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Discussion Paper Discussion Paper Innovative Financing for Development: A New Model for Development Finance? January 2012 Innovative Financing for Development: A New Model for Development Finance? January 2012 Copyright © January 2012 United Nations Development Programme Bureau for Development Policy One United Nations Plaza New York, NY 10017, USA E-mail: [email protected] Web site: www.undp.org/poverty Acknowledgements This Discussion Paper was written by Gail Hurley, Bureau for Development Policy, UNDP. Research assistance was provided by Sofia Palli, also of the Bureau for Development Policy, UNDP. The author would like to thank the following people for their guidance and comments in the drafting of this paper: Paul Ladd (UNDP), Anne-Marie Sloth Carlsen (UNDP), Yanchun Zhang (UNDP) and Pedro Martins (Overseas Development Institute). Contact Information Gail Hurley, Poverty Group, Bureau for Development Policy, UNDP: [email protected] Cover Image Kletr/Shutterstock.com Disclaimer The views expressed in this publication are those of the authors and do not necessarily represent those of the institutions to which they are affiliated or the United Nations or their Member States, including UNDP. Contents List of Acronyms and Abbreviations 2 Abstract 3 1. Introduction 5 2. Innovative financing for development: what’s it all about? 7 3. Major innovative financing for development initiatives 9 3.1 Taxes, dues or other obligatory charges on globalized activities 10 3.2 Frontloading and debt-based instruments 11 3.3 State guarantees, public-private incentives, insurance and other market-based mechanisms 14 4. Innovative financing for development: initiatives under discussion 17 4.1 Financial transactions taxes 17 4.2 Carbon taxes 19 4.3 Solidarity Tobacco Contribution 19 4.4 IMF’s Special Drawing Rights 20 5. Innovative financing for development and the experience so far: key issues and considerations for the future 21 5.1 Have innovative financing for development initiatives generated additional resources for development? 22 5.2 Have innovative sources of development finance delivered concrete development results? 24 5.3 Which countries have benefited from innovative financing for development and why? 25 5.4 Have innovative financing for development initiatives delivered stable and predictable resources for 27 international development and climate/environment? 5.5 Have innovative financing initiatives strengthened country ownership of the development process? 29 5.6 Have innovative financing for development initiatives supported capacity development in beneficiary 31 countries? 5.7 Have innovative financing for development initiatives accentuated issues related to fragmentation and 33 coordination in international aid delivery? 5.8 Is innovative financing for development sustainable over the longer-term? 34 5.9 Can innovative financing for development be scaled up and/or initiatives replicated in other 36 development areas or regions? 6. Looking forward: the place of innovative finance in a changing development financing landscape 38 Notes 41 Annex: A Snapshot of the Pros and Cons of Different Approaches 44 Glossary: Major innovative financing for development initiatives 54 References 57 List of Acronyms and Abbreviations ACTs Artemisinin-based Combination Therapies TB Tuberculosis AFD Agence Française de Développement UEMOA West African Economic and Monetary Union (French Development Agency) UN United Nations AMC Advance Market Commitments UNDP United Nations Development Programme AMFm Affordable Medicines Facility for Malaria UNESCO United Nations Educational, Scientific BTC Belgian Technical Cooperation and Cultural Organization CCRIF Caribbean Catastrophe Risk Insurance Facility UNEP United Nations Environment Programme CDM Clean Development Mechanism UNICEF United Nations Children’s Fund CERs Certified Emissions Reductions UNODC United Nations Office on Drugs and Crime CTT Currency Transactions Tax UN-REDD United Nations Collaborative DAC Development Assistance Committee Programme on Reducing Emissions from Deforestation and Forest Degradation EC European Commission WB World Bank EU European Union WHO World Health Organization EU ETS European Union Emissions Trading Scheme WWF World Wide Fund for Nature WWF FTT Financial Transactions Tax GAVI Global Alliance for Vaccines and Immunisation GNI Gross National Income HIPCs Heavily Indebted Poor Countries HSS Health System Strengthening IBRD International Bank for Reconstruction and Development ICT Information and Communications Technology IDA International Development Association IFFIm International Finance Facility for Immunisation IMF International Monetary Fund IRED Initiative Régionale pour l’Energie Durable (Regional Initiative for Sustainable Energy) LDCs Least Developed