Blended finance: a powerful tool for achieving SDG7
The Energizing Finance 2019 report series highlights a massive shortfall in finance commitments for electricity and clean cooking access in 20 countries with the greatest energy access deficits.
One of the recommendations presented in Energizing Finance: Taking the Pulse 2019 is for government to “Take the lead in enabling blended finance for energy access.” It goes on to say that “Governments have the ability to secure concessional financing from multilateral and bilateral development partners that can be used to provide risk-tolerant financing to enterprises. This can in turn crowd in more commercial capital from investors.”
Blended finance is a term that gets used a lot in the context of Sustainable Development Goal 7 (SDG7)—affordable, reliable, sustainable and modern energy for all by 2030.
We asked 2019 SEforALL Charrettes participant Ladé Araba, Managing Director for Africa at Convergence Blended Finance, to explain this concept, why it is so crucial to achieving SDG7, and how this form of financing can evolve to help make SDG7 a reality.
Let’s start with the basics. What does “blended finance” mean?
Convergence’s definition of blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in developing countries towards sustainable development. We see this type of finance as directly targeting the SDGs.
Why is blended finance so important to achieving the SDGs, particularly SDG7?
Blended finance can address critical challenges to increasing access to clean and affordable energy. Providing energy access requires considerable capital expenditures in building the infrastructure to support energy supply, as well as on-going operations and maintenance.
For electricity, we know that millions of people live in rural communities with no grid connection. They are widely dispersed with very low levels of density. So, reaching these households is more costly and time consuming. The issue of affordability means project owners can’t charge full cost-recovery prices for the infrastructure, products, and services they deliver. This means that off-grid solutions must seek scale to be economical.
Without natural economies of scale, solutions must be cheap and easy to deploy and affordable credit must be provided to the end-users to facilitate affordability. This is where innovative blended finance vehicles and structures can lend a hand. They can help reduce the cost of capital, lower the cost of access, and attract large sums of financing to seemingly unattractive opportunities.
Is the idea to catalyze private sector investment in projects by first having development funds committed to that same project?
Exactly. That development funding is what we call concessional capital and it can come from public or philanthropic sources. We can create more investable opportunities in energy access projects by having concessional capital come into deals earlier when it is most risky, in order to create commercially viable projects, companies, and structures.
In addition, project sponsors and developers can work with partners to create more innovative financial products that are aligned with the commercial mandates of investors. Aligning these products with the existing financial instruments and products that investors are familiar with will help to increase their comfort levels, overcoming barriers to adoption.
What needs to happen for more blended finance to be directed towards SDG7?
There needs to be a deeper understanding of the various blended finance structuring approaches. Convergence’s database of historical deals and its case studies on specific transactions are a useful starting point. This archive offers an evidence base for effectively structuring new deals and points investors looking to diversify their portfolios towards potential partners.
How else is Convergence contributing to the achievement of SDG7?
Convergence is the global network for blended finance. We generate blended finance, data, intelligence, and deal flow to increase private sector investment in developing countries, in support of the SDGs. One way we contribute to SDG7 is through our Design Funding grant program, which supports the design of innovative blended finance vehicles that aim to attract private capital to global development. Under this program, 39 percent of grants have directly supported the achievement of SDG7. For example, we supported the design of the Climate Finance Facility, the first “Green Bank” in an emerging market, which is housed within the Development Bank of Southern Africa.
What other successes have you achieved thus far?
From our database of roughly 500 blended finance transactions, our data shows that 162 blended finance deals have been aligned to SDG7 to date, representing over USD 72 billion, with participation from over 500 investors. We have seen these financing flows target projects (37 percent), funds (35 percent), companies (17 percent), facilities (9 percent), and bonds/notes (2 percent). At least half of that financing comes from private investors with commercial mandates, whose participation has been facilitated by concessional capital.
Convergence is presently also supporting capital raises for 32 SDG7-related deals that are seeking USD 2 billion in financing. These transactions have secured about USD 1 billion to-date and we are matching them to our global network of investors to help to close their individual funding gaps.
*Ladé Araba is the Managing Director for Africa at Convergence Blended Finance and is Co-Chair of the Board of EED Advisory.