Blended not stirred: The future of development financing

The answer to the current development financing gap may lie in aligned incentives across the public and private sectors.

Today’s world economy is a paradox. We have huge investment needs in the social sectors, water and environment, infrastructure, and in combatting climate change across the world. Puerto Rico is bankrupt, and Greece and other countries in crisis have dismantled all but the most essential services to their citizens.

At the same time, trillions of dollars are parked in government bonds with a negative yield where investors basically pay to keep their money in the safe hands of governments. What if we could make it more attractive for these investors to do good while doing well? Enter blended finance.

The yearly funding gap for financing the Sustainable Development Goals has been estimated at US$ 2.5-3.0 trillion. There is no way this gap can be met solely through public financing or traditional Official Development Assistance (ODA). But by using a bit of ODA money in a smart way, we can reduce risks, attract more resources from institutional and private investors and maybe even tap into other financial flows like remittances.

Blended finance can unlock new pools of financing

The typical application of blended finance is to use grant money to reduce the cost of a loan, often by extending the term and buying down the interests. This is not new. Guarantees, and concessional financing have been available for years to finance large infrastructure projects across the globe, but the problem is that these mechanisms are often only available to low-income countries and they haven’t been widely used for the social sectors. By making more grant money available for blended finance products, actively involving private investors, and testing different incentive models (e.g. by providing other types of support to sweeten the deal for debtors), we can unlock new pools of financing for development.

One blended finance partnership that we at the Global Fund have been supporting is the Lives and Livelihoods Fund. Through a collaboration between the Gates Foundation and Islamic Development Bank, the partnership offers countries an opportunity to get concessionary funding to fund health and priority areas. I expand on this and some of our other innovative financing platforms in the recently published report on financing the UN Development System.

Connecting remittances and development objectives

Then there are remittances. Every year, individuals remit over US$ 440 billion to the developing world. That’s close to four times the amount of ODA. When I started working for UNDP back in the early 2000s, we all talked about how to tap into the remittance flows. We learnt quickly that very few individuals would use their hard earned resources to help finance traditional ‘development projects’ – projects that often have no direct visible impact on the well-being of their families.

But, it turns out that there are ways to connect remittances and development objectives. It’s all about incentives and innovation. For example, in India- the world’s largest remittance receiving country with an inflow of over $72 billion in 2015 (over 50% of global ODA) – a start-up, OurhealthMate, is now looking at ways to connect remittances to fund healthcare in India, and more are following suit.

Others have contemplated establishing dedicated savings accounts for disadvantaged children. The accounts could be fuelled by remittances, a contribution by the financial intermediary, and then partly matched by Government or ODA money. So, for every dollar remitted to such an account, the other actors add a bit extra. The money could be used to pay for health care insurance, education, or maybe just as start-up capital for a business venture or a plot of land. Like blended finance, the idea is to use some public money to incentivise private investments.

The world of development financing is changing rapidly

These are just a few examples and much more is happening. Add other elements like the fact that over US$ 30 trillion will shift hands to the millennial generation in the next couple of years, and that crowdfunding networks mobilised over US$ 34 billion in 2015 (a virtually non-existent industry a few years ago), we quickly realise that the world of development financing is changing rapidly.

The convergence of technology, innovation and new funding streams represents the future. Will blended finance, remittances and crowdfunding bridge the SDG financing gap? Probably not on their own, but they show the potential that exists if we can get the incentives right.