The International Finance Corporation’s Blended Finance Operations Findings from a Cluster of Project Performance Assessment Reports © 2020 International Bank for Reconstruction and This work is a product of the staff of The World RIGHTS AND PERMISSIONS Development / The World Bank Bank with external contributions. The findings, The material in this work is subject to copyright. 1818 H Street NW interpretations, and conclusions expressed in this Because The World Bank encourages dissemination Washington, DC 20433 work do not necessarily reflect the views of The of its knowledge, this work may be reproduced, in Telephone: 202-473-1000 World Bank, its Board of Executive Directors, or the whole or in part, for noncommercial purposes as Internet: www.worldbank.org governments they represent. long as full attribution to this work is given. 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Photo credit: Dragos Lucian Birtoiu /Shutterstock The International Finance Corporation’s Blended Finance Operations Findings from a Cluster of Project Performance Assessment Reports Careful observation and analysis of program data and the many issues impacting program efficacy reveals what works as well as what could work better. The knowledge gleaned is valuable to all who strive to ensure that World Bank goals are met and surpassed. Abbreviations IDA International Development Association IFC International Finance Corporation MIGA Multilateral Investment Guarantee Agency All dollar amounts are U.S. dollars unless otherwise indicated. Independent Evaluation Group Management and Project Performance Assessment Report Team Director-General, Independent Evaluation Ms. Alison Evans Director, Financial, Private Sector, and Sustainable Development Mr. José C. Carbajo Senior Manager, Finance and Private Sector Development Mr. Stoyan Tenev Task Managers Mr. Hiroyuki Hatashima Ms. Unurjargal Demberel 2 The International Finance Corporation’s Blended Finance Operations Contents Acknowledgments 5 1. Context6 International Financial Institution Principles of Blended Concessional Finance9 2. Results and Lessons from Earlier Projects (2010–14) 10 Earlier Projects Reveal Startup Challenges10 Two Relevant Lessons from Early Experience 12 3. Deep Dives into Recent Blended Finance Projects (2012–16)13 Projects Evaluated13 Evaluation Findings from Deep Dive Cases18 Did Projects Realize Commercial Sustainability? 18 Did Projects Provide Sustainable Economic Benefits? 18 Effects Beyond the Project Entities Were Vital for a Stronger Development Footprint of the Project 19 4. What Worked Well?22 Blended Finance Helped the Projects Get Off the Ground22 Advisory Services Played a Pivotal Role in Enhancing the Development Footprint of the Project23 5. Areas That Need Attention26 6. Lessons for Successful Blended Finance Projects27 Independent Evaluation Group | World Bank Group 3 Boxes Box 4.1. Projects Meeting Blended Financing Principles 25 Figures Figure 1.1. IFC’s Blended Finance8 Figure 2.1. Project Outcome Ratings11 Tables Table 3.1. Projects and Objectives14 Table 3.2. Blended Finance Used for the Projects16 Table 3.3. Summary of Project Outcome20 Table 4.1. Contributions of IFC Advisory Services or Technical Interventions24 4 The International Finance Corporation’s Blended Finance Operations Acknowledgments The Independent Evaluation Group team appreciates the availability of and support provided by the blended finance team of the International Finance Corporation (IFC), in particular support from Martin Spicer, Jeremie Dumon, the IFC project teams (Natalia Donde, Radwa Elsharkawi, Nelly Feze, William Kizito, Donald Nzorubara), and the Multilateral Investment Guarantee Agency Project Evaluation Report team (Bexi Jimenez Mota, Joana Nicolau, and Wenhe Zhang) for this evaluation. The team is grateful to IFC’s clients for the opportunity to interact with key stakeholders during field visits. The evaluation team was led by Hiroyuki Hatashima and Unurjargal Demberel. Gürkan Kuntasal per- formed the environmental and social evaluation with support from Sanjeev Aggarwal and Elaine Wee- Ling Ooi. Beata Lenard, Ichiro Toda, and Carlos Otobed Stagliano peer reviewed the underlying project evaluations. Data support was provided by Leonardo Bravo and Feruza Akbarovna Abduazimova, and administrative and budget support were provided by Marylou-Kam Cheong, Feruza Akbarovna Abdu- azimova, Emelda Cudilla, and Linette Atieno Malago. Independent Evaluation Group | World Bank Group 5 1. Context Blended finance is a risk mitigation tool applied to investments for which it is difficult to attract commercial funding. Blended finance refers to the combination of concessional and commercial funding in private sector–led projects. Its rationale is to support projects with potentially high social benefits that would not attract funding on strictly commercial terms because of their high risks. The purpose of this evaluation is to inform IFC’s approach to the deployment of the blended finance instrument with evaluative findings on the perfor- mance and outcomes of projects using it. This note synthesizes evaluation findings from two sources: (i) IFC’s early experience with blended finance as reflected in 14 project evaluations of projects approved over 2010–14; and (ii) a cluster of five Project Performance Assessment Reports of projects approved over 2012–16. The emphasis is on findings from the more recent projects. 