WEF Blended Finance How to Guide

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ReDesigning Development Finance Initiative A joint initiative of the World Economic Forum and the OECD

A How-To Guide forBlended Finance

A practical guide for Development Finance andPhilanthropic Funders to integrate BlendedFinance best practices into their organizations

September 2015


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2 Acknowledgments

3 Preface

4 Section 1. Executive Summary

6 Section 2. Rationale for Blended Finance

10 Section 3. Framework for Engaging inBlended Finance

10 Step 1: Understand Your Organization’sStarting Point

12 Step 2: Build Organizational Buy-Inand Awareness

13 Step 3: Formulate a Preliminary Set of Goalsand Principles for Blended Finance

14 Step 4: Assess Gaps in OrganizationalCapacity for Blended Finance

16 Step 5: Pilot a Blended Finance Deal in YourNew Framework

18 Step 6: Review Lessons to Build BlendedFinance Capabilities Across your organization

20 Step 7: Develop Pipeline and DealExecution Capacity

21 Step 8: Learn and Scale Up

22 Section 4. Conclusion

23 Appendix

23 Blended Finance Resources

24 References and Frameworks forDevelopment Funders

© WORLD ECONOMIC FORUM, 2015 – All rights reserved.

No part of this publication may be reproduced ortransmitted in any form or by any means, includingphotocopying and recording, or by any informationstorage and retrieval system.

REF 180915

Contents

This Report synthesizes the ideas and contributions ofhundreds of individuals and organizations, to whom we areextremely thankful for generously contributing their time, energyand insights.

We would like to acknowledge our partners in the ReDesigningDevelopment Finance Initiative Report, the OECD Development

Assistance Committee, who have tirelessly lent their timeand insights to the project. In particular, we would like torecognize Erik Solheim, Haje Schütte, Jens Sedemund and

Kaori Miyamoto. A special thanks also goes out to our Reportpartners, Dalberg Global Development Advisors, for theircontinuous support and engagement on this document, and to

Tom Bui and the team at the Canadian Department of Foreign Affairs, Trade and Development for sharing their BlendedFinance journey. Furthermore, we would like to acknowledgethe insights and contributions of the ReDesigning DevelopmentFinance Initiative Steering Committee:Chair: Christian Paradis,Minister of International Development and La Francophonie ofCanada, Vice-Chair: Julie Sunderland, Director, Bill & MelindaGates Foundation, Charlotte Petri Gornitzka, Director-General,Swedish International Development Cooperation Agency (Sida),Dale Mathias, Chairman - Partners Forum for Private CapitalGroup for Africa, US Agency for International Development(USAID), Thomas Speechley, Chief Executive Ofcer, AbraajNorth America, and Gavin Wilson, Chief Executive Ofcer, IFC

Asset Management Company.

We would also like to extend our sincere thanks to ProfessorKlaus Schwab, Founder and Executive Chairman of the WorldEconomic Forum; Rick Samans, Head of the Centre for theGlobal Agenda and Member of the Managing Board of theWorld Economic Forum; Michael Drexler, Senior Director, Headof Investors Industries; as well as the Project team: Terri Toyota,Philip Moss, Michelle Larivee, and Christina Gomis.

Acknowledgements


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Preface

The international community is set to commit to a new set of ambitious Sustainable Development Goals,reecting the need to transform economies, end poverty, and tackle the challenge of climate change. Thesegoals are laudable, reecting a shared vision for the future of humanity. However, this ambition comes with aprice tag that could run into the trillions.

Private nance will be critical in helping countries to transform and grow in a sustainable way, providing jobs, particularly for the poorest and most marginalized and enabling countries to broaden their nancingbase and exit aid dependence. The good news is that private ows to developing countries are alreadyincreasing, reecting increased attention on investment opportunities in global growth markets. But the badnews is that they often struggle to make inroads into the projects, sectors and countries where they can

have the maximum development impact.

This is where Blended Finance comes in. Private investors sometimes have good reasons for avoidingdeveloping country markets: returns are too low for the level of risk, markets don’t always function as wellas they should do, and local investment climates can be challenging to work in. They may also have someless founded reasons for staying away – not recognizing the rewards on offer, or perceiving a risk that ishigher than the reality, based on outdated assessments of country potential.

By blending development nance or philanthropic funds with private capital, all actors in a Blended Financetransaction benet from win-win-win solutions. Wins for the development funders, as they can magnifythe impacts of small amounts of public sector support to leverage larger amounts of private nance: from‘billions to trillions’. Wins for private investors and nanciers, as they secure viable returns on worthwhileprojects. And most of all, wins for people in developing countries as more funds are channeled to emergingand frontier markets, in the right way, to really help transform economies, societies, and lives.

Getting started to adopt a Blended Finance approach within your organization is not always easy.Organizations may feel overwhelmed with the challenge of working in new ways with sometimes unfamiliarpartners. This is where this How-To Guide (the “Guide”) comes in, providing clear, step-by-step guidance,combined with experience from organizations that have already pioneered the integration of a BlendedFinance approach. Starting from Day One, it provides guidance for organizations to develop champions,identify capacity gaps, work with external partners, and start executing your rst Blended Finance project.

The stakes could not be higher. We are the rst generation to be able to end poverty, and the lastgeneration to be able to prevent runaway climate change. Using Blended Finance can help support theseobjectives, contribute to better lives, stronger economies, and a brighter future.

In order to maximize the use of this Guide and to understand the dynamics of Blended Financetransactions, readers should familiarize themselves with the core concepts presented in theReDesigning Development Finance Initiative publication, “Blended Finance: A Primer forDevelopment Finance and Philanthropic Funders” (the “Primer”). This Primer provides furtherinformation on denitions, types, and the respective roles of commercial and developmentinvestors, as well as illustrations of scenarios for applying Blended Finance models.

Richard SamansManaging Directorand Member of theManaging BoardWorld EconomicForum

Erik SolheimChair, Development

AssistanceCommittee (DAC)Organisation forEconomicCo-operationand Development

(OECD)

3 A How-To Guide for Blended Finance


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Blended Finance is an approach to development nancethat employs the “strategic use of development nance

and philanthropic funds to mobilize private capital ows toemerging and frontier markets” and is characterized by threecharacteristics:

– Leverage: Use of development nance and philanthropicfunds to attract private capital.

– Impact: Investments that drive social, environmental andeconomic progress.

– Returns: Returns for private investors in line with marketexpectations based on perceived risk.

Blended Finance offers the opportunity to scale up commercialnancing for developing countries and to channel suchnancing toward investments with development impact. Inthis way, it can support progress towards the SustainableDevelopment Goals. This is particularly important in a contextwhere public resources are increasingly under pressure, whileprivate ows to developing countries are increasing signicantly.

Blended Finance contributes to development objectives by:

– Increasing capital leverage: Extends the reach of limiteddevelopment nance and philanthropic funds as they areused strategically to facilitate larger volumes of privatecapital that are channelled to investments with highdevelopment impact.

– Enhancing impact: The skillsets, knowledge andresources of public and private investors can increase thescope, range, and effectiveness of development-relatedinvestments.

– Deliver risk-adjusted returns: Risks can be managed torealise returns in line with market expectations.

For development funders1 including development agencies,development nance institutions, foundations, and otherorganizations with a commitment to funding the developmentoutcomes, Blended Finance has the potential to amplify theimpact of scarce funds, be they ofcial or philanthropic. On theground, this can mean preparing dozens of new infrastructureprojects for investment, directing millions in nancing tohigh-growth SMEs, or vaccinating millions of children againsttreatable illness.

Section 1:Executive Summary

So why have only a limited number of institutions looked toused Blended Finance on a broad scale? Development fundersface a number of barriers that have limited the adoption ofBlended Finance across their organizations, including:

– Limited awareness of the potential for public-privatecollaboration to realize greater impact, due in part to a lackof evidence.

– Institutional constraints, including the limits of anorganization’s mandate and the regulations of investmentauthorities that can restrict some types of instruments usedin Blended Finance (e.g. equity or direct debt investments).

– Organizational capacity, including the technical expertiseof staff to structure, manage, and execute transactions; staffincentives to explore and execute such transactions; andthe extent of your organization’s external partnerships.

