Blended finance will generate billions – not trillions – for developing countries. So we need to improve its development effectiveness

“From billions to trillions.” This is a familiar phrase from last year’s global debates about financing the 2030 Agenda for Sustainable Development. Billions refers to the finance currently flowing into developing countries (through Official Development Assistance (ODA), foreign direct investment and remittances, for example). Trillions is the amount we collectively need to mobilise to finance the Sustainable Development Goals (SDGs). This leaves an annual funding gap for developing countries estimated at US$2.5 trillion yearly. Public finance, whether domestic or international, clearly cannot fill this gap. In fact, since the 2002 Monterrey Consensus, policymakers have asked how we can use public resources as a catalyst to leverage other public and private resources for development.

Blended finance is one type of catalytic aid receiving plenty of attention lately. This is a catch-all term for a variety of complex financing setups, which all have in common their use of public funds, sometimes ODA, to de-risk, or leverage, private investments in development through instruments such as guarantees, syndicated loans and equity investments. There are big expectations for what blending could achieve: “There’s a $2.5 trillion development investment gap. Blended finance could plug it.” as one recent headline said. But we really don’t know if this is true.

We don’t know how much blended finance there is, where it’s going, or indeed, what impact it will have when it gets there. From a development effectiveness perspective, providers and partner countries need to understand different resources in relation to one another, to determine how they can be used to finance a development strategy. What is the added value of blended finance, as part of the financing toolbox? What are the potential risks, and where should it be targeted?

Our new report, Blended finance: Understanding its potential for Agenda 2030 uses the available data to try to answer these questions. We found that there are more private investments mobilised through blended finance in middle-income countries, and in countries with lower levels of poverty. Blended finance is most likely to be invested in infrastructure and the productive sectors, though we found examples of blended finance in the education and health sectors too. But private capital mobilised through blended finance seems more likely than foreign direct investment – which mostly goes to upper middle income countries – to be invested in poorer, lower middle income countries. This could mean that blending might be working the way it’s supposed to: using public funds to encourage private finance to go where it otherwise would not.

However, while blending is growing, it’s not likely to get us to trillions. Our projections show billions annually at the most – well short of bridging the gap in SDG funding. Blended finance should probably, therefore, be a resource that complements, not replaces, others, and as such should be used strategically. There are also challenges in aligning blended finance with development effectiveness principles. There is a particular challenge with reporting of results and data on blended finance flows. The data is so poor that we can’t determine the amount of ODA spent to generate the private finance described in the previous paragraphs.

To address these questions and issues, we need to look firstly at how we can generate better evidence to discuss how blended finance can be made more effective at country level, especially as big providers (like the EU) scale up their use of blended finance instruments. The goal is to ensure we have the evidence and information needed to understand how blended finance can best be used to finance development and end poverty as part of a coherent strategy that leaves no one behind. This means understanding country contexts and where blended finance can add real value, including the opportunity costs of using ODA for blending instead of traditional grants and loans. Partner countries must be able to assess how and whether blending fits into their own national strategic plans, and may question whether it’s the best use of aid to strengthen their domestic economies and markets versus other catalytic uses of aid. Improving monitoring and evaluation systems, results frameworks and publicly available qualitative information on objectives and outcomes is needed to develop this evidence base – and a common space to discuss and agree what these systems and frameworks should look like.

The Global Partnership for Effective Development Cooperation can play a key role in improving understanding and evidence, promoting dialogue and supporting action. At its Second High-Level Meeting, Development Initiatives is partnering with Oxfam International and the UK Aid Network to host a side event to examine available evidence and identify next steps. We aim to generate commitments enhancing the effectiveness of blended finance under the auspices of the Global Partnership. Join us in Nairobi – we hope to hear a diversity of voices, to advance the policy debate and move our collective knowledge forward.

Download DI’s report: Blended finance: Understanding its potential for Agenda 2030

About author: Cordelia Lonsdale is a policy and engagement adviser at Development Initiatives, an independent international development organisation focused on ending poverty by 2030. Cordelia works to inform policymakers and influence global policy processes, particularly to enhance the transparency and effectiveness of development finance.

Financing for development and country ownership

In July, the international community will come together in Addis Ababa to identify ways to provide the necessary resources to achieve our sustainable development objectives over the coming years. Taking place on the African continent, the Third International Conference on Financing for Development will provide an opportunity to ensure that the wide range of development resources available – including aid, partnerships with other actors, and our own domestic resources – can be harnessed effectively by developing countries to support our development priorities.

