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An overview of innovative financial

instruments used to raise funds for


international development
11th Plenary Session of the Leading Group on Innovative
Financing

Dr. Helke Waelde


Introduction

MDG requirements still challenge DAC members in suitable policies, strategies


AND financial resources
Controversy not just over the level of funds needed to finance development,
BUT also with regard to the sources (Will innovative financing replace ODA?, The
Development Newswire, 28.12.2012)
Maintaining the 0.7 % goal
AND/OR usage of local sources (taxation, reduction of capital flight) first, and use
funds more efficiently
Do countries have sufficient capacity to absorb the funds
AND/OR does development finance poison or weaken the local efforts for
development?

Possible solution: combination of policies strongly orientated toward


development, increasing local revenues, strengthening the focus on results,
increasing efficiency and mobilising additional international funding

Overview of IFD / February 2013 2


What are innovative financial instruments?

Given the sources of financing, we classify the instruments in

Type 1:
Additional
public funds
Type 3:
Efficiency
Type 2:
Additional improvements
and
private funds debt conversion

Overview of IFD / February 2013 3


Type 1: Mobilizing additional public funding

New taxes and levies on specific activities, generally of a global nature


(Financial transaction, airline tickets, CO2 emission)
Government sale/auction of rights of use
(Certified emission rights, UMTS licences)
Allocating IMF special drawing rights
(specifically to developing countries)

Overview of IFD / February 2013 4


Type 2: Mobilizing additional private funding

Public Private Partnerships (PPP)


Government guarantees/assumptions of risk (IFFIm, AMC, GAVI)
Concessionary loans combining public and private funding (Blending)
Loans/bonds with performance-dependent repayment terms (Counter-cyclical
loans, GDP-indexed bonds)
Securities and structured funds
Ethical funds/bonds and diaspora funds
Local currency loans
The Clean Development Mechanism and the Adaptation Fund
Lotteries

Overview of IFD / February 2013 5


Type 3: Efficiency improvements or debt conversion

Result-based Financing, Output-based Aid, Health Impact Fund


Weather insurance, catastrophy insurance
Conditional debt forgiveness, debt buy-back and debt-for-development swaps

Overview of IFD / February 2013 6


Identification of four cluster
Fund volume which
can be mobilised

Taxes (airline
GDP-indexed
tickets, currency
bonds
transactions)
High-volume, adequate range
of application (also suitable Auctioning rights SDRs Blending
for poorer countries) of use (CO2,
UTMS etc) Public-Private
Partnerships
High-volume, broad range of
CDM/AF
application (but primarily
suitable for developed
countries)

Securities &
Weather/ structured funds
catastrophe/ climate
insurance
Results-based
financing/ OBA Counter-
Loans in local cyclical loans
currency
Debt buy-back,
debt swaps Ethical funds
AMC, IFFIm

Acceptable level of
productivity and range of
Diaspora bonds application (suitable for
many countries)
Lotteries
Low volumes, only
suitable for a few
applications

Funds freed up Breadth of regional/ sectoral


Key: Government funds Private funds
through efficiency applications
mobilised mobilised
improvements

Overview of IFD / February 2013 7


Instruments that should be pursued with vigour

Fund volume which


can be mobilised

Taxes (airline
tickets, currency
GDP-indexed
High-volume, broad range of
bonds
transactions)

application,
High-volume, adequate range
of application (also suitable Auctioning rights SDRs Blending
for poorer countries) of use (CO2,
UTMS etc) Public-Private
Partnerships
High-volume, broad range of
CDM/AF
application (but primarily
suitable for developed
countries)
BUT primarily suitable for advanced/middle
Securities &
structured funds

income countries
Weather/
catastrophe/ climate
insurance
Results-based
financing/ OBA Counter-
Loans in local cyclical loans
currency
Debt buy-back,

AMC, IFFIm
debt swaps Ethical funds

Acceptable level of
the driver is the private capital
productivity and range of
Diaspora bonds

not all ideas are practically verified yet


application (suitable for
many countries)
Lotteries
Low volumes, only
suitable for a few
applications

