Blended finance: the future of development
At a time when national budgets and donor resources are stretched, finding new sources of capital for investment in public infrastructure and services is critical to helping some of the world’s poorest people change their circumstances.
Governments around the world are looking to private sector investment, efficiency and expertise to transform critical sectors such as transportation, power and water to better deliver vital services. At the same time, the private sector and institutional investors are looking to enter high potential markets.
Blended finance — the merging of public and private funds to mobilise private capital flows for the public good — is a key tool in global efforts to reduce poverty. It also offers a unique opportunity for investors to gain a foothold in emerging markets in Africa, Asia and Latin America.
Despite emerging and frontier markets contributing 49 percent of global gross domestic product, only a fraction of global capital markets flow to these countries due to risk and market inefficiencies.
Catalysing private investment for development has been fundamental to the work of the US government’s Millennium Challenge Corporation, an independent US government agency founded in 2004. Our innovative approach, from viability gap financing for infrastructure projects to support of institutional and regulatory reforms, unlocks capital, improves investment environments, and helps create opportunities for firms in emerging markets.
We do this by incorporating the private sector into project development and working to create the right conditions for investment.
Our country partners around the globe are competitively selected. They must meet transparent criteria for selection based on ruling justly, investing in people and economic freedom as evaluated on MCC’s scorecard, creating an incentive for countries to improve their economic and business environments before even a dollar of MCC funding is expended.
Performing well on our scorecard is often seen as a seal of approval, signaling to the private sector that the country is open for business.
When we develop our projects, in countries such as Côte d’Ivoire, Liberia and Niger, we first identify factors holding back growth and investment. We then customise a programme to alleviate those constraints with the goal of amplifying and sustaining our investments - and those of private sector partners.
We hold consultations with the private sector, civil society, and other stakeholders to better understand their concerns and needs. Depending on a partner country’s needs, MCC often creates a customised approach to blended finance.
In Ghana, the lack of reliable power has been a barrier to doing business in the country, holding back Ghana’s potential for private investment and partnership with businesses. Domestic and foreign investors expressed concern around the financial strength of the Electricity Company of Ghana, the public electricity distribution utility.
Through MCC’s $498m compact focused on the power sector, we are supporting the government of Ghana’s efforts to improve the financial and operational health of the utility. Together we will bring in a competitively selected private sector operator who will invest up to $500m to strengthen the distribution network and improve service quality for households and businesses.
Our investments in Ghana are expected to help catalyze nearly $4bn in new private investment overall and help the Government of Ghana better deliver reliable electricity services to its people.
In Benin, we are crowding in commercial finance for off-grid power solutions. Our Off-Grid Electricity Access Project is a competitive $46.8m grant facility that will fund critical public infrastructure, household solar photovoltaic systems, mini-grids, and energy efficiency measures.
We also encourage effective partnering in blended finance. In Liberia, we are working alongside the European Investment Bank, Germany’s KfW Development Bank, and the government of Norway to fund the rehabilitation of the Mt. Coffee Hydropower Plant.
Last month, I visited London to advance conversations around blended finance and discuss how we can continue to drive significant new capital flows into high-impact, growth sectors in our partner countries. Coordination between the many organisations – from banks, Development Finance Institutions, International Development Agencies, private equity, and foundations – is essential to executing blended finance projects.
MCC wants to be a convener for those conversations. Through continued dialogue, we can identify actionable strategies for unlocking capital flows.
Blended finance offers a promising solution to meeting the vast development challenges of the 21st century. In sub-Saharan Africa approximately 600 million people — two-thirds of the population — live without electricity.
There is immense potential for investors by partnering with MCC and multilateral donors in emerging markets.
By connecting investors to new, underserved markets while expanding access to vital services, blended finance can have a transformative role in reducing global poverty and expanding opportunity for millions.
Jonathan Nash is the Chief Operating Officer of the Millennium Challenge Corporation
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