Blended Finance’s Poor Country Swirl
Amid the ‘billions to trillions” hype over combining official and private finance to achieve the 2030 Sustainable Development Goals for low-income economies a sobering OECD and UN report working from 2017 data found that only 5% of the blend went there as opposed to emerging market destinations. South Asia and Africa took almost half the total, with credit and risk guarantees the main bilateral and multilateral contribution. By sector energy, banking and financial services dominate, and domestic investors only account for 15% of transactions. A number of general principles apply but have been followed unevenly, including national ownership, technical assistance and a local presence in deals. Over the period under review, FDI fell almost 20% and official aid remains the top external source. A new cash-flow methodology is used for tracking, with the “missing middle” as small and mid-sized business seeking up to $1 million in funding is bypassed in databases compiled by the UN and blended specialists like Convergence. In 2017 $1.5 billion was mobilized for poor countries, and the leading recipients over time were African commodity exporters (Angola, Senegal, Zambia) and Asian garment hubs Bangladesh and Cambodia. Over 45 nations featured, but conflict and small island states were excluded. The average deal amount was $5 million, compared to $30-$60 million in the middle income category. A weak correlation exists between aid and blended finance totals, but economic growth and policy scores are not broken out for greater performance distinction. Guarantees have been 60% of volume over a 5-year horizon, while simple co-financing was the number one individual project tool. Energy and banking were half the industry focus, followed by mining and telecoms. Oil and natural gas power plants were 40% of the first allocation, while renewables are the majority in more advanced developing markets. By provider, the World Bank’s MIGA with 15% of the total, the US and France are the largest, with new entrants like Canada and Korea moving up the ranks. Local investors have been a small minority and most active in Africa, especially in agriculture and forestry pursuits. Often participation is through national development banks reprising a role after decades out of favor in the aid community over continued losses and bad governance. The current mantra is public-private partnership and these units are encouraged to get credit ratings and continuously report accounts and operations in contrast with previous experience. In industrial economies they are also under consideration to meet large scale physical and cyber infrastructure mandates. The survey suggests further experimentation and research in the nascent field, with different interpretations and versions of the “flexible concept.” A marker may be imminent when the US Development Finance Agency is formally launched in October, with a menu of debt, equity and guarantee offerings under an eventual $60 billion cap. In testimony core executives from OPIC and AID have previewed early organization divided into policy and transaction departments, but instrument and strategy preferences await rollout, although low-income regions are a target. Private sector bankers and fund managers will likely be recruited in a first wave, alongside an expert advisory committee to be named with a talent blend, according to the original legislation,
