Why private finance for sustainable development is still bracing for impact

Since PIDG's investments, solar capacity in Vietnam has "skyrocketed" from 86MW in 2018 to nearly 1,900MW today (such as on these rooftops in Hanoi), says the Swiss foreign ministry. LUONG THAI LINH/Keystone

As its overseas assistance budget shrinks, Switzerland says it will rely more heavily on mobilising private capital to fund sustainable development in poorer countries. But the record on innovative mechanisms, such as “blended finance”, is mixed at best.

In 2018, the site for Vietnam’s first industrial-sized solar power plant was 300 hectares of difficult-to-farm wasteland in the nation’s poorest province. Seven years later, with cash from Switzerland and a handful of other donors, the project is supplying enough power for 200,000 homes and cutting CO2 emissions by 240,000 tonnes a year.

The project not only kickstarted a boom in solar production across Vietnam that has curbed dependence on coal. It was also remarkable for using about $20 million (CHF16 million) from donors as a lure to attract a further $147 million of investment from the private sector.

Now, as development assistance from major state donors falls globally for the first time in yearsExternal link, Switzerland is among rich nations seeking to rely more on this kind of public-private deal, known in the jargon as blended finance, to spur new projects and sustain relationships with developing countries.

“If we have less public money, we must turn to the private sector,” Patricia Danzi, director of the Swiss Agency for Development and Cooperation (SDC), saidExternal link as the country implemented a CHF250 million cut to its 2025 aid budget.

Danzi singled out blended finance – one of the primary ways by which Switzerland attracts private capital in development – and explained how it works.

“As a state,” she said, “we can bring in guarantees, insure initial losses, and attract private actors in sectors where they don’t want to work, or that are too risky”.

‘A big movement around blended finance’

When, in 2015, the world’s governments agreed to 17 UN Sustainable Development Goals (SDGs), they talked optimistically of turning “billions to trillions” to achieve these by 2030.

United Nations

Blended finance was to play a big role in raising the cash. So far, using this approach, international donors have attracted some $260 billion for developing countries, according toExternal link Convergence, a global network that supports this type of financing.

“There’s a big movement right now around blended finance,” said Robin Ivory, manager of market insights at Convergence. “Interest is only going up.”

What is blended finance?

The OECD defines blended finance as the strategic use of development funds to mobilise additional financing for sustainable development in low- and middle-income countries. Donors do this by improving the risk-return profile of investments for the private sector. The OECD has a set of guiding principles and a five-point checklist to ensure transactions meet quality standards and achieve goals.

Sources: OECD, UNESCO

About two-thirds of investors come from the private sector, Convergence reports. Among the most active are Swiss investment management firms responsAbility and Blue Orchard. But the biggest investors are publicly funded: the American development agency USAID (before it was dismantled by the Trump administration in early 2025), followed by the German and Japanese governments.

Switzerland itself uses several mechanisms for blended finance, including the Private Infrastructure Development Group (PIDG), which invested in solar power in Vietnam. The Alpine country has contributed $220 million since it co-founded PIDG with other donors in 2002. Between 2022-2024 alone, the group attracted $5.86 billion in private-sector investments, the Swiss foreign ministry said.

The impact has been “significant”, the ministry told Swissinfo: “Every Swiss franc of official development assistance generates more resources for financing local businesses with a strong social or environmental impact in target countries.”

‘You cannot make money from poor people’

Yet for all this success in raising private capital for sustainable development, scepticism is rife. The promise of “billions to trillions” remains unfulfilled: the so-called financing gap to reach the UN goals is still vast, toppingExternal link $4 trillion today, compared to an estimated $2.5 trillion in 2019. According to the UN, the international community is now on trackExternal link to meet just 18% of the SDGs by 2030.

The OECD, a grouping of rich democratic nations, acknowledged in a recent reportExternal link that donors had “mobilised relatively limited private finance” through blending, which it said “remained a cottage industry with largely bespoke and fragmented interventions”.

But Ivory believes it can still reach its full potential: “The more we make this mainstream, the more we can create blended transactions that are replicable and that we can scale up,” she said.

