According to Principle 3, development finance should be deployed to ensure that blended finance supports local development needs, priorities and capacities in a way that is consistent with, and where possible contributes to, local financial market development.
OECD DAC Blended Finance Guidance 2025
Abstract
Subprinciple 3.A. Support local development priorities.
Align blended finance with national policies, strategies and local investment blueprints.
Promote country ownership through inclusive stakeholder engagement.
Subprinciple 3.B. Ensure consistency of blended finance with the aim of local financial market development.
De-risk hard currency investments.
Develop local financial markets.
Reform and support multilateral development banks (MDBs) and development finance institutions (DFIs) to facilitate greater local currency lending.
Subprinciple 3.C. Use blended finance alongside efforts to promote a sound enabling environment.
Support developing countries’ institutional capacity building and technical know-how of local government authorities.
Support developing countries’ regulatory and policy reforms that address structural obstacles faced by both domestic and international investors.
National policies, strategies and local investment blueprints
Development priorities are becoming more anchored in global climate and development goals through the use of Nationally Determined Contributions (NDCs), national adaptation plans (NAPs), national biodiversity strategies and action plans and long-term strategies, ensuring that development interventions are strategically aligned with local needs. However, whereas “NDCs can be a useful tool for investors to assess countries’ long-term climate ambition, in their current form, NDCs vary significantly in quality and detail across countries, and often lack sufficient information on policy implementation to effectively guide investment decision-making” (IIGCC, 2024[1]). As partner countries update their NDCs and NAPs with more ambitious targets for 2030 and beyond, the integration of private capital mobilisation in general, and blended finance specifically, within these frameworks becomes even more crucial for achieving climate and development goals.
Evidence also indicates that blended finance operations increasingly respond to local needs and realities through structured, country-driven investment platforms, such as Just Energy Transition Partnerships, and with Integrated National Financing Frameworks (UNDP, 2024[2]) (see also Principle 4). This indicates a growing dedication to matching national transition plans and investment strategies with external financing, particularly blended finance.
These frameworks, which can support shifts from high carbon to sustainable industries (OECD, 2022[3]), must also address local currency needs, ensuring that new climate financing goals do not further expose developing countries to foreign exchange risks. New instruments such as climate debt pause clauses,1 debt-for-nature swaps2 and sovereign disaster bonds3 have proven useful to help integrate risk mitigation into local financing strategies. Yet evidence shows that these tools remain underutilised in blended finance frameworks and need more emphasis in scenarios when local development priorities intersect with growing climate risks.
Local currency and financial markets
Local currency financing is critical to reduce foreign exchange (FX) risks and promote deeper domestic capital markets. Some progress in facilitating local currency financing has been made since 2020 in the form of local currency loans provided by some DFIs and local currency bonds promoted by a few donors and MDBs. However, initiatives have been fragmented and local currency financing has largely remained an under-prioritised objective of development finance. Blended finance deals are still mostly USD- or EUR denominated (OECD, 2022[4]), and hedging instruments are still either limited, expensive or unavailable (World Bank, 2024[5]). Capital markets in most developing countries remain shallow and lack the necessary depth to mobilise domestic capital including institutional investors.
Currency mismatches occur when there is a misalignment between the currency denomination of a borrower’s assets and liabilities or between liabilities and available currency resources. These mismatches take two main forms: 1) a balance sheet mismatch occurs when the currencies of assets and liabilities are different across all maturities; and 2) a maturity mismatch occurs when liabilities in a foreign currency surpass easily accessible resources such as hedges, foreign exchange income or liquid reserves (IMF, 2022[6]). Such mismatches expose borrowers to potential valuation changes driven by currency movements, making their debt more expensive and affecting solvency over long horizons and liquidity in the short term.4
A sustainable approach towards reducing FX risks includes the development of local capital markets and mobilising domestic actors in blended finance structures that facilitate local currency finance. Higher levels of local currency financing can strengthen domestic financial markets, enhance resilience to global shocks and support sustainable economic development (IMF, 2021[7]). Yet, local currency financing has proven challenging to deploy, necessitating careful planning to prevent market instability and increased borrowing costs. To be more effective, local currency solutions must be phased, integrated into broader financial systems and continuously refined to meet the evolving needs of developing economies.
The necessity of increasing concessional financing to support local currency lending has been emphasised by the European Commission's High-Level Expert Group on Scaling up Sustainable Finance (EU Commission, 2024[8]). While hard currency remains indispensable for certain sectors and contexts, there is growing consensus that strengthening local financial markets and using development banks to shoulder more FX risk are essential strategies to lowering reliance on external hedging strategies (Financial Times, 2024[9]). This necessitates the use of blended finance strategies that strike a balance between the short-term requirement for accessible and affordable local currency solutions and longer-term initiatives to create resilient capital markets in emerging economies, including increased co-operation with domestic players like financial institutions, central banks and investors. As local capital markets grow, institutions such as TCX continue to play a key role in supplying local currency hedging solutions, providing a shorter-term, yet complementary approach for reducing currency risk (TCX, n.d.[86]).
Enabling environment
A robust enabling environment is a precondition for the success of blended finance interventions. Enabling conditions to unlock private investment include national regulations, policies, institutions, subsidies and incentives, public-private partnership frameworks as well as market and legal infrastructure. Enabling conditions can be created by several actors, although national governments and regulatory authorities have a critical role to play in ensuring enabling environments and enforcing adequate regulatory and institutional frameworks.
