Oecd dac blended finance principles

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OECD DAC BLENDED FINANCE PRINCIPLES

for Unlocking Commercial Finance for the Sustainable Development Goals

? Blended finance will contribute to faster economic growth, but to achieve this it is vital to get donors into alignment. ?

MARTIN WOLF, CHIEF ECONOMICS COMMENTATOR, FINANCIAL TIMES

? The private sector recognises that donors need an effective framework in order to take blended finance forward to the next level, these Principles provide the step in that direction, which now needs to be taken. ?

JULIA PRESCOT, HEAD OF STRATEGY, MERIDIAM

? The OECD DAC Principles are another important step forward to align the international community, and especially, the key development participants, around mobilizing the funding that can help deliver the SDGs. ?

H.E. LUHUT PANJAITAN, COORDINATING MINISTER FOR MARITIME AFFAIRS, REPUBLIC OF INDONESIA

2 BLENDED FINANCE PRINCIPLES

FOREWORD

CHARLOTTE PETRI GORNITZKA, CHAIR OF THE OECD'S DEVELOPMENT

ASSISTANCE COMMITTEE

JORGE MOREIRA DA SILVA, DIRECTOR OF THE DEVELOPMENT CO-OPERATION DIRECTORATE (DCD)

With 2030 fast approaching, financing the Sustainable Development Goals (SDGs) is one of the starkest challenges faced by providers of development co-operation. Blended finance is the strategic use of development finance for the mobilisation of additional finance towards the SDGs in developing countries. It is a growing practice, as 17 of the 30 DAC members already carry out blended finance activities and more donors are looking to enter this field. Official development finance plays a fundamental role, having unlocked an additional USD 81 billion in private finance for development over four years based on recent OECD analysis.

While existing blended finance initiatives aim to bring in much-needed private finance, their strategies, objectives and approaches vary greatly. Some governments have been undertaking blending activities for a considerable amount of time, while others are just beginning to use such instruments. Some may be particularly risk averse and prefer standard approaches such as concessional loans; others have focused on one particular instrument, for instance guarantees. Some donors prefer to focus on priority sectors or regions, others may want to pursue a broader approach.

Finding an agreement amongst all stakeholders on what constitutes good practice and aligns with the SDGs has become critical. The OECD has responded by bringing together key players from the private sector, civil society and governments to elaborate a common framework, the OECD DAC Blended Finance

Principles for Unlocking Commercial Finance for the SDGs. Building on OECD analysis and best practices, these Principles were shaped by the DAC members and external stakeholders who provided country-level perspectives from their constituencies. As a result, the OECD DAC Principles for Unlocking Commercial Finance for the SDGs were approved at the DAC High Level Meeting on 31 October 2017.

The OECD DAC Principles give a clear definition and provide a five-point checklist to ensure blended finance meets accepted quality standards and achieves impact, based on a development rationale promoted by DAC members. The OECD DAC Principles represent a critical first step towards ensuring that donors engage in the right way, by guaranteeing that the policy framework is fit for purpose. Whether a donor is looking to begin a blending programme or already has one, we recommend that the OECD DAC Principles be used to test assumptions about how blending is currently being undertaken on critically important aspects such as the engagement of local capital markets, the use of concessionality as a precondition to blending, or the provision of monitoring and evaluation mechanisms.

The OECD DAC Blended Finance Principles for Unlocking Commercial Finance for the SDGs will be used to further inform our key partners such as the United Nations, the European Union and the World Economic Forum in progressing best practices in blended finance, including through forums such the G20 and G7. We look forward to further engaging with these actors and others in order to deliver the SDGs.

BLENDED FINANCE PRINCIPLES 3

Blended finance is one approach in the `toolbox' of development finance which the OECD DAC Blended Finance Principles aim to make more effective and efficient. The OECD definition of blended finance is "the strategic use of development finance for the mobilisation of additional finance towards sustainable development1 in developing countries", with `additional finance' referring primarily to commercial finance.2 The focus thus lies on the mobilisation of commercial finance which is not currently being directed towards development-related investments. All relevant, higher level, commitments made by DAC Members in relation to development co-operation apply to blended finance in the same way as to other financing approaches. These include, amongst others, commitments on official development assistance (ODA) financing targets, the commitment on leaving no one behind, commitments related to development effectiveness, as well as those related to untying aid. Furthermore, these commitments are addressed in the OECD DAC principles and will be further integrated into the design and implementation of blended finance policies and approaches in bilateral and multilateral development co-operation.3

Blended finance is a key tool for direct mobilisation of commercial capital and offers an opportunity to move towards fully market-based financing in support of the SDGs. The private sector plays an important role in developing, launching and executing projects in developing countries. Both dimensions of the private sector, as the financier and as the investee, are crucial in the context of blended finance. The Principles focus primarily on commercial actors as a source of potential financing for development that has not yet been targeted towards the SDGs.

