A new report reveals the level of private sector finance leveraged in blended concessional finance deals is rising, but observers are calling for more transparency.
Development finance institutions (DFIs) have been asked to improve transparency on what and how they fund projects to improve the scale and attempts to crowd in private capital following a report on their level of blended concessional finance.
The report, involving the International Finance Corporation (IFC), African Development Bank (ADB), European Investment Bank (EIB) and the Association of European Development Finance Institutions, found that in 2021 DFIs financed long term projects with a total volume of US$13.4 billion supported by blended concessional finance.
It covers development finance when concessional funds are involved, a very important part of development finance which extends project financing to high-risk markets. The IFC says it represents under 15% of the development finance provided to private sector companies by DFIs and MDBs. The latest report which covers overall DFI/multilateral development bank (MDB) mobilisation was published in 2021.
Concessional funds committed to these projects via DFIs were around US$1.9 billion. The total volume of private sector finance leveraged was US$4.6 billion – an increase from US$3 billion in 2020, and DFI own-account investments in these projects were about US$5.3 billion – the same amount in 2020.
But according to Chris Chubb, Managing Director at blended finance body Convergence, the figures fail to illustrate how much a DFI has mobilised from private third-party financing. He explains that much of the private sector finance leveraged is likely the DFIs own private sector operations or money provided by the project sponsor.
“If you look at the cases they’ve provided I’m not aware of any third-party private investment coming into any of those transactions, other than what was provided by the sponsor themselves, which is obligatory in all MDB and DFI financing transactions.”
A spokesperson for the IFC said that the private mobilisation figures did not include any DFI own-account funds, or any public funds.
“It does include all private sources including sponsor money,” the spokesperson told ESG Investor.
“Since we don’t collect sponsor contributions as a separate item, we can’t comment on what percent of the private mobilisation numbers are due to sponsor contribution and what percent are due to bank finance or other finance.”
Convergence’s own research has found that out of a sample of 72 blended finance funds they only leveraged US$4 of commercial capital for every dollar of concessional capital, with only a fraction of this commercial capital (US$1.10) coming from private sector investors.
In 2015, multilateral development banks (MDBs) published a document called ‘Billions to Trillions’ where they said they would do more to catalyse private finance flows in developing countries. Since then, little progress has been made, said Chubb.
“There’s lots of dialogue and discussion, but when the rubber hits the road, there’s very little private investment mobilisation happening,” he said.
Chubb said that MDBs and DFIs could be more transparent with their data on deals housed within the Global Emerging Markets Database (GEMS database).
“It aggregates all their information together and you can see the historical incidence of default there,” he said. “It is broken into two subsets, public sector loans and private sector – it’s an excellent public sector resource.”
People in the mobilisation community, like Convergence, have been asking for information to be made available for private investors for the last six years – but the project’s owners have refused, says Chubb.
“If private investors had that dataset, it’s possible that a lot more lending would have happened,” he said. “The release of this in our estimation would have saved probably more than US$5 billion a year in interest by governments in low-and-middle income countries.”
Chubb said he views DFIs and MDBs as having an oligopoly on concessional funding that comes from OECD countries, arguing that “taxpayer money should be made available to the best ideas”.
The IFC said that an important part of transparency when using concessional finance has to do with the amount of subsidy being used for projects, to ensure the most efficient use of limited donor resources. “IFC is leading this area by disclosing the estimated amount of subsidy in each blended concessional finance project. This information is available on the IFC project website.”
Super funds blended finance gap
A new report from the Investor Group on climate Change (IGCC) on investing in emerging markets has found institutional investors from Australia and New Zealand had “substantial interest” in blended finance deals, such as when public finance took a “first loss” position.
However, there was uncertainty around how blended finance arrangements worked in practice, and several interviewees noted the need for Australian investors to build capacity and knowledge around such deal structures.
Laura Hillis, Director of Climate and Environment, Church of England Pension Board, who co-authored the report told ESG Investor: “People who I spoke to were typically aware of blended finance and understood the basic idea, but had no direct experience of it, and weren’t sure how it would work in practice.
“One thing I’d observe is that often where this has worked well, the DFI is domiciled in the same location as the investor (e.g. Denmark) and there isn’t exactly a DFI in Australia – though there are Asian DFIs that could be relevant and the arm of DFAT that I mention in the report.”
She added that other comments on barriers to blended finance included capacity, knowledge and expertise within pension funds.
“Part of this is scale; most pension funds simply do not have the size to have large teams dedicated to emerging markets and this is unlikely to change, although several of the larger ones globally either have teams or are starting to build teams so this is changing,” said Hillis.
“But, given the various challenges and constraints of investment in emerging markets and the need to have market knowledge including knowledge of regulatory landscape for renewables as one example, it is a significant barrier for the majority of pension funds.”
She said organisations like IGCC (or IIGCC here in the UK) are likely to provide some of the solution, and collaboration and partnerships seem like the best opportunity to address this in the short-medium term. Knowledge sharing and demonstrations of best practice is something industry associations like IGCC do extremely well.