This guide provides an overview of both the theory and practice of blended finance. Blended finance is defined as the complementary use of grants (or grant-equivalent instruments) and non-grant financing from private and/or public sources to provide financing on terms that would make projects financially viable and/or financially sustainable. Given that certain infrastructure investments may not be commercially viable, innovative instruments have been sought to close this ‘viability gap’ and make a larger number of projects bankable. By blending grants with loans, this innovative approach to development finance aims to achieve a number of objectives – from increasing the volume of development finance in a context of constrained resources, to increasing the viability of investments, to enhancing the overall effectiveness of aid. Moreover, by demonstrating the long-term viability of markets, blending can potentially trigger an increase in private investment without the need for a grant element (although the evidence on this so-called ‘demonstration effect’ remains relatively weak).
The objective of this guide is threefold: to define and provide the theory and rationale behind blending, to highlight key considerations for donors and development finance institutions (DFIs) of blended finance, and to illustrate how blending occurs in practice.
The guide addresses blending primarily from the perspective of donors and DFIs and is structured as follows:
The guide assesses blended finance in the context of financing infrastructure and low-carbon infrastructure projects in Sub-Saharan Africa and South Asia with case studies of relevant projects used throughout to illustrate the following main points:
This peer reviewed Topic Guide has been produced by the Overseas Development Institute (ODI) with the assistance of the UK Department for International Development (DFID) contracted through the Climate, Environment, Infrastructure and Livelihoods Professional Evidence and Applied Knowledge Services (CEIL PEAKS) programme, jointly managed by HTSPE Limited and IMC Worldwide Limited.