In order to help the world address social and environmental concerns, such as eradicating poverty and hunger, combating climate change, and ensuring that everyone has access to clean water and electricity, the United Nations established 17 Sustainable Development Goals (SDGs) in 2012. The UN urged nations to accomplish the SDGs by 2030, but investment in underdeveloped regions is insufficient to meet this goal.
Some have claimed that blended financing could assist attract funds to development projects to overcome the gap since traditional private and public means of funding have proven insufficient.
Blended finance: what is it?
In order to finance development initiatives, a strategy known as “blended finance” combines an initial investment, frequently from a charity or governmental organization, with a future commercial investment.
This first investment, often known as a concessional investment, assumes a sizable portion of the project’s risk. First-loss capital, a grant, a government guarantee, or a subsidy are all examples of initial finance. Its goal is to launch the project, even if that necessitates taking on excessive risk or receiving below-market returns. Investors seeking market-rate returns with lesser risk are more likely to be drawn to the project once the concessional funding has mostly eliminated the risk, which is frequently owing to regulatory limitations.
For instance, the government of Jordan contributed public funding and the Millennium Challenge Corporation gave a grant to finance the construction of Jordan’s As-Samra Wastewater Treatment Plant to solve water scarcity in Amman and Zarqa. The project attracted private investors as a result of the concessionary finance, and a private operator was given the funding for the expansion through commercial debt.
By using blended finance, governments and development organizations are able to address market inefficiencies without being forced to finance all of their initiatives with public money.
Why blend finances?
This tactic has the benefit of attracting funding to underdeveloped regions. It helps to understand why many investors pass over development projects without blended finance instruments because more than three-quarters of investments in lower-income regions are below investment grade. By using blended finance, governments and development organizations are able to address market inefficiencies without being forced to finance all of their initiatives with public money. Additionally, these deals can demonstrate the viability of development initiatives and assist highlight prospects in underdeveloped areas.
However, there are certain problems with this strategy. A potential investor must confirm that initiatives can be expanded and made commercially successful. Only 43 out of 117 blended finance projects analyzed had more than half the money coming from private sources. This implies that this strategy could not be utilizing as much private cash as is required for long-term, sustainable investing. It has also been suggested that if blended finance is used for projects that don’t require concessional investments to draw investors, it could displace other forms of funding.