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.’
The research highlights how the potential of blended finance in LICs is currently being hindered by a range of factors including a lack of private companies and projects to invest in, and the low risk appetites of publicly-funded bodies such as multilateral development banks and DFIs.
The report warns that if blended finance is to meet the ambitions of policymakers, leverage ratios would need to increase dramatically, while managing the higher level of risk this implies.
Experts have made a series of recommendations for policymakers to scale up blended finance:
- Make fundamental changes to the business models of publicly-funded bodies to enable them to take on riskier projects
- Be clear about the problem that policy makers are trying to solve and establish whether subsiding the private sector is the right solution
- Radically improve transparency at the transaction and investment level of how much public money is invested in these operations and how much private finance it is mobilising
Notes to editors
- The report, ‘Blended finance in the poorest countries: the need for a better approach’, is due to be published on Wednesday, April 10
- The findings are based on a unique and comprehensive database which examines the investment portfolios of the largest and most important blended finance actors, accounting for more than three quarters of the total private finance mobilised in developing countries over the most recent four-year period for which data are available
- Researchers analysed the 2016 OECD mobilisation survey for the 2012-2015 period, the most recent four-year period for which data are available. During this period $81.1 billion was mobilised in total private finance.
For more information or to arrange an interview with one of the report authors please contact James Rush on [email protected] or +44 (0)7808 791265