Key: Government funds


mobilised
Private funds
mobilised
Funds freed up
through efficiency
improvements
Breadth of regional/ sectoral
applications (GDP-indexed bonds)
Fund volume which
can be mobilised

High-volume, adequate range of


Taxes (airline
GDP-indexed
tickets, currency
bonds
transactions)
High-volume, adequate range
of application (also suitable Auctioning rights SDRs Blending
for poorer countries) of use (CO2,
UTMS etc) Public-Private
Partnerships
CDM/AF
High-volume, broad range of
application (but primarily
suitable for developed
countries)
application,
Weather/
catastrophe/ climate
insurance
Securities &
structured funds

Results-based
ALSO suitable for poorer countries
financing/ OBA Counter-

the aim is to mobilize more public


Loans in local cyclical loans
currency
Debt buy-back,
debt swaps Ethical funds
AMC, IFFIm

Diaspora bonds

Lotteries
Acceptable level of
productivity and range of
application (suitable for
many countries)
funds
Low volumes, only
suitable for a few

Key: Government funds


applications

Private funds
Funds freed up
through efficiency
Breadth of regional/ sectoral
applications
problems arise from unfavourable
mobilised mobilised
improvements

prevailing market conditions (CDM) and


from the uniqueness of some events
Overview of IFD / February 2013
(auction rights) 8
Instruments that could be considered more often

Fund volume which


can be mobilised
Fair level of volume and range of
Taxes (airline
tickets, currency
transactions)
GDP-indexed
bonds application,
High-volume, adequate range
of application (also suitable Auctioning rights Blending

THEREFORE suitable for many countries


SDRs
for poorer countries) of use (CO2,
UTMS etc) Public-Private
Partnerships
High-volume, broad range of
CDM/AF
application (but primarily
suitable for developed
countries)
mixture of efficiency improvements
Weather/
Securities &
structured funds
and mobilising private capital
catastrophe/ climate
insurance
Results-based
financing/ OBA Counter-
potential for successful applications
Loans in local cyclical loans
currency

AMC, IFFIm
Debt buy-back,
debt swaps Ethical funds and increasing importance (local currency
Diaspora bonds
Acceptable level of
productivity and range of
loans, structured funds)
application (suitable for
many countries)
Lotteries
Low volumes, only
suitable for a few
applications

Funds freed up Breadth of regional/ sectoral


Key: Government funds Private funds
through efficiency applications
mobilised mobilised
improvements

Overview of IFD / February 2013 9


Instruments that complete the former instruments in
specific contexts

Fund volume which


can be mobilised

Taxes (airline
GDP-indexed
tickets, currency
bonds
transactions)
High-volume, adequate range

Low volume and only suitable for a few,


of application (also suitable Auctioning rights SDRs Blending
for poorer countries) of use (CO2,
UTMS etc) Public-Private
Partnerships
High-volume, broad range of
CDM/AF
application (but primarily
suitable for developed
countries)
but for that context reasonable,
Weather/
Securities &
structured funds
applications
catastrophe/ climate
insurance
Results-based
financing/ OBA Counter-
Loans in local cyclical loans
currency
Debt buy-back,
debt swaps Ethical funds
AMC, IFFIm

Acceptable level of
productivity and range of
Diaspora bonds application (suitable for
many countries)
Lotteries
Low volumes, only
suitable for a few
applications

Funds freed up Breadth of regional/ sectoral


Key: Government funds Private funds
through efficiency applications
mobilised mobilised
improvements

Overview of IFD / February 2013 10


Conclusion: What do we learn for the future?

Focusing on the fair and high volume instruments/ideas with a broad range of applications
(Blending, GDP-indexed bonds, PPP, local currency loans)
BUT all instruments/ideas with high or small volume are reasonable to motivate financing, which
is needed for the development

In the future
Developing countries have to be supported in their own efforts towards attracting financing
for development beside the known problems (corruption, capital flight aso.)
How can perhaps Remittances be used for financing development?
Misguiding incentives for traditional donors should be mitigated
Not only invest in instruments that produce ODA, instead of developing new instruments
that are not ODA.
Think outside the box to acquire new sources of financing.
More private capital should be motivated to speed up closing of the gap in financing for
development.

Overview of IFD / February 2013 11