping to engage with private sector investors. In January 2018, OECD also hosted a blended finance week, which culminated with a blended finance capacity building session for OECD-DAC members hosted by Convergence.
This pioneering report presents an overview of blended finance actors and instruments, and discusses lessons learned from blending approaches, tracking and data, and monitoring and evaluation. We've pulled out a few key insights for you here:
Blended finance is ramping up
The development community is increasingly turning towards blended finance, with at least 17 OECD DAC members now engaging in blended finance to varying degrees. Between 2000-2016, donor governments set up 167 dedicated facilities for blended finance, with the number of new facilities growing every year. Further, the blended finance projects analyzed reflected a clear focus on private sector mobilization. Between 2012-2015, official development finance interventions mobilized USD 81.1 billion from the private sector through five instruments: guarantees, shares in collective investment vehicles, syndicated loans, direct investment in companies, and credit lines.
More buy-in is needed from donors
Donors are the backbone of blended finance. Without their concessional capital, there would be no crowding in of private investments. The purpose of the report is to support donor governments and agencies in designing approaches that mobilize and better target commercial capital towards the SDGs. For blended finance to succeed and scale-up, it is critical that donors increase their allocations towards blended finance. In Convergence's report 'The State of Blended Finance', we note that donors require better enabling conditions, including improved expertise and organization capacity in blended finance and expanded authorities to deploy equity, debt, and risk mitigation instruments into blended finance transactions.
MDBs and DFIs will be the drivers
Many donor governments lack the capacity, track record, and skill set to engage in complex blended finance structures, so they often look towards intermediaries for support. Intermediaries can play several different roles, including structuring and/or facilitating blended finance transitions as well as collecting return data and impact metrics and reporting trends and benchmarks out to the market. While intermediaries like local financing institutions, non-governmental organizations (NGOs) and private fund managers all play a role, the multilateral development banks (MDBs) and development finance institutions (DFIs) will be the driving engine. MDBs and DFIs currently arrange around USD 35 billion of private sector financing in developing countries annually. For blended finance to achieve scale, the MDBs and DFIs must i) arrange a higher number of transactions, ii) arrange a much larger amount of annual financing volumes, and iii) transfer these exposures to blended finance vehicles.
Monitoring and evaluation are indispensable
The effective deployment of blended finance is hindered by the lack of a robust evidence base on what works and what does not. Monitoring and evaluation (M&E) are essential to building this evidence base and ensuring accountability, yet 22% of the blended finance funds and facilities surveyed in the report have no formalized M&E approach. There is a need both to monitor the financial flows in and out (i.e., leverage, returns) and to evaluate the impact outcomes for the target beneficiaries. For the OECD DAC members, improved impact evaluation is critical. Currently, only 20% of blended finance funds and facilities collect information one or more years after the investment.
Moving from blended finance 1.0 to blended finance 2.0
Blended finance is an evolving approach in development finance. The way it is currently being deployed suggests opportunities and implications for future efforts. Making progress on blended finance will mean moving from blended finance 1.0, where different forms of development capital are combined to increase efficiency and make projects more viable, to blended finance 2.0, where development finance is used much more strategically to mobilise commercial capital at scale and target it towards a range of development issues and contexts. This vision is at the core of Convergence's work and will require a change in how donors communicate and engage with the private sector.
Read the OECD report here.