Presentation on theme: "ReDesigning Development Finance Blended Finance: The Road to Addis and Beyond March 2015 Terri Toyota World Economic Forum."— Presentation transcript:
1 ReDesigning Development Finance Blended Finance: The Road to Addis and Beyond March Terri Toyota World Economic Forum
2 ReDesigning Development Finance Initiative (RDFI) The World Economic Forum and OECD-DAC are institutionally committed to advancing the Blended Finance ecosystem through a multi-year initiativeVisionBlended finance is a systematic and structured approach to finance and investment in emerging and frontier marketsObjectivesExtend the reach and effectiveness of ODA through the complementary deployment of philanthropic and private capital investmentExpand private investment in developing countries through the complementary deployment of risk mitigation and concessional finance tools by official and philanthropic institutionsTo this end, expand the pool of foreign and domestic capital available for economic development, including small and medium enterprises, agriculture, infrastructure and key public servicesA scaled-up market where… private investment flows beyond niche unitsA liquid market with… standardized products and investmentsA transparent market that… connects all players on a virtual active platform
3 Blended FinanceThe deliberate and strategic alignment of public-private capabilities and capital to accelerate social and economic growth in emerging and frontier marketsImpact: investments in emerging and frontier markets that deliver transformative social and economic progressImpactReturnsLeverageReturns: market-based, risk-adjusted returns that meet business goals and fiduciarydutiesLeverage: systematic and strategic use of development and philanthropic funds to mobilize and engage private capital at scale
4 Investment Barriers to Scale There are seven key reasons why supply of capital does not flow at scale to emerging and frontier marketsBoth public and private sector face challenges that hinder exponential capital from flowing to emerging markets and ultimately limit development impact and business goalsBusiness Case Not ViableNot an intermediated marketLimited local market knowledgeDifficult local investment climateLack of mandate and incentivesAsset and capability gapsDevelopment needs outpacing capital flowsPrivate sector challenges largely stem from the difficulty to realize risk-adjusted returns……while public sector challenges are largely due to mandate and funding constraints.Business Case Not Viable: Due to Fundamental unfavorable underlying economics. Nascent markets requiring subsidies, high transactions costs, no deal sourcing mechanisms, significant country risks, illiquidity of projects, etc. Development returns can be reached but requires blending resources to create a sustainable commercial business case.Market intermediation: Not enough local intermediaries in places with high domestic savings, lack of external fund managers with mandate to invest where capital currently does not flow, and lack of the right financial and non-financial products to package capital and connect the dotsLocal knowledge and skills: Includes sectors specific expertise, risk-return trade-offs, local knowledge, technical and operational skills, data around performance of SMEs in emerging markets, clear and standard measurement systems for social and financial returns, inability of frontier countries to make their case / justify why investment dollars should flow thereLocal investment climate: Capital can’t flow freely due to restrictions and capital controls including under developed capital markets, limited tax incentives, strict labor policies, inconsistent tariffs, visa challenges, etc. Challenges include both creating and implementing the enabling Investment Climate.Role of ODA: ODA has played an instrumental role in poverty reduction– having reduced poverty from 58% to 38% of the population in ODA recipient countries – however, ODA is an increasingly smaller percentage of total resources flowing to developing countries despite being at record levels.Asset and capability gaps: Lack of information and understanding, clear data and measurement systems and operational skills or expertiseMandate and incentives: With high competition for capital (across countries, sectors, etc.), capital won’t flow to certain places (e.g., frontier countries, BoP) without a clear mandate (e.g., invest in farming in Liberia). ODA reform is needed (i.e., doesn’t currently include guarantees, etc.). The private sector lacks mandate to do socially good projects. While DFIs are mandated to do business in frontier countries and reach BoP, internal incentives don’t align with this. They also face challenges of not preferentially working with the private sector. The public sector lacks flexibility and mandate to embrace working with the private sector.Note: While we recognize local investment climate as an important driver, this initiative focuses on the other four drivers that can be controlled by suppliers of capital. Other players such as the World Bank are very active in this area.
