2020 Reports

Case Study on Catalytic Finance: The Inter-American Development Bank

Bose, Satyajit; DeFrancia, Kelsie; Uquillas, Maria Clara

Catalytic finance leverages limited amounts of scarce development-focused capital into much larger amounts of other capital, particularly private capital, towards projects with high development impact. In order to successfully implement catalytic finance transactions in a development finance context, a development bank must play the essential role of a policy entrepreneur, often sourcing catalytic capital and other resources in a highly customized manner to address specific financing challenges. This case study examines three innovative transactions designed by the Inter-American Development Bank (IDB) to address specific development financing challenges in the Latin America and Caribbean (LAC) region. These cases comprise risk reduction in the financing of geothermal energy, securitization of solar energy, and collective action to facilitate efficient and results-based investment in disease prevention. We examine the methods used in these transactions to decrease actual and perceived risk, and match appropriate sources of capital with pressing development needs. The broader lessons from these examples, when scaled up to similar situations, can facilitate the leveraging of private investment in the underdeveloped world that is many times larger than the available public capital. They all involve the curating of diverse sources of capital which would not be feasible in the absence of a mission-driven blended finance sponsor such as the IDB. These cases illustrate the crucial role played by the Office of Outreach and Partnerships within the IDB, whose task is to act as a resource mobilizer, blended finance sponsor and policy entrepreneur.