IFC’s Blended Finance practice uses concessional resources effectively, efficiently, and transparently to deliver on impact.
In its Blended Finance practice, IFC uses relatively small amounts of concessional donor funds to mitigate specific investment risks and help rebalance risk-reward profiles of pioneering investments that are unable to proceed on strictly commercial terms.
Blended finance solutions at IFC can be structured as debt, equity, risk-sharing, or guarantee products with different rates, tenor, security, or rank. Under select facilities, they can also be performance-based incentive structures. Solutions are tailored to address specific market barriers and failures and the requirements of donor partners.
IFC has a well-established, formal, and rigorous approach to blending concessional funds alongside its own capital, including the principles and governance by which it applies such funds.
The use of blended finance allows IFC to fill financing gaps by addressing market barriers and attracting private sector investments to areas of strategic importance with high development impact. As pioneering projects, when successful, blended finance investments pave the way for other investors and help create markets. With increased interest in the use of blended concessional finance in transformative projects, IFC pays particular attention to its ability to measure project outcomes and impact. Read more about IFC’s Anticipated Impact Measurement and Monitoring (AIMM) system.
IFC has nearly two decades of experience implementing blended concessional finance and currently manages and invests in projects supported by over a dozen Blended Finance facilities funded by various development partners.
While Blended Finance resources can be instrumental in helping move high risk/high impact projects forward, they must be used:
- effectively to achieve the intended development impact and tackle specific market failures
- efficiently to make sure that only the minimum concessionality needed is used to catalyze commercial capital, and
- transparently to enhance the market creation potential of each transaction.
IFC applies a disciplined and targeted approach to blended finance, following the DFI Enhanced Blended Concessional Finance Principles for Private Sector Projects:
These enhanced principles and guidance for providing blended concessional finance for private sector projects includes guidelines for how to push for commercially viable solutions using minimum concessionality. In addition, it advocates for increased scrutiny of projects proportionate with the underlying risk that concessional resources could lead to market distortion.
DFI Enhanced Blended Concessional Finance Principles for Private Sector Projects
Rationale for Blended Concessional Finance
Contribution that is beyond what is available, otherwise absent from the market, and should not crowd out the private sector.
Crowding-in and Minimum Concessionality
Contribute to catalyzing market development and mobilization of private sector resources, with concessionality not greater than necessary.
Impact achieved by each operation should aim to be sustainable and contribute towards commercial viability.
Addresses market failures effectively and efficiently minimizes the risk of market distortion or crowding out private finance.
Promoting High Standards
Promote adherence to high standards, including in areas of corporate governance, environmental impact, integrity, transparency, and disclosure.
Governance and Transparency
IFC’s Blended finance practice uses concessional resources strategically and transparently to deliver on impact. This means taking a disciplined and target approach to blended finance, following five key blended finance principles: rationale for blended concessional finance; crowding-in and minimum concessionality; commercial sustainability; reinforcing markets; and promoting high standards. These principles are also known as the DFI Enhanced Principles for Blended Concessional Finance for Private Sector Projects.
IFC has developed strong governance processes to ensure that blended concessional finance principles are consistently applied, including an independent decision-making for allocating development partners’ scarce concessional resources. These processes ensure that that concessional resources are used only when they are truly needed to ensure that a high-impact investment can move forward.
Disclosing Concessionality Levels
In 2019, IFC announced it would hold itself to the highest standards of transparency when deploying concessional resources: IFC now discloses in its Summary of Investment Information, the subsidy levels for each proposed project along with justification for why it is necessary. IFC is the only DFI or blended finance implementer taking this step to date.
Members of IFC’S internal Blended Finance Committee, consisting of senior leadership, are accountable for ensuring that all projects requesting concessional resources adhere to the DFI Enhanced Blended Concessional Finance Principles for Private Sector Projects. Particular attention is paid to calibrate the level of concessionality that a project supported by concessional finance is receiving. The use of blended concessional finance starts with a case by-case analysis to determine the appropriateness of blending concessional public with private finance, specifically, the link to market failures and the effort to avoid undue subsidies to the private sector and undue risk for the public sector.
What is Concessionality and How is it Calculated?
Concessionality figures are based on the difference between (i) a “reference price” (which can be a market price, if available; the price calculated using IFC’s pricing model, which comprises three main elements of risk, cost and net profit; or a negotiated price with the client) and (ii) the “concessional price” being charged by the blended concessional finance co-investment.
Total project cost refers to the amount it will take to construct or expand a plant, facility or building or the operations of a company — including equity financing and debt. In transactions with financial institutions, total project cost or value refers to the size of the loan or the amount of investment in a capital markets issuance. To ensure clarity, the disclosure language will also provide the total project cost figure.
The table below provides historical information on the average concessional levels in a sample of IFC’s blended concessional finance portfolio (FY10-FY22). The figures below may not be reflective of future trends as they are based on a limited sample size, and likely to change as IFC introduces new products to expand the portfolio in low income, fragile and conflict affected countries, where blended concessional finance resources have become available at scale only in the last couple of years. These historical figures will be updated yearly to include data points for the most recent fiscal year ended and to reflect any refinements to the calculation approach and methodology.
|Average concessional level as a percentage of total project cost|
|Manufacturing, Agriculture, and Services||5.0%|
|Financial Institution Group||4.5%|
|Infrastructure and Natural Resources||3.0%|
|Disruptive Technology and Funds||1.4%|
By Blended Finance Facility Theme
|Low income & fragile and conflict affected states||6.4%|