This guide provides an overview of both the theory and practice of
blended finance. Blended finance is defined as the complementary use of
grants (or grant-equivalent instruments) and non-grant financing from
private and/or public sources to provide financing on terms that would
make projects financially viable and/or financially sustainable. Given
that certain infrastructure investments may not be commercially viable,
innovative instruments have been sought to close this ‘viability gap’
and make a larger number of projects bankable. By blending grants with
loans, this innovative approach to development finance aims to achieve a
number of objectives – from increasing the volume of development finance
in a context of constrained resources, to increasing the viability of
investments, to enhancing the overall effectiveness of aid. Moreover, by
demonstrating the long-term viability of markets, blending can
potentially trigger an increase in private investment without the need
for a grant element (although the evidence on this so-called
‘demonstration effect’ remains relatively weak).
The objective of this guide is threefold: to define and provide the
theory and rationale behind blending, to highlight key considerations
for donors and development finance institutions (DFIs) of blended
finance, and to illustrate how blending occurs in practice.
The guide addresses blending primarily from the perspective of donors
and DFIs and is structured as follows:
- Section 1 defines blended finance and describes the various grant and
non-grant instruments that can be used in blending.
- Section 2 provides an overview of the underlying rationale for
blending as well as multiple criteria that govern decisions such as
the size of grant and type of instrument. It also looks at the
relationship between official development assistance (ODA) and blended
- Section 3 demonstrates how the European Union (EU) and the
International Finance Corporation (IFC) of the World Bank Group have
engaged in blending to explore practical considerations around its use
and application. It identifies the current entry points for donors in
their respective processes.
- Section 4 assesses the main underlying issues that practitioners need
to be aware of in order to ensure that they use this innovative
financing tool efficiently and effectively. This is important since,
although the potential benefits associated with blending are
significant, questions have been raised in some cases regarding its
effectiveness, development impact and potentially distortive effects.
The main challenges include balancing financial incentives and
development principles, avoiding crowding out of private markets, debt
unsustainability, transparency, accountability and monitoring and
evaluation (M&E), as well as the possibility of negative
- Section 5 concludes by identifying a set of critical questions for
consideration by donors and DFIs when designing a blended finance
package, as well as areas where further research is required in order
to develop a more comprehensive understanding of blending.
The guide assesses blended finance in the context of financing
infrastructure and low-carbon infrastructure projects in Sub-Saharan
Africa and South Asia with case studies of relevant projects used
throughout to illustrate the following main points:
- The different motivations for blending.
- Various forms of the value added of the grant element.
- Potential improvements in donor coordination.
This peer reviewed Topic Guide has been produced by the Overseas
Development Institute (ODI) with the assistance of the UK Department for
International Development (DFID) contracted through the Climate,
Environment, Infrastructure and Livelihoods Professional Evidence and
Applied Knowledge Services (CEIL PEAKS) programme, jointly managed by
HTSPE Limited and IMC Worldwide Limited.
Mustapha, S.; Prizzon, A.; Gavas, M. Topic Guide: Blended finance for infrastructure and low-carbon development [full report]. Evidence on Demand, UK (2014) 51 pp. [DOI: 10.12774/eod_tg9_jan2014.odi]