Blended Finance and Aligning Private Investment with Global Development

Two Sides of the Same Coin

Over the past few decades, the composition of development finance has flipped from being primarily funded through public-sector resources, to intensified interest and investment from the private sector. A combination of phenomena has diversified the mix from which global development deals receive funding. At once, rising tides of official development assistance (ODA), having consistently risen to triple its amount from 1960 to 2012, is plateauing as interest from the public sector in the major donor countries wanes. The appetite for publicly funded foreign assistance seems to have eroded in response to ongoing and perceived worsening global stability. ODA continues to rise, but it also continues to be a smaller portion of a country’s economy and engagement with the developing world. The role of ODA is also shifting, from that of operational capacity, to an agenda setter responsible for catalyzing private investment. Increasingly, development and economic engagement is characterized through private investment. The public sector has a chance to channel this rising tide for development impact.

At the same time, there are calls for exponentially increasing global development funding. The global community has embraced the new Sustainable Development Goals (SDGs), but achieving these principles will require moving from “billions to trillions” in development funding. Now, traditional development donors are looking to supplement diminished public finance with diversified resources.

The private sector—in its diverse forms from large multinational corporations, private equity funds, foundations, and nongovernment-controlled financiers—is playing an increasingly central role in global development. Seen as one path for unlocking the trillions necessary for reaching the SDGs, there is increased focus globally on encouraging private-sector engagement, investment, and market and capacity creation in the developing world.

Across the many avenues and tools for the private sector to become active in the developing world, blended finance is one method to unlock private capital for development. Blended finance refers to structuring global development investment deals with a mixed portfolio of public and private funds to spread and smooth risk-reward profiles, increase catalytic private investment in sustainable financing, and create markets in developing and new contexts. Blended finance aims to “crowd in” private capital by managing, transferring, or mitigating the risk inherent or perceived in the developing world, while also producing a return and creating jobs and growth through investments that otherwise would not exist. While blended finance is a somewhat nebulous term referring to decades of public-private partnerships, the increased focus and popularization comes at a time for development when more money is needed for development as interest simultaneously fades.

Private-sector involvement in development is on a rapidly upward trajectory. But increased amounts will not necessarily result in increased impact. The public sector must work to partner with and understand the private sector if it wishes to channel these expanding sources of investment for development impact. The challenge will be how to scale up these kinds of activities to be easily replicable on a global scale rather than for boutique operations. But overall, there are not enough development deals to be easily scaled to have a global impact.

Blended finance, while existing for decades in various forms, is a relatively new strategy for mobilizing private capital in developing countries. This report aims to survey the modern landscape of global development finance, finding points of utilization for blended finance, and posing questions for its future.
Conor M. Savoy
Senior Fellow, Project on Prosperity and Development

Aaron Milner