According to Principle 2, development finance in blended finance should facilitate the unlocking of commercial finance to optimise total financing directed towards development impacts.
OECD DAC Blended Finance Guidance 2025
Abstract
Subprinciple 2.A. Ensure additionality for crowding in commercial finance.
Ensure additionality is core to all blended finance operations.
Blended finance interventions should strive to have the highest standard of additionality at both the transaction level and the systemic level.
Ensure that additionality is assessed, documented and publicly disclosed.
Encourage a more harmonised approach to interpreting and assessing additionality in blended finance.
Additionality assessments and assumptions should be evaluated to enable continuous learning.
Subprinciple 2.B. Seek leverage based on context and conditions.
Anchor the design of blended finance transactions in the specific development objective taking context-specific drivers into account.
For scale mobilisation, select effective instruments and mechanisms, for example securitisation, guarantees, structured funds and bonds. For smaller scale opportunities, effective instruments include funds, risk sharing and liquidity facilities, guarantees, equity and technical assistance.
Subprinciple 2.C. Deploy blended finance to address market failures while minimising the use of concessionality.
Use financial modelling combined with competitive processes (such as tender processes, calls for proposals and open access programmes) to establish a minimum level of concessionality.
Identify market failures, analyse the drivers of concessionality and choose the right instrument.
Make concessional finance available to all implementing entities at equal terms, for example by using open tenders or pooling concessional funds across donor agencies to enhance equal treatment.
Co-ordinate and, where possible, harmonise on reporting of concessionality in a transparent manner including for implementing partners; agree on a set of standardised key parameters as part of this and make levels of concessionality of individual investments publicly available.
Subprinciple 2.D. Focus on commercial sustainability
Combine blended finance with support to underlying market fundamentals through accompanying policy and regulatory reforms.
Incorporate exit strategies into blended finance, both at the level of the transaction and at market level and reduce concessional blended finance gradually with increased commercial sustainability.
Significant developments have taken place since 2020 around the key concepts of Principle 2: additionality, mobilisation, minimum concessionality and commercial sustainability.
Additionality
Establishing additionality, particularly financial additionality, in blended finance has proven challenging. No single interpretation or assessment methodology has been agreed upon and an international debate is ongoing about what exactly constitutes additionality and how to assess it.
Since the first edition of the Guidance in 2020, a range of multilateral development bank/development finance institution (MDB/DFI) annual reports, evaluations and research activities for assessing additionality have been produced that illustrate the challenges around interpreting, assessing and establishing additionality (MDB Group, 2018[1]; MDBs/DFIs, 2024[2]; OECD, 2021[3]; DFI Working Group, 2023[4]; Norad, 2024[5]; EBRD, 2025[6]; Publish What You Fund, 2025[7]). The challenges include a:
Lack of harmonised definitions/interpretation of additionality across development finance providers. This may lead to limited comparability due to, for example, different assessments of the same project, and it may challenge the verification of additionality claims across DFIs.
Lack of harmonised assessment methodologies and metrics. This may lead to inconsistent benchmarking and evaluation of additionality in blended finance projects.
Lack of data. Relevant data for the assessment of additionality are often either unavailable, outdated or incomplete. This may lead to weak assessments, or assessments that rely on assumptions or proxy indicators rather than evidence. It may also lead to inconsistent monitoring of outcomes.
Lack of transparency. While providers assess additionality internally using proprietary tools and assessment frameworks, they almost never disclose the details behind the assessments. This may lead to reduced accountability and stakeholder trust as it becomes difficult to verify whether blended finance mechanisms are truly catalytic. Lack of transparency may also prevent learning and replication of successful models.1
The evidence also indicates that establishing financial additionality in contexts with more developed markets (e.g. middle-income countries) is relatively more challenging, highlighting an increased risk of crowding out private investments in these markets.
A range of new frameworks and methodologies for assessing additionality have recently been developed and good practice is emerging around both methodologies and documentation of additionality assessment. This is rooted in the mandate, principles and core frameworks of most MDBs, DFIs and other providers of development finance. Evidence (EBRD, 2025[6]; OECD, 2024[8]; OECD, 2024[9]) indicates how additionality is a key concern across DFIs and MDBs and is incorporated into their business model and due diligence processes. They typically include financial and value additionality in their assessment of investments and often use internal scoring systems that draw on both quantitative and qualitative indicators. Selected case studies on additionality assessment frameworks are provided in Chapter 6.
In 2024 the Development Assistance Committee (DAC) agreed on a new set of reporting methods for private sector instruments (PSI) that include a streamlined definition of additionality. DAC statistics distinguish between three types of additionality: financial, value and development additionality (OECD, 2024[10]). For a PSI to be ODA-eligible, it must be additional financially or in value, together with its development additionality. The updated Guidance below addresses the challenges and reflects the streamlined definition of additionality used by the OECD DAC.
Mobilisation
Mobilisation of private finance has taken centre stage in the international discussion on financing for development. Since the launch of the SDGs and the Paris Agreement in 2015, most United Nations, G7, G20 and COP high-level communiques and statements2 have emphasised the need to mobilise private investment in developing countries and have called for more action. However, despite this, private investment mobilisation by official development finance interventions has remained relatively low.
OECD figures on private finance mobilised by official development finance increased from 2012 to 2018, however levelling out at around USD 50 billion from 2018 to 2021. In 2022 and 2023, the amount increased to USD 62 billion and USD 70 billion, respectively (OECD, 2024[11]). During the last six years the average annual increase in private finance mobilised was USD 3.35 billion, and during the last two years it was USD 11.5 billion per year. Among the leveraging mechanisms included in the OECD mobilisation data, the three that mobilised the most private finance on average during the four-year period from 2020 to 2023 were direct investment in companies/special purpose vehicles (29%), guarantees (23%) and syndicated loans (19%). These were followed by shares in collective investment vehicles (CIVs) (13%), credit lines (11%) and simple co-financing (5%) (OECD, 2024[11]). The majority of the increase since 2012 is due to MDBs, raising mobilisation from USD 9 billion in 2012 to USD 53 billion in 2023 (a six-fold increase), whereas DAC countries increased mobilisation from USD 6 billion in 2012 to USD 15 billion in 2023 (a 2.5‑fold increase). Mobilisation by DAC countries has shown a notable flat trend since 2019.
The total increases in private finance mobilised during the last 12 years are incremental and even if the trend of the latest two-year period (2022-23) continues, using the leveraging mechanisms included in the OECD data will not deliver any significant contribution to meeting the SDG financing needs which stands at USD 3.9 trillion per year (OECD, 2022[12]). Recent OECD analysis indicates that the SDG financing needs could reach USD 6.4 trillion by 2030 (OECD, 2025[13]).
Notes: DAC: Development Assistance Committee; MDB: multilateral development bank. Official development assistance (ODA), other official flows (OOF) and private sector instruments are covered by official development interventions which capture all activities extended by providers in support of development, concessional and non-concessional, as well as in the form of contingent liabilities such as guarantees/insurance. Two United Nations agencies, the International Fund for Agricultural Development and the United Nations Capital Development Fund are not counted within MDB grouping, while all other ‘multilateral institutions’ within the Creditor Reporting System database are.
The limited mobilisation figures reflect a broader challenge of how to scale the mobilisation of private finance via blended finance. To address this challenge, the development finance community is increasingly focusing on instruments and structures that can produce assets investible for a wider market of institutional investors or are able to mobilise private finance at scale. Examples of such instruments and structures that have been highlighted in the international debate include securitisation, guarantees, structured funds and bonds, for example (BII, 2025[14]) (Convergence, 2025[15]) (MOBILIST, 2023[16]).3 It is worth noting that not all of these are blended finance instruments and structures per se, but their deployment or issuance can be facilitated via blended finance approaches. It is also worth noting that several of these instruments and structures are not captured via the existing OECD mobilisation methodology and therefore are not represented in the mobilisation data referenced above.4
Securitisation
Securitisation refers to the conversion of an asset, especially a loan (or a basket thereof), into marketable securities, typically for the purpose of raising cash (and/or transferring risk) by selling them to other investors. Securitisation can transform a diversified pool of underlying assets into securities that can be listed and traded, issued with credit ratings that meet a range of investors’ risk-return preferences. Investors who buy these securities receive payments from the underlying assets, while the capital freed up by the originator of the loans or receivables can be recycled into new projects and loans (MOBILIST, 2023[16]; OECD, 2018[17]).
An alternative model referred to as “synthetic” securitisation sees the originator (often banks) transfer a tranche of the credit risk from a pool of assets (loans) to investors without selling these assets. This can be a more efficient solution when originators want to maintain ongoing relationships with borrowers, diversify risk exposure or achieve better pricing by structuring tranches tailored to different investor risk appetites. Since this approach does not systematically result in the creation of marketable securities, it is also described as synthetic risk transfer (SRT).
The use of securitisation and SRT has increased in recent years with some MDBs and a few donors leading the way and using securitisation and SRT models to both recycle capital faster and mobilise private capital. The G20 Independent Review of the MDB’s Capital Adequacy Framework encouraged MDBs to use innovative structures, and several MDBs are now responding and considering or actively developing securitisation structures (OECD, 2023[18]; G20-IEG, 2023[19]). Examples of both SRT and true sale securitisation include:
The original African Development Bank’s Room2Run transaction in 2018.
