Becoming part of a mainstream movement – blended finance in water and sanitation. Water Blog, May 2018.
Persuasion does not always involve an epiphany. Often, attitudes are formed and opinions are shaped by the steady accumulation of evidence and examples. And so, it has been for me when it comes to blended finance.
While anecdotes of transformation may be catchier, the gradual absorption of the work of experts and practitioners is frequently how one’s thinking evolves.
I left the recent 2018 Global Water Summit not feeling transformed or possessed by the idea that blended finance is THE solution for bridging the humongous financial gap required to meet SDG6, but more convinced than ever it has a key role to play. I was also positively surprised that this financial solution is no longer an exotic stranger to our sector and that a significant number of water supply and sanitation (WSS) practitioners are implementing blended finance schemes.
What exactly is blended finance? The OECD representative at the summit explained it as a strategic use of development finance to mobilize private capital flows to emerging and frontier markets. From my experience in Europe, I know that
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Case studies in blended finance for water and sanitation, 2016. Water and Sanitation Program.
This report has case studies on facilitating access to finance for household investment in sanitation in Bangladesh, Cambodia, South Africa and other countries.
Achieving universal access to water and sanitation by 2030 – how can blended finance help? | Source: World Bank Water Blog, August 29, 2016 |
An excerpt: What is “blended finance”?
OECD refers to blended finance as ‘the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets’. Blended finance in the water sector has the potential of mobilizing private sector financing for credit-worthy or close to credit-worthy investments. This would allow reallocating public funds to other areas where public subsidies are likely to be needed.
Commercial finance usually brings requirements for greater investment discipline and transparency, which in turn could support improved efficiency in the sector, an objective for most water sector reform efforts around the world.
Domestic commercial finance in particular can be mobilized in local currency, which reduces the foreign exchange risk and can bring down transaction costs, particularly for smaller scale investments to improve efficiency that can generate rapid returns (such as replacing meters or fixing leaks).
Blended finance has traditionally been used as a tool to stimulate interest from the commercial financial sector, with the use of concessional finance then tapering off over time to avoid distorting markets. Given the embedded distortions in the WSS sector in developing countries, where financing is predominantly based on subsidized public funds, it will be necessary to move towards mobilizing more commercial funds over time. Blended finance can be a stepping-stone in that transition.
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