The international community is paying attention to the need for development resources with various means in order to satisfy the rapidly developing development demand in the SDGs era. In this regard, as the importance of mobilization of private sources has emerged, blended finance has become recognized as one of the most powerful means for this. The OECD DAC defines blended finance as ‘the strategic use of public or private investment aimed at development, including concessional means to mobilize the additional resources needed for investment in SDGs in developing countries’.

The international community’s discussions on blended finance began in earnest in 2014, centered on the WEF and OECD, and officially recognized its role and necessity in the process of establishing SDGs in 2015. The international community has noted that through blended finance, private investment can be provided to developing countries along with public resources, and it can minimize risks for private sector and maximize the development effect of the public sector. Blended finance should have all three characteristics: leverage, impact, and returns.

The main reason why the international community is trying to expand the use of blended finance is that blended finance can attract private investment needed to implement SDGs. According to the WEF and OECD surveys in 2015, private finance of US dollar 0.3 to 20.4 can be mobilized per dollar of blended finance by project phase. The reason why the donor government should activate the blended financing is that it can overcome the shortage of ODA, which is limited in scale, through inflow of private funds. On the other hand, by participating in blended financing, the private sector can strategically and effectively manage the risks associated with capital investment, such as political and credit risk, which are high in emerging markets and new markets in developing countries through public financing. The private sector can broaden the range and target of investment as well.

Considering all forms of international financial flows into developing countries, the proportion of private investment by blended finance is only 0.7% of the total. Private investment mobilized by blended financing is more concentrated in meddle-income countries than in the poorest or lowest-income countries, but tends to be more invested in countries with lower income than foreign direct investment (FDI). The sectors in which blended finance is mainly used are climate change and clean energy, financial services, food and agriculture, health and infrastructure. In the period of 2012~2015, the largest private finance was mobilized by public funds in the banking and financial services sector, followed by energy, manufacturing, natural resources and mining, and transportation.

The donor country or donor agency provide blended finance combining various types of financing instruments depending on the situation, circumstances, and conditions of the recipient country, based on basic forms and types. In general, market conditions (or concessional) loan and grant (grant-equivalent support) are mainly made up of ① direct investment grants, ② interest rate subsidies, ③ loan guarantees, ④ technical support, ⑤ risk mitigation, guarantee, equity investment.

While finance sector and infrastructure sector the largest sector that blended financed has provided, in Korea ODA, these two sector show a contrasting proportion of support performance. The financial sector is one of the sectors where development projects have not been activated in Korea’s development cooperation compared to advanced donors. The financial sector, a key sector in the development of the private sector, especially in developing countries, is very important in promoting inclusive growth in developing countries. On the other hand, in contrast to the financial sector, the infrastructure sector has been supported as the main method for Korea’s development cooperation projects. Infrastructure, which is the most basic condition to lead economic development in developing countries, requires large-scale capital investment and long-term payback period. It is also difficult to make effective investment with conventional public aid but also securing adequate revenue with private capital alone.

SMEs play a big role in job creation and income generation for economic growth in developing countries. Nevertheless, SMEs in developing countries face difficulties due to the high business cost, poor infrastructure, and lack of skilled manpower. In particular, lack of access to financial services is the greatest difficulty. Many donor agencies and development banks use mechanisms to support local financial institutions as intermediaries to expand access to local SMEs. In order to maximize financial services for SMEs, donor agencies and development banks select local financial institutions mainly focusing on SMEs as an intermediary institution, support loan and guarantee the selected to reduce the risk of local institutions. In addition to financial support, it also provides technical support for strengthening the capabilities of local intermediary agencies and improving financial infrastructure. This is not only to expand financing for SMEs, but also to improve the financial environment for SMEs in the region, thereby contributing to the continued growth of financial sector in developing countries.

Infrastructure development is one of the most important factors for economic and social growth. As the importance of infrastructure development is emphasized, there is a growing need for plans to expand resources for infrastructure development. The main funding mechanisms for infrastructure projects are government funding, corporate finance(on-balance sheet finance), and project financing. Recently, it is a tendency to raise funds in the form of project finance to avoid the budget constraints of companies or to expand investment in projects. Project finance is a method of raising funds by using the assets, rights, and business feasibility of the project itself as the main repayment resources, not the credit of the company. In project financing, SPVs are created for the purpose of project execution, and the right to transfer and operate the project is transferred to serve as a key player in project financing. SPV is an important prerequisite for mobilization of private funding in infrastructure projects, and various participants, such as project owners and partners, share roles and risks through contracts.

One of the main roles of ODA in blended finance is risk mitigation. Systematic risk analysis and response will encourage private investment and facilitate local enterprise support. In this study, we conducted a survey on the risks that may occur in the development cooperation projects in Korea, and collected demand and opinions about the utilization of blended finance through the same survey. Potential risks of ODA projects are classified into national risks and project risks. Among these, the national risk is classified according to the risk character, and the project risk is classified according to the business category.

In the process of ODA projects, the overall incidence and impact of project risks were greater than national risks. In addition, the magnitude of the risks is greater than the frequency of the risks once the risks occurred. Particularly, in the political and policy aspects of the country’s risks, the difference between the frequency and magnitude of the risks is so great that political risks are not frequent but their effects are very large. Among the project risks, it is considered that the risks from the project implementation stage and the project conditions are the most serious. On the other hand, both major categories showed low perceptions of the importance of environmental and social impact risks.