Positive developments have taken place in supporting the creation of sound enabling environments in emerging markets and developing economies, for example through bilateral donors’ policy dialogue and capacity-building programmes through government institutions and regulatory authorities (UNCDF/OECD, 2020[10]). MDBs and DFIs have also increased focus on policy-based lending, upstream reform and public sector capacity-building (e.g. IFC’s “upstream approach” and the World Bank’s cascade framework). In addition, new regional platforms have been established to better align reform efforts and local ownership with the provision of finance, as seen with initiatives such as the Africa Green Finance Coalition,5 the Team Europe Initiatives,6 amongst others (European Commission, n.d.[11]).
Despite positive developments and pockets of improvements, the overall progress remains insufficient to unlock larger flows of private capital. Evidence indicates that achieving transformational results requires long-term commitment to policy and institutional reform with a focus on institutional capacity-building and technical know-how of national and local government authorities, as well as support for regulatory and policy reforms that address structural obstacles to private finance mobilisation (World Bank, 2023[12]).
Capturing and reporting the impacts of macro-level catalytic technical assistance has proven challenging, particularly given the long-term horizons of achieving outcomes of such initiatives and the complexities of attributing outcomes. Several frameworks have or are currently being developed to capture activities that catalyse downstream investments; these include the World Bank’s Private Capital Enabled indicator (World Bank Group, 2025[13]), Publish What You Fund’s methodology (Publish What You Fund, 2024[14]), upcoming revisions to Joint MDB Framework for Reporting on Private Capital Mobilisation (IFC, 2025[15]) and the OECD’s DAC Working Party on Development Finance Statistics (WP-STAT) work on developing a catalysation methodology (OECD, 2024[16]). While these initiatives attempt to capture the catalytic impact of macro-level technical assistance, they also illustrate the trade-offs inherent in short-term reporting pressures versus the long-term horizons required for successful and lasting macro-level technical assistance. This trade-off has implications for the Guidance (see below).
Sub-principle 3.A. Support local development priorities
Blended finance should support investments that are aligned with national priorities to ensure that critical development priorities at the country level are met. Achieving alignment requires comprehensive inclusion of local context and perspectives at every stage of the project life cycle. By building inclusive partnerships with local stakeholders fostering local ownership and local investment, investors and development actors can help ensure that blended finance interventions are both impactful and sustainable. Establishing direct relations with credible local partners not only provides valuable insights into local needs and conditions, it also reduces risk perceptions among private investors. Investments tailored to local contexts and aligned with national and regional priorities are more likely to meet the dual goals of mobilising private finance while generating meaningful development impact, contributing to achieving the SDGs and delivering long-term benefits for local communities.
Effective alignment with local priorities requires careful planning and collaboration. While national governments often aim to attract investments to stimulate economic growth, certain projects may better align with specific local priorities and yield greater developmental outcomes. Blended finance can play a crucial role in financing businesses that serve local consumers and create decent jobs, ensuring that projects directly address people’s needs.
Align blended finance with national policies, strategies and local investment blueprints
Donors should ensure that blended finance initiatives are firmly rooted in recipient countries' policy frameworks, such as NDCs, NAPs, national biodiversity strategies and action plant, long-term strategies and INFFs. These frameworks articulate a country’s development vision and financing priorities, providing a roadmap for aligning international financial flows with local needs and sectoral plans.
Transform plans into investable proposals
Donors should support governments in translating national strategies into bankable projects. Technical assistance and capacity-building efforts can help create pipelines of investable opportunities that align with local development priorities while appealing to private investors. Additionally, ensuring early engagement with private sector investors, including asset managers, is crucial to aligning projects with commercial investment criteria. Investable projects should be structured to meet private sector needs, including risk-return expectations, liquidity considerations and regulatory compliance.
To better anchor blended finance in the local context and deliver a more transformational impact on local markets, while helping to transform plans into investable proposals, blended finance providers should look beyond single investment proposals and co-ordinate their operations where possible. A clustering of blended finance transactions (as opposed to focusing on project-level activities) may allow blended finance actors to achieve more systemic results in each market.
Use integrated national financing frameworks to promote policy coherence
Donors and other development finance providers should, where possible, make use of INFFs to promote cross-sectoral policy coherence and incorporate private funding into long-term development strategies. INFFs ensure that financing methods are integrated in national settings by combining public and private financial resources. The International Partners Group7 leverages INFFs to foster policy coherence, aligning international investments with national development goals. By doing so, it enables countries to attract and deploy private finance in a way that supports long-term, sustainable development.
Promote country ownership through inclusive stakeholder engagement
Country ownership is critical to the success and sustainability of blended finance projects. As outlined in the Kampala Principles,8 local actors should be co-owners in the design, implementation and monitoring of projects. Local investors also provide improved understanding and mitigation of local risks while providing much needed local currency finance.
Donors should ensure that local stakeholders are engaged throughout the project life cycle. Local stakeholders typically include national authorities, civil society organisations, local communities and beneficiaries, national development banks, as well as private actors such as investors, commercial banks and sponsors. Efforts should be made to collaborate with relevant local stakeholders in the design and implementation of both transaction-level and portfolio solutions. While it may not always be feasible to engage all stakeholders in every transaction, particularly in more complex financial structures, consultations should be inclusive and bottom-up where possible to increase the range of partners involved at the community level, as outlined in the Kampala Principles (GPEDC, n.d.[17]).
