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  • 10 October 2018

Is using ODA for blending a good use of scarce concessional resources?

Blended finance is dominating international development financing discourse. This blog breaks down the possibilities and limits to this financial resource.

Cecilia Caio profile picture

Written by Cecilia Caio

Senior Analyst

Blended finance is dominating international development financing discourse. Discussions at almost every conference relating to development seem to cover the potential of using development finance, including ODA, to mobilise additional commercial financing for development. This week’s World Bank and IMF Annual Meetings are no exception.

It’s an important discussion to have. The unprecedented ambition of the 2030 Agenda will be difficult, if not impossible, to achieve unless all actors play a part and the development impact of all resources is maximised. However, such close focus risks pushing important issues out of the spotlight, such as how traditional forms of development cooperation are being used in key social sectors – this remains crucial if we are to ensure no one is left behind.

Development Initiatives’ third Investments to End Poverty report sets out the financing challenge to leave no one behind. It shows clearly the continued value of ODA as a unique resource that can be directed to the poorest and most vulnerable people and countries, and to key sectors such as health, education and social protection. These are sectors that other forms of finance – including private finance mobilised via blending – tend to bypass.

We have a big funding gap to fill if we’re to achieve the SDGs, and we need to close it in the right way because ending poverty and ensuring sustainable development is about much more than volumes of finance. Public and private financing are not substitutes for one another. SDG 1 and SDG 10 commit us to reach the poorest first, yet we know that private finance mobilised via blending – based on use and distribution to date – will not do this.

Blending certainly has a role to play in funding the Sustainable Development Goals (SDGs), and private-sector actors, if anything, need to step up to meet these critical responsibilities. Their contributions must be increasingly leveraged, and so a focus in this area is appropriate; however, if we’re serious about leaving no one behind in the run up to 2030, there must be a much more balanced debate on how we apportion scarce concessional finance resources. The way aid can be spent effectively will change in different settings and over time, and in some contexts, using it to support blended finance interventions could prove to be a ‘good use’ of ODA. For now, there is no way to say this with certainty.

The OECD is leading efforts to ensure that shared values and high standards are applied throughout the financing process where blending is involved. Progress is being made on important aspects, including effectiveness and transparency. More remains to be done if we want to be sure that allocating scarce concessional resources to blended finance deals is not drawing resources away from other types of interventions that we know can be effective at meeting the needs of the poorest people.

For making good decisions about using ODA in blending we need:

  • More evidence on the impact of blended finance on the poorest people including the channels through which it can impact the poorest people, the conditions that need to be in place for blending to have a positive impact on them, and how blending can be implemented alongside more systemic investments to create an enabling environment for domestic private sector development to thrive
  • More evidence on how blended finance can serve nationally identified sustainable development priorities, and more broadly, national ownership including who benefits from blended finance investments, what the effect is on domestic private-sector development, and how commercial investments mobilised via blending are contributing to domestic revenue mobilisation
  • More and better data and transparency on blended finance including risk profiles of blended finance deals (needed to attract more investors), and also on the volumes of ODA being spent in blending, and who benefits (key for strengthening accountability on who these investments are serving)

Today and tomorrow, on the margins of the Annual Meetings, stakeholders at the Tri Hita Karana Forum are discussing, among other things, the adoption of a common roadmap for turning shared values for effective blended finance into action.

The OECD Blended Finance Principles, which this roadmap draws on, cover some of the considerations raised above. Success will lie in how well the roadmap is implemented, and how well the map and the principles meet those critical impact, ownership and transparency needs. And this is especially important where scarce ODA resources are being used.