The Promise of Blended Finance for Sub-Saharan Africa

Clint Bartlett (MAM '17) returned to SOM to discuss blended finance and impact investing in Sub-Saharan Africa as part of SOM’s Social Impact Lab. He currently serves as an advisor to the United Nations Development Program and to the Global Resilience Partnership.

Bartlett was born in South Africa and grew up with post-apartheid inequality as the background of his youth. Bartlett saw his government’s introduction of the program of Black Economic Empowerment (BEE) as a precursor to ESG and impact investing. BEE used a data-driven approach to direct the flow of funds to organizations meeting certain social requirements, in this case, Black representation. Today, blended finance has a broadly similar ethos that encourages private sector funds to flow to emerging markets to support sustainable and inclusive development.

Bartlett summarized the relationship between the private and public sectors: the private sector is focused on maximizing returns and the public sector is interested in creating social goods, such as a stronger healthcare or education system. Creating social goods require private sector support, but without the public sector’s engagement, private firms often do not get involved. Blended finance seeks to help bridge this gap.

Consider, for example, an initiative to build schools in Kenya. In principle, the private sector is interested in building a well-educated future labor force, and there are several Kenyan businesses that run private schools. But the risk-adjusted return required by lenders may be too costly for such businesses to be able invest building new schools. To get such an initiative off the ground, a public organization such as the International Finance Corporation (IFC) can step in to provide concessional funds to improve the risk-reward profile for lenders. In this scenario, everyone wins: schools get built, lenders receive risk-adjusted returns, the IFC earns its money back, and students (who make up the future workforce) benefit from greater access to education.

However, Bartlett believes this cycle as an ongoing model is not sustainable. A blended finance project only works when organizations like the IFC offer “very cheap” money, funded by taxpayers from around the world. So a crucial role played by well-designed blended finance initiatives is to demonstrate that the overall market risk for such investments is in fact much lower than originally thought. At sufficient scale, the successful completion of projects funded through blended finance reduces the risk of investing in emerging markets by improving the overall system. For the next round of schools built in Kenya, lenders will recognize the overall lower risk of the system and finance the project with less (or no) cushion from concessional financing sources. While it is difficult to project the scale required to elicit this behavioral change from the private sector, Clint believes there is a “tipping point” at which the risk premium slides downward.

Impact measurement presents another question. The “E” (environmental) impact of ESG investments can often be accurately gauged, such as the benefits of reduced carbon emissions. Creating a comparably rigorous measure for the “S” (social) benefit can present a challenge, though one that can at times be navigated. Bartlett offered the example of a mining firm offering HIV treatment to its miners. This investment provides both a social good to the workers through better health outcomes and a financial return to the mining firm via reduced sick leave and lower turnover. At first, the mining firm might want to partner with an NGO for the intervention; over time, recognizing the positive financial outcomes may lead the firm to offer further interventions with its own capital.

In closing, Bartlett challenged the students to think about what the next innovations could be in deploying capital for social good.