Financial Innovation for the SDGs

  • Doreen
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Financial Innovation for the SDGs

Dear All,

Just saw the article below in the UN Global Impact which focuses on exploring innovative financial instruments with the potential to direct private finance towards critical sustainability solutions.

Below the link: www.unglobalcompact.org/take-action/action/financial-innovation

Best regards.

Doreen

Doreen Mbalo

Sustainable Sanitation Programme and Sustainable Sanitation Alliance (SuSanA) Secretariat
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Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
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  • JKMakowka
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Re: Financial Innovation for the SDGs

Interesting might be also this pilot by ICRC:
www.icrc.org/en/document/worlds-first-hu...ing-aid-conflict-hit

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  • Marijn Zandee
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Re: Financial Innovation for the SDGs

The "bonds" from the ICRC seem interesting, though I am not sure I really see the advantages.

Essentially, the project is pre-financed by the "bond holders", who get paid back based on the results the project achieves. If the project exceeds results, they get more than their initial payments If the project results are below expectation, the investors get less. The money to the investors comes from larger donors.

The private investors are thus asked to take a risk. They can get a positive return on investment if the ICRC outperforms targets. Presumably, this puts extra pressure on the ICRC to perform, as they can only raise money in this way if they are successful (no one will buy the instrument if not successful). I feel this is a somewhat contrived way to create "market pressure".

On the down side, the ICRC has to raise the money 2 times. First from the donors who will pay the investors and then from the private investors. Maybe there is a plus-side that the cash-flow from the project is paid with investor money and not with ICRC funds?

I am also curious how the project will define success/failure. This will have to be a formula that is acceptable to all, including the private investors who, presumably, have an interest in making sure the criteria are not too stringent.

I am curious to see how this one will work out.

Marijn Zandee

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  • JKMakowka
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Re: Financial Innovation for the SDGs

Yes, maybe not so much a financial innovation by itself, but rather an attempt to solve the chicken<->egg problem that plagues results-based financing.

But ultimately we have to be careful with all these financial innovations that it doesn't just create another expensive administrative layer onto a system that is already impacted by often too high overhead costs.

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  • Marijn Zandee
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Re: Financial Innovation for the SDGs

Hi Kris,

What is the exact Chicken/Egg problem you refer to? Is it the issue that payment is only after the activities have been carried out, which leads to the question of from which cash-flow the implementation phase is o be paid?

Regards
Marijn

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  • JKMakowka
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Re: Financial Innovation for the SDGs

Basically yes, but it goes a bit deeper than that by having the same institutional donors that push for results-based funding strongly encourage lowering so called overhead costs, which in turn are usually seen as essential to run a results-based project by cross-subsidizing them at least in regards to overall management.

In a way that is a clash of two different ideas within the same overall system, i.e. the idea that NGOs should work more like businesses (and thus be able to pre-finance their successful projects) while the same time strongly discouraging any kind of activity that could be seen as "making a profit" off public money.

As a side point, the often mentioned financial resources that larger NGOs have (and that could in theory serve for pre-financing projects) are usually either tied to their humanitarian efforts (and act as an emergency reserve of sorts) or as in the case of for example Red Cross Societies are typically linked to their domestic efforts such as blood banking or running hospitals, and are thus not really available for "risky" investments abroad.

I actually see this ICRC pilot as interesting from another perspective however: I believe originally results-based financing wasn't really "invented" for NGOs, but rather within ODA to replace direct budget support to poor countries' governments. However this never really took off as these governments usually strongly disliked what appeared to them as a colonial like external evaluation system. However these same governments usually don't shy away from borrowing money from "neutral" financial markets (if they get the chance), and thus a scheme like described for ICRC could work well in the sense that financial investors could approach a government with a good loan offer that promises reduced liability in case the funded projects qualify for a results-based financing scheme of a third party.

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