Making Blended Finance Work for the Sustainable Development Goals

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29 Jan 2018
9789264288768 (PDF) ;9789264288751(print)

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The global community has spoken loud and clear: more resources must be mobilised to end extreme poverty and mitigate the effects of climate change. Blended finance - an approach to mix different forms of capital in support of development - is emerging as an important solution to help raise resources for the Sustainable Development Goals in developing countries. But scaling up blended finance without a good understanding of its risks could have unintended consequences for development co-operation providers. This report presents a comprehensive assessment of the state and priorities for blended finance as it is being used to support sustainable development in developing countries.  It describes concepts and definitions, presents an overview of actors and instruments, and discusses lessons learned from blending approaches, tracking and data, and monitoring and evaluation. Its findings and recommendations are useful for policy makers and practitioners.

'Blended finance will contribute to faster economic growth, but to achieve this it is vital to get donors into alignment.'
Martin Wolf, Chief Economics Commentator, Financial Times

'Official development assistance continues to be a key way to finance efforts aimed at eradicating extreme poverty. However, the challenge is more than governments alone can manage. We must all think, work, finance and deliver development differently to mobilize private-sector resources and expertise to help the world’s poorest and most vulnerable people. Canada continues to promote innovative approaches to finance development and achieve sustainable growth for everyone.'
The Honourable Marie-Claude Bibeau, Canada's Minister of International Development and La Francophonie.

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Expand / Collapse Hide / Show all Abstracts Table of Contents

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  • Foreword and Acknowledgements

    Donor governments face increased demand to finance the 2030 Agenda and increased pressure to link financing with development results. Blended finance - defined as the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries – is gaining traction as a way to grow development aid. Initial OECD studies show that blended finance has generated over USD 81 billion for development goals in four years and a survey of OECD Development Assistance Committee member countries demonstrated that the majority are participating in some blending.

  • Abbreviations and acronyms
  • Executive summary

    Delivering the Sustainable Development Goals (SDGs) and the Paris Agreement will require more resources than are currently being spent on development outcomes, not least in developing countries. Blended finance, an approach that mixes different forms of capital to support development, is emerging as a solution to help achieve the “billions to trillions” agenda. Scaling up blended finance without a sound understanding of its potential and its risks, however, may have unintended consequences for development co-operation providers. This report presents a comprehensive assessment of the state of blended finance and priorities for action to improve its implementation, drawing on surveys, case studies, interviews and desk research. It argues that while blending has potential to scale up commercial finance for the Sustainable Development Goals, its deployment by the development finance community needs to be based on a common framing and principles, as well as additional evidence and analysis. While this report is meant primarily for a development co-operation and finance audience, its findings and recommendations are useful for a broader range of policy makers and practitioners pursuing sustainable development in developing countries.

  • Infographic: Blended finance for the sustainable development goals
  • Overview: What will it take to make blended finance work for the Sustainable Development Goals?

    Blended finance is emerging as an approach to help bridge the financing gap for the Sustainable Development Goals. This chapter contains an expanded synthesis of the report, highlighting the challenges and opportunities for blended finance and outlining key policy recommendations. The chapter presents an overview of the main building blocks of blended finance – concepts, definitions, blended finance architecture and instruments – and highlights important gaps and challenges that need to be addressed. It presents policy recommendations for the development co-operation community and outlines the OECD DAC Blended Finance Principles to improve blending efforts. It highlights an agenda for action for research work in this area going forward.

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  • Expand / Collapse Hide / Show all Abstracts Understanding blended finance

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    • The imperative of blended finance

      Meeting the objectives of the 2030 Agenda for Sustainable Development and the Paris Agreement will require significant investment. This chapter examines recent changes in the landscape of financing for development and recent estimates of the financing needs for the SDGs, which point to the need to mobilise additional investment. It reviews the main barriers to external private investment in developing countries, outlines the potential to scale up private investment for development and explores the role of blended finance in closing the gap.