Bayfront Infrastructure Management’s fourth Infrastructure Asset Backed Securities (IABS) transaction which was supported in 2023 by the UK Foreign, Commonwealth & Development Office’s MOBILIST’s pioneering equity participation.
The Inter-American Development Bank’s Invest’s Scaling4Impact in 2024.
The 2025 West Africa Development Bank securitisation programme providing finance to small and medium-sized enterprises.
A multi-originator synthetic securitisation platform was agreed in 2024 and is being established in a collaboration between the African Development Bank, the Development Bank of Southern Africa and institutional investors as a revolving vehicle to de-risk the balance sheets of DFIs operating in Africa, while providing attractive investment returns for private sector participants. In addition, the International Finance Corporation (IFC) is understood to be working on a Warehouse Enabled Securitisation Program (IFC, 2024[20]).5 Selected case studies on SRTs and securitisation transactions are provided in Chapter 6.
Market precedents thus demonstrate innovation and growing momentum. Development finance actors are executing and proposing transactions at meaningful scale, and private sector supply of (and demand for) sustainable securitisations is growing. This provides opportunities for donors and other providers of development finance to use the modality to scale up the mobilisation of private finance.
Guarantees
Guarantees have proven to be one of the most efficient financial instruments from a cost, capital efficiency and mobilisation perspective given their high leverage factor.6 They can mobilise five times more than loans (Carolien van Marwijk Kooij, Jesse Hoffman and Jeroen Huisman, 2023[21]). Private finance mobilised in 2023 via guarantees was USD 17 billion, only surpassed by syndicated loans, which stood at USD 19 billion (OECD, 2024[11]). A 2025 study reconfirms how guarantees are among the most powerful tools for mobilising private capital, particularly unfunded guarantees which are ideal in fiscally constrained environments (CGD and Lion's Head, 2025[22]).
The interest in using guarantees as a risk mitigating instrument to mobilise private finance has increased since 2020, against the backdrop of several developments:
Importantly, the OECD DAC reform of PSI agreed in 2023 included guarantees as an ODA-eligible instrument, and the PSI reform paved the way for new donors to look at the possible use of guarantees.
Several new bilateral donors have established guarantee schemes since 2020 including Czechia, Denmark and Norway, and others are exploring it (e.g. Germany).
A range of multilateral institutions have either moved into guarantees or increased the use of them; these include EU-EFSD+ and the World Bank Guarantee Platform hosted by the Multilateral Investment Guarantee Agency.
New guarantee institutions and platforms have been set up, e.g. the Green Guarantee Company, and new networks on developing guarantees have been established, e.g. the Green Guarantee Group. Both small and large-scale guarantees have been tested and used, from providing access to finance for SMEs in Africa via smaller guarantees to financial institutions’ lending, to very large guarantee models that have mobilised billions of USD.
More collaboration on guarantees has taken place, both among donors (e.g. the Investment Mobilisation Collaboration Alliance) and among MDBs/DFIs (e.g. the Innovative Finance Facility for Climate in Asia and the Pacific).
Lastly, a range of analytical work of guarantees has been undertaken (OECD, 2021[23]; CPI, 2024[24]).
Guarantees can be used for portfolios (such as SME loan portfolios) and/or at the transaction/project level (e.g. infrastructure public-private partnerships where individual project sizes are significantly larger). Selected case studies on guarantees are provided in Chapter 6.
Despite the increased interest in guarantees, there is still limited availability of guarantees, particularly for higher risk countries such as fragile and conflict-affected situations and low-income countries (LICs). For example, the Multilateral Investment Guarantee Agency only provides guarantees for countries rated BB- and above. Guarantees covering risks such as liquidity and foreign exchange (FX) risk are also still in limited supply (CGD and Lion's Head, 2025[22]). In addition, research has indicated that the use of guarantees may be limited by financial regulations such as Basel III and Solvency II that affect how financial institutions perceive, value and use guarantees, particularly in high-risk markets.7
Structured funds
Structured funds have shown to be well-positioned private finance mobilisation instruments both upstream in developed markets, for example when pension funds invest in structured funds, and downstream through concrete transactions on the ground in emerging markets and developing economies (EMDEs). Funds can be structured in different ways, either with a flat structure where all investors share the same risk-return profile (pari passu) or in a layered structure that allocates risks and returns differently across different investor classes. This flexibility allows structured funds to blend development and commercial resources while mobilising additional financing at both the fund and project levels (Dembele, 2022[25]).
The use of structured funds, including private equity, private debt and fixed income asset classes, has increased in recent years:
Convergence’s Historical Deals Database has captured approximately 113 blended finance structured funds from 2014-2023 (Convergence, 2024[26]). In 2014, aggregate financing within captured structured funds stood at just over USD 612 million, while in 2023, aggregate financing within captured structured funds stood at nearly USD 2.2 billion, over a 260% increase (Convergence, 2024[26]).
Similarly, the assets under management (AUM) captured by the latest OECD 2020 Blended Finance Funds and Facilities Survey have steadily increased since 2017 (Dembele, 2022[25]). The 2020 survey captures 198 collective investment vehicles (CIVs) with USD 75 billion under management, where the value of these AUM represents an increase of 24% over the 2018 survey (USD 60.2 billion) and a 152% increase over the 2017 survey (USD 29.6 billion). However, the 2020 survey analysis reveals that private commercial investors contribute less than 6% of the total capital in CIVs, despite the fact that blended finance funds are essential structures for blended finance flows (Dembele, 2022[25]). This underscores the critical need to mobilise more private finance at scale.
Yet, for structured funds to be able to mobilise institutional investors at scale requires more standardised structures that produce assets readily investible by investors (see the Guidance section below). Selected case studies on structured funds are provided in Chapter 6.
Debt instruments
Debt instruments, such as green, social, sustainability and sustainability-linked (GSSS) bonds, can mobilise private capital at scale. Within the global bond market, GSSS bonds have gained traction and importance due to their ability to link scale and their long-term duration and impact. 2024 was the GSSS bond market’s second-best year to date, with issuances reaching EUR 878 billion (LuxSE, 2024[27]). However, issuances are currently not occurring in the countries or regions with the greatest financing needs. In 2022, only 13% of the overall GSS bond market (dropping to 5% when not including the People’s Republic of China) and 5% of the overall sustainability-linked bond (SLB) market came from issuers in developing countries (OECD, 2023[28]; OECD, 2024[29]). At the same time, GSSS bonds only represent 5% of annual emerging market bond issuance – suggesting there is room for these countries to increase issuances of these instruments (IFC-Amundi, 2024[30]).
In recognition of the potential of these instruments for developing countries, recent years have seen donors provide different types of support to the issuance of GSSS bonds and to local capital market development more broadly. This can range from directly investing in issuances through anchor investments, providing credit enhancement to reduce risks or providing technical assistance to create a more issuance-ready and investment-friendly market infrastructure. Selected case studies on bonds are provided in Chapter 6.
When contemplating debt instruments, it is important to consider the broader macroeconomic context to ensure that these instruments are appropriately and effectively used. In 25 developing countries, debt servicing costs account for more than a fifth of tax revenue, while about 40% of EMDE outstanding debt will mature by 2027 (OECD, 2025[13]) (OECD, 2025[31]). Debt-servicing costs consume money that could otherwise be spent on the SDGs including education and health. In response, debt swaps have been used to refinance debt, reduce debt service costs and redirect the debt savings to development objectives such as nature restoration and climate (WB, IMF, 2024[32]). In 2024, swaps took place in Bahamas, Barbados, Belize, Côte d’Ivoire, Ecuador, El Salvador and Gabon unlocking USD 1.7 billion of financing over time (FinDevLab, 2025[33]). It is estimated that debt-for-nature swaps could redirect USD 100 billion of debt towards climate and nature in developing countries (OECD, 2025[13]). Furthermore, these instruments can mobilise private finance by restructuring debt into bonds that can be bought by investors. The Guidance messages below advice further on how these debt instruments (GSSS bonds and debt-for-X) can be used to scale the mobilisation of private finance through blended finance.
Minimum concessionality
Concessionality reflects the degree to which the terms offered by development finance providers are more favourable than market conditions; concessionality is thus a subsidy provided to the commercial investor(s) in blended finance transactions. According to Subprinciple 2.C, blended finance should be deployed to address market failures while minimising the use of concessionality. Concessional finance should be used to overcome market failures and enable crowding in commercial finance, and the principle of minimum concessionality is meant to avoid undue subsidies to the private sector in blended finance transactions. Concessionality can create a direct distortion by subsiding otherwise unproductive/unsustainable businesses, with the associated risks of rent-seeking, and an indirect distortion by the signal that the very presence of concessionality sends to market participants, i.e. that the assets - and even whole markets - are sub-commercial (the other side of positive demonstration effects).
