Concessional finance, together with investments and other types of donor funding, is increasingly a key tool that development financial institutions (DFIs) are using to boost private sector involvement in developing economies and to achieve the UN Sustainable Development Goals (SDGs).
DFIs, including the European Bank for Reconstruction and Development (EBRD), agreed to a set of principles for use of concessional finance in private sector operations in 2013. With increased availability of concessional funds on the horizon and more donors moving towards the use of financial instruments to support development, the DFIs spent the past year enhancing those principles and developing concrete guidelines for implementing projects with blended commercial and concessional finance.
This will help ensure that DFI finance is additional and attracts private sector capital to frontier and emerging markets. The results are presented in a report titled “Blended Concessional Finance for Private Sector Projects” produced by more than 20 DFIs, including the EBRD.
Private sector involvement is crucial to meeting global commitments to tackle climate change, end extreme poverty and close investment gaps in critical infrastructure. Blended concessional finance can spur private sector activity where fully commercial solutions are not yet available.
This type of financing combines donor concessional funds with funds from DFIs’ own account and commercial funds from other investors. It makes projects viable when investors and companies perceive that there are high risks with regard to market failures, technology, or first-mover business models – and when the potential for development impact is high.
“The international community needs to galvanise a combination of public and private sector funding if the ambitious Sustainable Development Goals they have set for 2030 are to be achieved. The EBRD, with its strongly private-sector-focused business model, is already adept at leveraging private finance. Effective use of blended concessional finance can increase the efficiency and impact of the financing that is being applied in order to meet the SDGs,” said EBRD President Sir Suma Chakrabarti.
The principles have been enhanced with detailed guidelines developed by a working group representing DFIs that together invest more than USD 35 billion a year in private sector solutions.
The principles include how to promote commercially sustainable solutions using the minimum concessionality. They also state the need for high social, environmental and governance standards. In addition, the working group has agreed to exchange best practices, pilot a data-gathering exercise and examine case studies to support the development of these enhanced principles. Other institutions are welcome and encouraged to join these efforts.