This Guide aims to overcome these barriers. It explains theBlended Finance opportunity and offers a framework forstarting or scaling up activities for a range of developmentfunder audiences. Each organization’s mission, motivations,staff prole, and operating context are, of course, unique. Asthere is no “one size ts all” method to adopting a BlendedFinance approach, the framework provided in this documentwill need to be tailored to t your own organization’s needs.

This Guide has used the experience of the CanadianDepartment of Foreign Affairs, Trade and Development toillustrate ‘real world’ examples of how this process can beemployed, but their experience will need to be adapted for yourown context. The purpose of this document is to help yourorganization set goals to engage in Blended Finance and realizean action plan for successful implementation.

Development funders can draw on a range of tools to engage

private capital providers through Blended Finance.

Supporting Mechanisms have been traditionally used bydevelopment funders in a Blended Finance package to attractand support private sector investors by managing risks andreducing transaction costs. These Mechanisms can generallybe classied as providing:

– Technical Assistance, to supplement the capacity ofinvestees and lower transaction costs.

– Risk Underwriting, to fully or partially protect the investoragainst risks.

– Market Incentives, guaranteed payments contingent onperformance of future pricing and/or payment in exchangefor upfront investment in new or distressed markets.

1 For the remainder of this paper, we will use the term ‘public funders’ for the full range of developmentnance and philanthropic actors involved in Blended Finance, recognizing that not all of these will bepublic actors but motivations may be similar.



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Blended Finance can also be enabled by development fundersvia Direct Funding throughout the project or enterprise lifecycle. Direct Funding includes grants, equity, and debt that canhelp support:

– Preparing, reducing commissioning uncertainty and ‘rst-mover disadvantage.’

– Pioneering, helping high-risk enterprises or projects toexperiment with, test, and pilot new business approaches.

– Facilitating, offering investments at more generous termsthan the market to encourage investments with a highexpected development impact.

– Anchoring, seeking to ‘crowd in’ private capital on equalterms to achieve ‘rst close’ or demonstrate viability.

– Transitioning, providing a pipeline of mature and sizeableinvestments cultivated by development funders that attractsscalable investments through exits to commercial players.

This Guide provides a simple step-by-step approach toensuring that your organization has the necessary managementand institutional arrangements in place to pursue a Blended

Finance strategy. In summary, these steps are:1. Understand your organization’s starting point2. Build organizational buy-in and awareness3. Formulate a preliminary set of goals and principles for

Blended Finance4. Assess gaps in organizational capacity for Blended

Finance5. Pilot Blended Finance deals with your new framework6. Review lessons to build Blended Finance capabilities7. Develop pipeline and deal execution capacity

8. Learn and scale up across your organization

Blended Finance offers signicant opportunities for yourorganization to catalyse private capital to increase developmentimpact. However, prior to deciding how to engage in BlendedFinance, your organization must rst determine whetherBlended Finance ts with your goals and mandate. BlendedFinance can be a key component of an organization’s strategyto harness its resources for maximum impact, but this requiresstrong commitment across your organization and capabilitiesthat span staff skills, organizational effectiveness, and privatesector partner engagement. For organizations that embrace

the challenge, the opportunities to increase social impact,environmental stewardship, and inclusive and sustainablegrowth in the developing world holds tremendous promise.



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2.1 Why Blended Finance? WhyNow?

The Millennium Development Goals (MDGs) are set to expire atthe end of 2015. UN member states are currently negotiating anew set of Sustainable Development Goals (SDGs), reectinga broader and more ambitious agenda. The SDGs will beexpensive to achieve: the United Nations Conference on Tradeand Development (UNCTAD) estimates that the developing

world faces a $3.1 trillion annual investment gap in critical areassuch as health, education, food security, climate change, andinfrastructure.2 While public nancing, including from OfcialDevelopment Assistance (ODA), will continue to be important,signicant increases in private nancing will be required if theSDGs are to be achieved. The good news is that private capitalows to emerging and frontier markets are already growing: forexample, FDI from private investors to these markets more thandoubled between 2004 and 2014, from under $400 billion toover $1.1 trillion annually3.

Section 2:Rationale for Blended Finance

However, ve signicant challenges have severely limited privatecapital from scaling in these markets:

1. Returns are seen as too low for the level of real or perceived risk

2. Local markets often do not function efciently, with localnancial markets in developing economies particularly weak

3. Private investors have knowledge and capability gaps,which impede their understanding of the investmentopportunities in often unfamiliar territories

4. Private investors have limited mandates and incentives to invest in sectors or markets with high development impact

5. Local and global investment climates are challenging, including poor regulatory and legal frameworks

Blended Finance, the strategic use of development nance andphilanthropic funds to mobilize private capital ows to emergingand frontier markets, offers institutions a mechanism to addressthese barriers and drive greater capital ows to projects andcompanies with development impact by:

– Shifting the investment risk-return prole with exible capitaland favourable terms to overcome the problem of lowreturns relative to high real and perceived risks that limitsprivate investment.

– Sharing local market knowledge and experience to bridgeknowledge and capability gaps.

– Building local capacity, to help support local markets.– Shaping policy and regulatory reform to help improve the

local investment climate.

Blended Finance transactions are characterized by a number ofbenets for institutions engaged in promoting development:

– Leverage: Use of development nance and philanthropicfunds to attract private capital

– Impact: Investments that drive social, environmental andeconomic progress.

– Returns: Returns for private investors in line with marketexpectations based on perceived risk

2 United Nations Conference on Trade and Development (2014), World Investment Report 2014.3 Institute of International Finance (2014), Capital Flows to Emerging Market Economies (October2014).



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Figure 1: Blended Finance Benets

Table 1: Blended Finance Approaches

2.2 How Does Blended Finance Work?Blended Finance transactions are structured to address barriers to investment and nance faced by private capital providersacross the investment lifecycle in order to engage additional capital ows to a transaction that delivers development impact.Depending on the funding gap being addressed, Blended Finance offers different rationales for and approaches to the use of avariety of nancial instruments that can be used.

Pioneering

Early-stage projectswith high businessmodel risk; high

transaction costs

Little to no returnexpectations andabsorbs costs,reduces businessmodel risk andprovides advisoryservices; can deferrights or enhanceprivate returns

Grants, RepayableGrants, JuniorEquity, Flexible Debt

Preparing

High upfront costs;binary risk that aproject will not

happen

Funds upfront costsand activitiesreducing uncertainty,creatingtransparency, andbuilding a pipeline ofbankable projects

Grants, RepayableGrants, HighlyFlexible debt

Anchoring

Macro or sectorialrisks; liquidity,refinancing and exit

risks

Signaling effect and‘stamp of approval’by achieving ‘first-close’ ordemonstratingviability to ‘crowd-in’private funds

Market Rate Debt,Equity

Transitioning

Lack of local marketsknowledge and dealpipeline; inefficient

markets

Market Rate Debt,Equity

Facilitating

Sectorial or projectrisks; returns belowcommercial rates

Equity, Flexible Debt

S U P P O R T I N G

M E C H A N I S M S

M A R K E T

S E G M E N T

P U B L I C

S E C T O R R O L E

D I R E C T

F U N D I N G

Takes a subordinateposition with higherrisk or provides lowcost leverage toenable privatecapital to meet theirrisk-returnthresholds

Exit mature andsizeable investmentsthat provide apipeline forcommercial actors

Life Cycle of Projects & Enterprises

Explore Build MatureGrow

Technical Assistance (Technical/Operational Expertise) – Advisory or preparatory services, assistance, andtraining to facilitate private investment in high-impact projects and enterprises in order to supplement the capacity ofinvestees and more generally lower the transaction costs

Market Incentives (Results-based Financing/Price Guarantees) – Guarantees of future payments contingent onperformance in exchange for upfront investment in new or distressed markets, or to stimulate innovation around newproducts and services

Risk Underwriting (Capital Preservation) – Risk reduction tools that fully or partially protect the investor againstvarious forms of risk, effectively reducing their risk of capital losses



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Blended Finance development funders have traditionally providedSupporting Mechanisms to engage private capital in atransaction. Use of Supporting Mechanisms can attract and support private sector investors by managing risks and reducingtransaction costs:

Table 2: Supporting Mechanisms

Technical Assistance(Technical/OperationalExpertise)

Technical Assistance addresses the risks in new, uncertain and fragmented markets forinvestors. Costs and risks associated with exposure to new markets, technical uncertainty,and the inability to build a pipeline can be reduced through this mechanism, lowering the hightransaction costs for investors and operational risks which often dissuade a commitment offunds.

