[...] we see a huge missing middle finance gap that blended solutions can help to fill
Executive Secretary, UNCDF
Ladies and gentlemen
I am delighted to join you all at this important regional event. This gathering is a wonderful example of how to share lessons and exchanges across countries in Africa and is exactly the kind of reflection we need at this point towards the SDGs. More than that, if we are to improve how blended finance works for countries in Africa,
To be sure, we see the impressive progress being made in Southern and East Africa towards the SDGs. I have spent the last few days learning first-hand about many exciting developments here in Uganda, from its embrace of digital solutions to the establishment of a national SDG roadmap.
Still, across the region, there is still a need for accelerated progress. Getting the finance piece right is essential to that acceleration.
Specifically, we need more risk-taking and changes in the incentives that underpin much of the financing for development architecture if we aim to get more finance to where it’s most needed.
And we need to make those changes now, before the structure of the current international financial system further entrenches the inequalities that further marginalize poor and vulnerable countries and communities at risk of being left behind.
While there is much focus on turning the ‘billions into trillions’, we need to think not just of quantity, but also about quality and how and where those resources are allocated. If we are to live up to the SDG commitment of leaving no one behind, then increased public and private financial flows must be made to work also for vulnerable countries in this region and for smaller-sized projects in the so-called ‘missing middle’.
Blended finance is seen as holding out great promise, by making SDG-positive investments more attractive for private investors. For this reason, in Africa and in Asia, UNCDF is deploying blended finance strategies to mobilize private resources for under-served communities and projects. Let me mention three examples from our work here in Uganda.
Under the Development Initiative for Northern Uganda, we have utilized a dedicated blended finance facility to provide affordable finance for SMEs working in agriculture. That facility, called Support to Agricultural Revitalization and Transformation, or START, has an initial capitalization of €4 million, and is expected to leverage €8 million through private sector financing and financial support from development partners.
A separate blended finance facility under the Development Initiative for Northern Uganda is offering conditional grants for the rehabilitation of district and community access roads in target districts. The initial capitalization is €7.2 million with an expected leverage of €1.4 million from public and private funds. This will help district governments to connect local and regional markets while improving the access of local communities to jobs and social services.
Blended finance solutions are also at the core of our project finance work, with aims to unlock national financial markets for sustainable and inclusive local development, with a particular focus on empowering women. In Uganda, we are helping to develop and structure a pipeline of 16 public and private projects worth around $80 million.
And yet, despite its exciting potential, blended finance may not be the most appropriate solution in every case. We need to think of blended finance not as a cure-all, but as another tool in our financing for development toolbox.
To be more specific, let me highlight four issues that all countries and partners working in this region may wish to think about as they pursue blended approaches. These are all issues that permeate our own work on blended finance at UNCDF.
First, it is important to look at each project and each country, at their specific risk profiles, and at national policy priorities to determine where blended finance makes sense, or where domestic resources or ODA makes more sense.
Part of making this determination is making sure that governments in the region have in place the right national capacities to design, analyze and structure blended transactions, so that blended risks and rewards are shared fairly between the public and private partners involved.
Second, we need to be careful that blended finance does not leave LDCs further behind. Our data for 2012-2015 show that, of the $81 billion of private capital mobilized by official development finance, only 7% was for LDCs.
Certainly, if blended finance continues to be more widely used, we need to ensure that this does not lead to a decline in the overall share of development finance received by those countries where blending has proved to be more difficult.
This speaks to the importance of ODA commitments being met. And it also speaks to the need for blended finance operations to respect national ownership and be aligned with national priorities.
Third, we need to align blended finance with the need to leave no one behind. To be sure, blended finance often works well for big infrastructure projects. But we also know that SMEs in this region are engines of job creation, that they can provide opportunities to women and young people yet lack the business advisory support or affordable financing to grow.
For example, we are also finding the clean energy sector to be especially ripe for blending. We provided growth capital to a Ugandan solar company focused on delivering quality products in the western region of the country. UNCDF not only provided a first-loss guarantee to a loan from a local bank, but also combined it with a direct concessional loan so that the company can, for the first time, purchase sufficient inventory in one-go, rather than breaking down their orders in bits and pieces despite having customer orders coming in.
So we see a huge missing middle finance gap that blended solutions can help to fill. But this means we also need organizations with boots on the ground to identify and support SMEs through their lifecycle.
Finally, we need to align blended finance at a minimum does no harm. This means we need to make sure that local impacted communities are consulted about projects that affect their lives. It means we need to adhere to environment, social and governance standards. It means we need to empower women.
We need to use all options at our disposal to close financing gaps.
We need to encourage DFIs and MDBs to scale up their support for countries at risk of being left behind.
We need to support transactions in local currencies, crowd-in domestic investors, and empower women.
We need a sharper focus on using the lessons from blended finance to inform policies and build local capital markets.
We need to improve how we measure and report on the SDG impacts of blended operations, and we need more sharing of knowledge.
Our hope is that our report, and this event today, prompt a lively debate on what more could or should be done when it comes to applying blended finance in LDCs.