Drive to mobilise ‘trillions’ through private finance for development ‘completely unrealistic’ – new ODI research

SDGs – Development Finance

Drive to mobilise ‘trillions’ through private finance for development ‘completely unrealistic’ – new ODI research
Press release | 10 April 2019
New report on blended finance finds policy makers have unrealistic expectations about how much private money can be mobilized.

The drive to use aid and other public funds to mobilise trillions of dollars of private investment in developing countries is well off target, new research from the Overseas Development Institute (ODI) has found.

A major new report on the use of blended finance, the term used when public-sector development funds are used to encourage private investments in poorer countries, has found policy makers have unrealistic expectations about how much private money can be mobilised. It also reveals private investment is heavily concentrated in middle-income countries (MICs), with very little going to low-income countries (LICs).

The report, ‘Blended finance in the poorest countries: the need for a better approach’, finds that for every $1 of public money invested in this way mobilises just $0.37 of private finance in LICs and just $0.75 in all developing countries.

The report finds only 1% of the total private finance mobilised by the UK government, including through the CDC Group, the UK government’s DFI, was mobilised in the poorest countries during the period 2012 to 2015.

Lead author Samantha Attridge, Senior Research Fellow at ODI, said: ‘Our research shows that an urgent reality check on blended finance is needed. The current approach is not leveraging significant amounts of private investment overall and very little for low-income countries. The “billions to trillions” mantra is completely unrealistic without significant changes to the system.

‘Donors and development finance institutions (DFIs) need to make urgent changes to their business models and risk appetites to get anywhere near the amounts required to achieve the Sustainable Development Goals.

‘They also need to focus more on supporting developing country governments to build a more conducive investment climate for investable companies and projects. Until they do that, aid spent on blended finance risks diverting much needed resources away from the poorest countries.’’…

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Research reports and studies
Blended finance in the poorest countries: the need for a better approach
| April 2019 | Samantha Attridge and Lars Engen
The need to mobilise private finance is at the heart of international discussions on how to finance the Sustainable Development Goals (SDGs) and move the needle from ‘billions’ of dollars in development aid to ‘trillions’ of dollars in investment.
With an estimated SDG financing gap of $2.5 trillion a year in developing countries alone, the international development community is placing an increasing emphasis on blended finance. This report aims to provide hard evidence to inform the discussion on the role of blended finance in plugging the SDG financing gap in developing countries.

We found that:
:: Expectations that blended finance can bridge the SDG financing gap are unrealistic: ‘billions-to-billions’ is more plausible than ‘billions to trillions’.
:: The big push on blended finance risks undermining the poverty eradication agenda in the poorest countries.
:: Policy-makers need a better understanding of the poverty and development impact of blended finance, as well as its true costs, to ensure value for money and effective policy-making and allocation of aid.
:: Multilateral development banks and development finance institutions need to collectively adopt a more distinct and tailored approach to blended finance in low-income countries.