In a world where challenges can be so complex they require strange bedfellows to solve them, the World Economic Forum’s annual meeting in Davos has taken on new importance. It’s a rare place where critical masses of stakeholders across government, civil society, business and media can come together at the same time to forge unique alliances that have a real chance of success. Here are three such initiatives from this year’s Davos meeting that exemplify three big trends in global development.
With scarce aid dollars, it’s all about leverage
Almost every advanced economy is seeing their foreign aid budget plateau or even go down. (The U.K. is the major exception: its budget is going up.) But the needs in areas such as global health, climate change and food security require much larger investments. The result is many governments are using capital markets to leverage their limited aid grants into larger investments tied to debt and equity instruments. This is not a new phenomenon but it is likely to continue accelerating as aid agencies grapple with limited budgets and as these leveraging models become more widely understood and accepted.
At this year’s annual meeting, the Norwegian government announced a $400 million fund to combat deforestation. As part of the announcement, the government said it aims for this fund to lead to total investments of $1.6 billion. What’s interesting is that so far Norway has actually allocated only $100 million but is using its initial grant to incentivize other donors (including multilateral banks and private sector companies) to join in. Unilever has committed $25 million and other donors are expected to join soon.
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How does $400 million become $1.6 billion? The precise tools the Norwegians aim to use haven’t been revealed so far, but achieving a four-times multiple on grant dollars is possible by incentivizing investments through lowering their costs and reducing their risks. For example, a country that relies a lot on agriculture in its economy but has a big deforestation problem might like to find a more sustainable approach for its agriculture industry. This fund could offer to pay part of the interest on a loan the government takes, the proceeds of which could be used to fund new infrastructure, train farmers and set up stronger regulatory agencies. As the country’s agriculture industry becomes more competitive globally as a result, the government can pay off the loan — a loan that costs much less because it was provided at a reduced interest rate.
Treating private companies like peers
Public-private partnership is now a ubiquitous concept in the global development community. But such partnerships are not always deep. They might entail convening public and private actors or sharing ideas or even committing to principles. But it’s extremely hard for public agencies to work with businesses in roles beyond those that their procurement rules require. That’s why so many corporations complain they are relegated to just two positions: donor or vendor.
What’s challenging for government agencies of all kinds is to treat private companies as peers. This is particularly important in the case of major corporations, some of which are operating at a scale much larger than government agencies themselves. Many such companies have no interest in being a vendor to a foreign aid agency or U.N. institution. That’s a very limiting role when they may have technology, expertise, supply chains or customers that could be so much more impactful if made part of a solution.
One of the biggest announcements in Davos this year was a new vaccine initiative designed to get ahead of the next big pandemics. One reason this has failed in the past is certainly money, and this initiative, called CEPI, made headlines in large part because of the huge commitments made, now totaling over $700 million. But what’s been missed in the excitement is the way in which private pharmaceutical companies are engaged in the project. GSK’s chief executive Andrew Witty was on stage at Davos with Bill Gates and Wellcome Trust Director Jeremy Farrar (among others) when he made a fascinating comment. He explained that GSK doesn’t intend to make either profit or loss from its involvement with CEPI. GSK will bring its prodigious research capabilities to bear on developing the vaccines that CEPI identifies as priorities and will cover its costs using CEPI’s funds. But, Witty explained, other companies may choose to make a profit from CEPI if they wish. It’s up to them.
What’s novel is the idea that the corporate partners of CEPI are being treated as peers. Even though many governments are providing funding to CEPI, no one is asking these pharma companies to change their business model in order to be part of developing these vaccines. It’s their research capabilities that are being utilized to solve this global challenge, not their ability to provide the cheapest bid or to write a check. There was much discussion in Davos on this point, and the likelihood is that more initiatives will come about that engage the core capabilities of telecom, mobile money, and food companies, among others.
Financing engineering can be a good thing
The idea of financial engineering has got a bad reputation, and for good reason. But in the global development sector, there’s tremendous promise. Perhaps the largest example today is the Global Financing Facility, which aims to close the $33 billion gap in global health spending for low-income countries.
At a session in Davos on the GFF, it was revealed that $1 billion has now been raised for the fund, which, after leveraging it up, will yield between $4 and $5 billion. The GFF aims to raise a few more billion dollars which, with leveraging, will put the fund in a position to close perhaps half of the global health gap.
But the GFF is not just a vehicle for taking health grants and leveraging them into health investments. It’s engaged in highly creative financial engineering in order to get over the many obstacles associated with increasing the amount spent on health in some developing countries. For example, some low-income countries may already be nearing the limit on how much they can borrow from the World Bank's International Development Association, which provides concessional loans at low interest rates. Many of these countries use the loans to fund airports, bridges, and roads. But those kinds of infrastructure projects could be designed to attract private capital, freeing up IDA loans for health. So GFF is working with low-income countries to help ensure their infrastructure projects are designed to be bankable (that is, able to attract risk-averse private capital), including by offering risk insurance, guarantees and reduced interest rates.
A health initiative helping to build an airport? That now works just fine for global health professionals eager to free up funding for live-saving investments in primary health care. And for a global development community looking to find the few trillion dollars some say are needed to fund the Sustainable Development Goals by 2030, financial engineering is likely to become a valuable skill set.
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