BLENDED FINANCE: ADDRESSING THE INFRASTRUCTURE GAP
The lack of infrastructure in developing countries inhibits their economic growth and development and a significant amount of capital is required to address this. There is no shortage of available capital worldwide, but commercial investors remain ever wary of investing in infrastructure projects in developing countries due to the perceived unfavourable ‘risk-return profile’.
Governments in these countries cannot fill the infrastructure gap alone – they do not have the funds to do so – and the provision of development finance by those tasked with its deployment does not provide a sustainable solution in the long-term. The solution has been widely sought – particularly by the United Nations (UN), which has developed a set of sustainable development goals (SDGs) that have infrastructure development as a common theme running through many of them.
One of the solutions that the UN has explored is blended finance. Although not limited to a single description, the one that is common is that blended finance is the blending of commercial finance and development finance to fund a project, transaction or sector. Development finance is finance that is earmarked for development, whereas commercial finance is finance that has return maximisation as its central feature. The idea of blended finance is for development finance to be a catalyst for commercial finance, with the result of shifting the risk-return profile of infrastructure development transactions in a favourable manner.
A good example of the utilisation of blended finance in the infrastructure transaction context is the Beitbridge Border Post Project in Zimbabwe. Bowmans recently acted for the sponsor, borrower and project company on this project, which entails the upgrade, refurbishment and modernisation of the existing physical and information and communications technology infrastructure at the Beitbridge Border Post.
The combination of development finance and commercial finance is one of the factors that made the Beitbridge Border Post Project possible – that and the unwavering determination of the two principal partners at the centre of the project: the Republic of Zimbabwe (acting through the Minister of Trade and Infrastructural Development) and the project company, Zimborders (acting through its sponsor, La Frontiere (Pty) Ltd).
Projects like the Beitbridge Border Post Project are the start of the achievement of the ultimate goal of blended finance – the creation of a stable enough environment to render the country or sector in question less and less dependent on the development finance element.
Blended finance cannot fill the infrastructure gap on its own, however, nor can it carry the achievement of the wider array of SDGs. It is simply one solution in the broader spectrum of solutions.
Bowmans has developed a guide to blended finance (available here) which outlines the benefits and potential uses of blended finance in more detail, and provides further information on the use of blended finance in the successful financing of the Beitbridge Border Post Project.