5 Variables Affecting Risk-Adjusted Returns The most significant barrier to private capital flow in emerging and frontier markets is that returns are often not commensurate with the high level of risk (real or perceived)ReturnsReturns in emerging and frontier markets are realised based on several variables:SeniorityTenor / ExitCredit SpreadLiquidityVolatilityGrowth RatesCostsSector performanceLeveragePrivate capital providers have a fiduciary duty to maximize risk-adjusted returns….RisksEmerging and frontier markets face a number of unique risks:MacroeconomicPoliticalRegulatoryBusinessHard & Local CurrencyLiquidityTax ConditionsMarket Segmentation….if risk-adjusted returns are less attractive relative to other markets, investors will not allocate capital to emerging and frontier markets.
6 An Approach to Mitigating Risks and Managing Returns However, in blended finance, public capital can mitigate risk or manage returns bringing risk-adjusted returns in line with investor requirementsMitigating RisksPublic investors can mitigate risks for the private sectorImproving credit worthinessLimiting downside loss exposureInsuring against unforeseen market and catastrophic eventsProviding technical assistance and other advisory servicesEliminating funding shortfallsEncouraging necessary risk takingAmong others….Managing ReturnsPublic investors can also apply mechanisms that enhance returns for the private sectorAbsorbing transaction and project preparation costs‘Topping-up’ returns by sharing or forgoing any returns to public capitalProviding incentives for successful performance outcomesProviding low cost leverageTaking subordinate positionsAmong others….RISKRETURNNote: Blended Finance does not seek to eliminate risks, but rather to encourage necessary risk taking at acceptable levels relative to opportunities in other markets and investor tolerance
7 Blended Finance currently lacks… …impacting success by… Five Institutional Barriers to ScalingRDFI has identified five key barriers that must be addressed in order to scale up blending finance as a core business for both public and private sector investorsBlended Finance currently lacks……impacting success by…Education and awareness of the potential for blended finance to meet return and impact goals, through evidence and analytics on results of existing models……hindering adoption of best practices without a champion and evidence to support the business and impact caseA common language and understanding between development and private funders……missed opportunities and a steep learning curve for every new opportunity that slows down timeline…impeding ability to communicate and collaborate and the execution of investments in a streamlined, structured fashionInstitutional readiness that provides a clear mandate to engage the private sector, along with internal assets and capabilities…Standardized deals and opportunities, as well as a pipeline of bankable projects……limiting commitment of capital due to high transaction costs and limited opportunities to invest creating high competition for capitalA platform to connect return- and impact-oriented capital providers for early co-design of structures and alignment on purpose……leaving blended finance fragmented and duplicative and development challenges persistent
8 The RDFI Blended Finance Toolkit RDFI seeks to overcome these barriers by influencing policy, raising awareness, creating enabling assets & capabilities and curating a diverse communityThe RDFI seeks to overcome barriers to scaling blended finance…Education & AwarenessBlended Finance NetworkGlobal Finance ExchangeConcrete OpportunitiesEcosystemInfrastructureThought leadership provides evidence and high-profile forums generate commitment and spark big ideasCurated community of pioneers and influencers facilitates innovation, and new partnershipsProvides a platform for diverse stakeholders to connect and deal facilitationCreates results and new partnerships by placing ideas and opportunities in front of investorsEmbedding blended finance in narrative for policy and reform and other ecosystem infrastructure…by providing stakeholders with a “blended finance toolkit”Primers for private capital and development investorsCatalogue of existing models and analysis of results‘How-To’ Roadmap for development fundersFormalized Blended Finance Network with online collaboration spaceWebinars and knowledge sharingPipeline of transactions and marketplace liquidityIncubator for new opportunitiesDevelopment and maintenance of necessary systemsCurrent ideas and opportunities for blended investmentLarge, signaling opportunitiesScalable, replicable opportunities‘Blended Finance Marketplace’ sessionsGAC on Sustainable Development working papersEngagement on the 3rd International Conference on Financing for Development the Financing forcument
