Over the past few decades, India has mobilized 300+ million people out of multidimensional poverty and made significant progress in social upliftment. However, the nation continues to reel with gaping inequalities, which have been further compounded by the Covid-19 pandemic, across sectors. To make matters worse, India’s $565 Bn Sustainable Development Goals (SDGs) annual financing gap has only further widened post the pandemic. At the same time, government social funding is still constrained by limited resources, while economic shocks have induced a demand failure.
Given these challenges, it is imperative to look beyond traditional models of socio-economic development and embrace innovative financing mechanisms such as blended finance to enhance overall effectiveness of development interventions.
" Blended finance is the strategic use of development finance from public and philanthropic sources to mobilise additional capital from the private sector towards sustainable development. Typically, grant funding is blended with other sources of capital such as debt or equity to maximize funding and social impact capacity. "
As the definition above suggests, blended finance enhances the impact of philanthropic and government funding by leveraging the funds to unlock the trillions of dollars of commercial capital available in the global market to finance socio-economic development. This innovative financial structuring is used to re-balance the risk–return profiles of pioneering, high-impact investments that would otherwise be deemed too risky to fund. The catalytic nature of such transactions allows governments and foundations to address market failures by utilising their corpus of funds judiciously.
Use of development finance and philanthropic funds to attract private capital
Investments must be targeted towards concrete social or environmental impact
Financial return for a set of investors, based on risks and pricing of impact
Blended Finance structures can be categorised into four thematic archetypes based on the mode of intervention.
Concessional capital encompasses the universe of catalytic funding from development organizations with the intention of bearing below-market returns and/or absorbing higher investment risk. This re-balancing of the risk-return profile through the use of catalytic capital helps make investments in the social sector more worthwhile for risk averse commercial investors.
Support Mechanism structures come in diverse forms such as technical assistance facilities, design stage grants, project preparation facilities etc. They aim to strengthen the quality, efficiency and sustainability of development projects and improve the financial viability of Blended Finance transactions by increasing the probability of financial close.
Risk mitigation tools function as a form of insurance for commercial investments into social impact. Unlike concessional capital that is often deployed hand-in-hand with commercial capital, risk mitigation guarantees a portion of future losses on an investment. In effect, such tools help augment market efficiency because capital is only used to cover losses when they actually occur.
Results-based Financing is an innovative, outcomes-oriented or pay-for-success approach that incentivizes providers, and the investors providing their working capital, based on achievement of agreed- upon, measurable performance targets. Such structures are unique because capital is not deployed to satisfy the cost of inputs but to reward the achievement of desired outcomes by end beneficiaries. Common forms include Social/ Development Impact Bonds, conditional cash transfers, debt swaps and outcome- linked interest rate loans.
By facilitating robust public-private collaboration, Blended Finance structures present a strong and unique opportunity for investors, foundations and governments to collaborate in a way that build upon each other’s strength while mitigating risks.
Blended Finance can strengthen the government’s efforts to support underserved and marginalised sections of society. The use of innovative financing structures can increase both depth and breadth of government programs to drive large scale impact by:
Commercial investors have traditionally been wary of investing in the development sector due to unfavourable risk-return tradeoffs. However, the use of Blended Finance structures can support investors looking for market returns through:
Blended Finance structures can catalyse the flow of capital into the social sector and support the development agenda of non-profits and foundations by:
Blended Finance allows development financiers to tackle structural needs for programs at different stages of the life cycle and market maturity. By providing an improved risk-return profile for the private sector, Blended Finance can help to bridge funding gaps that impede development objectives in situations a market failure needs to be overcome.
Brings more investable,
market ready projects
Makes capital available
in unpenetrated markets
Brings in new
investors and skills
Leads to fully
commercial solutions
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