PHM-Exch> 'Blended Financing' Not an SDGs Financing Silver Bullet

[Claudio Schuftan]

From: Jomo <jomoks at yahoo.com>

Jomo Kwame Sundaram, Anis Chowdhury

SYDNEY & KUALA LUMPUR, Apr 30 (IPS)  - After largely failing to provide 0.7
per cent of their Gross National Income (GNI) in aid to developing
countries for almost half a century since making the commitment, donor
countries have recently promoted blended finance (BF) as a solution to the
financing for development challenge. Blending refers to combining public
development funds (in the form of grants, technical assistance or interest
indemnification) with loans from private lenders.

Following adoption of Agenda 2030 for the Sustainable Development Goals
(SDGs), the OECD and the World Economic Forum (WEF) claimed that "blended
finance represents an opportunity to drive significant new capital flows
into high-impact sectors, while effectively leveraging private sector
expertise in identifying and executing development investment strategies".

Potential and progress
The OECD and WEF launched the multi-year ReDesigning Development Finance
Initiative (RDFI) in 2013 to promote public-private cooperation for
sustainable development. The RDFI defines BF as "the strategic use of
development finance and philanthropic funds to mobilize private capital
flows to emerging and frontier markets".

The RDFI promoted BF at the Third International Conference on Financing for
Development (FfD3) in Addis Ababa in July 2015. A BF pioneer claimed BF had
been effective in targeted development interventions and would complement
traditional overseas development aid (ODA) such as grants.

The European Council endorsed BF as a tool of development cooperation in
2014, with other donors following suit. Multilateral development banks
(MDBs) have enthusiastically embraced BF, issuing From Billions to
Trillions: Transforming Development Finance, which claimed that it ensures
"the best possible use of each grant dollar". The Canadian minister of
international development echoed this in Turning billions into trillions:
The power of blended finance.

In a 2017 report, the OECD argued that BF can help bridge the US$2.5
trillion annual investment gap for SDGs in developing countries. The
European Union (EU), the single largest promoter of BF, has made the
European Fund for Sustainable Development key to its External Investment
Plan (EIP) to address investment gaps in 18 countries of Southeastern
Europe, Central and West Asia, and Africa, with a budget of €2.6 billion
and guarantees of €1.5 billion.

According to the 2018 Inter-Agency Task Force (IATF) report on Financing
for Development, 17 of 23 DAC members are engaged in BF, often through
intermediaries such as development banks and finance institutions. It also
noted that 167 new blended finance facilities, with approximately US$31
billion in commitments, and 189 blended finance funds were launched during
2000-2016.

A 2016 OECD survey found US$81.1 billion from the private sector mobilized
through five instruments (guarantees, syndicated loans, credit lines,
direct investments in companies, and shares in collective investment
vehicles) during 2012-2015.

What's the catch?
The IATF Report noted the lack of a universally agreed definition of BF,
while a 2017 OXFAM-EURODAD report listed six different definitions. All
accept ODA (e.g., grants), but other non-ODA official finance (e.g., export
credit) are also included. Confusingly, terms such as ‘leveraging',
‘mobilizing' and ‘catalyzing' are used interchangeably.

Thus, monitoring BF's actual magnitude and development impact is difficult.
BF often lacks transparency and accountability, with insufficient
information made public. Noting the confusion, OXFAM-EURODAD argued that BF
can be problematic: it is not necessarily pro-poor and mainly serves
middle-income countries.

Like others, they also found donor country private corporations favoured,
as with tied aid. When relying on external private finance, BF often
crowded out host country financial sectors. Furthermore, BF projects may
not be aligned with national plans, and usually do not involve stakeholder
participation, undermining country ownership. An evaluation of the EU's EIP
found no reliable evidence of BF mechanisms actually aligned with and
contributing to development objectives.

Worsening inequality
The IATF found BF has largely bypassed LDCs so far. ¬In 2016, the MDBs
mobilized US$49.9 billion in private co-financing, with only US$1 billion
going to LDCs, where infrastructure gaps are greatest. An OECD survey found
that only 7 per cent of private finance was for projects in LDCs. According
to the 2017 OECD report, between 2012 and 2015, most private financing
mobilized by ODA was for middle income countries, with little trickling to
LDCs. It also noted that private capital was greatest for finance and
energy.

The IATF also observed that BF tends to target investment areas where the
business case is clearer—such as energy, growth, infrastructure, climate
action and, to a lesser extent, water and sanitation. BF is much smaller
for areas such as ecosystems, reflecting such investments' strong ‘public
good' character, with public finance generally more effective.

OXFAM-EURODAD noted that by pooling public resources and using ODA to
subsidize private companies usually owned and domiciled in OECD countries,
BF diverts aid from social programmes and essential services. Clearly,
private finance is not guided by the same interests and principles as
public finance, and cannot be presumed to serve the public interest.

Labelling BF a ‘honey trap', The Economist noted, "Private investors do not
typically fund the construction of rural roads in Africa, say, or
vaccination drives in villages, even though the returns on such investments
are often enormous. That is because the returns are either hard to
monetize, or the risks are too great for the private sector to tolerate."

It is unclear how public development funds, channelled through risky
commercial financial services, will effectively mobilize private resources
for sustainable development. There is no evidence that current BF practices
are achieving development outcomes that would not have happened otherwise.
After all, existing BF mechanisms do not safeguard the public interest and
achieve development objectives.

The IATF report noted limited evidence of any additional development impact
due to BF. Many BF projects do not monitor development impacts, while the
few evaluations made are rarely publicly available. The limited evidence
available suggests a modest impact on poverty.

Going forward
ODA nevertheless remains crucial for low-income countries. Private finances
cannot achieve what public finances can, especially for social development
and environmental protection. Public finance is more predictable and
effective in providing public goods. Despite much enthusiasm for using ODA
or public funds to leverage private finance, many unanswered questions
remain, suggesting BF is no silver bullet.

Caution is needed as the development community ascertains the pros and cons
of using public money to ‘leverage' private finance. First steps would
include a universally acceptable BF definition and a monitoring framework
to ascertain the additionality of alternative BF mechanisms for both
finance and development impacts.

Additionally, BF should respond to recipient country's development
strategies in the spirit of the 2015 Addis Ababa FfD Action Agenda which
recognizes its potential while urging caution.
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