5 ways to make blended finance work
Tara Nathan, Executive Vice President, Government and Development, Mastercard
It is estimated that up to $4.5 trillion per year in investment will be required in developing countries to achieve the Sustainable Development Goals (SDGs) by 2030. These same estimates suggest this means we have a $3.1 trillion per year funding gap.
While much has been written on the topic of blended finance as a solution, debate continues as to how to define the term and the best approach and sources to secure this funding. One thing is clear: with 17 SDGs and 169 individual targets, the UN’s Agenda for Sustainable Development is far too big for any entity or sector to tackle alone.
That’s why blending funds from donor organizations, governments and private debt and equity is our best shot at making a real impact on the problems that threaten our society and the livelihoods of generations to come. Bringing together these entities would allow sustainable initiatives to benefit from private-sector innovation, and technical and operational expertise, and drive investment towards projects with development impact that would otherwise not happen.
The nature of humanitarian and development work creates a unique set of challenges for private-sector firms that typically look for faster returns from their capital and operational investments. Yes, these investments may be used to undertake projects that may be high-risk, but they also hold the potential for extremely high rewards not only for investors, but for the millions of people around the world trapped in poverty.
Trust, but verify
Unfortunately, even some of the best intentions to solve the problems that threaten society have so far fallen short. In order to make real progress, we have to first start by addressing the elephant in the room: trust.
Historically, there have been many who have drawn a distinction between civil society and the private sector — on one side there are those who do good; on the other side, those who are interested in making money. The first step to productively engage in partnership is to break down the walls of “us and them” to realize our common objectives, even if we take different roads of getting there. There’s a great quote by Ernest Hemingway: “The best way to find out if you can trust somebody is to trust them.”
The essential building blocks of trust are transparency and accountability — two things that are often lacking in current examples of blended finance. That’s because blended finance only represents half the equation. Our biggest challenge isn’t simply closing the gap in development funding, it’s also figuring out the most effective ways to invest those funds and make billions of dollars do the work of trillions.
A five-step approach to sustainable development
Approximately 82% of capital that reaches the developing world already comes from the private sector. But there is no appropriate way to ensure these funds impact the development agenda. Government initiatives are often disconnected and lack a comprehensive strategy. And, donors don’t have good mechanisms for coordination to leverage one another’s investments.
So while attractive investment opportunities are available, we need a new approach that focuses on the entire ecosystem in order to drive the systemic inclusive transformation of markets. This approach can be implemented in five simple, but critical steps.
1: Engage governments
If any systemic change is to occur, establishing solid relationships at the country level must be the starting point of any approach. Companies need to work with governments on programmes that help to achieve greater cost-savings and efficiencies, drive revenue, reduce crime, expand financial inclusion and improve overall quality of life. In our experience at Mastercard, this is an essential first step for countries in need of a holistic approach to help advance their development initiatives.
2: Assess the market
For any solution to be successful, you must first understand the problem. Research that is based on specific, high-impact use cases, tailored to an individual market, must be conducted in partnership with the local stakeholders to get a clear and comprehensive picture of the market’s current state. This allows for a greater understanding of the regulatory environment as well as the relationships between local institutions that could impact the plan.
3: Create an ecosystem blueprint
Armed with comprehensive research on local market needs, a holistic design or “blueprint” can then be created. This roadmap to the desired future state describes what roles are required as part of the ecosystem. What is a sustainable business model? What are the technical and infrastructure requirements to achieve the vision? These questions are answered with input from both public and private sector players, which increases the likelihood that a country’s plans will be scalable.
4: Manage (or design) investments
This is where the blended finance structure comes into play. The “ecosystem blueprint” becomes the basis for coordinated investments — including grants, equity and debt — to amplify the impact of each, increase efficiencies and reduce the associated transaction costs. This entails the ongoing management of investments including developing a country funding plan and individual funding recommendations.
Have you read?
- How blended finance can help create sustainable development
- There’s a $2.5 trillion development investment gap. Blended finance could plug it
5: Measure results
As previously mentioned, a major criticism of blended finance is the lack of accountability and evidence of proven success of the approach. That’s why the final, critical step is to measure impact. This involves developing and implementing monitoring and evaluation plans pre- and post-funding for each recipient and country portfolio, and reporting results on a regular basis. Only then can we attain a thorough understanding of how and where blended finance can be deployed most effectively.
Advancing the SDGs is not simply a nice thing to do, it’s a business imperative. The longevity of companies the world over is predicated on the increased access and usage of financial services by those at the bottom of the pyramid. With business goals and global goals inextricably linked, the best way to drive transformational change is at the ecosystem level. This addresses market-level needs for governments, creates a space for the private sector to play in those markets, and makes it affordable for the underserved to connect to the formal economy.
We must look beyond the basics of blended finance and look at how we truly maximize the impact of public, private and social sector dollars, in a way that provides transparency and accountability. This is the recipe for new and better ways to spur economic opportunity and growth, individual empowerment and dignity, and build more resilient communities.
Originally published at weforum.org.