Risk Underwriting(Capital Preservation)

Risk Underwriting reduces specic risks associated with a transaction. This Mechanismprovides direct compensation or assumes losses for specic negative events, addressingconcerns of private capital providers related to macro and project/company specic risks toensure capital is preserved.

Market Incentives(Results-based

Financing/PriceGuarantees)

Market Incentives address critical sectors that do not support market fundamentals. This helpsnew and distressed markets that require either scale to be commercially viable or reduced

volatility, by providing xed pricing for products in order for private capital to justify committingto the sector.

Increasingly, Blended Finance is provided viaDirect Funding to overcome the barriers in each Market Segment throughout theproject or enterprise life cycle. The objectives of Direct Funding can be categorized according to ve different stages of theinvestment lifecycle and/or market maturity.

Preparing Preparing funding addresses the high upfront costs associated with pre-commissionedprojects and feasibility exercises for new businesses. Funding at this stage is most oftenapplicable to large infrastructure projects. It is typically in the form of grants, repayable grantsor highly exible loans.

Pioneering Pioneering funding addresses the high risk and uncertain returns associated with early stageinvestments, or projects using new technologies or in new markets. It is typically in the formof seed or venture capital that helps entrepreneurs to test and experiment with new ideas,markets, and/or business models, or grants and exible debt that underwrite pilot projectcosts.

Facilitating Facilitating funding assists projects and companies that may offer low returns relative to therisks, which investors do not nd to be commercially viable. By investing in the riskiest partsof the capital structure, development funders can make the private sector investment moreattractive. Direct Funding at this stage takes a variety of forms including most often exible orsubordinate debt (e.g., mezzanine) and junior equity.

Anchoring Anchoring funding from a development funder on the same terms as private sector investmentcan provide comfort to investors, increasing the perceived quality of the investment and theability of investors to manage macro risks. Anchoring funding can be in the form of eithermarket rate debt or equity.

Transitioning Transitioning funding allows funding pools looking to invest in emerging and frontier marketsto access a pipeline of deals that are sufciently sizeable and scalable to t within investormandates, bringing greater liquidity to the market and contributing to development outcomes.

Table 3: Direct Funding for each Market Segment



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In the dynamic world of development funding, organizationsneed to be exible and creative in their tools, partnerships,and vision in order to drive impact and remain relevant throughshifting economic and political contexts. However, manydevelopment funders face gaps in their ability and resources toexecute Blended Finance transactions. Your organization doesnot have to make the transition all at once, nor does it haveto engage with the full spectrum of Blended Finance activities

right off the bat. Part of the challenge of engaging in BlendedFinance is setting goals based on both your organization’scurrent capabilities and its capacity to change and build newones.

For Blended Finance approaches to take root in yourorganization, dedicated “champions” will have to step forwardto drive the process. By becoming a champion, your visionwill be at the forefront of broadening and deepening theimpact your organization has in the world. Blended Financechampions need to challenge their organizations to thinkdifferently about their work, break down barriers that haveceased to be benecial, and bring far more resources to bear

on development challenges by folding private capital intomajor projects in creative and powerful ways. By shepherdingyour organization through the process of engaging in BlendedFinance, you are a “champion” helping it remain vital, relevant,and effective.



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For organizations that do not currently engage in BlendedFinance transactions, the rst step can seem daunting. Whereto begin? How does a development funder learn to speakthe language of private investors? How does it seek out andstructure partnerships that meet the distinct needs of privatesector and development funding organizations? How longwould it take?

Section 3:Framework for Engaging in Blended Finance

This section addresses these questions and more, takingyou through the process in eight discrete, manageable stepsdesigned to help your organization scale up its engagementwith Blended Finance. Regardless of your organization’sstarting point, your organization can be ready to begin piloting aBlended Finance deal in as little as four months.

Figure 2: Framework for Engaging in Blended Finance

This framework provides practical steps for your organizationto assess its interest in Blended Finance, determine itscapabilities, and execute against its vision. Each step leads toa specic outcome that will help advance your organization onthis journey. It is worth noting that while these steps provide asolid basis for assessing and implementing Blended Finance inthe context of your organization, the success of this processhinges on the engagement of Blended Finance championswithin your organization to drive the change process forward.

Step 1: Understanding YourOrganization’s Starting PointExpected time: up to 1 week

Purpose: This initial step will help you gather the informationyou will need to establish a shared understanding within yourorganization of its current engagement with Blended Finance

and level of development impact. By completing the BlendedFinance Scorecard, you will be prepared to use this Guide mosteffectively in setting goals, assessing and closing gaps, andmeasuring the additional impact that Blended Finance brings toyour organization’s mission.

4-6 months



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Principles: Aim for this assessment to be:

– Evidence-driven , reecting both quantitative and qualitativeevidence

– Objective and candid , reecting an impartial assessmentof your organization’s experience, interest and capacity toinitiate or scale up Blended Finance

Process: This scorecard will ask you to assess yourorganization’s relationship to Blended Finance in terms ofexperience, skills, engagement, awareness, and interest.It will also require you to describe how your organizationmeasures development impact. Later in this Guide when yourevisit lessons learned and assess what gaps will need to beaddressed, you can return to your assessments to identifyareas for improvement and of strength. Note that this process

is not intended to be time consuming , but rather to establisha basis for the activity and potential capabilities of yourorganization.

Figure 3: Blended Finance Scorecard

Engagement: This process should be led by a small,committed group of internal champions with some directexperience with your organization’s private sector partnershipsand/or Blended Finance investments, if relevant

At the end of this step, you should have:

Important consideration. Your organization needsto make sure it understands any potential legalor institutional barriers preventing co-investmentswith the private sector. There may be legal orpolicy constraints to deploying specic nancinginstruments. Understanding your organization’sstarting point means becoming aware of suchconstraints. √ A completed Blended Finance Scorecard outlining your

organization’s experience and capacity in engaging inBlended Finance.

√ A starting point to begin building organizational buy-in andawareness.

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Step 2: Build Organizational Buy-Inand AwarenessExpected time: 4 weeks

Purpose: The process of building organizational buy-in andawareness of the value of Blended Finance is a precondition

for scaling up Blended Finance. Its potential benets andlimitations need to be widely understood throughout yourorganization before you can actively engage in BlendedFinance. While building buy-in across your organization is anongoing process, this step will ask you to make an initialfourweek “push” to support initial Blended Finance investments.

Principles: To foster buy-in, the case for Blended Financeneeds to be context-specic , the case for Blended Financeshould be tailored to the priorities and concerns of leaders andstaff in your organization as well as the specic environment inwhich your organization operates. The case should be madeas specic as possible, presenting credible information in aformat that is easy to communicate, including visuals whereverpossible.

Process: Prepare a position paper—no more than vepages—for staff at multiple levels of your organization thatarticulates why now is the time for your organization to adoptelements of a Blended Finance approach, highlighting the caseat the global, environmental , and institutional levels, as wellas explicitly highlighting how potential risks associated withBlended Finance might be managed.

with private sector partners, to help prioritise “quick win”areas for leveraging impact through Blended Finance.

– Demonstrate alignment with your organization’soverarching mandate and ensure that the coalition of keyactors understand how Blended Finance can benet theorganization by developing a Theory of Change model (asoutlined in Figure 5 of the Appendix 2.1).

– Allow private investors to articulate their needs and

concerns in order to participate in Blended Finance projects.

