Is innovative financing for development sustainable over the longer-term?

In document Discussion Paper. Innovative Financing for Development: A New Model for Development Finance? January 2012 (Page 38-40)

“As is the case with all resources for development, it will be important

5.8 Is innovative financing for development sustainable over the longer-term?

Experience so far

A major rationale for developing innovative sources of development finance is that they provide avenues to mobilize resources in ways which are not dependent on donors and which are sustainable over the longer-term. This could transform the ways in which international development is financed in the future, as well as raise unprecedented sums for development and climate-related actions. But just how true is this assertion?

Some initiatives do indeed demonstrate significant potential to raise sizeable resources sustainably over time. This includes taxation based instruments such as the airline ticket tax, the FTT and various forms of carbon tax. However, they are only sustainable in so far as governments remained prepared to implement the tax and citizens/businesses/investors remain prepared to pay it.

Voluntary solidarity contributions—a form of traditional charitable donation—have a long and rich history. However, their ability to generate sustainable revenue streams for development is contingent on several factors which include public perceptions of the cause(s) to be supported and the wider economic climate. The closure of MASSIVEGOOD is indicative of the vulnerability which faces such approaches. The initiative was closed at the end of 2011 due to insufficient returns in the current economic climate.

Innovative financing for development and the experience so far

Initiatives which depend on ODA and/or continuous donor replenishments to operate may also be less sustainable over time. This includes the AMC for a pneumococcal vaccine and the IFFIm. Both depend on donors’ commitments to resourcing them; replenishment rounds may be more or less successful each time. Indeed the UN Secretary-General’s 2011 progress report on innovative finance notes that, “[f]or IFFIm, which so far demonstrates the greatest potential, future funding for this mechanism is in decline” (United Nations 2011). Debt conversions are also largely ‘one-off’ operations; they may provide much-needed fiscal space and/or support useful development projects in the short-term but they are not designed to resolve broader issues related to debt sustainability or social and economic development.

There are also other considerations with regard to the sustainability of innovative finance mechanisms. It is important to note that some innovative financing for development initiatives may not necessarily provide resources on concessional terms or have a clear development focus. This means that medium and long-term debt sustainability in beneficiary countries must be factored-in to analyses of the sustainability of some innovative finance instruments. For instance, diaspora bonds, local-currency loans and funds raised through the World Bank’s Eco-Notes and Green Bonds all create public debt liabilities which must be repaid by sovereign borrowers. The terms and conditions will depend, in part, on market conditions.

In this context, some innovations aim precisely to reduce sovereigns’ risks of unsustainable debt. Countercyclical loans reduce/ eliminate debt service payments when major economic shocks occur while local currency loans aim to hedge currency risk associated with borrowing in foreign currencies. Local currency financing has been widely used by regional development banks in particular. The use of countercyclical loan instruments has so far been limited to the Heavily Indebted Poor Countries (HIPCs) which have experienced debt repayment problems in the past. However, given the increased intensity and frequency of various forms of economic shock, a strong case can be made to extend such innovative financial instruments to other developing countries. Looking forward: key issues and lessons learned

Some initiatives demonstrate more potential to generate a sustainable stream of resources for development and climate change/ environment over time. Others represent shorter-term cash injections or help to free-up additional fiscal space in the short-term. However, most initiatives remain vulnerable to various forms of uncertainty, such as the prevailing economic climate, donor politics or citizen preferences.

With this in mind, it is useful to consider whether some initiatives may be more suited to supporting some development areas over others. For instance, short-term initiatives may generate instabilities and inefficiencies in beneficiary countries and thus may only be appropriate under certain circumstances (e.g. a rapid vaccination campaign or an immediate humanitarian intervention). Initiatives which provide a more predictable and sustainable stream of resources over time may be used by beneficiary governments to support longer-term investments and development programmes. Meanwhile, voluntary solidarity contributions may only ever play a complementary financing role due to the vulnerabilities cited above. SDRs may be most appropriate as a countercyclical financing tool.

Some instruments generate non-concessional public debt liabilities in beneficiary nations and thus may be more suited to middle- income countries. These instruments may also be more appropriate for the financing of projects which are expected to generate a positive return on investment. This implies that low-income countries may need continued support from innovative financing initiatives exclusively—or almost exclusively—in the form of grants.

Finally, measures of the sustainability of different mechanisms may also need to include an assessment of the feasibility of implementation both in the immediate and long-term, i.e. what are the associated technical, financial and human skills which may be required to set-up and run specialised initiatives? Some initiatives may demand more intensive (and costly) inputs in terms of specialised sectoral or financial expertise. How will these be secured over the longer-term? Capacity development in beneficiary countries will thus be a critical component of the longer-term sustainability of such initiatives.

5.9

Can innovative financing for development be scaled up and/or initiatives

In document Discussion Paper. Innovative Financing for Development: A New Model for Development Finance? January 2012 (Page 38-40)