IFC’s Blended Finance Department: Combining Public and Private Finance to Invest in Challenging Markets
What can be done to further encourage private investment in developing countries, especially the poorest and most fragile? This question is at the heart of the development challenge today.
Governments and development institutions recognize that the private sector is essential to ending extreme poverty. But getting investors to enter these markets has never been easy, despite continued progress in improving countries’ overall investment environment. The COVID-19 crisis has only increased the real and perceived risks of doing business in developing countries. But it is more important than ever to support and develop a vibrant private sector that preserves and creates jobs and provides essential goods and services.
One approach has emerged that could help make a difference: the blending of concessional funds from development partners with commercial investment funds from private sources. Blended concessional finance has proven effective in encouraging private investment in difficult markets, helping to create and sustain markets, introducing new technologies and accelerating economic development.
Concessional blended finance can help cushion contextual risks that would otherwise make investing impossible or unaffordable, even when the underlying business proposition is strong. Or to target financing on projects with positive spin-offs, for example precursors in a market that is costly to develop but which makes it easier for future investors. Or to inspire investors to overcome misconceptions or outdated behaviors that have held back, for example, funding for women entrepreneurs.
IFC has deployed and refined this tool for nearly two decades, with a total of $1.6 billion in concessional funds used to support 266 high-impact projects in 2010-20, mostly in the poorest countries. Growth has been substantial, with commitments reaching nearly $500 million in FY2020. The results have been promising: donor funds have leveraged $6.1 billion in IFC financing and more than $7.1 billion in investment from private sources.
Blended concessional finance has been successfully deployed across all sectors and regions. For example, through IFC’s Small Loans Guarantee Program, IFC and the IDA Private Sector Window (PSW) invest in a Mortgage refinancing based in Togo company to increase access to housing finance and strengthen local capital markets. In Afghanistan, IFC and IDA PSW are supporting a power generation project that will help the country meet its enormous energy needs. In Malawi, the Global Agriculture and Food Security Program (GAFSP) Private Sector Window and IFC are helping farmers tap into the global demand for macadamia nuts. In Pakistan, the Women Enterpreneurs Finance Initiative (We-Fi) is supporting IFC’s investment in Sarmayacar, a fund that provides seed funding and training to start-ups in Pakistan – with a focus on women-led startups high impact women. In Uzbekistanthe Canada-IFC Blended Climate Finance Program is helping bring an additional 100 megawatts of solar power to the grid.
While many low-income markets remain below investment grade, blended concessional finance is one of the tools that help achieve the 2030 Sustainable Development Goals, especially those related to employment, growth and poverty reduction. Blended finance is also being used to provide rapid liquidity support and help preserve jobs for businesses struggling due to the COVID-19 crisis. Several such programs have been launched by development finance institutions in response to the pandemic, particularly in the most risky markets.
However, the effective use of blended concessional finance requires relatively new knowledge and experience for governments and development practitioners, in part because of the complexity of combining public and commercial funds. When poorly targeted, it can be wasteful at best and distort or destroy markets at worst.
A clear diagnosis and rationale is essential to ensure that the only activities supported are those that deliver significant development benefits and would not occur without the use of concessional blended finance. In addition, these investments must show a clear path to sustainable commercial financing without subsidies. Good governance is also paramount: there must be transparency around the use of public funds, processes that address potential conflicts of interest, and the separation of operational decisions and decision makers from those on concessional blended finance.
Along with other development finance institutions (DFIs), IFC has been at the forefront of setting and maintaining high standards in blended concessional finance. In 2017, an IFC-led working group developed a set of Strengthened principles for the use of concessional finance in private sector investment operations.
Recognizing that transparency is essential, IFC informs development partners, its Board of Directors and the public about the key parameters of concessional transactions. Public documents disclose the proposed use of blended concessional finance on a transaction-by-transaction basis, the instruments to be used, the estimated amount of financing, the rationale for deploying concessional finance, the expected development impact and the estimated grant in percentage of total project costs (for projects commissioned after October 1, 2019). A revamped IFC project website provides easy access to this information for all IFC blended finance transactions. The website shares this information for all IFC blended concessional finance transactions (see below for how to access these projects).
To avoid a race to the bottom, where concessional resources are used not to de-risk highly development-oriented projects that otherwise would not happen, but only to benefit the investor, we must continue to strive to improve governance, coordination, transparency, and the use of minimal concessionality.
IFC recently published a report as a practitioner’s guide that summarizes its experience with blended concessional finance. It highlights best practices for articulating the rationale for using blended concessional finance; examines approaches for strong transparency, access and governance; explains how to expand the reach of private sector projects in low-income countries; and discusses recent financing innovations such as repayable capital contributions. The report, Using Blended Concessional Finance to Invest in Difficult Markets – Economic Considerations, Transparency, Governance and Lessons from Experience, covers these topics in depth and provides a practical introduction to the key elements of this tool. Click here to see the full report.
Other useful resources:
Joint Report of the DFI Working Group on Blended Concessional Finance for Private Sector Projects (December 2020 Update)
IFC blended finance website
EM 72 compass note: Mixed concessional financing: the rise of repayable capital contributions
EM 66 Compass Rating: Blended concessional finance: governance matters for impact
Note EM 60 compass: Blended Concessional Finance: Increasing Private Investment in Low-Income Countries
To access detailed information on all of IFC’s blended finance projects, visit IFC Project Information and Data Portal and click “Blended Finance” on the left side of the screen under Refine by. Click All to view all blended finance projects or select by institution (e.g. GAFSP TF).
About IFC’s Blended Finance Unit
IFC’s Blended Finance Unit blends funds from donor partners with IFC’s equity to catalyze investments that otherwise would not occur due to market barriers. These funds can be used to undertake high-risk, high-reward projects that have high potential to improve lives and reduce poverty. From fiscal year 2010 to 2020, IFC deployed $1.6 billion in concessional donor funds to support 266 high-impact projects in more than 50 countries, leveraging $5.8 billion in financing from IFC and more than $6.8 billion from third parties.
About the Author
Kruskaia Sierra-Escalante is Acting Director/Senior Manager in IFC’s Blended Finance Department and responsible for managing a suite of contributor funds of over $5 billion focused on accelerating IFC’s engagement in areas of greatest development impact: IDA and FCS countries, climate, infrastructure, gender, SMEs and agriculture. Since 2013, Kruskaia has managed IFC’s blended climate finance facilities with over $1 billion in contributions from bilateral and multilateral donors for climate-smart co-investments in IFC projects. During this period, IFC’s blended climate finance portfolio doubled in size and helped IFC enter riskier markets. It also manages IDA’s private sector window, established in 2017 to support private sector development, growth and job creation in some of the world’s least developed countries. Prior to her current role, she led the Blended Finance Unit, a governance unit with credit review, quality assurance and knowledge sharing functions and served as IFC’s Global Senior Climate Advisor. and blended finance at IFC.
Kruskaia holds a master’s degree in public affairs, with a concentration in economics and public policy, from Princeton University’s Woodrow Wilson School, and a JD from New York University School of Law. Prior to joining IFC in 2003, Kruskaia was with Chadbourne & Parke, LLP, working primarily in project finance in the energy sector.
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