The impact of blended finance: what we don’t know and how to fix it

Around this time last year, in a blog published ahead of the 2018 World Bank and IMF Annual Meetings, we called for more evidence on the impact of blended finance on the poorest people as a key requirement for making good decisions on the allocation of official development assistance (ODA). It’s that time of year again, and with the 2019 Annual Meetings around the corner, we’ve published a discussion paper that takes this call forward by assessing the theory and the practice of how blended finance reaches the poorest. The conclusion is clear: unless the evidence gap on impact is addressed, we risk diluting the role of ODA in achieving the SDGs.

What’s missing in the theory

Tackling the evidence gap on impact – including impact on poverty – doesn’t mean getting lost in definitions and the detail of specific indicators and systems. What it requires, first and foremost, is deeper consideration (both before and after making an investment) of the pathways to impact that blended finance investments have; and ensuring that, especially when ODA is involved, pathways that can positively contribute to the acceleration of progress for the poorest people are prioritised.

Our paper assesses the rationale of twelve actors who use ODA to blend, and finds that they are characterised by several assumptions. Addressing these assumptions would provide a better case for what using ODA to blend can ‘buy’ in terms of poverty reduction, and thus how this way of spending ODA can most effectively complement other approaches, such as direct programming in social sectors and strengthening government institutions. Poverty is a complex phenomenon, and the solution will rely on a wide range of actions – from improving the systems that capture basic information on a country’s population and expanding access to basic services and social protection, as well as decent and stable livelihood opportunities, to promoting fuller political and economic participation in development. Blending can be an important part of the solution but only if we address the assumptions around how its development impact will materialise.

What’s missing in the practice

To address these assumptions, we need to take a closer look at the available data on the anticipated and actual impact of blended finance investments. By examining data published by 56 blended finance actors, our paper finds that there is a clear intent to improve transparency and impact reporting, including in relation to poverty, but the operationalisation of this intent is lagging behind. Critical gaps exist, especially around: the quality of investments; who benefits (and who doesn’t) and over what timeframe; the more systemic effects of blending (and their impact on poverty reduction); and baselines and targets.

Filling these gaps is not straight forward (as recognised, for example, in the key challenges outlined in chapter 9 of this essay series). Yet, having a better picture of who in particular is set to benefit, as well as how and when, will increase the likelihood of ODA being used in investments that can contribute to closing the gap between the poorest people and the rest, by positively impacting the lives of the poorest (even when private finance is involved). Ensuring that we have the necessary information to paint this better picture is thus a matter of urgency, and as our paper seeks to show, it doesn’t have to be an overcomplicated affair.

The priority going forward

The context is ripe for accelerating action on tackling the evidence gap on impact. While emphasis on private finance to achieve the SDGs continues, the fact that private sector involvement will not be the solution to all problems is increasingly acknowledged (see, for example, the recent SDSN report here) and so are concerns around whether using ODA to blend means missing opportunities to invest that same ODA in interventions with proven poverty impact (see, for example, concerns expressed by US Congress in relation to the role of the IDA Private Sector Window).

To move the conversation forward in a pragmatic and timely manner – and ensure that ODA’s contribution toward poverty reduction is maximised, including when it’s spent via blended finance structures – the priority should be to focus on a small number of fundamental questions, applicable across actors and sectors, and how existing reporting standards can be harnessed to facilitate the collection and use of necessary data to answer them.

Our paper puts forward three sets of questions to guide more inclusive and poverty-focused use of ODA. These revolve around the intended and unintended effects that investments, including those made through blended finance structures, have on the poorest and most marginalised people – thus ensuring that their progress remains at the core of ODA’s contribution in the wider development financing landscape. Ultimately, to tackle the evidence gap on impact, we need to incorporate the fundamental purpose of ODA into both allocation and impact assessment criteria.

We look forward to discussing the findings of the paper and the questions that this research throws up, over the coming week and beyond. If you have any comments or feedback, please get in touch. We look forward to hearing from you too!