What Is Blended Finance?

In September 2015, the Organization for Economic Co-operation & Development (OECD) and the World Economic Forum (WEF) released a paper entitled “A How-To Guide for Blended Finance.” In the opening salvo of the Executive Summary (p.4) the authors wrote:

“Blended Finance is an approach to development finance that employs the ‘strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets’ and is characterized by three characteristics:

  • Leverage: Use of development finance and philanthropic funds to attract private capital.
  • Impact: Investments that drive social, environmental, and economic progress.
  • Returns: Returns for private investors in line with market expectation based on perceived risk.”

At the recent Financing for Development Forum in New York (May 2017), Blended Finance was again mentioned as one of the most promising mechanisms to help finance the needs and opportunities associated with the SDGs. The OECD, the UN, and the WEF are some of the international bodies continuing to work on compiling information on Blended Finance initiatives globally.

To date, the results of Blended Finance have been mixed, as the first prototypes have featured different methodologies among stakeholders resulting in an inability to compare findings and insights in support of the entire field. In 2016, however, the European Union (EU) introduced the European Investment Plan (EIP) and is in the process of rolling out what has been referred to as “Blending 2.0”[1] The EIP’s overall aim is to promote sustainable private investments with a view to tackling some of the root causes of migration in Africa and the EU Neighbourhood. “Its main ambition,” write San Bilal and Sebastian Große-Puppendahl, “is to provide a coherent integrated framework and approach to the EU’s external investment support; a ‘one-stop-shop’, which contributes to the global architecture for long-term sustainable development.”[2] What is evident in the description of the EIP is that designers of the framework have taken into consideration the multiple stakeholders, the need for non-financial capital investments, and the significance of sharing and learning across projects, approaches, and implementation – a transitional upshift, indeed.

How Might We Envision Blended Finance in Colombia?

Recognizing that Blended Finance is meant, first and foremost, to mobilize large-scale private investment by leveraging development finance and philanthropic funds to mitigate risk, it appears that there is room to expand the field of supporting investments to enhance risk mitigation, particularly at the incubation phase of an enterprise. In the context of a post-conflict Colombia, for example, we propose that the potentially expanded landscape of Blended Finance – the “Blending Finance Ecosystem” – might look similar to Figure 3. Note that in the Blending Finance Ecosystem the three elements of Blended Finance expand to eight, inclusively: 1) Enterprise Philanthropy, 2) Institutional Investors, 3) Loans, 4) Crowdfunding, 5) Personal Financing, 6) Impact Investing, 7) Grants, and 8) the Blockchain.

Initially, financial investments may come in the form of small-scale Personal Financing – direct investment from family, friends, and/or strong social contacts (results of bonding social capital). Crowdfunding (results of bridging social capital) – online platform(s) and “offline” traveler’s-directed philanthropy – could extend the life of early stage enterprises, subsequently attracting Microfinance and possibly Loans from angel investors. Such investments would likely precede a fully-enabled Blended Finance Strategy; however, they may prove invaluable to the overall success of an economically and socially fragile, post-conflict environment.

Peace, and the prospect of continuing peace, in a country that has been ravaged by civil war (and its direct & indirect impacts for a half-century), are compelling investment appeals to those who are “not in it for the money.” Tapping resources that are not typically considered in the triune resource pool of development finance, philanthropic funds, and private investment may well result in substantively de-risking the MSME-enabling environment in Colombia. Further, it may open new, “traditional” Blended Finance investment options for renewable energy and infrastructure projects, as examples, in communities that feature budding MSME collectives of investees.

[1] Bilal, S. and Große-Puppendahl, S. (2016). Blending 2.0: Towards new (European External) Investment Plans, European Centre for Development Policy Management (ECDPM) (p. 1-31). (http://www.ecdpm.org/dp207) retrieved 29 June 2017.
[2] Ibid. p. vii

Experts and research

While Official Development Assistance (ODA) comprised the majority of resource flows in international development during much of the twentieth century, today private money, composed of philanthropy, remittances, and investment, significantly surpasses ODA. Additionally, with increased remittances, a more skilled labor force, open markets, and rise of communication technology, the developing world has also changed. Private actors in developing countries are taking on a larger role in the assistance process. These private flows have fundamentally transformed the way foreign aid is delivered: the private sector, with more flexibility and higher risk tolerance, is more likely to fund programs that government aid may not. This paradigm shift offers a great opportunity to reinvent official aid, allowing the aid community to better focus on results, demand-driven development, transparency, and sustainability. Her research focus on the value of private flows, the actors involved, future developments in private-sector involvement in foreign assistance, and the impact of private flows on the development landscape.

‘Much attention has been paid to the consequences for traditional and (re)-emerging official donors of the shifting sands of development cooperation and global power and poverty. But what of the role of non-state actors, particularly the evolving and expanding group of international NGOs, the arrival of mega-foundations (some much bigger than state funders) on the international scene, and the unhelpfully grouped ‘private sector’, from multinational to cornershop.

‘The past 10 years have seen a big increase in private development assistance, or ‘philanthropic giving across borders’. Trusts, foundations and NGOs have become major players in the world of development finance, and now have more sway over the global development agenda.’

