The right blending can strengthen financing mechanism for meeting SDGs
By Kushankur Dey
Sustainable Development Goals (SDGs) aim at aligning the aspects of poverty alleviation, social welfare, community development, environmental sustainability, among others. While poverty reduction and food security can be achieved through integrating farming systems, sustainability is a long-term undertaking and rather difficult to attain unless the development intervention has measurable impacts on social, economic, cultural and environmental parameters. Sustainability in any development intervention needs to be achieved by striking a balance between development outcomes and financial returns.
What can be an appropriate yet cost-effective financing mechanism for meeting SDGs? Blended finance through PPP seems a timely solution for development finance ambit, especially in agriculture, energy, healthcare and housing. In practice, blended finance has been evolved to improve fiscal prudence of national governments and strengthen bilateral/multilateral cooperation with developed countries, and finance development projects. Annual investment gap for delivering SDGs in developing countries is pegged at $2.5 trillion, and blended finance through facilities and funds should finance this gap. According to IFC (2016), blended finance can be used to enable the private sector to invest where it would not otherwise be possible. The idea is to mix concessional funds typically from donor agencies with those of commercial development institutions such as multilateral development banks/development finance institutions and private investors in a risk-sharing arrangement, with aligned incentives to make sure technical assistance can be leveraged with commercial capital.
Typologies exist in development finance literature, such as ‘responsible investing’, ‘sustainable investing’, ‘impact investing’, the meaning of which resonates well with the essence of blended finance. As the objective is to deliver ‘blended value’, the rationale of financing is to challenge institutional complexity in light of competing impact logic (environmental, social, governance) and investment logic (financial return to investors). Further, blended finance use is tailored to local setting.
Blending entails chanelling both public and private capital judiciously through optimal risk-sharing. For example, agriculture projects are relatively uncertain in return or are risky as compared to utility-based ones where scaling up can be feasible. Therefore, grant and loan guarantees can otherwise finance the gap in agriculture/farming-based projects in addition to small equity/debt capital infusion. For instance, in EU development projects, blended finance facilities and technical assistance together accounts for 75% of blending. Blended finance use has gained salience in farming/natural resource management projects besides energy and infrastructure sectors in developing countries. Take the Umbrella Programme for Natural Resource Management (UPNRM). It has combined the technical and financial assistance to facilitate blended finance facilities (grant, concessional loan, technical assistance) to promote sustainable development. For financing UPNRM, NABARD partnered with German International Development Cooperation (GIZ) and German Government-owned Development Bank (KfW). The loan eligibility of projects is guided by five principles: pro-poor, need-based, and environmentally sustainable, good governance, and promote community participation.
NABARD has approved 330 projects with an investment of 84.79 million euros (79.28 million euros loan and 5.38 million euros grant) as of 2017-18. Through blended financing, investment has been made in capacity building of resource agencies to help them implement and replicate successful climate smart business models. Concerted efforts of technical and financial cooperation agencies have tried to transform traditional agricultural practices into profitable and sustainable business enterprises in that beneficiary farming households exhibit their risk-taking abilities, try to reduce uncertainty of earnings, and have experimented with farming techniques for sustainable livelihood.
It is apparent from some evaluation-based studies as part of UPNRM that mainstream financial institutions are insufficiently aware of many aspects of lending to farm-based activities, for example, integrated fisheries yet. However, it is to the credit of bankers that they have evinced interest in extending credit for replicable business models. Demonstration models of UPNRM projects can be set up and visits by bank officials could be organised to bring such projects into mainstream financing and scaling up.
However, the difficulties for financial mainstreaming lie in the complexity of documentation, lack of clarity in terms of land titles or ownership, and remoteness of locations. As a result, MFIs and informal sources of credit have captured this niche credit market and charge higher rates of interest. It is hoped that as the business correspondent or agent banking model for extending financial services to areas not served by banks takes off, this problem is likely to be solved.
Nonetheless, it is interesting to note that some financial products as part of blended finance funds are in the offing, such as Social Impact Bonds that ensure ‘payment by outcome’ apart from private equity funds or/and Alternative Investment Funds. A right blending can strengthen financing mechanism for meeting SDGs.
-The author teaches finance at IIM Bodh Gaya. Views are personal