Engagement: Communicate to others in your organizationthrough the position paper, drafted by a nancially literatechampion(s) working with senior leadership who can engageother internal stakeholders—the risk management team, leadprogram ofcers, and other key stakeholders—in reviewing andoffer input on the Blended Finance vision. The paper should bea starting point to build buy-in beyond the initial 4-week “push”with periodic activities, including e-newsletter updates to yourorganization, brown bag lunches, and conference calls to sharelessons learned.

Figure 4: Position Paper

1. What is Blended Finance?2. Why use Blended Finance for development impact,

vis-à-vis other nancing instruments?3. Initial benchmark assessment of Blended Finance at

your institution4. The case for Blended Finance in your institution5. Potential risks and how to mitigate them

The position paper should attempt to:

– Outline the opportunity for Blended Finance to addressdevelopment objectives, referencing sources such asthe Primer and other resources listed in the Appendix.

– Leverage the insights gained from the Scorecard.– Refer to any policy guidance that your organization may

have received in the past 12 months.– Draw feedback from a series of brainstorming

sessions with key actors within your organization to seekanswers to any outstanding questions.

– Use analytical decision-making frameworks and harddata wherever possible to resolve disagreements anddifferences in opinion on whether your organization should

pursue Blended Finance and in what fashion. For example,analyse the distribution of your organization’s annualbudget by issue area (e.g., health, environment, or SMEdevelopment), highlighting areas in which you already work

Spotlight: DFATD build organizationalawareness

Several internal champions for Blended Finance atCanada’s Department of Foreign Affairs, Trade, andDevelopment (DFATD) recognized that a broad-basedawareness of Blended Finance across the organizationwas critical to realizing DFATD’s potential. The internalchampions conducted a series of discussions andinterviews with a range of DFATD personnel in order tounderstand staff perspectives on partnering with private

investors to achieve development outcomes. At the endof the process, the team developed an internal documentexplaining Blended Finance and its potential for achievingdevelopment outcomes for DFATD and its partners.


√ A position paper that articulates why now is the time foryour organization to engage more effectively in BlendedFinance, highlighting the case at the global, environmental ,and institutional levels to enhance your organization’simpact; and

√ A list of key inuencers and operational actors within yourorganization.

Important consideration. Building organizationalbuy-in and awareness of Blended Finance in a publicinstitution cannot be done in a vacuum. Buy-in mustbe informed by the external environment, includingthe rationale for using Blended Finance to meetpolicy objectives, as well as the internal environment,including staff perceptions of partnering with theprivate sector to achieve development impact.

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Step 3: Formulate a Preliminary Setof Goals and Principles for BlendedFinanceExpected time: 8-12 weeks

Purpose: Your organization’s approach to Blended Financeshould be focused, measured and deployed selectivelyto ensure that it is optimally using limited resources andaligning with its overarching mandate. This requires clearlydened goals as well as principles that should be eventuallyincorporated into your organization’s strategy for BlendedFinance. An approach based on a sound set of principles canalso mitigate concerns over the potential risks associated withdeploying funds with Blended Finance in mind.

Principles: Your organization’s Blended Finance goals shouldbe characterized by four criteria:

– Specicity —who will be involved, what will beaccomplished, how, and when– Realism —given existing resources and constraints,

including government policy, nancing tools available, andstaff capabilities

– Timeliness —anchored to a specic timeline to increasecommitment and accountability

– Attribution—each goal should be attributed to specicindividuals in your organization to ensure execution andincorporation

Process: A clearly articulated set of Blended Finance goals

should answer questions that address the key topics, in theform (outlined in Appendix 2.2):

Preparation– Why is your organization trying to engage in Blended

Finance?– What nancial instruments can your organization use?– Which nancial instruments is your organization willing to

use?– What type of risk can your organization accept?– How much risk can your organization accept in an

individual transaction or across a portfolio?– How much Blended Finance activity can your organization

sustain per year?

Operations and Allocation– How will your organization engage in Blended Finance—

directly, or through intermediaries?– How will your organization decide which transactions to

pursue?– How will your organization identify investment

opportunities?– How will your organization monitor and measure its

progress against its goals?– Where should funding to support Blended Finance be

focused—e.g. by issue area or geography?

– Who within your organization will be responsible for whichactivity?

– What resources are required to deliver the vision?

Long Term Strategy– What activities will your organization pursue to scale

Blended Finance?– Who will your organization work with to scale up Blended

Finance activity?– What does your organization’s Blended Finance portfolio

look like in ve years?– Annual totals or % of investment portfolio earmarked

for Blended Finance per year– Proportion of issue areas (e.g., neonatal care) that will

involve a Blended Finance project– Blended Finance approaches with mandate and

priorities

In addition to these goals, principles should also be developed

based on your organization’s rationale for pursuing BlendedFinance and its approach to address potential challengesassociated with this approach. Challenges outlined in theliterature include:

– Balancing nancial incentives and developmentprinciples. Using development funding to leverageprivate sector investment can be seen as a waste offunds if an organization use these limited resources tosupport projects that do not have signicant developmentoutcomes (e.g., low value for money).

– Avoiding crowding out private nancing and marketdistortion. Crowding out occurs when developmentnance institutions invest in a project that would havebeen commercially viable (e.g., that could have attractedfull private sector nancing) without any support throughBlended Finance. Where this occurs, it not only meansthat scarce development funding has been misspent, but italso has the potential to distort markets and undermine thedevelopment of a healthy private sector market.

– Ensuring transparency while simultaneously protectingcommercial condentiality. Transparency is importantin all areas of development nance operations and, manywould argue, particularly so where development fundingis used to support and leverage private investments.However, there are certain characteristics of BlendedFinance processes − in particular the need for commercialcondentiality when dealing with the private sector − thatcreate a unique set of barriers to full transparency. A clearapproach needs to be found that ensures appropriateaccountability of development nance while safeguardingcommercial condentiality.

Engagement: A range of stakeholders will be involvedin providing input to the goal setting including BlendedFinance champions, senior leadership, and heads of relevantprogrammatic areas.



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Spotlight: Canada’s DFATD goals for scaling Blended Finance

DFATD’s internal Blended Finance champion developed a vision statement and set of clear goals for the use of BlendedFinance with input from senior leadership. The team identied the most appropriate approaches to scaling Blended Finance atDFATD in both the near term (“Preparing” and “Facilitating” investments) and long term (including those from the near term aswell as “Pioneering” investments and “Market Incentives” mechanisms).


√ A clearly articulated set of near-term Blended Financegoals that take into account a ve-year vision for yourorganization’s Blended Finance activities.

√ A clearly articulated set of principles to guide your BlendedFinance operations.

√ An updated position paper that outlines Blended Financegoals and principles.

Step 4: Assess Gaps in

Organizational Capacity for BlendedFinanceExpected time: 4-8 weeks

Purpose: In order for your organization to map out a clearand realistic path to achieving its Blended Finance vision, itmust rst assess its existing capabilities and areas that needstrengthening. Through this process, your organization willgain a comprehensive understanding of its Blended Financecapabilities; determine the Blended Finance mechanisms thatyour organization is best prepared to scale in the short term;and identify key capacity gaps your organization must ll inorder to effectively undertake the Blended Finance approachesit has proposed.