Some critics, however, say blending simply doesn’t work.

“Everyone’s drunk the Kool-Aid of blended finance, but it’s illogical in many ways,” said Susan Spronk, an associate professor of international development at the University of Ottawa. “The logical flaw with it is you cannot make money from poor people.”

Spronk produced a report on blended finance in her native Canada where, like in Switzerland, the government has created or joined several such mechanisms in the last decade. Some Canadian development NGOs she spoke to expressed concerns over the ethics of this approach.

The projects, they said, were reaching people in certain “bankable” sectors, such as agriculture, and mostly in middle-income countries, therefore bypassing economies that are most in need – observations echoedExternal link by UN Under-Secretary-General Li Junhua at an international development financing conference last July.

Blended finance works only “in areas where there’s a market solution”, Ivory noted.

“There has to be some ability to earn a commercial profit off the transaction,” she said, “and for it to be sustainable without concessional capital,” which is financing at below-market rates provided by public institutions.

Opportunities for private investors exist in energy transition, infrastructure, healthcare and “financial inclusion”, accordingExternal link to Swiss bank UBS.

Yet research by British economist Kate Bayliss showsExternal link that little infrastructure in the poorest economies ends up privately financed in practice. The education and social sectors have also received relatively low levels of private funding, the OECD says.

A different type of public-private collaboration

If blending has failed to bring substantial investments in certain areas, the Swiss-based Jacobs Foundation wants to show other creative financing schemes may be able to.

It spent ten years testing a co-funding mechanism that mobilises capital from various private entities – charitable foundations and businesses alike – to support basic education in Ivory Coast. In the end, 16 firms with links to cocoa production in the country, a handful of foundations, and the Ivory Coast government pledged $78 million for a project to improve access to quality basic education. The mechanism was able to leverage an additional $13 million from the Global Partnership for Education Multiplier Fund, an innovative finance instrument that raises money for schooling.

With the funding, the aim is to offer quality education to over 4 million children in Ivory Coast by 2027. Keystone

Convincing businesses to join the project was no mean feat and involved persuading them to look beyond the sector’s lack of immediate market returns for investors.

Companies “have an incentive to ensure that those communities get the education they need, both from an economic standpoint, but also from a positioning for the brand they represent,” said Simon Sommer, co-CEO of the foundation. “It’s important for them to be seen as contributing to the education of the country.”

The foundation is now applying this funding approach in Ghana and Colombia, two other cocoa-producing countries. It also wants to explore how it could be used in other industries since the impact in Ivory Coast is already evident.

“We’re seeing improvements in literacy and maths skills,” said Sommer.

A ‘silver lining’

Projects like this and the one in Vietnam may be demonstrating positive outcomes, but accusations of “impact washing” – when investors overstate or falsify the social benefits of their involvement – in public-private deals are equally common.

Convergence rejects thisExternal link, noting that investors in blended finance are held to the same standards as traditional, publicly funded projects. Any gaps or lack of transparency in impact reporting, it argued, are part of a broader, development-sector problem.

Critics also have doubts that blended finance projects provide any extra benefit, known as “additionality”, over and above normal market-based investment. Some argue that taxpayers may simply be reducing costs and boosting profits for businesses involved.

According to the OECD, it’s difficult to determine additionality, given that investors rarely disclose enough information or the methodologies behind their calculations.

“How do you demonstrate additionality?” Spronk said. “How do you know the private sector wouldn’t have done it if we didn’t try to lure them to do it?”

“There has to be a fundamental rethink about using scarce official development assistance to leverage private-sector funding,” she added.

As Switzerland and other donors consider further foreign aid cuts, Sommer sees “a silver lining” that can force the donor community to imagine a more effective global multilateral structure, one that balances public funding with private capital, depending on the situation.

“There will be some need for debt financing for countries that qualify and can pay it back,” he said. “But there’s also a need for creative co-funding mechanisms. How do we spend the money better, and how do we align together more effectively?”

Edited by Tony Barrett/vm