The development impact bond, the social impact bond, the climate bond, and blended finance are all relatively new financial instruments in the global development space, and together they are poised to help turn the billions into the trillions necessary to achieve the Sustainable Development Goals.
But with these innovations already in play, is there a need for continued conversation around new funding models? Devex Associate Editor Adva Saldinger believes there is.
“While there’s growing rhetoric, there's still a lot of confusion around what some of these terms mean, what you need for a particular intervention, and how you might be able to finance it in a way that makes more sense,” she said.
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With some funding models still in the early days, questions remain about when to use them, how to harness them, and how to structure them.
“It's important to continue trying to unpack some of the complexities involved with these new models and to help people understand how to take this theoretical idea and put it into action.”
Saldinger — who focuses on the intersection of business and global development, as well as United States foreign aid policy — will be sitting down at Devex World on June 12 in Washington, D.C., to help turn these theories into action.
Drawing on the perspectives of luminaries including Instiglio’s Avnish Gungadurdoss, IDinsight’s Neil Buddy Shah, and Co-Impact’s Pam Foster, she’ll translate the language of social enterprise, impact investing, and blended finance into tangible opportunities organizations can take forward.
Ahead of the event, we sat down with Saldinger to learn more.
The conversation has been edited for length and clarity.
What are the key challenges the global development community needs to overcome in terms of new funding models?
Some of the models are really complicated to create — especially the first time around. There are pretty significant costs in terms of time, effort, and legalities in trying to structure some of these deals. Hopefully over time there will be more templates but for now, one of the key challenges is the upfront costs of trying to put these things together.
One other challenges is that it really — this is probably the fundamental challenge — requires a shift in thinking. You used to need stellar grant writers and people who can respond to request for proposals on your team — and that's a certain type of skill that’s different from building a vehicle to leverage private sector finance.
In part, the industry needs to start shifting some of the skillsets — bringing people in with a finance background who understand some of the commercial financing implications, including when certain types of financing could be used and how.
There's often been a rise in the hype around certain models. Yes, there's huge potential here, but it's also going to take a lot of time and work to get some of these instruments operational in a way that that is cost effective and makes sense.
“I think that this shift in how development is funded is going to fundamentally alter the way we do development at large.”— Adva Saldinger, associate editor at Devex
How can some of these challenges be overcome?
If you really want to leverage private capital, acknowledge that investors are coming in with a profit motive. Not every development program is going to be funded with a financing deal that leverages private capital, because not everything can recycle the capital and give back the money put in.
There’s still, in some cases, a reluctance to acknowledge profit motive from investors in private or commercial capital. It's important for the development community to shift the way it thinks; having a profit motive isn't bad if you can find places that profit motive can overlap with, or support, addressing a social issue — that's important.
There can be a misalignment of incentives; in an ideal world you'd have more private capital actors willing to take concessional returns — so instead of earning 15 percent they'd agree to earn 7 percent if there was a real development payoff. Currently, that's not always the case.
So how do you find the right investors for the right deals? Certain investors are only going to do deals that are very straightforward with a high return — and maybe there are projects like that, particularly in infrastructure and other areas. It's a little bit of a balancing act, trying to figure out what the right deals are and who is the right investor for a particular project — whether a high net worth individual, a philanthropist, or more commercial capital.
That's where some of the multilateral development banks — especially those helping to finance big infrastructure projects — are where you could get the more traditional commercial capital, whereas impact investors need to come in — on what some might call, softer or more social issues.
Why is Devex World the place where practitioners need to be to see this conversation advance?
Devex World brings these different players together in one place. It's an opportunity to help folks understand perspectives of people working in different fields and to really understand what's happening in the space — and to talk to some of the practitioners helping put these deals together and bridging some of those gaps.
People will leave thinking about how these new trends apply to their organizations — and how they can structure themselves in a slightly different way to capitalize on opportunities to make sure they're doing so in the smartest way possible.
This shift in how development is funded is going to fundamentally alter the way we do development at large — so we're not going to get into the nitty gritty of how you structure a financing deal.
If you want a glimpse into how the industry is changing and the direction of jobs moving forward, I think the “new funding models” discussion would be a good place to start.
Devex World is on June 12, 2018, at the Mead Center for the American Theater in Washington, D.C., Find out more here and note that this unique event will reach full capacity.