9 Supporting Mechanisms Scenarios for Applying Blended FinanceFive identified scenarios for blending that vary based on the maturity of the challenge at hand are complemented by three supporting mechanisms across the lifecycleExploreBuildGrowMatureScenariosPREPARINGHigh upfront costs and binary risk a project will not happen creates bottleneck. Grant funded upfront costs and activities reduce uncertainty by creating bankable projectsPIONEERINGEarly stage, high business model risk and transaction costs. ‘Soft’ capital with little to no return expectations used for testing innovative products or business models, and advisory services in order to absorb the highest risksFACIILTATINGHigh perceived sector or other risks and expected returns below market. Public capital will take a subordinate position and may top-up returns to attract commercial capitalANCHORINGSome perceived macro or sector risk, funding needed to achieve a ‘first-close’ or demonstrate viability. Public needed to ‘crowd-in’ private fundPublic capital seeks exit from mature investments to commercial actors, provides a pipelineTRANSITIONINGSupporting MechanismsTECHNICAL ASSISTANCE – New or distressed markets require incentives. Public investors attract private capital by offering incentives or contingent payment in exchange for upfront investment in new products and servicesRISK UNDERWRITING – credit-enhancing instruments that fully or partially protect investor capital against various forms of riskNEW MARKET INCENTIVES – New or distressed markets require incentives. Public investors attract private capital by offering incentives or contingent payment in exchange for upfront investment in new products and services
10 4. Assess gaps in capacity for blended finance A How-To Guide for Development Funders Seven steps to initiating or scaling blended finance12Benchmark your starting point in blended financeBuild buy-in and awareness across the organization3Set goals for blended finance7Learn and scale up across the organizationEach step has:Purpose—objectives to initiate or scale blended financePrinciples—an approach to achieving these objectivesPractical steps—a series of actions a blended finance ‘champion’ can carry out44. Assess gaps in capacity for blended finance5Build capabilities6Partner and invest
11 Select, Concrete Examples from Davos Blended Finance Marketplace (1 of 2) Abraaj Growth Markets Healthcare StrategyDanish Climate Investment Fund (DCIF)Opportunity: While demand for affordable, high-quality, mass market healthcare in South Asia and sub-Saharan Africa is large and rapidly growing, supply lags and healthcare businesses require substantial capital, deep operational expertise, and access to high quality clinical staff.Structure: Purpose-built team to deliver strong financial and impact returns. Impact objectives integrated into the investment strategy and governance framework. Invest in scalable healthcare services models in low- to middle-income markets that provide measurable improvements in health status of the underserved low- to middle-income population segments. Work with various funders to maximize impact.Opportunity: While investment opportunities in renewable energy and energy efficiency in developing countries exists, few projects initially offer risk-return profiles in line with institutional investors’ investment criteria.Structure: DCIF provides risk capital, including a preferred return for institutional investors, for climate-related projects to mobilize further financing from both public and private investors. The fund will be an active minority investor and contributes only part of the total project financing in the individual projects.Mobilizing Institutional Investments in African InfrastructureCitibank and SMBC Infrastructure Investment PartnershipOpportunity: Africa needs significant investments in energy and infrastructure but faces a significant investment shortfall. Pension funds have considerable capital but limited access to and knowledge of African infrastructure investment opportunities and risk-mitigation tools.Structure: A task force was created to address this investment shortfall through public private collaboration. Joint efforts by public and private institutional investors, donors providing risk mitigation tools, and multilateral agencies with access to project pipelines offer significant potential to lever up infrastructure investments and financing in Africa.Opportunity: In order to effectively implement infrastructure projects that promote real prosperity, quality of life, and opportunity for emerging market countries, players must utilize the best available expertise and arrange for the most cost-effective funding, credit enhancement and capital resources.Structure: The U.S. Government, in partnership with SIDA, Citi, SMBC, and Capitol Peak Asset Management, launched a $10B Infrastructure Investment Partnership to fund and fast-track critical infrastructure projects in emerging markets, with an initial focus on Africa and Asia as well as Latin America.
