Can Leveraged Funding Attract Enough Private Sector Funding to Close the SDG Financing Gap?

The United Nations Capital Development Fund (UNCDF) led a virtual session on engaging the global development community to better leverage donor funding in order to scale up private investment in small and medium sized enterprises (SMEs) in least developed countries (LDCs). The message was clear: Now more than ever we must work together to address the 17 Sustainable Development Goals (SDGs). 

Global challenges require global solutions, and only by working together across all sectors, public, private, finance, civil society, global agencies, etc., will we develop the actionable solutions we need by 2030 when we aim to close the SDG gap. Of course this is so much easier said than done. Yes, leveraging donor funding is more critical than ever before. Traditional grant based aid alone is not sufficient to translate SDGs into reality. The speakers reiterated several times that we must tap into private financing. Yet the big question is how do LDCs attract new pools of funding, deliver social and financial return and ensure funding gets to those who really need it as they work to supercharge their economies?

The UNCDF shared their intent to ensure development interventions are equally benefiting those who are furthest behind. They recognize that these support mechanisms can be improved.

That’s encouraging, and perhaps a vast understatement.

The private sector is already engaging in leveraging public development funding in various ways. This ranges from interjecting investment capital, creating access for smaller companies, helping improve gender equity in SME financing, differentiating markets and building programs for blended finance. There is still some short sightedness, however. When one of the panelists from Bamboo Capital Partners indicated that some of their smaller investments are at levels around $250,000, it makes me wonder what SMEs in LDCs are structured in such a way that they can even accept $250,000? Frankly even small companies in the United States may not be able to absorb that level of funding. Are smaller tranches an option? Certainly government assistance programs can support smaller companies with smaller cash assistance needs. Though in many countries, support for small business during times of disaster or economic turndown simply doesn’t exist in government budgets. Again, how do private sector actors reach those who are not having their needs met, and how can governments support/leverage those efforts?

The question I raised was this: Private sector is already doing quite a bit to fund SDG gaps. Yet many groups in LDCs are still not reached. Beyond financial investors, how can commercial entities that have an interest in investing in new and diverse regions know where their investments in market development will be matched by government transparency and infrastructure support? Currently many companies depend on other government co-funding as first loss guarantee. Are there other options?

According to the panelists, only 3-4% of overseas development assistance (ODA) is used for private sector investment. How do you leverage that at a higher rate? One attendee rightly suggested that given 70% of populations in rural areas in Africa, for example, is supported by agriculture, how does funding support the need to absorb additional blended capital (i.e. equity and debt) in small, rural agricultural communities? Until now, much investment has been in the form of grant funding or zero-interest rate loans.

I have no doubt the private sector is taking this financing gap seriously. It’s still unclear, though, how much of leveraged private sector funding goes to traditional technical assistance, humanitarian support and philanthropy rather than shoring up business systems, investing in new business models and supporting small, growing businesses in LDCs.

Bamboo Capital Partners, as well as UNCDF and several donor governments have committed to the BUILD Fund, a blended finance vehicle to stimulate small businesses in LDCs. I was encouraged to hear that several European governments, including Sweden, Luxembourg, Noway and the Netherlands, will contribute to this fund, and recognize that regulatory environments, infrastructure, financial institution stability, first loss guarantee programs, and micro-funding approaches must be shored up beyond what we’ve seen over the last 20 years. “It’s all needed," and while quite a lot of money has been delivered (perhaps in the billions), there needs to be a newer approach.

What does that look like?

I certainly don’t have all of the answers. All I know, from speaking to private sector companies, as well as professionals working in government funding, is that coordination, clear identification of gaps and needs, more transparency from LDC governments, first loss assurance, and shored up markets will be necessary to make significant progress.

What are your thoughts on this issue?

​Feel free to share in the comments or email me anytime: jsonenshine@connectiveimpact.com