    • Blended finance Definitions and concepts

      Blended finance has played a role in development financing for some time and is gaining greater attention among donor governments. However, its potential for generating needed investment for the 2030 Agenda for Sustainable Development and the Paris Agreement is constrained by the absence of a mutually agreed understanding of blending even within the development co-operation community. This chapter presents the range of definitions in use, the characteristics and boundaries of blended finance, and efforts to build a framework that addresses concerns about blending while allowing it to achieve its potential. It also highlights key concepts associated with blending such as concessionality, additionality, mobilisation and catalysation.

    • The role of development actors in blended finance

      Development finance actors play a key role in blended finance, providing the capital that mobilises the commercial sector to engage. This chapter explores the changing role of different development actors involved in blended finance including donor governments and aid agencies, multilateral development banks, and bilateral development finance institutions. It highlights their current engagement in blending, motivations and drivers, and maps challenges faced. While the focus is on public development actors, the chapter also briefly maps the main private actors engaging in blended finance.

    • Blended finance instruments and mechanisms

      Blended finance involves the use of different financial instruments that can be used alone or together to address unfavourable risk-return profiles of investment in developing countries. This chapter outlines the main risks facing commercial investors in developing countries. It presents the types of financial instruments that can be used in blended finance and outlines the main mechanisms and structures that blending entails. The chapter presents examples to illustrate how different instruments and approaches come together to crowd in private, commercial investment for development outcomes.

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  • Expand / Collapse Hide / Show all Abstracts Insights from blended finance in practice

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    • Pooling finance through blended finance facilities and funds

      Collective investment or pooled vehicles such as facilities and funds are prominent in the blended finance landscape. This chapter presents results from OECD and Association of European Development Finance Institutions (EDFI) surveys of blended finance funds and facilities carried out in 2015 and 2017. It explores the increasing interest in donor government facilities to pool donor financing for blended finance, highlighting the main trends in the development of these facilities. It also explores blended finance funds that bring together development and commercial investors to invest in projects in developing countries. The chapter also considers to what extent facilities and funds are addressing the SDGs and initial lessons learned.

    • Insights from project level case studies on blended finance

      While blended finance is emerging as an area of interest among donor governments, evidence is lacking on the outcomes and implications of blending as one approach in a toolkit of development co-operation approaches. This chapter presents insights from ten project level case studies of blended finance. It describes how blending has been applied in each case, focussing on the sources and terms of financing for each project, the financing structures used, and the project’s contribution to achieving the Sustainable Development Goals. The chapter points to implications for donor government policies and raises operational issues that need to be considered.

    • Progress and challenges in tracking blended finance

      The growing prominence of blended finance is creating an increased demand for data. The use of public, concessional development finance in the context of commercial investment has raised the need for transparency and accountability, particularly regarding the effectiveness of blended finance. This chapter outlines the main efforts to track and map the blended finance market. It highlights what has been achieved through stand-alone surveys and in the context of existing reporting systems for development finance. The chapter also presents gaps in existing data systems and identifies areas for further work.

    • Monitoring and evaluation in the context of blended finance

      Monitoring and evaluation (M&E) are essential to assessing the performance of blended finance and raising awareness on its effectiveness in achieving development outcomes. This chapter presents an overview of existing M&E systems for private sector engagement in development co-operation and highlights implications for blended finance. It reviews governance of M&E as well as challenges and issues relating to monitoring and the importance of evaluation. The chapter presents the main areas that need to be addressed in order to strengthen M&E for future blending.

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  • Summary of findings from survey of OECD DAC members on blended finance
  • Methodology for surveys on blended finance funds and facilities

    Two categories were identified for the purpose of this research: funds and facilities (see Table A2.1 for characteristics of each). An initial mapping was conducted to identify funds and facilities launched between 2000 and 2016, building on surveys by the Association of European Development Finance Institutions (EDFI) and World Economic Forum conducted in 2015, and on OECD surveys of amounts mobilised from the private sector by official development finance interventions (see Chapter 5). The mapping identified 356 blended finance vehicles that were set up in this time period, 167 of them facilities and 189 funds. Facilities are earmarked pools of development resources for blended finance; in contrast, funds always include commercial capital. Within the funds, a distinction was made between structured funds and flat funds. Structured funds allow actors with different risk/return profiles to invest in different tranches. In flat funds, all shareholders hold the same return and bear the same risk as the other.

  • Project level case studies of blended finance
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