12 Select, Concrete Examples from Davos Blended Finance Marketplace (2 of 2) Bank of America (BofA) Catalytic Finance Initiative (CFI)Women Entrepreneurs Debt Fund (WEDF)Opportunity: BofA committed to help meet the challenge of scaling up investment in sustainable energy around the world. At the United Nations Climate Summit in September 2014, the bank launched its Catalytic Finance Initiative (CFI), designed to catalyse at least $10 billion of new investment into high-impact clean energy projects.Structure: BofA will commit $1 billion to investment structures that employ a range of de-risking tools, developed in conjunction with development finance institutions, insurance providers, foundations and institutional investors. The goal is to make clean energy investments more financeable, particularly in emerging markets where project impact is often amplified – addressing other large-scale issues like health, education and job creation.Opportunity: Women-owned SMEs are an untapped and attractive market in developing countries with a $300 billion estimated credit gap and as many as 70% having unserved or under-served credit needs. Working with lenders in developing countries, WEDF accesses a market segment with higher product cross-selling, deposit growth and loyalty, benefiting from the lower risk tolerance of women-owned SMEs.Structure: Seeks to empower women entrepreneurs in developing countries through investing in a portfolio of senior loans to commercial banks. It provides a platform for investing at scale in commercial banks in developing countries, playing a critical role in bridging the financing gap for women-owned SMEs and achieving a greater reach.The Patient Procurement PlatformAtlas Mara (ATMA)Opportunity: Significant opportunities exist across agribusiness value chains in developing markets. In Africa alone, food systems currently valued at $313 billion are forecast to grow threefold to $1 trillion by Smallholder financing also represents a vast untapped market estimated at $450 billion, 80% of which is currently unmet.Structure: Addresses risks of all stakeholders, in particular inconsistent large buyer engagement and insufficient financing, through a multistakeholder consortium of input companies, distributors and dealers, traders, buyers, capital providers and smallholder farmers. The platform aggregates demand from large buyers using longer than typical forward contracts to secure access to finance and inputs.Opportunity: Opportunity to create a local financial institution that provides leadership, liquidity and technology. Combining global institutional knowledge with extensive local insights to create innovative, well-designed products can reach underserved customer segments (women, rural areas and youth) that represent a large commercial opportunity .Structure: Financial inclusion focus and goals align ATMA with development investors and suppliers of finance. Partnering with the private sector enables development finance institutions to mobilize large amounts of capital quickly for target markets in sub-Saharan Africa. Low-cost debt financing from development institutions catalyses product innovation in servicing SMEs, trade finance and mobile banking.
13 Blended Finance Coalition of the Committed The growing blended finance network includes diverse stakeholders who are pioneers in blended finance and actively applying blended finance in a mainstream fashionRDFI Steering GroupHon Christian Paradis (Chair)Canadian Minister for International Cooperation and La FrancophonieJulie Sunderland (Vice Chair)Bill and Melinda Gates FoundationDale MathiasPartners Forum for Private CapitalCharlotte Petri GornitzkaSwedish International Development Cooperation AgencyTom SpeechleyAbraaj GroupGavin WilsonIFC Asset Management CorporationPrivate Sector Capital ProvidersDevelopment and Philanthropic FundersInstitutional InvestorsDonor Governments and AgenciesDiversified Financial InstitutionsDevelopment Finance InstitutionsCoalition of the CommittedFinancial IntermediariesPhilanthropic FoundationsCorporations & Operating PartnersDeveloping country governments
14 Engaging in the Forum’s Blended Finance Initiative As Blended Finance gains momentum, there are numerous ways for players to get involved—and the Forum and OCED-DAC can help you get startedFor further information please contact:Terri Toyota, Director, Foundations and Development Community, World Economic ForumJens Sedemund, Executive Advisor to the DAC Chair, OECD