6 The International Finance Corporation’s Blended Finance Operations Two definitions of blended finance exist among development players. Most agree on the core elements of the definition, which involve stra- tegic use of public or concessional funding to catalyze private sector investment for development. Organisation for Economic Co-operation and International Financial Institution Working Group Development–Development Assistance Com- Definition mittee Definition “Combining concessional finance from donors or “The strategic use of development finance for the third parties alongside DFIs’ [development finance mobilization of additional finance toward sustain- institutions’] normal own account finance and/ able development in developing countries,” with or commercial finance from other investors, to ‘additional finance’ referring primarily to commer- develop private sector markets, address the Sus- cial finance” (October 2017). tainable Development Goals (SDGs), and mobilize private resources.” (April 2017) This definition focuses on the mobilization of commercial finance, which is not currently being The DFI definition refers to a specific segment of directed toward development-related invest- the institution’s operations that receives conces- ments, including all official development assis- sional financing as a supplementary element to tance, foreign direct investments, grants, trust enhance its potential. funds, and others. Blended finance by the International Finance Corporation (IFC) follows the DFI definition and excludes grants in recognizing concessional co-invest- ment with IFC’s own investment. Independent Evaluation Group | World Bank Group 7 Figure 1.1. IFC’s Blended Finance Concessional Coinvestment + IFC Investment Concessional coinvestment = Financing at softer terms through price, tenor, rank, or security, or a combination to reduce project risk Market-based financing Senior or mezzanine debt on subcommercial terms Guarantee (for example, first loss for a portfolio) Early stage equity with insufficient returns Grants DFI working group definition of blended finance OECD DAC definition of blended finance Note: DFI = development finance institution; OECD DAC = Organisation for Economic Co-operation and Devel- opment–Development Assistance Committee. IFC leads international financial institutions in establishing common principles of blended finance that guide the justification of deploying concessional resources. 8 The International Finance Corporation’s Blended Finance Operations Development Finance Institution Principles of Blended Concessional Finance Principle 1. Present a rationale or economic case for using blended concessional finance DFI support of the private sector should contribute something beyond what is available or something otherwise absent from the market and should not crowd out the private sector. Principle 2. Support crowding-in and minimum concessionality DFI support to the private sector should, to the extent possible, contribute to catalyzing market development and to the mobili- zation of private sector resources. Principle 3. Create commercial sustainability DFI support of the private sector and the impact achieved by each operation should aim to be sustainable. DFI support is therefore expected to contribute toward the commercial viability of the institution’s clients. Principle 4. Reinforce markets DFI assistance to the private sector should be structured to effectively and efficiently address market failures and minimize the risk of disrupting or unduly distorting markets or crowding out private finance, including new entrants. Principle 5. Promote high standards DFI private sector operations should promote adherence to high standards of conduct in their clients, including in the areas of Corporate Governance, Environmental Impact, Social Inclu- sion, Transparency, Integrity, and Disclosure. Independent Evaluation Group | World Bank Group 9 2. Results and Lessons from Earlier Projects (2010–14) IFC’s approach to and experience with blended finance projects has been evolving since FY10. FY10—18 $929 million + support 169 $3.5 billion concessional projects IFC financing donor funds The new Replenishment of the International Development Association (IDA)–IFC–Multilateral Investment Guarantee Agency (MIGA) Private