After the Fall of Aid: Can Blended Finance Deliver Development?

Introduction

In early 2025, the U.S. government announced a sweeping 90% reduction in foreign assistance grants administered by USAID. This decision marked the sharpest retreat from U.S. development leadership in decades. The move came amid a broader global trend: according to the Organisation for Economic Co-operation and Development (OECD), official development assistance (ODA) from major donors fell by 7.1% in 2024, marking the first decline in six years. Humanitarian aid experienced an even sharper drop of 9.6%. At the same time, developing countries face mounting pressures: rising debt burdens, intensifying climate shocks, and widening gaps in infrastructure and service delivery. The United Nations now estimates that the financing gap to achieve the Sustainable Development Goals (SDGs) has surpassed $4 trillion, up from $2.5 trillion before the pandemic.

Against this backdrop, the search for new ways to finance development has intensified, including blended finance. In simple terms, blended finance means using public or philanthropic money to absorb part of the risk so that private investors are more willing to finance projects in areas like climate, infrastructure, or health. More technically, it refers to the use of concessional capital, through instruments such as grants, guarantees, or low-interest loans, to improve the risk-return profile of investments in developing countries, with the goal of mobilizing additional private capital toward the Sustainable Development Goals (SDGs).

This article argues that in an era of shrinking aid and tight fiscal space, blended finance will only succeed if it becomes more transparent, accountable, and country-led. It first reviews the promise and pitfalls of blended finance, then examines how transactions are structured, before turning to governance challenges. The article concludes by outlining what a more coherent, accountable development finance architecture could look like.

The Promise of Blended Finance

Blended finance has gained traction because it promises to turn limited concessional resources into a catalyst for much larger private flows. By de-risking projects, it seeks to channel investment into areas central to sustainable development. In theory, every public or philanthropic dollar can unlock several more from private investors, making it appear essential in closing the SDG financing gap.

Yet in practice, two major shortcomings limit its impact. First, the leverage has been weaker than promised. According to the Overseas Development Institute (ODI), every $1 of public money mobilizes less than $0.75 of private capital in developing countries (and only $0.37 in low income countries). Transactions are often complex, time-consuming, and opaque. The lack of standardized frameworks makes it difficult to assess risks, returns, and impacts.

Second, blended finance often flows to the “bankable” rather than the most urgent. Renewable energy and infrastructure projects with predictable cash flows attract investors, while essential but less profitable sectors like education, water and sanitation, or health systems remain underfunded. This risks skewing development priorities toward investor interests rather than public needs, potentially weakening long-term planning and crowding out public leadership.

These twin challenges, underwhelming leverage and misaligned priorities, point to the need for more disciplined design and stronger safeguards if blended finance is to deliver on its promise.

The Mechanics of Mobilization: Inside Blended Finance Transactions

In emerging markets, where real and perceived risks limit the flow of private capital, blended elements are often critical to make projects bankable. As noted by CrossBoundary (2024), virtually every successful deal in these contexts involves some form of blended finance instrument.

Recent transactions in Latin America illustrate how blended finance is evolving to meet this challenge. In 2024, the World Bank launched a $225 million Amazon Reforestation-Linked Outcome Bond, an innovative deal that ties investor returns to environmental performance. The bond leverages the willingness of investors to accept a lower fixed coupon in exchange for exposure to a variable return linked to carbon removal outcomes. The foregone interest, about $36 million over the life of the bond, is redirected to finance large-scale reforestation projects in Brazil, carried out by Mombak, a specialized project developer. The additional revenue for investors comes from a forward purchase agreement signed by Microsoft, which guarantees the acquisition of future carbon removal credits. This structure shows that blended finance can be achieved not only through concessional capital but also through outcome-linked design and creative partnerships between public  or multilateral institutions and the private sector.

IDB Invest provides another example of how blended finance can be applied to equity transactions through the Women Entrepreneurs Finance Initiative. IDB Invest combined commercial equity with concessional capital from a donor trust fund to support a platform serving underserved entrepreneurs, especially women. In addition to capital, the deal included technical assistance to strengthen data capabilities and improve product design. Here, the concessional equity helped crowd in private investment by absorbing some of the downside risk, while the non-reimbursable grant element supported long-term capacity building. The result was a more attractive risk-return profile for investors, and a stronger development outcome for the region.

The Amazon outcome bond and IDB Invest’s concessional equity deal show that innovative structures can expand blended finance beyond predictable projects. And with thousands of transactions now recorded worldwide, the question is no longer scale but quality. Leverage will only improve when deals are transparent, align incentives, and are embedded in national priorities. Ensuring that quality is precisely what makes governance the defining challenge, to which the next section turns.

Governance and Safeguards: Aligning Finance with Development

As blended finance appears as a potential solution, the question is not only whether public and philanthropic capital should be used to mobilize private investment, but how to ensure that these flows are governed effectively. While transparency and rigorous measurement are essential, the reality on the ground is usually more complex.

Transparency and Impact Measurement
Data disclosure remains a weak spot. The OECD finds that while most blended finance funds collect data, only about a third publish evaluation results. Many share findings only with investors, limiting broader learning and accountability. Even when metrics exist, they often focus on short-term outputs, like number of loans issued, rather than long-term impact on institutions or communities. Clearer standards and stronger incentives for public reporting are needed, alongside closer alignment with national development strategies.

Beyond Additionality
The long-running debate about “additionality”, whether blended finance actually brings in new private capital or simply subsidizes what would have happened anyway, remains important. But impact cannot always be reduced to numbers. In sectors like health, climate resilience, or governance, the most valuable results may be enabling local institutions to experiment and adapt, benefits that do not appear in annual reports but are essential for sustainable growth.

Coordination and Strategic Alignment

Effective coordination is another challenge. The OECD (2022) emphasizes that for blended finance to be most effective in emerging markets, it should be aligned with local financing priorities and fundamentally embedded in national financing strategies. This alignment ensures that blended finance serves as a tool to increase overall financing available for sustainable development investments. However, the complexity of blended finance transactions, often involving multiple stakeholders with differing objectives and timelines, can impede effective collaboration.

Without strong coordination, even well-intentioned blended finance can inadvertently crowd out local initiatives, distort incentives, or create parallel systems. Conversely, when projects are embedded within national plans and support local leadership, they can generate positive spillovers: building government capacity, attracting complementary investments, and strengthening development ecosystems. These are the kinds of system-wide benefits that may be hard to quantify, but are essential for long-term transformation.

Conclusion: Toward a Coherent and Accountable Development Finance Architecture

The retreat from traditional aid marks a turning point for global development finance. Blended finance has emerged as a central tool, but its value will not be judged by the volume of private capital mobilized. Its real test is whether it strengthens institutions, delivers lasting outcomes, and aligns with the long-term priorities of developing countries.

The adoption of the G20 Principles on Blended Finance is a step in this direction, emphasizing country ownership, transparency, and alignment. But principles must become practice. Financial innovation is important, yet it cannot replace public accountability or coherent national strategies. Concessional resources should be deployed openly, with governments empowered to steer investments, and with donors, multilaterals, and private partners coordinating around shared standards.

Ultimately, the challenge is not simply to unlock more capital but to do so in a way that rebuilds trust, respects sovereignty, and drives structural transformation. Blended finance will remain essential in an era of shrinking aid, but its promise will only be realized if quality, alignment, and accountability guide every deal.

The views expressed in this article are those of the author and do not represent those of any previous or current employers, the editorial body of SIPR, the Freeman Spogli Institute, or Stanford University.