Innovative Development Financing Notes

These notes provide an overview of development financing and major points (excluding links) are pulled from this McKinsey article.this McKinsey article. The notes are intended to familiarize yourself with innovative development financing, and feel free to pull points if you want to run a ML session for your chapter. Suggested reading time: 40 mins. How to read these notes

Development Financing refers to finance mechanisms that can mobilize, distribute, or govern funds beyond traditional donor-country ODA. Official Development Assistance (ODA) is declining from $128.7 billion in 2010, to $125.6 billion in Much more funding is required to meet the Millennium Development Goals (MDGs).more funding is required to meet the Millennium Development Goals (MDGs). Background about the need for Innovative Development Financing.

Criteria For Successful Innovative Development Financing The ability to unlock a meaningful level of additional financing, or engage multiple actors. The feasibility to implement within a short to medium- term time frame. The existence of a clear and compelling role for government. The potential to gain significant political momentum.

1.Unlocking value from diaspora flows. 2.Stimulating private-capital flows. 3.Encouraging private voluntary contributions through matching funds. 4.Tackling sector-specific inefficiencies. Promising areas that show potential for innovative development finance

Around $325 billion of remittances go to developing countries each year. In 2012, Canadian remittance outflows to developing countries were $14.7 billion USD.$14.7 billion USD The World Bank estimates that diaspora bonds can raise as much as 5-10 billion USD annually, (nearly 1/5 of total ODA flows to Africa). Diaspora bonds could be used to fund education or infrastructure.fund education or infrastructure. Marketing through patriotism can spread usage of these bonds to countries with emigrant populations in developed countries. Marketing through patriotism Unlocking value from diaspora flows

Average cost of sending money to a home country is about 9%.sending money to a home country is about 9%. In 2009, G8 countries pledged to cut these costs from 10% to 5%. 10% to 5%. A 1% reduction to the cost of sending money can unlock $3.3 billion per year for recipients in developing countries. Mobile phone payment systems (M-Pesa) eliminate exclusivity clauses with conventional money-transfer providers. Mobile phone payment systems (M-Pesa) Unlocking value from diaspora flows

Developing countries typically have a high-risk perception from investors.a high-risk perception from investors. The World Bank currently offers loan guarantees worth $1.4 billion The World Bank currently offers loan guarantees worth $1.4 billion The loans have stimulated about five dollars of private capital per dollar guaranteed by the bank. There is opportunity for G8, G20 to encourage multilateral development banks and bilateral agencies to creating innovative instruments that stimulate private flows. Stimulating private-capital flows

Big opportunity to fuel the growth of small- medium enterprises (SMEs) in developing economies because they are typically too small for banks, yet too big for microcredit.growth of small- medium enterprises (SMEs) Overall risk can be shared by multilateral organizations.multilateral organizations. Skill-building for entrepreneurs, particularly within the agricultural sector is an ideal place to start. Stimulating private-capital flows

Social-impact bond (SIB) are being piloted in the United States. Impact investors take on the risk of expanding promising social programs, and nongovernment organizations deliver the social program and government pays only if the program is successful.piloted in the United States. SIBs do have downsides, particularly around transaction costs and financing costs. transaction costs and financing costs. Center for Global Development has a working group exploring how SIBs can be applied in international development context.working group Stimulating private-capital flows

Governments can commit to establishing national-challenge fund that matches commitments from corporations and individuals. In 2010, the Canadian government set up a Pakistan Relief Fund that raised $47 million from individual citizens over a two-month period. CIDA matched contributions up to $100,000 each. Pakistan Relief Fund GAVI Alliance is matching $130 million in contributions from private firms, foundations, and citizens for a total of $260 million USD by GAVI Alliance Encouraging private voluntary contributions through matching funds

Countries can find powerful ways to unlock the value of their development dollars by examining market inefficiencies of specific sectors. Advance market commitments provided reassurances for a new vaccines. Advance market commitments Tackling sector-specific inefficiencies