Stakeholder consultations should not be perceived as a single event but rather as a process parallel to the investment cycle. An ongoing engagement fosters a respectful and equal relationship in development co-operation and helps ensure that projects are better aligned with local needs and conditions.
A differentiated approach to stakeholder consultations could be taken depending on the type of project: For example, large infrastructure projects may require extensive consultations with a range of different stakeholders while consultations may be less extensive for direct investment in a small and medium-sized enterprise.
Subprinciple 3.B. Ensure consistency of blended finance with the aim of local financial market development, including the promotion of local currency financing
The development of efficient and robust local financial markets is essential in effectively channelling financial resources towards greater sustainable development outcomes in EMDEs. Local currency financing is a systemic enabler and should be treated as such.
Hence, donors should work to ensure that blended finance seek opportunities to expand the availability and affordability of local currency financing solutions, rebalance currency risks more equitably away from the borrower who shoulders most of the risk, and focus on crowding in domestic finance. This is essential to build local financial markets that allow blended finance to play out its transitory role and pave the way for private financing. Capacity building and improved co-ordination with local financial institutions – particularly central banks, ministries of finance and regulators within local markets – also provide opportunities to focus on systemic change that institutionalises sustainable local markets.
As evidenced in Box 3.1, there are deep-rooted constraints to local currency financing in EMDEs that stem from a combination of structural, market and instrument-specific challenges faced by DFIs, MDBs, and institutional investors.
Main constraints to scale private finance mobilisation in local currency
There are significant constraints to local currency financing particularly in relation to liability constraints in MDBs’ and DFIs’ business models and regulatory mandates. The structural need for capital preservation and financial self-sustainability is deeply embedded in their operations, as these institutions must balance development mandates with the imperative to ensure that returns from their assets can adequately cover operational costs and meet shareholder expectations (OECD, 2023[18]). This structural need, rooted in long and often politically challenging recapitalisation cycles, linked to the preference for safeguarding their AAA credit ratings, can deter DFIs and MDBs from taking on the heightened risks associated with local currency lending. Coupled with risk-averse statutory policies1 MDBs are often compelled to hedge exposures or avoid local currency financing entirely to preserve their net interest margins and maintain financial stability. Additionally, regulatory frameworks – whether external for certain bilateral DFIs or self-imposed by MDBs – create additional hurdles, making local currency lending more cumbersome and costly. In these higher-risk markets and geographies, the liabilities constraints found within these models restrict DFIs’ and MDBs’ investment operations more broadly.
Another significant constraint to local currency financing is a critical mismatch in both the incentives and instruments available to institutional investors, which limit private finance flows in local currency investments into EMDEs. Institutional investors, managing over USD 100 trillion globally, allocate more than 90% of their portfolios to bonds and listed equities (OECD, 2021[19]). However, the primary instruments offered by DFIs and MDBs – such as direct lending and intermediated private equity – are poorly suited to institutional investors’ needs. Direct lending, whether in hard or local currency, requires significant internal resources, making it unattractive for these investors. Private equity – despite being intermediated – carries challenges such as limited allocations to developing markets, high fees and indirect exposure to exchange risk due to local currency earnings from underlying assets. Furthermore, regulatory hurdles such as Solvency II discourage local currency investments by requiring larger capital reserves for foreign currency assets (Horrocks et al., 2025[20]).
Meanwhile, benchmarking practices tied to indices catered towards institutional investors such as the JP Morgan GBI-EM Global Diversified Index skew capital flows towards larger, more liquid issuers, and this is sidelining frontier markets where funding is most needed.
The scaling of local currency mobilisation in EMDEs is also severely hampered by local financial market gaps, shallow domestic capital markets, information asymmetries and weak regulatory and enabling environments. Insufficient know-how and operational capacity among local institutional investors limit their ability to assess and execute investments in alternative asset classes like private equity and infrastructure, even where regulatory frameworks permit such allocations. For example, Kenyan pension funds can allocate up to 10% of assets to private equity but have only achieved 0.32%, highlighting key misalignments between regulatory limits and actual investment behaviour (Kenyan Retirement Benefits Authority, 2023[21]).
Local investment is further restricted by issues such as smaller investment plans' inability to reach minimum ticket sizes, limited opportunities for diversification and a preference for high-yield government securities. Domestic regulatory restrictions on overseas investments, such as Brazil's 10% cap on foreign assets, also discourage global or regional diversification. Moreover, pension fund trustees often lack the tools to align investment strategies with long-term liabilities, as seen in East African pension schemes' limited engagement with private equity or infrastructure investments (FSD Africa, 2019[22]). The lack of standardised legal and regulatory frameworks, the shallow depth and infrastructure of the local capital market, the inability of local banks and asset managers to engage in financial intermediation, and the lack of reliable market data and credit rating systems all contribute to these structural problems and further limit the mobilisation of local currency financing.
Note 1. This is seen in the founding agreements of several World Bank Group entities, for example Art. IV Section 3(a) (b) of IBRD Agreement, but also in terms of local currency borrowing for example Art. IV Section 1.b of the IBRD Agreement and Art. III Section 6 of the IFC Agreement.