Principles: The assessment of capacity gaps should aim to be:

– Realistic—an honest assessment of your organization’scurrent Blended Finance activity and capability strengths/ weaknesses

– Holistic—a comprehensive view of the institution acrossfour organizational dimensions: structure and governance,people and culture, tools and processes, and externalengagement

The baseline should also consider all parts of the funder’sorganization that are relevant to Blended Finance. Whenassessing your organization’s ability to undertake the targetedBlended Finance activities, you should consider:

– Organizational capacity —the required tools and capabilitiesto scale this Blended Finance approach, or the ability tobuild these requirements over time

– Demand —the need for Blended Finance to overcomebarriers faced in target Market Segments

Process: A series of consultations and internal assessments toprovide a holistic overview of your organization should include:

– One-on-one interviews and focus groups with internalstakeholders, particularly those who focus on innovation,private sector partnerships, portfolio and risk management,and monitoring and evaluation

– A complete portfolio mapping of your existing BlendedFinance activity

– Assessment of internal policies, procedures, andtransactional documentation relevant to Blended



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Spotlight: Canada’s DFATD assesses its Blended Finance capacity

DFATD’s internal Blended Finance champion and an independent consulting team conducted in-person interviews withstaff across the agency, working to uncover key strengths and barriers across the four organizational dimensions critical toBlended Finance. The team synthesized a set of strengths and barriers that DFATD faces in doing Blended Finance:

Finance, for example:– Policy notes on public-private partnerships– Database of relevant projects related to private sector

co-investment– Term sheets or loan agreements from past investments– Breakdown of staff by function and experience– Organizational chart

– A synthesize of ndings to gauge your organization’scapabilities along four organizational dimensions critical toBlended Finance (outlined in Appendix 2.3):Structure and governance– Structural ability to provide cross-functional support of

Blended Finance activity– Organizational mandate to deploy capital through

investment or nancingPeople and culture– Staff views on working with the private sector– Organizational culture that promotes entrepreneurship

and risk-taking– Staff background and exposure to nance and

investment– Staff experience in structuring Blended Finance

transactions and managing a portfolio Tools and processes– Processes and best practices for identifying,

structuring, and executing Blended Financetransactions

– Reporting and evaluation processes that canaccommodate Blended Finance needs

External engagement– Organizational ability to engage proactively in deal

origination through formal and informal channels– Formal relationships or frequent interactions with

other national stakeholders such as pension fundsor sovereign wealth fund, or globally with otherdevelopment nance networks and institutions

– Identication of your greatest strengths to leverageand gaps to be lled, prioritizing capability gaps that willneed to be lled in order to scale Blended Finance (outlinedin Appendix 2.4).

– Determination of the Blended Finance approachesto prioritize, in consultation with senior stakeholders, forscale in the near and long term based on supply- anddemand-side factors and t with your organization’s visionand mandate.

– Revision of your Blended Finance goals based on the

gaps previously identied in Step 3.

Engagement: The process should be led by a small contingentof Blended Finance champions to ensure cooperationand alleviate fears about potential organizational change.Champions should share the ndings with senior internalstakeholders to help build further buy-in for future changes thatmay be necessary in order to ll capacity gaps.



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√ An assessment of your organization’s Blended Financestrengths and capacity gaps across the four keyorganizational dimensions for Blended Finance.

√ Clearly identied capacity gaps to be lled.

√ Revised goals based on a clear assessment of currentcapacity to engage in Blended Finance.

Step 5: Pilot a Blended Finance Dealin Your New FrameworkExpected time: 6-18 months

Purpose: Your organization is now ready to pilot a BlendedFinance investment. By starting small and gaining experience,your organization will be in a better position to understand howBlended Finance can play a role in achieving developmentoutcomes, and what capacity constraints or gaps you need toaddress as you scale. This step involves identifying a potentialinvestment project that satises project selection criteria youdeem important for Blended Finance, reaching out to privateinvestors to build a partnership; and structuring and executinga Blended Finance transaction.

Principles: Your organization should look to use a rsttransaction to build and test the framework for your approachto Blended Finance, focusing on:

– Pragmatism —stay within the scope of your organization’sobjectives and capabilities to do Blended Finance

– Leadership —Blended Finance deals require support fromyour institution’s senior leadership, particularly if yourorganization has had minimal private sector interaction orprior experience with a private sector partnership

Process: If this is your rst time proactively identifyingan investment opportunity and seeking a private partner,structuring a Blended Finance deal may feel a bit daunting.

You may feel perplexed as to where to begin. Where do yougo to “look” for an investment opportunity? How do you ndthese prospective private investor partners? What criteria doyou use to assess a project’s suitability for Blended Finance?By following a few simple steps you can easily identify bothpartners and investments and kick-start your organization’sengagement with Blended Finance:

– Develop a short list of target countries and topics inwhich to invest. In Step 3, you set goals for how andwhere Blended Finance investments should be deployedbased on your organization’s priority geographies and/

or issue areas. Those target geographies and issue areasshould initially be the focus of your efforts.– Establish a tentative list of project selection criteria

that reect your organization’s priorities, goals andprinciples for Blended Finance. This can be an important

step for reasons of transparency as well as mitigating therisks associated with Blended Finance, such as ensuringthat development impact and nancial objectives areproperly balanced. Your project selection criteria will involvea combination of your organization’s desired role acrossthe Market Segments, alongside pragmatic considerationslike the type of nancing instruments your organization candeploy and the desired impact your organization seeks to

achieve in a particular issue area.– Build networks with mentor organization and privateinvestors. Several multilateral and bilateral developmentnance institutions have adopted Blended Financeapproaches for several years. Mentors/advisors can alsobe identied by networking at conferences, identifyingauthors of relevant pieces on development nance, ormaking use of partnerships your institution already has withother similar organizations. Private marketplaces targetingBlended Finance, investor associations, as well as thenational Chamber of Commerce in target geographies.

– Initiate informational discussions with private

investors in a group setting or one-on-one. Share yourorganization’s interests and objectives, and see wherethey might align with those of private investors. Impactobjectives are not always perfectly aligned, but buildingrelationships with potential private investor partners willhelp you better discern where underlying business activityand objectives may match your organization’s BlendedFinance goals.

– Consider sourcing partnerships through formal,competitive channels. To mitigate the risk that a privatepartner is selected arbitrarily or in a fashion that createsmarket distortions, consider creating a competition toselect your partners. This can be done in a variety ofways: through an open call for tenders from private equityfund managers or the creation of dedicated “challengefunds” that deliver payments for the achievement of pre-specied outcomes. Consider selection criteria aimedat screening potential partners, including considerationssuch as reputation in the market, track record of success,implementation capacity, and alignment of mission withyour development impact goals.

Once you reach the point of seriously exploring a partnershipwith a private investor, there are three key questions that youshould consider in order to ensure that you have the foundationfor a high-performing partnership:

– Clarity: Do we understand each other’s needs,preferences, and limitations?

– Compatibility: Are our goals ultimately compatible witheach other? The way to mitigate the risk of misalignmentis for each party to state directly its nancial anddevelopmental return objectives.

– Commitment: Will we each bring the necessary human,nancial, and intellectual resources to bear in order to makethe partnership a success? The drafting and signing of abrief memorandum of understanding (MoU) is a way tocodify the partners’ commitment.

Once a partnership has been struck, the investmentopportunity identied, and the intent to proceed with a



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Blended Finance investment formalized, you should shift intothe mode of investment execution and management. Fromthe development funder’s perspective, executing on and thenmanaging a Blended Finance investment involves several steps:

– Assign an investment ofcer: This person (who may ormay not be a Blended Finance champion) will drive theprocess forward to ensure the project is properly screened,

is presented and managed through internal processesto ensure that the nancial transaction is completed,communicate on a regular basis with the investee andthe private co-investor, and report back internally asappropriate. Bring the investment ofcer into the processas early as possible—even prior to formalizing an MoU—astheir sense of co-ownership is a critical success factor.

– Assess risks of the investment: Develop a ‘screeningmemo’, outlining an assessment of risks associated withthe investment, ideally led by a specialist risk managementofcer, in line with your organization’s risk managementframework. Risks relevant to the development funder mayinclude both nancial risks (e.g., risks associated with creditdefault, investment liquidity, market prices, interest rates,and foreign exchange) and a broad set of non-nancialrisks, including operational, macroeconomic, strategic,and reputational risks, as well as environmental, socialand governance (ESG) risks. If your organization has notyet formalised a nancial risk management framework,you can track your assessment of each category of riskfor this investment and develop a framework later in theGuide process—a critical step to enable you to to developa balanced portfolio of Blended Finance investments overtime )outlined in Appendix 2.5).

– Draft a term sheet: Outline the specics of the transactionin an investment ‘term sheet’ and execute a contractaccordingly. If you have found a mentor at a peerorganization, this is a good moment to ask for advice onspecic terms. Be sure to involve your internal legal counselin the process early on.

