Key messages from the report

More resources—public and private, domestic and international—need to work together effectively to help all developing countries meet the Sustainable Development Goals (SDGs) and support inclusive and sustainable growth. Increases in SDG finance must benefit and include the world’s 47 least developed countries (LDCs) at risk of being left behind.

​While official development assistance (ODA) and domestic public finance remain essential, they will not be enough for LDCs to meet the SDGs. Private investment, including foreign direct investment (FDI), often bypasses LDCs. It is, therefore, important to understand how these countries can best benefit from the full range of financing options, including blended approaches. This report examines the opportunities and challenges for deploying blended strategies in LDCs, and how to pursue them effectively.

Blended finance is receiving increasing attention for its potential to amplify the impact of concessional resources by sharing risks or lowering costs to adjust risk–return profiles for private investors, thereby crowding in private finance for SDG investments that would otherwise be overlooked. In addition, blended finance in LDCs can create demonstration effects that support commercial replication over time, inform government-led policy improvements and potentially support the development of local markets. Still, blended projects are not without their limitations and risks.

Data from the Organisation for Economic Co‑operation and Development (OECD) compiled for this report show that official development finance has mobilized much less private capital in LDCs than in other developing countries: of US$81 billion mobilized in 2012–2015 for all developing countries, $5.5 billion (some 7 percent) was for LDCs, though the trend is one of growth. This is not necessarily an ‘underweighting’ relative to the size of LDC economies, though it is small relative to the ODA that LDCs receive. Average amounts mobilized per transaction in LDCs are less than one third of those in developing countries overall. Credit and risk guarantees generated the largest absolute mobilization of private capital.

Barriers to private capital are typically more prevalent and severe in LDCs than in middle-income countries (MICs). At the enabling environment level, these stem from macroeconomic, governance, regulatory, infrastructure, market and other perceived risks. At the project level, these include operational and contract risks, costly and time-consuming pipeline origination and project preparation, small deal size (in absolute terms and relative to transaction costs), untested business models, and information and data gaps.

The difficulty of blended finance in LDCs may reflect objective challenges in attracting private capital to riskier, smaller and less-tested markets—even when concessional resources are deployed to share risks. Some providers of concessional capital may also shy away from such markets, for several reasons: low risk appetite given the need to preserve their triple-A credit ratings; a lack of awareness of investable projects; institutional incentives to close deals, leading to a focus on ‘easier’ markets or projects; or mandates that favour commercial returns.

Blended approaches must be deployed carefully in line with established principles on effective development cooperation related to the use of ODA more generally. Two critical principles are:

  • sustainable development additionality, meaning that the intervention has direct development impact and alignment with the SDGs, with the goal of leaving no one behind. Development additionality entails incorporating social equity considerations into project design and execution, including pricing products and services with public good features at affordable levels. These affordability constraints imply that when it comes to providing many public services, domestic public finance, supported by ODA as necessary, might be the best option; and
  • financial additionality, meaning that the project would not be funded by commercial sources alone without concessional support. Ensuring the minimum amount of concessionality is critical to avoid over-subsidizing the private sector while also not crowding out private investors or unduly distorting local markets. Determining the amount and structure of concessionality in LDCs can be complicated by differences in risk perception and the scarcity of market data and pricing references, among other factors.

Providers of concessional finance should also ensure that blended transactions:

  • comply with high standards of transparency and accountability;
  • promote the fair allocation of risks and rewards between private investors and project beneficiaries; and

  • apply rigorous economic, social and governance (ESG) standards, promote local participation and ensure a focus on the empowerment of women.


While blended approaches seek to increase overall financing for the SDGs, absent an increase in the overall level of aid, using more ODA for blending may result in a decrease in its use for such purposes as helping to fund basic infrastructure or social services in LDCs—sectors not usually suitable for blending. Given concerns about LDC governments not being fully involved in decisions about the allocation of concessional resources, or blended finance being a back door to tied aid, concessional finance providers and donors should ensure that blended transactions align with national priorities and respect national ownership.

