What is blended finance and what can it do for digital equity?￼
Blended finance. Catalytic capital. BEAD. CRA. The language of broadband funding isn’t always straightforward. So, Erica, our Director of Partnerships, and Calum, our Communications Manager sat down to unpack some digital equity jargon.
Erica, when we say that we won’t achieve digital equity without blended finance, what do we mean?
The kinds of internet providers that we think are necessary to bridge the digital divide — community connectivity providers — struggle to finance their networks because traditional investors are often weary of the perceived risk in lending to them. Brian Vo recently wrote about why.
Blended finance is a way to combine different types of capital from different types of funders to lower the risk in investing in these projects and attract more funding.
So blending finance is like blending whisky? There’s a limited supply of single malt but by combining different kinds of spirit, we can get more bottles out the door?
Well, yes actually. Rather than being the product of one distiller/investor, the barrel holds capital from a number of different sources, each with their own characteristics.
Then what exactly goes in the barrel?
In practice it starts with public or philanthropic grant funding. Let’s say, a foundation gives a grant to help fund a fiber network for a rural area that’s still running on slow, copper wire. This money — the “catalytic capital” portion of blended finance — improves the viability of building a financially sustainable network which makes the project more attractive to private investors. They can then lend with the expectation of a return.
So the free money brings more money to the table?
Exactly. And then this additional capital can help the network scale, sign up more customers and move towards sustainability. The original grantmaker achieves their goal of getting unserved residents connected to broadband and the commercial investors get the return they’re looking for.
Sounds like a win, win.
Don’t take my word for it. The World Bank has called blended finance “a game-changing, long-term initiative to bring investment to places that banks and investors have deemed too risky.” It’s time we get more catalytic capital to fund broadband expansion.
Jargon check. Explain catalytic capital.
Catalytic capital is basically money from funders who are willing to take more risk or accept lower returns than a conventional investor in order to finance something that won’t be funded by commercial capital alone.
So we’re not just talking about grants?
It can be grants, but also a whole range of impact investment tools where an investor expects their money back but on more generous terms than a purely commercial investment. This could be a straightforward low-interest loan or something like first loss capital — where an investor agrees to bear the first loss if a project goes south, in order to encourage more commercial investment.
Calvert Impact Capital puts it like this: “Catalytic capital providers’ primary motivation is not financial return but leverage and scale. They focus on crowding in additional capital to develop new and unproven markets; prove the viability of new markets and new business models to other investors and multiply impact outcomes by leveraging greater volumes of capital.”
And by lowering the cost of capital for borrowers, blended finance can make network business models more sustainable.
Right. And it’s not a new idea. It has been used in areas from agriculture in low-income countries, to developing low-carbon technologies, to building affordable housing.
What lessons can we apply from affordable housing?
Like quality housing, broadband is critical to improve employment, education, and health outcomes. And like affordable housing, expanding broadband access to all does not work on a purely commercial basis.
Affordable housing is often built with a mix of tax credits like the Low-Income Housing Tax Credit, concessionary lending programs like the Community Reinvestment Act (CRA), grants from foundations, low interest debt from housing authorities, equity investments from impact investors, and revenue partnerships with community providers like local hospitals. We can use many of these same tools to advance digital equity.
And our colleague Jordana Barton-Garcia is pioneering efforts to ensure Community Reinvestment Act funds are used to expand broadband access.
With the US government about to spend $65 billion to tackle the digital divide, will that not be enough?
No — for a couple of reasons.
First, even though it sounds like a lot of money, it’s not enough to get the job done. Infrastructure is expensive. Cartesian estimates that deploying gigabit fiber to the entire US would cost between $117 billion and $198 billion. That’s why the catalytic part of catalytic capital is so important. The public investments must bring more private investment to the mix.
Secondly, there’s a real risk most of these funds flow to the big incumbent providers that have swallowed up billions of government funds over the years while leaving millions of Americans on the wrong side of the digital divide. Research from Deloitte has shown that despite spending $54 billion across various government programs between 2014-2019, which went overwhelmingly to large incumbent operators, there has been a less than 1% increase in the number of Americans with broadband access.
And that’s just access right? Digital equity also means looking at things like affordability, digital literacy, and device access.
Exactly — the full cost of ending the digital divide in the US is likely more like $400 billion. Neither philanthropy, which has historically spent just 0.05% of its resources in digital interventions, nor government programs will be enough. It’s clear that the $65 billion alone won’t get the job done.
That’s why I believe blended finance is absolutely necessary. We need to ensure community connectivity providers have the capital they need to build, grow and deliver affordable internet to more people.
Well, let’s drink to that.
To learn more about financing community connectivity providers, read our latest report on Financing mechanisms for locally-owned internet infrastructure.
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