Sector Window includes a blended finance facility, a risk mitigation facility, a local currency facility, and a MIGA guarantee facility. The Window is expected to generate projects and mobilize capital in IDA countries and fragile and conflict-affected situations. Earlier Projects Reveal Startup Challenges Fourteen projects with blended finance components were sampled and evaluated during the regular project evaluation cycle. These projects were from the early years of formal blended finance operations, were predomi- nantly in middle-income countries, and mostly focused on climate change. Most of the projects were “wholesale” (that is, using financial intermediaries to target beneficiary companies) as opposed to “retail” (projects with identi- fied client companies). Of 14 evaluated projects, 4 achieved their development objectives and met performance benchmarks. Overall, these early and predominantly risk-shar- ing facility projects had weak business and economic effects compared with what was expected at the time of approval by the Board of Executive Direc- tors. However, they showed good adherence to environmental and social standards because they were mostly with repeat clients who had already established environmental and social capacities. Low use of facilities was frequent, and projects’ intended objectives were often not realized. 10 The International Finance Corporation’s Blended Finance Operations Figure 2.1. Project Outcome Ratings Development outcome 29 21 Project business success Economic sustainability 14 71 Environmental and social effects 36 Private sector development 0 10 20 30 40 50 60 70 80 Projects with high outcome ratings (percent) Note: The development outcome rating is a synthesis assessment of the project’s results across four development dimensions. In a binary analysis performed by the Independent Evaluation Group, “high outcome rating” refers to mostly successful or better on the six-point scale of development outcome and to satisfactory or better on the four-point scale for the rest of criteria. Independent Evaluation Group | World Bank Group 11 Two Relevant Lessons from Early Experience 1.  Blended finance did not provide enough incentive for clients to enter into new, perceived high-risk business. Technical assis- tance was also not sufficient. A sponsor’s business model and client base should be aligned with the type of intended beneficiaries. Otherwise, low use is to be expected (for example, banks whose main clients are large industries would use little medium enterprise finance). Assessment of demand for sustainable financing in the target segment (small and medium enterprises) was limited. 2.  The business case for the development project should be strong and based on robust market assessment. If the business case is weak, continued reliance on government support should be questioned. For instance, in several cases, governments froze the implementation of a renewable energy regulatory framework, which negatively affected the client bank’s expan- sion to financing small hydropower projects. If the success of the project requires improved policy and regu- latory frameworks or adequate regulatory incentives, coopera- tion between IFC and the World Bank becomes key. These early projects, which predate the prioritization of fragile and con- flict-affected situations (FCS) and low-income and IDA countries, do not necessarily align with the current emphasis on such countries as indicated more recently by donors such as the Global Agriculture and Food Security Program or the Private Sector Window, the latest and growing area of IFC’s blended finance. 12 The International Finance Corporation’s Blended Finance Operations 3. Deep Dives into Recent Blended Finance Projects (2012–16) In addition to the project evaluations from the regular cycle, the Indepen- dent Evaluation Group conducted deep dives of purposefully selected projects (four IFC projects with blended finance) that reflect the World Bank Group’s current strategic emphasis on low-income countries and FCS. They had a mix of financial instruments such as equity, subordinated debt, and risk-sharing facilities, in Africa and the Middle East. A MIGA project was also reviewed for relevant lessons. Projects Evaluated The IFC projects covered a dairy producer, leasing for agriculture cooper- atives, a food processing company, and a fund for affordable housing with green features. MIGA supported a wastewater treatment plant operating under a public-private partnership arrangement with an expansion using a commercial bank loan and donor funding. Independent Evaluation Group | World Bank Group 13 Table 3.1. Projects and Objectives Industry Dairy Leasing Food processing Establish a new, fully oper- Introduce equipment leasing Complete expansion of pro- ational, higher-capacity milk for agriculture cooperatives, duction facility