This document discusses the importance of infrastructure for achieving development goals and the significant shortfall in infrastructure financing. It notes that an estimated $3-6 trillion per year is needed for infrastructure but there is currently a $3 trillion shortfall. Blended finance, which combines public and private sector funds, is proposed as a way to attract more private capital from capital markets. However, incorporating official development assistance directly into financial structures poses challenges due to its concessional nature and development objectives conflicting with private sector return expectations. The performance of blended finance innovations should be evaluated based on the amount of additional capital they attract from markets per public dollar spent.

1. Innovations in Blended Finance
for Infrastructure
What I learnt.

2. Significance of Infrastructure
• Infrastructure – the physical and structural facilities needed for the
operation of society
• These are key in a country’s pursuit of economic as well as holistic
development and in acquiring those objectives that are important to that
society
• The significance of infrastructure is evident on the basis of number of
SDGs that rely on infrastructure facility
- SDG 6: Ensure availability and sustainable management of water and
sanitation for all
- SDG 7: Ensure access to affordable, reliable, sustainable, modern energy for all
- SDG 9: Build resilient infrastructure, promote inclusive and sustainable
industrialization and foster innovation
- SDG 11: Make cities and human settlements inclusive, safe, resilient and
sustainable

4. Dimensions of Infrastructure Paradox
• Considering the importance of infrastructure in pursuit of development
objectives and SDGs, a lot of infrastructure will be need over the next 15
years.
• As per forecasts, there will be a requirement of $3 trillion - $6 trillion per
year needed for meeting infrastructure needs.
• But despite this, there is major shortfall in infrastructure financing; and
this is manifested in various forms and at different levels. These are
differing levels are referred here to as dimensions of infrastructure
paradox:
(i) Despite the vast amounts of private capital available and looking for long-term
investments on which it can acquire returns, and the large need for funds in financing
infrastructure projects - these large sums of money are not being directed into infrastructure
projects and the governments are left financing these themselves. Shortfall of $3 trillion.
(ii) Of the $400 billion of financing flows from the private sector in financing infrastructure
projects, only $50 billion are sourced from the capital markets. The rest of this as of now
come from various private sources including from bank lending. This is a paradox, due to the
need to shift towards capital markets for financing as banks are no longer able to finance
infrastructure projects due to the new regulatory environment.

5. Infastructure Paradox continued…
(iii) And considering the need for investments from the capital markets, there is a need to
segment the risk associated with infrastructure projects and distribute in such a manner that
each economic entity most capable of dealing with this risk – is assigned to deal with it by means
of capital market instruments.
But this is difficult in many developing countries around the world whose financial and capital
markets are underdeveloped and lack the sophistication needed for such distribution of risk.
-> Hence, the need for blended financial solutions.

6. Blended Financial Institutions
• To tap into the capital markets for financing the infrastructure needs, we
will need to leverage resources of the public and private sector to meet
the funding requirements
• Attributes of Blended Financing:
(i) combining public sector social objectives with private sector financial return
objectives,
(ii) mitigating risk by the public sector in a way that allows the private sector to
participate,
(iii) achieve financial returns that will enable the private sector to meet their
objectives and participate.
• Need for more innovative blended financing to overcome paradoxes and attract
capital market funds to project bonds
- How to blend ODA into project financing structure?

7. Financial Structure definition and ODA inclusion
• Financial Structure refers to the specific mixture of long-term debt and
equity that a company uses to finance its operations.
• The financial structure is a mixture that directly affects the risk and value
of the business.
• The main concern for the financial manager of the company is deciding
how much money should be borrowed and the best mixture of debt and
equity to obtain.
• The financial manager also has to find the least expensive sources of funds
for the company to use.
 Introducing ODA into this will significantly complicate matter by …
- ODA carries with it additionality parameters (concessional nature with purely
developmental objective) and complexities (risk and value considerations) into the
mix of highly sophisticated financial structures where financial participants are
demanding returns and risk adjusted returns

9. Blended Finance and guaging performance
• On the basis of the definition and objectives of blended finance, the basis
to gauge performance of blended finance innovations will to evaluate for
its multiplicative effect.
• That is for every dollar spent by MDBs, how many dollars of fund inflows
are we acquiring from capital markets?
• Considering the desire for innovative means of blended finance and need
for incorporating ODA directly into the privately funded financial structure
projects:
- The objective should be to cover the most risky category of development finance.
- Last slide: the categories of development finance are organized from the least
risky (expensive) categories to the most risky (cheap) kinds.
[Risk assessed from the lender/donor, while cost assessed from the borrower]