Blended finance approaches make use of public and development finance sources, such as development assistance from donor governments and funds provided by philanthropic foundations, to mobilise additional finance, primarily from private and commercial sources. Their purpose is often tied to the achievement of political goals, such as to address the SDGs and promote climate action in countries (Paul Horrocks, 2017). Blending involves the strategic use of a limited amount of grant resources to catalyse additional financing for development projects. Grants are often combined with loans, equity, beneficiary resources or other forms of financing, with the aim of de-risking projects and making them bankable. Blending allows partners to get the most out of their grant resources and enhance their overall development impact (EIB, 2022).
Advantages: Because of the blending of multiple types of financing sources larger volumes of capital can be raised and investments can be steered towards a certain goal. Depending on the mix of the funding types only some capital needs repayment, for example when a grant is part of the blended instruments only the part of the investment that stems from commercial sources bears financial costs.
This type of financing structure is particularly of interest when a governmental entity wants to steer actions and developments in a particular direction and would like to attract private capital to support this development. Meanwhile, for private investments blended finance makes the investment more attractive compared similar situations without public funding support, as it can be associated with lower risks and better investment conditions.
Disadvantages: Apart from the inherent disadvantages of each funding type in the blended mix, the project needs to meet the reporting requirements of each funding type and depending on the complexity of the instrument, requires solid planning and a well-developed incentive scheme, as well as financial expertise and dedicated managerial oversight.
First steps
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Based on the needs assessment and the projects proposed identify the capital required.
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Research available call for grants at the EU, national, state and regional level.
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Review and create a landscape of potential external financing options.
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Analyse whether blended finance is applicable for the municipality.
Case studies:
1. BABLE Solutions: Smart Cities, Europe
Further reading:
References:
EIB (2022), "EU Blending Facilities"
Paul Horrocks et al., (2017), “Blended finance – Mobilising resources for sustainable development and climate action in developing countries”, OECD Publishing, https://www.oecd.org/cgfi/forum/Blended-finance-Policy-Perspectives.pdf
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