– Design a monitoring and evaluation approach: Yourorganization will need a verication and reporting protocolto ensure that the investment is being deployed asintended, that key nancial and environmental, social, andgovernance (ESG) guidelines are being followed, and thatdesired outcomes are being attained. The monitoring andevaluation challenge specic to Blended Finance relatesto the need to measure the value added by bringingprivate capital into an investment. Assessing whether aBlended Finance transaction can be successful is notlimited to the ratio of investment raised against grantsinvested, but rather the evaluation of the developmentimpact of actual projects nanced, and the extent to whichdevelopment funding has enhanced impact. This canoften be a challenge, due to the lack of insight into thealternative scenario but can be guided with a checklist onhow to assess and measure different types of additionality(outlined in Appendix 2.5) and a structured monitoring andevaluation process (outlined in Appendix 2.6).

– Develop an implementation plan: Work with your partnerto develop an execution plan for the investment. If this isan intermediary such as a private equity fund, this couldbe a target for the deployment into a diverse portfolio over

several years; if a direct investment, this will entail a detailedexecution timeline with owners of specic tasks.

– Execute a contract: Engage your internal legal counselor an external law rm to draft or negotiate an appropriatecontract (e.g., loan agreement) including the key termsitemized in the term sheet and referencing specic aspectsof the implementation and monitoring plans.

Engagement: Given the fundamental changes that thisprocess can lead to within an organization, it is importantto develop clear lines of communication and promotetransparency internally. Practical steps to provide this include:

– Creating an informal working group comprised of keyactors (the investment ofcer, Blended Finance championsthat work in the geographic or issue areas relevant to theinvestment) that convenes regularly to discuss progress onthe investment and partnership, and to mobilize additionalsupport as needed.

– Providing periodic updates across your organization to

provide visibility into the partnership and investment,helping to reinforce organizational buy-in.– Allowing colleagues to engage directly with the private

investor partner so staff can see rst-hand that interestsare mutually reinforcing and compatible e.g., inviting peoplefrom across your organization to attend the signing of aterm sheet or schedule a lunchtime presentation).



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Spotlight: Canada’s Blended Finance journeybegins to scale

Through discussions with the Overseas Private InvestmentCorporation (OPIC) in 2012, DFATD began exploringinvestment in a new fund of funds for frontier marketsby Canadian investment management rm Sarona

Asset Management. DFATD has a strong relationshipwith US government agencies involved in internationaldevelopment, and the “champions” driving DFATD’s interestwere familiar with Sarona’s model and team. Informalbrainstorming led to a creative structure later captured in aformal term sheet: a rst-loss equity contribution by DFATDof CAD 15 million, with features such as investment-by-investment loss protection and subordinated return ofcapital. This combination of loss protection and returnenhancement in DFATD’s concessional equity investmentwas designed to leverage the most capital for developmentimpact as possible through the fund. The fund – SaronaFrontier Markets Fund 2 – closed in late 2014 with CAD

185 million, including CAD 107 million from 117 privatesector investors including family ofces, foundations andmunicipal pension funds.


√ One active investment with a private investor that has thepotential for a Blended Finance “quick win” and provideslearning opportunities for your organization.

√ Drafts of formal documents corresponding to differentstages of the investment planning process such asa screening memo, Memorandum of Understanding(MoU), term sheet, and a contract detailing the speciccommitments and responsibilities.

√ A monitoring and evaluation framework tailored to theneeds of Blended Finance.

Important consideration. Embedded in yourorganization’s risk management framework shouldbe a set of policies and guidelines to identify andmanage ESG risks of your organization’s investments,also often known as an Environmental and SocialManagement System (ESMS). There are several ESGtoolkits available which can be helpful resources forestablishing ESG policies and guidelines for yourorganization. The IFC’s Performance Standardsare another commonly-used ESG resource. Thesetoolkits provide guidance for assessing, monitoringand reporting on ESG risks, as well as evaluationand reporting templates that can be adopted by yourorganization. While sometimes geared toward privateequity fund managers operating in emerging andfrontier markets, they nonetheless can be valuableresources for a development funder establishing orrevamping ESG policies or processes. Appendix 1lists a number of resources for ESG that can be usedin developing an effective ESMS system (outlined in

Appendix 2.8).

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Step 6: Review Lessons to BuildBlended Finance Capabilities Acrossyour organizationExpected time: 4-8 months

Purpose: In this step, you will review your pilot BlendedFinance deal. What did blending development funds with aprivate investor enable you to achieve? What went well orpoorly in the process, and can be improved? The purposeof this step is to learn from your initial experience, coursecorrect as required, and identify your organizational capabilitiesneeded to improve and expand Blended Finance activity in yourorganization. More specically, you will identify the institutionalcapabilities to build that are most relevant for Blended Finance,and design an implementation plan to develop capabilitiesover time and prioritized for near-term “quick wins.” You willalso determine an organizational structure for scaling BlendedFinance based on your organization’s current makeup, appetitefor, and experience with Blended Finance.

Principles: When selecting the most relevant capacity gapsand designing an implementation plan to address them, youshould seek to be:

– Realistic—prioritize building capabilities that can deliver“quick wins” or be more easily incorporated into yourorganization

– Resourceful —explore new pools of talent, looking forrelevant and untapped experience or skill sets amongcurrent staff, and reimagining potential organizational

structures to cut across silos and issue areas

Process: – Present senior stakeholders with a “menu” of

options for lling each capacity gap. Highlight 1-2recommendations for each gap and support theserecommendations with a synthesis of benets andconsiderations for each option to help facilitate theidentication of key activities from the menu to perform inthe near term.

– Create an implementation plan outlining key activities,timelines, and target outputs/results. Assign individualresponsibility for the implementation of the overall agendaand the execution of specic activities over a 12- to18-month period.

– Establish incentive structures and performanceoutcomes that will support your Blended Financeobjectives. Include targets based on geography, sectorand metrics for leveraging private investments.

– Develop a structure for your organization’s BlendedFinance efforts to get to scale. There is no ideal modelfor how to mobilize the talent required to scale yourBlended Finance activity, but consider the conditions underwhich these three models might work best:– Option 1 - Dedicated unit: House a new unit within

your organization, with its own budget, through whichall Blended Finance transactions are initiated andmanaged.



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Organizational conditions:– Heads of your organization wants to show public

leadership and progress in Blended Finance– Organization lacks a wide base of investment

expertise but has signicant interest in BlendedFinance

– Option 2 - Cross-functional technical support team:Form a team that provides temporary transaction-specic support to Blended Financing efforts acrossyour organization.Organizational conditions– Awareness and appetite for Blended Finance are

pervasive– Divisions have some degree of investment ability

already, and possibly some experience withBlended Finance.

Spotlight: DFATD builds capacity

Building off of the capacity gap assessment and lessons from early Blended Finance deals, the team developed a “menu”of options for addressing each gap with benets and key considerations for each option. The team also developed a list ofimmediate next steps for the internal “tiger team” and Blended Finance champions and a detailed implementation plan:

– Option 3 - Mainstreaming: Hire or train a few peoplein each department or division to be responsible forinitiating, managing, and growing a Blended Financeportfolio.Organizational conditions– Organization operates in fairly self-contained and

separate silos– A culture of leading from within one’s own group

rather than employing expertise from other parts ofyour organization

Engagement: Changes should be communicated broadlyacross your organization, especially to the heads of differentprogrammatic areas, human resources (for hiring and foractivities that involve training), and nance and budgetdepartments.


√ An implementation plan for addressing Blended Financecapacity gaps that outlines leadership roles, budgets, keyactivities, timelines, and outcomes over a 12-18 monthperiod.

√ An organizational structure for scaling up Blended Financeacross your organization.



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Step 7: Develop Pipeline and DealExecution CapacityExpected time: Annual Reviews

Purpose: At this stage, you have learned from a BlendedFinance investment and are now ready to develop a Blended

Finance investment “pipeline” (e.g., high-potential projects thatmeet your impact objectives and are likely attractive to privatesector investors) and deal execution capacity. Developmentfunders can address these points by developing partnershipsof varying levels of formality or devoting more effort to buildingthese capabilities internally. In either case, your organizationwill benet by becoming known by and accessible to a rangeof private sector partners, so they approach your organizationwith appropriate and high-potential opportunities forpartnership.