As Co-Chair of the Global Partnership for Effective Development Co-operation (Global Partnership), I see a strong need to maintain a focus not only on how many resources we can raise, but to ensure they are employed effectively to support developing countries’ efforts. In January 2015, I co-chaired the 7th meeting of the Global Partnership’s Steering Committee in The Hague, which confirmed the importance of exploring better ways to use development finance tools, and the critical need for keeping the principles of effective development co-operation – country ownership, focus on results, inclusive partnerships, and transparency and accountability – front and centre of this year’s major discussions on Financing for Development and Post-2015 agenda.

At the 2015 World Bank Spring meetings, the Global Partnership held a side event on strengthening development finance, particularly from a partner country perspective. The meeting featured interventions from a range of developing countries, including Rwanda, Tanzania, Timor Leste, Kenya and South Sudan, as well as the g7+ group of fragile states, as well as views from development partners including Development Initiatives, the Netherlands, Mexico, and UNDP. Discussions focused on how the principles of effective development co-operation can contribute to making better use of existing resources for development, as well as to leveraging more quality public and private finance to achieve sustainable development for all. Overall, the event highlighted the importance attached to the development effectiveness agenda – and particularly the centrality of country ownership – for implementing the post-2015 sustainable development goals.

This begins with keeping a focus on the commitments that have already been made to improve the effectiveness of Official Development Assistance (ODA). The first Financing for Development Conference in Monterrey in 2002 recognised the need to ensure that aid is delivered to produce maximum development impact at country level, through the harmonisation of co-operation providers’ procedures; efforts to untie aid ; and the use of development frameworks led by developing countries.

Efforts like those of the Global Partnership have helped spur progress in making development co-operation more effective in the past decade. In Malawi, for example, as part of its cloud-based Aid Management Platform, the government is using geospatial interactive maps to better understand development work, in terms of who is doing what and where. These data-driven, online maps correlate development activities by donor, type of work and poverty rates in Malawi’s 28 districts, thus helping ensure aid goes where it is most needed. Further progress is however required, calling for a collective international will to achieve development commitments.

Undeniably, development partnerships going beyond the traditional donor-recipient relationship will become increasingly important in the coming years. We will need to work with businesses, civil society, foundations, development partner governments from the South, and many more. Such partnerships will provide an immense opportunity to direct more resources to eradicating extreme poverty and promoting sustainable development – but their diversity also raises new challenges of co-ordination for developing countries. For us to take full advantage of these partnerships, we need to promote good practice so that these resources are deployed in support of our development priorities.

The surest way to promote country ownership is for us, developing countries, to mobilise our own domestic resources. At the January Steering Committee meeting of the Global Partnership, members agreed that the GPEDC will further explore how development co-operation can be scaled up, deepened and improved to strengthen institutional capacity for domestic revenue mobilisation, by improving tax transparency and accountability, and tackling tax avoidance and illicit financial flows.

Indeed, at the World Bank Spring Meetings side event, participants focused heavily on domestic resource mobilisation, calling for more support from co-operation providers to improve tax and revenue collection systems and capacity. Equally, the private sector needs to be kept in check to ensure that no one gets away with tax evasion and avoidance. There was repeated and clear recognition of the need for better and smarter quality development finance, beyond ODA, to achieve post-2015 objectives.

A strong commitment to progress in these areas should be a priority for the Addis Ababa conference.

Country leadership and ownership must be at the forefront of the post-2015 sustainable development agenda. The Global Partnership helps translate the principles of effective development co-operation into action on the ground. These principles are applicable to all forms of development co-operation, and the Global Partnership provides an inclusive platform for engaging all development stakeholders as equals.

goodall-gondweAbout the Author
Minister of Finance, Economic Planning and Development Goodall Edward Gondwe has had a long and distinguished career as an economist. Among other positions, he has worked at the Reserve Bank of Malawi, the African Development Bank and served in the IMF for 22 years. Since 2002, he has worked in the Government of Malawi, and in 2014 was appointed as Minister to Finance, Economic Planning and Development to head the amalgamation of the Ministry of Finance and Ministry of Economic Planning and Development.

Six Ways to Strengthen Links Between Effective Development Cooperation and the Financing for Development Agenda

Brief Overview of Development Finance in the Asia-Pacific Region
The Asia-Pacific region has a strong history of collaboration via regional mechanisms to strengthen institutions that support and are supported by effective development cooperation. For instance, countries within the Pacific Islands Forum have committed to a peer review of country systems, as well as expenditure and accountability assessments, to ensure greater progress in MDG completion and guarantee that development outcomes are tracked, planned, budgeted, and monitored.

