How blended finance can help create sustainable development

One of the exciting things about the Financing for Development conference under way in Addis Ababa this week is that it is about so much more than official development assistance – or aid. Increasingly, there’s a recognition that all sorts of potential financial flows – from developing countries’ own resources, through private sector investment, to revenues that are now lost to illicit capital flight, and more – need to be deployed to end extreme poverty, fight preventable disease, and build a better world.

In this connection, so-called ‘blended finance’ – where aid is combined with loans from publicly-owned institutions or commercial lenders, thereby leveraging additional finance – has gotten a lot of attention.

In blended finance schemes, the combination of a concessional and a non-concessional component acts to soften the terms and conditions of the final financial package. The potential is great. If well-designed, blended finance could allow governments to leverage official funds with private capital, sharing risks and returns, while still pursuing national social, environmental and economic goals in areas of public concern. But despite the widespread use of blending in development finance, its development impact remains uncertain due to lack of transparency and limited evidence.

Here are two points to bear in mind when evaluating what role blended finance schemes can play.

First, is there real transparency and accountability in the scheme? Is the procurement process open, and is implementation monitored so that development objectives, including economic, social and environmental considerations with a poverty reduction focus, are met? Private financial institutions often do not provide disaggregated data or development impact data on their projects citing commercial sensitivity, but effective monitoring and evaluation systems are critical for improving accountability and fostering learning and knowledge generation. The momentum that is building behind the data revolution and a new global partnership to tackle the crisis of poor data should be used to increase the openness, transparency and accountability of blended finance.

Second, can the scheme benefit the very poorest countries, where private loans are viewed as more risky? The least developed countries’ share in global Foreign Direct Investment (FDI) flows stands at only 1.7%. Blended finance may be one tool to help mitigate risk for private investors, and help build capacity in developing countries to attract greater private investment. But these schemes need to be carefully planned and implemented, so as not to overburden countries with debt.

At The ONE Campaign we are asking that 50% of aid be delivered to the least developed countries, as they have the greatest need. Some of this aid could be used to help build capacity in the poorest countries to attract greater private finance. We could thereby mitigate risk for investments in key growth areas like energy and infrastructure, as well as spurring investment in key poverty-reducing sectors like health and agriculture.

In other words, if we put together schemes that actually benefit the poorest countries and ensure high standards of accountability and transparency, then blended finance can be an important part of the development mix. Done right, it could accelerate the path to self-sufficiency.

At Addis, among a range of other initiatives, the Global Financing Facility (GFF) for maternal and child health, will be launched as a new form of blended finance. It aims to mobilize, leverage, and channel additional international (including private) funding, domestic resources, and countries’ World Bank International Development Association portfolios in order to scale up and sustain efficient and equitable delivery of quality health services across the maternal and child health spectrum—an area that has historically been a lesser priority of many donors and countries themselves.

For our part, we hope the GFF serves to mobilize financing that is additional to bilateral and multilateral efforts, including those supported by the Global Fund, Gavi, and UNFPA. But beyond that, the GFF provides us with the perfect chance to take a new initiative and ensure that it delivers new financing in a smart, evaluated and transparent way.. That’s one way we will know if blended finance deserves the attention it’s now getting.

Author: Michael Elliott is the President and Chief Executive Officer of ONE, the global campaigning and advocacy organization fighting extreme poverty and preventable disease.

Image: A building is seen under construction in Ethiopia’s capital Addis Ababa, September 15, 2013. REUTERS/Tiksa Negeri