What is innovative financing for development, and how can we harness its power to eradicate poverty and increase opportunity around the globe?
Devex spoke with Kevin Starace, executive director of global health innovation at the United Nations Foundation, about the history, goals and new priorities and tactics of IFD.
Why do we need innovative financing mechanisms?
Official development assistance is fundamental, but it is still volatile and unpredictable, despite the criteria for aid effectiveness set out in Accra. With more than $119 billion in ODA (in 2009) going to worthy activities in poverty, climate, health, human rights, gender equality and rural development, there is an increasing need to manage aid efficiently.
With only four years until the Milennium Development Goals deadline, global austerity and financial uncertainty are upon us, and foreign aid is stalling, being interrupted, or flatlining. Most urgently, with global health budgets declining, we risk lives lost today - not to mention lost gains from a decade’s worth of successful scale-up.
Given these challenges, we must find ways to improve aid effectiveness by (a) increasing the amount of funding available, and/or (b) stretching the value that funding delivers, in order to meet the funding gap.
What is innovative financing and where did it come from?
The notion of innovative financing for development largely became an international topic for debate at the Monterrey Summit of 2002.The Leading Group on Innovative Financing for Development was created and then in 2006, the first mechanisms, IFFIm and UNITAID, were started up. It’s been a blooming, creative multi-sector movement since.
The concept of innovative financing generally is that financial instruments in the private sector are re-cast to suit development objectives. The World Bank distinguishes between innovative finance mechanisms that generate additional funds, make funds more efficient, and link funds to results. It is commonly agreed that in addition to raising funds for development, effective innovative financing should be complementary to official development assistance, stable and linked to the idea of global public goods. All of these definitions in some way contribute to the current concept of value for money, which encompasses efficiency, performance, risk sharing and market dynamics.
What have been the more successful outcomes of innovative health financing?
In terms of new public revenue, facilities designed to bring forward the availability of finance or generate additional funds for international development through taxes, dues or charges raised by revenue-generating authorities, there are three major health-related such mechanisms in existence today:
UNITAID and the solidarity contribution on airline tickets is able to leverage economies of scale to drive prices down and stimulate the development of new drugs better adapted to patients’ needs. In three years, UNITAID has raised over a billion dollars and is funding projects in 94 very poor countries, half of them in Africa.
The International Finance Facility for Immunization issues bonds in the capital markets backed by legally binding donor commitments to pay grants over the next 20 years. Donor commitments to IFFIm amount to $5.9 billion (from the United Kingdom, France, Italy, Norway, Spain, Netherlands, Sweden and South Africa), with bond issuances at $2.6 billion.
Product (RED) raises funds for HIV/AIDS programs in Africa through a share of the profits from the sale of branded products; it has generated more than $150 million for the Global Fund to Fight AIDS, Tuberculosis and Malaria.
There is a growing list of debt-based instruments or frontloading mechanisms that make public funds - existing or innovative - available for development earlier by taking on liability or reducing debt burden. The pioneering IDA buy-down, also referred to as credit buy-down, refers to a third party donor paying off all or part of a specific IDA credit on behalf of the government subject to achievement of predefined results. Since 2003, IDA buy-downs in Pakistan and Nigeria received almost $150 million from the Bill & Melinda Gates Foundation, U.N. Foundation, Rotary International and the U.S. Centers for Disease Control and Prevention, to buy-down more than $300 million in IDA credits.
Advance market commitments have been successful in minimizing the risk for suppliers so they can engage in research and development, marketing and sales activities. $1.5 billion have been put up under the advance market commitment for pneumococcal vaccines.
Debt2Health makes funds available to Global Fund projects through reducing a country’s debt burden. A Debt2Health swap is a conversion of official debt at a discount. By 2010, some €160 million in Debt2Health swaps have been agreed upon.
