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Blended Finance

Blended finance is an innovative approach to development financing that strategically combines public, philanthropic, and private capital to fund sustainable development initiatives, particularly in low income and developing countries. The OECD defines it as "the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries."

Blended finance works by using public or philanthropic funds (concessional capital) to catalyze private sector investment in projects that contribute to sustainable development but may not otherwise attract commercial funding due to high perceived risks or low returns. This approach has been implemented across various sectors, with a particular focus on infrastructure, energy, and financial services in developing countries, though it has been less prevalent in social sectors like education.

Notable implementation examples include the Global Partnership for Education (GPE) Multiplier Fund, the Quality Education India Development Impact Bond, Climate Investor One, and the International Finance Facility for Education (IFFEd). While the use of blended finance has grown significantly since 2015, the total amount of private finance mobilized remains relatively small, with only about $205 billion mobilized between 2012 and 2018, and only 6% of this going to least developed countries. The education sector has received particularly little attention, with only about 1-5% of blended finance transactions in recent years.

How it works

The core principle of blended finance is to use public or philanthropic funds (concessional capital) to catalyze private sector investment in projects that contribute to sustainable development but may not otherwise attract commercial funding due to high perceived risks or low returns. This is achieved by improving the risk-return profile of investments through various mechanisms:

  • First-loss capital: Public or concessional funds absorb initial losses, protecting private investors
  • Guarantees: Public entities provide assurances against specific risks
  • Technical assistance: Grants to improve project viability and reduce risks
  • Concessional loans: Below-market rate loans to improve overall returns
  • Insurance
Blended Finance DTC Finance Toolkit Factsheet
Category
Key stakeholders
DTC Framework Pillars
Funding sources

Key stakeholders

  • Governments and Regulators
    Public sector entities that provide concessional capital, grants, and enabling policy environments for blended finance initiatives.
  • Donors and Philanthropic Organizations
    Entities that often provide catalytic funding through grants, concessional loans, or high-risk positions.
  • Multilateral Organizations and Development Banks
    Organizations like the World Bank, IFC, and European Investment Bank that provide both concessional and non-concessional resources.
  • Private Sector Investors
    Commercial banks, institutional investors, pension funds, and insurance companies that provide commercial capital seeking market-rate returns.
  • Educational Institutions
    Schools and educational organizations that implement projects funded through blended finance mechanisms.
  • Local Communities and Beneficiaries
    Students, teachers, and communities who ultimately benefit from the funded educational initiatives.
  • Implementing Agencies
    Organizations responsible for executing blended finance projects and programs.
  • Coordinating Organizations
    Entities that facilitate blended finance arrangements and coordinate between different stakeholders.

DTC Framework pillars

  • Coordination and leadership
    Supports governance through impact bonds like Quality Education India that emphasize monitoring, evaluation, and evidence-informed decision-making.
  • Connectivity and infrastructure
    Well-suited for large-scale infrastructure projects like the GPE Multiplier Fund's deployment of 50,000 devices to teachers in Ukraine and Rwanda's last-mile internet connections for schools.
  • Capacity and culture
    Supports capacity-building initiatives like the IFC's risk-sharing initiative in Ghana providing technical assistance to schools on financial management.
  • Content and solutions
    Enables development of educational content as shown by the Quality Education India DIB's support for computer-based adaptive learning platforms.
  • Data and evidence
    Supports data initiatives as demonstrated by the Uzbekistan Early Childhood Development SIB's contribution to developing a data culture in preschool education.

Where does the money come from

  • Government Funding
    Public sector entities and donor agencies provide concessional capital or grants that act as catalytic capital to attract additional financing.
  • Philanthropic Organizations and Foundations
    Provide catalytic funding to blended finance vehicles through grants, concessional loans, or high-risk positions.
  • Multilateral Organizations
    Organizations like the IFC, FMO, and European Investment Bank provide both concessional and non-concessional resources.
  • Private Sector Investors
    Commercial banks, institutional investors, pension funds, and insurance companies provide commercial capital seeking market-rate returns.

Challenges to be aware of

Limited evidence base and track record in the education sector makes it difficult to assess risks and structure deals effectively.

Measuring and demonstrating impact is challenging as education outcomes are complex and often require long timeframes.

Misalignment of incentives between private investors' desire for shorter-term returns and long-term education outcomes.

Equity and access concerns as blended finance models could exacerbate inequalities by focusing on easier-to-serve populations.

Capacity constraints in many education institutions and governments to structure complex blended finance deals.

Regulatory challenges as education is often heavily regulated, creating barriers for private sector involvement.

Scale, replicability, and sustainability questions about the long-term viability of some blended finance models.

Political risks from government or education policy changes affecting long-term education investments.

Stakeholder engagement challenges in balancing the interests of students, parents, teachers, administrators, and policymakers.

Small deal sizes and high transaction costs making education investments less attractive to private investors.

Additionality and market distortion concerns about crowding out private investment or subsidizing activities that would have occurred anyway.

Ethical considerations about equity, access, and the role of profit in educational provision.

Links and Ressources

Relevant cases studies

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