Blended finance supports private investment in sustainable infrastructure

Well-designed economic and social infrastructure (e.g. transport links, energy and utilities, schools and hospitals) is the backbone of economic productivity and social and environmental well-being.

Emerging and developing countries have huge demands for better mobility and energy-generation infrastructure to deliver improved living standards. In advanced economies, there is an urgent need to replace high-carbon infrastructure or to upgrade ageing assets to accommodate new technologies. Infrastructure investments last for decades.

Getting these milestone investments right can speed up low-carbon, climate-resilient transitions and leapfrog generations of polluting and inefficient technology. Getting them wrong could lock in emissions for decades and create risks of stranded assets costing hundreds of billions of dollars, for example, in Investments that have already been made in oil and gas, coal and other fossil fuels.

In 2017, the Organisation for Economic Co-operation and Development (OECD) estimated that, from 2016–2030, USD 6. 9 trillion dollars were needed annually to align planned infrastructure with the Paris and Sustainable Development Agenda goals. The estimated shortfall is around USD 3 trillion each year, a sum few public actors can afford.

Blended finance aims to mobilise private investors to help fill the financing gap. It strategically uses public and philanthropic development finance to reduce financing risk for profit-seeking actors whose actions can support job creation and reduce conflict and instability. Development capital is paid into funds that combine with commercial finance or are delivered directly through vehicles such as default insurance and loan-guarantee instruments. Blended funds report that they can mobilise up to 12 dollars in private-sector funding for every dollar raised in grants.

In 2017, the European Union launched the External Investment Plan (EIP) flagship initiative to provide blended finance through loans and guarantees to mobilise private investment, including in Africa. Under the EIP, EUR 4.6 billion is expected to mobilise EUR 44 billion in sustainable investments by the end of 2020. In addition to supporting renewable energy and urban infrastructure, through the European Sustainable Development Fund, the EIP also seeks to support small and medium-sized enterprises, digitalisation and agricultural initiatives.

Other blended initiatives include platforms such as a Sustainable Development Investment Partnership, and Convergence, the Blended Finance Network.

Post-COVID-19, there are new opportunities for governments to direct recovery packages towards green infrastructure. This will no doubt include measures that build on the learning already achieved through blended approaches targeted at unlocking even larger investment pools, such as the USD 89-trillion global institutional investor market.