Bilal, S., Krätke, F. 2013. Blending loans and grants: To blend or not to blend? (Background note prepared for the 21st EDFI & INTERACT Annual General Meeting, 23-24 May 2013, Madrid). Maastricht: ECDPM.
Blending loans and grants has become common practice in international development finance. It is one of the mechanisms regularly used with development finance institutions (DFIs) such as the Agence Française de Développement (AFD), the European Investment Bank (EIB), the Kreditanstalt fuer Wiederaufbau (KfW) and the Nordic Investment Bank (NIB).
Blending mechanisms are perceived as having the potential to not only leverage quantitative financing for development, but also to leverage qualitative development as well as enhancing the development impact and effectiveness of development cooperation.
Many of the concerns raised about blending mechanisms overlap with recurrent criticisms raised notably by civil society organisations about the operations of development finance institutions.
Blending facilities do not guarantee that grant funding introduced into them will be matched by loans, while funds be reprogrammed, this would harm the disbursement rate.
The European Union has recently put greater emphasis on the opportunities offered by blending, combining EU grant aid with non-grant resources. Since 2007, the EU has established eight loan and grant blending facilities with a view to leveraging development finance. The EU Agenda for Change, adopted by the Council in May 2012, includes a commitment to increase the share of EU aid through innovative financial instruments, including under facilities for blending grants and loans, and other risk-sharing mechanisms.
The EU Platform for Blending in External Cooperation launched in December 2012 by the EU, will first review existing blending mechanisms and develop a common framework to measure their impact.
Blending mechanisms are thus perceived as having the potential of quantitative and qualitative development, which is the basic rationale for the current approach adopted by the EU. Discussions are still on-going whether blended loans count towards official development assistance (ODA).
In considering the opportunity for blending mechanisms, the opportunities and challenges must be carefully assessed and the added value of the additional component of blending mechanism for each project clearly identified and assessed.
In assessing the merits and shortcomings of blending instruments, it is therefore necessary to focus on characteristics that are specific to blending, distinct from those that concern development finance in general by DFIs and traditional ODA. Leverage loans with grants may provide vital assistance to project preparation and implementation; but it may also entail longer and more cumbersome procedures than simply disbursing the grant aid or a loan.