Determining the exact amount of concessionality needed to unlock commercial investment while not over-subsidising has proven to be a complex exercise and is one of the key unresolved challenges in blended finance. Concessionality is context-specific; it is driven by the choice of financial instrument, the risk-return profile associated with the sector and geography in question, the project cycle and the degree of market maturity. All these drivers need to be considered, as does the availability of relevant data.
Research has illustrated how complex the problem is. For example, the Center for Global Development (2020[34]) emphasises that when a subsidy is in the form of concessional capital, persuading project sponsors to participate in a process designed to minimise the concession (maximise their cost of capital) is a tricky proposition. Gregory (2025[35]) also emphasises how MDBs and DFIs have been wrestling with how to set the appropriate level of concessionality to achieve their development objectives, while respecting the principle of minimum concessionality.
Evidence indicates that in practice, different providers of development finance use a range of different financial modelling approaches in combination with competitive processes to approximate the level of concessionality needed to crowd in the private sector. Financial modelling includes expected loss models and benchmarking data from comparable industries, sectors and geographies. Market mechanisms include tendering processes and auctions whereby multiple bidders compete for support based on minimum concessionality, as well as open access programmes which make concessionality available to investors who can meet predefined criteria for the outcomes they will deliver with the concessionality (IFC, 2021[36]). Several MDBs and DFIs are also increasing their use of performance-based mechanisms which link the payment of a subsidy to the achievement of impact outcomes (Gregory, 2025[35]).8
An example of the use of tender processes is the Investment Mobilisation Collaboration Alliance (IMCA), an alliance of several donors that have come together and use joint competitive tender processes to obtain the best offers from the market. Another practical example of determining minimum level of concessionality is Aceli Africa, which reviewed the historical loan portfolio of financial institutions and non-bank financial institutions to identify the profitability gap against other, less impact-oriented sectors. These were then used to calibrate the minimum level of concessionality (Aceli Africa, 2025[37]) (both IMCA and Aceli Africa are included as case studies in Chapter 6).
In some cases the level of concessionality can be significantly high. In a study by ISF Advisors analysing the historical use of concessional capital across 18 investment funds in sub‑Saharan Africa with significant exposure to agri-SMEs, concessionality used to address senior private investors’ risk perception was found to exceed expected losses by 15-20 times (ISF Advisors, 2025[38]).
Commercial sustainability
Ensuring commercial sustainability is linked to successful exit leaving investee companies or projects financially viable on market terms without the need for further concessional or non-concessional development finance. Commercial sustainability implies financially sustainable transaction structuring (where blending can enhance bankability through, for example, viability gap funding) and ensuring that blended finance takes place in a commercially sustainable enabling environment (through, for example, technical assistance), as blended finance cannot substitute for an enabling environment at the transaction level.
Evidence since 2020 has shown how successful exits of blended finance can be challenging, especially in more risky countries and markets where lack of commercial investor interest, persistent market failures and unforeseen risks can make sustainable private sector participation difficult. Evidence (IMF, 2021[39]; MOBILIST, 2021[40]; OECD, 2019[41]; CSIS, 2024[42]) points to a range of such challenges:
Limited liquidity and underdeveloped exit markets. In most EMDEs there is a scarcity of active secondary markets or established exit mechanisms, such as initial public offerings or strategic acquisitions. This is compounded by limited local investor participation and it makes it challenging for investors to realise returns or divest their assets efficiently.
Complex and bespoke deal structures. Blended finance transactions often involve bespoke structures that combines various forms of capital (e.g. grants, concessional loans, guarantees, equity investment). The complex structures can make it difficult to align incentives among stakeholders and this can create challenges in standardising terms which are essential for facilitating exits.
Currency risk. Only a limited part of MDB/DFI assets are held in local currency,9 and this creates a mismatch with the risk appetite and/or capabilities of local investors. The dominance of hard currency assets thus limits the pool of potential investors and reduces the potential for south-south exits where, for example, African DFIs might look to exit to African institutional investors.
Regulatory constraints and legal uncertainties. Foreign ownership restrictions, limitations on repatriation of capital and issues with contract enforcement can pose substantial risk to investors considering exit and may require additional due diligence and risk mitigation on their part. This complicates and increases the cost of exiting investments and challenges the execution of exit strategies.
Limited availability of pipeline of investible projects. Limited pipelines in certain sectors or geographies restrict opportunities for investors to exit by selling their assets to new entrants. Scarcity of follow-on investors can lead to prolonged holding periods and reduced liquidity.
Financial returns vs. development impact. An additional challenge is striking a balance between financial returns with long-term development impact and ensuring that private investors continue to meet environmental, social and governance standards after the exit of development finance providers.
Despite these challenges, evidence indicates how commercial sustainability is a key concern across DFIs and is incorporated into their business model and due diligence processes (OECD, 2024[8]). It is considered a prerequisite for blended finance investments to generate sustainable development impact (such as job creation) and it is regarded as a critical facilitator of successful exits. DFIs typically customise their exit strategies to match the financial instruments used, the investee’s development stage and sustainability goals. Timing of exits thus depends on a range of factors including project maturity, fund closing, return performance, access to private capital, market maturity and impact performance. Instruments applied by DFIs typically include self-liquidating instruments, equity sales, fund exit mechanisms, loan repayment and refinancing, and transfer to commercial investors (OECD, 2024[9]).
Evidence has also highlighted the importance of exits to mobilise private capital. MOBILIST (2021[40]) explores exit-mobilisation opportunities for MDBs and DFIs in Africa through public listings or transfers of assets to commercial investors and emphasises how exit-mobilisation can transform MDBs/DFIs into catalysts for public market growth, enabling them to both recycle capital and scale impact. In line with this finding is the growing trend since 2020 of some MDBs to move towards originate-to-share/distribute business models, whereby they transfer projects and/or credit risks to private investors (as referenced above). This approach helps mobilise private capital while ensuring the financial sustainability of development projects.
The Guidance addresses the challenges and opportunities in relation to exit and ensuring commercial sustainability, particularly in relation to ensuring that long-term impact and ESG standards are safeguarded, and that the underlying market fundamentals (enabling environment) are in place.
Subprinciple 2.A. Ensure additionality for crowding in commercial finance
Assessing and establishing additionality is not an exact science with definite answers for each investment. Additionality is transaction-specific; it varies depending on context and should be assessed with due consideration for contextual factors and drivers of additionality including country, sector, market and project characteristics. Table 2.1. provides a stylised illustration of the drivers and probabilities of additionality.
Notes: LIC: low-income country; LDC: least developed country; FCS: fragile and conflict-affected situation; MIC: middle-income country; UMIC: upper middle-income country. These drivers may also apply to development additionality. It is important to note that certain projects, technologies, innovations and financial instruments may exist elsewhere in the world; however, their entry into new markets and sectors can be additional in certain markets. This could require several transactions to create a reputable and/or comparable track record.
In general terms, deployment of development finance in contexts with relatively well-developed investment frameworks and deep, well-developed capital markets would be less likely to be financially additional and would need careful assessment to justify deploying development finance into blended finance. Deployment in contexts with poor investment climates and underdeveloped capital markets would be more likely to be financially additional and justify the use of blended finance to unlock additional commercial finance, as commercial finance would be less likely to be forthcoming without development finance. In principle, the closer a blended finance intervention is to ‘perfect market conditions’, the more thorough the assessment of additionality should be. This principle is also reflected in the MDB/DFI Enhanced Principles guidelines, which call for increasing the level of scrutiny of projects commensurate with the underlying risk that concessional resources could lead to market distortions or rent-seeking behaviours (ADB, 2022[43]; DFI Working Group, 2023[4]).10
Although definite answers regarding additionality cannot be assumed, adhering to a set of guiding principles and good practice in development finance operations can help ensure that both the nature and likelihood of additionality are addressed and used as a basis for decision making. As partly shareholders/ owners of MDBs and DFIs, and as main providers of development finance into private sector operations, donor governments play a crucial role in promoting that good practice is established and guiding principles are followed.
Ensure additionality is core to all blended finance operations
Donors should ensure that development finance is only used to catalyse private finance through blended finance structures if there is a plausible degree of certainty that private finance is required and is not forthcoming on its own (see the cascade approach under Subprinciple 2.C). This principle should be anchored in mandates, internal strategies and criteria for geographic, thematic and impact allocation of all institutions deploying development finance into blended finance, and it should be reflected in the reporting to donor governments to ensure accountability, integrity and efficiency in blended finance.
Additionality is in fact already anchored in the mandates, strategies and/or principles of MDBs, DFIs and most other providers of development finance. For MDBs and DFIs, the mandate is typically provided via parliamentary acts related to international development co-operation, government resolutions, ordinances or decrees, and is thus included in their founding documents. The MDBs/DFIs Harmonised Framework for Additionality in Private Sector Operations (IFC, 2018[44]) and the Enhanced Blended Concessional Finance Principles for Private Sector Operations (DFI Working Group, 2023[4]) establish that MDB/DFI support of the private sector should make a contribution that is beyond what is available or that is otherwise absent from the market, and should not crowd out the private sector.
Apart from MDBs and DFIs, additionality requirements should also extend to other intermediaries (civil society organisations, funds, facilities, programmes) as development finance is often deployed through such intermediaries to, for example, promote financial inclusion and local micro, small and medium-sized enterprise development.
