Post 2015: Global Action for an Inclusive and Sustainable Future
Post 2015: Global Action for an Inclusive and Sustainable Future
Post 2015: Global Action for an Inclusive and Sustainable Future
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CHApTER SEvEn<br />
Blending<br />
involves the<br />
complementary<br />
use of gr<strong>an</strong>ts<br />
<strong>an</strong>d non-gr<strong>an</strong>t<br />
sources such as<br />
lo<strong>an</strong>s or risk<br />
capital to fin<strong>an</strong>ce<br />
investment<br />
projects in<br />
developing<br />
countries.<br />
122<br />
cyclical fluctuations. currently donors are hesit<strong>an</strong>t<br />
to commit to further future liabilities in the <strong>for</strong>m<br />
of such bonds because of fiscal constraints <strong>an</strong>d<br />
fin<strong>an</strong>cial market conditions, which limits the<br />
prospects of exp<strong>an</strong>ding their use.<br />
Blending<br />
blending involves the complementary use of gr<strong>an</strong>ts<br />
<strong>an</strong>d non-gr<strong>an</strong>t sources such as lo<strong>an</strong>s or risk capital<br />
to fin<strong>an</strong>ce investment projects in developing<br />
countries. usually donors provide the gr<strong>an</strong>t<br />
component, which c<strong>an</strong> take various <strong>for</strong>ms including<br />
direct investment, interest rate subsidies or a lo<strong>an</strong><br />
guar<strong>an</strong>tee. Development fin<strong>an</strong>ce institutions or<br />
development b<strong>an</strong>ks often provide the non-gr<strong>an</strong>t<br />
component, usually using funds mobilised through<br />
bonds issu<strong>an</strong>ce in capital markets (Gavas et al., 2011;<br />
núñez Ferrer <strong>an</strong>d behrens, 2011; Wälde, 2012).<br />
blending allows donors to use gr<strong>an</strong>ts to make<br />
investment projects that have a high economic rate<br />
of return fin<strong>an</strong>cially viable. 80 by providing a gr<strong>an</strong>t<br />
element, donors c<strong>an</strong> close fin<strong>an</strong>cing gaps in the<br />
project that prevent investment from materialising.<br />
In this way, blending c<strong>an</strong> make investment projects<br />
more feasible by reducing overall project costs,<br />
including interest, <strong>an</strong>d by reducing risks <strong>for</strong> the<br />
providers of non-gr<strong>an</strong>t fin<strong>an</strong>ce. the gr<strong>an</strong>t element<br />
allows risk to be shared <strong>an</strong>d ensures that in the<br />
event of losses, all fin<strong>an</strong>cial returns accrue to the<br />
providers of the non-gr<strong>an</strong>t component. this c<strong>an</strong><br />
increase the risk-adjusted returns of investment<br />
projects, <strong>an</strong>d hence unlock non-gr<strong>an</strong>t fin<strong>an</strong>cing<br />
<strong>for</strong> investments where the economic rate of return<br />
is high, but the fin<strong>an</strong>cial return is not enough <strong>for</strong><br />
investors to be attracted without the gr<strong>an</strong>t element<br />
(rudischhauser, 2012). this is the case <strong>for</strong> m<strong>an</strong>y<br />
infrastructure projects in developing countries. For<br />
most investments in renewable energy, <strong>for</strong> example,<br />
the economic rate of return exceeds the fin<strong>an</strong>cial<br />
EuropE<strong>an</strong> rEport on DEvElopmEnt 2013<br />
rate of return. using the qu<strong>an</strong>titative leverage of<br />
the gr<strong>an</strong>t element c<strong>an</strong> hence catalyse non-gr<strong>an</strong>t<br />
fin<strong>an</strong>cing from institutions borrowing in capital<br />
markets. 81 In addition, using non-gr<strong>an</strong>t fin<strong>an</strong>cing<br />
releases gr<strong>an</strong>t funding <strong>for</strong> other development<br />
projects. this makes blending appealing to<br />
providers of SSc <strong>an</strong>d donors such as the Eu (box<br />
7.4), which have increased the use of blending<br />
facilities (núñez Ferrer <strong>an</strong>d behrens, 2011). Finally,<br />
by increasing the fin<strong>an</strong>cial viability of projects<br />
adhering to high social <strong>an</strong>d ecological st<strong>an</strong>dards<br />
blending c<strong>an</strong> indirectly contribute to development<br />
because the gr<strong>an</strong>t element, as a qualitative lever,<br />
serves to fin<strong>an</strong>ce the additional costs associated<br />
with adherence to such st<strong>an</strong>dards.<br />
Its potential notwithst<strong>an</strong>ding, blending carries<br />
the risk that development projects will be selected<br />
more on fin<strong>an</strong>cial th<strong>an</strong> on development grounds<br />
because investments must achieve a minimum<br />
fin<strong>an</strong>cial return to attract non-gr<strong>an</strong>t fin<strong>an</strong>cing.<br />
Where donors seek to depress the gr<strong>an</strong>t component<br />
<strong>an</strong>d emphasise fin<strong>an</strong>cial viability in order to<br />
attract funding, they may opt to engage in highreturn<br />
low-risk projects, although low-return<br />
high-risk projects may potentially have greater<br />
development impacts (Spratt, 2013; Griffiths,<br />
2012). there are also high opportunity costs in<br />
using oDa to leverage non-gr<strong>an</strong>t fin<strong>an</strong>cing <strong>for</strong><br />
investment projects whose impacts on development<br />
may be ambiguous. Furthermore, where investors<br />
would have provided the funds without the gr<strong>an</strong>t<br />
component, oDa effectively crowds out non-gr<strong>an</strong>t<br />
fin<strong>an</strong>ce (Griffiths, 2012). but it c<strong>an</strong> be difficult<br />
to assess whether a project using blended fin<strong>an</strong>ce<br />
has created fin<strong>an</strong>cial additionality because of the<br />
lack of a counterfactual <strong>an</strong>d because there may<br />
be limited tr<strong>an</strong>sparency where blending relies on<br />
private fin<strong>an</strong>ce, as contracts often have commercial<br />
confidentiality clauses (Spratt, 2013). there is some<br />
80 the economic rate of return measures the total net economic <strong>an</strong>d social impact of <strong>an</strong> intervention. the fin<strong>an</strong>cial rate of return, which measures<br />
the net fin<strong>an</strong>cial return to the project initiator, is a sub-set of the economic rate of return.<br />
81 the leverage ratio (lo<strong>an</strong> component/gr<strong>an</strong>t component provided) depends on the type of project, i.e. its economic <strong>an</strong>d fin<strong>an</strong>cial rate of return,<br />
<strong>an</strong>d the gap between the two.
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