Blended finance in a Bhutanese nutshell

In 2012, struggling to cultivate her ancestral farm in Bhutan, Ani Kinzang Choden heard whispers about a hardy green sapling that could thrive anywhere—even on the arid slopes of the tiny Himalayan kingdom where she lived.

It was “the tree that will grow where nothing else will,” remembers Ani Kinzang about the moment her brother-in-law told her about the hazelnut tree, which is indigenous to Bhutan, but was so unrecognized that there was not even a word in the national tongue to describe it.

At the time, Ani Kinzang—a Buddhist nun dedicating her earnings to funding a religious retreat for other nuns—was barely getting by on the paltry earnings produced by the bamboo, walnut and sandalwood trees that dotted the stony slopes of her mountainous farm in Mukazor.

"the tree that will grow where nothing else will”

But in 2013 her prospects improved when Mountain Hazelnuts, a company promoting hazelnut production by smallholders across Bhutan, gave Ani Kinzang hazelnut saplings, inputs and training to plant her own orchard of trees. Once the trees bore nuts, Mountain Hazelnuts employees assured Ani Kinzang, they would return to purchase the crop at a guaranteed minimum price.

This unusual partnership between a small Bhutanese start up and a Buddhist nun is representative of a new trend in development financing known as ‘blended finance’— the mixing of public, philanthropic and private capital in emerging and frontier markets. 

GAFSP’s Private Sector Window has been at the forefront of this trend for several years—facilitating both public and private investors to mitigate risks in joint investments by ‘blending’ capital. Public financing, typically with below-market rates, provides comfort to cautious private investors while making prospective investments more attractive by cushioning risks and boosting investment returns.

The experience of Mountain Hazelnuts typified the experiences that many investors in emerging markets face. Could this semi-greenfield company manage 15,000 untrained farmers to grow hazelnut trees across a mountainous country with moderate infrastructure? Could management meet sobering targets to plant 10 million hazelnut trees and establish a logistics and international marketing infrastructure before seeing their first meaningful cash inflows?

But thanks to the flexibility of a blended finance structure using milestone-based disbursements and concessional funding support, GAFSP was able to take a chance on Mountain Hazelnuts. In 2015, working alongside our partners at the Asian Development Bank (ADB), IFC and ADB each made a $3 million investment into Mountain Hazelnuts to expand their hazelnut production.

Now Mountain Hazelnuts can supply hazelnut tree plantlets, inputs and support to local farmers free of charge. Like Ani Kinzang on her mountain top farm in Mukazor, these farmers will plant their trees on fallow land that has no commercial use. In time, Mountain Hazelnuts aims to plant ten million new hazelnut trees across Bhutan that will help sequester carbon and improve the environment. When these trees bear nuts, farmers will double their income on the basis of these entirely incremental earnings from the sale of the nuts. Eventually, up to 15 percent of Bhutan’s population is expected to directly benefit from the project.

At GAFSP we believe that blended finance investments have the potential to transform not just development finance as we know it but also the lives of ordinary people.

Just look at Ani Kinzang. As she combines her farming and spiritual practice, the Buddhist nun’s hazelnut orchard continues to thrive.

“This life is precious. We cannot waste it,” Ani Kinzang said. “I only hope that by planting trees such as hazelnuts, I can help others move closer to enlightenment.”

“I only hope that by planting trees such as hazelnuts, I can help others move closer to enlightenment.”