Used in its various accepted meanings, the term “innovative” financing is not intended to be misleading. In practice, there is a wide range of so-called “innovative” financing mechanisms. Some of the oldest are designed to increase the resources available to support development policies or a related purpose. Others, which are more complex and more recent, associate additional funding with the notion of outcomes. The Dalberg report (2014) estimates the amount of innovative financing for development mobilised between 2001 and 2013 at US$100 billion, with an annual increase in volume of 11%[1]. Understanding innovative financing means making a distinction between several different categories.

The first category consists of mechanisms viewed as innovative because of their capacity for mobilising additional resources to support development policies. Most of the time, these are financial mechanisms that are adapted to address specific situations or applied to particular purposes. Within this category, there are two distinct groups.

1. The first consists of new tax bases, particularly those linked to globalisation, such as taxes on plane tickets, financial transactions, carbon emissions trading or mining resources, which make it possible to redistribute a very small proportion of the income from these activities. While the principle of taxation is well established, its application to new areas is viewed as innovative and provides a means of releasing new resources. International taxation still offers significant potential for development financing.
2. Another group consists of mechanisms that are innovative in terms of seeking a leverage effect, such as guarantees[2] and combining private-sector and government revenue[3].

A second category of innovative financing consists of mechanisms whose primary objective is to achieve outcomes. Again, there are two distinct groups within this category.

1. Impact investing which aims to generate social and environmental impacts at the same time as delivering a financial return. This capital-investment targets “companies with significant social impact and/or enterprises that are too small to meet the criteria of eligibility of traditional investors”[4].
2. Mechanisms based on contracts between a public-sector stakeholder and a public or private-sector provider, linking the payment of the service provided to specific outcomes to be achieved. In this case, the private-sector provider covers the investment and is paid by the public-sector stakeholder later, with interest, according to the outcomes achieved[5].

Development impact bonds and social impact bonds are a specific and relatively new type of these mechanisms. They aim to finance service public costs by a private provider. In fine, the public ordering institution reimburses and remunerates investors according to the outcome obtained. The return on investment is thus depending on the achievement of pre-defined objectives that are measured by an independent institution. These “bonds” are also contracts (they are not bond securities). One of the strengths of this kind of mechanisms is that investors have an interest at least equal to that of the public ordering institution in ensuring the achievement of the objectives.

1. We can also include here thematic bonds, as green bonds for instance, that are aiming to orient investors towards projects concerned with a specific cause (environmental quality in the case of green bonds) for which traditional financing instruments are not relevant. They are issued by public development banks, local authorities, large companies or States.

A third category is composed by mechanisms whose innovation is in the financing modalities:

1. Original ways to manage debt as loans that are indexed against GDP and other countercyclical instruments[6], and debt-swap.
2. Mechanisms based on bonds issuance for which several donors pledge to reimburse, in the long run, in order to ensure the immediate financing of the provision of a public service that a developing countries is unable to finance alone. The International Finance Facility for Immunisation (Iffim) is an example.
3. Mechanisms that aim to create a market, such as Gavi’s Advance Market Commitment (AMC), through which donors commit to finance the purchase of vaccines over the long term, to encourage laboratories to develop vaccines and sell them at affordable prices.
4. There are numerous specific mechanisms in the climate area. Examples include index-linked insurance, flexible savings schemes and loans designed to address the risks associated with natural disasters, and “carbon offset”-type mechanisms based on market principles, such as payment for environmental services, e.g. REDD+ for forests (Angelsen, 2015).

These mechanisms seek to reconcile market imperatives and public benefit. They are particularly well aligned with the spirit of the Addis Ababa Action Agenda on development finance (United Nations, 2015) and the SDGs.

Another aspect of the topic is technological innovation to support development finance. The digitisation of the economy and current practices, particularly in banking, offer new opportunities to raise funds, for example, the ability to make a donation via text message and wider access to traditional financing mechanisms in the economy.[7] This is one of the aspects this workshop is aiming to cover.   

[1] Dalberg (2014) “did not include bonds to fund infrastructure or public private partnerships (PPPs) that focus on infrastructure investment. In addition, [it] only considered mechanisms where resources were deployed in developing countries”.

[2] See in particular, Benn et al. (2015). A case study on the guarantees applied to city financing has been carried out by Iddri (Criqui and Vaillé, 2017)

[3] See in particular Benn et al. (2017), OECD (2018)

[4] https://blog.secteur-prive-developpement.fr/2016/06/06/promouvoir-durablement-les-petites-entreprises-africaines-le-defi-des-investisseurs-de-mission/

[5] To a certain extent, public-private partnerships can be viewed as a simple form of innovative financing

[6] See Panizza (2015), among others

[7]Digitisation has various other consequences on how economies are financed (the “blockchain” revolution, for example) but it is not possible to cover everything in one event.

Chapters of the book Financing Sustainable Development: Addressing Vulnerabilities, Boussichas, M. and Guillaumont (Eds.), P. (Economica), 2015 :

• Angelsen, A. (2015) « All You Need Is Cash (for REDD+)? »
• Benn J., Sangaré C. and Mirabile M. (2015), « Potential and Perspectives for Using Guarantees for Development in the Post-2015 Framework »
• Douste-Blazy, P. and Filipp, R. (2015), « Innovative Financing for Development»
• Jacquet, P. and Pande, V. (2015), Financial Innovation for Global Solidarity »
• Panizza, U. (2015), « Debt Sustainability in Low Income Countries : The Grants versus Loans Debate in a World Without Crystal Balls »

Benn, J., Sangaré C.  and Hos T. (2017), « Amounts Mobilised from the Private Sector by Official Development Finance Interventions: Guarantees, syndicated loans, shares in collective investment vehicles, direct investment in companies, credit lines », OECD Development Co-operation Working Papers, No. 36, OECD Publishing, Paris. http://dx.doi.org/10.1787/8135abde-en

Clarke, D., de Janvry, A., Sadoulet, E., Skoufias, E. (eds.) (2015), Disaster Risk Financing and Insurance: Issues and Results, Ferdi, 105 p

Criqui, L. and Vaillé, J. (2017), « Les garanties pour le financement des villes en développement : un outil prometteur pour les bailleurs ? », Iddri Issue Brief n°04/17, Juillet 2017

Dalberg (2014), Innovative Financing for Development: Scalable Business Models that Produce Economic, Social, and Environmental Outcomes, AFD, City, GDI, Dalberg

Mathonnat, J. and Pélissier, A. (2017), « How a results-based financing approach can contribute to the health SDGs: policy-oriented lessons from what we do know and do not yet know », Iddri Case study

UNCTAD (2014), World Investment Report: Investing in the SDGs, an action plan, Nations unies, New-York et Genève

United Nations (2015), Addis Ababa Action Agenda of the Third International Conference on Financing for Development (Addis Ababa Action Agenda). Nations unies, New York. http://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf

OECD (2018), Making Blended Finance Work for the Sustainable Development Goals, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264288768-en