The European Commission is increasingly using a mechanism known as ‘Blending’ to bring public and private sector resources together with donor assistance to meet some of the biggest investment needs in developing countries.
Blending combines European Union grants with non-grant financing such as loans to reduce costs and realise key investment projects that might otherwise not see the light of day.
“The biggest advantage of this is when ourselves and the European Union work together in a blending instrument we achieve number one, a lot more financing,” said Christopher Clubb, Director of the European Bank for Reconstruction and Development (EBRD). “Number two, by working together we have a larger collective voice…. in front of the government.”
“A lot of our finance is tied to reforms in particular areas, so we’re speaking the exact same language, delivering the exact same message and hopefully getting a very similar outcome from the local authorities,” he added.
The Neighbourhood Investment Facility (NIF), set up in 2008 for countries close to EU borders and the Investment Facility for Central Asia (IFCA) launched in 2010, were both set up to blend EU budget grants funding with loans by European public finance institutions.
Results to date are encouraging with Mr Clubb estimating a tripling of financing in regions covered by these facilities. The Commission is committed to expanding the use of blending as a complementary tool to other existing mechanisms for tackling poverty.
In the European Commission’s ‘Agenda for Change’, the organisation’s roadmap for development activities produced in 2011, the EC states that it wants to see: “a higher share of EU aid [distributed] through innovative financial instruments, including facilities for blending grants and loans.”
"Blending has gradually evolved into an important instrument of EU external policy,” said Roberto Ridolfi, Director of Sustainable Growth and Development, EuropeAid. “The experience so far has been very positive. In line with the Agenda for Change, we expect to further exploit the potential of blending in the next Multi-Annual Financial Framework, especially in terms of doing more guarantees and other advanced financial instruments."
“While public investment is essential, it cannot shoulder the immense investment required in a number of different regions,” added Mr Ridolfi. “The private sector needs to come into the picture to fill this financing gap and blending is a useful tool to mobilise funds for development.”
Though blending mechanisms in EU aid funding can now be found worldwide, around 90 percent of these projects focus on working with the public sector.
With the establishment of the ‘EU Platform for Blending and External Cooperation’ in 2012, the EU is now looking at how the private sector can play a larger role.
Bridging the Gap
In many developing and even middle income countries, government and donor funds combined are insufficient to meet investment needs, particularly in areas like transport, energy or water.
But at the same time, private sector investors that have the necessary funds and experience of setting up and managing large-scale infrastructure projects are wary of entering such markets due to real or perceived risks.
Blending can bridge this investment gap by providing the assurances that the private sector needs and thereby leverage much needed additional resources and secure important know-how.
Bruno Wenn, Chairman of the association for European Development Finance Institutions, welcomes blending as it can create a better enabling environment for investment by reducing risk.
“The European Commission could be extremely helpful,” said Mr Wenn, “because a better enabling environment reduces the risks of the private sector to do business – for the local private sector investor but also for the European or international investor.”
Donors like the EU can assist in “helping to draft a regulatory framework, reducing risk and so making it more attractive for private sector investment,” said Mr Wenn.
Mr Wenn and Mr Clubb sat on a panel of experts at the 2013 European Development Days in Brussels where they spoke about ‘Blending as a catalyser for private financing’. A podcast of that session is available online.
After some years of experience using blending, Mr Clubb offered some advice for EC staffers who might be embarking on using the mechanism for the first time.
1)Identify the development objective you’re trying to achieve.
2)Focus on types of financing that is additional and complementary to existing funding.
3)Consider how much leverage can be attained, whether that’s multiplying financial gains or other means of increasing impact.
European Commission and European External Action Service staff can also visit the capacity4dev.eu group Learning on Blending where they can post questions, launch discussions, upload project examples and share anything that may be of interest to colleagues working on blending.
This collaborative piece was drafted by Sarah Simpson with input from Brunno Maradei, and support from the capacity4dev.eu Coordination Team