Dialling up the Blender: Scaling up Blended Finance Solutions in Africa

Following a tumultuous 2020, economies around the globe – especially those in the developing world – are in desperate need of investment. The huge injection in liquidity has in some part sustained financial markets, as well as creating a frenzy of SPAC activity (and no, this is not a piece on SPACs in Africa, but do keep an eye out for our next piece…) that captured the investment world’s attention. However, we want to take a step back and refocus you on blended finance.

Having now passed the 5-year anniversary of the launch of the Sustainable Development Goals (SDGs) and given the importance of 2021 as the year of ‘Building Back Better’ from the Covid-19 pandemic, we are now entering a critical juncture. This, alongside some of the year’s important upcoming events, including COP26 taking place in Glasgow, means we need to reconsider and revaluate how we scale up sustainable investments.

Blended finance, as described by the OECD, is the strategic use of development finance for the mobilisation of additional finance towards sustainable development, particularly in developing countries. It became a pillar to the envisioned success of 2015’s UN Sustainable Development Goals.

Figure 1: The World Bank Group HQ in DC. The World Bank through its private sector investment arm, the International Finance Corporation, is a leader in trying to structure investments in a blended finance capital stack Credit: Victor Grigas

In Africa, this increased investment is fundamental to ensuring any chance of achieving these goals; blended finance was positioned to be a winning strategy in guaranteeing this. Yet the trillions of dollars blended finance promised to usher in this wave of new investment has not materialised. Why?   

Is it mitigating enough risk?

In essence, blended finance plays a fundamental role as a risk mitigation tool. It allocates risk in a targeted, balanced and sustainable manner ensuring distinct groups of capital (both concessional and commercial) can be comfortable investing collaboratively in projects, funds or businesses.

As always, when dealing with a myriad of stakeholders, challenges arise to ensuring everyone is unanimously aligned with one another. In blended finance vehicles it is certainly no different. The variety of stakeholders involved (multilaterals, DFIs, governments, corporates and private investors), all of whom have different management structures, policies, objectives and expertise (and even an agreed definition of what ‘blended finance’ constitutes) has, in instances, made alignment on objectives and their subsequent deliverables difficult.

Take rural electrification, where government grid extension programs are often at loggerheads with donor supported off-grid solar programs operating in the same region (see Kenya’s recent VAT on solar for one). This misalignment on the optimal path for achieving a particular objective (such as rural electrification and poverty reduction), naturally creates friction and frustration for firms, potential donors and investors.

Figure 2: Graphical depiction regarding the variability of investment criteria across organizations. Source: TWA Analysis

On top of this, there is little doubt that the notion of blended finance can go further. Take financing for one. According to Convergence, a leading global non-profit focused on blended finance, the flow of public and private capital into blended projects and funds has stayed flat at around $20 billion a year; far below the $100 billion target set by the UN back in 2015.

Of course, reaching a set financing target is not the only measure of success. We are not on track to achieve the SDGs by 2030, particularly for more fragile countries, with many of these located in sub-Saharan Africa.  Indeed, as argued by William Easterly’s the ‘The Elusive Quest for Capital’, an increase in public investment projects across the developing world was generally met with paltry growth in the latter part of the 20th century. Put simply, both the quality and quantity of investments needs to improve for blended finance to achieve its goals in Africa.

So how can we scale up blended financing to best serve the long run economic interests of African and other developing countries?

Dialling up the impact and rewriting the recipe card

At ThirdWay, we argue that the first, and perhaps most important step, is one towards greater transparency and visibility at the aggregate level with regards to blended financing initiatives. As it stands, if as an investor you wanted to get the data on X project, performed by Y DFIs in Z region in sub-Saharan Africa, you would be hard pressed to find key points. You could also forget about obtaining data on a range of projects performed by various DFIs and multilaterals in said sector across all the regions in sub-Saharan Africa; the data simply does not exist at the aggregate level.

Given the sheer number of these stakeholders, projects and variables (financial, social, regulatory) in the blended financing space, along with the confidential nature of firm and investment level data, there are challenges to achieving a state of “open data”.

Some progress has been made. The IFC for one, regularly updates its principles and guidance for blended finance, which it shares with a consortium of other DFIs and donors. The DFI transparency initiative, which was kickstarted in 2019 and funded by the Bill & Melinda Gates Foundation, is another example of donor efforts to move blended finance closer towards a world of “open data.” Our colleagues at the Global Impact Investing Network (GIIN) also produce a Blended Finance toolkit which demonstrates how and when blended financing solutions should be utilised.

ThirdWay is committed to supporting measures which enable transparency, uniformity and openness in blended finance. As a firm, we expect that the improvements in measures to increase the global transparency of blended financing schemes will not only continue to develop but will ultimately serve to improve the dialogue between stakeholders, and in turn, move them closer to speaking a ‘common language’. Such changes will only help in further incentivizing more private and public investment and collaboration across Africa and the developing world.

A good example of this in practice is where we have recently worked with a leading FMCG company present in ten plus African countries on the amplification of their sustainability agenda. One component to this explored how partnerships with DFIs could be structured (from both a technical and financial perspective) to work collaboratively on the development of specific impact-oriented initiatives in the countries where they operate. Whilst we enabled the two groups of stakeholders to ‘bridge the gap’ and ensure everyone is ‘speaking the same language’, the increased interest to work with one another was clearly present between both groups to leverage each other’s expertise and subsequently ensure these projects are able to scale.

Blended Finance will continue to be a powerful tool

We believe in the power of blended finance to maximize the development and creation of sustainable economies across sub-Saharan Africa and are committed to fostering dialogues between all of the continent’s stakeholders. Given the added stress many Least Developed Countries (LDCs) now face in achieving the SDGs considering the Covid-19 pandemic, an increased effort to maximise blended financing solutions is imperative to ensure many of these countries are able to truly ‘Build Back Better’. From a financing perspective, we do think if used in the right manner, blended finance can help create viable local and regional capital markets. Once this is in place, we will then see a positive increase of capital inflows into businesses and projects from both local and international investors.

In essence, all the ingredients that will ensure blended finance becomes ubiquitous and can subsequently be scaled up are present. All that is required is the rewriting of the recipe card and ensuring all of those in the ecosystem are empowered to pool together every stakeholders’ expertise, resources, and financing capabilities to create successful outcomes.

The bottom line? 2021 will provide many tests to the status quo of blended finance, but we remain bullish to its success and its ability to catalyse capital inflow into countries and projects where it is needed (particularly in light of Coronavirus pandemic). This will not happen in a vacuum however and the development of other enabling factors, not least capital markets, will also be key. Stay tuned for our next TWA Insight on SPACs!