for specialty processing facility and milk which otherwise face the nutritious products for relief collection centers high cost of maintaining old agencies equipment and are unable to Project provide good product collec- tion from rural farmers ƒ  Provide market access ƒ Reach small farmers ƒ Enhance food security for  and help improve the and contribute to improving the vulnerable population incomes of dairy farmers smallholder farmers’ income in the country by increasing the quality of ƒ Improve health and  cocoa collected education outcomes for ƒ Contribute to the devel-  children opment of a formal dairy ƒ Increase lending to Objectives industry cooperatives by replicating in other financial institutions ƒ  Generate direct perma- nent employment for 150 people and improve the livelihoods of over 10,000 farmers in rural areas Note: MIGA = Multilateral Investment Guarantee Agency. 14 The International Finance Corporation’s Blended Finance Operations Affordable housing Wastewater treatment plant (MIGA) Establish a fund for early Expand the existing wa- investments in affordable ter treatment plant on a housing projects build-operate-transfer basis to enhance its capacity to meet the needs of the growing population (the MIGA guarantee was for private sector shareholders under the existing build-op- erate-transfer arrangement, for coverages of country risk events) ƒ  Increase supply of quality ƒ Expand wastewater and  affordable housing in sludge treatment capac- country ity to increase access to safe water and sanitation ƒ Create jobs during both  construction and proper- ƒ  Improve the local envi- ty management ronment and contribute to energy production, ƒ Introduce economic employment generation, stimulus through inputs, government revenue, and infrastructure, and higher the development of other disposable income businesses ƒ Develop green homes  that incorporate ener- gy- and water-efficient technologies Independent Evaluation Group | World Bank Group 15 Table 3.2. Blended Finance Used for the Projects Industry Dairy Leasing Food processing The sponsors of a greenfield The agriculture cooperatives The food product had strin- gent quality standards, and Rationale for Blended Finance operation in the dairy sector in did not have access to formal an IDA country with weak in- banking systems, and banks the facility needed increased frastructure, market and supply were reluctant to work with capacity for timely response chain uncertainties, sensitivity them. to emergencies. The sponsor to commodity price fluctua- had a limited track record tions, and intense competition in manufacturing specialty from semiformal and informal products, and the company businesses, were new to the was exposed to the risk of dairy sector and did not have client concentration of key aid the finances to support the IFC agencies. loan in the case of acceleration. ƒ  The interest rate for blend- ƒ  The blended finance com- ƒ The blended finance loan  ed finance was lower than ponent of the mezzanine had the same terms as the Blended Finance Features or Subsidies that for IFC’s loan. loss tranche would reduce IFC loan but subordinated. the expected loss for IFC’s ƒ The subsidy was given in  tranche, making the price ƒ The subsidy was given in  the form of a lower interest the form of not charging of the deal close to the rate charge and subordina- subordination premium, level acceptable to project tion compared with IFC’s thus lowering financial counterparts. loan, which lowered costs charges compared with the for the client company. ƒ  The subsidy created a instrument risk. lower guarantee fee for the ƒ The subsidy element was  client bank to carry out the ƒ  The subsidy was estimated estimated at 5% of total at 2.7% of total project leasing program. project cost. cost. ƒ The subsidy element was  estimated at 2.5% of total project cost. Note: IDA = International Development Association; IFC = International Finance Corporation; MIGA = Multilateral Investment Guarantee Agency. 16 The International Finance Corporation’s Blended Finance Operations Affordable housing Wastewater treatment plant (MIGA) The cost of greening is high A gap exists between the ability and willingness to and cannot be passed on from pay for wastewater treatment and the actual cost developers to home buyers of treatment. Water and wastewater infrastructure and renters. The affordable often have high social returns but cannot achieve housing fund would not have socially acceptable commercial rates of return. invested in the development Private investors have to make substantial upfront of green homes because the investments with long gestation periods but often additional cost of greening face capped returns and possible pressures to would have lowered returns for subsidize users. its investors. ƒ Blended finance was in the  ƒ The project was financed through