Promote that blended finance interventions have the highest standard of additionality at both the transaction level and the systemic level
Donors and other providers of development finance should work to promote that blended finance interventions have the highest standard of additionality. When deploying development finance into blended finance, all three types of additionality applied by the OECD DAC – development, financial and value additionality – interact and complement each other, and they each play a role in blended finance interventions as seen in Figure 2.2.
Notes: PSI: private sector investment; ODA: official development assistance. Development additionality, financial additionality and value additionality interact and complement each other. ODA-eligibility requires a combination of development additionality and financial additionality or value additionality. The highest standard of additionality combines all three forms of additionality.
Development additionality ensures the investment achieves impact beyond what would otherwise be achieved without development finance and will typically follow from screening of projects based on impact management and measurement systems. Financial additionality ensures that development finance is offering terms and conditions that private investors are unwilling or unable to offer, thus avoiding market distortion and preventing crowding out private investment through blended finance. Value additionality brings, for example, knowledge transfer, capacity building and ESG standard setting to an investment. The highest standard of additionality combines all three, as shown in Figure 2.2.
Donors and other providers should work to ensure that additionality is considered both at the transaction level and at the systemic level. Whereas transaction-level additionality ensures that a specific blended finance deal mobilises private capital and creates impact that would otherwise not have happened, systemic-level additionality ensures that blended finance helps create long-term market transformation that makes future private investments more sustainable and scalable. Systemic-level additionality focuses on market-building, regulatory improvements and strengthening the eco-system. It aims at reducing reliance on concessionality over time; measures impact through structural changes in capital markets, investor confidence and sustainable capital flows; and often involves policy reform, institutional strengthening and financial innovation. The leverage of systemic additionality – particularly in building of capital markets – is significantly greater than transaction-level additionality because it addresses challenges at a more aggregate level (factor markets) and helps create a stronger foundation for private investment in the longer term.
Whereas additionality at the transaction level can be challenging to establish, systemic-level additionality is even more complex, as it involves indirect, long-term and market-wide impact. Donors and other providers can apply a combination of several data collection methods including market diagnostics and investment climate surveys, stakeholder interviews, case studies and monitoring and evaluation frameworks. Possible key performance indicators for systemic-level additionality could be: market development indicators (e.g. increased bond issuance or new financial products); policy and regulatory shifts (e.g. reforms of laws/regulations); institutional capacity building (e.g. strengthening of local financial institutions’ ability to finance projects without blended finance); replication and demonstration effects (e.g. number of follow-on projects or private investments) and exits from concessionality (e.g. improved risk perception or investor appetite).11
Ensure additionality is assessed, documented and publicly disclosed
Donors should ensure that additionality is assessed and documented ex ante of an investment and closely monitored and adjusted throughout the lifetime of the investment (see Subprinciple 2.D and EBRD (2024[45])). Good practice ex ante financial additionality frameworks typically involve a mixed methods approach combining a qualitative assessment based on project-specific narratives, and quantitative screening tools rooted in available data to maintain simplicity, replicability and rigour (see Chapter 6 for good practice examples of additionality assessment frameworks for selected DFIs and MDBs). As MDBs/DFIs generally lack sufficient data to ensure rigorous, high-quality ex ante assessments of financial additionality (see the Context and trends section earlier), co-ordinated efforts among MDBs/DFIs could enhance access to, and improve collection and interpretation of, such data.
Internal guidelines should be provided to deal teams on how and what to cover in their description related to financial additionality and they should be updated regularly to maintain relevance. The responsibility for updating the guidelines could be placed with a unit that has an independent controller function for each project, as an internal quality assurance mechanism. Experience with establishing independent controller and/or quality assurance units within donors, MDBs, DFIs and other development finance providers should thus be shared among stakeholders to learn about the concept and develop it further.
The principle of ensuring assessment and documentation of additionality include intermediaries, and it is therefore important to understand the additionality of the financing provided to these intermediaries as well as the additional services they offer to local enterprises beyond what they would provide on their own. Development finance providers therefore need to work collaboratively with intermediary channels to develop good practices for safeguarding the development profile and additionality of these channels.
Additionality assessments should be made publicly available to foster accountability and facilitate feedback from stakeholders. This is elaborated further under Principle 5.
Encourage a more harmonised approach to interpreting and assessing additionality in development finance, including blended finance
There is no commonly agreed-upon interpretation of and methodology for assessing additionality among blended finance actors. Many institutions (donors, MDBs, DFIs) interpret and assess additionality in blended finance differently. A more harmonised approach and methodology for defining/interpreting and assessing additionality in blended finance is therefore needed and donors should encourage this. This could include refining the typology of additionality and agreeing on good practices on assessment and documentation of additionality. A collaborative approach could also lead to agreement on clear indicators on additionality.
Ensure additionality assessments and assumptions are evaluated to enable continuous learning.
Evaluating additionality assessment and assumptions is critical to enable continuous learning and improve the frameworks. It is also important to ensure that development finance is used to truly mobilise private capital and generate impact while minimising the risk of inefficiency, market distortion and the misallocation of resources.
Evaluation of additionality should be undertaken at three stages:
1) ex ante through, for example, counterfactual analysis (where possible), market benchmarking and stakeholder surveys
2) during the lifetime of an intervention through continuous monitoring to undertake course corrections as needed
3) ex post through, for example, trend analyses, interviews and case studies to evaluate the accuracy and validity of the ex ante assessment.
Subprinciple 2.B. Seek leverage based on context and conditions
In the context of blended finance, leverage refers to the ways in which specific instruments and structures stimulate the allocation of additional financial resources for particular objectives. It requires a demonstrable causal link between finance made available for a specific project and the leveraging instrument used (Benn, Sangaré and Hos, 2017[46]). Greater leverage is often seen as a measure of success in mobilisation, as it measures the efficiency and effectiveness of development finance in mobilising private capital volumes. However, using high leverage as a target should be considered carefully, as more leverage is often easier to achieve in lower risk transactions where private investors have a higher appetite to invest. Pursuing higher leverage may push blended finance into lower risk contexts with better market conditions at the expense of contexts with higher risk and more challenging market conditions. The pursuit of leverage should, therefore, be aligned with the development co-operation policy choice and the related theory of change in question.
Anchor the design of blended finance transactions in the specific development objective, taking context-specific drivers into account
Seeking leverage implies designing blended finance transactions considering context-specific drivers. Like additionality, leverage – or mobilisation – is context-specific. Its potential depends on the environment's and the investment's risk and return profile and is a function of specific country, sector, market and project characteristics. This highlights the importance of using the right blended finance instruments and mobilisation models in the right context. Understanding the context of a specific project, programme or transaction is critical for the choice of instruments and for setting the right expectations and mobilisation targets. It is a development co-operation policy choice whether to support trailblazing investments such as in adaptation for smallholder farmers or access to finance for micro enterprises in LICs, growth of “missing middle” SMEs and market creation in MICs, and/or scale-like investments such as large infrastructure projects in upper middle-income countries. However, for each of these objectives it is critical to select the appropriate blending model and structure to ensure the optimal use of scarce development finance. Importantly, mobilisation models cut across both the investment value chain and the context. Evidence shows how small-scale investment opportunities do not always require small-scale solutions.
Mobilisation at scale implies increasing the volumes of mobilised private finance, but it also implies scaling up outreach to underserved stakeholders in EMDEs that need investment and access to finance. Increasing volumes typically involves large institutional investors in international capital markets buying standardised, large-ticket products (USD 100 million and greater). Important routes to scaling volumes include market-building interventions triggering transactions that require no blended finance but that otherwise would not have occurred. Scaling up outreach typically involves supporting smaller scale opportunities with higher transaction costs and smaller volumes of mobilisation – although multipliers can still be high. In this regard, engaging local investors can both help scale and support outreach, especially in local currency finance.
For scale mobilisation, select effective instruments and mechanisms, for example securitisation, guarantees, structured funds and bonds
Providers of development finance into blended finance should identify mobilisation instruments and structures that have proven to be efficient and effective in mobilising private finance. Mobilisation at scale requires instruments and structures that are able to produce assets investible for a wider market of institutional investors or that can mobilise large sums of private finance. As elaborated in the context and trends section above, examples include securitisation, guarantees, structured funds and debt instruments (bonds and debt-for-X). These mechanisms share a common feature in their ability to slice and distribute risks into different layers which are tailored to the risk-return preferences of various investors. By slicing risks and returns, these instruments enable tailored investment opportunities and thereby enhanced financial efficiency and broader participation in financial markets. At the same time, they also have standardisation features that facilitate the entry of investors at scale.
Securitisation
Securitisation presents an opportunity to mobilise private capital at scale by transforming some of the risk of illiquid assets into investible securities, thus enhancing risk-sharing and leveraging the capital market to fund critical sectors such as infrastructure and SME financing. It encourages the development of new financial instruments in which institutional investors can invest, signalling to the market that EMDE assets are investible. Particularly when undertaken in the transparency of public markets, securitisation can create demonstration effects and send strong signals to private investors. Securitisation can thus serve as an effective intermediation mechanism, enabling large-scale institutional investors to access dedicated exposures they would normally not consider due to ticket size mismatches, lack of due diligence knowledge and capacity, the absence of local presence, high transaction costs, or high perceived risk.
