McLeod Group guest blog by Ian Smillie, August 6, 2019
The Globe and Mail recently ran a story written by two employees at a Canadian government-funded organization called Convergence. Headlined “Blended finance offers global solutions,” it explained – or at least it tried to explain – how “strategic use of capital from public sources to mobilize private-sector funds can help developing countries.”
“Blended finance,” the article states, “is the strategic use of catalytic capital from public or philanthropic sources to mobilize commercial capital from the private sector for developing countries.”
In lay terms, the idea is simple. The private sector will make up the massive shortfall in funding required to meet the Sustainable Development Goals (SDGs). This shortfall – estimated in trillions of dollars – exists because, while country after country signed on to the impressive set of development targets for 2030, when it came time to pony up the cash, donor and emerging country governments alike fell flat on their collective face. At the infamous 2015 Addis Ababa Financing for Development Summit, the Harper government promised exactly nothing, and since then the Trudeau government has allowed Canadian ODA spending to languish in the doldrums.
Now, from Convergence, we hear that “the Canadian government has been a leader and innovator in the blended finance space.” Not really. But just to check, I went to the Convergence website, which explains that “blended finance has already mobilized over $100 million” (most of it long before Canada entered the field). “We’re going to bring this number into the trillions,” says Convergence, without defining “we”.
Quibbles aside, the site has dozens of charts and graphics that grow furiously as you scroll past them: “deal” sizes and types, blending trends, number of “archetypes” per deal, regions, countries, sector and sub-sector frequency, number of investors, and so on. If I’m reading the data correctly, it seems that while $1.4 trillion is needed annually to meet the SDGs, only 17 “solutions” have so far been supported by Convergence, with a total funding of $6 million. And 41% of the grantees have been financial institutions.
The overview of a “Climate Finance Partnership” exemplifies how the system works. The initiative involves the governments of France and Germany, several philanthropic foundations, and BlackRock, the world’s largest asset manager. They have joined together to develop a vehicle that will make investments in renewable energy, energy efficiency, energy shortage, etc., “in middle income countries across Latin America, Asia and Africa.”
Once they get it together, the consortium will call for proposals in which concessionary capital of $100 million will (hopefully) mobilize an additional $900 million in institutional money. Of course, the institutional capital will be looking for security and profits, which is why the whole thing is aimed at middle-income countries rather than low-income ones, where risks are higher. Middle-income countries, however (the overview hastens to explain), “represent the majority of the world’s poorest population and face massive climate finance shortfalls.” One might ask as an aside: If it’s tough for middle-income countries, how much tougher is it for low-income ones, where most of the people are among the world’s poorest?
A 2017 Oxfam report raised a variety of concerns about how blended finance can divert aid money from other priorities. There are issues with its risk aversion (hence, for example, middle-income countries), an absence of pro-poor priorities and ownership, accountability, transparency, and evaluation. Blended finance has also shown weak alignment with developing country priorities, and it evinces worrisome tied aid proclivities.
Concerns like these and others are raised in a 2019 OECD working paper on the subject. The study asks how much new money is actually being mobilized. It asks about additionality: are development outcomes being achieved that would not have materialized otherwise? Or are investors simply taking advantage of cheap money and less risky opportunities?
While these two questions ask about effectiveness and impact, a third relates to efficiency: Is blended finance better than the alternatives? This is important because blended finance is premised on the idea that private sector involvement will provide additional social returns beyond what the private sector on its own might achieve anyway. If, through blended finance, it does not, then the aid money used to promote it is almost certainly being diverted from priorities that might have a greater impact – perhaps in low-income countries – in achieving the Sustainable Development Goals.
It would be a tragedy if this turned out to be the case, given the tremendous shortfalls in aid funding for development, and Canada’s low rung in the generosity ladder.
Canada has been along this road before with something called CIDA-INC, a mechanism aimed at encouraging Canadian companies to invest in developing countries. A 2007 evaluation found that of 721 contribution agreements over the previous decade, only 15.5% could be considered successful, “success” itself defined in narrow terms that had nothing to do with development or poverty reduction.
These are all reasons why clear, pro-poor policy, monitoring, transparency and evaluation are needed in order to ensure that blended finance actually delivers both additional financing and social returns. Since such measures are now lacking, one has to fear that blended finance will become an early 21st century fad created to let governments off the hook in their responsibility to end global poverty.
Ian Smillie is a development professional and foreign aid critic. Image: Mike Vrobel.