In today’s aid industry, practitioners grapple with allocating limited development assistance resources amid an ever-growing array of sustainable development challenges. The debate has coalesced around a “billion to trillion” narrative and the need to channel the institutional investors' deep pockets to fill the Sustainable Development Goals spending gap. Putting these two ideas together, it is tempting to believe that the measure of success for blended finance is how much private money flows for every public dollar. However, an overemphasis on this leverage ratio in transactions will likely result in bad investment decisions.
A decade ago, IDB Invest financed the first utility-scale solar plants in Uruguay together with blended finance resources from the Canadian Climate Fund. Because the asset class was untested, no private capital funded the projects other than sponsors’ equity.
Fast forward to 2020, all projects were refinanced by institutional investors or commercial banks at a lower pricing than the previously subsidized rate. Successive tenders were supported by commercial capital. Leverage ratios were not the decisive factor, as mobilization of private capital did not occur until later. This case exemplifies the transformative potential of blended finance — combined with other instruments — while highlighting the limitations of relying solely on financial ratios.
About the author
Matthieu Pegon
Matthieu Pegon is the head of blended finance at IDB Invest since 2017. He oversees the deployment of IDB Invest's concessional finance resources in high-impact projects where risks are too high for commercial finance alone. He recently published “Beyond Leverage Ratios: A Strategic Approach to Blended Finance.”
