As prepared for delivery.
I am delighted to join you today to launch the report “Blended Finance in the Least Developed Countries”.
At the big picture level, we know that traditional types of development financing - including ODA and domestic public resources - will remain critical to achieving the SDGs, particularly for the poorest and most vulnerable countries. We also know that private and blended capital each have an important role to play.
Private sector investments continue to be highly concentrated, mostly in middle-income countries, in resource-rich countries, or in certain sectors such as the extractive industries. Private investments in the LDCs have been curtailed by: 1) high risks or the perceptions of high risk; 2) a lack of investment-ready opportunities; 3) the small size of the opportunity, especially in smaller economies; and 4) weak enabling or regulatory frameworks that could incentivize long-term investments aligned with the SDGs.
Of $81 billion of private capital mobilized by official development finance in 2012–2015 for all developing countries, only 7% was for LDCs, though the trend is one of growth.
A bit like an impressionist painting, however, while the big picture is clear, it is the individual brushstrokes – the myriad differences and nuances between countries and sectors - that can be obscured.
Yet, it is that nuanced understanding of what is happening, what works, and what can be done better, that is instrumental to our ability not only to mobilize the additional resources needed for the SDGs on aggregate, but to ensure that those resources help leave no one behind.
That is where this report fills important data and evidence gaps and can advance our policy debates. Let me note just four areas where this is the case.
First, blended finance must be deployed as part of broader SDG finance frameworks, with due consideration given to impacts on fiscal risks and overall aid allocation levels.
Ultimately, project and country characteristics, macroeconomic conditions and national policy priorities should determine which financing model - public, private or blended - is best suited for which SDG investment.
At the same time, if blended finance grows in popularity, and without an increase in aid levels overall, using more ODA for blending may result in a decrease in its use for such purposes as helping to fund basic infrastructure or social services in LDCs -sectors not usually suitable for blending.
That is why all development partners need to respect national ownership, meet their existing ODA commitments to LDCs, and ensure that more blended finance does not come at the expense of support for those countries where blending has thus far been more challenging.
Second, we need more partners to focus on getting more finance flowing to the missing middle.
SMEs promote innovation; help to diversify economic activity in local economies beyond capital cities; deliver goods and services to excluded populations; and can be a powerful force for integrating women and youth into the economic mainstream.
Yet, the transaction costs or perceived risks of directly supporting SMEs can be too high for some development partners, investors, or local banks. The result is that many SMEs lack the early-stage technical assistance or financing they need to expand.
Despite ongoing work in this space, there is a huge missing middle finance gap that blended solutions can potentially help to fill. This is a critical frontier where more investments are needed by a range of development stakeholders, including from United Nations entities such as UNCDF that do the heavy lifting preparing small-scale projects through to large development finance institutions and multilateral development banks.
Third, we need development finance institutions and multilateral development banks to expand even further their investments in LDCs.
Some actors may shy away from such markets for several reasons: low risk appetite given the need to preserve their credit ratings; a lack of awareness of investable projects; or mandates that favour commercial returns.
Still, there are innovative solutions that should be explored and scaled up. This may require the boards of development finance institutions and multilateral development banks to give them sufficient headroom to take more risks while preserving their financial sustainability.
This could mean, for instance, establishing or further replenishing dedicated funds, facilities, or special purpose vehicles that will allocate a greater portion of investment portfolios towards projects in LDCs. It may also mean deploying instruments flexibly or in new combinations.
Finally, we need to have a much sharper focus on building local capital markets.
The report shows that two-thirds of blended finance deals in LDCs involved a local private counterpart. This suggests that we should not only be talking about international investors, even if they represent larger pools of capital. Even in some of the world’s most vulnerable countries there are domestic investors that have the resources and are looking to invest them in the SDGs.
Development finance institutions and multilateral development banks, as well as those of us in the UN engaged in blended transitions, should proactively focus on crowding-in domestic investors.
Similarly, all of us need to harness much more effectively the potential of national development banks to finance national SDG plans.
In short, we cannot accept as some iron law of nature that the bulk of development finance and SDG-related private investment bypass LDCs.
We need development finance institutions and multilateral development banks to scale up further their support in LDCs and for SMEs.
We need LDCs to continue improving their investment climates.
We need much greater sharing of best practices, so that we can improve the deployment of blended transactions and reveal opportunities to wider pools of investors.
We need to involve LDCs and Southern providers in global discussions on blended finance.
And we need much greater coordination between all of our efforts to mobilize private finance for LDCs, so that demonstration effects from blended finance can closely inform efforts to undertake policy reforms.
If this report has one message, it is that we cannot get comfortable: we need to forge those partnerships, take those risks, and challenge ourselves in ways that may move us out of our safety zones but are ultimately essential for us to mobilize sufficient financing for the LDCs and other vulnerable countries.
I commend UNCDF for laying down that challenge for us, and I thank all its partners - OECD, Southern Voice, Convergence, and the United Nations Foundation - for their fantastic support in this effort.