Friday
April 22
2016

Trending: Blending, The Fad for Mixing Public, Charitable and Private Money

Meeting the United Nations’ Sustainable Development Goals will require additional investments of $2.5 trillion a year in things like health care and education for the world’s poorest people, according to UNCTAD, a UN agency. A further $13.5 trillion is needed by 2030 to implement the Paris climate accord, according to the International Energy Agency, a watchdog group. It is enough to drive development types to drink—which may be how they came up with the term “blended finance”, a heady cocktail of public, private and charitable money.

The phrase is being floated at all manner of gatherings, from the recent meetings of the IMF and the World Bank to the World Economic Forum in Davos, as a way to make the limited pool of money available for worthy causes go further. The new name notwithstanding, however, the idea of using public funds to attract private money is a venerable one. For it to change development finance fundamentally, as enthusiasts claim it can, it will have to become easier to scale up.

Private investors do not typically fund the construction of rural roads in Africa, say, or vaccination drives in villages, even though the returns on such investments are often enormous. That is because the returns are either hard to monetise, or the risks are too great for the private sector to tolerate. The point of blended finance is to use public or charitable funds to remedy those problems, allowing private money to flow to places and projects it would usually shun. According to a WEF survey of 74 blended-finance vehicles, this “honey trap” is working: every dollar of public money invested typically attracts a further $1-20 in private investment.

When Wandee Khunchornyakong, a Thai entrepreneur, wanted to build solar farms in sunny north-east Thailand, commercial lenders were unwilling to take a leap into such an untested market. In 2011 the IFC, an arm of the World Bank, provided an $8m commercial loan blended with a low-interest loan of $4m from CTF, a climate investment fund backed by several governments. This gave three local banks the confidence to lend a further $14m. By 2015 the company had attracted $800m of investment, all but the initial loan from the private sector.

Source: The Economist (link opens in a new window)

Categories
Entrepreneurship
Tags
Base of the Pyramid, entrepreneurship, poverty alleviation, solar