5.6 Innovative financing mechanisms for LA
In addition to using budget support operations or smart projects to channel funds directly to LAs, EU delegations may also consider new financing mechanisms like blending and trust funds.
Supporting LA through blending
Blending refers to a mechanism that links a grant element provided through official development assistance with loans from publicly owned institutions or commercial lenders. While the grant element refers to a transfer made in cash, goods or services for which no repayment from the recipient country is required, the loan implies a repayment of principal and interest by the recipient. The grant aid can take several forms (technical assistance, interest rate subsidies, investment grants…)
Current EU blending facilities focus on large-scale infrastructure investments and support to small and medium enterprises. All facilities target broadly defined sectors — i.e. transport, energy, social infrastructure mainly related to water and environment, and the private sector mainly through finance for small and medium enterprises (SMEs). Partners in the beneficiary country can be public, private or mixed; public partners predominate in current projects, aside from support to small and medium enterprises. Most projects are of a public sector nature (90%).
Supporting LA through trust funds
EU trust funds are development tools that pool resources from different donors to enable a quick, flexible, collective EU response to the various dimensions of an emergency/ post-emergency situation or of a thematic action.
Experience has shown that the weakness of national or local administrations combined with a sudden increase in the number of donors have led to disorganisation and a fragmentation of response on the part of the international community — thus hampering an effective and sustainable contribution to the reconstruction of a country. A joint approach is one possible answer to this problem. These various qualities and circumstances make EU trust funds a window of opportunity for LAs.
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