Image credit: Graham Holliday

ICYMI — You have two weeks to have your say on the way forward for blended finance

24/02/2018

We’re republishing this post to encourage as many people to submit comments on this important draft report by the deadline, March 16. Please email katherine.stodulka@systemiq.earth and catharina.dyvik@systemiq.earth if you wish to be involved in the consultation process

The Blended Finance Taskforce, established by the Business & Sustainable Development Commission and Systemiq, has just issued a consultation paper on the way forward for blended finance: Better Finance, Better World.

Comments are sought till mid-March (the email address for these is in the paper), following which the final report will be published at the World Bank annual meetings in April.

We urge you to comment on this important paper on a critical topic – it may help to get some badly needed changes made.   

Below are a few starter reflections from us, based on an initial scan of the draft.  If you are sending comments to the Taskforce, please do copy us in too (info@ndci.global), and we’ll report further on your reactions.


Overall, the report is a fairly comprehensive and accurate overview of the topic.  For the non-expert, it sums up well what blended finance is, and the role it can (and/or should) play in financing global goals such as the SDGs (within which the paper incorporates climate goals, though it has little to say specifically on the Paris agreement).  Even for blended finance experts, there are plentiful nuggets of useful data, for example on default rates of infrastructure projects in Africa (far lower than perceived rates), institutional investor allocations to developing country investments, and details of the rates at which development banks mobilise private capital (all very low).  There is also an excellent section on regulation.

There are some perhaps surprising omissions from the paper, for example, the important potential role of green investment banks – especially in developing countries –  helping to create enabling policy frameworks and becoming trusted local intermediaries for private capital inflows.  There is also no mention of the climate funds, which are clearly a key feature of the Paris finance landscape, and suffer from all the same issues that the report cites with reference to aid and development finance more generally. Nor, in the discussion of MDB mobilisation rates, is there any mention of the usual excuse given by these organisations for their failure to improve these rates, that this would affect their typically AAA ratings and thus the cost of funds to their borrowers.  The truth of this, and ways around the problem if it truly is one, need to be explored.

There are also some important factors affecting the ability to scale blended finance that are a bit buried in the “back” of the document that might be moved up to the summary at the front, which is what most readers will probably focus on.  For example, the high transaction costs of doing business with the DFIs, in terms of the slowness and complexity of their procedures, is a very important reason why the private sector doesn’t engage more. Similarly, the role of shareholders in DFIs is crucial (see below) and needs more prominence  – as well as more specificity on how behaviours can (practically) be changed.

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Finally, because the report uses the SDGs as its reference point for development, from the point of view of those interested in climate finance, there is no specific mention of adaptation finance.  This is an important gap, given how critical blended finance will be to this aspect of Paris finance (since adaptation projects typically have lower or no revenue potential to repay commercial investment).  The “adaptation premium” (the extra cost of making projects climate resilient) is also a hot topic for the climate funds and DFIs, and should surely be a topic in any discussion of their future roles, as it is both related to their missions and very relevant to infrastructure projects.

The report’s main “call to action” covers six topics across three main sets of actors:

 

In general, we would agree with this agenda, but we would make two high-level observations:

  1. The calls to action are couched in “shoulds”, which begs the question of what incentives other than altruism will actually drive behaviour change. We would argue that the targeting of action needs to be much more “granular”.  For example, the shareholder representatives within the MDBs – who are the only people who can actually vote to redirect MDB behaviour – are a very specific set of individuals, typically senior-ish civil servants from ODA or treasury departments, especially in the global north countries that provide most of the capital.  Though doubtless committed people themselves, these shareholder reps have no real time or experience to bring to bear on their own, to change what are often deeply entrenched cultures and internal political structures in the MDBs/DFIs.  One of three things therefore needs to happen: (1)The decision-making systems themselves within these institutions have to be changed; (2) the present non-expert shareholder representatives need to be replaced with more time- and experience-rich individuals, or (3) the present individuals have to be given the help they need to instigate and manage change, for example with education and capacity building in and on their roles.
  2. The draft makes no real mention at all of the overarching architecture for global finance, which is now some 70 years old (in terms of the Bretton Woods institutions such as the World Bank and the IMF) and which we have suggested before could probably do with an overhaul. While we don’t believe that we need to create new institutions, reforming the existing ones will surely require some redesign of the architecture. In an almost throwaway line, for example, the report suggests that DFIs might be better organised around technical skillsets, rather than regional geographies – a really interesting suggestion, but one that couldn’t be achieved with the current global setup.

Those are our “starter remarks”.  We look forward to your further commentary!

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