As part of broader efforts to get more private resources flowing to LDCs, providers of concessional finance should engage with their boards, donors and LDC governments to find innovative ways to take more risk and experiment with new solutions. With the aim of generating demonstration effects that can inform subsequent scale-up and replication, this could include the following in relation to blending:
Determining, first, when blended approaches may be the right ones for leveraging private finance and for providing public services. In some cases, a project may simply not be ripe for blending, and pure public financing might be a better option. However, there may be other cases in which blended transactions are important to create demonstration effects that can narrow the gap between actual and perceived risks in LDCs.
For those cases where blended finance is appropriate, establishing and/or sufficiently resourcing existing dedicated funds, facilities, entities or special purpose vehicles that will support blended projects in LDCs throughout their life cycle. At the same time, providers of concessional finance should be given the headroom and incentives to take risks while preserving their credit ratings and financial sustainability.
In LDCs where providers are not physically represented, working with those providers which do have boots on the ground—including United Nations entities—to source, develop, structure, finance and/or scale up SDG-aligned projects, and engage local communities in decisions which affect them.
To bring more voices and perspectives to the table, with a view to improving best practice, global policymaking discussions on blended finance should purposefully engage LDCs and other developing countries as active participants. The same applies to engaging providers of concessional capital from the South that may support blended transactions. It would be important to convene these discussions in universal forums, such as the Financing for Development and Development Cooperation Forums held at the United Nations.
To strengthen national capacities in LDCs, providers of concessional finance and donors should support national and local government officials and national development banks with targeted capacity-building and training to:
identify and develop a pipeline of SDG-aligned projects;
ensure robust metrics are in place for assessing and monitoring development and financial additionality;
involve impacted communities in decisions;
negotiate deal structures that share risks and rewards fairly;
put robust mechanisms in place to ensure transparency and accountability; and
apply rigorous ESG standards, promote local participation and support the empowerment of women.
Providers and other development partners in LDCs should, where appropriate:
actively seek out suitable domestic investors—many of whom may be more willing to invest in local projects than external investors—and support blended transactions in local currencies; and
ensure that linkages are built with local suppliers and entrepreneurs, so that blended transactions can help strengthen domestic industries.
In line with the principle of national ownership, providers should proactively engage at a strategic level with LDC governments so that they can determine which financing model—public, private or blended—is best suited for which investment; and
LDC governments, concessional providers and donors should coordinate closely at the country level to introduce new blended finance vehicles and to ensure that blended finance transactions are complementary to interventions by other development partners aimed at supporting long-term private-sector development and promoting a sound enabling environment.
While currency risks are not specific to blending, blended approaches can help mitigate one of the most frequent barriers to investment in LDCs—local currency volatility. Providers should, therefore, increase facilitation of currency hedging for projects in LDCs.
Strengthening SDG impact measurement means that providers should:
ensure that ex ante SDG and ESG impact assessments are undertaken, along with analysis to minimize market distortions caused by their interventions; and
conduct or support ex post evaluations and consider providing additional grant capital for such impact evaluations. These evaluations should be made publicly available and should focus not just on project-specific impacts but, to the extent possible, also on broader impacts on market development and enabling environments.
To improve transparency concerning the use of blended finance in LDCs and help coordination with other interventions, it is important that concessional providers:
make publicly available information such as how much ODA is going into blended transactions, any non-commercially sensitive information on deals and portfolios, performance, eligibility criteria and impact metrics;
create appropriate data standards that support better monitoring, measurement and cross-comparison of blended finance interventions; and
work with LDC governments to run fair tendering processes to select the most competitive project sponsors.
Providers should work with all stakeholders to maximize the sharing and transfer of knowledge on blended finance in LDCs. This could mean:
at the country level, creating regular policy dialogues to share lessons from blended finance successes and failures;
at the global level, promoting and scaling up existing data efforts by making them available to a larger group of stakeholders, including the private sector;
at the global level, actively supporting North–South and South–South exchanges on blended finance—including through Financing for Development and Development Cooperation Forums held at the United Nations, expert meetings, conferences and field visits; and
within concessional providers, disseminating evidence and past experiences more effectively between different functional and geographical units.
All stakeholders should continue generating additional evidence as to how blended finance can work in LDCs. Topics that deserve further research include:
how blended finance should be applied across different countries and sectors and using different instruments;
how to assess and measure development and financial additionality;
how much blending is taking place thanks to concessional providers from the South;
the impact of increased blending and mobilization ratios on development financing envelopes overall, and for LDCs in particular;
how blended finance can help build capital markets in LDCs so that increased financing can be sourced domestically, and what role local entities can play in supporting this goal; and
how to increase standardization in blended transactions and achieve scalability.
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