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  • 6 November 2017

New principles for DAC donors on blended finance

DI's Cornelia Lonsdale reviews the OECD DAC's new guidance on blended finance for development - including what they got right, and what should happen next.

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Written by Cordelia Lonsdale

But who will monitor whether they deliver, and how?

At its High Level Meeting last week, the OECD Development Assistance Committee (DAC) adopted a new set of principles (Annex 1 in their communiqué), providing high-level policy guidance on the use of blended finance for development. The principles were developed with the inputs of a multi-stakeholder senior advisory group set up by the OECD, in which I took part. Here I’ll share some thoughts on what the principles get right – and what should happen next.

The five principles are:

  1. Anchor blended finance use to a development rationale
  2. Design blended finance to increase the mobilisation of commercial finance
  3. Tailor blended finance to local context
  4. Focus on effective partnering for blended finance
  5. Monitor blended finance for transparency and results.

A preface in a separate OECD document defines blended finance as “the strategic use of development finance for the mobilisation of additional finance towards the SDGs in developing countries”, with ‘additional finance’ referring primarily to commercial finance. The Annex of the October communiqué gives the outline of each principle, followed by a short rationale, and then a few sentences on the ‘how’.

What’s good?

Well, we now have policy principles: this is fairly significant in itself. When we started work on blended finance in late 2015, donors rarely had blended finance policies or strategies – at least, not public ones. (Also, until recently, they had been unable to count much aid to the private sector, including ‘blended finance’, as ODA – a situation that has also just changed, as my colleague Rob Tew explains.)

Principle 5, “Monitor blended finance for transparency and results”, is the one I’m happiest about, and the one I least expected to see in the principles. Many are cautious about transparency in blending, because the involvement of private-sector investors may raise issues around commercial confidentiality. Better yet, this principle also has a subsection calling for actors to “Ensure public transparency and accountability on blended finance operations”. Now, to ensure transparency and accountability, clarification is needed on which actor is responsible for publishing which data, in what formats, and to which stakeholders. There should also be a discussion around existing reporting frameworks used by DAC donors, such as DAC statistics and the IATI Standard – donors could commit to dialogue on shaping these specifically to enhance transparency in blending. DAC statistics and IATI have complementary roles to play in getting better data on blended finance out there: DAC statistics as the most comprehensive official source of donors’ aid activities, coupled with IATI’s ability to record data on individual transactions and track the passing of funds through the hands of multiple actors. There’s an opportunity for progress, and those DAC donors engaged in IATI could play a crucial role in driving this.

What could be better?

Let’s talk about the OECD’s definition of blended finance I mentioned earlier, a definition the senior advisory group couldn’t easily agree on. Some donors feel that ‘blended finance’ describes the use of concessional public resources to leverage less-concessional public resources, for example, an EU grant ‘blended’ with an EU loan. Others (it might be fair to say most)[1] see blended finance as the use of development finance (often ODA) to de-risk or otherwise ‘leverage’ commercial resources.

The compromise the OECD has ended up with seems to capture both, but also somehow neither. This isn’t ideal: donors are likely to scale up private-sector instruments rapidly, now they can report them as ODA, but the risks in using ODA for engaging the private sector in development through blending need careful navigation – the development community needs to ensure the most is made of this opportunity, but that the approach is responsible.

The act of ‘blending’ two types of public development resource is very different from leveraging investments from a commercial bank into a development project – and the principles appropriate to one scenario would likely be rather different from principles relevant to the other. Hopefully, now the meeting is over, the DAC can take swift steps towards more specific policy guidance for ODA–private blending.

We need the OECD to clarify quickly how and when detailed policy guidance will be developed to support these principles, which – while perfectly fine – are also quite generic and top line. They’re hard to be offended by (which is good as far as facilitating further dialogue goes) but is also a drawback in terms of supporting donors in implementation. For example, Principle 1, the ‘development principle’, is not clear to what extent the various actors – donors, private investors or investees – are responsible for delivering positive development impacts, or how to mitigate risks such investments may pose to poor and vulnerable people and communities. It doesn’t mention how to assess the comparative advantages of using ODA for blended finance over and above other kinds of development intervention in specific contexts, sectors, etc – an assessment that should be used to justify this use of aid. The policy guidance should address this, drawing on expertise of DAC members.

Finally, my biggest concern. At the High Level Meeting, the DAC was apparently not in a position to commit to systematic monitoring of blended finance (for example, in peer reviews) – despite committing as a membership to drive it forward. The principles seem to leave monitoring up to the individual providers. As our report last year highlighted, monitoring blending and getting better evidence on its impacts is critical. The communiqué states that the DAC sees “significant potential for blended finance to mobilise private investments towards sustainable development”. Hopefully, the DAC will be able to propose a more concrete role for itself in due course, as it’s well placed to monitor whether or not this potential is actually being realised – and whether the principles are being upheld by its members.

For more information about ODA modernisation, you can watch our animation and read our background paper

Image: Asian Development Bank

Notes

[1] DI reviewed all the existing definitions of blended finance in the annex of our 2015 discussion paper.