Before we define Blended Finance it’s important to situate the term in the development assistance, or foreign aid, landscape.
Defining Official Development Assistance (ODA) aka Foreign Aid
The Organization for Economic Cooperation and Development’s Development Assistance Committee (OECD DAC) defines Official Development Assistance (ODA) as “government aid that promotes and specifically targets the economic development and welfare of developing countries.
ODA flows to countries and territories on the DAC List of ODA Recipients and to multilateral development institutions are:
- Provided by official agencies, including state and local governments, or by their executive agencies; and
- Concessional (i.e. grants and soft loans) and administered with the promotion of the economic development and welfare of developing countries as the main objective.
WHAT IS NOT ODA?
- Military aid and promotion of donors’ security interests
- Transactions that have a primarily commercial objectives e.g. export credits”
The Sustainable Development Financing Gap
The current global aid agenda is organized around a series of Sustainable Development Goals (SDGs)—17 development targets adopted by United Nations (UN) member states in 2015 to be accomplished by 2030. These include eliminating poverty and hunger, ensuring access to public services like health, education and clean water and achieving gender equality.
This is a massive undertaking. The UN estimates that the “financing gap,” or funds still needed to achieve the SDGs – $2.5 trillion USD per year before the start of the pandemic – has now grown to $4.2 trillion USD per year.
Current levels of ODA fall far short of what is needed. Totalling only 153 billion USD worldwide in 2019, donor countries have continue to miss the goal they set for themselves in 1970, of 0.7% of their Gross National Income (GNI) for ODA.
Instead of raising ODA budgets to reach their stated commitment, Northern countries and multilateral development institutions have proposed that ODA, that is public aid funds, be used to attract profit-seeking private sector capital to fill this sustainable development financing gap; i.e. ‘blended finance.’
Enter Blended Finance
According to its proponents, “Blended finance is the strategic use of development finance [or ODA] for the mobilisation of additional finance towards sustainable development in developing countries.”
As the Convergence Blended Finance Network, headquartered in Toronto, Canada, suggests, “Blended finance is a structuring approach” which uses “catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development.”
The problem is that blended finance consistently falls short when it comes to offering effective aid. It is certainly failing to raise the promised finances. But more centrally, of the little money that is raised, almost all is directed to middle income countries and projects that can turn a profit for investors with less risk, rather than the most needed projects and programs in the least-developed countries. And as is the case with other forms of privatization, evidence shows that private financing for international projects ends up being more expensive than public financing. Private financing also adds levels of complexity, not only leading to greater administrative costs, but also to less transparency and accountability.
Read more about the high costs and problems with blended finance here.