“As is the case with all resources for development, it will be important
5.4 Have innovative financing for development initiatives delivered stable and predictable resources for international development and climate/environment?
Experience so far
The literature on aid effectiveness underscores the importance of stable and predictable finance for recipient countries. Where ODA is unpredictable it can raise the cost of financial management, worsen the composition of investment and amplify the fiscal effects of business cycles. For instance, unexpected shortfalls in ODA typically lead governments to shift expenditures away from long-term investments towards short-term consumption (Desai and Kharas, 2010). Thus, the extent to which innovative sources of development finance are able to both raise and deliver resources in a stable and predictable manner is a key question for consideration.
In one sense, innovative finance initiatives are only able to disburse resources on a stable, predictable basis in so far as they are able to raise finance in a stable and predictable manner—whether these resources are delivered, in turn, in a predictable manner is a separate question.
So do innovative sources of development finance raise resources on a more stable and predictable basis than conventional ODA? Predictability is frequently touted as a major advantage of innovative finance initiatives over conventional approaches to external assistance (Leading Group 2011).
Some initiatives score more favourably than others. But most remain vulnerable to different forms of uncertainty or shock. For instance, initiatives which rely on continuous donor pledges or frequent replenishment rounds (such as IFFIm, AMC etc.) may only be able to assure predictable resources for certain periods of time (until donors make fresh commitments to the initiative).
Initiatives based on taxation—such as the airline ticket tax—may appear inherently more stable and predictable but they are also vulnerable to fluctuations in global economic or other conditions. For instance, air travel dropped sharply following the September 11 attacks on the twin towers in the United States as well as in late-2008 and 2009 as the global financial crisis began to unfold. Airline travel has recovered from both shocks and, overall, the industry has grown steadily over the last decade. Nevertheless, such shocks, where they occur, can reduce predictability for such initiatives. Voluntary solidarity contributions (such as Product (RED) and others) are also vulnerable to changes in consumer preferences as well as broader economic conditions (recessions often affect consumers’ and businesses’ abilities and willingness to donate to so-called ‘good’ causes). This means that, similar to conventional ODA, many innovative sources of development finance are also procyclical in nature.
The delivery channels selected for innovative sources of development finance are equally, if not more, important where predictability is concerned; even where resources are raised in a sustainable and largely predictable manner, some initiatives may not deliver this finance in a stable and predictable manner.
Current evidence points to limited predictability in the delivery of resources raised through innovative financing for development initiatives. Many vertical programmes—through which innovative typically channel their resources—operate performance-based allocation processes. These aim to incentivise and reward governments for positive development outcomes and the effective use of resources. Results-based finance means that the performance of recipient countries influences subsequent releases of funds. For instance, the Global Fund, which receives resources through Product (RED) and the Debt2Health initiative (among many other conventional funding sources) links the “provision of funding to the achievement of clear, measurable and sustainable results” (Global Fund, 2011).
It is argued that such approaches create incentives for countries to improve performance (Global Fund 2011). It facilitates public scrutiny (by both donor and recipient) and helps to bring the public on board through the clear and effective communication of the role of different initiatives in positive development outcomes. But it can also reduce predictability in development finance which, in turn, undermines aid effectiveness. In particular, the results based approach may penalise weaker and/or poorer countries as well as increase incentives to misreport development outcomes. It may, therefore, tell us little in practice (Sridhar and Tamashiro 2010). A lack of predictability in aid flows can also lead to macroeconomic instability. The OECD (2010) finds that for a large number of developing countries, regardless of sector, results-based finance does not enhance predictability in access to development finance. Looking forward: key issues and lessons learned
In the long-run, on average, volatility in ODA is negatively correlated with economic growth (UNDP 2011). Thus, innovative financing for development initiatives should strive to provide stable and predictable revenue streams for recipient countries.
While no initiative may be entirely immune from external shocks which temporarily interrupt their normal revenue generation patterns, initiatives such as the airline ticket tax and emissions trading schemes have on the whole provided more constant and predictable revenue streams for international development. This predictability cannot, at present, be matched through traditional budget outlays from donors which are constantly vulnerable to political preferences, economic conditions and other pressures. Financial transactions taxes and carbon taxes could offer similar advantages. Nevertheless, like conventional aid, many instruments tend to be procyclical. This needs to be taken into consideration so that appropriate aid delivery modalities may be designed; for instance it may be desirable for some initiatives to disburse more finance in bad times and less in good, i.e. on a countercyclical basis. The use of performance based allocation systems can reduce predictability in the delivery of resources on the ground. This can impact the effectiveness of this finance. The use of such approaches also raises questions as regards which performance indicators
Innovative financing for development and the experience so far
and development outcomes are the most appropriate to measure (and which may be waived in cases of non-performance), and more importantly who decides. As a result, they may skew accountability upwards towards donors rather than downwards towards citizens (the ultimate beneficiaries). With some vertical programmes, beneficiary countries define their own performance criteria but this may still reduce predictability in the delivery of resources.
Currently, many innovative financing for development initiatives are small. However, as initiatives become larger in the future and/or countries begin to receive relatively large sums via such mechanisms, efforts will need to be undertaken to ensure that such financial flows are delivered on a stable, predictable and transparent basis. Performance-based allocation systems may not be appropriate in some cases and the case for direct budget or sectoral support may need to be examined more closely (see question five).