Over the past decade, global development has been guided by the Millennium Development Goals (MDGs) which have inspired a public sector reform movement.

With an agenda that looks to promote healthy institutions, the development industry is full of projects that seek to restructure the public sectors of developing countries – from ambitious plans to transform how public finance is managed, to state assets within the education and health sectors. But these efforts have yielded mixed results, often hampered by corruption or inefficiency. As a result, voices in the industry have been advocating for domestic private sectors to take on a bigger role across developing countries.

But private sector involvement remains controversial in many contexts; most of all in poverty reduction. Businesses, on the one hand, are considered the key driver of growth and wealth creation; in the words of the World Bank (long a proponent of the free market) businesses are an “employer, investor, source of finance, motor of competitiveness and in building capacity and human capital”.

There are however questions about human development working in sync with profit-driven bodies. These concerns were amplified by the United States’ push for privatised and deregulated national industries across the developing world. Any mention of the private sector in the development context has usually been met with cynicism.

Many of these fears are grounded either in commonly accepted truths or documented research. Few can argue against the importance of corporate responsibility to combat issues such as a lack of transparency and accountability. A report by the UK’s independent aid commission pointed to a “very large margin of error” in the development work of private sectors, with their reported project results being inflated to give the impression they were meeting targets.

But still there is an ever-growing call for more private sector involvement in development. In the wake of the new Sustainable Development Goals in 2015 (SDGs), a new term – aptly named ‘blended finance’ – has rapidly entered the industry’s vocabulary.

Blending, in this context, is a word usually used to describe the targeting of public capital (such as aid) with the aim of mobilising private capital to achieve developmental outcomes. It is generally used to – as Oxfam puts it – “leverage additional funds from other actors” to stimulate the private sector. The short answer to why the market for blended finance is already worth $50bn globally is simple: there is a huge development investment gap worth $2.5tn. The appetite for risk in the industry is generally low, not to mention aid is increasingly viewed with greater cynicism. All of these factors only serve to worsen fears that the price tag for the SDGs simply cannot be afforded. With this in mind, blending is increasingly being seen as a potential ‘silver bullet’ for financing development projects as more cases of blending emerge.

One country that is often touted as a success story for blended finance is Kenya. With a thriving and vibrant private sector, there have been many lessons learnt from the East African powerhouse. In times of crisis blended finance has been seen attracting the capital of global and local business can make up for momentary shortfalls or vulnerabilities in short-term funding, especially during the drought responses in 2011 and 2015 where the Kenya Red Cross Society led private sector finance initiatives. The Kenyan response to the 2014 Ebola outbreak also proved the effectiveness of such an approach with Kenya’s Cabinet Secretary for Health stressing the significance of contributions from the private healthcare industry. These examples make it difficult to argue against claims that fewer restrictions and a lack of bureaucracy allows for faster action during a short-term emergency.

When it comes to longer projects, the World Bank – as part of its wider study of blending finance – noted its successes in a pilot loan programme with K-Rep, a Kenyan commercial bank specialising in microfinance lending. The use of aid funds to incentivise K-Rep was found to be broadly successful: while poorer rural communities were given more access to credit, water systems also became more accessible. When the European Union scaled up the programme, it was cheered as a remarkable success by the World Bank with an estimated 190,000 people gaining access to water and aid.

Another notable example of infrastructure development spurred on by blended finance would be the World Bank and the UK Department for International Development’s (DfID) funding of the M-PESA project. The primary aim of the product – owned by Vodafone Group – was to provide an SMS-based system that would facilitate the easy transfer of money using mobile phones without requiring a bank account. Now seen as the main factor behind Kenya’s ‘mobile money revolution’, it has been championed as one of the most successful mobile financial service in the Global South.

But blended finance and development remain a risky mix. Recent reports of blended finance’s true face value in providing results have revealed the paradox at the heart of this practice of mixing non-profit and private sectors. A recent Oxfam report warns that blended finance ‘threatens the quality of aid’ as it is a much less transparent mechanism with poor evidence of results and monitoring. Similarly the European Network on Debt and Development found that there was sometimes little justification for private sector involvement, noting an absence of ‘any added value’ in certain cases. Further research by the organisation also shone a light on the fact that the biggest beneficiaries of blending were finance sectors, which arguably makes little sense from the perspective of poverty reduction. The Oxfam report has similar findings noting the practice might lead to larger aid flows to middle-income countries as, it is claimed, investment opportunities could take precedence over aid outcomes.

Along this vein lies the risk of a separation of private sector and development aims. There lies the possibility of aid-sponsored monopolies arising from blended finance projects. As with most poorly regulated monopolies, consumers are always the first to be negatively impacted. This danger is amplified when agencies such as DfID have been reported to show a lack of leadership concerning the monitoring of aid. Despite all of this, the deficiency of any other solutions to close the SDG funding gap suggests that a blended approach to financing development is here to stay and will only continue to grow.

Both sides of the debate reflect an extremely divisive topic in the development industry. Early case studies provide hope that careful targeting of aid to spur on private sector activity will eventually lead to tangible, high-quality outcomes. It is clear that K-Rep’s corporate aims were well aligned with the sixth SDG – the provision of clean water and sanitation. On the other hand, the phenomenon has the potential to disrupt the flow of aid to the world’s poorest – which would be a clear violation of the SDG pledge to leave no one behind. With the practice set to enter the mainstream, it is certain that injecting aid money into private sector initiatives will eventually come at the expense of traditional development projects. When this happens, policymakers must be aware of blended finance’s dangers.  

About the author

VINCENT KAM graduated from Newcastle University reading Economics and Politics. His areas of interest cover macroeconomic trends, international development, and global governance.