Then there is future receivables financing. More recently countries have leveraged more innovative approaches to financing their development via asset- backed securitization of future-flow receivables, diaspora bonds, and GDP- indexed bonds. Specifically, with regards to future-flow receivables, countries have principally used heavy crude oil receivables, diversified payment rights, airline ticket receivables, telephone receivables, credit card receivables, electronic remittances, oil and gas royalties and export receivables, paper remittance and tax revenue receivables. All have been used as potential collateral to obtain better lending terms on the bond market.
What do you see as the future of innovative health financing?
Perhaps the most untapped breed of innovative financing are hybrid initiatives that present a clear and shared stake both by the official and private sector actors - not only blending, but co-joining public and private investments to forward development objectives. This qualifies in some cases as results-based financing and in other cases as impact philanthropy, by offering subsidies, guarantees and new insurance-type facilities. Volume guarantees are useful in minimizing the uncertainty that suppliers have to invest in scaling operations to ensure greater volumes for developing economies.
Examples include net guarantees, a niche insurance product for long-lasting bed net manufacturers, enabling suppliers to guarantee stock thereby ensuring rapid deployment. The Revolving Guarantee Bridge Fund allows private sector actors to support UNICEF projects while aid recipients gain bridge access to funding until regular, slower disbursements become available.
The Affordable Medicines Facility - malaria, or AMFm, is a global subsidy, managed by the Global Fund, designed to expand access to artemisinin-based combination malaria therapies. The Global Fund negotiates the price of ACTs and subsidizes it to lower the cost to first-line buyers. AMFm has received $212.5 million in contributions from the Gates Foundation, UNITAID, and the United Kingdom.
Backed by a Gates Foundation, the U.N. Foundation’s Pledge Guarantee for Health uses guarantees to underwrite donor commitments, securing low-cost commercial credit for recipients of aid on the basis of pending aid commitments. By providing bridge financing and organizing guarantees through letters of credit, essential health supplies can be shipped while the normal processes of transferring donor funding gets worked out, the net benefit being accelerated commodity delivery and less supply chain inefficiency and supplier risk.
>> How Anti-Malaria Bednets Were Delivered to Zambia Ahead of Schedule
Fortunately, current IFD mechanisms are being designed to adjust to the constantly changing needs of donors, recipients, and suppliers. The flexibility of mechanisms allows for tailored-fit solutions to financing challenges. The result must be accelerated delivery of services and more efficiently priced health commodities with a minimum amount of wastage, stock-outs and unnecessary costs. This ensures that the benefits of donor funds are maximized, and distributed effectively to reach its full potential.
Given the financial uncertainties and the urgency in global health, where is the so-called low-hanging fruit?
General efficiency. Rarely included as innovative finance are initiatives that enhance the delivery of aid or aid finance, or new features within existing systems that increase the value of existing funds, both of which raises additional capital for development indirectly while increasing the overall efficiency of the investment.
For good reason, most efforts in IFD are centered on finding new capital to sustain development. Returning savings back to program investments achieves the same goal as raising new capital, but does so quicker and more efficiently than setting up new instruments. Statistics confirm the low level of technical efficiency in donor aid; for example, recent studies, including by the Brookings Institution, show value destruction as high as 28 percent of all ODA due to volatile donor funding flows. This major source of value destruction should catalyze organizations to design activities or leverage mechanisms to help minimize the amount of waste due to stock outs, premium risk pricing and emergency and shipping costs.
One such example is bridge financing such as our Pledge Guarantee. In addition to working with donors and recipients, PGH engages suppliers, providing direct guarantees to ensure future payment, removing risks for suppliers throughout the value chain. By amortizing payments over the life of a commodity, buyers can offer suppliers certainty along with much-improved invoicing terms, effectively increasing the amount of funding available via trade/supplier financing.
While shifting money from one pocket to another may provide a more productive use of resources, the challenge of maximizing that productive capacity remains. For the most part, investigating the strategic use of funds at different stages of the development supply chain will unveil efficiencies and new ways to process or minimize risk, and create savings and thereby more available program funds. At the same time, providing suppliers or markets that serve the developing world with more assurances, more risk sharing and some creativity usually results in further price savings and supply chain efficiency, which really should be the ultimate goal right now.
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.