Leverage mechanisms play an influential and often decisive role in Blended Finance approaches, but the degree of its influence may decline as the investment risks attached to a country escalate(OECD report of 2019). The Development Bank of Southern Africa announced the establishment of Climate Finance Facility through the principle of Blended Finance two year after the continental financial institution, African Development Bank delegates agreed that the use of blended finance as a tool to address risk perceptions and crowd in private investments to develop Africa and achieve the Sustainable Development Goals at the inaugural Africa Investment Forum in 2018.
Has the approach been viable in Africa or LDCs? NB!! 31/43 LDCs are from Africa
The report released by the OECD late last year showed that particularly in Least Developed Countries and Low Income Countries, leverage mechanisms plays an influential role in private finance mobilisations although the report pointed how much the LDCs investment risks make it difficult to mobilize private funds specifically for Least Developed Countries in comparison to other categories. Private investments mobilised for LDCs makes up a just pinch of salt if not a granule of the total private investments mobilised for all categories.
Private investors preferred guarantees making the it the most powerful mechanism at 63% of the total volume reported in 2012-2017. Guarantees represent over 55% of all private finance mobilised in every year excluding 2017, when guarantees fell to 44% of private finance mobilise.Total amounts reported as mobilised from direct investments in companies registered a slightly increased over the full time period, from representing 18% of private finance mobilised in 2012, to over 21% in 2017. The number of operations on guarantees declined, after recording 35% of deals in 2012 and a mere 15% in 2017, in favour of direct investment in companies and SPVs and simple co-financing. Guarantees were used in 35 LDCs to mobilise private finance. However, 5 countries, 3 of which in Africa - Angola,Senegal and Zambia -received over half of all private finance mobilised through guarantees, OECD 2019.
Simple co-financing arrangements represent the largest number of deals overall, but mobilised a relatively small share of private capital, 4% over 2012-2017.Acquisition of shares in collective investment vehicles (CIVs) remains a less attractive leveraging mechanism in LDCs, representing 2% of private investment mobilised and total number of deals between 2012-2017.
Annually, Private finance mobilised $17.7 millions through syndicated loans, the largest in LDCs. Guarantees mobilised private funds amounting to $15.5 millions while Credit lines contributed $10.3 millions towards the total mobilised through Private finance. Simple Co-financing amassed the least funds, $0.4 millions while Shares in collective investment vehicles and Direct investment in companies and SPVs mobilised $7.2 millions and $8.3 millions of private finance in LDCs, respectively.
Despite the influence leveraging mechanisms have on Finance mobilisation, just a mere USD 9.3 billion, or 6% of the total finance investments mobilised went to LDCs, whereas over 70% went to middle-income countries which indicates nothing much changes when it comes to using the Blended Finance to attract investors for the less advantaged countries, amid the leverage mechanisms employed and UNCDF proposing the five-point action agenda to improve the practice of blended finance and support the LDCs to achieve SDGs. Is blended finance really an appropriate apparatus for attracting investments for the most vulnerable and less advantaged?
Reasons cited for the fruitlessness and inviabilities of the approach is some investors may have a low appetite for risk given the need to preserve their triple-A credit ratings, they may lack awareness of investable projects, institutional incentives may push them to close deals, leading to a focus on “easier” markets or projects, or their mandates may favour commercial returns.
