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Topic guide: blended finance for infrastructure and low-carbon development

Working paper

Written by Shakira Mustapha, Annalisa Prizzon, Mikaela Gavas

Working paper

Most developing countries face a chronic deficit of infrastructure constraining economic growth rates, leaving the world’s most vulnerable communities without access to basic services and hampering attempts to achieve broad-based poverty reduction. While over £500 billion is currently invested in infrastructure every year, it has been suggested that that annual infrastructure spending will need to more than double by 2020 to meet the development requirements for infrastructure.  However, public finance is insufficient and private finance too volatile to bring financing up to the level required. Blended finance enables infrastructure projects to be financed that would otherwise be too costly for a single donor.

This unique guide provides an overview of both the theory and practice of blended finance. It examines the types of financial instruments used in blending, the rationale for the use of blending and it goes beyond the theory to outline how the European Union and the International Finance Corporation, two of the biggest players in infrastructure, have defined, structured and operationalised blending. It also assesses six challenges associated with blended finance. The guide concludes by identifying critical questions donors and Development Finance Institutions could consider when assessing the opportunity of a blended finance package.

Blended finance is defined as the complementary use of grants and non-grant financing from private and/or public sources to provide financing on terms that would make projects financially viable and/or financially sustainable. Blending grants with loans can increase the volume of development finance in a context of constrained resources, the viability of investments and the overall effectiveness of aid.

Nevertheless, in spite of the many potential benefits that can arise from blending, it needs to be carefully managed to ensure that its optimal value is realised. Despite the widespread use of blending in development finance, its development impact is largely uncertain due to the limited evidence gathered so far. For this purpose, the guide outlines areas where further research is required in order to develop a more comprehensive understanding of blending and of its impact on development outcomes. 

Shakira Mustapha, Annalisa Prizzon, Mikaela Gavas