What is Innovative Development Finance? Depends on Who You Ask.

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Andrew Wainer

Director of Policy Research in the Public Policy and Advocacy Department 

Washington, DC

May 27, 2015

Financing is currently at the center of global development discussions and will be center stage in July at the Financing for Development (FFD) conference in Addis Ababa, Ethiopia.

Thousands of finance experts and policymakers will descend on Addis to advance their vision on funding for the Sustainable Development Goals (SDGs), which will be approved in September at the United Nations (UN) General Assembly.

The SDGs are extremely ambitious – ending extreme poverty and child deaths are just two of its global goals – and achieving them will require a new development financing paradigm.

A clear and meaningful conversation on FFD is not an academic exercise. If we don’t get development finance right, the SDGs won’t be realized.  So it’s important to have well-defined terms as a foundation for action.

One of the most-discussed among the multitude of development financing tools is innovative finance. Before diving into definitional issues, there are several things to know about innovative finance:

  • It’s viewed as a solution to declining levels of traditional official development assistance (ODA). As national budgets in wealthy nations are squeezed, ODA decreases, and policymakers and analysts are shifting their focus to innovative finance to fill the gap. 
  • The term was coined at a previous financing for development discussion in 2002 in Monterrey, Mexico where the Monterrey Consensus emphasized, “The value of exploring innovative sources of finances.”
  • Everybody is interested in innovative finance. USAID, the UN, McKinsey and Company, and many, many others view innovative finance as a key component to meet the SDG financing needs and the lack of funding currently available.

But there’s one problem: There’s no common definition of innovative finance. In fact, some definitions are diametrically opposed.

Words matter. To analyze and envision development finance effectively at Addis – and then implement that vision – we need to have a (at least somewhat) common understanding of what we are talking about.

Currently, agencies are talking past each other when discussing innovative finance:

  • The UN often discusses it in terms of taxation. In its draft of the Addis Ababa Accord innovative finance includes, “Financial transaction tax, carbon taxes… taxes on fuels used in international aviation and maritime activities, or additional tobacco taxes.”

One major example of this type of innovative development  is UNITAID. UNITAID was established in 2006 to increase funding for HIV/AIDS, malaria, and tuberculosis treatments in low-income countries. 

About half of UNITAID’s $2.4 billion funding comes from an airline ticket tax. Through this $1-2 “solidarity tax, levied in nations as diverse as Chile, Congo, France, Madagascar, the Republic of Korea, UNITAID is able to fund much of its operations.

Is this innovative finance? According to some U.S. foreign assistance agencies, innovative finance has almost the opposite connotation.

One classic example of innovative financing that engages the private sector is the Global Alliance for Vaccines and Immunization (GAVI).  GAVI pools the demand from developing countries for new vaccines and provides long-term, predictable financing to attract new (private) vaccine manufacturers who otherwise would not work on the issue because it wouldn’t be profitable.

It’s a great example of government donors shaping a market so that it’s profitable for the private sector. It’s also been great for children in poor nations immunizing 370 million children worldwide.

The main agreement on innovative finance across many organizations is that there is no common definition. On this point there is almost word-for-word consistency.

  • International development consulting company Dalberg states, “Innovative finance means different things to different people.”

Development organizations around the world including Save the Children are looking at the July Addis Ababa meeting and the September New York UN meeting to imprint a new vision of global development.

That vision will be conveyed through words.

Without a better understanding of innovative financing and other SDG finance models, acting on the vision that comes out of Addis Ababa and New York City will make a challenging goal even more difficult.

In the short term, crafting a more inclusive – yet cogent – definition of innovative finance in the Addis Ababa Accord would be an ideal platform for a more meaningful – and actionable – understanding of the term.

However defined, innovative finance should adhere to the core principles of effective development finance: It should be transparent, accountable, and aligned with developing nations’ priorities.

Over the long-term, models should be tested, evaluated, and results should be disseminated and shared among the vast array of organizations working on innovative finance.

Only by first defining the term and then learning – and sharing – what works, will innovative finance live up to its promise to revolutionize international development.