This article is part of the OECD & UNCDF report: Blended finance in the least developed countries – 2019

The past decade has been marked by significant progress on promoting development effectiveness. It is now clear that to ensure sustainable development that meets local needs we must keep in mind how programmes and projects are designed and implemented. The principles of country ownership, transparency and accountability have become central to development co-operation. The new wave of blended finance has brought with it the question of which principles should guide these operations. As last year’s instalment of this report emphasised, where official development assistance (ODA) is involved, blended transactions should meet these long-standing development effectiveness principles. One aspect that is often overlooked in both practice and research is how to ensure that blended finance supports national ownership of the development agenda.

Southern Voice recently reviewed the relevance of the development effectiveness principles in different country contexts. This revealed that country ownership is a decisive principle for co-operation, underpinning all the other effectiveness principles. Ownership of development projects encompasses a variety of dimensions. First, it entails an active role for national actors in planning and enunciating the need and demand for development projects. Second, ownership during the implementation of projects means that project beneficiaries have the opportunity to make tangible contributions, such as co-investing in projects, or providing in-kind support. Finally, it involves national actors being committed to and supporting a project’s success over the long term, so that its impacts are sustainable. This means that national actors advance strategies to implement projects and deals that are aligned with their objectives and needs. This not only requires the involvement of the government, but also other actors in society, including civil society and affected communities. In practice, this means there is a negotiation in which different interests are balanced.

When it comes to blended finance deals, ensuring ownership can be complicated. Blended transactions can involve multiple partners, including development co-operation agencies or development banks, commercial partners, national governments, and the domestic or international private sector. There are concerns that blended finance may be used as a back door to increase the use of tied aid. Significant government involvement, especially when a government does not have private transaction experience, may be a deterrent to private investors seeking to move quickly.

So how can ownership work in the context of these complex arrangements?

Southern Voice carried out four scoping studies on blended finance in 2018, on Bangladesh, Nepal, Senegal and Uganda. These case studies shed light on some of the key ingredients for ownership in the case of blended finance. Three issues are worth highlighting.

First, LDC governments need more consistent and better organised information on who is deploying blended strategies and the practices and opportunities for accessing concessional finance through blended transactions. This will help them to assess when and where blended finance can best be used. The scoping studies suggest that LDC officials are often unaware of blended finance approaches. While each beneficiary government could invest in researching the sector, making this knowledge publicly accessible to all governments through a common platform would help create a better understanding of how blended finance fits within their integrated financing frameworks for meeting the SDGs. 

Second, it is important for LDCs to establish the right institutional frameworks that will allow them to analyse and structure blended transactions that share risks and rewards fairly; and to deploy blended strategies where and when they are appropriate and in line with high environmental, social and governance standards. The scoping studies found that in some countries the institutions that are currently in place are usually in the context of public-private partnerships (PPPs); these may therefore need to be updated in terms of their skills, capacities, and mandates to cover blended transactions more broadly. Some governments are already moving in this direction. In other countries, it is not clear which institution would be a natural leader for blended finance initiatives – clarifying this would be an important first step. Providers of concessional finance and development partners overall can also help to build the capacities of national and subnational authorities to engage meaningfully in the design and implementation of blended finance deals.

Third, governments need to be able to co-ordinate different development initiatives and ensure their coherence. For example, blended finance initiatives to provide credit lines to sectors that have been traditionally underserved require well-functioning credit reference bureaus to ensure that the various financing offers do not all reach the same beneficiaries. Concessional finance providers can help with this, by engaging more systematically with LDC governments – and other key national stakeholders – to ensure that projects support national development goals.

If blended finance is to be used more and more to leverage private investment for reducing the SDG financing the gap, beneficiary countries must be able and supported to exercise ownership effectively. Practical knowledge and capacities relevant to the practices of blended finance are essential for them to take the lead and to put in place the right institutional frameworks and arrangements to ensure that blended finance deals align with national priorities and are deployed appropriately.

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