Look at the lender group of almost any large power, transport or water project in Sub-Saharan Africa and the same names recur: the International Finance Corporation, the African Development Bank, British International Investment, Proparco, DEG, FMO, Norfund and their peers. Development finance institutions exist to invest where commercial capital alone would not, on terms that are commercial enough to be sustainable. In practice they do far more than lend. They anchor transactions, set the standards the rest of the lender group works to, and bring instruments that change the risk profile of a project for everyone else.
Anchor, not only lender
A commercial bank considering a long-dated loan in a frontier market is weighing risks it may have limited means to manage. The presence of a development finance institution alters that calculation. It brings due diligence capacity, long tenors that commercial banks may not offer on their own, and a relationship with host governments that can help resolve disputes. Through structures such as the A/B loan, in which the institution lends alongside commercial banks under its own umbrella, it can extend some of its preferred position to the banks that join it.
Securing a development finance anchor early often makes the rest of the debt easier to raise.
For sponsors this means the order of approach matters. Securing a development finance anchor early often makes the rest of the debt easier to raise, and designing the project to meet that anchor’s requirements from the outset avoids rework later.
Blended finance and the first loss
Where the risk of a project is still too high for commercial capital, concessional money can be used to absorb part of it. Blended finance structures place grant or low-cost capital from donors and development institutions in a position that takes losses first, or provide guarantees that protect senior lenders, so that private investors can participate on terms they can accept. Used well, this capital does not subsidise returns so much as bridge a gap in perceived risk that would otherwise leave a viable project unfinanced.
Blended structures add complexity and take time to assemble, and they are most valuable where a project, a sector or a market is new. As markets mature and track records build, the need for concessional layers typically falls, and commercial lenders take a larger share of the stack.
Standards as the price of admission
Development finance institutions apply environmental and social standards — for most, the IFC Performance Standards — as a condition of their participation, and they monitor compliance for the life of the loan. They also carry out integrity and beneficial-ownership checks on sponsors and counterparties. Sponsors sometimes experience these requirements as friction. They are better understood as the terms on which long-term, patient capital is available, and as a reassurance to every other investor that the project has been examined thoroughly.
A growing pool, and a larger ambition
The scale of the task is shifting how development finance is deployed. Mission 300, led by the World Bank Group and the African Development Bank, has set a goal of connecting 300 million people in Africa to electricity by 2030, with the World Bank Group targeting 250 million and the African Development Bank 50 million, and a stated emphasis on mobilising private capital alongside public money. That ambition will not be met by development institutions alone; it depends on projects that are prepared well enough for private investors to follow.
That is the space in which a capital-introduction firm is useful: helping sponsors understand what each kind of investor needs, and bringing investors projects that have been prepared to meet it.
