This op-ed was originally published on ImpactAlpha.
The global aid architecture is undergoing a seismic shift. Since 2024, we’ve seen cuts to official development assistance, or ODA, from major donors like Germany, France, the Netherlands, and the United States. As geopolitical priorities shift inward, the era of larger foreign aid budgets appears to be ending.
This presents a massive challenge to blended finance – the use of public and philanthropic capital to mobilize private investment in sustainable development. The impact on blended finance is compounded by the surprise shuttering of USAID, one of the most frequent investors in blended finance amongst donor agencies.
We should care about blended finance, because it is one of the only tools for channeling private capital to places that need it – a need that will only grow as aid declines.
What to expect now
Blended finance has been a rare bright spot in development finance over the last decade. Despite dealflow dipping in 2024 from a historic high in 2023, it still remained higher than previous years (excluding 2023), with 123 deals reaching close totaling $18 billion in financing. Median deal size also rose from $38 million (2020 – 2023) to $65 million (2024) — reflecting growing ambition and scale.
With less ODA we can expect a more rapid culling and streamlining of the field, where deals that require long-term, ongoing ODA to reach bankability, or that are supporting pilot transactions, will decrease, in favour of prioritizing near-bankable deals with clear paths to scale.
Aid may also become more conditional upon the donor country’s own benefit. We may see more transactions that serve donor interests — by helping their investors enter new markets or access strategic resources.
The need for scale and standardization
Ironically, the decline in ODA may provide the jolt the blended finance market needs to professionalize and scale. For years, the field has been criticized for bespoke deal structures and poor replicability. With every dollar of aid now under scrutiny, it’s time to double down on what works.
Convergence recently launched the Scale Private Investment Mobilization Project, which identifies 12 proven Private Investment Mobilization Models, or PIMMs. These are not theoretical frameworks—they’re tested structures, such as tiered funds that layer junior public capital with mezzanine tranches to attract private investors. With less concessional capital available, it is vital blended finance actors adopt standard models such as these to get more deals done efficiently.
Filling the gap
The disappearance of USAID is a blow. Its contributions were highly catalytic, especially in agriculture and non-energy infrastructure. One striking example: a $760,000 USAID grant to the Water Access Acceleration Fund helped crowd in $55 million. But let’s not overstate its absence, as it delivered only 2.1% of concessional blended finance capital annually since 2018. Other bilateral donors, such as JICA, Germany’s BMZ, and the UK’s FCDO, have contributed substantially more concessional finance by volume and remain active.
Multilaterals like the Green Climate Fund and the Private Infrastructure Development Group are also stepping up, though they are still reliant on donor replenishments.
Non-traditional donors like the UAE are emerging too. In 2024, ALTERRA, its concessional capital platform, committed $1.5 billion to two funds. At the same time, there’s a huge opportunity for philanthropic capital, which is typically highly concessional and more willing to take first-loss positions in riskier deals. For example, the Gates-backed Accelerating Human Development Guarantee—a $750 million initiative — is helping de-risk health infrastructure investments.
The rise of coalition-led platforms — such as the Green Guarantee Company — points to another way forward. These collaborative efforts can stretch each donor’s impact further, increase pipeline development, and support new strategic priorities.
Finally, blended finance must go local. Until now, it’s been driven by global north donors with the intention of mobilizing global, cross-border private investment. However, attracting local investment is critical for long-term sustainable development and stable local financial markets, especially amid rising debt burdens.
From donor dependency to strategic resilience
Given that ODA comprised 19% of blended finance capital in 2024, it remains the most important source of concessional capital in the market. However, the market is proving it can grow with less—thanks in part to more strategic structuring and the presence of development finance institutions reducing the amount of ODA necessary to draw in private capital. Even as blended finance volumes dropped by 25% from 2023 to 2024, private capital remained steady at $7.1 billion in 2023 and $6.9 billion in 2024.
Still, a durable future for blended finance depends on coordination, scale, and smarter use of scarce concessional dollars. Blended finance is at a crossroads. The collapse of traditional aid models is not the end of development finance—but it is the end of business as usual. With more standardization and strategic alignment, blended finance can not only survive this transition—it can lead it.