Securitisation is a well-established process for loans originated by commercial banks. Loans originated by MDBs/DFIs can also be securitised. MDBs and DFIs are well-positioned to leverage their high-quality loan portfolios – characterised by strong underwriting capacities, long track records, low default rates and where MDB lending to the public sector is concerned, their preferred creditor status – and transfer credit risk from their balance sheets to finance additional projects (OECD, 2021[47]).
While MDBs and DFIs play an important role in providing additional finance to otherwise underserved borrowers, local commercial financial institutions also have significant exposure to, track record in and knowledge of lending in EMDEs. Where appropriate, these institutions could scale their lending through securitisation, unlocking new sources of capital and enhancing financial inclusion in EMDEs (OECD, 2021[47]).
Donors with scale mobilisation as a development policy objective should investigate if securitisation could help deliver this policy objective. Donors could facilitate the use of securitisation in several ways:
As partly owners and shareholders of MDBs and DFIs, donors engage with these institutions and could encourage scaling up multi-asset mobilisation and shifting the business model from “originate-to-hold” to “originate-to-share” (CGD, 2023[48]) while also encouraging closer collaboration between MDBs and DFIs. As part of this, donors should encourage pooling of assets across institutions. Few MDBs/DFIs have the volume of assets necessary to sustain a standalone true-sale securitisation programme; over time, they will need to move towards solutions that involve pooling assets held across different development institutions and even with private sector counterparts.
Donors (and other development finance providers) could help enable local banks and financial institutions to undertake more lending by sharing or buying credit risks with or from commercial lenders’ operations, thus incentivising them to lend more to projects with the greatest financing needs and highest development impact potential (OECD, 2021[47]).
Donors could support and facilitate replication of transactions like the Bayfront IABS. This transaction holds significant strategic importance that reaches beyond the immediate financial impact. It mobilises institutional capital, enhances secondary market liquidity, introduces sustainable investment opportunities and sends a strong signal to the market that infrastructure assets in EMDEs are investible. The transaction thus exemplifies market creation through demonstration. It employs an innovative financial model that can be replicated to mobilise more private capital through securitisation and illustrates how public funds can mobilise institutional investment at scale while investing pari passu with private capital, particularly for climate-resilient infrastructure.
Donors could build into investment assessment frameworks the possibility of creating securities that can be purchased by institutional investors, and they could proactively signal to the market their interest in blended finance models that create products for a wider market of investors.
Although securitisation is a powerful mobilisation tool, it is not an end in itself. It is important to understand the different types of securitisation models and the roles securitisation can play in relation to both balance sheet optimisation and the mobilisation of private capital at scale. Equally important is analysing which of the several different models are best suited to achieve a given objective and what role donor agencies can play. It is also essential to understand the risks and the limitations related to different securitisation models.12
Securitisation in development finance is relatively novel. Donors should therefore encourage development finance providers to continue to learn from each other and collaborate with market participants and regulators to intentionally build a market for securitisation of development finance and impactful private assets in EMDEs. MDBs/DFIs should learn from market participants and regulators to align with best practices and investor expectations regarding consistent documentation, structuring, risk management, terms, rating methodologies and underlying contracts. Collaboration on market standards should seek to enable competition and innovation, not to undermine it. Donors should also encourage the emerging development finance community of practice on securitisation to engage more systematically with their regulatory and private sector counterparts to build awareness of development finance assets in the market and deepen the understanding of investors' and regulators' expectations.
Lastly, donors should encourage more transparency around transactions. Transparency is critical for replication and benchmarking to build markets and achieve scale. Transparency is achieved by default in public market transactions; in private market transactions, often only a few actors have access to information about the transaction. To ensure that securitisation functions as a market-building exercise, donors should work to increase transparency when supporting securitisation, whether directly or indirectly through MDBs and DFIs.
Chapter 6 contains case studies on different securitisation models and transactions. Together, the cases illustrate how financial institutions can use both true-sale securitisation and synthetic risk transfer (SRT) as a powerful tool to create markets and mobilise institutional investors in capital markets while simultaneously starting, continuing or expanding their lending to borrowers such as entrepreneurs, SMEs, corporates or large infrastructure projects.
Guarantees
Development guarantees are an effective instrument to mobilise private capital at scale in addition to creating markets and providing access to finance for underserved segments of the population, as evidenced earlier.13 However, guarantees are still an under-utilised tool for mobilising private capital. There is thus a significant need to scale up their use. There are several ways that donors can support the use of guarantees:
Donors and other providers of development finance should investigate the possibility of establishing new guarantee schemes that are additional to existing supply, or engaging in, and pooling resources with, existing guarantee schemes and platforms to increase the supply of guarantees in the market. Collaboration and co-ordination are critical to minimise the risk of crowding out not only the private sector but also other public guarantee providers which would represent inefficient use of limited development finance.
Donors should work to address the challenges that prevent realising the full potential of guarantees including a lack and limited transparency of data, limited capacity and knowledge on guarantees and complexity in setting up guarantee mechanisms.
Donors should encourage the rules and practices of accounting for guarantees on providers’ balance sheets to be further investigated to enable peer learning among providers with a view to possibly unlocking further guarantee capacity. Constraints posed by Basel III and Solvency II regulations should also be further investigated and addressed in consultation with relevant regulatory authorities.
Donors could attempt to expand guarantees to LICs and fragile and conflict-affected situations depending on their development policy priorities. These contexts are riskier because of political instability, relatively weak legal systems, currency volatility, poor infrastructure and shallow financial markets. Designing guarantees for such contexts could focus more on local currency guarantees, fast and simple claims processes and bundling guarantees with capacity building.
Donors should investigate the possibility of using the callable capital frame14 (USD 900 billion) as a basis for issuing guarantees in EMDEs. This is in accordance with Recommendation 2.a. of the Capital Adequacy Framework (CAF) report noting that callable capital has considerable financial value that can be incorporated into CAFs and calling for MDBs to consider callable capital as a specialised type of shareholder guarantee that creates a certain amount of capital headroom (EC HLEG, 2022[49]; Independent Expert Panel, 2022[50]).
Donors should consider key learnings for the effectiveness of guarantees, including that 1) guarantees must be better tailored to risk as one size does not fit all; 2) transparent and standardised additionality assessment is essential to ensure crowding in of private finance; 3) simplicity and speed are crucial for private sector uptake; 4) re-insurance can expand capacity and reduce risk concentration; and 5) guarantees work better within a co-ordinated and transparent system (CGD and Lion's Head, 2025[22]).
Donors should ensure that guarantees serve as a temporary crutch for investors as the need for them should fade away as investors build experience and confidence under the protective umbrella of the guarantee.
Chapter 6 provides cases studies on guarantees that have been able to scale the mobilisation of private finance for sustainable investment, stimulate the development of financial markets, unlock clean energy finance and promote small-scale investment opportunities by facilitating access to finance for micro, small and medium-sized enterprises. Together, the cases illustrate the flexibility, breadth, depth and scope of guarantees.
Structured funds
Structured funds are a mechanism designed to pool resources, distribute risks and address financing gaps in developing countries. Effectively structured funds incorporate layered risk-mitigation mechanisms that attract diverse investors, including junior, mezzanine and senior tranches that balance risk and return preferences. Diversification of risks across multiple projects, and layers of equity and/or subordinated junior and mezzanine debt tranches of capital, can enhance the senior debt in the fund to investment grade and attract institutional investors. Pooling also offers institutional investors large ticket sizes and avoids them needing to understand underlying risks/contexts, which is a major constraint to investment in individual EMDE assets.
Figure 2.3 illustrates the capital structure and operational flow of a typical blended finance fund. Capital is sourced from a diverse number of investors, including senior A-shares (pension funds, insurance companies), mezzanine B-shares (DFIs and mission investors) and junior C-shares (ODA donors and philanthropists), where a technical assistance facility may also be supported by extra grant financing. Managed inhouse by an MDB or DFI, or outsourced to a private fund manager, this capital is intermediated through equity, loans or other instruments (senior debt, mezzanine debt, guarantees) to target investees, ensuring dual alignment with both commercial returns and developmental impact goals.
Note: ODA: official development assistance. Technical assistance facilities - which are not part of the capital stack - play a critical role. This assistance can be provided by donors, development finance institutions, multilateral development banks and some philanthropists. While the structure depicted here reflects cases where sub-commercial terms are needed in junior tranches to attract private capital, in fully commercial structures private investors may also hold the most junior equity-like positions. Similarly, ODA donors may not always be found in the junior tranche, but often sometimes in the mezzanine trance. As such, the composition of each tranche varies depending on the risk-return profile of the investors and the availability of concessional capital.
Source: Based on Koenig and Jackson, (2016[51]), Private Capital for Sustainable Development: Concepts, Issues and Options for Engagement in Impact Investing and Innovative Finance, https://etjackson.com/wp-content/uploads/2019/05/2016_Private_Capital_for_Sustain _Development.pdf.
