Scaling up blended finance

The key to closing the infrastructure investment gap in emerging markets

The global infrastructure investment gap has reached unprecedented levels: from USD 0.7 trillion in 2017 to USD 3 trillion in 2022, particularly affecting emerging markets. Governments and multilateral development banks (MDBs) alone cannot bridge this enormous gap. Therefore, the imperative lies in mobilizing private infrastructure investment in emerging markets, where potential remains untapped.

Private investors exhibit caution when approaching emerging markets due to a lack of bankable projects and high cost of capital raising from project and country risks, particularly driven by political, macroeconomic, and environmental factors, which are far beyond their control.

Blended finance emerges as a potential mechanism to align the interests of public and private sectors and allocate risks to each party according to their ability to manage and mitigate them. The G20 MDBs Capital Adequacy Framework report highlights the importance of partnerships between MDB, DFIs and the private sector to enhance project viability in emerging markets.

To accelerate the scaling of blended finance, a "dual-approach" strategy must be considered. This entails broadening the traditional conception of blended finance beyond project-level instruments (e.g., guarantees, subordinated debt etc.) and leveraging MDB balance sheets as instruments themselves, allowing private investor participation in MDBs’ capital structure through mechanisms like bond issuance, hybrid capital instruments, or ownership of non-voting shares.

MDBs, private investors, and policymakers must move from a current position in which private capital principally flows to developed nations, to a future position in which money also flows to what are often perceived today as riskier and less stable opportunities in under-financed emerging. Blended finance will play a pivotal role in turning these priorities into reality.

 

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Andrew McDowell

Andrew McDowell

Partner, Strategy& Luxembourg

Tel: +352 49 48 48 2034

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