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Giving Compass' Take:
• Devex discusses the concept of "blended finance" in development and the important questions we need to explore before fully committing to the practice through U.S. institutions.
• Will there be full buy-in from American policymakers and private investors in the blended financing space? That remains to be seen, but approaching the challenges set out in this piece will be a good first step.
• Here's how to leverage blended finance to meet the Sustainable Development Goals.
The development community in Washington, D.C., is rightly abuzz about the prospect of crowding in private investors to tackle intractable social and environmental challenges. The prospect of a new United States development finance institution (USDFI) and the pivot toward “blended finance” are two of the hottest topics — and both subjects of recent events at the Center for Strategic and International Studies.
Given the scale and promise of the opportunity at hand, there are four questions we need to get right.
Institutional blending. One question is whether the “blend” of technical and financial instruments should all happen within USDFI or whether the combined efforts of various U.S. government agencies involved in investment, including and especially USAID, should be leveraged.
Mind-melding. A challenge for the new U.S. development and investment architecture is mindsets. Development finance institutions such as the Overseas Private Investment Corporation or the International Finance Corporation tend to think in terms of transactions, not systemic change. Traditional donors, on the other hand, care more about the bigger picture; private companies, and development finance institutions won’t necessarily jump to solve the systemic problem that’s vexing them. Can they meet in the middle? Can you combine both mindsets in one organization?
Risk appetite. The key is to take a portfolio approach, investing in some more risky projects together with less risky ones. At the end of the day, protecting against downside risk through blending is probably not enough to entice private investors.
Over-blending. Regardless of the risk profile, we need to be careful not to over-blend. Embedding concessional funds in private sector investments can be fraught with moral hazard. Targeted, disciplined, and rigorous application of the Blended Finance Principles, endorsed recently by all relevant development finance institutions, is key to ensuring commercial viability and sustainability.
Read the full article about what we need to get right about blended finance by Brigit Helms at Devex International Development.