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Innovative development finance

There is no one universally agreed definition of innovative development finance (IDF). The World Economic and Social Survey 2012 (In Search of New Development Finance) defined IDF as mechanisms that are in the realm of international public finance and that have the following characteristics: (i) official sector involvement; (ii) international cooperation and cross-border resource flows to developing countries; (iii) an element of innovation in the nature of resources, their collection or governance structures; and (iv) as a desirable characteristic that resources are additional to traditional ODA. The Leading Group on Innovative Development Finance describes it as ‘comprising mechanisms for raising funds for development that are complementary to official development assistance, predictable and stable, and closely linked to the idea of global public goods’.

A significant number of such mechanisms have been implemented over the last two decades. The international solidarity levy for airline tickets is by far the single largest resource-raising IDF mechanism operational at this point. Introduced in 2006, it is currently levied on airline tickets in 10 countries, and a large share of proceeds are used to fund the UNITAID drug purchase facility. As of 2015, 63 per cent of the cumulative funding of UNITAID (or around USD 1.5 billion) has come from the solidarity tax levied on air-tickets. Yet, overall IDF has so far raised or intermediated only a modest amount of resources. At the same time, some proposed mechanisms (such as issuances of Special Drawing Rights (SDRs), carbon or financial transaction taxes) have the potential to raise large amounts of resources for sustainable development, but remain controversial.

Other innovative development finance mechanisms are designed to restructure existing flows to frontload, reduce risk, pool philanthropic funds with official resources, or leverage official flows with private resources. The largest such initiative in financial terms is the International Finance Facility for Immunization (IFFIm), which uses securitization, a mechanism developed in the private sector, to front-load aid flows. Set up in 2006, IFFIm securitizes long-term pledges from donor governments and issues vaccine bonds in the capital markets backed by future aid flows. Since its inception, IFFIm has disbursed US$ 2.5 billion to support Gavi vaccine purchases and deliveries to 71 developing countries and provided approximately one third of Gavi’s funding over this period.

UNPD’s Financing Solutions for Sustainable Development toolkit provides further information on a number of innovative financing approaches, including approaches that would not qualify as innovative development finance under narrower definitions. These include: enterprise challenge funds, impact investment, social and development impact bonds, crowdfunding, and alternative financing mechanisms.

UNDP has supported a number of innovative finance initiatives in the areas of climate change, environment, health, social protection, private sector development and emergency and crisis management. UNDP is engaging public and private counterparts to research and link promising innovative finance flows with development strategies and plans for the implementation of the SDGs, with particular emphasis on LDCs and SIDS. The organization has also recently started to support the prototyping of innovative resource mobilization strategies, technologies and financial products that are exemplified below.

UNPD’s Financing Solutions for Sustainable Development toolkit  provides further information on a number of innovative financing approaches, including approaches that would not qualify as innovative development finance under a narrower definition. These include: enterprise challenge funds, blending impact investment, social and development impact bonds, crowdfunding, and alternative financing mechanisms. A selection of examples from UNDP’s portfolio on above mechanisms and solutions is provided below.

Blending Impact investment

Impact investment is private sector investment that seeks not only financial return, but also environmental, social, and governance impacts (see section on Impact Investment). The impact can be exemplified by improvements in healthcare services, access to financial services, access to clean water, and employment/income generation in rural or poor communities. UNDP works at the cross-road of blending ODA with resources from impact investors to achieve social or environmental outcomes that would not occur if the investment were not made (additionality). ,UNDP acts as a conveyer, advisor for the public sector, and promoter of hybrid-ODA vehicles and matching platforms for impact investors. A snapshot of recently UNDP-supported initiatives include:

·         Impact Investment in Africa: The Africa Action Plan aims to support the development of a vibrant impact investment sector on the continent. The Plan outlines interventions required to support the initial development of the sector including: (i) A coordinating network / body primarily responsible for implementation of the action plan and co-ordination of relevant stakeholders; (ii) An advocacy and awareness raising programme on impact investment in Africa; (iii) A pipeline of viable impact investees that are able to meet financial, social and/or environmental requirements; (iv) Enabling policy and regulatory environment in which impact investment can thrive; (v) Good practices in impact investment by high capacity, skilled and experienced impact investors; (vi) Appropriate infrastructure and mechanisms to facilitate impact investment deals; (vii) Consensus on and broad-based adoption of impact measurement standards and metrics to demonstrate social and environmental returns. The UNDP's Private Sector Unit based in the Addis Ababa regional Hub is working with partners to advance the implementation of the Plan.

