Innovative financing, a branch of development financing that creatively adapts old and tested methods to raise new money, is at the end of its first decade.
Innovative health care financing mechanisms created since the 2002 International Conference on Financing for Development in Monterrey have had mixed results. Several evaluations have pointed out the pros and cons of initiatives such as Debt2Health, UNITAID, the International Finance Facility for Immunisation, advance market commitments, as well as private-sector initiatives such as Product Red, the Dow Jones Global Fund 50 Index, and the GAVI Matching Fund.
Here are some challenges that international organizations should consider when engaging in innovative financing:
1. Words are meaningless
Results are needed on both the revenue and the expenditure side. A successful innovative financing mechanism should raise consistent amounts of money over time. Donors pay significant attention to expenditures. The financing mechanism’s incentives for all actors involved, such as transaction costs, visibility and the satisfaction of interests, are also crucial. The calculation of the rate of return in innovative financing should consider financial, programmatic, political and governance variables.
2. Scaling up innovative financing
Innovative financing is primarily a multilateral action to tackle global public goods. However, existing innovative financing initiatives have depended on a single donor (or a small group of donors) – mostly Europeans. There is a need to scale up innovative financing mechanisms and to include major donors such as the United States, Japan and Canada.
3. The cost-benefit calculus
Innovative financing mechanisms tend to be more resource-intensive than traditional ways to raise funds for development. Their cost-benefit needs to be evaluated well to prevent a diversion of funds and energy from an organization’s core business.
4. Follow the money
Ideas for new innovative financing mechanisms may abound, but current constraints of our global economy should be considered as well. That is why the creation of new innovative financing products is different from 10 years ago, when they were first discussed.
Today, there are several noteworthy innovative financing opportunities, including:
Sovereign wealth funds: More than $4 trillion in assets are being managed by these investment funds, but so far there is no evidence of them channeling significant assets into development activities.
Emerging economies: Keeping expectations low in the short term is fundamental; the triangular South-South cooperation mechanism is the most appropriate mechanism to initially work with countries like Brazil and India. Evidence shows that the traditional OECD-DAC framework is not appropriate for engaging emerging donors.
Financial markets: The political momentum around the financial transaction tax seems to be maturing; the concept of taxing a little-taxed and highly profitable businesses appears even more attractive during budgetary and financial crisis, and as discussed at last month’s G-20 meeting in Cannes, it may be reasonable to dedicate part of FTT revenue to global development.
In times of global financial crisis, innovative financing seems like an attractive solution for ODA retraction. But innovative financing will only be able to offset a reduction in ODA if a global tax-based mechanism, such as the FTT, is implemented. And it does not prevent international organizations from developing or expanding smaller-scale innovative financing products that satisfy their needs.
Much has been achieved in the last ten years. Challenges remain, but now is a time to use opportunities creatively in development financing.
Want to read more about innovative financing for development? Check out Busannovate, a blog brought to you by Devex in partnership with the United Nations Foundation, and launched with a thought-provoking guest opinion by Nobel Peace Prize winner Muhammad Yunus.