Blended Finance: the Spanish experience



This article was originally published by the Latin American Association of Development Finance Institutions (ALIDE).

 

The purpose of this instrument, consisting of the strategic use of development finance and non-reimbursable resources to channel private capital to developing countries, is not to reduce costs, but to make projects viable that would otherwise not receive market financing.

 

The Spanish Development Finance Institution (Cofides), as an accredited entity, is able to structure projects for financing in the form of blended finance[1] within the framework of the Latin American Investment Facility (LAIF) and the Green Climate Fund (GCF).


European Union (EU) blended finance consists of combining an EU donated component with a reimbursable component to finance projects that should be located within the geographic sphere of countries situated in regions that enjoy EU external cooperation and are in line with its priorities, contribute to the development of the recipient country, provide an additionality, and are economically, financially and technically viable and sustainable. The minimum total investment amount must also be between €8 and €10 million, and the project must have systems to control socio-environmental risks in place (Examples of EU blending are to be found in Table N°1).


Among the eligible sectors are transport, renewable energy, water and sanitation, ITC, agriculture and local private sector development. Blended finance is available to states, municipal governments, public enterprises and the private sector.

Reimbursable financing instruments can take the following forms: as 1) debt: targeting the public sector, loans to states and the private sector for productive investment, finance institutions that intermediate with MSMEs and debt securities of special-purpose entities (SPEs) that target financial inclusion; 2) capital in the form of capital and quasi-capital for productive investment by the private sector, private venture capital institutions, and SPEs that provide support for the economic fabric or for MSMEs; and 3) guarantees.


Non-reimbursable resources for this financing come from Latin American Investment Facility (LAIF) funds that are available for financing in Argentina, Bolivia, Brazil, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay, Peru and Venezuela. Funds in the case of the Caribbean Investment Facility (CIF) are to be used to favor Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, the Dominican Republic, Grenada, Guyana, Haiti, Jamaica, Saint Kitts & Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, and Trinidad y Tobago.


In granting loans for private sector projects for productive investment, aspects like the following are considered: the promoter’s commitment in the co-financing; the promoter’s capacity and experience; the project’s economic and financial viability; appropriate management of the environmental and social aspects; contribution to the development of the recipient countries; and corporate social responsibility. The financing is provided to a head company, project company or a vehicle corporation or nominee company. The financing ranges from €75 thousand to €35 million, with loan terms of from 3 to 10 years, grace periods and institutional support. Projects are financed in all sectors, except for real estate.


Insofar as financing with venture capital for private institutions is concerned, this must be provided for impact investing in companies, organizations or investment funds, with a view towards generating a social and environmental impact and producing a financial return.


A number of different criteria are also involved in venture capital investment, to wit: 1) alignment with EU geographic and sector priorities and OECD official development assistance (ODA) recipients. Sectors included in the International Finance Corporation (IFC) are excluded; 2) neither the Fund, nor any of its intermediate vehicles can be domiciled in tax havens, according to Spanish law; 3) investment in funds whose activity involves the transfer of ownership of basic social services to private hands, including water and sanitation, is excluded; 4) experience of the promoter team in similar investment vehicles. No more than two funds can be managed by the same promoter; 5) the promoter’s participation. Variable commitment in accordance with the size of the fund and the promoter’s resources, with a referential figure of 1% of the total fund resources; 6) duration and exit. Funds with preset periods or liquidity periods; 7) impact on development; 8) priority of operations that promote social, environmental and governance best practices; and 9) a ceiling on participation of 20% of the committed resources or of the Fund.


In the identification of loans to financial institutions for financial inclusion / microfinance, these must be intended to provide financial services to MSMEs or else directly through local retail finance institutions, or through those with wholesale activities; the financing is provided in dollars, euros or any other currency quoted by the European Central Bank; repayment is on a long-term basis and grace periods are always considered, there is no limit on the amount of the financing, it is adjusted to the creditworthiness and capacity of the borrowing institution; the loan interest rate is in line with the institution’s financing cost and market rates, but always complies with the percentage set by the OECD Development Assistance Committee (DAC); and the reimbursable financing must always be backed by sufficient guarantees.