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Development Financing Remarks at the OECD Development Assistance Committee

Ms. Shamshad Akhtar Assistant Secretary-General for Economic Affairs Department of Economic and Social Affairs

5 December 2012, London

Official Development Assistance (ODA) delivery has been less than internationally agreed, close to $133 billion, or 44% lower than the UN agreed target of about $300 billion (derived as 0.7% of GNI). Prospects for the realization of the target seem more uncertain as the crisis has been protracted and fiscal compulsions have forced additional cuts. Moving from net ODA to gross ODA will not really make a difference in raising cross border flows aimed at developmental purposes, though they indeed will introduce transparency and better reflect the aggregate picture for donors.

Few points are important to concentrate on:

 

  1. ODA flows are only part of the development financing story. ¡°Other flows¡± to developing countries, such as private sources of funding, philanthropic contributions, FDI, and remittances are more significant. However, not all these sources of financing have been channeled for the MDGs. For example, remittances have grown phenomenally but actually spend mostly for household consumption etc.
  2. Financing gaps for the existing development agenda are huge and these gaps will grow depending on the scope and scale of the Post 2015 Development agenda. UN¡¯s World Economic and Social Survey (WESS) 2011 estimates suggest that additional investments of $2 trillion (equivalent to 3% of global GDP) would be needed to develop new green energy systems. Private sources indicate that investment gaps in agriculture to feed population, and in other social indicators tied to MDGs could be anywhere in the range of another $300 billion or so in future. Infrastructure requirements are phenomenal and run into trillions.
  3. ODA flows extrapolations suggest that it may rise to $200 billion by 2020. Irrespective of size, recent evidence confirms uncertainty and volatility in ODA flows; however these flows are critical to leverage properly other sources of funding.

 

Innovative development finance (IDF) has assumed new significance.

The Monterrey Consensus recognized ¡°the value of exploring innovative sources of finance…¡±. Over the period, a range of initiatives have been launched and there exist a number of proposals of innovative mechanisms and instruments that need to be properly explored.

Over the last decade, there has been good progress in nurturing:

 

  1. Innovative distribution and delivery mechanisms?that involve global partnerships for structuring fund and governance structures such as the Global Fund to fight AIDs, and other diseases and the GAVI Alliance.
  2. New intermediation mechanisms?by organizing funds to leverage philanthropic money, for example, the International Finance Facility for Immunization (IFFIm) that front loaded aid to ensure immediate availability of funds for immunization.
  3. Innovative Sources of financing?such as the UNITAID that is funded mostly through a solidarity levy of airline tickets, a small tax on air passengers implemented in 9 countries. Not only are these structures innovative in financing structures but serve as efficient delivery mechanisms.
  4. Other mechanisms?such as the Debt2Health swaps relieve part of a country¡¯s external debt in return for a commitment by the debtor to invest half the nominal value of the debt in programs of Global funds and Advance Market Commitments provide guaranteed market demand at a specific price for producers of vaccines.

 

The total health financing mobilized under these initiatives is estimated to be $5.5 billion and except for UNITAID these depend on restructuring of aid flows, though it helps leverage private funding from philanthropic sources.

In Climate Finance the contribution of IDF to raise resources has been thus far limited but there is huge potential and scope. Existing IDFs involve:

 

  1. The Clean Development Mechanism, a global emissions trading scheme established by the 1997 Kyoto Protocol of the UN Framework Convention on Climate Change, funded by a 2% levy and the certified European Union Emissions Trading Scheme.
  2. Special purpose funds serve as disbursing mechanism where funds are earmarked for particular adaptation and mitigation activities.
  3. Intermediation mechanism have involved debt for nature swaps too.
  4. Thirty one Development Assistance Committee (DAC) donors operate close to 1600 environmental partnerships alongside 30 or more non DAC donors and dozens of small multilateral environmental agencies.

 

The Green Climate Fund, set up under the UN Framework Convention on Climate Change will be inevitably a better response to deliver the large scale financing required but it has yet to be fully operationalized and financed ¨C it has good potential for serving as the multilateral financing mechanism for climate action.

IDF has a significant potential as there are several proposals to mobilize funding from other sources, which could raise close to $400 billion or so. Examples of these include:

 

  • International taxes on financial and currency transactions,
  • Carbon taxes on emissions which alone could raise $250 billion or so; beside raising funds, this will help cap the emissions,
  • Creation of liquidity mechanism through the use of IMFs Special Drawing Rights (SDRs) ¨C In this proposal, countries with excess reserves would buy bonds from MDBs to enhance their bank lending capacities. With new issuance of SDRs close to $150-200 billion could be raised for long term financing.

 

Other official sector IDF could involve drawing down, in a multilateral framework context, the FX holdings of the reserve surplus economies and using them to finance development. This would have to be packaged effectively to ensure proper governance of funds, and use to finance infrastructure based on proper due diligence to ensure adequate returns.

It is important to develop proper financing structures and monitoring mechanisms to ensure IDF effectively complements ODA flows and is consistent with the efforts underway to foster transparency, policy coherence and development effectiveness.

Another interesting endeavor to track is The Global Impact Investing Network (GIIN) and initiatives of its kind. GIIN is, in effect, a commitment to create a new asset class¡ªimpact investing¡ªyielding a financial return alongside a social or environmental benefit. GIIN members include big banks (Citigroup, Deutsche Bank, JPMorgan), philanthropic institutions (such as the Bill & Melinda Gates Foundation and the Rockefeller Foundation), the Acumen Fund, which invests charitable donations in firms supplying health care, clean water and so forth in Africa and India, and Generation Investment Management, a green-tinged fund manager co-founded by Al Gore. The new asset class being advocated by this group is intended to create positive social or environmental impact beyond financial return.

 

  • Impact investments are typically structured in private markets by providing debt or equity to mission-driven businesses.
  • Impact investing has gained traction among a wide range of investors, including large-scale financial institutions, pension funds, family offices, private wealth managers, foundations, individuals, commercial banks, and development finance institutions.
  • Analysis of more than 1,000 impact investments offers return comparison of this asset class, relative to the established benchmarks for emerging and developed market debt and equity returns. The analysis shows that investors have broad expectations for impact investment financial returns, ranging from concessionary to market-beating.
  • Based on analysis of five sectors – urban affordable housing, rural access to clean water, maternal health, primary education, and microfinance ¨C and focus on serving the population at the “base of the economic pyramid ¨C this initiative has a potential investment opportunity of around $400 billion and $1 trillion over the next decade with adequate returns.

 

The financial industry may be providing technical know how, but the backing of rich philanthropists is a critical driver of IDF. The Rockefeller Foundation has been a force behind the creation of the GIIN. Meanwhile, the Gates Foundation, a keen supporter of the GIIN, has begun an experiment in using financial innovation to generate extra investment in its favored causes. The foundation has created a facility to mobilize funding from governments and private investors.

Specialized intermediaries have also sprung up, including several ¡°social investment banks¡±, such as Total Impact Advisors, which is supported by Calvert Foundation and Social Finance, recently founded in Britain. Social-enterprise clubs have also emerged in leading business schools.

In conclusion, there are multiple approaches, sources, modalities and types of innovations underway to finance sustainable development. Each of these proposals has technical and economic merits, but more impetus and leveraging require international community¡¯s consensus, agreement and political will. The design of appropriate governance and allocation mechanism is crucial for innovative financing. Supportive legislation and tax breaks and other incentives could further help mobilize more IDF. IDF is clearly an emerging area and would need to be further researched to ensure appropriate financing mix is available to support the Post 2015 Development Agenda.

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