Blended finance, or the use of public funds to de-risk or ‘leverage’ private investments in development, has been presented by donors and development finance institutions as having the potential to provide at least part of the solution to the gap in funding for the Sustainable Development Goals (SDGs). However, the discussion about blending has been based on very little evidence to date. Before scaling up investments in this area we need a much better understanding of the current role and the future potential of blended finance and the comparative advantages for ending poverty in relation to other possible uses of official development assistance (ODA), such as traditional grants and loans.
In this report we analyse the available data on blended finance, beginning to build the evidence base that is needed to inform decisions on its future use. We look at what the data can tell us about the potential of blended finance for financing the SDGs and the associated risks, opportunities and possible benefits for developing countries.
Key findings
- The current amount of private sector investment to developing countries as a result of blended finance is small compared with other financial flows; however, it is growing and there appears to be potential for significant future growth, though not the trillions needed to finance the SDGs.
- Private investments mobilised through blended finance are currently higher in middle-income countries and developing countries with lower levels of poverty; however, it seems more likely than foreign direct investment to be invested in poorer countries.
- Private capital mobilised through blended finance is most likely to be invested in infrastructure and the productive sectors.
- Data and information on blended finance is of varying quality and needs to be improved; for example, it is currently not possible to say how much ODA is being used to support blended finance.
- Improved transparency of blended finance is critical to ensure that donors and their partner countries can better understand its impact on poverty.
Recommendations
- The guiding principle for donors should be that the role of ODA in blended finance increases available resources for targeting poverty, rather than pursuing private investment through blending as an end in its own right.
- Donors must carefully consider and discuss with their partner countries the most appropriate use of ODA for blending; this is particularly pertinent with the ongoing modernisation of ODA, which could incentivise donors to scale up their use of blended finance instruments in some of the poorest and most fragile developing countries.
- Crucially, for blended finance to work for Agenda 2030, we need improved transparency and better data on where it is going and how, and on its impact.
- A common standard of reporting needs to be established for all providers using blended finance instruments. The International Aid Transparency Initiative (IATI) Standard could be used as the basis for reporting since many actors are already using it to report on their development spending.
- There is a need for open dialogue between relevant stakeholders to establish how to improve qualitative aspects of reporting.
- Since data and evidence are currently insufficient to inform decision-making, providers should be active in calling for improved evidence and should be cautious in scaling up blending until better data becomes available.