Donors should use and promote structured funds as part of their scale mobilisation efforts. Structured funds – particularly two- and three-tier funds – have been identified as one of the most effective private investment mobilisation models that can be standardised and replicated to scale mobilisation (Convergence, 2025[15]). However, several important considerations need to be made when promoting structured funds:
Choosing the right fund structure, whether it be closed or open-ended, debt or equity-funded or flat or structured, remains key in ensuring the alignment of investor priorities and expectations, calculating appropriate concessionality levels and achieving effective impact. For example, while equity-based funds may typically drive greater impact by absorbing greater risks, they typically require more patient concessionary capital, whereas debt-based structures help appeal to more risk-averse investors but can often fail to serve early-stage or high-risk projects.
Simple structures can expedite fund development and allow investors to clearly understand the risk-return dynamics of their position within the capital stack. However, for maximum capital mobilisation in consideration of specific market needs, sectoral risks and/or country-specific characteristics, more elaborated fund structures incorporating catalytic mechanisms – such as FX hedging facilities, reserve accounts and guarantees – can play a transformative role. These more intricate designs enable DFIs, MDBs, and asset managers to mobilise private capital effectively, tailoring solutions to align with diverse investor profiles and the unique requirements of high-impact sectors and regions.
Avoid “subsidy stacking”: When multiple development finance providers are involved in a fund there is a risk of “subsidy stacking” where they in fact mobilise one another instead of private capital, thereby setting artificially low benchmarks that distort markets and crowd out private participation. To ensure additionality in catalysing private investment, provider(s) of development finance must prioritise junior tranche positions, allow senior tranches to be reserved for private investors, maintain their role as market builders, adopt "originate-to-share" rather than “originate-to-hold” models, and establish clear exit strategies to avoid becoming long-term market participants.
Balance the trade-off between scale and priority for high-risk sectors and geographies: Investments in contexts experiencing high and extreme fragility or high-risk sectors typically demand high levels of concessionality to address political instability, information asymmetries or nascent markets.
Align policy with market demand to avoid donor fragmentation: Donor governments’ political and strategic priorities may not align with investors’ market demands. This misalignment can further complicate fund structuring and slow down fund management decision-making processes, thereby inhibiting the potential replicability required for scaling private mobilisation efforts.
Standardise fund structures: Structured funds are resource-intensive, with high legal, due diligence, and reporting costs, and lengthy timelines from concept to first close. The lack of standardisation deters private investors (especially institutional ones) who prioritise predictable, simple and scalable investment opportunities. Enabling replicability and scale requires that fund structures be aligned with preferred investor frameworks and regulatory constraints, especially as smaller fund sizes and domiciliation sometimes restrict institutional involvement. Fund structures can be tailored to attract the necessary funding by making the target investor base clear, whether it be institutional, impact-driven, or regionally focused.
Chapter 6 contains case studies on different types of structured funds. Simple two-level capital structures, which allow investors to easily understand risk-return dynamic, have proven crucial in attracting a broad spectrum of investors, particularly institutional investors which is one of the segment groups required to scaling up private finance mobilisation efforts (BII, 2025[14]). Funds can however also adopt more elaborate structures, incorporating additional catalytic mechanisms (for example FX hedging facility, technical assistance, reserve account) to address diverse investor needs. Designing funds with a clear rationale and focus helps ensure that the fund’s capital is directed towards underserved markets with intentionality – balancing concessionality with commercial viability while also embedding learning, transparency and local capacity building into the fund’s operational model.15
Bonds and debt swaps
GSSS bonds have proven to be powerful tools to drive financing towards green or social projects, or to incentivise future improvements in agreed-upon sustainability outcomes.16 Crucially, they link scale, impact and long-term investment horizons – and therefore hold significant potential for financing sustainable development in developing countries. It is important to note that GSSS bonds are debt instruments, meaning that they should only be considered for issuers that have room to sustainably take on more debt. This is particularly important considering worrying trends in developing countries’ high debt vulnerability and distress (WB, IMF, 2024[32]). Relatedly, issuing bonds – let alone GSSS bonds – requires significant human and technical capacities, which may be lacking in developing countries (and can be especially pronounced for first-time issuances). This highlights the importance of effectively assessing and evaluating the decision to issue GSSS bonds. Where appropriate, however, GSSS bonds hold significant advantages for issuers, also in developing countries and for the public sector.
Donors are particularly well-placed to support GSSS bonds, which align well with their own sustainable development priorities. They are also familiar with developing country contexts and often have existing relationships with key stakeholders needed to support GSSS bonds (including debt management offices and diverse ministries). More broadly, donors’ experience with blended finance instruments can also be applied in the context of GSSS bonds. The nascent stage of the SLB market provides an important opportunity for strong market development from the onset, and for ensuring that this instrument establishes itself as a credible financing tool for developing countries. While donor support in this area remains limited, some noteworthy examples exist. The Development Bank of Rwanda’s 2023 SLB, for example, benefited from credit enhancement from the World Bank International Development Association (IDA) funds – which was also the first time IDA financing was used to leverage private capital. OECD (2024[29]) explores this example in more detail.
In situations where debt vulnerability or distress is an issue, donors can support debt sustainability in certain markets by providing technical assistance, guarantees or insurance. One instrument that has proven to be effective are debt-for-X swaps. These are financial arrangements where a country’s external debt is reduced in exchange for commitments to invest in specific areas (X), such as climate, nature, health or education. The swaps can help highly indebted countries free up resources for development or environmental protection while reducing their sovereign debt burden. At the same time, however, debt swaps are complex and expensive, and should not be seen as an alternative to debt restructuring (when needed) or to putting in place policies and measures to avoid debt distress in the first place (OECD, 2023[52]; Georgieva, Chamon and Thakoor, 2022[53]).
Donors should explore if GSSS bonds and debt-for-X swaps can play a role in their development co-operation toolkit as mobilisation instruments and as instruments to reduce debt distress. A crucial first step in the decision to support GSSS bond issuances in developing countries is the recognition that these are complex debt instruments. Their issuance rests on broader macroeconomic and institutional factors; their use must therefore be carefully evaluated and assessed, while also recognising the complementarity of GSS bonds and SLBs based on an issuers’ ultimate financing needs. Previous OECD work presents a decision tree to guide the choice of donor support for GSSS bonds (OECD, 2024[29]).
When either GSS bonds or SLBs are deemed the appropriate financing solution for issuers, donors can support issuances through a range of instruments/approaches, and by targeting different policy areas. Recognising the importance of donor support for GSSS bond issuances in developing countries, the OECD identifies five major policy areas for donors to effectively support the growth of the GSSS bond market, in its “Five Is” framework: investment, insurance, issuance, (market) infrastructure and impact (OECD, 2023[28]; OECD, 2024[29]).
In relation to investment, donors can support developing country issuances via anchor investments. This can signal to other investors the credibility of the bond and the issuer and adjust the risk-return profile of a transaction. Donors should, therefore, encourage scaling up their engagement with potential bondholders and their investment in GSSS bonds.
In relation to insurance, donors can leverage the mobilisation potential of guarantees. They should consider increasing their own institutional capacity to provide guarantees, or exploring joint guarantee programmes, with a view to scale up their use for GSS bonds and SLBs.
In relation to issuance, support can be provided to address a variety of barriers, including a lack of technical capacity, limited project pipelines (in the case of GSS bonds) and missing stakeholder co-ordination. For example, donors can support the aggregation of small-scale projects or provide early-stage equity investments to build up robust project pipelines.
In relation to market infrastructure, donor support can be fundamental in helping to create the right enabling environment for GSS bonds and SLB issuances in developing countries. This can involve, for example, targeting capacity building and technical assistance towards ministries of finance, debt management offices, local external reviewers and other key actors who can then support local issuances. Donor support can also focus on the development of local taxonomies and GSSS bond principles and standards which are adapted to local contexts but also interoperable between each other and with global best practices (e.g. those set by the International Capital Market Association).
In relation to impact, donor support can target a range of areas. Standards, principles, frameworks and taxonomies all play a crucial role in increasing the robustness and credibility of GSSS bonds. Donors can support the development of these while ensuring that they are adapted to local contexts and aligned with global best practices. For SLBs in particular, donors can also assist issuers in choosing key performance indicators and sustainability performance targets which are ambitious, material and harmonised.
Regarding debt-for-X swaps, donors can support their scaling up, for example debt-for-development, debt-for-climate and debt-for-nature swaps. Given the complexity of these schemes, donors can provide capacity building to familiarise debtor countries with these instruments and support with designing and structuring schemes (OECD, 2023[52]). Donors and MDBs/DFIs can provide financial support for buybacks and restructuring and can offer guarantees and other risk-sharing mechanisms (e.g. currency hedging mechanism) to make the transactions more attractive for private investors. They can also support institutional capacity building and governance frameworks and enhance monitoring and impact measurement to track progress towards sustainability commitments. Debt-for-X swaps can also be combined with SLB issuances to achieve greater fiscal relief and lower borrowing cost, by issuing an SLB with sustainability targets and using the proceeds to fund a debt-for-nature or climate swap.
