The potential of ODA to leverage additional financing for development was already recognized in the Monterrey Consensus. To support the mobilization of additional domestic public resources, donors have increased their engagement in tax capacity-building, even though the share of ODA for this purpose remains low. There is also renewed interest in phasing out tax exemptions for ODA, which run counter to efforts to strengthen national tax systems.
The biggest focus to date, however, has been placed on development finance’s ability to crowd in, leverage, or catalyze additional private or commercial financing, often referred to as “blended finance”. The use of blending instruments is increasing, putting a spotlight on their allocation across country groups, their development impact, and their alignment with key development effectiveness principles such as country ownership and transparency. Existing experience suggests that there would be benefit for all stakeholders to further consider how blending modalities can support and be aligned with relevant principles in the Addis Agenda and the overarching principles of development effectiveness.
Member States defined blended finance as combining “concessional public finance with non-concessional private finance and expertise from the public and private sector” in the Addis Agenda. However, not all international organizations use this definition. While global reporting efforts are based on different underlying definitions, most measures find a rising trend in both blended financing volumes and number of deals. Recent data collections show that at least 23 out of 30 DAC members engage in blended finance. Donor Governments set up 167 dedicated facilities for blending between 2000 and 2016. Between 2012 and 2017, their blending activities mobilized a total of $152.1 billion from commercial sources. Most of blending is in middleincome countries, with 8 per cent mobilized for LDCs.
Blending is likely to advance some SDGs more than others: 84 per cent of blended deals are aligned to SDG 9 on infrastructure and industrialization, but only 7 per cent align with SDG 6 on clean water and sanitation (figure 10). Indeed, most blended deals are concentrated in sectors with significant potential for economic returns. For example, projects in infrastructure and financial services accounted for 33 and 29 per cent, respectively, of all deals registered in the Convergence database. In the case of the former, this was mainly driven by the energy sector, and in the latter, by microfinance/retail banking and small business/corporate banking (reflecting a focus on financial inclusion). Social infrastructure sectors with less clear-cut revenue potential have received less funding. Health care accounted for 17 per cent of blended finance deals and education accounted for 9 per cent of deals. Because of limited profitability of such investments, any further scaling up of blending needs to be accompanied by an international commitment to redouble efforts to mobilize additional public funding for those areas where blending is not appropriate.
The Addis Agenda spells out an overarching set of principles to improve the effectiveness and efficiency of blended finance in achieving the SDGs. It stresses the importance of national ownership and alignment with national priorities. It also highlights the need for blending to support sustainable development. The Addis Agenda calls for careful consideration of sectors and local contexts in the use of blending to ensure its use is appropriate. Recognizing the risk of oversubsidizing the private sector, it calls for a fair sharing of risks and rewards, as well as clear accountability mechanisms and transparency. It further recognizes the need to monitor the impact of blending on debt sustainability. In addition, it stresses the need for local participation in blended investments that affect their communities.
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Addis principles on blended finance and PPPS
Relevant actors have also worked on defining principles for blending. In the Addis Agenda, Member States had agreed on a set of overarching principles for blended finance and public-private partnerships.
- Careful consideration given to the structure and use of blended finance instruments (para. 48)
- Sharing risks and reward fairly (para. 48)
- Meeting social and environmental standards (para. 48)
- Alignment with sustainable development, to ensure sustainable, accessible, affordable and resilient quality infrastructure (para. 48)
- Ensuring clear accountability mechanisms (para 48)
- Ensuring transparency, including in public procurement frameworks and contracts (paras. 30, 25 and 26)
- Ensuring participation, particularly of local communities in decisions affecting their communities (para. 34)
- Ensuring effective management, accounting, and budgeting for contingent liabilities, and debt sustainability (paras. 95 and 48)
- Alignment with national priorities and relevant principles of effective development cooperation (para. 58)
Subsequently, other actors have agreed on sets of principles for their own activities. This includes the OECD DAC Blended Finance Principles, endorsed in October 2017, and the DFI Working Group’s Enhanced Blended Concessional Finance Principles, agreed to in 2017. In October 2018, Indonesia and the OECD, together with other partners released the Tri Hata Karana Roadmap for Blended Finance, which calls for coordinated efforts to ensure effectiveness and efficiency in the use and scaling up of blended finance operations.
These blended finance principles have many areas of overlap with the principles spelled out in the Addis Agenda. However, while they usually include guidance on the financial additionality of blended finance, only a few of them place strong emphasis on development additionality, which has proven more challenging to document. In addition, while most emphasize alignment with national priorities, the Addis Principles may put a stronger emphasis on the importance of providers of blended finance engaging with host-country Governments at the strategic level, to ensure that priorities are aligned. This underscores the usefulness of integrated financing frameworks as an instrument to guide discussions (see chapter II). Going forward, the international community should reflect collectively on how different sets of principles relate to respective commitments in the Addis Agenda.
Total official support for sustainable development (TOSSD) is a statistical framework initiated by the Organization for Economic Cooperation and Development to measure external officially supported finance for sustainable development and the Sustainable Development Goals (SDGs). TOSSD is a two-pillar framework that aims to track officially supported (i) cross-border resource flows to developing countries and (ii) global and regional expenditures in support of development enablers (e.g., global public goods) to address global challenges. It includes both official resources and resources mobilized from the private sector by official development finance interventions, regardless of their level of concessionality. In response to the call of the Addis Ababa Action Agenda to develop TOSSD in an open, inclusive and transparent way, an International Task Forcea was established in July 2017 to develop TOSSD Reporting Instructions, which define the main statistical parameters (definitions, measurement methods, taxonomies) of the two-pillar framework. In January 2019, the Task Force concluded the methodology to track cross-border resource flows to developing countries (pillar I). A data survey will be conducted in the first months of 2019 to start collecting TOSSD data at the activity level. The TOSSD Task Force has also started developing the methodology for pillar II and aims to complete it in 2019.