·         Global Islamic Finance and Impact Investing Platform: The platform, established by the Islamic Development Bank and UNDP’s Istanbul International Center for Private Sector in Development (IICPSD), aims to position Islamic finance and impact investing as a leading enabler of SDG implementation globally. The platform will mobilize and blend the resources of Islamic finance and the private sector to drive solutions to sustainable development challenges. It serves as a knowledge hub for peer-learning and experience sharing, a forum for policy dialogue and advocacy, and a marketplace where Islamic financiers can meet impact investors and social impact enterprises. Available at: www.iicpsd.undp.org/content/dam/istanbul/docs/IslamicFinance_BroWEB.pdf.

·         Social Impact Bond on Youth Unemployment in Serbia: Approximately only a fourth of the currently unemployed youth in Serbia is covered by the labour market policies currently in place. To tackle the challenges and negative impacts of long-term youth unemployment, UNDP, the Finnish Innovation Fund Sitra, and the Government of Serbia is designing a Youth Employment Bond. UNDP and Sitra have embarked on designing a pilot, based on Finnish Social Impact Bond modalities applied to the Serbian context. In a social impact bond the government generally hires a private sector firm (or NGO) for its services, and borrows money from private investors through a bond issuance to cover the related costs. The government only repays the private investors if agreed-upon outcomes are achieved. Thus taxpayer’s monies will be invested only in programs that have measurable impacts and that create savings or improve social welfare. Detailed analyses are under preparations on the financial and legal framework as well as on the service gaps in the youth employment services. The result-based contracting with service providers leaves room to innovate how the services will be provided while focus of the contracting will be on the results. More information: http://www.crowdfundingacademy.eu/blog/jobs-for-youth-savings-for-government-return-for-investors-all-in-one   

·         Development Impact Bond for Rhinos: In collaboration with the Global Environment Facility (GEF), the Zoological Society of London, Social Finance and United for Wildlife, UNDP is designing a development impact bond which aims to secure much needed long-term finance to help protect rhinos from extinction. Development impact bonds, which are similar to social impact bonds discussed above, are aimed at ensuring that development projects effective. Like any borrowing, they do not raise additional funds, but rather help governments front-load financing for projects. In a development impact bond, governments borrow money from private investors for a project that has a clear development goal, and only repay the bond if the programs achieve pre-agreed developmental outcomes.  UNDP is also exploring the potential of development impact bonds in Belarus, Bangladesh, Trinidad and Tobago, and Serbia.

·         United Nations Social Impact Fund (UNSIF): UNSIF is a social impact or blended finance platform built by the United Nations in partnership with social responsible public and private sector investors that support the achievement of the SDGs in priority sectors. Part of the UN Multi-Partner Trust Fund (MPTF Office), UNSIF is a partnership between UNEP, UNCDF, UNFPA and UNDP. It plans to extend the reach, efficiency and impact of international development grants by leveraging and deploying complementary capital market investment from socially minded development financiers. Available from: http://un.socialimpact.fund/

Accellerate 2030: UNDP and Impact Hub joined forces to launch the Accellerate 2030 platform to support and promote impact-driven ventures who focus on tackling the SDGs. Five entrepreneurs, selected with the support of the global Impact Hub network, had the opportunity to participate in the 2016 Social Good Summit in Geneva and connect with other impact investors, representatives from international organizations, and fellow entrepreneurs. Available at: https://storify.com/GenevaUNDP/social-good-summit-2016-geneva. http://www.accelerate2030.net/

Crowdfunding

From its first campaign in Croatia to date, UNDP has developed a series of services that it offers to its clients including:

·        Crowdfunding Academies: these are envisaged as 3-6 month services where the team i) identifies a pipeline of potential ideas, ii) develops ideas into crowdfunding campaigns, iii) develops capacities of local partners to carry on similar work in the aftermath of the academy, iv) provides hands on support during the campaign.  The team is moving into the area of setting regional support centres with the best candidates by providing education, training and by connecting local actors, diaspora, start-up community and social enterprises. First pilot countries could be Egypt (but would require some research and analysis before launching it). The AltFin Lab has run 2 distinct Academies with the third planned for January 2017.