The importance of co-ordination and co-operation in this space should be noted. While some donors already support developing countries in these different policy areas, there is a need for donor co-ordination and co-operation to leverage synergies and comparative advantages. Donors should co-ordinate on supporting large-scale blended finance instruments for GSSS bonds and debt-for-X swaps. As part of this, donors should develop a strategic co-ordination mechanism for GSSS bonds and for debt-for-X swaps to facilitate co-ordination on impact and blended finance instruments that aim for scale. They should also promote the comparability and interoperability of taxonomies and standards and encourage the harmonisation of high-quality impact measurement and reporting on GSSS bonds.
Subprinciple 2.C. Deploy blended finance to address market failures while minimising the use of concessionality
Use financial modelling combined with competitive processes (such as tender processes, calls for proposals, and open access programmes) to establish a minimum level of concessionality
When concessionality is deemed necessary, minimising it in the development finance element is important to find the right balance between mobilising commercial investors and not over-subsidising or crowding them out of the market. The minimum level of concessionality is a subsidy that is sufficient enough to mobilise private investors but not more than that so that subsidies are not offered to investors who would have accepted a lower level or could have obtained finance at market conditions. This is a very delicate balance to strike, as it requires private investors to willingly accept the most unfavourable terms at which they would like to participate in a transaction, and there is no reason for them to do so. It is difficult to make public the relevant financial information and actual preferences of private investors, and preferences even vary between international and local investors who possess better risk assessment capabilities. This complicates the work of development finance providers. However, both financial modelling and practical steps can be taken by donors and other providers to establish the minimum level of concessionality:
Apply quantitative methods to determine the appropriate level of concessionality wherever possible. For blended finance involving debt finance, risk-based approaches such as expected loss models can be used as a reference point to size the share of concessional finance in a blended finance project or fund. For equity, project returns should not exceed average returns for the industry/sector in the country. Available benchmark data from comparable industries, sectors and geographies can be used, taking differences in country risk into account.
Consider setting a maximum amount for concessionality. This can be a limit on the concessional amount as a percentage of total project costs based on context-specific risk analysis and benchmarks.
Monitor concessionality over time. As risk profiles and markets evolve, the need for concessionality in each context and blended finance transaction may change. Donors and other providers of development finance therefore need to actively monitor blended finance transactions over time as well as market developments around them and re-assess the level of concessionality required.17 For example, the risk profile of projects typically improves once they reach their operating phase, requiring lower or no concessionality; or growing track record and progress in developing local capital markets may close the gap in terms of maturity and return requirements that concessional finance initially aimed to fill.
Build mechanisms to reduce concessionality over time. For example, in structured funds, concessional finance for first loss tranches could be phased out over time, thereby reducing the concessionality deployed for the donor as the investor gets more comfortable with the risk profile of the investment and ensuring financial sustainability. Similarly, over time and as the investment track record has been built in each market, concessionality can be redeployed to areas that help accelerate market building, such as technical assistance. In addition, underperforming assets should be exited if they are not showing any route to commercial sustainability, as maintaining a position while the value falls and other investors exit implies that the level of concessionality over time is increasing.18
Combine financial modelling with competitive processes to better determine the minimum level of concessionality. This includes using tender processes, auctions and open access programmes combined with a thorough assessment of the barriers that prevent the investment.
Identify market failures, analyse the drivers of concessionality and choose the right instrument
If commercial finance is available in the market, it should be prioritised to limit the use of development finance. The World Bank cascade approach can help conceptualise if and when there is a need for development finance to overcome barriers for commercial investors, and which type of risk mitigation is appropriate. Barriers, or market failures, should first be addressed by upstream reforms, and risk-mitigating instruments should only be considered if this proves impossible. The cascade approach implies that highly concessional finance should only be used as a last resort in markets where commercial finance is not available and where market failures or barriers to investment cannot be addressed through reforms or risk- mitigation instruments (WBG, 2017[54]).
Donors should understand the root causes of market failures
It is thus crucial for donors and other providers of development finance to understand the root causes of market failures in each context to be able to streamline blended finance efforts accordingly. Market failures include public goods with positive externalities, information failures, structural market inefficiencies, first-mover challenges and misperception of risk in EMDEs. Providers should identify the source and extent of the market failure that the blended finance approach should address and verify if accompanying reform measures are needed to address it in a sustainable manner. Providers should also ensure that blended finance is only used to address temporary market failures.
Donors should understand the drivers of concessionality
Once the market failure(s) has been identified, the drivers of concessionality should be assessed. These include the expected development impact, the type of financial instrument, sector and geography, project cycle and market maturity. A high development impact (implying a high positive externality of the investment) can merit a higher level of concessionality to crowd in commercial investors. The concessionality of blended finance instruments can vary from 0% (senior loans at market terms) to 100% (one-off grant). Sector and geography influence investment risk and hence the level of concessionality necessary to crowd in commercial investors. Project cycle influences concessionality in the early-stage development phases and needs for environmental and social impact assessments (e.g. for large infrastructure projects) may require higher levels of concessionality. Market maturity determines the level of concessionality where higher levels may be justified in immature markets. As markets develop and investments become more commercially viable, the level of concessionality should reduce over time.
Make concessional finance available to all implementing entities at equal terms, for example by using open tenders or pooling concessional funds across donor agencies to enhance equal treatment
When deploying concessional funds, donors and other providers of development finance should establish fair and equal access procedures so that all market participants, both public and private, can understand the objectives, terms and conditions for accessing concessional funds.
As practical steps, donors can pool their concessional funds to enhance equal treatment and standardisation of access across development finance providers. They can also use tender processes, auctions, calls for proposals and open access programmes to test market demand for concessionality on equal terms. Open calls for proposals are a useful way to test market demand and typically provide a relatively high degree of flexibility by applications regarding the use of concessionality. Open access programmes set the parameters of a blended finance operation (e.g. a partial risk guarantee to financial institutions for SME lending programmes) which are open to multiple institutions to apply for (IFC, 2021[36]).
Co-ordinate and, where possible, harmonise on reporting of concessionality in a transparent manner, including for implementing partners, and agree on a set of standardised key parameters
Donors should engage in a continuous dialogue on concessionality with other donors and providers. This is necessary to harmonise principles to determine concessionality among development actors, including on reporting. Co-ordination on blended finance programmes and transactions is crucial particularly when a concessional element is part of a programme.
Donors should ask their implementing agencies (such as DFIs, MDBs and fund managers) to report on the use of concessionality in a transparent manner. Implementing partners need to regularly and publicly report on the amount of concessional finance used in blended finance transactions, financial returns achieved and impact generated on a project-by-project level. Reporting on a set of standardised key parameters in blended finance transactions in a transparent manner would enable a repository of reference data that can inform the structuring of future blended finance transactions. This would, in turn, contribute to developing the market for blended finance by creating a data set that would allow comparison of the use of concessionality in different contexts and the establishment of benchmarks to help ensure minimum concessionality.
Subprinciple 2.D. Focus on commercial sustainability
Blended finance is intended to temporarily intervene in a market with the purpose of enabling access to commercial finance, thereby making the need for further blended finance redundant. The long-term objective of creating commercially sustainable markets needs to be incorporated into blended finance approaches. However, this cannot be achieved at the level of the blended finance transaction alone. Achieving commercial sustainability therefore entails:
accompanying interventions to develop adequate policy, sector and investment frameworks
facilitating capital market development
incorporating exit strategies into blended finance.
Combine blended finance with support to underlying market fundamentals
Donors should contribute to the establishment of the necessary underlying market fundamentals in developing countries, e.g. sector policies and regulatory frameworks that allow for cost recovery of investments, for example through technical assistance. Blended finance is not sustainable in environments where minimum market fundamentals are not in place or are not being developed to attract commercially sustainable investments. Blended finance transactions therefore need to be designed and implemented in close co-ordination with partner governments and development interventions focused on creating sustainable market fundamentals in countries, sectors and for population groups where they are not yet in place. Otherwise, blended finance risks providing ineffective subsidies to a target structure and market without ensuring commercial sustainability. As part of this, donors should work to facilitate local capital markets to underpin the commercial sustainability of blended finance transactions (see Subprinciple 3.B.).
Incorporate exit strategies into blended finance, both at the level of the transaction and at market level
Donors and other providers of development finance should ensure that blended finance is phased out once the investee generates sufficient cash flows and markets are developed enough to attract commercial investors. Exit strategies should be systematically included in the design of a blended finance intervention, both at the level of the transaction and at market level. Exit indicators should be defined within the due diligence of a transaction from the start. Relevant exit indicators include both financial and development indicators. Financial indicators include the stage of capital market development, return thresholds being achieved, available data on actual risks and loss rates versus initially perceived risks, and private investor response to auction processes. Development indicators can trigger an exit of blended finance both if the expected development objective is achieved and if there is a significant shortfall in achieving the target objective as this may signal a failure by the blended finance intervention to achieve its target.
Timing of concessionality
Assess the likelihood that the blended finance transaction will be financially sustainable without the concessional element after a reasonable time frame for the specific sector or geography and within an enabling environment.
