It’s time for an honest conversation about the elephant in the room.
We need to rethink – reimagine — blended finance. We need a BF 2.0.
Why?
Blended finance, in its current form, is in a rut. According to Convergence’s report The State of Blended Finance 2019, blended finance activity hasn’t budged materially since 2014 – roughly $15 billion and 50 deals annually.
GROWTH OF ANNUAL BLENDED FINANCE ACTIVITIES (2007-2018)
Source: The State of Blended Finance 2019, Convergence
Of course, these deals are not unwelcome; indeed, any capital that helps move the funding needle for Sustainable Development Goals (SDGs) is laudable. But these amounts fall well short the trillions of dollars needed every year. And with COVID-19 imperiling financial flows and investment opportunities, this problem is sure to persist.
Moreover, emerging data suggests that blended finance activity is leaving the poorest and most vulnerable behind. Development Initiatives found that, of the 10 largest country recipients of private capital via blended finance in 2017, 8 had less than 5% of their population living in extreme poverty. This means richer countries like Turkey, Brazil, India and South Africa benefit the most, while poorer countries like Nigeria, Zambia and Madagascar are left wanting.
Can blended finance contribute meaningfully in these poorer places? Opinions are mixed; as the Overseas Development Institute recently concluded, “increased investment of ODA in blended finance could further exacerbate the poor targeting of ODA, neglecting the countries and sectors that need it most.”
PRIVATE FINANCE MOBILISED VIA BLENDING
Source: how blended finance reaches the poorest people, Overseas Development Institute, October 2019
Sister Can You Spare a Dime? (Actually 400 Trillion of them…)
Blended finance is, by nature, a numbers game. So, let’s look at the numbers.
Most estimate a funding gap for SDGs of up to $40 trillion dollars between now and 2030. Blended finance is seen as a key pathway to get “from billions to trillions”. But how realistic is this?
We can all agree $40 trillion is a lot of money. But can we actually grasp just how much money that is?
Some perspective: on a balance sheet basis, $40 trillion is the equivalent of 150 more World Banks, or 6,000 new Green Climate Funds. Or, if every Western country increased its ODA spending tenfold from now until 2030, we would fall short by more than $15 trillion. Or – for those philosophically inclined – if you put $1 million in a jar every hour since the time of Plato, you would still need another $16 trillion.
Indeed, $40 trillion is a lot of money.
Wait, I hear you say, what about big multilateral development banks (MDBs), like EBRD, ADB, and IADB? Combined they spend upwards of $200 billion annually – surely their activities mobilize substantial private capital for development. Regrettably, no – the Blended Finance Task Force reports that every dollar of MDB financing crowds in only 80 cents of private capital, directly and indirectly; and if you exclude indirect mobilization, this ratio falls to 12 cents.
Some Perspective – and Some Questions
Of course, blended finance was never intended to be the silver bullet to solve all SDG funding challenges. The United Nations’ post-Addis global compact “The 2030 Agenda for Sustainable Development” underscores a range of measures, not least enhanced mobilization of developing-country domestic resources via improved enabling environments (i.e., labor rights, health standards, tax collection, etc.), equitable international trade, and coordinated debt relief.
Nevertheless, blended finance has a vital role in mobilizing capital at scale for SDGs. While it may be tempting to search for the Next-Big-Thing, blended finance is here to stay, and we must find ways of enlarging the tent; of doing more with less.
How do we get there? Sadly, the answer is still rather fuzzy. But by asking the right questions, we can gain clarity.
An overriding question is what’s stalling current levels of blended finance activity? The answer is at once complex, and simple.
Blended finance combines public, private and not-for-profit entities to mobilize dollars, knowledge, and networks for SDGs, with the idea that 1+1+1 can, with proper structuring, equal 10. This premise is elegant in principle, but challenging in practice. Governments are slow – they rightly must be careful deploying taxpayer money in a fiduciarily responsible manner. Private sector is impatient – they rightly want to get on with investing for impact and earning returns. Not-for-profits are disparate – some have “aid” budgets larger than sovereign states, while others struggle to stay afloat. This is combination of capabilities and motivations not a recipe for blended success over the long term.
Whither Blended Finance?
Moving forward in uncharted waters without a compass is never easy or comforting, but here we are. If we are honest, we know new thinking and new action is needed to move from BF 1.0 to BF 2.0. We need less talking and more listening. We need less high-brow policy and more grassroots innovation. We need more pull and less push.
And with COVID-19, the world is becoming a different place with new challenges and untold opportunities. Let’s get ready – BF 2.0 is within our grasp.