To improve the effectiveness and efficiency of blended operations, principles related to blended finance have been articulated in recent years. For instance, embedded in the Addis Ababa Action Agenda, Member States agreed on a set of overarching principles for blended finance and public–private partnerships (PPPs). In October 2017, the OECD Development Assistance Committee approved a set of blended finance principles for unlocking commercial finance for the SDGs.

Many blended finance projects tend to fall into two categories: infrastructure projects and corporate investments. This report maintains a particular focus on the ‘missing middle’ segment of the corporate sector. While the support required will vary by project type and sector, a flexible and hands-on approach is necessary in blended finance transactions in LDCs throughout the project life cycle:

  • During pipeline and project preparation, concessional finance providers typically need to spend more time and resources providing technical assistance and capacity-building support to project stakeholders. More broadly, providers of concessional capital and donors should also help strengthen national capacities in LDCs to engage effectively on blended transactions.

  • During deal design and execution, greater concessionality may have to be deployed in LDCs. This may come in the form of a larger amount of concessional finance, more generous terms and pricing and/or the use of multiple concessional instruments. In corporate deals, especially in the ‘missing middle’ segment, this results from risks related to the small scale of the opportunity, the early stage of business development, project sponsors lacking a strong record, or the novelty of business models or technologies adopted. In addition to some of these factors, in infrastructure deals higher concessionality may be required to mitigate tariff affordability issues and regulatory risks.

  • During the transition to commercial solutions, the phasing-out of concessional support, with the ultimate goal of reaching commercial sustainability, may take longer in LDCs than in other developing countries. Some concessionality may still be needed in subsequent deals—for instance, in infrastructure projects where tariff affordability and social equity issues persist. The government may replace ODA with domestic public resources to keep a project viable, while needing carefully to assess potential fiscal and sovereign debt repercussions.

Given the limited track record of, and evidence on, blended finance impact in LDCs, monitoring and evaluation (M&E) and knowledge-sharing are very important—in all three stages of the investment life cycle. M&E can contribute to the formation of best practices and identification of similar blended opportunities in new sectors or geographies.

Given concerns around indebtedness, LDC governments should institute sound fiscal risk management frameworks that account for contingent liabilities arising from blended finance projects.

Blended finance in LDCs is an evolving concept. The report examines several open questions, including:

  • Should blended finance be expanded to more sectors? The report argues that blended finance may not be well suited to all sectors, especially those with limited revenue-generating potential. In some cases, the cost of blending may be too high, and pure public financing might be a better option. In other cases, blended transactions are important to create demonstration effects that narrow the gap between real and perceived risks of investing in LDCs.
  • Should blended finance focus on attracting domestic or foreign investors? This report argues that any source of private capital should be opportunistically targeted. While FDI can also bring benefits in the form of know-how, technology and expertise to LDCs, proactively focusing on domestic investors can have positive side effects on local market development.
  • Is blended finance better suited to countries with stronger enabling environments? While some enabling environment barriers can only be fixed by policy interventions, demonstration effects from blended projects (especially when they are of national importance) can inform government-led policy reforms. This underlines the need for coordination between blended finance and other interventions aimed at supporting long-term private-sector development.

  • Should providers of concessional finance set hard targets for mobilizing private finance? This report argues that while higher leverage ratios can play an important role in bridging SDG financing gaps, setting hard mobilization targets for providers of concessional finance raises concerns. Careful analysis is necessary to consider the impact of mobilization targets on development finance envelopes and allocations for LDCs and other vulnerable countries. More broadly, if blended finance becomes an increasingly important modality of development cooperation, development partners will need to ensure that this does not come at the expense of support for LDCs and other vulnerable countries—those where blending has been more challenging.

Blended approaches can help mobilize much‑needed additional capital for LDCs. But they need to be considered carefully and should be applied as part of a broader SDG financing strategy. Ultimately, project and country characteristics, macroeconomic conditions and national policy priorities should determine which financing model—public, private or blended—is best suited for which SDG investment.

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