Together hand in hand: How blended finance can help LDCs achieve the SDGs
A recent United Nations Capital Development Fund (UNCDF) report, "Blended Finance in the Least Developed Countries", states that an increase of financial resources, both public and private, domestic and international, is needed and they have to work harmoniously in order to help the world's 47 least developed countries (LDCs) achieve the SDGs. The report was prepared in collaboration with the OECD, Southern Voice on Post-MDG International Development Goals, Convergence, and the United Nations Foundation.
Although many LDCs have made significant progress towards structural transformation with the help of ODA domestic public finance, these traditional sources of funding will not be enough for the LDCs to meet the SDGs. Increased private investment is needed to complement ODA; however, LDCs do not often receive private investment, including foreign direct investment.
Typically, LDCs have more prevalent and severe barriers to accessing private capital than middle-income countries. These barriers are rooted in perceived risks at both the enabling environmental level, such as governance, regulatory, infrastructure, and market risks, as well as at the project level, including operational and contract risks, small deal size (in absolute terms and relative to transaction costs), untested business models, and information and data gaps. In order to fill these gaps, the report uses a deep base of evidence, data analysis, and detailed case studies to examine the opportunities and challenges for employing blended financial strategies in LDCs, as well as how to implement the strategies effectively.
A proposed action agenda for blended finance in LDCs has the following main points:
- Encourage risk-taking and experimentation, as appropriate
- Bring LDCs to the decision-making table
- Deploy blended strategies to support sustainable outcomes
- Improve impact measurement and transparency
- Increase knowledge-sharing and evidence to inform blended finance best practice
Blended finance approaches are not right for every project and so their implementation should be aligned with established principles on effective development cooperation related to the use of ODA such as sustainable development additionality and financial additionality. Blended finance projects in LDCs also need a flexible, hands-on approach throughout their life cycles. Monitoring and evaluation and knowledge sharing are also important in blended finance approaches as they contribute to the creation of best practices and can help identify similar blended opportunities in other sectors or locations.
Although blended approaches can help raise capital for LDCs, they should be applied as part of a more comprehensive SDG financing strategy, the authors conclude. This means that donors will play a greater role in exploring how more effectively and efficiently mobilize more blended financing to LDCs, while ensuring that the meet their ODA commitments to these countries.