Knowledge Platform
Many of the last decade’s innovations have come as a result of bringing multiple stakeholders together. The topic of Innovative financing for development is vast in scope. It encompasses social impact bonds, diaspora bonds, securitization, green bonds, and results-based lending, among other innovations.
There has been a recent seismic shift in the approach to development in order to reach the last mile and eradicate poverty. Achieving the Sustainable Development Goals (SDGs) will require mobilizing an estimated USD 2.5 trillion. The Paris Climate Agreement calls for the mobilization of USD 100 billion per annum for green growth alone to limit global warming to 2 degrees Celsius. The African Development Bank’s (afDB) own High 5 Strategy will require annual investments of around USD 170 billion, and the 2030 Agenda more than USD 600 billion, or roughly 12 times the annual Official Development Assistance (ODA) flows to Africa. In fact, these amounts dwarf the availability of ODA which stood at USD 135 billion at its peak in 2013. Development partners have been asked to ramp up development financing from billions to trillions, but the global development agenda cannot be achieved with public finance alone. It will require private financing, including philanthropic capital, at scale.
Yet, the Organization for Economic Cooperation and Development (OECD) reports that philanthropic flows are still modest in volume compared to ODA – accounting for only 5% between 2013 and 2015, except in some key sectors like health in which their impact is more astutely felt. Their report also found partnerships to be highly concentrated to about 20 foundations and thus there is a need for a diversification of partners and specifically for more African philanthropies to emerge and throw their resources into the blended finance mix especially to reach the lowest income countries and fragile states, which even philanthropies shy away from. The statistics at a glance show that while 143 foundations from all over the world gave USD 24 billion from 2013-2015, only 28% of that targeted Africa and only 33% targeted low income countries, and 53% of it – that is, over half of philanthropic giving – goes to health and population management, and not other sectors such as energy, job creation or infrastructure.
The 2015 Addis Ababa Agenda for Action (AAAA) called on innovative financing solutions to meet the SDG investment needs. The 2018 United States General Assembly (UNGA) was awash with debate on how best to harness innovation for development outcomes. At UNGA, the Leading Group on Innovative Financing for Development launched a debate on cryptocurrencies, blockchains, and other innovative ways to unlock capital. Another key innovative solution to help crowd in private sector investment in development is the use of blended finance. As Africa’s premier development finance institution, the African Development Bank was nominated to lead resource mobilization for the attainment of the SGDs in Africa, and thus, the mobilization of capital from sources beyond the African Development Bank – for example, from partners like the Bill and Melinda Gates Foundation and Rockefeller Foundation – remains critical.
Indeed, the partnering with non-sovereign entities such as with the Dangote Foundation with regards to the African Leaders on Nutrition program and the Rockefeller Foundation to support the Bank’s Job for Youth (J4Y) initiative, has been a structural innovation in AfDB’s institution given that it only formalized the processes for partnering with private sector in 2015. Other notable successes include the Sustainable Energy Fund for Africa (SEFA) or Africa Guarantee Fund. Refer to side bar “Case Studies: Innovative Financing for Development” for examples.
Given the trends outlined above, we would like to offer some guidance and lessons learned to philanthropic organizations particularly those domiciled and working in Africa as we move towards more innovative solutions for financing development:
Adhere to the DFI principles and guidelines for blended concessional finance in private sector projects. While there exist opportunities where direct grants make sense, for example, in humanitarian situations, supporting the private sector in Africa requires the involvement of more and more philanthropic organizations. Create specific guidelines within your organization that allow your concessional funds to be used for investments in private sector projects, including through instruments such as reimbursable grants. Adhering to the DFI principles and guidelines will ensure that the limited pool of concessional financing is used to directly address market failures and that these scarce resources are provided at terms that provide the minimum concessionality required to make the project viable. This will allow the contribution of your concessional funds to leverage far more additional resources.
Participate in private placements. While many donors suffer from ‘plant the flag’ syndrome and wish to champion activities single-handedly, SDG17 is about partnerships for the goals. Financing organization should think about how much of their endowment it might consider putting into a SIB or DIB in their areas of interest. More philanthropic organizations should look to partnering in some capacity with larger MDBs or UN agencies not just as implementing partners but as financiers to their activities. The African Development Bank’s themed and social bonds have had anchor investors from the private sector as part of their corporate social responsibility. Certainly, the support of the philanthropic community would also be beneficial.
Set up trust funds. The African Development Bank currently has 25 active trust funds supporting a wide range of sectors, including agriculture, governance, renewable energy, water and sanitation and infrastructure development, youth employment and entrepreneurship and climate change. We would be happy to see more African and other philanthropic organizations contributing to these as seed anchors or first loss participants. Partnerships with those institutions mandated to work in development such as the African Development Bank, and others give you the clout and access to government and other agencies you may not currently have. Working with such DFIs allows you to balance direct investment on the project level with a multilateral approach to scale up existing funds in those organizations.
To conclude, the next wave of innovation will not come from the usual suspects – it might come from you. The future bodes well for financial innovation for development on the continent, and we, as the African Development Bank welcome learning more from our partners. Philanthropic donors and other private sector actors including high net worth individuals are welcome to join DFIs in our joint quest to eradicate poverty within a generation. Together, we can achieve the SDGs.