a syndicated  form of equity, with lower commercial bank loan, government funding, returns than those for its and a bilateral grant. limited partners by initial capping of returns, with ƒ The subsidy was in the form of grants to the  catching up once other project capital works to lower the capital cost investors were paid the of the expansion. expected returns. ƒ A grant covering more than half of project cost  was needed to achieve the objective of afford- ƒ IFC structured blended  finance in the fund to par- able treatment charges. tially cover the incremental greening costs. ƒ By halving the investment cost from the project  company, the project company could lower its operating cost (including financial charges), thus ƒ The equity was estimated  at 2% of total fund size. lowering the wastewater treatment charges. The lower bill for treatment partially offsets the government’s subsidy for the end users. Independent Evaluation Group | World Bank Group 17 Evaluation Findings from Deep Dive Cases Did Projects Realize Commercial Sustainability? In all cases, commercial sustainability was achieved. The creation and expansion of viable businesses were necessary conditions to realize the intended project benefits supported by blended finance. Dairy and food processing companies achieved successful expansion (out of a high-risk greenfield period, which established a track record) and exponential revenue growth and realized high market share. For leasing and wastewater treatment plant projects, the commercial return was moderate because the deal structures capping the return. For them, social return significantly exceeds private returns, which is an important criterion for deploying subsidies. Did Projects Provide Sustainable Economic Benefits? All five projects realized economic benefits and achieved the sustainability of results despite high riskiness. They brought positive effects to end beneficiaries and to the markets in which they operate. Dairy and leasing projects had higher purchas- es from local farmers, increased farmers’ incomes, and lifted thousands out of poverty. The housing project delivered not just affordable housing but energy and water savings to low- er-income individuals. The food processing project produced specialty food to treat children with malnutrition, and more children were saved owing to the lower prices of the product and transport cost through local production. The objectives and achieved benefits of the projects were linked with Sustainable Development Goals, such as 2–Zero Hunger, 8–Decent Work and Economic Growth, and 13–Climate Action. Market effects (competition, dissemination of good practice, and adoption through demonstration) were also observed. 18 The International Finance Corporation’s Blended Finance Operations Effects Beyond the Project Entities Were Vital for a Stronger Development Footprint of the Project Projects also had market effects through demonstration and replication by other players. The dairy project contributed to ex- ports to neighboring countries, demonstrating quality standards for food safety. The leasing company’s approach was replicated in the market, thus spreading positive effects. Projects achieved positive outcomes for end beneficiaries and stimulated market creation beyond the project entities. The causal link between project subsidies and the economic benefits to intended beneficiaries was evident in most of the proj- ects because their design ensured that benefits from the subsidy are passed along the causal chain to the ultimate beneficiaries. In all cases, the project subsidies have enabled economic benefits that significantly exceeded the cost of the subsidy. Independent Evaluation Group | World Bank Group 19 Table 3.3. Summary of Project Outcomes Industry Dairy Leasing Food processing Sustainability Business Commercial sustainability Commercial sustainability Commercial sustainability achieved achieved achieved Sustainability Commercial Successful expansion and Assets of good quality in the Successful expansion and exponential revenue growth lease portfolio exponential revenue growth ƒ  New collection centers and ƒ Higher income for farmers  ƒ Lives saved (directly and  Effects on End Beneficiary increased capacity for dairy through intensified collec- indirectly) farmers to improve herd tion of products management and quality 2 ZERO HUNGER ƒ Increased sales by farmers  8 DECENT WORK AND ECONOMIC GROWTH 8 DECENT WORK AND ECONOMIC 3 GOOD HEALTH AND GROWTH WELL-BEING Contributed to export growth Spread a new financing ap- Increased competition and Effects Market proach to other market players reduced prices for specialty products Note: IDA = International Development Association; IFC = International Finance Corporation; MIGA = Multilateral Investment Guarantee Agency. 