Time is running out for the UN Sustainable Development Goals (SDGs). Donor governments, including Canada, have increasingly turned to blended finance—using public money to leverage private sector investments—to fill the financing gap and meet the SDGs.
While blended finance purports to go ‘beyond aid’ in the context of shrinking aid budgets, it is becoming increasingly clear that the blended finance agenda is not likely to mobilize the amount of money needed to move the needle on the SDGs, nor promote human rights and social equality.
A recent op-ed co-authored by the Former Secretary of the US Treasury, Larry Summers, argues that the turn to blended finance has been nothing short of “disastrous.” He writes that, “nearly $200 billion flowed out of developing countries to private creditors in 2023. The World Bank’s heralded ‘Billions to trillions’…has become ‘millions in, billions out.’”
The blended finance agenda is also changing how aid money is spent. Canadian development cooperation and solidarity organizations have found that their room for manoeuvre is narrowing due to the Canadian government’s promotion of blended finance.
The International Assistance Innovation Program, 2019-2024
Up until 2014, all of Canada’s Official Development Assistance (ODA) was delivered as grants. In the past ten years, the amount of ODA distributed in the form of loans has more than tripled.
In 2019, Global Affairs Canada created a pilot project called the International Assistance Innovation Program (IAIP), that aims to de-risk private investors by making “targeted, repayable investments – together with other private and public partners – in high-impact projects in developing countries.” In other words, loans and equity investments to make businesses more attractive to other investors.
Since Canadian ODA levels have remained stagnant, this shift means that an increasing share of the ODA envelope is dedicated to subsidizing the private sector, that is, promoting activities where profit is the goal.
What does this turn mean for the promotion of human rights and the production of public goods such as water and sanitation, health and education?
New Report on the Effect on Canadian NGOs
Our recent report based upon 21 interviews with development cooperation and solidarity organizations operating in Canada, demonstrates many problems with this approach. While a few are optimistic, most of the development practitioners we spoke to have serious misgivings about the practical implications and ethics of blended finance.
One of the most surprising findings of our report was how critical practitioners who were involved in blended finance initiatives were of the IAIP. One interviewee from an organization described the application processes that Global Affairs Canada requires as “hellish” and “complicated.” It took up to two years to approve a project.
Another noted that “the government has been unwilling to assume the risk.” NGOs’ perception, including those who have been successful in securing financing through Global Affairs Canada, is that they are being asked to assume all the risk (for example, absorbing a high percentage of overall investment cost). This raises the question of which stakeholder(s) should assume the risk in blended finance: beneficiaries in the South, NGOs in the South, NGOs in the North, the government or the private sector?
The most widely shared perception was that the amount of money required in blended finance arrangements is way too high and that the government has oversold the idea. One small organization reported that deals started at $100 million. Indeed, the biggest players in blended finance are not non-governmental organizations, governments or multilateral banks, but the world’s largest institutional investors, such as private equity firms like State Street.
Rethinking Blended Finance
The problems with blended finance are structural and therefore not easily addressed with piecemeal reforms to existing programs. It is not practical nor ethical to use scarce aid dollars to make profit from poor people in the global South. Blended finance needs a rethink.
One interviewee from a development cooperation NGO who is involved in a ‘bankable’ sector put it as follows:
“The … problem with blended financing is that they cherry pick the best projects where you’re going to make money; …. they wouldn’t consider the really poor countries or conflict-prone countries.”
Many worry about the ability of blended finance to uphold international human rights standards and alleviate poverty, two goals of ODA that are mandated by Canadian law. As one interviewee from a development cooperation NGO put it:
“Canada is increasingly putting Official Development Assistance (ODA) into a system that does not centre rights holders, that centres private interests and increasingly robbing from systems and modalities that at least have the capacity to centre rights holders.”
Several interviewees commented that there are problems with transparency and accountability. Private investors are protected by commercial confidentiality. Unless information is leaked by someone in on the deal, it is not possible to get information about the terms of a contract with a private company, including the payment schedule, the profit rate and so on. It is difficult to score this approach with a feminist approach to international assistance:
“[W]e were talking about feminist tools, including transparency, collaboration and horizontality. These are things that go with feminist development or a feminist management approach, which are incompatible with a shareholders’ meeting, with confidentiality clauses or with padlocks on contracts.”
Development cooperation and solidarity organizations have consistently been a rich source of diverse ideas and practices that have shaped Canadians’ understandings of international issues and promoted social justice and equity in the global community. These organizations deserve an approach that does not force them to try to make profit from their partners in the global South.
Read the full report here: Mapping Blended Finance: What is the experience of development cooperation and solidarity organizations in Canada?
