By Reid Dobell, Chloe Hite, Jean Zhou, and Jack Hoagland
The effort to meet the United Nations Sustainable Development Goals (SDGs) is facing a financing crisis. In September 2019, Deputy Secretary General and Chair of the Sustainable Development Group Amina J. Mohammed cited a $2.5 trillion annual financing gap to achieving the SDGs, the widely accepted objectives for increasing global prosperity.[1] The ongoing global COVID-19 pandemic will almost certainly negatively impact the existing shortfall, with an expected USD $1.7 trillion widening in the financing gap in 2020 alone.[2] Least Developed Countries (LDCs) in particular are facing mounting difficulties responding to the COVID-19 pandemic.[3] LDCs have experienced severe socio-economic impacts from the global economic crisis, due to domestic and global demand shocks, significant drops in foreign direct investment and remittances, supply chain disruptions, collapses in oil and commodity prices, declines in the tourism industry, and other causes. These disruptions will greatly diminish capital flows to LDCs, possibly wiping out the progress many have made towards achieving the SDGs.[4],[5]
Blended finance, or the strategic use of development finance to mobilize commercial finance towards fulfilling the SDGs, represents an increasingly viable method to accelerate the achievement of the SDGs in LDCs – and fill some of the financing gap. Concerningly, the mobilization of private capital through such deals has so far not met expectations. While the amount of private capital raised for every unit of public capital – known as the “mobilization ratio” – is increasing, the estimated ratio of 0.37 in low-income countries is still too low for many blended finance vehicles.[6] Furthermore, the raised capital rarely goes to the most in need. Of the private finance mobilized through blended instruments between 2013 and 2018, only USD $13.4 billion went toward LDCs. This accounts for only 6 percent of the USD $207.2 billion total mobilized across all developing country categories.[7] However, this percentage is increasing, with USD 3.8 billion mobilized in LDCs in 2018 alone, accounting for approximately 7.5 percent of the total that year.8]
Our practicum team, consisting of Jean Zhou, Chloe Hite, Jack Hoagland, and Reid Dobell spent the year working with The United Nations Capital Development Fund to investigate the barriers to greater use of blended finance tools in LDCs. UNCDF is a member of the UN system which is dedicated to using innovative financing tools to support the eradication of poverty in the world's 46 LDCs. As part of their mandate, they are reviewing how they can help catalyze greater flows of capital to LDCs using blended finance.
UNCDF intends to use our final report’s recommendations to tailor its approach to designing future blended finance funds or altering its already-created blended finance vehicles. The creation of our report involved in-depth desk research and the drafting of an extensive gap analysis examining DFI use of blended tools in support of LDC economic growth. The team then conducted semi-structured interviews with 15 industry stakeholders representing DFIs, private investors, asset managers, reporting entities, and philanthropic organizations.
We found that despite the opportunities and enormous needs in LDCs, several challenges prevent the scaling up of blended finance. As of now, private investors still feel too much uncertainty about the risks-return profiles of blended finance investments, and establishing a solid track record for blended funds, coordination between the public and private sector, and increased transparency will be critical in taking blended finance mainstream. Our report includes concrete steps that development finance institutions can take to advance blended finance and mobilize more capital toward LDCs. These include building stronger deal pipelines, standardizing impact and return measurement, and prioritizing investments in sectors that will achieve greater development outcomes.
The SAIS International Development (IDEV) Practicum allows students to work directly with public, private, and non-governmental organizations as a capstone to their graduate studies. The 2021 IDEV Practicum Blog is a seven-part series that chronicles the virtual travels of IDEV students who take on client projects.
[1] United Nations. “Citing $2.5 Trillion Financing Gap during SDG Business Forum Event, Deputy Secretary General Says Poverty is Falling Too Slowly.” (25 September 2019) Transcript.
[2] OECD (2020), Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet, OECD Publishing, Paris, https://doi.org/10.1787/e3c30a9a-en.
[3] OECD/UNCDF (2020). Blended Finance in the Least Developed Countries 2020: Supporting a Resilient COVID-19 Recovery, OECD Publishing, Paris, https://doi.org/10.1787/57620d04-en.
[4] United Nations Committee for Development Policy. “Covid-19 and Graduation from the LDC Category.” 12 May 2020.
[5] OECD/UNCDF (2020). Blended Finance in the Least Developed Countries 2020: Supporting a Resilient COVID-19 Recovery, OECD Publishing, Paris, https://doi.org/10.1787/57620d04-en.
[6] Attridge, Samantha, and Lars Engen. Blended Finance in the Poorest Countries: The Need for a Better Approach. ODI. April 2019. https://www.odi.org/sites/odi.org.uk/files/resource-documents/12666.pdf
[7] OECD/UNCDF (2020). Blended Finance in the Least Developed Countries 2020: Supporting a Resilient COVID-19 Recovery, OECD Publishing, Paris, https://doi.org/10.1787/57620d04-en. Page 22.
[8] OECD/UNCDF (2020). Blended Finance in the Least Developed Countries 2020: Supporting a Resilient COVID-19 Recovery, OECD Publishing, Paris, https://doi.org/10.1787/57620d04-en. Page 14.
Photo Credit: by Ecomena