Philanthropies Serving As a Launch Pad for New Blended Finance Vehicles

The African Development Bank opened its first trust fund with a philanthropic donor four years ago and has since received tremendous support from a multitude of foundations. Its partnership with foundations has been critical to pushing the institution in unconventional directions and unlocking doors to new relationships. For example, the African Digital Financial Inclusion Facility (ADFI) is a multi-donor Special Fund established in May 2018. Its primary objective is to contribute to the scaling of financial inclusion through catalytic investments in the digital financial services (DFS) ecosystem in Africa by addressing the systemic barriers to DFS growth and uptake. ADFI came about through an initial contribution of USD 500,000 from the Bill and Melinda Gates Foundation (BMGF). It allowed AfDB to finance the market assessments to further inform the structure and size of ADFI. ADFI is a blend of grant resources from donors and ordinary capital resources from the African Development Bank with a target size of USD 100 million that will be extended in the form of grants and affordable loans to non-sovereign entities. To implement the objectives of the Fund, BMGF is now seeking approval for USD 35 million contribution. With the market assessment completed, the Bank obtained the contribution of two more donors: the Agence française de développement (AFD), in July 2017 and Luxembourg in December 2017. The German DFI, KfW has also expressed interest to join. Thus, the BMGF grant catalyzed others to join in this new transformative vehicle.

The Facility for Energy Inclusion (FEI) is a debt financing platform championed by the African Development Bank for small-scale projects – off-grid solar, small scale IPPs and mini-grids – with the objectives of aggregating capital, structuring bankable projects and accelerating their delivery so as to increase access to clean energy across Africa while supporting the transition to low-carbon development pathways. FEI is structured with two discrete windows/funds. FEI ON-GRID will provide senior and mezzanine debt financing to small scale independent power producer (IPPs) and mini-grid projects. FEI OFF-GRID will provide short/medium term debt financing to support the growth of companies providing off-grid energy access, as well as related products and appliances. The beauty of FEI is that it addresses market failures head on. For off-grid solar and mini-grids the market failure arises because of:

  • perceived/real risk in nascent sectors with innovative technologies and limited track record;
  • information asymmetry (lack of understanding of the business models, including ‘Pay As You Go’);
  • the opportunity cost for local financial institutions of investing in nascent energy sectors versus better known sectors, and the financial and operational constraints faced by banks in terms of servicing the market.

Thus, FEI aims to catalyze private sector capital by both (a) structuring bankable deals and (b) demonstrating the commercial viability of projects by leveraging a capital structure that provides significant protection to commercial investors. Capital with a high-risk appetite like the resources available at foundations is needed to catalyze investment by public and private investors into innovative and emerging technologies and smaller scale projects than are typically supported by DFIs. FEI’s ability to provide cost effective capital to off-grid solar players is critical in order to enable the growth of the sector and lower overall electricity costs for the ultimate end consumers (low-income households, mostly in remote rural areas, and SMEs).

The off-grid window of the FEI has a targeted fund value of USD 100 million out of which USD 17 million will be provided on concessional terms, either as junior equity (i.e. first loss capital), or as ordinary equity with capped return. In fact, it is the blended finance contributions that will enable FEI to reach a target return of 6%-8% for the ordinary equity tranche. Furthermore, the debt tranche attracts additional investment from impact investors, enabling the Fund to provide affordable working capital to its target companies in hard and local currencies, while establishing commercial viability for investors that may wish to anchor similar funds in the off-grid energy sector.

In conclusion, using the examples seen above, Blended Finance can be used across a range of structures, geographies and sectors using a range of instruments. Deals bring together different stakeholders that partner in a fund or transaction, involving a mixture of development funding and private investors. Blended Finance is provides a strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets. It enhances the impact of limited philanthropic and development resources by using those funds to tap into the trillions of dollars of private capital available in global markets. It offers promising potential as an ecosystem solution to close the development funding gap.