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”. 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, 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. 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:
- Enterprise Philanthropy;
- Institutional Investors;
- Personal Financing;
- Impact Investing;
- Grants, and
- 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.
‘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.
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. With an unprecedented $40 trillion poised to move inter-generationally from “baby boomers” to “Millennials” worldwide, the pool of impact investment dollars is likely to grow substantially in the coming decades.
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.
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. 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.
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.