20 The International Finance Corporation’s Blended Finance Operations Affordable housing Wastewater treatment plant (MIGA) Commercial sustainability Commercial sustainability achieved achieved The fund’s gross return for all Public-private partnership the funded deals was positive arrangement maintained in local currency terms ƒ  Energy and water savings ƒ Wastewater treatment in the units built service coverage and use of treated wastewater for irrigation 13 CLIMATE ACTION 6 CLEAN WATER AND SANITATION Market growth of green Not applicable as a public building service Independent Evaluation Group | World Bank Group 21 4. What Worked Well? Blended Finance Helped the Projects Get Off the Ground All projects display high-risk characteristics. For example, the dairy project was a greenfield operation in an IDA country with weak infrastructure, mar- ket and supply chain uncertainties, sensitivity to commodity price fluctua- tions, and intense competition from semiformal and informal businesses, and the sponsors were new to the dairy sector. The food processing project requires stringent quality standards and specifications, and the sponsor had a limited track record in manufacturing specialty products. A leasing project was in a postconflict country and the agriculture cooperatives involved in the business had no formal banking experience. Affordable housing projects never had a green building, which was a component supported by blended finance. Some clients did not have the financial strength to supplement cash shortfalls, and investors like IFC were reluctant to invest in such projects. The subsidy amount was between 2 percent and 5 percent of project costs, indicating that it was close to the minimum needed to catalyze the transac- tion, including the mobilization of other financiers (official and commercial). Advisory Services Played a Pivotal Role in Enhancing the Development Footprint of the Project Nonfinancial additionality, in the form of subsidized advisory services on top of the financial subsidy, also reduced project risks. Technical assistance often accompanied blended finance operations because the projects were innovative ventures dealing with less-experienced clients and stakeholders (farmers, cooperatives), thus requiring capacity building advisory services or close hand-holding by IFC. For the dairy project, IFC supported expanding extension services to some model farmers. They had been successful in re- ducing a seasonal variety of milk production through feed management and disease control. For the leasing project, IFC supported training for cooper- atives to enhance their business management skills, including budgeting and cost control. In several instances, the cost of the technical assistance support greatly exceeded the subsidy element of blended finance. 22 The International Finance Corporation’s Blended Finance Operations Table 4.1. Contributions of IFC Advisory Services or Technical Interventions Industry Dairy Leasing Affordable housing IFC supported advisory in food Before the truck leasing After approval, IFC saw the safety. The client subse- program’s launch, a capacity project’s potential to push a quently pursued the advisory building advisory services proj- green agenda in residential project for dairy supply chain ect was given to the cooper- housing sector. IFC had on- Technical Intervention Advisory Services or development by contributing atives for enhancing business going work with the coun- significant funds from its own management skills, including try’s Green Building Council resources. budgeting and cost control. through the EDGE program. Those cooperatives that IFC persuaded the fund successfully completed the manager to promote green program became candidates investments in its portfolio for the truck leasing program. and enabled it to do so by arranging blended finance and building capacity through EDGE. The advisory services proj- One of the risks of guarantee  As approved, the affordable  ect is expanding extension facility was low usage due housing fund’s focus was on services. Model farmers had to lack of eligible candidates development, and it did not been successful in reducing and minimal interest from have a green agenda. Through Advisory Services Contributions the seasonable variability of banks. Sequencing technical a holistic approach involving milk production, among other assistance to beneficiaries to investment and capacity build- things, because of feed man- prepare for financing contribut- ing, IFC could influence its agement and disease control. ed to high use of the risk-shar- client and the broader market ing facility, with virtually no to adopt new practices and payment defaults. move into previously untested niche areas such as green buildings. Note: EDGE = Excellence in Design for Greater Efficiencies; IFC = International Finance Corporation. Independent Evaluation Group | World Bank Group 23 Box 4.1. Projects