KfW Development Bank Innovative Development Finance Toolbox Authors: Anja-Nadine König, Chris Club and Andrew Apampa October 2020 Foreword Roland Siller Member of the Management Committee KfW Development Bank Dear readers, In 2015, the third international development conference took place in Addis Ababa. Representatives of 193 states discussed global development challenges resulting in the Addis Ababa Development Finance with the goalto enhance the knowledge Action Agenda. The agenda contains policy actions and on innovative development financing mechanisms within KfW measures contributing to the 2030 Agenda for Sustainable as well as with peers and other stakeholders. Development. In a first step, the focus of the work was to take stock of The financing gap to reach the Sustainable Development relevant German and international developments and Goals (SDGs) was estimated by the UN to be approximately experiences and to identify priorities for German Development USD 2.5 trillion per year. This gap cannot completely be Cooperation (stocktaking report). This toolbox publication has covered by public or philanthropic resources. then been developed based on information gathered and insights gained in the stocktaking excercise. In the next stage To address this issue, the “Billions to Trillions Campaign” was of this assignment innovative instruments and approaches of established, focusing on how to close the financing gap in the German financial cooperation will be further explored, order to achieve the SDGs. But it is not only a question of the refined or newly developed. quantity but also the quality of capital raised and deployed. Bi- and multilateral development banks can build a bridge between The present Toolbox provides an overview of innovative public and private capital and play an important role to mobilise development finance mechanisms, its terminology and additional private capital as well as to support our partners and concepts. Twelve factsheets offer descriptions of families of help strengthen markets locally. Innovative Development Finance mechanism (InnoFin) that Among others, development banks can cover the political and were selected based on priorities of German Financial economic risks private investors often face in developing Cooperation. The toolbox lists key facts of the instruments, countries, facilitate private investments by improving outlines basic structures, variations and identifies success framework conditions or set incentives as anchor investors and factors. It also provides an opinion with regard to the effect of by financing smart subsidies. each InnoFin on key impact areas of the Addis Ababa Action Agenda, namely on mobilising additional private capital, In order to increase the attractiveness of projects for private strengthening local capital markets and promoting debt investors and thereby mobilise additional capital, development sustainability. banks need to use innovative financing mechanisms. On the one hand, those instruments and approaches aim at using The amalgamation of different sources of finance and other public resources to leverage private capital and on the other ressources in close cooperation with our local and international hand, they target the effective and efficient use of capital. partners is critical in bridging the financing gap and in achieving a transformational impact. Let us dive deep into the Acknowledging the relevance of this topic for the achievement instruments and approaches presented in this toolbox and how of the SDGs, KfW on behalf of the Federal Ministry for they can help in bridging that gap and contribute to achieving Economic Cooperation and Development (BMZ) commissioned the SDGs and Paris Goals. an assignment on Innovative Contents Part I: Background & Purpose 4 Part II: Terminology & Key Concepts 6 Part III: InnoFins Objectives & Sectors 15 Part IV: Factsheets 18 Facilities 20 Endowments 26 Structured Funds 33 Flat (unstructured) Funds 40 Results-Based Finance 46 Outcomes-Based Finance 53 Policy-Based Finance 60 Guarantees 66 Bonds 73 Insurance 79 Local Currency Finance 87 Securitisation 93 Annex 1 Glossary of key terms 100 Annex 2 Summary of references 102 List of Tables and Figures Tables Table 1: Development capital providers ........................................................................................ 8 Table 2: Types of additionality .................................................................................................... 12 Table 3: Sector specific financing challenges and Examples of InnoFins and/or financiers ........ 16 Table 4: Factsheet overview ....................................................................................................... 18 Figures Figure 1: Innovative development finance waves ......................................................................... 4 Figure 2: InnoFins impact value chain .......................................................................................... 7 Figure 3: Financial (Input) and Development Additionality .......................................................... 11 Figure 4: Where donors have high additionality .......................................................................... 11 Figure 5: The World Bank Cascade Approach ............................................................................ 12 Figure 6: Creating and transforming markets .............................................................................. 13 Figure 7: InnoFins according to objectives .................................................................................. 15 Abbreviations AAAA Addis Ababa Action Agenda ADB Asian Development Bank AEGF African Energy Guarantee Facility AFD Agence Française de Développement AfDB African Development Bank AGF African Guarantee Fund ALCBF African Local Currency Bond Fund AMC Advance Market Commitments ATI African Trade Insurance Agency BOAD West African Development Bank BOLD BlueOrchard Loans for Development BoP Bottom of the Pyramid CCT Conditional cash transfer CDO Collateralised debt obligation DAC Development Assistance Committee DC Development Cooperation DFI Development Finance Institution DFID Department for International Development (UK) DIB Development impact bond DS Debt Sustainability EDFI European Development Finance Institutions EFSD European Fund for Sustainable Development EFSE European Fund for Southern Europe EIB European Investment Bank EIF European Investment Fund EM Emerging Markets ESG Environmental and Social Governance FC Financial Cooperation FDI Foreign Direct Investment FX Foreign exchange GAVI Global Alliance for Vaccines and Immunization GIIN Global Impact Investment Network GRiF Global Risk Financing Facility IBRD International Bank for Reconstruction and Development ICRC International Committee of the Red Cross IDA International Development Association IDB Inter-American Development Bank IFC International Finance Corporation IFI International Finance Institutions ILS Insurance-linked security IMF International Monetary Fund InnoFin Innovative (development) finance mechanism JICA Japan International Cooperation Agency LCY Local currency LDC Least Developed Countries LIC Low Income Countries LSE London Stock Exchange MCPP Managed Co-lending Portfolio Programme MDB Multilateral Development Banks MIC Middle Income Countries MIGA Multilateral Investment Guarantee Agency MoU Memorandum of Understanding MSME Micro, Small, and Medium Enterprises NGO Non-Governmental Organisation ODA Official Development Assistance OECD Organisation for Economic Cooperation and Development PBG Policy based guarantees PBL Policy based loans PONT Prespa Ohrid Trust Fund PPP Public Private Partnership PRI Political risk insurance PSW Private Sector Window RBF Result based finance REDD+ Reducing emissions from deforestation and forest degradation REM REDD Early Movers SDC Swiss Agency for Development and Cooperation SDG Sustainable Development Goals Sida Swedish International Development Cooperation Agency SIINC Social Impact Incentives SLL Sustainability linked loans SME Small and Medium Enterprises SPV Special purpose vehicle SRL Shock Resistant Loans TA Technical Assistance TCX The Currency Exchange UNDP United Nations Development Programme UNFCC United Nations Framework Convention on Climate Change WB World Bank WEF World Economic Forum Part I: Background & Purpose Background The need for innovative development finance (IDF) is evident in view of the challenges ahead. Despite overall progress in achieving the Sustainable Development Goals (SDGs), 767 million people remain in extreme poverty and billions lack access to basic services, infrastructure, financial services and decent jobs. Without accelerating efforts, resources and innovation to address these challenges, the gains of the past decades could be lost, with poverty and fragility becoming more chronic in low income countries (LIC), and the ambitions of the Paris Agreement in addressing climate change being compromised.1 Estimates for investment needs required to achieve the SDGs in developing countries range from USD 3.3 trillion to USD 4.5 trillion per year resulting in an SDG investment gap of approximately USD 2.5 trillion for developing countries.2 About 30 % may be bridged by public resources, leaving at least 70 % of the gap that would need to be covered by private capital. At the same time, there is a consensus the challenge is not only about the quantity of capital required but also about ensuring that the capital raised is deployed effectively and efficiently