Official Development Assistance and Blended Finance in Palestine

author: Luis Abughattas


Blended finance aims to strategically use development finance for the mobilisation of additional finance toward sustainable development. Blending has become a mantra for donors, both bilateral and multilateral agencies, and as shown by a survey by the OECD Development Assistance Committee (DAC), most donors are increasingly participating in blending schemes (Sangaré and Hos, 2017).

There is no consensus definition of blended finance, as it varies according to different donors and analysts (OECD, 2018)1. The definition adopted by the United Nations (UN) in 2015 at the Addis Ababa Action Agenda (AAAA) of the Third International Conference on Financing for Development refers to blended finance as “combining concessional public finance with non-concessional private finance and expertise from the public and private sector”. According to the OECD, blending can be “broadly defined as the combination of public concessional official development assistance (ODA) with private or public resources, aiming at ‘mobilizing’ or ‘leveraging’ development finance from other actors” (OECD, 2018). For its part, the International Financial Institutions Working Group (FIWG) defines blended finance as “combining concessional finance from donors or third parties alongside DFIs’ [development finance institutions’] normal own account finance and/ or commercial finance from other investors, to develop private sector markets, address the Sustainable Development Goals (SDGs), and mobilize private resources”. (World Bank, 2020).

In general, blended finance using different financial mechanisms seeks to shift the risk-return profile of projects in targeted countries and sectors to attract and mobilise additional commercial capital. Blended finance explicitly focuses on generating a catalytic effect crowding in commercial financing enabling viable projects that in the absence of support would not materialize. In this respect, it must be clearly differentiated from other forms of financial interventions, such as impact investing, co-financing, and public-private partnerships (DAI, 2016). Besides mobilizing additional capital, blended finance would also contribute to demonstrating that investments similar to those that are supported are also viable. Thus, it would create an enlarged market for commercial capital, and it could also contribute to direct commercial lending to underserved areas delivering financial returns while having a development impact (Pereira, 2017). OECD estimates indicate that, during the period 2012-2020, blended finance mobilized worldwide, US $ 257.6 billion from the private sector through official development finance interventions (OECD, 2021).

This report, as provided by the terms of reference examines the blended finance experience in Palestine. It focuses mainly on the case of the EU´s development finance institutions’ investments in Palestine, examining, among other issues, their contribution to national development. The report is based mainly on the examination of secondary sources, and available data. A major limitation for an in-depth evaluation of the impact of blended finance is the difficulty in accessing data regarding specific blending projects, and the lack of impact assessments of the different blending financial interventions that have been implemented in Palestine over time.
This report is organized into three sections and supporting annexes. The first section presents some general features of blended finance, examining among other issues the main instruments utilized, some methodological problems which make impact assessment of blending
1 Refer to this publication for a discussion of different definitions of blended finance.

interventions a complex undertaking, and provides some information about the effectiveness of blended finance based on the existing literature. This discussion provides the framework for the assessment of blended finance as a component of official development assistance (ODA) in Palestine. The second section examines the situation of financing to the private sector in Palestine by the financial system, mainly banks and microcredit financial institutions. It mainly aims to assess the extent of a gap between the demand and supply of finance creating an environment in which blended finance could make a real difference in promoting further private sector investments in productive activities. Section three examines the evolution of ODA to Palestine based on available information, and, in that context, the extent to which blended finance has been implemented, and its impact on economic development. The report ends with some general conclusions and recommendations.

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