As a result of ranking the degree of seriousness of risk considering both the frequency and impact of potential risks of ODA projects revealed by experienced developers in the development cooperation project, it was found that ODA project performers are more concerned about project risks than national ones. In particular, the risks that could arise from the implementation of the plan in the project implementation stage were the top. In addition, it was found that ODA project performer felt greater risks in the case of damages to the project performer than to damage to the source country or local residents due to local environmental or social problems.

In detail, the change that occurs in the contents originally planned such as design change or extension of construction period was considered to be the greatest risk in project implementation. In addition, it was said that a very large risk occurred when the project budget was exceeded due to the limited budget of the project. In particular, the risks associated with exceeding the project cost were the biggest impact on the business once it occurred. The uncooperative attitude of the officials of partner countries connected with corruption was also found to be a very significant risk, which is a specific risk for ODA projects in developing countries.

In Korea, the concept of blended finance for development cooperation has recently been formed, and the use of blended finance is somewhat limited because there is no development financial institution (DFIs) that can implement equity investment or guarantee, which is a form of blended finance. Korea’s projects for blended finance are concentrated in the form of Public-Private Partnership (PPP) projects, and the projects that have the characteristics of blended finance are limited to the projects of KOICA and the Korea Eximbank.

The case of using blended finance in the PPP sector is mainly limited to KOICA. Looking at the current projects of ODA in the PPP sector, most of the projects are concentrated in the education sector, but since 2015, the projects of business support and job creation have been greatly expanded. KOICA’s PPP-related projects began in 1995. Initially, the program was centered on civil society cooperation programs. However, cooperation partners have been diversified since 2010, starting with the cooperation program with the university. In 2015, KOICA started the program of Creative Technology Solutions (CTS) which helps technology based start up cooperating with private companies or organizations.

EDCF is promoting investment in the infrastructure sector by linking the export financing of the Korea Eximbank to the ODA funding. EDCF started to provide blended finance by supporting the airport development project in the Philippines in December 1996. Since then, EDCF has provided five projects with total of 4,838 million dollar which consists of 3,367 million dollar of EDCF and 1,471 million dollar of export financing.

In the aforementioned survey on the potential risks of development cooperation projects, respondents showed a positive response to the effect of blended finance that mitigates ODA business risks and thereby induce firms to participate in ODA projects. In other words, about 54% of respondents were positive about blended finance, 32% were neutral and 14% were negative.

For forms of blended finance that may affect the decision to participate in ODA projects, the respondents preferred direct forms of funding, such as donations or equity investments, rather than indirect support measures such as technical assistance, risk-taking instruments and market incentives. The demand for grant or concessional loans (68.2%) was very high in the form of direct funding, and the demand for technical support (80.0%) such as pre-feasibility study, design and advisory service was overwhelmingly high.

Overall, respondents highly rated grant or concessional loans for questions about financial instruments that would work effectively for each of the three characteristics of blended finance: leverage, impact, and profit. For the forms of blended finance that are positive to the effects of leverage and impact, expectations for technical support and grant or concessional lending were high. On the other hand, expectations for equity investments and market incentives increased sharply on the profit side, which was different from the other two characteristics of blended finance. Especially, expectations about the effectiveness of technical support in terms of profits dropped sharply.

This study suggests the following ways to utilize blended finance. First, it is necessary to develop and operate an innovative blendedfinance project structure with diversified projects and operation systems of domestic aid. In particular, for the financial sector, this study proposes to establish a local corporation or joint venture in the form of blended finance with private financial sectors in the short term, and to support local SMEs using the corporation or organization through the financial intermediaries over the medium to long term. For large-scale infrastructure projects, project finance can be used to mitigate the risk of private investment, and it can also create an opportunity to vitalize the cooperation between the concessional loan and grant aid.

Second, it is necessary to identify possible risks in ODA projects and to select financial instruments and plan projects to solve each risk. In a survey of ODA project risks and the demand for blended finance, Korean firms showed a high demand for blended finance, which is a form of direct financing to mitigate possible risks in the early stages of project. In order to enhance the development impact and sustainability of development cooperation projects, the ways to use blended finance should be comprehensively considered.

Third, it is possible to utilize joint investment platforms with multilateral development banks or international organizations. These measures are effective in mitigating the financial burden of the domestic ODA agencies, utilizing the expertise of international organizations, and ensuring project visibility. The use of various financial instruments for ODA projects should be promoted by reflecting the cases of PPP and co-financing projects of international organizations in accordance with the situations of domestic ODA projects.

Fourth, the establishment of a window or a platform for sharing opinions with the private sector is required to induce participation and interest of the private sector. Through the organizations that can ensure communication between the private sector and donor agencies on an ongoing or regular basis, the private sector’s understanding in the innovative PPP ODA projects can be enhanced and also aid agencies can seize the opportunity to obtain information on private sector’s ideas and needs.

Fifth, it is necessary to prepare system and education for ODA project providers to raise awareness of domestic companies about the environmental and social impacts of ODA projects that are failure factors of ODA projects. Domestic ODA providers do not place importance on the environmental risks of the countries concerned and on the risks of environmental and social impact of the project to the concerned countries. Therefore, the voluntary efforts to solve the environmental and social risks of the project is limited. It is important to raise ODA project providers’ awareness of the environmental and social impacts of the projects in order to address concerns that environmental and social impacts may be neglected as the private sector participates in development cooperation projects with only focusing on profit.