Blended finance can de-risk investments and encourage private sector participation and it can thus be a critical tool in enabling more innovative approaches to enhance the efficiency of both local and hard currency financing efforts. The context and trends of local currency financing since 2020 has emphasised a need to use blended finance strategies that strike a balance between the short-term requirement for accessible and affordable local currency solutions and longer-term initiatives to create resilient capital markets in emerging economies. To this effect, donors can use several sets of interventions in blended finance to de-risk hard currency investments, increase the availability and accessibility of local currency finance, and strengthen local capital markets (Chapter 6 contains case studies that illustrate different approaches to promoting local currency finance).
De-risk hard currency investments
A first set of interventions is concerned with addressing the currency issues linked to the activities of development finance providers, be they bilateral or multilateral. These strategies – which include hedging solutions, first-loss guarantees and FX liquid facilities – aim to protect lenders and borrowers from the impact of a range of currency-related risks in the short term (while building and deepening local capital markets is necessary to sustainably reduce FX risks over time).
Hedging solutions
Donors should consider supporting hedging solutions as an effective short-term solution for FX risk mitigation. Hedging instruments, such as non-deliverable cross-currency swaps9 and forward contracts,10 enable development finance actors to lend in hard currency while providing borrowers with local currency funding, thereby mitigating FX risks.
Hedging solutions are a viable solution, for example in SME and microfinancing sectors, given their typically short-term maturities. It is important to note that hedging approaches might be inaccessible or unsuitable for long-term projects like private equity investments or infrastructure projects with maturities exceeding 15-20 years. Additionally, hedging costs tied to a fully hedged project can, in certain situations, surpass the actual costs of depreciation losses tied to unhedged position, limiting its cost-effectiveness, especially for borrowers in EMDE’s (OECD, 2025[23]). In high-risk sectors and geographies, the cost of providing hedging solutions can be prohibitively expensive, deterring private investment. In such cases, higher levels of concessionality, including grants or other support tools, may be necessary – as evidenced by IFC blended finance projects done in local currency which had an average concessionality of 11% of total project costs between 2010 and 2020, compared to the portfolio average of just 4.8% (IFC, n.d.[24]).
First-loss guarantees
First-loss guarantees are a powerful mobilisation tool to facilitate local currency financing. They effectively de-risk investments by absorbing initial losses, thereby reducing perceived risks and enhancing the attractiveness of projects, especially in volatile markets where local currency is most needed. As evidenced in Principle 2, guarantees have proven to be one of the most successful instruments for mobilising private capital, highlighting their consistent effectiveness across years and sectors (OECD, 2021[25]).
Foreign exchange liquidity facilities
FX liquidity facilities can increase borrowers’ access to local currency financing solutions. As donors and other development finance providers seek to concurrently mobilise global pools of capital and identify local currency solutions, they could leverage the market infrastructure of existing capital markets, thereby accelerating market development (OECD, 2025[23]). FX liquidity facilities mitigate the impact of exchange rate volatility and can provide borrowers with temporary access to foreign currency to meet debt obligations during adverse movements. For example, the Brazilian Ministry of Finance and the Inter-American Development Bank are currently working to finance the Eco Invest Brazil programme through a combination of blended finance solutions, including via a FX liquidity facility, with the support of the United Kingdom Foreign, Commonwealth & Development Office (Brazilian Chamber of Deputies, 2024[26]).
Develop local financial markets
While the above first set of interventions address currency issues in the short term, a second set of interventions is concerned with building and deepening local capital markets and reducing FX risks over time. These include engaging local financial actors, establishing credit bureaus and increasing transparency, supporting broader financial infrastructure and strengthening local capital markets.
Local financial actors
Mobilising domestic private capital is essential for the long-term sustainability of blended finance interventions and donors should ensure that blended finance prioritise engaging local financial actors – such as banks, intermediaries and investors – as active participants in investment structures. This includes structuring transactions that enable local institutional investors to invest through, for example local currency project bonds that align liabilities and assets and thereby reduce currency mismatches.
Local banks play a critical role in mobilising local currency financing, particularly for SMEs, by leveraging domestic deposit bases that are often a stable and low-cost source of funding in developing economies. However, their capacity to provide long-term loans is typically constrained by the short-term nature of these deposits. To bridge this maturity mismatch, additional support – such as concessional loans, bond structures or local intermediaries – is often needed. While DFIs and MDBs have been effective in providing hard currency financing, this creates vulnerabilities when borrowers lack foreign currency revenue streams. As such, donors and other providers of development finance should prioritise enabling local banks to access and mobilise local capital markets, helping them lend in local currency at affordable terms. Initiatives like FrontClear have proven the value of deepening local interbank markets by providing credit guarantees and technical assistance, thereby enhancing liquidity management and enabling long-term domestic lending.
In parallel, donors should engage MDBs and DFIs to reassess how effectively their local bank-intermediated models leverage deposit bases and whether more support should be given to specialist non-bank financial institutions to obtain banking licenses, granting them access to untapped local deposit funding.
