Panel, Conference Presentation
Bridge and Blend: The Role of DFIs in Scaling Sustainable Financing
- The annual financing gap for the Sustainable Development Goals (SDGs) in emerging markets is estimated at $2.5 trillion, requiring unprecedented mobilization of private capital.
- Current private capital mobilization for SDGs in emerging markets is in the "low billions," falling far short of the trillions needed and slowing urgent development agendas.
- Development Finance Institutions (DFIs) are expected to catalyze private finance through landmark transactions, syndication, guarantees, and market building but are currently performing these functions at insufficient levels and speeds.
- DFIs are disproportionately not investing in low-income countries; only 28% of DFI participation in blended finance deals occurs in low-income regions, despite 79% of blended finance transactions involving DFIs overall.
- Approximately 75% of cataloged blended finance transactions occur outside of low-income countries, indicating a failure to prioritize the regions where market failure is most acute.
- Four pervasive gaps in capital markets block finance flow to low- and middle-income countries: early-stage finance, local currency financing, innovation in systemically important sectors, and finance for excluded populations like women entrepreneurs.
- DFIs are struggling because they are often modeled on commercial banks, lacking the specific capabilities to manage high risks in early-stage projects and build market infrastructure from scratch.
- The International Finance Corporation (IFC) deployed $1.6 billion in concessional finance cumulatively from 2010 to 2020, with over one-third of that amount deployed in the last two years via the new "Private Sector Window."
- The IFC is shifting its strategy to increase financing to low-income (IDA) and fragile markets from under 20% to a target of 40% of its portfolio to better address the financing gap.
- A key strategic pivot for DFIs involves moving beyond firm-level technical assistance to "upstream" market-building work that creates enabling environments and viable project pipelines over 3–5 years.
- Global DFI blended finance operations deployed approximately $3.5 billion in transactions in 2018, representing only 6% of total DFI transactions and roughly $1 billion in subsidy capital.
- The scale of available official donor aid is flatlining at approximately $150 billion annually, which is an order of magnitude smaller than the $2.5 trillion gap, requiring maximum leverage from every dollar of concessional finance.
- DFIs face conflicting shareholder mandates: fiduciary duties requiring financial sustainability and ratings protection versus political mandates to expand activities in low-income countries and de-risk investments.
- Investment officers at DFIs often prioritize simpler, volume-generating transactions with a single financier over complex, multi-party deals required for true mobilization due to institutional pressure and workload constraints.
- The IFC and the European Development Finance Institutions Association (EfDFA) are collaborating with the Global Impact Investing Network (GIIN) to harmonize impact metrics (IRIS Plus) to facilitate private sector engagement.
- Nancy Lee proposes a "stretch fund"—an off-balance sheet vehicle capitalized by shareholders willing to accept lower returns—to provide first-loss positions, equity, and guarantees that existing DFIs cannot tolerate within their current balance sheets.
- Joan Rohrbach notes that specialized, ring-fenced entities (e.g., green banks, infrastructure groups, TCX) housed within or alongside existing DFIs have successfully mobilized capital by focusing on specific, difficult instruments.
- The IFC's Private Sector Window serves as a model for a "stretch fund" by utilizing IDA (World Bank's soft loan) capital to allow the IFC to take risks beyond its conventional commercial capacity.
- Panelists emphasize extreme urgency, noting that while building enabling environments and market infrastructure takes years, the 2030 SDG deadline requires immediate investment to ensure markets are ready for scale.
- Joan Rohrbach argues that urgency necessitates standardization and scaling of transaction patterns to institutionalize private capital entry, rather than relying solely on bespoke, complex deals.
- Monish Mahogar notes that the IFC's current portfolio strategy relies on cross-subsidization, where profits from middle-income markets offset the flat/zero returns often seen in low-income market operations.
- The conversation concludes that a combination of existing DFI transformation, new specialized vehicles, and increased collaboration across the capital spectrum is required to bridge the financing gap.