·         Crowdfunding Academy Croatia (most of them on Indiegogo) to date has completed 10 campaigns with mobilized over $200,000[1]. The projects range from helping migrants set up their own businesses in host countries, to introducing STEM education at schools or improving nutrition of schoolkids, to growth of new start-ups (eg. producing pencils made of organic waste).

The Crowdfunding Academy UNDP Global has mobilized $200,000 with currently 4 closed and 3 ongoing campaigns, with another 8 in the pipeline. Some of the UNDP offices have opted for setting up their own platforms including the Live Lebanon, which has been used with the purpose of engaging Lebanese expatriates, providing them with the opportunity to donate money online and support development and community projects throughout the county- current tally is 33 projects funded in the amount of over $3 million ranging from water filtration to installing solar PV systems. In Ecuador, UNDP has set up GreenCrowds and in Yemen the YemenOurHome, while there are several more national platforms under development (OneArmenia.org in Armenia; PeaceFunding in Colombia) and several others in consideration, as well as UNDP donation-fundraising webpage: “Digital Good Platform”.

·        Equity Crowdfunding for renewable energy: UNDP Croatia is a partner in a flagship project financed by the European Commission for crowdfunding renewable energy www.citizenergy.eu with an aim to facilitate citizens` investment in renewable energy. At this stage, the website serves as a “Trip Advisor” for citizens-investors in renewable energy with crowdfunding; existing crowdfunding platforms are registering at citizenergy.eu and putting their projects online to be visible for citizens interested in investing. It already has the potential today to serve for publishing and supporting all UNDP renewable energy projects worldwide; and in the future it could do several further steps.  The Lab will be testing this model in at least 1 country in Central Asia in 2016.

Crowdfunding for climate change mitigation: UNDP has set up a new joint initiative with UNFCCC to increase the availability of financing for climate change mitigation, focusing on crowdfunded investment into renewable energy projects in developing countries (from the pool of approved CDM projects that had not been implemented after the collapse of the carbon market) that are certified by UNFCCC and UNDP. These investments could produce certified GHG emission reductions and additional sustainable development benefits. The proposed model has been approved by the UNFCCC Executive Board in September 2016 and the pool of CDM projects is already been filtered for appropriate projects to be realised through crowd-investing.

·        [currently in pipeline] Large scale crowd-lending: by using crowdfunding project from Indonesia: “Solar pumps”. Setting up a business model in which community pays a part of investment for solar panels as a service/income to crowd lenders. Replicating the business model which was used in funding solar energy project in Mali with crowd lending.

·        [currently in pipeline] Crowdfunding platform using mobile payment system: using business model developed by M-Changa used in Kenya for setting up a pilot in Tajikistan, mostly targeting remittances financing. Another option under consideration is Bangladesh as there is already existing crowdfunding platform there using mobile payment system.

·        [currently in pipeline] Pilot project for small-scale crowd lending (P2P lending): by connecting to Kiva platform, we are exploring an option where the Lab would de-risk investment in small-scale PV systems for households by certificating technology, installers, by providing community underwriting and a mutual fund. Pilot would take place in Colombia (as a part of crowdfunding project idea) and in Tajikistan (focusing on Green Villages) initiative. Partnership with Kiva can be done unofficially such as a partnership of UNDP with Indiegogo platform.

The UNDP Alternative Finance Lab

In an effort to explore potential and feasibility of various alternative finance mechanisms both in the Europe and CIS (as well as other regions), UNDP’s Regional Hub in Istanbul with support of the Slovak Ministry of Finance has set up an UNDP Alternative Finance Lab (AltFin Lab). The lab seeks to support (in)formal citizen and other groups, government partners, business and others who are willing to experiment with emerging finance mechanisms. The purpose of the Lab is to manage a portfolio of prototypes that can show to what extent, under what circumstances, and with what type of support these mechanisms can help various citizen and other groups access capital, find investment in their social good projects, and extend financial services to the poorest of the poor. Currently, the AltFinLab is working out new modes of cooperation with several important partners who wish to work with the Lab including the European Commission, the UNFCCC, the StartNetwork, AlliedCrowds, Center for Alternative Finance of the University of Cambridge, GIZ, Karolina Fund and German Crowdfunding Network and more.




[1] Including both funds raised on the chosen crowdfunding platform and those mobilized off line for the purposes of the same campaign/project