To further strengthen local financial ecosystems, donors should support targeted technical assistance to domestic investors and asset managers to enhance their capacity to assess and invest in risky assets. This includes improving regulatory frameworks; environmental, social and governance strategies; credit-rating mechanisms; and risk assessment tools that enable local institutions to better participate in blended finance transactions. Engaging domestic capital not only increases financial resilience but also reduces reliance on external concessional funding, fostering a more self-sustaining and scalable investment environment.
Donors should also support adopting and structuring originate-to-share models in MDBs and DFIs that can help local financial actors to match local currency liabilities with local currency assets (e.g. project bonds) (see also Principle 2). The focus should be on structuring instruments that can readily be bought by local institutional investors (OECD, 2025[23]). This may involve structuring transactions with both hard currency and local currency components.
Credit bureaus and transparency
Donors should support initiatives to establish credit bureaus and enhance transparency in data on borrowers, as credit bureaus and data transparency work to reassure local investors. Due to the high origination costs and credit risks, lending to local SMEs is expensive which frequently discourages local banks from making loan extensions (OECD, 2025[23]). Limited information on borrower creditworthiness – which prevents local money from being efficiently directed into domestic investments – further exacerbates the challenges. Credit bureaus and improved data transparency can address these gaps, providing local investors with greater confidence and enabling better credit assessments. In this connection, digitalisation of financial services and products plays a key role in improving data availability and quality. Also, microfinance organisations will still be crucial in enhancing credit availability and financial inclusion for smaller businesses.
Financial infrastructure
Donors should consider supporting broader financial infrastructure development to enhance the effectiveness of local financial markets. This can include modernising payment systems, improving clearing and settlement mechanisms, and establishing reliable trading platforms to facilitate efficient transactions of local currency-denominated assets. Additionally, improving the effectiveness of credit rating agencies would enable them to provide better and more accurate credit ratings for local currency assets, reducing the challenges associated with perceived versus real risk in EMDEs (see also Principle 4).
Local capital markets
A well-functioning local capital market is critical for financial resilience, offering a sustainable alternative to foreign-denominated debt (World Bank, 2020[27]). Robust capital markets provide diverse funding sources that support businesses with larger, longer-term financing options while reducing dependency on external flows. In addition, well-developed markets allow governments to better fund public infrastructure projects and address fiscal needs domestically.
Donors should ensure that incentives are provided for local banks to issue bonds with the aim of encouraging longer-term local currency lending and strengthening the alignment between local currency liabilities and assets. This two-pronged strategy addresses currency imbalances and promotes local market expansion. Encouraging local banks to issue debt on local capital markets can strengthen financial resilience and promote the development of corporate bond markets. Financial institutions already dominate global and regional corporate bond markets, where banks are often the first issuers. For example, the International Capital Market Association estimates that as of August 2020, 53% (USD 21.5 trillion) of outstanding corporate bonds were issued by financial institutions (ICMA, 2020[28]).
Reform and support multilateral development banks and development finance institutions to facilitate greater local currency lending
Risk mandates and regulatory barriers
Donors should engage MDBs and DFIs to reassess risk mandates and regulatory constraints that limit local currency lending. These constraints should be carefully examined to ensure they do not unduly restrict MDBs' and DFIs’ capacity to offer local currency finance, especially when such funding is in line with development directives.
Simultaneously, prudential laws in DFIs’ home countries frequently prohibit bilateral DFIs from taking on local currency risk. Despite being designed to protect financial systems, these rules might be unnecessarily restrictive given the relatively low systemic risk posed by development finance. Donors should revisit these constraints and engage with relevant regulatory authorities to explore regulatory adjustments that would allow DFIs to engage more directly in local currency lending, hereby reducing the need for inefficient off-balance sheet vehicles.
Onshore treasury functions
Donors should engage MDBs with the aim of improving the efficiency of local currency financing by optimising treasury functions and enhancing co-ordination across institutions. A lack of harmonisation in MDB treasury operations results in fragmented liquidity pools and limits the scalability of local currency solutions (MDB Working Group, 2024[29]). Establishing onshore treasury operations in EMDEs – for example setting up local currency accounts or cash pooling arrangements managed by MDB treasuries – could improve liquidity conditions by enabling MDBs to source, manage, and deploy local currency directly within domestic markets. Such operations could minimise exposure to FX volatility, eliminate the need for expensive currency conversions and hold and recycle local currency profits from bond issuances or loan repayments.
MDBs should collaborate to pool donor resources and streamline funding mechanisms, as seen with initiatives such as the Asian Infrastructure Investment Bank and EBRD’s "Delta" programme (AIIB, 2024[30]). Donors should help fund similar efforts, ensuring that MDBs and DFIs take a co-ordinated approach to local currency operations rather than duplicating efforts.
Subprinciple 3.C. Use blended finance alongside efforts to promote a sound enabling environment
A sound enabling environment is a vital condition for mobilising private investment. The relationship between blended finance and a sound enabling environment is mutually reinforcing. In a perfect enabling environment, no blended finance intervention would be required in the first place. At the same time, blended finance can help create and deepen capital markets and support existing ones. It does so by providing capital to projects in a difficult environment, facilitating further reforms and changing the perception of risks through technical assistance programmes and capacity-building initiatives.
Developing a sound enabling environment involves supporting institutional capacity-building and technical know-how of local government authorities as well as supporting regulatory and policy reforms that address structural obstacles to private capital mobilisation.
