Blended Finance
In addition to providing commercial financing for our own account, IFC uses a number of complementary tools to crowd in private sector financing that would otherwise not be available to projects with high development impact. One such approach is to blend concessional funds—typically from development partners—alongside IFC’s own commercial funding.
Blended finance can assist in mitigating early-entrant costs or project risks, helping re-balance risk-reward profiles for pioneering investments and enabling them to happen as highlighted in the Emerging Markets Compass Note.
IFC currently applies this approach in three areas: climate change, agribusiness and food security, and finance for small and medium enterprises, including women entrepreneurs. Other areas of strategic priority can benefit from this tool in the future. In FY16, we committed more than $117 million of donor funds, catalyzing more than $1 billion of IFC and private sector financing.
Read more on the role of blended finance in creating markets, and lessons from three blended-finance projects in the Emerging Markets Compass Note, from April 2018.
WHAT IFC IS DOING IN BLENDED FINANCE:
CLIMATE BUSINESS
Much of IFC’s experience with blended finance has been in the area of climate change where private sector players face higher risks or uncertainties associated with new, unproven technologies or first-of-their kind projects.
The concessional funds in the form of blended finance enable projects to demonstrate viability and then pave the way for financing on fully commercial terms. IFC has a proven track record of mobilizing and intermediating concessional finance from the Global Environment Facility, the Climate Investment Funds and the IFC-Canada Climate Change Program. The latest IFC-Canada Climate Change Program Donor Report (June 2018), provides an overview of the program's most recent activities and results. The Finland-IFC Blended Finance for Climate Program and the Canada-IFC Renewable Energy for Africa Program have recently been added to IFC’s portfolio of blended climate finance platforms.
SME FINANCE
Small and Medium Enterprises (SMEs) in emerging markets face a trillion-dollar financing gap. Although banks in some markets are starting to move into SME lending, there still remain segments that are totally underserved. This includes SMEs in fragile and conflict-affected markets, women-owned businesses, education and health-care SMEs, and firms in rural markets.
IFC’s Global SME Finance Facility, the Goldman Sachs Foundation, IFC’s Women Entrepreneurs Opportunity Facility, as well as the MENA SME Facility utilize blended-finance instruments to help financial intermediaries expand their lending to underserved SME segments.
These facilities offer guarantees to lower the risks faced by financial institutions moving into SME markets. They also provide dedicated credit lines to reach specific segments—including women-owned SMEs—and performance incentives to motivate financial institutions grow their SME portfolios more quickly.
AGRIBUSINESS & FOOD SECURITY
Seventy-five percent of the world’s poorest people live in rural areas – places where agriculture has the greatest potential to lift them out of poverty. The Global Agriculture and Food Security Program (GAFSP) is a multi-donor fund with public and private sector windows and targets IDA countries with the highest rates of poverty and hunger. The private sector window of the program is managed by IFC and provides short- and long-term loans, credit guarantees, quasi-equity and equity to private sector companies or banks and financial institutions to support projects that help smallholders and SME farmers to improve productivity growth, create and deepen links to markets, and increase capacity and technical skills.
The IDA Private Sector Window (IDA-PSW)
The IDA Private Sector Window is a new development finance tool to crowd-in more private sector investment where it is most needed. The $2.5 billion allocation from IDA-18 for IFC and MIGA will rebalance the risk-reward profile for private sector projects in the poorest countries eligible to borrow from the World Bank’s International Development Association, or IDA, and fragile and conflict-affected situations (FCS). It will be implemented through four facilities:
- a Local-Currency Financing Facility for markets with limited currency hedging capabilities;
- a Risk-Mitigation Facility to provide project-based guarantees – focusing on infrastructure or public-private partnership (PPP) projects – without sovereign backing;
- a MIGA Guarantee Facility to expand coverage of MIGA guarantee(s); and
- a Blended-Finance Facility to mitigate various financial risks by providing loans, equity, and guarantees to pioneering IFC investments across sectors with high development impact. In addition to the sectors to which we have already applied blended finance, we will be expanding to new sectors such as manufacturing, technology, and basic services.
The IDA 18 Private Sector Window became operational on July 1, 2017. For more information, visit the IDA 18 Private Sector Window website.
2018 UPDATED JOINT REPORT: DFI WORKING GROUP ON BLENDED CONCESSIONAL FINANCE FOR PRIVATE SECTOR PROJECTS, October 2018
This is an update of the activities of a working group of more than 20 development finance institutions (DFIs) working to promote the effective and efficient use of blended concessional finance for private sector projects. This year’s report provides an extensive set of data on how blended concessional finance is used by DFIs—including how much, where, and in what sectors, and how much private finance is mobilized. The report also provides:
- A review of best practices and improvements in governance, decision-making processes, documentation, training, and effective monitoring to ensure concessional funds are used efficiently, and that the DFI Enhanced Principles for using blended concessional finance are effectively implemented.
- A discussion of key issues encountered by DFIs in 2017 with respect to implementing the Enhanced Principles and possible solutions.
- A review of possible methodologies for calculating the level of concessionality in projects, and the strengths and weaknesses of each.
Click here to download the new report.
Click here to for an overview of the Blended Concessional Finance Principles.
2017 REPORT: THE DEVELOPMENT FINANCE INSTITUTIONS WORKING GROUP ON BLENDED CONCESSIONAL FINANCE FOR PRIVATE SECTOR PROJECTS, October 2017
At the core of the 2017 working group report is a set of principles and guidelines (DFI Enhanced Principles) that aim to maximize development impact. The work builds on previous guidelines from 2013.
Key highlights of the 2017 report include:
- An update of principles and guidance for providing blended concessional finance for private sector projects, including how to push for commercially viable solutions using minimum concessionality.
- An overview of key drivers for the use of blended concessional finance, with a focus on addressing key obstacles to private sector investment and reinforcing and creating commercial markets over time.
- A pilot data gathering exercise on the volume and composition of blended concessional finance transactions by DFIs.
Click here to download the 2017 report.
