What can be done to encourage more private investment in developing countries, especially the poorest and most fragile? This question is today at the heart of the development challenge.
Governments and development institutions recognize that the private sector is essential to end extreme poverty. But getting investors to enter these markets has never been easy, despite continued progress in improving countries’ overall investment environments. The COVID-19 crisis has only increased the real and perceived risks of doing business in developing countries. But it is more important than ever to maintain and develop a vibrant private sector that preserves and creates jobs and provides essential goods and services.
One approach has emerged that could help make a difference: mixing concessional funds from development partners with commercial investment funds from private sources. Blended concessional finance is found to be effective in encouraging private investment in difficult markets, helping to create and maintain markets, introduce new technologies, and accelerate economic development.
Blended concessional finance can help cushion contextual risks that would otherwise make investment impossible or unaffordable, even when the underlying business proposition is strong. Or to target financing on projects with positive spinoffs, for example the first entrants in a market which is expensive to develop but which makes it easier for future investors. Or to push investors to overcome the misperceptions or obsolete behaviors that have held back, for example, the financing of women entrepreneurs.
IFC has deployed and refined this tool for nearly two decades, with a total of $ 1.6 billion in concessional funds used to support 266 high-impact projects during the period 2010-2020, mainly in the poorest countries. . Growth has been substantial, with pledges reaching nearly $ 500 million in FY2020. The results are promising: Donor funds have mobilized $ 6.1 billion in IFC funding and more than $ 7 billion. , $ 1 billion in investments from private sources.
Blended concessional finance has been successfully deployed in all sectors and regions. For example, under IFC’s small loan guarantee program, IFC and the IDA Private Sector Window (PSW) invest in a Mortgage refinancing in Togo to increase access to housing finance and strengthen local capital markets. In Afghanistan, IFC and IDA PSW are supporting a power generation project that will help the country meet its vast energy needs. In Malawi, the Global Agriculture and Food Security Program (GAFSP) private sector window and IFC are helping farmers capitalize on global demand for macadamia nuts. In Pakistan, the Women Enterpreneurs Finance Initiative (We-Fi) supports IFC’s investment in Sarmayacar, a fund that provides start-up financing and training to start-ups in Pakistan, with a focus on run start-ups by women with high impact. In Uzbekistan, the Canada-IFC joint climate finance program helps bring an additional 100 megawatts of solar power to the grid.
While many low-income markets remain below the investment grade, concessional blended finance is one of the tools that helps achieve the 2030 Sustainable Development Goals, especially those related to employment, to growth and poverty reduction. Blended finance is also being used to provide rapid liquidity support and help preserve jobs for businesses struggling due to the COVID-19 crisis. Several of these programs were launched by development finance institutions in response to the pandemic, especially in the most risky markets.
However, the effective use of concessional blended finance requires relatively new knowledge and experience for governments and development practitioners, in part because of the complexity of combining public and commercial funds. When poorly targeted, it can be wasteful at best and distort or destroy markets at worst.
A clear diagnosis and rationale is essential to ensure that the only activities supported are those that offer significant development benefits and that would not take place without the use of concessional blended finance. In addition, these investments must show a clear path to sustainable trade finance without subsidies. Good governance is also paramount: there must be transparency regarding the use of public funds, the processes that deal with potential conflicts of interest, and the separation of operational decisions and decision-makers from those on concessional blended finance.
Along with other development finance institutions (DFIs), IFC has been at the forefront of developing and maintaining high standards in concessional blended finance. In 2017, an IFC-led task force developed a set of Strengthened Principles for the Use of Concessional Finance in Private Sector Investment Operations.
Recognizing that transparency is essential, IFC educates development partners, its Board of Directors and the public on key parameters of concessional transactions. The public documents disclose the proposed use of blended concessional finance on a transaction-to-transaction basis, the instruments to be used, the estimated amount of financing, the rationale for deploying the concessional finance, the expected development impact and the estimated subsidy in percentage of total project costs (for projects mandated after October 1, 2019). A revamped IFC project website provides easy access to this information for all IFC blended finance transactions. The website shares this information for all IFC Blended Concessional Finance transactions (please see below for how to access these projects).
To avoid a race to the bottom, where concessional resources are used not to reduce the risks of highly structuring projects that would not otherwise occur, but only for the benefit of the investor, we must continue to strive to improve governance, coordination, transparency, and the use of minimum concessionality.
IFC recently released a report as a practitioner’s guide that summarizes its experience with blended concessional finance. It highlights best practices for articulating the rationale for using concessional blended finance; examines approaches for strong transparency, access and governance; explains how to extend the reach of private sector projects in low income countries; and discusses recent innovations in financing such as repayable capital contributions. The report, Using Blended Concessional Finance to Invest in Difficult Markets – Economic Considerations, Transparency, Governance and Lessons of Experience, covers these topics in depth and provides a practical introduction to the key elements of this tool. Click here to view the full report.
Other useful resources:
EM Note 72 Compass: Blended concessional financing: increasing repayable capital contributions
EM Note 66 compass: Blended concessional financing: governance matters for impact
For detailed information on all of IFC’s blended finance projects, visit IFC Project Information and Data Portal and click on “Blended Finance” on the left side of the screen under Refine By. Click on All to display all blended funding projects or select them by institution (for example, GAFSP TF).
About IFC’s Blended Finance Unit
IFC’s blended finance unit blends donor partner funds with those of IFC to catalyze investments that would not otherwise occur due to market barriers. These funds can be used to undertake high risk, high return projects that have high potential to improve lives and reduce poverty. Between fiscal 2010 and 2020, IFC deployed $ 1.6 billion in concessional donor funds to support 266 high-impact projects in more than 50 countries, leveraging $ 5.8 billion in funding from IFC and over $ 6.8 billion from third parties.
About the Author
Kruskaia Sierra Escalante is Acting Director / Senior Manager in IFC’s Mixed Finance Department and is responsible for managing a pool of over $ 5 billion contribution funds focused on accelerating IFC’s engagement in the areas with the most impact on development: IDA and FCS countries, climate, infrastructure, gender, SMEs and agriculture. Since 2013, Kruskaia has managed IFC’s climate blended finance facility with more than $ 1 billion in contributions from bilateral and multilateral donors for climate-smart co-investments in IFC projects. During this period, IFC’s blended climate finance portfolio doubled in size and helped IFC enter riskier markets. It also manages the IDA Private Sector Window, established in 2017 to support private sector development, growth and job creation in some of the world’s least developed countries. Prior to her current role, she headed the Blended Finance Unit, a governance unit responsible for credit review, quality assurance and knowledge sharing functions, and served as IFC’s Global Senior Advisor for climate and blended finance at IFC.
Kruskaia holds a master’s degree in public affairs, with a concentration in economics and public policy, from the Woodrow Wilson School at Princeton University, and a JD from New York University School of Law. Prior to joining IFC in 2003, Kruskaia was at Chadbourne & Parke, LLP, working primarily in project finance in the power sector.