Support developing countries’ institutional capacity building and technical know-how of local government authorities
Building institutional capacity refers to the process of enhancing the abilities, skills, resources and institutions within a developing country to empower local actors to take ownership of their development processes. Activities can include staff training, streamlining internal processes, participating in international events and conducting sectoral analyses, as well as establishing new institutions to address structural gaps and governance issues. Building capacity and empowering local institutions enable them to take a leading role in project management and implementation. This strengthens governance and ensures that projects remain sustainable beyond donor involvement.
Wherever possible, donors should ensure that blended finance projects are accompanied by institutional capacity building activities that empower local stakeholders to negotiate, structure and deploy appropriate financing arrangements, ensuring knowledge and skills are effectively transferred to partner countries (OECD/UNCDF, 2020[31]). Capacity building is a critical part of broader development finance efforts to address structural barriers that hinder effective private sector engagement. Capacity building should focus on interventions that can drive systemic change to investment environments and build a demonstration effect that may inspire confidence and mobilise further private capital. Initiatives should thus be designed to create long-term, sustainable improvements in the enabling environment, addressing fundamental weaknesses that can inhibit private capital flows in EMDEs.
Donors can, for example, contribute to policy dialogue, technical assistance and financing facilities deployed directly and through local partner banks and financial intermediaries. The overarching goal should be to enhance authorities' ability to attract and manage investments, including foreign direct investment and local investment. In emerging markets, where local authorities often lack institutional capacity, technical assistance can help overcome barriers to private sector engagement by creating a more supportive investment environment, identifying opportunities and providing targeted support to investors. Examples of capacity building at the local level include the EBRD’s Regional Energy Efficiency Programme (REEP) and the SECO-IFC Crop Receipt Program (both included as case studies in Chapter 6).
Support developing countries’ regulatory and policy reforms that address structural obstacles faced by both domestic and international investors
Donors should support regulatory and policy reforms as critical elements of creating a sound enabling environment. These can include investment and business climate reforms, sector-specific regulations, financial sector reforms or legal and judicial reforms. They can also include support to the development or improvement of public-private partnership frameworks. The aim of supporting the reform agenda should be to reduce risks for private investors, increase transparency and improve co-ordination between government and private sector actors. Reforms that help create a stable, transparent and investible climate for both domestic and foreign investors should be prioritised in close collaboration with partner governments.
While supporting the reform agenda, donors should leverage the comparative advantages of relevant partner organisations including MDBs, DFIs and civil society organisations. While donors play a critical role as actors in policy dialogue with government representatives including regulatory authorities in partner countries, MDBs and DFIs can play a critical role in diagnostics and reform prioritisation, investment climate assessments, co-ordinated public-private dialogue as well as providing technical assistance and capacity-building. MDBs and DFIs can also tie policy and regulatory reforms to investment commitments, providing stronger incentives for governments to reform.
Civil society organisations can play a critical role in policy advocacy and in shaping policy reform. They can facilitate more inclusive stakeholder engagements and promote voices of affected communities and marginalised groups. They often play the role as watchdogs for transparency and accountability and can lend increased public legitimacy to reform processes. Civil society organisations can also help build capacity, facilitate dialogue and raise public awareness around financial, legal and economic reforms so that citizens can participate meaningfully.
Balance project level and macro-level catalytic technical assistance
While regulatory reforms and capacity-building through technical assistance play a fundamental role in catalysing private investment, it should be noted that these are notoriously long-term initiatives for which the impact on specific investments and on mobilising private finance is often not immediately visible and may even take years to materialise; for the same reason the impact of the initiatives on private finance mobilisation is difficult to measure, attribute and account for. The interdependence between macro-level and project-specific technical assistance adds further complexity to attribution.
The OECD’s DAC Working Party on Development Finance Statistics identifies five categories of technical assistance which distinguish between technical assistance mobilising and catalysing private finance (Box 3.2, Figure 3.1).
The OECD DAC Working Party on Development Finance Statistics’ technical assistance categories in the context of mobilised private finance include: (Category A) direct support in accessing external financing; (Category B) public-private partnership transaction advisory services; (Category C) feasibility studies or other support to help develop and implement projects; (Category D) capacity building of official sector authorities; and (Category E) policy and regulatory reform.
Note: TA: technical assistance; PPP: public-private partnership.
Macro-level catalytic technical assistance initiatives (Categories D and E) differ from traditional, project-specific technical assistance by focusing on interventions that can drive systemic change to an investment environment. They are designed to create long-term, sustainable improvements in the investment climate, addressing fundamental weaknesses that can inhibit private capital flows. Compared to project-specific technical assistance, macro-level catalytic technical assistance aims to avoid the risks of market distortion that often come with direct subsidies or project-based interventions by improving the broader macro-level investment environment through regulatory reforms and capacity building initiatives rather than artificially lowering risk for specific projects. Additionally, macro-level catalytic technical assistance contributes to the development of resilient markets, allowing private finance to scale more effectively and endure over time without continued reliance on concessional resources.
Source: OECD, (2023[32]), Measuring Mobilised Private Finance through Technical Assistance: Revised Proposal, https://one.oecd.org/document/DCD/DAC/STAT%282023%2935/REV1/en/pdf.
