Blended Finance: Finding its place

The debate on blended finance (BF) tends to be polarized. On one hand great expectations on how BF can scale up private investments for sustainable development in developing countries. On the other hand, deep concerns about the lack of transparency and evidence of development result, and the risk that BF will crowd out ODA to the most vulnerable people and contexts.

A lot of the debate has to do with how BF should be implemented. In the Act Church of Sweden discussion paper Finding its place, the focus is put on the questions when, where, and in what context BF is a good tool, and where it isn’t.

The simple idea is that BF can be a great tool, but that it is not appropriate for investments that for one reason or another should rather be made with public resources. In particular, investments in services such as health care and education should primarily be made with public money. For any blending proposals in these sectors, the risk of negative impact on the Agenda 2030 commitments to leave no one behind and to decrease inequalities need to be thoroughly scrutinized.

The idea that care should be taken in the social sectors in not new or just theoretical. At the recent Word Economic Forum, it was argued that intensifying privatization of education and cuts in funding for public education is excluding the vulnerable from accessing quality education and a major reason for why about 263 million children and youth are out of school today.

A session on blended finance in the health sector at the OECD Private Finance for Sustainable Development (PF4SD) conference recently exposed examples on how profit motives skew development financing for health into high end expensive hospitals, or the imposition of unaffordable user fees to pay for the use of medical equipment.

Explicitly considering whether blending is likely to be appropriate in a particular case means, for instance, the World Bank “cascading approach” to Maximise Finance for Development, in which private finance is always the first choice, will have to be adjusted. At present it includes a possibility test but does not consider appropriateness. Likewise, explicit considerations of whether blended finance is an appropriate finance mechanism should be included in operational guidelines of financing institutions as well as OECD Blended Finance Principles.

If private money is not appropriate in all cases, more attention should be given to the mobilisation of public resources – domestic as well as international (ODA). Hence, catalytic ODA to support national mobilization of development finance, in particular taxes, has to be scaled up just as BF is scaled up.

It is encouraging to hear from that the narrative around development finance finally seems to be moving beyond “billions to trillions” into aligning (existing) finance with SDGs. As a contribution to the emerging new narrative on development finance, I would offer the following to do-list:

– Align all private investments with SDGs
– Scale up public investments in public services
– Use blended finance where it is appropriate

In particular, donors have to make sure that blended finance will not crowd out ODA investments in social sectors, as these investments are absolutely necessary to live up to leave no one behind commitment of the Agenda 2030.