Blended finance driving capital to emerging markets

THE Indonesian and Malaysian governments, and the recently established Singapore Sustainable Finance Association, have made blended finance a key priority, recognising its potential as a powerful tool to unlock development finance across the region.

Developing nations, including Indonesia, contribute half of global gross domestic product, yet only attract a fraction of the US$220 trillion of global capital due to high perceived risks and other market inefficiencies. Blended finance offers a template for how emerging economies can attract investment without compromising on growth or sustainability.

Despite its potential, there remains a shortage of execution of such structures, leaving many key projects in emerging markets underfunded.

Governments and authorities can play a key role in creating awareness and advocacy of the value of blended finance. If they focus on developing and executing blended finance structures, they can support the adoption through involvement in various investment initiatives within Asean nations.

Blended finance is like a symphony, where diverse instruments – public funds, philanthropic contributions and private investment – create harmony and impact. This in turn attracts additional players, drawn to transformative projects that may not otherwise meet their risk-return appetite.

Fundamentally, blended finance is the strategic use of catalytic capital from public or philanthropic sources to catalyse private sector investment in developing countries, aiming for societal impact and commercial returns.

This approach is crucial in regions like Asean, where such financial structuring can help mitigate key investment risks.

Blended finance has three key characteristics – leverage, impact and return.

Leverage is essential, providing the catalyst for the private sector to invest. Impact reflects the meaningful progress delivered by these investments in developing countries, aligned with the United Nations’ Sustainable Development Goals. Finally, return is critical, ensuring that these ventures meet the financial benchmarks of the private sector, harmonising development with economic viability.

Blended finance also offers a remedy to the perception of risk investors may have about developing markets, by creating structural solutions to tackle asymmetries in investors’ risk-return spectrums.

It can help shift risks and make risk-adjusted returns more acceptable, with public investors and donors focusing on improving creditworthiness, limiting downside loss exposure, insuring against unforeseen events and supporting project development, among other things.

A notable example is the Energy Transition Mechanism – an initiative signed at COP28 in Dubai, aimed at accelerating the transition from fossil fuels by retiring coal power assets earlier than planned. It demonstrates the collaborative efforts of stakeholders, including government agencies and international financiers, showcasing the vital role of concessionary finance in facilitating such transformative projects.

Investment and co-investment opportunities in transport and logistics infrastructure, digitalisation and digital infrastructure, healthcare, and renewable energy and transformation are all tailor-made for blended finance.

For infrastructure investments, which typically have longer project timelines, commercial viability may take decades. This makes infrastructure projects, such as toll roads and seaports, prime targets to deploy blended finance across their long project life cycles.

By 2040, Indonesia aims to be among the top 10 global economies and Asean is predicted to become a global economic power. Achieving this will require not only capital, but innovation in how capital is structured and deployed.

As global economic dynamics evolve, the strategic use of blended finance can and should play a critical role in transitioning, not only Indonesia, but other emerging markets from potential to prosperity.

The writer is chief financial officer of the Indonesia Investment Authority, the sovereign wealth fund of Indonesia