Principles:

– Specicity: Your organization’s interests and intent shouldbe dened clearly and specically. Do you intend to scaleBlended Finance in one specic issue area (e.g., greenenergy) or do you intend to roll Blended Finance out acrossyour organization’s portfolio of development activity?Will you solely seek to mitigate risk through the use ofguarantees, or will you also catalyse private capital intoearly-stage market segments through “Pioneering” capital?

– Transparency: All parties should be explicit, systematic,and transparent in sharing what brought them to the table,what they can or cannot contribute to the partnership, andwhat results they seek in order for the partnership to besuccessful

Process: Given that Blended Finance may be a new approachfor your organization, it is important that your organizationtakes steps to signal its interest in partnering with the privatesector in this way. To increase private sector awareness ofthe opportunities for Blended Finance investments with yourorganization, you should develop a clear statement of interestwith a description of the priority areas, eligibility criteria andcontact persons.

– External communications and outreach. This caninclude a variety of activities such as setting up a simpleand easy-to-navigate Web page that outlines yourorganization’s interests in pursuing Blended Financeby issue area and/or funding mechanism; attendingconferences for development funders and for investors;and/or contacting other development funders who mayrefer potential partners to your organization based onclearly-dened interest areas.

– Resource enhancement. To further develop your in-housepipeline generation and deal execution capacity, consideraugmenting your staff prole to hire additional teammembers with deal-making experience and private sectornetworks (see Figures 12 and 13 in Appendix for BlendedFinance-specic training and hiring plan). You may considerhiring several new investment ofcers and, with sufcientscale, locate several individuals in eld ofces or regionalhubs, such as Nairobi to cover East Africa investments.

This local presence can improve the visibility of yourorganization in the relevant market and thus your ability tosource Blended Finance deals, and can also increase thespeed of execution. However, many development fundersnd that simply relocating a few investment ofcers to theeld doesn’t necessarily lead to more deals and betterexecution. Instead, successful organizations typicallystrive to ensure that these investment ofcers are part of

an integrated “deal team” including sector or technicalexperts, legal and contracting professionals, and country orregional specialists.

Engagement: Communications both internally and externallyis necessary to promote the changes in your organizationand develop new partnerships and deal opportunities. Thismay require your organization to seek help in facilitatingcommunication from:

– An internal communications team or an external agencyto help develop a “position” for your organization’sperspective on and approach to and Blended Finance.

– Industry groups, both domestically and in countriesof focus, to introduce your organization and identifyoverlapping interests among member companies orinvestors.

– Networks of external mentors and trusted advisorsto identify channels to the private sector that aid thedevelopment of a Blended Finance partnerships strategy.


√ A list of prospective partners and private sector networks,which can be added to over time, to help generate interestand pipeline for future Blended Finance deals.

√ A series of tools for external engagement, including a socialmedia presence, e-newsletters to partners, a dedicatedWeb site (or page of your existing Web site) describingpartnership interests and opportunities, with contactinformation for external parties to reach internal BlendedFinance champions.

√ A recruitment strategy for new deal-making staff, withpotential local or regional presence, to facilitate in-housepipeline generation and better deal execution.

Important consideration. Note that manydevelopment funders nd that simply relocating a fewinvestment ofcers to the eld doesn’t necessarilylead to more deals and better execution. instead,successful organizations typically strive to ensure thatthese investment ofcers are part of an integrated“deal team”, including sector or technical experts,legal and contracting professionals, and country orregional specialists.

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Step 8: Learn and Scale UpExpected time: Annual Reviews

Purpose: Evaluating and adjusting the Blended Financestrategy and portfolio will allow your organization to assess itsprogress towards longer-term goals and to course-correct,if needed, as its efforts scale. Your organization may needto accommodate changes in environmental or institutionalcontexts—for instance, it may learn about nancial innovationsin the market, new types of partners, or new evidence on theimpact of Blended Finance, and use that learning to scale itsoperations in different directions. The denition of “scale” willvary from organization to organization, and may change overtime within an organization as its experience with BlendedFinance evolves.

Principles:– Measure and assess each and every project, including

those that do not come to fruition or are unsuccessful: These assessments should aim for:

– Rigour —employ a robust and impartial processto track, measure, and report progress towards aBlended Finance vision and associated goals – Be open and honest about the performance,

referring to quantitative metrics when possible tobenchmark against other projects.

– Flexibility —demonstrate willingness to learn fromexperience and adjust/course-correct where needed– Frame failures to conclude deals and issues with

projects as learning opportunities, providing an

opportunity to examine what your organization haslearned in the process of engaging in discussionswith a private-sector partner or negotiating acontract, even if those discussions or negotiationsultimately break down.

Process: Your organization should set up a process forlearning from its experiences on an ongoing basis byestablishing a timeline for self-assessment (for for example,what lessons have been learned after the rst twelve months?)In order to do this, your organization should take steps to mirrorthe learning curve demonstrated in Appendix 2.11:

– Measure and monitor the impact of Blended Financeactivity:– Use a baseline of standardized impact indicators as

applied in Step 1 against which to measure progress– Adopt a “less is more” approach in order to streamline

impact evaluation processes (for example, mandatea maximum of 3-5 important cross-portfolio and 2-3project-specic metrics per project)

– Obtain independent impact assessments of BlendedFinance transactions from specialist third-partyproviders

– Solicit and synthesize annual feedback from externalpartners and staff on your organization’s effectiveness ininvesting with and alongside private sector capital

– Include formal staff performance reviews on dimensionsrelevant to Blended Finance in assessment of capability

gaps (e.g., the number, nature, and size of investmentpartnerships developed)

– Monitor the process of organizational change byrevisiting the Scorecard you completed in Step 1. Has yourorganization made progress in building Blended Finance (a)awareness, (b) interest, and (c) capacity?

– Adjust organizational goals, as needed, in light ofprogress towards specied milestones and staff and

external partner feedback:– Assess the continued relevance of existing goals for

Blended Finance– Consider extending the scale and reach of your

organization’s efforts in order to take on more BlendedFinance investments, additional types of partnerships,and greater inuence in the development funderecosystem as a Blended Finance “champion.”

– Share your organization’s experiences and lessons with other development funders through informal networks,publications, and knowledge-sharing platforms. Forexample, you can draft and publish case studies ofBlended Finance investments covering these themes:– Who was involved in the transaction? What unique

capabilities and expertise did each participant bring tothe table? How were participants brought together?

– What was the structure of the transaction? How didthis structure cater to participants’ unique risk-returnrequirements? What Blended Finance approacheswere used?

– What key lessons did your organization learn from thisexperience? How might these lessons apply to otheraid agencies and development nance providers?

Engagement: The feedback process should capture anddisseminate learnings across your organization by conductingindependent assessments of the Blended Finance portfolio.Oversight should be provided by change champions andindividuals responsible for specic Blended Finance activities.

An external rm may support the process by providingobjectivity in synthesizing periodic feedback from partners andstaff.


√ A robust self-assessment that measures the impact of yourorganization’s Blended Finance activity and monitors theprocess of organizational change.



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Blended Finance offers signicant opportunities for yourorganization to catalyse private capital to close the gap ondevelopment challenges and support greater developmentimpact. However, prior to deciding how to undertake BlendedFinance, your organization must rst determinewhetherBlended Finance is a t with your institution’s goals andmandates. Blended Finance can be a key component of anorganization’s strategy to increase its development impact,but this requires strong commitment across the organizationand specic capabilities that span staff skills, organizational

effectiveness, and private sector partner engagement.

There is no one-size-ts-all solution to initiating or scalingBlended Finance. Driven by the commitment of internalchampions, each institution can determine and adopt anapproach that suits its unique mandate, capabilities, and visionfor the future. This Guide outlines a step-by-step processthat enables your organization to build on its capabilities,partnerships, and investment insights over time, which canrapidly help the organization evolve over a number of monthsoutlined in Appendix 2.12. Helping your organization engagewith and scale up Blended Finance is less an end than abeginning. For organizations that embrace the challenge ofBlended Finance, the opportunities to increase social impact,environmental stewardship, and inclusive and sustainablegrowth in a developing world can be exponential.

