Examples of blended finance facilities
Direct funding is the provision of debt, equity or grants. The public contribution to blending consists of grants, junior equity (with the donor accepting a high risk for a relatively low return), and/or subordinated/junior/mezzanine debt (with which the donor absorbs the first tranches of risks in the case of non-payment or late payment of loans). The effect of all of these blending tools is the private financiers in a transaction can achieve better returns at lower risk, to the extent that they can provide finance to a project/transaction that they would otherwise not fund (“additionality”). At times, it can be sufficient for an international agency just to become a stakeholder in a project, without providing any grants/concessional funding/guarantees, simply because the agency’s involvement provides comfort to private investors.
Apart from direct funding, blended finance also encompasses several specific supporting mechanisms:
- Technical assistance: Supplements the capacity of investees and lowers origination and transaction costs.
- Risk underwriting: Fully or partially protects the investor against risks and capital losses.
- Market incentives: Provides results-based financing and offtake guarantees contingent on performance and/or guaranteed payments, in exchange for upfront financing in new or distressed markets.
Particularly technical assistance and risk underwriting were found to be highly effective in leveraging private finance, especially when compared to direct funding, with well over US$ 5 of private funding raised for every dollar of development funding.
With the exception of market incentives, all direct funding modalities as well as the two first supporting mechanisms can be found in the various blending schemes that currently operate. The following are some of the main ones: