What concessional capital is for
Blended finance combines concessional capital — below-market, first-loss, or grant — with commercial capital, so a project that cannot carry commercial terms alone becomes financeable. The concessional element is scarce and publicly accountable, which is why every provider applies an additionality test.
The test asks a simple question with an awkward answer: would this project have proceeded without concessional support? If yes, the concession has displaced commercial capital rather than mobilising it, and the provider has subsidised a transaction that did not need it.
What providers actually look for
A financing gap that can be evidenced. Not an assertion that returns are thin, but a model showing the structure at commercial terms and the point at which it fails a lender's or an investor's test. Providers see many models; the credible ones show the failure clearly.
Evidence that commercial capital was approached. Term sheets that were declined, indicative pricing that did not work, or a documented market sounding. A project that has never tested the commercial market cannot demonstrate that it needs concession.
Concession sized to the gap. Providers resist over-concession, both because capital is scarce and because an over-subsidised structure distorts the market for the next transaction. The discipline is to take the minimum that makes the structure work.
A path to commercial terms. Increasingly providers ask what makes the next project of this type financeable without concession — a demonstration effect, a regulatory change, a track record. Projects that can answer that question are more fundable than those that cannot.
Where concessional capital sits in the structure
Its placement determines what it does:
- First-loss equity or subordinated debt absorbs early losses and improves the risk position of everything above it. Most effective where the concern is downside severity.
- Guarantees address a specific identified risk rather than general risk. Most effective where one exposure is blocking the financing.
- Interest rate subsidy or tenor extension improves affordability rather than risk. Most effective where the project is sound but the tariff cannot carry commercial pricing.
- Technical assistance funds preparation. Frequently the highest-leverage use and the most overlooked, because a badly prepared project cannot be rescued by capital structure.
Choosing the wrong instrument produces a structure that consumes concessional capital without resolving the constraint.
Preparing the case
- Model the structure at commercial terms and show precisely where it fails
- Document what the commercial market said, with dates and counterparties
- Size the concession to the gap and be able to defend the number
- State which specific risk or affordability constraint the instrument addresses
- Describe what would make the next comparable project financeable without concession
Additionality is often treated as a compliance hurdle. Treated properly it is a design discipline: it forces a sponsor to know exactly why the project is not commercially financeable, which is the same knowledge required to structure it well.
