Picking up the tab for development
20 July 2012, New York
Combating HIV/Aids, malaria, tuberculosis and other infectious diseases, ensuring environmental sustainability, and achieving the UN development agenda, including the MDGs require significant resources from the international community. In an era of economic uncertainty and austerity measures, resources are increasingly scarce making development cooperation commitments difficult to fulfill. Going forward, innovative financing has the potential to contribute to addressing global challenges and foster economic development.
Ambassador Mootaz Ahmadein Khalil, Vice-President of the Economic and Social Council (ECOSOC) chaired a panel discussion on innovative financing for development as part of the Council’s Substantive Session last week. In his opening remarks, Mr. Khalil stressed the important contribution innovative financing can make in mobilizing additional resources: “This event is very timely, as reaching the Millennium Development Goals and addressing new challenges and emerging issues requires considerable amounts of financing. The need for additional and more predictable funding has led to a search for innovative financing mechanisms.”
Defining innovative financing
There is no one catch-all definition of innovative development finance (IDF). Ms. Shari Spiegel, Senior Economic Affairs Officer of DESA’s Development Policy and Analysis Division, highlighted that “different institutions use the term differently. The World Bank uses the term broadly and includes private sector innovations, as well as innovations in domestic markets in developing countries. The working definition used by the 2012 World Economic and Social Survey, ‘In Search of New Development Finance’, focuses on the question of raising funds for international public goods, specifically through international cooperation coordinated by Governments and resource transfers to developing countries”, in accordance with the concept championed by the Leading Group for Innovative Finance for Development.
The importance of innovative sources of development finance was recognized by the 2002 Monterrey Consensus and reaffirmed by the 2008 Doha Declaration for Development. More recently, the outcome document of the Rio+20 Conference, ‘The Future We Want’, spelled out the value of IDF for sustainable development. IDF is intended to mobilize additional resources pledged on a voluntary basis and should supplement, not substitute traditional sources of financing such as Official Development Assistance (ODA).
Mr. David O’Connor, Chief of the Policy Analysis and Network Branch of DESA’s Division for Sustainable Development, underscored that innovative instruments can help match available funds to end users, strengthening the weakest link of the financial supply chain for sustainable development, as financial sectors are usually underdeveloped in low-income countries. As available public resources are insufficient, and private capital predominates in most international financing flows, IDF mechanisms and instruments can act as catalysts to multiply such funds, in a process perhaps analogous to fractional reserve banking, as well as lowering risks and the cost of capital.
The 2012 World Economic and Social Survey found that the current landscape of innovative finance is complex, composed of innovative sources, intermediation and distribution mechanisms and only a small amount administered through innovative mechanisms is actually additional to ODA. Moreover, the amounts raised through innovative financing are relatively small.
Types of innovative financing and UNITAID
Many countries are already participating in some form of innovative finance mechanism. In the last decade, innovative mechanisms have administered $5.8 and $2.6 billion dollars in health and climate financing respectively. Many forms of IDF are in operation, with others still under consideration. UNITAID has been a beneficiary of IDF sources, such as air ticket levies and carbon emission taxes, complementing specially designated ODA flows, amounting to $1.2 billion so far, 86 per cent of which have been devoted to meeting the needs of the low-income countries. Worldwide, airline ticket solidarity levies and voluntary contributions generate as much as $1 billion a year.
As Dr. Syed A. Samad, State Minister and Executive Chair, Board of Investments, Office of the Prime Minister of Bangladesh explained, Advance Market Commitments (AMC’s) are another example of innovative finance and involve contractual agreements between donors and pharmaceutical firms to focus research on neglected diseases and distribute affordable drugs. The Debt2Health program has used debt swaps converting portions of old debt claims into new domestic resources for health through the global fund. Additionally, the International Finance Facility for Immunization (IFFIm) has raised $3.6 billion since 2006 for immunization programs through issuing floating bonds on international capital markets front-loading ODA.
Other innovative solutions under consideration, which include an international financial transactions tax, an international currency transaction tax, carbon taxes, airline transportation tax and the use of IMF Special Drawing Rights (SDRs) for development, could raise $400 billion annually.
UNITAID is an example of a development agency, which relies heavily on innovative financing and has used these additional resources to transform healthcare commodity markets in the developing world improving access to HIV, TB and malaria treatments. Its Executive Director Mr. Denis Broun, said “At UNITAID, the fact that we are largely supported by innovative financing has changed the way we are able to work. We have been called the laboratory of innovative financing and transformed markets for essential health commodities so they will become favorable to poor countries and address market failures. By doing so we also have an impact on decreasing the amount of funding needed to achieve positive outcomes”.
He added, “less than 100 children were born with HIV in all the rich countries put together. People had access to medication and pregnant women were treated leaving very few cases of transmission from mother to child. The result was that there was no market for pediatric antiretrovirals for those who were able to pay, as less than 100 children is not a market for a multinational pharmaceutical company. In the developing world there are over 400,000 children born with HIV but there was no market because of a lack of ability to pay. This was a perfect example of market failure”.
UNITAID negotiated with the generic producers of these antiretrovirals creating an artificial market funded through grants provided by IDF ensuring that the prices of these drugs would decrease over time. Currently, 80% of the 400,000 children living with HIV in developing countries are being treated with UNITAID intermediated drugs.
Innovative financing for development will need to be significantly stepped up in order to help pick up the development tab. It is clear that to achieve the MDGs, full ODA in line with international commitments, debt relief, market access, financial and technical support and capacity building will also be needed.
Accompanied by efforts to raise new resources through innovative financing, efforts have to be made to streamline the allocation and delivery of these resources with appropriate governance structures, in line with the development needs of developing countries and streamline the architecture for development financing.