Countries MDBs Multilateral Development Banks MDGs Millennium Development Goals NGOs Non-Governmental Organizations OBA Output-based Aid ODA Official Development Assistance OECD Organisation for Economic Cooperation and Development PES Payments for Ecosystem Services PIUs Parallel Project Implementation Units PPP Public Private Partnerships SDRs Special Drawing Rights StAR Stolen Asset Recovery Initiative Abstract Abstract This Discussion Paper explores recent experiences with innovative sources of development finance in order to capture lessons learned for the more effective implementation of both current and future initiatives. We first look at what is understood by the term ‘innovative financing for development’ since the term encompasses a heterogeneous mix of innovations both in fund-raising and in spending on the ground. We then summarise some of the major schemes implemented so far and outline how they work. The paper then reviews a number of proposals currently on the table for future innovative development finance schemes and examines the political dynamics associated with each. We then assess the record of innovative sources of development finance against nine key questions which serve as useful indicators of the added value and possible draw-backs of each instrument. These include questions such as: the extent to which initiatives have created additional financial flows for development, have supported country ownership of the development process, delivered predictable finance and supported concrete development results. Finally we explore the place of innovative financing for development in a changing development financing landscape. Specifically, we look at whether we are likely to see increased dependence on such mechanisms in the future and consider the possible benefits and risks associated with such a shift. The paper aims to provide some insights into the pros and cons of different approaches and, as such, make a useful contribution to international policy discussions over the design and implementation modalities of both current and future innovative sources of development finance. Innovative Financing For Development: A New Model For Development Finance? 3 Introduction 1. Introduction The multi-faceted nature of the challenges associated with development are reflected in the United Nations Millennium Declaration. The document recognises that good governance, improvements in institutional capacities, an equitable trade regime, improvements in health and education, empowerment of women, creation of productive employment, access to technologies, protection of the environment and strong partnerships with the private sector and with civil society organizations all play an essential role in the development process. They key role of adequate financial resources—domestic and external—is also recognised and since the year 2000, the international community has committed to “grant more generous development assistance” to the developing world. 1 The Millennium Development Goals (MDGs) quickly emerged as the blueprint agreed to by all the world’s countries to reduce poverty and accelerate development within a 15 year time-frame. Of the eight MDGs, seven focus on challenges such as poverty reduction and the eradication of hunger, as well as measures to improve access to health and education services, improve the position of women and preserve the environment. The eighth MDG recognises that developing countries will need a supportive international environment to have the best chances of success. This includes more generous development aid, especially for the poorest countries. 2 Some attempts have been made to quantify the volume of external assistance required to meet different MDGs. Estimates as to the amount of resources needed annually to control malaria and tuberculosis stand at over US$10 billion. US$25 billion and US$36 billion is required annually for HIV/AIDS and education respectively. To eradicate hunger requires an additional US$30 billion per annum. 3 While these estimates are subject to a high degree of uncertainty, it is clear that the amounts provided annually in Official Development Assistance (ODA) are far from sufficient to meet the MDGs and other international development goals; in 2010, ODA from the OECD DAC members reached US$128 billion of which US$46 billion was allocated to sub-Saharan Africa, the region furthest off-track towards the MDGs (MDG Gap Task Force, 2011). This reality has stimulated multiple efforts by development partners—and by developing countries themselves—to find ‘innovative’ ways to raise additional and/or alternative sources of development finance to support the MDGs. And over the last decade, the concept ‘innovative financing for development’ has become increasingly
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