Blended finance has emerged as a transformative tool to bridge the financing gap required for sustainable development. In an era of constrained public budgets and rising private capital pools, its catalytic potential lies in mobilising resources and addressing critical barriers to investment and development, including high transaction costs, currency risk and immature local capital markets.

Debt, equity, first-loss capital, grants and credit enhancement tools, such as guarantees, all play a pivotal role in unlocking financing. This type of capital often takes on disproportionate risk or concessionary returns to unlock private investment that might otherwise remain sidelined.

Guarantees and first-loss capital structures are particularly instrumental in addressing supply-side risks and reducing the cost of capital. They have even proven effective in markets where perceived risks deter private investment. For instance, InfraCredit, a local currency credit guarantor co-developed by the Nigeria Sovereign Investment Authority, has successfully mobilised domestic institutional capital for infrastructure projects in Nigeria. InfraCredit guarantees have also reduced dependency on international private capital and mitigated currency risks, emphasising just how blended finance instruments can catalyse local market development.

Similarly, the Green Guarantee Company exemplifies how guarantees can mobilise local and international capital to scale green infrastructure projects. NSIA's Construction Finance Warehouse Facility provides early-stage debt funding to projects, positioning them to eventually access the capital market for longer-term financing. This strategic approach has successfully facilitated the sustainable development of multiple clean energy projects, addressing key barriers to private sector investment.

Programmes and incentives

Functioning as a means of signalling confidence to other investors and attracting additional capital, equity is a vital component for demonstrating ‘skin in the game’. NSIA has effectively adopted this model in several of its projects, deploying equity to develop proof of concepts and catalyse further investments.

Grant funding also plays an essential role here, such as in enabling and supporting early-stage activities like project preparation and technical assistance. Increasingly, performance-based grants are being adopted to enhance project success and maximise the impact of funding. For example, the World Bank's Nigeria Electrification Project and Sustainable Energy for All Universal Energy Facility have successfully deployed performance-based grants to expand energy access in Nigeria’s underserved communities. By incentivising performance, these programmes demonstrate how well-structured grant mechanisms can deliver measurable outcomes while creating a pipeline of investable projects.

The role of strategic partnerships

At the core of successful blended finance initiatives are partnerships that transcend traditional silos. Effective collaboration among public institutions, private investors, development finance institutions, institutional investors and philanthropic organisations creates a shared ecosystem where each actor’s strengths are leveraged effectively.

In this ecosystem, public institutions and DFIs function as risk mitigators, providing guarantees, first-loss capital or concessional financing that de-risk investments for private actors. Where private investors bring scale, efficiency and market expertise, institutional investors contribute patient capital and philanthropic entities contribute catalytic grants.

These key actors can create tailored mechanisms that unlock capital at scale to drive sustainable growth. Platforms like InfraCredit and GGC exemplify how strategic alliances can unlock financing for pioneering ventures and foster systemic change, underscoring the transformative potential of blended finance partnerships.

The path forward

The International Energy Agency estimates that $80bn-$100bn will be needed annually to unlock the private capital required for growth opportunities in emerging markets and developing economies. Achieving this ambitious target requires a focus on several key enablers to fully harness the potential of blended finance. These include strengthening policy and regulatory frameworks to attract private investors, strengthening institutional capacity of local stakeholders to scale blended finance solutions sustainably and improving data integrity to increase investor confidence and facilitate the replication of successful models.

Blended finance offers an encouraging pathway to sustainable development, but its success depends on intentional design and execution. Continued experimentation with hybrid structures will be crucial to addressing market-specific challenges. By leveraging the complementary roles of these catalytic instruments and strategic partnerships, the global community can unlock unprecedented opportunities for sustainable growth.