Blending: The new buzzword at EU’s ‘Davos of Development’

Xavier Michon [MattTempest/Flickr]

‘Blending’ – a form of pump-priming private sector investment, by leveraging it onto public official development aid – seems to be the new buzzword at this year’s EU Development Days, according to the UN’s Xavier Michon.

Xavier Michon is deputy executive of the United Nations Capital Development Fund.

Michon explained the policy to euractiv.com’s Matthew Tempest.

I sat through this morning’s debate on ‘new financing models for a new development agenda’, and it seems there’s always a lot of buzzwords in the development sector, and this year’s seems to be ‘blending finance’. Can you explain what it is, in layman’s terms?

When we talk about innovative financial instruments, it’s not that new, actually. It’s becoming a buzzword because of the Sustainable Development Goals (SDGs) and the conference for financing in development in Addis Ababa, it’s becoming a buzzword.

But the ‘diaspora bonds’ were launched by Ethiopia about six years ago, and were pretty successful, and these were innovative financial instruments.

‘Blending’ is basically combining grants, with non-grants instruments – which are loans and guarantees, basically.  We try to create a space, or develop finance initiatives, or a combination of the two, where there is a need for technical assistance, and grants.

Because at that stage, you’re trying to incubate something. And on the horizon, to scale it.

Once this initiative matures, with a ‘proof of concept’, it could be economic activities, no matter what the sponsors are, it has the capacity to move to the next stage.

We have several projects where we support entrepreneurs, with public-private initiatives, where they have a good idea, they have done a preliminary investment, but maybe what they are missing is fine-tuning the management capacity, an environmental study, and they need to reach the next level, where the local banks, applying their own criteria and risk-analysis, saying this is a soluble partner and stable economic activity.

Got it. I’m not an economist, but one of the criticisms from a member of the audience was that if you’re mixing public sector money and private investment, the danger is the public sector takes the risk, and the private sector walks away with the profits.

You have a good point. First of all, that dialogue, and those issues, are coming out now. That’s extremely positive.

Secondly, in the past, the public institutions said ‘the private sector is bad, we don’t talk to them’. Now we start from something very concrete – ODA (official development aid) versus private investment – whether it’s Foreign Direct Investment, philanthropy or remittances. ODA is only one fifth as big, and the gap is getting larger by the day.

So how do you make sure private resources have an element of leveraging? It’s not just that the public sector is preparing the ground for the private sector. When the UNCDF selects a program, they have to be within the local development plans. They have to have a vocation, they are not commercial projects with an immediate high return, they are 5-10 years, with lower returns, and it has to have a transformative element.

It has to have some element in terms of gender inequality, it has to have a benefit to the society locally.  So it’s not just ‘here it is!’ There are criteria for selecting, and these are companies that are engaging in the longer term, gets a certain sensibility and awareness that this is not making a quick buck and getting out. This is investment.

And I think the private sector realise that. They realise economic growth is today in developing countries. And forecasters say developing countries will drive the global economy in the next 50 years. So it’s an issue of positioning themselves, laying the foundations.

So it’s not black-and-white, and the world is not black-and-white.

Sure, it’s not ‘either-or’. But even if you can solve the problem of privatising the profits and public sector liability for the risks, there was another question from the audience that was very good: ‘if the profits are flowing back to developed, rich world corporations, you’re ultimately increasing the problem of inequality’?

A very interesting point. First of all, economic risk is always there. Maybe the level of risk, but it’s not the public sector says ‘here, we’ve done the risk, take it’. That’s a simplistic approach.

What we see in our relationship is public-private. We are working in Tanzania with nuns, in a private sector, project but there is private for profit, and non-profit private. It’s a broad sector. And they submitted to us with a proposal to set up a hydro plant, through a competitive process.

The immediate effects, in bringing energy to the community, is a no-brainer. And this was a private initiative, with a costing model that was suitable for the realities. That requires long-term investment.

We’re supporting a bus station and a market in Tanzania, a main transport intersection where all the buses come. In the past you had an empty lot, with buses everywhere, improvised stands. There no generation of revenue from taxes. Now we’re there, connecting the dots.

Another question from the audience, who asked some very good questions at Development Days. There was EU Commissioner Jyrki Katainen, Vice-President for Jobs and Growth on the panel, who said in official development aid, when the EU gave €3 billion, and the member states €3 billion, the private sector could leverage to a factor of 10, giving you €60 billion. But then someone pointed out that no one on the panel had mentioned tax avoidance or tax justice, which the IMF reckons accounts for $200 billion a year, and others many multiples of that. That is many times over the total ODA…

It’s an issue of inequality also. I don’t know if it was just a slippage or we were just concentrating on delivering our specific messages – although the OECD panellist mentioned it.

One of the effects of the financial crisis is governments trying to expand the tax base and reduce evasion and tackling fiscal havens and supporting developing countries.

I was personally in one African country, and the biggest programme of international cooperation (putting aside electoral assistance) was the support to the tax authorities, to create a tax base.

What you create also is citizenship, with taxation. It creates an element of belonging, participating, and you have both the benefits and responsibilities of being a citizen. And the revenue must also be invested in a transparent way – these are virtuous circles that fit into each other.

But we at the UNCDF are not really on the tax side.

No, sure I understand that.

But we’re trying to look at creating mechanisms with local development actors which implicitly generate a tax base, and that’s conducive to development in the long run.

A lot of the talk on stage was in abstract terms and jargon, but you mentioned UNCDF’s work in Burkino Faso. What is that?

We work with segments of the population where the resources are not there, where development is not there, in areas outside of the capitals, rural areas where nobody goes, that are the most vulnerable – women facing inequality, youth without possibilities, health factors and education, and we sponsor financial inclusion.

We’re trying to see how finance works for the poor. In concrete terms, by involving the poor in protecting their own savings – instead of literally having it under their mattress. Same problem in Burundi – a local economy that is cash-based. Even micro-, medium- enterprises and of course, the household, all cash.

That’s a vulnerability – the resource can evaporate. And they’re not generating any interest. The culture of saving is very important and empowers the individual.

In Burkino Faso, we supported financial service providers, and micro-credit institutions, to develop products just for youth. Saving products. They develop a little pot of money, and use it and invest it. And that’s before even extending credit. And with that, comes financial education. The discipline of saving every month. It’s a projection into the future. They become micro-entrepreneurs.

And what do they say back to us? The complain: ‘Why didn’t you bring this years ago?’