This session will cover principles of blended finance, which will enable participants to understand a variety of financing options for their project concepts. This session will also focus on how blended finance projects are typically structured. Participants will be able to identify different financing instruments that could potentially be mobilized to fund a project to ensure efficiency and sustainability. o OBJECTIVE 1: Participants will understand the type and characteristics of different funding instruments and their benefit-cost requirements o OBJECTIVE 2: Participants will demonstrate how each instrument can be utilized to address specific risks of a particular project.

1. Blended Finance

2. Outline
• Understanding characteristics of different funding
instruments and their sources as well as the
accompanying requirements of each
• Understand how different funding instrument can
be used to addressed a certain risk
• How to mobilize and structure different funding
instruments to achieve sustainable outcome
• Exercise: Financing options for a sample project

3. Blended Finance Defined
Blended Finance refers to flows combining
– market (or concessional) loans and other financial
instruments with
– accompanying grant (or grant equivalent)
components
• The scope is to leverage additional non-
concessional public and/or private resources
with different financial terms and
characteristics.
Source: Adopted from Evidence on Demand, 2014, TOPIC GUIDE: Blended Finance for Infrastructure and Low-Carbon Development, Oversea Development Institut
http://www.evidenceondemand.info/topic-guide-blended-finance-for-infrastructure-and-low-carbon-development-full-report

4. Basic Characteristics of Financial
Instruments
Debt Instruments (Loan and bond)
• Repayment is required in fixed schedule with
different cost according to the risk profile of
the borrower
• Usually a guarantee is required to minimize
default risk of borrower
• Debt is normally less than total project cost
to ensure ownership of the borrower and
increase incentive to complete the project
• Debt size is up to the repayment ability of
the borrower and capital of the lender
• Debt maturity period should match with the
project life and cash-flow for repayment
Grant
• Grant normally does not require repayment
however, it could be made based on certain
criteria (output-based-aid)
• Guarantee is not required
• Counterpart funding (in-kind and in-cash) is
usually required to ensure ownership of the
project proponent
• Grant size is usually small as no repayment is
needed
• Grant financed project is usually short-term
as the size of fund is small
Partial Risk Guarantee*
• Partial Risk Guarantees cover private lenders,
or investors through shareholder loans,
against the risk of a government (or
government-owned entity) failing to perform
its contractual obligations with respect to a
private project.
*World Bank Guarantee Products: IBRD Partial Risk Guarantee (PRG)
http://siteresources.worldbank.org/INTGUARANTEES/Resources/IBRD_PRG.pdf
Equity
• Funds provided by a private firm’s owners
(investors and stockholders/shareholders)
that are repaid subject to the firm’s
performance
• The investors normally have only expectation
to be repaid.
Reference: Gitman, Lawrence J. and Chad J. Zutter, 2015, Principles
of Managerial Finance, 14th Eds., Pearson

5. Example of Blended Finance
Global
Environment
Facility (GEF)
Multilateral
Fund (MLF)
Made
Grant
Available
through
MDB
MDB Local FI
Made
concessional
fund (0%
interest)
Available to
Local FI
Facility
Owner
Made loan available
only to purchase a
qualified chiller but
charged only
management fee
Upgrade
chiller
Used loan
proceeds to
upgrade chiller
and auxiliary
system
Chiller
Supplier
Supplier
guaranteed
energy
efficiency level
Loan repayment
calculated from
energy savings
i.e., lower
electricity bill
Local FI repaid
concession fund
within 3 years
Global Benefits
Reduced GHG
Reduced ODS
Source: Implementation Completion Report, 2006, Thailand Building Chiller Replacement Project, the World Bank
http://documents.worldbank.org/curated/en/101781468132276470/Thailand-Building-Chiller-Replacement-Project
Local Benefits
• Leverage private capital
• Create market for
replacing old chillers
• Enhanced competitiveness
of facility owners

6. • Facility owner is reluctant to change their old inefficient chiller because
– High upfront cost
– High cost of borrowing
– The new chiller may not provide sufficient savings (i.e., returns on investment
may not be justifiable)
• Grant was used to
– structure the business model, project management, monitoring and
evaluation and
– buy down the cost of borrowing
• Loan was used reduce high upfront investment cost
• Equity was required as the loan only cover the purchase of the chiller. The
facility owner had to finance other required auxiliary equipment and
related services.
• Guarantee was provided as a part of the package from qualified suppliers
to ensure sufficient fund for loan repayment
How different risk can be addressed by
different financial instrument

7. Project Cash Flow and Risk Profile of a
Typical Project
(8,000,000)
(6,000,000)
(4,000,000)
(2,000,000)
-
2,000,000
4,000,000
6,000,000
8,000,000
0 1 2 3 4 5 6 7 8 9 10 11 12 13
USD
Year
Pre-FS Detail Design and Development
Financial and Legal Arrangement Construc on
Commissioning Opera on and Maintenance
Major Overhual Revenue from tariff
Risk Profile along the project cycle
LevelofRisk

8. Exercise:
How can we use blended finance to improve the outcome of a typical
irrigation project?
• Project: Deliver water for irrigation to increase resilient of smallholder
farmer to cope with prolonged drought due to climate change
• Traditional Solution: The government invests in building a reservoir and
water distribution system.
• Typical Challenges:
– The government lacks adequate operation and maintenance expenses to
maintain the asset as there is no revenue.
– Since, the water is free, it is likely that its usage would not be optimized.
– The system fails to deliver sufficient water to farmers.
– The farmers lack new skills, know-how, financial and market access to
maximize the benefit of water during the dry-spell within the rainy season and
dry season.
• Typical Outcome: Famers’ income and livelihood increase for a short
period of time and then fall back to the level before the project when the
irrigation system fails to deliver the water.

9. Example of Risk Allocation in
PPP Arrangement
Source: Cities Development Initiative for Asia (CDIA), 2010, CDIA PPP Guides for Municipalities
http://cdia.asia/wp-content/uploads/2014/09/PPP-guide-for-municipalities.pdf

10. Basic Distinction between
Public and Private Goods
Divisibility of Benefits
Yes No
Rivalry of
Consumption
Yes
Private Goods Common-pool
Resources
No
Club Goods Public Goods
Mobile Phone
Car
Clothing
Food
Fish Stock
Timber
Grass Land
Satellite TV
Cinema
Private Park
National
Defense
Public Area
Cleansing

11. Basic Decision Tool to
Identify PPP Potential
Source: Cities Development Initiative for Asia (CDIA), 2010, CDIA PPP Guides for Municipalities
http://cdia.asia/wp-content/uploads/2014/09/PPP-guide-for-municipalities.pdf
What If, the investment
can save public
expenditures?
What if, the
investment can be
done cheaper by
the private party?

12. Guiding Questions for the Excercise
• What risk should be managed by which party?
– Government
– Private Party
– Financial Intermediary (National and International)
– Development Partner (National and International)
• What financing sources are available?
– Government Budget
– Grant (e.g., GEF, GCF, Adaptation Fund, Philanthropic Entity,
bilateral and multilateral organization, …)
– Debt (National and International FI)
– Equity ((National and International Firm)
• How and when each financing source should be used
during the project cycle?