A Primer for Development Finance and Philanthropic Funders
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ReDesigning Development Finance Initiative A joint initiative of the World Economic Forum and the OECD Blended Finance Vol. 1: A Primer for Development Finance and Philanthropic Funders An overview of the strategic use of development finance and philanthropic funds to mobilize private capital for development September 2015 Contents Acknowledgements 3 Preface This Report synthesizes the ideas and contributions of hundreds of individuals and organizations, to whom we are 4 Executive Summary extremely thankful for generously contributing their time, energy and insights. 6 Financing an Ambitious Sustainable Development Agenda We would like to acknowledge our partners in the ReDesigning 8 Blended Finance: An Opportunity to Unlock Wider Development Finance Initiative Report, the OECD Development Actors and Resources for Development Assistance Committee, who have tirelessly lent their time and insights to the project. In particular, we would like to 8 3.1 Defining Blended Finance recognize Erik Solheim, Haje Schütte, Jens Sedemund and Kaori Miyamoto. A special thanks also goes out to our Report 9 3.2 Why is Blended Finance Important? partners, Monitor Deloitte, for their continuous support and 10 The Role of Blended Finance engagement on this document. Furthermore, we would like to acknowledge the insights and contributions of the ReDesigning 10 4.1 Overcoming Barriers to Private Capital in Development Finance Initiative Steering Committee: Emerging and Frontier Markets Chair: Christian Paradis, Minister of International Development and La Francophonie of Canada; Vice-Chair: Julie Sunderland, 11 4.2 The Role of Development and Philanthropic Director, Bill & Melinda Gates Foundation; Charlotte Capital Petri Gornitzka, Director-General, Swedish International 11 4.3 Investor Barriers across Stages of Maturity Development Cooperation Agency (Sida); Dale Mathias, Chairman - Partners Forum for Private Capital Group for Africa, 13 4.4 Blended Finance Tools US Agency for International Development (USAID); Thomas Speechley, Chief Executive Officer, Abraaj North America; and 16 Blended Finance Approaches and Case Studies Gavin Wilson, Chief Executive Officer, IFC Asset Management Company. 16 5.1. Supporting Mechanisms 18 5.2. Direct Funding We would also like to extend our sincere thanks to Professor Klaus Schwab, Founder and Executive Chairman of the World 24 Mainstreaming and Scaling Blended Finance Economic Forum; Rick Samans, Head of the Centre for the Global Agenda and Member of the Managing Board of the 25 Blended Finance as a Pillar for Future Development World Economic Forum; Michael Drexler, Senior Director, Head Efforts of Investors Industries; as well as the Project team: Terri Toyota, 26 Appendix A: Blended Finance Lexicon Philip Moss, Michelle Larivee, Christina Gomis and Marina Leytes. 27 Appendix B: Abbreviations and Acronyms © WORLD ECONOMIC FORUM, 2015 – All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. REF 180915 Preface This Primer outlines the significant opportunity that Blended Finance presents for public-private cooperation to support international development efforts. There is a huge, and largely untapped, potential for public, philanthropic and private actors to work together towards win-win-win solutions: wins for private investors, as they make an attractive return on their capital; wins for public and philanthropic providers, as they make their limited dollars go further; and most importantly, wins for people in developing countries as more funds are channeled to emerging and frontier markets, in the right way, to help transform economies, societies, and lives. The development challenges of the 21st century remain vast. Poverty has fallen, and will continue to do so, but developing economies will need to be transformed if they are to ensure long-term development. The Richard Samans needs for infrastructure, health, education, agriculture, and other development challenges loom large. Managing Director and Member of the The good news is that there is enough money to go around. Capital markets are growing, and frontier and Managing Board emerging markets are particularly attractive. Private investment into developing countries has been growing World Economic at much faster rates than development funding, and the potential to do more is huge. But to realize this Forum potential, key bottlenecks which prevent private investors targeting the sectors and countries in which they are needed most must be addressed. This new context creates incredible new and exciting opportunities for collaboration. Through Blended Finance, development finance and philanthropic funders can help to address development challenges, ensuring that private investors can identify and support key investment opportunities in the developing world. By guaranteeing investments, development finance and philanthropic funders can help to reduce risk. By supplementing private investment with grant financing, development finance and philanthropic organizations can raise private returns, creating better incentives for the private sector to invest in strategic sectors. By providing technical assistance, they can support the development of strategic projects and help improve the investment climate in key markets. Erik Solheim To help development finance and philanthropic organizations to seize these opportunities, this Primer Chair, Development outlines the Blended Finance approach, clarifies the key concepts, and explains the benefits such Assistance approaches can bring. Committee (DAC) Organisation for Economic Co- operation and Development (OECD) Blended Finance Vol. 1: A Primer for Development Finance and Philanthropic Funders 3 Section 1: Executive Summary The international community will shortly agree on a new set Section 3 explains the concept of Blended Finance. It of Sustainable Development Goals (SDGs) to shape global highlights that Blended Finance has three key characteristics: development priorities for the next 15 years. The SDGs – Leverage: use of development finance and philanthropic envisage a world in which poverty is eradicated, economies funds to attract private capital into deals. are transformed, and development takes place within planetary – Impact: investments that drive social, environmental and boundaries. The resources required for this endeavor are economic progress. immense, as much as $4.5 trillion per annum according – Returns: financial returns for private investors in line with to some estimates1a. Public resources, including Official market expectations, based on real and perceived risks. Development Assistance (ODA) are not sufficient to implement this ambitious new agenda. Sections 4 explains the role of Blended Finance. It identifies the main challenges that prevent private capital from being Private investment will be vital to augment the efforts of deployed into emerging and frontier markets: development finance and philanthropic funders. Only a fraction – Returns are seen as too low for the level of real or perceived of the worldwide invested assets of banks, pension funds, risks. insurers, foundations and endowments, and multinational – Markets do not function efficiently, with local financial corporations, is targeted at sectors and regions that advance markets in developing economies particularly weak. sustainable development. A key challenge for the SDG era – Private investors have knowledge and capability gaps, is how to channel more of these private resources to the which impede their understanding of the investment sectors and countries that are critical for the SDGs and wider opportunities in often unfamiliar territories. development efforts. – Investors have limited mandates and incentives to invest in sectors or markets with high development impact . This is the opportunity presented by Blended Finance, which – Local and global investment climates are challenging, for the purposes of this primer refers to ‘the strategic use including poor regulatory and legal frameworks. of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets’. For Through Blended Finance, development funders can help to development finance and philanthropic funders, Blended overcome investor barriers and increase the supply of private Finance represents an opportunity to drive significant new capital to key sectors and countries by: capital flows into high-impact sectors, while effectively – Shifting the investment risk-return profile with flexible capital leveraging private sector expertise in identifying and executing and favourable terms. development investment strategies. – Sharing local market knowledge and experience. – Building local capacity. This Primer, a product of the ReDesigning Development – Shaping policy and regulatory reform. Finance Initiative (RDFI), aims to clarify the definition of ‘Blended Finance’, and provide practical insights on how development Section 5 identifies and outlines how development funders can funders1b can meet their impact objectives and use tools to use Supporting Mechanisms and Direct Funding to enable a address knowledge gaps and execute using approach. Blended Finance transaction. It provides real world examples of different approaches to address investor barriers faced by Section 2 outlines the scale of the funding challenge. It companies and projects in emerging and frontier markets. highlights