Donors should be alert that the lack of robust methodologies to attribute and measure the impact of catalytic technical assistance makes it challenging to capture the full value of such initiatives and this may lead providers of development finance to favour project-level interventions over systemic, market-shaping initiatives. As a result, opportunities to leverage technical assistance for systemic change and long-term market development may be under-utilised. While project-level technical assistance remains crucial, macro-level catalytic technical assistance addresses the more underlying systemic barriers to help ensure that private finance flows can be transformative. Prioritising, scaling and co-ordinating these interventions alongside blended finance projects and anchor investments is therefore critical for donors to help ensure systemic, long-term impact and mobilise private finance effectively.
To underpin Subprinciple 3.C, Chapter 6 contains case studies that illustrate different approaches, instruments and lessons in supporting and improving enabling environments in EMDEs to make them more conducive to private investment. Together, they illustrate the importance of strong policy and regulatory frameworks, sector specific reforms, investment promotion and institutional co-ordination as well as support to local financial ecosystems.
References
[30] AIIB (2024), MDBs Working as a System for Impact and Scale, https://www.aiib.org/en/about-aiib/who-we-are/partnership/_download/Heads-of-MDBs-Viewpoint-Note-20-April-2024.pdf.
[26] Brazilian Chamber of Deputies (2024), Legislação Informatizada - MEDIDA PROVISÓRIA Nº 1.213, DE 22 DE ABRIL DE 2024 - Publicação Original, https://www2.camara.leg.br/legin/fed/medpro/2024/medidaprovisoria-1213-22-abril-2024-795526-publicacaooriginal-171592-pe.html.
[8] EU Commission (2024), Global Gateway: Scaling up sustainable finance in EU partner countries, https://international-partnerships.ec.europa.eu/document/download/b5b4ed83-ff82-4684-b301-bf5e4dcd1f28_en?filename=hleg-final-recommendations-april-2024_en.pdf.
[11] European Commission (n.d.), Team Europe Initiatives, https://international-partnerships.ec.europa.eu/policies/team-europe-initiatives_en#:~:text=Team%20Europe%20Initiatives%20%28%E2%80%98TEIs%E2%80%99%29%20focus%20on%20identifying%20critical,Europe%E2%80%99%20would%20ensure%20results%20with%20a%20transforma.
[9] Financial Times (2024), Time to trim the hedge costs, https://www.ft.com/content/eba81f44-6a8a-4a87-a993-1ed9f7fbb78f.
[22] FSD Africa (2019), “Market Study Report”, Private equity investing for pension funds in East Africa, https://fsdafrica.org/wp-content/uploads/2019/10/Market-Study-Report1.pdf.
[17] GPEDC (n.d.), “Kampala Principles”, On effective private sector engagement in development co-operation, https://www.effectivecooperation.org/system/files/2019-07/Kampala%20Principles%20-%20final.pdf.
[20] Horrocks, P. et al. (2025), Unlocking local currency financing in emerging markets and developing economies, https://www.oecd.org/content/dam/oecd/en/publications/reports/2025/02/unlocking-local-currency-financing-in-emerging-markets-and-developing-economies_af15df6a/bc84fde7-en.pdf.
[28] ICMA (2020), Bond Market Size, https://www.icmagroup.org/market-practice-and-regulatory-policy/secondary-markets/bond-market-size/.
[15] IFC (2025), Mobilization of Private Finance by Multilateral Development Banks and Development Finance Institutions, https://www.ifc.org/content/dam/ifc/doc/2025/2023-joint-report-mobilization-of-private-finance-by-mdbs-dfis.pdf.
[24] IFC (n.d.), How Blended Finance Works, https://www.ifc.org/en/what-we-do/sector-expertise/blended-finance/how-blended-finance-works.
[1] IIGCC (2024), Making NDCs investable. The investor perspective, https://www.iigcc.org/resources/making-ndcs-investable-the-investor-perspective.
[6] IMF (2022), Review of The Institutional View on The Liberalization and Management of Capital Flows, https://doi.org/10.5089/9798400204593.007.
[7] IMF (2021), Keeping it Local: A Secure and Stable Way to Access Financing, https://www.imf.org/en/Blogs/Articles/2021/03/12/blog-keeping-it-local-a-secure-and-stable-way-to-access-financing?utm_source.
[21] Kenyan Retirement Benefits Authority (2023), National Retirement Benefits, https://www.rba.go.ke/download/national-retirement-benefits-policy-october-2023/.
[29] MDB Working Group (2024), MDB Viewpoint: Local currency finance and hedging instruments for foreign exchange risk: Summary on Working Group Discussions, https://www.eib.org/files/documents/mdb-viewpoint-local-currency-finance-en.pdf.
[23] OECD (2025), Unlocking local currency financing in emerging markets and developing economies: What role can donors, development finance institutions and multilateral development banks play?, https://doi.org/10.1787/bc84fde7-en.
[16] OECD (2024), Handbook on measuring and reporting on Mobilised Private Finance in OECD DAC, https://one.oecd.org/document/DCD/DAC/STAT(2024)38/en/pdf?sessionId=1743778912540.
[32] OECD (2023), Measuring mobilised private finance through technical assistance - Revised proposal, https://one.oecd.org/document/DCD/DAC/STAT%282023%2935/REV1/en/pdf.
[18] OECD (2023), The Funding Models of Bilateral Development Finance Institutions, OECD Development Perspectives, https://www.oecd.org/en/publications/the-funding-models-of-bilateral-development-finance-institutions_2ee6960c-en.html.