Given this focused regional atmosphere, Asia-Pacific countries are positioned to continue to contribute to development financing and the post-2015 development agenda, particularly in terms of providing linkages between on the ground realities and global policy dialogue. In preparation for the Third Global Conference on Development Financing, over 120 delegates from 24 countries including representatives of government, civil society, the private sector, came together in Manila in March to work together to strengthen connections between effective development cooperation and the Financing for Development agenda in the Asia-Pacific.

PH_topBy focusing on the “how” of achieving the Busan Principles and the eventual Sustainable Development Goals (SDGs), in Manila, Asia-Pacific leaders worked together to reinforce the importance of strong, transparent, and integrated national systems to enhance the planning and budgeting of all finance flows for better development results.

The regional meeting provided the following six key recommendations for strengthening the use of country systems:

  1. National development priorities should continue to guide international development flows. As maintained by the Busan Principles, country-led development means that cooperation must support country goals.
  2. The use (and strengthening) of country systems is essential to financing the means of implementation for the SDGs: country systems lead to country-led development.
  3. Civil society, the private sector, and all development partners must be at the table to support Integrated National Financing Framework at the country level.
  4. Open and transparent data at the country level must inform decisions within Integrated National Financing Frameworks. Using such data in decision-making will limit inefficiencies that create further challenges to developing countries.
  5. Countries must also be accountable for monitoring of financing for SDG implementation. The linkage must be made to the national processes, with regional and global processes leading the post-2015 dialogue.
  6. South-South Cooperation should guide partnership within the Integrated National Financing Frameworks so as to take full advantage of the myriad of economic, social, technical, and other knowledge resources from Southern countries.

The Philippines: Strengthening Ties Between Effective Development Cooperation (EDC) and the Financing for Development (FfD)

The Philippine country context provides an important input to regional dialogue surrounding the changing nature of development finance. National reforms in the Philippines have resulted in stronger links between development planning, budgeting, and institutional frameworks to mobilize more effective uses of development finance, the effect of which is evident in increases in domestic revenue as well as declining reliance on external borrowing and ODA. In addition, ongoing reforms undertaken by the Philippines have resulted in a stronger link between the Philippine Development Plan (PDP) and the development budget, and a robust institutional framework to mobilize and more effectively use diverse flows of development finance.

To this end, a Development Finance and Aid Assessment (DFAA) was commissioned by the Government of the Philippines through the National Economic and Development Authority (NEDA) to take stock of current development finance, and its successes and lessons learned.

The study’s outcomes found an increasing reliance on DRM and more efficient financial markets as important sources of development financing in the future. The DFAA also suggests that the Philippine government will be able to meet and perhaps surpass its fiscal deficit targets if it continues with the pace of fiscal reforms. Reliance on external borrowings and ODA are expected to continue to decline and Public-Private Partnerships and foreign direct investment could become significant sources of development finance if the country succeeds in addressing regulatory and political risks.

Overall, the country has a strong outlook for development financing with several key issue areas of focus moving forward, including areas linked to the Busan Principles of country ownership, accountability, and focus on partnerships and results. Areas for future consideration include:

  • • Ensuring government ownership and accountability to the Philippine Development Plan (PDP) and using the PDP as a platform for better coordination of various donor CASs (Country Assistance Strategies);
  • • Improving the quality of the PDP with the increased use of evidence-based recommendations in selecting and prioritizing policies and interventions;
  • • Increasing dialogue with donors to examine how their CAS contributes to the Philippines’ own national development priorities and formulating a development cooperation strategy to identify further synergies between government and donor development initiatives;
  • • Promoting discussion around improving the role of bilateral and multilateral donors in the provision of key public goods such as disaster prevention, post-disaster rehabilitation, and post-conflict transition;
  • • Intensifying the use of ODA as a catalyst for attracting private capital to finance certain public goods; and
  • • Providing the NEDA Monitoring and Evaluation Staff with technical training from institutions and various other Southern countries to further build in-house monitoring and evaluation capacity.

These focus areas lend further support to the recommendations made at the Manila Regional Meeting that the principles of Effective Development Cooperation remain relevant as supporters of development financing and sustainability as articulated in the post-2015 agenda.

DDG RGT 4Mr. Rolando G. Tungpalan is the Undersecretary for Investment Programming of the National Economic and Development Authority (NEDA) of the Government of the Philippines. He is a member of the Steering Committee of the Global Partnership for Effective Development Cooperation (GPEDC) and the Asia-Pacific Community of Practice on Managing for Development Results (APCOP).