Meeting the Sustainable Development Goals: Can Blended Finance Fill the Gap?
The Canadian government increasingly promotes blended financing—as a form of privatization—to meet the United Nations’ 2030 Sustainable Development Goals (SDGs). But blended finance in fact undermines Canada’s ability to meet its commitments to the established goals of Official Development Assistance (ODA), namely poverty reduction, a central focus of the SDGs.
Today, more and more ODA is being channeled towards ‘blended finance’ rather than through traditional aid channels including projects, programs and budget support to developing countries.
In 2019, Canada only contributed 0.27% of Gross National Income (GNI) to ODA, an historic low, and far from its 0.7% commitment. An increasing proportion of this money has been allocated to blended finance over the past few years.
For example, in 2017, the Government of Canada established a development finance institute (DFI), FinDev Canada, under the auspices of Export Development Canada (EDC). Its mandate is to support “inclusive private sector growth” through blended finance initiatives. Canada is also one of the main sponsors of the Convergence Platform, “The Global Network for Blended Finance,” headquartered in Toronto.
Alongside the creation of FinDev, the federal government also made significant changes to Canada’s definition of ODA, introduced a new International Financial Assistance Act, and committed $1.5 billion to facilitate “innovative and blended financing” approaches to ODA.
Blended finance has a poor track record.
- Blended finance does not help low-income countries
According to the data, low-income countries receive only a fraction of DFI contracts. The lion’s share goes to middle and upper middle income countries. These investments often benefit large, multinational corporations, and are sometimes channeled through tax havens. It is unclear how FinDev Canada proposes to avoid these issues.
- Private financing is more expensive than public financing
From the perspective of banks, private sector lending is actually riskier since the private sector may not be able to secure long-term returns on investments. The public sector pays lower rates of interest on loans than the private sector due to the superior security of tax revenue. That is why, without exception, the large expenses associated with initiatives needed for development require financial support from governments.
- Blended finance initiatives are complex and difficult to monitor
Similar to public-private partnerships, blended finance initiatives suffer from a lack of transparency and democratic accountability. There are a range of barriers to increasing transparency – commercial and privacy law prevent the publication of commercial contracts, and the use of financial intermediaries and sub-contracting adds an additional level of complexity. Blended finance is a particularly poor choice in countries with weak state capacity for regulation.
- This mode of financing development shifts investment away from the services needed most by low-income populations
Public investments in health, education, water and sanitation is urgently needed. However, the majority of investment in blended finance initiatives goes to finance, energy, industry and extractives (mining and oil and gas). Many of these projects have considerable negative environmental and social impacts.
Read more about alternatives for effective aid and international solidarity!