Africa steps up for blended finance

Development finance institutions are turning to blended finance, which has been identified as key to bridging Sub-Saharan Africa’s infrastructure gap.

Sub-Saharan Africa has a widening, $100bn annual infrastructure funding gap, particularly for ventures of 10 years or more, with local commercial banks often lacking capacity for long tenures. Ninety percent of projects on the continent are failing due to inadequate risk allocation and feasibility studies.

This has seen more blended finance transactions under way. There are 216 transactions targeting one or more countries in Sub-Saharan Africa and representing an aggregate volume of up to $45bn invested in full or in part in the region.

Blended finance is an instrument aimed at supporting highincome projects that would otherwise not attract funding on strictly commercial grounds.

It is the strategic use of development finance and other funds to mobilise capital flows to emerging markets, combining official development assistance with other private and public resources.

But analysts say the blended finance model, which allows for institutional investors and the private sector to back projects in the early stage of development, will be tested in the global economic slowdown and African governments need to create systems that allow capital to flow efficiently.

Speaking at the Africa Finance Industry Summit in Lome, Togo, last week, International Finance Corporation (IFC) director for economic policy Denis Medvedev said the main challenges for infrastructure funding include finance gap risk due to high country, sector or project risk.

“Returns are initially too low mainly because of untested business models, limited scale and the misalignment in incentives from stakeholders regarding maximising development impact,” Medvedev said. “Blended finance products provide a critical value-add via targeted financing solutions that help overcome each barrier and move deals over the finish line.”

He said the IFC has focused on the careful use of concessional funds for high development impact projects.