Section 4:Conclusion



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Appendix

Appendix 1 - Blended Finance Resources

Development Finance Basics and Context

– Development Initiatives: Investments to End Poverty (http:// devinit.org/wp-content/uploads/2013/09/Investments_to_End_Poverty_full_report.pdf)

– OECD DAC Table 1 (https://stats.oecd.org/Index.aspx?DataSetCode=TABLE1)

– Chelsky, Jeff, “Investment Financing in the Wake of theCrisis: The Role of Multilateral Development Banks,”WorldBank Economic Premise , June 2013 (http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/ IB/2013/06/28/000442464_20130628125431/Rendered/ PDF/789740BRI0Box377363B00PUBLIC00EP121.pdf

– Didymus, John-Thomas, “Huge seed funding gap for African tech startups despite venture capital boom,” AllVoices , September 2014 (http://www.allvoices.com/ article/100000770)

– Donor Committee for Enterprise Development, “DonorPartnerships with Business for Private Sector Development:What can we Learn from Experience?”

– GIIN, “Catalytic First-Loss Capital”– IFC, “International Finance Institutions and Development

Through the Private Sector”– Legland, Ja., “ The African project preparation gap,”

Gridlines, (2007)– OECD-DAC, “The Role of the Private Sector in the Context of

Aid Effectiveness”– Mustapha, S; Prizzon, A.; Gavas, M. Topic Guide: Blended

nance for infrastructure and low-carbon development.Evidence on Demand, UK (2014)

– OPIC,U.S.-Africa Clean Energy Finance Initiative (https://

www.opic.gov/sites/default/les/les/ACEF%20One-Pager%2005%2021%202013%20nal.pdf)

– UNFPA/NIDI, (2011)New donor countries (http:// resourceows.org/sites/default/les/RF%20Report%20New%20donor%20countries%20_Oct2011_.pdf)

– United Nations Conference on Trade and Development,Development and Globalization: Facts and Figures (2012)(http://unctad.org/en/PublicationsLibrary/webgdsdsi2012d2_en.pdf)

– World Bank,Global Development Finance 2012 (http://data.worldbank.org/data-catalog/global-development-nance/gdf-2012)

– World Bank,Capital for the Future: Saving andInvestment in an Interdependent World (2013) (http:// siteresources.worldbank.org/EXTDECPROSPECTS/ Resources/476882-1368197310537/CapitalForTheFuture.pdf)

Development Finance Statistics

– Dalberg InnovativeFinancing for Development report anddatabase

– IMF,World Economic Outlook (April 2014) (http://www.imf.org/external/Pubs/ft/weo/2014/01/pdf/text.pdf)

– Institute of International Finance,October 2014 Capital Flowsto Emerging Market Economies (October 2014) (https://www.iif.com/publication/capital-ows/october-2014-capital-ows-emerging-market-economies)

– Oakley, David, Assets under management leave nancialcrisis behind , Financial Times (July 2014) (http://www.ft.com/ cms/s/0/34ee713a-0848-11e4-9afc-00144feab7de.html)

– OECD-DAC database– Pelosky, Jay, Emerging markets portfolio globalization: The

next big thing , Pensions & Investments (July 2014) (http:// www.pionline.com/article/20140717/ONLINE/140719890/ emerging-markets-portfolio-globalization-the-next-big-thing)

– United Nations Conference on Trade and Development,World Investment Report 2014: Investing in the SDGs:

An Action Plan (2014) (http://unctad.org/en/pages/ PublicationWebyer.aspx?publicationid=937)

– World Bank Development Indicators database

Assessing Leverage Ratios in Development Finance

– Climate Investment Funds, “Assessing “Leverage”in the Climate Investment Funds (https://www.climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.org/les/Assessing_leverage_in_the_CIF.pdf)

– World Economic Forum, “The Green Investment Report”(http://www3.weforum.org/docs/WEF_GreenInvestment_Report_2013.pdf)

Market-rate investor priorities and models

– MIGA, “World Investment and Political Risk” 2013 (http:// www.miga.org/resources/index.cfm?stid=1866)

– Sarona, “Growth That Matters” (2014) (http://www.saronafund.com/docs/Values%20report%20FINAL.PDF)

Environmental, Social and Governance (ESG) resourcesand international conventions

– CDC Toolkit on ESG for Fund Managers

– FIRST for Sustainability– FMO ESG Risk Management Tool for Private Equity– The IFC Performance Standards– The IFC Environmental, Health and Safety Guidelines



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– The IFC Environmental and Social Management Toolkit forPrivate Equity Funds

– The Equator Principles– The UN Global Compact– The UN Global Reporting Initiative– The UN Principles for Responsible Investment– The US Private Equity Council Responsible Investment

Guidelines– The EDFI Principles for Responsible Financing and Guidelines

for Fund Investments

– The ILO Fundamental Conventions– The UN Convention against Corruption– The UN Anti-Corruption Toolkit– The OECD Anti-Bribery Convention– The Extractive Industries Transparency Initiative– The Financial Action Task Force– The OECD Principles of Corporate Governance

– The DFI Toolkit on Corporate Governance– The International Private Equity and Venture Capital Valuation

Guidelines

Appendix 2 - References for Development Funders

Appendix 2.1: Example Theory of Change for a Development Funder investing in a Financial Institution

Critical staff to engage are those with knowledge andconnections in ve particular areas:

– Private sector partnership

– Finance and investment– Portfolio and risk management– Legal frameworks– Monitoring and evaluation



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Appendix 2.2: Template for Setting Initial Goals

Appendix 2.3: for Assessing Gaps in Capacity for Blended Finance

Appendix 2.4: Illustration of Prioritization of Near-term Capacity Building



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Appendix 2.5: Illustrative Outline of an M&E Process for Blended Finance Investment

Appendix 2.6: Questions for Assessing Additionality of Blended Finance

Source : Mustapha, S; Prizzon, A.; Gavas, M. Topic Guide: Blended nance for infrastructure and low-carbon development. Evidence on Demand, UK (2014)

Type of Additionality Evaluation questions

Financial Does the project create nancial additionality or crowd outprivate investment?

Economic When the purpose of the public component goes beyondnancial additionality, are there any social and economicbenets that are provided by the grants separate fromthose resulting from other types of project nancing?

Demonstration effect Does the project have an impact on the probability ofsubsequent private sector funded projects in the samearea?

Project scale What is the effect of the public component on the scale ofthe operation or number of project beneciaries?

Project quality and standards What is the effect of the public component on the quality ofoutcomes as well as the project’s likely success?

Project timing What is the effect of the public component on the timing ofthe operation and delivery of benets?

Innovation What innovations in the project result from public supportand what are the benets of that innovation?

Benets sustainability What are the spin-off effects of the public componentthat may improve the sustainability of the project such asinuencing reform in the partner country?



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Appendix 2.7: Illustrative Outline of an M&E Process for Blended Finance Investment

Appendix 2.8: Approach to Developing an Environmental and Social Monitoring System (ESMS)

Source : Adapted from IFC’s FIRST for Sustainability.http://rstforsustainability.org/risk-management/managing-environmental-and-social-risk-2_2/components-of-an-esms/



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Appendix 2.10: Illustration of Training Modules to Support Blended Finance

Appendix 2.9: Illustration of a Hiring Plan for Blended Finance



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Appendix 2.11: Illustration of the DFATD vision for Blended Finance

Appendix 2.12: Timeline for Implementing the Blended Finance framework



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Appendix 3 - Blended Finance Templates Blended Finance Scorecard

Setting Initial Goals



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Assessing Gaps in Capacity for Blended Finance

Monitoring and Evaluation Process for Blended Investment



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World Economic Forum91–93 route de la CapiteCH-1223 Cologny/GenevaSwitzerland

The World Economic Forum isan international institutioncommitted to improving thestate of the world throughpublic-private cooperation in thespirit of global citizenship. Itengages with business, political,academic and other leaders ofsociety to shape global, regionaland industry agendas. Incorporated as a not-for-protfoundation in 1971 andheadquartered in Geneva,Switzerland, the Forum isindependent, impartial and nottied to any interests. Itcooperates closely with allleading internationalorganizations.

WEF Blended Finance How to Guide

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