[4] OECD (2022), Blended finance funds and facilities: 2020 survey results, OECD Publishing, Paris, https://www.oecd.org/content/dam/oecd/en/publications/reports/2022/06/blended-finance-funds-and-facilities_05511bbb/fb282f7e-en.pdf.
[3] OECD (2022), OECD Guidance on Transition Finance: Ensuring Credibility of Corporate Climate Transition Plans, Green Finance and Investment, OECD Publishing, Paris, https://doi.org/10.1787/7c68a1ee-en.
[19] OECD (2021), Mobilising institutional investors for financing sustainable development in developing countries. Emerging evidence of opportunities and challenges., https://one.oecd.org/document/DCD(2021)11/en/pdf.
[25] OECD (2021), The role of guarantees in blended finance, OECD, https://doi.org/10.1787/730e1498-en.
[31] OECD/UNCDF (2020), Blended Finance in the Least Developed Countries 2020: Supporting a Resilient COVID-19 Recovery, OECD Publishing, Paris, https://doi.org/10.1787/57620d04-en.
[14] Publish What You Fund (2024), What works: How to measure and disclose private capital mobilisation to increase private investment and close the SDG financing gap, https://www.publishwhatyoufund.org/app/uploads/dlm_uploads/2024/10/What-Works.pdf.
[10] UNCDF/OECD (2020), Blended Finance in the Least Developed Countries 2020: Supporting a Resilient COVID-19 Recovery, https://www.oecd.org/en/publications/blended-finance-in-the-least-developed-countries_57620d04-en/full-report.html.
[2] UNDP (2024), Making Finance Work for People and Planet, https://www.jointsdgfund.org/publication/making-finance-work-people-and-planet-how-countries-are-building-their-sustainable?utm_source.
[5] World Bank (2024), Unlocking Local Finance for Sustainable Infrastructure, https://www.worldbank.org/en/topic/infrastructure/publication/unlocking-local-finance-for-sustainable-infrastructure?utm_source.
[12] World Bank (2023), Lessons on creating an enabling environment for private sector climate action, https://ieg.worldbankgroup.org/podcast/lessons-creating-enabling-environment-private-sector-climate-action.
[27] World Bank (2020), “Capital Markets Development”, A Primer for Policymakers, https://documents1.worldbank.org/curated/en/228291627375113518/pdf/Capital-Markets-Development-A-Primer-for-Policymakers.pdf.
[13] World Bank Group (2025), World Bank Group Scorecard, https://scorecard.worldbank.org/en/data/result-details/CSC_RES_PRIV_CAP_ENAB?orgCode=ALL&refareatype=REGION&refareacode=ACW&age=_T&disability=_T&sex=_T.
← 1. Climate debt pause clauses are contractual provisions in sovereign debt agreements that allow for the temporary suspension of debt service payments following predefined climate-related disasters. These clauses are aimed at providing fiscal space for recovery efforts.
← 2. Debt-for-nature swaps are financial mechanisms whereby a portion of a country's external debt is forgiven in exchange for local investments in environmental conservation or climate resilience (see also Subprinciple 2.B).
← 3. Sovereign disaster bonds are securities issued by sovereign governments that provide rapid financing in the event of a natural disaster. They are typically triggered by parametric indicators such as wind speed or seismic activity.
← 4. For example, infrastructure projects in the renewable energy sector frequently produce revenue in local currency (utilities) yet necessitate substantial hard currency funding for imports (equipment or construction materials). The debt load associated with these imports rises when hard currencies, such as US dollars or euros, appreciate relative to local currencies, yet revenue, which is expressed in the depreciating local currency, is still insufficient to meet growing expenses - thereby potentially discouraging international private sector investment in infrastructure projects that yield local currency earnings.
← 5. The Africa Green Finance Coalition (AGFC) is a pan-African initiative supported by governments, development banks, and private sector actors aimed at scaling green finance through enabling policies, regional co-operation, and capacity building (for more info, see Africa Green Finance Coalition (AGFC) - FSD Africa.
← 6. Team Europe Initiatives are joint efforts by EU institutions, Member States, and European development finance actors to align and co-ordinate development co-operation, particularly to scale investments in priority sectors such as climate and digitalisation (for more info, see Team Europe Initiatives - European Commission.
← 7. The International Partners Group, announced at COP26, is a coalition of countries committed to supporting EMDEs in their transition to sustainable energy systems. Its membership varies depending on the specific partnership and country involved (e.g. South Africa, Viet Nam) (for more info, see Joint Statement from the International Partners Group.
← 8. The Kampala Principles toolkit provides tailored advice to countries and organisations engaging in private sector partnerships in development co-operation. It includes practical guidance on how to design, implement and review policies and partnerships to address global challenges and deliver on the 2030 Agenda through private sector engagement (for more info, see Kampala Principles | Global Partnership for Effective Development Co-operation.
← 9. Non-deliverable cross-currency swaps are a derivative contract that allows two parties to exchange interest payments and currency exposures between a hard currency and a local currency, settled in cash without physical delivery. They are often used when capital controls restrict currency convertibility.
← 10. Forward contracts are customised financial agreements between two parties to buy or sell an asset at a predetermined price on a future date. They are commonly used to hedge against foreign exchange risk.