Private capital falls short in ‘blended finance’



ImpactAlpha, February 5 – In theory, blended finance should leverage limited public financing to “crowd in” many times that amount in private capital. In practice, such leverage has been limited, according to a Dalberg review of 117 such blended financing deals. Overall, each dollar of public funding generated only about 79 cents of private investment.

Among our prescriptions: Base more deals on project revenues rather than repayments from governments.

Blended finance has attracted much attention in recent years because public funding alone cannot possibly close the funding gap to achieve the Sustainable Development Goals (SDGs) in developing countries. Official development assistance was $147 billion in 2017, according to the OECD, but an estimated $2.5 trillion per year is needed to realize the SDGs in developing countries. Blended finance, which uses public funding to catalyze private investments in developing countries, offers the promise of closing some of the financing gap.

This article presents research suggesting that blended finance is not (yet) realizing its full promise. It is already well-known that the current scale of blended finance is small compared to the need: about $125 billion has been mobilized since 2000. Our research show that every dollar of public funding used in blended finance generates only about 79 cents of private capital.

We also find that half of blended finance deals studied appear to involve borrowing by developing country governments, meaning that future growth may be constrained not by the availability of capital but rather by governments’ capacity to borrow.

Blended finance is defined by the OECD as “the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries”. Blended finance uses different financing mechanisms to reduce investment risk for private sector investment, including co-financing of equity and debt, guarantees and insurance, grants and technical assistance.

Leverage ratio

To understand what blended finance looks like in practice, we analyzed 117 deals recorded since 2000 with a total value of about $37 billion. The deals were sourced mainly – but not exclusively – from a database managed by Convergence, a platform for blended finance actors. These 117 deals involve 40 different multilateral development banks and development finance institutions, 36 government agencies, 16 funds and facilities, 19 philanthropic and non-profit organizations and 126 private investors (including a few asset management firms and private companies that are publicly funded).

For the deals we studied, public funding contributed a large share of blended finance capital, and the leverage ratio of private to public investments was small. Only 43 out of 117 deals drew more than 50% of the funding from private sources, accounting for $12.2 billion out of the $37 billion total value of deals studied (figure 1). Private sources provided about 44% of the total capital invested in blended finance deals (excluding those financed purely from public or from private sources) – a leverage ratio of $79 of private investment for every $100 of public investment.

Capital flows

We also looked at to types of organizations blended finance money is going. Of the deals we studied, 41 deals valued at $18.9 billion delivered money to public agencies while 76 deals with a value of $18.6 billion went to private organizations (figure 3).

Public debt levels in developing countries have been rising over the past decade, and many countries are getting close to limits on what they can borrow sustainably. Thus, for the future growth of blended finance, more finance needs to be directed to private organizations – while still having public interest purposes and/or deals where returns are derived from project revenues and do not require sovereign guarantees.

High priority

Blended finance remains one of the most promising instruments to help narrow the SDG funding gap. This study highlights priorities for the blended finance community.

First, build on past success and continue to expand the scale of blended finance. Second, increase the private to public ratio – through changing the mix of capital in future blended finance deals or encouraging more private-only investments to follow on from blended finance facilities. Third, direct more financing to private sector borrowers and/or structure blended finance deals to receive returns from project revenues rather than from government debt repayments.

The great hope for blended finance is to attract large amounts of private capital with small amounts of strategically deployed public funding. Our analysis suggests that blended finance in practice is currently far from this ideal – and that the priority should be to increase the ratio of private to public investment in the future.

Blended finance is still in its early days and it is reasonable to expect that the share of capital from private sources will increase over time. Private investors might require less public funding support as they become more familiar with, and less averse to risks in, developing countries.

Indeed, in the ideal scenario, blended finance should introduce private investors to new markets, and those investors should eventually continue to invest on their own – in other words, the greatest leverage should come from the pattern of investments over time rather than from the ratio of private to public finance in individual deals.


Paul Callan is a partner and strategy practice leader at Dalberg. Hafsa Anouar is a consultant Dalberg.

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