Perspectives 2019 2020 Public Sector

32 Sustainable Sovereign Financing: Optimizing Resource and Risk Allocation 10 https://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/OECD-Blended-Finance-Principles.pdf Risk absorption — “Equity” vs “Debt” Driven by different mandates and objective, and therefore different risk appetite and returns target, each financing actor in a blended finance structure would possess a different risk absorption capacity. Such risk absorption capacity, in turns, determines how each actor should participate in a blended finance structure, i.e. via which financial instrument. Governments have historically played an instrumental role both as debt and equity provider for the financing of SDG related projects and assets. However given their developmental priorities, governments are often willing to stand last in the capital structure waterfall, taking higher risk at low concessional returns. As such, a shift towards more equity-like participation by governments, for example in the form of first loss capital, will be most effective in catalyzing private sector capital. In particular for projects or assets that are commercially viable when given the right capital structure, equity-like contribution will also help alleviate the large financing burden on governments. This, in turns, eases the pressure on government’s debt sustainability. Impact assessment & disclosure For blended finance to be scalable in order to bridge the significant SDG financing gap, information transparency and efficiency are the key prerequisites. Every investment decision made is influenced by investors’ assessment of an asset or project’s past performance, precedents of similar investments, and expected returns from the asset or project. It is therefore critical to define, monitor, assess and disclose data and information on the commercial and social returns of SDG projects. At the preparation stage, stakeholders should agree on performance and result metrics and adopt a common monitoring and evaluation framework. During execution, financial flows, commercial performance and development results should be tracked to assess the effectiveness and efficiency of blended finance operations. There should be dedicated resources for monitoring and evaluation; and information should be made publicly available and easily accessible to allow for transparency and accountability. OECD Blended Finance Principles The above building blocks are aligned with a number of blended finance principles put forward by the OECD’s Development Assistance Committee (DAC) 10 , namely “Focus on effective partnering for blended finance” and “Monitor blended finance for transparency and results”. The principles also point to the importance of anchoring blended finance use to a development rationale, designing blended finance to increase the mobilization of commercial finance and tailoring blended finance to local context. In particular, the DAC emphasizes that blended finance should be deployed to address market failures; overcoming barriers to market formation but subsequently should be withdrawn once functioning markets have been established. This implies that blended finance should not become a static or permanent approach and there is a need for commercial sustainability in the structure to allow for a clear exit strategy of concessional finance. This means local context should also be embedded in the financing framework and that blended finance should be complemented by governments’ reform efforts to promote an enabling environment and deepening of the local financial market.