• Blog
  • 10 January 2017

Effective development aid through blended finance? Proceed with care

The concept of 'blended finance' is becoming increasingly popular in the humanitarian sector. This post explains what it is and what it could be.

Written by Cordelia Lonsdale

This blog was originally published by Oxfam International on 5 January 2017.

These days when the development community talks about aid effectiveness, using aid to increase private sector investments isn’t far from their thoughts. The recent discussions at the second High-Level Meeting of the Global Partnership for Effective Development Cooperation (GPEDC) in November were no different. The GPEDC is the premier forum for the development community: providers of development cooperation, partner countries, civil society, the private sector and more, and at the High-Level Meeting they all came together to discuss and agree on how to improve development cooperation to end poverty and deliver the Sustainable Development Goals (SDGs).

At the meeting, ‘blended finance’ was a hot topic.  Donors have been turning increasingly toward blending private finance with development assistance, though many are not convinced that this is the best use of public funds for development. There’s no doubt that challenges exist in ensuring blended finance is delivered in line with development effectiveness principles like country ownership, focus on results, inclusivity, transparency and mutual accountability.

The opportunity was ripe for a high-level conversation on the topic. So Oxfam International, the UK Aid Network and Development Initiatives seized the opportunity with a side event to share recent studies and move the conversation forward.

Financing sustainable development

What was clear from the discussion, and from research about blending, is that there is no consensus about the value of blending official development assistance (ODA) with private sector investments for development impact. On the one hand, everyone realises the importance of needing to fill the financing gap and recognises the value of mobilising private resources to achieve the SDGs. On the other, there is little evidence allowing stakeholders to understand the opportunities and risks involved in blending, which has hampered policy dialogue.

We hosted a side event at the Nairobi meeting to promote ideas and solutions to move forward, encourage mutual understanding between stakeholders, and inform the GPEDC community – particularly partner countries – on the ways blended finance might impact on the development landscape. DI’s Executive Director, Harpinder Collacott, chaired the eminent panel, which was made up of a diverse array of stakeholders.

How to make blended finance more effective

Event participants, both blended finance critics and champions alike, agreed that there is a need to make blended finance more effective. They also agreed that this can only happen if all stakeholders – including those observing from the outside like civil society – continue to discuss ways to strengthen the poverty alleviating effects of blended finance. Here are four key takeaways and next steps:

1. Blending may have value as one of several tools in the toolbox for financing the SDGs, particularly in specific country contexts and/or sectors but more could be done to ensure blended finance benefits people living in poverty. Panellists and participants from Africa, Latin America and South Asia shared examples of blended finance delivering results; mainly in the infrastructure, energy and climate sectors. It was also noted that ODA and “Other Official Flows” have been used in a variety of blended finance mechanisms that work differently, and can be tailored to various contexts and needs.

2. Partner countries can utilize blended finance strategically for development alongside broader efforts to use aid to support and catalyse private sector investment – such as strengthening the environment for investment. There may be a place for both uses of aid. That said, more information is needed to ensure official resources are only used when private resources alone are truly insufficient, also known as proving additionality.

3. We need to be cautious and safeguard against risks, especially to poor households. Strong governance and oversight is needed from partner country governments to ensure that private partners have positive impacts on development, as governments have primary responsibility for ensuring that benefits from private sector growth impact positively on the poorest people. Donors need to improve safeguards and provide greater transparency to ensure that private investments are accountable to communities and don’t harm livelihoods or the environment.

4. More work is needed to develop definitions, guidelines, policies, and impact and results frameworks for blended finance. The work that donors of the OECD Development Assistance Committee (DAC) are doing in this area needs to include a wider range of stakeholders. The GPEDC should work to bring its experience and knowledge to inform blended finance providers and policymakers about development effectiveness and enhancing sustainability and impact on poverty reduction.

The High-Level Meeting in Nairobi provided a great opportunity to orient blended finance more meaningfully toward poverty reduction. The meeting’s Outcome Document pushes stakeholders to improve how blended resources are used, calling on stakeholders to “set clear effectiveness commitments” for development cooperation aimed at leveraging private investment. And these commitments will be captured and monitored through the GPEDC monitoring framework to ensure follow-through. In addition, engagement with OECD DAC discussions on reforming ODA to include private sector instruments and upcoming effectiveness policy debates – such as the 2017 Financing for Development Forum – are important technical next steps.

The entry was posted by Cordelia Lonsdale (@Claudie_L), Policy and Engagement Advisor, Development Initiatives, and Julie Seghers (@JulieSeghers), Oxfam’s Advocacy Advisor on Aid and Development Finance, on 5 January 2017.

Read the full write-up of the event and more information on blended finance.