Such assertions have become something of a mantra in today’s development sector. But are they supported by any hard evidence? This was the starting point for research by Development Initiatives (DI) into private development assistance (PDA): to analyse how much PDA there is, who is giving it, and where it is going. We analysed data for PDA flows in chapter 7 of our Investments to End Poverty report (September 2013) Our in-depth analysis of PDA, looking at issues, trends and outlining our methodology, will be published in the coming months.

Private development assistance: a glimpse of the landscape

At their 2013 summit, the G7 nations declared impact investing a national priority. Each of those countries has subsequently set up a National Advisory Board to promote policy nationwide. Banks, private wealth managers, and institutional investors are developing departments of “social finance,” “social investment,” and “impact investment.” Over 300 documented funds invest in businesses that provide a social return. The 2017 Global Impact Investing Network (GIIN) Annual Impact Investor Survey reported impact investments valued at $114 billion USD currently under management by 208 respondents to its survey.[1] With an unprecedented $40 trillion poised to move inter-generationally from “baby boomers” to “Millennials” worldwide[2], the pool of impact investment dollars is likely to grow substantially in the coming decades.[3]

In spite of this maturing financial flow into impact investing, access to financing remains one of the most significant constraints for the survival, growth, and productivity of micro-, small-, and medium-sized enterprises (MSMEs), especially in emerging markets. The G20 countries, in developing their Global Partnership for Financial Inclusion, made small- and medium-sized enterprise (SME) finance one of their core work streams. Realizing the benefits to employment, innovation, and the provision of many key goods and services depends on including SMEs, not individuals only, in countries’ financial inclusion strategies.

[1] Mudaliar, A., Schiff, H., Bass, R., and Dithrich, H. (2017). 2017 Annual Impact Investor Survey. Global Impact Investing Network, p. 1-62.

[2]Havens, J. J., and Schervish, P. (2003).
Why the $41 Trillion Wealth Transfer is still valid: A Review of Challenges and Questions. The Journal of Gift Planning, 7 (1), pp. 11-15, 47-50.

[3] “Sustainable Signals: New Data from the Individual Investor,” Morgan Stanley Insitute for Sustainable Investing, August 2017. (https://www.morganstanley.com/pub/content/dam/msdotcom/ideas/sustainable-signals/pdf/Sustainable_Signals_Whitepaper.pdf)

With an emphasis on business, Jane Nelson presents in the two following paper the role of the private sector in development and proposes various ways to scale up the collaboration between these actors and official donors.

Catalyzing Development: A New Vision for Aid

The Private Sector and Aid Effectiveness: Toward New Models of Engagement »

Private development assistance (PDA) is quietly revolutionizing international development. This paper will examine this phenomenon as well as the potential benefits and drawbacks of increased private assistance in international development. Private financial flows from developed to developing countries began to eclipse official development flows in the mid-1990s. New aid commitments during the Monterrey, Gleneagles, and Doha summits steadily increased official development assistance (ODA) throughout the past decade but have been outpaced globally by private investment, private philanthropy, and remittances.
These combined private financial flows now exceed ODA from the United States. After five decades of debating why ODA has seen only limited developmental success, the increase in private financial flows is buoying optimism that new private actors, public-private partnerships, and more unrestricted funding may spur innovation, leading to new ways to better the welfare of the poor around the world

Private resources by far comprise the majority of dollars now flowing into developing countries from external sources. Overall, aggregate foreign direct investment (FDI) is more than triple overall remittances sent from family members and more than double official development assistance (ODA). Private philanthropy and other forms of charitable donations are also accelerating in growth and nearing the scale of government aid.

At the same time, there has been a far more dramatic increase in the scale of domestic resources in developing countries. In absolute amounts, the total has increased from $1.5 trillion in 2000 to more than $7 trillion in 2011.2 Developing countries not only have access to more of the world’s capital—as well as additional types of capital and financing mechanisms—they also have more of their own resources to match.

This is good news. Countries are responsible for their own economic and social development, and the mobilization of domestic resources lies at the core of this mission. As a country develops, its mix of external funding sources diversifies, with short- and long-term loans and portfolio equity

matching the scale of foreign direct investment and significantly outpacing remittances and development assistance (Figure 1). The combined scale of external investment and increased domestic resources offers great promise for stimulating the inclusive and broad-based economic growth that historically has been the surest path to reducing extreme poverty.

Tony Pipa is USAID’s Chief Strategy Officer in the Bureau for Policy, Planning and Learning (PPL). He works with the Administrator and the Agency’s senior leadership to improve Agency-wide strategic planning, coordination, and management for results, helping to identify, prioritize, and address key challenges related to U.S. development priorities.

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Sam Worthington is chief executive officer of InterAction, the largest U.S. alliance of nongovernmental international organizations, with more than 220 members and partners. Sam leads the U.S. NGO sector’s engagement at the highest levels with the UN, governments, and civil society groups around the world. He has testified before the U.S. Congress, routinely consults with the administration, speaks to boards and at universities, and is a regular contributor on numerous major national and international media outlets.

With a focus on international nonprofit organizations, Samuel A. Worthington (InterAction) and Tony Pipa (independent consultant) analyze the relationship between official aid and private development assistance, suggesting that the role of civil society must evolve as part of the international dialogue on aid effectiveness.

International NGOs and Foundations: Essential Partners in Creating an Effective Architecture for Aid

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