Meeting Blended Financing Principles By deploying financial and nonfinancial additionality, all International Finance Corporation projects met blended financing principles: Economic Case for Blended Finance ƒ  A subsidy ensured financing that was not available from alternative sources. Crowding-In and Minimum Concessionality ƒ  The amount was the minimum needed to realize the transaction, with some other official and com-  mercial financing being catalyzed. Commercial Sustainability ƒ  Commercial viability and sustainability were achieved. Reinforcing Markets ƒ  Market effects, such as enhanced competition, market development, and spreading of good busi-  ness practices, were observed. Promoting High Standards ƒ  Improvements realized in environmental and social and food safety practices. 24 The International Finance Corporation’s Blended Finance Operations 5. Areas That Need Attention Projects achieved commercial viability and profitability, but IFC’s returns were inadequate in all cases. Small size of investment, slow disbursement, and complexity of transactions resulting in high adminis- trative costs contributed to lower loan income for IFC. One equity investment was negatively affected by local currency depreciation. The shortfalls in IFC’s return could be viewed as an additional subsidy to these projects. Furthermore, the subsidies of blended finance were often dwarfed by the size of advisory services relat- ed to these projects. Not all advisory services are a subsidy to the private sector: IFC’s work on a green building program was industrywide. Also, some companies covered some costs of advisory services. Their scope and timing can vary from those of investment services. Nevertheless, advisory services con- tain a strong subsidy element as well given partial, if any, cost recovery. It is challenging but important to have a full cost accounting to get a complete picture of all the subsidies involved in a project. These findings argue for clarity on the subsidies involved to enable a separation between subsidy and commercial elements in project performance and to ensure returns commensurate with risks for all investors, including IFC. More holistic accounting would provide a more transparent performance in- dicator that reflects the full opportunity cost of resources deployed for development interventions. The presence of subsidies in a project should not be a reason for IFC to accept inadequate returns. Blended finance is expected to financially “de-risk” projects, but project risks such as sponsor and management quality, market risk, and macroeconomic conditions are not mitigated by the blended finance. The subsidies associated with blended finance do not reduce project risks but rather reallo- cate them. The reviewed projects provide evidence that advisory services can reduce specific types of risks, such as risks associated with weak managerial capacity and harmful environmental and social effects. Other Bank Group interventions (policy and regulatory reforms) can reduce macroeconomic and regulatory risks, which often account for poor investment results in FCS and IDA countries, as also seen in some of the reviewed projects. Thus, the blended finance instrument can have more powerful effects when combined with other Bank Group instruments to address a broader range of risks in the specific project circumstances. Independent Evaluation Group | World Bank Group 25 6. Lessons for Successful Blended Finance Projects A business case and rationale are essential for private sector projects. ƒ Market and risk assessments are starting points for project design. Financial additionality is needed but not sufficient. ƒ Clients do not respond to a subsidy for undertaking high-risk projects. ƒ C  lose alignment with clients’ strategic interest is needed to enter new business lines supported by blended finance. Nonfinancial additionality is critical for project risk mitigation. ƒ T  he client’s commitment and capacity for a project’s business needs to be assessed. ƒ  eeds for complementary and preparatory technical assistance and N regulatory reforms, in tandem with investment preparation and progress, need to be assessed. ƒ The client needs to understand the necessary contributions. The cost of an intervention can go beyond that of the investment projects. ƒ  ssociated advisory services and preparatory work require additional A resources. ƒ A  full accounting will help in the assessment of the total cost of achieving the intended outcome. IFC needs to consider ways to account for implicit subsidies from IFC’s net income in the form of revenue falling below expectations. ƒ T  he comprehensive cost of blended finance should be shared with do- nors and IFC with enhanced transparency. 26 The International Finance Corporation’s Blended Finance Operations The World Bank 1818 H Street NW Washington, DC 20433