Build a clear exit strategy of the concessional element at the design stage, for example reducing levels of concessionality in repeat transactions, introducing a repayable grant mechanism in case of successful project development, or applying a limited maturity through closed-end blended finance funds that returns the donor capital after a defined period.
In the case of open-ended blended finance funds or other structures that lock in concessional finance for a long-term horizon ex ante (such as project finance), build in market testing mechanisms at regular intervals to validate the need for concessional finance and recalibrate the estimation of the amount/relative value of concessionality left in the structure (e.g. following fund redemptions or as a securitisation amortises).
Exit strategies
Consider a cascade approach for phasing out blended finance, with concessional finance gradually being replaced by non-concessional finance to finally reach stand-alone private finance based on market building and familiarity.
Market the blended finance fund to private investors and assess their appetite to take out the development finance. If deemed inappropriate to change the conditions after the establishment of the fund, a maturity for the concessional portion could be set.
In open-ended funds where take-out for concessionality is not available, use existing concessionality to invest in new, higher risk markets and sectors that still justify the use of concessionality.
In a project finance structure, exit an asset (e.g. through asset sale of an infrastructure public-private partnership) once it has reached the operating phase. Alternative financing mechanisms for the development, construction and operating phase should also be considered.
Exit mechanisms should as much as possible aim to attract local investors (such as local commercial banks, local pension funds, insurance companies), and there should thus be a focus on local currency financing where possible.
It should be noted that a complete exit of the development finance provider is not feasible in all contexts or under all conditions even in the medium to long term, especially in contexts facing high and extreme fragility and least developed countries (OECD/UNCDF, 2020[55]). Investments in pioneering firms in terms of patient or risk-taking capital can enable them to overcome high pioneering costs and have catalytic effects throughout the entire economy (International Growth Centre, 2021[56]). Hence, in such contexts the presence of development finance might be indispensable even in the longer term to enable private sector investment and eventually build up markets.
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← 1. In a report from April 2025 on the importance of disclosure of additionality, Publish What You Fund assesses how bilateral DFIs disclose the additionality of their private sector investments. The findings indicate: inconsistent compliance, with only few DFIs disclosing all required additionality fields in 2023; formulaic classifications, with inconsistent application of additionality types even among the DFIs that disclose the types; over-reliance on financial additionality at the expense of value additionality; and variable quality of additionality statements by the DFIs (more information at: https://www.publishwhatyoufund.org/2025/04/making-additionality-count-why-development-finance-institutions-must-step-up-on-transparency/).
← 2. United Nations, G7, G20 and COP high-level communiques and statements have emphasised the need to scale up blended finance and mobilise additional private finance include G7 Canada 2018, G7 France 2019, G20 Osaka Declaration 2019, G20 Bali Leader’s Declaration 2022, the G20 India Sustainable Finance Report 2023, the G7 Development Ministers’ Meeting Communique 2024, the UN Pact for the Future 2024 and COP29 Baku 2024.
← 3. Convergence has proposed a Scale Private Investment Mobilisation (SPIM) action plan to mobilise private investment by scaling up proven models that deliver impact and investment at scale. A significant part of the action plan consists of 12 Private Investment Mobilisation Models (PIMMs) identified by Convergence and consulted stakeholders as the most effective and efficient way to standardise and scale SDG and climate investment in developing countries. The PIMMs are based on a review of historical mobilisation transactions that 1) have demonstrated effective and efficient mobilisation, and 2) have best potential to mobilise private investment to/within developing countries in the quantity and quality necessary for sustainable development. The 12 PIMMs include guarantees, securitisation, structured funds (2-3 tier) and bonds. BII (2025) discusses particularly the use of structured funds to scale up mobilisation, and MOBILIST (2023) illustrates how securitisation is used to mobilise private capital at scale.
← 4. The OECD is working with MDBs to harmonise mobilisation metrics and include new private finance mobilisation approaches in the measurement; these include portfolio mobilisation (e.g. securitisation), generation (e.g. bond issuance) and catalysation (activities to create an enabling environment, see also Principle 3).
← 5. The Warehouse Enabled Securitisation Program (WESP) is the IFC’s new securitisation programme designed to scale private capital mobilisation, aligned with the G20’s call for MDBs to optimise their balance sheets. WESP’s primary objective is building a new asset class of global emerging market securitisations. It will give investors direct exposure to a portfolio of investment projects in emerging markets, with a wide range of risk/return options (senior, mezzanine and residual/equity). See: https://www.ifc.org/content/dam/ifc/doc/2024/WESP-Presentation-Seminar-IFC-Day-Nov-6-2024-External.pdf.
← 6. The leverage ratio of a guarantee is the total amount of private finance mobilised divided by the value of the guarantee provided. If a guarantee of USD 10 million is issued that helps mobilise USD 100 million from private investors, the leverage ratio is 100/10 = 10x.
← 7. Basel III and Solvency II are regulatory frameworks that influence the use of guarantees in financial markets, including blended finance. Under Basel III, guarantees are subject to risk-weighted asset calculations which can increase the capital banks must hold. This makes providing guarantees more capital-intensive and potentially less attractive for banks. Under Solvency II, insurers offering long-term guarantees face higher capital charges, and this can discourage insurers from providing such guarantees. Also, Solvency II may limit insurers’ ability to invest in certain assets or to outsource investment decisions to institutions not regulated under Solvency II, such as some DFIs (see: https://www.convergence.finance/resource/state-of-blended-finance-2024/view).
← 8. Gregory (2025) notes that this method does not ensure that concessionality is entirely minimised, as it is possible another party could have delivered the same outcomes for less subsidy, but it does provide some protection against over subsidising activities (Gregory, 2025[35]).
← 9. According to MOBILIST 2021 (at: https://www.mobilistglobal.com/research-data/mobilist-the-exit-mobilisation-opportunity-in-africa/), less than 5% of the MDB/DFI commitments covered by the study were made in local currencies.
← 10. The DFI Working Group 2023 (in: https://publications.iadb.org/en/dfi-working-group-blended-concessional-finance-private-sector-projects-summary-report), indicates that additionality is often easier to establish in fragile and conflict-affected situations than in other countries. Also, an evaluation of ADB’s non-sovereign operations in 2022 showed that additionality was weaker in advanced financial markets, underscoring the importance of phasing out support or shifting financial instrument (see: https://www.adb.org/documents/additionality-asian-development-bank-s-nonsovereign-operations).
← 11. The IFC’s Anticipated Impact Measurement and Monitoring System is an example of a system that distinguishes between project outcomes and market outcomes and that measures an investment’s total anticipated impact.
← 12. Securitisation played a central role in the 2008 global financial crisis, where the widespread use of securitised financial products – particularly mortgage-backed securities and collateralised debt obligations – significantly contributed to the crisis. The financial institutions adopted an originate-to-distribute model where they originated loans – especially subprime mortgages – and bundled them and sold them as securities to investors. The model reduced the lenders’ incentives to ensure the borrowers’ creditworthiness, leading to a proliferation of high-risk loans. Also, complex and opaque financial instruments were created in the securitisation process that were difficult to assess for risk. Investors relied on credit rating agencies, and risks were underestimated. It is thus crucial to understand the nature and the risks of the various securitisation models and ensure that the financial structures being supported with development finance effectively contribute to sustainable investment without introducing unintended negative consequences.
← 13. The OECD defines guarantees as “a type of insurance policy protection banks and investors from the risk of non-payment” (https://www.oecd.org/en/publications/guarantees-for-development_5k407lx5b8f8-en.html). A guarantee is a legally binding agreement under which the guarantor agrees to pay all or part of an amount due on a loan, equity or other instrument in the event of non-payment by the obligor (or a loss of value in case of investment).
← 14. Callable capital is a portion of a shareholder country’s capital that is pledged to an MDB but not paid up front. It serves as a guarantee that can be called upon in exceptional circumstances, such as if the MDB is unable to meet its financial obligations to creditors. The 2022 CAF report recommends that the financial value of callable capital should be recognised and used to enhance MDBs’ lending capacity without necessitating additional paid-in capital.
← 15. Regulatory complexities (Basel III and Solvency II) can limit the scaling of blended finance funds and create differences across jurisdictions and between different investor types. Some blended finance funds could be perceived as securitisation, and insurance companies covered by Solvency II face significant regulatory impediments when investing in a securitisation vehicle, i.e. having to maintain significantly more risk capital for investments in securitisation vehicles than investments in non-securitisation ones (See: https://www.convergence.finance/resource/state-of-blended-finance-2024/view).
← 16. GSSS bonds can be divided into two sub-categories – green, social and sustainability (GSS) bonds and sustainability-linked bonds (SLBs) – based on the different underlying mechanisms. GSS bonds are use-of-proceeds instruments that are tied to underlying assets, whereas SLBs have structural and/or financial characteristics that change depending on whether issuers meet pre-defined sustainability objectives.
← 17. Adhering to the principle of continuously adjusting concessionality over time should be adjusted in situations where specific criteria have already been agreed upon with the involved stakeholders, for example in a fund structure.
← 18. Even in a case where the value decreases and blended finance is not working, the underlying asset may still have a strong development rationale, in which case there may be a need to restructure the intervention to conventional development assistance or public support (subsidy).