IFC blended finance

26 June 2013 | Inside the institutions

The International Finance Corporation (IFC), the World Bank’s private sector arm, has recently formalised its ‘blended finance’ approach, which subsidises investment in the private sector at lower than market rates by combining donors’ concessional funds with the IFC’s own non-concessional funding.

Other organisations, such as the Inter-American Development Bank and the European Union, have also started using donor funds to extend concessional lending to the private sector. The IFC uses the term blended finance to distinguish it from ‘concessional finance’, which requires a minimum 25 per cent grant element, according to the official definition of the Organisation for Economic Cooperation and Development’s Development Assistance Committee. Although blended finance has a concessional component, the IFC deliberately tries to minimise the subsidy portion of the investment and not to crowd out private financing.

The IFC’s blended finance instruments aim “to catalyse investments with strong social and development benefits that would not otherwise happen” and to address “market barriers by investing in projects that are not considered commercially viable today but have the potential to be in the future.”

The IFC says it applies four core principles to blended finance: minimum concessionality; “upholding transparency by sending clear signals to the market when subsidies are needed and when they are not”; using it only where projects would not be able to happen without it; and applying it to projects that are expected to demonstrate a business case for sustainable investments. The IFC has said that it “does not expect blended finance to be a large part of IFC’s overall business”.

Before 2008, donor funds were mostly utilised for stand-alone demonstration projects. The IFC’s blended finance unit (BFU) was established in July 2008 to manage the concessional donor funds, reflecting growing support at the Bank for this approach. A paper outlining the IFC’s approach to blended finance was sent to the Bank’s executive board in March 2012, with an update to this paper discussed in May 2013, but these papers have not been publicly disclosed. The IFC has not provided a reason for these papers to remain confidential.

Among other instruments, blended finance structures can include lower interest rates, risk sharing products, longer tenure loans and subordinated debt (loans with a lower priority in terms of repayment). Despite the supposed commitment to transparency, the IFC does not reveal the exact terms of its blended finance on project or aggregate levels, nor does it provide a reason for failing to disclose this information. Currently, the IFC uses blended finance in only three thematic areas: climate change-related projects; small and medium enterprise (SME) finance; and agribusiness and food security. Since 2009, the IFC has invested approximately $225 million of concessional funds for investment and advisory projects using a blended finance approach. Approximately half of blended finance funds have been channelled through financial intermediaries.

Climate change-related finance is the largest area of blended finance. The BFU manages around $700 million in concessional climate change funds from donor facilities, such as the Climate Investment Funds (see CIFs Monitor), Global Environment Facility and IFC-Canada Climate Change Program. These funds are then combined with IFC funding, totalling approximately $1 billion since 2009. Examples of blended finance and advisory services in this area include the construction of solar plants, conversion of biomass to renewable energy and improvement of forest management in the Brazilian Amazon. Approximately one-third of the IFC’s blended finance for climate activities has been invested in Africa, and roughly 20 per cent in each of Latin America, East Asia and Eastern Europe.

In April 2012, the IFC announced a commitment of $200 million of its own resources to a Global SME Finance Facility, “the first global platform of its kind to blend donor funding with funding from international development institutions … to expand lending to small businesses in emerging markets”. The facility invests through financial intermediaries, such as banks, and leverages commercial funds from other IFIs, and if necessary blends those with donor funds to help absorb certain risks that the IFC feels constrain financial institutions from investing boost investment in traditionally under-served SME markets such as women-owned enterprises and conflict-affected states. The UK was the facility’s first donor, providing $63 million, and the European Investment Bank has committed $100 million. The IFC expects the facility to expand to $1.8 billion over the next ten years with the contribution of other donors and institutions, and fund 600,000 businesses.

Blended finance for food security and agribusiness is channelled through the private sector window of the Global Agriculture & Food Security Program (GAFSP, see Update 80, 69), administered by the IFC. Five donors have pledged just over $300 million to support private sector projects in low-income countries related to smallholder farming, agriculture, and food processing. Its first project, consisting of a $5 million loan to a food processing company in Bangladesh, was announced in March 2012.