Development Initiatives
  • Our work
    • Poverty
      • Citizen-generated data
      • The P20 Initiative: data to leave no one behind
    • More on poverty
    • Resources
      • Investments to End Poverty
      • International Aid Transparency Initiative
    • More on resources
    • Data use
      • Data Support Service in Kenya and Uganda
      • Development Data Hub
    • More on data use
    • Humanitarian
      • Global humanitarian assistance report 2018
      • Monitoring the Grand Bargain commitment on transparency
    • More on humanitarian
  • Development Data Hub
  • News
  • Events
  • Blogs
    • Latest data blogs
      • What does new World Bank data tell us about progress on poverty?
      • The needs of Kenyans by county: exploring the latest poverty data
      • The latest trends in UK aid spending on nutrition
      • See latest data blogs
    • Latest comment blogs
      • UN appeals: What does underfunding really mean?
      • How can blended financing help the world’s poorest?
      • Development cooperation for improved data
      • See latest comment blogs
    • Latest innovation blogs
      • Exploring concepts and practices to increase data use: A short learning paper
      • What are the principles of joined-up data?
      • Opinion: The case for metadata
      • See latest innovation blogs
  • Publications
    • Latest publications
      • Underfunded appeals: Understanding the consequences, improving the system
      • Final ODA data for 2017 – persistent trends raise concerns
      • Filling the gaps in current global poverty data estimates
      • See all publications
    • Publication formats
      • Reports
      • Briefings
      • Factsheets
  • Media
    • Media
      • As the experts on data about poverty and resources, we can help journalists with a wide range of reliable statistics and evidence for articles that relate to our areas of work.
    • Latest press releases
      • Launch: Investments to End Poverty 2018
      • What do the 2018/2019 national budget estimates mean for Kenya's poorest households?
      • Development Initiatives named new host of the Global Nutrition Report
      • See all press releases
    • Useful links
      • Briefings
      • Data blog
      • Factsheets
  • About
    • About us
      • Our story
      • Our work
      • Our consultancy services
      • Our team
      • Finances — being transparent
      • Open DI — Publishing to IATI
      • Contact us
    • Working with us
      • Working for us
      • Vacancies
      • Partnerships

Searching Site...

Will blended finance lead to private sector growth in developing countries?

by Cecilia Caio

Apr 18, 2018

Resources

Commentary blogs


Donors are facing increasing pressure to scale up their investments in blended finance in order to mobilise additional commercial finance to plug the funding gap for the Sustainable Development Goals. Clear prominence is being given to the topic at this year’s UN Financing for Development Forum, and it will also feature during the World Bank and IMF Spring Meetings this week and next. However, there are five key elements that are at risk of being neglected in the current debate. These must be tackled if we want blended finance to be an effective addition to the development financing toolkit and to result in sustainable private sector growth in developing countries – without causing unintended diversion of scarce official development assistance (ODA) from interventions we know benefit the poorest and most vulnerable.

  1. Long-term versus short-term solutions

To encourage private sector contributions to sustainable development as envisaged in the Addis Ababa Action Agenda, donors need to support initiatives that address underlying challenges to private sector development. These can range from unfavourable international trade and investment rules, to a weak judicial and regulatory environment at the domestic level, to a shortage of skilled and healthy workforce. Available evidence suggests that blending can offer a short-term fix by leveraging new partners into a new market via individual investment projects. Even then, without the right conditions, it isn’t always even a short-term solution. Ensuring the private sector fulfils its potential in relation to the SDGs requires longer term change at the national (and international) level to create the enabling environment within which the private sector can flourish.

  1. Foreign vs local private sector

The private sector is not a homogenous entity; different types of private sector actors have different incentives and are likely to impact on poverty reduction and broader sustainable development objectives in different ways. When it comes to blending, international donors and the global and regional development finance institutions are mainly partnering with large foreign companies and investors. The risk of this is that local, job-creating private sector partners may, in many cases, end up being crowded out. For example, trade policies that enable the entry of foreign investors into the market may create additional challenges for domestic players. Donors must consider how blending can facilitate local private sector growth and development, as well as funding important projects alongside international commercial actors.

  1. Middle income versus poorest/fragile contexts

Blending requires a supply of impactful and sustainable investment projects. Those that are at a ‘tipping point’ of being profitable in the long-run but that are not perceived as investable in the short run (usually due to factors such as deal size and not being part of recognised asset classes), are the projects that can create new markets and spur additional private investment down the line. However, they’re hard to find – especially in the poorest and most fragile settings. They also require a thorough knowledge of the local context in order to avoid distortion of local markets, and the crowding out of additional investment. Therefore, blending may not be the short-term solution which will bring new private partners into some of the poorest and most fragile countries.

  1. Development effectiveness

In 2016, Development Initiatives published a blog titled The Busan principles and blended finance: time to bridge the divide. It remains important today. While calls to scale up blended finance have since intensified, the same is not true for the need to ensure that ODA used in blending adheres to the development effectiveness principles. Donors are increasingly sharing best practice on how to evaluate the development impact of blended finance projects but too little emphasis is placed on the need to ensure country ownership, transparency and accountability, a focus on results, and inclusive partnerships in blending.

  1. Policy coherence

The world has changed and we cannot look at scaling up blending without also considering global trade regulations, international tax rules and financial markets. All these areas are connected and cannot be approached in isolation from the others. The aim must surely be to encourage the development of private sector at the domestic level and open up new financial flows to some of the poorest countries in the world. Blending alone cannot achieve this but used within a coherent approach to local private sector development, we could see a transformation in the impact of international public finance on this area.

Author

Cecilia Caio

Senior Analyst

Latest articles

From Resources

How can blended financing help the world’s poorest?

Final ODA data for 2017 – persistent trends raise concerns

Enhancing access to safe water and improved sanitation services in Kenya

Strengthening subnational government own-source revenue mobilisation in Kenya

Launch: Investments to End Poverty 2018

Investments to end poverty 2018

Related topics

  • blended finance 13
  • Development finance and aid (ODA) 137
  • private finance 3
  • private funding 4
  • Private sector instruments 2
See all topics

Sections

Data blog Publications Events Working with us

Quick links

Contact us Topics Our consultancy services Open DI — publishing to IATI

Newsletter

Sign up for the Development Initiatives newsletter to receive regular news and updates from DI.

Creative Commons

This site's content is licensed under a Creative Commons Attribution 4.0 International license.

© Development Initiatives 2018. Development Initiatives is the trading name of Development Initiatives Poverty Research Ltd, registered in England and Wales, Company No. 06368740;
DI International Ltd, registered in England and Wales, Company No. 5802543, Registered Address: North Quay House, Quay Side, Temple Back, Bristol, BS1 6FL, UK; and Development Initiatives Poverty Research America Inc. (a 501(C)3 company registered in the state of Delaware with the registration number 5737757), Registered Address: 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. View our privacy policy. View our Modern slavery and human trafficking statement.