Opinion: How blended finance at country level can deliver on the SDGs

When the first significant example of a country-level blended finance initiative emerged at the 26th United Nations Climate Change Conference, or COP 26, in 2021 — the Just Energy Transition Partnership, or JETP, announced by South Africa — it was welcomed as a constructive model to help bridge the global sustainable development financing gap. This gap is particularly acute in emerging and developing economies, and it is growing — up from $2.5 trillion in 2015 to an estimated $4 trillion per year now. This investment gap cannot be closed by public finance alone — much more private-sector investment is required. But how are we to mobilize this amid a continued aversion to emerging market risk in the private sector? Blended finance, where concessional capital is used to mobilize private sector investment, has long been recognized as a solution across the market but has historically been applied at the project level. This limits its capacity to change the rules of the game which renders projects difficult to bank in the first place: a lack of project pipeline, small ticket sizes, persistent regulatory friction, and high political and currency risk. Enter the country platform concept, first advanced by the World Bank in 2017 to promote a programmatic approach to blended finance that can help remove barriers to investment at a country level. Country platforms move beyond single projects, seeking instead to apply concessional finance at a national level to help remove barriers to investment and unlock the policy reform required to enable private finance to invest at scale in support of the United Nations Sustainable Development Goals. The JETPs are now one the leading examples of this approach. A challenging start There was early support for the South Africa JETP in 2021. The international donor community committed an initial sum of $8.5 billion of concessional finance, with the intention to mobilize a further $90 billion of both public and private sector financing. Soon after, Indonesia, Vietnam, and Senegal announced their own JETPs, each serving to address unique national priorities, and Egypt launched another example of country platforms — the Nexus of Food, Water and Energy program — in 2022. However, in the two years since, enthusiasm for country platforms like the JETPs has been dampened by criticism over implementation delays and perceived politicization. Indeed, they are not without their challenges. Multinational investment plans of this size, timeframe, and ambition have never been attempted before and so each is adopting a learning-by-doing approach — but this is also what makes the work to implement them so valuable. A unique opportunity to unlock investment at a systems level Irrespective of perceived flaws, the implementation of country platforms like the JETPs has been critical in highlighting the important role these vehicles can play in unlocking barriers to investment at a system level. Take the South Africa JETP as an example. As partners began to implement it, all parties agreed that — given its limited sums — the concessional capital available should be conserved for activities that were unlikely to ever be bankable, such as initiatives to support mining communities as they transition away from coal. This meant that other investment priorities — such as the buildout of renewables — would have to be financed completely commercially. To achieve this, the JETP partners identified barriers to private investment in these areas at a system level that could be resolved through implementing regulatory reform. In response, in 2022, the South African government removed the licensing threshold for embedded power generation, freeing major power consumers in South Africa to invest in building out their own renewable generation capacity. Despite ongoing political challenges, this has begun to yield encouraging results. The South African government signed off 14.5GW of new renewable energy projects in 2023, with a further 51.5GW of projects in the pipeline – against only 54GW of total currently installed capacity across all energy types in 2022. A new capital allocation model to maximize concessional finance Efforts to implement country platforms have also played a critical role in helping establish how capital can be most effectively mobilized in support of the SDGs. Through a programmatic approach, partners are able to determine which projects will be wholly funded by the private sector — having been unlocked by policy reform or regulatory change — which will be funded purely by concessional capital, and where a mix of the two is required. The South Africa JETP has evolved this dialogue further by establishing a clearing house model, to match concessional capital in the form of grants to projects that have been brought forward by partners. This approach can give donors confidence that their public sector financing will not be crowding out the private sector and help create a pipeline of projects that involves the private sector from the outset. Today, it is being applied to other platforms. For example, in Vietnam and Indonesia, the role of the private sector has been built into the JETP governance structure from the beginning. Too much at stake for country platforms to fail Of course, delivering across such an agenda is complex. Getting the formula of concessionary capital, policy reform, and private finance right such that it delivers the most impact requires groups that can work across traditional public and private sector divides. It also requires geographical awareness, sensitivity, and regional and industry knowledge: What works in one country may not work in another. No surprise, then, that there have been early-stage challenges as domestic reformers and international partners work together to turn theory into practice. This said, we cannot cede to the cynics — there is simply too much at stake. At worst, the lessons learned from efforts to implement country platforms will play an important role in unlocking future regulatory barriers. At best, if parties can embrace the country platform concept of cooperation rather than competition between donors, we stand a better chance of successfully delivering on shared climate goals.