The Principles have been developed in close coordination with other international initiatives on blended finance. This includes notably the DFI Enhanced Principles on Blended Concessional Finance for Private Sector Projects4 which address critical blended finance topics at the operational level by taking the perspective of implementing institutions. Meanwhile, the Business & Sustainable Development Commission has focused on gathering the private sector perspective.5

The Principles are targeted at the policy level, reflecting the development mandate of DAC donors, and the policies and instruments under their political oversight. They aim to ensure that blended finance is deployed in the most effective way to address the financing needs for sustainable development as set out in the Addis Ababa Action Agenda (AAAA), by mobilising additional commercial capital and enhancing impact. Whereas both concessional and/or non-concessional development finance can be part of blended structures, the use of concessional resources requires particular care, given its scarcity. Moreover, potential competitive distortions need to be minimised and complementary objectives, such as structural reforms, pursued.

The global context leaves no doubt about the importance of, and the opportunity for, blended finance. The need for mobilising sources beyond development finance for achieving development targets, and the importance of using development finance in a catalytic way is well accepted and reflected in Agenda 2030, the Paris Agreement on Climate Change, and the AAAA. Increasing evidence of the superior long-term performance of sustainable investing points to a shift in the alignment of development and commercial financing. New, evidence and data generated through blended finance can play a key role in demonstrating the potential to substantially enhance commercial actors' information on and understanding of investment performance in developing country markets. By allowing more effective and sophisticated assessments of risk, blended finance can thereby contribute to market building, and provide an accelerated pathway towards sustainable development investments as an asset class.

In conclusion, blended finance carried out effectively holds the promise of yielding substantial additional gains for all parties, especially to the benefit of those, whose development needs require financing. The Principles serve as a call to action to deliver optimal blended finance and to seize the opportunities that come with it for all sides.

1. Until 2030, the Sustainable Development Goals provide the universally agreed results framework in this regard. 2. Development finance, in the context of this definition, includes Official Development Finance as well as private funds that are governed by a development mandate e.g.

financing provided by philanthropic organisations. The Principles contained herewith focus on the increased mobilisation of additional commercial finance. As such, they are narrower than the complete scope of blending activities, which also comprise some DAC members' use of blending for the mobilisation of additional public development finance ("Blending 1.0"). The narrower focus of these Principles reflects the evolution of blended finance, in light of the importance of increasing the mobilisation of commercial finance ("Blending 2.0") to meet the financing needs of Agenda 2030. 3. Policy Guidance will be developed to support the operationalisation of the Principles by DAC Members. 4. 5.

4 BLENDED FINANCE PRINCIPLES

PRINCIPLES

PRINCIPLE 1 : A NCHOR BLENDED FINANCE USE TO A DEVELOPMENT RATIONALE

PRINCIPLE 2 : D ESIGN BLENDED FINANCE TO INCREASE THE MOBILISATION OF COMMERCIAL FINANCE

PRINCIPLE 3 : T AILOR BLENDED FINANCE TO LOCAL CONTEXT PRINCIPLE 4 : F OCUS ON EFFECTIVE PARTNERING FOR BLENDED FINANCE PRINCIPLE 5 : M ONITOR BLENDED FINANCE FOR TRANSPARENCY AND RESULTS

BLENDED FINANCE PRINCIPLES 5

PRINCIPLE 1 : ANCHOR BLENDED FINANCE USE TO A DEVELOPMENT RATIONALE

All development finance interventions, including blended finance activities, are based on the mandate of development finance providers' to support developing countries in achieving social, economic and environmentally sustainable development.

A) Use development finance in blended finance as a driver to maximise development outcomes and impact.

B) Define development objectives and expected results as the basis for deploying development finance.

C) Demonstrate a commitment to high quality.

1a) Use development finance in blended finance as a driver to maximise development outcomes and impact. The development mandate provides the rationale for deploying development finance through blended finance, as an effective and efficient financing approach towards its policy objectives. Consequently, the SDGs are at the core of how and why official development finance is used in blended finance.

1b) Define development objectives and expected results as the basis for deploying development finance. Development objectives and expected results should be defined before the deployment of blended finance. They should be mutually agreed and embraced by all parties, as a key basis for the deployment of

blended finance. The overarching objective for the use of blended finance is the expansion of sustainable, marketbased solutions for development financing needs.

1c) Demonstrate a commitment to high quality. High quality in the design and execution of projects financed by development finance, including blended finance, are central to the objective of supporting the development of functioning and effective markets. Blended finance should be based on high corporate governance, environmental and social standards, as well as internationally recognised responsible business conduct instruments, providing an opportunity for commercial partners to acquaint themselves with quality standards in unfamiliar markets.

? Private sector financing will be critical to reaching the 2030 goals. DFIs have recently adopted joint guidance for the use

of blended concessional finance in our private sector operations. We also welcome the OECD's efforts to bring donors and other

stakeholders together around policy principles for blended finance. These initiatives will help us make the best use of scarce development finance resources, having more development impact

and mobilising more than would otherwise be possible, without getting in the way of the private market. ?

NANNO KLEITERP, CHAIRMAN, EUROPEAN DEVELOPMENT FINANCE INSTITUTIONS

6 BLENDED FINANCE PRINCIPLES

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